Midori Corporation is a distiller of fine liqueurs. The market for this specialty product is thin but very lucrative. Midori wants to diversify its product line and is interested in acquiring Verdigris, which specializes in exotic teas and spices.
Because the spice products are of no interest to Midori, it suggests that Verdigris dispose of this line of business before the merger. Midori would then exchange 15% of its stock and $500,000 for the remaining assets of Verdigris. The Midori stock would be distributed to 30% of the Verdigris shareholders for their stock; the remaining Verdigris shareholders would receive cash.
What income tax problems can you identify with the proposed transactions?