Question 1
Ethan manufactures furniture in the United States and sells it in the United States and South America. Ethan incorporates the company by transferring the assets he uses in the furniture business to a newly formed corporation, EthanCo, in exchange for all of EthanCo’s stock. The transferred assets include $1,000,000 of furniture making equipment and $100,000 of cash.
A- If EthanCo 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 EthanCo's profits?
B- If EthanCo 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 EthanCo’s profits?
Question 2
Assume that Ethan opted to form EthanCo in Delaware and transferred all the furniture business assets to EthanCo. EthanCo's income for the year includes gain of $300,000 of furniture sales to customers in the US and gain of $500,000 of furniture sales to customers in Brazil. EthanCo's assets are the same as in Question 1: $1,000,000 of furniture making equipment and $100,000 of cash.
Assume Brazil does not tax any of the income and the US corporate tax rate is 21%.
How much US tax will EthanCo owe for the year?
Sample Solution