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realized and must recognize gain on the distribution of Clinpath
stock. Sec. 311(b)(1). Petitioner disagrees, urging us to
conclude that it structured the spinoff of its clinical business
and the subsequent sale of Clinpath’s stock for legitimate
corporate business purposes and that the spinoff satisfied the
requirements of sections 368(a)(1)(D) and 355. Therefore,
petitioner contends, it is not required to recognize gain on the
distribution of Clinpath stock to its shareholders.
Respondent also argues that, in calculating the gain to
petitioner under section 311(b)(1) as a result of the failed
reorganization, the fair market value of the Clinpath stock must
be measured by the price paid by NHL for that stock. Petitioner
agrees that the amount of corporate gain, if any, resulting from
the distribution is based on the excess of the fair market value
of the Clinpath stock over petitioner’s basis in the stock but
argues that the fair market value of the stock must be measured
by the underlying value of the clinical business’s assets
contributed by petitioner to Clinpath on October 29, 1993.
In order to resolve these disputes, we must first decide
whether the distribution of Clinpath stock to petitioner’s
shareholders met the section 355 requirements. We conclude that
it did not for the reasons set forth below.
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