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Exam 25: Taxation of International Transactions

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Question 1

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Which of the following statements regarding income sourcing is not correct?

A) Concerning the foreign tax credit, most U.S. persons benefit from earning low-tax foreign-source income.
B) Foreign persons generally benefit from avoiding U.S.-source income classification.
C) U.S. persons are not concerned with source of income because all their income is subject to U.S. tax under a worldwide system.
D) Foreign persons may be subject to tax on U.S.-source income without regard to their actual presence in the United States.

E) A) and B)
F) B) and C)

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Question 2

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RainCo, a U.S. corporation, owns a number of patents related to designing umbrellas. RainCo licenses these patents to unrelated parties. TexCo, a domestic corporation, paid RainCo $100,000 in royalties related to these licenses. TexCo uses the patent information in its manufacturing process in its Canadian plant. IrishCo, an Irish corporation, paid RainCo $25,000 in royalties related to the licenses. IrishCo uses the patent information in its manufacturing process in its Michigan manufacturing plant. How much U.S.-source royalty income did RainCo earn from these licenses?

A) $0
B) $25,000
C) $100,000
D) $125,000

E) B) and C)
F) All of the above

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Question 3

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Match the definition with the correct term. a. Expatriate b. Resident c. Nonresident alien d. U.S. trade or business e. Branch profits tax f. Effectively connected income -Rule that requires determination of the dividend equivalent amount.

SunCo, a U.S. corporation, owns a number of patents related to designing sunglasses. SunCo licenses these patents to unrelated parties. SpainCo, a Spanish corporation, paid SunCo $78,000 in royalties related to these licenses. SpainCo uses the patent information in its manufacturing process in its Texas plant. WiscCo, a domestic corporation, paid SunCo $32,000 in royalties related to the licenses. WiscCo uses the patent information in its manufacturing process in its Germany manufacturing plant. How much U.S.-source royalty income did SunCo earn from these licenses?

Match the definition with the correct term. Not all of the terms have a match. A definition can be used more than once. a. Foreign base company income b. Foreign personal holding company income c. Controlled foreign corporation d. U.S. shareholder e. Previously taxed income f. More than 10 percent g. More than 50 percent h. More than 80 percent -Upon repatriation to a CFC, it does not create dividend income.

GoldCo, a U.S. corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly owned foreign corporation. GoldCo transfers $200 in inventory (basis = $50) and $900 in land (basis = $950) to GreenCo. GreenCo uses these assets in carrying on a trade or business outside the U.S. What gain or loss, if any, does GoldCo recognize as a result of this transaction?

In year 1, George renounces his U.S. citizenship and moves to Fredonia, where income tax rates are very low. George is a multimillionaire and says he "has had it" with high Federal income taxes on wealthy individuals like himself. In year 4, George's U.S.-source income is $1.5 million. That income escapes Federal income taxes.

Identifying an income item as U.S source creates U.S. taxable income for a:

The following income of a foreign corporation is not subject to the regular U.S. corporate income tax rates.

USCo, a U.S. corporation, reports worldwide taxable income of $500,000, including a $100,000 dividend from ForCo, a wholly-owned foreign corporation. ForCo's undistributed earnings and profits are $1 million and it has paid $200,000 of foreign income taxes attributable to these earnings. What is USCo's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation) ?

Wellington, Inc., a U.S. corporation, owns 30% of a CFC that has $50 million of earnings and profits for the current year. Included in that amount is $20 million of Subpart F income. Wellington has been a CFC for the entire year and makes no distributions in the current year. Wellington must include in gross income:

Carol, a citizen and resident of Adagio, reports gross income that is effectively connected with a U.S. business. No deductions are allowed against this income, and Carol's U.S. tax rate is a flat 30 percent.

USCo, a U.S. corporation, receives $700,000 of foreign-source passive income on which foreign taxes of $70,000 are withheld. Its worldwide taxable income is $1,500,000 and its U.S. tax liability before the foreign tax credit is $315,000. What is USCo's allowed foreign tax credit?

A foreign currency gain or loss might occur year when:

A Qualified Business Unit of a U.S. corporation that operates in Germany generally uses the Euro as its functional currency.

The § 367 cross-border transfer rules seem to counteract other favorable tax provisions that allow the taxpayer to defer gross income,e.g. §§ 351 and 368. What is the rationale for eliminating this deferral? Provide two examples of transactions to which § 367 would apply.

In international corporate income taxation, what are the uses of the "sourcing rules" in computing Federal taxable income?

Which of the following statements best describes the primary purpose of the Subpart F income provisions?

During the current year, USACo (a domestic corporation) sold equipment to FrenchCo, a foreign corporation, for $350,000, with title passing to the buyer in France. USACo purchased the equipment several years ago for $100,000 and took $80,000 of depreciation deductions on the equipment, all of which were allocated to U.S.-source income. USACo's adjusted basis in the equipment is $20,000 on the date of sale. What is the sourcing of the $330,000 gain on the sale of this equipment?

WaterCo, a domestic corporation, purchases inventory for resale from unrelated distributors outside the U.S. It resells this inventory to U.S. customers, with title passing inside the United States. What is the sourcing of WaterCo's inventory sales income?