PSB Holdings, Inc. - Page 8




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          Respondent has since conceded the determination stated in the               
          second paragraph quoted above.  Respondent also concedes that               
          Investments was created to reduce State taxes and is a separate             
          business entity that is not a sham.                                         
                                     Discussion                                       
               We decide the narrow issue of whether Peoples must include             
          the tax-exempt obligations purchased and owned by Investments in            
          the calculation of Peoples’ average adjusted bases of tax-exempt            
          obligations under sections 265(b)(2)(A) and 291(e)(1)(B)(ii)(I).2           
          Petitioner argues that the relevant text in those sections                  
          provides that Peoples calculate the numerator without regard to             
          those obligations.3  Respondent disagrees.  As respondent sees              

               2 Petitioner invites the Court to decide that the                      
          calculation does not include any tax-exempt obligation owned by             
          Investments.  We decline to do so.  The consolidated returns                
          reported that the calculation included all outstanding tax-exempt           
          obligations purchased by Peoples and transferred to Investments,            
          and respondent’s determination in the notice of deficiency                  
          relates to that position.  Moreover, petitioner states in its               
          opening posttrial brief that it is not requesting either an                 
          adjustment or a refund as to its reporting position.  Nor does              
          the petition request such an adjustment or refund.  We consider             
          it inappropriate to decide the issue proffered by petitioner                
          because it does not relate to the decision that we will enter on            
          the amount of deficiency (if any) in the affiliated group’s                 
          income tax for the subject years.                                           
               3 We set forth the applicable text of secs. 265(b) and                 
          291(e) in the appendix.  The relevant text of sec. 265(b)(2)(A),            
          “the taxpayer’s average adjusted bases (within the meaning of               
          section 1016) of tax-exempt obligations” is similar to the                  
          relevant text of sec. 291(e)(1)(B)(ii)(I), “the taxpayer’s                  
          average adjusted basis (within the meaning of section 1016) of              
          obligations described in clause (i)”; i.e., tax-exempt                      
                                                             (continued...)           






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