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ACC/559 unit 3 problems

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Question;Can you answer these questions?;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.;USAco, a domestic;corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco?s;only assets are cash of $200,000, accounts receivable of $200,000 and its U.S.;manufacturing plant worth $500,000. USAco has no liabilities. FORco sells USAco;to an independent U.S. buyer.;Is FORco?s sale of USAco;subject to withholding under FIRPTA? Explain.;Would your answer change;if USAco had a liability of $300,000 in the form of a mortgage on the U.S.;manufacturing plant?;3.;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 million;Interest income...............................................................................;$6 million;Interest expense (paid to Wheelco).................................................................................................;$6 million;Depreciation;expense.....................................................................;($30 million);Other operating expenses...............................................................;($81 million);Pre-tax income.............................................................................;$15 million;5.;6.;Assume 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.;7.;USAco, a domestic;corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign;corporation. The U.S.-Country F tax treaty exempts interest payments from;withholding taxes. USAco?s financial statements appear as follows;BALANCE SHEET;Assets Liabilities;Owners? Equity;Cash $100;Receivables $500;Notes Payable $400;Owner?s Equity $200;INCOME STATEMENT;Gross Income $500;Administrative Expenses;$350;Interest Expense $100;The interest expense of;$100 arises from a notes payable from USAco to FORco.;What is the maximum;amount of interest USAco may deduct on its U.S. return?

 

Paper#42100 | Written in 18-Jul-2015

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