Question 1

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

Accepted Answer

Risks,assets,and functions are the three major dimensions considered when determining how much profit a person deserves to earn.

Question 2

ForCo,a foreign corporation,receives interest income of $100,000 from USCo,an unrelated domestic corporation.USCo has historically earned 82% of its income from foreign sources.What amount of ForCo's interest income is U.S.source?

Accepted Answer

Interest income generally is sourced based on the residence of the payor.[§ 861(a)(1)] However,an exception exists when a U.S.payor meets the 80% foreign business requirement of § 861(a)(1)(A).If this test is met,the interest paid by a U.S.corporation is treated as foreign source.This test is not met in this case; thus,all of the interest is foreign source.An exception also exists for interest received on deposits with foreign branches of U.S.banks.[§ 861(a)(1)(B)]

Question 3

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 $90,000 of depreciation deductions on the equipment,all of which were allocated to U.S.-source income.USACo's adjusted basis in the equipment is $10,000 on the date of sale.What is the source of the $340,000 gain on the sale of this equipment?

Accepted Answer

$90,000 of the gain must be sourced according to prior depreciation deductions (i.e.,as U.S.source).The remaining $250,000 is sourced as inventory (i.e.,where title passed).

Question 4

Which of the following statements is false in regard to the U.S.income tax treaty program?

Accepted Answer

Residence of the taxpayer and the presence of a permanent establishment are both important considerations in the U.S. income tax treaty program. The presence of a permanent establishment may determine whether the income is subject to tax in the treaty partner country or not.

Question 5

Yosef Barbutz,an NRA,is employed by Fisher,Inc.,a foreign corporation.In November,Yosef spends 12 days in the United States performing consulting services for Fisher's U.S.branch.He earns $5,000 per month.A month includes 28 workdays.

Accepted Answer

To fall under the commercial traveler exception,all of the following requirements must be met.
 11ea7f05_2e7d_29b4_92e1_e97f95ef99bc_TB4123_00 Jorge's employer has a U.S.trade or business.

Question 6

FLCo,a U.S.corporation,has $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.FLCo's U.S.and foreign assets are as follows.

How should FLCo allocate and apportion its interest expense between U.S.and foreign sources in order to maximize its FTC for the current year?

Accepted Answer

The taxpayer is required to use either the fair market value or the tax book value of the assets to allocate and apportion the interest expense between U.S.and foreign sources.The taxpayer may not use a mix of the methods.Using the Tax Book Value method results in less interest expense being allocated against foreign-source income.This will maximize the FTC since the numerator of the FTC limitation formula will be larger in this case.
Tax book value method
$250,000 F1F1F1S1F1F1F10 [$2,000,000/($2,000,000 + $1,000,000)] = $166,667 interest expense allocated and apportioned to U.S.-source income,with the remainder of $83,333 allocated and apportioned to foreign-source income.
Fair market value method
$250,000 F1F1F1S1F1F1F10 [$5,000,000/($5,000,000 + $10,000,000)] = $83,333 interest expense allocated and apportioned to U.S.-source income,with the remainder of $166,667 allocated and apportioned to foreign-source income.

Question 7

Liang,an NRA,is sent to the United States by Fu Corporation,her foreign employer.She spends 50 days in the United States and earns $10,000 for a two-month period.This amount is attributable to 40 U.S.working days and 10 foreign working days.Her employer does not have a U.S.trade or business and Liang spends no other time in the U.S.for the tax year.Liang's U.S.-source taxable income is:

Accepted Answer

Liang does not meet the commercial traveler exception.She was in the United States for 90 days or less during the year,she was working for a foreign employer that did not have a U.S.trade or business,but she earned more than $3,000 [$8,000 ($10,000 F1F1F1S1F1F1F10 40/50)] for the days worked in the United States.

Question 8

Drake Corporation,a domestic corporation,conducts all of its transactions in the U.S.dollar.It sells inventory for $1 million to a Canadian company when the exchange rate is $1US: $1.2Can.The Canadian company pays for the inventory when the exchange rate is $1US: $1.25Can.What is Drake's exchange gain or loss on this sale?

Accepted Answer

The answer of Drake Corporation,a domestic corporation,conducts all of its...

Question 9

Section 482 is used to:

Accepted Answer

Section 482 of the Internal Revenue Code is used to force taxpayers to use arms-length pricing on transactions between related parties, in order to prevent tax avoidance or evasion by artificially inflating or deflating prices.

Question 10

The U.S.system for taxing income earned inside its borders by non-U.S.persons is referred to as inbound taxation because such foreign persons are earning income by coming into the United States.

Accepted Answer

Foreign taxpayers coming into the U.S.are taxed under the "inbound" approach,which relates to the U.S.generally taxing such persons only on income earned within the U.S.

Question 11

USCo,a domestic corporation,purchases inventory for resale from distributors within the U.S.and resells this inventory to customers outside the U.S.with title passing outside the U.S.What is the source of the USCo's inventory sales income?

Accepted Answer

Income from the sale of inventory purchased for resale is sourced based on the place of title passage.[§ 865(b)] The place of production is not relevant for sourcing purposes.

Question 12

The U.S.system for taxing income earned outside its borders by U.S.persons is referred to as the territorial approach because only income earned within the U.S.border is subject to taxation.

Accepted Answer

The U.S.taxes the income of U.S.persons without regard to where the income is earned.It then provides a foreign tax credit for foreign income taxes paid or accrued on foreign-source income.

Question 13

U.S.income tax treaties:

Accepted Answer

The treaties generally provide taxing rights with regard to taxable income of residents of one treaty country who have income sourced in the other treaty country.The primary taxing rights generally reside with the source country and require the other treaty partner to allow a credit for the taxes paid on the twice-taxed income.

Question 14

GreenCo,a domestic corporation,earns $25 million of taxable income from U.S.sources and $5 million of taxable income from foreign sources.What amount of taxable income does GreenCo report on its U.S.tax return?

Accepted Answer

The United States preserves the right to tax income earned by U.S.corporations without regard to where that income is earned.[§ 61] The United States mitigates any potential double taxation problem with allowance of a credit for foreign taxes paid or deemed paid.[§§ 901 and 902]

Question 15

Sean,a citizen of Ireland with no trade or business activities in the United States,sells at a gain 200 shares of MicroSoft,Inc.,a U.S.company.The sale takes place through Sean's broker in Dublin.How is this gain treated for U.S.tax purposes?

Accepted Answer

The residence of seller rule applies to the sale of personal property that does not fall under one of the exceptions.Consequently,Sean's gain is foreign-source income and not subject to U.S.tax.

Question 16

Without the foreign tax credit,double taxation would result when:

Accepted Answer

Double taxation would not result due to taxation of the U.S.-source income (a.)because it would not be subject to foreign taxation,to the foreign-source income of a nonresident alien because it would not be subject to U.S.taxation (c.),or in the case where the treaty prevented the foreign country from taxing the income (d.).

Question 17

A U.S.corporation owns a German corporation.The U.S.corporation receives a dividend (non-Subpart F income)of 75,000 euro.The average exchange rate for the year is $1US: 0.6 euro,and the exchange rate on the date of the dividend distribution is $1US: 0.80 euro.The U.S.corporation's exchange gain or loss is:

Accepted Answer

There is no exchange gain or loss on an actual dividend distribution because the dividend is translated at the exchange rate on the date of distribution.

Question 18

Dividends received from a domestic corporation are totally U.S.source:

Accepted Answer

The answer of Dividends received from a domestic corporation are...

Question 19

Which of the following statements best describes the purpose of § 482?

Accepted Answer

The purpose of § 482 is to place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.The Secretary of the Treasury is given authority to distribute,apportion,or allocate gross income,deductions,credits,etc.among or between commonly controlled entities in order to more clearly reflect the true income of each entity.

Question 20

An advance pricing agreement (APA)is an agreement:

Accepted Answer

An advance pricing agreement (APA) is an agreement between a taxpayer and the IRS, and sometimes also involves tax authorities from other countries in the case of cross-border transactions. The APA specifies the method for determining the arm’s length price of the transaction or set of transactions covered by the agreement.

Quiz 9: Taxation of International Transactions