To: Date: From: Re:
Mr. Jones 2/10/2012 xyz CPA Firm Overview Tax Issues
1. Mr. Jones, a wealthy client of the firm, has decided to purchase a manufacturing company, Smithon Widgets (a C corporation) that has been very profitable. 2. This client, Mr. Jones, is the majority shareholder of another C corporation, Johnson Services, which has incurred significant losses. 3. Mr. Jones comes to you with some questions and suggested outcomes. a) I want to buy Smithon Manufacturing because it is very profitable. b) Right now it has 30 shareholders but no single majority shareholder. c) It is a C corporation with a fiscal year-end of December 1. d) In order for Mr. Jones to buy this company, he will need to invest a lot of money in new manufacturing equipment, which means that Smithon will incur a loss for two years. e) Mr. Jones wants to buy the company effective January 1. f) Mr. Jones indicated that he wanted to buy the company from the shareholders and convert it to an S corporation, in order to offset Smithon’s profits with the losses from Johnson Services. g) Also, Mr. Jones wanted a fiscal year-end that is also a calendar year-end, i.e., December 31. h) 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.
1. OUTRIGHT PURCHASE OF SMITHON STOCK: 1a.) Should Mr. Jones purchases 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? First I think it’s important to outline Mr. Jones intentions. 1. He wants to purchase Smithon Widgets, a , “very profitable” closely held C Corporation, it currently has 30 shareholders.. 2. He currently owns another C...