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Exam 24: The US Taxation of Multinational Transactions

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Question 1

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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

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

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Question 2

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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?

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Question 3

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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.

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?

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?

Which of the following is not a benefit derived from an income tax treaty between the United States and another country?

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?

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.

Which of the following statements best describes how the deemed paid credit is computed by a U.S. corporation.

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.

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 2012, Natsumi came to the United States on business and stayed for 240 days. She came to the United States again on business in 2013 and stayed for 120 days. In 2014 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 2014 under the substantial presence test?

Which of the following expenses incurred by a U.S. corporation is not subject to special apportionment rules for foreign tax credit purposes?

A rectangle with an inverted triangle within it is a symbol used to represent what organizational form?

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.

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?

Which of the following exceptions could cause subpart F income to be excluded from the deemed dividend regime?

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?

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?

All passive income earned by a CFC will be treated as foreign personal holding company income under subpart F for U.S. tax purposes. F.

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?