In 2017, Phoenix Corporation is a controlled foreign corporation (CFC) incorporated in Country X. It is 100% owned by its U.S parent corporation. Phoenix has $80,000 of taxable income from the sale of widgets that were purchased from their U.S. parent corporation. All widgets have the same gross profit. Sixty percent of the widgets were sold through a Country Y wholesaler that is 100% owned by Phoenix, and are destined for use in Country Y. The remaining 40% are sold through unrelated Country X wholesalers and are destined for use in Country X. What amount of profits will be constructively distributed as foreign- based company sales income to the U.S. parent company?

Question

Quizplus · Accepted Answer

Since Phoenix Corporation is a controlled foreign corporation (CFC), the U.S parent corporation is required to include in its taxable income the amount of foreign-based company sales income constructively distributed to the U.S. parent company.

The foreign-based company sales income is equal to (gross profit x sales price), and the sales price is determined based on where the widgets were sold and their intended use.

For the 60% of widgets sold through Country Y, the sales price is based on the arm's length transfer price between Phoenix and its Country Y wholesaler. This amount is not included in foreign-based company sales income.

For the 40% of widgets sold through unrelated Country X wholesalers, the sales price is equal to the arm's length transfer price between Phoenix and the wholesalers, since they are unrelated parties. This amount is included in foreign-based company sales income.

Therefore, the foreign-based company sales income is equal to:

(40% x gross profit x sales price) = (0.4 x $40,000 x $2) = $32,000

Thus, the amount of profits that will be constructively distributed as foreign-based company sales income to the U.S. parent company is $32,000. The correct answer is D.

In 2017, Phoenix Corporation Is a Controlled Foreign Corporation (CFC)