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DISCUSSION QUESTIONS
1. (LO 1) U.S. persons are taxed on all income from whatever source derived (§ 61). Consequently, both
U.S.- and foreign-source income is subject to U.S. taxation. Some of the U.S. Federal income tax may
be offset by available foreign tax credits.
2. (LO 1, 5) No. Unless and until the profits of the foreign corporation are repatriated to the U.S. owner,
e.g., as a dividend payment or a Subpart F pass-through, such profits are not subject to U.S. Federal
income taxation. The foreign corporation is not a U.S. person (even though it is owned by a U.S.
person).
3. (LO 5) If a U.S. taxpayer transfers assets outside the United States, gain may be recognized as a result
of realized appreciation in these assets. The general rule under § 367 is that any gain will be
recognized in such a transfer. However, several exceptions exist, including an exception for certain
assets used in a trade or business outside the United States. Even with this exception, certain assets
trigger gain. These “tainted assets” include inventory and accounts receivable.
9-1
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9-2 2016 Corporations Volume/Solutions Manual
5. (LO 5) For an entity to be a controlled foreign corporation (CFC), more than 50% of the total
combined voting power of all classes of stock entitled to vote or the total value of the stock of the
corporation must be owned by U.S. shareholders on any day during the taxable year of the foreign
corporation. For purposes of determining if a foreign corporation is a CFC, a U.S. shareholder is
defined as a U.S. person who owns, or is considered to own, 10% or more of the total combined
voting power of all classes of voting stock of the foreign corporation. Stock owned directly,
indirectly, and constructively is counted.
Certain income, but not all of it, of a CFC is taxed immediately to its U.S. shareholders.
If each unrelated shareholder owned 20% of the foreign corporation, each of the shareholders would
be U.S. shareholders and the corporation would be a CFC.
6. (LO 5) The “U.S. Tax” limitation restricts the effects of the foreign tax credit in mitigating double
taxation of foreign-source income. The limitation prevents domestic corporations operating in high-
tax foreign jurisdictions from offsetting those higher foreign taxes against the U.S. tax on U.S.-source
income.
7. (LO 5) Concerning foreign taxes paid by a U.S. person, a deduction is claimed in computing U.S.
taxable income. Alternatively, the taxpayer can claim a credit for those taxes against its U.S. tax
liability. The same dollar of foreign tax paid can be used for either a deduction or a credit, but not both.
8. (LO 5)
• Is the entire tax withheld by PJ creditable? Is part of it a soak-up tax or a non-income tax?
• Does Molly qualify to take the § 902 deemed-paid foreign tax credit?
9. (LO 5) The FTC computations and limitations are computed separately for the “passive” and “general”
income baskets. In this manner, a taxpayer cannot “cross-credit;” for example, high-tax business
income cannot be matched against low-tax investment income, resulting in a higher FTC limitation.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Taxation of International Transactions 9-3
This approach to taxation is called a territorial approach, with a government taxing only the income
earned within its borders. The U.S. taxation of foreign persons earning U.S. investment or business
income is referred to as “inbound” taxation.
I. A U.S. taxpayer is subject to Federal income tax on all income, regardless of where it is earned.
This is known as taxation on “worldwide income.” Most other countries today apply “territorial
taxation,” whereunder a country taxes income only if it is earned within its own borders.
II. If a U.S. taxpayer is subject to U.S. income tax on profits earned outside the United States,
and such profits also are subject to income tax in the foreign jurisdiction, the taxpayer may
escape some or all double taxation with the use of the foreign tax credit and/or deduction.
III. Although the United States requires the U.S. taxpayer to include all worldwide income from
whatever source derived in its gross income, the U.S. tax liability may be reduced by the
credit or deduction for foreign income tax paid or accrued by the U.S. taxpayer.
IV. The U.S. taxpayer may be limited on how much foreign tax credit is allowed based on the
foreign tax credit limitation formula for U.S. taxes paid, but in general, the existence of the
credit mitigates or eliminates double taxation.
COMPUTATIONAL EXERCISES
12. (LO 3) Because Bronze Corporation and Copper Corporation are domestic corporations, the dividends
that they pay are U.S.-source income ($1,000 for Bronze and $2,000 for Copper). Silver Corporation is
a foreign corporation that earned 35% of its business income over the prior three years from income
effectively connected with a U.S. trade or business. Because Silver meets the 25% threshold, 35% of
its dividend is U.S.-source (35% × $1,500 = $525).
13. (LO 5)
a. If Cordeio is a CFC for the entire year, Yancy has a $337,500 constructive dividend
($450,000 × 75%).
b. If Cordeio is a CFC until March 1, the dividend is prorated by the number of days (January 1
to February 28; 59 days). As Cordeio meets the definition of a CFC, Yancy’s constructive
dividend is computed as follows.
59 days/365days = .161644
.161644 × $450,000 × 75% = $54,555
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9-4 2016 Corporations Volume/Solutions Manual
16. (LO 6) Velocity’s DEA and branch profits tax are computed as follows.
a. E & P effectively connected with a U.S. trade
or business ($900,000 − $306,000) $594,000
Less: Increase in U.S. net equity (194,000)
Dividend equivalent amount $400,000
b. Dividend equivalent amount $400,000
Branch profits tax rate × 30%
Branch profits tax liability $120,000
PROBLEMS
17. (LO 4, 5) BlueCo will not incur any U.S. income tax on GreenCo’s earnings. GreenCo is a separate
foreign corporation, made no dividend distribution to BlueCo, and did not create any deemed dividend
under Subpart F. Consequently, BlueCo has no current income related to its ownership of GreenCo.
18. (LO 3)
a. $600 U.S.-source. The interest income is received from a domestic bank.
b. $5,000 U.S.-source. Dividends from a domestic corporation generally are U.S.-source.
d. $3,333 U.S.-source. Dividends from a foreign corporation may be U.S.-source if the payor
earns significant (> 25%) U.S.-source income based on a look-through approach [i.e.,
$10,000 × ($4,000,000 ÷ $12,000,000)].
e. $5,000 foreign-source. Warren Corporation is a domestic corporation that meets the 80%
foreign business requirement. Of its gross income for the immediately preceding three-year
period, 83.3% ($6,000,000 ÷ $7,200,000) was from the active conduct of a foreign trade or
business.
The general rule is that income from services is sourced where the services are performed. Physical
performance, such as playing golf in a tournament, is categorized as personal services performed by
an athlete. Where the funds are deposited is irrelevant for sourcing purposes. There is a “commercial
traveler” exception available if all of the following requirements are met.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Taxation of International Transactions 9-5
• The services must be performed by a nonresident alien who is in the United States for 90 days or
less during the taxable year;
• The compensation may not exceed $3,000 in total for the services performed in the United States;
and
• a nonresident alien, foreign partnership, or foreign corporation that is not engaged in a U.S.
trade or business, or
The “commercial traveler” exception does not apply to you this year. You are not in the United States
for more than 90 days during the tax year, but the income attributable to your services performed in
the United States exceeds $3,000. Furthermore, you are not performing in the capacity of an
employee.
Thus, you are subject to U.S. taxation on the $250,000 from your U.S. tournaments. Some income tax
treaties allow a greater amount in making the “commercial traveler” test and some provide an
exception for professional athletes as long as the earnings do not exceed a certain amount specified in
the treaty.
My comments may change if additional facts arise or change. My work is regulated under Circular
230.
Sincerely,
Tomas Suarez
Tax Consultant
20. (LO 3)
a. The gain is foreign-source income. Gain from the sale of personal property is generally
sourced at the residence of the seller, in this case an NRA. An exception to this rule provides
that the gain on sale of stock is taxable if the gain is attributable to an office or other fixed
place of business that the NRA maintains in the United States. Use of a broker in the United
States does not constitute a U.S. trade or business.
b. Same as (a). Gain is foreign-source because seller is NRA, and sourced based on residency of
seller.
c. The source of income from the sale of inventory manufactured in the United States and sold
in another country is determined by allocating a portion of the income to the manufacturing
activity and a portion to the sales activity. The sales activity portion is generally sourced
based on where title passes. In this case, half the income is sourced in the United States
(based on manufacturing) and half is sourced as foreign based on title passage.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9-6 2016 Corporations Volume/Solutions Manual
21. (LO 3, 6)
a. $90,000 of the gain is attributable to the depreciation adjustment. Of the $105,000 gain,
$90,000 is foreign-source income attributable to depreciation taken against foreign-source
income, and the remaining $15,000 is sourced as gain on the sale of inventory (i.e., where
title passes). Thus, $15,000 of the gain is U.S.-source income.
b. The $200,000 gain is U.S.-source. Gains on the disposition of real property located in the
United States are U.S.-source income. A building located in Denver is a U.S. real property
interest.
c. $60,000, the portion attributable to Carla’s days in the United States is U.S.-source (i.e.,
$150,000 × 80 days/200 days). Even though Carla is a nonresident alien, she is not in the
United States for more than 90 days during the tax year, and the services are performed as an
employee of a foreign corporation that does not have a U.S. trade or business, the amount
attributable to U.S. days exceeds $3,000. Thus, the commercial traveler exception does not
apply.
d. The royalty income is foreign-source. Income from the use of intangible property is sourced
according to where the intangible property is used.
22. (LO 3) $1 million foreign-source. Purchased inventory is sourced according to the place of title passage.
23. (LO 3) $1 million foreign-source. Royalties are sourced according to where the intangible property is
used.
25. (LO 3)
a. Interest expense is allocated and apportioned based on location of assets.
Tax Book Value FMV
Assets producing foreign-source income $5,000,000 $15,000,000
Assets producing U.S.-source income 2,000,000 5,000,000
b. To minimize the amount of interest allocated against foreign-source income (the answer that
maximizes the FTC in most cases), Create should use the tax book value method.
26. (LO 4) No foreign currency exchange gain or loss is recognized until the payment is made. Thus, no
gain or loss is recognized in 2015.
The cost of $750,000 (¥60,000,000 ÷ ¥80) is recorded for the equipment. If payment is made on
February 2, 2016, when the foreign exchange rate is ¥85:$1US, the foreign currency gain recognized
in 2016 is $44,118 ($750,000 – $705,882*). Peck pays only $705,882 for the ¥60,000,000 needed to
make payment (not $750,000).
* ¥60,000,000 ÷ ¥85
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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kuin pilven varjo vieno punastus. Nyt hymyää hän. Taakse,
oikealle pää hiukan taipuu; niin, ja silloin, silloin –
SUURESSA KAUPUNGISSA
VIIMEINEN TAHTO
Mun ratsuni!
Mulle se tuokaa!
Suin vaahtoavin ja kupein värisevin.
Viha polttaa päätäni mun, ja silmä palaa.
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mun ratsuni!
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Välkkyvin miekoin!
Sotatorvien äänet, sotahuudot kuulen.
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Välkkyvin miekoin
nyt seuratkaa!
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Vapise, tanner!
Haju ruudin ja ruumiit. Eespäin järkkymättä.
Päin tulta käytävä on, kun liput liehuu.
Vapise, tanner!
Hei, voittohon!
MERENKÄYNTIÄ
MUSTA RITARI
ELÄMYS
Kummallista!
Mun sielussani
hiljaa itki, itki
nimetön
kotikaipuu elon
luokse kuin itkee
mies, min illan
tullen laiva vie
purjein keltaisin
ja mahtavin veen
tummansinertävä
ä siltaa pitkin
ohitse
kotikaupungin. Ja
hän, hän näkee
kadut,
suihkukaivojen
hän kuulee
solinan ja tuoksut
tuntee myös
sireenien; itsensä
hän näkee veen
partahalla lasna,
lapsensilmin, jotk’
ovat pelokkaat ja
itkuvalmiit, hän
näkee valon
omast’
ikkunastaan –
mut suuri laiva
liukuu hiljaa pois
veen
tummansinertävä
ä siltaa pitkin niin
oudoin, keltaisin
ja suurin purjein.
OTTO ERICH HARTLEBEN (1864-1905)
SEIKKAILIJA
KUIHTUNUT LEHTI
LAULU ELÄMÄSTÄ
LAULU LAPSIPARASTA
eli
PELKO
Mä pelkään vuokses, Anna – – –.
Mut miksi pelkään, tiedä en,
vain pelkääväni tiedän.
Mä pelkään!
Kuin äidin valtaa pelko aiheeton,
he kaikki vielä iloiset ja terveet on – – –!
Ja niinkuin laivurikin pelkää, pelkää, pelkää,
kun huolettomin silmin vielä tähyävät
muut pilvetöntä taivasta ja tyyntä merenselkää
ja varoittajan viisaudelle hymähtävät.
Mä pelkään, niinkuin pelkää hän,
ken näkee rannan hiekkakunnahalla lasten leikkivän
ja tietää: vuoksi nousee, nielaisee nyt juuri – pakoon!
Mä pelkään, niinkuin pelkää mies,
ken tietää: riipun hirsipuussa kello seitsemän.
Niin, niin mä pelkään vuokses sun – – –
vuoks itseni: sä oothan elämäni mun;
mut sinä omaa tietäs käyt, pois rinnaltain,
et pelkää ahdistavaa pelkoain,
sä syöksyt uuteen kohtaloon, käyt uutta elon-rataa – – –
vain kaste uusill’ aamuteilläs on
mun kuolinhikeni, mi jalkais juureen sataa!
CARL HAUPTMANN (1858-1921)
KALLIOÄÄNIÄ
HARMAAT ENKELIT
ILTA
NUORUUS
LINTU SYNKKÄMIELI
METSÄN YÖSSÄ
Metsän yössä kuljit polkuasi,
omaa jalkaas edes nähnyt et.
Pelon voitti tieto tunnossasi:
Ties johdattaa.
SYKSY
PUUTARHASSA
PEHONEN
***
***
***
***
***
***
ME KAKSI
VAELTAJAN LAULU
EPÄTOIVO
Viikkokausiin en sano yhtään sanaa;
yksin elän ja kuihdun.
Taivaalla ei pala yhtään tähteä.
Tahtoisin kuolla.
PUHTAUDEN RUKOUS