You Decide:

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?
NO, Mr. Jones should not buy the stock. A stock purchased would result in Mr. Jones acquiring the assets, liabilities and also would inherit the contractual obligations of the selling corporation. I would not advice Mr. Jones to buy the stock because he will be liable for any current and future tax obligations that the selling corporations had before sale. The tax basis of the selling corporation will not change and the tax aspects will also remain the same. The methodology and tax year will not change which means that Mr. Jones cannot change the financial period to end in December 31. Failure to change the legal entity is not advantageous to the buyer because he is limited to adhering to the current tax basis on Smithon’s assets even if he had paid more for the assets.
Issuing debt in Johnson Service Company to pay for the Smithon Company would raise debt equity ratio issues. Issuing debt would increase the amount of liabilities owned by the organization to compound the fact that it is already operating at a loss. Issuing debt would result in ratio that is over or close to unity indicating that the company’s assets are being financed by debt. High debt equity ratio indicates that the organization is risky and is financially weak; hard to get financing.
A straight purchase of Smithon is a simple transaction, and probably the lease will be costly in terms of administrative matters. Purchasing Smithon with debt could raise debt issue with Johnson, if the Johnson’s current cash flow is insufficient to meet the debt service requirements to bond purchasers.
b. Should Mr. Jones convert Smithon to an S