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(as a purported capital contribution), followed by a transfer of
this cash from Finance to HGI in exchange for HGI’s promissory
notes, followed by a dividend of the cash from HGI to City, all
accomplished within the same day as prearranged. Moreover,
respondent contends, the HGI notes were “highly irregular”:
interest was either not charged or below market and was never
paid; there was no collateral or fixed schedule for repayment;
and the notes were ultimately canceled without payment. The
notes were unenforceable, respondent contends, for lack of
consideration. Thus, respondent concludes: “Finance did not
receive the actual benefit of the purported contribution to
capital”. Accordingly, in respondent’s view, Finance’s
capitalization with the HGI notes should be disregarded,
resulting in Finance’s failure to satisfy the 5-to-1 debt/equity
ratio mandated in DEFRA section 127(g)(3)(B).
Petitioner contends that Finance’s equity capital consisted
of the promissory notes of a creditworthy affiliate (HGI), the
value of which at all times substantially exceeded 20 percent of
Finance’s outstanding indebtedness to the Eurobond holders.
Accordingly, petitioner argues, Finance’s capitalization
conformed with the principles of the listed rulings which permit,
inter alia, a finance subsidiary to invest its equity capital in
the stock or debt of an affiliate and do not further restrict or
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