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If, as petitioner contends, section 1.1502-14(d)(4), Income
Tax Regs., functions solely to prevent gains and losses from
being restored by section 1.1502-14(d)(3), Income Tax Regs., then
it would be inapplicable where there had been no previous
deferral under section 1.1502-14(d)(1), Income Tax Regs.
However, the example set forth in the regulations at section
1.1502-14(d)(4)(iii), Income Tax Regs., disproves petitioner’s
contention. In the example, a corporation receives a security
from its newly formed subsidiary in a section 351 exchange, and
the security is later redeemed.6 In 1966, when these regulations
were implemented, and at all times through the year at issue, no
gain or loss was recognized under the Code on the receipt of a
5(...continued)
Regs., is inapplicable both to the 1977 stock redemption and the
1987 note redemption.
6 The full text of sec. 1.1502-14(d)(4)(iii), Income Tax
Regs., is as follows:
This subparagraph may be illustrated by the following
example:
Example. Corporation P forms a subsidiary, S, in
a transaction to which section 351 applies and receives
as a result of such transaction, in addition to stock,
a security with a face value of $100 and a basis of
$50. If the security is redeemed for $100, the $50
gain on redemption is deferred and is not taken into
account until P ceases to be a member or the stock of S
is treated as disposed of under this subparagraph.
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