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“requirements which are based on the principles set forth in” the
listed rulings.
The parties agree that one principle set forth in the listed
rulings is that the debt of a finance subsidiary will be treated
as its own if the subsidiary maintains a ratio of debt to equity
that does not exceed 5 to 1.15 Beyond this point, the parties
disagree. Respondent, while acknowledging that a test of the
debt/equity ratio, rather than conventional substance-over-form
principles, is to be used in determining whether a finance
subsidiary should be disregarded as a conduit, nevertheless
argues that the finance subsidiary’s capitalization for purposes
of the debt/equity ratio must withstand scrutiny under substance-
over-form doctrine. Respondent contends that the listed rulings’
principles require that a finance subsidiary’s equity capital
“must exist not only in form but also in substance” and that
Finance’s capitalization lacks the requisite substance. In
respondent’s view, the capitalization of Finance was
“meaningless” because it was accomplished through a circular
cash-flow; namely, the capitalization of Finance in connection
with the issuance of both the 8-3/4-percent notes and the FR
notes was accomplished by a transfer of cash from City to Finance
15 This principle appears implicitly in the first two listed
rulings, Rev. Rul. 69-377, 1969-2 C.B. 231, and Rev. Rul. 69-501,
1969-2 C.B. 233, and explicitly in the two later listed rulings,
Rev. Rul. 70-645, 1970-2 C.B. 273, and Rev. Rul. 73-110, 1973-1
C.B. 454.
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