Question 1

Jaime received gross foreign-source dividend income of $250,000. Foreign taxes withheld on the dividend were $25,000. Jaime's total U.S. tax liability is $800,000 (the 35% marginal tax rate applies). Jaime's current year FTC is $87,500.

Accepted Answer

False

Question 2

Winnie, Inc., a U.S. corporation, receives a dividend of $400,000 from a non-CFC foreign corporation. Deemed-paid foreign taxes attributable to the dividend are $120,000. If Winnie elects the FTC, its gross income attributable to this dividend is $400,000.

Accepted Answer

False

Question 3

Subpart F income includes portfolio income like dividends and interest.

Accepted Answer

Subpart F income includes not only passive income such as dividends and interest, but also other types of income such as rents, royalties, and certain types of gains.

Question 4

ForCo, a non-U.S. corporation based in Aldonza, purchases widgets from USCo, Inc., its U.S. parent corporation. The widgets are sold by ForCo to an unrelated foreign corporation in Aldonza. The income from sale of the widgets by ForCo is Subpart F foreign base company sales income.

Accepted Answer

The income from the sale of the widgets by ForCo would not be considered Subpart F foreign base company sales income because the sale is between ForCo and an unrelated foreign corporation in Aldonza. Subpart F income typically targets income earned by controlled foreign corporations (CFCs) from artificial transactions designed to shift profits out of the United States, such as sales involving related parties, not sales to unrelated foreign corporations.

Question 5

In allocating interest expense between U.S. and foreign sources, a taxpayer elects to use either the tax basis of the income-producing assets or their fair market values.

Accepted Answer

This statement is true. Taxpayers can elect to use either the tax basis or fair market value method for allocating interest expense between U.S. and foreign sources.

Question 6

The sourcing rules of Federal income taxation apply to deductions as well as to income items.

Accepted Answer

The sourcing rules of Federal income taxation apply to both deductions and income items. These rules specify which income items are subject to taxation in which jurisdiction, as well as which deductions are allocated to which income items.

Question 7

Waltz, Inc., a U.S. taxpayer, pays foreign taxes of $50,000 on foreign-source general basket income of $90,000. Waltz's worldwide taxable income is $450,000, on which it owes U.S. taxes of $157,500 before FTC. Waltz's FTC is $50,000.

Accepted Answer

The answer of Waltz, Inc., a U.S. taxpayer, pays foreign...

Question 8

U.S. individuals who receive dividends from foreign corporations may claim the deemed-paid foreign tax credit related to such dividends.

Accepted Answer

The answer of U.S. individuals who receive dividends from foreign...

Question 9

The "residence of seller" rule is used in determining the sourcing of all gross income and deductions of a U.S. multinational business.

Accepted Answer

The residence of the seller rule is not used for determining the sourcing of all gross income and deductions of a U.S. multinational business. Instead, various sourcing rules apply depending on the type of income or deduction, such as the source of income from sales of inventory, services, and intangibles, which may consider factors like where the property was produced or where the services were performed, rather than solely the residence of the seller.

Question 10

Unused foreign tax credits are carried back two years and then forward 20 years.

Accepted Answer

The answer of Unused foreign tax credits are carried back...

Question 11

Kipp, a U.S. shareholder under the CFC provisions, owns 40% of a CFC. If the CFC's Subpart F income for the taxable year is $200,000, Kipp is taxed on receipt of a constructive dividend of $80,000.

Accepted Answer

As a shareholder owning 40% of a CFC, Kipp is subject to taxation on his share of the CFC's Subpart F income under the CFC provisions. In this case, his share of the Subpart F income would be $80,000, which would be treated as a constructive dividend and taxed accordingly.

Question 12

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

Accepted Answer

The answer of Income tax treaties provide for either higher...

Question 13

Twenty unrelated U.S. persons equally own all of the stock of Quigley, a foreign corporation. Quigley is a CFC.

Accepted Answer

The answer of Twenty unrelated U.S. persons equally own all...

Question 14

ForCo, a subsidiary of a U.S. 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 not Subpart F foreign base company sales income.

Accepted Answer

The income from the sale of widgets is not Subpart F foreign base company sales income and therefore, ForCo's income is not subject to U.S. taxation.

Question 15

A "U.S. shareholder" for purposes of CFC classification is any U.S. person who owns directly, indirectly, and constructively at least 50% of the voting power of a foreign corporation.

Accepted Answer

A "U.S. shareholder" for purposes of CFC (Controlled Foreign Corporation) classification is defined as a U.S. person who owns directly, indirectly, or constructively at least 10% of the total combined voting power of all classes of stock of a foreign corporation.

Question 16

The United States has in force income tax treaties with about 70 countries.

Accepted Answer

The United States has income tax treaties in force with about 70 different countries.

Question 17

Jokerz, a CFC of a U.S. parent, generated $80,000 Subpart F foreign base company services income in its first year of operations. The next year, Jokerz distributes $50,000 cash to the parent, from those service profits. The parent is taxed on $0 in the first year (tax deferral rules apply) and $50,000 in the second year.

Accepted Answer

The U.S. parent is taxed on the $80,000 of Subpart F income in the first year it is earned by Jokerz, regardless of whether any cash is distributed. Subpart F income is taxed to the U.S. shareholders in the year it is earned, not in the year it is distributed.

Question 18

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

Accepted Answer

Section 482 of the Internal Revenue Code empowers the IRS to reallocate income, deductions, credits, or allowances between commonly controlled taxpayers to reflect the true economic reality of a transaction. This is commonly used to prevent related parties from engaging in transfer pricing abuses.

Question 19

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

This statement is true according to the given information. Hendricks Corporation owns 40% of Shane Corporation and 55% of Ferrell Corporation, both foreign corporations. Ferrell Corporation owns the other 60% of Shane Corporation, resulting in a controlled foreign corporation (CFC) structure.

Question 20

A U.S. taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued.

Accepted Answer

A U.S. taxpayer may take a current Foreign Tax Credit (FTC) only up to the limit calculated based on their U.S. tax liability on foreign income, not exceeding the actual foreign taxes paid or accrued.

Quiz 16: Multijurisdictional Taxation