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?
A)$0
B)$32,000
C)$48,000
D)$80,000

Question

Quizplus · Accepted Answer

Under the CFC rules, a U.S. shareholder is required to include in its gross income its pro rata share of the CFC's Subpart F income. Subpart F income includes foreign-based company sales income (FBCSI), which is income from the sale of goods to related parties (including a related party's related parties) that are manufactured, produced, grown or extracted outside of the country where the CFC is organized.

In this scenario, Phoenix Corporation is a CFC and has $80,000 of taxable income from the sale of widgets. Sixty percent of these widgets were sold through a Country Y wholesaler that is 100% owned by Phoenix, and are destined for use in Country Y. This sale is not considered FBCSI because the widgets were sold to a related party for use in the country where Phoenix is organized.

The remaining 40% of the widgets were sold through unrelated Country X wholesalers and are destined for use in Country X. This sale is considered FBCSI because the widgets were sold to unrelated parties for use outside the country where Phoenix is organized.

Therefore, $32,000 (40% of $80,000) of the profits will be constructively distributed as FBCSI to the U.S. parent company. Hence, the correct answer is option C.

Phoenix Corporation Is a Controlled Foreign Corporation (CFC)incorporated in Country