UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

REYNOLDS METALS COMPANY AND
CONSOLIDATED SUBSIDIARIES,
Petitioner-Appellant,
                                                                   No. 96-1755
v.

INTERNAL REVENUE SERVICE,
Respondent-Appellee.

Appeal from the United States Tax Court.
(Tax Ct. No. 93-24939)

Argued: May 5, 1997

Decided: June 3, 1997

Before HALL, LUTTIG, and MICHAEL, Circuit Judges.

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Affirmed by unpublished per curiam opinion.

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COUNSEL

ARGUED: Frederick H. Robinson, MILLER & CHEVALIER,
CHARTERED, Washington, D.C., for Appellant. Edward T. Perel-
muter, Tax Division, UNITED STATES DEPARTMENT OF JUS-
TICE, Washington, D.C., for Appellee. ON BRIEF: James L.
Sanderlin, MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P.,
Richmond, Virginia, for Appellant. Loretta C. Argrett, Assistant
Attorney General, Gilbert S. Rothenberg, Tax Division, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee.

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Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

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OPINION

PER CURIAM:

Appellants Reynolds Metals Company and its consolidated sub-
sidiaries (collectively "Metals"), appeal from the United States Tax
Court's holding that they are not entitled to deduct as a capital loss
the difference between the fair market value of Metals common stock
surrendered by Metals in exchange for certain debentures issued by
Metals' wholly-owned subsidiary, and the outstanding principal, or
face value, on those debentures received by Metals from the issuer of
the debentures. We affirm.

In 1968, Metals formed a wholly-owned subsidiary, Reynolds Met-
als European Capital Corporation ("RMECC"), in order to raise $50
million from the European bond market. Metals used RMECC as a
vehicle to sell onto the European market $50 million worth of 5-
percent Subordinated Guaranteed Convertible Debentures, convertible
at any time into Metals common stock at a fixed price at the option
of the debenture holder. The indenture under which the debentures
were issued provided that, under certain conditions, RMECC could
call for the redemption of the debentures and that, should such a
redemption be called for, debenture holders could, at their option,
either tender the debentures to RMECC for cash, or to Metals for
shares of Metals common stock. In the event that the debenture hold-
ers chose the latter course, Metals would have the right to "sell" the
debentures that it received for its common stock to RMECC not for
the market value of the Metals common stock that Metals surrendered
for the debentures, but only for the face value of the debentures.

On February 24, 1987, RMECC exercised its right, pursuant to the
indenture, to redeem all outstanding debentures at their face value
which, by that time, had been reduced from $50,000,000 to
$29,733,000. Because of market conditions, the debenture holders,
who could receive greater value by converting their debentures into

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shares of Metals common stock than by returning them to RMECC
for the face value of the debentures, chose overwhelmingly to tender
their debentures to Metals in exchange for stock. 1 Accordingly,
$29,150,000 of the $29,733,000 outstanding debentures were ten-
dered to Metals in exchange for 667,214 shares Metals common stock
with a fair market value of $41,879,710.2 After accounting for other
expenses incurred in connection with the conversion, Metals paid a
total of $42,174,721 for the debentures,3 leaving it as the holder of
debentures with a face value of $29,150,000. Pursuant to the inden-
ture, Metals proceeded to "sell" the debentures that it now possessed
to RMECC in exchange for their face value, $29,150,000, plus
accrued interest.

In its 1987 tax return, Metals attempted to claim $13,024,721,
which represented the difference between the $42,174,721 that Metals
had paid out for the debentures and the $29,150,000 that it ultimately
received from RMECC, as a "capital loss deduction" under section
165(f) of the Internal Revenue Code.4 Metals argued that because it
"paid" $42,174,721 for the debentures, it therefore had a basis in the
debentures for that amount; and, because it then"sold" those deben-
tures for $29,150,000, it was entitled to a capital loss deduction for
the amount by which its basis in the debentures ($42,174,721)
exceeded the amount received from the sale of the debentures
($29,150,000). The Commissioner of Internal Revenue rejected this
claim and disallowed the deduction.
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1 A debenture holder either could have returned each debenture to
RMECC for its face value of $1,000, plus accrued interest of $15.97, for
a total of $1,015.97; or, alternatively, delivered each debenture to Metals
in exchange for 22.89 shares of Metals common stock which, at the time,
ranged in value from $1,207.45 to $1,487.85.
2 Another $25,000 in debentures were redeemed for cash, and the
remaining $598,000 in debentures went unaccounted for.
3 The $42,174,721 consists of the fair market value of the common
stock surrendered by Metals in exchange for the debentures
($41,879,710), plus general expenses incurred by Metals in connection
with the exchange ($288,768), plus amounts paid in lieu of issuing frac-
tional shares ($6,242).
4 Section 165(f) of the Internal Revenue Code provides that "[l]osses
from sales or exchanges of capital assets shall be allowed only to the
extent allowed in sections 1211 and 1212."

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The Tax Court, siding with the Commissioner, concluded that the
difference between the fair market value of the stock surrendered by
Metals and the face value of the debentures it received from RMECC
for the debentures was not a "capital loss" incurred by Metals, but,
rather, a "capital contribution" from Metals to RMECC. The court
reasoned that this difference was part and parcel of the conversion
obligation that Metals voluntarily undertook in the indenture under
which RMECC, Metals' wholly-owned subsidiary, issued the deben-
tures in the first place. Accordingly, the court held that Metals was
not entitled to claim the difference as a capital loss deduction; Metals
could, however, obtain the tax benefits of this capital expenditure by
using it to increase its basis in its shares of RMECC.5

We have reviewed the Tax Court's opinion, and, particularly, its
conclusion that the $13,024,721 paid out by Metals constituted a capi-
tal contribution made by Metals to RMECC, its wholly-owned subsid-
iary. We have also reviewed both parties' briefs and the record and
heard oral argument in this case. Finding no error in the decision of
the Tax Court, see J.A. at 17-48, we affirm the opinion of that court.

AFFIRMED
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5 The Tax Court reached this issue only after rejecting the Commission-
er's argument that no capital loss was incurred by Metals because the
debentures did not survive as obligations of RMECC to Metals. The
Commissioner does not now challenge this determination, and, for the
purposes of this appeal, we accept the court's conclusion on this issue.

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