Final answer:
The statement that expenses related to the production of tax-exempt income are not deductible, including interest on debt used to purchase or hold tax-exempt financial instruments, is true. This prevents investors from benefiting from tax-exempt income while also claiming a tax deduction for related expenses.
Step-by-step explanation:
The statement is true: Expenses related to the production of tax-exempt income are not deductible. This means that if you invest in tax-exempt securities, such as municipal bonds, you cannot deduct any costs associated with purchasing or holding those securities. This includes interest on loans used to buy or maintain your investment in these tax-exempt financial instruments. The policy behind this is to prevent double-dipping, where an investor would benefit from tax-exempt income and also receive a tax deduction for the related expenses.