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3 7 3 FEDERAL RESERVE BOARD X-4628 WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE T O JUHS 2 9 , 19-.6. T H E FEDERAL RESERVE BOARD 1 SUBJECT: E l i g i b i l i t y f o r r e d i s c o u n t of n o t e s of p a r e n t c o r p o r a t i o n t o f i n a n c e p u r c h a s e of a u t o m o b i l e s t o "be u s e d by i t s s u b s i d i a r i e s . Dear S i r ; The B o a r d h a s b e e n r e q u e s t e d t o r u l e u p o n t h e e l i g i b i l i t y f o r r e d i s c o u n t a t a F e d e r a l R e s e r v e Bank o f n o t e s i s s u e d u n d e r t h e following plan: The n o t e s a r e t o b e made b y a c e r t a i n c o r p o r a t i o n w h i c h i s a p a r e n t company owning a p p r o x i m a t e l y 7 5 $ of t h e c a p i t a l s t o c k of a number of c o r p o r a t i o n s t h r o u g h o u t t h e U n i t e d S t a t e s e n g a g e d i n m o t o r t r a n s p o r t a t i o n u n d e r t h e " D r i v e i t y o u r s e l f p l a n " . The p r o c e e d s of t h e n o t e s i n q u e s t i o n a r e t o b e u s e d b y t h e p a r e n t company t o p u r c h a s e a u t o m o b i l e s w h i c h a r e t o be d i s t r i b u t e d t o t h e v a r i o u s s u b s i d i a r y companies. These s u b s i d i a r i e s a r e to pay f o r t h e c a r s out of e a r n i n g s f r o m month t o m o n t h . The n o t e s w i l l b e g u a r a n t e e d b y a s u r e t y company. The p a r e n t company d o e s a l l of t h e b o r r o w i n g f o r t h e subsidiaries. The p l a n a p p e a r s t o b e one w h e r e b y t h e p a r e n t c o r p o r a t i o n b o r r o w s money t o f i n a n c e t h e p u r c h a s e of a u t o m o b i l e s t o b e u s e d a s permanent or f i x e d i n v e s t m e n t s i n the b u s i n e s s of i t s s u b s i d i a r i e s . The B o a r d h a s h e r e t o f o r e h e l d t h a t n o t e s of a c o r p o r a t i o n e n g a g e d i n t h e b u s i n e s s of f u r n i s h i n g m o t o r t r a n s p o r t a t i o n , made f o r t h e p u r p o s e of p r o v i d i n g f u n d s w i t h which to p u r c h a s e motor v e h i c l e s , a r e i n e l i g i b l e f o r r e d i s c o u n t , on t h e g r o u n d s t h a t s u c h m o t o r v e h i c l e s n e c e s s a r i l y c o n s t i t u t e a l a r g e p a r t of t h e c o r p o r a t i o n ' s e n t i r e equipment and a r e hence to be c o n s i d e r e d permanent or f i x e d i n v e s t ments. I t i s t r u e t h a t under the plan here presented the n o t e s are to b e made b y t h e p a r e n t c o r p o r a t i o n a n d t h e c a r s p u r c h a s e d and d i s t r i b u t e d by i t to i t s s u b s i d i a r i e s , b u t t h i s does n o t change t h e n a t u r e o r p u r p o s e of t h e t r a n s a c t i o n . I t does n o t appear whether t h e r e i s an a c t u a l s a l e o f t h e s e a u t o m o b i l e s b y t h e p a r e n t company to t h e s u b s i d i a r i e s , b u t i n any event t h e Board does n o t f e e l t h a t t h e s e n o t e s s h o u l d b e c o n s i d e r e d e l i g i b l e on t h e t h e o r y t h a t t h e p r o c e e d s a r e to be u s e d to p u r c h a s e goods which a r e t o be r e s o l d , b e c a u s e of t h e c l o s e a f f i l i a t i o n of t h e p a r e n t company w i t h t h e s u b s i d i a r i e s ; t h e o b v i o u s p u r p o s e of t h e p l a n i s t o f i n a n c e t h e X-4628 s u b s i d i a r y c o r p o r a t i o n s i n a c q u i r i n g the a u t o m o b i l e s . In t h e B o a r d ' s o p i n i o n , t h e t r a n s a c t i o n i s , in s u b s t a n c e even i f n o t i n f o r m , a b o r r o w i n g f o r c a p i t a l p u r p o s e s . The n o t e s of t h e p a r e n t company, t h e r e f o r e , t h e p r o c e e d s of which a r e t o be u s e d to p u r c h a s e a u t o m o b i l e s to be d i s t r i b u t e d to i t s s u b s i d i a r i e s and u s e d by them f o r c a p i t a l p u r p o s e s , mast b e c o n s i d e r e d i n e l i g i b l e f o r r e d i s c o u n t a t a F e d e r a l Reserve Bank. By o r d e r of t h e F e d e r a l R e s e r v e Board. Very t r u l y y o u r s , W a l t e r L. Eddy, Secretary. TO GOVEBBOaS OF AIL F.R.BANKS AND ALL F.H.AGENTS. 374
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