- 12 - determined under rules similar to those that apply under section 291(a)(3) and (e)(1)(B). Id. As enacted, sections 265(b) and 291(a)(3) and (e)(1)(B) reduce the interest expense deductions of financial institutions without requiring evidence of a direct relationship between borrowing and tax-exempt investment. Specifically, those sections disallow a deduction with respect to the portion of a financial institution’s interest expense that is allocable, on a pro rata basis, to its holdings in tax-exempt obligations. While section 265(b) disallows a deduction for the entire amount of that portion of a financial institution’s interest expense allocable to tax-exempt obligations, section 291(a)(3) and (e)(1)(B) disallows only 20 percent of the interest expense allocable to those obligations. The 20-percent rule of section 291(a)(3) and (e)(1)(B) applies with respect to tax-exempt obligations acquired from January 1, 1983, through August 7, 1986. The 100-percent rule of section 265(b) generally applies to those tax-exempt obligations acquired after August 7, 1986. In the latter case, however, section 265(b)(3) provides a special rule for a “qualified tax-exempt obligation”, defined in section 265(b)(3)(B) as a certain tax-exempt obligation issued by small issuers. Under section 265(b)(3)(A), a “qualified tax-exempt obligation” acquired after August 7, 1986, is treated for purposes ofPage: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 NextLast modified: March 27, 2008