Chapter 25 (Part 1)

1.

1 point

GreenCo, a U.S. corporation, earns $25 million of taxable income from U.S. sources and $10 million of taxable income from foreign sources. What amount of taxable income does GreenCo report on its U.S. tax return?

$25 million.

$35 million.

$25 million less any tax paid on the foreign income.

$35 million less any tax paid on U.S. income.

2.

1 point

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

The United States taxes the U.S.-source income of a U.S. resident.

A foreign country taxes the foreign-source income of a nonresident alien.

The United States and a foreign country both tax the foreign-source income of a U.S. resident.

Terms of a tax treaty assign income taxing rights to the U.S.

3.

1 point

U.S. income tax treaties typically:

Provide for taxation exclusively by the source country.

Provide for taxation exclusively by the country of residence.

Provide rules by which multinational taxpayers avoid double taxation.

Provide that the country with the highest tax rate will be allowed exclusive tax collection rights.

4.

1 point

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

There are about 70 bilateral income tax treaties between the U.S. and other countries.

Tax 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.

U.S. income tax treaties are written to set up a “network” of up to five foreign countries that are covered by the treaty language.

None of the above statements is false.

5.

1 point

ForCo, a foreign corporation, receives interest income of $100,000 from USCo, an unrelated domestic corporation. USCo has historically earned 85% of its income from foreign sources. What amount of ForCo’s interest income is U.S. source?

$0.

$50,000.

$85,000.

$100,000.

6.

1 point

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

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.

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.

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.

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.

In all of the above cases.

7.

1 point

Chang, an NRA, is employed by Fisher, Inc., a foreign corporation. In November, Chang spends 10 days in the United States performing consulting services for Fisher’s U.S. branch. She earns $5,000 per month. A month includes 20 workdays.

Chang has $2,500 U.S.-source income which is exempt from U.S. taxation, because she is in the U.S. for 90 days or less.

Chang has $2,500 U.S.-source income which is exempt from U.S. taxation, because the amount paid to her is less than $3,000.

Chang has $2,500 U.S.-source income, because her foreign employer has a U.S. branch.

Chang has no U.S.-source income, under the commercial traveler exception.

8.

1 point

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?

$5,000 U.S. source and $5,000 foreign source.

$5,000 U.S. source and $5,000 sourced based on location of the pertinent manufacturing assets.

$10,000 U.S. source. has $2,500 U.S.-source income, because her foreign employer has a U.S. branch.

$10,000 foreign source.

9.

1 point

Liang, an NRA, is sent to the United States by Fuller Corporation, her foreign employer. She spends 50 days in the United States and earns $20,000 for a two-month period. This amount is attributable to 40 U.S. working days and 10 non-U.S. 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:

$20,000.

$16,000.

$3,000.

$0.

10.

1 point

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 U.S. tax purposes?

It is foreign-source income subject to U.S. taxation.

It is foreign-source income not subject to U.S. taxation.

It is U.S.-source income subject to U.S. taxation.

It is U.S.-source income exempt from U.S. taxation.

11.

1 point

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 $80,000 of depreciation deductions on the equipment, all of which were allocated to U.S.-source income. USACo’s adjusted basis in the equipment is $20,000 on the date of sale. What is the source of the $330,000 gain on the sale of this equipment?

$330,000 foreign source.

$330,000 U.S. source.

$250,000 foreign source and $80,000 U.S. source.

$250,000 U.S. source and $80,000 foreign source.

12.

1 point

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.

Fair market value—
U.S. assets ..............................$5,000,000
Foreign assets ..........................$10,000,000
Tax book value—
U.S. assets ..............................$2,000,000
Foreign assets ..........................$6,000,000

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

Using tax book values.

Using tax book value for U.S. source and fair market value for foreign source.

Using fair market values.

Using fair market value for U.S. source and tax book value for foreign source.

13.

1 point

Which of the following statements best describes the purpose of § 482, under which the Treasury can reallocate income and deductions among related taxpayers?

To provide tax benefits to U.S. multinationals that export U.S. produced property.

To allow the IRS to select the best method for determining transfer prices for U.S. taxpayers.

To alleviate double taxation problems generated by related entities doing business in two or more countries.

To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.

14.

1 point

Section 482 is used by the Treasury to:

Force taxpayers to use arms-length transfer pricing on transactions between related parties.

Reallocate income, deductions, etc., to a related taxpayer to minimize tax liability.

Increase information that is reported about U.S. corporations with non-U.S. owners.

All of the above.

None of the above.

15.

1 point

An advance pricing agreement (APA) is used between:

Two or more governments.

Two related taxpayers.

The taxpayer and the IRS.

The IRS and U.S. taxing authorities.

16.

1 point

Flapp Corporation, a U.S. 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 Flapp’s exchange gain or loss on this sale?

Flapp does not have a foreign currency exchange gain or loss, since it conducts all of its transactions in the U.S. dollar.

Flapp’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. Flapp has an exchange gain of $50,000.

Flapp’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. Flapp has an exchange loss of $5,000.

Flapp’s foreign currency exchange loss is $50,000.

17.

1 point

Wood, a U.S. corporation, owns Holz, a German corporation. Wood receives a dividend (non-Subpart F income) from Holz 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€. Wood’s exchange gain or loss is:

$15,000 loss.

$15,000 gain.

$75,000 gain.

$0. There is no exchange gain or loss on a dividend distribution.

18.

1 point

Wood, a U.S. corporation, owns 30% of Hout, a foreign corporation. The remaining 70% of Hout is owned by other foreign corporations not controlled by Wood. Hout’s functional currency is the euro. Wood receives a 50,000€ distribution from Hout. 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 the exchange rate is 1.1€: $1, what is Wood’s tax result from the distribution?

Wood receives a dividend of $45,455 and realizes an exchange gain of $3,788 [$45,455 minus $41,667 (50,000€/1.2)].

Wood receives a dividend of $52,632 (50,000€/.95) with no exchange gain or loss.

Wood receives a dividend of $41,667 and realizes an exchange loss of $3,788 ($41,667 minus $45,455).

Wood receives a dividend of $45,455 (50,000€/1.1) with no exchange gain or loss.

19.

1 point

Generally, accrued foreign income taxes are translated at the:

Exchange rate when the taxes are paid.

Exchange rate on the date when the taxes are accrued.

Average exchange rate for the tax year to which the taxes relate.

Average exchange rate for the last five tax years.

20.

1 point

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

Translation of foreign taxes into U.S. dollars helps manage the U.S. balance of trade.

Foreign taxes are translated into U.S. dollars only when such translation provides a tax benefit to the taxpayer.

Foreign taxes typically are paid in a foreign currency and, thus, must be converted to U.S. dollars when used as a FTC on a U.S. return.

Translation of foreign taxes into U.S. dollars encourages foreign corporations to set up operations in the United States.

21.

1 point

GoldCo, a U.S. corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly owned foreign corporation. GoldCo transfers $200 in inventory (basis = $50) and $900 in land (basis = $950) to GreenCo. GreenCo uses these assets in carrying on a trade or business outside the U.S. What gain or loss, if any, does GoldCo recognize as a result of this transaction?

($50).

$0.

$100.

$150.

22.

1 point

SilverCo, a U.S. corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly owned foreign corporation. SilverCo transfers $200 in Yen (basis = $150) and $900 in land (basis = $925) to GreenCo. GreenCo uses these assets in carrying on a trade or business outside the United States. What gain or loss, if any, is recognized as a result of this transaction?

($25).

$0.

$25.

$50.

23.

1 point

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

Incorporation of U.S branch as a U.S. corporation when the branch earns only foreign-source income.

Incorporation of a U.S. branch by a U.S. corporation when the branch earns only U.S.-source income.

Incorporation of a U.S. branch as a U.S. corporation if the new U.S. corporation also has foreign shareholders.

Incorporation of a U.S. branch as a U.S. corporation if the new U.S. corporation has no foreign shareholders.

24.

1 point

A tax haven often is:

A country with high internal income taxes.

A country with no or low internal income taxes.

A country without income tax treaties.

A country that prohibits “treaty shopping.”

25.

1 point

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

Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. David is married to Kathy. Mike is a foreign resident and citizen.

Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Ben is Mike’s son. Mike is a foreign resident and citizen.

Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Mike is a foreign resident and citizen.

26.

1 point

The following persons own Schlecht Corporation, a foreign corporation.

Jim, U.S. individual ..............35%
Gina, U.S. individual ............15%
Marina, U.S. individual ...........8%
Pedro, U.S. individual ...........12%
Chee, non-U.S. individual ......30%

None of the shareholders are related. Subpart F income for the tax year is $300,000. No distributions are made. Which of the following statements is correct?

Schlecht is not a CFC.

Chee includes $90,000 in gross income.

Marina is not a U.S. shareholder.

Marina includes $24,000 in gross income.

27.

1 point

Wellington, Inc., a U.S. corporation, owns 30% 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. Wellington has been a CFC for the entire year and makes no distributions in the current year. Wellington must include in gross income (before any § 78 grossup):

$0.

$6 million.

$20 million.

$50 million.

28.

1 point

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

Purchase of inventory from unrelated U.S. person and sale outside the CFC country.

Purchase of inventory from a related U.S. person and sale outside the CFC country.

Services performed for the U.S. parent in a country in which the CFC was organized.

Services performed on behalf of an unrelated party in a country outside the country in which the CFC was organized.

29.

1 point

Which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia? Purchase of inventory from the U.S. parent, followed by:

Sale to anyone outside Fredonia.

Sale to anyone inside Fredonia.

Sale to a related party outside Fredonia.

Sale to a non-related party outside Fredonia.

30.

1 point

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

• $500,000 attributable to previously taxed increases in investment in U.S. property.
• $1,500,000 attributable to previously taxed Subpart F income.
• $4,800,000 attributable to other E & P.

Xenia recognizes a taxable dividend of:

$3 million.

$2.5 million.

$1.5 million.

$1 million.

$0.

31.

1 point

OutCo, a controlled foreign corporation in Meena, earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies. All of the dividend payors are located in Meena. OutCo’s Subpart F income for the year is:

$0.

$0 only if OutCo is engaged in a trade or business in Meena.

$600,000.

$600,000 only if OutCo is engaged in a trade or business in Meena.

32.

1 point

Bryden, a controlled foreign corporation owned 100% by USCo, earned $900,000 in Subpart F income for the current year. Bryden’s current year E & P is $350,000, and its accumulated E & P is $15 million. What is the current year Subpart F deemed dividend to USCo?

$350,000.

$550,000.

$900,000.

$15 million.

33.

1 point

Peanut, Inc., a U.S. corporation, receives $500,000 of foreign-source interest income, on which foreign taxes of $5,000 are withheld. Peanut’s worldwide taxable income is $900,000, and its U.S. Federal income tax liability before FTC is $270,000. What is Peanut’s foreign tax credit?

$500,000.

$275,000.

$150,000.

$5,000.

34.

1 point

Maxim, Inc., a U.S. corporation, reports worldwide taxable income of $8 million, including a $900,000 dividend from ForCo, a whollyowned foreign corporation. ForCo’s undistributed E & P are $15 million and it has paid $6 million of foreign income taxes attributable to these earnings. What is Maxim’s deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

$0.

$360,000.

$900,000.

6 million.

35.

1 point

Chipper, Inc., a U.S. corporation, reports worldwide taxable income of $1 million, including a $300,000 dividend from Emma, Inc., a foreign corporation. Chipper’s U.S. tax liability before FTC is $340,000. Chipper owns 20% of Emma. Emma’s E & P after taxes is $8 million and it has paid foreign taxes of $2 million attributable to that E & P. If Chipper elects the FTC, its U.S. gross income with regard to the dividend from Emma is:

$300,000.

$340,000.

$375,000.

$400,000.

36.

1 point

Which of the following is a specific separate income “basket” for purposes of the foreign tax credit limitation calculation?

Intangibles income.

Passive income.

Business income.

None of the above are separate FTC limitation baskets.

All of the above are separate FTC limitation baskets.

37.

1 point

A non-U.S. individual’s “green card” remains in effect until:

The individual discards it.

The individual leaves the U.S.

The individual has abandoned lawful permanent residency in the U.S.

The individual remains outside the U.S. for two full years.

38.

1 point

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?

The individual was prevented from leaving the United States due to an illness which arose while in the United States.

The individual commutes daily from Mexico to the United States to work.

The individual is a foreign consul assigned to the United States.

The individual was in the United States to oversee her investments.

39.

1 point

Luisa, a non-U.S. person with a green card, spends the following days in the United States.

Year 1 ......360 days
Year 2 ......210 days
Year 3 ........30 days

Luisa’s residency status for Year 3 is:

U.S. resident because she has a green card.

U.S. resident since she was a U.S. resident for the past immediately preceding two years.

Not a U.S. resident because Luisa was not in the United states for more than 30 days during Year 3.

Not a U.S. resident since, using the three-year test, Luisa is not present in the United States for at least 183 days.

40.

1 point

Zhang, an NRA who is not a resident of a treaty country, receives taxable dividends of $50,000 from U.S. corporations. Zhang does not conduct a U.S. trade or business. Zhang’s dividends are subject to withholding by the payor of:

35%.

30%.

15%.

0%.

41.

1 point

Which of the following statements regarding foreign persons not engaged in a U.S. trade or business is true?

Foreign persons are subject to potential withholding taxes on the gross amount of U.S.-source investment income.

Foreign persons with any U.S.-source income are taxed on net investment income (after expenses).

Foreign persons are not subject to U.S. tax if not engaged in a U.S. trade or business.

Foreign persons with only U.S.-source investment income are exempt from U.S. tax.

42.

1 point

The following income of a foreign corporation is not subject to the regular U.S. corporate income tax rates.

FIRPTA gains.

Capital gains effectively connected with a U.S. trade or business.

Net long-term capital gains, where no U.S. trade or business exists.

Fixed, determinable, annual or periodic (FDAP) income effectively connected with a U.S. trade or business.

43.

1 point

Which of the following statements regarding the taxation of U.S. real property gains recognized by non-U.S. persons not engaged in a U.S. trade or business is false? Gains from the disposition of U.S. real property are:

Not taxed to non-U.S. persons because real property gains are specifically exempt from U.S. taxation.

Taxed to non-U.S. persons without regard to whether such non-U.S. persons are engaged in a U.S. trade or business.

Taxed in the U.S. because such gains are treated as if they are effectively connected to a U.S. trade or business.

Taxed to non-U.S. persons notwithstanding the general exemption of capital gains from U.S. taxation.

44.

1 point

Mitch, an NRA, sells a building in Omaha for $1 million. His basis in the building is zero for both regular tax and AMT purposes. Mitch has no other contact with the U.S. other than the ownership of the building. How much Federal income tax is due from Mitch on the sale?

$0, he is an NRA.

The amount realized times the top individual tax rate.

The net gain times the top capital gains tax rate.

The net gain taxed at the lesser of the applicable regular or AMT rates.

45.

1 point

Which of the following situations requires the filing of an information return with the U.S. government?

A domestic corporation that is 25% or more foreign owned.

A foreign corporation carrying on a trade or business in the United States.

U.S. persons who acquire or dispose of an interest in a foreign partnership.

All of the above.

None of the above.

46.

1 point

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

Non-U.S. persons never are subject to U.S. income tax.

Non-U.S. persons are subject to U.S. income tax only on gains from U.S. real property.

Non-U.S. persons are subject to a withholding tax on U.S.-source portfolio income.

Non-U.S. persons are subject to a withholding tax on foreign-source portfolio income.

47.

1 point

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true?

A non-U.S. person’s effectively connected U.S. business income is taxed by the U.S. only if it is portfolio income.

A non-U.S. person’s effectively connected U.S. business income is subject to U.S. income taxation.

A non-U.S. person may earn income from selling U.S. real property without incurring any U.S. income tax.

A non-U.S. person must spend at least 183 days in the United States before any effectively connected income is subject to U.S. taxation.

48.

1 point

Which of the following is a special tax regime imposed on certain foreign persons engaged in a U.S. trade or business?

Nondiscrimination tax.

Windfall U.S. profits tax.

Dividend repatriation tax.

Branch profits tax.

49.

1 point

Which of the following statements regarding a nonU.S. person’s U.S. tax consequences is true?

Non-U.S. persons may be subject to withholding tax on U.S.-source investment income even if not engaged in a U.S. trade or business.

Non-U.S. persons are subject to U.S. income or withholding tax only if they are engaged in a U.S. trade or business.

Non-U.S. persons are not taxed on gains from U.S. real property as long as such property is not used in a U.S. trade or business.

Once a nonU.S. person is engaged in a U.S. trade or business, the nonU.S. person’s worldwide income is subject to U.S. taxation.

50.

1 point

Which of the following statements regarding a nonU.S. person’s U.S. tax consequences is true?

Non-U.S. persons are potentially subject to U.S. withholding tax on U.S.-source investment income.

Non-U.S. individuals may be subject to U.S. income tax but non-U.S. corporations are never subject to U.S. income tax.

Non-U.S. persons are only subject to U.S. income or withholding tax if engaged in a U.S. trade or business.

Non-U.S. persons must be physically present in the United States before any U.S.-source income is subject to U.S. income or withholding tax.