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Exam 13: Jurisdictional Issues in Business Taxation

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Question 21

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Which of the following statements regarding controlled foreign corporations is true?

A) U.S. shareholders are taxable on any income earned by a controlled foreign corporation.
B) U.S. shareholders are never taxable on income earned by a controlled foreign corporation until such income is distributed to the shareholders.
C) U.S. shareholders of a controlled foreign corporation can increase their basis by the amount of any constructive distributions from the corporation.
D) Controlled foreign corporations are taxable in the United States on their worldwide income.

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

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Question 22

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The foreign tax credit is available for income taxes paid to a foreign country.

A) True
B) False

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Question 23

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Which of the following entities is not subject to U.S. federal income tax?

Galaxy Corporation conducts business in the U.S. and in Country X. In which of the following situations will Galaxy not be allowed a foreign tax credit for income taxes paid to Country X?

Cambridge, Inc. conducts business in states X and Y. This year, its before-tax income was $150,000. Below is information regarding its sales, payroll, and property factors in both states. Both states apply an equally-weighted three-factor formula to apportion income. State X has a 10% corporate income tax and state Y has a 5% corporate income tax. Compute the state tax savings if Cambridge could relocate $100,000 of property and $50,000 of payroll from state X to state Y.

Which of the following statements about income tax treaties is false?

Which of the following statements about subpart F income is false?

Under the U.S. tax system, a domestic corporation pays U.S. tax only on the portion of its business income earned in the United States.

Under most tax treaties, income attributable to a permanent establishment through which a foreign taxpayer conducts business can be taxed only by the taxpayer's country of residence.

A bilateral agreement between the governments of England and France defining and limiting each party's respective tax jurisdiction is an example of a tax treaty.

DFJ, a Missouri corporation, owns 55% of Duvall, a foreign corporation formed under Krunian law. Krunia is a central European country with a 22% corporate income tax and no income tax treaty with the United States. Last year, DFJ leased equipment to Duvall for a $415,000 annual rent payment. DFJ reported the rent as taxable income, while Duvall deducted it in the computation of taxable income. This year, the IRS determined that an arm's length rent for the equipment should be $600,000. The IRS can use its Section 482 authority to:

If a corporation with a 35% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $13,000.

All states assessing an income tax use the same formula for apportionment purposes.

Pennworth Corporation operates in the United States and foreign country M. Its domestic subsidiary Delco, Inc. operates in foreign country N. This year, the two corporations report the following. If Pennworth and Delco file a consolidated U.S. tax return, compute consolidated income tax liability.

Cross-crediting allows multinational corporations to use excess credits generated in low-tax jurisdictions to offset excess limitations generated in high-tax jurisdictions.

Chester, Inc., a U.S. multinational, earns income in three foreign countries. Country A has a 25% income tax, Country B has a 35% income tax, and Country C has a 45% income tax. In which of these countries could Chester lower its world-wide tax liability by operating through a foreign subsidiary rather than a domestic subsidiary? Assume the foreign subsidiary will reinvest all after-tax earnings rather than paying dividends.

Wilmington, Inc., a Pennsylvania corporation, manufactures computer components that it sells to Seine Corporation, a French company, for assembly into finished products. Wilmington owns 90% of Seine's stock. Wilmington's cost per component is $5, its selling price per component is $16, and it sold 110,000 components to Seine this year. Wilmington's taxable income as reported on its Form 1120 was $2,400,000, and Seine's taxable income as reported on its French corporate income tax return was $1,750,000. Determine the effect on the taxable incomes of both corporations if the IRS determines that an arm's length transfer price per component is $23.

A U.S. taxpayer can make an annual election to take a credit or a deduction for foreign income taxes paid.

Jenkin Corporation reported the following for its first two taxable years. Calculate Jenkin's U.S. tax liability for Year 2.

The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S. parent corporation.