Question

Debra Dillinger, Inc. was incorporated in Connecticut in 1992. Debra Dillinger owns 82% of the stock of Debra Dillinger, Inc. Unrelated individuals hold the remaining stock. In 1993 Debra formed Connecticut Motors and in 1995 Debra formed Long Island Sound Motors. Debra owned 85% of the stock of Connecticut Motors and 85% of the stock of Long Island Sound Motors. Unrelated individuals own the remaining stock of these two corporations. All three corporations are involved in the business of buying, selling and repairing foreign-made sports cars. Each corporation owns a different franchise for selling and servicing different makes of foreign-made cars. In 2018, Connecticut Motors sold all of its shop equipment and vacated its business address. It did not purchase any new automobiles. Long Island Sound Motors had two locations in Connecticut. It closed one location in early 2018 and then closed the other location in mid-2018. All previously sold cars for Connecticut Motors and Long Island Sound Motors were serviced through Debra Dillinger, Inc. On November 1, 2018, Connecticut Motors and Long Island Sound Motors merged into Debra Dillinger, Inc. Connecticut Motors and Long Island Sound Motors were both insolvent at the time of the merger. Debra Dillinger, Inc. issued its stock to the shareholders of Connecticut Motors and Long Island Sound Motors. On the date of the merger Connecticut Motors was indebted to Debra Dillinger, Inc. in the amount of $32,450 and Long Island Sound Motors was indebted to Debra Dillinger, Inc. for $14,300. Both corporations were insolvent. What issues may the IRS raise concerning this merger? Assume that the merger meets all Connecticut statutes.

Answer 1

1.The above merger considered as common control business combination as Debra Dillinger, Inc.has significant control over Connecticut Motors and Long Island Sound Motors.Accordingly all the accounting entries to be passed in the books of accounts as per the guidance issued by FASB.So IRS may raise issue on the accounting in the books of accounts.Ensure to comply with the guidance issued by the FASB.

2.Due diligence

IRS will deeply look into the due diligence process conducted in the merger process.So the following due diligence process is complied

• Legal and financial diligence on each other’s organization i,e Debra Dillinger, Inc,Connecticut Motors and Long Island Sound Motors
• Financial diligence typically includes operating trends, quality of earnings, debt-like items, capital expenditure needs and net asset considerations
• Other key due diligence areas include taxation, coding/compliance, reimbursement, payer contracting, physician strategy, information technology, insurance and risk management, legal and human resources (including employee benefits)

3.Fair Market Value-Debra Dillinger issues stock at fair market value to the Connecticut Motors and Long Island Sound Motors.Fair value computation should be justified with the workings and documents.

4.The following questions may raise by the IRS while considering merger

• Are there states in which your old company has not filed in the past that you now have income tax nexus in, and will need to file an income tax return?
• Are there personal property tax returns in new states and counties that will need to be filed?
• Will you need to register the new business in states that you used to do business under the old name?
• Will you need to file a final tax return for your “old” entity?
• Are there payroll matters that need to be addressed?
• Which relationships are you going to keep between the CPA, attorney, insurance division, IT department, HR.