South-Western Federal Taxation 2018 Corporations, Partnerships, Estates and Trusts 41st Edition by William TB

South-Western Federal Taxation 2018 Corporations, Partnerships, Estates and Trusts 41st Edition by William TB

1. The United States has in force income tax treaties with about 70 countries.
a. True
b. False
ANSWER: True
RATIONALE: The United States has bilateral treaties with many countries.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-02 – LO: 9-02
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

2. Income tax treaties provide for either higher or lower withholding tax rates on interest income than the rate provided under U.S. statutory law.
a. True
b. False
ANSWER: False
RATIONALE: Currently, tax treaties only reduce the interest withholding rate.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-02 – LO: 9-02
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

3. Interest paid to an unrelated party by a domestic corporation that historically earns more than 50% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.
a. True
b. False
ANSWER: False
RATIONALE: Interest income received from the U.S. government, or the District of Columbia, and from noncorporate U.S. residents or domestic corporations generally is sourced within the United States. The 80% foreign business requirement pertains to the sourcing of interest paid by a domestic corporation doing business outside the United States.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

4. Dividends received from Murdock Corp., a corporation organized in Sustenato that earns 70% of its income from U.S. business activities, are 70% U.S.-source income.
a. True
b. False
ANSWER: True
RATIONALE: A portion of dividends received from foreign corporations are treated as U.S.-source income if the foreign corporation record 25% or more of its gross income for the immediately preceding three tax years effectively connected with the conduct of a U.S. trade or business, to the extent of such dividends times a ratio equal to the effectively connected U.S. income for the three-year period over the total gross income for the three-year period. Although U.S.-source, such dividends typically are exempt from withholding tax.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.

5. Serena, a nonresident alien, is employed by GlobalCo, a non-U.S. corporation. Serena works in the United States for 3 days during the year, receiving a gross salary of $2,500 for this period. GlobalCo is not engaged in a U.S. trade or business. Under the “commercial traveler” exception, the $2,500 is not classified as U.S.-source income.
a. True
b. False
ANSWER: True
RATIONALE: The “commercial traveler” exception applies. Serena is in the United States for less than 90 days and earns less than $3,000, working for a foreign employer.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.

6. PlantCo is a company based in Adagio. PlantCo uses a formula to manufacture pharmaceuticals. The formula was developed and is owned by DrugCo, a U.S. entity. Royalties paid by PlantCo to DrugCo for the use of the formula are U.S.-source income.
a. True
b. False
ANSWER: False
RATIONALE: The source of income received for the use of intangible property is the country in which the property is used.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

7. Julio, a nonresident alien, realizes a gain on the sale of commercial real estate located in Omaha. The real estate was sold to Mariana, Julio’s cousin who is also a nonresident alien. Julio recognizes foreign-source income from the sale because his home country is not the U.S.
a. True
b. False
ANSWER: False
RATIONALE: The source of income from the sale of real estate is determined by where the real estate is located.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

8. The “residence of seller” rule is used in determining the sourcing of all gross income and deductions of a U.S. multinational business.
a. True
b. False
ANSWER: False
RATIONALE: There are numerous exceptions to the residence of seller rule.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

9. A U.S. business conducts international communications activities between the U.S. and Spain. The resulting income is sourced 100% to the U. S., the residence of the taxpayer.
a. True
b. False
ANSWER: False
RATIONALE: Income from international communications activities earned by a U.S. person is sourced 50% in the United States when the transmission is between the United States and a foreign country.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

10. The sourcing rules of Federal income taxation apply to deductions as well as to income items.
a. True
b. False
ANSWER: True
RATIONALE: Deductions and losses are allocated and apportioned between U.S.- and foreign-source gross income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

11. In allocating interest expense between U.S. and foreign sources, a taxpayer elects to use either the tax basis of the income-producing assets or their fair market values.
a. True
b. False
ANSWER: True
RATIONALE: The taxpayer can elect to use either method.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

12. The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-03 – LO: 9-03
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

13. A Qualified Business Unit of a U.S. corporation that operates in Germany generally uses the Euro as its functional currency.
a. True
b. False
ANSWER: True
RATIONALE: A QBU usually uses the local currency as its functional currency.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-04 – LO: 9-04
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

14. When a business taxpayer “goes international,” the first step usually is to create an overseas branch sales office.
a. True
b. False
ANSWER: False
RATIONALE: The first steps usually are to make export sales and to license domestic property overseas.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

15. LocalCo merges into HeirCo, a non-U.S. entity, in a transaction that would qualify as a “Type A” reorganization. The resulting realized gain is tax-deferred under U.S. income tax law, using §§ 351 and 368.
a. True
b. False
ANSWER: False
RATIONALE: Section 367 can trigger current taxation even in the case of an otherwise tax-deferred reorganization.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

16. The transfer of the assets of a U.S. corporation’s foreign branch to a newly formed foreign corporation is always tax deferred under § 351.
a. True
b. False
ANSWER: False
RATIONALE: Section 367 generally makes a § 351 transfer taxable, with certain exceptions.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

17. “Inbound” and “offshore” asset transfers by a U.S. business can be subject to immediate Federal income taxation under § 367.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

18. A “U.S. shareholder” for purposes of CFC classification is any U.S. person who owns directly, indirectly, and constructively at least 50% of the voting power of a foreign corporation.
a. True
b. False
ANSWER: False
RATIONALE: A “U.S. shareholder” for purposes of CFC classification is any U.S. person who owns directly, indirectly or constructively at least 10% of the voting stock of a foreign corporation.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

19. Twenty unrelated U.S. persons equally own all of the stock of Quigley, a foreign corporation. Quigley is a CFC.
a. True
b. False
ANSWER: False
RATIONALE: If 20 unrelated U.S. persons own a foreign corporation equally, each U.S. person owns only 5% of the stock and none of the U.S. persons is a U.S. shareholder for purposes of CFC classification.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

20. Hendricks Corporation, a domestic corporation, owns 40 percent of Shane Corporation and 55 percent of Ferrell Corporation, both foreign corporations. Ferrell owns the other 60 percent of Shane Corporation. Both Shane and Ferrell are CFCs.
a. True
b. False
ANSWER: True
RATIONALE: Hendricks, a U.S. shareholder under the 10% test, directly owns more than 50% of Ferrell (55%) and, directly and indirectly, owns more than 50% of Shane [direct ownership = 40%, indirect ownership = 33% (60% × 55%)].
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.

21. Kipp, a U.S. shareholder under the CFC provisions, owns 40% of a CFC. If the CFC’s Subpart F income for the taxable year is $200,000, Kipp is taxed on receipt of a constructive dividend of $80,000.
a. True
b. False
ANSWER: True
RATIONALE: U.S. shareholders must include their pro rata share of any Subpart F income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.

22. ForCo, a non-U.S. corporation based in Aldonza, purchases widgets from USCo, Inc., its U.S. parent corporation. The widgets are sold by ForCo to an unrelated foreign corporation in Aldonza. The income from sale of the widgets by ForCo is Subpart F foreign base company sales income.
a. True
b. False
ANSWER: False
RATIONALE: The sales take place in the same country as the CFC.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

23. ForCo, a subsidiary of a U.S. corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany. The income from the sale of widgets is not Subpart F foreign base company sales income.
a. True
b. False
ANSWER: True
RATIONALE: Because ForCo manufactures the widgets, there is no foreign base company sales income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 9-05 – LO: 9-05
NATIONAL STANDARDS: United States – BUSPORG: Comprehension – BUSPORG:Comprehension
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.