COMPREHENSIVE VOLUME--CHAPTER 25--TAXATION

OF INTERNATIONAL TRANSACTIONS

Student: ___________________________________________________________________________

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

True False

2. Income tax treaties may provide for either higher or lower withholding tax rates on interest income than the

rate provided under U.S. statutory law.

True False

3. Interest paid to an unrelated party by a domestic corporation that historically earns more than 50% of its gross

income each year from the conduct of an active trade or business outside the United States is foreign-source

income.

True False

4. Dividends received from Murdock Corp., a corporation organized in Sustenato that earns 70% of its income

from U.S. business activities, are 70% U.S.-source income.

True False

5. Serena, a nonresident alien, is employed by GlobalCo, a foreign corporation. Serena works in the United

States for 3 days during the year, receiving a gross salary of $2,500 for this period. GlobalCo is not engaged in a

U.S. trade or business. Under the commercial traveler exception, the $2,500 is not classified as U.S.-source income.

True False

6. PlantCo is a company based in Adagio. PlantCo uses a formula to manufacture pharmaceuticals. The

formula was developed and is owned by DrugCo, a U.S. entity. Royalties paid by PlantCo to DrugCo for the

use of the formula are U.S.-source income.

True False

7. Julio, a nonresident alien, realizes a gain on the sale of commercial real estate located in Omaha. The real

estate was sold to Mariana, Julios cousin who is also a nonresident alien. Julio recognizes foreign-source income from the sale because his home country is not the U.S.

True False

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

True False

9. A U.S. business conducts international communications activities between the U.S. and Spain. The resulting

income is sourced 100% to the U. S., the residence of the taxpayer.

True False

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

True False

11. 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.

True False

12. The IRS can use 482 reallocations to assure that transactions between related parties are properly reflected

in a tax return.

True False

13. A Qualified Business Unit of a U.S. corporation that operates in Germany generally uses the Euro as its

functional currency.

True False

14. When a business taxpayer goes international, the first step usually is to create an overseas branch sales office.

True False

LocalCo merges into HeirCo, a non-U.S. entity, in a transaction that would qualify as a Type A reorganization. The resulting realized gain is tax-deferred under U.S. income tax law, using 351 and 368.

True False

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

True False

Inbound and offshore asset transfers by a U.S. business can be subject to immediate Federal income taxation under 367.

True False

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.

True False

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

CFC.

True False

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.

True False

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

True False

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.

True False

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.

True False

Subpart F income includes portfolio income like dividends and interest.

True False

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.

True False

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

credit related to such dividends.

True False

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.

True False

Jaime received gross foreign-source dividend income of $250,000. Foreign taxes withheld on the dividend

were $25,000. Jaimes total U.S. tax liability is $800,000 (the 35% marginal tax rate applies). Jaimes current year FTC is $87,500.

True False

Waltz, Inc., a U.S. taxpayer, pays foreign taxes of $50,000 on foreign-source general basket income of

$90,000. Waltzs worldwide taxable income is $450,000, on which it owes U.S. taxes of $157,500 before FTC. Waltzs FTC is $50,000. True False

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

True False

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.

True False

Nico lives in California. She was born in Peru but holds a green card. Nico is a nonresident alien (NRA).

True False

Freda was born and continues to live in Uruguay. She exports widgets to U.S. customers. The U.S. does not

have in force an income tax treaty with Uruguay. Fredas net U.S. income from the widgets is subject to a flat 30% Federal income tax rate.

True False

Carol, a citizen and resident of Adagio, reports gross income that is effectively connected with a U.S.

business. No deductions are allowed against this income, and Carols U.S. tax rate is a flat 30 percent. True False

A domestic corporation is one whose assets are primarily located in the U.S. For this purpose, the primarily

located test (>50%) applies.

True False

Quest is organized and operates in the U.K. Its U.S. effectively connected earnings for the taxable year are

$900,000 and its net U.S. equity has increased by $40,000. Quests dividend equivalent amount for the tax year is $860,000.

True False

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 tax at capital gains rates under FIRPTA.

True False

In 2013, George renounces his U.S. citizenship and moves to Fredonia, where income tax rates are very

low. George is a multimillionaire and says he has had it with high Federal income taxes on wealthy individuals like himself. In 2016, Georges U.S.-source income is $1.5 million. That income escapes Federal income taxes.

True False

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

between related entities.

True False

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

income is assigned.

True False

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.

True False

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.

True False

GreenCo, a U.S. corporation, earns $25 million of taxable income from U.S. sources and $10 million of taxable

income from foreign sources. What amount of taxable income does GreenCo report on its U.S. tax return?

A. $25 million.

B. $35 million.

C. $25 million less any tax paid on the foreign income.

D. $35 million less any tax paid on U.S. income.

Without the foreign tax credit, double taxation would result when:

A. The United States taxes the U.S.-source income of a U.S. resident.

B. A foreign country taxes the foreign-source income of a nonresident alien.

C. The United States and a foreign country both tax the foreign-source income of a U.S. resident.

D. Terms of a tax treaty assign income taxing rights to the U.S.

U.S. income tax treaties typically:

A. Provide for taxation exclusively by the source country.

B. Provide for taxation exclusively by the country of residence.

C. Provide rules by which multinational taxpayers avoid double taxation.

D. Provide that the country with the highest tax rate will be allowed exclusive tax collection rights.

Which of the following statements is false in regard to the U.S. income tax treaty program?

A. There are about 70 bilateral income tax treaties between the U.S. and other countries.

B. Tax treaties generally provide for primary taxing rights that require the other treaty partner to allow a credit

for the taxes paid on the twice-taxed income.

C. U.S. income tax treaties are written to set up a network of up to five foreign countries that are covered by the treaty language.

D. None of the above statements is false.

ForCo, a foreign corporation, receives interest income of $100,000 from USCo, an unrelated domestic

corporation. USCo has historically earned 85% of its income from foreign sources. What amount of ForCos interest income is U.S. source?

A. $0.

B. $50,000.

C. $85,000.

D. $100,000.

Dividends received from a domestic corporation are totally U.S. source:

A. If the corporation earns at least 80% of its gross income over the immediately preceding three tax years from

the active conduct of a U.S. trade or business.

B. If the corporation earns at least 25% of its gross income over the immediately preceding three tax years from

the active conduct of a U.S. trade or business.

C. Unless the corporation earns at least 80% of its gross income over the immediately preceding three tax years

from the active conduct of a foreign trade or business.

D. Unless the corporation earns at least 25% of its gross income over the immediately preceding three tax years

from the active conduct of a foreign trade or business.

E. In all of the above cases.

Chang, an NRA, is employed by Fisher, Inc., a foreign corporation. In November, Chang spends 10 days in the

United States performing consulting services for Fishers U.S. branch. She earns $5,000 per month. A month includes 20 workdays.

A. Chang has $2,500 U.S.-source income which is exempt from U.S. taxation, because she is in the U.S. for 90

days or less.

B. Chang has $2,500 U.S.-source income which is exempt from U.S. taxation, because the amount paid to her is

less than $3,000.

C. Chang has $2,500 U.S.-source income, because her foreign employer has a U.S. branch.

D. Chang has no U.S.-source income, under the commercial traveler exception.

USCo, a U.S. corporation, purchases inventory from distributors within the U.S. and resells this inventory to

customers outside the U.S., with title passing outside the U.S. Profit on the sale is $10,000. What is the source

of the USCos inventory sales income? A. $5,000 U.S. source and $5,000 foreign source.

B. $5,000 U.S. source and $5,000 sourced based on location of the pertinent manufacturing assets.

C. $10,000 U.S. source.

D. $10,000 foreign source.

Liang, an NRA, is sent to the United States by Fuller Corporation, her foreign employer. She spends 50 days in

the United States and earns $20,000 for a two-month period. This amount is attributable to 40 U.S. working

days and 10 non-U.S. working days. Her employer does not have a U.S. trade or business and Liang spends no

other time in the U.S. for the tax year. Liangs U.S.-source taxable income is: A. $20,000.

B. $16,000.

C. $3,000.

D. $0.

Olaf, a citizen of Norway with no trade or business activities in the United States, sells at a gain 200 shares of

MicroShift, Inc., a U.S. company. The sale takes place through Olafs broker in Oslo. How is this gain treated for U.S. tax purposes?

A. It is foreign-source income subject to U.S. taxation.

B. It is foreign-source income not subject to U.S. taxation.

C. It is U.S.-source income subject to U.S. taxation.

D. It is U.S.-source income exempt from U.S. taxation.

During the current year, USACo (a domestic corporation) sold equipment to FrenchCo, a foreign corporation,

for $350,000, with title passing to the buyer in France. USACo purchased the equipment several years ago for

$100,000 and took $80,000 of depreciation deductions on the equipment, all of which were allocated to

U.S.-source income. USACos adjusted basis in the equipment is $20,000 on the date of sale. What is the source of the $330,000 gain on the sale of this equipment?

A. $330,000 foreign source.

B. $330,000 U.S. source.

C. $250,000 foreign source and $80,000 U.S. source.

D. $250,000 U.S. source and $80,000 foreign source.

Qwan, a U.S. corporation, reports $250,000 interest expense for the tax year. None of the interest relates to

nonrecourse debt or loans from affiliated corporations. Qwans U.S. and foreign assets are reported as follows.

Fair market value U.S. assets $ 5,000,000

Foreign assets $10,000,000

Tax book value U.S. assets $ 2,000,000

Foreign assets $ 6,000,000

How should Qwan assign its interest expense between U.S. and foreign sources to maximize its FTC for the current year?

A. Using tax book values.

B. Using tax book value for U.S. source and fair market value for foreign source.

C. Using fair market values.

D. Using fair market value for U.S. source and tax book value for foreign source.

Which of the following statements best describes the purpose of 482, under which the Treasury can reallocate

income and deductions among related taxpayers?

A. To provide tax benefits to U.S. multinationals that export U.S. produced property.

B. To allow the IRS to select the best method for determining transfer prices for U.S. taxpayers.

C. To alleviate double taxation problems generated by related entities doing business in two or more countries.

D. To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the

entities.

Section 482 is used by the Treasury to:

A. Force taxpayers to use arms-length transfer pricing on transactions between related parties.

B. Reallocate income, deductions, etc., to a related taxpayer to minimize tax liability.

C. Increase information that is reported about U.S. corporations with non-U.S. owners.

D. All of the above.

E. None of the above.

An advance pricing agreement (APA) is used between:

A. Two or more governments.

B. Two related taxpayers.

C. The taxpayer and the IRS.

D. The IRS and U.S. taxing authorities.

Flapp Corporation, a U.S. corporation, conducts all of its transactions in the U.S. dollar. It sells inventory for

$1 million to a Canadian company when the exchange rate is $1US: $1.2Can. The Canadian company pays for

the inventory when the exchange rate is $1US: $1.25Can. What is Flapps exchange gain or loss on this sale? A. Flapp does not have a foreign currency exchange gain or loss, since it conducts all of its transactions in the

U.S. dollar.

B. Flapps account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.) and it collects on the receivable when the exchange rate is $1US: $1.25Can. Flapp has an exchange gain of $50,000.

C. Flapps account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.). It collects on the receivable at $1US: $1.25Can. Flapp has an exchange loss of $5,000.

D. Flapps foreign currency exchange loss is $50,000.

Wood, a U.S. corporation, owns Holz, a German corporation. Wood receives a dividend (non-Subpart F

income) from Holz of 75,000. The average exchange rate for the year is $1US: 0.6, and the exchange rate on the date of the dividend distribution is $1US: 0.80. Woods exchange gain or loss is: A. $15,000 loss.

B. $15,000 gain.

C. $75,000 gain.

D. $0. There is no exchange gain or loss on a dividend distribution.

Wood, a U.S. corporation, owns 30% of Hout, a foreign corporation. The remaining 70% of Hout is owned by

other foreign corporations not controlled by Wood. Houts functional currency is the euro. Wood receives a 50,000 distribution from Hout. If the average exchange rate for the E & P to which the dividend is attributed is 1.2: $1, the exchange rate at year end is .95: $1, and on the date of the dividend payment the exchange rate is 1.1: $1, what is Woods tax result from the distribution? A. Wood receives a dividend of $45,455 and realizes an exchange gain of $3,788 [$45,455 minus $41,667

(50,000/1.2)]. B. Wood receives a dividend of $52,632 (50,000/.95) with no exchange gain or loss. C. Wood receives a dividend of $41,667 and realizes an exchange loss of $3,788 ($41,667 minus $45,455).

D. Wood receives a dividend of $45,455 (50,000/1.1) with no exchange gain or loss.

Generally, accrued foreign income taxes are translated at the:

A. Exchange rate when the taxes are paid.

B. Exchange rate on the date when the taxes are accrued.

C. Average exchange rate for the tax year to which the taxes relate.

D. Average exchange rate for the last five tax years.

Which of the following statements regarding the translation of foreign income taxes is true?

A. Translation of foreign taxes into U.S. dollars helps manage the U.S. balance of trade.

B. Foreign taxes are translated into U.S. dollars only when such translation provides a tax benefit to the

taxpayer.

C. Foreign taxes typically are paid in a foreign currency and, thus, must be converted to U.S. dollars when used

as a FTC on a U.S. return.

D. Translation of foreign taxes into U.S. dollars encourages foreign corporations to set up operations in the

United States.

GoldCo, a U.S. corporation, incorporates its foreign branch in a 351 exchange, creating GreenCo, a wholly

owned foreign corporation. GoldCo transfers $200 in inventory (basis = $50) and $900 in land (basis = $950) to

GreenCo. GreenCo uses these assets in carrying on a trade or business outside the U.S. What gain or loss, if

any, does GoldCo recognize as a result of this transaction?

A. ($50).

B. $0.

C. $100.

D. $150.

SilverCo, a U.S. corporation, incorporates its foreign branch in a 351 exchange, creating GreenCo, a wholly

owned foreign corporation. SilverCo transfers $200 in Yen (basis = $150) and $900 in land (basis = $925) to

GreenCo. GreenCo uses these assets in carrying on a trade or business outside the United States. What gain or

loss, if any, is recognized as a result of this transaction?

A. ($25).

B. $0.

C. $25.

D. $50.

Which of the following transactions by a U.S. corporation may result in taxation under 367?

A. Incorporation of U.S branch as a U.S. corporation when the branch earns only foreign-source income.

B. Incorporation of a U.S. branch by a U.S. corporation when the branch earns only U.S.-source income.

C. Incorporation of a U.S. branch as a U.S. corporation if the new U.S. corporation also has foreign

shareholders.

D. Incorporation of a U.S. branch as a U.S. corporation if the new U.S. corporation has no foreign shareholders.

A tax haven often is:

A. A country with high internal income taxes.

B. A country with no or low internal income taxes.

C. A country without income tax treaties.

D. A country that prohibits treaty shopping.

In which of the following independent situations would Slane, a foreign corporation, be classified as a

controlled foreign corporation? The Slane stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie,

10% by David, 8% by Ben, and 48% by Mike.

A. Jen, Kathy, Leslie, David, Ben, and Mike are all U.S. citizens.

B. Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. David is married to Kathy. Mike is a foreign resident

and citizen.

C. Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Ben is Mikes son. Mike is a foreign resident and citizen.

D. Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Mike is a foreign resident and citizen.

The following persons own Schlecht Corporation, a foreign corporation.

Jim, U.S. individual 35%

Gina, U.S. individual 15%

Marina, U.S. individual 8%

Pedro, U.S. individual 12%

Chee, non-U.S. individual 30%

None of the shareholders are related. Subpart F income for the tax year is $300,000. No distributions are made. Which of the following statements is

correct?

A. Schlecht is not a CFC.

B. Chee includes $90,000 in gross income.

C. Marina is not a U.S. shareholder.

D. Marina includes $24,000 in gross income.

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 (before any

78 gross-up):

A. $0.

B. $6 million.

C. $20 million.

D. $50 million.

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

A. Purchase of inventory from unrelated U.S. person and sale outside the CFC country.

B. Purchase of inventory from a related U.S. person and sale outside the CFC country.

C. Services performed for the U.S. parent in a country in which the CFC was organized.

D. Services performed on behalf of an unrelated party in a country outside the country in which the CFC was

organized.

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:

A. Sale to anyone outside Fredonia.

B. Sale to anyone inside Fredonia.

C. Sale to a related party outside Fredonia.

D. Sale to a non-related party outside Fredonia.

Xenia, Inc., a U.S. shareholder, owns 100% of Fredonia, a CFC. Xenia receives a $3 million cash distribution

from Fredonia. Fredonias E & P is composed of the following amounts.

$500,000 attributable to previously taxed increases in investment in U.S. property.

$1,500,000 attributable to previously taxed Subpart F income.

$4,800,000 attributable to other E & P.

Xenia recognizes a taxable dividend of:

A. $3 million.

B. $2.5 million.

C. $1.5 million.

D. $1 million.

E. $0.

OutCo, a controlled foreign corporation in Meena, 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.

OutCos Subpart F income for the year is: A. $0.

B. $0 only if OutCo is engaged in a trade or business in Meena.

C. $600,000.

D. $600,000 only if OutCo is engaged in a trade or business in Meena.

Bryden, a controlled foreign corporation owned 100% by USCo, earned $900,000 in Subpart F income for the

current year. Brydens current year E & P is $350,000, and its accumulated E & P is $15 million. What is the current year Subpart F deemed dividend to USCo?

A. $350,000.

B. $550,000.

C. $900,000.

D. $15 million.

Peanut, Inc., a U.S. corporation, receives $500,000 of foreign-source interest income, on which foreign taxes of

$5,000 are withheld. Peanuts worldwide taxable income is $900,000, and its U.S. Federal income tax liability before FTC is $270,000. What is Peanuts foreign tax credit? A. $500,000.

B. $275,000.

C. $150,000.

D. $5,000.

Maxim, Inc., a U.S. corporation, reports worldwide taxable income of $8 million, including a $900,000

dividend from ForCo, a wholly-owned foreign corporation. ForCos undistributed E & P are $15 million and it has paid $6 million of foreign income taxes attributable to these earnings. What is Maxims deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

A. $0.

B. $360,000.

C. $900,000.

D. $6 million.

Chipper, Inc., a U.S. corporation, reports worldwide taxable income of $1 million, including a $300,000

dividend from Emma, Inc., a foreign corporation. Chippers U.S. tax liability before FTC is $340,000. Chipper owns 20% of Emma. Emmas E & P after taxes is $8 million and it has paid foreign taxes of $2 million attributable to that E & P. If Chipper elects the FTC, its U.S. gross income with regard to the dividend from

Emma is:

A. $300,000.

B. $340,000.

C. $375,000.

D. $400,000.

Columbia, Inc., a U.S. corporation, receives a $150,000 cash dividend from Starke, Ltd. Columbia owns 15%

of Starke. Starkes E & P is $2 million and it has paid foreign taxes of $750,000 attributable to that E & P. What is Columbias foreign tax credit related to the Starke dividend? A. $22,500.

B. $56,250.

C. $150,000.

D. $750,000.

Columbia, Inc., a U.S. corporation, receives a $150,000 cash dividend from Starke, Ltd. Columbia owns 15%

of Starke. Starkes E & P is $2 million and it has paid foreign taxes of $750,000 attributable to that E & P. What is Columbias gross income related to the Starke dividend? A. $206,250.

B. $150,000.

C. $56,250.

D. $22,500.

Kilps, a U.S. corporation, receives a $200,000 dividend from a 20% owned foreign corporation. The

deemed-paid taxes attributable to this dividend are $40,000 and foreign taxes withheld on remittance of the

dividend are $30,000. Kilpss U.S. tax liability before the FTC is $350,000, the gross dividend income is $240,000, and Kilpss worldwide taxable income is $1 million. Kilpss foreign tax credit for the taxable year is: A. $84,000.

B. $70,000.

C. $40,000.

D. $30,000.

Which of the following is not a specific separate income basket for purposes of the foreign tax credit limitation calculation?

A. Intangibles income.

B. Passive income.

C. Business income.

D. None of the above are separate FTC limitation baskets.

E. All of the above are separate FTC limitation baskets.

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. Kunsts 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 Kunsts foreign tax credit for the tax year? A. $64,000.

B. $39,000.

C. $35,000.

D. $4,000.

A non-U.S. individuals green card remains in effect until: A. The individual discards it.

B. The individual leaves the U.S.

C. The individual has abandoned lawful permanent residency in the U.S.

D. The individual remains outside the U.S. for two full years.

Which of the following would not prevent an alien without a green card from being classified as a U.S. resident for income tax purposes?

A. The individual was prevented from leaving the United States due to an illness which arose while in the

United States.

B. The individual commutes daily from Mexico to the United States to work.

C. The individual is a foreign consul assigned to the United States.

D. The individual was in the United States to oversee her investments.

Luisa, a non-U.S. person with a green card, spends the following days in the United States.

2012 360 days

2013 210 days

2014 30 days

Luisas residency status for 2014 is:

A. U.S. resident because she has a green card.

B. U.S. resident since she was a U.S. resident for the past immediately preceding two years.

C. Not a U.S. resident because Luisa was not in the United states for more than 30 days during 2014.

D. Not a U.S. resident since, using the three-year test, Luisa is not present in the United States for at least 183

days.

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. Zhangs dividends are subject to withholding by the payor of:

A. 35%.

B. 30%.

C. 15%.

D. 0%.

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

A. Foreign persons are subject to potential withholding taxes on the gross amount of U.S.-source investment

income.

B. Foreign persons with any U.S.-source income are taxed on net investment income (after expenses).

C. Foreign persons are not subject to U.S. tax if not engaged in a U.S. trade or business.

D. Foreign persons with only U.S.-source investment income are exempt from U.S. tax.

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

A. FIRPTA gains.

B. Capital gains effectively connected with a U.S. trade or business.

C. Net long-term capital gains, where no U.S. trade or business exists.

D. Fixed, determinable, annual or periodic (FDAP) income effectively connected with a U.S. trade or business.

Fulton, Ltd., a foreign corporation, operates a U.S. branch that reports effectively connected U.S. earnings and

profits (after income taxes) of $800,000 for the tax year. The branchs U.S. net equity at the beginning of the tax year is $2 million and at the end of the tax year is $1.5 million. Fulton is organized in a nontreaty country.

Fultons dividend equivalent amount for the year is: A. $1,300,000.

B. $800,000.

C. $500,000.

D. $300,000.

Jilt, a non-U.S. corporation, not resident in a treaty country, operates a U.S. branch that earns effectively

connected E & P of $4 million for the tax year. The branch increases its investments in U.S. property (its U.S.

net equity) by $1,600,000. The branch pays a U.S. corporate income tax of $2,153,846. Jilts branch profits tax is:

A. $720,000.

B. $1,200,000.

C. $2,153,846.

D. $2,873,846.

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:

A. Not taxed to non-U.S. persons because real property gains are specifically exempt from U.S. taxation.

B. Taxed to non-U.S. persons without regard to whether such non-U.S. persons are engaged in a U.S. trade or

business.

C. Taxed in the U.S. because such gains are treated as if they are effectively connected to a U.S. trade or

business.

D. Taxed to non-U.S. persons notwithstanding the general exemption of capital gains from U.S. taxation.

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?

A. $0, he is an NRA.

B. The amount realized times the top individual tax rate.

C. The net gain times the top capital gains tax rate.

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

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?

A. $0.

B. $300,000.

C. $3 million.

D. $5 million.

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

foreign taxes by:

A. Deducting the excess foreign taxes that do not qualify for the credit.

B. Repatriating more foreign income to the United States in the year there is an excess limitation.

C. Generating same basket foreign-source income that is subject to a tax rate higher than the U.S. tax rate. D. Generating same basket foreign-source income that is subject to a tax rate lower than the U.S. tax rate.

Krebs, Inc., a U.S. corporation, operates an unincorporated branch manufacturing operation in the U.K. Krebs,

Inc., reports $900,000 of taxable income from the U.K. branch on its U.S. tax return, along with $1,600,000 of

taxable income from its U.S. operations. The U.K. branch income is all general limitation basket income. Krebs

paid $270,000 in U.K. income taxes related to the $900,000 in branch income. Assuming a U.S. tax rate of

35%, what is Krebs U.S. tax liability after any allowable foreign tax credits? A. $0.

B. $270,000.

C. $605,000.

D. $875,000.

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 $40,000 in German income taxes related to the $100,000 of

Dunkel income. Assuming a U.S. tax rate of 35%, what is Darks U.S. tax liability after any allowable foreign tax credits?

A. $35,000.

B. $135,000.

C. $140,000.

D. $175,000.

Waldo, Inc., a U.S. corporation, owns 100% of Orion, Ltd., a foreign corporation. Orion earns only general

basket income. During the current year, Orion paid Waldo a $5,000 dividend. The foreign tax credit associated

with this dividend is $3,000. The foreign jurisdiction requires a withholding tax of 10%, so Waldo received only

$4,500 in cash as a result of the dividend. What is Waldos total U.S. gross income reported as a result of the $4,500 cash received?

A. $8,000.

B. $5,000.

C. $4,500.

D. $3,000.

Performance, Inc., a U.S. corporation, owns 100% of Krumb, Ltd., a foreign corporation. Krumb earns only

general basket income. During the current year, Krumb paid Performance a $200,000 dividend. The foreign tax

credit associated with this dividend is $30,000. The foreign jurisdiction requires a withholding tax of 30%, so

Performance received only $140,000 in cash as a result of the dividend. What is Performances total U.S. gross income reported as a result of the $140,000 cash received?

A. $30,000.

B. $140,000.

C. $200,000.

D. $230,000.

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

A. Non-U.S. persons never are subject to U.S. income tax.

B. Non-U.S. persons are subject to U.S. income tax only on gains from U.S. real property.

C. Non-U.S. persons are subject to a withholding tax on U.S.-source portfolio income.

D. Non-U.S. persons are subject to a withholding tax on foreign-source portfolio income.

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

A. A non-U.S. persons effectively connected U.S. business income is taxed by the U.S. only if it is portfolio income.

B. A non-U.S. persons effectively connected U.S. business income is subject to U.S. income taxation. C. A non-U.S. person may earn income from selling U.S. real property without incurring any U.S. income tax.

D. A non-U.S. person must spend at least 183 days in the United States before any effectively connected

income is subject to U.S. taxation.

Which of the following is a special tax regime imposed on certain foreign persons engaged in a U.S. trade or

business?

A. Nondiscrimination tax.

B. Windfall U.S. profits tax.

C. Dividend repatriation tax.

D. Branch profits tax.

Which of the following statements regarding a non-U.S. persons U.S. tax consequences is true? A. 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.

B. Non-U.S. persons are subject to U.S. income or withholding tax only if they are engaged in a U.S. trade or

business.

C. Non-U.S. persons are not taxed on gains from U.S. real property as long as such property is not used in a

U.S. trade or business.

D. Once a non-U.S. person is engaged in a U.S. trade or business, the non-U.S. persons worldwide income is subject to U.S. taxation.

Which of the following statements regarding a non-U.S. persons U.S. tax consequences is true? A. Non-U.S. persons are potentially subject to U.S. withholding tax on U.S.-source investment income.

B. Non-U.S. individuals may be subject to U.S. income tax but non-U.S. corporations are never subject to U.S.

income tax.

C. Non-U.S. persons are only subject to U.S. income or withholding tax if engaged in a U.S. trade or business.

D. Non-U.S. persons must be physically present in the United States before any U.S.-source income is subject

to U.S. income or withholding tax.

Which of the following is not a U.S. person?

A. Domestic corporation.

B. Citizen of Turkey with U.S. permanent residence status (i.e., green card).

C. U.S. corporation 100% owned by a foreign corporation.

D. Foreign corporation 100% owned by a domestic corporation.

Which of the following is not a foreign person?

A. Foreign corporation 51% owned by U.S. shareholders.

B. Foreign corporation 100% owned by a domestic corporation.

C. Citizen of Germany with U.S. permanent resident status (i.e., green card).

D. Citizen of Italy who spends 14 days vacationing in the United States.

Yvonne is a citizen of France and does not have permanent resident status in the United States. During the last

three years she has spent a number of days in the United States.

Current year 150 days First prior year 150 days Second prior year 90 days

Is Yvonne treated as a U.S. resident for the current year?

A. No, because Yvonne is a citizen of France.

B. No, because Yvonne was not present in the United States at least 183 days during the current year.

C. No, because although Yvonne was present in the United States at least 31 days during the current year, she

was not present at least 183 days in a single year during the current or prior two years.

D. Yes, because Yvonne was present in the United States at least 31 days during the current year and 215 days

during the current and prior two years (using the appropriate fractions for the prior years).

Magdala is a citizen of Italy and does not have permanent resident status in the United States. During the last

three years she has spent a number of days in the United States.

Current year 120 days First prior year 150 days Second prior year 150 days

Is Magdala treated as a U.S. resident for the current year?

A. Yes, because Magdala was present in the United States at least 31 days during the current year and 195 days

during the current and prior two years (using the appropriate fractions for the prior years).

B. No, because Magdala is a citizen of Italy.

C. No, because Magdala was not present in the United States at least 183 days during the current year.

D. No, because although Magdala was present in the United States at least 31 days during the current year, she

was not present at least 183 days in a single year during the current or prior two years.

Which of the following persons typically is concerned with the U.S.-sourcing rules for gross income?

A. U.S. persons with only U.S. activities.

B. U.S. persons that earn only tax-exempt income.

C. U.S. persons with U.S. and non-U.S. activities.

D. Non-U.S. persons with only non-U.S. activities.

Which of the following persons typically is not concerned with the U.S.-sourcing rules for gross income?

A. Foreign persons with U.S. activities.

B. Foreign persons with only foreign activities.

C. U.S. employees working abroad.

D. U.S. persons with foreign activities.

Which of the following determinations requires knowing the amount of ones foreign-source gross income? A. Itemized deductions.

B. Foreign tax credit.

C. Calculation of a U.S. persons total taxable income. D. Calculation of a U.S. persons deductible interest expense.

Which of the following determinations does not require knowing the amounts of ones U.S.- versus foreign-source income?

A. Calculation of a U.S. persons total taxable income. B. Calculation of U.S. withholding tax on the FDAP income of foreign persons.

C. Calculation of the foreign earned income exclusion.

D. Calculation of a foreign persons income effectively connected with carrying on a U.S. trade or business.

Which of the following is a principle used in applying the income-sourcing rules under U.S. tax law?

A. The rules should be acceptable to both countries.

B. The rules should favor the U.S. Treasury.

C. The rules should favor the treasury of the non-U.S. country.

D. The rules should apply to income items only; deductions need not be sourced in this way.

Which of the following statements regarding income sourcing is correct?

A. Everything else being equal, a larger foreign-source income decreases the foreign tax credit limitation for

U.S. persons.

B. Everything else being equal, a larger foreign-source income increases the foreign tax credit limitation for

U.S. persons.

C. Everything else being equal, a larger U.S.-source income increases the foreign tax credit limitation for U.S.

persons.

D. Everything else being equal, changing foreign-source income does not change the foreign tax credit

limitation for U.S. persons.

Which of the following statements regarding income sourcing is not correct?

A. U.S. persons benefit from earning low-tax foreign-source income.

B. Foreign persons generally benefit from avoiding U.S.-source income classification.

C. U.S. persons are not concerned with source of income because all their income is subject to U.S. tax under a

worldwide system.

D. Foreign persons may be subject to tax on U.S.-source income without regard to their actual presence in the

United States.

ForCo, a foreign corporation, receives interest income of $50,000 from USCo, an unrelated domestic

corporation. USCo historically has earned 79% of its gross income from active foreign-source business income.

What amount of ForCos interest income is U.S.-source? A. $0.

B. $10,500.

C. $39,500.

D. $50,000.

WorldCo, a foreign corporation not engaged in a U.S. trade or business, receives $50,000 in interest income

from deposits with the foreign branch of a U.S. bank. The U.S. bank earns 78% of its income from foreign

sources. How much of WorldCos interest income is U.S. source? A. $0.

B. $11,000.

C. $39,000.

D. $50,000.

GlobalCo, a foreign corporation not engaged in a U.S. trade or business, receives $80,000 in interest income

from deposits with the foreign branch of a U.S. bank. The U.S. bank earns 24% of its income from foreign

sources. How much of GlobalCos interest income is U.S. source? A. $0.

B. $19,200.

C. $60,800.

D. $80,000.

Which of the following statements is true, concerning the sourcing of income from inventory produced by the

taxpayer in the U.S. and sold outside the U.S.?

A. Because the inventory is manufactured in the U.S., all of the inventory income is U.S. source.

B. If title passes on the inventory outside the U.S., all of the inventory income is foreign source.

C. The taxpayer may use the 50-50 method to source one-half the income based on title passage and one-half

the income based on where the sale negotiation takes place.

D. The taxpayer may use the 50-50 method to source one-half the income based on title passage and one-half

the income based on location of production assets.

AirCo, a domestic corporation, purchases inventory for resale from unrelated distributors within the United

States and resells this inventory to customers outside the United States, with title passing outside the United

States. What is the source of AirCos inventory sales income? A. 100% U.S. source.

B. 100% foreign source.

C. 50% U.S. source and 50% foreign source.

D. 50% foreign source and 50% sourced based on location of manufacturing assets.

WaterCo, a domestic corporation, purchases inventory for resale from unrelated distributors outside the U.S. It

resells this inventory to U.S. customers, with title passing inside the United States. What is the source of

WaterCos inventory sales income? A. 100% U.S. source.

B. 100% foreign source.

C. 50% U.S. source and 50% foreign source.

D. 50% foreign source and 50% sourced based on location of manufacturing assets.

RainCo, a U.S. corporation, owns a number of patents related to designing umbrellas. RainCo licenses these

patents to unrelated parties. TexCo, a domestic corporation, paid RainCo $100,000 in royalties related to these

licenses. TexCo uses the patent information in its manufacturing process in its Canadian plant. IrishCo, an Irish

corporation, paid RainCo $25,000 in royalties related to the licenses. IrishCo uses the patent information in its

manufacturing process in its Michigan manufacturing plant. How much U.S.-source royalty income did RainCo

earn from these licenses?

A. $0.

B. $25,000.

C. $100,000.

D. $125,000.

SunCo, a U.S. corporation, owns a number of patents related to designing sunglasses. SunCo licenses these

patents to unrelated parties. SpainCo, a Spanish corporation, paid SunCo $78,000 in royalties related to these

licenses. SpainCo uses the patent information in its manufacturing process in its Texas plant. WiscCo, a

domestic corporation, paid SunCo $32,000 in royalties related to the licenses. WiscCo uses the patent

information in its manufacturing process in its Germany manufacturing plant. How much U.S.-source royalty

income did SunCo earn from these licenses?

A. $0.

B. $32,000.

C. $78,000.

D. $110,000.

Which of the following statements is true, regarding the sourcing of dividend income?

A. Dividends are sourced based on the residence of the recipient.

B. Dividends from a U.S. corporation are U.S.-source based on the percentage of U.S.-source income earned by

the U.S. payor.

C. Dividends from a U.S. corporation are U.S. source, without regard to where the U.S. corporation generated

the E & P.

D. Dividends from a U.S. corporation are foreign-source based on the percentage of foreign-source income

earned by the U.S. payor.

Which of the following statements is true, regarding the sourcing of dividend income?

A. Dividends are sourced based on the residence of the recipient.

B. Dividends from non-U.S. corporations are always foreign source.

C. Dividends from non-U.S. corporations are foreign-source only to the extent that 80% or more of the non-U.S.

corporations gross income for the 3 years preceding the year of the dividend payment was effectively connected with the conduct of a non-U.S. trade or business.

D. A percentage of dividends from non-U.S. corporations are U.S. source to the extent that 25% or more of the

non-U.S. corporations gross income for the 3 years preceding the year of the dividend payment was effectively connected with the conduct of a U.S. trade or business.

Which of the following statements regarding the sourcing of gross income is true?

A. Non-U.S. persons not engaged in a U.S. trade or business are indifferent as to whether any of their income is

U.S. source.

B. All income earned by non-U.S. persons not engaged in a U.S. trade or business is treated as foreign source.

C. U.S.-source income is not subject to withholding so long as such income is not treated as effectively

connected with a U.S. trade or business.

D. Certain U.S.-source investment income earned by non-U.S. persons not engaged in a U.S. trade or business

may be subject to a U.S. withholding tax.

Which of the following statements best describes the primary purpose of the Subpart F income provisions?

A. They allow for a deferral of non-U.S.-source income from U.S. taxation.

B. They provide certainty as to the U.S. income tax treatment of cross-border transactions.

C. They prevent shifting of income from the U.S. to high-tax non-U.S. jurisdictions.

D. They prevent shifting of income from the U.S. to low-tax non-U.S. jurisdictions.

USCo, a U.S. corporation, receives $700,000 of foreign-source passive income on which foreign taxes of

$70,000 are withheld. Its worldwide taxable income is $1,500,000 and its U.S. tax liability before the foreign

tax credit is $525,000. What is USCos allowed foreign tax credit? A. $70,000.

B. $175,000.

C. $245,000.

D. $770,000.

Which of the following foreign taxes paid by a U.S. corporation may be eligible for the foreign tax credit?

A. Real property taxes.

B. Value added taxes.

C. Sales taxes.

D. Dividend withholding taxes.

USCo, a U.S. corporation, reports worldwide taxable income of $1,500,000, including a $300,000 dividend

from ForCo, a wholly-owned foreign corporation. ForCos undistributed earnings and profits are $15 million and it has paid $10 million of foreign income taxes attributable to these earnings. What is USCos deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

A. $200,000.

B. $300,000.

C. $10 million.

D. $15 million.

USCo, a U.S. corporation, reports worldwide taxable income of $500,000, including a $100,000 dividend from

ForCo, a wholly-owned foreign corporation. ForCos undistributed earnings and profits are $1 million and it has paid $200,000 of foreign income taxes attributable to these earnings. What is USCos deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

A. $500,000.

B. $200,000.

C. $100,000.

D. $20,000.

Match the definition with the correct term.

1. U.S. taxpayers earning income outside the

United States. Income tax treaty ____

2. Bilateral agreement between two countries

related to tax issues. Outbound ____

3. Foreign taxpayers earning income inside the

United States. Inbound ____

4. Method for sourcing income and deductions.

Allocation and

apportionment ____

5. Treasury powers over transfer pricing. Section 482 ____

6. A country with very low or no income tax. Tax haven ____

7. A business operation that accounts for profits

and losses using its functional currency.

Qualified business

unit ____

Match the definition with the correct term. Not all of the terms have a match. A definition can be used more

than once.

1. Portfolio income treated as Subpart F income. U.S. shareholder ____

2. Owner of shares counted in determining

whether a foreign corporation is a controlled

foreign corporation.

Foreign base company

income ____

3. A CFCs profits from sales of goods and services.

Foreign personal

holding company income ____

4. A non-U.S. subsidiary whose income may be

taxed to the U.S. parent before repatriation.

Controlled foreign

corporation ____

5. Ownership threshold for U.S. shareholders to

be deemed a controlled foreign corporation.

Previously taxed

income ____

6. Upon repatriation to a CFC, it does not create

dividend income. More than 50 percent ____

Match the definition with the correct term.

1. Activity that creates the potential for effectively

connected income.

U.S. trade or

business ____

2. A non-U.S. citizen who holds a green card. Nonresident alien ____ 3. Individual who is not a U.S. citizen or resident. Resident ____

4. An individual who gives up U.S. citizenship to

avoid U.S. income taxes. Expatriate ____

5. Rule that requires determination of the dividend

equivalent amount.

Effectively

connected income ____

6. Income of foreign person taxed through filing of a

U.S. tax return with deductions allowed against

gross income. Branch profits tax ____

During 2014, Josita, an NRA, receives interest income of $50,000 from Talmadge, Inc., an unrelated U.S.

corporation. Considering the following facts related to Talmadges operations, what is the source of the interest income received by Josita?

U.S.-source Active foreign Total gross

Year income business income income

2011 $200,000 $ 500,000 $ 700,000

2012 50,000 950,000 1,000,000

2013 100,000 900,000 1,000,000

Totals $350,000 $2,350,000 $2,700,000

2014 $150,000 $ 950,000 $1,100,000

Goolsbee, Inc., a U.S. corporation, generates U.S.-source and foreign-source gross income. Goolsbees assets (tax book value) are as follows.

Generating U.S.-source income $15,000,000

Generating foreign-source income 25,000,000

Total $40,000,000

Goolsbee incurs interest expense of $200,000. Using the asset method and the tax book value, apportion interest expense to foreign-source income.

Arendt, Inc., a U.S. corporation, purchases a piece of equipment for use in its manufacture of custom pianos.

The equipment is acquired in Ireland at a cost of 200,000 euros when 1 euro: $1.35. Payment is due in 90 days.

Arendt acquires 200,000 euros and pays for the machine when 1 euro: $1.15. What is the basis of the asset to

Arendt and what is the foreign currency exchange gain or loss, if any?

KeenCo, a U.S. corporation, is the sole shareholder of LovettCo, a controlled foreign corporation. LovettCo has

$250,000 in E & P attributable to income not previously taxed to KeenCo. LovettCo also holds $200,000 E &

P attributable to income taxed to the U.S. shareholder as Subpart F income. LovettCo makes a $150,000

dividend distribution to KeenCo. Ignoring any deemed paid credit implications, what is the U.S. gross income

to KeenCo resulting from this dividend?

Given the following information, determine if FanCo, a foreign corporation, is a CFC.

Shareholders of Voting

foreign corporation power Classification

Murray 24% U.S. person

Nancy 20% U.S. person

Otto 40% Foreign person

Patricia 16% U.S. person

Patricia is Murrays daughter.

Present, Inc., a U.S. corporation, owns 60% of the stock of Past, Inc., a foreign corporation. For the current

year, Present receives a dividend of $80,000 from Past. Pasts pools of E & P (after taxes) and foreign taxes are $4,000,000 and $500,000, respectively. What is Presents total gross income from this dividend if it elects to claim the FTC for deemed-paid foreign taxes?

Britta, Inc., a U.S. corporation, reports foreign-source income and pays foreign taxes as follows.

Income Taxes Passive category $200,000 $ 10,000

General limitation category 800,000 350,000

Brittas worldwide taxable income is $1,600,000 and U.S. taxes before FTC are $560,000 (assume a 35% tax rate). What is Brittas U.S. tax liability

after the FTC?

Given the following information, determine whether Greta, an alien, is a U.S. resident for 2014. Greta cannot

establish a tax home in or a closer connection to a foreign country.

Year Number of days in the United States

2014 120

2013 150

2012 240

BrazilCo, Inc., a foreign corporation with a U.S. trade or business, has U.S.-source income as follows.

Dividend income from unrelated investment activities $ 50,000

Net U.S.-source effectively connected income 600,000

Determine BrazilCos total U.S. tax liability for the year, assuming a 35% corporate rate and no tax treaty. BrazilCo leaves its U.S. branch profits

invested in the United States, and it does not otherwise repatriate any of its U.S. assets during the year.

Freiburg, Ltd., a foreign corporation, operates a U.S. branch that reports effectively connected U.S. earnings

and profits (after income taxes) of $900,000 for the tax year. The branchs U.S. net equity at the beginning of the tax year is $3.5 million and at the end of the tax year is $2 million. Freiburg is organized in a nontreaty

country. Compute Freiburgs branch profits tax for the year.

Describe and diagram the timeline that most businesses use to enter the international markets.

With respect to income generated by non-U.S. persons, does the U.S. apply a worldwide or a territorial approach. Be specific.

Discuss the primary purposes of income tax treaties.

In international corporate income taxation, what are the uses of the sourcing rules in computing Federal taxable income?

The 367 cross-border transfer rules seem to counteract other favorable tax provisions that allow the taxpayer

to defer gross income, e.g. 351 and 368. What is the rationale for eliminating this deferral? Provide two

examples of transactions to which 367 would apply.

Your client holds foreign tax credit (FTC) carryforwards, i.e., it is in an excess credit position. Give at least three planning ideas that the client should implement, so as to free up the suspended FTCs.

COMPREHENSIVE VOLUME--CHAPTER 25--TAXATION OF

INTERNATIONAL TRANSACTIONS Key

1. TRUE

2. FALSE

3. FALSE

4. TRUE

5. TRUE

6. FALSE

7. FALSE

8. FALSE

9. FALSE

10. TRUE

11. TRUE

12. TRUE

13. TRUE

14. FALSE

FALSE

FALSE

TRUE

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TRUE

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TRUE

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B

C

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D

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A

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D

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D

Bilateral agreement between two countries related to tax issues. :: Income tax treaty and U.S. taxpayers earning income outside the United

States. :: Outbound and Foreign taxpayers earning income inside the United States. :: Inbound and Method for sourcing income and

deductions. :: Allocation and apportionment and Treasury powers over transfer pricing. :: Section 482 and A country with very low or no

income tax. :: Tax haven and A business operation that accounts for profits and losses using its functional currency. :: Qualified business unit

Owner of shares counted in determining whether a foreign corporation is a controlled foreign corporation. :: U.S. shareholder and A CFCs profits from sales of goods and services. :: Foreign base company income and Portfolio income treated as Subpart F income. :: Foreign personal holding

company income and A non-U.S. subsidiary whose income may be taxed to the U.S. parent before repatriation. :: Controlled foreign

corporation and Upon repatriation to a CFC, it does not create dividend income. :: Previously taxed income and Ownership threshold for U.S.

shareholders to be deemed a controlled foreign corporation. :: More than 50 percent

Activity that creates the potential for effectively connected income. :: U.S. trade or business and Individual who is not a U.S. citizen or

resident. :: Nonresident alien and A non-U.S. citizen who holds a green card. :: Resident and An individual who gives up U.S. citizenship to avoid U.S. income taxes. :: Expatriate and Income of foreign person taxed through filing of a U.S. tax return with deductions allowed against gross

income. :: Effectively connected income and Rule that requires determination of the dividend equivalent amount. :: Branch profits tax

Talmadge meets the 80% active foreign business requirement; thus, the interest income received by Josita is entirely foreign source. The 80% test is

calculated by taking Talmadges active foreign business income for the immediately preceding three tax years over its total gross income for those years ($2,350,000/$2,700,000 = 87%).

Using the asset method and the tax book value, interest expense is apportioned to the foreign-source income as follows.

No foreign currency exchange gain or loss is recognized until the payment is made. The cost of $270,000 (200,000 euros $1.35) is recorded as the

basis of the equipment. When payment is made, the foreign currency exchange gain is $40,000 ($270,000 $230,000). Arendt effectively pays $230,000 for the 200,000 euros needed to make payment (200,000 euros $1.15), before accounting for the tax on the currency gain.

$0. A controlled foreign corporation maintains three pools of E & P [ 959]. These pools represent (1) E & P attributable to income not previously

taxed to the CFCs U.S. shareholders, (2) E & P attributable to income taxed to U.S. shareholders as Subpart F income, and (3) E & P attributable to income taxed to U.S. shareholders as 956 investment in U.S. Property income. Any distribution from the previously taxed E & P pools is not taxed again when received by the U.S. shareholder. Thus, the $150,000 dividend received by KeenCo is considered to come first from the previously

taxed E & P pool of $200,000 and not taxed again to KeenCo. The previously-taxed pool now stands at $50,000.

Voting power Voting power Total

Shareholder held directly held constructively voting power

Murray 24% 16% (via Patricia) 40%

Nancy 20% 20%

Patricia 16% 24% (viaMurray) 40%

60%

Murray, Nancy, and Patricia are U.S. shareholders for purposes of CFC determination as all own 10% or more (directly or indirectly) of the

corporations voting power. Murray owns 40% (24% directly and 16% constructively through Patricia). Nancy owns 20% directly. Patricia also owns 40% (16% directly and 24% constructively through Murray). The corporation is a CFC because U.S. shareholders own 60% of the voting power.

Constructive voting power is not counted twice in making this determination. It is counted only in determining if the U.S. persons are U.S.

shareholders. Voting power held indirectly (i.e., through a foreign corporation), is counted in determining if a foreign corporation is a CFC.

If Patricia were not related to Murray or Nancy, Patricia would still be a U.S. shareholder (she holds 10% or more of the voting power directly), and

the corporation would still be a CFC.

Dividend income is grossed up for the deemed-paid foreign taxes. The deemed-paid foreign taxes are calculated as follows. Thus, gross income from the dividend is $90,000 ($80,000 + $10,000).

The FTC is computed separately for both of the two income baskets. Total FTC = $290,000 ($10,000 + $280,000). Net U.S. tax liability =

$270,000 ($560,000 $290,000).

FTCpassive basket

FTC is lesser of foreign taxes paid ($10,000) or the limitation:

$560,000 $200,000/$1,600,000 = $70,000.

FTC = $10,000

FTCgeneral basket

FTC is lesser of foreign taxes paid ($350,000) or the limitation:

$560,000 $800,000/$1,600,000 = $280,000.

FTC = $280,000

For Federal income tax purposes, Greta is U.S. resident for 2014, because she was physically present for 210 days during the three-year period

2012-2014.

2012: 1/6 240 days = 40 days

2013: 1/3 150 days = 50 days

2014: 1/1 120 days = 120 days

210 total days

If Greta would prefer a different result, she could establish a tax home in and a closer connection to a foreign country for 2014, she could avoid U.S.

residency; she is present in the U.S. for fewer than 183 days during 2014.

BrazilCos U.S. tax liability is:

Net effectively connected income $600,000

Tax on effectively connected taxable income $210,000

Plus: Withholding tax on dividend income at 30% 15,000*

Total U.S. tax liability $225,000

*collected at the source via withholding

The branch profits tax is equal to 30% of the branchs dividend equivalent amount (DEA). The DEA is effectively connected E & P (after income taxes) plus a decrease in U.S. net equity for the tax year, or minus an increase in U.S. net equity for the tax year.

Current addition to E & P $ 900,000

Decrease in U.S. net equity ($2 million $3.5 million) + 1,500,000 Dividend equivalent amount $2,400,000

Tax rate, branch profits tax 30%

Branch profits tax $ 720,000

Most businesses enter the international market using the following sequence.

The answer is both. U.S. persons are subject to worldwide taxation, with the foreign tax credit and tax treaty provisions allowing for a mitigation of some exposure to double taxation. Non-U.S. persons generally are subject to territorial approach, i.e., being taxed only on U.S.-sited business and

portfolio income items.

The primary purpose of an income tax treaty is to eliminate or reduce the double taxation of persons resident in one country earning income from

sources within the treaty-partner country. Tax treaties can override the Code and generally provide lower tax burdens as compared with statutory tax

provisions of a country.

The sourcing of income and deductions inside and outside the United States has a direct bearing on a number of tax provisions affecting both U.S.

and foreign taxpayers. For example, foreign taxpayers generally are taxed only on income sourced inside the United States, and U.S. taxpayers

receive relief from double taxation under the foreign tax credit rules based on their foreign-source income. Accordingly, an examination of sourcing

rules is often the starting point in addressing international tax issues.

Section 367 provides for the immediate taxation of transactions that would otherwise be tax deferred under domestic law (e.g., 351 transfers, 332

liquidations, etc.). Because assets with potential gain are being transferred outside the United States taxing jurisdiction, 367 preserves the ability of

the United States to tax this gain currently or, in some circumstances, in the future. Example transactions include an incorporation of a foreign

branch, transfer of U.S. assets to a foreign subsidiary, liquidation of a U.S. subsidiary into a foreign parent, and liquidation of a foreign subsidiary

into a U.S. parent.

Generate same basket foreign-source income that is subject to a tax rate lower than the taxpayers marginal U.S. tax rate.

Time the repatriation of foreign-source earnings to coincide with excess limitation years.

Deduct foreign taxes in years when the deduction benefit exceeds the FTC benefit.

Convert deductions related to foreign-source income so that they now relate to U.S.-source income instead.