CHAPTER 25 TAXATION OF INTERNATIONAL TRANSACTIONS

1. 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.

a. 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.

b. 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.

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

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

2. 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?

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

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

c. $10,000 U.S. source.

d. $10,000 foreign source.

3. 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:

a. $20,000.

b. $16,000.

c. $3,000.

d. $0.

4. 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?

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

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

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

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

5. 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?

a. $330,000 foreign source. b. $330,000 U.S. source.

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

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

6. 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?

a. Using tax book values.

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

c. Using fair market values.

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

7. Which of the following statements best describes the purpose of § 482, under which the Treasury can reallocate

income and deductions among related taxpayers?

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

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

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

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

8. Section 482 is used by the Treasury to:

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

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

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

d. All of the above.

e. None of the above.

9. An advance pricing agreement (APA) is used between:

a. Two or more governments.

b. Two related taxpayers.

c. The taxpayer and the IRS.

d. The IRS and U.S. taxing authorities.

10.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?

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

b. 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.

c. 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.

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