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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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