§265 — Expenses and interest relating to tax-exempt income
94 citing cases
Statute Text — 26 U.S.C. §265
No deduction shall be allowed for—
Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this subtitle.
Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle.
In the case of a regulated investment company which distributes during the taxable year an exempt-interest dividend (including exempt-interest dividends paid after the close of the taxable year as described in section 855), that portion of any amount otherwise allowable as a deduction which the amount of the income of such company wholly exempt from taxes under this subtitle bears to the total of such exempt income and its gross income (excluding from gross income, for this purpose, capital gain net income, as defined in section 1222(9)).
Interest on indebtedness incurred or continued to purchase or carry shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends.
For purposes of paragraph (2)—
The term “interest” includes any amount paid or incurred—
by any person making a short sale in connection with personal property used in such short sale, or
by any other person for the use of any collateral with respect to such short sale.
If—
the taxpayer provides cash as collateral for any short sale, and
the taxpayer receives no material earnings on such cash during the period of the sale,
subparagraph (A)(i) shall not apply to such short sale.
No deduction shall be denied under this section for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as—
a military housing allowance, or
a parsonage allowance excludable from gross income under section 107.
In the case of a financial institution, no deduction shall be allowed for that portion of the taxpayer’s interest expense which is allocable to tax-exempt interest.
For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to tax-exempt interest is an amount which bears the same ratio to such interest expense as—
the taxpayer’s average adjusted bases (within the meaning of section 1016) of tax-exempt obligations acquired after
August 7, 1986
, bears to
such average adjusted bases for all assets of the taxpayer.
Any qualified tax-exempt obligation acquired after August 7, 1986, shall be treated for purposes of paragraph (2) and section 291(e)(1)(B) as if it were acquired on August 7, 1986.
For purposes of subparagraph (A), the term “qualified tax-exempt obligation” means a tax-exempt obligation—
which is issued after
August 7, 1986
, by a qualified small issuer,
which is not a private activity bond (as defined in section 141), and
which is designated by the issuer for purposes of this paragraph.
For purposes of clause (i)(II), there shall not be treated as a private activity bond—
any qualified 501(c)(3) bond (as defined in section 145), or
any obligation issued to refund (or which is part of a series of obligations issued to refund) an obligation issued before
August 8, 1986
, which was not an industrial development bond (as defined in section 103(b)(2) as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) or a private loan bond (as defined in section 103(
o
)(2)(A), as so in effect, but without regard to any exemption from such definition other than section 103(
o
)(2)(A)).
For purposes of subparagraph (B), the term “qualified small issuer” means, with respect to obligations issued during any calendar year, any issuer if the reasonably anticipated amount of tax-exempt obligations (other than obligations described in clause (ii)) which will be issued by such issuer during such calendar year does not exceed $10,000,000.
For purposes of clause (i), an obligation is described in this clause if such obligation is—
a private activity bond (other than a qualified 501(c)(3) bond, as defined in section 145),
an obligation to which section 141(a) does not apply by reason of section 1312, 1313, 1316(g), or 1317 of the Tax Reform Act of 1986 and which would (if issued on
August 15, 1986
) have been an industrial development bond (as defined in section 103(b)(2) as in effect on the day before the date of the enactment of such Act) or a private loan bond (as defined in section 103(
o
)(2)(A), as so in effect, but without regard to any exception from such definition other than section 103(
o
)(2)(A)), or
an obligation issued to refund (other than to advance refund within the meaning of section 149(d)(5))
1
1 See References in Text note below.
any obligation to the extent the amount of the refunding obligation does not exceed the outstanding amount of the refunded obligation.
In the case of an issue under which more than 1 governmental entity receives benefits, if—
all governmental entities receiving benefits from such issue irrevocably agree (before the date of issuance of the issue) on an allocation of the amount of such issue for purposes of this subparagraph, and
such allocation bears a reasonable relationship to the respective benefits received by such entities,
then the amount of such issue so allocated to an entity (and only such amount with respect to such issue) shall be taken into account under clause (i) with respect to such entity.
Not more than $10,000,000 of obligations issued by an issuer during any calendar year may be designated by such issuer for purposes of this paragraph.
Except as provided in clause (iii), in the case of a refunding (or series of refundings) of a qualified tax-exempt obligation, the refunding obligation shall be treated as a qualified tax-exempt obligation (and shall not be taken into account under clause (i)) if—
the refunding obligation was not taken into account under subparagraph (C) by reason of clause (ii)(III) thereof,
the average maturity date of the refunding obligations issued as part of the issue of which such refunding obligation is a part is not later than the average maturity date of the obligations to be refunded by such issue, and
the refunding obligation has a maturity date which is not later than the date which is 30 years after the date the original qualified tax-exempt obligation was issued.
No obligation issued as part of an issue may be designated under this paragraph (or may be treated as designated under clause (ii)) if—
any obligation issued as part of such issue is issued to refund another obligation, and
the aggregate face amount of such issue exceeds $10,000,000.
Subclause (II) shall not apply if the average maturity of the issue of which the original qualified tax-exempt obligation was a part (and of the issue of which the obligations to be refunded are a part) is 3 years or less. For purposes of this clause, average maturity shall be determined in accordance with section 147(b)(2)(A).
For purposes of subparagraphs (C) and (D)—
an issuer and all entities which issue obligations on behalf of such issuer shall be treated as 1 issuer,
all obligations issued by a subordinate entity shall, for purposes of applying subparagraphs (C) and (D) to each other entity to which such entity is subordinate, be treated as issued by such other entity, and
an entity formed (or, to the extent provided by the Secretary, availed of) to avoid the purposes of subparagraph (C) or (D) and all entities benefiting thereby shall be treated as 1 issuer.
In the case of an obligation which is issued as part of a direct or indirect composite issue, such obligation shall not be treated as a qualified tax-exempt obligation unless—
the requirements of this paragraph are met with respect to such composite issue (determined by treating such composite issue as a single issue), and
the requirements of this paragraph are met with respect to each separate lot of obligations which are part of the issue (determined by treating each such separate lot as a separate issue).
In the case of obligations issued during 2009 or 2010, subparagraphs (C)(i), (D)(i), and (D)(iii)(II) shall each be applied by substituting “$30,000,000” for “$10,000,000”.
In the case of a qualified 501(c)(3) bond (as defined in section 145) issued during 2009 or 2010, this paragraph shall be applied by treating the 501(c)(3) organization for whose benefit such bond was issued as the issuer.
In the case of a qualified financing issue issued during 2009 or 2010—
subparagraph (F) shall not apply, and
any obligation issued as a part of such issue shall be treated as a qualified tax-exempt obligation if the requirements of this paragraph are met with respect to each qualified portion of the issue (determined by treating each qualified portion as a separate issue which is issued by the qualified borrower with respect to which such portion relates).
For purposes of this subparagraph, the term “qualified financing issue” means any composite, pooled, or other conduit financing issue the proceeds of which are used directly or indirectly to make or finance loans to 1 or more ultimate borrowers each of whom is a qualified borrower.
For purposes of this subparagraph, the term “qualified portion” means that portion of the proceeds which are used with respect to each qualified borrower under the issue.
For purposes of this subparagraph, the term “qualified borrower” means a borrower which is a State or political subdivision thereof or an organization described in section 501(c)(3) and exempt from taxation under section 501(a).
For purposes of this subsection—
The term “interest expense” means the aggregate amount allowable to the taxpayer as a deduction for interest for the taxable year (determined without regard to this subsection, section 264, and section 291). For purposes of the preceding sentence, the term “interest” includes amounts (whether or not designated as interest) paid in respect of deposits, investment certificates, or withdrawable or repurchasable shares.
The term “tax-exempt obligation” means any obligation the interest on which is wholly exempt from taxes imposed by this subtitle. Such term includes shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends.
For purposes of this subsection, the term “financial institution” means any person who—
accepts deposits from the public in the ordinary course of such person’s trade or business, and is subject to Federal or State supervision as a financial institution, or
is a corporation described in section 585(a)(2).
If interest on any indebtedness is disallowed under subsection (a) with respect to any tax-exempt obligation—
such disallowed interest shall not be taken into account for purposes of applying this subsection, and
for purposes of applying paragraph (2), the adjusted basis of such tax-exempt obligation shall be reduced (but not below zero) by the amount of such indebtedness.
This section shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property).
In applying paragraph (2)(A), there shall not be taken into account tax-exempt obligations issued during 2009 or 2010.
The amount of tax-exempt obligations not taken into account by reason of subparagraph (A) shall not exceed 2 percent of the amount determined under paragraph (2)(B).
For purposes of this paragraph, a refunding bond (whether a current or advance refunding) shall be treated as issued on the date of the issuance of the refunded bond (or in the case of a series of refundings, the original bond).
Treasury Regulations
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Treas. Reg. §1.265-1Expenses relating to tax-exempt income
(a) Nondeductibility of expenses allocable to exempt income. (1) No amount shall be allowed as a deduction under any provision of the Code for any expense or amount which is otherwise allowable as a deduction and which is allocable to a class or classes of exempt income other than a class or classes of exempt interest income.
(2) No amount shall be allowed as a deduction under section 212 (relating to expenses for production of income) for any expense or amount which is otherwise allowable as a deduction and which is allocable to a class or classes of exempt interest income.
(b) Exempt income and nonexempt income. (1) As used in this section, the term class of exempt income means any class of income (whether or not any amount of income of such class is received or accrued) wholly exempt from the taxes imposed by Subtitle A of the Code. For purposes of this section, a class of income which is considered as wholly exempt from the taxes imposed by subtitle A includes any class of income which is:
(i) Wholly excluded from gross income under any provision of Subtitle A, or
(ii) Wholly exempt from the taxes imposed by Subtitle A under the provisions of any other law.
(2) As used in this section the term nonexempt income means any income which is required to be included in gross income.
(c) Allocation of expenses to a class or classes of exempt income. Expenses and amounts otherwise allowable which are directly allocable to any class or classes of exempt income shall be allocated thereto; and expenses and amounts directly allocable to any class or classes of nonexempt income shall be allocated thereto. If an expense or amount otherwise allowable is indirectly allocable to both a class of nonexempt income and a class of exempt income, a reasonable proportion thereof determined in the light of all the facts and circumstances in each case shall be allocated to each.
(d) Statement of classes of exempt income; records. (1) A taxpayer receiving any class of exempt income or holding any property or engaging in any activity the income from which is exempt shall submit with his return as a part thereof an itemized statement, in detail, showing (i) the amount of each class of exempt income, and (ii) the amount of expenses and amounts otherwise allowable allocated to each such class (the amount allocated by apportionment being shown separately) as required by paragraph (c) of this section. If an item is apportioned between a class of exempt income and a class of nonexempt income, the statement shall show the basis of the apportionment. Such statement shall also recite that each deduction claimed in the return is not in any way attributable to a class of exempt income.
(2) The taxpayer shall keep such records as will enable him to make the allocations required by this section. See section 6001 and the regulations thereunder.
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Treas. Reg. §1.265-1(a)Nondeductibility of expenses allocable to exempt income.
Nondeductibility of expenses allocable to exempt income. (1) No amount shall be allowed as a deduction under any provision of the Code for any expense or amount which is otherwise allowable as a deduction and which is allocable to a class or classes of exempt income other than a class or classes of exempt interest income.
(2) No amount shall be allowed as a deduction under section 212 (relating to expenses for production of income) for any expense or amount which is otherwise allowable as a deduction and which is allocable to a class or classes of exempt interest income.
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Treas. Reg. §1.265-1(b)Exempt income and nonexempt income.
Exempt income and nonexempt income. (1) As used in this section, the term class of exempt income means any class of income (whether or not any amount of income of such class is received or accrued) wholly exempt from the taxes imposed by Subtitle A of the Code. For purposes of this section, a class of income which is considered as wholly exempt from the taxes imposed by subtitle A includes any class of income which is:
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Treas. Reg. §1.265-1(c)Allocation of expenses to a class or classes of exempt income.
Allocation of expenses to a class or classes of exempt income. Expenses and amounts otherwise allowable which are directly allocable to any class or classes of exempt income shall be allocated thereto; and expenses and amounts directly allocable to any class or classes of nonexempt income shall be allocated thereto. If an expense or amount otherwise allowable is indirectly allocable to both a class of nonexempt income and a class of exempt income, a reasonable proportion thereof determined in the light of all the facts and circumstances in each case shall be allocated to each.
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Treas. Reg. §1.265-1(d)Statement of classes of exempt income; records.
Statement of classes of exempt income; records. (1) A taxpayer receiving any class of exempt income or holding any property or engaging in any activity the income from which is exempt shall submit with his return as a part thereof an itemized statement, in detail, showing (i) the amount of each class of exempt income, and (ii) the amount of expenses and amounts otherwise allowable allocated to each such class (the amount allocated by apportionment being shown separately) as required by paragraph (c) of this section. If an item is apportioned between a class of exempt income and a class of nonexempt income, the statement shall show the basis of the apportionment. Such statement shall also recite that each deduction claimed in the return is not in any way attributable to a class of exempt income.
(2) The taxpayer shall keep such records as will enable him to make the allocations required by this section. See section 6001 and the regulations thereunder.
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Treas. Reg. §1.265-1(i)§1.265-1(i)
Wholly excluded from gross income under any provision of Subtitle A, or
(ii) Wholly exempt from the taxes imposed by Subtitle A under the provisions of any other law.
(2) As used in this section the term nonexempt income means any income which is required to be included in gross income.
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Treas. Reg. §1.265-2Interest relating to tax exempt income
(a) In general. No amount shall be allowed as a deduction for interest on any indebtedness incurred or continued to purchase or carry obligations, the interest on which is wholly exempt from tax under subtitle A of the Code, such as municipal bonds, Panama Canal loan 3-percent bonds, or obligations of the United States, the interest on which is wholly exempt from tax under Subtitle A, and which were issued after September 24, 1917, and not originally subscribed for by the taxpayer. Interest paid or accrued within the taxable year on indebtedness incurred or continued to purchase or carry (1) obligations of the United States issued after September 24, 1917, the interest on which is not wholly exempt from the taxes imposed under Subtitle A of the Code, or (2) obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer, the interest on which is wholly exempt from the taxes imposed by Subtitle A of the Code, is deductible. For rules as to the inclusion in gross income of interest on certain governmental obligations, see section 103 and the regulations thereunder.
(b) Special rule for certain financial institutions. (1) No deduction shall be disallowed, for taxable years ending after February 26, 1964, under section 265(2) for interest paid or accrued by a financial institution which is a face-amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and which is subject to the banking laws of the State in which it is incorporated, on face-amount certificates (as defined in section 2(a)(15) of the Investment Company Act of 1940) issued by such institution and on amounts received for the purchase of such certificates to be issued by the institution, if the average amount of obligations, the interest on which is wholly exempt from the taxes imposed by Subtitle A of the Code, held by such institution during the taxable year, does not exceed 15 percent of the average amount of the total assets of such institution during such year. See subparagraph (3) of this paragraph for treatment of interest paid or accrued on face-amount certificates where the figure is in excess of 15 percent. Interest expense other than that paid or accrued on face-amount certificates or on amounts received for the purchase of such certificates does not come within the rules of this paragraph.
(2) This subparagraph is prescribed under the authority granted the Secretary or his delegate under section 265(2) to prescribe regulations governing the determination of the average amount of tax-exempt obligations and of the total assets held during an institution's taxable year. The average amount of tax-exempt obligations held during an institution's taxable year shall be the average of the amounts of tax-exempt obligations held at the end of each month ending within such taxable year. The average amount of total assets for a taxable year shall be the average of the total assets determined at the beginning and end of the institution's taxable year. If the Commissioner, however, determines that any such amount is not fairly representative of the average amount of tax-exempt obligations or total assets, as the case may be, held by such institution during such taxable year, then the Commissioner shall determine the amount which is fairly representative of the average amount of tax-exempt obligations or total assets, as the case may be. The percentage which the average amount of tax-exempt obligations is of the average amount of total assets is determined by dividing the average amount of tax-exempt obligations by the average amount of total assets, and multiplying by 100. The amount of tax-exempt obligations means that portion of the total assets of the institution which consists of obligations the interest on which is wholly exempt from tax under Subtitle A of the Code, and valued at their adjusted basis, appropriately adjusted for amortization of premium or discount. Total assets means the sum of the money, plus the aggregate of the adjusted basis of the property other than money held by the taxpayer in good faith for the purpose of the business. Such adjusted basis for any asset is its adjusted basis for determining gain upon sale or exchange for Federal income tax purposes.
(3) If the percentage computation required by subparagraph (2) of this paragraph results in a figure in excess of 15 percent for the taxable year, there is interest that does not come within the special rule for certain financial institutions contained in section 265(2). The amount of such interest is obtained by multiplying the total interest paid or accrued for the taxable year on face-amount certificates and on amounts received for the purchase of such certificates by the percentage figure equal to the excess of the percentage figure computed under subparagraph (2) of this paragraph over 15 percent. See paragraph (a) for the disallowance of interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from tax under Subtitle A of the Code.
(4) Every financial institution claiming the benefits of the special rule for certain financial institutions contained in section 265(2) shall file with its return for the taxable year:
(i) A statement showing that it is a face-amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and that it is subject to the banking laws of the State in which it is incorporated.
(ii) A detailed schedule showing the computation of the average amount of tax-exempt obligations, the average amount of total assets of such institutions, and the total amount of interest paid or accrued on face-amount certificates and on amounts received for the purchase of such certificates for the taxable year.
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Treas. Reg. §1.265-2(a)In general.
In general. No amount shall be allowed as a deduction for interest on any indebtedness incurred or continued to purchase or carry obligations, the interest on which is wholly exempt from tax under subtitle A of the Code, such as municipal bonds, Panama Canal loan 3-percent bonds, or obligations of the United States, the interest on which is wholly exempt from tax under Subtitle A, and which were issued after September 24, 1917, and not originally subscribed for by the taxpayer. Interest paid or accrued within the taxable year on indebtedness incurred or continued to purchase or carry (1) obligations of the United States issued after September 24, 1917, the interest on which is not wholly exempt from the taxes imposed under Subtitle A of the Code, or (2) obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer, the interest on which is wholly exempt from the taxes imposed by Subtitle A of the Code, is deductible. For rules as to the inclusion in gross income of interest on certain governmental obligations, see section 103 and the regulations thereunder.
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Treas. Reg. §1.265-2(b)Special rule for certain financial institutions.
Special rule for certain financial institutions. (1) No deduction shall be disallowed, for taxable years ending after February 26, 1964, under section 265(2) for interest paid or accrued by a financial institution which is a face-amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and which is subject to the banking laws of the State in which it is incorporated, on face-amount certificates (as defined in section 2(a)(15) of the Investment Company Act of 1940) issued by such institution and on amounts received for the purchase of such certificates to be issued by the institution, if the average amount of obligations, the interest on which is wholly exempt from the taxes imposed by Subtitle A of the Code, held by such institution during the taxable year, does not exceed 15 percent of the average amount of the total assets of such institution during such year. See subparagraph (3) of this paragraph for treatment of interest paid or accrued on face-amount certificates where the figure is in excess of 15 percent. Interest expense other than that paid or accrued on face-amount certificates or on amounts received for the purchase of such certificates does not come within the rules of this paragraph.
(2) This subparagraph is prescribed under the authority granted the Secretary or his delegate under section 265(2) to prescribe regulations governing the determination of the average amount of tax-exempt obligations and of the total assets held during an institution's taxable year. The average amount of tax-exempt obligations held during an institution's taxable year shall be the average of the amounts of tax-exempt obligations held at the end of each month ending within such taxable year. The average amount of total assets for a taxable year shall be the average of the total assets determined at the beginning and end of the institution's taxable year. If the Commissioner, however, determines that any such amount is not fairly representative of the average amount of tax-exempt obligations or total assets, as the case may be, held by such institution during such taxable year, then the Commissioner shall determine the amount which is fairly representative of the average amount of tax-exempt obligations or total assets, as the case may be. The percentage which the average amount of tax-exempt obligations is of the average amount of total assets is determined by dividing the average amount of tax-exempt obligations by the average amount of total assets, and multiplying by 100. The amount of tax-exempt obligations means that portion of the total assets of the institution which consists of obligations the interest on which is wholly exempt from tax under Subtitle A of the Code, and valued at their adjusted basis, appropriately adjusted for amortization of premium or discount. Total assets means the sum of the money, plus the aggregate of the adjusted basis of the property other than money held by the taxpayer in good faith for the purpose of the business. Such adjusted basis for any asset is its adjusted basis for determining gain upon sale or exchange for Federal income tax purposes.
(3) If the percentage computation required by subparagraph (2) of this paragraph results in a figure in excess of 15 percent for the taxable year, there is interest that does not come within the special rule for certain financial institutions contained in section 265(2). The amount of such interest is obtained by multiplying the total interest paid or accrued for the taxable year on face-amount certificates and on amounts received for the purchase of such certificates by the percentage figure equal to the excess of the percentage figure computed under subparagraph (2) of this paragraph over 15 percent. See paragraph (a) for the disallowance of interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from tax under Subtitle A of the Code.
(4) Every financial institution claiming the benefits of the special rule for certain financial institutions contained in section 265(2) shall file with its return for the taxable year:
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Treas. Reg. §1.265-2(i)A statement showing that it is a face-amount certificate company registered under the Investment Company Act of 1940 (15 U.
A statement showing that it is a face-amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and that it is subject to the banking laws of the State in which it is incorporated.
(ii) A detailed schedule showing the computation of the average amount of tax-exempt obligations, the average amount of total assets of such institutions, and the total amount of interest paid or accrued on face-amount certificates and on amounts received for the purchase of such certificates for the taxable year.
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Treas. Reg. §1.265-3Nondeductibility of interest relating to exempt-interest dividends
(a) In general. No deduction is allowed to a shareholder of a regulated investment company for interest on indebtedness that relates to exempt-interest dividends distributed by the company to the shareholder during the shareholder's taxable year.
(b) Interest relating to exempt-interest dividends. (1) All or a portion of the interest on an indebtedness relates to exempt-interest dividends if the indebtedness is either incurred or continued to purchase or carry shares of stock of a regulated investment company that distributes exempt-interest dividends (as defined in section 852(b)(5) of the Code) to the holder of the shares during the shareholder's taxable year.
(2) To determine the amount of interest that relates to the exempt-interest dividends the total amount of interest paid or accrued on the indebtedness is multiplied by a fraction. The numerator of the fraction is the amount of exempt-interest dividends received by the shareholder. The denominator of the fraction is the sum of the exempt-interest dividends and taxable dividends received by the shareholder (excluding capital gain dividends received by the shareholder and capital gains required to be included in the shareholder's computation of long-term capital gains under section 852(b)(3)(D)).
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Treas. Reg. §1.265-3(a)In general.
In general. No deduction is allowed to a shareholder of a regulated investment company for interest on indebtedness that relates to exempt-interest dividends distributed by the company to the shareholder during the shareholder's taxable year.
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Treas. Reg. §1.265-3(b)Interest relating to exempt-interest dividends.
Interest relating to exempt-interest dividends. (1) All or a portion of the interest on an indebtedness relates to exempt-interest dividends if the indebtedness is either incurred or continued to purchase or carry shares of stock of a regulated investment company that distributes exempt-interest dividends (as defined in section 852(b)(5) of the Code) to the holder of the shares during the shareholder's taxable year.
(2) To determine the amount of interest that relates to the exempt-interest dividends the total amount of interest paid or accrued on the indebtedness is multiplied by a fraction. The numerator of the fraction is the amount of exempt-interest dividends received by the shareholder. The denominator of the fraction is the sum of the exempt-interest dividends and taxable dividends received by the shareholder (excluding capital gain dividends received by the shareholder and capital gains required to be included in the shareholder's computation of long-term capital gains under section 852(b)(3)(D)).
94 Citing Cases
265 does not provide this congressional “fix” as it is inapplicable to petitioner’s case.
e also 5 U.S.C. secs. 5584(a), 8346(b), 8470(b) (2012); 10 U.S.C. secs. 1442, 1453(b)(2) (2012); 37 U.S.C. secs. 303a(e), 373(b) (2012); 38 U.S.C. sec. 5302(a) and (b) (2012); Intelligence Authorization Act for Fiscal Year 1993, Pub. L. No. 102-496, sec. 265, 106 Stat. at 3237-3238 (codified at 50 U.S.C. sec. 2095 (2012)); Social Security Amendments of 1967, Pub. L. No. 90-248, sec. 152(b), 81 Stat. at 861 (codified as amended at 42 U.S.C. sec. 404(b) (2012 & Supp. III 2015)); Social Security Am
Commissioner, supra (minister taxpayer denied deduction for automobile business expenses when virtually all income earned during year was tax-exempt parsonage allowance under section 107.) Petitioner’s circumstances are not factually distinguishable - 6 - from the cases cited above. Petitioner earned both nonexempt income as a minister and tax-exempt parsonage income from the Church. The parsonage allowance is a class of income wholly exempt from tax under section 107, and section 265(a)(1) exp
Thus, for example, for [alternative] minimum tax purposes it was intended that section 1211 (limiting capital losses) be computed using [alternative) minimum tax basis, that section 263A (requiring the capitalization of certain depreciation deductions to inventory) apply with regard· to [alternative] minimum tax depreciation deductions, and that section 265 (relating to expenses of earning tax-exempt income) apply with regard only to items excludable from alternative minimum taxable income.
- 45 - ________________ 4 For example, an interest deduction that is disallowed under section 265 or 291 should not be allowed, capitalized, or suspended under another provision.
Thus, for example, for [alternative] minimum tax purposes it was intended.that section 1211 (limiting capital losses) be computed using [alternative] minimum tax basis, that section 263A (requiring the capitalization of certain depreciation deductions to inventory) apply with regard to [alternative] minimum tax depreciation deductions, and that section 265 (relating to expenses of earning tax-exempt income) apply with regard only to items excludable from alternative minimum taxable income.
Thus, for example, for [alternative] minimum tax purposes it was intended that section 1211 (limiting capital losses) be computed using [alternative] minimum tax basis, that section 263A (requiring the capitalization of certain depreciation deductions to inventory).apply with regard· to [alternative] minimum tax depreciation deductions, and that section 265 (relating to expenses of earning tax-exempt income) apply with regard only to items excludable from alternative minimum taxable income.
For example, an interest deduction that is disallowed under section 265 or 291 should not be allowed, capitalized, or suspended under another provision.
Petitioners provided no allocation of the fees they paid. Nevertheless, we recognize that some part of the legal fees was - 8 - business expenses. Where the Court is satisfied that the taxpayer is entitled to some deduction but where the records are inadequate to establish the amount of the deduction, the Court may make an approximation
Respondent, however, relies on section 265 to support his determination that these otherwise allowable deductions may not be deducted if allocable or attributable to excludable income.
d 1486; Lee v. Commissioner, 155 F.3d 584 (2d Cir. 1998). We, therefore, uphold respondent's disallowance of these deductions. Decision will be entered under Rule 155. 49Respondent argues that the administrative fees should be disallowed pursuant to sec. 265. Because we have held that the administrative fees must be disallowed as the product of a sham, we have no need to consider disallowance under sec. 265. - 68 - Appendix A Scenario 1 - Constant Loan Interest Rate Profit and Loss Statement (do
first such increased premium is paid. The parties also agree that petitioner’s COLI policies meet the definition of a life insurance contract for purposes of sec. 7702. Respondent argues that the administration fees should be disallowed pursuant to sec. 265. Because we have held that the administration fees must be disallowed as the product of a sham, we have no need to consider disallowance under sec. 265.
yment income received from ElderPlace in the amounts of $13,167, $22,750, and $32,366 for the years 1992, 1993, and 1994, respectively, and are - 8 - entitled to claim additional business expenses associated with the income that was allocated under section 265. Discussion The parties agree that payments petitioners received directly from residents, or their representatives, are taxable and that payments petitioners received for residents placed in their home directly by the State of Oregon are t
of a qualified scholarship under section 117, meaning that interest payments incurred during repayment are not deductible because they are directly related to the production of tax-exempt income and are subject to the nondeductibility limitations of section 265. The issue for decision is whether petitioner may deduct the interest portion of the payments he made pursuant to the settlement agreement with DHHS in 1987. Deductions are strictly a matter of legislative grace, and petitioner must prove
Commissioner, supra at 193-194, where the tax exemption attaching to the taxpayer's farm income derived from his status as an Indian and the location of the farm on Indian land: The legislative purpose behind section 265 is abundantly clear: Congress sought to prevent taxpayers from reaping a double tax benefit by using expenses attributable to tax-exempt income to offset other sources of taxable income.
- 28 - We held that under section 265, the portion of the attorney's fees allocable to the settlement amount for wrongful discharge was not deductible, but the portion of the attorney's fees allocable to the taxable portion of the suit, the breach of contract action, was deductible under section 162.
We find that WSA is entitled to a deduction under sections 162(a) and 512(a) in the amount determined by applying the ratio which WSA's instant bingo proceeds bear to its total gross proceeds to the total fees of $1,237.60. Excess Contributions The remaining issue for decision is whether WSA is entitled to deduct as a business expense the
e that petitioner's legal fees and costs are deductible, if at all, under section 162 as expenses paid or incurred in the course of petitioner's trade or business. However, the deductibility of petitioner's legal expenses must also be tested against section 265. Section 265 provides in pertinent part as follows: (a) GENERAL RULE.--No deduction shall be allowed for-- (1) EXPENSES.--Any amount otherwise allowable as a deduction which is allocable to one or more classes of income * * * wholly exemp
We find that WSA is entitled to a deduction under sections 162(a) and 512(a) in the amount determined by applying the ratio which WSA's instant bingo proceeds bear to its total gross proceeds to the total fees of $1,237.60. Excess Contributions The remaining issue for decision is whether WSA is entitled to deduct as a business expense the
cable to the instant case.2 Respondent next argues that the Color Q payment was not an "ordinary and necessary" business expense of the S Corporation 2 Respondent makes no argument that the deduction of the Color Q payment should be disallowed under sec. 265. - 12 - within the meaning of section 162(a). To qualify as an allowable deduction pursuant to section 162(a), "an item must (1) be 'paid or incurred during the taxable year,' (2) be for 'carrying on any trade or business,' (3) be an 'expens
DNI includes tax-exempt interest under section 103, reduced by any amounts "which would be deductible in respect of disbursements allocable to such interest but for the provisions of section 265 (relating to disallowance of certain deductions)." Sec.
Section 265 provides the following: No deduction shall be allowed for-- (1) Expenses.--Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle * * *
265[(a)](2) or 246A) by its own terms, is not applicable in the case of related parties”. Neither party cites any case dealing specifically with borrowings by a subsidiary and the purchase of portfolio stock or tax-exempt securities by the parent company. The only case dealing with related persons that either party cites is Drybrough v. Commis