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The finance subsidiary borrowed $70 million at 17-1/4 percent
interest in that market and lent that amount to the taxpayer at
18-1/4 percent interest. Respondent argued that the finance
subsidiary should be ignored and that the taxpayer was liable for
withholding taxes under section 1441 on the interest payments to
the foreign Eurobond holders. Finding that the finance
subsidiary engaged in substantive business activity that resulted
in significant earnings, we held that the finance subsidiary was
not a mere conduit or agent.
We think the within situation falls more within the ambit of
Northern Indiana than Aiken Industries. In the latter case,
there was an identity both in terms and timing between the back
to back loans, as well as a close relationship between the
parties involved. In the former case, although there was a clear
connecting purpose between the borrowing and lending
transactions, i.e., to obtain the benefit of the exemption from
the withholding tax on interest under the U.S.-Netherlands
treaty; there were differences in terms, i.e., in the interest
rate (albeit not large); and a close relationship between all the
parties was not present since the borrowings by the finance
subsidiary were from unrelated parties.
In the instant case, there was a close relationship between
the parties. However, although respondent asks us, in passing,
to take that relationship into account, she does not pursue the
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