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subsidiary’s reduction of its debt load as one of the two
occasions when a recomputation of the debt/equity ratio based on
then-prevailing currency values was required. In the instant
case, a portion of the HGI notes was transferred by Finance to
City as a return of capital after repayment of the 8-3/4-percent
notes. The remainder of the HGI notes was transferred from
Finance to City in connection with Finance’s liquidation. In
each instance, City contributed the HGI notes to the capital of
HGI, and HGI extinguished them. The extinguishment of the HGI
notes without payment was consistent with the principles of the
listed rulings, which permit the withdrawal of a finance’s
subsidiary’s equity capital so long as the required ratio is
maintained.
Respondent argues that the amplification of Rev. Rul. 69-
377, 1969-2 C.B. 231, in Rev. Rul. 72-416, 1972-2 C.B. 591, to
allow a finance subsidiary to be capitalized with the parent’s
publicly traded stock rather than cash also supports his position
that a finance subsidiary’s capitalization must have economic
substance. In respondent’s view, since the finance subsidiary’s
capital in Rev. Rul. 72-416, supra, consisted of “marketable
securities” (respondent’s term on brief), it has economic
substance, apparently because of the liquidity of such assets.
We believe this interpretation overlooks the peculiar features of
a finance subsidiary. Since a finance subsidiary’s sole function
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