Question 1

Waltz, Inc., a U.S. taxpayer, pays foreign taxes of $50,000 on foreign-source general basket income of $90,000. Waltz's worldwide taxable income is $450,000, on which it owes U.S. taxes of $157,500 before FTC. Waltz's FTC is $50,000.

Accepted Answer

The answer of Waltz, Inc., a U.S. taxpayer, pays foreign...

Question 2

U.S. individuals who receive dividends from foreign corporations may claim the deemed-paid foreign tax credit related to such dividends.

Accepted Answer

The answer of U.S. individuals who receive dividends from foreign...

Question 3

The purpose of the transfer pricing rules is to ensure that taxpayers have ultimate flexibility in shifting profits between related entities.

Accepted Answer

The purpose of transfer pricing rules is to prevent taxpayers from shifting profits between related entities in order to avoid taxation or manipulate profits. The rules aim to ensure that related entities are pricing their transactions fairly and at market value, rather than artificially inflating or deflating prices for tax purposes.

Question 4

Unused foreign tax credits are carried back two years and then forward 20 years.

Accepted Answer

The answer of Unused foreign tax credits are carried back...

Question 5

A domestic corporation is one whose assets are primarily located in the U.S. For this purpose, the primarily located test (>50%) applies.

Accepted Answer

The answer of A domestic corporation is one whose assets...

Question 6

Jokerz, a CFC of a U.S. parent, generated $80,000 Subpart F foreign base company services income in its first year of operations. The next year, Jokerz distributes $50,000 cash to the parent, from those service profits. The parent is taxed on $0 in the first year (tax deferral rules apply) and $50,000 in the second year.

Accepted Answer

The U.S. parent is taxed on the $80,000 of Subpart F income in the first year it is earned by Jokerz, regardless of whether any cash is distributed. Subpart F income is taxed to the U.S. shareholders in the year it is earned, not in the year it is distributed.

Question 7

Nico lives in California. She was born in Peru but holds a green card. Nico is a nonresident alien (NRA).

Accepted Answer

Holding a green card means that Nico is a lawful permanent resident of the United States, not a nonresident alien.

Question 8

In 2013, 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 2016, George's U.S.­source income is $1.5 million. That income escapes Federal income taxes.

Accepted Answer

Even if George renounced his U.S. citizenship, he still may be subject to U.S. income taxes on certain types of income, such as U.S.-source income. Therefore, his income of $1.5 million from a U.S. source may still be subject to Federal income taxes. Additionally, renouncing citizenship for the sole purpose of avoiding taxes is illegal under U.S. law.

Question 9

An appropriate transfer price is one that considers the risks, assets, and functions of the persons to whom income is assigned.

Accepted Answer

An appropriate transfer price should be based on the analysis of risks, assets and functions of the parties involved in the transaction, in order to ensure that income is allocated in a fair and reasonable manner.

Question 10

ForCo, a non-U.S. corporation based in Aldonza, purchases widgets from USCo, Inc., its U.S. parent corporation. The widgets are sold by ForCo to an unrelated foreign corporation in Aldonza. The income from sale of the widgets by ForCo is Subpart F foreign base company sales income.

Accepted Answer

The income from the sale of the widgets by ForCo would not be considered Subpart F foreign base company sales income because the sale is between ForCo and an unrelated foreign corporation in Aldonza. Subpart F income typically targets income earned by controlled foreign corporations (CFCs) from artificial transactions designed to shift profits out of the United States, such as sales involving related parties, not sales to unrelated foreign corporations.

Question 11

Kipp, a U.S. shareholder under the CFC provisions, owns 40% of a CFC. If the CFC's Subpart F income for the
taxable year is $200,000, Kipp is taxed on receipt of a constructive dividend of $80,000.

Accepted Answer

This is correct under the CFC provisions, which require a U.S. shareholder to be taxed on their share of the CFC's Subpart F income. In this case, Kipp's share is 40% of $200,000, or $80,000, which is treated as a constructive dividend and subject to taxation.

Question 12

ForCo, a subsidiary of a U.S. corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany. The income from the sale of widgets is not Subpart F foreign base company sales income.

Accepted Answer

The income from the sale of widgets is not Subpart F foreign base company sales income, meaning it is not considered passive income that would be subject to immediate taxation under U.S. tax law.

Question 13

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.

Accepted Answer

The answer of Carol, a citizen and resident of Adagio,...

Question 14

Jaime received gross foreign-source dividend income of $250,000. Foreign taxes withheld on the dividend were
$25,000. Jaime's total U.S. tax liability is $800,000 (the 35% marginal tax rate applies). Jaime's current year FTC is
$87,500.

Accepted Answer

The answer of Jaime received gross foreign-source dividend income of...

Question 15

Quest is organized and operates in the U.K. Its U.S. effectively connected earnings for the taxable year are $900,000 and its net U.S. equity has increased by $40,000. Quest's dividend equivalent amount for the tax year is $860,000.

Accepted Answer

The dividend equivalent amount is included in effectively connected earnings, so the total effectively connected earnings for Quest is $900,000 + $860,000 = $1,760,000. The increase in net U.S. equity is irrelevant to the calculation of the dividend equivalent amount.

Question 16

A U.S. taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued.

Accepted Answer

A U.S. taxpayer may take a current Foreign Tax Credit (FTC) only up to the limit calculated based on their U.S. tax liability on foreign income, not exceeding the actual foreign taxes paid or accrued.

Question 17

Freda was born and continues to live in Uruguay. She exports widgets to U.S. customers. The U.S. does not have in force an income tax treaty with Uruguay. Freda's net U.S. income from the widgets is subject to a flat 30% Federal income tax rate.

Accepted Answer

The answer of Freda was born and continues to live...

Question 18

Winnie, Inc., a U.S. corporation, receives a dividend of $400,000 from a non-CFC foreign corporation. Deemed-paid foreign taxes attributable to the dividend are $120,000. If Winnie elects the FTC, its gross income attributable to this dividend is $400,000.

Accepted Answer

The answer of Winnie, Inc., a U.S. corporation, receives a...

Question 19

Gains on the sale of U.S. real property held directly or indirectly through U.S. stock ownership by NRAs and foreign corporations are subject to tax at capital gains rates under FIRPTA.

Accepted Answer

The answer of Gains on the sale of U.S. real...

Question 20

Subpart F income includes portfolio income like dividends and interest.

Accepted Answer

Subpart F income includes not only passive income such as dividends and interest, but also other types of income such as rents, royalties, and certain types of gains.

Quiz 25: Taxation of International Transactions