Acc553

In: Business and Management

Submitted By spielman76
Words 1200
Pages 5
Memo
To: Mr. Jones
From:
Date: 9/16/2012
Re: Questions for the purchase or merger of Smithon Manufacturing 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?
Treasury Regulation Subchapter A, Sec. 1.368-2T states that all of the assets (other than those distributed in the transaction) and liabilities (except to the extent satisfied or discharged in the transaction) of each member of one or more combining units (each a transferor unit) become the assets and liabilities of one or more members of one other combining unit (the transferee unit). With the purchase of Smithon, you will be responsible for any current and future tax liabilities of that corporation along with the responsibility of day to day operations. Since you are purchasing the company and inheriting all tax liability it is not in your best interest to purchase the stock and leave Smithon intact and would just be more costly as you are responsible for the tax liability either way due to the purchase.
The issuing of debt in the Johnson Services company would definitely raise debt to equity issues. Johnson Services Company is already having difficulty and has incurred significant losses and the issuance of more debt would only place more of a hardship on the company. Also, if a company has to high of a debt to equity ratio it will look unattractive to investor and may make it harder to obtain financing from a bank.
b. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year-end to a calendar year-end?
IRC § 1378 states that a taxable year for S corporations shall be a permitted year or taxable year which is a year ending December 31, or is any other accounting period for which the…...

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