Prepare a three-page memo (at least 300 words per page) to Mr. Jones addressing
ID: 2672688 • Letter: P
Question
Prepare a three-page memo (at least 300 words per page) to Mr. Jones addressing the potential sale or merger of these two companies. Address his issues point by point.1. Outright purchase of Smithon stock:
a. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith company--would that raise debt to equity issues?
b. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year-end to a calendar year-end?
c. What potential income tax ramifications exist for Mr. Jones personally if he purchases the stock of Smithon and converts it to an S corporation?
d. Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)?
2. Merger or acquisition of Smithon by Johnson Services
a. If the two companies are merged, could Smithon use Johnson Service’s net operating loss carryforwards? Are there any limitations on their use?
b. Should Mr. Jones use Johnson Services’ stock to acquire Smithon? Why or why not?
c. Would a merger or acquisition affect Mr. Jones’ ability to change Smithon’s fiscal year-end to a calendar year-end? Could Smithon be converted to an S corporation?
d. Does the potential of significant capital investment in Smithon affect any of your answers for 2(a)-(c) above?
You Decide: It's your turn as a tax professional to decide on the best course of action from a tax perspective on these issues as presented.
For each issue, begin by restating the issue and numbering as shown above [i.e., 1(a), 1(b), etc.]. Next, explain and discuss the tax rules that apply to the issue, which you gleaned from your tax research. Then, conclude with a definitive answer to the issue, supported by citations to the sources used. Thus, for each issue, you should:
state the issue;
explain and discuss the applicable law (IRC sections, regulations, court decision, etc.); and
present your answer concisely (i.e., to the point) and in the form of a concluding paragraph that refers to specific language from the IRC sections, regulations, court decisions, and other sources (if applicable) to support the conclusion.
Explanation / Answer
1.a. A straight purchase of Smithon is the simplest transaction, and probably the lease costly in terms of administrative matters. Purchasing Smithon with debt could raise debt issues with Johnson, if the Johnson's current cash flow is insufficient to meet the debt service requirements to bond purchasers.