Facts
With the pending merging of two businesses on the basis of family, the valuation of the newly formed Messina Propriety Inc. is suggested to be a direct market value combination of the values of the two companies. This cumulatively stands at $ 3,600,000. The merger will see the three Messina’s has a 62.2% holding for Tony Messina, 15.6% for Martin Messina and another 22.2% for Tony Jr. Looking at the basis of shareholding in the two companies, Tony holds 600,000 ordinary shares , which is double what Martin owns in their company. On the other end, Tony Jr. as 800,000 worth basis on ordinary equity from his restaurant. Cost basis of stock and asset items are values of original items under many valuations considered the purchase price of assets.
With the merging of the restaurants, the rational expectation is based on the ability and cover that the company will have in consolidation and strength based on size. Another fact on hand is that of their shareholding will be inclusive of both the preferred shares and ordinary stocks. The choice of preferred shares is suggestively considered about 50% of the $ 3.6 million value of equity. Additionally, the position advocated by Tony Messina himself is that with the preferred shareholding his position in the company is secure with an estimated 6% return on investment annually. The direction is seen as a position from, which the merging seeks to prepare his exit from active participation in the operations of the company. It is indeed important to value, and present the control of the company under the law. The pre-suggested condition seems to be in line with Code 351, however, consolidation and control need more advise under the Code 351 as it is seen with the case of Howard T.C Memo – 2015.
Issues
Before any consolidation of business, there have been a number of valuation positions to be taken. Moreover, the valuation and the consolidation need to be done with the law in place. The transfer of corporation control order takes place by this precision. The legal Information Institution has a presentation of the 26 United States code 351 (transfer to corporation controlled by transferor). Arguably, the law in this case is more inclined to assessing the passing of ownership by the three Messina to the new Messina Proprietary Inc.
According to Bena and Li (2014), the identification of the issues needs to be set in place first. The transfer of assets to the new formed corporation has been established. The law provides that no gain or loss should, therefore, amount from the transfer of property to a corporation. These issues seem materially satisfied with the asset valuation of the two companies having made no gains or losses settling at the $ 3.6 million-consolidation value.
The second issue that is raised here is on the position that consolidation percentages have on the control of the company. Having read that the Metro Culinary has in its portfolio preferred shares, the probable position that the Tony Messina will be having can be debated on basis of the ordinary, and preferred shares having different values. Lastly, the issues identify with the position that the post-consolidation operations and profit declarations will be realized. Messina is of the idea of a 6% annual divided on preference shares, which are only owned by him in this agreement. This is seen as a means of compensation from the less active management role of the newly consolidated Messina proprietary Inc. However, this is certain to the approval of the consolidation of the two companies, as none of the prerequisite conditions have been agreed upon awaiting the advice by Code 351.
Discussion
Discussing the scenario that the Messina business has, the issues and the facts identified form the basis of this assessment. First is the valuation of the business keeping in mind the $ 2,800,000 asset valuation can be affected by the ordinary and the preference shareholding that the Metro Company has. Second, is the treatment to be leveled with the valuation of the preference shareholding that Tony has overly suggested to have value of the ordinary shareholding. Lastly, is the returns that are attached to the preference shareholding all based on the code 315 interpretations.
Company evaluation
According to the general rule of code 351 as defined by section 368 (c) “no gain or loss shall be recognized of the property is transferred to a corporation by one or more persons solely in exchange on stock in such a corporation ” This applies to the acts of Tony, Martin and Tony Jr. interestingly, is the manner in which they cumulatively come to the shareholding ratios of 62.2%: 22.2%: 15.6%. According to the Code 351, the treatment of this can be manipulated on different levels of corporation associations. Looking at the presentation in this case the 62.2% cannot be directly quantified with the 600,000 basis on the net assets that Metric Company had. In real practice of business, the expectation is that there will be valuation of goodwill in this case. The presentation of goodwill as the founder of the company brings to light the position that he has in getting better and higher shareholding basis. On the second, ratio item by Tony Jr. his is an interest that is taken care of by the recognition of the value of the restaurant he owns. Moreover, his assets worth 800,000 present a shift in the overall valuation of the newly formed corporation by 28.57% in this case. This compared to the position that Martin has seemingly is the point of consideration by which they value his basis higher at 22.2% compared to that of Martin at 15.6%.
Preference Shares
The treatment of preference shares can follow the example on the case of Hewlett-Packard Company T.C 2012. This was a negotiation on consolidation of business based on the treatment of non-qualified preferred stock. According to the code 351, the transfer of property to a corporation shall only apply under a number of case scenarios. First is if and only in the transfer receives other stock inclusive of the nonqualified preferred stock. In this case, the position is satisfactory looking and identifying with the position that Metric Culinary has to bring into the Messina Property Inc. According to Hewlett-Packard Company T.C 2012, the presentation is only requiring of the transfer to be inclusive of valued company where both ordinary and preferred stock are valued on a combined level. This is suggestive of the $ 2,800,000 valuation as inclusive of the asset base is recognizing of the preference shares that the company had. Reading more into the treatments of the share values of the preference share, the situation received a different thought according to the suggestion of the Code 351 Section 311, “the treatment of controlled corporations.” This valuation is primarily concern with the position that recognizes the same principle of the loss or the gain in valuation at transfer position. Since there is no initial value noted of the preference share values, the final value cannot be established as fair. The assumption that they will be worth half the value of equity can be a point and concern to dismiss more so to the interest of Tony Jr. This is based on the needs of the Code 351 primary rule assertions that there needs to be a verification of the true values of the preferred shares before valuation on consolidation. In fact, according to the act “such exchange in not in pursuance of a plan for reorganization.” this statements builds on the needs to have the value of the preference shared held constant for the first financial year of consolidation or the period of consolidation.
Dividend in the long run for preference shares
Reading from the same position as the one above with the valuation of the preference shareholding, Tony has a suggestion of a dividend payout of 6% on an annual basis. Having brought this to the suggestion that one he ceases to manage the business his investment shares will be invoked only through the preference shareholding. On affair note, this seems like a good bargain based on the risk involved with the business. His decisions will no longer be at the helm of the propriety body. However, by law, this still needs a policy consideration on the value of the preference shares. Suggestively, this is slated at half the price of the ordinary shareholder, which in any case is the recipient of the largest share of profits.
Arguably, the long run has a lower risk positions for Tony compared to his sons. The position by which preference shares grow can also be suggestively lower than that of the ordinary share equity, which has no security on return. Additionally, the assumption of the business making more in terms of profits can be valid therefore warranting the likelihood of affording the 6% annual payout on the preference stocks. The options however remain clear in case of a long run situation that will prove to be workable. The family has the option of the redemption of the preference shares. This still provides from a position under which the future of the Messina Proprietary Inc. is on a good path.
Summary
Business consolidation process can be misunderstood. In this case, the states of affair is about a fair as the transfer of assets where the transferor position is still within benefit of the transfer. The transfer takes no consequences from the considerations of tax, as it would have been feared. The position that is sought after in this case is one that there is no gain or loss with the transfer of assets to the new parent company. With the Metro and the restaurant owned by Tony being fully owned subsidiaries after consolidation, the tax effect on the company are consolidated in this case. Therefore, rational business modeling will imply on the establishing of the true value of the company in this case the Messina Inc. at the transfer of property. According to Alm and Torgler (2011), an overvaluation will be implicit of the need to have income tax consequences on the newly formed company.
Reading from the efforts that Tony has in mind this memo described the consolidation into one company are in line with reducing the impact and incidence of tax by working as one company. Such differences could have been noted with the different pricing that the restaurant must have been having. In light of the differences, the new Menissa Proprietary Inc. now seen as established lawfully under Code 351 can be said to have better tidings are the capital formation and asset valuation clauses are satisfactory.
References
Bena, J., & Li, K. (2014). Corporate Innovations and Mergers and Acquisitions. The Journal of Finance, 69(5), 1923-1960. http://dx.doi.org/10.1111/jofi.12059
Alm, J., & Torgler, B. (2011). Do Ethics Matter? Tax Compliance and Morality. J Bus Ethics, 101(4), 635-651. http://dx.doi.org/10.1007/s10551-011-0761-9
Hewlett-Packard Company and Consolidated Subsidiaries v. Commissioner of Internal Revenue, 2012 T.C. Memo 135 (T.C. 2012).
Howard v. Commissioner of Internal Revenue, 2015 T.C. Memo 38 (T.C. 2015).
