Question 1

In allocating interest expense between U.S.and foreign sources,a taxpayer must use the tax basis of assets in determining the proper interest apportionment.

Accepted Answer

False

Question 2

Hendricks Corporation,a domestic corporation,owns 40 percent of Shane Corporation and 55 percent of Ferrell Corporation,both foreign corporations.Ferrell owns the other 60 percent of Shane Corporation.Both Shane and Ferrell are CFCs.

Accepted Answer

The scenario describes a cross-ownership arrangement between domestic and foreign corporations, with two foreign subsidiaries being controlled by a foreign affiliate. This meets the criteria of Controlled Foreign Corporations (CFCs) as defined by the US tax code.

Question 3

The transfer of the assets of a foreign branch (of a U.S.corporation)to a newly formed foreign corporation is always tax deferred under § 351.

Accepted Answer

The transfer of assets of a foreign branch to a newly formed foreign corporation is not always tax-deferred under § 351. This is because § 351 applies only to transfers of property to a domestic corporation. However, there may be other tax deferral provisions or rules in the foreign country that govern the transfer of the assets.

Question 4

In all cases,the sourcing of income is determined by the residence of the taxpayer.

Accepted Answer

The sourcing of income can be determined by various factors such as the location of the source of income, type of income, and the tax laws of the relevant country or jurisdiction. Residence of the taxpayer is just one of the factors that can be considered in determining the sourcing of income.

Question 5

Monika,a nonresident alien,is employed by GlobalCo,a foreign corporation.Monika works in the United States for 32 days during the year,receiving a gross salary of $2,900 for this period.GlobalCo is not engaged in a U.S.trade or business.Under the "commercial traveler" exception,the $2,900 is not classified as U.S.-source income.

Accepted Answer

The "commercial traveler" exception states that compensation for services performed in the U.S. by a nonresident alien who is temporarily present in the U.S. as a nonresident alien for less than 90 days and is engaged in business activities, including the selling of goods or services or the solicitation of orders, may be exempt from U.S.-source income. Since Monika is a nonresident alien who was present in the U.S. for only 32 days and was engaged in business activities, her $2,900 salary is exempt from U.S.-source income.

Question 6

Interest paid to an unrelated party by a domestic corporation that historically earns 81% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.

Accepted Answer

According to the IRS regulations, interest paid to an unrelated party by a domestic corporation that earns at least 80% of its gross income each year from the conduct of an active trade or business outside the United States is considered foreign-source income. Therefore, since the corporation earns 81% of its gross income from an active trade or business outside the US, the interest paid to an unrelated party is foreign-source income.

Question 7

A "U.S.shareholder" for purposes of CFC classification is any U.S.person who owns directly,indirectly,or constructively at least 10% of the voting power or value of a foreign corporation.

Accepted Answer

The answer of A "U.S.shareholder" for purposes of CFC classification...

Question 8

All losses are apportioned against U.S.-source income.

Accepted Answer

Not all losses are apportioned against U.S.-source income; the apportionment depends on the specific tax rules and the nature of the income and losses.

Question 9

The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.

Accepted Answer

§ 482 of the Internal Revenue Code allows the IRS to reallocate income, deductions, credits, or allowances between related parties to better reflect the taxable income of the parties involved. This tool is used by the IRS to prevent tax evasion and to ensure that transactions between related parties are conducted on an arm's length basis.

Question 10

A Qualified Business Unit of a U.S.corporation that operates in Germany generally uses the U.S.dollar as its functional currency.

Accepted Answer

A Qualified Business Unit (QBU) operating in Germany is required to use the euro as its functional currency according to the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS).

Question 11

Dividends received from Shamrock,Ltd. ,an Irish corporation that earns 40% of its income from U.S.business activities,are foreign-source income.

Accepted Answer

The answer of Dividends received from Shamrock,Ltd. ,an Irish corporation...

Question 12

The source of income received for the use of intangible property is the country in which the owner of the property producing the income is resident.

Accepted Answer

The source of income from intangible property is generally determined by the location where the property is used, not where the owner resides.

Question 13

Income tax treaties may provide for higher withholding tax rates on interest income than the rate provided under U.S.statutory law.

Accepted Answer

Income tax treaties typically provide for lower withholding tax rates on interest income compared to the rates under U.S. statutory law to avoid double taxation and encourage cross-border investments.

Question 14

Gain or loss on the exchange of foreign currency must be considered separately from the underlying transaction (e.g. ,the purchase or sale of goods).

Accepted Answer

According to accounting standards, gains or losses on the exchange of foreign currency must be recorded separately from the underlying transaction. This is because fluctuations in currency exchange rates can impact the amount of money received or paid in a transaction, and must be accounted for separately in order to provide an accurate representation of the financial results of an organization. Failure to separate currency exchange gains or losses from underlying transactions can result in inaccurate financial reporting and analysis.

Question 15

Twelve unrelated U.S.persons own a foreign corporation equally.The foreign corporation is a CFC.

Accepted Answer

The answer of Twelve unrelated U.S.persons own a foreign corporation...

Question 16

Tax deferred reorganizations involving U.S.-owned foreign corporations may be currently taxable under certain circumstances.

Accepted Answer

Tax deferred reorganizations involving U.S.-owned foreign corporations may be currently taxable if certain conditions are met, such as if the reorganization does not qualify for deferral under the applicable section of the Internal Revenue Code or if the foreign corporation is deemed to be a controlled foreign corporation (CFC) under the tax rules. It is important to consult with a tax professional to determine the tax implications of any proposed reorganization.

Question 17

The United States has income tax treaties with only members of the European Union.

Accepted Answer

The United States has income tax treaties with various countries, not just members of the European Union.

Question 18

A nonresident alien realizes a gain on the sale of commercial real estate located in Cleveland,Ohio.The real estate was sold to his cousin who is also a nonresident alien.The seller has foreign-source income from the sale because the seller is a foreign resident.

Accepted Answer

The source of income from the sale of real estate is determined by the location of the property, not the residency of the seller. Since the property is located in Ohio, the income is U.S.-source income.

Question 19

"Inbound" and "offshore" transfers are exempt from taxation under § 367.

Accepted Answer

The answer of "Inbound" and "offshore" transfers are exempt from...

Question 20

Income from international communications activities earned by a U.S.person is sourced 100% in the United States.

Accepted Answer

Income from international communications activities can be sourced both in the United States and in foreign countries, depending on factors such as the location of the customers, employees, and assets involved in the activity. The determination of the source of income for tax purposes involves a complex set of rules and calculations.

Quiz 25: Taxation of International Transactions