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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 of
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