Chapter 24 The U.S Taxation of Multinational Transactions True / False Questions "Outbound taxation" deals with the U.S tax rules that apply to U.S persons doing business outside the United States True False Amy is a U.S citizen During the year she earned income from an investment in a French company Amy will be subject to U.S taxation on her income under the principle of source-based taxation True False Nexus involves the criteria used by a government to assert its right to tax a person or transaction within or without its borders True False The United States generally taxes U.S source fixed and determinable, annual or periodic income earned by non-U.S persons by applying a withholding tax to the gross amount of income True False Philippe is a French citizen During 2014 he spent 150 days in the United States on business Because Philippe does not spend 183 days in the United States in 2014, he will not be treated as a resident alien for U.S tax purposes True False A non U.S citizen with a green card will always be treated as a resident alien for U.S tax purposes regardless of the number of days she spends in the United States during the current year True False The foreign tax credit regime is the primary mechanism used by the United States government to mitigate or eliminate the potential double taxation of income earned by U.S persons outside the United States True False 24-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Marcel, a U.S citizen, receives interest income from bonds issued by a Dutch corporation The interest income will be considered U.S source income for U.S tax purposes True False Cecilia, a Brazilian citizen and resident, spent 120 days working in the United States in the current year and earned $50,000 Because she spent more than 90 days in the United States, Cecilia's income will be treated as U.S source and subject to U.S taxation The United States does not have an income tax treaty with Brazil True False 10 The gross profit from a sale of inventory manufactured in the United States and sold in Spain will always be treated as 100 percent U.S source income True False 11 Deductible interest expense incurred by a U.S corporation will always be treated as a U.S source deduction True False 12 Once a U.S corporation chooses a method to allocate interest expense, either fair market value or tax book value, that election cannot be changed without the permission of the commissioner of the Internal Revenue Service True False 13 Under most U.S treaties, a resident of the other country must have a permanent establishment in the United States before being subject to U.S taxation on business profits earned within the United States True False 14 Alex, a U.S citizen, became a resident of Belgium in 2013 Alex will no longer be subject to U.S taxation on income he earns in Belgium if such income is exempted from tax under the U.S - Belgium treaty True False 15 Alhambra Corporation, a U.S corporation, receives a dividend from its 100 percent owned Spanish subsidiary For foreign tax credit purposes, the dividend will always be characterized as passive category income True False 16 All taxes paid to a foreign government by a U.S corporation are creditable on the corporation's U.S tax return True False 24-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 17 The Canadian government imposes a withholding tax of 15 percent on a dividend paid by a Canadian corporation to a U.S individual The withholding tax will be creditable on the individual's U.S tax return as an "in lieu of" tax True False 18 U.S individuals and corporations are eligible for a deemed-paid credit on dividends received from foreign corporations True False 19 A hybrid entity established in Ireland is treated as a flow-through entity for U.S tax purposes and a corporation for Irish tax purposes True False 20 One of the tax advantages to using a corporation through which to earn income in Germany is deferral of U.S taxation on active business income earned by the corporation until such income is remitted back to the United States True False 21 All income earned by a Swiss corporation owned by a U.S corporation is deferred from U.S taxation until such income is remitted back to the United States True False 22 A Japanese corporation owned by eleven U.S individuals cannot be treated as a controlled foreign corporation for U.S tax purposes True False 23 Subpart F income earned by a CFC will always be treated as a deemed dividend to the CFC's U.S shareholders in the year the subpart F income is earned True False 24 All passive income earned by a CFC will be treated as foreign personal holding company income under subpart F for U.S tax purposes True False 25 A U.S corporation can use hybrid entities to avoid the application of subpart F to cross border payments made between wholly-owned entities outside the United States True False Multiple Choice Questions 24-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 26 Which statement best describes the U.S framework for taxing multinational transactions? A B C D The U.S government applies source-based taxation to income earned by U.S and The U.S government applies residence-based taxation to income earned by U.S a The U.S government applies residence-based taxation to income earned by U.S The U.S government applies source-based taxation to income earned by U.S per 27 Which statement best describes the U.S framework for taxing non-U.S persons on income earned from U.S sources? A B C D Income that is characterized as effectively connected income is subject to net taxa Income that is characterized as effectively connected income is subject to a withh All U.S source income is subject to net taxation, regardless of whether it is chara All U.S source income is subject to a withholding tax applied to gross income, reg 28 Which statement best describes the U.S framework for determining if an individual who is not a U.S citizen will be treated as a resident alien for U.S tax purposes? A B C D A person must have a green card and meet a substantial presence test to be treat A person must have a green card to be treated as a resident alien for U.S tax pu A person must meet a substantial presence test to be treated as a resident alien A person with a green card will always be treated as a resident alien for U.S tax p 29 Which of the following statements best describes the substantial presence test as it applies to determining if a non U.S citizen is a resident alien for U.S tax purposes? A B C D To be treated as a resident alien, an individual must be physically present in the U To be treated as a resident alien, an individual must be physically present in the U To be treated as a resident alien, an individual must be physically present in the U To be treated as a resident alien, an individual must be physically present in the U 30 To be eligible for the "closer connection" exception to the physical presence test, an individual must be in the United States for less than how many days? A B C D 24-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 31 Guido was physically present in the United States for 150 days in 2014, 120 days in 2013, and 90 days in 2012 Under the substantial presence test formula, how many days is Guido deemed physically present in the United States in 2014? A B C D 32 Gwendolyn was physically present in the United States for 90 days in 2014, 180 days in 2013, and 30 days in 2012 Under the substantial presence test formula, how many days is Gwendolyn deemed physically present in the United States in 2014? A B C D 33 Under which of the following scenarios could Charles, a citizen of England, be eligible to claim the "closer connection" exception to the substantial presence test in 2014? A B C D Charles spent 183 days in the United States in 2014 and has his tax home in Eng Charles spent 183 days in the United States in 2014 and has his tax home in the U Charles spent 182 days in the United States in 2014 and has his tax home in En Charles spent 182 days in the United States in 2014 and has his tax home in the 34 Flint Steel Corporation has a precredit U.S tax of $170,000 on $500,000 of taxable income in 2014 Flint has $200,000 of foreign source taxable income and paid $80,000 of income taxes to the German government on this income All of the foreign source income is treated as general category income for foreign tax credit purposes Flint's foreign tax credit on its 2014 tax return will be: A B C D 35 Ames Corporation has a precredit U.S tax of $340,000 on $1,000,000 of taxable income in 2014 Ames has $600,000 of foreign source taxable income and paid $120,000 of income taxes to the Australian government on this income All of the foreign source income is treated as general category income for foreign tax credit purposes Ames's foreign tax credit on its 2014 tax return will be: A B C D 24-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 36 Austin Corporation, a U.S corporation, received the following investment income during 2014: $50,000 of dividend income from ownership of stock in a French corporation, $20,000 interest on a loan to its Dutch subsidiary, $40,000 royalty from its 50-percent owned Irish venture, and $30,000 capital gain from sale of its stock in a Brazilian corporation How much foreign source income does Austin have in 2014? A B C D 37 Russell Starling, an Australian citizen and resident, received the following investment income during 2014: $5,000 of dividend income from ownership of stock in a U.S corporation, $10,000 interest from a certificate of deposit in a U.S bank, $3,000 of interest income earned from a loan to Clint Westwood, a U.S citizen, and $2,000 capital gain from sale of a stock in a U.S corporation How much of Russell's income will be subject to U.S taxation in 2014? A B C D 38 Giselle is a citizen and resident of Brazil, a country with which the United States does not have an income tax treaty Giselle earned $24,000 of compensation within the United States She worked 60 days in the United States and 180 days in Brazil How much of her compensation earned in the United States will be subject to U.S tax? A B C D 39 Santa Fe Corporation manufactured inventory in the United States and sold the inventory to customers in Mexico Gross profit from the sale of the inventory was $200,000 Title to the inventory passed FOB: shipping point How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year? A B C D The answer cannot be determined with the information provided 24-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 40 Orono Corporation manufactured inventory in the United States and sold the inventory to customers in Canada Gross profit from the sale of the inventory was $300,000 Title to the inventory passed FOB: destination How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year? A B C D The answer cannot be determined with the information provided 41 Which of the following expenses incurred by a U.S corporation is not subject to special apportionment rules for foreign tax credit purposes? A B C D Research and experimental State and local income taxes 42 Manchester Corporation, a U.S corporation, incurred $100,000 of interest expense during 2014 Manchester manufactures inventory that is sold within the United States and abroad The total tax book value and fair market value of its U.S production assets is $20,000,000 and $50,000,000, respectively The total tax book value and fair market value of its foreign production assets is $5,000,000 and $10,000,000, respectively What is the minimum amount of interest expense that can be apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation? A B C D 43 Hanover Corporation, a U.S corporation, incurred $300,000 of interest expense during 2014 Hanover manufactures inventory that is sold within the United States and abroad The total tax book value and fair market value of its production assets is $20,000,000 and $60,000,000, respectively The total tax book value and fair market value of its foreign production assets is $5,000,000 and $20,000,000, respectively What is the minimum amount of interest expense that can be apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation? A B C D 24-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 44 Knoxville Corporation, a U.S corporation, incurred $300,000 of research and experimental (R&E) expenses during 2014 Knoxville sells inventory within the United States and abroad Knoxville conducted all of the research related to the inventory within the United States Gross sales of the inventory were $10,000,000, of which $3,000,000 was from foreign source sales Gross profit from sale of the inventory was $5,000,000, of which $2,000,000 was from foreign source sales What is the minimum amount of R&E expense that can be apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation? A B C D 45 Camellia Corporation, a U.S corporation, incurred $600,000 of research and experimental (R&E) expenses during 2014 Camellia sells inventory within the United States and abroad Camellia conducted all of the research related to the inventory within the United States Gross sales of the inventory were $20,000,000, of which $12,000,000 was from foreign source sales Gross profit from sale of the inventory was $8,000,000, of which $2,000,000 was from foreign source sales What is the minimum amount of R&E expense that can be apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation? A B C D 46 Which of the following is not a benefit derived from an income tax treaty between the United States and another country? A B C D Lower withholding tax rates imposed on cross border dividend and interest paym A higher threshold for determining when a person has nexus in the other count Lower statutory tax rates imposed on effectively connected income earned by a r A higher threshold before an individual is considered a resident of the other count 47 Absent a treaty provision, what is the statutory withholding tax rate imposed by the United States on a dividend paid by a U.S corporation to a resident of Denmark? A B C D 24-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 48 Under a U.S treaty, what must a non-resident corporation create in the United States before it is subject to U.S taxation on its business profits? A B C D U.S trade or business Permanent establishment The physical presence of at least one employee The physical presence of an asset such as a warehouse 49 A U.S corporation reports its foreign tax credit computation on which tax form? A B C D 50 Which of the following items of foreign source income is classified as passive category income for foreign tax credit purposes? A B C D Dividend received from a percent owned foreign corporation, all of the income o Dividend received from a 20 percent owned foreign corporation, all of the income Dividend received from a 100 percent owned foreign corporation, all of the incom None of the dividends is classified as passive category income 51 Which of the following tax rules applies to an excess foreign tax credit (FTC) that arises in 2014? A B C D The excess FTC is first carried back to 2013 and any excess is carried forward for The excess FTC is first carried back to 2012, then 2013, and any excess is carried f The excess FTC is first carried back to 2011, then 2012, then 2013, and any exces The excess FTC is carried forward 10 years, with no carryback allowed 52 Which of the following foreign taxes is not a creditable foreign tax for U.S tax purposes? A B C D Income tax paid to the government of Portugal Income tax paid to the city of Amsterdam Value-added tax paid to the government of France All of these taxes are creditable 53 Which of the following foreign taxes are not creditable for U.S tax purposes? A B C D Direct taxes paid by a U.S corporation on income earned in a foreign branch Deemed paid taxes on a dividend received by a U.S corporation from its 100 perc Withholding taxes imposed on a dividend received by a U.S corporation from its All of these taxes are creditable 24-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 54 A deemed paid credit is available on which of the following dividends received by a U.S corporation? A B C D Dividend received from a percent owned foreign corporation, all of the income o Dividend received from a 20 percent owned foreign corporation, all of the income Dividend received from a 100 percent owned foreign corporation, all of the incom Both dividend received from a 20 percent owned foreign corporation, all of the inc 55 Bismarck Corporation has a precredit U.S tax of $340,000 on $1,000,000 of taxable income in 2014 Bismarck has $200,000 of foreign source taxable income characterized as general category income and $50,000 of foreign source taxable income characterized as passive category income Bismarck paid $80,000 of foreign income taxes on the general category income and $10,000 of foreign income taxes on the passive category income What amount of foreign tax credit (FTC) can Bismarck use on its 2014 U.S tax return and what is the amount of the carryforward, if any? A B C D $90,000 FTC with $0 carryforward $85,000 FTC with $5,000 carryforward $78,000 FTC with $12,000 carryforward $78,000 FTC with $5,000 carryforward 56 Pierre Corporation has a precredit U.S tax of $510,000 on $1,500,000 of taxable income in 2014 Pierre has $300,000 of foreign source taxable income characterized as general category income and $150,000 of foreign source taxable income characterized as passive category income Pierre paid $90,000 of foreign income taxes on the general category income and $15,000 of foreign income taxes on the passive category income What amount of foreign tax credit (FTC) can Pierre use on its 2014 U.S tax return and what is the amount of the carryforward, if any? A B C D $153,000 FTC with $0 carryforward $105,000 FTC with $0 carryforward $105,000 FTC with $48,000 carryforward $117,000 FTC with $0 carryforward 57 Provo Corporation received a dividend of $350,000 from its 100 percent owned German subsidiary A deemed paid credit of $150,000 was available on the dividend No withholding tax was imposed on the dividend What are the U.S tax consequences to Provo on receipt of the dividend, assuming the foreign tax credit limitation is not binding and the company breaks even on its U.S operations? Assume a U.S tax rate of 34 percent A B C D Taxable income of $350,000 and a net U.S tax liability of $0 Taxable income of $350,000 and a net U.S tax liability of $20,000 Taxable income of $500,000 and a net U.S tax liability of $170,000 Taxable income of $500,000 and a net U.S tax liability of $20,000 24-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 81 Obispo, Inc., a U.S corporation, received the following sources of income during 2014: $20,000 interest income from a loan to its 100 percent owned U.S subsidiary $30,000 dividend income from its 100 percent owned Canadian subsidiary $50,000 royalty income from its Irish subsidiary for use of a trademark within the United States $40,000 rent income from its Dutch subsidiary for use of a warehouse located in Belgium $3,000 capital gain from sale of stock in its 40 percent owned Mexican joint venture Title passed in the United States What amount of foreign source income does Obispo have in 2014? $70,000 Feedback: Foreign source income consists of the $30,000 dividend income and $40,000 rent income The interest income, royalty income and capital gain are treated as U.S source income AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 82 Vintner, S.A., a French corporation, received the following sources of income during 2014: $20,000 interest income from a loan to its 100 percent owned U.S subsidiary $30,000 dividend income from its 100 percent owned Canadian subsidiary $100,000 royalty income from its Irish subsidiary for use of a trademark within the United States $100,000 rent income from its Mexican subsidiary for use of a warehouse located in Arizona $50,000 capital gain from sale of stock in its 40 percent owned German joint venture Title passed in the United States What amount of U.S source income does Vintner have in 2014? $220,000 Feedback: U.S source income consists of the $20,000 interest income, $100,000 rent income, and the $100,000 royalty income The dividend income and capital gain are treated as foreign source income AACSB: Analytic 24-224 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 83 Gouda, S.A., a Belgium corporation, received the following sources of income during 2014: $10,000 interest income from a loan to its 100 percent owned Dutch subsidiary $20,000 dividend income from its 100 percent owned U.S subsidiary $30,000 royalty income from its Irish subsidiary for use of a trademark outside the United States $40,000 rent income from its Canadian subsidiary for use of a warehouse located in Wisconsin $5,000 capital gain from sale of stock in its 40 percent owned New Zealand joint venture Title passed in New Zealand What amount of U.S source income does Gouda have in 2014? $60,000 Feedback: U.S source income consists of the $20,000 dividend income and $40,000 rent income The interest income, royalty income, and capital gain are treated as foreign source income AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-225 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 84 Janet Mothra, a U.S citizen, is employed by Caterpillar Corporation, a U.S corporation In May 2014, Caterpillar relocated Janet to its operations in Spain for the remainder of 2014 Janet was paid a salary of $200,000 As part of her compensation package for moving to Spain, Janet received a housing allowance of $40,000 Janet's salary was earned ratably over the twelve month period During 2014 Janet worked 280 days, 168 of which were in Spain and 112 of which were in the United States How much of Janet's total compensation is treated as foreign source income for 2014? $160,000 Feedback: Janet apportions 60% (168/280) of her $200,000 salary to foreign source income (60% × $200,000 = $120,000) Her housing allowance of $40,000 is treated as foreign source income because it considered a fringe benefit and is sourced based on a geographic basis AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 85 Jimmy Johnson, a U.S citizen, is employed by General Motors Corporation, a U.S corporation In June 2014, General Motors relocated Jimmy to its operations in Germany for the remainder of 2014 Jimmy was paid a salary of $250,000 As part of his compensation package for moving to Germany, Jimmy received a cost of living allowance of $30,000, which was paid to him only while he worked in Germany Jimmy's salary was earned ratably over the twelve month period During 2014 Jimmy worked 260 days, 130 of which were in Germany and 130 of which were in the United States How much of Jimmy's total compensation is treated as foreign source income for 2014? $155,000 Feedback: Jimmy apportions 50% (130/260) of his $250,000 salary to foreign source income (50% × $250,000 = $125,000) His cost of living allowance of $30,000 is treated as foreign source income because it is considered a fringe benefit that is sourced based on a geographic basis AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-226 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 86 Jesse Stone is a citizen and bona fide resident of Great Britain During 2014, Jesse received the following income: Compensation of $10 million from performing concerts in the United States Cash dividends of $20,000 from a U.S corporation Interest of $1,000 from a U.S citizen who is a resident of Ireland Rent of $10,000 from British residents who rented Jesse's townhouse in Orlando, Florida Gain of $50,000 on the sale of stock in a U.S corporation Determine the source (U.S or foreign) of each item of income Jesse received in 2014 U.S source: compensation, dividend, rent, capital gain; Foreign source: interest Feedback: The interest income is foreign source because it is paid by a non-U.S resident AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-227 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 87 Rafael is a citizen of Spain and a resident of the United States During 2014, Rafael received the following income: Compensation of $5 million from competing in tennis matches in the U.S Cash dividends of $10,000 from a Spanish corporation that earns 50 percent of its income from sales in the United States Interest of $2,000 from a Spanish citizen who is a resident of the U.S Rent of $5,000 from U.S residents who rented his villa in Italy Gain of $10,000 on the sale of stock in a German corporation Determine the source (U.S or foreign) of each item of income Rafael received in 2014 U.S source: compensation, interest, and capital gain Foreign source: dividends, rent Feedback: The dividend income is foreign source because it is paid by a foreign corporation The rent is foreign source because the property being rented is outside the U.S AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-228 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 88 Spartan Corporation, a U.S company, manufactures widgets for sale in the United States and Europe All manufacturing activities take place in the United States During the current year, Spartan sold 100,000 widgets to European customers at a price of $5 each Each widget costs $2 to produce All of Spartan's production assets are located in the United States For each independent scenario, determine the source of the gross profit from sale of the widgets A Spartan ships its widgets F.O.B., place of destination B Spartan ships its widgets F.O.B., place of shipment A $150,000 gross profit is U.S source and $150,000 gross profit is foreign source B $300,000 gross profit is U.S source and $0 gross profit is foreign source Feedback: A Under §863(b), 50% of the gross profit is sourced based on the location of the manufacturing assets and 50% of the gross profit is sourced based on where title passes In this scenario, title passes outside the United States B Under §863(b), 50% of the gross profit is sourced based on the location of the manufacturing assets and 50% of the gross profit is sourced based on where title passes In this scenario, title passes within the United States AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 89 Cheyenne Corporation is a U.S corporation engaged in the manufacture and sale of mining equipment The company handles its export sales through sales branches in Canada and Mexico The average tax book value of Cheyenne's assets for the year was $200 million, of which $100 million generated U.S source income and $100 million generated foreign source income The average fair market value of Cheyenne's assets was $600 million, of which $400 million generated U.S source income and $200 million generated foreign source income Cheyenne's total interest expense for the year was $30 million What is the minimum amount of interest expense that Cheyenne can apportion against its foreign source gross income for foreign tax credit purposes, assuming the company can elect either apportionment method? $10 million Feedback: Under the fair market value method, Cheyenne apportions one-third of the interest expense to foreign source gross income ($200/$600) Under the tax book value method, Cheyenne apportions half of the interest expense to foreign source gross income ($100/$200) AACSB: Analytic 24-229 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 90 Portland Corporation is a U.S corporation engaged in the manufacture and sale of fishing equipment The company handles its export sales through sales branches in Canada and Norway The average tax book value of Portland's assets for the year was $300 million, of which $250 million generated U.S source income and $50 million generated foreign source income The average fair market value of Portland's assets was $500 million, of which $400 million generated U.S source income and $100 million generated foreign source income Portland's total interest expense for the year was $24 million What is the minimum amount of interest expense that Portland can apportion against its foreign source gross income for foreign tax credit purposes, assuming the company can elect either apportionment method? $4 million Feedback: Under the fair market value method, Portland apportions 20% of the interest expense to foreign source gross income ($100/$500), or $4,800,000 Under the tax book value method, Portland apportions 1/6 thof the interest expense to foreign source gross income ($50/$200), or $4,000,000 AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-230 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 91 Hazelton Corporation, a U.S corporation, manufactures golf equipment Hazelton reported sales from this product group of $100 million, of which $40 million were foreign source sales The gross profit percentage for domestic sales was 20%, and the gross profit percentage from foreign sales was 30% Hazelton incurred R&E expenses of $10 million, all of which were conducted in the United States What is the minimum amount of the R&E expense that can be apportioned to foreign source gross income for foreign tax credit purposes, assuming the company can elect either apportionment method? $2,000,000 under the sales method Feedback: AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-231 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 92 Orleans Corporation, a U.S corporation, manufactures boating equipment Orleans reported sales from this product group of $200 million, of which $80 million were foreign source sales The gross profit percentage for domestic sales was 20%, and the gross profit percentage from foreign sales was 10% Orleans incurred R&E expenses of $15 million, all of which were conducted in the United States What is the minimum amount of the R&E expense that can be apportioned to foreign source gross income for foreign tax credit purposes, assuming the company can elect either apportionment method? $2,812,500 under the gross income method Feedback: AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 24-232 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 93 Rainier Corporation, a U.S corporation, manufactures and sells quidgets in the United States and Europe Rainier conducts its operations in Europe through a German GmbH, which the company elects to treat as a branch for U.S tax purposes Rainier also licenses the rights to manufacture quidgets to an unrelated company in China During the current year, Rainier paid the following foreign taxes, translated into U.S dollars at the appropriate exchange rate: What amount of creditable foreign taxes does Rainier incur? $1,800,000 Feedback: The creditable income taxes are the national income taxes, city of Munich income taxes, and the withholding taxes AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-02 Apply the U.S source rules for common items of gross income and deductions Level of Difficulty: Medium Topic: U.S source rules for gross income and deductions 94 Ypsi Corporation has a precredit U.S tax of $780,000 on $2,000,000 of taxable income in 2014 Ypsi has $400,000 of foreign source taxable income characterized as general category income and $150,000 of foreign source taxable income characterized as passive category income Ypsi paid $180,000 of foreign income taxes on the general category income and $30,000 of foreign income taxes on the passive category income What amount of foreign tax credit (FTC) can Ypsi use on its 2014 U.S tax return and what is the amount of the FTC carryforward, if any? $186,000 FTC with an excess $24,000 FTC in the general category basket Feedback: The foreign tax credit in the general category basket is limited to the lesser of $180,000 or the FTC limitation, computed as $400,000/$2,000,000 × $780,000 = $156,000 The foreign tax credit in the passive category basket is limited to the lesser of $30,000 or the FTC limitation, computed as $150,000/$2,000,000 × $780,000 = $58,500 The total FTC is $156,000 + $30,000 = $186,000, leaving a $24,000 carryforward in the general category FTC basket AACSB: Analytic AACSB: Reflective Thinking 24-233 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation Level of Difficulty: Medium Topic: Foreign tax credits 95 Boca Corporation, a U.S corporation, received a dividend of $800,000 from its 100 percent owned Swiss subsidiary A deemed paid credit of $200,000 was available on the dividend A five percent withholding tax ($40,000) was imposed on the dividend What amount of taxable income does the dividend generate on Boca's U.S tax return and what is the company's net U.S tax, assuming the company broke even on its other operations and the FTC limitation is not binding? Use a U.S tax rate of 34 percent $1,000,000 of taxable income The company has a net U.S tax of $100,000 Feedback: The deemed paid credit of $200,000 is added to the $800,000 dividend, resulting in taxable income of $1,000,000 The net U.S tax is the precredit U.S tax of $340,000 less the deemed paid FTC of $200,000 and the withholding tax of $40,000, which equals $100,000 AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation Level of Difficulty: Medium Topic: Foreign tax credits 96 Kiwi Corporation is a 100 percent owned Australian subsidiary of Exotic Fruit Corporation, a U.S corporation Kiwi had post-1986 earnings and profits of 1,000,000 Australian dollars (AUD) and post-1986 foreign taxes of $225,000 During the current year, Kiwi paid a dividend of 250,000 AUD to Exotic Fruit Assume an exchange rate of AUD = $0.75 No withholding tax was imposed on the dividend What amount of taxable income does the dividend generate on Exotic's U.S tax return? $243,750 Feedback: The dividend is $187,500, computed as 250,000,000 AUD × $0.75 The deemed paid credit is $56,250, computed as 250,000/1,000,000 × $225,000 The deemed paid credit is added to the dividend, resulting in taxable income of $243,750 AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation Level of Difficulty: Medium 24-234 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Topic: Foreign tax credits 97 Wooden Shoe Corporation is a 100 percent owned Dutch subsidiary of Tulip Corporation, a U.S corporation Wooden Shoe had post-1986 earnings and profits of €3,000,000 and post-1986 foreign taxes of $1,000,000 During the current year, Wooden Shoe paid a dividend of €300,000 to Tulip Assume an exchange rate of €1 = $1.40 No withholding tax was imposed on the dividend What amount of taxable income does the dividend generate on Tulip's U.S tax return? $520,000 Feedback: The dividend is $420,000, computed as €300,000 × $1.40 The deemed paid credit is $100,000, computed as 300,000/3,000,000 × $1,000,000 The deemed paid credit is added to the dividend, resulting in taxable income of $520,000 AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation Level of Difficulty: Medium Topic: Foreign tax credits 24-235 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 98 Emerald Corporation is a 100 percent owned Irish subsidiary of Shamrock, Inc., a U.S corporation Emerald had post-1986 earnings and profits of €2,625,000 and post-1986 foreign taxes of $525,000 During the current year, Emerald paid a dividend of €525,000 to Shamrock The dividend was characterized as general category income for FTC purposes The dividend was subject to a withholding tax of €26,250 Assume an exchange rate of €1 = $1.50 Shamrock reported U.S taxable income of $1,000,000 Shamrock's U.S tax rate is 34 percent Compute Shamrock's net U.S tax liability for the current year and excess FTC, if any Net U.S tax of $499,075 with $0 excess FTC Feedback: The FTC limitation is computed as 892,500/1,892,500 × $643,450 = $303,450 and is not binding because the Irish tax rate is less than 34% AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation Level of Difficulty: Hard Topic: Foreign tax credits 24-236 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 99 Sushi Corporation is a 100 percent owned Japanese subsidiary of Squid, Inc., a U.S corporation Sushi had post-1986 earnings and profits of ¥120,000,000 and post1986 foreign taxes of $800,000 During the current year, Sushi paid a dividend of ¥60,000,000 to Squid The dividend was characterized as general category income for FTC purposes The dividend was subject to a percent withholding tax Assume an exchange rate of ¥1 = $0.010 Squid reported U.S taxable income of $2,000,000 Squid's U.S tax rate is 34 percent Compute Squid's net U.S tax liability for the current year and excess FTC, if any Net U.S tax of 680,000 with a $60,000 excess FTC Feedback: The FTC limitation is computed as 1,000,000/3,000,000 × $1,020,000 = $340,000 and is binding because the Japanese tax rate is greater than 34% The excess FTC is $60,000 AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation Level of Difficulty: Hard Topic: Foreign tax credits 24-237 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 100 Portsmouth Corporation, a British corporation, is a wholly owned subsidiary of Salem Corporation, a U.S corporation During the year, Portsmouth reported the following income: $250,000 interest income received from a loan to an unrelated French corporation $100,000 dividend income received from a less than percent owned unrelated Dutch corporation $150,000 rent income from an unrelated British corporation on property Portsmouth actively manages $500,000 gross profit from the sale of inventory manufactured by Portsmouth in Great Britain and sold to a 100 percent owned subsidiary in Germany What amount of subpart F income does Portsmouth recognize in the current year? $350,000 Feedback: The interest income and dividend income are foreign personal holding company income The rent income is excluded from foreign personal holding company income because Portsmouth actively manages the property The gross profit is not foreign base company sales income because the inventory is manufactured in the country in which Portsmouth is incorporated AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Analyze Blooms: Apply Learning Objective: 24-06 Comprehend the basic U.S anti-deferral tax regime and identify common sources of subpart F income Level of Difficulty: Hard Topic: U.S anti-deferral rules 24-238 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... from U.S sources? A B C D Income that is characterized as effectively connected income is subject to net taxa Income that is characterized as effectively connected income is subject to a withh... shareholder" of a controlled foreign corporation (CFC) for subpart F purposes? A B C D A U.S citizen owning percent of the CFC A U.S citizen owning 15 percent of the CFC A U.S corporation owning 15 percent... FTC carryover o Taxable income of $3,000,000, a net U.S tax of $680,000, and a FTC carryover of Taxable income of $2,600,000, a net U.S tax of $680,000, and a FTC carryover o Taxable income of