Deck 9: Taxation of International Transactions

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

A Qualified Business Unit of a U.S. corporation that operates in Germany generally uses the Euro as its functional currency.

Answer 3

True

Question 4

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

Question 5

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 6

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

Question 7

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

Question 8

Serena, a nonresident alien, is employed by GlobalCo, a foreign corporation. Serena works in the United States for 3 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 9

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 foreign­source income from the sale because his home country is not the U.S.

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

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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 17

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

Question 18

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 19

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.

Question 20

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 21

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

Question 22

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.

Question 23

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 24

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.

Question 25

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 26

Subpart F income includes portfolio income like dividends and interest.

Question 27

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

Question 28

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.

Question 29

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.

Question 30

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.

Question 31

Bighley shows the following results for the year. Bighley offsets the general-basket loss against U.S.-source income for the current tax year.
U.S.-source income $5 million
Foreign-source income, general FTC basket ($2 million)
Foreign-source income, passive FTC basket $3 million

Question 32

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

Question 33

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 34

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.

Question 35

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.

Question 36

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 37

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 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

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

Question 40

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

Question 41

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 42

Qwan, a U.S. corporation, reports $250,000 interest expense for the tax year. None of the interest relates to nonrecourse debt or loans from affiliated corporations. Qwan's U.S. and foreign assets are reported as follows. How should Qwan assign its interest expense between U.S. and foreign sources to maximize its FTC for the current year?

A) Using tax book values.
B) Using tax book value for U.S. source and fair market value for foreign source.
C) Using fair market values.
D) Using fair market value for U.S. source and tax book value for foreign source.

Question 43

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 44

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.

Question 45

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

Question 46

Section 482 is used by the 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 the above.
E) None of the above.

Question 47

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 U.S. 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 the above statements is false.

Question 48

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 U.S. 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 49

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 50

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

A) If the corporation earns at least 80% of its gross income over the immediately preceding three tax years from the active conduct of a U.S. trade or business.
B) If the corporation earns at least 25% of its gross income over the immediately preceding three tax years from the active conduct of a U.S. trade or business.
C) Unless the corporation earns at least 80% of its gross income over the immediately preceding three tax years from the active conduct of a foreign trade or business.
D) Unless the corporation earns at least 25% of its gross income over the immediately preceding three tax years from the active conduct of a foreign trade or business.
E) In all of the above cases.

Question 51

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

A) $15,000 loss.
B) $15,000 gain.
C) $75,000 gain.
D) $0. There is no exchange gain or loss on a dividend distribution.

Question 52

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: $1.25Can. 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: $1.25Can. Flapp has an exchange gain of $50,000.
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: $1.25Can. Flapp has an exchange loss of $5,000.
D) Flapp's foreign currency exchange loss is $50,000.

Question 53

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 U.S.

Question 54

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 $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 source 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 55

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 56

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 U.S. taxing authorities.

Question 57

GreenCo, a U.S. corporation, earns $25 million of taxable income from U.S. sources and $10 million of taxable income from foreign sources. What amount of taxable income does GreenCo report on its U.S. tax return?

A) $25 million.
B) $35 million.
C) $25 million less any tax paid on the foreign income.
D) $35 million less any tax paid on U.S. income.

Question 58

USCo, a U.S. corporation, purchases inventory from distributors within the U.S. and resells this inventory to customers outside the U.S., with title passing outside the U.S. Profit on the sale is $10,000. What is the source 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 59

Which of the following statements best describes the purpose of § 482, under which the Treasury can reallocate income and deductions among related taxpayers?

A) To provide tax benefits to U.S. multinationals that export U.S. produced property.
B) To allow the IRS to select the best method for determining transfer prices for U.S. taxpayers.
C) To alleviate double taxation problems generated by related entities doing business in two or more countries.
D) To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.

Question 60

Liang, an NRA, is sent to the United States by Fuller Corporation, her foreign 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. 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:

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

Question 61

Wood, a U.S. corporation, owns 30% of Hout, a foreign corporation. The remaining 70% of Hout is owned by other foreign corporations not controlled by Wood. Hout's functional currency is the euro. Wood receives a 50,000€ distribution from Hout. If the average exchange rate for the E & P to which the dividend is attributed is 1.2€: $1, the exchange rate at year end is .95€: $1, and on the date of the dividend payment the exchange rate is 1.1€: $1, what is Wood's tax result from the distribution?

A) Wood receives a dividend of $45,455 and realizes an exchange gain of $3,788 [$45,455 minus $41,667 (50,000€/1.2)].
B) Wood receives a dividend of $52,632 (50,000€/.95) with no exchange gain or loss.
C) Wood receives a dividend of $41,667 and realizes an exchange loss of $3,788 ($41,667 minus $45,455).
D) Wood receives a dividend of $45,455 (50,000€/1.1) with no exchange gain or loss.

Question 62

SilverCo, a U.S. corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly owned foreign corporation. SilverCo transfers $200 in Yen (basis = $150) and $900 in land (basis = $925) to GreenCo. GreenCo uses these assets in carrying on a trade or business outside the United States. What gain or loss, if any, is recognized as a result of this transaction?

A) ($25)
B) $0
C) $25
D) $50

Question 63

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 $270,000. What is Peanut's foreign tax credit?

A) $500,000
B) $275,000
C) $150,000
D) $5,000

Question 64

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

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

Question 65

GoldCo, a U.S. corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly owned foreign corporation. GoldCo transfers $200 in inventory (basis = $50) and $900 in land (basis = $950) to GreenCo. GreenCo uses these assets in carrying on a trade or business outside the U.S. What gain or loss, if any, does GoldCo recognize as a result of this transaction?

A) ($50)
B) $0
C) $100
D) $150

Question 66

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 67

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 (before any § 78 gross­up):

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

Question 68

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 69

Columbia, Inc., a U.S. corporation, receives a $150,000 cash dividend from Starke, Ltd. Columbia owns 15% of Starke. Starke's E & P is $2 million and it has paid foreign taxes of $750,000 attributable to that E & P. What is Columbia's foreign tax credit related to the Starke dividend?

A) $22,500
B) $56,250
C) $150,000
D) $750,000

Question 70

Which of the following transactions by a U.S. corporation may result in taxation under § 367?

A) Incorporation of U.S branch as a U.S. corporation when the branch earns only foreign-source income.
B) Incorporation of a U.S. branch by a U.S. corporation when the branch earns only U.S.-source income.
C) Incorporation of a U.S. branch as a U.S. corporation if the new U.S. corporation also has foreign shareholders.
D) Incorporation of a U.S. branch as a U.S. corporation if the new U.S. corporation has no foreign shareholders.

Question 71

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 a 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 72

Columbia, Inc., a U.S. corporation, receives a $150,000 cash dividend from Starke, Ltd. Columbia owns 15% of Starke. Starke's E & P is $2 million and it has paid foreign taxes of $750,000 attributable to that E & P. What is Columbia's gross income related to the Starke dividend?

A) $206,250
B) $150,000
C) $56,250
D) $22,500

Question 73

Chipper, Inc., a U.S. corporation, reports worldwide taxable income of $1 million, including a $300,000 dividend from Emma, Inc., a foreign corporation. Chipper's U.S. tax liability before FTC is $340,000. Chipper owns 20% of Emma. Emma's E & P after taxes is $8 million and it has paid foreign taxes of $2 million attributable to that E & P. If Chipper elects the FTC, its U.S. gross income with regard to the dividend from Emma is:

A) $300,000.
B) $340,000.
C) $375,000.
D) $400,000.

Question 74

Bryden, a controlled foreign corporation owned 100% by USCo, earned $900,000 in Subpart F income for the current year. Bryden's current year E & P is $350,000, and its accumulated E & P is $15 million. What is the current year Subpart F deemed dividend to USCo?

A) $350,000
B) $550,000
C) $900,000
D) $15 million

Question 75

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 76

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

A) Purchase of inventory from 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 77

Xenia, Inc., a U.S. shareholder, owns 100% of Fredonia, a CFC. Xenia receives a $3 million cash distribution from Fredonia. Fredonia's E & P is composed of the following amounts. -$500,000 attributable to previously taxed increases in investment in U.S. property.
-$1,500,000 attributable to previously taxed Subpart F income.
-$4,800,000 attributable to other E & P. Xenia recognizes a taxable dividend of:

A) $3 million.
B) $2.5 million.
C) $1.5 million.
D) $1 million.
E) $0.

Question 78

Maxim, Inc., a U.S. corporation, reports worldwide taxable income of $8 million, including a $900,000 dividend from ForCo, a wholly­owned foreign corporation. ForCo's undistributed E & P are $15 million and it has paid $6 million of foreign income taxes attributable to these earnings. What is Maxim's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

A) $0
B) $360,000
C) $900,000
D) $6 million

Question 79

OutCo, a controlled foreign corporation in Meena, 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 80

The following persons own Schlecht Corporation, a foreign corporation. 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.
D) Marina includes $24,000 in gross income.