Textron Inc. and Subsidiary Companies - Page 5

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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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