Multiple Choice
1) GreenCo, a domestic corporation, earns $25 million of taxable income from U.S. sources and $5 million of taxable income from foreign sources. What amount of taxable income does GreenCo report on its U.S. tax return?
A) $25 million
B) $30 million
C) $25 million less any tax paid on U.S. income
D) $30 million less any tax paid on the foreign income
2) 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) The United States and a foreign country both tax the foreign-source income of a U.S. resident
C) A foreign country taxes the foreign-source income of a nonresident alien
D) Only the United States taxes the foreign-source income of a U.S. resident (e.g., a treaty prevents foreign taxation)
3) U.S. income tax treaties:
A) Provide for primary taxation with a tax credit for income sourced in one country and earned by a resident of the other treaty country
B) Provide for taxation exclusively by the source country
C) Provide that the country with the highest tax rate will be allowed exclusive tax collection
D) Provide for taxation exclusively by the country of residence
4) Which of the following statements is false in regard to the U.S. income tax treaty program?
A) There are over 50 income tax treaties between the U.S. and other countries.
B) For the most part, neither country is prohibited from taxing the income of its residents
C) The 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
D) Residence of the taxpayer is an important consideration, while the presence of a permanent establishment is not
E) None of the above statements is false
5) ForCo, a foreign corporation, receives interest income of $100,000 from USCo, an unrelated domestic corporation. USCo has historically earned 82% of its income from foreign sourced investment income. What amount of ForCo’s interest income is U.S. source?
A) $100,000
B) $18,000
C) $0
D) $82,000
6) Yosef Barbutz, an NRA, is employed by Fisher, Inc., a foreign corporation. In November, Yosef spends 12 days in the United States performing consulting services for Fisher’s U.S. branch. He earns $5,000 per month. A month includes 28 workdays
A) Yosef has no U.S.-source income under the commercial traveler exception
B) Yosef has $2,143 U.S.-source income since his foreign employer has a U.S. branch
C) Yosef has $2,143 U.S.-source income which is exempt from U.S. taxation since he is in the U.S. for 90 days or less
D) Yosef has $60,000 U.S.-source income which is exempt from U.S. taxation since he is working for a foreign employer
7) USCo, a domestic corporation, purchases inventory for resale from distributors within the U.S. and resells this inventory to customers outside the U.S. with title passing outside the U.S. What is the source of the USCo’s inventory sales income?
A) 50% U.S. source and 50% foreign source
B) 100% U.S. source
C) 100% foreign source
D) 50% foreign source and 50% sourced based on location of manufacturing assets
8) Liang, an NRA, is sent to the United States by Fu Corporation, her foreign employer. She spends 50 days in the United States and earns $10,000 for a two-month period. This amount is attributable to 40 U.S. working days and 10 foreign 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. Liang’s U.S.-source taxable income is:
A) $10,000
B) $8,000
C) $2,000
D) $0
9) Sean, a citizen of Ireland with no trade or business activities in the United States, sells at a gain 200 shares of MicroSoft, Inc., a U.S. company. The sale takes place through Sean’s broker in Dublin. How is this gain treated for U.S. tax purposes?
A) It is foreign-source income subject to U.S. taxation
B) It is U.S.-source income subject to U.S. taxation
C) It is foreign-source income not subject to U.S. taxation
D) It is U.S.-source income exempt from U.S. taxation
10) 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 $90,000 of depreciation deductions on the equipment, all of which were allocated to U.S.-source income. USACo’s adjusted basis in the equipment is $10,000 on the date of sale. What is the source of the $340,000 gain on the sale of this equipment?
A) $250,000 U.S. source and $90,000 foreign source
B) $250,000 foreign source and $90,000 U.S. source
C) $340,000 foreign source
D) $340,000 U.S. source
11) LCo, a U.S. corporation, has $250,000 interest expense for the tax year. None of the interest relates to nonrecourse debt or loans from affiliated corporations. FLCo’s U.S. and foreign assets are as follows
Fair market value-
US assets $5,000,000
Foreign assets 10,000,000
Tax book value-
US assets 2,000,000
Foreign assets 1,000,000
How should FLCo 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 fair market value
C) Using tax book value for U.S. source and fair market value for foreign source
D) Using fair market value for U.S. source and tax book value for foreign source
12) Which of the following statements best describes the purpose of §482?
A) To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities
B) To allow the IRS to select the best method for determining transfer prices for solely U.S. taxpayers
C) To alleviate double taxation problems generated by related entities doing business in two or more countries
D) To provide tax benefits to U.S. multinationals that export U.S. produced property
13) The purpose of § 482 is to place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities. The Secretary of the Treasury is given authority to distribute, apportion, or allocate gross income, deductions, credits, etc. among or between commonly controlled entities in order to more clearly reflect the true income of each entity.
Section 482 is used to:
A) Force taxpayers to use arms-length pricing on transactions between related parties
B) Reallocation of income, deductions, etc., by a taxpayer to minimize tax liability
C) Application to transactions between unrelated parties
D) All of the above
E) None of the above
14) An advance pricing agreement (APA) is an agreement between:
A) The taxpayer and the IRS
B) Two related taxpayers
C) Two or more governments
D) The IRS and U.S. taxing authorities
15) Generally, accrued foreign taxes are:
A) Translated at the exchange rate when paid
B) Translated at the exchange rate on date accrued
C) Translated at the average exchange rate for the tax year
D) Translated at the average exchange rate for the last five years
16) Which of the following statements regarding translation of foreign taxes is true?
A) Foreign taxes are typically paid in a foreign currency and thus must be converted to U.S. dollars when used as a FTC on a U.S. return
B) Foreign taxes are translated into U.S. dollars only when such translation provides a tax benefit to the taxpayer
C) Translation of foreign taxes into U.S. dollars helps manage the U.S. balance of trade
D) Translation of foreign taxes into U.S. dollars encourages foreign corporations to set up operations in the United States
17) BlueCo, a domestic corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly-owned foreign corporation. BlueCo transfers $200 in inventory (basis = $20) and $900 in land (basis = $950) to GreenCo. GreenCo uses these assets in carrying on an active trade or business outside the United States. What gain, if any, is recognized as a result of this transaction?
A) $0
B) $130
C) $180
D) $230
E) Some other amount
True/False
18) The United States has income tax treaties with only members of the European Union.
19) Income tax treaties may provide for higher withholding tax rates on interest income than the rate provided under U.S. statutory law.
20) For years after 2010, interest paid to an unrelated party by a domestic corporation that historically earns 81% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.
21) Dividends received from Shamrock, Ltd., an Irish corporation that earns 40% of its income from U.S. business activities, are foreign-source income.
22) Monika, a nonresident alien, is employed by GlobalCo, a foreign corporation. Monika works in the United States for 32 days during the year, receiving a gross salary of $2,900 for this period. GlobalCo is not engaged in a U.S. trade or business. Under the commercial traveler exception, the $2,900 is not classified as U.S.-source income.
23) The source of income received for the use of intangible property is the country in which the owner of the property producing the income is resident.
24) A nonresident alien realizes gain on the sale of commercial real estate located in Cleveland, OH. The real estate was sold to his cousin who is also a nonresident alien. The seller has foreign-source income from the sale because the seller is a foreign resident.
25) In all cases, the sourcing of income is determined by the residence of the taxpayer.
26) Income from international communications activities earned by a U.S. person is sourced 100% in the United States.
27) All losses are apportioned against U.S.-source income.
28) In allocating interest expense between U.S. and foreign sources, a taxpayer must use the tax basis of assets in determining the proper interest apportionment.
29) The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.
30) Tax deferred reorganizations involving U.S.-owned foreign corporations may be currently taxable under certain circumstances.
31) The transfer of the assets of a foreign branch (of a U.S. corporation) to a newly formed foreign corporation is always tax deferred under § 351.
32) [Inbound] and [offshore] transfers are exempt from taxation under § 367.
33) A [U.S. shareholder] for purposes of CFC classification is any U.S. person who owns directly, indirectly, or constructively at least 10% of the voting power or value of a foreign corporation.
34) Twelve unrelated U.S. persons own a foreign corporation equally. The foreign corporation is a CFC.
35) 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.
36) Abe, a U.S. shareholder under the CFC provisions, owns 49% of a CFC. If the CFCs Subpart F income for the taxable year is $200,000, Abe is not taxed on receipt of a constructive dividend of $98,000 because he doesn’t own more than 50% of the CFC.
37) ForCo, a foreign corporation, purchases widgets from USCo, Inc., its U.S. parent corporation. The widgets are sold by ForCo to another unrelated foreign corporation in the same country as ForCo. The income from sale of the widgets by ForCo is foreign base company sales income.
38) ForCo, a foreign corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany. The income from the sale of widgets is foreign base company sales income.
39) U.S. individuals that receive dividends from foreign corporations may not claim the deemed-paid foreign tax credit related to such dividends.
40) Scott, Inc., a domestic corporation, receives a dividend of $800,000 from a § 902 noncontrolled foreign corporation. Deemed-paid foreign taxes attributable to the dividend are $120,000. If Scott, Inc. elects the FTC, its gross income attributable to this dividend is $800,000.
41) Collins, Inc. received gross foreign-source dividend income of $250,000. Foreign taxes withheld on the dividend were $25,000 and no § 902 credit is available. Its worldwide taxable income for the tax year is $500,000. Its U.S. tax before FTC is $175,000. Collins’ current year FTC is $87,500.
42) If Polka, Inc., a U.S. taxpayer, pays foreign taxes of $50,000 on foreign-source single-category (basket) income of $90,000 and has worldwide taxable income of $450,000, on which it owes U.S. taxes of $157,500 before FTC, its FTC is $50,000.
43) U.S. taxpayers may take a current FTC equal to the lesser of the FTC limit or the actual foreign taxes (direct or indirect).
44) A nonresident alien is defined as someone who is not a citizen or resident of the U.S.
45) All of an NRA’s U.S.-source income that is not effectively connected with a U.S. trade or business is subject to a flat U.S. income tax rate of 30% unless modified by a treaty.
46) A nonresident alien with U.S.-source income effectively connected with a U.S. trade or business can take effectively connected deductions against that income.
47) The existence of a U.S. trade or business is a prerequisite to having effectively connected income.
48) If a foreign corporation’s U.S. effectively connected earnings for the taxable year are $900,000 and its net equity has increased by $40,000, its DEA is $940,000.
49) Gains on the sale of U.S. real property held directly or indirectly through U.S. stock ownership by NRAs and foreign corporations are subject to taxation under FIRPTA.
50) Disposition of stock of a domestic corporation that is a real property holding corporation is subject to tax under FIRPTA.
51) The purpose of the transfer pricing rules is to ensure that taxpayers have ultimate flexibility in shifting profits between related entities.
52) An appropriate transfer price is one that considers the risks, assets, and functions of the persons to whom income is assigned.
53) 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.
54) The U.S. system for taxing income earned inside its borders by non-U.S. persons is referred to as inbound or territorial taxation because generally such foreign persons are earning income by coming into the United States.