UNITED STATES TAX COURT



      TEXTRON INC. AND SUBSIDIARY COMPANIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20643-98.                    Filed August 7, 2000.


          A filed a consolidated return with its wholly-
     owned subsidiary (PR) in 1977. During that year, A
     distributed a note to PR in redemption of PR’s shares
     in A. In 1985, P acquired more than 80 percent of the
     stock of A, and thereupon A and PR became members of
     P’s consolidated group. In 1987, A redeemed the note
     from PR. Later that year, PR liquidated into A. Held:
     Under sec. 1.1502-14(d)(4), Income Tax Regs., P may not
     take a deduction in 1987 for the capital loss PR
     realized on the redemption of A’s note.



     James P. Fuller, Kenneth B. Clark, and David L. Forst, for

petitioner.

     Nancy B. Herbert and Ruth M. Spadaro, for respondent.
                                - 2 -

                               OPINION

     LARO, Judge:    This case is before the Court fully

stipulated.   See Rule 122.   Petitioner petitioned the Court to

redetermine respondent’s determination of deficiencies in Federal

income tax for its taxable years ended January 2, 1988, December

31, 1988, December 30, 1989, December 29, 1990, December 28,

1991, and January 2, 1993, in the amounts of $5,083,201,

$1,783,938, $244,211, $1,152,171, $14,011,513, and $68,811,

respectively.

     We decide herein whether petitioner is entitled to a claimed

$14,934,745 capital loss for the taxable year ended January 2,

1988 (1987 taxable year).1    We hold it is not.   Unless otherwise

indicated, section references are to the Internal Revenue Code

and the regulations thereunder in effect for the years in issue.2

Rule references are to the Tax Court Rules of Practice and

Procedure.    Dollar amounts are rounded to the nearest dollar.




     1
       This case involves several issues, some of which have been
settled. The other issues remaining for decision will be
addressed in one or more subsequent opinions and/or orders.
     2
       The applicable regulations were revised in 1995, with
prospective effect. See T.D. 8597, 60 Fed. Reg. 36671 (July 18,
1995), generally effective for transactions in years beginning
after July 11, 1995.
                                - 3 -

                            Background3

     Textron Inc. (Textron) is the common parent of an affiliated

group of corporations within the meaning of section 1504(a) (the

Textron group) that filed a consolidated Federal income tax

return for its 1987 taxable year.   For certain periods of time,

members of the Textron group included Paul Revere Corporation

(Paul Revere) and AVCO Corporation (AVCO).

     Before joining the Textron group in 1985, AVCO was the

common parent of its own affiliated group of corporations within

the meaning of section 1504(a) (the AVCO group).    In February

1967, Paul Revere purchased four million shares of AVCO stock for

$135 million.   AVCO’s remaining stock was owned by the general

public and traded on the New York Stock Exchange.    In November

1967, AVCO acquired all of the stock of Paul Revere, and Paul

Revere became a member of the AVCO group.    Paul Revere still

owned the four million shares of AVCO stock at the time it was

acquired by AVCO.

     On December 1, 1977, AVCO redeemed all of Paul Revere’s AVCO

stock (the stock redemption).   In return for this stock, Paul

Revere received a promissory note from AVCO (the AVCO note), with

a face amount and fair market value of $40,419,005, and other

property.   Paul Revere realized a $55,353,750 loss on the stock



     3
       When the petition was filed in this case, petitioner’s
principal place of business was Providence, Rhode Island.
                                - 4 -

redemption.    Pursuant to section 1.1502-14(b)(1)(iii), Income Tax

Regs., the AVCO group did not recognize this loss.    Instead, Paul

Revere’s basis in the AVCO stock was allocated to the property

distributed in the stock redemption (including the AVCO note) in

accordance with section 1.1502-31(b)(2)(ii), Income Tax Regs.4

     AVCO and Paul Revere were members of the AVCO group at all

times from 1967 to 1985.    Textron began to acquire stock in AVCO

in 1984, and by January 9, 1985, Textron had acquired in excess

of 80 percent of the outstanding stock of AVCO and thereupon AVCO

and Paul Revere became members of the Textron group.

     On November 11, 1987, AVCO redeemed the AVCO note from Paul

Revere for $40,419,005 in cash (the note redemption).    This was

$14,934,745 less than Paul Revere’s basis in the AVCO note.

     Paul Revere was liquidated into AVCO in a tax-free

liquidation under section 332 on December 30, 1987.    AVCO

remained with the Textron group through 1992.    Textron, as parent

of the Textron group, claimed on its 1987 tax return a

$14,934,745 long-term capital loss on the note redemption.

                             Discussion

     We decide whether the Textron group may deduct the loss

realized by Paul Revere on the redemption of the AVCO note in

1987.    Section 1001 generally requires gain or loss to be



     4
       The tax treatment of the stock redemption is not in
dispute.
                                - 5 -

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.
                                - 6 -

1.   Whether Section 1.1502-14(d)(4) Operates Solely as an
     Exception to Section 1.1502-14(d)(3)

     The flush language of section 1.1502-14(d)(4)(i), Income Tax

Regs., provides that if the enumerated requirements are met “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 reads this language to

mean that section 1.1502-14(d)(4), Income Tax Regs., operates

solely to override section 1.1502-14(d)(3), Income Tax Regs., and

does not otherwise operate to defer gains and losses.    We

disagree.

     Section 1.1502-14(d)(3), Income Tax Regs., is a restoration

provision, i.e., it establishes the circumstances under which an

intercompany gain or loss deferred elsewhere in the consolidated

return regulations is triggered into income (i.e., restored).

Specifically, section 1.1502-14(d)(3), Income Tax Regs., restores

gains or losses deferred with respect to an obligation under

section 1.1502-14(d)(1), Income Tax Regs.     Gains and losses

deferred under section 1.1502-14(d)(1), Income Tax Regs., are

those that are “recognized under the Code to a member during a

consolidated return year because of a sale or disposition (other

than a redemption or cancellation) of an obligation of another

member”.5


     5
         The parties agree that sec. 1.1502-14(d)(1), Income Tax
                                                     (continued...)
                               - 7 -

     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.
                                - 8 -

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.
                               - 9 -

     It is well settled that the heading of a section does not

limit the plain meaning of the text.    See Brotherhood of R.R.

Trainmen v. Baltimore & O.R. Co., 

, 529 (1947);

Warren v. Commissioner, 

, 347 (2000).    The text of

section 1.1502-14(d)(4), Income Tax Regs., requires only that an

obligation be received in exchange for property and that the

basis of the obligation be determined by reference to the basis

of the property exchanged.   Paul Revere received the AVCO note in

exchange for its AVCO stock, and its basis in the note was

determined by reference to its basis in the stock.   See sec.

1.1502-31(b)(2)(ii), Income Tax Regs.   Thus, we find the stock

redemption to be a qualifying exchange covered by the provision.8

3.   Whether Paul Revere Was a “Nonmember”

     Section 1.1502-14(d)(4), Income Tax Regs., applies only if

the obligation at issue “has never been held by a nonmember”.

Sec. 1.1502-14(d)(4)(i)(c), Income Tax Regs.    Section 1.1502-

14(d)(4)(i)(c), Income Tax Regs., does not specify how or when a

corporation’s status as a member or nonmember is to be

determined.   Petitioner focuses on the word “nonmember” and

concludes that the deferral of Paul Revere’s loss ended in 1987,



     8
       Even if the heading did limit the scope of the provision,
the AVCO group recognized no gain or loss on the stock redemption
because the redemption was governed by sec. 1.1502-14(b)(1),
Income Tax Regs. The fact that the redemption would have been
taxable under sec. 302 had AVCO and Paul Revere not been members
of the same consolidated group is immaterial.
                               - 10 -

upon AVCO’s redemption of the note, because Paul Revere held the

note for 7 years before Paul Revere became in 1985 a member of

the Textron group.9    Throughout that 7-year period, Paul Revere

and AVCO both had been members of the AVCO group.

     We disagree with petitioner’s interpretation of the word

“nonmember” in section 1.1502-14(d)(4)(i), Income Tax Regs.,

because it reads that word out of context and in isolation.     The

salient fact is that Paul Revere, having held the note from the

date of its issuance, was a member of the Textron group when the

note was redeemed.    Petitioner’s reading is incongruous with the

purpose of the consolidated return regulations and leads to an

unreasonable result.    The provisions of the regulation in

question must be construed consistently with the framework of the

consolidated return regulations, in light of their overall

purpose and regulatory scheme.    Cf. Albertson’s, Inc. v.

Commissioner, 

, 541 (9th Cir. 1994), affg. 

(1990); Woodral v. Commissioner, 

, 22 (1999); see also

Estate of Schwartz v. Commissioner, 

, 953 (1984)


     9
       Sec. 1.1502-1(a) and (b), Income Tax Regs., defines
“group” and “member” as follows:

               (a) Group. The term “group” means an
     affiliated group of corporations as defined in section
     1504. See section 1.1502-75(d) as to when a group
     remains in existence.

               (b) Member. The term “member” means a
     corporation (including the common parent) which is
     included within such group.
                              - 11 -

(canons of statutory construction apply to interpretation of

Treasury regulations); Whelan v. United States, 208 Ct. C1. 688,

, 1002-1003 (1976) (canons of statutory construction

used to interpret administrative regulations).

     The consolidated return regulations are built on the premise

that members of a consolidated group are a single economic entity

with regard to intercompany transactions and distributions and

that resulting gains or losses are given effect only when the

transferred property, or stock of the transacting member, leaves

the consolidated group.   See also secs. 1.1502-13 & 1.1502-14,

Income Tax Regs.; see generally 3 Bittker & Lokken, Federal

Taxation of Income, Estates and Gifts, par. 90.5, at 90-48 (2d

ed. 1991):

         The basic concept underlying * * * [the consolidated
     return] provisions is that the consolidated group is * * * a
     single taxable enterprise whose tax liability ought to be
     based on its dealings with outsiders rather than on
     intragroup transactions. This single taxpayer concept lies
     at the heart of the treatment of intercompany transactions,
     which, with some exceptions to prevent tax avoidance, are
     eliminated in computing the group’s consolidated taxable
     income.

Petitioner’s interpretation of section 1.1502-14(d)(4)(i)(c),

Income Tax Regs., conflicts with this framework.   At the time

AVCO redeemed its note from Paul Revere, both were members of the

Textron group and both remained members as of the end of the 1987

taxable year.   There were no “dealings with outsiders” that would
                              - 12 -

entitle the group to take into account the loss from that

intercompany transaction.

     For purposes of section 1.1502-14(d)(4)(i), Income Tax

Regs., we determine the status of Paul Revere as a member or

“nonmember” of the Textron consolidated group at the time of

redemption of the note.   We interpret the word “nonmember” in

that provision of the regulations as applying to cases where a

member of a consolidated group cancels or redeems an obligation

that is held, or was held, by a corporation that is a nonmember

at the time of cancellation or redemption.   We do not read

section 1.1502-14(d)(4)(i), Income Tax Regs., as applying to

cases such as we have here where a corporation/noteholder was

acquired by and became a member of the consolidated group before

the note’s redemption or cancellation.

     Our reading is supported by consideration of the result that

would have occurred had AVCO redeemed Paul Revere’s AVCO stock in

1977 for cash.   In that case, Paul Revere’s loss on the

redemption would have been deferred under section 1.1502-

14(b)(2)(iii), Income Tax Regs., and would have continued to be

deferred as of the end of the 1987 taxable year even though AVCO

and Paul Revere were then members of the Textron group rather

than the AVCO group.   See secs. 1.1502-13(f), 1.1502-14(b)(3),

(f), Income Tax Regs. (termination of a consolidated group due to

the acquisition of its common parent by a nonmember does not
                              - 13 -

restore deferred gains and losses if the members of the

terminating group become members of another group).    The subject

loss, therefore, would have continued to be deferred in the year

in which petitioner now claims it is deductible.

     Petitioner seeks a result different from a cash redemption

relying on the mere fact that AVCO redeemed the stock for a note

rather than cash.   We do not believe that this distinction in

fact leads to a different result.   Petitioner offers no

explanation why the consolidated return regulations would give

effect to gains and losses realized in intercompany redemptions

paid for with debt but not those realized in intercompany

redemptions paid for by cash or other property.    In fact, we

understand petitioner to concede that Paul Revere’s status as a

member of the Textron group at the time the loss was realized on

the note redemption satisfies the membership requirement of

section 1.1502-14(d)(4)(i)(a), Income Tax Regs. (“A member

received an obligation of another member in exchange for

property”), even though Paul Revere was not a member of the

Textron group at the time it received the AVCO note in exchange

for the AVCO stock.   We conclude that Paul Revere is a member for

purposes of section 1.1502-14(d)(4)(i)(c), Income Tax Regs., and

that the AVCO note was never held by a nonmember.
                               - 14 -

4.   Whether the AVCO Stock Was “Property”

     Deferral under section 1.1502-14(d)(4), Income Tax Regs., is

required only if the obligation is received by a member in

exchange for property.   See sec. 1.1502-14(d)(4)(i)(a), Income

Tax Regs.   The term “property” is undefined in the regulations.

     The parties agree that Paul Revere received the AVCO note in

a redemption satisfying the requirements of section 302.

Petitioner argues that because stock of the distributing

corporation is not considered property in a section 302

transaction, the reference in section 1.1502-14(d)(4), Income Tax

Regs., to “property” excludes the AVCO stock given up by Paul

Revere in the stock redemption.10   Petitioner further argues that

this reading is consistent with the economic substance of the

transaction because this would permit petitioner to recognize and

take into account the substantial economic loss that Paul Revere

realized in the redemptions.

     The pre-1966 consolidated return regulations deferred to

Code definitions when a word used in the regulations was not

specifically otherwise defined.11   See Foster v. Commissioner,


     10
      Sec. 317(a) provides: “For purposes of this part * * *
[secs. 301 through 318], ‘property’ means money, securities, and
any other property; except that such term does not include stock
in the corporation making the distribution (or rights to acquire
such stock).”
     11
      T.D. 6894, 1966-2 C.B. 362, promulgated new consolidated
return regulations under sec. 1502 of the 1954 Code. The new
                                                   (continued...)
                              - 15 -

T.C. Memo. 1966-273, modified and remanded on a different issue

sub nom. Likins-Foster Honolulu Corp. v. Commissioner, 

(10th Cir. 1969).   The 1966 regulations abandoned that rule

in favor of a more general requirement that “The Code, or other

law, shall be applicable to the group to the extent the

[consolidated return] regulations do not exclude its

application.”   Sec. 1.1502-80, Income Tax Regs.

     Here the consolidated return regulations are on point, so

contrary provisions in the Code are inoperative.    See First Natl.

Bank in Little Rock v. Commissioner, 

(1984) (though

sections 166 and 585 otherwise entitled bank to take a bad debt

deduction arising from an intercompany loan, election of

consolidated return treatment required deferral under sec.

1.1502-14(d)(1), Income Tax Regs.).    While the 1977 stock

redemption met the requirements of section 302, AVCO and Paul

Revere had elected consolidated treatment, and thus the tax

consequences of the stock redemption were determined under

section 1504 and sections 1.1502-14(b)(1)(iii) and 1.1502-

31(b)(2)(ii), Income Tax Regs.   These provisions do not exclude

stock of the redeeming corporation from the definition of

property.




     11
      (...continued)
regulations were applicable to taxable years beginning after Dec.
31, 1965.
                              - 16 -

     The only authority cited by petitioner in support of its

position is Tech. Adv. Mem. 96-27-003 (Feb. 28, 1996).12     The

TAM concluded that the definition of “redemption” in section

317(b) may have some general application in the determination of

whether a redemption took place for the purposes of section

1.1502-13(f)(1), Income Tax Regs.   Petitioner reads into this

that respondent’s administrative position was that the definition

of property set forth in section 317(a) is similarly relevant to

the interpretation of the consolidated return regulations.    This

assumption is inaccurate.   In G.C.M. 39,608 (Mar. 5, 1987),13

respondent determined that the gain realized on a consolidated

subsidiary’s distribution of its parent’s stock to its parent in

a section 311 transaction resulted in a deferral of gain pursuant

to section 1.1502-14(c)(1), Income Tax Regs.   The G.C.M. found

the stock of the parent corporation to be “property” for purposes

of the consolidated return regulations even though the stock was

held by the parent as treasury stock after the distribution.       The

G.C.M. concurrently looked to the section 317(b) definition of



     12
      Technical advice memoranda (TAMs) and private letter
rulings have no precedential value but merely represent the
Commissioner’s position as to a specific set of facts. See sec.
6110(k)(3); Bunney v. Commissioner, 114 T.C. ___, ___ n.2 (2000)
(slip op. at 5).
     13
      A general counsel memorandum is a legal opinion from one
division of the Commissioner’s Office of Chief Counsel to another
and is not binding on this Court. See Old Harbor Native Corp. v.
Commissioner, 

, 207 (1995).
                              - 17 -

redemption to interpret section 1.1502-13(f)(1), Income Tax Regs.

Thus, respondent did not consider the two positions to be

contradictory.   We are not aware that respondent has ever taken

the position, administratively or otherwise, that the definitions

found in section 317 are universally applicable to interpret the

consolidated return regulations.

     In any case, as stated above, had AVCO redeemed the stock

for cash, the gain or loss would have been deferred under section

1.1502-14(b)(2)(iii), Income Tax Regs.    Under petitioner’s

interpretation, a consolidated taxpayer could elect to recognize

losses on the redemption of the stock between members at its

whim.   Instead of redeeming depreciated member stock with cash,

it could simply redeem the stock with debt and then retire the

debt.   We decline petitioner’s invitation to interpret an

undefined term so as to achieve this anomalous result.

Petitioner’s interpretation would undermine the structure of the

consolidated return regulations by treating as recognition events

what are purely intragroup transactions.

     As to petitioner’s economic substance argument, the

consolidated return regulations were promulgated under the

congressional mandate of section 1502 to regulate the privilege

of filing consolidated returns.    Once an eligible group of

corporations consents to consolidation both the taxpayer and the

Government are bound by the consolidated return regulations.   See
                               - 18 -

sec. 1502.    Though Paul Revere may have realized a genuine

economic loss on a separate entity basis, recognition of that

loss is deferred by reason of petitioner’s election to be bound

by the consolidated return regulations.

5.   Whether the Loss Was Restored Upon Liquidation of Paul
     Revere

     As a final matter, we note that the liquidation of Paul

Revere in 1987 did not restore Paul Revere’s loss on the note

redemption.    A member’s gain or loss deferred by section 1.1502-

14(d)(4), Income Tax Regs., is restored immediately before the

earlier of the time:    (1) When the deferring member (in this

case, Paul Revere) ceases to be a member, or (2) when the stock

of the debtor member (in this case, AVCO) is considered to be

disposed of by any member.    See sec. 1.1502-14(d)(4)(ii), Income.

Tax Regs.    However, in the event the deferring member ceases to

be a member because its assets are acquired by another member of

the group in a transaction described in section 381(a) (such as a

section 332 liquidation), the gain or loss is not so restored.

See sec. 1.1502-14(e)(2), Income Tax Regs.    Paul Revere ceased to

be a member of the Textron Group when it liquidated in a section

332 transaction.    Thus, the liquidation was not a restoration

event.

     In reaching our holdings herein, we have considered all

arguments made by the parties, and, to the extent not discussed

above, we find those arguments to be irrelevant or without merit.
                        - 19 -

To reflect the foregoing,

                                 An appropriate order will be

                            issued.