Please refer to the IRS publication 550 page 37 - http://www.irs.gov/pub/irs-prior/p550--2006.pdf - that is 2006 publication.
http://www.irs.gov/pub/irs-pdf/p550.pdf - publication for 2007 will be updated here - it is not available at this time.
Tax-exempt income. You cannot deduct expenses you incur to produce tax-exempt income. Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a regulated investment company (mutual fund) that distributes only exempt-interest dividends.