Part 1

Pet Instructional Programs Corp. (PIP) and its 91% owned subsidiary, Squeak Toys Ltd (Squeak), join in filing consolidated returns for U.S. tax purposes.

On September 15, 2016, Squeak purchased a new warehouse for $279,000, which Squeak immediately placed into service in its business. On January 1, 2017, when the warehouse had an adjusted basis of $276,910, Squeak sold the warehouse to PIP for $281,000. Although PIP immediately placed the warehouse into service in 2017, PIP ended up selling the warehouse to an unrelated purchaser on August 14, 2018. Under the terms of the sale, the unrelated purchaser agreed to pay PIP 10% of whatever profit the purchaser reported in the month of October for eleven consecutive years, starting with October 2018. Accordingly, the unrelated purchaser made its first payment to PIP of $25,600 on November 15, 2018.

Required (25 points): Explain what depreciation, gain, and/or loss PIP and Squeak would include in their respective separate taxable incomes (i.e., taxable income after any adjustments for intercompany transactions) for 2017 and 2018 with respect to the warehouse.

Part 2

Common Facts for Each Situation:

Epic Feat Inc. (Epic), a U.S. corporation, took its first step toward global domination during 2019 by establishing a global enterprise that acquires goods from a manufacturer in Guatemala and resells those goods to retail customers in Thailand (the 'Business'). Legal title to the goods passes to the customers in Thailand, and the Business will generate $317,000 of income (gross income less deductible expenses, as determined under U.S. tax laws) as it gets a toehold in the Thai market during 2019. Epic will also have $390,000 of U.S. source income (gross income less deductible expenses, as determined under U.S. tax laws) from its business operations wholly within the United States. The total value of Epic's tangible assets is $5,656,000 (i.e., the original cost of the assets less ADS straight-line depreciation). Assume the U.S. government taxes Epic at a 21% flat rate.

Required (25 points for each INDPENDENT situation):

(A) Assume Epic conducts the Business without having any of its assets or employees outside the United States (i.e., all $5,656,000 of the tangible assets are located within the United States), and the Thai government will impose $47,550 of withholding taxes on Epic's sales to Thai customers during 2019. Explain what amount of income tax Epic will owe the U.S government for 2019.

(B) Assume Epic moved $848,400 of its tangible assets to Thailand and conducts the Business as a branch. Assume further that--under Thai tax law--the Thai government will treat

BSAD 264 Corporate Taxation Page 3 Fall 2019

Epic's branch as having taxable income of $538,900 for 2019, and the Thai government imposes a 4% tax rate on taxable income up to $50,000 and a 12% tax rate on taxable income in excess of $50,000. Explain what amount of income tax Epic will owe the U.S government for 2019.

(C) Assume Epic transferred $848,400 of its tangible assets to a newly-formed Thai corporation (a 'foreign subsidiary') in exchange for all of the foreign subsidiary's stock, and the foreign subsidiary conducts the Business. Assume further that--under Thai tax law--the Thai government will treat the foreign subsidiary as having taxable income of $538,900 for 2019, and the Thai government imposes a 4% tax rate on taxable income up to $50,000 and a 12% tax rate on taxable income in excess of $50,000. Finally, assume the foreign subsidiary will not make any distributions to Epic during 2019. Explain what amount of income tax Epic will owe the U.S government for 2019.