JIM is acquiring all of the assets of Mason Machining, Inc. in a merger transact
ID: 2499620 • Letter: J
Question
JIM is acquiring all of the assets of Mason Machining, Inc. in a merger transaction. Mason transfers 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.
Click here to view Mason's Acquisition Data.
Explain what type of merger this is. JIM distributes its stock and cash to Mason in exchange for all of its assets.
Calculate Mason's gain on this transaction.
How much of this gain will Mason recognize?
How must tax liability will Mason incur from this transfer?
Mason distributes the JIM stock and cash to its shareholders for all of their shares of Mason’s stock. Shareholders' basis in this stock is $600,000.
Calculate how much gain the Mason’s shareholders will realize and recognize on this transfer.
How must tax liability will Mason’s shareholders incur from this transfer?
Explain the tax implications for JIM.
Explanation / Answer
Since the business that JIM deals in is not known, it can be called a conglomerate merger
When two companies that operates in completely different industry, regardless of the stage of production, a merger between both companies is known as conglomerate merger. This is usually done to diversify into other industries, which helps reduce risks.
Mason's gain on this transaction = 750000 + 800000 - 995000 - 200000 = $355000
Mason will not recognize any gain.
As 800000 is worth of stock and would not come in Mason's hands and apart from this Jason suffers a loss of $45000
As there is no gain there would be no taxability as well.
Gain that Mason's shareholder's would recognize = 800000 - 600000 = $200000
Mason's shareholders will not be any tax liability for now; Tax on capital gains will arise once they sell these stocks.
Tax implications for JIM would be a tax on 1575000 - 1550000 = $25000 according to the applicable tax rates.
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