Beatco, an accrual basis domestic corporation, manufactures musical instruments for sale both in the United States and abroad. Beatco's functional currency is the U.S. dollar. Two years ago, Beatco established a branch sales office in Switzerland. The sales office qualifies as a qualified business unit with the Swiss franc (SF) as its functional currency. The branch's tax attributes for its first two years of operations are as follows:
Year 1 Year 2
Taxable income SF40 million None
Foreign income taxes (paid at end of year) SF15 million None
Remittance to Beatco (paid at end of year) None SF25 million
The Swiss franc had an average daily value of $0.50 during Year 1, $0.65 during Year 2, and was worth $0.60 at the end of Year 1, and $0.75 at the end of Year 2.
What are the U.S. tax consequences of the branch's activities in Year 1 and Year 2?
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According to the Tax Code, given that the Switzerland branch is Beatco's qualified business unit with a functional currency other than the US dollars, Swiss Francs, then the branch's income ...
The solution discusses the U.S. taxation of international transactions and consequences.