LAY, Circuit Judge.
The United States appeals from a judgment of the district court granting Liberty Loan Corporation (hereinafter taxpayer) a refund of $246,292.28 plus interest for 1961 income taxes alleged to have been wrongfully assessed and paid. The trial court’s opinion is reported at 359 F.Supp. 158 (E.D.Mo.1973). We reverse the judgment for the taxpayer and remand with directions to enter judgment in favor of the government.
The fundamental issue is whether the Commissioner of Internal Revenue properly exercised his discretion under 26 U.S.C. § 482 1 and the regulations promulgated thereunder in allocating to taxpayer the amount of $473,639 as interest income from certain of its wholly-owned subsidiaries.
Taxpayer is engaged in the consumer finance business, operating through 40 branch offices and 399 subsidiaries in several states. In 1961, taxpayer borrowed substantial sums which it then loaned to its 399 subsidiaries. The subsidiaries in turn loaned the monies to consumers. This procedure of borrowing by the parent was employed because of the parent’s higher credit rating, which enabled it to borrow at a lower rate of interest than would have been available to the subsidiaries acting independently.2 In 1961, taxpayer was [227]*227able to borrow the amount involved, over $110,547,000, at an effective interest rate of 5.55%. The ultimate consumers were charged considerably higher interest rates by the subsidiaries.3
Rather than charge each subsidiary 5.55% interest, taxpayer charged its solvent companies 5.75%, while its 55 insolvent enterprises were charged little or no interest.4 This system resulted in interest income to taxpayer just sufficient to cover its own interest expense on the total amount borrowed, i. e., 5.55%.
The Commissioner determined that taxpayer’s 1961 income had not been clearly reflected due to the no-interest loans.5 Acting pursuant to § 482 and the regulations thereunder, the Commissioner therefore increased taxpayer’s income to reflect interest payments of 5% from the insolvent subsidiaries.6 No adjustment was made to the 5.75% interest income received from the solvent subsidiaries.
Upon Liberty Loan’s suit for a refund, the district court found no distortion in taxpayer’s income, since taxpayer had received the actual costs of its borrowing from the overall group of subsidiaries. Hence, the court held that § 482 and its regulations had been improperly applied. The court recognized that the income of the subsidiaries had been distorted; however, it held the Commissioner erred in attempting to adjust the income of the taxpayer, rather than unscrambling the distortion among the subsidiaries.
The regulations under § 482 specifically require that the method of allocating and apportioning income “shall be determined with reference to the substance of the particular transactions . . . .” Regs. § 1.482-1 (d)(1) (emphasis added). We find the “group loan” theory of the trial court ignores the actual substance of the transactions under scrutiny here. It is clear that the loans by the taxpayer were not made to a single entity or group. The facts stipulated show that the loans were made individually to each subsidiary; the interest rates charged the individual subsidiaries ranged from 0 to 5.75%, depending on the capital status of each company; each subsidiary carried on its balance sheets a note payable to its parent; and each subsidiary filed a separate income tax return, reflecting the individual loan from the parent. Although the parent, for admittedly sound business reasons, may have borrowed a lump sum, nevertheless when it came to relending the monies to the subsidiaries, it is evident that each loan was a separate transaction requiring independent scrutiny by the Commissioner.
[228]*228The individual nature of taxpayer’s loans to its controlled interests is not altered in any way by the references to “group borrowing” contained in Paragraph 3 of the stipulation. As the government notes in its brief:
This label is in itself meaningless; here it can signify no more than that the assets of the entire group of corporations were made subject to the lender’s debt claim in order to achieve more favorable interest rates. But this is a, fortiori true of any loan to a parent corporation since the assets of its subsidiaries can be reached by its creditors. Hence, the parent is likely to be in a better credit position than the individual subsidiaries.
Equally unsupported by the facts is taxpayer’s argument that the solvent subsidiaries, rather than the parent, were actually the creditors of the insolvent concerns to the extent the insolvent companies failed to pay their full share of the interest costs. There is no evidence that the insolvent subsidiaries had any obligation to pay the “gain” subsidiaries any amounts whatsoever. The balance sheets of the gain subsidiaries do not reflect any amounts due from the “loss” subsidiaries. Particularly noteworthy in this regard is the fact that some of the insolvent subsidiaries paid the parent 5.75% interest for six months of the year. See note 4, supra. If the taxpayer’s theory were true, these amounts would have been paid to the gain subsidiaries, not to the parent.
Moreover, the stipulated fact that the gain subsidiaries paid 5.75% interest, while the loss subsidiaries paid little or no interest, is totally inconsistent with taxpayer’s assertion that all of the subsidiaries actually paid 5.55%, with the gain subsidiaries loaning the necessary interest amounts to the loss subsidiaries.
Viewed as a number of independent transactions, it is readily apparent that the no-interest loans to the insolvent subsidiaries distorted taxpayer’s 1961 taxable income. As the Second Circuit has observed, in construing § 482:
The instant loans without interest are obviously not at arm’s length, since no unrelated parties would loan such large sums without interest. The allocation of the interest income to taxpayers was necessary in order to properly reflect their taxable incomes.
B. Forman Co. v. Commissioner, 453 F.2d 1144, 1156 (2d Cir.), cert. denied, 407 U.S. 934, 92 S.Ct. 2458, 32 L.Ed.2d 817, rehearing denied, 409 U.S. 899, 93 S.Ct. 102, 34 L.Ed.2d 158 (1972).
We note also that even if one were to accept the “group loan” premise of the trial court, there is nevertheless a distortion in taxpayer’s income. As the trial court recognized:
Low or no income subsidiaries would have significantly less use for an interest expense deduction, whereas a subsidiary corporation in a surtax bracket would be able to utilize the deduction against higher tax rates. The internal apportionment undoubtedly led to substantial overall savings in taxes to the group, taken as a whole. (emphasis added).
359 F.Supp. at 162-163.
We think it obvious that any savings in taxes realized by the subsidiaries has the effect of increasing the parent’s net worth and hence distorting its true income.
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LAY, Circuit Judge.
The United States appeals from a judgment of the district court granting Liberty Loan Corporation (hereinafter taxpayer) a refund of $246,292.28 plus interest for 1961 income taxes alleged to have been wrongfully assessed and paid. The trial court’s opinion is reported at 359 F.Supp. 158 (E.D.Mo.1973). We reverse the judgment for the taxpayer and remand with directions to enter judgment in favor of the government.
The fundamental issue is whether the Commissioner of Internal Revenue properly exercised his discretion under 26 U.S.C. § 482 1 and the regulations promulgated thereunder in allocating to taxpayer the amount of $473,639 as interest income from certain of its wholly-owned subsidiaries.
Taxpayer is engaged in the consumer finance business, operating through 40 branch offices and 399 subsidiaries in several states. In 1961, taxpayer borrowed substantial sums which it then loaned to its 399 subsidiaries. The subsidiaries in turn loaned the monies to consumers. This procedure of borrowing by the parent was employed because of the parent’s higher credit rating, which enabled it to borrow at a lower rate of interest than would have been available to the subsidiaries acting independently.2 In 1961, taxpayer was [227]*227able to borrow the amount involved, over $110,547,000, at an effective interest rate of 5.55%. The ultimate consumers were charged considerably higher interest rates by the subsidiaries.3
Rather than charge each subsidiary 5.55% interest, taxpayer charged its solvent companies 5.75%, while its 55 insolvent enterprises were charged little or no interest.4 This system resulted in interest income to taxpayer just sufficient to cover its own interest expense on the total amount borrowed, i. e., 5.55%.
The Commissioner determined that taxpayer’s 1961 income had not been clearly reflected due to the no-interest loans.5 Acting pursuant to § 482 and the regulations thereunder, the Commissioner therefore increased taxpayer’s income to reflect interest payments of 5% from the insolvent subsidiaries.6 No adjustment was made to the 5.75% interest income received from the solvent subsidiaries.
Upon Liberty Loan’s suit for a refund, the district court found no distortion in taxpayer’s income, since taxpayer had received the actual costs of its borrowing from the overall group of subsidiaries. Hence, the court held that § 482 and its regulations had been improperly applied. The court recognized that the income of the subsidiaries had been distorted; however, it held the Commissioner erred in attempting to adjust the income of the taxpayer, rather than unscrambling the distortion among the subsidiaries.
The regulations under § 482 specifically require that the method of allocating and apportioning income “shall be determined with reference to the substance of the particular transactions . . . .” Regs. § 1.482-1 (d)(1) (emphasis added). We find the “group loan” theory of the trial court ignores the actual substance of the transactions under scrutiny here. It is clear that the loans by the taxpayer were not made to a single entity or group. The facts stipulated show that the loans were made individually to each subsidiary; the interest rates charged the individual subsidiaries ranged from 0 to 5.75%, depending on the capital status of each company; each subsidiary carried on its balance sheets a note payable to its parent; and each subsidiary filed a separate income tax return, reflecting the individual loan from the parent. Although the parent, for admittedly sound business reasons, may have borrowed a lump sum, nevertheless when it came to relending the monies to the subsidiaries, it is evident that each loan was a separate transaction requiring independent scrutiny by the Commissioner.
[228]*228The individual nature of taxpayer’s loans to its controlled interests is not altered in any way by the references to “group borrowing” contained in Paragraph 3 of the stipulation. As the government notes in its brief:
This label is in itself meaningless; here it can signify no more than that the assets of the entire group of corporations were made subject to the lender’s debt claim in order to achieve more favorable interest rates. But this is a, fortiori true of any loan to a parent corporation since the assets of its subsidiaries can be reached by its creditors. Hence, the parent is likely to be in a better credit position than the individual subsidiaries.
Equally unsupported by the facts is taxpayer’s argument that the solvent subsidiaries, rather than the parent, were actually the creditors of the insolvent concerns to the extent the insolvent companies failed to pay their full share of the interest costs. There is no evidence that the insolvent subsidiaries had any obligation to pay the “gain” subsidiaries any amounts whatsoever. The balance sheets of the gain subsidiaries do not reflect any amounts due from the “loss” subsidiaries. Particularly noteworthy in this regard is the fact that some of the insolvent subsidiaries paid the parent 5.75% interest for six months of the year. See note 4, supra. If the taxpayer’s theory were true, these amounts would have been paid to the gain subsidiaries, not to the parent.
Moreover, the stipulated fact that the gain subsidiaries paid 5.75% interest, while the loss subsidiaries paid little or no interest, is totally inconsistent with taxpayer’s assertion that all of the subsidiaries actually paid 5.55%, with the gain subsidiaries loaning the necessary interest amounts to the loss subsidiaries.
Viewed as a number of independent transactions, it is readily apparent that the no-interest loans to the insolvent subsidiaries distorted taxpayer’s 1961 taxable income. As the Second Circuit has observed, in construing § 482:
The instant loans without interest are obviously not at arm’s length, since no unrelated parties would loan such large sums without interest. The allocation of the interest income to taxpayers was necessary in order to properly reflect their taxable incomes.
B. Forman Co. v. Commissioner, 453 F.2d 1144, 1156 (2d Cir.), cert. denied, 407 U.S. 934, 92 S.Ct. 2458, 32 L.Ed.2d 817, rehearing denied, 409 U.S. 899, 93 S.Ct. 102, 34 L.Ed.2d 158 (1972).
We note also that even if one were to accept the “group loan” premise of the trial court, there is nevertheless a distortion in taxpayer’s income. As the trial court recognized:
Low or no income subsidiaries would have significantly less use for an interest expense deduction, whereas a subsidiary corporation in a surtax bracket would be able to utilize the deduction against higher tax rates. The internal apportionment undoubtedly led to substantial overall savings in taxes to the group, taken as a whole. (emphasis added).
359 F.Supp. at 162-163.
We think it obvious that any savings in taxes realized by the subsidiaries has the effect of increasing the parent’s net worth and hence distorting its true income. And, as one commentator has observed, “[t]he purpose of the section is to prevent corporations within the same corporate family from utilizing their separate corporate structures to diminish the overall tax liability of the corporate family.” Note, 6 N.Y.U.J.Int.L. & Politics 169, 171 (1973). Thus, any distortion in the income of the subsidiaries is necessarily a distortion of the parent’s income as well.
Contrary to the district court’s holding, it makes no difference whether the Commissioner first adjusts the income of the subsidiaries or that of the parent. Regs. § 1.482-l(d)(2) requires the Commissioner to make appropriate correlative adjustments to the income of any other member of the group involved in the allocation. In other words, when the [229]*229Commissioner increased taxpayer’s income, he was also required to give the insolvent subsidiaries correspondingly increased interest deductions. Whether the Commissioner starts by increasing the income of the parent or, instead, by increasing the deductions of the insolvent subsidiaries should have no effect on the ultimate tax consequences.
Having determined that there exists a § 482 distortion in taxpayer’s income, it remains to be seen whether the Commissioner’s adjustment was a proper application of the regulations. We note at the outset that the Commissioner has broad discretion under § 482 and his determination will not be upset unless proven by the taxpayer to be arbitrary and capricious. See, e. g., Ballentine Motor Co. v. Commissioner, 321 F.2d 796, 800 (4th Cir. 1963); Grenada Industries, Inc. v. Commissioner, 17 T.C. 231, 255 (1951), aff’d, 202 F.2d 873 (5th Cir.), cert. denied, 346 U.S. 819, 74 S.Ct. 32, 98 L.Ed. 345 (1953). As the Tax Court has recognized :
The legislative history of section 482 indicates that it was designed to prevent evasion of taxes by the arbitrary shifting of profits, the making of fictitious sales, and other such methods used to “milk” a taxable entity. * * * The Commissioner has considerable discretion in applying this section and his determinations must be sustained unless he has abused his discretion. We may reverse his determinations only where the taxpayer proves them to be unreasonable, arbitrary, or capricious.
Pauline W. Ach, 42 T.C. 114, 125-126 (1964), aff’d, 358 F.2d 342 (6th Cir.), cert. denied, 385 U.S. 899, 87 S.Ct. 205, 17 L.Ed.2d 131 (1966).
Regs. § 1.482-l(b)(1) provides that the “purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer . ” In the case of loans or advances from one controlled entity to another, the regulations provide that tax parity with uncontrolled taxpayers is to be achieved through application of an arm’s length standard. Regs. § 1.482-2(a)(1).7
Regs. § 1.482-2(a) (2) sets up standards for determination of the appropriate arm’s length interest rate.8 The [230]*230regulation first requires that the arm’s length rate shall be the rate which would have prevailed between unrelated parties under similar circumstances. However, the regulation then creates certain “safe haven” rates which, even though not the prevailing arm’s length rate, will be allowed to stand unadjusted. The government calls these rates “deemed arm’s length rates,” since they may be substituted for the prevailing arm’s length rate. One commentator explains the operation of the deemed rate provisions as follows:
Thus, if a taxpayer (not in the business of making loans) lends money to an affiliate at an interest rate between 4 and 6 per cent no allocation will be made; if the arm’s length rate is greater than 6 per cent or less than 4 per cent, and the actual rate charged falls between the arm’s length rate and the safe haven rate, the actual rate charged similarly will be allowed to stand; if the actual rate falls outside of this zone, however, a rate of 5 per cent simple interest will be imputed to the loan for allocation purposes.
Eustice, Affiliated Corporations Revisited: Recent Developments Under Sections 482 and 367, 24 Tax L.Rev. 101, 105 (1968).
In the present case, the Commissioner adjusted taxpayer’s income upward to reflect interest income of 5% from the insolvent subsidiaries. This adjustment was made pursuant to Regs. § 1.482-2(a)(2) (ii), applicable in the case of no-interest loans.9
The Commissioner made no adjustment to the 5.75% interest rates charged the solvent subsidiaries because, in his view, 5.75% was within the safe haven provision of Regs. § 1.482-2(a) (2)(i).
Because the district court viewed the subsidiaries as a single entity, it in effect required the Commissioner to offset the 5.75% interest paid by the solvent subsidiaries against the no-interest loans to the insolvent subsidiaries. It is clear, however, that the regulations do not permit an offset under the factual circumstances of this case. Regs. 1.-482-1 (d)(3) limits offsets to transactions between the same two members of the controlled group.10 Thus, if the par[231]*231ent loaned one of its subsidiaries monies at no interest, but'received in exchange services equivalent to an arm’s length interest charge, an offset would be permitted. But the regulations do not contemplate offsets involving benefits flowing to other members of the group. As one commentator has observed:11
In a sense, the allowance of any offset to a section 482 adjustment represents a retreat from the Service’s historical position that section 482 is a “one-way street” which may not be invoked by the taxpayer. On the other hand, multinational corporations with many foreign subsidiaries probably would have preferred an approach which permitted netting not only “vertically” (that is, between two members of a controlled group) but also “horizontally” (that is, among all members of the group) .... The Treasury, however, rejected the “horizontal netting” principle, presumably because of administrative difficulties and the possibilities of manipulation.
It must be recognized, however, that there would be an obvious temptation under horizontal netting to overcharge profitable subsidiaries in high-tax countries and to undercharge those operating at a loss or in low-tax countries. The reservation of authority to deny offset and to make individual allocations, where United States tax liabilities are thus distorted might be sufficient to control such tax-motivated operations. However, there is a marked reluctance in this, as in other areas of the section 482 regulations, to depart from the concept of allocation in individual transactions or to judge compliance on the basis of overall results. Taxpayers had to settle for the proverbial half a loaf.
Jenks, Treasury Regulations Under Section 482, 23 Tax Lawyer 279, 285-286 (1970).12
In addition to the above limitation on the offset regulation, Regs. § 1.482-1(d)(3) requires a taxpayer desiring to utilize the offset provision to notify the IRS of that fact within 30 days of the date of the examination report advising taxpayer of the proposed § 482 adjustment. Taxpayer made no attempt here to so notify the Commissioner.
Finally, the taxpayer may not assert an offset in which a deemed arm’s length rate (here 5%), as opposed to the actual arm’s length rate (stipulated to be in excess of 5.75%), is used as the balance point. Regs. § 1.482-l(d)(3) provides that for purposes of an offset:
[T]he term arm’s length refers to the amount which was charged or would have been charged in independent transactions with unrelated parties under the same or similar circumstances considering all the relevant facts and without regard to the rules found in § 1.482-2 by which certain charges are deemed to be equal to arm’s length, (emphasis added.)
[232]*232Thus, it would have been contrary to the regulations for the Commissioner to balance out the transactions at 5% (or 5-55%) when the stipulated arm’s length rate was in excess of 5.75%. This limitation on the offset provision logically follows when one remembers that the purpose of a § 482 adjustment is to more clearly reflect income. The upward adjustments to the no-interest loans do just that. Downward adjustments to the 5.75% loans, however, would have the effect of moving those loans even further away from the actual arm’s length rate. In adjusting the no-interest loans upwards to 5%, the Commissioner therefore made the only adjustment he could.13
In sum, we conclude that the Commissioner acted within his discretion in allocating to the taxpayer interest income of 5% to bring the no-interest loans more closely into conformity with the arm’s length standard of § 482.
Judgment reversed and remanded with directions to the district court to enter judgment for the United States.