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to petitioner’s decision to distribute Clinpath stock to
petitioner’s shareholders. Indeed, petitioner could have sold
the Clinpath stock directly to NHL without first transferring the
Clinpath stock to its shareholders.9
We conclude, therefore, that petitioner’s status as a
professional corporation does not provide a valid corporate
business purpose for the distribution of Clinpath’s stock to
petitioner’s shareholders and is not evidence of nondevice.
iii. Covenants Not To Compete
The third purported corporate business purpose cited by
petitioner is NHL’s requirement that each of Clinpath’s
physician-shareholders sign a binding and enforceable covenant
not to compete. Relying upon Bayly, Martin & Fay, Inc. v.
Pickard, 780 P.2d 1168 (Okla. 1989), petitioner contends that
representatives for both petitioner and NHL believed that a
covenant not to compete would be enforced under Oklahoma State
law only if it were entered into in connection with the sale of
goodwill or the dissolution of a partnership. Petitioner
9Pulliam v. Commissioner, T.C. Memo. 1997-274, a case on
which petitioner relies, is distinguishable because the spinoff
and subsequent prearranged sale of some of the distributed stock
involved in Pulliam could not have been structured as a direct
sale of stock between the distributing corporation and the third-
party purchaser (a former employee). We concluded that the
structure of the transaction was compelled by applicable State
law, which prohibited a corporation from owning a funeral
business, and by the need to structure the stock sale as an
installment sale.
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