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Petitioners advance two alternative arguments as to why
section 304 should not be applied to the exchange of LINKS stock
for debt release, one of which rests on a general appeal to
policy and the other of which relies on a specific statutory
exception. As a policy matter, petitioners emphasize that
Congress, in enacting section 304, sought to prevent the
“bailout” of corporate earnings as capital gain rather than
ordinary income. Because it is petitioners’ position that the
transfer at issue does not manifest the characteristics of such a
bailout, petitioners aver that it should not be subjected to the
construct set up by section 304.
In the alternative, petitioners contend that the transaction
here is specifically exempted from the redemption treatment
otherwise required under section 304(a) by the exception
established in section 304(b)(3)(B). According to petitioners,
the disputed transfer involved COST’s assumption of liability
incurred by Mr. Combrink to acquire the LINKS stock. As such,
petitioners claim that the transaction falls within the section
304(b)(3)(B) exception applicable in certain cases where there is
an assumption of acquisition indebtedness.
Conversely, respondent asserts that to characterize the
December 1996 transaction as a redemption pursuant to the rules
of section 304(a) is consistent with both the language and the
policy of the statute. Respondent further maintains that Mr.
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