US Tax

1.     
Hans, a citizen and resident of Argentina, is a retired bank executive. Hans does not hold a green card. At the start of Year 1, Hans paid $2.5 million for a 20-unit apartment complex located in the suburbs of Washington, D.C. Hans does not actively manage the building, but rather leases it to an unrelated property management company that subleases the building to the tenants. During Year 1, Hans had rental income of $300,000 and operating expenses (depreciation, interest, insurance, etc.) of $220,000. On the advice of his accountant, Hans made a Code Sec. 871(d) election in Year 1. At the start of Year 2, Hans sold the building for $350,000. Hans’ adjusted basis in the building at that time was $290,000.What are the U.S. tax consequences of Hans’ U.S. activities?

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.4. 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 millionInterest income …………………………………………………………………. $6 millionInterest expense (paid to Wheelco)……………………………………………………………………………. $60 millionDepreciation expense………………………………… ………………………… ($30 million)Other operating expenses…………………………… ………………………… ($81 million)Pre-tax income …………………………………………. ………………………. $15 millionAssume 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.

 

3.      Engco, a domestic Corp, produces industrial engines at its U.S. Plans for sale in the United States and Canada. Engco also has a plant in Canada that performs the final stages of production with respect to the engines sold in Canada. All of the output of the Canadian plant is sold in Canada, whereas only one-third of the output of the U.S plant is shipped to Canada. The Canadian operation is classified as a branch for the U.S tax purposes. During the current year, Engco’s total sales to Canadian customers were $10 Million, and the related cost of goods sold is $7 million. The average value of property, plant and equipment is $30 million at the U.S plant, and $5 million the Canadian plant. Engco sells all goods with title passing at the Canadian plant in the case of Canadian sales and at the U.S plant in the case of U.S Sales.

 

1. How much of Engco’s export gross profit of $3 million is classified as foreign-source for U.S tax purposes?
2. Assume that the facts are the same in part (a), except that the Canadian, factory is structured as a wholly owned Canadian subsidiary, rather than a branch. Engoc’s sales of semi-finished engines to the Canadian subsidiary (which will represent one-third of its output) where $6 million during the year and the related cost of goods sold was $4 million. The Canadian subsidiary total sale of finished engines to Canadian customers (which represents all of its output) was $10 million and the related cost of good sold is $7 million. The average value of property, plan and equipment is still $30 million at the U.S. plant, and $5 million at the Canadian plant, and Engco sells all goods with title passing at its U.S. plant. How much of Engco export gross profit of $2 million is classified as foreign-source for U.S. tax purposes?
3. How would your answer to part (b) change if Engco sold its goods with title passing at the customer’s locations?