Northern Indiana Public Service Company - Page 15

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            for the withholding tax if Finance's debt-to-equity ratio does                            
            not exceed 5 to 1.7                                                                       
                  Petitioner argues that its assignment of accounts receivable                        
            in an amount of at least $28 million was an equity investment in                          
            Finance that brings Finance well within the debt-to-equity ratio                          
            of 5 to 1.  Respondent argues that this assignment was not an                             
            equity investment because actual ownership of the accounts                                
            receivable was never transferred.  Before we launch any inquiry                           
            into the true nature of the assignment of petitioner's accounts                           
            receivable, we will first inquire into the legal basis for                                
            respondent's reliance on alleged inadequate capitalization as a                           


            6(...continued)                                                                           
                        In light of the inseparability of the IET                                     
                  [Interest Equalization Tax] and the five to one debt to                             
                  equity ratio and resultant Federal income tax                                       
                  consequences, the expiration of the IET on June 30,                                 
                  1974, eliminated any rationale for treating finance                                 
                  subsidiaries any differently than other corporations                                
                  with respect to their corporate validity or the                                     
                  validity of their corporate indebtedness.  Thus, the                                
                  mere existence of a five to one debt to equity ratio,                               
                  as a basis for concluding that debt obligations of a                                
                  finance subsidiary constitute its own bona fide                                     
                  indebtedness, should no longer be relied upon.  [Id.]                               

            7As more fully discussed infra, sec. 127(g)(3) of the                                     
            Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat.                           
            652, provides a "safe harbor" from taxation for interest paid to                          
            a controlled foreign corporation if the requirements of the                               
            above-mentioned revenue rulings are met.  At trial, respondent's                          
            counsel acknowledged that the specific capital requirements of                            
            the revenue rulings outlined above were not based on statute or                           
            case law, except to the extent that compliance with them is                               
            required to come within the "safe harbor" provisions of DEFRA                             
            sec. 127(g)(3).                                                                           




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