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Respondent does not deny the corporate existence of Finance.
Respondent's reason for treating Finance as a mere conduit or
agent is that Finance was "not properly capitalized". The
explanation of adjustments in the notice of deficiency states:
It has been determined that your 100% owned foreign
subsidiary, incorporated in the Netherlands Antilles,
was not properly capitalized, therefore the interest
paid by that subsidiary on debt obligations (Euronotes)
is treated as being paid directly by you.
Consequently, you are liable for the 30% withholding
which was not withheld on interest payments made to the
holders of the Euronotes * * * [Emphasis added.]
Respondent's argument that Finance was inadequately
capitalized, and that this should result in ignoring it for tax
purposes, appears to be based on Rev. Rul. 69-377, 1969-2 C.B.
231; Rev. Rul. 69-501, 1969-2 C.B. 233; Rev. Rul. 70-645, 1970-2
C.B. 273; and Rev. Rul. 73-110, 1973-1 C.B. 454. These revenue
rulings basically recognize the validity of the debt obligation
of wholly owned foreign financing subsidiaries in situations
identical to the instant case, if the amount borrowed by the
financing subsidiary does not exceed five times its equity
capital.6 Respondent would agree that petitioner is not liable
5(...continued)
620 (C.A.3, 1952).
6In Rev. Rul. 74-464, 1974-2 C.B. 47, respondent indicated
that the mere existence of a 5-to-1 debt-to-equity ratio could no
longer be relied upon by taxpayers.
(continued...)
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