1.Numberco, a domestic corporation, is an engineering consulting firm that has its main offices in San Francisco, California. Because Numberco does a considerable amount of business in China, it has a branch office in Beijing. During the current year, Numberco generates a total pre-tax profit of $100 million (all from active business operations), including $80 million of profits from its U.S. operations and $20 million of profits from its foreign branch in China. Assume the U.S. tax rate is 21% and the Chinese rate is 26%.
Compute Numberco’s creditable foreign income taxes, foreign tax credit limitation, and excess credits (if any).
Now assume that Numberco has a second foreign branch office in Singapore which generated $10 million of profits (all from active business operations), on which Numberco pays Singapore taxes. Assume the effective Singapore tax rate is 8%.
Recompute Numberco’s creditable foreign income taxes, foreign tax credit limitation, and excess credits.
- What is the name of the phenomenon by which the Singapore profits resulted in the elimination of the excess credits on the Chinese profits?
- 2.During 2020, KBike, a foreign subsidiary, distributes a $10 million dividend to Bikeco, a U.S. C corporation. KBike has post-2017 undistributed E&P of $90 million and post-2017 foreign income taxes of $36 million. Assume that the United States corporate tax rate is 21% and the dividend incurs a withholding tax of 5%. As a result of the dividend, what is the foreign tax due and the U.S. tax due?
3. USC, a domestic corporation, operates abroad through three wholly-owned foreign corporations, Forco1 through Forco3, each of which is organized in a different foreign country. During the current year, Forco1 has total gross income of $10 million, including $400,000 of interest income that qualifies as foreign personal holding company income, and $9.6 million of gross income from the sale of goods that Forco1 manufactured in its country of incorporation.
- Forco2’s current year earnings and profits are $30 million, which consists of $40 million of foreign personal holding company income and a $10 million loss from sales of goods that Forco2 manufactured in its country of incorporation.
- What amount, if any, should Forco1 report as Subpart F income?
What amount, if any, should Forco2 report as Subpart F income?
4. Phillipe is a United States citizen. In 20Y1, Phillipe pays $1 million for 1% of the stock of Hco, a foreign corporation that qualifies as a passive foreign investment company but is not a controlled foreign corporation. Phillipe does not make a qualified electing fund election with respect to his interest in Hco. During 20Y1 to 20Y4, Hco makes no distributions to Phillipe. On December 31, 20Y4, Phillipe sells all of his Hco stock for $5 million. Assume the highest United States individual income tax rate in 20Y1 to 20Y4 was 40%, and the interest rate for computing the Code Sec. 1291(c) deferred tax amount is 3% for a tax due 1 year ago, 6% for a tax due 2 years ago, and 9% for a tax due 3 years ago.
Determine Phillipe’s United States tax on his sale of shares in Hco.
5. Susan is a United States citizen. On January 1 of Year 1, Susan, who annually is in the 24% tax bracket, pays $500 for one of the 100 outstanding shares in Taiwan Equities (“TE”), a Taiwan corporation that invests in Asian entities not incorporated in Taiwan. Assume that the appropriate rate of interest on any amounts due is simple interest computed at 10% annually.
In Year 1, TE earns $100,000. When preparing her return for Year 1, Susan files a Form 8621 that elects Qualified Electing Fund (“QEF”) status. What are the U.S. tax implications to Susan?
Assume that in the following year, which is Year 2, TE again earns $100,000. On December 31 of Year 2, TE distributes $2,000 to Susan. What are the U.S. tax implications to Susan?
Continue to assume that TE earns $100,000 in Year 1 and $100,000 in Year 2, but that Susan never makes a QEF election. Moreover, on December 31 of Year 2, without having received a dividend, Susan sells her TE share for $2,500. What are the United States tax implications to Susan?
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