Question 1

Disposition of stock of a domestic corporation that is a real property holding corporation is subject to tax under FIRPTA.

Accepted Answer

FIRPTA (Foreign Investment in Real Property Tax Act) imposes taxes on the disposition of stock of a domestic corporation that is a real property holding corporation. This means that when a foreign person sells their interest in such a corporation, they are subject to tax as if they had sold the underlying real estate directly. The tax rate may be up to 21% of the gross proceeds from the sale, depending on the value of the property and the ownership stake being sold.

Question 2

U.S.individuals that receive dividends from foreign corporations may not claim the deemed-paid foreign tax credit related to such dividends.

Accepted Answer

U.S. individuals cannot claim the deemed-paid foreign tax credit because it is only available to U.S. corporations that own at least 10% of the voting stock of a foreign corporation.

Question 3

U.S.taxpayers may take a current FTC equal to the lesser of the FTC limit or the actual foreign taxes (direct or indirect).

Accepted Answer

This statement is true. U.S. taxpayers may take a current Foreign Tax Credit (FTC) equal to the lesser of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued during the taxable year.

Question 4

Gains on the sale of U.S.real property held directly or indirectly through U.S.stock ownership by NRAs and foreign corporations are subject to taxation under FIRPTA.

Accepted Answer

Gains on the sale of U.S. real property by NRAs and foreign corporations are subject to taxation under the Foreign Investment in Real Property Tax Act (FIRPTA). This includes property held directly or indirectly through U.S. stock ownership.

Question 5

The existence of a U.S.trade or business is a prerequisite to having effectively connected income.

Accepted Answer

The Internal Revenue Service (IRS) of the United States defines effectively connected income (ECI) as income that is derived from a U.S. trade or business. In other words, a U.S. trade or business is a prerequisite to having ECI. Therefore, the statement is true.

Question 6

The purpose of the transfer pricing rules is to ensure that taxpayers have ultimate flexibility in shifting profits between related entities.

Accepted Answer

The purpose of transfer pricing rules is actually to prevent taxpayers from artificially shifting profits to related entities in order to avoid paying taxes. The rules aim to ensure that transactions between related entities are conducted at arm's length, meaning that the prices and terms of the transactions are comparable to those that would be agreed upon by unrelated parties in similar circumstances. This helps to ensure that each entity in a multinational enterprise pays taxes on its fair share of profits.

Question 7

If Polka,Inc. ,a U.S.taxpayer,pays foreign taxes of $50,000 on foreign-source single-category (basket)income of $90,000 and has worldwide taxable income of $450,000,on which it owes U.S.taxes of $157,500 before FTC,its FTC is $50,000.

Accepted Answer

The foreign tax credit (FTC) is limited to the lesser of the foreign taxes paid or the U.S. tax liability on the foreign-source income. The U.S. tax liability on the foreign-source income is calculated as ($90,000 / $450,000) * $157,500 = $31,500. Therefore, the FTC is limited to $31,500, not $50,000.

Question 8

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 is true.

Question 9

If a foreign corporation's U.S.effectively connected earnings for the taxable year are $900,000 and its net equity has increased by $40,000,its DEA is $940,000.

Accepted Answer

DEA (Dividend Equivalent Amount) is calculated as the effectively connected earnings minus the increase in net equity, not the sum. Therefore, DEA would be $860,000 ($900,000 - $40,000).

Question 10

Scott,Inc. ,a domestic corporation,receives a dividend of $800,000 from a § 902 noncontrolled foreign corporation.Deemed-paid foreign taxes attributable to the dividend are $120,000.If Scott,Inc.elects the FTC,its gross income attributable to this dividend is $800,000.

Accepted Answer

The gross income attributable to the dividend includes both the dividend received and the deemed-paid foreign taxes, totaling $920,000.

Question 11

Collins,Inc.received gross foreign-source dividend income of $250,000.Foreign taxes withheld on the dividend were $25,000 and no § 902 credit is available.Its worldwide taxable income for the tax year is $500,000.Its U.S.tax before FTC is $175,000.Collins' current year FTC is $87,500.

Accepted Answer

The foreign tax credit (FTC) is limited to the lesser of the foreign taxes paid or the U.S. tax attributable to foreign-source income. The U.S. tax attributable to the foreign-source income is calculated as ($250,000 / $500,000) * $175,000 = $87,500. However, since the foreign taxes withheld are $25,000, the FTC is limited to $25,000, not $87,500.

Question 12

All of an NRA's U.S.-source income that is not effectively connected with a U.S.trade or business is subject to a flat U.S.income tax rate of 30% unless modified by a treaty.

Accepted Answer

The answer of All of an NRA's U.S.-source income that...

Question 13

ForCo,a foreign corporation,purchases widgets from USCo,Inc. ,its U.S.parent corporation.The widgets are sold by ForCo to another unrelated foreign corporation in the same country as ForCo.The income from sale of the widgets by ForCo is foreign base company sales income.

Accepted Answer

The answer of ForCo,a foreign corporation,purchases widgets from USCo,Inc. ,its...

Question 14

A nonresident alien with U.S.-source income effectively connected with a U.S.trade or business can take effectively connected deductions against that income.

Accepted Answer

Nonresident aliens with U.S.-source income effectively connected with a U.S. trade or business can take deductions that are effectively connected with that income, including deductions for expenses incurred in earning that income. Examples of effectively connected deductions include business expenses, depreciation on business assets, and business bad debts.

Question 15

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 as the U.S. system for taxing income earned outside its borders by U.S. persons is known as the global approach, as it taxes worldwide income of its citizens and residents.

Question 16

ForCo,a foreign corporation incorporated in Belgium,manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany.The income from the sale of widgets is foreign base company sales income.

Accepted Answer

The answer of ForCo,a foreign corporation incorporated in Belgium,manufactures widgets...

Question 17

Abe,a U.S.shareholder under the CFC provisions,owns 49% of a CFC.If the CFC's Subpart F income for the taxable year is $200,000,Abe is not taxed on receipt of a constructive dividend of $98,000 because he doesn't own more than 50% of the CFC.

Accepted Answer

Under the CFC provisions, if a U.S. shareholder owns at least 50% of a CFC, they are subject to taxation on their share of the CFC's Subpart F income, which includes certain types of income earned by the CFC. In this scenario, Abe owns 49% of the CFC and therefore is not subject to taxation on his share of the Subpart F income. However, if he were to receive a constructive dividend of $98,000, this would be subject to taxation as ordinary income regardless of his ownership percentage.

Question 18

A nonresident alien is defined as someone who is not a citizen or resident of the U.S.

Accepted Answer

A nonresident alien is someone who is not a citizen or resident of the U.S.

Question 19

An appropriate transfer price is one that considers the risks,assets,and functions of the persons to whom income is assigned.

Accepted Answer

An appropriate transfer price should take into account the risks, assets, and functions of the individuals or entities involved in the transfer. This ensures that the transfer price is fair and reflects the value of the goods or services being transferred.

Question 20

GreenCo,a domestic corporation,earns $25 million of taxable income from U.S.sources and $5 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 the sum of all its taxable income, both foreign and domestic, on its U.S. tax return. Therefore, the taxable income reported on the U.S. tax return is $30 million.

Quiz 25: Taxation of International Transactions