Deck 9: Taxation of International Transactions

Question 1

A Qualified Business Unit of a U.S.corporation that operates in Germany generally uses the U.S.dollar as its functional currency.

Answer 1

False

Question 2

Monika,a nonresident alien,is employed by GlobalCo,a foreign corporation.Monika works in the United States for 32 days during the year,receiving a gross salary of $2,900 for this period.GlobalCo is not engaged in a U.S.trade or business.Under the "commercial traveler" exception,the $2,900 is not classified as U.S.-source income.

Answer 2

True

Question 3

Income from international communications activities earned by a U.S.person is sourced 100% in the United States.

Answer 3

False

Question 4

All losses are apportioned against U.S.-source income.

Question 5

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

Question 6

In allocating interest expense between U.S.and foreign sources,a taxpayer must use the tax basis of assets in determining the proper interest apportionment.

Question 7

Dividends received from Shamrock,Ltd. ,an Irish corporation that earns 40% of its income from U.S.business activities,are foreign-source income.

Question 8

Interest paid to an unrelated party by a domestic corporation that historically earns 81% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.

Question 9

A nonresident alien realizes a gain on the sale of commercial real estate located in Cleveland,Ohio.The real estate was sold to his cousin who is also a nonresident alien.The seller has foreign-source income from the sale because the seller is a foreign resident.

Question 10

In all cases,the sourcing of income is determined by the residence of the taxpayer.

Question 11

Twelve unrelated U.S.persons own a foreign corporation equally.The foreign corporation is a CFC.

Question 12

The United States has income tax treaties with only members of the European Union.

Question 13

A "U.S.shareholder" for purposes of CFC classification is any U.S.person who owns directly,indirectly,or constructively at least 10% of the voting power or value of a foreign corporation.

Question 14

The transfer of the assets of a foreign branch (of a U.S.corporation)to a newly formed foreign corporation is always tax deferred under § 351.

Question 15

"Inbound" and "offshore" transfers are exempt from taxation under § 367.

Question 16

Income tax treaties may provide for higher withholding tax rates on interest income than the rate provided under U.S.statutory law.

Question 17

Hendricks Corporation,a domestic corporation,owns 40 percent of Shane Corporation and 55 percent of Ferrell Corporation,both foreign corporations.Ferrell owns the other 60 percent of Shane Corporation.Both Shane and Ferrell are CFCs.

Question 18

The source of income received for the use of intangible property is the country in which the owner of the property producing the income is resident.

Question 19

Gain or loss on the exchange of foreign currency must be considered separately from the underlying transaction (e.g. ,the purchase or sale of goods).

Question 20

Tax deferred reorganizations involving U.S.-owned foreign corporations may be currently taxable under certain circumstances.

Question 21

There is no minimum ownership percentage required before application of the PFIC rules to a U.S.owner of a PFIC.

Question 22

Gains on the sale of U.S.real property held directly or indirectly through U.S.stock ownership by NRAs and foreign corporations are subject to taxation under FIRPTA.

Question 23

Foreign-source losses within a separate limitation basket are allocated directly against U.S.-source income without regard to income in other separate limitation baskets.

Question 24

Abe,a U.S.shareholder under the CFC provisions,owns 49% of a CFC.If the CFC's Subpart F income for the taxable year is $200,000,Abe is not taxed on receipt of a constructive dividend of $98,000 because he doesn't own more than 50% of the CFC.

Question 25

ForCo,a foreign corporation,purchases widgets from USCo,Inc. ,its U.S.parent corporation.The widgets are sold by ForCo to another unrelated foreign corporation in the same country as ForCo.The income from sale of the widgets by ForCo is foreign base company sales income.

Question 26

Scott,Inc. ,a domestic corporation,receives a dividend of $800,000 from a § 902 noncontrolled foreign corporation.Deemed-paid foreign taxes attributable to the dividend are $120,000.If Scott,Inc.elects the FTC,its gross income attributable to this dividend is $800,000.

Question 27

A nonresident alien is defined as someone who is not a citizen or resident of the U.S.

Question 28

A PFIC is a U.S.-based mutual fund owned more than 50% by U.S.owners.

Question 29

ForCo,a foreign 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 foreign base company sales income.

Question 30

The purpose of the transfer pricing rules is to ensure that taxpayers have ultimate flexibility in shifting profits between related entities.

Question 31

Disposition of stock of a domestic corporation that is a real property holding corporation is subject to tax under FIRPTA.

Question 32

The existence of a U.S.trade or business is a prerequisite to having effectively connected income.

Question 33

U.S.individuals that receive dividends from foreign corporations may not claim the deemed-paid foreign tax credit related to such dividends.

Question 34

The presence of foreign losses that offset U.S.-source income in prior years can reduce the allowed FTC for the year by reducing the FTC limitation.

Question 35

If Polka,Inc. ,a U.S.taxpayer,pays foreign taxes of $50,000 on foreign-source single-category (basket)income of $90,000 and has worldwide taxable income of $450,000,on which it owes U.S.taxes of $157,500 before FTC,its FTC is $50,000.

Question 36

All of an NRA's U.S.-source income that is not effectively connected with a U.S.trade or business is subject to a flat U.S.income tax rate of 30% unless modified by a treaty.

Question 37

Collins,Inc.received gross foreign-source dividend income of $250,000.Foreign taxes withheld on the dividend were $25,000 and no § 902 credit is available.Its worldwide taxable income for the tax year is $500,000.Its U.S.tax before FTC is $175,000.Collins' current year FTC is $87,500.

Question 38

A nonresident alien with U.S.-source income effectively connected with a U.S.trade or business can take effectively connected deductions against that income.

Question 39

U.S.taxpayers may take a current FTC equal to the lesser of the FTC limit or the actual foreign taxes (direct or indirect).

Question 40

If a foreign corporation's U.S.effectively connected earnings for the taxable year are $900,000 and its net equity has increased by $40,000,its DEA is $940,000.

Question 41

Liang,an NRA,is sent to the United States by Fu Corporation,her foreign employer.She spends 50 days in the United States and earns $10,000 for a two-month period.This amount is attributable to 40 U.S.working days and 10 foreign working days.Her employer does not have a U.S.trade or business and Liang spends no other time in the U.S.for the tax year.Liang's U.S.-source taxable income is:

A)$10,000.
B)$8,000.
C)$2,000.
D)$0.

Question 42

ForCo,a foreign corporation,receives interest income of $100,000 from USCo,an unrelated domestic corporation.USCo has historically earned 82% of its income from foreign sources.What amount of ForCo's interest income is U.S.source?

A)$100,000.
B)$18,000.
C)$0.
D)$82,000.

Question 43

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

A)It is foreign-source income subject to U.S.taxation.
B)It is U.S.-source income subject to U.S.taxation.
C)It is foreign-source income not subject to U.S.taxation.
D)It is U.S.-source income exempt from U.S.taxation.

Question 44

During the current year,USACo (a domestic corporation)sold equipment to FrenchCo,a foreign corporation,for $350,000,with title passing to the buyer in France.USACo purchased the equipment several years ago for $100,000 and took $90,000 of depreciation deductions on the equipment,all of which were allocated to U.S.-source income.USACo's adjusted basis in the equipment is $10,000 on the date of sale.What is the source of the $340,000 gain on the sale of this equipment?

A)$250,000 U.S.source and $90,000 foreign source.
B)$250,000 foreign source and $90,000 U.S.source.
C)$340,000 foreign source.
D)$340,000 U.S.source.

Question 45

U.S.income tax treaties:

A)Provide for primary taxation with a tax credit for income sourced in one country and earned by a resident of the other treaty country.
B)Provide for taxation exclusively by the source country.
C)Provide that the country with the highest tax rate will be allowed exclusive tax collection.
D)Provide for taxation exclusively by the country of residence.

Question 46

The U.S.system for taxing income earned inside its borders by non-U.S.persons is referred to as inbound taxation because such foreign persons are earning income by coming into the United States.

Question 47

GreenCo,a domestic corporation,earns $25 million of taxable income from U.S.sources and $5 million of taxable income from foreign sources.What amount of taxable income does GreenCo report on its U.S.tax return?

A)$25 million.
B)$30 million.
C)$25 million less any tax paid on U.S.income.
D)$30 million less any tax paid on the foreign income.

Question 48

USCo,a domestic corporation,purchases inventory for resale from distributors within the U.S.and resells this inventory to customers outside the U.S.with title passing outside the U.S.What is the source of the USCo's inventory sales income?

A)50% U.S.source and 50% foreign source.
B)100% U.S.source.
C)100% foreign source.
D)50% foreign source and 50% sourced based on location of manufacturing assets.

Question 49

FLCo,a U.S.corporation,has $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.FLCo's U.S.and foreign assets are as follows.

How should FLCo assign its interest expense between U.S.and foreign sources to maximize its FTC for the current year?

A)Using tax book values.
B)Using fair market value.
C)Using tax book value for U.S.source and fair market value for foreign source.
D)Using fair market value for U.S.source and tax book value for foreign source.

Question 50

A U.S.corporation owns a German corporation.The U.S.corporation receives a dividend (non-Subpart F income)of 75,000€.The average exchange rate for the year is $1US: 0.6€,and the exchange rate on the date of the dividend distribution is $1US: 0.80€.The U.S.corporation's exchange gain or loss is:

A)$15,000 gain.
B)$15,000 loss.
C)$75,000 gain.
D)There is no exchange gain or loss on an actual dividend distribution.

Question 51

An appropriate transfer price is one that considers the risks,assets,and functions of the persons to whom income is assigned.

Question 52

Yosef Barbutz,an NRA,is employed by Fisher,Inc. ,a foreign corporation.In November,Yosef spends 12 days in the United States performing consulting services for Fisher's U.S.branch.He earns $5,000 per month.A month includes 28 workdays.

A)Yosef has no U.S.-source income under the commercial traveler exception.
B)Yosef has $2,143 U.S.-source income since his foreign employer has a U.S.branch.
C)Yosef has $2,143 U.S.-source income which is exempt from U.S.taxation since he is in the U.S.for 90 days or less.
D)Yosef has $60,000 U.S.-source income which is exempt from U.S.taxation since he is working for a foreign employer.

Question 53

An advance pricing agreement (APA)is an agreement between:

A)The taxpayer and the IRS.
B)Two related taxpayers.
C)Two or more governments.
D)The IRS and U.S.taxing authorities.

Question 54

Which of the following statements best describes the purpose of § 482?

A)To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.
B)To allow the IRS to select the best method for determining transfer prices for U.S.taxpayers.
C)To alleviate double taxation problems generated by related entities doing business in two or more countries.
D)To provide tax benefits to U.S.multinationals that export U.S.produced property.

Question 55

Dividends received from a domestic corporation are totally U.S.source:

A)If the corporation earns at least 80% of its gross income over the immediately preceding three tax years from the active conduct of a U.S.trade or business.
B)Unless the corporation earns at least 80% of its gross income over the immediately preceding three tax years from the active conduct of a foreign trade or business.
C)If the corporation earns at least 25% of its gross income over the immediately preceding three tax years from the active conduct of a U.S.trade or business.
D)Unless the corporation earns at least 25% of its gross income over the immediately preceding three tax years from the active conduct of a foreign trade or business.
E)In all cases.

Question 56

Drake Corporation,a domestic corporation,conducts all of its transactions in the U.S.dollar.It sells inventory for $1 million to a Canadian company when the exchange rate is $1US: $1.2Can.The Canadian company pays for the inventory when the exchange rate is $1US: $1.25Can.What is Drake's exchange gain or loss on this sale?

A)Drake's exchange loss is $50,000.
B)Drake's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can. )and it collects on the receivable when the exchange rate is $1US: $1.25Can.Drake has an exchange gain of $50,000.
C)Drake's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can. ).It collects on the receivable at $1US: $1.25Can.Drake has an exchange loss of $5,000.
D)Drake does not have an exchange gain or loss,since it conducts all of its transactions in the U.S.dollar.

Question 57

Without the foreign tax credit,double taxation would result when:

A)The United States taxes the U.S.-source income of a U.S.resident.
B)The United States and a foreign country both tax the foreign-source income of a U.S.resident.
C)A foreign country taxes the foreign-source income of a nonresident alien.
D)Only the United States taxes the foreign-source income of a U.S.resident (e.g. ,a treaty prevents foreign taxation).

Question 58

Section 482 is used to:

A)Force taxpayers to use arms-length pricing on transactions between related parties.
B)Reallocation of income,deductions,etc. ,by a taxpayer to minimize tax liability.
C)Application to transactions between unrelated parties.
D)All of the above.
E)None of the above.

Question 59

Which of the following statements is false in regard to the U.S.income tax treaty program?

A)There are over 50 income tax treaties between the U.S.and other countries.
B)For the most part,neither country is prohibited from taxing the income of its residents.
C)The treaties generally provide for primary taxing rights that require the other treaty partner to allow a credit for the taxes paid on the twice-taxed income.
D)Residence of the taxpayer is an important consideration,while the presence of a permanent establishment is not.
E)None of the above statements is false.

Question 60

The U.S.system for taxing income earned outside its borders by U.S.persons is referred to as the territorial approach because only income earned within the U.S.border is subject to taxation.

Question 61

Which of the following transactions by a U.S.corporation may result in taxation under § 367.

A)Incorporation of U.S branch as a U.S.corporation when the branch earns foreign-source income.
B)Incorporation of a U.S.branch as a U.S.corporation if the new U.S.corporation has no foreign shareholders.
C)Incorporation of a U.S.branch as a U.S.corporation if the new U.S.corporation also has foreign shareholders.
D)All the above.
E)None of the above.

Question 62

In which of the following independent situations would a foreign corporation be classified as a controlled foreign corporation?

A)The stock is directly owned 12% by Jen,10% by Kathy,12% by Leslie,10% by David,8% by Ben,and 48% by Mike.Jen,Kathy,Leslie,David,and Ben are all U.S.citizens.Mike is a foreign resident and citizen.
B)The stock is directly owned 12% by Jen,10% by Kathy,12% by Leslie,10% by David,8% by Ben,and 48% by Mike.Jen,Kathy,Leslie,David,and Ben are all U.S.citizens.David is married to Kathy.Mike is a foreign resident and citizen.
C)The stock is directly owned 12% by Jen,10% by Kathy,12% by Leslie,10% by David,8% by Ben,and 48% by Mike.Jen,Kathy,Leslie,David,and Ben are all U.S.citizens.Ben is Mike's son.Mike is a foreign resident and citizen.
D)The stock is directly owned 12% by Jen,10% by Kathy,12% by Leslie,10% by David,8% by Ben,and 48% by Mike.Jen,Kathy,Leslie,David,Ben,and Mike are all U.S.citizens.

Question 63

Rufus,Inc. ,a domestic corporation,has worldwide taxable income of $800,000,including a $300,000 dividend from Emma,Inc. ,a § 902 noncontrolled foreign corporation.Rufus' U.S.tax liability before FTC is $280,000.Rufus owns 20% of Emma.Emma's post-1986 E & P after taxes is $8 million and it has paid foreign taxes of $5 million attributable to post-1986 E & P.If Rufus elects the FTC,its U.S.gross income with regard to the dividend from Emma is:

A)$487,500.
B)$112,500.
C)$300,000.
D)$0.

Question 64

ForCo,a controlled foreign corporation,earns $500,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies.All of the unrelated companies are located in ForCo's country of incorporation.ForCo's Subpart F income for the year is:

A)$0.
B)$500,000.
C)$500,000 only if ForCo is engaged in a trade or business in its home country.
D)$500,000 only if ForCo is not engaged in a trade or business in its home country.

Question 65

Benchmark,Inc. ,a U.S.shareholder owns 100% of a CFC from which Benchmark receives a $3 million cash distribution.The CFC's E & P is composed of the following amounts.

Benchmark recognizes a taxable dividend of:

A)$3 million.
B)$700,000.
C)$2,300,000.
D)$0.

Question 66

Amelia,Inc. ,a domestic corporation,has worldwide taxable income of $8 million,including a $600,000 dividend from ForCo,a wholly-owned foreign corporation.ForCo's post-1986 undistributed E & P are $18 million and it has paid $12 million of foreign income taxes attributable to these earnings.What is Amelia's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

A)$0.
B)$400,000.
C)$12 million.
D)$18 million
E)Some other amount.

Question 67

BoxCo,Inc. ,a domestic corporation,owns 10% of the stock of X and of Y,two foreign corporations that are not CFCs and pay no foreign taxes.Both X and Y earn only general limitation income.During the current year,BoxCo,Inc.receives dividend income of $50,000 from X and $80,000 from Y for the tax year (all from post-2003 E & P).BoxCo's total taxable income for the current year is $730,000.Foreign withholding taxes of $49,000 ($5,000 on the X dividend and $44,000 on the Y dividend)and U.S.taxes of $248,200 (before FTC)are levied.What is BoxCo's allowed foreign tax credit?

A)$130,000.
B)$49,000.
C)$32,200.
D)$44,200.

Question 68

BlueCo,a domestic corporation,incorporates its foreign branch in a § 351 exchange,creating GreenCo,a wholly owned foreign corporation.BlueCo transfers $200 in inventory (basis = $20)and $900 in land (basis = $950)to GreenCo.GreenCo uses these assets in carrying on a trade or business outside the United States.What gain,if any,is recognized as a result of this transaction?

A)$0.
B)$130.
C)$180.
D)$230.
E)Some other amount.

Question 69

Which of the following income items do not represent Subpart F income if earned by a controlled foreign corporation?

A)Purchase of inventory from a U.S.parent and sale to anyone inside the CFC country.
B)Purchase of inventory from a U.S.parent and sale to anyone outside the CFC country.
C)Purchase of inventory from a U.S.parent and sale to a related party outside the CFC country.
D)Purchase of inventory from a U.S.parent and sale to a non-related party outside the CFC country.

Question 70

Amelia,Inc. ,a domestic corporation receives a $100,000 cash dividend from Starke,Ltd. ,a § 902 noncontrolled foreign corporation (i.e. ,Amelia owns at least 10% but Starke is not a CFC).Amelia owns 15% of Starke.Starke's post-1986 E & P is $2 million and it has paid foreign taxes of $1 million attributable to post-1986 E & P.What is the § 902 FTC allowed Amelia related to the Starke dividend?

A)$0.
B)$50,000.
C)$100,000.
D)$200,000.

Question 71

Which of the following is a true statement regarding a tax haven?

A)A country with high internal taxes.
B)A country with no or low internal taxes.
C)A country without income tax treaties.
D)A country that prohibits "treaty shopping."
E)None of the above statements is true.

Question 72

Generally,accrued foreign taxes are:

A)Translated at the exchange rate when paid.
B)Translated at the exchange rate on date accrued.
C)Translated at the average exchange rate for the tax year.
D)Translated at the average exchange rate for the last five years.

Question 73

Copp,Inc. ,a domestic corporation,owns 40% of a CFC that has $50 million of earnings and profits for the current year.Included in that amount is $20 million of Subpart F income.The CFC has been a CFC for the entire year and makes no distributions in the current year.Copp must include in gross income (before any § 78 gross-up):

A)$0.
B)$8 million.
C)$20 million.
D)$50 million.
E)Some other amount.

Question 74

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

A)Purchase of inventory from unrelated party and sale to anyone outside the CFC country.
B)Services performed for the U.S.parent in a country in which the CFC was organized.
C)Purchase of inventory from a related party and sale to anyone outside the CFC country.
D)Services reformed on behalf of an unrelated party in a country outside the country in which the CFC was organized.
E)None of the above transactions.

Question 75

A U.S.corporation owns 30% of a foreign corporation.The remaining 70% is owned by other foreign corporations not controlled by the U.S.corporation.The functional currency of the foreign corporation is the euro.The U.S.corporation receives a dividend equivalent to 50,000€.If the average exchange rate for the E & P to which the dividend is attributed is 1.2€: $1,the exchange rate at year end is .95€: $1 and on the date of the dividend payment is 1.1€: $1,what is the result to the U.S.corporation on receipt of the dividend?

A)The U.S.corporation receives a dividend of $45,455 and realizes an exchange gain of $3,788 [$45,455 minus $41,667 (50,000€/1.2)].
B)The U.S.corporation receives a dividend of $45,455 (50,000€/1.1)with no exchange gain or loss.
C)The U.S.corporation receives a dividend of $41,667 and realizes an exchange loss of $3,788 ($41,667 minus $45,455).
D)The U.S.corporation receives a dividend of $52,632 (50,000€/.95)with no exchange gain or loss.

Question 76

Section 1248 applies to which of the following transactions?

A)Sale or exchange of stock in a U.S.corporation by a foreign person.
B)Sale or exchange of stock in a U.S.corporation by a U.S.person.
C)Sale or exchange of stock in a controlled foreign corporation by its 100% U.S.shareholder.
D)Sale or exchange of stock in a foreign corporation that has never been a controlled foreign corporation by a U.S.person.
E)None of the above transactions is affected by § 1248.

Question 77

ForCo,a controlled foreign corporation owned 100% by USCo,earned $900,000 in Subpart F income for the current year.ForCo's current year E & P is $150,000 and it's accumulated E & P is $18 million.What is the current year Subpart F deemed dividend to USCo?

A)$18 million.
B)$900,000.
C)$150,000.
D)$0.

Question 78

Peanut,Inc. ,a domestic corporation,receives $500,000 of foreign-source interest income on which foreign taxes of $5,000 are withheld.Its worldwide taxable income is $900,000,and U.S.tax liability before FTC is $315,000.What is Peanut's foreign tax credit?

A)$500,000.
B)$315,000.
C)$175,000.
D)$5,000.
E)Some other amount.

Question 79

Which of the following statements regarding translation of foreign taxes is true?

A)Foreign taxes are typically paid in a foreign currency and thus must be converted to U.S.dollars when used as a FTC on a U.S.return.
B)Foreign taxes are translated into U.S.dollars only when such translation provides a tax benefit to the taxpayer.
C)Translation of foreign taxes into U.S.dollars helps manage the U.S.balance of trade.
D)Translation of foreign taxes into U.S.dollars encourages foreign corporations to set up operations in the United States.

Question 80

The following persons own Good Corporation,a foreign corporation.

None of the shareholders are related.Subpart F income for the tax year is $200,000.No distributions are made.Which of the following statements is correct?

A)Good Corporation is not a CFC.
B)Chee includes $60,000 in gross income.
C)Marina includes $16,000 in gross income.
D)Marina is not a U.S.shareholder.
E)None of the above statements is correct.