Chapter 3 Homework Problems

1) USAco is a domestic corporation that distributes scientific equipment worldwide. During the current year, USAco had:

$100 million of sales

$40 million gross profit

$30 million of selling, general and administrative expenses (SG&A)

for total taxable income of $10 million.

USAcos sales include $20 million of sales to foreign customers. The gross profit on these foreign sales was $10 million. USAco transferred title abroad on all foreign sales, and therefore the entire $10 million is classified as foreign-source income.

A time management study was recently completed, and indicates the employees devote 90% of their time to the companys domestic operations and 10% to foreign operations. Compensation expenses account for $20 million of the $30 million of total SG&A expenses. Assume USAcos $10 million of taxable income is subject to a US tax rate of 21%.

If USAco uses gross sales as an apportionment base, determine the amount of SG&A expenses allocable to foreign-source income.

If USAco uses gross profit as an apportionment base, determine the amount of SG&A expenses allocable to foreign-source income.

If USAco uses 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, determine the total amount of SG&A expenses allocable to foreign-source income.

2) CanCo, a Canadian corporation sells the stock of a U.S. subsidiary (a Delaware corporation engaged in software development) to a U.S. buyer in a transaction that is negotiated and consummated in the U.S. Will there be any U.S. tax imposed on CanCos gain on the sale? Must the U.S. buyer withhold U.S. tax from the sale proceeds? Explain.

3) Marcel is a wine merchant in Country F with no ties to the U.S. Marcel is interested in expanding his business and shipping wine to distributors in the U.S. He calls you to ask about things he may want to think about with respect to tax sourcing that may be associated with this new business venture. What may be important for Marcel to consider as he ponders this idea?

4) Smith, a U.S. citizen and resident, visits the website of ForCo., a country F corporation, from which Smith downloads a computer game to his computer. Smith pays $100 for the game, and the amount is charged to his credit card as part of the download transaction. ForCo. has no office, employees, or representatives in the U.S. Is Smith liable for U.S. withholding U.S. tax on this payment? (Feel free to check out Treas. Reg. 1.861-18 as you analyze this problem, and problem #5).

5) Same facts as above, except in this instance the copy of the program that Smith downloads will only work for one week, after which time it will be automatically disabled unless Smith makes another payment to ForCo. for an unlock key. In this case, must Smith withhold U.S. tax from the payments made to ForCo.?

6) Jennifer, a citizen of Canada who maintains her home there, is a travelling salesperson for a Canadian company. Many of her customers are in the U.S., and she spends about 125 days per year (out of 250 working days) in the U.S. Is Jennifers compensation, or any part of it, going to be subject to U.S. tax? Explain. Assume for this problem that Jennifers work situation has been going on indefinitely. (It may help to look over IRC 7701(b)(7)(B) and Treas. Reg. 301.7701(b)-3)).

7) Ben, a citizen and resident of Canada, is employed by a Montreal branch of a Delaware corporation, whose business is located primarily in the U.S. He recently spent 2 weeks in Philadelphia attending a series of meetings at his employers office in that city. Is any of Bens salary likely subject to U.S. tax? What information is missing from this problem that will ultimately help you answer this question?

8) XCo, a U.S. corporation, and FCo, a foreign corporation, jointly incorporate YCo, a U.S. corporation to operate a mining operation in a foreign country. During its first year of operations, YCo earned $900 of foreign-source income from its mining operations and $100 of U.S. source income from investments in the U.S. At the end of the year, YCo distributed a $100 dividend to both XCo and FCo. This was the only income received by XCo and FCo for the year. XCo distributed $50 as a dividend to its shareholders, all of whom are foreign residents. Source the dividends as follows:

$100 dividend paid to XCo

$100 dividend to FCo

$50 dividend by XCo to its foreign shareholders

9) ABC Corp., a domestic corporation, specializes in selling building and operating materials, including cranes and building machinery. Three years ago ABC opened a second operation in the UK, which is structured as a foreign branch of ABC. To finance the operations, ABC took out a $25 million loan from the Royal Bank of Scotland. Assume the loan is being repaid via the profits of the UK branch. What is the source of the gain from this interest? Explain