- 44 -
investment of the cash it received from City in the notes of HGI
conforms to Rev. Rul. 69-377, supra, and the cycling back of that
cash from HGI to City is not inconsistent with the principles
revealed in the amplification of that ruling in Rev. Rul. 72-416,
supra. The principles of these and the other listed rulings
recognize highly artificial transactions with elements of
circularity. This was the administrative position of the
Commissioner with respect to recognizing the debt of finance
subsidiaries as their own during the pendency of the Interest
Equalization Tax, and in DEFRA section 127(g)(3)(B) Congress
adopted that position as the standard for extending relief from
withholding tax obligations.
This interpretation of the phrase “requirements which are
based on the principles set forth in Revenue Rulings 69-501, 69-
377, 70-645, and 73-110" as used in DEFRA section 127(g)(3)(B) is
consistent with the legislative history of that section, which
indicates that Congress intended broad relief under the provision
22(...continued)
to be disregarded. Respondent’s assertions notwithstanding, HGI
did receive consideration for its notes; namely, cash.
Respondent’s argument concerning lack of consideration comes down
to the claim that because HGI immediately (and as prearranged)
transferred the cash received as consideration to City as a
dividend, HGI’s receipt of the cash should be ignored, resulting
in a lack of consideration for the notes. We think this argument
is merely a variant of the circular cash-flow critique, and we
reject it for the same reason: under the principles of the
listed rulings, transactions designed to capitalize a finance
subsidiary are not disregarded because they contain elements of
circularity.
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