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III. Section 355 Distribution
Section 355(a)(1) permits a nontaxable distribution by a
corporation to its shareholders of stock in a controlled
corporation if the distribution meets four statutory
requirements: (1) Solely stock of a controlled corporation is
distributed to shareholders with respect to their stock in the
distributing corporation; (2) the distribution is not used
principally as a device for the distribution of earnings and
profits of the distributing corporation or the controlled
corporation or both; (3) the requirements of section 355(b)
(relating to active businesses) are satisfied; and (4) all of the
controlled corporation’s stock held by the distributing
corporation, or an amount constituting control, is distributed.
Sec. 355(a)(1). In addition to these statutory requirements, the
regulations under section 355 require that the distribution have
an independent corporate business purpose and that there be
continuity of proprietary interest after the distribution. Sec.
1.355-2(b) and (c), Income Tax Regs.
Respondent argues that the distribution of Clinpath stock to
petitioner’s shareholders failed to satisfy the requirements of
section 355 because: (1) The distribution of Clinpath stock was a
device for the distribution of earnings and profits in violation
of section 355(a)(1)(B); (2) the spinoff of Clinpath lacked a
valid corporate business purpose as required by section 1.355-
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