Deck 25: Taxation of International Transactions

Question 1

Twenty unrelated U.S. persons equally own all of the stock of Quigley, a foreign corporation. Quigley is a CFC.

Answer 1

False

Question 2

The United States has in force income tax treaties with about 70 countries.

Answer 2

True

Question 3

The transfer of the assets of a U.S. corporation's foreign branch to a newly formed foreign corporation is always tax deferred under § 351.

Answer 3

False

Question 4

The residence of seller rule is used in determining the sourcing of all gross income and deductions of a U.S. multinational business.

Question 5

A U.S. business conducts international communications activities between the United States. and Spain. The resulting income is sourced 100% to the United States, the residence of the taxpayer.

Question 6

The sourcing rules of Federal income taxation apply to deductions as well as to income items.

Question 7

Income tax treaties provide for either higher or lower withholding tax rates on interest income than the rate provided under U.S. statutory law.

Question 8

In allocating interest expense between U.S. and foreign sources, a taxpayer elects to use either the tax basis of the income-producing assets or their fair market values.

Question 9

LocalCo merges into HeirCo, a non-U.S. entity, in a transaction that would qualify as a "Type A" reorganization.
The resulting realized gain is tax-deferred under U.S. income tax law using §§ 351 and 368.

Question 10

A "U.S. shareholder" for purposes of CFC classification is any U.S. person who owns directly, indirectly, and constructively at least 50% of the voting power of a foreign corporation.

Question 11

When a business taxpayer "goes international," the first step usually is to create an overseas branch sales office.

Question 12

The IRS can use § 482 reallocations to ensure that transactions between related parties are properly reflected in a tax return.

Question 13

Interest paid to an unrelated party by a domestic corporation that historically earns more than 50% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.

Question 14

Dividends received from Murdock Corp., a corporation organized in Sustenato that earns 70% of its income from
U.S. business activities, are 70% U.S.-source income.

Question 15

Julio, a nonresident alien, realizes a gain on the sale of commercial real estate located in Omaha. The real estate was sold to Mariana, Julio's cousin who is also a nonresident alien. Julio recognizes foreign-source income from the sale because his home country is not the United States.

Question 16

Hendricks Corporation, a domestic corporation, owns 40 percent of Shane Corporation and 55 percent of Ferrell Corporation, both foreign corporations. Ferrell owns the other 60 percent of Shane Corporation. Both Shane and Ferrell are CFCs.

Question 17

Serena, a nonresident alien, is employed by GlobalCo, a non-U.S. corporation. She works in the United States for three days during the year, receiving a gross salary of $2,500 for this period. GlobalCo is not engaged in a U.S. trade or business. Under the commercial traveler exception, the $2,500 is not classified as U.S.-source income.

Question 18

PlantCo is a company based in Adagio. PlantCo uses a formula to manufacture pharmaceuticals. The formula was developed and is owned by DrugCo, a U.S. entity. Royalties paid by PlantCo to DrugCo for the use of the formula are U.S.-source income.

Question 19

A qualified business unit of a U.S. corporation that operates in Germany generally uses the Euro as its functional currency.

Question 20

Inbound and offshore asset transfers by a U.S. business can be subject to immediate Federal income taxation under
§ 367.

Question 21

U.S. income tax treaties typically:

A) Provide for taxation exclusively by the source country.
B) Provide for taxation exclusively by the country of residence.
C) Provide rules by which multinational taxpayers avoid double taxation.
D) Provide that the country with the highest tax rate will be allowed exclusive tax collection rights.

Question 22

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

Question 23

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

Question 24

Freda was born and continues to live in Uruguay. She exports widgets to U.S. customers. The United States 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.

Question 25

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

Question 26

Subpart F income includes portfolio income such as dividends and interest.

Question 27

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.

Question 28

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.

Question 29

A domestic corporation is one whose assets are primarily located in the United States. For this purpose, the
primarily located test (greater than 50%) applies.

Question 30

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 $94,500 before FTC. Waltz's FTC is
$50,000.

Question 31

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.

Question 32

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.

Question 33

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

Question 34

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.

Question 35

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%.

Question 36

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

A) The United States taxes the U.S.-source income of a U.S. resident.
B) A foreign country taxes the foreign-source income of a nonresident alien.
C) The United States and a foreign country both tax the foreign-source income of a U.S. resident.
D) Terms of a tax treaty assign income taxing rights to the United States.

Question 37

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.

Question 38

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.

Question 39

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.

Question 40

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 $840,000 (the 21% tax rate applies). Jaime's current-year FTC is $52,500.

Question 41

A controlled foreign corporation (CFC) realizes Subpart F income from:

A) Purchase of inventory from an unrelated U.S. person and sale outside the CFC country.
B) Purchase of inventory from a related U.S. person and sale outside the CFC country.
C) Services performed for the U.S. parent in a country in which the CFC was organized.
D) Services performed on behalf of an unrelated party in a country outside the country in which the CFC was organized.

Question 42

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

A) There are about 70 bilateral income tax treaties between the United States and other countries.
B) Tax treaties generally provide for primary taxing rights that require the other treaty partner to allow a credit for the taxes paid on the twice-taxed income.
C) U.S. income tax treaties are written to set up a "network" of up to five foreign countries that are covered by the treaty language.
D) None of these statements is false.

Question 43

Chang, an NRA, is employed by Fisher, Inc., a foreign corporation. In November, Chang spends 10 days in the United States performing consulting services for Fisher's U.S. branch. She earns $5,000 per month. A month includes 20 workdays.

A) Chang has $2,500 U.S.-source income, which is exempt from U.S. taxation, because she is in the United States for 90 days or less.
B) Chang has $2,500 U.S.-source income, which is exempt from U.S. taxation, because the amount paid to her is less than $3,000.
C) Chang has $2,500 U.S.-source income, because her foreign employer has a U.S. branch.
D) Chang has no U.S.-source income under the commercial traveler exception.

Question 44

An advance pricing agreement (APA) is used between:

A) Two or more governments.
B) Two related taxpayers.
C) The taxpayer and the IRS.
D) The IRS and non- U.S. non-taxing authorities.

Question 45

Purchase of inventory from a U.S. parent followed by which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia?

A) Sale to anyone outside Fredonia.
B) Sale to anyone inside Fredonia.
C) Sale to a related party outside Fredonia.
D) Sale to a nonrelated party outside Fredonia.

Question 46

ForCo, a foreign corporation, receives interest income of $100,000 from USCo, an unrelated domestic corporation. USCo has historically earned 85% of its income from foreign sources. What amount of ForCo's interest income is
U)S. source?

A) $0
B) $50,000
C) $85,000
D) $100,000

Question 47

In which of the following independent situations would Slane, a foreign corporation, be classified as a controlled foreign corporation? The Slane stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie, 10% by David, 8% by Ben, and 48% by Mike.

A) Jen, Kathy, Leslie, David, Ben, and Mike are all U.S. citizens.
B) Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. David is married to Kathy. Mike is a foreign resident and citizen.
C) Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Ben is Mike's son. Mike is a foreign resident and citizen.
D) Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Mike is a foreign resident and citizen.

Question 48

The following persons own Schlecht Corporation, a non-U.S.entity. $\begin{array}{lr}\text { Jim, U.S. individual } & 35 \% \\\text { Gina, U.S. individual } & 15 \% \\\text { Marina, U.S. individual } & 8 \% \\\text { Pedro, U.S. individual } & 12 \% \\\text { Chee, non-U.S. individual } & 30 \%\end{array}$ None of the shareholders are related. Subpart F income for the tax year is $300,000. No distributions are made. Which of the following statements is correct?

A) Schlecht is not a CFC.
B) Chee includes $90,000 in gross income.
C) Marina is not a U.S. shareholder for purposes of determining whether Schlecht is a CFC.
D) Marina includes $24,000 in gross income.

Question 49

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:

A) $0.
B) $6 million.
C) $20 million.
D) $50 million.

Question 50

OutCo, a controlled foreign corporation in Meena (located outside the United States), earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies. All of the dividend payors are located in Meena. OutCo's Subpart F income for the year is:

A) $0.
B) $0 only if OutCo is engaged in a trade or business in Meena.
C) $600,000.
D) $600,000 only if OutCo is engaged in a trade or business in Meena.

Question 51

Peanut, Inc., a U.S. corporation, receives $500,000 of foreign-source interest income on which foreign taxes of $5,000 are withheld. Peanut's worldwide taxable income is $900,000, and its U.S. Federal income tax liability before
FTC is $189,000. What is Peanut's foreign tax credit?

A) $500,000
B) $189,000
C) $105,000
D) $5,000

Question 52

USCo, a U.S. corporation, purchases inventory from distributors within the United States and resells this inventory to customers outside the United States, with title passing outside the United States. Profit on the sale is $10,000. What is the sourcing of the USCo's inventory sales income?

A) $5,000 U.S. source and $5,000 foreign source.
B) $5,000 U.S. source and $5,000 sourced based on location of the pertinent manufacturing assets.
C) $10,000 U.S. source.
D) $10,000 foreign source.

Question 53

Which of the following statements regarding the translation of foreign income taxes is true?

A) Translation of foreign taxes into U.S. dollars helps manage the U.S. balance of trade.
B) Foreign taxes are translated into U.S. dollars only when such translation provides a tax benefit to the taxpayer.
C) Foreign taxes typically are paid in a foreign currency and, thus, must be converted to U.S. dollars when used as an FTC on a U.S. return.
D) Translation of foreign taxes into U.S. dollars encourages foreign corporations to set up operations in the United States.

Question 54

Section 482 is used by the U.S. Treasury to:

A) Force taxpayers to use arms length transfer pricing on transactions between related parties.
B) Reallocate income, deductions, etc., to a related taxpayer to minimize tax liability.
C) Increase information that is reported about U.S. corporations with non-U.S. owners.
D) All of these.
E) None of these.

Question 55

During the current year, USACo (a domestic corporation) sold equipment to FrenchCo, a non-U.S. 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?

A) $330,000 foreign source.
B) $330,000 U.S. source.
C) $250,000 foreign source and $80,000 U.S. source.
D) $250,000 U.S. source and $80,000 foreign source.

Question 56

Generally, accrued foreign income taxes are translated at the:

A) Exchange rate when the taxes are paid.
B) Exchange rate on the date when the taxes are accrued.
C) Average exchange rate for the tax year to which the taxes relate.
D) Average exchange rate for the last five tax years.

Question 57

Liang, an NRA, is sent to the United States by Fulston Corporation, her non-U.S. employer. She spends 50 days in the United States and earns $20,000 for a two-month period. This amount is attributable to 40 U.S. working days and
10 non-U.S. working days. Fulston does not have a United States trade or business, and Liang spends no other time in the United States for the tax year. Liang's U.S.-source taxable income is:

A) $20,000.
B) $16,000.
C) $3,000.
D) $0.

Question 58

A tax haven often is:

A) A country with high internal income taxes.
B) A country with no or low internal income taxes.
C) A country without income tax treaties.
D) A country that prohibits treaty shopping.

Question 59

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

A) It is foreign-source income subject to U.S. taxation.
B) It is foreign-source income not subject to U.S. taxation.
C) It is U.S.-source income subject to U.S. taxation.
D) It is U.S.-source income exempt from U.S. taxation.

Question 60

Flapp Corporation, a U.S. 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: $1.3Can. What is Flapp's exchange gain or loss on this sale?

A) Flapp does not have a foreign currency exchange gain or loss, since it conducts all of its transactions in the U.S. dollar.
B) Flapp's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.) and it collects on the receivable when the exchange rate is $1US: $1.3Can. Flapp has an exchange gain of $100,000.
C) Flapp's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.). It collects on the receivable at $1US: $1.3Can. Flapp has an exchange loss of $10,000.
D) Flapp's foreign currency exchange loss is $100,000.

Question 61

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

A) A non-U.S. person's effectively connected U.S. business income is taxed by the United States only if it is portfolio income.
B) A non-U.S. person's effectively connected U.S. business income is subject to U.S. income taxation.
C) A non-U.S. person may earn income from selling U.S. real property without incurring any U.S. income tax.
D) A non-U.S. person must spend at least 183 days in the United States before any effectively connected income is subject to U.S. taxation.

Question 62

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

A) FIRPTA gains.
B) Capital gains effectively connected with a U.S. trade or business.
C) Net long-term capital gains for which no U.S. trade or business exists.
D) Interest income effectively connected with a U.S. trade or business.

Question 63

Which of the following statements regarding the taxation of U.S. real property gains recognized by non-U.S. persons not engaged in a U.S. trade or business is false? Gains from the disposition of U.S. real property are:

A) Not taxed to non-U.S. persons because real property gains are specifically exempt from U.S. taxation.
B) Taxed to non-U.S. persons without regard to whether such non-U.S. persons are engaged in a U.S. trade or business.
C) Taxed in the United States because such gains are treated as if they are effectively connected to a U.S. trade or business.
D) Taxed to non-U.S. persons notwithstanding the general exemption of capital gains from U.S. taxation.

Question 64

Which of the following is a specific separate income "basket" for purposes of the foreign tax credit limitation calculation?

A) Services income.
B) Passive income.
C) Business income.
D) None of these are separate FTC limitation baskets.
E) All of these are separate FTC limitation baskets.

Question 65

Kunst, a U.S. corporation, generates $100,000 of foreign-source income in the general income basket and $40,000 of foreign-source income in the passive income basket. Kunst's worldwide taxable income is $1,200,000, and its U.S. tax liability before FTC is $240,000. Foreign taxes attributable to the general income basket are $60,000 and to the passive income are $4,000. What is Kunst's foreign tax credit for the tax year?

A) $64,000
B) $24,000
C) $20,000
D) $4,000

Question 66

Luisa, a non-U.S. person with a green card, spends the following days in the United States. Year $1 \quad 360$ days
Year $2 \quad 210$ days
Year $3 \quad 30$ days Luisa's residency status for year 3 is:

A) U.S. resident because she has a green card.
B) U.S. resident since she was a U.S. resident for the past immediately preceding two years.
C) Not a U.S. resident because Luisa was not in the United states for more than 30 days during year 3.
D) Not a U.S. resident since, using the three-year test, Luisa is not present in the United States for at least 183 days.

Question 67

Which of the following statements regarding a non-U.S. person's U.S. tax consequences is true?

A) Non-U.S. persons may be subject to withholding tax on U.S.-source investment income even if not engaged in a U.S. trade or business.
B) Non-U.S. persons are subject to U.S. income or withholding tax only if they are engaged in a U.S. trade or business.
C) Non-U.S. persons are not taxed on gains from U.S. real property as long as such property is not used in a U.S. trade or business.
D) Once a non-U.S. person is engaged in a U.S. trade or business, the non-U.S. person's worldwide income is subject to U.S. taxation.

Question 68

Which of the following statements regarding a non-U.S. person's U.S. tax consequences is true?

A) Non-U.S. persons may be subject to U.S. withholding tax on U.S.-source investment income.
B) Non-U.S. individuals may be subject to U.S. income tax but non-U.S. corporations are never subject to U.S. income tax.
C) Non-U.S. persons are subject to U.S. income or withholding tax only if engaged in a U.S. trade or business.
D) Non-U.S. persons must be physically present in the United States before any U.S.-source income is subject to U.S. income or withholding tax.

Question 69

Which of the following situations requires the filing of an information return with the U.S. government?

A) A domestic corporation that is 25% or more foreign owned.
B) A foreign corporation carrying on a trade or business in the United States.
C) U.S. persons who acquire or dispose of an interest in a foreign partnership.
D) All of these.
E) None of these.

Question 70

Which of the following is not a foreign person?

A) A foreign corporation 51% owned by U.S. shareholders.
B) A foreign corporation 100% owned by a domestic corporation.
C) A citizen of Germany with U.S. permanent resident status (i.e., green card).
D) A citizen of Italy who spends 14 days vacationing in the United States.

Question 71

Which of the following statements regarding foreign persons not engaged in a U.S. trade or business is true?

A) Foreign persons are subject to potential withholding taxes on the gross amount of U.S.-source investment income.
B) Foreign persons with any U.S.-source income are taxed on net investment income (after expenses).
C) Foreign persons are not subject to U.S. tax if not engaged in a U.S. trade or business.
D) Foreign persons with only U.S.-source investment income are exempt from U.S. tax.

Question 72

Yvonne is a citizen of France and does not have permanent resident status in the United States. During the last three years, she has spent a number of days in the United States. Current year - 150 days First prior year - 150 days Second prior year - 90 days
Is Yvonne treated as a U.S. resident for the current year?

A) No, because Yvonne is a citizen of France.
B) No, because Yvonne was not present in the United States at least 183 days during the current year.
C) No, because although Yvonne was present in the United States at least 31 days during the current year, she was not present at least 183 days in a single year during the current or prior two years.
D) Yes, because Yvonne was present in the United States at least 31 days during the current year and 215 days during the current and prior two years (using the appropriate fractions for the prior years).

Question 73

Dark, Inc., a U.S. corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany. Dark reports $100,000 of taxable income from Dunkel on its U.S. tax return along with $400,000 of taxable income from its U.S. operations. Dark paid $30,000 in German income taxes related to the $100,000 of Dunkel income. Assuming a U.S. tax rate of 21%, what is Dark's U.S. tax liability after any allowable foreign tax credits?

A) $21,000
B) $75,000
C) $84,000
D) $105,000

Question 74

Which of the following is not a U.S. person?

A) Domestic corporation.
B) Citizen of Turkey with U.S. permanent residence status (i.e., green card).
C) U.S. corporation 100% owned by a foreign corporation.
D) Foreign corporation 100% owned by a domestic corporation.

Question 75

In working with the foreign tax credit, a U.S. corporation may be able to alleviate the problem of excess foreign taxes by:

A) Deducting the excess foreign taxes that do not qualify for the credit.
B) Repatriating more foreign income to the United States in the year there is an excess limitation.
C) Generating "same basket" foreign-source income that is subject to a tax rate higher than the U.S. tax rate.
D) Generating "same basket" foreign-source income that is subject to a tax rate lower than the U.S. tax rate.

Question 76

ForCo, a foreign corporation not engaged in a U.S. trade or business, recognizes a $3 million gain from the sale of land located in the United States. The amount realized on the sale was $50 million. Absent any exceptions, what is the required withholding amount on the part of the purchaser of this land?

A) $0
B) $300,000
C) $3 million
D) $5 million

Question 77

Which of the following is a principle used in applying the income-sourcing rules under U.S. tax law?

A) The rules should be acceptable to both countries.
B) The rules should favor the U.S. Treasury.
C) The rules should favor the treasury of the non-U.S. country.
D) The rules should apply to income items only; deductions need not be sourced in this way.

Question 78

Mitch, an NRA, sells a building in Omaha for $1 million. His basis in the building is zero for both regular tax and AMT purposes. Mitch has no other contact with the United States other than the ownership of the building. How much Federal income tax is due from Mitch on the sale?

A) $0, because Mitch is an NRA.
B) The amount realized times the top individual tax rate.
C) The net gain times the top capital gains tax rate.
D) The net gain taxed at the lesser of the applicable regular or AMT rates.

Question 79

Zhang, an NRA who is not a resident of a treaty country, receives taxable dividends of $50,000 from U.S. corporations. Zhang does not conduct a U.S. trade or business. Zhang's dividends are subject to withholding by the payor of:

A) 35%.
B) 30%.
C) 15%.
D) 0%.

Question 80

Magdala is a citizen of Italy and does not have permanent resident status in the United States. During the last three years, she has spent a number of days in the United States: Current year - 120 days First prior year - 150 days Second prior year - 150 days
Is Magdala treated as a U.S. resident for the current year?

A) Yes, because Magdala was present in the United States at least 31 days during the current year and 195 days during the current and prior two years (using the appropriate fractions for the prior years).
B) No, because Magdala is a citizen of Italy.
C) No, because Magdala was not present in the United States at least 183 days during the current year.
D) No, because although Magdala was present in the United States at least 31 days during the current year, she was not present at least 183 days in a single year during the current or prior two years.