International Tax

DC, a U.S. corporation, operated a branch in Islandia for three years with the following results:

Year          Branch Net Income (Loss)

2010     ($1,000)

2011    ($2000)

2012         $ 500

DC also earned $5,000 from its U.S. business activities in each of these three years.

On January 1, 2013, DC formed FC, an Islandian corporation, and transferred the branch’s assets to FC.  At the time of the transfer, DC’s basis in the branch’s assets was $1,000 and the fair market value of the branch’s assets was $5,000.  The assets only consisted of equipment which was not subject to depreciation.

What amount, if any, must DC include in its gross income in 2013?  What is FC’s basis in the branch’s assets after the transfer?

Assume that DC forms FC on January 1, 2014 instead of 2013.  Also assume that in 2013 DC’s Islandian branch had Net Income of $3000.  How would your answer change?