PSB Holdings, Inc. - Page 9




                                        - 9 -                                         
          it, the relevant text when read in the light of the statutes’               
          legislative intent allows respondent for purposes of the                    
          numerator to treat Investments’ assets as owned by Peoples.  We             
          agree with petitioner that the relevant text does not include in            
          the numerator the tax-exempt obligations purchased and owned by             
          Investments.                                                                
               Section 265(a)(2) provides that no deduction shall be                  
          allowed for interest on indebtedness incurred or continued to               
          purchase or carry obligations the interest on which is wholly               
          exempt from Federal income tax.  For purposes of that provision,            
          whether a taxpayer’s indebtedness was incurred or continued to              
          purchase or carry tax-exempt obligations generally depends on the           
          taxpayer’s purpose in incurring the indebtedness.  See Wisconsin            
          Cheeseman, Inc. v. United States, 388 F.2d 420, 422 (7th Cir.               
          1968).  In other words, a disallowance of interest expenses under           
          section 265(a)(2) requires a finding of a sufficiently direct               
          relationship between a borrowing and a tax-exempt investment.               
          See id.                                                                     
               Congress enacted section 291(a)(3) and (e)(1)(B) in 1982.              
          See Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),               
          Pub. L. 97-248, sec. 204(a), 96 Stat. 423.  As enacted, those               


               3(...continued)                                                        
          obligations.  For purposes of our analysis, we consider the                 
          relevant text of each of those sections to be the same and refer            
          to that text as the relevant text.                                          






Page:  Previous  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  Next 

Last modified: March 27, 2008