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recognized upon an exchange of property. See also sec.
1271(a)(1) (amounts received by the holder on the retirement of
any debt instrument are considered to be amounts received in
exchange for the instrument). Respondent asserts, however, that
the loss suffered by Paul Revere on the note redemption is
deferred by reason of section 1.1502-14(d)(4)(i), Income Tax
Regs., which provides:
(4) Exception for obligations acquired in tax-free
exchanges. (i) If –
(a) A member received an obligation of another member
in exchange for property,
(b) The basis of the obligation was determined in
whole or in part by reference to the basis of the property
exchanged, and
(c) The obligation has never been held by a nonmember,
then any gain or loss of any member on redemption or
cancellation of such obligation shall be deferred, and
subparagraph (3) of this paragraph shall not apply.
Petitioner offers four independent reasons why section
1.1502-14(d)(4), Income Tax Regs., does not apply to defer its
loss on the note redemption: (1) Section 1.1502-14(d)(4), Income
Tax Regs., operates solely to override section 1.1502-14(d)(3),
Income Tax Regs., and cannot otherwise defer gains or losses; (2)
Paul Revere did not receive the AVCO note in a tax-free exchange;
(3) the AVCO note was previously held by a nonmember of the
Textron group; and (4) Paul Revere did not receive the AVCO note
in exchange for property. We address these arguments in turn.
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