Eagle Inc., a U.S. corporation intends to create a Limitada (limited liability company) in Brazil in 2020 to manufacture pitching machines. The company expects the operation to generate losses of US$2,500,000 during its first three years of operations. Eagle would like the losses to flow-through to its U.S. tax return and offset its U.S. profits.
a. Can Eagle “check-the-box” and treat the Limitada as a disregarded entity (branch) for U.S. tax purposes? Consult the Instructions to Form 8832, which can be found on the “Forms & Instructions” site on the IRS website, www.irs.gov.
b. Assume management’s projections were accurate and Eagle deducted $75,000 of branch losses on its U.S. tax return from 2020-2022. At 01/01/23, the fair market value of the Limitada’s net assets exceeded Eagle’s tax basis in the assets by US$5 million. What are the U.S. tax consequences of “checking-the-box” on Form 8832 and converting the Limitada to a corporation for U.S. tax purposes?