SnoGo, Inc. is a snowmobile manufacturing business, and MountainsRUs, Inc. is a mountain bike manufacturing business. Because each business is seasonal, their manufacturing plants are idle during their respective off-seasons. SnoGo and MountainsRUs have decided to consolidate their businesses as one operation. In so doing, they expect to increase their sales by 15% annually and cut their costs initially by 30%. Both are C Corporations and provide the following summary of their 2015 taxable incomes:

SnoGo MountainsRUs

Business income

Sales $6,000,000 $4,500,000

Cost of goods sold (4,000,000) (3,000,000)

Other expenses (1,000,000) ( 750,000)

Business taxable income $1,000,000 $ 750,000

SnoGo and MountainsRUs dont know what method they should use to combine the businesses. They would like to know the tax implications of each of the possible methods. They have agreed that SnoGo shareholders will own 55% of the business and MountainsRUs shareholders will own 45%. All shares of stock are voting shares. They each pay dividends of $100,000 currently and would like to increase that by 10% per year.

What are the possible methods of merger/reorganization which they can use? Which do you recommend they use, and why?

Based on the information provided, do a three-year projection of the income of the business and the total taxes for the merged corporation. In doing the projections, assume that after the initial 30% decrease in total costs, their annual costs will increase in proportion to sales. Use the 2015 tax rate schedules to compute the tax for each year of the analysis. (page 17 in https://www.irs.gov/pub/irs-pdf/i1120.pdf)