Question 1

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 2

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 3

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 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

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 6

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 because Kipp owns 40% of the CFC and Subpart F income is attributed to each shareholder based on their ownership percentage. Therefore, Kipp's share of the Subpart F income would be $80,000, which is taxed as a constructive dividend.

Question 7

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 8

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 9

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

Since the income from the sale of widgets is not Subpart F foreign base company sales income, it is not subject to current U.S. taxation.

Question 10

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 the effectively connected earnings calculation for determining U.S. taxable income. Therefore, Quest's dividend equivalent amount of $860,000 is already factored into the $900,000 of effectively connected earnings, and there is no need to add it separately. The increase in net U.S. equity is also not relevant to calculating the dividend equivalent amount.

Question 11

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 12

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

Accepted Answer

Nico is not a nonresident alien (NRA) because holding a green card allows her to be considered a lawful permanent resident of the United States, not a nonresident.

Question 13

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 consider various factors such as risks involved, assets used, and functions performed by the respective parties involved in the transfer process. A transfer price that takes into account these factors is more likely to be fair and justifiable.

Question 14

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 15

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 16

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 17

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.

Question 18

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 artificially shifting profits to related entities in order to avoid taxes. The rules aim to ensure that related entities transact with each other at arm's length, meaning the prices charged for goods or services are in line with what would be charged between unrelated parties. This helps to ensure that profits are allocated appropriately and not shifted to lower tax jurisdictions.

Question 19

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 20

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 renounces his U.S. citizenship, he may still be subject to U.S. income tax on his U.S.-source income. The U.S. has rules that impose taxes on certain types of income earned by non-U.S. citizens as well. Therefore, George needs to determine whether he is still considered a U.S. taxpayer for tax purposes.

Quiz 9: Taxation of International Transactions