Textron Inc. and Subsidiary Companies - Page 7

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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              

          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.  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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