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ARGUED FEBRUARY 23, 2010

Before BAUER, POSNER, and SYKES, Circuit Judges.

This appeal from the Tax Court presents an important question concerning the taxation of banks that either (1) are subchapter S corporations or (2) are wholly owned by such corporations and are classified as “qualified subchapter S subsidiaries” (“QSubs”), as is permissible unless they’re in one of the categories of “ineligible corporations.” 26 U.S.C. §§ 1361(b)(2), (3). Thirty-one percent of all federally insured banks are either subchapter S corporations or QSubs (by number, not deposits-these banks are mainly small community banks). Federal Deposit Insurance Corporation, Institution Directory, www2.fdic.gov/IDASP/main.asp?formname=inst (under “Specialized Categories (FAQ)” drop-down menu) (visited Feb. 24, 2010). The question is whether they can deduct all or merely part of the interest expense that they incur to purchase certain tax-exempt bonds.

 
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