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provisions provided a 15-percent cutback in a corporate tax
preference item affecting certain financial institutions.4 The
cutback applied to the deduction otherwise allowable for “the
amount of interest on indebtedness incurred or continued to
purchase or carry [tax-exempt] obligations acquired after
December 31, 1982”. The amount of the cutback was calculated by
applying to the otherwise allowable interest expense a fraction
that is virtually the same as in the current version of the
statutes. The report of the Senate Finance Committee, the
committee in which TEFRA section 204(a) originated, sets forth
the following rationale with respect to the cutback and similar
provisions:
Numerous corporate tax preferences have been
enacted over the years in order to stimulate business
investment and advance other worthwhile purposes. For
several reasons, some of these tax preferences should
be scaled back. First, the federal budget faces large
deficits, which will require large reductions in direct
Federal spending. In addressing these deficits, tax
preferences should also be subject to careful scrutiny.
Second, in 1981 Congress enacted the Accelerated Cost
Recovery System, which provides very generous
incentives for investment in plant and equipment. ACRS
makes some corporate tax preferences less necessary.
Third, there is increasing concern about the equity of
the tax system, and cutting back corporate tax
preferences is a valid response to that concern.
4 The 15-percent cutback was increased to 20 percent in the
Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 68(a),
98 Stat. 588. The referenced corporate tax preference was that
under prior law, banks had been effectively excused from sec.
265(a)(2) on the ground that their obligations to their
depositors did not constitute “indebtedness” within the meaning
of that section.
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Last modified: March 27, 2008