SU Tax Jurisdiction of Juan Considered a Non Resident Alien Case Study

Juan is a citizen and resident of Brazil. During the      current year, Juan never visits the United States, nor does he hold a      green card. However, he received a dividend from Macro Corporation,      received interest on a bond issued by NTI Corporation, realized a gain on      the sale of Paxtel Corporation stock, and realized a gain on the sale of      2,000 acres of undeveloped land located in Tennessee. Macro, NTI, and Paxtel      are all corporations organized in the United States. The United States      does not have an income tax treaty with Brazil.

1. Describe the U.S. tax consequences of each of the       above items of income.
2. How would your answers change if Juan held a green       card?
3. AlabamaCo is a domestic corporation that manufactures      products in the United States for distribution in the U.S. and abroad.      During the current year, AlabamaCo derives a pre-tax profit of $20      million, which includes $2 million of foreign-source income derived from a      country F sales office that is considered an unincorporated branch for      U.S. tax purposes. The country F corporate income tax rate is 30%, and the      U.S. tax rate is 21%.
   1. What would be the amount of worldwide tax paid on the       foreign-source income, assuming the United States taxes the worldwide       income of domestic corporations, but allows an unlimited credit for       foreign income taxes? How much, if any, excess credit would be allowed to       offset other U.S. source income?
   2. What would be the amount of worldwide tax paid on the       foreign-source income, assuming the United States allows a credit for       foreign income taxes, but the credit is limited to the United States tax       attributable to foreign-source income?
   3. How would your answer to part (b) change if the       foreign tax rate was 15%?
4. Ahmed is a citizen of Yemen who lives there most of the      year. Ahmed, who has never been to the United States, receives significant      annual income from his substantial oil holdings in Yemen. In Year 1, Ahmed      visits the United States from April 1 through July 30. In Year 2, Ahmed      visits the United States from February 1 through June 20, and he is also      considering a 5-day trip to the United States during the month of      November.
   1. As Ahmed’s tax advisor, do you think that he should       make the trip in November? Assume that Ahmed does not meet the closer       connection exception and that all months contain 30 days.
   2. Would your answer change if Ahmed held a green card?
5. USco, a domestic corporation, produces industrial      engines at its United States plant for sale in the United States and      Canada. USco also has a plant in Canada that performs the final stages of      production with respect to the engines sold in Canada. All of the output of      the Canadian plant is sold in Canada, whereas only 25% of the output of      the United States plant is shipped to Canada. The other 75% of the output      of the U.S. plant is sold to customers in the United States. The Canadian      operation is classified as a branch for United States tax purposes. During      the current year, USco’s total sales to Canadian customers were $12      million, and the related cost of goods sold is $9 million. The average      value of production assets is $30 million at the U.S. plant and $5 million      at the Canadian plant.
   1. How much of USco’s gross profit of $3 million on sales       to Canadian customers (export sales of $12 million less $9 million cost       of goods sold) is classified as a foreign source for U.S. tax purposes?
   2. Now assume that the facts are the same as in part (a),       except that the Canadian factory is structured as a wholly-owned Canadian       subsidiary, rather than a branch. USco’s sales of semi-finished engines       to the Canadian subsidiary (which still represent 25% of its output) were       $6 million during the year, and the related cost of goods sold was $4       million. The Canadian subsidiary’s total sales of finished engines to       Canadian customers (which represents all of its output) was $12 million,       and the related cost of goods sold is $9 million. The average value of       production assets is still $30 million at the U.S. plant, and $5 million       at the Canadian plant, and USco sells all goods with title passing at its       U.S. plant. How much of USco’s gross profit of $2 million on sales to the       Canadian subsidiary is classified as a foreign source for U.S. tax       purposes?
6. Domco is a domestic corporation that distributes      scientific equipment worldwide. During the current year, Domco had $200      million of sales, had a gross profit of $90 million, and incurred $60      million of selling, general and administrative expenses (SG&A), for      taxable income of $20 million. Domco’s sales include $50 million of sales      to foreign customers. The gross profit on these foreign sales was $20      million. Domco transferred title abroad on all foreign sales, and      therefore the entire $20 million is classified as foreign-source income. A      time management survey was recently completed, and indicates that      employees devote 80% of their time to the company’s domestic operations      and 20% to foreign operations. Compensation expenses account for $40      million of the $60 million of total SG&A expenses. Assume Domco’s $20      million of taxable income is subject to U.S. tax at a 21% rate. Compute      Domco’s U.S. tax on the foreign portion of taxable income under the following      independent assumptions.
   1. Domco determines the amount of SG&A expenses       allocable to foreign-source income using gross sales as an apportionment       base.
   2. Domco determines the amount of SG&A expenses       allocable to foreign-source income using gross profit as an apportionment       base.
   3. Domco determines the amount of SG&A expenses       allocable to foreign-source income using time as an apportionment base       for the compensation component of SG&A, and gross sales as an       apportionment base for all other SG&A expenses.
7. Jace is an internationally renowned tennis player from      Germany. Jace receives $2 million from a U.S. soft drink company to wear      the company’s logo on his tennis shirt in the Wimbledon final (which takes      place in the United Kingdom), which is televised worldwide. What is the      source of the $2 million? Why?