Question 1

ForCo, a foreign corporation not engaged in a U.S. trade or business, recognizes a $3 million gain from the sale of land located in the United States. The amount realized on the sale was $50 million. Absent any exceptions, what is the required withholding amount on the part of the purchaser of this land?

Accepted Answer

The required withholding amount on the part of the purchaser of the land is 10% of the amount realized on the sale, which is $50 million. Therefore, the correct withholding amount is $5 million (10% of $50 million). This is in accordance with FIRPTA (Foreign Investment in Real Property Tax Act) regulations.

Question 2

Peanut, Inc., a U.S. corporation, receives $500,000 of foreign-source interest income, on which foreign taxes of $5,000 are withheld. Peanut's worldwide taxable income is $900,000, and its U.S. Federal income tax liability before FTC is $270,000. What is Peanut's foreign tax credit?

Accepted Answer

Peanut's foreign tax credit is limited to the lesser of the foreign taxes paid or the U.S. tax on the foreign-source income. In this case, the U.S. tax on the foreign-source income is $45,000 (900,000 x 5%), which is greater than the foreign taxes paid of $5,000. Therefore, Peanut's foreign tax credit is limited to $5,000.

Question 3

A controlled foreign corporation (CFC) realizes Subpart F income from:

Accepted Answer

Subpart F income includes foreign base company sales income, which arises from transactions involving related parties where the goods are purchased from or sold to a related party and the goods are neither manufactured nor sold for use in the CFC's country of incorporation.

Question 4

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

Accepted Answer

Non-U.S. persons can be subject to a withholding tax on U.S.-source portfolio income. While non-U.S. persons may not be subject to U.S. income tax on all types of income, they can be subject to withholding tax on certain types of income sourced to the U.S., such as dividends, interest, and some capital gains.

Question 5

Dark, Inc., a U.S. corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany. Dark reports $100,000 of taxable income from Dunkel on its U.S. tax return, along with $400,000 of taxable income from its U.S. operations. Dark paid $30,000 in German income taxes related to the $100,000 of Dunkel income. Assuming a U.S. tax rate of 21%, what is Dark's U.S. tax liability after any allowable foreign tax credits?

Accepted Answer

Dark's taxable income is $500,000 ($100,000 from Dunkel + $400,000 from U.S. operations). Its U.S. tax liability before any foreign tax credit is $105,000 ($500,000 x 21%). However, Dark can claim a foreign tax credit for the $30,000 of German income taxes paid, reducing its U.S. tax liability to $84,000 ($105,000 - $30,000). Therefore, the correct answer is C.

Question 6

Which of the following situations requires the filing of an information return with the U.S. government?

Accepted Answer

All three situations listed require the filing of an information return with the U.S. government.

A) A domestic corporation that is 25% or more foreign owned must file Form 5472 with the IRS to report certain transactions between the foreign owner and the domestic corporation.

B) A foreign corporation carrying on a trade or business in the United States must file Form 1120-F with the IRS to report its income, deductions, and credits.

C) U.S. persons who acquire or dispose of an interest in a foreign partnership must file Form 8865 with the IRS to report certain information about the partnership and its activities.

Question 7

Wellington, Inc., a U.S. corporation, owns 30% of a CFC that has $50 million of earnings and profits for the current year. Included in that amount is $20 million of Subpart F income. Wellington has been a CFC for the entire year and makes no distributions in the current year. Wellington must include in gross income:

Accepted Answer

As a U.S. corporation owning 30% of a CFC with $50 million of earnings and profits for the current year, Wellington is subject to Subpart F income inclusion rules. Subpart F income includes certain types of income earned by a foreign corporation that are currently taxable in the U.S. regardless of whether the income is distributed to the U.S. shareholder.

In this case, $20 million of the CFC's income is Subpart F income. Wellington must include in gross income its pro rata share of Subpart F income, which is 30% x $20 million = $6 million. Therefore, the correct answer is B.

Question 8

Zhang, an NRA who is not a resident of a treaty country, receives taxable dividends of $50,000 from U.S. corporations. Zhang does not conduct a U.S. trade or business. Zhang's dividends are subject to withholding by the payor of:

Accepted Answer

As Zhang is not a resident of a treaty country, he is subject to the default withholding rate of 30% on taxable U.S. dividends.

Question 9

Kunst, a U.S. corporation, generates $100,000 of foreign-source income in the general income basket and $40,000 of foreign-source income in the passive income basket. Kunst's worldwide taxable income is $1,200,000, and its U.S. tax liability before FTC is $420,000. Foreign taxes attributable to the general income basket are $60,000 and to the passive income are $4,000. What is Kunst's foreign tax credit for the tax year?

Accepted Answer

The foreign tax credit is limited to the lesser of the foreign taxes paid or the U.S. tax on the foreign-source income. For the general income basket, the U.S. tax is ($100,000/$1,200,000) * $420,000 = $35,000. For the passive income basket, the U.S. tax is ($40,000/$1,200,000) * $420,000 = $14,000. Therefore, the foreign tax credit is $35,000 (general) + $4,000 (passive) = $39,000.

Question 10

Luisa, a non-U.S. person with a green card, spends the following days in the United States. 
Luisa's residency status for Year 3 is:

Accepted Answer

Luisa is considered a U.S. resident because she has a green card, which gives her permanent residence in the United States.

Question 11

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

Accepted Answer

A non-U.S. person's effectively connected U.S. business income is subject to U.S. income taxation. This includes income from a trade or business that is conducted within the United States by the non-U.S. person, and any income from U.S. real property that is used in a trade or business. The U.S. tax law generally does not tax non-U.S. persons on portfolio income such as interest, dividends, and capital gains from non-U.S. sources. However, there are exceptions to this general rule, and certain portfolio income may be subject to U.S. taxation if it is effectively connected with a U.S. trade or business. The 183-day threshold is used to determine an individual's U.S. tax residency status, and it is not directly relevant to the taxation of a non-U.S. person's effectively connected income.

Question 12

Which of the following statements regarding the taxation of U.S. real property gains recognized by non-U.S. persons not engaged in a U.S. trade or business is false? Gains from the disposition of U.S. real property are:

Accepted Answer

This statement is false. Non-U.S. persons are subject to taxation on gains from the disposition of U.S. real property, regardless of whether they are engaged in a U.S. trade or business. Such gains are subject to taxation in the U.S. because they are treated as if they are effectively connected to a U.S. trade or business. Additionally, non-U.S. persons are not exempt from taxation on capital gains from U.S. real property, as this is a specific exemption that does not exist under U.S. tax law.

Question 13

The following income of a foreign corporation is not subject to the regular U.S. corporate income tax rates.

Accepted Answer

Net long-term capital gains of a foreign corporation, where no U.S. trade or business exists, are not subject to regular U.S. corporate income tax rates.

Question 14

Mitch, an NRA, sells a building in Omaha for $1 million. His basis in the building is zero for both regular tax and AMT purposes. Mitch has no other contact with the U.S. other than the ownership of the building. How much Federal income tax is due from Mitch on the sale?

Accepted Answer

The net gain is taxed at the lesser of the applicable regular or AMT rates.

Question 15

Which of the following statements regarding foreign persons not engaged in a U.S. trade or business is true?

Accepted Answer

Foreign persons are subject to U.S. withholding taxes on certain types of U.S.-source income, such as dividends and interest, even if they are not engaged in a U.S. trade or business. This withholding is typically done on the gross amount of the income.

Question 16

Which of the following is a specific separate income "basket" for purposes of the foreign tax credit limitation calculation?

Accepted Answer

Passive income is a specific separate income "basket" for purposes of the foreign tax credit limitation calculation. The other choices, intangibles income and business income, are not separate FTC limitation baskets. Option D (None of the above are separate FTC limitation baskets) and E (All of the above are separate FTC limitation baskets) are both incorrect.

Question 17

Which of the following statements regarding a non-U.S. person's U.S. tax consequences is true?

Accepted Answer

Non-U.S. persons may be subject to withholding tax on U.S.-source investment income even if not engaged in a U.S. trade or business. This is known as withholding tax on FDAP (fixed, determinable, annual, or periodic) income. Non-U.S. persons may also be subject to U.S. tax on capital gains from the sale or exchange of certain U.S. assets even if not engaged in a U.S. trade or business, such as U.S. real property interests. However, the tax treatment may vary depending on the specific tax treaty between the U.S. and the non-U.S. person's home country. Once a non-U.S. person is engaged in a U.S. trade or business, their worldwide income is subject to U.S. taxation.

Question 18

In working with the foreign tax credit, a U.S. corporation may be able to alleviate the problem of excess foreign taxes by:

Accepted Answer

The answer of In working with the foreign tax credit,...

Question 19

OutCo, a controlled foreign corporation in Meena (located outside the U.S.), earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies. All of the dividend payors are located in Meena. OutCo's Subpart F income for the year is:

Accepted Answer

Subpart F income includes certain types of passive income, such as interest and dividends, earned by a controlled foreign corporation. Since OutCo earns $600,000 in net interest and dividend income, this amount is considered Subpart F income.

Question 20

Which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia? Purchase of inventory from the U.S. parent, followed by:

Accepted Answer

Subpart F income generally includes income from the sale of goods where the goods are purchased from a related party and sold outside the country of the controlled foreign corporation. If the sale is to someone inside Fredonia, it does not fall under Subpart F income.

Quiz 25: Taxation of International Transactions

Peanut, Inc., a U.S. corporation, receives $500,000 of foreign-source interest income, on which foreign taxes of $5,000 are withheld. Peanut's worldwide taxable income is $900,000, and its U.S. Federal income tax liability before FTC is $270,000. What is Peanut's foreign tax credit?

A controlled foreign corporation (CFC) realizes Subpart F income from:

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

Which of the following situations requires the filing of an information return with the U.S. government?

Zhang, an NRA who is not a resident of a treaty country, receives taxable dividends of $50,000 from U.S. corporations. Zhang does not conduct a U.S. trade or business. Zhang's dividends are subject to withholding by the payor of:

Luisa, a non-U.S. person with a green card, spends the following days in the United States. Luisa's residency status for Year 3 is:

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

Which of the following statements regarding the taxation of U.S. real property gains recognized by non-U.S. persons not engaged in a U.S. trade or business is false? Gains from the disposition of U.S. real property are:

The following income of a foreign corporation is not subject to the regular U.S. corporate income tax rates.

Mitch, an NRA, sells a building in Omaha for $1 million. His basis in the building is zero for both regular tax and AMT purposes. Mitch has no other contact with the U.S. other than the ownership of the building. How much Federal income tax is due from Mitch on the sale?

Which of the following statements regarding foreign persons not engaged in a U.S. trade or business is true?

Which of the following is a specific separate income "basket" for purposes of the foreign tax credit limitation calculation?

Which of the following statements regarding a non-U.S. person's U.S. tax consequences is true?

In working with the foreign tax credit, a U.S. corporation may be able to alleviate the problem of excess foreign taxes by:

OutCo, a controlled foreign corporation in Meena (located outside the U.S.) , earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies. All of the dividend payors are located in Meena. OutCo's Subpart F income for the year is:

Which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia? Purchase of inventory from the U.S. parent, followed by: