Question 1

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 statement is incorrect. The U.S. system for taxing income earned outside its borders by U.S. persons is referred to as the worldwide approach, because all income earned by U.S. persons both inside and outside the U.S. is subject to taxation.

Question 2

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:

Accepted Answer

Liang's U.S.-source taxable income is calculated by multiplying her total income by the ratio of U.S. working days to total working days. In this case, 40 out of 50 working days were spent in the U.S., so Liang's U.S.-source taxable income is $20,000 x (40/50) = $16,000. Since her employer does not have a U.S. trade or business and she spends no other time in the U.S., Liang's non-U.S. income is not subject to U.S. taxation. Therefore, choices A, C, and D are incorrect.

Question 3

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?

Accepted Answer

The answer of Qwan, a U.S. corporation, reports $250,000 interest...

Question 4

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?

Accepted Answer

The answer of ForCo, a foreign corporation, receives interest income...

Question 5

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.

Accepted Answer

Chang has U.S.-source income of $2,500 because her foreign employer, Fisher, Inc., has a U.S. branch. As per the U.S. tax laws, income earned in the U.S. by a foreign corporation's employee is considered U.S.-source income, regardless of the length of stay in the U.S. Also, the exemption limit for a foreign employee's U.S.-source income is not applicable in this scenario.

Question 6

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:

Accepted Answer

The answer of Wood, a U.S. corporation, owns Holz, a...

Question 7

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

The statement accurately describes the U.S. system for taxing income earned by non-U.S. persons inside its borders. This type of taxation is called inbound taxation.

Question 8

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

Accepted Answer

The statement that 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 is false. There is no specific limit to the number of foreign countries that can be covered by a U.S. income tax treaty.

Question 9

Section 482 is used by the Treasury to:

Accepted Answer

The answer of Section 482 is used by the Treasury...

Question 10

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?

Accepted Answer

The gain on the sale is the difference between the selling price of $350,000 and the adjusted basis of $20,000, which equals $330,000. Since title passed in France, the sale is considered foreign source. However, only $250,000 of the gain is attributable to foreign operations ($350,000 - $100,000), while the remaining $80,000 is attributable to the depreciation deductions that were previously allocated to U.S.-source income. Therefore, the source of the gain is $250,000 foreign source and $80,000 U.S. source.

Question 11

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

Accepted Answer

Double taxation occurs when the same income is taxed twice by two different jurisdictions. In this case, both the United States and a foreign country are taxing the foreign-source income of a U.S. resident, which would result in double taxation without the foreign tax credit. The foreign tax credit allows the taxpayer to offset U.S. tax liability to avoid double taxation. Options A, B, and D are incorrect because they do not involve income being taxed by two different jurisdictions.

Question 12

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

Accepted Answer

§ 482 is designed to ensure that related entities are taxed appropriately by requiring that transactions between them be conducted at arm's length, meaning that the prices charged should be similar to those that would be charged between unrelated parties. This puts a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.

Question 13

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?

Accepted Answer

GreenCo must report all of its taxable income, both from U.S. and foreign sources, on its U.S. tax return. Therefore, GreenCo would report a taxable income of $35 million ($25 million U.S. income + $10 million foreign income) on its U.S. tax return.

Question 14

An advance pricing agreement (APA) is used between:

Accepted Answer

An advance pricing agreement (APA) is a program in which the taxpayer and the IRS agree on the transfer pricing method used for cross-border transactions. Therefore, the APA is used between the taxpayer and the IRS, making choice C the best answer.

Question 15

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?

Accepted Answer

Since Olaf has no trade or business activity in the U.S., and the sale was made through a broker in Oslo, the gain is considered foreign-source income and is not subject to U.S. taxation.

Question 16

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?

Accepted Answer

The answer of Flapp Corporation, a U.S. corporation, conducts all...

Question 17

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?

Accepted Answer

The answer of Wood, a U.S. corporation, owns 30% of...

Question 18

U.S. income tax treaties typically:

Accepted Answer

U.S. income tax treaties typically provide rules by which multinational taxpayers avoid double taxation. This means that taxpayers are not taxed twice on the same income by both their country of residence and the source country. In order to avoid double taxation, the treaty may provide for a credit against the taxpayer's home country tax liability for taxes paid in the source country or may provide for exemptions, deductions, or other relief.

Question 19

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

Accepted Answer

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

Question 20

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?

Accepted Answer

The source of USCo's inventory sales income is foreign source since the sale occurred outside the U.S. with title passing outside the U.S., regardless of where the inventory was originally purchased from.

Quiz 9: Taxation of International Transactions