Your client, Bigco, is considering buying Littleco. Littleco’s particulars are as follows:

Assets: FMV=100mm; adjusted basis 40mm

Liabilities: none

Market Value of stock: 130mm

Location: Incorporated in Florida; no subsidiaries

Operations in: unknown number of states

Tax Status: NOL of 10mm this year, with NOL carryforward (state) of 20mm

Business: retail clothing

Bigco, A California C corporation, is considering two options: buying the stock of Littleco for 140mm, or buying the assets for the same amount. In either case, Bigo stock would be the consideration used. Comment on both methods, especially the SALT implications.

2. FACTS

Smith’s Home Hardware is a successful Arizona - based retail operation, realizing significant profits from its retail hardware stores. Smith’s creates a subsidiary (“Alixco”) by contributing $70 million of capital. The contribution of capital includes: $15 million of inventory, $15 million of CD’s, a $10 million office building in Missouri, and patents on high-tech power tools worth $30 Million. Alixco’s offices are entirely in Missouri. Alixco will manufacture and sell power tools to the construction industry. In 2001, Alixco realizes income as follows: tool sales $100 Million, interest on commercial CD’s $50,000, rent from 9 floors of its 10-story office building $1.5 Million, and royalty income of $3 Million from overseas licensing of its tool patents. Total business deductions for the year are $85 Million.

Alixco hires a president in Missouri. Officers of Smith’s Home Hardware make up the balance of the Board of Directors and Officers. Smith’s internal accounting staff in Arizona maintains the books. A CPA firm in Missouri prepares annual financial statements. The only assets held by Alixco are those mentioned above, plus a newly constructed manufacturing plant in New Mexico and another newly constructed plant across the border in Mexico.

The $15 Million of CD’s and $10 Million office building were acquired with funds available from retail hardware store operations. Smith’s Home Hardware and Alixco file a consolidated federal tax return. Smith’s Home Hardware files a separate California tax return from Alixco. During 2001, Smith’s Home Hardware received $2 million in dividends from Alixco, which was used to expand existing retail stores. Outside of the original contribution of inventory, there are no intercompany sales. However, approximately 20% of Alixco’s purchases are handled by Smith’s purchasing agents.

Smith’s Home Hardware realized net income in 2001 of $40 Million, which was apportioned 75% toArizona and 25% to California. Smith’s filed a separate return in California for 2001. The California Franchise Tax Board has audited Smith’s Home Hardware and concluded that Smith’s and Alixco should be members of a unitary group filing a combined California tax return. The auditor added the Alixco net business income into the combined return, resulting in a California tax increase of $300,000.

Please defend Alixco’s non-unitary tax filing position.

3.

Based on facts in question 2
Assume that Missouri follows the “Joyce” rule and that Alixco and Smith’s are unitary. Describe how sales of Alixco intoCalifornia would be apportioned on the combined Missouri tax return and how sales of Alixco into California would be apportioned on the combined California corporate tax return (assuming California follows the “Finnigan” rule). Why?

4.

A wants to start an online sales business and is targeting a couple of states - Alaska, Nevada, Oregon, and Florida. What are the main tax concern you would advise A to be aware of!

5.

Which of the payroll taxes are also SALT? Give some state examples.

6.

What are the tax-savings techniques that a consultant may use with respect to property taxes?

Answer rating: 100% (QA)

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