...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? I would recommend Mr. Jones to purchase the stock Of Smith outright, leaving Smithon intact. This purchase will give profit to Mr. Jones. But buying it would incur a heavy investment of money in the manufacturing equipment. This implies that Smithon will incur losses for 2-3 years. But if we see in the long term Smithon proves to be a profitable corporation which will conduct a lot of benefits. So Mr. Jones should purchase the stock of smith outright. Mr. Jones should issue shares of stock from Johnson Services to the shareholders of Smithon in an exchange of shares. That way, the current Smithon owners would become new shareholders but not owners of Johnson Services and he would get all the shares of Smithon. Doing so, this could probably offset Smithon's profits with the losses from Johnson Services. Thus it should issue debt in the Johnson Services company to pay for the Smith Company. Initially it will raise the debt to equity issues which will imply that a company has been aggressive in financing its growth with debt. This can also result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations, the company could potentially generate more earnings than it would have without this outside financing...
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...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...
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...You Decide: 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? NO, Mr. Jones should not buy the stock. A stock purchased would result in Mr. Jones acquiring the assets, liabilities and also would inherit the contractual obligations of the selling corporation. I would not advice Mr. Jones to buy the stock because he will be liable for any current and future tax obligations that the selling corporations had before sale. The tax basis of the selling corporation will not change and the tax aspects will also remain the same. The methodology and tax year will not change which means that Mr. Jones cannot change the financial period to end in December 31. Failure to change the 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 Service Company to pay for the Smithon Company would raise debt equity ratio issues. Issuing debt would increase the amount of liabilities owned 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...
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...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...
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