Lincoln Corporation, a U.S. corporation, owns 50% of the stock of a controlled foreign corporation (CFC). At the beginning of the year, Lincoln's basis in its CFC stock was $100,000. The CFC's current-year income was $1 million, $600,000 of which was subpart F income. The CFC has no global intangible low-taxed income, paid no foreign income tax and distributed no dividends. How much current taxable income must Lincoln report as a result of its ownership of the CFC?

Question

Quizplus · Accepted Answer

As Lincoln owns 50% of the CFC stock, it will be attributed 50% of the CFC's income, which is $500,000 ($1 million x 50%). Since $600,000 of the CFC's income is subpart F income, this amount will be included in Lincoln's current taxable income under the Subpart F rules. Therefore, Lincoln will have to report $300,000 ($600,000 x 50%) of subpart F income as taxable income on its U.S. tax return. The remaining $200,000 of the CFC's income ($500,000 - $300,000) will not be currently taxable to Lincoln as the CFC has not distributed any dividends to Lincoln.