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Exam 25: Taxation of International Transactions

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Question 31

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Which of the following statements is true, regarding the sourcing of dividend income?

A) Dividends are sourced based on the residence of the recipient.
B) Dividends from non-U.S. corporations are always foreign source.
C) Dividends from non-U.S. corporations are foreign-source only to the extent that 80% or more of the non-
US. corporation's gross income for the 3 years preceding the year of the dividend payment was effectively
Connected with the conduct of a non-U.S. trade or business.
D) A percentage of dividends from non-U.S. corporations are U.S. source to the extent that 25% or more of the non­U.S. corporation's gross income for the 3 years preceding the year of the dividend payment was effectively connected with the conduct of a U.S. trade or business.

E) A) and D)
F) B) and D)

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Question 32

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USCo, a U.S. corporation, purchases inventory from distributors within the U.S. and resells this inventory to customers outside the U.S., with title passing outside the U.S. Profit on the sale is $10,000. What is the source of the USCo's inventory sales income?

A) $5,000 U.S. source and $5,000 foreign source.
B) $5,000 U.S. source and $5,000 sourced based on location of the pertinent manufacturing assets.
C) $10,000 U.S. source.
D) $10,000 foreign source.

E) None of the above
F) A) and D)

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Question 33

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Which of the following would not prevent an alien without a "green card" from being classified as a U.S. resident For income tax purposes?

Discuss the primary purposes of income tax treaties.

A controlled foreign corporation (CFC) realizes Subpart F income from:

PlantCo is a company based in Adagio. PlantCo uses a formula to manufacture pharmaceuticals. The formula was developed and is owned by DrugCo, a U.S. entity. Royalties paid by PlantCo to DrugCo for the use of the formula are U.S.-source income.

Which of the following statements is true, concerning the sourcing of income from inventory produced by the taxpayer in the U.S. and sold outside the U.S.?

The sourcing rules of Federal income taxation apply to deductions as well as to income items.

ForCo, a subsidiary of a U.S. corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany. The income from the sale of widgets is not Subpart F foreign base company sales income.

Columbia, Inc., a U.S. corporation, receives a $150,000 cash dividend from Starke, Ltd. Columbia owns 15% of Starke. Starke's E & P is $2 million and it has paid foreign taxes of $750,000 attributable to that E & P. What is Columbia's foreign tax credit related to the Starke dividend?

Match the definition with the correct term. Not all of the terms have a match. A definition can be used more than once. -Portfolio income treated as Subpart F income.

Freda was born and continues to live in Uruguay. She exports widgets to U.S. customers. The U.S. does not have in force an income tax treaty with Uruguay. Freda's net U.S. income from the widgets is subject to a flat 30% Federal income tax rate.

The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.

Match the definition with the correct term. -Method for sourcing income and deductions.

Waldo, Inc., a U.S. corporation, owns 100% of Orion, Ltd., a foreign corporation. Orion earns only general basket income. During the current year, Orion paid Waldo a $5,000 dividend. The foreign tax credit associated with this dividend is $3,000. The foreign jurisdiction requires a withholding tax of 10%, so Waldo received only $4,500 in cash as a result of the dividend. What is Waldo's total U.S. gross income reported as a result of the $4,500 cash received?

Olaf, a citizen of Norway with no trade or business activities in the United States, sells at a gain 200 shares of MicroShift, Inc., a U.S. company. The sale takes place through Olaf's broker in Oslo. How is this gain treated for US. tax purposes?

USCo, a U.S. corporation, reports worldwide taxable income of $1,500,000, including a $300,000 dividend from ForCo, a wholly­owned foreign corporation. ForCo's undistributed earnings and profits are $15 million and it has paid $10 million of foreign income taxes attributable to these earnings. What is USCo's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation?

A U.S. taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued.

The § 367 cross­border transfer rules seem to counteract other favorable tax provisions that allow the taxpayer to defer gross income, e.g. §§ 351 and 368. What is the rationale for eliminating this deferral? Provide two examples of transactions to which § 367 would apply.

Qwan, a U.S. corporation, reports $250,000 interest expense for the tax year. None of the interest relates to Nonrecourse debt or loans from affiliated corporations. Qwan's U.S. and foreign assets are reported as follows. $\begin{array}{llr} \text {Fair market value - } &\\ \text {U.S. assets } &\$5,000,000\\ \text { Foreign assets } &\$10,000,000\\ \text { Tax book value - } &\\ \text { U.S. assets } &\$2,000,000\\ \text { Foreign assets } &\$6,000,000\\\end{array}$ How should Qwan assign its interest expense between U.S. and foreign sources to maximize its FTC for the current year?