Question 1

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 2

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

Since USCo earns 85% of its income from foreign sources, only 15% of the interest income paid by USCo to ForCo is considered U.S. source. Therefore, the U.S. source amount is $100,000 x 15% = $15,000, which is less than the $30,000 threshold for foreign corporations to have U.S. source income. Therefore, the answer is A, $0.

Question 3

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 of taxing income earned by non-U.S. persons inside its borders. This is referred to as inbound taxation because the foreign persons are entering (coming into) the United States to earn the income subject to taxation.

Question 4

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, regardless of the source, on its U.S. tax return. Therefore, the amount of taxable income reported on its U.S. tax return is the sum of the $25 million of U.S. source taxable income and the $10 million of foreign source taxable income, which equals $35 million.

Question 5

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. $\begin{array}{l}
\text { Fair market value }\
\begin{array}{lr}
\text { U.S. assets } & \$ 5,000,000 \
\text { Foreign assets } & \$ 10,000,000 \
\text { Tax book value: } & \
\text { U.S. assets } & \$ 2,000,000 \
\text { Foreign assets } & \$ 6,000,000
\end{array}
\end{array}$ ? How should Qwan assign its interest expense between U.S. and foreign sources to maximize its FTC for the current year?

Accepted Answer

Using fair market values maximizes the allocation of interest expense to foreign sources, which can increase the foreign tax credit (FTC) by reducing foreign source income subject to U.S. tax.

Question 6

Section 482 is used by the Treasury to:

Accepted Answer

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

Question 7

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

Accepted Answer

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

Question 8

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 earned income from consulting services performed in the U.S. for Fisher's U.S. branch, which makes it U.S.-source income. Since Fisher, Inc. has a U.S. branch, Chang's income is considered effectively connected with a U.S. trade or business, and is subject to U.S. taxation. However, if Chang is in the U.S. for 90 days or less, she may qualify for an exemption under the U.S. tax treaty with her home country. The exemption applies to income from personal services performed in the U.S. for a foreign employer, if the individual is present in the U.S. for no more than 90 days in a tax year, and the income is less than $3,000. However, the exemption does not apply to income earned by a nonresident alien in connection with a U.S. trade or business of the foreign employer. Therefore, option B is not correct. The commercial traveler exception applies to employees who are present in the U.S. for less than 90 days, and who engage in certain activities, such as soliciting orders or negotiating contracts, on behalf of a foreign employer. However, the exception does not apply to income earned by a nonresident alien in connection with a U.S. trade or business of the foreign employer. Therefore, option D is not correct.

Question 9

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 only based on her U.S. working days, which is 40. Therefore, her U.S.-source taxable income is $16,000 (40/50 x $20,000). Since she has no other U.S. source income and her employer has no U.S. trade or business, she is not subject to U.S. taxation on her non-U.S. working days.

Question 10

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

The gain from the sale of the MicroShift, Inc. shares is considered foreign-source income and is not subject to U.S. taxation because Olaf is not engaged in any trade or business activities in the United States. Additionally, the sale took place through Olaf's broker in Oslo, which further solidifies the source of the income as foreign.

Question 11

An advance pricing agreement (APA) is used between:

Accepted Answer

An advance pricing agreement (APA) is an agreement between a taxpayer and the IRS to establish transfer pricing methods and related outcomes for transactions between related parties. It is not an agreement between two or more governments or the IRS and U.S. taxing authorities.

Question 12

Generally, accrued foreign income taxes are translated at the:

Accepted Answer

The answer of Generally, accrued foreign income taxes are translated...

Question 13

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 14

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: 0.8€. Wood's exchange gain or loss is:

Accepted Answer

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

Question 15

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 the inventory sales income is foreign because the inventory was sold to customers outside the U.S. with title passing outside the U.S.

Question 16

U.S. income tax treaties typically:

Accepted Answer

U.S. income tax treaties typically provide rules by which multinational taxpayers avoid double taxation, meaning that they do not have to pay taxes on the same income to both their country of residence and the source country where the income was earned. This is typically achieved through provisions for offsetting taxes paid in one country against taxes owed in the other, or for granting credits for taxes paid in the source country.

Question 17

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

Accepted Answer

When both the United States and a foreign country tax the foreign-source income of a U.S. resident, double taxation occurs. Without the foreign tax credit, the U.S. taxpayer would have to pay taxes twice on the same income – once to the foreign country where the income was earned and again to the United States. The foreign tax credit allows the taxpayer to offset the U.S. tax liability by the amount of foreign tax paid, preventing double taxation. Options A, B, and D do not involve double taxation of foreign-source income by both the United States and a foreign country.

Question 18

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 of the equipment is $330,000 ($350,000 sale price minus $20,000 adjusted basis). Since the title passed to the buyer in France, the sale is considered a foreign transaction. Therefore, $250,000 of the gain is considered foreign source income (the difference between the sale price and the adjusted basis) and $80,000 is considered U.S.-source income (the depreciation deductions previously claimed).

Question 19

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, regardless of its source, is subject to taxation.

Question 20

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

Accepted Answer

U.S. income tax treaties are not restricted to covering only five foreign countries. This statement is false since there is no such limit.

Quiz 9: Taxation of International Transactions