§265 — Expenses and interest relating to tax-exempt income

265 does not provide this congressional “fix” as it is inapplicable to petitioner’s case.

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

- 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.

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

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

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

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

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.

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 * * *

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

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.

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.

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

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

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.