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The fourth ruling, Rev. Rul. 73-110, 1973-1 C.B. 454, concerned
the appropriate computation of a finance subsidiary’s debt/equity
ratio where its capital contribution is made in one currency and
its borrowings are made in another. Where different currencies
are involved, an initial contribution to capital that is equal to
20 percent of the debt to be issued by a finance subsidiary may
cease to be so as a result of fluctuating currency values. Rev.
Rul. 73-110, supra, held that, in these circumstances, the
debt/equity ratio need only be recomputed to reflect then-
prevailing currency exchange rates if (1) the finance subsidiary
undertakes additional borrowings or (2) the parent withdraws
equity capital for any reason, such as a reduction in the finance
subsidiary’s outstanding indebtedness. Otherwise, the failure to
maintain the required debt/equity ratio after the initial
contribution is immaterial.
We believe the listed rulings evidence principles that are
in clear conflict with many of respondent’s arguments. Though
19(...continued)
from third parties to make a capital contribution to a second-
tier finance subsidiary. The ruling concluded that the first-
tier finance subsidiary’s debt/equity ratio was not adversely
affected by its use of a portion of its third-party borrowings to
make a capital contribution to a second-tier finance subsidiary,
so long as neither the first-tier finance subsidiary nor its
parent provided any guaranty with respect to the second-tier
finance subsidiary’s borrowing.
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