PSB Holdings, Inc. - Page 11




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                    For these reasons, the committee bill contains a                  
               15-percent across-the-board cutback in a series of                     
               corporate tax preferences.  [S. Rept. 97-494 (Vol. 1),                 
               at 118-119 (1982).]                                                    
               Four years later, in 1986, Congress enacted section 265(b).            
          See Tax Reform Act of 1986, Pub. L. 99-514, sec. 902(a), 100                
          Stat. 2380.  According to the report of the House Ways and Means            
          Committee, Congress enacted section 265(b) for two reasons.                 
          First, the report states, financial institutions had been allowed           
          to deduct interest payments regardless of their tax-exempt                  
          holdings, a result, the committee concluded, that discriminated             
          in favor of financial institutions at the expense of other                  
          taxpayers.  See H. Rept. 99-426, at 588-589 (1985), 1986-3 C.B.             
          (Vol. 2) 1, 588-589.  Second, the report states, financial                  
          institutions had been allowed to reduce their tax liability                 
          drastically by investing in tax-exempt obligations.  Id.  The               
          report explains that                                                        
                    To correct these problems, the committee bill                     
               denies financial institutions an interest deduction in                 
               direct proportion to their tax-exempt holdings.  The                   
               committee believes that this proportional disallowance                 
               rule is appropriate because of the difficulty of                       
               tracing funds within a financial institution, and the                  
               near impossibility of assessing a financial                            
               institution’s “purpose” in accepting particular                        
               deposits.  The committee believes that the proportional                
               disallowance rule will place financial institutions on                 
               approximately an equal footing with other taxpayers.                   
               [Id.]                                                                  
          The report explains that the amount of interest allocable to                
          tax-exempt obligations for purposes of section 265(b) is                    







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