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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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