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As part of his argument that Finance’s capitalization lacked
substance, respondent also contends that Finance received no
benefit from the contribution to its capital. Rev. Rul. 69-377,
supra, provides no basis for such a requirement and indeed is
counter to it. In the ruling, the cash transferred to the
finance subsidiary as a capital contribution could be invested in
the stock of affiliates. There is no discussion of the
affiliates’ dividend-paying history or capacity. Absent such a
showing, we are unable to see how the finance subsidiary in Rev.
Rul. 69-377, supra, benefited from holding affiliates’ stock in
any greater degree than Finance benefited from holding the non-
interest-bearing notes of HGI.
In a similar vein, respondent argues that the lack of
commercially reasonable terms for the HGI notes further indicates
that the notes lacked substance and should be disregarded as
equity capital for purposes of DEFRA section 127(g)(3). Rev.
Rul. 69-377, supra, however, permitted a finance subsidiary’s
capital to be invested in either debt or stock of affiliates.
Given this indifference to the choice of debt or equity, we do
not believe the failure to provide for interest on the HGI notes
is fatal under the principles of that ruling. The HGI notes
contained other characteristics of indebtedness. Each was
unsubordinated and contained an unconditional promise to pay at a
time certain or upon demand thereafter by a creditworthy obligor.
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