- 42 -
Rul. 69-377, supra; namely, the immediate cycling back to the
parent of its cash contribution to the finance subsidiary’s
capital, via a series of steps in which Finance transferred the
cash received from City to HGI in exchange for HGI’s notes,
followed by HGI’s transfer of the cash to City as a dividend.
This circular cash-flow distinguishes the capitalization of
Finance from that in Rev. Rul. 69-377, 1969-2 C.B. 231, and is at
the core of respondent’s contention that the capitalization
should be disregarded.
Respondent’s contention raises the question of whether a
capitalization involving a circular cash-flow-–for example, where
a finance subsidiary lends its cash capital contribution back to
the parent–-would be prohibited under the principles of the
listed rulings. The listed rulings do not address the point
directly. The listed rulings clarify various ways that a finance
subsidiary may reinvest the cash contributed to it, such as in
the stock or debt of affiliates (Rev. Rul. 69-377, supra) or a
bank deposit (Rev. Rul. 69-501, supra), but contain no
prohibitions. As we observed in Northern Ind. Pub. Serv. Co. v.
Commissioner, 105 T.C. at 352 n.10, “nothing in * * * [the
listed] rulings indicates the manner in which a financing
subsidiary is required to invest its capital.” However, Rev.
Rul. 72-416, 1972-2 C.B. 591, which permitted the parent’s own
stock to serve as the equity capital for a finance subsidiary,
Page: Previous 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 NextLast modified: May 25, 2011