You Decide Week 6

Introduction

Mr. Jones, as I understand, you are considering the purchase of, Smithon Widgets, a C corporation that has been very profitable in the past. You are the majority shareholder of Johnson Services, also a C corporation, which has incurred significant losses and you would like to have some analysis and recommendations on the following issues:

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?

Outright Purchase of Smithon stock

1 (a) Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact?

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1 (a) What about issuing debt in his Johnson Services company to pay for the Smith company-would that raise debt to equity issues?

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1 (b) Should Mr. Jones convert Smithon to an S corporation and change the fiscal year-end to a calendar year-end?

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1(c) What potential income tax...