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After petitioner made the disclosures pursuant to the
confidentiality agreement, petitioner agreed to sell its clinical
business to NHL. Before October 5, 1993, petitioner and NHL
negotiated the sale of the clinical business and agreed to
structure it as a sale of the stock of a yet-to-be-incorporated
clinical laboratory company that would be capitalized with the
clinical business and spun off2 from petitioner. Thereafter, NHL
delivered to petitioner a letter of intent, dated September 30,
1993, concerning the purchase by NHL of all outstanding stock of
that newly incorporated clinical laboratory company. After both
parties signed the letter of intent, petitioner’s shareholders
believed there was a commitment by NHL to buy and a commitment by
petitioner to sell petitioner’s clinical business.3 As of
October 5, 1993, petitioner and NHL had negotiated and agreed to
the essential terms of the sale.4
2A spinoff is described as a “pro rata distribution by one
corporation of the stock of a subsidiary”. Bittker & Eustice,
Federal Income Taxation of Corporations and Shareholders, par.
11.01[1][e], p. 11-6 (7th ed.).
3Ordinarily, NHL purchased clinical laboratory businesses
through an asset sale. In this case, NHL agreed to structure its
purchase of the clinical business as a stock sale only if it
could acquire a “clean” corporation. A “clean corporation” was
defined by the parties as one in which no clinical laboratory
tests had been performed that could subject the purchaser (NHL)
to any potential liability.
4Petitioner conceded in its brief that “the sale of the
Clinpath stock to NHL was prearranged prior to the spin-off
transaction”.
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