From: ___ TRUSTAS CPAs LLP______
To: ____Mr. Jones___________
Date: ___December 7, 2011 ________
Subject: Sale of Smithon Manufacturing Concerns
Per your inquiries, I have prepared responses to address them accordingly below:
(1) Mr. Jones, your concerns are addressed below:
a) You asked if it is better to purchase the stocks of Smithon or to issue debt in Johnson Services to buy Smithon, and my response is this:
Purchasing Smithon outright may help in two folds for you; first, it is the simplest transaction, and probably the least costly in terms of administrative matters. On the other hand, if you purchase it outright, you must the assets, liabilities and also inherit the contractual obligations of the selling corporation as well as the implied responsibility of providing more direct input to the management team for day to day operations. From a tax perspective a straight cash-for-stock purchase will only incur tax liabilities on any capital gains that result from either the sale of appreciated stock or dividends.
Regarding the idea that you are considering raising capital by issuing new shares for Johnson stock to acquire Smithton, I have this response for you:
Unless Johnson has adequate supply of capital stock shares to cover most of the purchase the issuance of new shares would greatly impact the current value of Johnson shares, and that in turn may cause current investors to sale off their shares thereby reducing the company’s working capital. As stated previously though, if there are adequate shares of capital stock available to cover the transaction then this would be a viable option that would not greatly impact your company’s value to shareholders. From a tax perspective under the 1984 tax law and IRS Code Section 351 –no gain or loss will be recognized for property transfers
b) I also understood your concerns regarding the possibility of changing Smithon’s current C Corporation status to S Corporation, and...