DC, a U.S. corporation, operated a branch in Islandia for three years with the following results: Year Branch Net Income (Loss) 2001 ($1,000) 2002 ($2000) 2003 $ 500 DC also earned $5,000 from its U.S. business activities in each of these three years. On January 1, 2004, DC formed FC, an Islandian corporation, and transferred the branchs assets to FC. At the time of the transfer, DCs basis in the branchs assets was $1,000 and the fair market value of the branchs assets was $5,000. The assets only consisted of equipment which was not subject to depreciation.

What amount, if any, must DC include in its gross income in 2004? What is FCs basis in the branchs assets after the transfer? Assume that DC forms FC on January 1, 2005 instead of 2004. Also assume that in 2004 DCs Islandian branch had Net Income of $3000. How would your answer change?