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provision, is consistent with respondent's scrutiny of
petitioner's debt to equity ratio and should be carried
out. [Emphasis added.]
The Deficit Reduction Act of 1984 significantly modified
withholding requirements with respect to "interest received by
foreigners on certain portfolio investments." DEFRA sec. 127, 98
Stat. 648. These provisions essentially provided U.S. taxpayers
direct tax-free access to the Eurobond market. The amendments
made by DEFRA section 127 generally applied to "interest received
after the date of the enactment of this Act with respect to
obligations issued after such date, in taxable years ending after
such date." DEFRA sec. 127(g)(1), 98 Stat. 652. However, DEFRA
section 127(g)(3), 98 Stat. 652-653, established safe harbor
rules applicable to certain controlled foreign corporations in
existence on or before June 22, 1984:
(A) In General.--For purposes of the Internal
Revenue Code of 1954, payments of interest on a United
States affiliate obligation to an applicable CFC in
existence on or before June 22, 1984, shall be treated
as payments to a resident of the country in which the
applicable CFC is incorporated.
(B) Exception.--Subparagraph (A) shall not apply
to any applicable CFC which did not meet requirements
which are based on the principles set forth in Revenue
Rulings 69-501, 69-377, 70-645, 73-110.
Thus, respondent argues that for the safe harbor rules to apply,
the controlled foreign corporation must have met the 5-to-1 debt-
to-equity ratio as set forth in Rev. Rul. 69-377, 1969-2 C.B.
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