57. Your client, Midwest Products Inc. (MPI), is a closely held, calendaryear, accrual-method corporation located in Fowlerville, 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 as follows:

Shares Adjusted Basis FMV Iris Green 300 $2,000,000 $3,000,000 Rose Ruby 100 1,200,000 1,000,000 Lily White 100 800,000 1,000,000 Shares Adjusted Basis FMV Totals 500 $4,000,000 $5,000,000 The three shareholders are unrelated.
Outdoor Living Company (OLC), a publicly held, calendar-year corporation doing business in several midwestern states, has approached MPI about acquiring its furniture division. OLC has no interest in acquiring the tool division, however. OLC’s management has several strong business reasons for the acquisition, the most important of which is to expand the company’s market into Michigan. Iris, Rose, and Lily are amenable to the acquisition provided it can be accomplished in a tax-deferred manner.
OLC has proposed the following transaction for acquiring MPI’s furniture division. On April 30 of this year, OLC will create a 100-
percent owned subsidiary, OLC Acquisition Inc. (OLC-A). OLC will transfer to the subsidiary 60,000 shares of OLC voting common stock and $2,000,000. The current fair market value of the OLC voting stock is $50 per share ($3,000,000 in total).
Each of the three MPI shareholders will receive a pro rata amount of OLC stock and cash.
As part of the agreement, MPI will sell the tool division before the acquisition, after which MPI will merge into OLC-A under Michigan and Ohio state laws (a forward triangular Type A merger). Pursuant to the merger agreement, OLC-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. OLC’s management is convinced that the cash infusion, coupled with new management, will make MPI’s furniture business profitable. OLC management has no plans to liquidate OLC-A into OLC at any time subsequent to the merger. After the merger, OLC-A will be renamed Michigan Garden Furniture Inc.

a. Determine whether the proposed transaction meets the requirements to qualify as a tax-deferred forward triangular Type A merger. Consult Rev. Rul. 88-48, 1988-1 CB 117, and Rev. Rul. 2001-25,2001-1 CB 1291, in thinking about the premerger sale of the tool division assets.

b. Could the proposed transaction qualify as a reverse triangular Type A merger if OLC-A merged into MPI? If not, how would the transaction have to be restructured to meet the requirements to be a reverse triangular merger?