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Income Tax Regs., emphasizes that a distribution ordinarily will
not be considered to have been used principally as a device if
the distributing and controlled corporations have “no accumulated
earnings and profits at the beginning of their respective taxable
years” and “no current earnings and profits as of the date of the
distribution”. (Emphasis added.) Section 1.355-2(d)(5)(ii),
Income Tax Regs., does not provide a safe harbor for corporations
with “insignificant” or “minimal” earnings and profits, as
petitioner contends.
Second, petitioner ignores the fact that the spinoff enabled
it to claim that the substantial gain on the distribution of
Clinpath stock to its shareholders, which ordinarily would have
increased its current and accumulated earnings and profits, need
not be recognized for corporate income tax purposes or reflected
in the calculation of its earnings and profits as of October 30,
1993 and at yearend. Respondent argues that, if the spinoff of
Clinpath did not qualify for tax-free treatment under sections
368 and 355, the distribution of Clinpath stock to petitioner’s
shareholders would be taxable under section 311(b) and,
therefore, would have generated substantial current earnings and
profits to petitioner under section 312(b) as of October 30, the
date of the distribution.
Neither party disputes that, if the spinoff of Clinpath
does not qualify as a tax-free transaction under sections 368 and
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