You Decide Week 6 Federal Tax

cide week 6 federal taxAs to your first question, should Mr. Jones purchase the stock of Smithon outright leaving Smithon intact? The stock should not be purchase by Mr. Jones. Mr. Jones acquiring the assets, liabilities and also would inherit the contractual obligations of the selling corporation, would, be the results of the purchase. In lay terms, he 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. It would be my advice for Mr. Jones to not buy the stock because of the liability of current and future tax obligations which Mr. Jones would incur from the purchase of the stock. Since the tax identity of Smithon corporation would have not ceased, it is not a favorable purchase for Mr. Jones. Ina a case where the tax identity of a firm does not cease not to exist, the tax aspects will remain the same and so will the existing tax schedule. So in this case it would mean that Mr. Jones would not be allowed to change the financial year to end on December 31. The buyer in cases where he can’t change the legal entity is in a non -benefice situation, the buyer is limited to follow the current tax basis on the company’s assets even if the buyer paid more for the company.

Debt to equity issues would be raised by the issuance of debt from Johnson Services to finance the purchase of Smithon. This would only create more damage to Johnson who is already in the position of a financial loss. The addition of more liabilities would only add fuel to the fire. Issuing more debt by johns would lead to high debt to equity ratio which translates in a financially weak firm. In no way should the company’s assets be financed by issuing debt.

A possible option for Mr. Jones is the conversion of Smithon to a S Corporation. This would allow Smithon to avoid Double Taxation. Smithon as a C...