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Answered: - Question 1 DP, a California corporation, manufactures equipment


Question 1

DP, a California corporation, manufactures equipment in the United States and sells it in the United States and South America. It has a branch in Brazil through which it makes sales to customers in Brazil and several other countries in South America. The branch also installs and services the equipment purchased by these customers. Although the branch incurred losses in its early years, these losses have more than been recouped by subsequent profits. DP incorporates the branch by transferring the branch?s assets to a newly formed corporation, SC, in exchange for all of SC?s stock. The assets that DP transferred to SC in this transaction include accounts receivable, inventory, depreciable property of various sorts, and a building in which the branch activities are carried on.

A- If SC is organized under the laws of Delaware:

What are the tax consequences of the transfer?

When and how will U.S. taxes be imposed on SC?s profits?

B- If SC is organized under the laws of Brazil:

What are the tax consequences of the transfer?

When and how will U.S. taxes be imposed on SC?s profits?

Question 2

Assume the same facts as in Question 1(B) (SC is a newly-formed Brazilian corporation), except that the Brazilian branch, which had been DP?s only foreign activities, had incurred losses exceeding profits during the period of its existence. These losses were used to offset income from DP?s U.S. activities.

What are the tax consequences of the transfer?

When and how will U.S. taxes be imposed on SC?s profits?

 


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