- 15 -
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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