AC559 Unit 4 Assignment 1: I am not understanding the readings to answer the question: What arethe United States tax consequences of the incorporation transaction.

Six years ago, Bullco, Inc., a domestic manufacturer of mold- injection systems, established a sales and service operation in Madrid, Spain. The Madrid office was structured as a Spanish corporation, but Bullco made a check-the-box election to treat the operation as a branch in order to obtain a U.S. tax deduction for the branchs start-up losses. The Spanish operation has become quite profitable and Bullco wishes to change its United States tax classification from a branch to a subsidiary by filing a new check-the-box election (this is feasible since 5 years had passed since the first election). At the time of the conversion, the Spanish operations assets includes some local currency, accounts receivable from Spanish customers, an inventory of spare parts, and an extensive database of information regarding Spanish customers that the marketing personnel had painstakingly developed over the years. Bullcos CFO has asked you to brief her regarding the United States tax consequences of the incorporation transaction. Briefly outline your response.

HINT: (8-2) BullCo is related to the concepts from Chapter 8. Consider this: Does BullCos Spanish operation satisfy the active business requirements? What are the implications of qualifying under the active business requirement? Which assets qualify and which do not?