Lincoln Corporation,which has a 34% marginal tax rate,owns 50% of the stock of a controlled foreign corporation (CFC).At the beginning of the year,Lincoln's basis in its CFC stock was $100,000.The CFC's current-year income was $1 million,$600,000 of which was subpart F income.The CFC paid no foreign income tax and distributed no dividends.How much current taxable income must Lincoln report as a result of its ownership of the CFC?

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Quizplus · Accepted Answer

Under the rules for taxation of controlled foreign corporations, a U.S. shareholder is generally required to include in its taxable income its pro rata share of the CFC's subpart F income. In this case, since Lincoln owns 50% of the CFC's stock, it must include 50% of the CFC's subpart F income in its taxable income. The amount of subpart F income in this case is $600,000, so Lincoln must include $300,000 ($600,000 x 50%) in its taxable income. The fact that the CFC paid no foreign income tax and distributed no dividends is irrelevant for this calculation.

Lincoln Corporation,which Has a 34% Marginal Tax Rate,owns 50% of the Stock