Textron Inc. and Subsidiary Companies - Page 4

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          redemption.  Pursuant to section 1.1502-14(b)(1)(iii), Income Tax           
          Regs., the AVCO group did not recognize this loss.  Instead, Paul           
          Revere’s basis in the AVCO stock was allocated to the property              
          distributed in the stock redemption (including the AVCO note) in            
          accordance with section 1.1502-31(b)(2)(ii), Income Tax Regs.4              
               AVCO and Paul Revere were members of the AVCO group at all             
          times from 1967 to 1985.  Textron began to acquire stock in AVCO            
          in 1984, and by January 9, 1985, Textron had acquired in excess             
          of 80 percent of the outstanding stock of AVCO and thereupon AVCO           
          and Paul Revere became members of the Textron group.                        
               On November 11, 1987, AVCO redeemed the AVCO note from Paul            
          Revere for $40,419,005 in cash (the note redemption).  This was             
          $14,934,745 less than Paul Revere’s basis in the AVCO note.                 
               Paul Revere was liquidated into AVCO in a tax-free                     
          liquidation under section 332 on December 30, 1987.  AVCO                   
          remained with the Textron group through 1992.  Textron, as parent           
          of the Textron group, claimed on its 1987 tax return a                      
          $14,934,745 long-term capital loss on the note redemption.                  
               We decide whether the Textron group may deduct the loss                
          realized by Paul Revere on the redemption of the AVCO note in               
          1987.  Section 1001 generally requires gain or loss to be                   

               4 The tax treatment of the stock redemption is not in                  

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