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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.
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