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Accounting Taxation Related Problems




Question;Cholati is a foreign corporation that produces;fi ne chocolates for sale worldwide. Cholati markets it chocolates in;the United States through a branch sales offi ce located in New York City.;During the current year, Cholati?s effectively connected earnings and profi ts;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.;2. A foreign corporation can structure its U.S. operations;as either a branch or a subsidiary. What are the tax advantages of;operating in the United States through a separately incorporated;subsidiary? What are the tax advantages of operating in the United States;through an unincorporated branch? What general business factors should be;considered when choosing between the branch and subsidiary forms of;doing business in the United States?;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 fi rst year of operations are as follows: Sales $180 million;Interest income $6 million;Interest expense (paid to Wheelco) ($60 million);Depreciation expense ($30 million);Other operating expenses ($81 million);Pre-tax income $15 million;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.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?


Paper#42386 | Written in 18-Jul-2015

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