Maaser Sheni, Chapter 3, Mishnah 2. The Mishnah opens with the ruling: "Ein lokchin terumah bikhsef maaser sheni" - one may not purchase Terumah with maaser sheni money.
The reason for the prohibition:
Although maaser sheni money is meant for buying food in Jerusalem, one may not use it to buy food that is Terumah, "mipnei shehu memaet ba'achilato" - because such a purchase reduces the ability to eat the maaser sheni. Ordinarily maaser sheni may be eaten by any Jew and is not restricted to a kohen, whereas Terumah may be eaten only by a kohen. One who buys Terumah with maaser sheni money therefore limits who may eat it, and that is not what we want.
Some add that the reduction applies to the Terumah itself as well, since two leniencies that it had are now cancelled:
Where it may be eaten: Terumah may be eaten anywhere, whereas maaser sheni may be eaten only in Jerusalem.
Eating by an onen: Terumah may be eaten even by an onen - one who has lost a close relative - whereas maaser sheni may not be eaten by an onen.
The view of Rabbi Shimon:
Rabbi Shimon permits buying Terumah with maaser sheni money and eating it, and his position rests on a principle he holds: one may bring sacred items into a state in which they will become disqualified. Here only part of the permitted use is lost, and even so Rabbi Shimon allows narrowing the ability to eat it, and he sees no problem in that.
This is how Rabbi Shimon argues: "Amar lahem Rabbi Shimon: mah im hekel bezivchei shelamim shehen mevi'in lidei pigul v'notar v'tamei, lo nakel biterumah?" - if the law was lenient with peace offerings, which can come to pigul, notar and tumah, shall we not be lenient with Terumah?
If we were lenient and allowed peace offerings to be bought with maaser sheni money, there the meat of the offering may become disqualified in three ways:
Pigul - if the kohen had disqualifying intentions.
Notar - if the meat is left over, and it then must be burned.
Tamei - for if it became impure, it may not be eaten at all.
And if we nevertheless permit buying them with maaser sheni money, all the more so should we be lenient with Terumah: true, only a kohen may eat it, but in the end it is eaten, and it is not subject to all these disqualifications - there is a concern of tumah, but there is no pigul and no notar.
The response of the Sages:
"Amru lo: mah im hekel bezivchei shelamim shehen mutarin l'zarim, nakel biterumah she'asurah l'zarim?" - they said to him: if the law was lenient with peace offerings, which are permitted to non-kohanim, shall we be lenient with Terumah, which is forbidden to non-kohanim?
The leniency regarding peace offerings was stated precisely because they may be eaten even by non-kohanim, and therefore one cannot derive from it a leniency for Terumah, which is forbidden to non-kohanim. There is a further basic distinction: in buying Terumah the reduction is certain - it will no longer be eaten by anyone who is not a kohen; whereas with peace offerings the disqualification is not certain, and they may never come to pigul, notar or tumah at all, so it is no more than a possibility.
In summary: The Mishnah forbade buying Terumah with maaser sheni money because it reduces the eating - both of the maaser sheni, which now becomes restricted to kohanim alone, and of the Terumah itself, which is now limited to the place where maaser sheni is eaten and is forbidden to an onen. Rabbi Shimon permitted it, based on the principle that one may bring sacred items into a state of disqualification, and on a kal vachomer from peace offerings, which are liable to come to pigul, notar and tumah. The Sages rejected his argument: the leniency with peace offerings stems from their being permitted to non-kohanim, and with them the disqualification is only a possibility, while with Terumah, which is forbidden to non-kohanim, the reduction is certain.