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declines. The failure to address issues arising from any change
in the value of the equity capital, once invested in other
assets, suggests the ruling’s emphasis falls entirely on the
nominal amount of initial paid-in capital, a highly formalistic
approach. This principle is reinforced in Rev. Rul. 73-110,
supra, which held that if changes in relative currency values
after the initial contribution to capital cause a finance
subsidiary to fail to meet the required debt/equity ratio, the
failure can be disregarded unless the subsidiary undertakes
additional borrowing or the parent withdraws capital. Both
rulings’ “snapshot” approach of testing the ratio only at the
time of the capital contribution or withdrawal is artificial and
formalistic. Under such an approach, which treats subsequent
changes in the value of the equity capital as largely irrelevant
to the debt/equity ratio, we do not believe much economic
substance inheres in a finance subsidiary’s capitalization.
Overall, the inherent artificiality of the finance
subsidiary’s capitalization in Rev. Rul. 69-377, supra, is
highlighted when one considers that the purpose of the whole
undertaking was to obtain capital for the foreign affiliates,
which is precisely where the cash used to capitalize the finance
subsidiary ended up. The finance subsidiary thus functioned as a
conduit both with respect to the borrowed funds and with respect
to the contribution to its capital.
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