1. Place each of the following transactions in one of four categories: (i) an inbound transaction, (ii) an outbound transaction, (iii) a transaction taxed under the Internal Revenue Code, (iv) a foreign-tax only transaction. For any transactions that are in categories (i) through (iii) (i.e. inbound, outbound, or taxed under the IRC) please describe the likely tax consequences of such transaction in 1-2 sentences.

a. Blienstacht, BVD, a foreign corporation, receives interest income of $10,000 from International U.S. Bank (“IUSB”), an unrelated domestic corporation. IUSB has a significant international presence historically earning about 92% of its active business income from foreign sources.

b. Winestad, Inc., a domestic corporation, provides engineering consulting services both domestically and internationally. Winestad received $5M of income paid to its Munich Germany branch office from a province in Germany for drafting the plans to build a series of new railroad bridges.

c. Richtenbaum, BBD, a foreign corporation, receives $3,500 in dividends on its common shares of Microsoft, a domestic corporation. Microsoft earns approximately 55% of its income over the last three years from sources outside the U.S.

d. Klassen Motor Co., a domestic corporation, manufactures vehicle air conditioning compressor units in East Lansing, Michigan that are sold for $25M to Toyota, a foreign corporation, and shipped to Toyota’s manufacturing plant in Detroit, Michigan where they are placed into vehicles. These vehicles are eventually sold by Toyota both domestically and internationally throughout North and South America.

Problem 2. Smithy International Inc. is a domestic corporation that earns $60 million in income including $50 million of income from operations from U.S. sources and $10 million of income from operations from foreign sources by branches of the corporation (assume none of the foreign income is eligible for exemption under the rules for specified 10 percent-or-more owned foreign corporations). Determine the amount of tax Smithy would pay to the U.S. under the following scenarios taking into account the foreign tax credit.

a. Assume all of Smithy’s foreign income were earned in the Caman Islands where corporations pay no income tax on corporate earnings.

b. What if Smithy’s foreign income were earned in Scotland where corporate earnings are subject to a 10% income tax?

c. What if Smithy’s foreign income were earned in Italy where corporate earnings are subject to a 30% income tax?