Problem 1. Corporate Reorganizations. Middle Products Inc. (MPI), is a client of yours that is a closely held, calendar-

year, accrual-method corporation located in Grand Rapids, Michigan. MPI has two operating divisions. One division

manufactures lawn and garden furniture and decorative objects (furniture division), while the other division

manufactures garden tools and hardware (tool division). MPI's single class of voting common stock is owned by three

unrelated shareholders as follows:

Shares Adjusted Basis FMV

Amanda Iris Green 300 $2,000,000 $3,000,000

Beth Rose Ruby 100 $1,200,000 $1,000,000

Cam Lily White 100 $800,000 $1,000,000

Totals 500 $4,000,000 $5,000,000

Open Spaces Living Company (OSLC), a publicly held corporation that does business in several midwestern states, has

approached MPI about acquiring its furniture division. OSLC has no interest in acquiring the tool division, however.

OSLC's management is particularly interested in expanding its market into Michigan. Amanda, Beth, and Cam are

amenable to the acquisition provided it can be accomplished in a tax-deferred manner.

OSLC has proposed the following transaction for acquiring MPI's furniture division. On April 30, OSLC will "create a" 100-

percent owned subsidiary, OSLC Acquisition Inc. (OSLC-A). OSLC will transfer to the subsidiary 60,000 shares of OSLC

voting common stock and $2,000,000. The current fair market value of the OSLC voting stock is $50 per share

($3,000,000 in total). Each of the three MPI shareholders will receive a pro rata amount of OSLC stock and cash.

As part of the agreement, MPI will sell the tool division before the acquisition, after which MPI will merge into OSLC-A

under Michigan and Ohio state laws (a forward triangular "Type A" merger). Pursuant to the merger agreement, OSLC-A

will acquire all of MPI's assets, including 100 percent of the cash received from the sale of the tool division

($2,000,000), and will assume all of MPI's liabilities. The cash from the sale of the tool division will be used to

modernize and upgrade much of the furniture division's production facilities. OSLC's management is convinced that the

cash infusion, coupled with new management, will make MPI's furniture business profitable. OSLC management has no

plans to liquidate OSLC-A into OSLC at any time subsequent to the merger. After the merger, OSLC-A will be renamed

Michigan Garden Furniture Inc.

a. Does the proposed transaction meets the requirements to qualify as a tax-deferred forward triangular "Type A"

merger based on (i) the structure of the transaction and (ii) the judicial doctrines for such transactions (continuity of

interest, continuity of business enterprise, and business purpose)?

b. Could the proposed transaction qualify as a reverse triangular "Type A" merger if OSLC-A merged into MPI?

Problem 2. Asset or Stock Sale. Continuing the facts of Problem 1 above. MPI identified a buyer for its tools division

that is willing to purchase the division's assets or "do a" stock purchase. The assets of the division include manufacturing

equipment worth $1,500,000 with an adjusted basis of $300,000 and goodwill worth $500,000 with no basis. In order

to "do a" stock purchase, MPI would place the assets and operations of the tools division into a subsidiary corporation

called Tool Time, Inc. (or TTI) in exchange for 100 shares that would be sold to the buyer. What transaction would the

sellers prefer? Does your answer change if the buyer were willing to pay $100,000 more for an asset sale?