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taxation" ch24 Student: 1. "Outbound deals with the U.S. tax rules that apply to U.S. persons doing business outside the United States. True False 2. 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 3. 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 4. 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 5. Philippe is a French citizen. During 2012 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2012, he will not be treated as a resident alien for U.S. tax purposes. True False 6. 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 7. 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 8. 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 9. 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 t ax 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 2012. 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 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 compan y 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 26. Which statement best describes the U.S. framework for taxing multinational transactions? A. The U.S. government applies source-based taxation to income earned by U.S. and non-U.S. persons. B. The U.S. government applies residence-based taxation to income earned by U.S. and non-U.S. persons. C The U.S. government applies residence-based taxation to income earned by U.S. persons and source. based taxation to income earned by non-U.S. persons. D The U.S. government applies source-based taxation to income earned by U.S. persons and residence. based taxation to income earned by non-U.S. persons. 27. Which statement best describes the U.S. framework for taxing non-U.S. persons on income earned from U.S. sources? AIncome that is characterized as effectively connected income is subject to net taxation while income that . is characterized as fixed and determinable, annual or periodic income is subject to a withholding tax applied to gross income. BIncome that is characterized as effectively connected income is subject to a withholding tax applied to . gross income while income that is characterized as fixed and determinable, annual or periodic income is subject to net taxation. C All U.S. source income is subject to net taxation, regardless of whether it is characterized as effectively . connected or as fixed and determinable, annual or periodic income. DAll U.S. source income is subject to a withholding tax applied to gross income, regardless of whether it . is characterized as effectively connected or as fixed and determinable, annual or periodic income. 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. A person must have a green card and meet a substantial presence test to be treated as a resident alien for U.S. tax purposes. B. A person must have a green card to be treated as a resident alien for U.S. tax purposes. C. A person must meet a substantial presence test to be treated as a resident alien for U.S. tax purposes. DA person with a green card will always be treated as a resident alien for U.S. tax purposes, while a . person without a green card may be treated as a resident alien if she meets a substantial presence test. 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.To be treated as a resident alien, an individual must be physicall y present in the United States for 183 days in the current year. B To be treated as a resident alien, an individual must be physically present in the United States for 183 . days in the current year and each of the prior two years. CTo be treated as a resident alien, an individual must be physically present in the United States for 183 . days using a formula that includes the current year and the prior two years. DTo be treated as a resident alien, an individual must be physically present in the United States for 183 . days using a formula that includes the current year and the prior year. 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. 31 B. 61 C. 181 D. 183 31. Guido was physically present in the United States for 150 days in 2012, 120 days in 2011, and 90 days in 2010. Under the substantial presence test formula, how many days is Guido deemed physically present in the United States in 2012? A. 360 B. 205 C. 190 D. 150 32. Gwendolyn was physically present in the United States for 90 days in 2012, 180 days in 2011, and 30 days in 2010. Under the substantial presence test formula, how many days is Gwendolyn deemed physically present in the United States in 2012? A. 300 B. 155 C. 150 D. 90 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 2012? A. Charles spent 183 days in the United States in 2012 and has his tax home in England. B. Charles spent 183 days in the United States in 2012 and has his tax home in the United States. C. Charles spent 182 days in the United States in 2012 and has his tax home in England. D. Charles spent 182 days in the United States in 2012 and has his tax home in the United States. 34. Flint Steel Corporation has a precredit U.S. tax of $170,000 on $500,000 of taxable income in 2012. 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 2012 tax return will be: A. $102,000 B. $80,000 C. $68,000 D. $32,000 35. Ames Corporation has a precredit U.S. tax of $340,000 on $1,000,000 of taxable income in 2012. 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 2012 tax return will be: A. $72,000 B. $120,000 C. $204,000 D. $340,000 36. Austin Corporation, a U.S. corporation, received the following investment income during 2012: $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 2012? A. $140,000 B. $110,000 C. $70,000 D. $60,000 37. Russell Starling, an Australian citizen and resident, received the following investment income during 2012: $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 2012? A. $20,000 B. $15,000 C. $10,000 D. $8,000 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. $24,000 B. $8,000 C. $6,000 D. $0 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. $200,000. B. $100,000. C. $0. D. The answer cannot be determined with the information provided. 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. $300,000. B. $150,000. C. $0. 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. Interest B. Research and experimental C. Advertising D. State and local income taxes 42. Manchester Corporation, a U.S. corporation, incurred $100,000 of interest expense during 2012. 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. $0 B. $20,000 C. $25,000 D. $100,000 43. Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during 2012. 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. $300,000 B. $100,000 C. $75,000 D. $60,000 44. Knoxville Corporation, a U.S. corporation, incurred $300,000 of research and experimental (R&E) expenses during 2012. 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 was $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 compan y makes this computation? A. $120,000 B. $90,000 C. $45,000 D. $0 45. Camellia Corporation, a U.S. corporation, incurred $600,000 of research and experimental (R&E) expenses during 2012. 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 was $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. $360,000 B. $180,000 C. $150,000 D. $112,500 46. Which of the following is not a benefit derived from an income tax treaty between the United States and another country? A. Lower withholding tax rates imposed on cross border dividend and interest payments B. A higher threshold for determining when a person has nexus in the other country C. Lower statutory tax rates imposed on effectively connected income earned by a resident of one country in the other country D. A higher threshold before an individual is considered a resident of the other country for tax purposes 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. 30% B. 15% C. 5% D. 0% 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. U.S. trade or business B. Permanent establishment C. The physical presence of at least one employee D. 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. Form 1116 B. Form 1118 C. Form 1120 D. Form 8832 50. Which of the following items of foreign source income is classified as passive category income for foreign tax credit purposes? A. Dividend received from a 5 percent owned foreign corporation, all of the income of which is derived from an active business B. Dividend received from a 20 percent owned foreign corporation, all of the income of which is derived from an active business C.Dividend received from a 100 percent owned foreign corporation, all of the income of which is derived from an active business D. None of the dividends are classified as passive category income 51. Which of the following tax rules applies to an excess foreign tax credit (FTC) that arises in 2012? A. The excess FTC is first carried back to 2011 and any excess is carried forward for 10 years. B. The excess FTC is first carried back to 2010, then 2011, and any excess is carried forward for 20 years. C. The excess FTC is first carried back to 2009, then 2010, then 2011, and any excess is carried forward for 5 years. D. 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. Income tax paid to the government of Portugal B. Income tax paid to the city of Amsterdam C. Value-added tax paid to the government of France D. All of these taxes are creditable 53. Which of the following foreign taxes are not creditable for U.S. tax purposes? A. Direct taxes paid by a U.S. corporation on income earned in a foreign branch B. Deemed paid taxes on a dividend received by a U.S. corporation from its 100 percent owned foreign subsidiary C. Withholding taxes imposed on a dividend received by a U.S. corporation from its 100 percent owned foreign subsidiary D. All of these taxes are creditable 54. A deemed paid credit is available on which of the following dividends received by a U.S. corporation? A. Dividend received from a 5 percent owned foreign corporation, all of the income of which is derived from an active business. B. Dividend received from a 20 percent owned foreign corporation, all of the income of which is derived from an active business. C.Dividend received from a 100 percent owned foreign corporation, all of the income of which is derived from an active business. D. Both B and C are correct answers. 55. Bismarck Corporation has a precredit U.S. tax of $340,000 on $1,000,000 of taxable income in 2012. 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 o n the passive category income. What amount of foreign tax credit (FTC) can Bismarck use on its 2012 U.S. tax return and what is the amount of the carryforward, if any? A. $90,000 FTC with $0 carryforward B. $85,000 FTC with $5,000 carryforward C. $78,000 FTC with $12,000 carryforward D. $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 2011. 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 2011 U.S. tax return and what is the amount of the carryforward, if any? A. $153,000 FTC with $0 carryforward B. $105,000 FTC with $0 carryforward C. $105,000 FTC with $48,000 carryforward D. $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. Taxable income of $350,000 and a net U.S. tax liability of $0 B. Taxable income of $350,000 and a net U.S. tax liability of $20,000 C. Taxable income of $500,000 and a net U.S. tax liability of $170,000 D. Taxable income of $500,000 and a net U.S. tax liability of $20,000 58. Silverado Corporation is a 100 percent owned Mexican subsidiary of Gold Nugget Corporation, a U.S. corporation. Silverado had post-1986 earnings and profits of 350,000,000 pesos and post-1986 foreign taxes of $15,000,000. During the current year, Silverado paid a dividend of 70,000,000 pesos to Gold Nugget. Assume an exchange rate of 1 peso = 0.10 dollars. Compute the tax consequences to Gold Nugget as a result of this dividend. A. Taxable income of $7,000,000 and a deemed paid credit of $3,000,000 B. Taxable income of $10,000,000 and a deemed paid credit of 3,000,000 C. Taxable income of $7,000,000 and a deemed paid credit of $1,500,000 D. Taxable income of $10,000,000 and a deemed paid credit of $1,500,000 59. Madrid Corporation is a 100 percent owned Spanish subsidiary of Doubloon Corporation, a U.S. corporation. Madrid had post-1986 earnings and profits of 4,200,000 and post-1986 foreign taxes of $2,700,000. During the current year, Madrid paid a dividend of 2,100,000 to Doubloon. Assume an exchange rate of 1 = $1.50. Compute the tax consequences to Doubloon as a result of this dividend. A. Taxable income of $3,150,000 and a deemed paid credit of $2,700,000 B. Taxable income of $4,500,000 and a deemed paid credit of $2,700,000 C. Taxable income of $3,150,000 and a deemed paid credit of $1,350,000 60. D. Taxable income of $4,500,000 and a deemed paid credit of $1,350,000 Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation, a U.S. corporation. Horton had post-1986 earnings and profits of C$2,400,000 and post-1986 foreign taxes of $1,600,000. During the current year, Horton paid a dividend of C$600,000 to Cruller. The dividend was characterized as general category income for FTC purposes. The dividend was subject to a withholding tax of C$30,000. Assume an exchange rate of C$1 = $1. Cruller reported U.S. taxable income of $2,000,000. Cruller's U.S. tax rate is 34 percent. Compute the tax consequences to Cruller as a result of this dividend. A. Taxable income of $3,000,000, a net U.S. tax of $590,000, and a FTC carryover of $0. B. Taxable income of $3,000,000, a net U.S. tax of $680,000 and a FTC carryover of $90,000. C. Taxable income of $2,600,000, a net U.S. tax of $680,000, and a FTC carryover of $226,000. D. Taxable income of $2,600,000, a net U.S. tax of $454,000 and a FTC carryover of $0. 61. Which of the following statements best describes how the deemed paid credit is computed by a U.S. corporation. A The foreign subsidiary's post-1986 earnings and profits is kept in functional currency and the post-1986 . foreign taxes is kept in U.S. dollars. B The foreign subsidiary's post-1986 earnings and profits is kept in U.S. dollars and the post-1986 foreign . taxes is kept in functional currency. C. The foreign subsidiary's post-1986 earnings and profits and post-1986 foreign taxes are kept in functional currency. D. The foreign subsidiary's post-1986 earnings and profits and post-1986 foreign taxes are kept in U.S. dollars. 62. Boca Corporation, a U.S. corporation, reported U.S. taxable income of $1,000,000 in 2012. Included in the computation of taxable income was foreign source taxable income of $200,000, of which $87,500 was a dividend received from the corporation's 100 percent owned subsidiary in Ireland. The dividend brought with it a deemed paid credit of $12,500. In addition, a withholding tax of $4,375 was imposed on the dividend. Compute Boca Corporation's net U.S. tax liability for 2012. Assume a U.S. tax rate of 34 percent. A. $335,625 B. $327,500 C. $327,375 D. $323,125 63. Which of the following tax benefits does not arise when a U.S. corporation forms a corporation in Ireland through which to earn business profits in Ireland? A. Potential deferral of U.S. tax on income earned by the corporation. B. Treaty benefits on cross border payments between the Irish corporation and the U.S. corporation. C. Use of transfer pricing to shift income between the United States and Ireland. D. Flow-through of losses from the Irish corporation to the tax return of the U.S. corporation. 64. Which of the following tax or non-tax benefits does not arise when a U.S. corporation forms a hybrid entity in Germany through which to earn business profits in Germany and elects to have the entity treated as a branch for U.S. tax purposes? A. Potential deferral of U.S. tax on income earned by the corporation B. Flow-through of losses from the German corporation to the tax return of the U.S. corporation C. Limited liability to the U.S. corporation for acts committed by the hybrid entity D. Free transferability of the stock of the hybrid entity by the U.S. corporation 65. What form is used by a U.S. corporation to "check-the-box" to elect the U.S. tax consequences of forming a hybrid entity outside the United States? A. Form 1118 B. Form 1120 C. Form 8832 D. Form 8833 66. A rectangle with a triangle within it is a symbol used to represent what organizational form? A. Partnership B. Corporation C. Hybrid entity treated as a branch for U.S. tax purposes D. Hybrid entity treated as a partnership for U.S. tax purposes 67. A rectangle with an inverted triangle within it is a symbol used to represent what organizational form? A. Partnership B. Corporation C. Hybrid entity treated as a corporation for U.S. tax purposes D. Hybrid entity treated as a partnership for U.S. tax purposes 68. Which of the following statements best describes the operation of subpart F as it applies to income earned by a foreign corporation? ASubpart F causes all income of a controlled foreign corporation to be treated as a deemed dividend to all . U.S. persons owning stock in the corporation on the last day of the corporation's tax year. BSubpart F causes certain income of a controlled foreign corporation to be treated as a deemed dividend . to all U.S. persons owning stock in the corporation on the last day of the corporation's tax year. CSubpart F causes certain income of a controlled foreign corporation to be treated as a deemed dividend . to only those U.S. shareholders owning stock in the corporation on the last day of the corporation's tax year. DSubpart F causes all income of a controlled foreign corporation to be treated as a deemed to . dividend only those U.S. shareholders owning stock in the corporation on the last day of the corporation's tax year. 69. Which of the following persons should not be treated as a "U.S. shareholder" of a controlled foreign corporation (CFC) for subpart F purposes? A. A U.S. citizen owning 5 percent of the CFC B. A U.S. citizen owning 15 percent of the CFC C. A U.S. corporation owning 15 percent of the CFC D. All of these persons are U.S. shareholders for subpart F purposes 70. Windmill Corporation, a Dutch corporation, is owned by the following unrelated persons: 50 percen t by a U.S. corporation, 5 percent by a U.S. individual, and 45 percent by a Swiss corporation. During the year, Windmill earned $2,000,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Windmill? A Windmill is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of . $1,000,000 and $100,000, respectively. B. Windmill is a CFC and only the U.S. corporation will have a deemed dividend of $1,000,000. C Windmill is a CFC and the U.S. corporation, U.S. individual, and Swiss corporation will have a deemed . dividend of $1,500,000, $100,000, and $900,000, respectively. D. Windmill is not a CFC and none of the shareholders will have a deemed dividend under subpart F. 71. Boomerang Corporation, a New Zealand corporation, is owned by the following unrelated persons: 40 percent by a U.S. corporation, 15 percent by a U.S. individual, and 45 percent by an Australian corporation. During the year, Boomerang earned $3,000,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Boomerang? A Boomerang is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of . $1,200,000 and $450,000, respectively. B. Boomerang is a CFC and only the U.S. corporation will have a deemed dividend of $1,200,000. C Boomerang is a CFC and the U.S. corporation, U.S. individual, and Australian corporation will have a . deemed dividend of $1,200,000, $450,000, and $1,350,000, respectively. D. Boomerang is not a CFC and none of the shareholders will have a deemed dividend under subpart F. 72. Which of the following income earned by a controlled foreign corporation incorporated in Spain is not foreign personal holding company income? A. Interest income received from a loan to an unrelated party B. Dividend income from a five percent investment in an unrelated corporation C. Rent received from a passive investment in an apartment complex D. Gross profit from the manufacture and sale of inventory to an unrelated party 73. Which of the following transactions engaged in by a Swiss controlled foreign corporation creates foreign base company sales income? A. Purchase of inventory from an unrelated person in Germany and sale to a related person in Poland. B. Purchase of inventory from a related person in Germany and sale to an unrelated person in Switzerland. C. Purchase of inventory from a related person in Germany and sale to a related person in Poland. D. Purchase of inventory from an unrelated person in Germany and sale to an unrelated person in Poland. 74. Which of the following exceptions could cause subpart F income to be excluded from the deemed dividend regime? A. The full inclusion rule. B. The de minimis rule. C. The high tax rule. D. Both B and C could cause subpart F income to be excluded from the deemed dividend regime. 75. Before subpart F applies, a foreign corporation must be a CFC for how many consecutive days? A. 1 B. 30 C. 183 D. 365 76. Nicole is a citizen and resident of Australia. She has a full-time job in Australia and has lived there with her family for the past 10 years. In 2010, Nicole came to the United States on business and stayed for 180 days. She came to the United States again on business in 2011 and stayed for 150 days. In 2012 she came back to the United States on business and stayed for 100 days. Does Nicole meet the U.S. statutory definition of a resident alien in 2012 under the substantial presence test? 77. Natsumi is a citizen and resident of Japan. She has a full-time job in Japan and has lived there with her family for the past 20 years. In 2010, Natsumi came to the United States on business and stayed for 240 days. She came to the United States again on business in 2011 and stayed for 120 days. In 2012 she came back to the United States on business and stayed for 120 days. Does Natsumi meet the U.S. statutory definition of a resident alien in 2012 under the substantial presence test? 78. Reno Corporation, a U.S. corporation, reported total taxable income of $6,000,000 in 2012. Taxable income included $1,800,000 of foreign source taxable income from the company's branch operations in Canada. All of the branch income is general category income. Reno paid Canadian income taxes of $720,000 on its branch income. Compute Reno's net U.S. tax liability and any foreign tax credit carryover for 2012. Use a U.S. corporate tax rate of 34%. 79. Appleton Corporation, a U.S. corporation, reported total taxable income of $10,000,000 in 2012. Taxable income included $2,500,000 of foreign source taxable income from the company's branch operations in the United Kingdom. All of the branch income is general category income. Appleton paid U.K. income taxes of $750,000 on its branch income. Compute Appleton's net U.S. tax liability and any foreign tax credit carryover for 2012. Assume a U.S. corporate tax rate of 34%. 80. Holmdel, Inc., a U.S. corporation, received the following sources of income during 2012: $10,000 interest income from a loan to its 100 percent owned Swiss subsidiary. $50,000 dividend income from its 100 percent owned French subsidiary. $100,000 royalty income from its Bermuda subsidiary for use of a trademark outside the United States. $25,000 rent income from its Canadian subsidiary for use of a warehouse located in New Jersey. $50,000 capital gain from sale of stock in its 40 percent owned Japanese joint venture. Title passed in Japan. What amount of foreign source income does Holmdel have in 2012? 81. Obispo, Inc., a U.S. corporation, received the following sources of income during 2012: $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 2012? 82. Vintner, S.A., a French corporation, received the following sources of income during 2012: $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 2012? 83. Gouda, S.A., a Belgium corporation, received the following sources of income during 2012: $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 Zeeland joint venture. Title passed in New Zeeland. What amount of U.S. source income does Gouda have in 2012? 84. Janet Mothra, a U.S. citizen, is employed by Caterpillar Corporation, a U.S. corporation. In May 2012, Caterpillar relocated Janet to its operations in Spain for the remainder of 2012. 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 2012 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 2012? 85. Jimmy Johnson, a U.S. citizen, is employed by General Motors Corporation, a U.S. corporation. In June 2012, General Motors relocated Jimmy to its operations in Germany for the remainder of 2012. 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 2012 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 2012? 86. Jesse Stone is a citizen and bona fide resident of Great Britain. During 2012, 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 2012. 87. Rafael is a citizen of Spain and a resident of the United States. During 2012, 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 2012. 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. Spartan ships its widgets F.O.B., place of destination. 89. 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. Spartan ships its widgets F.O.B., place of shipment. 90. 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? 91. 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? 92. 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? 93. 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%. Hazelton 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? 94. 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? 95. Ypsi Corporation has a precredit U.S. tax of $780,000 on $2,000,000 of taxable income in 2012. 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 2012 U.S. tax return and what is the amount of the FTC carryforward, if any? 96. 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. 97. 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 post1986 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 1 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? 98. 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? 99. 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' U.S. tax rate is 34 percent. Compute Shamrock's net U.S. tax liability for the current year and any excess FTC, if any. 100.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 post-1986 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 0 percent withholding tax. Assume an exchange rate of 1 = $0.010. Squid reported U.S. taxable income of $2,000,000. Squid' U.S. tax rate is 34 percent. Compute Squid's net U.S. tax liability for the current year and any excess FTC, if any. 101.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 1 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? ch24 Key 1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. FALSE 6. TRUE 7. TRUE 8. FALSE 9. TRUE 10. FALSE 11. FALSE 12. FALSE 13. TRUE 14. FALSE 15. FALSE 16. FALSE 17. TRUE 18. FALSE 19. TRUE 20. TRUE 21. FALSE 22. FALSE 23. FALSE 24. FALSE 25. TRUE 26. C 27. A 28. D 29. C 30. D 31. B 32. B 33. C 34. C 35. B 36. B 37. D 38. A 39. C 40. B 41. C 42. B 43. C 44. C 45. D 46. C 47. A 48. B 49. B 50. A 51. A 52. C 53. D 54. D 55. C 56. B 57. D 58. B 59. D 60. B 61. A 62. D 63. D 64. A 65. C 66. D 67. C 68. C 69. A 70. D 71. A 72. D 73. C 74. D 75. B Feedback: Using the formula, Nicole is treated as having 180 days in 2012, computed as 100 + 1/3(150) + 1/6(180). To be a res ident alien under the substantial presence test, she must be in the U.S. for 183 or more days. 76. No Feedback: Using the formula, Natsumi is treated as having 200 days in 2012, computed as 120 + 1/3(120) + 1/6(240). To be a re sident alien under the substantial presence test, she must be in the U.S. for 183 or more days. 77. Yes Reno's allowable foreign tax credit for 2012 is limited to $612,000, creating an excess credit of $108,000, which can be carr ied back one year and carried forward 10 years. Reno's net U.S. tax is $1,428,000, computed as $2,040,000 - $612,000. $1,800,000/$6,000,000 x $2,040,000 = $612,000. Feedback: Reno Corporation's precredit U.S. tax is $2,040,000 ($6,000,000 x 34%). Reno has creditable foreign taxes of $720,0 00. The company's foreign tax credit limitation is computed as: 78. A net U.S. tax of $1,428,000 and an excess FTC of $108,000. Appleton's allowable foreign tax credit for 2012 is the full $750,000, creating no excess credit. Appleton's net U.S. tax is $2,650,000, computed as $3,400,000 - $750,000. $2,500,000/$10,000,000 x $3,400,000 = $850,000. Feedback: Appleton Corporation's precredit U.S. tax is $3,400,000 ($10,000,000 x 34%). Appleton has creditable foreign taxes of $750,000. The company's foreign tax credit limitation is computed as: 79. A net U.S. tax of $2,650,000 and an excess FTC of $0. Feedback: Foreign source income consists of the $10,000 interest income, $50,000 dividend income, and the $100,000 royalty in come. The rent income and capital gain are treated as U.S. source income. 80. $160,000 Feedback: Foreign source income consists of the $30,000 dividend income and $40,000 rent income. The interest income, royalty in come and capital gain are treated as U.S. source income. 81. $70,000 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. 82. $220,000 Feedback: U.S. source income consists of the $20,000 dividend income and $40,000 rent income. The inter est income, royalty income, and capital gain are treated as foreign source income. 83. $60,000 Feedback: Janet apportions 60% (168/280) of her $200,000 salary to foreign source income (60% x $200,000 = $120,000). Her hou sing allowance of $40,000 is treated as foreign source income because it considered a fringe benefit and is sourced based on a geographic basis. 84. $160,000 Feedback: Jimmy apportions 50% (130/260) of his $250,000 salary to foreign source income (50% x $250,000 = $125,000). His cos t 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. 85. $155,000 Feedback: The interest income is foreign source because it is paid by a non -U.S. resident. 86. U.S. source: compensation, dividend, rent, capital gain; Foreign source: interest Feedback: The dividend income is foreign source because it is paid by a foreign corporation. The rent is foreign source becau se the property being rented is outside the U.S. 87. U.S. source: compensation, interest, and capital gain; Foreign source: dividends, rent Feedback: 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. 88. $150,000 gross profit is U.S. source and $150,000 gross profit is foreign source. Feedback: Under 863(b), 50% of the gross profit is sourced based on the location of the m anufacturing assets and 50% of the gross profit is sourced based on where title passes. In this scenario, title passes within the United States. 89. $300,000 gross profit is U.S. source and $0 gross profit is foreign source. Feedback: Under the fair market value method, Cheyenne apportions 1/3rd 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). 90. $10 million Feedback: Under the fair market value method, Portland apportions 20% of the interest expense to foreign source gross income ($1 00/$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. 91. $4 million Feedback: 92. $2,000,000 under the sales method Feedback: 93. $2,812,500 under the gross income method Feedback: The creditable income taxes are the national income taxes, city of Munich income taxes, and the withholding taxes. 94. $1,800,000 Feedback: The foreign tax credit in the general category basket is limited to the lesser of $180,000 or the FTC limitation, c omputed as $400,000/ $2,000,000 x $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 x $780,000 = $58,500. The total FTC is $156,000 + $30,000 = $186,000, leaving a $24,000 carry forward in the general category FTC basket. 95. $186,000 FTC with an excess $24,000 FTC in the general category basket Feedback: The deemed paid credit of $200,000 is added to the $800,000 dividend, resulting in taxable income of $1,000,000. Th e 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. 96. $1,000,000 of taxable income. The company has a net U.S. tax of $100,000. Feedback: The dividend is $187,500, computed as 250,000,000 AUD x $0.75. The deemed paid credit is $56,250, computed as 250,000/1,000,000 x $225,000. The deemed paid credit is added to the dividend, resulting in taxable income of $243,750. 97. $243,750 Feedback: The dividend is $420,000, computed as 300,000 x $1.40. The deemed paid credit is $100,000, computed as 300,000/3,000,000 x $1,000,000. The deemed paid credit is added to the dividend, resulting in taxable income of $520,000. 98. $520,000 The FTC limitation is computed as 892,500/1,892,500 x $643,450 = $303,450 and is not bind ing because the Irish tax rate is less than 34%. Feedback: 99. Net U.S. tax of $499,075 with $0 excess FTC. The FTC limitation is computed as 1,000,000/3,000,000 x $1,020,000 = $340,000 and is binding because the Japanese tax rate is greater than 34%. The excess FTC is $60,000. Feedback: 100. Net U.S. tax of 680,000 with a $60,000 excess FTC. Feedback: The interest income and dividend income are foreign personal holding company income. The rent income is excluded fr om 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. 101. $350,000 ch24 Summary Category AACSB: Analytic AACSB: Reflective Thinking AICPA BB: Critical Thinking Blooms: Analyze Blooms: Apply Blooms: Remember Blooms: Understand Learning Objective: 2401 Understand the basic U.S. framework for taxing multinational transactions and the role of t he foreign tax credit limitation. Learning Objective: 24-02 Apply the U.S. source rules for common items of gross income and deductions. Learning Objective: 24-03 Recall the role of income tax treaties in international tax planning. Learning Objective: 24-04 Identify creditable foreign taxes and compute the foreign tax credit limitation. Learning Objective: 2405 Distinguish between the different forms of doing business outside the United States and list their advantages and disadvan tages. Learning Objective: 24-06 Comprehend the basic U.S. anti-deferral tax regime and identify common sources of subpart F income. Level of Difficulty: 1 Easy Level of Difficulty: 2 Medium # of Questions 53 101 101 36 52 36 13 20 31 5 24 12 Level of Difficulty: 3 Hard 9 7 71 23 Spilker - Chapter 24 101 ... View Full Document

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