- 41 -
other listed rulings discussed, we do not think Rev. Rul. 69-501,
supra, can be reconciled with the other listed rulings to derive
a “principle” or “requirement” to the effect that a finance
subsidiary’s capitalization must have economic substance to the
extent urged by respondent herein. The other rulings, especially
Rev. Rul. 69-377, supra, concede too much to the contrary.
In the instant case, Finance was capitalized by means of two
transfers of cash from City to Finance, which cash was
immediately transferred20 by Finance to HGI in exchange for
promissory notes of equal face value, followed by HGI’s transfer
of the note proceeds back to City as a dividend. City’s cash
capital contributions to Finance ($13,200,000 in 1977 and $22
million in 1979), as well as the face value of the HGI notes
received by Finance in exchange for the cash, constituted 44
percent of the amounts borrowed by Finance on the Eurobond market
($30 million in 1977 and $50 million in 1979), well within the
required 5-to-1 ratio. Insofar as the capitalization of Finance
consisted of contributions of cash followed by the investment of
that cash in the securities of an affiliate, the transaction
conforms with Rev. Rul. 69-377, supra. However, the Finance
transaction contains an additional feature, not present in Rev.
20 In one instance, the cash was transferred into and out of
Finance’s bank account in the same day; in the other instance, a
check from City was endorsed by Finance to the order of HGI,
without the funds moving through Finance’s bank account.
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