dissenting: I agree with the majority’s handling of respondent’s argument with regard to the inclusion or exclusion of partners’ capital accounts in the denominator of the applied fraction. However, I respectfully disagree with almost everything else.
In my opinion the approach taken in the majority opinion is not quite as mechanical as that which the Court refused to apply in R. B. George Machinery Co., 26 B.T.A. 594 (1932), but it is still too mechanical for me. For 'all practical purposes, it calls for an automatic allocation of some portion of total interest expense, however small, to “dis-allowable” interest expense whenever the amount of a taxpayer’s borrowing is actually or presumably forced up by his present or contemplated purchase or holding of tax-exempt securities. Why pretend that the purpose test is still with us? With its opinion today, the ma-j ority coaxes the purpose test out the window.
I think that where petitioners find themselves in the same position as Leslie and Bradford we should give considerable weight to the following factors: That the amounts borrowed were dictated by the amounts needed to carry on the brokerage business; that they did not borrow more so as to purchase or carry tax-exempts; that they did not consider that they would have to borrow less if they sold their tax-exempts ; that there was no real relationship between the amounts borrowed and the amount of tax-exempts purchased; that they purchased tax-exempts only as items for resale to their customers; that they dealt in tax-exempts only to a small extent, and then only to complete the selection of securities sold by them and thus to foster all types of sales; and that, in one sense, they lost money in financing their dealing in tax-exempts since their “disallowable” interest expense exceeded the amount of tax-exempt interest income earned. These indicate to me that the true purpose of the disputed portion of total borrowing was to conduct a brokerage business in a usual, profitable manner.
While the majority’s approach is tidy, it unfortunately runs counter to the approach of Congress. In this respect I need only reiterate what we said in the not-too-distant past:
The legislative history makes clear that section 265(2) was not intended to be applied merely on the basis of an allocation of indebtedness to the purchase or carrying of tax-exempt securities. A reasonable allocation may justify the application of section 265(1), but there must be more to apply section 265(2). The respondent’s allocation may be reasonable, but its reasonableness does not justify the application of section 265 (2). There must be a connection between the reason for incurring or continuing the indebtedness and the purchase or the carrying of the tax-exempt securities, * * *. [John E. Leslie, 50 T.0.11, 22 (1968).]
The “coimection” we spoke of in the Leslie case must be found to be legally sufficient by the exercise of judicial judgment rather than arrived at by the mere opening and closing of administrative and judge-made synapses.
In my judgment the Court of Appeals for the Second Circuit was incorrect in reasoning that the partnership of which Leslie was a member borrowed to accommodate all the needs of its business, including the intended purchases of tax-exempt securities, and thus passed the purpose test. The petitioner in this case borrowed ultimately for one purpose, i.e., to enable J. G. Bradford & Co. to carry on the 'brokerage business and thus to earn commissions. That is actually what happened, whether courts talk in terms of “purpose,” “allocation,” “ultimate purpose,” “dominant purpose,” or “primary purpose.”
DrENNEN, Fokkester, Fay, SimpsoN, FeatherstoN, and Sterrett, JJ., agree with this dissent.