Eta Corporation approaches Lily White, the CEO and sole shareholder of MuCo, regarding the acquisition of Mucos cat toy division assets (worth $1.3 million). As selling the assets would create a $600,000 gain, ($1.3 million value - $700,000 basis), Lily declines the offer.

Eta counters and suggests a Type C reorganization as a method of acquiring all of MuCo by exchanging its voting stock for all assets (now worth $1.5 million) and all liabilities ($650,000) of MuCo. The other division of MuCo, Cat Publications, is small, with assets worth $200,000 and liabilities of $150,000. Lily agrees to the reorganization if MuCo receives the net value of the Cat Publication division ($50,000) in cash, as Lily would like money as well as stock.

Lily requests your advice on whether the transaction can be structured as a Type C reorganization as it is currently described. If it cannot meet the Type C requirements, suggest an alternative plan that will allow the transaction to qualify as a Type C reorganization. MuCos address is 3443 E. Riverbank Road, Wall Walla, WA 99362. Include your analysis in a letter to Ms. White.