Tax 6505 – International Taxation Solutions to Chapter 3 Handout Problems 1.a. Sales Factor: $3M X 50% = $1.5 = Foreign Source Production Factor $3M X 50%= $1.5 (5/(5 + 30/3)) = $.5M = Foreign Source Per Reg. Sec. 1-863-3(c)(1)(ii)(B), the adjusted basis of the U.S. property is to be calculated by multiplying the total basis of the U.S. property used in production by (Foreign Sales/Total Sales.) In the facts for this problem the fraction was stated as 1/3. This adjustment was not fully discussed in the textbook. See Reg. Sec. 1-863-3(c)(1)(iv) Example 1., for application of this allocation in the determination of production income. 1.b. Since the sales from the U.S. Parent to the Canadian Subsidiary pass title in the U.S., all income is U.S. sourced. Using the formula, 0 would be allocated under the Sales Factor, and since the U.S. Parent now does not directly own any foreign production facilities, the Property Factor would also be 0. 1.c.
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