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Petitioner was required to pay interest at 18-1/4 percent,
whereas Finance issued the Euronotes at 17-1/4 percent.
Finance's aggregate income on the spread between the Euronote
interest and the interest on petitioner's note was $2,800,000.
In addition, Finance earned interest income on its investments
(exclusive of interest received from petitioner) during its
existence.12
Moreover, in Aiken Indus., this Court did not rely upon, or
even mention, lack of adequate capitalization as a reason for
treating Industrias as a conduit. Since respondent's
determination was based on her finding that Finance was "not
properly capitalized," respondent's reliance on Aiken Indus. is
misplaced.
Respondent next argues that
in 1984 Congress had the option of retroactively
grandfathering all foreign subsidiaries and eliminating
all withholding tax on bond interest had it chosen to
do so. Instead, it opted for the safe harbor provision
contained in section 127(g)(3) which expressly
referenced the rulings requiring a debt equity ratio of
no more than five-to-one for financing subsidiaries
utilized prior to the effective date of the Act. The
intent of Congress, as reflected in this safe harbor
12Compare Morgan Pac. Corp. v. Commissioner, T.C. Memo.
1995-418, in which the taxpayer conceded, based on Aiken Indus.,
Inc. v. Commissioner, 56 T.C. 925 (1971), that a Netherlands
Antilles corporation should be treated as a conduit. The
transactions in Morgan Pacific are distinguishable from those in
the instant case. Among other things, the interest payments
received and paid by the Netherlands Antilles corporation in
Morgan Pacific were identical and the transactions did not
involve parties unrelated to petitioner.
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