                  T.C. Memo. 1997-409



                UNITED STATES TAX COURT



       GRIFFIN PAPER CORPORATION, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

          GREAT NORTHERN NEKOOSA CORPORATION
            AND SUBSIDIARIES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 17763-95, 18532-95.    Filed September 16, 1997.



     G owned all of L's stock. L's primary asset was a
sawmill, which was operating at a loss, and L desired
to find a partner with whom to build a pulp mill to
enhance the sawmill's productivity. In 1981, G and N
agreed that G would recapitalize L, and that L would
build the pulp mill after N transferred to L funds in
exchange for an ownership interest therein. Pursuant
to the agreement, G received 32.8 percent of L's
preferred stock and 5 percent of L's common stock, and
N received the rest of L's stock. All of G's L stock
was subject to simultaneous reciprocal options,
exercisable at any time after 1988, under which G could
put its L stock to N in return for $31.75 million plus
5 percent of L's retained earnings on the date of
exercise, and N could call G's L stock at the same
                               - 2 -

     price. On Jan. 2, 1989, G notified N that G was
     exercising its put, and, later that year, G transferred
     its L stock to N in exchange for $31.75 million (L had
     negative retained earnings). G and R argue that G sold
     its L stock to N in 1989. N argues that the sale
     occurred in 1981. Held: The sale occurred in 1989.



     Dean Holbrook, Lance G. Harris, and John G. Lipsett, for

petitioner in docket No. 17763-95.

     William L. Goldman, Christopher Kliefoth, Joni Lupovitz,

and Philip Alva McCarty, for petitioner in docket No. 18532-95.

     Stephen M. Miller, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge1:   These cases are before the Court consolidated

for purposes of trial, briefing, and Opinion.   See Rule 151.2

Griffin Paper Corp. (Griffin) petitioned the Court to redetermine

a deficiency of $3,703,147 in its 1989 Federal income tax.   Great

Northern Nekoosa Corp. (GNN) petitioned the Court to redetermine

a deficiency of $357,753 in its 1989 Federal income tax.




     1
       The trial of these cases commenced under Judge Thomas B.
Wells. After hearing part of the testimony, Judge Wells recused
himself and the Court assigned these cases to Judge David Laro.
The parties agreed to let the testimony not heard by Judge Laro
stand, and neither side asked Judge Laro to recall any witness
who testified before Judge Wells.
     2
       Rule references are to the Tax Court Rules of Practice and
Procedure. Section references are to the Internal Revenue Code
in effect for the year in issue.
                               - 3 -

     The deficiencies stem from Griffin's sale of certain stock

to GNN.   We must determine whether this sale occurred in 1981 or

1989.   GNN argues that the sale occurred in 1981.    Griffin and

respondent argue that the sale occurred in 1989.     We hold that

the sale occurred in 1989.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations and exhibits submitted therewith are

incorporated herein by this reference.   Griffin and GNN are

corporations whose principal places of business were in New York,

New York, and Atlanta, Georgia, respectively, when they

petitioned the Court.

     Griffin is the successor to Leaf River Paper Co. (LRPC).

LRPC was organized in 1971 under the laws of Delaware, and it

changed its name to Griffin in 1982 (hereinafter we refer to LRPC

as Griffin.)   Griffin's sole shareholder is a Finnish company

named Kymi Kymmene Oy (KKO).   KKO is one of the largest forest

product companies in Finland; it produces and sells in Europe

forest products such as pulp and paper products.     KKO organized

Griffin as a nonoperating holding company to manage KKO's

interests in the United States.   Until December 31, 1981, Griffin

had a wholly owned subsidiary named Leaf River Forest Products,

Inc. (LRFP), which was formed in 1975 to own and operate a

sawmill in New Augusta, Mississippi.
                               - 4 -

     GNN was organized in 1898 under the laws of Maine.     GNN is

one of the world’s largest producers of pulp and paper, and it is

a major U.S. paper distributor and envelope manufacturer.    GNN

became the sole owner of Leaf River Corp. (LRC) on December 31,

1981.   LRC was organized in 1981 under the laws of Delaware.

     KKO is a major user of pulp.   In or before 1970, KKO

ascertained that it needed additional sources of pulp, and it

conducted studies which revealed that woodlands in Mississippi

were a promising source of raw material and a good location for a

pulp mill.   KKO purchased land in Perry County, Mississippi, on

which it intended to build and operate a pulp mill.

     In 1975, KKO concluded that it should build the pulp mill in

two steps.   First, KKO would build a sawmill.   Second, KKO would

construct the pulp mill.   KKO ascertained that it had to

construct the sawmill before the pulp mill because the byproduct

chips from the sawmill were a vital part of the raw material

supply needed for the pulp mill.    KKO anticipated that it would

construct and operate both the sawmill and the pulp mill alone,

expecting that the sawmill's profits would be optimized by an

adjacent pulp mill.

     In connection with the two-step project, LRFP was formed,

and it established relations with local suppliers of timber.

LRFP also filed applications for air and water pollution permits

and studied the requirements for an energy permit.    In 1975 or
                                - 5 -

1976, KKO received financing for the first step of the project

through a $10 million loan from Aetna Life Insurance Co. (Aetna).

     The sawmill was built near the end of 1976, and it commenced

operations in January 1977.    The sawmill generated losses in each

of the years from 1977 through 1981; by the end of 1980, KKO had

lost approximately $17.224 million.      Due to these losses, KKO,

around 1980, decided not to build the pulp mill on its own but to

search for a partner.   As of the end of 1980, KKO's investment in

the sawmill project totaled $31.5 million.

     In 1978, GNN had an adequate cash flow and wanted to

undertake a major capital project.      After studying several

capital projects, GNN decided to build a pulp mill; GNN wanted to

enter the pulp business because of projected worldwide shortages

of pulp.   Due to the enormous cost associated with constructing a

pulp mill, GNN desired to obtain a partner for a joint venture to

effectuate the construction.   In about August or September 1980,

GNN learned about KKO's interest in entering into a joint venture

to build a pulp mill in Mississippi.

     In the fall of 1980, KKO began serious discussions with GNN

to build jointly a pulp mill on LRFP’s Mississippi property.      At

that time, the parties believed that construction of the pulp

mill would cost approximately $440 million.      KKO’s initial

objective was a 20-percent equity relationship and long-term pulp

supplies that would be 20 percent of the output of the intended

mill.   At this time, KKO was buying large quantities of pulp in
                               - 6 -

the open market and a long-term pulp contract would shore up its

pulp requirements.   KKO believed that the long term contract with

LRFP would be strengthened by KKO having a minority interest in

LRFP rather than creating a buyer-seller relationship.

     On November 5, 1980, GNN and KKO signed a letter of intent

(the Letter of Intent) to build jointly a pulp mill.   The Letter

of Intent contemplated that GNN would own 80 percent of the

venture and KKO would own 20 percent, and that GNN and KKO would

be responsible for their pro rata share of debt and equity.     KKO

desired to satisfy its 20-percent share of the equity by

contributing its sawmill operations, the pulp mill site, existing

environmental permits, and Finnish machinery.   The Letter of

Intent stated that GNN agreed with this proposal in principle,

subject to a mutual determination of the value of the contributed

assets.   KKO proposed that GNN value the contributed assets at

$31.5 million, which KKO represented to GNN was the total amount

KKO had invested in LRFP.

     When the parties contemplated the 80/20 split, they

anticipated that KKO would participate in the project for the

long run, and that KKO would be a true coventurer and equity

participant in the project.   KKO would also share any risk of

loss in the project.   The Letter of Intent stated that "If for

any reason the project does not proceed, expenses incurred by

either party shall be assumed by that party without reimbursement

from the other party."   The Letter of Intent also assured KKO a
                                 - 7 -

long-term pulp supply relative to its ownership interest in the

venture; the parties were to have access to the output of the

pulp mill "in proportion to their interests in the venture and on

mutually agreeable commercial terms."

     GNN selected the engineering firm of Brown & Root to prepare

preliminary studies of the parameters for the pulp mill and to

prepare a detailed study to set the specifications and

construction standards for the mill.     The controller departments

of GNN and KKO also prepared a joint financial projection in

1981, which projected the amount of retained earnings for their

joint venture for each year through 1990.    GNN's employees and

officers anticipated that the venture would generally suffer

losses from 1982 through 1989 and that LRFP would have negative

retained earnings as of 1989.

     In October 1981, Brown & Root reported substantial cost

escalation in constructing the pulp mill, and the partnership

proposal was revised so that KKO would have no debt portion.

Later that year, KKO suggested to GNN that KKO sell the sawmill

to GNN for cash and that negotiations continue only on a

long-term pulp sales contract.    GNN expressed a preference for a

continued joint venture, mainly because of KKO’s experience in

building pulp mills; KKO had recently built a very large pulp

mill in Finland and had the experience of procuring and using the

latest equipment.   KKO's recent experience in building a pulp
                               - 8 -

mill was an intangible asset that GNN wanted KKO to bring into a

joint venture with GNN.

     On December 31, 1981, GNN, LRC, KKO, Griffin, and LRFP

entered into the Stockholders' Agreement (the Stockholders'

Agreement) and the LRFP Stock Issuance Agreement (the Stock

Issuance Agreement), and KKO and LRFP entered into the Pulp Sales

Agreement.   On the same day, Griffin transferred property to LRFP

valued at approximately $31.5 million in exchange for 5 percent

of LRFP's common stock and 32.8 percent of LRFP's preferred

stock, and LRFP assumed KKO's $10 million debt owed to Aetna.

GNN transferred $56.7 million to LRFP in exchange for 95 percent

of LRFP's common stock and a promise to pay $40 million in

exchange for 67.2 percent of LRFP's preferred stock.

     The relevant parts of the Stockholders' Agreement provide as

follows:

          1. At the Closing * * * [Griffin] shall sell,
     assign and transfer to GNN all of its shares of common
     stock of LRC for the amount of $200.

          2. (a) Prior to the Closing KKO and [Griffin]
     shall cause a recapitalization of LRFP to take effect
     so that immediately prior to the Closing LRFP shall
     have an authorized capital consisting of 7,700 shares
     of preferred stock, without par value (the "Preferred
     Stock") and 4,500 shares of common stock, par value
     $1.00 per share (the "Common Stock"), of which 1,940
     shares of the Preferred Stock and 208 shares of the
     Common Stock shall be issued and outstanding and owned
     of record and beneficially by [Griffin].

                (b) At the Closing LRFP shall issue and
           sell to LRC, 3,952 shares of the Common Stock
           for the amount of $56,700,000 and
           simultaneously therewith LRC shall subscribe
                            - 9 -

     to 4,000 shares of the Preferred Stock to be
     purchased and paid for in ten equal quarterly
     installments of $4,000,000 each commencing
     March 1, 1983.

          (c) At the Closing LRFP shall deliver
     the certificates evidencing LRC's shares of
     the Common Stock against payment to LRFP of
     cash in the amount of $56,700,00 so that at
     the conclusion of the Closing LRC shall own
     of record and beneficially ninety-five
     percent of the Common Stock and [Griffin]
     shall own of record and beneficially five
     percent of the Common Stock.

*      *       *        *           *    *         *

     4. LRFP shall be responsible for constructing and
operating the Project. Unless otherwise agreed in
writing by KKO, the scope of LRFP's commercial
activities shall be the production and marketing
directly or indirectly of any and all products and by-
products relating to or arising out of the forest
products industry including the transportation thereof
in any manner.

     5. All of the funds necessary to construct and
operate the Project shall be provided to LRFP by LRC
and nothing herein or in law shall be deemed to require
Griffin to provide a pro rata portion of such funds
whether as loans or advances or equity to LRFP. * * *

*      *       *        *           *    *         *

     6. It is the intention of GNN and LRC to
construct the Project in accordance with the Report but
nothing herein shall be construed to require LRC or GNN
to complete the Project in accordance with the Report
or otherwise, to operate the pulp mill when constructed
and completed and/or the sawmill owned by LRFP or use
its efforts to operate the same or, if either or both
be in operation, to keep LRFP well or otherwise
supplied with funds of any kind, and LRC and GNN may
terminate the Project or cease construction of the pulp
mill or shutdown the pulp mill and/or the sawmill at
any time or times without obligation or liability to
any party hereto, all such decisions to be in the
absolute discretion of LRC and GNN. * * *
                        - 10 -

*      *       *        *        *       *       *

     9. (a) The Board of Directors of LRFP shall
consist of ten persons, eight of whom shall be
nominated by LRC (the LRC Directors), and two of whom
shall be nominated by [Griffin] (the [Griffin]
Directors). As long as LRC owns shares of the Preferred
Stock and Common Stock, it will vote its shares so as
to provide for the election of the two persons
nominated by [Griffin], and as long as [Griffin] owns
shares of the Preferred Stock and Common Stock, it will
vote its shares so as to provide for the election of
the eight persons nominated by LRC. * * *

*      *       *        *        *       *       *

          (b) The by-laws of LRFP shall provide
     that a majority of the whole Board of
     Directors of LRFP shall constitute a quorum
     for the transaction of business and that the
     act of a majority of the directors present at
     a meeting at which a quorum is present shall
     be the act of the Board of Directors.

*      *       *        *        *       *       *

     10. The authorization of any of the corporate
actions set forth below shall require the favorable
vote or consent in writing of the holders of at least
96 percent of the outstanding shares of the Common
Stock:

           (a) Any merger or consolidation of LRFP
     which would reduce [Griffin's] interest in
     the Common Stock of LRFP to less than 5
     percent or the dissolution or liquidation of
     LRFP.

          (b) Any issuance by LRFP of additional
     shares of the Common Stock (except as stock-
     splits or stock dividends).

          (c) Any method of financing LRFP
     involving the purchase by [Griffin] of
     additional securities of LRFP, but nothing
     herein shall preclude LRFP from issuing any
     securities of any kind, including additional
     shares of the Preferred Stock, to any person,
     provided the interest, dividend or other rate
                        - 11 -

     of return on such securities shall not exceed
     the prime rate of interest of Irving Trust
     Company published from time to time plus
     3/8ths of one percent and provided, further,
     that immediately after such issuance
     [Griffin's] interest in the Common Stock of
     LRFP shall not be reduced to less than 5
     percent.

*      *       *        *        *       *       *

     13. If, after the close of any fiscal year ending
after July 1, 1989, the independent auditors of LRFP
certify that LRFP has earned a net profit after taxes,
the Board of Directors of LRFP shall consider voting to
declare a dividend to the holders of the Common Stock
in an amount equalling not less than 40% of such after-
tax profit unless LRFP's Executive Committee certifies,
in writing, that part or all of such 40% portion of the
net after-tax profit shall not be declared a dividend
because such funds are required to be used, or to be
reserved for, particular capital investments or that
sufficient cash is not available in light of LRFP's
other requirements.

*      *       *        *        *       *       *

     15. (b) GNN shall have responsibility for the
management of LRFP and any of its subsidiaries. * * *

     16. On not less than six months' written notice
given to [Griffin] on and after January 1, 1989 LRC
shall have the right to purchase all of [Griffin's]
shares of the Preferred Stock and Common Stock of LRFP
at the price of $10,000 per share for each of
[Griffin's] shares of the Preferred Stock then owned by
it and $58,894.23 per share for each of [Griffin's]
shares of the Common Stock then owned by it plus five
(5) percent of the retained earnings, if any, of LRFP
as at the earnings date as hereinafter defined.

     Similarly, on not less than six months' written
notice given to LRC on and after January 1, 1989
[Griffin] shall have the right to sell all of
[Griffin's] Preferred Stock and Common Stock of LRFP to
LRC at the price of $10,000 per share for each of
[Griffin's] shares of the Preferred Stock then owned by
it and $58,894.23 per share for each of [Griffin's]
shares of the Common Stock then owned by it plus five
                        - 12 -

(5) percent of the retained earnings, if any, of LRFP
as at the earnings date.

     In the event additional shares of Common Stock are
issued to [Griffin] or [Griffin] receives additional
shares of the Common Stock as a result of any stock
split or stock dividend or [Griffin's] shares of the
Common Stock are combined into a lesser number of
shares, the price per share for each of [Griffin's]
shares of the Common Stock set forth above shall be
appropriately adjusted to reflect such issuance, stock
split, stock dividend or combination of shares.

     Such notice shall specify the closing date of the
sale of [Griffin's] Preferred and Common Stock and the
earnings date when the retained earnings of LRFP shall
be determined, which date shall be the close of the
calendar month preceding by not less than 30 nor more
than 90 days the closing date. Prior to such closing
date LRFP shall, if requested by [Griffin], declare and
pay a dividend on the Common Stock equal to the amount
of such retained earnings but only out of funds legally
available therefor. On such closing date [Griffin]
shall sell, assign and transfer to LRC and LRC shall
purchase [Griffin's] shares of the Preferred and Common
Stock of LRFP at the purchase price stated above, less
the amount of the retained earnings received by
[Griffin] as aforesaid.

*      *       *        *        *       *       *

     20. Immediately after the closing under the
Agreement, all certificates representing shares of the
Stock registered in the name of [Griffin] shall bear
the following legend on the face thereof:

     The shares represented by this certificate
     are subject to the provisions set forth in
     the Stockholders' Agreement dated as of
     December 31, 1981 among Great Northern
     Nekoosa Corporation, Kymi Kymmene Oy, Leaf
     River Paper Company, Inc., Leaf River
     Corporation and Leaf River Forest Products,
     Inc., a copy of which has been deposited with
     Great Northern Nekoosa Corporation at its
     office at 75 Prospect Street, Stamford,
     Connecticut.

*      *       *        *        *       *       *
                        - 13 -

                      Appendix I

     The designations, preferences, privileges and
voting powers, and the qualifications, limitations and
restrictions thereof, of the Preferred Stock and the
Common Stock shall be as follows:

                    Preferred Stock

     (a) Dividends. The holders of record of the
Preferred Stock shall be entitled to receive out of any
funds of the Corporation at the time legally available
for the declaration of dividends, non-cumulative
dividends at the rate of six percent (6%) per annum per
share, and no more, payable in cash when and as
declared by the Board of Directors. If dividends on
the Preferred Stock are not declared in any fiscal year
of the Corporation, they shall not accumulate, whether
or not earned. Nothing herein shall be construed to
prohibit the Board of Directors from declaring, and the
Corporation from paying or setting apart, dividends on
the Common Stock, whether or not dividends on the
Preferred have been declared.

     (b) Redemption. The Corporation may at any time
redeem all, or may from time to time redeem in part,
the shares of Preferred Stock at the redemption price
of $10,000 per share, plus any dividends which have
been declared and remain unpaid to the date fixed for
redemption. Notice of redemption of shares of the
Preferred Stock and of the date and place of redemption
shall be mailed not more than 60 nor less than 30 days
prior to the date fixed for redemption to each holder
of record of shares to be redeemed at his address as
shown by the records of the Corporation. If there is
to be redeemed less than all of the shares then
outstanding of the Preferred Stock, the shares to be
redeemed shall be selected on a pro rata basis.

     (c) Dissolution. In the event of any voluntary
or involuntary dissolution of the Corporation, the
holders of shares of the Preferred Stock then
outstanding shall be entitled to be paid out of the
assets of the Corporation, before any payments shall be
made to the holders of any shares of Common Stock,
$10,000 per share, plus any dividends which have been
declared and remain unpaid to the date of payment. In
the event that the assets of the Corporation are
insufficient to pay the full amounts to which the
                             - 14 -

    holders of the Preferred Stock shall be entitled in
    dissolution, then such assets shall be distributed to
    the holders of the Preferred Stock in proportion to the
    respective amounts which they would be entitled to
    receive if paid in full. After the payment in full of
    the sum per share hereinabove described to the holders
    of record of the Preferred Stock then outstanding, the
    holders of outstanding shares of Common Stock of the
    Corporation shall be entitled to receive any balance of
    the assets then remaining and the shares of the
    Preferred Stock shall not be entitled to share therein.
    No liquidation or other act of the Corporation shall be
    construed as a dissolution, voluntary or involuntary,
    unless approved by the stockholders in the manner
    provided by law.

          (d) Voting Rights. Except as provided by law,
     the Preferred Stock shall not be entitled to vote.

                          Common Stock

          (a) Dividends. The holders of shares of Common
     Stock shall be entitled to receive dividends from time
     to time when and as declared by the Board of Directors
     out of funds legally available therefor.

          (b) Dissolution. In the event of any dissolution
     of the Corporation, after the debts of the Corporation
     shall have been paid or provided for, and after the
     holders of the Preferred Stock shall have received the
     preferential distribution to which they are entitled as
     hereinabove set forth, all of the remaining assets of
     the Corporation shall belong to and shall be
     distributed ratably among the holders of the Common
     Stock. No liquidation or other act of the Corporation
     shall be considered as a dissolution, voluntary or
     involuntary, unless approved by the stockholders in the
     manner provided by law.

          (c) Voting Rights. At every meeting of the
     stockholders of the Corporation, the holders of record
     of shares of Common Stock entitled to vote thereat
     shall be entitled to one vote for each such share held.

     Under the Pulp Sales Agreement, KKO agreed to purchase

80,000 short tons per year of the output of the pulp mill, and

KKO was entitled to a 3-percent discount from the announced list
                              - 15 -

prices of the major American pulp companies; a 3-percent discount

was commonly offered to purchasers of market pulp, and it did not

represent a special price or discount resulting from KKO's

interest in LRFP.   These benefits to KKO were for the full term

of the Pulp Sales Agreement, and KKO’s discount applied in both

strong and weak markets.   The Pulp Sales Agreement also provided

that either party could terminate the agreement only on 1-year’s

written notice given on or after July 1, 1999, in which case

termination would take effect at the end of 5 years from the date

of the notice.   Pulp shipments for the period following the date

of the notice would be the same for the first 12 months and then

be reduced cumulatively.

     The pulp mill commenced operations in 1984.    In that year,

KKO purchased 2,555 tons of pulp from LRFP, and, in the next

year, KKO purchased 47,128 tons of pulp from LRFP.     The purchased

pulp was an important source of supply to KKO.     In 1986, the

markets improved, and LRFP began to develop new markets.     In late

1986, the parties to the Pulp Sales Agreement agreed to suspend

the Pulp Sales Agreement for 1987, and, by mutual consent on

December 31, 1987, the parties to the Pulp Sales Agreement

terminated the agreement in toto.

     In February 1988, Griffin notified GNN that it was going to

exercise its put.   On January 2, 1989, Griffin did so, exercising

its right to sell all of its common and preferred stock in LRFP

on July 3, 1989, with an earnings date of May 31, 1989.     LRFP’s
                             - 16 -

balance sheet dated May 31, 1989, reported negative earnings of

$142.2 million and a negative net worth of $43.3 million.

Because LRFP had no positive retained earnings on May 31, 1989,

Griffin’s right to 5 percent of the LRFP retained earnings was

zero, and LRC paid Griffin $31.75 million on July 3, 1989, in

exchange for Griffin’s common and preferred shares in LRFP. On

July 3, 1989, at the closing, Griffin delivered to GNN its LRFP

share certificates and stock powers in consideration of $31.75

million in funds which GNN wired to Griffin’s account.     Griffin

also gave GNN an officer's certificate dated July 3, 1989,

certifying that the LRFP shares sold by Griffin to LRC were then

owned by Griffin free and clear of all pledges, security

interests, liens, encumbrances, restrictions on transfer and

options or equities, or claims of others of whatsoever nature.

GNN, in turn, prepared a closing memorandum stating that a

closing was held on July 3, 1989, whereat LRC (on behalf of GNN)

gave Griffin $31.75 million in exchange for Griffin's

certificates representing 1,950 shares of preferred stock and

208 shares of common stock endorsed for transfer.

     Griffin filed a consolidated Federal income tax return for

1989, based on the calendar year.   Griffin reported a sale of its

entire interest in LRFP for $31.75 million, resulting in a

reported capital gain of $5,598,285.   During the period

January 1, 1982, through July 3, 1989, KKO’s two representatives

on LRFP's board of directors actively participated in the board
                              - 17 -

meetings and were treated as full members of the board.    In

LRFP's minutes of its board's meetings on November 12, 1986, and

November 11, 1987, Griffin was described as holding a stock

interest in LRFP.

     GNN’s annual reports for 1981 through 1988 reported GNN as

owning 95 percent of the voting stock of LRFP, and GNN’s Federal

income tax returns for 1982 through 1988 reported the same.     On

its 1987 through 1989 returns, GNN treated the 1981 transaction

as a sale of Griffin's shares in LRFP, and a portion of the

deferred payment as unstated interest under section 483.    GNN

concedes that its interest deductions in 1987 and 1988 were

erroneous and argues only that it is entitled to its interest

deduction in 1989.   On its 1989 return, GNN deducted $1,049,771

as unstated interest on the transaction with Griffin.   In its

petition, GNN claims a 1989 unstated interest deduction of

$16,477,615 with respect thereto, and that it has a $5,264,409

overpayment of income taxes for that year.

                              OPINION

     We are asked to decide the timing of Griffin's sale of its

LRFP stock to GNN.   GNN argues that it bought the stock in 1981

for a deferred payment of $31.75 million.    According to GNN, it

assumed the benefits and burdens of owning Griffin's LRFP stock

in 1981 because, as of December 31, 1981:    (1) There was only a

remote possibility of nonexercise of the reciprocal options and

(2) the Stockholders' Agreement had effectively shifted the
                              - 18 -

benefits and burdens of owning the stock from Griffin to LRC.

Respondent and Griffin counter that Griffin sold the subject

stock to GNN in 1989 for $31.75 million.   Respondent and Griffin

argue that the benefits and burdens of owning the subject stock

shifted in 1989 upon the exercise of the put.    According to

respondent, the legal title and beneficial ownership of the

subject stock in 1981 resided in Griffin, although GNN had the

greater opportunity for gain and risk of loss.    Griffin contends

that the intention of the parties and the form of the transaction

indicate that the sale occurred in 1989.

     We agree with Griffin and respondent that the sale occurred

in 1989.3   A sale of property occurs for Federal income tax

purposes when the benefits and burdens of owning the property

shift from the seller to the buyer.    Dettmers v. Commissioner,

430 F.2d 1019, 1023 (6th Cir. 1970), affg. Estate of Johnson v.

Commissioner, 51 T.C. 290 (1968); Lowe v. Commissioner, 44 T.C.

363, 369 (1965); Merrill v. Commissioner, 40 T.C. 66, 74 (1963),

affd. per curiam 336 F.2d 771 (9th Cir. 1964).    This Court has

considered the following factors in passing on the time of such a

shift:   (1) Whether legal title passes, Grodt & McKay Realty,

     3
       At the outset, we note that we disagree with Griffin and
respondent that GNN is attempting to disregard the form of the
transaction in violation of Commissioner v. Danielson, 378 F.2d
771 (3d Cir. 1967), vacating and remanding 44 T.C. 549 (1965).
Danielson is inapplicable to this case because the issue rests on
the tax consequences of the 1981 Agreements. GNN is not seeking
to disavow the terms of the contract. This case turns on the
effect of the terms of the Stockholders' Agreement.
                              - 19 -

Inc. v. Commissioner, 77 T.C. 1221, 1237-1238 (1981); (2) the

manner in which the parties treated the transaction, id.;

(3) whether the sale price is fixed, Clodfelter v. Commissioner,

48 T.C. 694, 701 (1967), affd. 426 F.2d 1391 (9th Cir. 1970);

(4) whether a significant amount of the agreed price has been

paid, Hay v. Commissioner, 25 B.T.A. 96, 101 (1932); (5) the

intention of the parties, Merrill v. Commissioner, 40 T.C. 66,

74 (1963), affd. per curiam 336 F.2d 771 (9th Cir. 1964);

(6) descriptive terms used in the agreement, Clodfelter v.

Commissioner, supra; and (7) whether an effective date has been

agreed upon fixing a specific time for recognition of the rights

and obligations of the parties, id.

     Our analysis of the facts of this case, in conjunction with

our analysis of these factors, points overwhelmingly to the

conclusion that the subject sale occurred in 1989.   The

Stockholders' Agreement explicitly provides that the benefits and

burdens of Griffin's ownership in its LRFP stock did not pass

until 1989 when it exercised its put, and almost every stock

benefit resided in Griffin until that time.   Griffin was the

legal and beneficial owner of its LRFP stock.    Griffin held the

stock.   Griffin occupied two seats on LRFP's board of directors,

an officer position, and one seat on the executive committee.

Griffin would receive any dividends declared on the stock.

Griffin could sell its stock to a third party.   Griffin could

block liquidation, stock dilution, merger, issuance of additional
                              - 20 -

shares, and certain methods of financing.   If GNN desired to sell

more than 50 percent of its stock to a third party, Griffin could

compel GNN to compel the third party to purchase Griffin's shares

on the same terms.   The Stockholders' Agreement also did not list

a due date for payment of the ultimate purchase price, an exact

purchase price, or the right for GNN to sell Griffin's stock

interest or receive profits attributable to Griffin's stock

interest.   In addition, the Stockholders' Agreement did not refer

to the 1981 transaction as a sale, and we know, from reading the

agreement repeatedly, that the parties thereto knew how to use

the various forms of the verb "to sell" when they wanted to.

     Nor do we find much of the traditional indicia surrounding a

debtor/creditor relationship to support GNN's position that it

was a debtor of Griffin to the tune of at least $31.5 million.

We find no promissory note evidencing the purported debt, no

security, no fixed price, and no stated interest.   Indeed, if we

were to accept GNN's position that Griffin sold GNN net assets of

$21.5 million in 1981 for a deferred payment of $31.75 million

that was payable at the earliest on July 1, 1989, we would be

finding that the interest rate on GNN's debt was a mere 5.2

percent compounded daily.4   We decline to find such a low

     4
       We use the following formula to compute this rate of
interest: F = P(1 + i/n)ny, where "F" is the future payment
($31.75 million), "P" is the principal of the loan ($21 million),
"i" is the annual interest rate (5.2%), "n" is number of times in
a year that interest is compounded (365), and "y" is the number
                                                   (continued...)
                                  - 21 -

interest rate as a fact without persuasive evidence.         Although

the Stockholders' Agreement also allowed Griffin to collect

5 percent of LRFP's retained earnings, in the case of profitable

years, we find this fact unavailing seeing that Griffin

anticipated that retained earnings would be negative throughout

the relevant years.

     It also is relevant that Griffin at all times considered

itself to be the owner of 5 percent of the common stock and 32.8

percent of the preferred stock.       GNN recognized consistently that

it owned 95 percent of the voting common stock on its tax returns

and in its financial statements, and GNN never told Griffin that

it considered that it had purchased 100 percent of the voting

common stock and 100 percent of the preferred on December 31,

1981.       Indeed, it was not until 1987, 5 years after the

agreements were executed, that LRFP first made an entry on its

books indicating a 1981 purchase of Griffin's stock.

     This case is similar to that of Penn-Dixie Steel Corp. v.

Commissioner, 69 T.C. 837 (1978).5         In Penn-Dixie, the Court held

that reciprocal put and call options did not constitute a sale


        4
      (...continued)
of years until payment (7.5).
        5
       GNN is mistaken in relying on Kwiat v. Commissioner, T.C.
Memo. 1992-433, to support its contention that the benefits and
burdens of ownership passed in 1981. In that case, the
"pertinent inquiry" was "whether the purported lessor maintained
the risk of economic depreciation and benefit of appreciation at
the end of the lease term." Id. That is not the case here.
                               - 22 -

because the "arrangement did not legally, or as a practical

matter, impose mutual obligations * * * to sell and * * * to buy

* * * [and] each party's obligation to act was contingent upon

exercise of the put or call, an event which might well fail to

occur."   Id. at 844-845.   The same is true here.   When viewed

from the perspective of December 31, 1981, the open-ended options

may never have been exercised.   To the extent that GNN's expert,

Daniel Frisch, testified to the contrary, we find this testimony

unpersuasive.   Among other things, Mr. Frisch assumed that GNN

would always have the $31.5 million in funds necessary to

exercise its call.   Mr. Frisch also failed to account properly

for the real-life possibility that, even though GNN's call may

have been "in the money", GNN may have declined to exercise its

call because the rate of return on an alternative investment of

the $31.5 million may have exceeded GNN's cost of declining to

exercise its call.

     We hold that the sale occurred in 1989.   In so holding, we

have considered all arguments made by GNN for a contrary holding

and, to the extent not discussed above, find them to be

irrelevant or without merit.

     To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155 in docket No.

                                     17763-95; decision will be
- 23 -

     entered for respondent in

     docket No. 18532-95.
