AmeriCorp, a U.S. corporation based in Houston, manufactures telecommunications equipment. It sells the equipment to retailers throughout the world. To promote its Latin American sales, AmeriCorp conducts its business through three entities: TelMexico, a sociedad anonima organized under Mexican law and 100% owned by AmeriCorp; TelBrazilco, a sociedade limitada, organized under Brazilian law and 51% owned by AmeriCorp; and TelCaymanco, an ordinary nonresident company organized under Cayman Islands law and 100% owned by TelBrazilco. Foreign investors own the remaining 49% of TelBrazilco voting stock. TelMexico routinely purchases telecommunications equipment from AmeriCorp and sells the equipment to independent retailers throughout Central America. This entity derives 20% of its revenues from equipment sales outside of Mexico. TelBrazilco manufactures telecommunications equipment in Brazil and sells the equipment to independent retailers throughout South America. This entity derives 65% of its income from equipment sales outside of Brazil. TelCaymanco purchases telecommunications equipment exclusively from TelBrazilco and sells the equipment to independent retailers throughout Europe. This entity derives 99% of its revenues from equipment sales outside the Cayman Islands. Periodically, TelMexico pays dividends to AmeriCorp, and TelCaymanco pays dividends to TelBrazilco. AmeriCorp's chief financial officer has approached you with the following questions:
1. What are the tax implications of this organizational structure? Specifically, are the entities controlled foreign corporations, and do their activities generate Subpart F income?
2. Can AmeriCorp use the check-the-box regulations to change the tax treatment of any foreign entity?
3. What tax consequences would ensue if AmeriCorp elected to have,
a. TelCaymanco and TelBrazilco taxed as corporations (i.e., associations)?
b. TelBrazilco taxed as a corporation (TelCaymanco would be disregarded as a taxable entity)?
Write a memorandum that addresses these questions. At a minimum, consult the following authorities:
• Reg. Secs. 301.7701-2 and 301.7701-3