1 USAco, a domestic corporation, is a wholly owned subsidiary of FORco, a foreign corporation USAco s only assets are cash of $200,000, accounts receivable of $200,000 and its U S manufacturing plant worth $500,000 USAco has no liabilities FORco sells USAco to an independent U S buyer Is FORco s sale of USAco subject to withholding under FIRPTA Explain Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U S manufacturing plant 2 Cholati is a foreign corporation that produces fine chocolates for sale worldwide Cholati markets it chocolates in the United States through a branch sales office located in New York City During the current year, Cholati s effectively connected earnings and profits are $3 million, and its U S net equity is $6 million at the beginning of the year, and $4 million at the end of the year In addition, a review of Cholati s interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15 of the combined voting power of Cholati s stock, and $160,000 of interest to a domestic corporation Compute Cholati s branch profi ts tax, and determine its branch interest withholding tax obligations Assume that Cholati does not reside in a treaty country 3 Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide Wheelco markets its motorcycles in the United States through Wheely, a wholly owned U S marketing subsidiary that derives all of its income from U S business operations Wheelco also has a creditor interest in Wheely, such that Wheely s debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco The results from Wheely s first year of operations are as follows Sales $180 million Interest income $6 million Interest expense (paid to Wheelco) $60 million Depreciation expense ($30 million) Other operating expenses ($81 million) Pre tax income $15 million Assume the U S corporate tax rate is 35 , and that the applicable tax treaty exempts Wheelco s interest income from U S withholding tax Compute Wheely s interest expense deduction 4 USAco, a domestic corporation, is the wholly owned U S subsidiary of FORco, a foreign corporation The U S Country F tax treaty exempts interest payments from withholding taxes USAco s financial statements appear as follows BALANCE SHEET Assets Liabilities Owners Equity Cash $100 Receivables $500 Notes Payable $400 Owner s Equity $200 INCOME STATEMENT Gross Income $500 Administrative Expenses $350 Interest Expense $100 The interest expense of $100 arises from a notes payable from USAco to FORco What is the maximum amount of interest USAco may deduct on its U S return 1 USAco, a domestic corporation, is a wholly owned subsidiary of FORco, a foreign corporation USAco's only assets are cash of $200,000, accounts receivable of $200,000 and its U S manufacturing plant worth $500,000 USAco has no liabilities FORco sells USAco to an independent U S buyer Is FORco's sale of USAco subject to withholding under FIRPTA Explain Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U S manufacturing plant 2 Cholati is a foreign corporation that produces fine chocolates for sale worldwide Cholati markets it chocolates in the United States through a branch sales office located in New York City During the current year, Cholati's effectively connected earnings and profits are $3 million, and its U S net equity is $6 million at the beginning of the year, and $4 million at the end of the year In addition, a review of Cholati's interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15 of the combined voting power of Cholati's stock, and $160,000 of interest to a domestic corporation Compute Cholati's branch profi ts tax, and determine its branch interest withholding tax obligations Assume that Cholati does not reside in a treaty country 3 Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide Wheelco markets its motorcycles in the United States through Wheely, a wholly owned U S marketing subsidiary that derives all of its income from U S business operations Wheelco also has a creditor interest in Wheely, such that Wheely's debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco The results from Wheely's first year of operations are as follows $180 Sales million Interest income $6 million Interest expense (paid to Wheelco) $60 million Depreciation expense ($30 million) Other operating expenses ($81 million) Pre tax income $15 million Assume the U S corporate tax rate is 35 , and that the applicable tax treaty exempts Wheelco's interest income from U S withholding tax Compute Wheely's interest expense deduction 4 USAco, a domestic corporation, is the wholly owned U S subsidiary of FORco, a foreign corporation The U S Country F tax treaty exempts interest payments from withholding taxes USAco's financial statements appear as follows BALANCE SHEET Assets Liabilities Owners' Equity Cash $100 Receivables $500 Notes Payable $400 Owner's Equity $200 INCOME STATEMENT Gross Income $500 Administrative Expenses $350 Interest Expense $100 The interest expense of $100 arises from a notes payable from USAco to FORco What is the maximum amount of interest USAco may deduct on its U S return

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1. USAco, a domestic corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco?s only assets are cash of $200,000, accounts receivable of $200,000

1. USAco, a domestic corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco?s only assets are cash of $200,000, accounts receivable of $200,000 and its U.S. manufacturing plant worth $500,000. USAco has no liabilities. FORco sells USAco to an independent U.S. buyer. Is FORco?s sale of USAco subject to withholding under FIRPTA? Explain. Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U.S. manufacturing plant? 2. Cholati is a foreign corporation that produces fine chocolates for sale worldwide. Cholati markets it chocolates in the United States through a branch sales office located in New York City. During the current year, Cholati?s effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholati?s interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholati?s stock, and $160,000 of interest to a domestic corporation. Compute Cholati?s branch profi ts tax, and determine its branch interest withholding tax obligations. Assume that Cholati does not reside in a treaty country. 3. Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheely?s debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheely?s first year of operations are as follows: Sales ............................................................................................. $180 million Interest income ............................................................................... $6 million Interest expense (paid to Wheelco)................................................................................................. $60 million Depreciation expense....................................... .............................. ($30 million) Other operating expenses................................. .............................. ($81 million) Pre-tax income ................................................. ............................ $15 million Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelco?s interest income from U.S. withholding tax. Compute Wheely?s interest expense deduction. 4. USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco?s financial statements appear as follows: BALANCE SHEET Assets Liabilities & Owners? Equity Cash $100 Receivables $500 Notes Payable $400 Owner?s Equity $200 INCOME STATEMENT Gross Income $500 Administrative Expenses $350 Interest Expense $100 The interest expense of $100 arises from a notes payable from USAco to FORco. What is the maximum amount of interest USAco may deduct on its U.S. return? image text in transcribed

1. USAco, a domestic corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco's only assets are cash of $200,000, accounts receivable of $200,000 and its U.S. manufacturing plant worth $500,000. USAco has no liabilities. FORco sells USAco to an independent U.S. buyer. Is FORco's sale of USAco subject to withholding under FIRPTA? Explain. Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U.S. manufacturing plant? 2. Cholati is a foreign corporation that produces fine chocolates for sale worldwide. Cholati markets it chocolates in the United States through a branch sales office located in New York City. During the current year, Cholati's effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholati's interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholati's stock, and $160,000 of interest to a domestic corporation. Compute Cholati's branch profi ts tax, and determine its branch interest withholding tax obligations. Assume that Cholati does not reside in a treaty country. 3. Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheely's debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheely's first year of operations are as follows: $180 Sales ............................................................................................. million Interest income ............................................................................... $6 million Interest expense (paid to Wheelco)................................................................................................. $60 million Depreciation expense....................................... .............................. ($30 million) Other operating expenses................................. .............................. ($81 million) Pre-tax income ................................................. ............................ $15 million Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelco's interest income from U.S. withholding tax. Compute Wheely's interest expense deduction. 4. USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco's financial statements appear as follows: BALANCE SHEET Assets Liabilities & Owners' Equity Cash $100 Receivables $500 Notes Payable $400 Owner's Equity $200 INCOME STATEMENT Gross Income $500 Administrative Expenses $350 Interest Expense $100 The interest expense of $100 arises from a notes payable from USAco to FORco. What is the maximum amount of interest USAco may deduct on its U.S. return