Question 61. (LO 6) Identify whether the corporations described below are controlled foreign

61. (LO 6) Identify whether the corporations described below are controlled foreign corporations.

a. Shetland PLC, a UK corporation, has two classes of stock outstanding, 75 shares of class AA stock and 25 shares of class A stock. Each class of stock has equal voting power. Angus owns 35 shares of class AA stock and 20 shares of Class A stock. Angus is a U.S. citizen who resides in England.

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b. Tony and Gina, both U.S. citizens, own 5% and 10%, respectively, of the voting stock of DaVinci S.A., an Italian corporation. Tony and Gina are also equal partners in Roma Corporation, an Italian corporation that owns 50% of the DaVinci stock.

c. Pierre, a U.S. citizen, owns 45 of the 100 shares outstanding in Vino S.A., a French corporation. Pierre’s father, Pepe, owns 8 shares in Vino. Pepe also is a U.S. citizen. The remaining 47 shares are owned by non-U.S. individuals.

62. (LO 6) USCo owns 100% of the following corporations: Dutch N.V., Germany A.G., Australia PLC, Japan Corporation, and Brazil S.A. During the year, the following transactions took place. Determine whether the above transactions result in subpart F income to USCo.

a. Germany A.G. owns an office building that it leases to unrelated persons. Germany A.G. engaged an independent managing agent to manage and maintain the office building and performs no activities with respect to the property.

b. Dutch N.V. leased office machines to unrelated persons. Dutch N.V. performed only incidental activities and incurred nominal expenses in leasing and servicing the machines. Dutch N.V. is not engaged in the manufacture or production of the machines and does not add substantial value to the machines.

c. Dutch N.V. purchased goods manufactured in France from an unrelated contract manufacturer and sold them to Germany A.G. for consumption in Germany.

d. Australia PLC purchased goods manufactured in Australia from an unrelated person and sold them to Japan Corporation for use in Japan.

63. (LO 6) USCo manufactures and markets electrical components. USCo operates outside the United States through a number of CFCs, each of which is organized in a different country. These CFCs derived the following income for the current year. Determine the amount of income that USCo must report as a deemed dividend under subpart F in each scenario.

a. F1 has gross income of $5 million, including $200,000 of foreign personal holding company interest and $4.8 million of gross income from the sale of inventory that F1 manufactured at a factory located within its home country.

b. F2 has gross income of $5 million, including $4 million of foreign personal holding company interest and $1 million of gross income from the sale of inventory that F2 manufactured at a factory located within its home country.

COMPREHENSIVE PROBLEMS

64. Spartan Corporation manufactures quidgets at its plant in Sparta, Michigan. Spartan sells its quidgets to customers in the United States, Canada, England, and Australia.

Spartan markets its products in Canada and England through branches in Toronto and London, respectively. Title transfers in the United States on all sales to U.S. customers and abroad (FOB: destination) on all sales to Canadian and English customers. Spartan reported total gross income on U.S. sales of $15,000,000 and total gross income on Canadian and U.K. sales of $5,000,000, split equally between the two countries. Spartan paid Canadian income taxes of $600,000 on its branch profits in Canada and U.K. income taxes of $700,000 on its branch profits in the U.K. Spartan financed its Canadian operations through a $10 million capital contribution, which Spartan financed through a loan from Bank of America. During the current year, Spartan paid $600,000 in interest on the loan.

Spartan sells its quidgets to Australian customers through its wholly-owned Australian subsidiary. Title passes in the United States (FOB: shipping) on all sales to the subsidiary. Spartan reported gross income of $3,000,000 on sales to its subsidiary during the year. The subsidiary paid Spartan a dividend of $670,000 on December 31 (the withholding tax is 0% under the U.S.-Australia treaty). Spartan was deemed to have paid Australian income taxes of $330,000 on the income repatriated as a dividend.

a. Compute Spartan’s foreign source gross income and foreign tax (direct and withholding) for the current year.

b. Assume 20% of the interest paid to Bank of America is allocated to the numerator of Spartan’s FTC limitation calculation. Compute Spartan Corporation’s FTC limitation using your calculation from Question A and any excess FTC or excess FTC limitation (all of the foreign source income is put in the general category FTC basket).

65. Windmill Corporation manufactures products in its plants in Iowa, Canada, Ireland, and Australia. Windmill conducts its operations in Canada through a 50 percent-owned joint venture, CanCo. CanCo is treated as a corporation for U.S. and Canadian tax purposes. An unrelated Canadian investor owns the remaining 50 percent. Windmill conducts its operations in Ireland through a wholly-owned subsidiary, IrishCo. IrishCo is a controlled foreign corporation for U.S. tax purposes. Windmill conducts its operations in Australia through a wholly-owned hybrid entity (KiwiCo) treated as a branch for U.S. tax purposes and a corporation for Australian tax purposes. Windmill also owns a 5 percent interest in a Dutch corporation (TulipCo).

During 2014 , Windmill reported the following foreign source income from its international operations

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