South Tulsa Pathology Laboratory, Inc. - Page 1

                                   118 T.C. No. 5                                     

                               UNITED STATES TAX COURT                                

                SOUTH TULSA PATHOLOGY LABORATORY, INC., Petitioner v.                 
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 18557-98.           Filed January 28, 2002.                 

                    P agreed to sell a portion of its business                        
               (clinical business) to N, a third party, pursuant to a                 
               prearranged sale that was structured as a spinoff.  P’s                
               basis in the clinical business’s assets was $105,015.                  
               On Oct. 29, 1993, P transferred the clinical business                  
               to a newly incorporated entity, S, in exchange for all                 
               of S’s stock, pursuant to sec. 368(a)(1)(D), I.R.C.,                   
               and, on Oct. 30, 1993, P distributed the stock to P’s                  
               shareholders in a transaction it claimed satisfied the                 
               requirements of sec. 355, I.R.C.  On the same day as                   
               the distribution of S’s stock to P’s shareholders, S’s                 
               shareholders sold all of S’s stock to N for $5,530,000.                
               P had accumulated E & P as of the beginning of its                     
               taxable year and failed to prove that P and S did not                  
               have current E & P as of Oct. 30, 1993.  Although P                    
               conceded that the spinoff followed immediately by the                  
               prearranged stock sale constituted evidence that the                   
               transaction was a device to distribute E & P within the                
               meaning of sec. 355(a)(1)(B), I.R.C., and sec. 1.355-                  

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