Merger or Acquisition of Smithon by Johnson Services

2. Merger or acquisition of Smithon by Johnson Services

a) If the two companies merge, could Smithon use Johnson Services' net operating loss carry forwards? Any limitations on their use?

Smithon can use Johnson Services' net operating loss because it acquired its tax position. The merger can be used to offset the income of Smithon which is a profitable corporation with the losses made by Johnson Services therefore reducing the amount of tax liabilities owed by the merger. The federal law provides that an acquiring company can use the selling company net operating loss land vice versa (Gordon, 2010).

However, the use of net operating loss has limitations. Net operating loss can only be used to counter expected earnings of the organization and not the income that is taxable. Use of net operating loss is limited when there is an ownership change and the loss can only be carried back for two years (Maples, 2007).

b) Should Mr. Jones use Johnson Services stock to acquire Smithon? Why or why not?

Mr. Jones should use stock to acquire Smithon Company because it will lower the cost of acquisition. Stock can be used to offset the cost expenses incurred to buy the corporation.

c) Would a merger or acquisition affect Mr. Jones' ability to change fiscal year end to a calendar year end? Could Smithon be converted to an S corporation?

A merger or acquisition would improve Mr. Jones' ability to change the financial period. It would result in the selling corporation which is Smithon Corporation adjusting the financial period to be in line with the controlling interest corporation. Smithon Corporation can be converted to an S corporation. The newly formed corporation will be subject to built in gains form of taxation where the corporation is axed on gains made from sale of assets during ten years after conversion to S corporation.