You represent a wealthy client who has decided to purchase a manufacturing company, Smithon Widgets - 7242

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Request Description

You represent a wealthy client who has decided to purchase a manufacturing company, Smithon Widgets (a C corporation), that has been very profitable. This client, Mr. Jones, is the majority shareholder of another C corporation. Johnson Services that has incurred significant losses. Mr. Jones comes to you with some questions and suggested outcomes.
Role
After reviewing Mr. Jones’ questions and recommendations, it will be your turn as a tax professional to decide on the best course of action from a tax perspective on the issues presented. Prepare a three page memo (at least 300 words per page) to Mr. Jones addressing the potential sale or merger of these two companies.
Activity
Given the scenario, your role and the information provided by the key player involved, it is time for you to make a decision.
If you are finished reviewing this scenario, close this window and return to this week's You Decide item, in your course window, to complete the activity for this scenario.
You can return and review this scenario again at any time.
You Decide Content Item Info:
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? 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?
AC553 - Week 6 You Decide (125 points)
AC553_Wk6_You Decide_Transcript.docx Page 2
You Decide: It’s your turn as a tax professional to decide on the best course of action from a tax perspective on these issues as presented above.
For each issue, begin by restating the issue and numbering as shown above, i.e., 1(a), 1(b), and so on. Then, explain and discuss the tax rules that apply to the issue, which you gleaned from your tax research. Then, conclude with a definitive answer to the issue, supported by citations to the sources used. So, for each issue, you should:
1. State the issue,
2. Explain and discuss the applicable law (IRC sections, regulations, court decision, etc.), and
3. Present your answer concisely (i.e., to the point) and in the form of a concluding paragraph that refers to specific language from the IRC sections, regulations, court decisions, and other sources (if applicable) to support the conclusion.
CITATIONS
Citations are required. You must provide cites whenever you refer to the sources of tax law used in this memorandum. You may cite your sources in numbered footnotes, numbered endnotes, or in parentheses immediately after the sentence mentioning the cited source.
Key Players
Key Players - Image
Title/Role/Character
Script – Text & Audio
Mr. Jones,
Prospective buyer of Smithon Manufacturing
I want to buy Smithon Manufacturing because it is very profitable. Right now it has 30 shareholders but no single majority shareholder. It is a C corporation with a fiscal year-end of December 1. In order for me to buy this company, I will need to invest a lot of money in new manufacturing equipment, which means that Smithon will incur a loss for two years. I want to buy the company effective January 1. I think I should buy the company from the shareholders and convert it to an S corporation. Also, I want a fiscal year-end that is also a calendar year-end, i.e., December 31. We should consider whether I could issue shares of stock from Johnson Services which is a C corporation 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 I would get all their shares of Smithon. If I do so, I could probably offset Smithon’s profits with the losses from Johnson Services.
AC553 - Week 6 You Decide (125 points)
AC553_Wk6_You Decide_Transcript.docx Page 3
Grading Rubric: The grading rubric below will be included on the You Decide assignment tab. This rubric provides the grading elements and points totals for each requirement of the assignment.
The rubric below is a sample. You may change/add/delete the grading requirements, i.e. content, grammar & formatting, use of references, etc. Depending on the complexity of the assignment, You Decide activities are typically worth anywhere between 15 and 100 points.
Category
Points
Description
Superior
100-125
Content and Subject: Easily identifiable, clear. Meets or exceeds page or word length requirement. All required citations are provided. Structure: Apparent, understandable, and applicable. Excellent flow and well-structured. Analysis: Interesting and novel. Provides different perspectives; demonstrates critical thinking and critical analysis at a high level. Mechanics: Virtually devoid of errors in grammar, syntax, punctuation, and spelling.
Achieving
80-99
Content and Subject: Overall concrete, but may be slightly unclear. Meets or exceeds page or word length requirement. Some citations missing. Structure: Generally clear and appropriate. Analysis: Evidence relates to the content. Evidence may lack some clarity. Critical analysis and critical thinking is apparent. Mechanics: Good sentence structure (syntax), grammar, punctuation, and spelling, with minor errors.
Average
65-79
Content and Subject: Fairly easy to read and understand, but the paper meanders from the topic or lacks cohesion/content. Meets page or word length requirement. Missing most citations. Structure: Overall good, with minor shortfalls. Analysis: Some critical thinking, but with minimal or no analysis or further discussion by the adult learner. Mechanics: Sentence structure may have some errors relative to syntax, grammar, punctuation, and spelling.
Below Average
<65
Content and Subject: Often unstructured and vague. Content not totally applicable to the paper's requirements or introduces substantial material not relevant to the assignment and/or the relevant discussion points. No citations provided for tax law research. Structure: Mostly unclear and difficult to visualize. Analysis: Very limited with no analysis or further discussion by the adult learner that demonstrates adult learner critical thinking/analysis. Mechanics: Numerous mistakes in sentences, paragraph formatting, spelling, and grammar that subtract from the content of the paper. The writing errors suggest minimal likelihood that this paper was proofread for errors prior to submission. Writing is not at a graduate level.

Solution Description

You represent a wealthy client who has decided to purchase a manufacturing company, Smithon Widgets (a C corporation), that has been very profitable. This client, Mr. Jones, is the majority shareholder of another C corporation. Johnson Services that has incurred significant losses. Mr. Jones comes to you with some questions and suggested outcomes.
Role
After reviewing Mr. Jones’ questions and recommendations, it will be your turn as a tax professional to decide on the best course of action from a tax perspective on the issues presented. Prepare a three page memo (at least 300 words per page) to Mr. Jones addressing the potential sale or merger of these two companies.
Activity
Given the scenario, your role and the information provided by the key player involved, it is time for you to make a decision.
If you are finished reviewing this scenario, close this window and return to this week's You Decide item, in your course window, to complete the activity for this scenario.
You can return and review this scenario again at any time.
You Decide Content Item Info:
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?

Attachments
Memo.doc
Memo.doc