Intentional Deception

            In the OBH case, it appears that one way to avoid the rules of §246A is to intentionally keep poor or hard to trace records.  While it was not the fact that everything ran through one account that kept OBH from incurring the §246A limitations, better records and separate accounts would have made any direct connections obvious and easier to trace.  The IRS agent did manage to find a trace even in the mass of daily transactions, so this method is not the best manner in which to avoid §246A.  However, even in a situation where a single account would help to hide the connection between the debt proceeds and the stock purchase, one must be careful since §246A can be invoked even without a direct trace.  As seen in the HEI case, the purpose of the taxpayer can cause the rules to be invoked even with a direct trace is missing.

            Contrary to the initial view, the OBH case really provides an argument for keep separate accounts and accurate and detailed records.  In this case, if facts had been different, and everything had been separated, it would have been less likely that Mr. Powell would have been able to make a connection, especially over the course of thousands of transactions and a year time frame.  OBH’s saving grace in this case was the lack of a purpose and the tenuous nature of the traces.  In a different scenario, a lucky IRS agent could have stumbled upon a direct trace regardless of what the taxpayer actually did, and §246A would apply despite the efforts of the taxpayer. 


            The limitations placed on dividend received deductions work to keep abuse to a minimum.  The ability to deduct not only the interest payment but also the dividend received would allow for a double deduction, and possibly the creation of money that would ultimately be paid for by the IRS.  While the statute does not go into details about how to trace funds and how to establish whether or not there is a direct connection, the courts have filled this gap and established tests that provide guidance for a tax planner that has to deal with this situation.  The revenue ruling also helps to understand what is permissible and what is not.  However, even with these tests and supporting guidance, one must still be wary of the purpose test that can limit even well planned transactions.