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Leisure, Inc. is a publicly held corporation that operates a chain of motels and manufactures leisure apparel. Each business has roughly the same net worth and has been operated by Leisure for over five years. Denim Corporation wishes to acquire the apparel business but is not interested in the motels. Leisure would like to dispose of the apparel business, preferably in a tax-free reorganization, and it will continue to operate the motel business for the indefinite future. Consider the consequences of the following alternative plans for carrying out the objectives of the parties.

(a) Leisure will transfer the motel assets to a newly formed subsidiary, Motel, Inc., and distribute the Motel stock pro rata to the Leisure shareholders. Leisure then will transfer the assets and liabilities of the apparel business to Denim in exchange for Denim voting stock (representing less than 50% of the total outstanding voting stock of Denim after the acquisition), and then Leisure will liquidate, distributing the Denim stock pro rata to its shareholders.

(b) Same as (a), above, except that after the spin-off, Leisure dissolves into Denim. Under the terms of this agreement, Leisure shareholders receive Denim nonvoting preferred stock.

(c) What result if Leisure transfers the apparel business to a new corporation, Cords, Inc., and then distributes the Cords stock pro rata to the Leisure shareholders. Leisure continues to operate the motel business, but Cords, Inc merges into Denim, Inc, and the Cords shareholders received Denim voting stock.

(d) Same as (c), above, except that after the merger, the Denim voting stock received by Cords shareholders represents more than 50% of the total outstanding stock of Denim.

(e) Same as (b), above, except that the merger of Leisure into Denim occurred one year after the spin-off. What factors are relevant in determining whether the transaction was part of a "plan" to acquire Leisure?

(f) Same as (b), above, except that the business purpose for the spin-off was unrelated to any acquisition of the apparel business, and the merger of Leisure into Denim occurred three years after the spin-off.

(g) Is 355(e) necessary; discuss why or why not?

(h) How did the typical Morris Trust transaction violate the policy of Subchapter C?

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