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355, petitioner must realize and recognize substantial gain as of
the date of distribution, sec. 311(b)(1), which will
substantially increase petitioner’s earnings and profits, sec.
312(b). Nevertheless, petitioner dismisses the prospect that it
would have substantial current earnings and profits as a result
of the spinoff8 and overlooks what respondent describes as “the
conspicuous fact that the corporate profits petitioner’s
shareholders clearly intended to bail out were the anticipated
profits of the prearranged sale.” Despite petitioner’s efforts
to suggest otherwise, we simply are not convinced that the
decision to structure this transaction as a spinoff and
subsequent stock sale was prompted by NHL; NHL usually structured
its acquisitions as asset sales to minimize its exposure to
liabilities that can arise from the purchase of an active
business. Petitioner’s protestations notwithstanding, the
spinoff of Clinpath followed immediately by a prearranged sale of
the Clinpath stock on the same day appears to have been designed
to eliminate the corporate-level tax that would have been due had
8Petitioner acknowledges that dividends paid to its
shareholders result “in a fairly significant double income tax
liability, and is the primary reason that * * * [petitioner]
distributes most or all of its income to its employee
shareholders and other employees prior to year end”, presumably
as deductible compensation. Petitioner claims, however, that its
practice of distributing income “virtually assures that there
would be little or no corporate income tax liability * * *
irrespective of the ultimate outcome of the spin-off
transaction.”
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