Griffin Paper Corporation - Page 1

                                 T.C. Memo. 1997-409                                  

                               UNITED STATES TAX COURT                                

                      GRIFFIN PAPER CORPORATION, Petitioner v.                        
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      
                         GREAT NORTHERN NEKOOSA CORPORATION                           
                           AND SUBSIDIARIES, Petitioner v.                            
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket Nos. 17763-95, 18532-95.    Filed September 16, 1997.           

                    G owned all of L's stock.  L's primary asset was a                
               sawmill, which was operating at a loss, and L desired                  
               to find a partner with whom to build a pulp mill to                    
               enhance the sawmill's productivity.  In 1981, G and N                  
               agreed that G would recapitalize L, and that L would                   
               build the pulp mill after N transferred to L funds in                  
               exchange for an ownership interest therein.  Pursuant                  
               to the agreement, G received 32.8 percent of L's                       
               preferred stock and 5 percent of L's common stock, and                 
               N received the rest of L's stock.  All of G's L stock                  
               was subject to simultaneous reciprocal options,                        
               exercisable at any time after 1988, under which G could                
               put its L stock to N in return for $31.75 million plus                 
               5 percent of L's retained earnings on the date of                      
               exercise, and N could call G's L stock at the same                     

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