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consideration, consisting of covenant payments and the purchase
price of the Clinpath stock, was $5,600,000. The consideration
allocated to the covenants not to compete was negotiated and
agreed upon by unrelated parties at arm’s length.6
Neither petitioner nor its shareholders retained any
ownership interest in Clinpath after October 30, 1993.
IV. Petitioner’s Earnings and Profits as of October 30, 1993
Petitioner had accumulated earnings and profits of at least
$236,347 as of its taxable year beginning July 1, 1993.
Petitioner did not prove whether petitioner and Clinpath had
current earnings and profits as of October 30, 1993.
OPINION
I. The Statutory Framework
Section 361(a) provides that “No gain or loss shall be
recognized to a corporation if such corporation is a party to a
reorganization and exchanges property, in pursuance of the plan
of reorganization, solely for stock or securities in another
corporation a party to the reorganization.” Section 368(a)(1)
defines reorganization for purposes of section 361 to include:
6In connection with the sale of Clinpath stock, petitioner
and NHL executed a consulting agreement, dated Oct. 30, 1993,
providing for a continuing business relationship between
petitioner and NHL for 5 years. The consulting agreement
reflected the desire of both petitioner and NHL to partner with
each other to increase the competitive position of both entities
in northeastern Oklahoma with respect to both clinical and
anatomic pathology services.
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