USAco, a domestic corporation, manufactures and sells widgets in the United States. To market its widgets in Europe, USAco forms CAYco, a Cayman Islands corporation. The Cayman Islands does not have a corporate income tax. USAco sells widgets at arm’s length to CAYco, which exports the widgets to Europe. The income of CAYco is: foreign base company sales income. foreign personal holding company income. foreign base company oil-related income. foreign base company services income. Question 2 Lee, a U.S. citizen, owns 1% of HONGco, a Hong Kong corporation whose only activity is to invest in publicly-traded foreign stocks and bonds. No other U.S. persons own shares of HONGco. HONGco is: a passive foreign investment company. a controlled foreign corporation. both a passive foreign investment company and a controlled foreign corporation. neither a passive foreign investment company nor a controlled foreign corporation. Question 3 Larry, Curly, Moe and Shemp are unrelated U.S. citizens. Larry, Curly, and Moe each own 15% of FORco, a foreign corporation. Shemp owns 8% of FORco, and unrelated foreign persons owns the remaining 47% of FORco. FORco is: a controlled foreign corporation because U.S. persons own at least 50% of its stock. a controlled foreign corporation because U.S. persons own more than 50% of its stock. not a controlled foreign corporation because U.S. shareholders do not own at least 50% of its stock. not a controlled foreign corporation because U.S. shareholders do not own more than 50% of its stock. Question 4 USAco, a domestic corporation, is subject to U.S. tax at a flat rate of 35%. USAco earns $100,000 of U.S.-source income and $100,000 of foreign-source income. USAco’s foreign tax credit limitation is: $35,000. $17,500. $100,000. $70,000. Question 5 USAco, a domestic corporation, owns 100% of FORco, a country F corporation. In its first year of operations, FORco earns $100,000 of income, pays $30,000 of country F income taxes, and distributes a dividend of $70,000 to USAco. USAco may claim a deemed paid foreign tax credit of: $100,000. $60,000. $30,000. $0. Question 6 SMALLco is a domestic corporation that has elected S corporation status. SMALLco wholly owns a Canadian corporation, CANco. During the current year, CANco derives $100,000 of taxable income, pays $40,000 in Canadian income taxes, and distributes a $60,000 dividend to SMALLco. The Canadian income taxes of $40,000 are eligible to be taken as a foreign tax credit by: SMALLco. shareholders of SMALLco. both SMALLco and SMALLco’s shareholders. neither SMALLco nor its shareholders. Question 7 USAco, a domestic corporation, forms a business entity called a private limited company in country F. Under country F law, such entities are not subject to country F’s corporate income tax, but do provide limited liability to their owners. USAco never makes a U.S. check-the-box election with respect to the country F private limited company. For U.S. tax purposes, the private limited company is treated as: a corporation. a branch. a branch because it is not subject to country F’s corporate income tax. neither a branch nor a corporation. Question 8 USAco, a domestic corporation, decides to conduct business in the United Kingdom. USAco desires to limit its liability in the United Kingdom, but anticipates that the operations will take a long time (approximately ten years) before becoming profitable. USAco should form: a corporate entity in the United Kingdom. a branch in the United Kingdom. a reverse hybrid entity in the United Kingdom. a hybrid entity in the United Kingdom. Question 9 USAco, a domestic corporation, decides to open a sales office in country F. USAco has a choice of operating in country F as: a branch only. a country F corporation only. either a branch in country F or a country F corporation. neither a branch in country F nor a country F corporation. 4 points Question 10 USAco, a domestic corporation, sells widgets in the United States. USAco’s foreignsubsidiary, FORco, sells widgets in foreign country F. USAco has a Canadian sales branch that markets widgets in Canada. USAco and its foreign activities include: three qualified business units. two qualified business units. one qualified business unit. no qualified business units. Question 11 USAco, a domestic corporation, has a branch in Canada. The functional currency of the Canadian branch is the Canadian dollar (C$). The Canadian branch pays C$100,000 of Canadian income taxes during the taxable year. At the beginning of the taxable year, $1 U.S. was worth C$1.75. At the end of the taxable year, $1 U.S. was worth C$1.25. During the taxable year, the exchange rate averaged $1 U.S. to C$1.50. For foreign tax credit purposes, USAco’s has paid foreign taxes in U.S. dollars of: $57,143. $66,667. $80,000. $100,000. Question 12 USAco, a domestic corporation, sells widgets in the United States. USAco has a French subsidiary, FRANco, which sell widgets only in France. FRANco is paid in euros for 90% of its sales, and is paid in British pounds for the remaining 10% of its sales. The functional currency of: USAco is the dollar and FRANco is the euro. USAco is the euro and FRANco is the dollar. both USAco and FRANco is the dollar. USAco is the dollar and FRANco is a proportionate amount of euros and pounds. Question 13 USAco, a domestic corporation, operates a Canadian subsidiary, CANco. The functional currency of the Canadian subsidiary is the Canadian dollar (C$). At the end of year one, CANco has earnings and profits of C$100,000. On January 1 of year two, CANco distributes C$100,000 to USAco. On January 1 of year one, $1 U.S. was worth C$1.75. On January 1 of year 2, $1 U.S. was worth C$1.25. During year one, the exchange rate averaged $1 U.S. to C$1.50. Ignoring any gross-up income associated with the deemed paid credit, the amount of year two income USAco reports as a dividend in U.S. dollars is: $57,143. $66,667. $80,000. $100,000. Question 14 USAco owns an IC-DISC, which derives $1 million of income from export sales. Which of the following statements is true regarding the IC-DISC? The IC-DISC must file a Form 1120. USAco does not have to report any income the IC-DISC earns. The IC-DISC must be incorporated in a foreign jurisdiction. The IC-DISC permits USAco to permanently exclude 15% of its export profits. Question 15 USAco manufactures widgets and owns an IC-DISC. USAco incurs 25% of its labor and material costs in the United States, 35% of its labor and material costs in Canada, and 40% of its labor and material costs in Mexico. Do the widgets constitute qualifying production property? No, because less than half of the labor and material costs are incurred in theUnited States. No, because the labor and material costs incurred in the United States are not substantial. Yes, because the labor and material costs incurred in the United States satisfy the safe harbor. Yes, because 100% of labor and material costs are incurred in North America. Question 16 USAco sells tires to Detroit Automobile Manufacturing (“DAM”), which mounts the tires on its automobiles for export to Canada. Both USAco and DAM own IC-DISCs. Which of the following statements is true? Only DAM satisfies the foreign destination test. Only USAco satisfies the foreign destination test. Neither USAco nor DAM satisfy the foreign destination test. Both USAco and DAM satisfy the foreign destination test. Question 17 The IC-DISC commission can be: 50% of combined taxable income. 4% of qualified export receipts. an arm’s length commission under the transfer pricing rules. all the above. Question 18 USAco, a domestic corporation, loans $100,000 to Toni, a U.S. citizen and resident. Interest of $10,000 is payable annually on December 31 of each year. Toni is physically present in Mexico on December 31, 20Y2 when he pays the interest. The interest income is: U.S.-source because USAco is a domestic corporation. U.S.-source because Toni is a U.S. resident. sourced under the 50-50 method. foreign-source because Toni is physically present in Mexico on December 31 when the interest is paid. Question 19 USAco, a domestic corporation, purchases merchandise in the U.S. that it resells in Canada. Title passes in Canada. The gross profits from these sales are: foreign-source because title passes in Canada. U.S.-source because the seller is a domestic corporation. U.S.-source because the merchandise was purchased in the U.S. sourced under the 50-50 method. Question 20 USAco, a domestic corporation, manufactures merchandise in the U.S. that it then sells in Canada. Title passes in Canada. The gross profit from these sales is: foreign-source because title passes in Canada. U.S.-source because the seller is a domestic corporation. U.S.-source because the merchandise was manufactured in the U.S. sourced under the 50-50 method. Question 21 USAco, a domestic corporation, operates two lines of business. The first line of business is concession sales at U.S. major league baseball games, which generate annual gross income of $1 million. The second line of business is concession sales at German professional soccer games, which generate annual gross income of $4 million. Each year, USAco’s combined general and administrative expenses for both lines of business total $500,000 annually. These expenses should be allocated: all to U.S.-source income. all to foreign-source income. $250,000 to U.S.-source income and $250,000 to foreign-source income. $100,000 to U.S.-source income and $400,000 to foreign-source income. Question 22 Don is a citizen of Great Britain and a famous race car driver. He decides to come to the U.S. to open a car dealership in Detroit. Don doesn’t obtain citizenship, but he procures a green card on June 30, 20Y2. He is in the U.S. during the following periods: 20Y1: April 1 through August 1 20Y2: June 1 through August 1 Which of the following best describes Don’s status? Resident alien under the green card test, starting in 20Y2. Nonresident alien. Nonresident alien under the green card test. Citizen of the U.S. Question 23 Don is a citizen of Great Britain and a famous race car driver. He decides to come to the U.S. to open a car dealership in Detroit. Don does not obtain a green card or U.S. citizenship, but he procures a visa to work in the United States. He is in the U.S. during the following periods: 20Y1: April 1 through August 1 20Y2: June 1 through August 1 Which of the following best describes Don’s status? Resident alien under the green card test. Nonresident alien. Resident alien under the substantial presence test. Citizen of the U.S. Question 24 USAco is a domestic corporation. During the current year, USAco starts doing business in foreign country F. USAco’s country F operations generate $100,000 of taxable income, which USAco reinvests in its country F operations. On its Form 1120, USAco will report taxable income from its country F operations of: $100,000 if the foreign operations are conducted as a branch and $0 if the foreign operations are conducted as a subsidiary. $0 if the foreign operations are conducted as a branch and $100,000 if the operations are conducted as a subsidiary. $0, regardless of whether the foreign operations are conducted as a subsidiary or a branch. $100,000, regardless of whether the foreign operations are conducted as a subsidiary or a branch. Question 25 Don is a citizen of Great Britain and a famous race car driver. He decides to come to the U.S. to open a car dealership in Detroit. He is in the U.S. during the following periods: 20Y1: April 1 through August 1 20Y2: March 1 through August 1 Which of the following best describes Don’s status? Resident alien under the green card test. Nonresident alien. Resident alien under the substantial presence test, starting in 20Y2. Citizen of the U.S.
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