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warrant the conclusion that the spinoff of Clinpath was a device
in contravention of section 355(a)(1)(B), and (2) several
compelling corporate business purposes drove the entire
transaction.
a. Earnings and Profits
Section 1.355-2(d)(5), Income Tax Regs., specifies three
types of distributions that ordinarily do not present the
potential for tax avoidance and will not be considered to have
been used principally as a device for the distribution of
earnings and profits even if there is other evidence of device.
A distribution that takes place at a time when neither the
distributing nor the controlled corporation has earnings or
profits is one of the distributions described in section 1.355-
2(d)(5), Income Tax Regs., and is the only type of distribution
thus described that petitioner argues applies in this case.
A distribution ordinarily is considered not to have been
used principally as a device if: (1) The distributing and
controlled corporations have no accumulated earnings and profits
at the beginning of their respective taxable years; (2) the
distributing and controlled corporations have no current earnings
and profits as of the date of the distribution; and (3) no
distribution of property by the distributing corporation
immediately before the separation would require recognition of
gain resulting in current earnings and profits for the taxable
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