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business purpose, sec. 1.355-2(d)(3), Income Tax Regs., outweigh
any evidence of device.
1. Device Factors
Section 1.355-2(d)(2), Income Tax Regs., identifies the
following factors as evidence that a transaction was a device for
the distribution of a corporation’s earnings and profits: (1)
Pro rata distribution among the shareholders of the distributing
corporation and (2) subsequent sale or exchange of stock of the
distributing or the controlled corporation. Our analysis of
these factors is set forth below.
A distribution that is pro rata or substantially pro rata
among shareholders of the distributing corporation is more likely
to be used principally as a device and is evidence of device.
Sec. 1.355-2(d)(2)(ii), Income Tax Regs. Petitioner does not
dispute that the Clinpath stock was distributed pro rata to
petitioner’s shareholders. The parties stipulated that pursuant
to the reorganization agreement, petitioner would and did
distribute all the Clinpath stock to its shareholders in
proportion to their stock ownership in petitioner. This factor
is evidence of device.
A sale or exchange of the distributing or controlled
corporation’s stock after a distribution is also evidence of
device. Sec. 1.355-2(d)(2)(iii)(A), Income Tax Regs. Generally,
the greater the percentage of stock sold and the shorter the
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