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security in exchange for property in a section 351 transaction.7
Thus, the corporation’s gain in the section 351 exchange would
not have been “recognized under the Code” as required to invoke
section 1.1502-14(d)(1), Income Tax Regs. As a result, section
1.1502-14(d)(4), Income Tax Regs., operated independently in the
example to defer the gain on the redemption of the security and
not as an override of section 1.1502-14(d)(3), Income Tax Regs.
Accordingly, we find that gains or losses on the redemption
of an obligation may be deferred under section 1.1502-14(d)(4),
Income Tax Regs., irrespective of the application of section
1.1502-14(d)(1) and (3), Income Tax Regs.
2. Whether The Stock Redemption Was a “Tax Free” Exchange
The heading to section 1.1502-14(d)(4), Income Tax Regs.,
refers to obligations acquired in “tax-free exchanges”.
Petitioner argues that the 1977 stock redemption was not a tax-
free exchange because stock redemptions are taxable under section
302.
7 Sec. 351(a) read:
SEC. 351(a) No gain or loss shall be recognized if
property is transferred to a corporation by one or more
persons solely in exchange for stock (or securities) in
such corporation and immediately after the exchange
such person or persons are in control (as defined in
section 368(c)) of the corporation.
Sec. 351 was amended in 1989 to provide that securities could no
longer be received tax-free under the provision. See Omnibus
Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7203(a),
103 Stat. 2106, 2333.
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