COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. PETER R. FINK ET
   UX.
   No. 86-511
   In the Supreme Court of the United States
   October Term, 1986
   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Sixth Circuit
   The Solicitor General, on behalf of the Commissioner of Internal
Revenue, petitions for a writ of certiorari to review the judgment of
the United States Court of Appeals for the Sixth Circuit in this case.
            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statutes involved
   Question Presented
   Statement
   Reasons for granting the petition
   Conclusion
   Appendix A
   Appendix B
   Appendix C
   Appendix D
                            OPINIONS BELOW
   The opinion of the court of appeals (App., infra, 1a-20a) is
reported at 789 F.2d 427.  The opinion of the Tax Court (App., infra,
23a-33a) is unofficially reported at 48 T.C.M. (CCH) 786.
                             JURISDICTION
   The judgment of the court of appeals (App., infra, 21a-22a) was
entered on April 30, 1986.  On July 18, 1986, Justice O'Connor
extended the time for filing a petition for a writ of certiorari to
and including September 27, 1986.  The jurisdiction of this Court is
invoked under 28 U.S.C. 1254(1).
                           STATUTES INVOLVED
   The relevant portions of Sections 165 and 1016(a) (1) of the
Internal Revenue Code of 1954 (26 U.S.C.) are set forth in the
Appendix, infra, 34a-35a.
                          QUESTION PRESENTED
   Whether the surrender by a corporation's dominant shareholders of a
small portion of their shares in order to improve the corporation's
financial position gives rise to an immediately deductible loss in the
computation of the shareholders' taxable income.
                               STATEMENT
   1. Respondents Peter and Karla Fink, who are husband and wife, were
the principal shareholders of Travco Corporation (App., infra, 2a).
Travco had one class of common stock outstanding, of which Peter owned
52.2% and Karla 20.3% (id. at 27a, 30a).  When the corporation
encountered financial difficulties (see id. at 25a-27a), respondents
surrendered a portion of their shares to the corporation in order "to
improve (its) financial position, to preserve its business, and to
increase (its) attractiveness * * * to outside investors" (id. at 3a,
28a).  Specifically, Peter surrendered 116,146 of his 802,300 shares
in 1976, and Karla surrendered 80,000 of her 311,359 shares in 1977.
No other shareholder surrendered any shares.  Id. at 28a-30a.  By
virtue of these stock surrenders, respondents reduced their combined
interest in the corporation from 72.5% of the outstanding shares to
68.5% (id. at 30a, 32a).  For federal income tax purposes, respondents
claimed the entire amount of their cost or "basis" in the surrendered
shares -- $197,782 for Peter and $191,258 for Karla -- as ordinary
loss deductions on their 1976 and 1977 joint tax returns (id. at
3a-4a).
   2. The Commissioner disallowed the claimed deductions.  He
determined that respondents' surrenders of stock to their corporation
did not generate currently deductible losses, but rather constituted
contributions to the corporation's capital (App., infra, 32a).  He
accordingly determined deficiencies of $131,885 for 1976 and $133,826
for 1977 (id. at 23a).
   Petitioners sought redetermination of the deficiencies in the Tax
Court.  That Court sustained the Commissioner's position, relying on
its reviewed decision in Frantz v. Commissioner, 83 T.C. 162, 174-182
(1984), aff'd, 784 F.2d 119 (2d Cir. 1986), petition for cert.
pending, No. 86-11, which was decided the same day.  In Frantz, the
Tax Court held that a stockholder's non-pro-rata surrender of shares
to his corporation does not entitle him to deduct his basis in those
shares as an immediate loss;  rather, his basis in the shares he
retains.  The Tax Court explained (83 T.C. at 181) that "(t)his
conclusion * * * necessarily follows from a recognition of the purpose
of the transfer, that is, to bolster the financial position of (the
corporation) and, hence, to provide and make more valuable (the
stockholder's) retained shares." Because the stockholder in
surrendering his shares was "attempting to decrease or avoid a loss on
his overall investment," the Tax Court was "unable to conclude that
(he) sustained a loss at the time of the transaction." Instead, the
court concluded, "(w)hether (he) would sustain a loss, and if so, the
amount thereof, could only be determined when he subsequently disposed
of the stock that the surrender was intended to protect and make more
valuable" (ibid.).  The Tax Court accordingly held in the instant case
that respondents' stock surrenders did not give rise to immediately
deductible losses, but rather must be treated as contributions to
Travco's capital (App., infra, 32a-33a).
   3. A divided court of appeals reversed (App., infra, 1a-20a).
According to the majority's analysis, the outcome depended on whether
it was proper to adopt a "unitary" or a "fragmented" view of stock
ownership for purposes of the presented case (see id. at 4a-10a).
Under the "fragmented" view, "each share of stock is considered a
separate investment," and gain or loss is computed separately on the
sale or dispostion of each share (id. 5a).  Under the "unitary" view,
"the stockholder's entire investment is viewed as a single indivisible
property unit," with the result that a sale or disposition of a
portion of his shares can result in an ascertainable loss only "when
the stockholder has disposed of his remaining shares" (id. at 5a, 12a
(original quotation marks omitted)).  The majority concluded that
affirmance of the Tax Court would have required it to adopt the
"unitary" view of stock ownership, and it declined to do so.  It noted
that each share of stock is normally treated as a separate unit for
tax purposes, and it held that the particular situation involved here
-- a majority shareholder's non-pro-rata surrender of a small portion
of his shares -- presented "(in)sufficient justification for
abandoning the 'fragmented view'" (id. at 11a (emphasis in original)).
 The court of appeals specifically rejected the contrary holdings of
the Second Circuit in Frantz V. Commissioner, supra, and of the Fifth
Circuit in Schleppy v. Commissioner, 601 F.2d 196 (1979), both of
which had held that similar stock surrenders did not give rise to an
immediate loss deduction.
   Judge Joiner dissented (App., infra, 17a-20a).  He pointed out that
where, as here, "the taxpayers' sole motivation in disposing of
certain shares is to benefit the other shares they hold," the
majority's insistence upon "(v)iewing the surrender of each share as
the termination of an individual investment ignores the very reason
for the surrender" (id. at 20a).  He emphasized that respondents had
"reduced their corporate ownership only slightly * * * and (had)
maintained their corporate control," so that they remained after the
stock surrender "in substantially the same position that they
previously held (and had) not suffered any sort of meaningful loss"
(id. at 18a).  "Particularly in cases * * * where the diminution in
the shareholder's corporate control and equity interest is so minute
as to be illusory," Judge Joiner reasoned, "the stock surrender should
be regarded as a contribution to capital" (id. at 20a).  He
accordingly concluded that, "(w)hatever validity the 'fragmented view'
may have outside of the present context, it should not be applied
here" (id. at 19a).
                   REASONS FOR GRANTING THE PETITION
   The court of appeals has created a direct conflict with the
decisions of two other circuits concerning an important question of
tax law -- the proper treatment for income tax purposes of a
stockholder's non-pro-rata surrender of corporate shares.  Because
this issue has been a recurring one, and because the court of appeals'
erroneous decision raises the possibility that taxpayers will be
encouraged to make such surrenders to gain an undeserved and improper
tax advantage, it appears likely that the conflict, if allowed to
persist, will result in disparate tax treatment for a significant
number of taxpayers.  Review by this Court is warranted to resolve
this conflict in the circuits and to correct the mistaken statutory
interpretation of the decision below.
   1. The court of appeals in this case has taken the position that a
shareholder's non-pro-rata surrender of stock entitles him to an
immediate loss deduction.  The amount of this deduction will typically
be measured by the taxpayer's cost or "basis" in the surrendered
stock, with perhaps some adjustment for any increase in value of his
remaining shares that is attributable to the surrender.  See App.,
infra, 14a;  Comment, Frantz v. Commissioner, Non Pro Rata Surrender
of Stock to the Issuing Corporation, 38 Tax Law. 739, 742 (1985).  The
Court of appeals' holding to this effect squarely conflicts with the
decisions of the Second Circuit in Frantz v. Commissioner, supra, and
the Fifth Circuit in Schleppy v. Commissioner, supra.
   In Frantz, the dominant shareholder had sought to improve the
corporation's financial condition by surrendering his preferred stock
(784 F.2d at 121). The court of appeals affirmed the Tax Court's
decision that the taxpayer was not entitled to an immediate loss as a
result of this surrender.  The court explained that "it is
questionable whether a controlling stockholding who voluntarily
surrenders stock to his corporation for the purpose of strengthening
it but continues his control through stock retained by him, thereby
benefiting from the surrender, necessarily suffers any recognizable
loss at the time of the surrender" (id. at 125).  Because the change
in the taxpayer's interest in the corporation as a result of the
surrender "was miniscule compared with (his) retained interest in the
company," the Second Circuit in Frantz concluded that the surrender
should not be treated as giving rise to an immediate loss but rather
should be regarded "as a non-deductible capital expenditure" (ibid.).
   The Fifth Circuit in Schleppy similarly held that a controlling
shareholder's "surrender of a very small part of (his) stockholdings *
* * to the corporation itself to improve its financial position" did
not give rise to a currently deductible loss (601 F.2d at 199).
Speaking for a unanimous court, Judge Tuttle noted "the general
proposition that voluntary payments by a stockholder to his
corporation in order to bolster its financial position cannot be
claimed as a loss," but rather must be "added to the basis of the
stock in the stockholder's hands" (id. at 197).  "It is difficult to
perceive why any distinction should arise," the court continued, "if,
instead of paying cash to the corporation, the shareholder surrenders
part of his shares to bolster (its) financial health" (ibid.).  The
court noted that the dominant shareholders' surrender of their stock
had reduced their controlling interest in the corporation only
slightly -- from 70.12% to 68.57% -- and hence that the surrender had
"left them in substantially the same position that they previously
held" (id. at 198).  The court concluded that the shareholders' action
could not be characterized as generating a "loss" and held that their
basis in the shares surrendered "is to be added to their basis in
their remaining shares" (id. at 198-199).
   The decision below cannot be reconciled with Frantz or Schleppy.
The inflexible rule adopted by the court below permits the immediate
recognition of loss as a result of a non-pro-rata stock surrender,
regardless of how insignificantly the surrendering shareholder's
ownership interest is thereby reduced and regardless of whether he has
suffered any loss as a practical matter.  Indeed, the facts of the
instant case, involving a stock surrender that reduced the taxpayers'
controlling interest from 72.5% to 68.5%, are substantially identical
to the facts in Schleppy, where the stock surrender reduced the
taxpayers' controlling interest from 70.1% to 68.6%.  Compare App.,
infra, 30a with 601 F.2d at 198.  There can thus be no doubt that
cases identical to Schleppy or Frantz would be decided in favor of the
taxpayer's request for immediate loss recognition should they arise in
the Sixth Circuit.  Indeed, the court of appeals below made no attempt
to harmonize its decision with Frantz and Schleppy;  it restricted its
discussion of those cases to criticisms of their rationale.  See App.,
infra, 12a-14a.  /1/
   2. Resolution of this direct conflict is a matter of substantial
administrative importance.  As the number of cases already decided
suggests, the treatment of non-pro-rata stock surrenders has proven to
be a recurring issue, and there is every reason to expect that
litigation concerning this question will persist, and probably
increase, in the wake of the court of appeals' decision here.  That is
especially true because acceptance of the taxpayer's position on this
question, as the Tax Court noted in Frantz, would encourage the use of
stock surrenders as a planning tool by which taxpayers might obtain
unjustified tax advantages.  See 83 T.C. at 182.
   First of all, the decision below would permit taxpayers to
accelerate their tax deductions, enabling them to recognize a
currently deductible loss on a transfer which, if effected by the use
of any property other than corporate stock, would result in a
nondeductible contribution to the corporation's capital.  Moreover,
the decision below could also permit "a conversion of eventual capital
losses into immediate ordinary losses" (83 T.C. at 182).  Under
Section 165(g)(1) of the Code, /2/ a loss on worthless stock is
"treated as a loss from the sale or exchange * * * of a capital
asset," and is thus subject to the limitation on deductibility of
capital losses established in Section 1211.  Because a unilateral
surrender of stock would usually not be deemed to involve a "sale or
exchange," however, a loss realized on such a surrender has been held
in the past by the Tax Court not to be a capital loss but rather to be
an ordinary loss deductible in full under Section 165(c)(2).  See
Frantz, 784 F.2d at 124-125;  83 T.C. at 182;  I.R.C. Sections 165(f)
and 1211(b).  Thus, "(s)hareholders of a corporation on the verge of
complete failure could * * * avoid the section 165(g) limitations by
surrendering shares in disproportionate amounts" just before their
stock becomes completely worthless (83 T.C. at 182).  For the courts
to sanction such a result would, as the Tax Court observed (ibid),
effect "the practical equivalent of a judicial repeal of section
165(g)." The court of appeals in Frantz echoed these two themes,
noting that acceptance of the taxpayer's position may give the
surrendering taxpayer "an undeserved and illogical tax advantage" (784
F.2d at 124).  See Gebhardt, When Are Loss Deductions Available on the
Voluntary Surrender Stock?, 43 J. Tax. 22 (1975) (suggesting the use
of stock surrenders as a tax planning device).
   The revenue consequences of stock-surrender transactions are
generally quite substantial.  In this case, for example, the tax
deficiencies asserted for a stock surrender in which "the diminution
in the shareholders' corporate control and equity interest (was) so
minute as to be illusory" (App., infra, 20a (Joiner, J., dissenting))
exceed a quarter of a million dollars.  It can thus be expected that
the decision below will lead to increased litigation concerning the
proper tax treatment of non-pro-rata stock surrenders unless this
Court intervenes to resolve the existing conflict in the circuits.
   3. The court of appeals' approval of an immediate loss deduction
for a non-pro-rata stock surrender is a serious misapplication of tax
law principles.  It has long been established that transfers by a
shareholder to his corporation are treated, not as losses, but as
contributions to capital that have no immediate tax consequences.  The
Treasury Regulations provide that "if a shareholder in a corporation
which is indebted to him gratuitously forgives the debt, the
transaction amounts to a contribution to the capital of the
corporation to the extent of the principal of the debt." Treas. Reg.
Section 1.61-12(a).  /3/ More generally, "voluntary contributions by
shareholders to the capital of the corporation for any corporate
purpose" are regarded as "capital investments and are not deductible."
Treas. Reg. Section 1.263(a)-2(f).  Pursuant to Section 1016(a) (1) of
the Code, such contributions to capital result not in a loss but in an
increase in the basis of the shareholder's shares by the amount of his
basis in the debt or other property transferred.
   These regulations reflect the general proposition, recognized by
this Court in Deputy v. du Pont, 308 U.S. 488 (1940), that a
shareholder may not take a deduction for outlays made to benefit his
corporation.  In du Pont, the taxpayer incurred certain expenses in
connection with the transfer of some of his stockholdings to new
executives of the corporation -- a transaction that was undertaken
because, "(f)or business reasons, (the corporation) thought it
desirable that these men have a financial interest in the company"
(308 U.S. at 490).  The Court held that these expenses, because
designed to further the corporation's business, did not give rise to a
personal deduction for the taxpayer even though he hoped to derive
some indirect benefit from them by virtue of his stock investment in
the company (id. at 494).  See also Interstate Transit Lines v.
Commissioner, 319 U.S. 590 (1943).  The lower courts have recognized
that it necessarily follows from du Pont that transfers made to third
parties for the benefit of one's corporation, like direct transfers to
the corporation itself, result in an increase in the shareholder's
basis in his shares.  See, e.g., Rittenberg v. United States, 267 F.2d
605 (5th Cir. 1959), cert. denied, 361 U.S. 931 (1960);  Eskimo Pie
Corp. v. Commissioner, 4 T.C. 669 (1945), aff'd, 153 F.2d 301 (3d Cir.
1946);  Ihrig v. Commissioner, 26 T.C. 73 (1956).  It thus follows
inexorably from du Pont and its progeny that, contrary to the decision
below, a shareholder's contribution of a portion of his stock to the
corporation for the purpose of improving its financial condition
yields an increase in the shareholder's basis in his remaining shares
and does not give rise to an immediate loss.  See generally Johnson,
Tax Models for Nonprorata Shareholder Contributions, 3 Va. Tax Rev. 81
(1983).
   The court of appeals failed to reach this result because it
mistakenly perceived this case as turning on a supposed distinction
between the "fragmented" and "unitary" views of stock ownership.  See
App., infra, 4a-10a.  This alleged difference is in fact specious, and
it provides no guidance whatever in resolving the question presented
here.  It is of course well settled that, if a person owns a piece of
property and sells or exchanges it for other property, his gain or
loss on the transaction is measured by the difference between his
basis in the property sold or exchanged and the amount realized upon
the sale or exchange (I.R.C. Section 1001(a)).  The same rule
naturally applies to stock.  An individual who owns shares in a
corporation may have quite different bases in the several shares,
depending on their purchase price and his mode of acquiring them.  If
he sells or exchanges some of the shares, his gain or loss is measured
by the difference between the amount realized and the basis, or bases,
of the particular shares sold or exchanged.  See, e.g., Davidson v.
Commissioner, 305 U.S. 44 (1938);  Helvering v. Rankin, 295 U.S. 123
(1935).  /4/ Only in very limited circumstances, such as after a
corporate reorganization, will the differing bases of different blocks
of stock be averaged and applied evenly to the total number of shares.
 See Arrott v. Commissioner, 136 F.2d 449 (3d Cir. 1943).  Thus,
stocks that are sold or exchanged are treated just like other types of
property that are sold or exchanged, with gain or loss being computed
by reference to their individual bases.
   Our position in this case casts no doubt upon this well-settled
rule, which the court of appeals would term the "fragmented" view of
stock ownership.  This case does not involve a sale or exchange.
Rather, it involves a contribution to a corporation of property in the
form of stock once issued by the corporation but now held by an
individual shareholder.  Just as a sale or exchange of stock is
treated like the sale or exchange of other property, so too a
surrender of stock should be treated like the surrender of other
property.  A shareholder's donation of cash or tangible property, or
his surrender of indebtedness, is treated as a contribution to the
corporation's capital that does not give rise to a deduction.  There
is no sound justification for treating a surrender of stock any
differently.  Regardless of what sort of property the shareholder
decides to transfer to his corporation, his transfer is made for the
purpose of enhancing or protecting the value of the shares he retains.
 The fact that his fellow shareowners will be benefitted to some
extent by his transfer does not entitle him to a current tax
deduction.  And this result does not follow from any abstract
distinction between "fragmented" and "unitary" views of stock
ownership.  It follows, rather, from (1) the significant difference
between a shareholder's transfer of property to his own corporation
and an arm's-length "sale or exchange," and (2) the lack of any
significant difference between a shareholder's transfer of shares to
his corporation and his transfer of some other form of property to it.
 /5/
   As the Second Circuit and the Tax Court explained in Frantz (see
784 F.2d at 123-124;  83 T.C. at 179-181), the fact that a
shareholder's surrender of stock is intended to improve the financial
position of his corporation -- and hence to enhance the value of his
remaining stock -- means that the surrender itself does not result in
any genuine and immediate loss to him.  To the contrary, the surrender
in reality is an "open transaction";  whether or not it will result in
a loss depends upon the extent to which the surrender ultimately
succeeds in enhancing the value of the taxpayer's remaining stock.
That can be determined only when the transaction is "closed" by the
disposition of his remaining shares.  See also Kistler v. Burnet, 58
F.2d 687, 689 (D.C. Cir. 1932) (explaining that tax consequences of
partial surrender will be assessed upon disposition of remaining
shares).
   4. Established principles regarding the tax treatment of stock
redemptions further demonstrate that the court of appeals erred in
allowing respondents a loss deduction for their non-pro-rata surrender
of shares to their corporation.  A redemption occurs when a
shareholder surrenders stock and receives cash or other property in
return (I.R.C. Section 317(b)).  A redemption is treated as a "sale or
exchange" of the stock, thereby giving rise to immediate recognition
of gain or loss, only if there is a substantial, or "meaningful,"
reduction in the shareholder's interest in the corporation.  United
States v. Davis, 397 U.S. 301, 313 (1970);  I.R.C. Section 302(a),
(b), and (d).  /6/ Absent such a substantial reduction in the
shareholder's overall interest in the corporation, the redemption is
broken down into two parts for tax purposes, with the receipt of cash
or property being dissociated from the surrender of shares.  The
receipt of cash or property is generally treated as a dividend.  See
I.R.C. Section 302(d).  The surrender of shares results in no
immediate gain or loss;  rather, the shareholder's basis in the
surrendered shares is added to his basis in the stock retained.  See
United States v. Davis, 397 U.S. at 307-308 n.9;  Treas. Reg. Section
1.302-2(c);  Brodsky & Pincus, The Case of the Reappearing Basis, 34
Taxes 675, 676-677 (1956).
   In this case, respondents' surrender of shares to their corporation
reduced their interest in the corporation from 72.5% to 68.5%, a
reduction that Judge Joiner correctly characterized as "so minute as
to be illusory" (App., infra, 20a).  If respondents had received any
cash in conjunction with the surrender -- even one penny a share --
the surrender would have been treated as a redemption, the cash would
have been treated as a dividend or other distribution, and
respondents' basis in the surrendered shares would have been added to
their basis in the shares retained.  Because respondents received no
cash, their transaction did not fall within the literal terms of the
redemption provisions, and Section 302 therefore does not mandate the
tax treatment just described.  But it would indeed be a perverse
result if respondents could secure the radically different tax
treatment of an immediately deductible loss -- and an ordinary rather
than a capital loss -- simply by foregoing a peppercorn of
consideration.
   Practically speaking, a stock surrender resembles a redemption for
a zero dividend.  More precisely, a stock surrender is equivalent to a
redemption in which the quid-pro-quo for the shareholder is not the
immediate and direct benefit of a cash dividend, but rather the more
indirect and longer-term benefit of enhancing his overall investment
in the corporation through the improvement of its financial condition.
 Thus, redemption principles strongly indicate that, when a
shareholder makes a non-pro-rata stock surrender to improve the
financial position of his corporation, maintaining the same effective
control over the corporation that he had before, he has suffered no
loss.  The tax consequences of the transaction should therefore be the
same as those that would attend a redemption of his shares, namely,
the addition of the basis in the surrendered shares to the basis in
the shares he retains.
   5. As noted above, the decision in this case directly conflicts
with Frantz v. Commissioner, supra, in which a petition for certiorari
is pending, No. 86-11.  We are filing contemporaneously with this
petition a brief outlining our views in Frantz.  As we explain in that
brief (at 7-9), we believe that the instant case is somewhat
preferable to Frantz as a vehicle for resolving the existing circuit
conflict.  It would therefore be appropriate for the Court to grant
certiorari here and hold the petition in Frantz pending disposition of
the instant case.  Alternatively, the Court may wish to grant
certiorari in Frantz and hold this case pending the outcome of that
one.
                              CONCLUSION
   The petition for a writ of certiorari should be granted.
Alternatively, if certiorari is granted in Frantz v. Commissioner, No.
86-11, the petition should be held and disposed of as appropriate in
light of the disposition of that case.
   Respectfully submitted.
   CHARLES FRIED
      Solicitor General
   ROGER M. OLSEN
      Assistant Attorney General
   ALBERT G. LAUBER, JR.
      Deputy Solicitor General
   ALAN I. HOROWITZ
      Assistant to the Solicitor General
   JONATHAN S. COHEN
   DAVID I. PINCUS
      Attorneys
   SEPTEMBER 1986
   /1/ The fact that the decision below cannot be squared with Frantz
is highlighted by the fact that Judge Parker, the author of the
dissent in Frantz (83 T.C. at 187-193), wrote the Tax Court decision
below in favor of the Commissioner.  Judge Parker in this case
reiterated her view that Frantz had been wrongly decided (App., infra,
33a n.3), but she nevertheless concluded that the Tax Court's decision
in Frantz could not be distinguished and was "dispositive" in the
instant case (id. at 33a).
   /2/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Code or
I.R.C.).
   /3/ This provision dates back to Art. 51 of Regulations 45 under
the Revenue Act of 1918.  See Commissioner v. Auto Strop Safety Razor
Co., 74 F.2d 226 (2d Cir. 1934).
   /4/ In the absence of specific identification of shares, the
Regulations provide that gains or losses are measured by assigning
basis to the shares that are sold or exchanged on a first-in,
first-out method.  See Treas. Reg. 1.1012-1(c)(1).
   /5/ The error of the court of appeals' focus on the "fragmented"
and "unitary" views of stock ownership becomes particularly clear when
one considers the consequences that flow from a shareholder's
surrender of debt to his corporation.  If a shareholder surrenders
some of his debentures, it is settled beyond any doubt that the
transaction is a contribution to the corporation's capital, resulting
in an adjustment of the shareholder's basis in his shares.  See Treas.
Reg. Section 1.61-12(a).  Clearly, this rule has never been thought to
undermine the "fragmented" view of bond ownership -- the rule that the
sale or exchange of individual debt instruments is a taxable event
even if the bondholder continues to hold other bonds from the same
debtor.
   /6/ Congress has quantified the concept of a "meaningful" reduction
under the rubric of a "substantially disproportionate" redemption.
See I.R.C. Section 302(b)(2);  Treas. Reg. 1.302-3.  Of particular
relevance here, the "safe harbor" provision of Section 302 provides,
as a threshold requirement that must be met before application of this
provision can result in sale-or-exchange treatment, that the
shareholder must hold less than 50% of the corporation's voting stock
immediately after the redemption.  I.R.C. Section 302(b)(2)(B).
Respondents here, of course, owned 68.5% of Travco's voting stock
immediately after their stock surrender.  See page 2, supra.