C corporations

1. Outright purchase of Smithon stock

a) Should Mr. Jones purchase the stock of Smithon outright leaving Smithon intact?

No, Mr. Jones should not buy the stock. A stock purchase would result in Mr. Jones acquiring the assets, liabilities and also would inherit the contractual obligations of the selling corporation. In other words, Mr. Jones has bought the existing Smithon Corporation and he is responsible of ensuring daily operations run efficiently but the tax aspect of acquisition he is responsible for existing and any future tax liabilities that the selling corporation had. I would not advise Mr. Jones to buy the stock because he will be liable for any current and future tax obligations that the selling organization had before sale. Also purchase of stock is not favorable to Mr. Jones since the tax identity of Smithon corporation does not cease not exist. The tax schedule or basis of the selling organization will not change and the tax aspects will also remain the same. The methodology and tax year will not change meaning that Mr. Jones cannot change the financial period to end in December 31. Failure to change legal entity is not advantageous to the buyer because he is limited to adhering to the current tax basis on Smithon's assets even if he had paid more for the assets.

Issuing debt in Johnson Services Company to pay for the Smithon Company would raise debt equity ratio issues. Issuing debt would increase the amount of liabilities owed by the organization to compound the fact that it is already operating at a loss. Issuing debt would result in ratio that is over or close to unity indicating that the company's assets are being financed by debt. High debt equity ratio indicates that the organization is risky and is financially weak.

b) Should Mr. Jones convert Smithon to an S corporation and change the fiscal year

Mr.