1. Engco, a domestic corporation, produces industrial engines at its U.S. plant for sale in the United States and Canada. Engco also has a plant in Canada that performs the final stages of production with respect to the engines sold in Canada. All of the output of the Canadian plant is sold in Canada, whereas only one-third of the output of the U.S. plant is shipped to Canada. The Canadian operation is classified as a branch for U.S. tax purposes. During the current year, Engco's total sales to Canadian customers were $10 million, and the related cost of goods sold is $7 million. The average value of property, plant and equipment is $30 million at the U.S. plant, and $5 million at the Canadian plant. Engco sells all goods with title passing at the Canadian plant in the case of Canadian sales and at the U.S. plant in the case of U.S. sales.
a. How much of Engco's export gross profit of $3 million is classified as foreign source for U.S. tax purposes?
b. Now assume that the facts are the same as in part (a), except that the Canadian factory is structured as a wholly-owned Canadian subsidiary, rather than a branch. Engo's sales of semi-finished engines to the Canadian subsidiary (which still represent one-third of its output) were $6 million during the year and the related cost of goods sold was $4 million. The Canadian subsidiary's total sales of finished engines to Canadian customers (which represents all of its output) was $10 million and the related cost of goods sold is $7 million. The average value of property, plant and equipment is still $30 million at the U.S. plant, and $5 million at the Canadian plant, and Engco sells all goods with title passing at its U.S. plant. How much of Engco's export gross profit of $2 million is classified as foreign source for U.S. tax purposes?
c. How would your answer to part (b) change if Engco sold its goods with title passing at the customer's location?
2. In Peter Stemkowski v. Comm'r, 690 F2d 40 (1982), why was the taxpayer arguing that the salary he received for playing hockey for the New York Rangers covered not only the regular hockey season and playoffs, but also the off-season and training camp?
3. Quantco, a domestic corporation, is an engineering consulting firm that has its main offices in San Diego, California. Because Quantco does a considerable amount of business in China, it has a branch office in Beijing. During the current year, Quantco generates a total pre-tax profit of $100 million (all from active business operations), including $80 million of profits from its U.S. operations and $20 million of profits from its Chinese operations. Assume the U.S. tax rate is 35% and the Chinese rate is 40%.
Compute Quantco's creditable foreign income taxes, foreign tax credit limitation, and excess credits (if any).
Now assume that Quantco has a second foreign branch office in Singapore which generated $10 million of profits (all from active business operations), on which Quantco pays Singapore taxes at a rate of 25%. RecomputeQuantco's creditable foreign income taxes, foreign tax credit limitation, and excess credits. What is the name of the phenomenon by which the Singapore profits resulted in the elimination of the excess credits on the Chinese profits?
4. Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Trikeco operates in Europe through Trike1, a wholly owned Italian corporation that manufactures a special line of mountain bicycles for the European market. In addition, Trike1 owns 100% of Trike2, a U.K. corporation that markets Trike1's products in the United Kingdom. At end of the current year, the undistributed earnings and foreign income taxes of Trike1 and Trike2 are as follows:
Trike1 Trike2
Post-1986 undistributed earnings ............ $90 million............ $54 million
Post-1986 foreign income taxes .............. $36 million............ $27 million
During the current year, Trike2 distributed a $10 million dividend to Trike1, and Trike1 distributed a $10 million dividend to Trikeco. To simplify the computations, assume that neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the dividend received by Trike1 was exempt from Italian taxation.
Compute Trikeco's deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Trikeco received from Trike1. Assume the U.S. tax rate is 35%.