Potential Sale Or Merger Of Smithon And Johnson Services

1439 words - 6 pages

To: Mr. Jones

From: Angela Williams

Date: December 3, 2011

Subject: Potential Sale or Merger of Smithon and Johnson Services

Facts: Mr. Jones has decided to purchase a manufacturing company, Smithon Widgets (a C corporation), that has been very profitable. Mr. Jones is the majority shareholder of another C corporation. Johnson Services that has incurred significant losses.

1. Outright purchase of Smithon stock

a.

1. Issue: 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?

2. Conclusion:

Mr. ...view middle of the document...

Every S corporation must file a return on Form 1120S each tax year even though the corporation may not be subject to tax.(2012 CCH Federal Taxation: Comprehensive Topic. CCH, 03/2011. p. 21-9).
3. Conclusion:

Yes, Mr. Jones, I recommend that you convert Smithon from a C corporation to an S corporation and change the tax year. That is if you plan on keeping the current operations and management intact. This would have several benefits to you considering the current form of taxation by the C corporation. C corporations are double taxed on profits and dividends. Since Smithon was formerly a C corporation it will be subject to built in gains. Otherwise, I would not recommend that you convert to an S corporation. Typically the S corporation status is more beneficial to corporations in early stages. However, if the business entity is changed to an S corporation, the tax year would also be changed to comply with S corporation standards.

c.

1. Issue: What potential income tax ramifications exist for Mr. Jones personally if he purchases the stock of Smithon and converts it to an S corporation?

2. Conclusion:

If you were to purchase personally the stock of Smithon and convert the company to an S Corporation you will be personally taxed on the company’s income. This would increase your personal liability. Changing to an S corporation would not help you in this type of transaction Mr. Jones.

d.

1. Issue: Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)?

2. Applicable Law & Analysis:

According to IRC section 368 there are seven qualifying patterns to reorganization. Each type offers a unique advantage. If the goal is to make Johnson Services more profitable, it would be a great idea to combine with a competitor that is profitable, Smithon.

3. Conclusion:

Yes, a merger of Johnson Services with Smithon Company would be favorable to the current financial situation of Johnson Services. A merger would also increase market share and increase in profitability in which Johnson Services needs. Of the seven types of reorganization, I would recommend -A Type A. This is a standard merger. Johnson Services would merge with the similar competitor Smithon Company to increase profits and decrease losses in your current venture Mr. Jones.

2. Merger or acquisition of Smithon by Johnson Services

a.

1. Issue: If the two companies are merged, could Smithon use Johnson Service’s net operating loss carry forwards? Any limitations on their use?

2. Applicable Law & Analysis:

The taxable year of the acquired corporation, except for Type F reorganizations, ends on the date of the transfer of assets. Code Sec. 381(b). As a result, its net operating loss carryover winds up in the acquiring corporation sometime during the latter's taxable year. The deduction allowed for the acquiring...

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