The Outcome from the Acquisition of Mason Machining, Inc. by Jefferson

ACCT618-1502A-01

Phase 4 Individual Project

Abstract

The intended purpose of this paper is to establish and the outcome that comes from the acquisition of Mason Machining, Inc. by Jefferson Industrial Machines. By ensuring that the proper understanding of the overall outcome of the acquisition of Mason Machining, Inc. by Jefferson Industrial Machines is understood will help both corporations to understand what is going to happen to the shareholders and the corporations regarding tax liabilities and corporate gains. Jefferson Industrial Machines acquired Mason Machining, Inc. with assets having a FMV of $1,775,000 and an adjusted basis of $995,000 and $200,000 in liabilities to JIM in exchange for $750,000 in cash and $800,000 of JIM’s common stock. This paper will discuss or explain the following about the acquisition of the companies: it will explain the type of merger that occurred with this type of information being converted between the companies. Then it will show the calculations that will show the gains that Mason Machining, Inc. will get from this transaction. Next, will be an explanation of how Mason will recognize the gains. Next, the tax liability that will be incurred by Mason Machining, Inc. from this transaction will be explained. The next process will be to calculate the amount of gain the shareholder’s from Mason Machining, Inc. will be able to realize and recognize from the transfer of stocks and assets between the two corporations. The next process will be to explain how much tax liability the shareholder’s will incur from the transfer of stocks between the corporations. And finally an explanation of the tax implications that Jefferson Industrial Machines will be responsible for based on the acquisition and merger of Jefferson Industrial Machines and Mason Machining, Inc.

Introduction

Jefferson Industrial Machines has finally decided to acquire Mason Machining, Inc. With the acquisition finalized between Jefferson Industrial Machines and Mason Machining, Inc. some very important transactions and occurrences took place during the acquisition. Jefferson Industrial Machines acquired all the assets of Mason Machining, Inc. with a fair market value (FMV) of $1,775,000 and an adjusted basis of $995,000, liabilities totaling $200,000. While Jefferson Industrial Machines is giving to Mason Machining, Inc. $750,000 in cash and $800,000 in Jefferson Industrial Machines common stock. With this in mind it is important to determine the method in which Jefferson Industrial Machines acquired Mason Machining, Inc.

Methods of Acquisition that Could be Considered

There are three primary methods of acquisition that Jefferson Industrial Machines could have usedthat was best for acquiring Mason Machining, Inc. The three primary methods of acquisition that Jefferson Industrial Machines must consider are: type A – merger or consolidation, type B – stock for stock acquisition and type C – assets for stock acquisition. By understanding and knowing that there are three different methods of acquisition that could have been used or chosen to be used by Jefferson Industrial Machines, it makes it easier to know which method of acquisition was used for acquiring Mason Machining, Inc.

Type A – Merger or Consolidation

A merger or consolidation is the combining of two companies. When to organizations, companies or corporations decide to merge together they “merge into one of the constituent companies (the surviving company)” (Keithley Lake & Associates, 2015). However, when the same to organizations, companies or corporations decide to consolidate together they “consolidate to form a new company (the consolidated company)” (Keithley Lake & Associates, 2015). With the merging of the two corporations’ a parent company and subsidiary will be created, therefore, the Mason Machining, Inc. will become a subsidiary of Jefferson Industrial Machines. The formation of a parent corporation and subsidiary will affect the tax filings of the overall corporation, these changes will require that both the parent company and the subsidiary must have their own “tax identification number and that the subsidiary is not an actual entity of the parent corporation” (Huntington, M., 2015). However, consolidating the Mason Machining, Inc. corporation into the Jefferson Industrial Machines corporation will turn both corporations into one corporation. The formation of a consolidated corporation of Jefferson Industrial Machines and Mason Machining, Inc. to be allowed to consolidate the tax returns. By consolidating the tax returns the joint corporation will be able to have the advantage of the following when filing Form 1120: US Corporate Tax Return – “they are filed both for simplicity and to allow the parent organization to receive tax benefits that may otherwise be forfeited” (Investopedia, LLC, 2015).

type b – stock for stock.

The second type of acquisition that Jefferson Industrial Machines should consider for a possible way of acquiring Mason Machining, Inc. is a stock for stock acquisition or stock for stock merger. The merging of Jefferson Industrial Machines and Mason Machining, Inc. with a stock for stock merger would simply be “the acquiring company (Jefferson Industrial Machines) simply proposes to the target firm (Mason Machining, Inc.) a payment of a certain number of its equity shares in exchange for all of the target company’s shares” (Gallant, C., 2015). By Jefferson Industrial Machines acquiring Mason Machining, Inc. with the stock for stock acquisition or merger option, this will “this action, of course, causes the dilution of the current shareholders’ equity, since there are now more total shares outstanding for the company” (Gallant, C., 2015).

type c – assets for stock.

The third and final acquisition or merger method for Jefferson Industrial Machines to consider for acquiring Mason Machining, Inc. is the assets for stock acquisition or assets for stock merger. The acquisition of Mason Machining, Inc. by the means of assets for stock will require that Mason Machining, Inc. fully liquidates the corporation and that the corporation has no affiliation with any business(s) anymore. With this type of acquisition it is considered or also known as a “C reorganization or a Triangular C reorganization”. These two classifications are both options and forms of asset for stock mergers or acquisitions. A “C reorganization” is “the acquiring corporation (“Acquiring”) acquires substantially all the assets of the target corporation (“Target”) solely in exchange for voting stock of Acquiring transferred to Target” (Pillsbury Winthrop Shaw Pittman LLP, 2007). While a “Triangular C reorganization” is “stock of a corporation (“Parent”) in control of Acquiring may be transferred to Target as consideration for Target’s transfer of assets to Acquiring (provided the other C reorganization requirements are satisfied), but a combination of Parent and Acquiring voting stock is not permitted” (Pillsbury Winthrop Shaw Pittman LLP, 2007). By determining and understanding that there are two different ways in which Jefferson Industrial Machines could acquire Mason Machining, Inc. with the assets for stock merger, allows for a better understanding of how the merger will or could affect the overall changes that will come about to Mason Machining, Inc. (Thompson, J., 2015).

Method Chosen to Acquire Mason Machining, Inc.

Understanding the facts and the information relating to the three different methods of acquisitions allows for a better, clearer decision to be made about which method was used to acquire Mason Machining, Inc. by Jefferson Industrial Machines. Based on the information and the related facts of each acquisition method, the method chosen by Jefferson Industrial Machines was to use the merger method. Jefferson Industrial Machines choses to “assume all the assets and all the liabilities of another. The acquiring firm retains its identity, while the acquired firm ceases to exist” (Advameg, Inc., 2015). By choosing the merger method of acquisition, Jefferson Industrial Machines and Mason Machining, Inc. have decided to completely become one entity that exists as the Jefferson Industrial Machines corporation, Mason Machining, Inc. is no longer a corporation and is completely dissolved and non – existence as a corporation.

Calculations of Mason’s Gain on the Transaction before Dissolution

To calculate the gain that Mason will receive on the transaction before the dissolution of the corporation all the factors must be taken into consideration. The important factors or figures that must be considered in the calculations for determining the gain for Mason are the amounts that are received from Jefferson Industrial Machines in stock and cash and the amount of liabilities and adjusted basis of assets that Jefferson Industrial Machines received from Mason Machining, Inc. By using these amounts, Mason Machining, Inc. will be able to determine the total amount of the gain on the transaction of merging with Jefferson Industrial Machines and dissolving the corporation as a whole will do for the shareholders.

The way in which to calculate the gain on the transaction for Mason is: amount of stock received + amount of cash received + amount of liabilities transferred to acquiring corporation – total adjusted basis of assets transferred to acquiring corporation. For the purposes of determining the calculated gain that Mason Machining, Inc. will receive from the merger with Jefferson Industrial Machines the actual calculated amount is below:

800,000 (stock) + 750,000 (cash) + 200,000 (liabilities) – 995,000 (adjusted basic of assets) = 755,000.

The total gain that Mason Machining, Inc. will get from the transaction of merging with Jefferson Industrial Machines is $755,000.

Mason’s Recognized Gain on the Transaction

Based on the calculations on the gains that Mason Machining, Inc. will get from the merger with Jefferson Industrial Machines, the recognizable gains are easy to determine. The recognizable gains that Mason Machining, Inc. is collecting are $755,000. This is the amount at which is the total gain that Mason Machining, Inc. is gaining in the merger with Jefferson Industrial Machines. This amount will be the amount that would be reported on the income tax for Mason Machining, Inc. when the tax return is filed showing the corporation has been dissolved and the taxes are filed for the year. The corporation of Mason Machining, Inc. is still required to report the Federal Income Tax for the operating year prior to the merger taking place and thus the gain from the merger would be listed as income for the year.

Mason’s Tax Liability from the Transaction

Mason Machining, Inc. has to focus on the tax liability rules and the scenarios that are put into effect by the Internal Revenue Service when dealing with mergers and acquisitions into other companies, partnerships or corporations. One of the most important regulations or standards that has been set into place by the Internal Revenue Service regarding mergers and acquisitions is called a “tax – free reorganization” (Edstrom, D., July 25, 2011).By listing a corporation or a merged set of corporation as a “tax – free reorganization” the corporation and shareholders can “actually defer tax on any gain at the time of the transaction, typically allowing capital gains treatment of tax on the gain when the equity is ultimately sold. If the equity holders receive cash, or if the transaction fails to meet the specific requirements for tax-deferred treatment, tax on any gain to the date of closing may be due, whether or not the transaction results in any cash distribution to the equity holders” (Edstrom, D., July 25, 2011). If Mason Machining, Inc. and Jefferson Industrial Machines have listed the merger of the two corporations as a one of these “tax – free reorganizations” then the tax liability that Mason Machining, Inc. is or would be responsible for is “none” (Cooper – Blood, L. April 27, 2015).

Distribution of Jefferson Industrial Machines Stock

The shareholders of Mason Machining, Inc. have distributed the stock received from Jefferson Industrial Machines accordingly to the shareholders that are entitled to receive shares from the merger. Now that the distribution has taken place there are several questions and concerns that both Mason Machining, Inc. and Jefferson Industrial Machines must address regarding the merger to ensure that everything was properly completed and that all information is properly reported and understood. The basis for the shareholders stock within Jefferson Industrial Machines based on the current amount of shares that are in use by the shareholders at Mason Machining, Inc. is 600,000 (Cooper – Blood, L., April 27, 2015)

Calculation of how Gain Shareholders of Mason Machining, Inc. Will Realize and Recognize on this Transaction

To calculate the gain that the shareholders of Mason Machining, Inc. will be able to realize and recognize is determined by the amount of money gained by the company + the stock amount given by the acquiring company – the total shares given to the current shareholders of stock at Mason Machining, Inc. The recognizable gain that the shareholders of Mason Machining, Inc. will be able to get is determined as follows:

750,000 + 800,000 – 600,000 = $950,000

This recognizable gain is based on the liquidation of the Mason Machining, Inc. corporation. However, the realizable gain that the shareholders will get based on the liquidation of the corporation comes from cash receipts or the gain stated above from the calculations that the corporation will get from the merger with Jefferson Industrial Machines. The realizable gains that the shareholders will get are $755,000.

Tax Liability Incurred by Mason Machining, Inc. Shareholders

Mason shareholders will incur a tax liability of $151,000“which is calculated by taking the” $750,000 “recognized gain and multiplying it by the capital gain rate of 20%” (Course Hero, Inc., 2015). By determining the total tax liability for this transaction it is possible to determine what the shareholders after tax earnings figures would be. The way in which to calculate the after tax earnings figures are based on the gains recognized by the company – tax liability of the shareholder + common stock amount given by the acquiring company. The actual figures for the total amount of the after tax earnings for the shareholders are:

755,000 – 151,000 + 800,000 = $1,404,000

Therefore, the after tax earnings for the shareholders is $1,404,000 based on the realized gains, tax liability and the total common stock available to the shareholders of Mason Machining, Inc.

Jefferson Industrial Machines Tax Liabilities

When determining the tax liabilities that Jefferson Industrial Machines is responsible for regarding the merger with Mason Machining, Inc. it all depends on the type of acquisition or merger that took place. Knowing that this merger was for the full takeover of the corporation, including all assets, stocks and liabilities, then Jefferson Industrial Machines is responsible for all the liabilities that Mason Machining, Inc. could have or could possibly incur including a tax liability. Regarding a tax liability between Mason Machining, Inc. and Jefferson Industrial Machines would be based on “including known and unknown taxes. An example of an unknown tax debt would be one that resulted from an IRS audit that has not yet begun” (NOLO.com, 1999). Additional tax liabilities that Jefferson Industrial Machines could be responsible for regarding the merger/acquisition of Mason Machining, Inc. would be “state and local taxes, tangible assets – equipment and machinery will result in local and state sales and use tax liabilities for the buyer or the seller and the employment taxes that are owed for the current year or even the previous tax year for the employees of the corporation” (Agredano, R., 2015). So these are the tax liabilities that Jefferson Industrial Machines could possibly be responsible for having merged with Mason Machining, Inc.

Conclusion

In conclusion, Jefferson Industrial Machines and Mason Machining, Inc. merging together into one corporation and no shareholder from the now dissolved Mason Machining, Inc. being left without the appropriate compensation for the transfer of corporation over to Jefferson Industrial Machines. In summary, this paper informs all members of both corporations of the gains, losses and tax liabilities associated with the dissolution of Mason Machining, Inc. and the gaining of Jefferson Industrial Machines with the assets and liabilities that were once held by Mason Machining, Inc., in exchange for a specific amount of cash and common stock within Jefferson Industrial Machines. By offering this information to all parties involved with the transaction, everyone is aware of what responsibilities (if any) must be taken care of and what potential gains will come from the overall merger taking place.

References

Advameg, Inc. (2015) “Mergers and Acquisitions”. Retrieved from: http://www.referenceforbusiness.com/encyclopedia/Man-Mix/Mergers-and-Acquisitions.html. Retrieved on May 1, 2015

Agredano, R. (2015) “Tax Implications of Buying a Business”. Retrieved from: http://smallbusiness.chron.com/tax-implications-buying-business-26154.html. May 1, 2015

Cooper – Blood, L. (April 27, 2015). Overview of Corporate Tax Issues: CTULiveChat 2 Archive Phase 4. Retrieved from: Colorado Technical University, Virtual Campus, Taxation and Business Decision: http://campus.ctuonline.edu. Retrieved on May 1, 2015

Course Hero, Inc. (2015) “Mason Shareholders Will Incur a Tax Liability of 150,000 Which is calculated by”. Retrieved from: https://www.coursehero.com/file/p57v3uo/Mason-shareholders-will-incur-a-tax-liability-of-150000-which-is-calculated-by/. Retrieved on May 1, 2015

Edstrom, D. (July 25, 2011) “Tax Consequences of the Transaction”. In Mergers and Acquisitions: Structure and Tax Basics. Retrieved from: http://biomassmagazine.com/articles/7187/mergers-acquisitions-structure-and-tax-basics/?ref=brm. Retrieved on May 1, 2015

Gallant, C. (2015) “What is a Stock – for – Stock Merger and How Does This Corporate Action Affect Existing Shareholders”? Retrieved from: http://www.investopedia.com/ask/answers/06/stockforstockmergerdetails.asp. Retrieved on April 28, 2015

Huntington, M. (2015) “Do Subsidiaries Have the Same Tax ID as the Parent Company”? Retrieved from: http://smallbusiness.chron.com/subsidiaries-same-tax-id-parent-company-76101.html. Retrieved on April 28, 2015

Investopedia, LLC (2015) “Definition of Consolidated Tax Return”. In Consolidated Tax Return. Retrieved from: http://www.investopedia.com/terms/c/consolidated-tax-return.asp. Retrieved on April 28, 2015

Keithley Lake & Associates (2015) “Who Can Merge or Consolidate”? In Merger and Consolidation. Retrieved from: http://www.anguilla-attorney.com/node/33. Retrieved on April 28, 2015.

NOLO.com (1999) “Corporations”. In Buying a Business or Its Assets. Retrieved from: http://www.inc.com/articles/2002/01/14631.html. Retrieved on May 1, 2015

Pillsbury Winthrop Shaw Pittman LLP (2007) “Stock for Asset Exchanges: C and Triangular C Reorganizations”. Retrieved from: http://www.pmstax.com/acqbasic/Crg.shtml. Retrieved on April 28, 2015

Thompson, J. (2015) Previously Used Information from Another Phase Assignment.