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Starlight Typewriters is in the business of producing and selling typewriters for the domestic United

 States market. Starlight is attempting to expand into overseas markets, and is negotiating with the People's Republic of China for a large contract to supply typewriters to Chinese governmental offices.

 

The Chinese have recently romanized their writing so that Chinese words can be written with Western letters. Starlight is aware of this change and thinks that with sufficient modification, existing typewriter configurations could be used for the Chinese market. The following modifications would be necessary.

 

  1. The keyboard keys should be brought closer together.
  2. The electrical wiring must be changed to conform to different types of currents. This requires research into how the Chinese electrical system would affect the circuitry of the typewriter.
  3. Some additional type symbols must be added to include certain Chinese characters.
  4. Market research studies should be done in China to determine the acceptability of such a product by those who would be using it.

 

Starlight is also engaged in discussions leading to a possible contract for supplying typewriters that could be linked to a Chinese computer system presently in operation. This would require substantial modification to the electrical circuitry of the typewriters and substantial research into the electrical and physical problems involved in making this linkage between the typewriter and the computer. Starlight believes that although its own staff of engineers and researchers could do the research involved in transforming the typewriter into one acceptable to Chinese typists, the research involved in adapting the typewriter for use with the computer is beyond their ability and will need to be contracted out to an engineering research firm.

 

Starlight's financial vice president is involved in discussions concerning the Chinese contract. Please advise her concerning the federal income tax consequences of the contract.

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