Northern Indiana Public Service Company - Page 14

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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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