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is to issue debt and facilitate repayment, the only substantive
role of its equity capital is to serve as security for the
holders of its debt; i.e., as an avenue of recourse in the event
of a default. Also central to the arrangement involving a
finance subsidiary is the parent’s guaranty of the debt, on which
the lenders to the subsidiary are in fact relying. In this
context, it does not appear that capitalizing the finance
subsidiary with the common stock of its parent adds significant
economic substance to the rights of the holders of the
subsidiary’s debt. If the parent is unable to meet its
obligations under the guaranty, the fact that the subsidiary has
equity capital in the form of the parent’s stock (as opposed to,
e.g., cash or publicly traded securities of some other entity)
adds little to the substantive economic position of the
debtholders.
In addition, respondent’s characterization of the parent
stock in Rev. Rul. 72-416, supra, as “marketable securities”, a
term that does not appear in the ruling, may misread the
significance of the stock’s publicly traded status to the
ruling’s conclusion. While respondent infers that the
contributed stock’s publicly traded, and therefore readily
marketable, status gives the stock independent economic substance
as equity capital, we think the ruling’s language suggests that
the significance of the contributed stock’s being publicly traded
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