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The Puerto Rico Industrial Incentive Act as it relates to a Southern California aircraft accessory manufacturer: A case study

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The Puerto Rico Industrial Incentive Act as it relates to a Southern California aircraft accessory manufacturer: A case study

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Content THE. PUERTO RICO INDUSTRIAL INCENTIVE ACT AS IT RELATES
TO A SOUTHERN CALIFORNIA AIRCRAFT ACCESSORY MANUFACTURER
A CASE STUDY
A Thesis
Presented to
the Faculty of the School of Commerce
The University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Master of Business -Administration in Finance
By
William Titus Reynolds
June, 1954
UMI Number: EP43386
All rights reserved
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Dissertation Publishing
UMI EP43386
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C.o*r> yv\ 8 A 's V-
This thesis, written by
William Titus Reynolds
under the guidance of his Fhculty Committee,
and approved by all its members, has been
presented to and accepted by the Faculty of
the School of Commerce in partial fulfill
ment of the requirements for the degree of
Date______May 13, 1954
Approved
’ 3 cM>
rvto • *
TABLE OF CONTENTS
CHAPTER
I. THE PROBLEM AND IMPORTANCE OF THE STUDY . .
Statement of the problem. . . . . . . . .
Importance of the study . . . . . . . . .
Organization of remainder of the thesis .
Review of the literature...........
Sources of data and methods of procedure.
II. THE PUERTO RICO INDUSTRIAL INCENTIVE ACT .
The enactment .......
Declaration of policy . . .
Eligibility for exemption .
Nature, extent, and scope of tax incentives
Grants, transfers of grants, and revocations
On constitutionality . . . . . . . . . . .
III. COMPREHENSIVE TAX ASPECTS . . . . . . . . . .
The Puerto Rico Industrial Incentive Act. .
Puerto Rican tax structure.......... . * . .
The Internal Revenue Code on Puerto Rican
income
On form of organization— domestic corporations
On form of organization— foreign (Puerto
Rican) corporation versus Section 251
corporation .... ......... .......
PAGE
1
1
2
8
9
11
14
14
16
17
18
22
25
27
27
28
34
59
46
iii
CHAPTER PAGE
Corporate versus individual ownership ...... 58
California franchise Tax. . . . . . . . . . . . 60
Summary . . . . . . . . . . . . . . . . . . . . 60
IY. THE SUBJECT COMPANY WITH COST STUDY.......... . 62,
The company ..................... ....... 62
Ownership 62
Markets................. . .................... 65
Terms of sale................... 64
Current operational level ........ . 64
Financial . ........ . . . . . . . . . . . . . 65
Preliminary appraisal ....... ............ 67
Organizational form of the operation proposed . 69
Personnel . . . . . . . . . ................. . 71
Property* . . . . . . . . . . . . . . . . . . . . 71
Level of operations .......... 72
Procurement of components.............. 73
Licensing . . . . . . . . ..................... 73
Sales . . . . * ........... 74
Cost analysis 75
Summary........................... 85
Y. CONCLUSION. . . . . . . . . ............. .... 87
BIBLIOGRAPHY. ..... ................... 92
TABLE
I.
II.
III.
IT.
T.
VI.
LIST OF TABLES
Puerto Bican Corporation and Partnership Surtax
Rates on Bet Income • .......... . . . ..........
Puerto Rican Surtax Rates on Personal Bet
Income. . . . . . . . . . . . .................
A Comparison of Puerto Rican and United States
Income Taxes, 1953, Single Person ......... ♦ .
A Comparison of Puerto Rican and United States
Income Taxes, 1953, Couple Two Children . . . .
Comparison for Purposes of Tax Advantage Section
351 and 109 Corporations Subsidiary to United
States Parent Corporation . . . . . . . . . . .
Peterson Pressure Regulator Company Statement
of Comparative Costs Based Upon 150 Units
of Production per Month .... ...............
PAGE
29
31
33
33
44
77
CHAPTER I
THE PROBLEM AND IMPORTANCE
OF THE STUDY
During the past several years the Business community
has been made aware of, to varying degrees, the extra
ordinary tax situation which exists in the ’ ’Commonwealth”^
of Puerto Rico. Articles have appeared in popular period
icals, promotional literature has been widely distributed—
most notably by an agency of the Puerto Rican government,
and studies devoted to the legal aspects of the situation
have appeared in law journals. Nowhere, however, has the
subject been treated from the standpoint of a single busi
ness operation for which a transfer might be contemplated.
Statement of the problem. It was the purpose of
this study to determine the economic feasibility of estab
lishing a segment of a Los Angeles aircraft accessory
manufacturer’s operation in Puerto Rico. Incident to
making such a determination, an organizational optimum, in
light of general and specific objectives, had to be
A constitution, establishing Puerto Rico as a
"Commonwealth” of the United States, was approved in an
island-wide referendum March 5, 1952, and a Congressional
Act of Ratification was, signed by the President of the
United States July 3, 1952.
z
selected, and ?7ithin the framework defined by that selec
tion, a study had to be undertaken to determine the relative
cost advantage or disadvantage attaching to the proposed
operation.
Importance of the study. The study*s importance
is derived from the broad applicability of (1) the ultimate
conclusions reached; {2} the preliminary conclusions with
respect to the organizational media best used, given cer
tain sets of conditions and objectives; and (3) the tech
nique used in developing the relative cost data in connec
tion with the preliminary study to determine the economic
feasibility of the undertaking proposed.
That broad applicability is not inconceivable was
indicated by the nature of the product contemplated for
manufacture. Its monetary value is high in relation to its
volume and weight. Its total manufacturing cost includes
a relatively large hand labor (for assembly) and semi-hand
labor (for machine operation) increment. It has these
characteristics in common with many products— instruments
and accessories— manufactured in the Los Angeles area for
use by the air-frame industry, which has its center In that
locale. The electronics industry, important in Los Angeles
in its own right, produces numerous items which are simil-
arly oriented._________________________________________________
s
'Discussion of applicability presumes interest, on the
part of the business community in general, and by manufac
turers of oriented products in particular. The existence
of this interest is indicated, if not defined, by (1) the
popular appeal of a business situation which promises vir
tually complete freedom from taxation for a ten year period;
(2) the not inconsiderable lineage devoted to the subject
in business periodicals and newspapers; (3) the apparent
success to date of Puerto Rico’s current industrialization
program— nearly three hundred mainland companies have
commenced operations since its inception in 1948;2 and
(4) the apparently permanent maintenance by the Puerto
Rican government of an office and staff in Los Angeles— a
mission of the Economic Development Administration of
Puerto Rico, an agency charged primarily with the task of
attracting mainland investment to that island. It is
doubtful that there are many members of the business com
munity sufficiently insulated that they are not at least
aware of the Puerto Rican situation. Though general aware
ness does not necessarily presage general interest, it is
suggestive of selective interest. It is that selective
interest that this study, as one of its objectives, sought
to serve.
I
£ ’ ’ The Congress," Time, LXIII (March 15, 1954), 21.
4
The importance of the study from the standpoint of
the particular business treated stems from problems and
motivations common to many businesses.
Th© problems possibly to be resolved by a Puerto
Rican venture are primarily financial. This is particu
larly true with respect to rapidly expanding businesses of I
recent origin, like the company treated in this study. For
with expansion at point of production and productive capa
city comes the expansion of working capital requirements.
Very often the only practical means by which the latter
,
fexpansion can be accomplished is through the retention and
re-investment of current earnings. The capital markets
i
are not usually available to such a company, and very often,
as in the case of a closely held enterprise, a minority
interest is not desirable even if control is not to be lost
through .dilution of ownership. Commercial banks typically
are reticent about extending credit to a new company, often
for the very reasons that the need for credit exists—
because of its youth, and because of the fact of its under
capitalization.
Ability on the part of business in general to expand
working capital through the retention and re-investment of
earnings is greatly diminished by the institution of income
taxes, at present rates. While, with the passing of excess
5
iprofits taxes, the maximum combined normal and surtax rate
(levied on all corporate income in excess of $25,000.00
annually) is fifty-two per cent, .the residual forty-eight
per cent, from the standpoint of working capital accumula
tion, is not entirely what it seems to be. It would rarely
happen that an expanding company, having operated profit
ably, would, at-year’s end, find that the increase in its
net worth is matched by a like increase in the cash account*
More likely, receivables and inventory, and possibly fixed
assets--assuming an expansion of productive capacity, would
offset the bulk of the increase in net worth. ( These non-
cafeh assets obviously cannot satisfy the income tax liab
ility which may approach fifty-two per cent of the amount
by which net worth has been e'nhancea.) Thus, the fifty-two
per cent rate looms large. The tax has become increasingly
oppressive (aside from rate adjustments) and the problem
more acute with each passing year since December 31, 1950.
From that year, the income tax liability for which was
payable in four equal quarterly installments, payment re
quirements have been annually accelerated, until currently
(for taxable years ending in 1954) the schedule calls for
payment of ninety per cent in the first two installments
and ten per cent in the latter two installments; and be
ginning in 1955, the entire liability must be paid in two
equal installments-— the second of which is payable five and
one half months after the close of the taxable year.® For
the expanding business faced with meeting the payments, the
problem would be no less serious because of the gradualness
of the change. ■ A long-existing problem has simply been
intensified.
The importance of the study derives further from the
universal business urge to maximize earnings. Taxes.,
whether or not oppressive, do operate to reduce the net
profits of businesses. Reference has been made, above, to
the impact of income taxes upon a particular business, or
upon a business of a particular type. Businesses are
subject to other forms of direct taxation— as property
taxes,4 real and personal, and State income taxes. Possible
elimination of all of these as elements of total cost,
alone gives purpose to the study*
Additionally, there are other possible advantages—
again from a cost standpoint— accompanying a Puerto Rican
venture. The most important of these are (1} lower labor
United States Internal Revenue Code, Section 56
(b) (2) (A),
4 Robert M. Baker and James E. Curry, "Tax Payer's
Paradise in the Caribean,n Vanderbilt Law Review, I: 194,
1948. Article includes a commentary on efforts by.states
at attracting industry by proffering property tax exemp
tion. These efforts have been abortive in general, largely
because of the relatively minor Importance of property
_t.axe.s_as__e 1 erne nf n_of_c o.s.t.___________________ ' ----------------
7
costs, and (2) possible lower transportation costs* While
in the ease of the former, whether or not there would be a
real advantage would depend upon the productivity of the
in the case or the ratter, whether or not orientation of
raw materials and markets is proper, further study would
seem to have been given added purpose by them.
Another business problem, the resolution of which is
often complex, concerns the difficulty attaching to the
accumulation of earnings and surplus without fear of penal
ity because of seetion 102 of the Internal Revenue Gode.
-Section 102 levies a surtax of from twenty-seven and one
naif to thirty-eight and one half per cent upon undistri
buted earnings deemed to have been accumulated for the
purpose of preventing the imposition of surtax upon a
corporation^ shareholders* Since undue earnings accumula
tion very often has that as its real purpose, the threat of
surtax imposition is a real deterrent to a very common
investment objective, i.e., the realization of income taxa
ble at capital gain rates, as through liquidation, or by
^ Minimum Wage Rates in Puerto Rico Under the Fair
Labor Standards Act, U.S. JDeprt of Labor, 1951* The mini
mum. rate, effective January 1, 1951, for the' general divi
sions of metal, plastics, machinery, instruments, trans
portation equipment, and allied industries is forty-five
eents an hour.
[Labor purchased at the unquestionably lower rates and
8
the sale of stock the value of which has been enhanced by
the accumulation of surplus, A Puerto Rican operation will
usually enable unlimited accumulation of earnings from that
operation without fear of imposition of the section 102
penalty.
Thus, having granted the broad applicability of the
conclusions reached and the techniques utilized, common
problems of individual businesses— as in connection with
financing, and with maximizing and retaining earnings—
ultimately suggest the importance of the study.
Organization of remainder of the thesis* The
ensuing chapter, Chapter II, is devoted to an analysis of
the Puerto Rico Industrial Incentive Act of 1954, which
Act enables the tax exemption inspiring this study.
Chapter III, has as its prime purpose the determin
ation of the optimum organizational medium— or media, so
as to take maximum advantage of the Puerto Rican tax exemp
tion. Relative advantages and disadvantages of the several
possible organizational types are discussed— from the
standpoint of facility of organization, facility of opera
tion, likelihood of application of the several, possibly
applicable, punitive sections of the Internal Revenue Code,
® Act No. 6, Approved December 15, 1953.
9
ease and cost of current and ultimate realization of tax-
free earnings, and applicable tax rates.
Chapter IV is devoted to the determination as to
economic feasibility of the proposed Puerto Rican venture,
apart from income tax considerations. Conclusions are
derived, in terms of dollars, from a comparison of costs—
historical on the one hand, projected on the other— based
upon various assumptions with respect to price, level of
sales, and labor productivity. Additionally, it contains
a description of the subject company, with respect to
product, personnel, present organization, and ownership,
this being in way of providing background for the cost
study. ) To the extent that the organizational pattern to be
utilized by the Puerto Rican operation bears upon costs,
so much of the conclusions reached in the preceding chapter,
Chapter III, are drawn upon.
In the final chapter, Chapter V, findings are sum
marized (to the extent that this is not accomplished in the
preceding chapter), and final conclusions are set forth.
Review of the literature. Much has been written in
recent years on the subject of Puerto Rico, especially as
relates to the unusual tax situation. The writings usually
fit into one of three categories: First is the considera
ble volume of promotional literature distributed by the
10
Economic Development Administration of Puerto Rico, an
■agency of the Puerto Rican government charged primarily with
the task of attracting mainland industry to the island.
jThls literature has as its main purpose the motivation of
mainland businessmen to serious consideration and study of
the Puerto Rican situation. With the possible exception of
"Facts for Businessmen," it has little value beyond that
of motivating and stimulating interest. "Pacts for Busin
essmen," while also promotional, is a useful compilation
of such economic data as local costs, living conditions,
freight rates and service, and Insular tax rates, as well.
Second ar© the numerous articles from popular
|
periodicals, as The, Wall Street Journal. Collier*s. Time,
etc. These are generally descriptive or reportorial in
character, rather than analytical.
Third are the several articles from law reviews.
These treat, without exception, various tax aspects of the
Puerto Rican situation. Baker discusses constitutionality,
and nature of the contract between the Puerto Rican i
i
I
government and persons to whom tax exemption is granted;7 j
various state laws as they might relate to a Puerto Rican j
' " i
't Robert M. Baker, "Puerto Rico's Program of Indus
trial Tax Exemption," George Washington Law Review, 18:327,
1950, ;
11
operation;8 and later, in summary fashion, a review of
Puerto Rican tax exemption in general.^ Baker and Curry-*-®
discuss constitutionality, and domestic use of tax exemp
tion to attract industry. Krause*--* discusses special ad
vantages accruing to principals of tax exempt corporations
who establish residence in Puerto Rico. Much of the fore
going is valuable in a general way to the prospective
Puerto Rican operator.
Nowhere in the literature is a cost study, from the
standpoint of a particular company, reported. While, un
doubtedly, numerous cost studies have been made by inter
ested mainland companies, these are not made generally
available.
Sources of data and methods of procedure. The most
important sources of data for this paper are (l) the
Internal Revenue Code of the United States, (2) statutes of
Puerto Rico— the Income Tax Act of 1924, as amended, and
the Industrial Incentive Act, (3) the several legal studies
8" t 443.
9 Robert M. Baker, "Tax Exemption As a Means of
Attracting Industry,” George Washington Law Review, 20:1,
1952.
10
Baker and Curry, op,, cit.
H Sydney Krause, ’ ’Dividends Free of Taxes I" Miami
Law Guarterly, 5:426, 1951. „ -
IS
referred to above, (4) information relative to Puerto Rican
operating costs disseminated by the Economic development
Administration, and (5) the cost records of the particular
company which is the subject of the study.
Proceeding from the assumption that the present stud^
is justified, it was deemed fundamental that costs be com
pared— to determine the basic economic justification, if
any, of the Puerto Rican operation. To accomplish this it
was necessary (1} to collect historical cost data, modify
ing it where indicated, to reflect more accurately a
current estimate of future domestic costs; (2) to gather
data relative to Puerto Rican costs as the bases for esti-
j
mates of actual operating costs; (3) to project Puerto Rican
costs in light of the organizational medium or media deter
mined to be most desirable; and (4) to broaden the projected
Puerto Rican costs to a cost range by making additional
assumptions as with respect to labor productivity.
Preliminary to the cost study, the optimum organiza
tional device had to be determined. The procedure for
i
making this determination required a tax study which in- J
i
volved culling all pertinent codes, statutes, regulations, j
etc, for points for, and against, the several alternative ;
I »
I f
possibilities in light of various objectives. There j1 ^
follows an evaluation of these. !
A
The ultimate combination of the tax study and cost
study findings will produce a final conclusion*
CHAPTER II
THE PUERTO RICO INDUSTRIAL INCENTIVE .ACT
The fountainhead of the possible tax 'exemption to he
accomplished as a result of this study, or other similar
studies, which it may inspire or guide, is the Puerto Rico
Industrial Incentive Act of 1954. It was necessary, there
fore, to examine critically its more important provisions,
especially as they were specifically pertinent to this study,.
Examination of the Puerto Rico Industrial Incentive
4ct, as set down here, takes the form of an analytical,
lescriptive narrative considering, in order, the various
pertinent sections. ^The text of the Act itself provides
the hulk of material utilized, although discussion of some
of its. provisions is expanded as deemed important and nec-
sssary hy reference to pertinent facts, commentary and
opinion from other sources. )
This phase of the study treats in turn: (1) enact
ment, (2} policy, (3) eligibility for exemption, (4) nature,
sxtent and scope of the exemption, and (5) grants and revo
cations.
The enactment* Act No. 6 of the Legislature of the
Commonwealth of Puerto Rico was approved hy the Governor of
Puerto Rico on December 15, 1953, Section 11 of the Act
provided for a short titie.: _Th.e_Puerto Rico Industrial
'Incentive Act of 1954*
The Puerto Rico Industrial Incentive Act of 1954 is
an extension and expansion of Act No. 184 (as amended),
approved May 13, 1948, the short title of which was The
Industrial Tax Exemption Act of Puerto Rico.1
The Industrial Incentive Act of 1954 became effective
January 1, 1954. The effective expiration date, the date
after which no applications for tax exemption under the Act
will be considered, is December 31, 1963,2 although certain
of the benefits of tax exemption may continue for ten
additional years, to December 31, 1973,®
/
The Act (l) declares "the policy of the Commonwealth
in connection with temporary industrial tax incentives";
(2) establishes "which operations shall be eligible to the
jbenefits of the Act"; (3) defines "the nature, extent and
'scope of the temporary tax incentives provided for. .
Lnd (4) authorizes "the Governor of Puerto Bico to grant
Luch temporary tax incentives, to revoke grants in certain
cases and to make such rules and regulations as may be
necessary for such purposes; and to forbid certain
| 1 Commonwealth of Puerto Rico, Act No. 184, approved
May 13, 1948, as amended, Sec. 20.
2 Commonwealth of Puerto Rico, Act No. 6, approved
December 15, 1953, Sec. 12.
! 3 Ibid., Sec. 1.
16
activities and to punish the performance thereof by fine
or imprisonment or both and by retroactive revocation of
the tax incentive benefits obtained under this Act.M^
Declaration of policy; The Legislature, in its de
claration of policy,-acknowledged that in the previous five
years "the economic advance of Puerto Rico has been greatly
enhanced by the accelerating success;..of the economic
development program of the Commonwealth..."
While the advance as enumerated was considerable,
the Legislature declared that meeting the long-range goal
would probably require doubling the 1951-52 gross national
product, by adding 60,000 additional industrial jobs along
with $250,000,000 of private capital investment. The
Legislature noted that the attainment of its goal would be
accomplished only through the incentives theretofore pro
vided by Act 184.
Act 184, as amended— The Industrial Tax Exemption
Act of Puerto Rico— provided for 100% tax exemption to
June 30, 1959, regardless of when exemption was granted,
^ Ibid.T Preamble.
5
Ibid., Declaration of Policy. Direct employment
by exempt.industries— 20,000, with employment by service
trades of a like number; rise in per capital income from
#292 to #399 (in current dollars) between fiscal je ars
1946-47 and 1951-52,
17~
Thereafter the exemption rate diminished annually, to 75%
for the year ended June 30, I960, to 50% for the next
ensuing year, and to 25% for the year ended June 30, 1962,
6
on which date all tax exemption was to hare ended.
The Legislature recognized the diminishing effective
ness of Act 184 as June 30, 1959 drew nearer, and declared
. . .that failure to provide for a continuation of tax
exemption as the main incentive for further industrial
development. . ., would result in a costly check to
the economic development of our country and in placing
unnecessary onerous burdens upon the people of Puerto
Rico.7
Hence the Enactment approved on December 15, 1953,
as Act 6--The Puerto Rico Industrial Incentive Act of 1954.
Eligibility for exemption. Exemption under Act 6
is limited to eligible businesses which have been declared
exempt by the Governor of Puerto Rico.®
Eligible businesses include; j
(1) Any industrial unit having as its object the j
production on a commercial scale in Puerto Rico of any
manufactured product which was not produced on a
commercial scale in Puerto Rico on January 2, 194-7, and
for which there were on that date in Puerto Rico no
production facilities capable of the production of that
6 Act No'. 164, Sec. 5.
7 Act No. 6, H8Cparation of Policy.
® Ibid., Sec. 2 (e).
18
manufactured product on a commercial scale.
(2) Any industrial unit established after the
enactment of this Act, having as its objective the
production on a commercial scale in Puerto Rico of
any designated article;.*-*-®
and (3) "Any property devoted, to industrial development.w^
Tax exemption is also extended to any industrial
unit engaged in the production of a designated article
prior to the Act, if tax exemption is granted to a new
industrial unit under the terms of this Act or Act No. 184
of May 13, 1948, as amended
Nature, extent, and scope of tax incentives. An
exempted business is exempt from income tax upon its
industrial development income earned during the ten years
following the date of the commencement of its operations.^5
Industrial development income is defined as "The net income
derived from the production of a manufactured product that
^ Ib'icl.T Sec. £ (d) (1). It has been observed that
almost any industry can quality under this test, simply
because so little manufacturing was carried on in Puerto
Rico before 1947* "Puerto Rican Tax Holiday Extended",
Taxation Report, Research Institute of America, 1954.
^ Ibid., S©c. 2 (d) (2). For list of designated
articles,.see Appendix.
-^bid, « Sec. 2 (d) (4).
t/12 Ibid., Sec. 2 (dj (3).
13 IMi* j Sec. 1 (a).
19
gives rise to the exemption of an exempted business...“I4
It is also the net income derived from property devoted to
industrial development!5*
The property of an exempted business is not subject
to municipal or commonwealth taxes on real or personal
property for at least five years. The five year exemption
applies to exempt businesses with an investment in real
or personal property of not more than $1,000,000. Where
such investment exceeds $1,000,000, property tax exemption
is extended to as many as ten years, depending upon the
amount of excess, up to *$ 1 9,0 0 0,0 0 0.IS
An exempted business is not "subject to license
fees, excises, or other municipal taxes...for a period
of ten years from the date when the business begins its
1 7
operations. . .
The exemptions offered by Act No. 6 correspond to
those proffered by Act No. 184 of May 13, 1948, except
that Act No, 184 extended to all exempt businesses total
exemption from all taxes— including property taxes—
until June 30, 1959 and provided for.lesser exemptions
13= Ibid7, Sec* £ (a) (l).
!5 Ibid., Sec. 2 (a) (2).
Ibid., Sec. 1 (b).
_______ X-Z—Ibid..._Sea.„l__(.C-)-.___________________________________
20
over the ensuing three years, to June 30, 1962.18
Hie sliding scale on property tax exemption,1®
established in Act No, 6, reflects'the act's statement of
policy in which, in addition to employment objectives,
capital investment objectives are set forth,
Distributions of dividends by an exempt corporation
or profits of an exempt partnership are exempt from income j
taxes, if made within fifteen years of the commencement of
exempt operations from industrial development income de
rived during the first seven years of such operations, and
if made to shareholders or partners who are (1) persons
residing in Puerto Rico;2! or (2) persons not residing in j
Puerto Rico who are not liable to payment, in any juris- j
diction outside Puerto Rico, of any tax on income derived i
i
P P I
by them from any source within Puerto Rico. j
i
In general, distributions by exempt corporations
are considered to have been made from exempt income, pro-
i
vided that on the date of distribution the undistributed j
i
balance of such income is not exceeded by the amounts |
I
18 Act No. 184, Sec. 5 (a), j
19 Act No. 6, Sec. 1 (b).
i
^ Ibid., declaration of Policy. j
21 Ibid., Sec. 3 (a) (1).
^ Ibid., Sec, 3 (a) (2).
21
distributed.23
In general, no gain or loss is recognized when
shares of an exempt corporation, whether acquired through
purchase or otherwise, are sold or exchanged before the
24
corporation*s exemption termination date. When shares
are sold or exchanged after the exemption termination date,
the larger base as between (l) the booh value of the shares
on that date, and (2) the cost of such shares as adjusted
for distributions of tax exempt income, may be used.
On complete liquidation of an exerapt business, on
or before exemption expiration, any property, including
money, may be received by a domestic or foreign corporation
without causing transferor or transferee to be liable for
income taxes, if the following three conditions are met:
(l) The transferee is the owner on the date of adoption
of the liquidation plan of at least 80jt of the common
stock of the exerapt corporation;26 (2} The property is
received by the transferee on or prior to the exemption
27
termination date; and (3) the distribution in liquidation
" ~2 IbidT, Sec, 3 (b).
24 Ibid., Sec. 3 (e).
25 ibid., Sec. 3 (d).
23 ibid., Sec. 4 (a).
27 ibid., Sec. 4.
22
by the transferor is in complete cancellation of all of its
capital stock.28
After expiration of a transferor’s exemption, prop
erty equal in value to the capital and earned surplus of
the transferor corporation as of the expiration date, may
he transferred without income tax liability to either trans
feror or transferee
The tax basis of the property involved in a tax-
free liquidation is, to the transferee, for purposes of
depreciation or subsequent liquidation, adjusted upward
by an amount equal to the earned surplus of the transferor
immediately prior to the liquidation.30
Grants, transfers of grants, and revocations.
Any natural or artificial person who has established
or proposes to establish in Puerto Bico an eligible
business, may apply to the Governor .of Puerto Rico
for the benefits of the act.3T
The Governor will, before deciding on any application for
exemption, first consider the reports, on each application
by the Secretary of the Treasury, the Secretary of Justice,
-------28-ibid; 1
1 i
29 Ibid. i
— |
30 -Ebld. This has the obvious effect of encouraging 1
continued utilization of plant after expiration of the |
exemption. j
Ibid., Sec. 5_ (a).
23
the Secretary of Labor, and the Economic Development Admin
istrator, and at the discretion of the Governor, any other
Commonwealth agencies*32 The Governor may include in
grants of tax exemption such terms and conditions as in his
judgment will further the purposes of industrial develop-
3 3
rnent* decisions of the Governor, for purposes of Act 6,
' i
are final, and are not subject to judicial or administrative
appeal.34
Under some circumstances, transfer of a tax exemption
grant, or transfer of property of, or proprietary interest
in, an exempt business, is permitted upon written notice to
the Governor of Puerto Rico.33 These circumstances include
(1) a transfer of shares of stock or other proprietary in
terest if such transfer does not directly or indirectly re
sult in a change of control of the exempted business; and
(2) an exchange incident to a tax-free liquidation.36
Transfers under other circumstances, without prior written
approval of the Governor, will cause an exemption to be
forfeited.
3L ibidT, sec* 5 (e) (l).
33 %bid., Sec. 5 (a). j
I
34 Ibid., Sec. 5 (c). !
_ |
^ £bid., Sec. 6 (a). !
^ Ibid., Sec. 6 (b). i
24
Provision is made for permissive revocation of tax
exemption by the Governor when (l) the grantee fails to
comply with any of the obligations imposed or terras spe
cified in an exemption grant (2) the grantee either does
not commence or fails to complete the construction of
installations necessary for the production of manufactured
products proposed to be produced, or fails to commence
production, within the periods fixed for such purposes in
the grant of exemption;38 and (3) when the grantee dis- .
continues production on a commercial scale for more than
thirty days without the authorization of the Governor.39
Mandatory revocation is provided for when an ex
emption is determined to have been obtained through
false and fraudulent representations. In the event of such
revocation, all net income previously reported as industrial
development income as well as any distribution therefrom
becomes subject to normal tax and surtax. Furthermore,
the taxpayer shall be deemed to have filed "a false or
i fraudulent return with intent to evade tax,” and, therefore,
! „ I
i subject to the penal provisions of the income tax laws of j
I
. |
3V IbidT. 3©c. 5 {d) (l) (A)* !
38 I M d .. Sec. 5 (d) (1) (B). I
t
39 Ibid*. See# 5 (d) (1). I
25
Puerto Rico.40
Revocation for reasons other than those enumerated in
the Act would seem to be barred by the prohibition against
the impairment of the obligation of contract. Grants of
tax exemption are declared in the Act to be in the nature of
contracts between the grantee and the Commonwealth of
Puerto Rico.4- * -
On constitutionality. Since, by means of the
exemption, a public purpose is served, and the exemption
classifications are not "arbitrary, unreasonable or cap
ricious,0 and uniformity is not violated, there would seem
to be little question as to constitutional!ty.42
40 Ibid.. Sec. 5 (d) (2).
4^ Ibid., Sec. 5 {a), The spirit of the Act may be
more important In this connection than the words of the Act.
Puerto Rico is miserably poor by North American standards.
Income per capita in 1950 was #295. Population was 650
per square mile and increasing at the rate of 30 per 1,000
per year. 101,000 persons, or 13$ of the labor force was
totally unemployed* Industrialization has been deemed the
best solution to the dilemma. Stuart Chase, Operation Boot
strap in Puerto Rico, National Planning Ass*n, 4, 67, 1951.
42 Robert M. Baker, "Puerto Rico*s Program of Indus
trial Tax Exemption," George Washington-Law Review, 18:345-
349, 1950* The United States judicial system extends to
Puerto Rico. The island has a Federal District Court with
the same functions and jurisdictions as other United States
courts. The First Circuit Court of Appeals at Boston and
the United States Supreme Court, in turn, are available for
appeals from the Federal District Court and the Insular
Supreme Court. Facts for Businessmen, Puerto Rico Economic
Development Administration, 27, 1951.
26
In summary, the Industrial Incentive Act of Puerto
Bico offers in general to qualified manufacturers: (1)
Complete, exemption from income tax, license fees and
excises for a period of ten years following commencement of
operations, from property taxes for a period of not less
than five years, complete income tax exemption as to pro
fits or dividends distributed to residents of Puerto Bico,
and complete income tax exemption, without limitation, on
liquidation.
CHAPTER III
COMPREHENSIVE TAX ASPECTS
Sought after in this phase of the study was the best
method of utilizing the Puerto Rican exemption, in terms
of organizational medium or media,' so as to assure maximum
tax savings with a minimum of risk— at point of the various
exemptions, exclusions and credits available.
This chapter, then, is devoted in its entirety to
the more important tax aspects of the problem. Those tax
aspects encompass (l) the Puerto Rico Industrial Incentive
Act, (2) the Puerto Rico Income Tax Act of 1924, as amended,
(3) the United States Internal Revenue Code, and (4) the
1
Bank and Corporation Tax Law of the State of California. j
The Puerto Rico Industrial Incentive Act. It had, ,
j
in brief, been determined as shown in the previous chapter j
that (l) qualified manufacturing operations, as there
defined, were eligible for a ten-year period of Puerto I
I
Rican tax exemption; (2) current distributions from tax I
1
exempt income were tax-free to individual recipients |
jresident in Puerto Rico; and (3) no gain or loss was recog- 1
jnized in connection with sale of shares of a tax exempt |
i
1 company. However, there remained a number of problems
28
incident to the ultimate realization of income to a United
States resident. A complex of laws, regulations, rulings,
!precedents, etc. required analysis in light of specific
objectives and characteristics of the particular operation,
if an answer in terms of maximum, realization or likelihood
of maximum realization was to be reached.
i
Puerto Rican tax structure. The Insular income tax
ilaw, like the Industrial Incentive Act, is essentially non-
I controversial from, the standpoint of this study, for all
Puerto Rican operators are affected by it, in that they or
|their employees are immediately subject to it— to the ex- j
tent that they, as residents, have earned income. Also, the
several organizational alternatives do not alter its impact-.
The Puerto Rican Income Tax of 1924^- closely resem
bles the Internal Revenue Code of the United States. How-
I
ever, the rates are, in general, slightly lower. Corporate !
I
I
rates range from twenty-one per cent to a maximum. of about
p
thirty-seven per cent.^ Individual rates range from
1 Act No. 74, approved August 6, 1924, as amended.
The normal tax is 20$ and applies to all net in- i
come. Section 28 (a). In addition, a surtax on income in |
excess of #25,000 and graduated to 20$ on income in excess I
of #100,000 is imposed. Section 28 (b). In computing the i
surtax, credit is taken (l) for the normal.tax paid, and J
(2) 5$ of net income. Section 34. A temporary tax of j
5 % (dating from 1951) is then added. Graduated surtax I
rates are as shown in Table I. I
TABLE 1
PUERTO RICAN CORPORATION AND PARTNERSHIP
SURTAX RATES ON MET INCOME
1953
Net Surtax Income Surtax
I 1 to # 25,000 non©
25.000 to 50,000, 5%
50.000 to 75,000 10#
75.000 to 100,000 15#
all over #100,000 20#
30
approximately thirteen per cent to about eighty-three per
cent.*^ The Internal Revenue Code pattern with respect to
gross income, deductions, and net income is evident* How
ever, in the case of individuals, marital income splitting
is not permitted, and 'exemptions are computed differently*4
dividends paid to a Puerto Rican resident by an
exempt corporation are not subject to income tax,5 hut
salaries paid to residents by such a corporation are taxa
ble. Dividends paid to non-residents are subject to a
withholding tax of 30*45 per cent,6 Compensation for
services performed in Puerto Rico by a non-resident are
also subject to tax.7
A comparison of the relative impacts of Puerto Rican
and United States income taxes is made below. Personal
!
deductions equal to ten per cent of gross income were !
i
i
3 The basic normal tax on personal income is seven
per cent. Section 12 (a). For graduated surtax rates see
Table II. Mote: ^Temporary tax of five per cent must be
added.
4 Personal exemption for unmarried individuals is
$800, for married persons or heads of families, $1,000,
plus $400 per dependent. Section 18, Income Tax.Act of
! 1S24, .as amended.
| 5 Act No. 6, approved December 15, 1953, as amended.
6 !
Act No. 74, approved August 6, 1924, as amended. >
Sec. 19 (f) applies a rate of twenty-nine per cent which is!
then raised by the five per cent temporary tax. ,
7 Ibia.i Sec. 12 (b) (1), !
31
TABLE II
PUERTO RICAN SURTAX RATES
ON PERSONAL NET INCOME
1953
Net Income
Bate
in
on last step
column one Net Income
Rate on last step
in column three
# 2,000 5# # 32,000 4:00
4,000 8 $ 38,000 48$
6,000 12$ 44,000 54$
8,000 15 $ 50,000 56$
10,000 19 $ 60,000 56$
12,000 23$ 70,000 60$
14,000 26$ 80,000 63$
16,000 29$ 90,000 66$
18,000 32$ 100,000 67$
20,000 34:$ 150,000 68$
22,000 31$ 200,000 70$
26,000 4,9$ over 72$
32
assumed tlirougliout. See Tables III and IV,
The Puerto Bican Income Tax laws grant to United
States citizens resident in Puerto Rico a credit for income
tax paid to the United States, or any possession of the
United States (not Puerto Rico), or any foreign country,8
It should be noted that this credit effects a direct re
duction of the computed tax liability; it is not a deduction
from net income, however, there is a limitation on the
credit; it may not exceed the proportion of the tax that
the net income of the taxpayer from, outside sources bears
to his total net income, for the same taxable year,) The
effect of this limitation is to permit only a part of an
individual's United States tax to be offset against his
Insular income tax when the average rate of the former is
higher than the average rate of the latter.(which is likely
to be the case). When this is the case, the taxpayer is
permitted to recompute his tax and deduct from gross in
come that part of his United States taxes for which credit
Q
has not been allowed.
Following is an illustration to show the manner in
which United States income tax paid is treated by a bona
fide resident of Puerto Rico in computing his Puerto Rican
8 Ibid,~ Sec, 23,
9 Ibid,» Sec, 16 (a).
33
TABLE III
A COMPARISON OF PUERTO RIGAN AND UNITED
STATES INCOME TAXES, 1953
Single Person
Gross Income Insular Tax Federal Tax
I 6,000 | 687 ■$1,168
10,000 1,483 .2,348
14,000 2,541 3,796
18,000 3,532 5,604
22,000 5,303 7,644
26,000 6,953 9,884
TABLE IY
A COMPARISON OF PUERTO RICAN AND UNITED
STATES INCOME TAXES, 1953
Couple Two Children
Gross Income Insular Tax Federal Tax
I 6,000 # 441 | 666
.10,000 1,151 1,528
14,000 1,919 2,510
18,000 3,089 3, 644
22,000 4,463 4,924
26,000 6,010 6,332
34H
tax liability.
Net income obtained in Puerto Rico #10,000
Ret income from continental U.S. 5,000^
Total taxable net income #15,000
Assuming Insular tax on #15,000 - #3,444
Assuming tax paid in U.S. on #5,000 g #1,600
Amount of credit to be granted:
#5,000 ~ ,
#15~Q0Q ~ °f tile Insular * tax #3»444 01,
Prom the #1,600 paid to the United States, the taxpayer
may take as credit in Puerto Rico the amount of #1,148
Normal tax and surtax (provisional) on
the Puerto Rican income of #15,000 # 3,444
Less: Credit for the tax paid to the
United States 1,148
Tax to be paid in Puerto Rico (pro- & g ggg
visional) *
The difference between the #1,600 paid to the United States
and the credit of #1,148, or #45S is the amount allowable
as a deduction^-after which the provisional tax liability
is recomputed to arrive at a lower final tax.
The credit for income taxes paid in other juris
dictions is also available to corporations resident in
Puerto Rico.-*-0
The Internal Revenue Code on Puerto Rican income.
United States income tax is not levied upon the Puerto
-TO IbidT. Sec. 36
35
Hican income of its individual residents, or corporations
organized under its laws, individual residents are
specifically so-favored by the Internal Bevenue Code.11
Puerto Hi can corporations are so-favored because of their
treatment by the Code as foreign corporations,12
To qualify as residents of Puerto Bico, individuals
must be bona fide residents during the entire taxable
year. Bona fide residence requires more than mere physi
cal presence in Puerto Rico. An individual becomes a
bona fide resident when he intends to stay in Puerto Rico
for an extended period of time. Bona fide residence is
established if an individual brings his family to Puerto
Bico, purchases or rents a home there, brings his personal
possessions with him, and enters into the life of the
lXTbiaT. Sec. 116 (e) (1).
12
"The term ’domestic? when applied to a corpora
tion. . . means created or organized in the United States,
or under the haw of the United States or any state or
territory.” Internal Revenue Code, Sec. 3797, (a) (4).
”The term ’United States* when used in a geographical
sense includes only the States, the territories of Alaska
and Hawaii, and the District of Columbia.” Ibid., (a) (9).
Since Puerto Bico has never been a territory, the word
"territories” in Section 3797 (a) (4) in which "domestic"
is defined would not include Puerto Rico. "The,term
’foreign* when applied to a corporation or partnership
means a corporation which is not domestic." ^-bid., (a)
(5). “
36
community.15
The qualifying period of dona fide foreign resi
dence must be continuous and uninterrupted; however,
trips to the United States for purposes of business or
vacation will not disqualify the taxpayer from, satis
fying bona fide residence requirements,14
Bona fide residence enables, for purposes of this
study, the entirely tax-free receipt of dividends or other
earnings distributions from an exempt operation.
-Foreign (Puerto Rican) corporations, if they are
non-resident in the United States, are subject only to
withholding tax on ’ ’fixed or determinable” income, as
interest, dividends, rents, etc., from sources within the
United States.-*-5 To be non-resident, a corporation must
not engage ”in trade or business within the United States”.1®
13 h@: :raan Frederick Baehre, 15 T.C. 236 (1950) *
These clues have been relied upon for purposes of deter
mining bona fide residence in foreign countries under
Section 116 (a). Although Puerto Rico is not a foreign
country for purposes of 116 (a), by implication, since
116 (a) is added to treat specifically with Puerto Rico
residency, the regulations issued under the respective
subsections are similar (Reg. Ill, Sec. 29. 116-1 and 29.
116-6) and it must be assumed that in litigation the same
tests would be applied.
14 United States Internal Revenue Code, Reg. Ill,
Sec. 29. 116-6.
15 Ibid., Sec. 231 (a) (l). The withholding tax
rate is thirty per cent. Sec, 144.
• * * ® 1bid., Sec. 231 (a) (1). Definition, and dis
cussion of * implications of the phrase ’ ’engaged in trade or
business within the United States” follows later in
this chapter*
37
Resident foreign corporations are taxable as domes
tic corporations, on all net income.17 However, gross in
come to such foreign corporations includes only gross income
from sources within the United States.I® The latter, for
jpurposes of this study, suggested the possible utilization
Lf a Puerto Rican corporation, resident in the United States,
as distributor of the products of Puerto Rican manufacture.
Two varieties of domestic (United States) corporation
?/ere considered as alternative to the Puerto Rican -corpor
ation as possible media for the Puerto Rican exemption.
Both qualify for relief as to foreign-source income, as
provided by Sections 251 and 109 of the Internal Revenue
Code. Section 251 provides that domestic corporations,
eighty per cent of whose income is derived from Puerto
Rico (or other United States "possessions”), and fifty per
cent of whose income is derived from the active conduct of
trade or business, must include in gross incorae only
income from sources within the United States.-1 - 9 Deductions
properly allocable to includible United States gross income
are allowedtherefore, only net income derived from, or
IV'Ibid.. Sec. 231 (b), Sec. 13, Sec. 15.
I® Ibid., Sec. 231 (c).
I9 ibid., Sec. 251 (a).
Ibid., Sec. 251 (e).
38
received within,21 the United States is taxable*
Section 109 of the Internal Revenue Code defines the
Western hemisphere Trade Corporation, as a domestic corp
oration deriving {1} at least ninety-five per cent of its
gross income from sources other than sources within the
United States and (2) at least ninety per cent of its
gross income from the active conduct of a trade or business;
providing that all of its business is done in a country (or
countries) in Uorth, Central, or South America, or in the
West Indies, or in Newfoundland. A corporation qualifying
under Section 109 is entitled to a credit against net
income of an amount equal to thirty per cent of normal-
i
tax income,22 j
i
To summarize the general application of the Internal
Revenue Code to income derived from sources in Puerto Hi go' :
Individuals who are bona fide residents of Puerto Rico are
entirely exempt; Puerto Rican corporations, non-resident
of the United States, are entirely exempt; Section 251 corp
orations are entirely exempt, subject to the eighty per
!cent-fifty per cent rule; Section 109 corporations are
i |
j 21 ihidT, Sec. 251 (b). All amounts received within \
i the United States must be included in gross income, whether!
i such amounts are "derived from sources within or without |
i the United States.” ■
j _ i
i 22 Ibid., Sec. 26 (!) (3). j
39
entitled to a credit against net income equal to thirty per
cent of net income, subject to the ninety-five per cent-
ninety per cent rule*.
The immediately ensuing paragraphs of this chapter
will be devoted primarily to an analysis of the relative
merits of the several corporate forms cited above, insofar
as they correlate with a Puerto Rican tax exemption. Sine®
exemption is available to nany natural or artificial
person,” a latitude of choices as to organizational form
exists, and as between a Puerto Rican and non-Puerto Rican
corporation. It was necessary then to determine their re
lative desirability* This was don© by comparing, in turn,
th© alternative domestic types, and the optimum domestic
type with the foreign (Puerto Rican) corporation.
On form of organization— domestic corporations.
Favored United States tax treatment, as defined in general
terms above, is available to both the 251 corporation and
the Western Hemisphere trade corporation.
The predecessor to Section 251 of the Internal
Revenue Code first appeared in the Revenue Act of 1921.
J Among those most forcefully advocating its adoption were
J corporations carrying on business in the Philippines. The
i
; Philippine legislature in 1920 had resolved that Congress
| be asked to correct the inequality which resulted because
40
United States concerns y/ere taxed at higher rates than com
peting British and French concerns. Congress obliged,
extending special treatment to income derived from sources
p ^
within all United. States possessions.^
Section 109 is of much later origin, having been
added to the Code in 1942. Patino Mines, Bolivia’s largest
tin producer, was probably the most forceful agitator for
the relief which this section provided. Patino, though
entirely a Bolivian concern, had been organized in the
United States. 'There was other very substantial support,
as from Kelson Rockefeller, who advocated Western Hemis
phere tax relief as part of his ’ ’good neighbor” program.
The purpose of Congress in enacting the section seemed
to be one of relieving United States business from the
competitive disadvantages resulting from high tax rates,
and thereby to promote inter-American trade.24
In way of comparing the possible domestic types,
the top"theoretical rate of tax on a section 251 corporation
2'id’ Thomas B. Jenks and Robert W. Bogue, Tax Saving
in Foreign.Operations, (Washington, D.C.; Lee, Toomey
Flfent) , "6.
24 Ibid.
41
is 10.4 per cent;25 the top rate on a Western Hemisphere
trade corporation is 36.0 per cent.26
That the margin for error with respect to source of
incorae is considerably larger (twenty per cent) for a Sec
tion 251 corporation than for a Western Hemisphere trade
corporation (five per cent} is, of course, significant*
Unlimited accumulation of surplus without fear of
Section 102 penalty— -to the extent that incorae is derived
from sources within Puerto Rico— is available to a Section
251 corporation, since income derived from sources within
Puerto Rico is excluded from gross income.27 On the other
hand, a Western Hemisphere trade corporation is entitled,
rather than to an exclusion from gross income, a credit
against net income, and the Section 102 surtax might
conceivably be levied against an unreasonable accumulation
of profits, from whatever source derived.
25 Maximum of 20$ of income is taxable, since 80$
or raore of a corporation*s gross income must be derived
from sources within a possession in order to qualify under
Section 251. Gr.oss income less 80$ of gross income,
times the maximum, combined normal and surtax rate of 52$.
26 Ret income, less 30$ of net income, times the
maximum combined normal and surtax rate.
27 Section 1 (a) of Act No. 6 would seem to super
cede Section 21 (a) of.the Puerto Rican Income Tax Act of
1924. Section 21 (a) provides for a penalty surtax simi
lar to that levied by Section 102.
42
When full current distribution of Puerto Rican pro
fits was contemplated, it was necessary to make a new tax
rate comparison, this because a domestic parent company is
entitled to a dividends-received credit as to distributions
from a 109 corporation, but not as to dividends from a
251 corporation.2® The maximum theoretical overall rate of
tax then became approximately fifty-seven per cent for the
251 corporation,2^ 45.8 per cent for the 109 corporation.30
dowever, if twenty per cent or more of the Western Hemis
phere corporation*s gross income is derived from Puerto
Kico, dividends paid to non-residents are subject to the
30.45 per cent withholding tax.31 .Since this tax is levied
upon recipients of dividend income, although it is actually
collected from the payor, the parent company of a 251 corp
oration is entitled to take as a credit against its income
tax liability an amount equal to the withholding tax, ^
and the over-all rate of tax, assuming full current
Puerto Rican Income Tax Act,of 1924, as amended,
See. 26 (6).
2^ 100$ less 10.4$ (See footnote 25), times 52$,
plus 10*4$ equals 57$.
3® 36$ (See footnote 26) plus 15$ of 52$ equals
43.8$.
Act No. 74, approved August 6, 1924, as amended,
Sections 31 (6), 19 (a) (2), and 22 (a).
_______32 U.S. Internal Revenue Code, Sec. 131 (a) (l)»______
43
distribution of profits, remains at fifty-seven per cent,
On the other hand, the parent of a 109 corporation is not
entitled to a credit for the withholding tax, and the
over-all rate becomes, as a result, 60,9 per cent,®® While
the 109 corporation initially appeared to be superior from
an over-all tax rate standpoint, assuming full current dis
tribution of profits, the appearance proved superficial, and
the 251 vehicle had the advantage in this respect as well.
On liquidation, both the 251 corporation and the
Western Hemisphere trade corporation are entitled to iden
tical treatment under 112 (b) (6) of the Internal Revenue
Code.
For purposes of this study, which contemplates income
derived entirely from Puerto Rico,®4 it was concluded that
as between the Section 251 corporation and the Section 109
corporation, the former is the preferred type of corporate
organization* ^h® chart below summarizes the findings with
i'his is explainable in terms of the fact that the
dividend income upon which the Puerto Rico withholding tax
is levied is not taxable to the parent. Computation: 43.8$
(See footnote 30} plus 30.45$ of 56*2$ equals 60.9$.,
34 There might exist a situation in which utilization
of the 109■corporation would be indicated— as when more than
80$ of sales are to be made in Western Hemisphere countries
other than Puerto Rico, and when current distribution of
dividends is contemplated. Section 251 would then not be
available, and dividends would not be subject to the
Puerto Rican withholding tax*
44
TABLE V
COMPARISON FOR PURPOSES OF TAX ADVANTAGE
SECTION 251 and 109 CORPORATIONS
SUBSIDIARY TO UNITED STATES PARENT CORPORATION
Section 251
Corporation
Section 109
Corporation
Maximum theoretical rate on
marginal income 10.4% 36.0%
Maximum theoretical rate assuming
regular full distribution of
profits 57.0% 60.9%
Rate on liquidation tax-free tax-free
Margin for error as to source
of income 20.0% 5.0%
Vulnerability to Section 102
surtax with accumulation of
earnings sub-normal normal
Note: See context for computations*
45
respect to the two, and illustrates the conclusion.
Should the two types here considered— Section 251
and 109 corporations— -he owned by individual shareholders,
residents of the United States, the Section 251 advantage
is even more marked, for in this instance the dividends-
received credit which was available to the corporate
owner of the Section 109 corporation is not available.
In the matter of the dividends-reeeived credit
available to the domestic parent of certain domestic
corporations, it has been suggested by Jenks and Bogue35
that the benefits to a Section 251 corporation may be en
larged by, after a period of time, deliberately disquali
fying the 251 subsidiary by transferring enough of its
income to sources outside a United States possession that
the three-year average income from those sources exceeds
twenty per cent. This act would allow the parent a
dividends-reeeived credit for a dividend of the accumulated
surplus. Moreover, if the possession were situated in the
Western Hemisphere, the subsidiary might conceivably
continue operations under Section 109.
Nothing can be gained by this, however, where
income can be transferred only to sources within the
United States, for obviously the ninety-five per cent-five
35 Ue'nks & Bogue, op. cit., p. 5.
46
per cent rule of Section 109 cannot be satisfied after such,
transfer* Inasmuch as it would not be possible to continue
operations under Section 109, a tax-free liquidation would
better accomplish the distribution of accumulated surplus
than would the distribution in anticipation of a dividends-
reeeived credit* In the latter case, the distribution
would be only eighty^five per cent tax-free, and in both
cases favored treatment, insofar as United States tax
laws are concerned, would be lost.
A more satisfactory device for the accomplishment
i of a tax-free interim distribution of exempt earnings
I would have the exempt corporation owned at the beginning
i
| by individual stockholders who could at anytime sell their
i
! shares to a corporation controlled by them. In this way
both the Puerto Rican exemption36 and Section 251 status
would be continued.
On form of organization— foreign (Puerto Rican)
corporation versus Section 251 corporation. Having elimin
ated for purposes of this study the Western Hemisphere
trade corporation from consideration as a possible vehicle
for the Puerto Rican tax exemption, there remained for
j
3b But see Act Ho. 6, Sec. 6 (a) (3).
47
consideration as alternatives only the Section 251 corpora
tion and the foreign (Puerto Rican) corporation.
It was determined that a decision as between the
two would need be predicated primarily upon (l) their
respective vulnerabilities as to adverse determination with'
respect to source of income, and (2) their relative ease of
organization, operation, and liquidation.
From the standpoint of administrative facility, the
Section 251 corporation was concluded to be preferable. In
the first place, the 251 corporation, because it is a com
mon domestic corporation, can be organized under familiar
local laws— those of the State in whieh the parent is
resident. In contrast, the formation of a Puerto Rican
corporation is governed by the Puerto Rican Corporation
Act of 1911, which requires in part (l) that two of the
directors (who must also be stockholders) must be residents
of Puerto Rico, and (2) that stockholders’ meetings must be
held in Puerto Rico.®7 While these requirements are not,
in themselves, serious handicaps, since it might be con
templated to allow resident managers an equity participation
in the Puerto Rican venture (if resident managers qualify
as residents at the time the corporation is formed), and
since a proxy from the parent corporation might effectively
37' hct 'ho. 30, approved March 9, 1911.
48
implement the latter, they contribute to diminish the rela
tive general appeal of the Puerto Rican corporation.
Prom the standpoint of operational facility through
the course of the exemption period; if the Puerto Rican
corporation is to avail itself of non-resident status,
necessary precautionary measures must include (l) having
no office in the United States, or mailing address, and {2)
having no employees in the United States.38 The latter,
as a matter of conservatism, would probably be extended to
preclude the use of officers or directors who are residents
of the United States. It should be recalled, however, that
non-resident status provides a second defense against
possible allocation of income to sources within the United
States, a defense not available to a Section 251 corpora
tion.
On liquidation, the 251 corporation has a decided
advantage over the Puerto Rican corporation. Its parent
corporation can realize any accumulated earnings without
recognition of gain,.hence tax-free.*59 A foreign corpora
tion, to be treated similarly, must establish to the satis
faction of the Commissioner of Internal Revenue that the
38 United. States Internal Revenue Code, Reg. Ill,
Sec. 29, 231.
39 Ibid., Sec. 112 (6) (C).
49
liquidation plan does not have as one of its principal
40
purposes the avoidance of Federal income taxes. When
the Commissioner’s approval is forthcoming, it may he sub
ject to the condition that a portion of the subsidiary’s
surplus be treated as having been accumulated from ordinary
income. However, the tax on this portion would not exceed
that of a capital gains tax, as on a taxable liquidation.^
Ownership of the Puerto Rican operating company by
individual stockholders alters none of the above observa
tions with respect to subsidiary company organization and
operation and the relative facility of their accomplishment.
On liquidation, where ownership is vested in individuals,
those individuals would be liable for capital gains tax to
42
the extent of their recognized gain. Actually these
gains would derive from the sale of stock to a mainland
corporation controlled by the same stockholders; the
corporation would accomplish the liquidation. Whether the
operating vehicle were a Section 251 corporation or a
Puerto Rican corporation, the same rules would apply.
Insofar as facility of organization, operation, and
Ibid., Sec. 112, (i). The Commi ssioner has
refused approval in a number of cases involving Puerto
Rican Corporations.
41 Ibid.. Sec. 115 {c}.
_______ 42 Ibid., Sec. 117 (a) (4)._____________________________
50
Liquidation are concerned, a conclusion was readily drawn,
clearly favoring the Section 251 corporation, if only be
cause of its more favorable treatment upon liquidation, when
it is owned by a corporation. However, upon introduction
of the question of relative vulnerability with respect to
source of income, the question of over-all relative desir
ability of the two types was complicated considerably.
f The question of vulnerability with respect to source
of income arises because income determined to have been
derived from sources within the United States is subject
fco current United States taxation, ^ Such a determination
Ls possible when, as for purposes of this study, customers
of the exempt company are located within the United States. )
It was apparent that the Section 251 corporation was
in a relatively more vulnerable position, if only because
of the eighty per cent rule with respect to eligibility for
status as a Section 251 corporation. Unless eighty per
cent of the income of such a corporation is derived from
sources within a United States possession (Puerto Rico},
all of its income is subject to taxation as if it were an
ordinary domestic corporation.^' Section 119 (e) of the
Internal Revenue Code provides 'for the apportionment of
-b. lbidT, Sec. 251 (a), (e) (1).
51
income from the sale in the United States of personal
property produced in a possession of the United States,
"by formulas. . . prescribed by the C o m m i s s i o n e r , ”44 ' Con
sequently, the fate of the Section 251 status hangs on
the definition of "sale,” or place of sale.
In litigation, "place of sale” has, without excep
tion, been held to be the place of title passage,45 It is
similarly defined in G.C.M. 25,131, which reads:
. , , This adopts the general rule that, for the
purpose of determining the source of income attribut
able to the sale of personal property, a sale is con-
sumated at the place where the seller surrenders all
his right, title, and interest to the buyer. . *”46
G.C.M, 25,131, then, as well as the background in
44 One formula, from Reg. Ill, Sec* 29-119-12B:
1/2 net income x
■i
1/2 net income x
property within U.S.
property within U.S. and P.R.
business within U.S.
business within U.S. ana P.R.
Business is defined as the amount paid out for com
pensation of employees and for the purchase of materials,
plus the amounts received from gross sales.
Gross sales within the United States are defined
(Reg. 129.119.A) as those "principally secured, negotiated,
or effected by employees, agents, offices, or branches of
the taxpayers business resident or located in the United
States,” i
■ 45 Commtr. v. East Coast Oil Co., S.A.. 31 B.T.A., ;
558 (1934), Aff*d 85 P. 2d 322 (5th Cir. 1936), cert,
denied, 299 U.S. 608 (.1936); Ronrico Corp., 44 B.T.A., 11301
(1941), appeal dismissed, 5th Gir. Jan. 23, 1942..
_______ 46 Internal Revenue Code, 1947-2 Com. Bull. 85.____
52
litigation, by advancing the title passage rule, are gener
ally favorable to the proposed. Puerto Rican operation, for
its sales, though, made to customers in the United States,
would presumably be on an f.o.b. San Juan (Puerto Rico)
basis.
But G.C.M. 25,131 continues:
However, in any case in which the sales transaction
is arranged in a particular manner for the primary
purpose of tax avoidance, the foregoing rules will not
be applied. . . In such cases, all factors of the
transaction, such as negotiations, the execution of the
agreement, the location of the property, and the place
of payment, will be considered, and the sale will be
treated as having been consummated at the place where
the substance of the sale occurred.
When, as with the proposed operation, a Section 251 corpor
ation sells to other United States corporations, the possi
bility of application of the latter paragraph of G.C.M,
25,131 must be granted— if only for the reason that trans
actions between United States corporations typically take,
place in the United States*
Additionally, it was noted that there is no refer
ence to the title passage rule in the regulations under
Section 119. In one place therein, the "country in which
sold" is defined as the place in which personal property
47
is marketed.
Since place of sale is controlling insofar as
47 Reg. 111. Sec. 29.119.B.
53
Section 251 status is concerned, G.C.M. 25,131 title passage
rule and its applicability is all-important* The fact that
there is some room for doubt as to its applicability,
coupled with the fact that an allocation of gross income
under Section 119 would undoubtedly destroy Section 251
status, operate to at best modify the erstwhile relative
advantage of the Section 251 vehicle over the Puerto Rican
corporation* While the Section 251 corporation may have
in its favor facility and ease of organization and opera
tion and a patentladvantage in liquidation, these raust be
balanced against an apparent weakness insofar as vulnera
bility with respect to source of income is concerned.
There follows an assessment of the Puerto Rican corporation
from the standpoint of the latter.
Theoretically, a Puerto Rican corporation is in no
different position than a Section 251 corporation insofar
as it might be alleged to derive income from sources within
the United States because all of its customers were located
within the United States. After all, manufacturing would
be accomplished in Puerto Rico, regardless of corporate
type, and all sales would be made on an f*o*b. San Juan
basis. .However, the Puerto Rican corporation appears to
enjoy several practical advantages— again, with respect to
vulnerability in connection with source of income.
54
Recalling the "tax avoidance" clause of G.C.M.
25,131, it would seem that a sale involving title passage
in Puerto Rico would be more likely to occur as between a
Puerto Rican corporation and a United States corporation
than as between two United States corporations. ''This point
has a greater or lesser degree of validity depending upon
whether the transaction is at "arm's length" with an un
affiliated customer or between a United States parent and
its subsidiary Puerto Rico operating company./ Fiction of
"arm’s length" dealing is obviously desirable of attainment
in the latter case.
A similar point may be made with respect to appli
cation of Section 45 of the Internal Revenue Code. Section
45 provides that the Commissioner is authorized to appor
tion gross income between or among commonly controlled
companies, if he determines that such is necessary in order
to prevent evasion or clearly to reflect the income of those
companies, Uere, as in connection with G.C.M. 25,131,
likelihood of application would undoubtedly vary propor
tionately with the volume of inter-company transactions.
Even where intercompany activity exists, if some degree of
care is exercised, application seems unlikely. The Com
missioner cannot ignore the separate corporate entities as
long as both conduct substantial business activities
55
in the United States,4® and when services are performed
for income received.49 Sales to outsiders undoubtedly
would be helpful in way of establishing the reasonableness
of inter-company prices. Again, the fiction of ’ ’arm’s
length” in inter-company transaction seems highly desirable,
for it is likely that transactions between a Puerto Rican
or Section 251 corporation and its parent or affiliate
mainland company will be carefully scrutinized— if only
because of the opportunity for gain because of profit
shifting*®®
In the event either the tax avoidance clause of
G.C.M, 25,131 or Section 45 were applied, the Section 251
corporation would be in a uniquely inferior position by
comparison with the Puerto Rican corporation, again be
cause of the eighty per cent gross income requirement in
connection with the former. Apportionment of gross income
in. excess of twenty per cent of total gross income would
operate to disqualify the Section 251 corporation and
suspend its Section 251 benefits*
^ ’ ’ ’ Sidney Koein V, United States, 187F. 2d 707
(2d Cir. 1951): R. 0. H. Hill, Inc., 9 T.C. 193 (1947)*
49 Texsun Supply Corp., 17 T.C. 433 (1951); Seminole
Flavor Company, 4 T.C. 1215 (1945); etc.
59 Whereas an item of marginal income to the mainland
corporation may be taxable at 52%, the same item of income
would be tax-free to its subsidiary or Puerto Rican affiliate.
56
A third practical advantage attaching to the Puerto
Rican corporation as compared with the Section 251 corpora
tion has to do with the fact that the former would file
no United States income tax return,^ whereas the latter,
a United States corporation, obviously would* (^Short of
positive action on the part of the Commissioner, the Puerto
Rican corporation is, therefore, beyond scrutiny insofar
as its gross income is concerned. J
The Puerto Rican corporation can be additionally,
and importantly, sheltered if it has non-resident status.
Non-resident foreign corporations are taxable only upon
"fixed or determinable annual or periodical gains, profits,
and income” from sources within, the United States.52
Therefore, even if source of income were questioned as
being from sources within the United States, a defense
would be available as long as the Puerto Rican corporation
has non-resident status.
As a practical matter, maintaining non-resident
status while most or all of its customers and suppliers
are within the United States can be a difficult matter for
the Puerto Rican corporation. A foreign corporation is
51' internal Revenue Code, Sec. 235 (b), 231 (a) {1).
52 Ibid., Sec. 231 (a) (1). Income derived from the
sale of personal property within the.United States is not
fixed or determinable annual or periodical income.
57
considered resident of the United States if at any time
jit engages in trade or business in the United States.53
Having an office, employees, or place of business in the
United States constitutes "engaging in trade or business.
So does selling goods through an exclusive agency.33 A
jPuerto Bican corporation, then, in selling to a mainland
parent or affiliate, would, at all costs, avoid the appear
ance of principal in a principal-agent relationship. Simi
larly in connection with purchasing activities, caution is
necessary to avoid engaging in trade or business as defined
in the regulation.56
It should be recalled with, respect to non-resident
status that while it may be, as indicated above, difficult
to sustain, it is all to the good insofar as the Section
251-Puerto Bican comparison is concerned. For non-resident
status is a secondary defense, available to the Puerto
jRiean corporation, but unavailable to the Section 251
corporation*
The overall conclusion in the matter of utilization j
of a Puerto Rican corporation versus utilization of a |
~
53
Reg. Ill, Sec. 29.231.1*
54
(1946).
.Amalgamated Dental Company, Ltd. 6 T.C. 1009
* 55
G.C.M., 21,219. Cum. Bull. 1939-1.
56
Reg. 111. Sec. 29.231.1.
58
Section S51 corporation as a vehicle for Puerto Bioan ex
emption, will depend upon a specific situation. It was
concluded above that the Section 251 corporation is some
what more desirable from the standpoint of facility of
organization and operation (if non-resident status is an
object), and greatly desirable on liquidation. This fora,
then, would be favored to the extent that vulnerability as
to souhca of income, and possibility of application of
the "tax-avoidance" clause of G.C.M, 25,131, or Section
45, is considered minimal. As a practical matter, the
extent of inter-company transactions, and industry selling
i
practices insofar as title passage Is concerned will i
probably govern.
Specific conclusion for purpose of this study will |
!
be expressed in Chapter IV, below. |
Corporate versus individual ownership. Where a
Section 251 corporation is utilized,corporate ownership is
patently advantageous— this because Section 112 (b) (6)
of the Internal Revenue Code permits tax-free transfer of
surplus on liquidation. Tax-free liquidation of a Puerto j
i
Rican corporation, on the other hand, is subject to the i
approval of the commissioner, In either type of liquida-
^ tion, the parent can continue its Puerto Rican operation |
: as a branch. I
I j
59
?/here corporations are individually owned, share
holders are subject in both cases to a capital gains tax
on liquidation* Continuing control of the Puerto Rican
operation would be accomplished by sale of the stock of
the Puerto Rican corporation or Section 251 corporation
to its mainland affiliate, which would in its turn, liquid
ate the insular corporation. This liquidation would be
tax-free regardless of whether a Puerto Rican corporation
or a Section 251 corporation were liquidated, since the
mainland company*s basis would exactly equal the value
of the shares.
Individual ownership has in its favor the fact that
the individual owners can at any time sell their stock
to the mainland corporation and take a capital gain; they
need not wait for liquidation of the Puerto Rican company.
As long as effective control does not change hands, the
57
Puerto Rican exemption is continued. At the termination
of the exemption, tax-free liquidation can be accomplished—
automatically, if a Section 251 corporation is involved,
subject to the Commissioner*s approval, if a Puerto Rican
corporation is the vehicle.
It was noted that where a Puerto Rican corporation
is utilized, individual ownership would be preferable from.
37 Act No. 6. Sec. 6 (a) (5).________________________
60
the point of view of ultimate realization. The Puerto
Rican corporation can he taxed incident to its own liqui
dation, then later on ultimate liquidation of, or sale of
stock in, the parent corporation. Where individual own
ership is used, taxation— at capital gains rates--comes
only once.
The ultimate choice in the matter of ownership would
he dependent upon individual circumstances and objectives.
A conclusion, for purposes of this study will be set
forth in Chapter IV, below.
California Franchise Tax. The Bank and Corporation
Tax Law of the State of California makes provision for
allocation of income. A non-resident Puerto Riean corp
oration, obviously, could not be made subject to this tax,
A Section £51 corporation, incorporated in California,
would be subject to the #25 minimum, but no more, since
all sales would be transacted on an f.o.b. San Juan basis,
and no corporate tangible personal property would have
sites in the State. Ministerial services by the parent
company*s employees would be remunerated, if at all, by
payment to the parent of an appropriate fee.
Summary, The phase of the study reported in this
chapter revealed (l).that the Puerto Rican income tax
________________________ i ________________________
framework, offers incentive for residence, to a greater ex
tent if the resident *s income is derived through the dis
tribution of profits of an exerapt operation, and to a
Lesser extent if his income is in salary form; (£} that
several corporate types may be utilized as vehicles of
Puerto Bican tax exemption, each having its special charac
teristics, and optimum, utility depending upon special cir
cumstances; (3) that any of the corporate types offer
greatly reduced incidence of, if not complete freedom from,
current income taxation; and (4} that, as in the matter
of the alternative corporate types, a significant choice
aeed be made insofar as corporate ownership is concerned,
as between corporate and individual ownership, with
special circumstances again determining.
CHAPTER 1Y
THE SUBJECT COMPANY WITH COST STUDY
The company. The Peterson Pressure Regulator Company>
Inc., had its beginnings from a research and product devel
opmental standpoint in 1951. Quantity production commenced
in 1952. The company is primarily a manufacturer of air
craft accessories.
The companyfs activities include engineering and
development, manufacturing, and sales. Engineering and
developmental activities loom very important in the opera
tion, because of the nature of the product and the indus
try. Actual manufacturing is limited to the assembly of the
company’s several products, with emphasis on quality con
trol and testing because of the relatively small tolerances
allowable. Sales activities are on a high technical plane.
The company’s products are of a proprietary nature.
The line includes six or eight separate designs, each
adaptable to specific requirements as to pressure settings.
All units operate on an hydraulic principal.
Ownership. The company is closely held, with the
president in the majority position. There are two minor
ity stockholders. The three stockholders own respectively
sixty-five per cent, twenty-five per cent, and ten per cent
63
of the shares outstanding*
A wholly owned subsidiary manufactures and markets
nationally through distributors, dealers, specialty, and
department stores a totally unrelated line of products,
consumer durables. (A relatively low value to weight
ratio, coupled with marketing peculiarities discouraged
consideration of this line for Puerto Bican manufacture.}
Should the Puerto Bican venture be undertaken by the parent
company, it is contemplated that this subsidiary would
avail itself of a tax-free reorganization under Section 112
(6) (11) of the Internal Bevenue Code, through which th©
stock of the subsidiary v^ould be distributed to the stock
holders of the parent. This reorganization would serve
the purpose of freeing the unrelated activity from involve
ment in the pressure regulator complex, since it is not
inconceivable that new minority interests would be intro
duced to the parent company incident to undertaking the
Puerto Bican operation; these latter interests presumably
would not be concerned with the present subsidiary.
Actually, this introduction of minority interests to the
parent would not likely occur until after expiration of
the exemption period at which time the Puerto Bican opera
tion might be continued as a branch of the present company.
Markets. The companyfs customer list is limited____
64
to the relatively few airframe manufacturing companies to
gether with several major producers of airframe sub-assem
blies. These major customers range geographically from
Johnson City, New York in the East, to Seattle in the
■Northwest, to San Diego in the Southwest*
Terms of sale. All orders are confirmed to custo
mers on an f.o.b. basis,. This is in accord with general
practice within the aircraft industry. All requests to
bid specify f.o.b. pricing. This practice has special
significance for purposes of this study to the extent
that it influences selection of the optimum corporate
vehicle for us® in the proposed Puerto Rican operation.
Current operational level. The Peterson Company
.is presently operating at a level which produces sales at
the rate of approximately $500,000 a year and net profits
before taxes at the rate of $25,000 a year. It is con
sidered highly significant for purposes of this study that
this level of business activity is being sustained without
significant sales of the particular unit proposed for
manufacture in Puerto Rico, This unit has in the past
contributed importantly to total volume, and its potential
insofar as future volume is concerned is considerable.
Receipt by the company of substantial orders from, this unit
65
would necessitate the expansion of bench facilities and an
addition to the present work force. If follows then that
the proposed Puerto Rican operation would occasion neither
the shut-down of facilities nor the 'lay-off of workers in
the United States.\^This fact has significance because the
Puerto -Rican government, as a matter of policy, denies
exemption to aDplicants which propose to close down facili-
1 I
ties in the United States because of the exemption. >
Financial. After giving effect to the reorganiza
tion which would remove the wholly-owned subsidiary, the
Peterson Company Balance Sheet as of December 31, 1953
appeared as follows;
ASSETS
Current §104,100
Fixed . 11,200
Other 4,900
Total Assets ' §120,200
EQUITIES
Current Liabilities
Accounts - Payable Tirade) <§ 13,800
Accrued Wages & Salaries . 3,300
Accrued Taxes 6,600
Rotes Payable (Stockholders) 19,500
Rotes Payable (Bank as secured
by Accounts Receivable) 23,200
Term Loan (Bank— Current
Maturity) 5,600 § 72,000
1 Taxation Report, Research Institute of America,1954
66
Peterson Company Balance Sheet
(continued)
Fixed Liabilities
Term Loan (Bank)
Capital Stock
# 3,300
# 48,300
5,400 44,900 Less Deficit
Total Equities $120,200
Note: All bank loans are personally guaranteed
by the principal stockholder, who is also president of the
company.
The Peterson Company has pending against a customer
in connection with a price re-determinable contract a
claim in the amount of approximately $25,000. The amount
collected would be income ascribable to prior periods, and,
after adjustment for income tax would go directly into
earned surplus. While the claim might conceivably be
compromised, at least #10,000 should be realized. This
sum would serve to bring into slightly better balance the
capital to debt ratio and put the company in a relatively
stronger financial position for purposes of contemplating
the Puerto Rican venture*
It should be noted that the $19,500 in notes pay
able to stockholders, while classified as current liabil
ities are readily re-newable with deferred maturities.
The revolving credit secured by the assignment of
certain accounts receivable has a limit of $30,000. The
67
capital loan has been paid down from $15,000, and might
conceivably be renewable to that level*
Preliminary appraisal. An original preliminary
appraisal as to the feasibility of the proposed Puerto
Rican operation was made, in the interest of determining
the economic justification for further, more extensive
appraisal. The preliminary appraisal contemplated (1) the
productfs value to weight (and volume) ratio; (2) the
product’s market destination; (3) the sources of coraponent
materials; and (4) the product’s hand labor increment.
The product contemplated for Puerto Rican manufacture
weighs one pound. Its selling price has ranged from a low
of $135 to a high of $160.
The product might conceivably be sold to any of a
dozen air frame establishments scattered throughout the
United States* The most important orders filled to date
originated in Richmond, Indiana and Johnson City, New
York. Reference to a map of North America revealed that
the air line distance from that general area to San Juan,
Puerto Rico was less than to Los Angeles, Comparison from
a land-water standpoint revealed that approximately two-
thirds of the shorter distance-’ — to San Juan— would be over
water. The latter observation suggested a favorable com
parison of combined rail-ocean freight rates to San Juan
68
witil rail rates to Los Angeles, although, as a practical
natter, considering the weight involved, a comparison of
air freight rates would have been sufficient.
Component parts are obtained nationwide— from as
far away as Chicopee, Massachusetts. The observations set
forth in the preceding paragraph, with respect to air,
water, and long distances, apply to the extent that Eastern,
or Mid?/estern sources are utilized. However, all machining
and finishing operations are performed to the company's
specifications, in Los Angeles. To the extent that such
component parts require shipment to San Juan, added costs
are incurred.
All labor added to the product by the Peterson Com
pany is semi-skilled hand labor. Such labor in Puerto
Rico is paid roughly one third the mainland rate. A
further advantage might derive from eventually having the
machining and finishing work, which is presently done in
Los Angeles, done in San Juan. An additional— originally
derivative— advantage might thereby accrue.
The result of this, the cost phase of the prelimin
ary appraisal, was, on balance, favorable to the proposed
venture. Transportation costs, if they were to be higher
than formerly would not be importantly so, in relation to
total value. And labor costs seem relatively favorable on
69
a comparative basis— even after making liberal allowance
for the productivity factor.
Further inspiring a more thorough study was the
realization that any additional net income derived above
the current rate would be taxable at the normal and surtax
rat© of fifty-two per cent, sine© operations at the present
level were currently producing net income at the rate of
125,000 per year.
Qrganizational form of the operation proposed* Since
the type of corporation selected as the optimum, vehicle for
Puerto Rican exemption would influence the hypothetical
operation to be drawn below, and vice-versa, a conclusion
was derived, based upon the phase of the study presented
in Chapters II and III*
On the question of utilizing a Section 251 corpora
tion or a Puerto Rican corporation, the former was selected
for the reasons that; (1) It can avail itself of a tax-
free liquidation under the provisions of Section 112 (b) (6)
of the Internal Revenue Code2 whereas the latter is res
tricted in this by the provisions of Section 112 (i),
which requires prior approval of the Commissioner of
2 Itshould be noted that the long-term capital gains
realized on liquidation of the Puerto Rican company would
■not be subject to the Section 102 penalty surtax. Internal
jRevenue Code, Sec. 102 (d) (l) CD)._________________
70
Internal Revenue; (2) it is preferable insofar as facility
of organization and operation are concerned; (3} at the
same tirae, its Section 251 status seems relatively secure
under the title passage rule in G.C.M. 25,131, in view of
industry practice in this connection; and (4) the double
shelter in some cases offered by the Puerto Rican corpor
ation probably would not be applicable in this case, be
cause the United States purchasing activities contemplated
would probably disqualify it for non-resident status. The
1
i Section 109 corporate alternative was not considered at
| this latter point, in light of the findings set down in ,J
Chapter II.
I
On the question of utilizing corporate ownership or
individual ownership (of the Puerto Rican vehicle), the
former was selected for the reasons that: (1) it permits
financing largely, if not entirely, by the parent company,
thus relieving the stockholders of the parent company
the necessity of personally contributing funds; (2) it
provides a funnel through which the credit of the parent
| is made available on an open account basis to its subsi-
I
j diary; (3) interim distribution of earnings is not contem-
! plated (as through sale of stock by individual stockholders
! to the mainland company); and (4) it enables designation j
| I
j i
I as sta wholly owned subsidiary of Peterson. Pressure Regulator
71
Company" for whatever value may attach to this because of
trade acceptance of the parent’s products*
Personnel* It was proposed that two employees of
the mainland company be sent to San Juan to establish the
operation. (This step would follow the granting of exemp
tion by the government of Puerto Hico, and selection earlier
of a plant site.) These two, who would originally consti
tute a cadre, would continue there as resident managers.
It was contemplated' that one of the individuals be an
engineer— in charge of production, quality control and
testing. The other would be in charge of administration,
accounting, and operational level finance. It is contem
plated that these two individuals would be given an
opportunity to acquire an equity interest in the proposed
operation— this in way of offering incentive in the form of
tax-free income, when, upon termination of the exemption,
the mainland corporation would buy their shareholdings.
Other overhead personnel would be engaged in San
Juan. A girl stenographer-typist, desirably bi-lingual,
would be required, as would a custodial employee, for
office, shop, and truck maintenance.
Property. It was estimated that two thousand square
feet would be required for the level of operations con
templated. Minimum required investment in machinery,_______
72
tools, benches and test equipment was estimated at ;§15,500.
Another $1,200 was estimated as adequate for office equip
ment and furnishings, and $3,000 for a panel truck for
local drayage. A final $4,500 ?ms estimated to be needed
for freight where not elsewhere imputed, excises (as sub
ject) and remodelling of the plant to specific requirements,
as with respect to wiring, partitions, cages, etc.
In summary, capital requirements were as follows:
Machinery, tools, benches, etc. $15,300
Office furnishings and equipment . 1,200
Truck 3,000
Miscellaneous 4,500
Total #24,000
It was contemplated that land and building be
leased.
Level of operations. Overall cost and income
estimates are based upon production and sales at the rate
of one hundred fifty units per month or eighteen hundred
per year. Assuming’an average unit selling price of $125,
monthly revenues would total #18,750— after the proposed
level of operations is accomplished. This price is con
servatively stated to make allowance for air-freight costs
of shipment at the buyers* expense to mainland points.
This level of operations was considered conservatively
realistic at point of market potential.
73
Procurement of components# It was contemplated that
all components be procured from present sources— at least
initially, ^o complications were foreseen with respect to
standard parts. However, in connection with component
parts machined and those finished "outside” to Peterson
specifications, and subject to Peterson inspection, it
seemed advisable as a practical matter to provide inspec
tion at the source, i.e., in the Los Angeles area. Also,
it was deemed advisable to have near the scene of this
"outside" production a purchasing representative acting
in a ministerial capacity. All purchase orders were to
emanate in San Juan,
The inspecting at source and expediting were to be
accomplished by the parent company incident to their own
inspection and procurement activities, often in the same
locations.
Licensing, It was proposed that a licensing
arrangement be used,, between Peterson Company and its
subsidiary, to recompense the former for its engineering
and development costs in connection with the unit to b®
manufactured in Puerto Rico. A reasonable royalty would
be paid by the latter to its parent on each unit shipped.
However, payment of this royalty would be waived when
Peterson Company is the buyer. It had been proposed that
I 74
the subsidiary company manufacture in Puerto Rico for its
parent all of the latter*s unfilled orders for the subject
unit at the time Puerto Rican operations are effectively
instituted, also any additional orders. A gradual transi
tion to full-scale independent sales would be anticipated*
Sales. The subsidiary company’s sales program would
involve first, establishing the new company as an "approved
source" for the unit to be manufactured.3 Since the unit
is produced under license from the Peterson Company, and
is identical to it, little difficulty should be experienced
in accomplishing this.
Second, sales and service representation should be
obtained. This would be accomplished on a regional basis
through firms specializing in furnishing these services.
As a hedge against application of the tax avoidance clause
of G.C.M. 25,131 or the regulations under Section 119 of
the Internal Revenue Code, requests for quotation would be
solicited for submission direct to San Juan. Quotations
and order acceptances should emanate from San Juan also.
Third, all prices should be quoted f.o.b. San Juan
in way of satisfying the title passage rule of G.C.M.
& The term "approved source" is one used by the
airframe industry to designate a supplier, or prospective
supplier, who has qualified his product from a design and
engineering standpoint.
75
25,131. As pointed out above f.o.b, pricing is in accord
with- industry practice. However, quoted prices should be
shaded downward to an extent necessary to compensate cus
tomers in full for any freight cost differential which
might exist as between a eomps:rable mainland product and
-this one*
Fourth, the Puerto Hican company' should be prepared
initially— costs notwithstanding— to better all quotations
by other sources. This would be in way of bluntly over
coming hesitency on the parts of purchasing agents who
might otherY/ise allow misgivings with respect to quality
and delivery influence their decisions. In the Puerto
Rican companyfs favor is the background of its parent, and
its own background, indirectly, to the extent that it had
\
produced units for its parent for resale to mainland buyers.
And finally, prices to buyers other than the parent
company should be as high as, or higher than, prices to
the parent company. This is a precaution against appli
cation of Section 45 of the Internal Revenue Code, which
would require allocation of profits where evidence of
shifting exists*
Cost analysis, A comparison of costs based upon Los
Angeles and San Juan manufacture, where the former operation
is pre-established and the latter is unestablished, is to a
76
considerable extent dependent upon the degree of fixity or,
conversely, the extent of variability of those costs. This
precept suggests a tabular presentation of Peterson Company
costs (for the unit contemplated for Puerto Bican manufac
ture) as follows in Table VI.
(1) Materialsj Materials costs per unit, as deter
mined by reference to the records of the Peterson Company,
were #55.04 per unit. This includes all purchased parts,
together with machining and finishing operations, to Peter
son’s specifications. Twenty per cent of the total of
these invoice prices was added to the estimated costs of
the same materials at the proposed San Juan plant. It
should b© noted that the machining and finishing operations
over a period of time be shifted to Puerto Bieo, where a
derivative benefit from the lower prevailing wage rates
might be realized.
(2) Direct labor* Direct labor costs, which in
clude for purposes of the Peterson operation, only those
incurred in assembly, inspection, and tasting, as deter
mined by reference to the Peterson Company records were
#13.85 per unit. Direct labor cost per hour was approxi
mately #1.80. For the Puerto Rican operation, an hourly
rate of approximately sixty cents is contemplated. This
basic rate was then adjusted for the lower productivity
77
TABLE VI
PETERSON PRESSURE REGULATOR COMPANY
Statement of Comparative Costs Based Upon 150
Units of Production per Month
Costs Los Angeles San Juan
Variable
Materials I 8,270 # 9,920
Direct labor 2,080 . 1,040
Payroll taxes & workmen1s compensa
tion 100 40
Freight in 30 150
Sales & service commissions 940 940
#12,420 112,090
Semi -vari able
Salaries— officer and general | 920 | 1,980
Shop & office supplies 200 400
Taxes & licenses 200 10
Utilities 20 60
Insurance
50 250
$ 1,390 f 2,700
Fixed
,
Rent
0 | 250
Depreciation & amortization 0 300
Automotive 0 100
Telephone & telegraph & postage 0 300
Maintenance 0 50
Engineering & development 0 310
Travel 0 250
Interest 0 200
I o
$ 1,760
Total costs #13,810 #16,550
U.S. income tax (52$ x 18,750 - 15,810) 2,570
California franchise tax
(4$ x 18,750 - 13,810) 200 25
Total costs plus taxes #16,580 116,575
78
which, might reasonably he expected of the initially un
trained Puerto Bican worker, to produce an adjusted rate of
approximately half the mainland rate. Bor the sake of
conservatism, the ninety cent rate is treated as permanent,
notwithstanding the obvious fact that productivity will
rise with on-the-job time— possibly even to a par with the
mainland worker. is so treated in anticipation of a
gradually rising level of wage rates in Puerto Rico as a
result of increasing industrialization and the fact that
rates are subject to Pair Labor Standards Act minimums,
which are periodically adjusted.
{3} Payroll taxes and workmen* s compensation in
surance costs. Corollary labor costs approximate five
dollars per hundred dollars of direct costs at Peterson*s
plant in Los Angeles. This allows one and one half per
cent for unemployment insurance, two per cent for social
security, and one and one half per cent for workmen’s
compensation insurance. Comparable taxes and insurance
in San Juan approximate in total only four per cent.
i
Social security taxes take two per cent as does workmen’s
i
j compensation.' There is no Puerto Rican equivalent of
!
j unemployment insurance. !
j 1
j (4) Freight in. Freight in is purely an estimate j
i insofar as the L q S Angeles operation is concerned. It is
79
based upon average charges during a six month period.
These were halved to coincide with the volume under consid
eration. The Puerto Rican figure was determined by multi
plying the approximate weight of the production units*
component parts by forty cents a pound, which is the air
freight rate between Los Angeles and San Juan. Air freight
was contemplated for consistent use in either bringing
raw materials in or shipping finished units out, because
of capital limitations, and in way of minimizing the
working capital time cycle.
(5) Sales and service commissions. Sales and
service commissions of a somewhat standard five per cent
of sales would be appropriate in either instance.
(6) Salaries— officer and general. Production
bonuses based upon the marginal volume ($18,750) would
cost the Peterson Company $220 per month or six and one
half per cent of that volume. Salaries and production
bonuses to the mainland managers were tentatively estab
lished at #625, plus one per cent of sales, or a total of
$812.50 each. It was contemplated that these men would
also participate in any tax-exempt earnings of the company
through stock ownership. An additional $350 was budgeted
for an office girl and a custodian hired locally. The
mainland personnel each earn approximately $600 in Los
80
Angeles. The difference between §600 and $825 is intended
to compensate them for a slightly higher cost of living in
San Juan, plus the inconvenience of being removed from Los
Angeles and the mainland. They would benefit additionally
from the slightly loY/er income tax rates in Puerto Rico
(see Chapter III).
(7) Plant and office supplies. Supplies ascribable
to marginal production in Los Angeles were estimated to be
one fourth of present consumption dollar-wise* for Puerto
Rico the cost was estimated at three fourths of that sam e
present level of consumption— to allow for the fact that
the Puerto Rican production is original, and for a freight
differential.
(8) Taxes and licenses. Taxes and licenses (which
include personal property taxes and license-fees) are more
nearly variable and were therefore estimated for the Los
Angeles corporation at one half the actual cost of same
at the usual level of operations. The Puerto Rican company
would incur no taxes. (See Chapter II). It would be
required to license its vehicle, however.
(9) Utilities. Utilities would add, it was esti
mated, one fourth to costs theretofore incurred in that
connection. This Los Angeles figure is tripled to obtain
an estimate for th© Puerto Rican operation. This is
81
justified by the original nature of the Puerto Rican opera
tion and the somewhat higher cost of utilities there*
(10) Insurance. Insurance on the additional inven
tory which would be occasioned by the new production would
equal approximately #50. This figure is derived by apply
ing a composite rate to th© marginal inventory* Por the
Puerto Rican-operation, a figure approximating the Peter
son Company*® insurance expense (as adjusted), when oper
ating normally, is used. It makes allowance for th© some
what higher rates in Puerto Rico and the larger inventory
it would necessarily carry because of its extended supply
lines,
(11) Rent. The Industrial Development Company of
Puerto Rico, a governmental agency, constructs for sale
or lease to manufacturers industrial buildings. The
rent established for these structures is eight per cent
of total cost of land and improvements. Assuming initial
requirements for twenty-five hundred square feet and
construction costs, with land, of a liberal fifteen dollars
per square foot, monthly rental would cost two hundred
fifty dollars. It was assumed that the afore-mentionned
rental rate of eight per cent serves as a guide for pri
vate renters, who probably could not exceed it signifi
cantly. It should be recalled that private builders of
82
•rental property are subsidized to the extent that rental
income is not subject to income taxation if it is derived
from an occupant who holds an exemption certificate* (See
Chapter IX.) Note: There is the possibility of free rent
if the operation is situated in an under-industrialized
4
area. .
(12) Automotive expense. The cost of maintaining
one panel truck was estimated to be $100. .
(13) Telephone, telegraph, and postage. With
respect to communications, the Puerto Bican expense was
estimated at an amount equal to that incurred by the main
land company. It is contemplated that whereas the volume
of communications would be less in Puerto Rico, higher
unit costs, as for calls to the mainland, would operate to
offset this lower volume.
(14) Maintenance* Maintenance costs were estima
ted at fifty dollars, roughly equivalent to this item of
expense incident to the mainland company’s operation. This
figure does not include janitor services which would be
provided by the custodial employee whose wages were included
in the general salary category above*
(15) Engineering. Engineering expense would be
j ^ Letter, Economic Development Administration,
February 10, 1954.
83
nominal in connection with the Puerto Bican operation,
since engineering and development would be confined to the
parent company. This expense would be met in the form of
royalties to the parent. Two and one half per cent of the
proposed selling price, or S3,12 per unit, was deemed a
reasonable basis for royalty payments to/the parent.
(16) Travel. Travel expense would undoubtedly be
high if mainland trips are to be undertaken periodically by
members of the staff of the Puerto Bican company. Allowing
two trips a year for each member, an estimated average
expense of two hundred fifty dollars per month was used.
This does not take into account, of course, occasional
trips by principals of the parent company, the cost of
which would be paid either by the individuals or by the
parent company if inter-company business seemed to warrant
it.
{17) Depreciation and amortization of investment,
Depreciation was computed on the estimated fixed capital
investment by dividing $24,000 by 120 months (10 years, the
exemption period). The resulting monthly depreciation
charge would be $200 per month. Additional amortization
would be necessary because of organization and establish
ment costs. These would include cost of transporting the
two mainland families to Puerto Rico and back again. These
84
llatter costs were estimated at #12,000, which figure, when
divided by 120 months is equivalent to #100 per month,
(18) Interest. The estimate of interest expense
was based upon approximate cost of all money borrowed, i.e.,
for which a debt instrument was to be used. Capital re
quirements were first appraised, as follows!.
Property #24,000
Cost of transporting mainland employ
ees with their families 5,000
Starting cost (outlay prior to receipt
of income) 6,000
Working capital:
Por inventory - two months 20,000
For accounts receivable -
two-thirds month 15,000
Total #70,000
The sum of #70,000 was proposed to be derived in its en
tirety in various forms from the parent. The sum of
#17,500 or one-fourth of the total capital requirement,
would be received as a capital contribution in the form of
cash. This amount would approximately enable the sub
sidiary to make its property expenditures, subject to
mortgages on same, transport its mainland employees to
San Juan, and finance its original operations to the
point where income is realized. The original stock of
inventory would be financed on an open account basis by
the parent. The parent would additionally stand prepared
to provide additional cash in a more formal loan basis as
.re.quir.e.d,________________________________________ ______________
85
At such time as income was heing regularly produced,
a line of credit for working capital purposes would he ar
ranged with the San Juan Branch of the National City Bank
of New York. The mortgage money referred to above would he
available from the Government Development Bank of Puerto
Bico, an agency of the commonwealth, which typically pro
vides only longer term capital of a type securable by real
or chattel mortgages. It was contemplated that the parent
company’s president would act as guarantor on loans to
the subsidiary, as for the parent.
Interest on a constant $15,000 (for working capital)
plus a diminishing- |l8,000 at would amount to about §200
a month during the first year and that figure is used in
the cost comparison. It is contemplated that these loans
would be liquidated as rapidly as possible, commensurate
with the profitability of the operation.
Summary. Costs associated with the proposed Puerto
Bican operation were relatively unfavorable at point of
fixed and semi-variable items. This is explainable in
terms of the domestic alternative whereby a going concern
merely raises its output by fifty per cent within existing
plant facilities, and without expanding organizational
overhead.
_______ Possible income tax savings in connection with the
86
proposed Puerto Rican operation operated to almost exactly
offset for purposes of the study the cost disadvantage
attaching to the Puerto Hi can operation.
CHAPTER V
CONCLUSION
In the course of the present study, it was found:
1* That United States taxation at current rates
poses acute problems for a new and growing company, parti
cularly at the point of working capital needs.
2. That a device exists by which tax-free income
may be realized without involvement in tariff restrictions
or currency controls, i.e., a Puerto Rican manufacturer’s
exemption.
3. That any of several corporate forms may be
utilized as a vehicle for tax exemption. Non-corporate
forms offer extraordinary opportunities if the principals
are domiciled in Puerto Rico.
4. That, of the corporate forms, the Section 251
corporation offers the best media for purposes of this
study. However, in general, each type has its optimum,
application.
5* That similarly, the question of corporate ver
sus individual ownership is in general resolved in a
matter dependent upon the special situation, and objectives*
For purposes of this study the former is preferable.
6. That cost comparison-wise, the variables, for
I
purpose of this study, approximately equal one another in [
88
total, as the possible gain in the direction of direct labor
costs is balanced at any level of operations by the loss
in terms of freight and handling. This assumes that all
component parts are shipped from the mainland. If opera
tions involving outside labor can be contracted to effect
ively derive a benefit from the lower wage rates prevail
ing in Puerto Rico, the comparative labor advantage may be
improved. This is perhaps impossible— in light of commer-
cial practices there. However, the alternative possibili
ty of doing the outside production work on the inside
exists. This might conceivably be accomplished over a
period of time, assuming its apparent feasibility in gen
eral. There exists also the possibility of rising labor
productivity to the point where it equals that of the
mainland. However, the gain in this direction might
easily be offset by a partial closing of the gap between
the island and mainland rates, as from the present 3:1
ratio (mainland to island labor rate} to 2:1.
Any of these aforementioned alternatives would oper
ate to improve the Puerto Rican variable costs relative to
1 Ponald J. O'Connor, Puerto Rico*s Potential as a
Site for Textile, . Apparel and" ' ’ Other Industries", (Washing
ton, 1 3 7 c . : Office of Puerto Rico7,' 37. Here reference is
made to the disparity between wholesale prices of building
materials in Puerto Rico and on the mainland. It (the
disparity) is ascribed in large part to differences in
mark-up policies.__________________ _______________ ____________
89
the Los Angeles costs. It is doubtful that, in total, they
would provide substance enough to alter the original cost
comparison for purposes of making the Puerto Rican decision.
7. That the comparison of semi-variables which
would favor the Los Angeles operation originally, would
favor the Puerto Rican company on marginal production
above $20,000 monthly— this because Puerto Rican salaries
and bonuses would remain constant above this level. How
ever, even at double the proposed volume, the Puerto
Rican semi-variables would exceed those of Los Angeles
by about a thousand dollars.
8. That the fixed costs, along with— to a lesser
extent— the semi-variables, for purposes of this study
operate to discourage the proposed Puerto Rican operation.
This might not have been the case, however, had the com
parison involved the establishment of a new mainland oper
ation as opposed to the expansion of an existing one.
Such a new establishment would have been burdened by many
of the fixed and semi-variable costs to which the proposed
Puerto Rican company was subject.
9. That, considering the several possibilities for
effecting labor and material economies, together with the
I
relatively small sum by which fixed and semi-variable costs
would exceed those of a new mainland establishment, such
a Puerto Rican operation as described in this study would,__
90
under th® latter circumstances, warrant a favorable re
commendation.
10. That as a general rule and subject to t ! , sourc©
of incomen considerations, where a study reveals that
approximately comparable costs will be incurred as between
a new mainland operation and a Puerto Rican operation, the
tax advantage attaching to the latter alternative would
suggest its use, and the greater the promised profitability
of the operation, the stronger the suggestion.
11. That, should the new mainland operation sug
gested as the possible alternative be a new corporation,
the surtax exemption on the first t>25,000 of income is
available, ana the Puerto Rican operation is relatively
less attractive.
12. 1 That it is difficult to generalize, so numer
ous are the facets with respect to any given situation
which may warrant appraisal for Puerto Rican operational
possibilities.
— / ^ ^
13. That for purposes of this study, it was con-'
eluded that while a Puerto Rican operation may be entirely
feasible and very attractive from a tax standpoint, econo
mic factors are determining, overall. Unless the contem
plated operation gives promise of being approximately as
profitable as the alternative mainland operation, it should
91
\
not be undertaken. Tax exemption should not be relied
upon to recapture profits not realized because of the
Puerto Rican move. Rather, the exemption should be consid
ered as recompense for new risks which include Cl) possible
adverse treatment under the Internal Revenue Code; (2) the
remote location of th© investment far from the parent or
affiliate; and (3) the relatively high capital outlay and
starting costs involved. If the exemption is considered
in this light, as a reward for unusual risks only, a
hedge is provided to the extent that profitable operations
are indicated irrespective of tax aspects.
B I B L I O G R A P H Y
!
\
I
I
)
I
I
93
Baker, Robert M., ’ ’Puerto Rico's Program of Industrial Tax
Exemption,” George Washington law Beview, 18:327-70,
1950.
_______ , ’ ’Tax Exemption as a Means of Attracting Industry,”
George Washington Law Beview, 20:1-11, 1952.
Baker, Bobert M. and James E. Curry, "Tax Payer's Paradise
in the .Caribean," Vanderbilt Law Review, 1:194-226,
1948.
Chase, Stuart, ’ ’Operation Bootstrap” in Puerto Rioo .
Washington/ D.0: Rational Planning Association, 1951.
72 pp.
Commonwealth of Puerto Rico, -^ct 3 0, approved March
9, 1911.
_______ , Act No. 74, approved August 6, 1925, as amended.
_______ , Act No. 184, approved May 13, 1948, as amended.
_______ , Act No. 6, approved December 15, 1953.
Pacts for Businessmen. Puerto Rico Economic Development
Administration, 1951. 72 pp.
Internal Revenue Code. New York: Prentice-Hall, Inc.,
1951.
Jenks, Thomas E. and Robert W. Bogue, Tax Saving in Foreign
Operations. Washington, D. C: Lee, Tpomey &~Eent.
7 PP.
Krause, Sydney, ’ ’Dividends Free of Taxes I” Miami Law
Quarterly, 5:426-34, 1951. ..
i
1 Minimum Wage Rates in Puerto Rico Under the Fair Labor
Standards Act. ~*U. ..Dept. of Labor, 1951,
0’Connorj Donald J., Puerto Rico’s Potential As a_ Site for
Textile Apparel, and other Industries. Washington,
IK Cl Office of Puerto Rico. 64 pp.
Prentice-Hall Federal Tax Course. New York: Prentice-
Hall,”Tnc., 1954.
__________________ U n i v w i r v o r S o u th e rn (Ja litn — ,
94
"Puerto Rican Tax Holiday Extended," Taxation Report.
Hew York? Research Institute of America, 1954. 4 pp*
"Puerto Rico— Land of Tax Exemption," Taxation Report.
New York; Research Institute of America, 1949. 4 pp.
i
t

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Asset Metadata

Creator Reynolds, William Titus (author)

Core Title The Puerto Rico Industrial Incentive Act as it relates to a Southern California aircraft accessory manufacturer: A case study

Degree Master of Business Administration

Degree Program Finance

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag OAI-PMH Harvest,sociology, industrial and labor relations

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Ragan, Rex (committee chair), Martin, G. Preston (committee member), Trefftzs, Kenneth L. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-131039

Unique identifier UC11263023

Identifier EP43386.pdf (filename),usctheses-c20-131039 (legacy record id)

Legacy Identifier EP43386.pdf

Dmrecord 131039

Document Type Thesis

Rights Reynolds, William Titus

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA