Question: 1
In accordance to the international
laws and regulations regarding sources of income and interest, the interest
amount paid through the foreign commercial banks or any other saving financial
institute are to be considered as the foreign source income (Law.cornell.edu, 2019). while if more than
80% of the total gross income or profit generated by a US based corporation is supported
by the foreign source of income (in the last 3 year before that corporation
took loan from the bank or any other foreign financial institute) then the
source of interest will be considered as foreign source of interest (Bankman,
Shaviro, Stark, & Kleinbard, 2018). Somehow, the
remaining 20% or less income of that corporation is not the foreign source.
In this case of Southcal US based
corporation more than 80% (as mentioned 85%) of the total revenue or income is
generated by the foreign source of trade and only remaining 15% income
attributed to the US sources (Law.cornell.edu, 2019). According to this,
source of interest amount paid to the bank of Belgian is a foreign source
income. Even when the amount of interest is paid by the US Corporation (Bankman,
Shaviro, Stark, & Kleinbard, 2018). But because the source
used to pay the interest amount is a Bank in New York therefore source of
interest payment will be considered as US source rather than foreign. Basically, geographical location matters in
determining the source of income but only when the amount is paid and from
where it was generated.
Furthermore, if in case US
Corporation directly pay that interest amount to the Brussels office of the Belgian
Bank then we will consider that it foreign interest source. Because the income
was attributed by foreign sources and the financial institute Belgian Bank is a
foreign bank (Law.cornell.edu, 2019). This is how the
whole source changes just by change in the geographical location of financial
institute. Somehow, the third scenario presented in the question is about shares
of the Southcal Corporation (Bankman, Shaviro, Stark, &
Kleinbard, 2018).
If all the share of this
corporation is owned by the residents or natives of the Belgium and company is
running operations in US then it can be considered as domestic source (as under
section 884 (f)(1) it would be considered as the amount is paid by the domestic
business) (Law.cornell.edu, 2019). While if operations
are not US based and income is generated from foreign trade sources then the
situation is different. In such situation, 85% of interest amount paid by the
Southcal Corporation will be considered as interest paid from foreign source (Zipursky
& Dorf, 2010).
While the remaining 15% interest will be considered as paid by domestic
source.
Question: 2
French Corporation Income
Companies working in different
geographical regions face several problems regarding dividend and income
sourcing. In this question Laballe corporation is presented as the corporation
working in two different countries France and United States (Larkins,
2003).
In this international business problems is related to the characterization of
the all or a portion of dividend as US source income. Section 861 (a) provide
information regarding dividends of the corporations that generate income from the
domestic, foreign, and mixed sourcing. In accordance to this section dividend
generated from the US based corporations should be attributed to US or domestic
source of income. (Bankman, Shaviro, Stark, & Kleinbard, 2018)While on the other
hand if operations are supported by the foreign corporations than the right way
to treat that income is to identity it as foreign spruce income dividend.
While foreign corporations that has
business in US market will have different conditions. As such organizations
will treat their dividend as US source if more than 25% of the total generated
gross income is from US business in the 4 year duration (4 taxable fiscal
year). Thus, in the light of these rules and regulations it is clear that
dividend generated by the Labelle Corporation will be treated as US source of
income (Zipursky & Dorf, 2010). Because Labelle
Company is generating 35% net gains or profit from US based operations from
preceding four years.
Furthermore, there is a criteria
introduced by these rules and regulations under which company can characterize
all or a portion as US source income while paying dividend to the French
holding company (Law.cornell.edu, 2019). for this company
have to calculate percentage of the income or net gains supported by the US
business and percentage of income generated by the operation held in France. Then
company will set out the base period. Then on the basis of these percentage
company can find out the desired information about dividend and source of
income (Larkins, 2003). Somehow, company
can get more information about dividend from mixed sourcing through following
section related to the dividend and income sourcing by US regulatory institutes
861 (a) (2) (B).
Question: 3
The operations under contract with
Canadian were based on 25 working days in the Canada while on the other hand
employees worked in the United States for 50 working days. Considering this
information it is clear that company will have to treat income and pay taxes
according to percentage of time spent in each country (Bankman,
Shaviro, Stark, & Kleinbard, 2018). But in this case
company want to take leverage of this situation. Management of Galaxy
corporation want to maximize the part of their income identified as foreign
source income as through this they will have to pay taxes to the foreign
government (Law.cornell.edu, 2019). In this case
foreign government is Canadian government and Galaxy Corporation has tax
exemption from Canadian government.
Therefore by maximizing foreign source
income they can reduce tax expense to promote their overall net income. But
there is a question how much of their overall gross income (income after
deducting all cost of sale or CGS) can be treated as foreign source of gross
income? (Law.cornell.edu, 2019)According to the
national level tax policy and unilateral relief of United States, domestic
corporations can get three major options for tax payment.
At the first corporation can get
exemption from the taxes due on the income generated from domestic operations
under a territorial system (only applicable for foreign source country tax). While
the second option is “credit for foreign tax paid” (Bankman,
Shaviro, Stark, & Kleinbard, 2018). Galaxy Corporation can follow up the most
appropriate tax deduction or mitigation rule from these but for this
corporation has to declare their income as foreign source income. Somehow,
company can only get tax exemption on the income that they will declare as
foreign source and for this they have to provide evidence that they operations
are supported by the Canadian country (Zipursky & Dorf, 2010).
Question: 4
Cosmos Corporation is a US based
company that is providing services in two different countries Paris and United
States. Some of the operations are continued in Paris while other in United
States for different services including manufacturing, sales and leasing.
Corporation leases a computer to their main office of Paris Branch for the
purpose to get rental income (Zipursky & Dorf, 2010). As asset relates to
two different geographical locations therefore question is about the source of rental
income. There are some rules and regulations by following which company can
easily determine whether source of income is domestic or foreign. ¶ 2015
elaborate on the rentals and royalties of the companies working in US or
foreign countries (Law.cornell.edu, 2019).
According to the rules and
regulations of rentals and royalties the source of rental income can be only
determined by the location or place where that property or asset is used. 861
(a) (4) and 862 (a) (4). According to this asset can be a land, car, trademark,
patents, machinery, goodwill, inventory, and office equipment (Bankman,
Shaviro, Stark, & Kleinbard, 2018). While the
intangible asset such as trademarks and goodwill will relate to the country in
which it derives legal protection. But these rules will applies on these
intangible assets when produces or services will be sold or offered in the US
market under these trademark. Somehow, computer is not an intangible asset
therefore ruling principles will apply on its rental income before purchase or
sales (Larkins, 2003). Computer is an
office equipment therefore rental income of computer will be also determined according
to these rules and regulations. 861 (a) (4) and 862 (a) (4). Thus in the light
of this it is clear that rental income will be treated apportioned between
foreign branch and domestic branch (Law.cornell.edu, 2019). Somehow, if that
computer will remain in use of Paris branch for a fiscal year then the whole
rental income will be considered as foreign source income as asset is in use of
foreign branch of Cosmos Corporation.
Question: 5
Royalty and rental income has same
treatment as both falls under same section. Ruling principles related to the
rentals and royalties clearly describe that income generated from the
intangible asset and tangible assets of company will be treated as domestic source
income or foreign source income on the basis of geographical location at which
these assets are used, sold, and resale (Bankman, Shaviro, Stark, &
Kleinbard, 2018).
In this case Bolivar is a Panamanian Corporation that works in two different
countries and states. Somehow, according to the situation presented in
question, Bolivar Corporation has ownership right on the US patent that they
granted to the Bermuda Corporation 861 (a) (4) and 862 (a) (4).
Bolivar Corporation licensed that
patent to trimmingham in exchange of profit generated by the net sales of their
operations. Considering this situation products sales of Bermuda Corporation
are incorporating by the patent of Bolivar Corporation therefore royalties are
due to the Bermuda Corporation. Trimingham Corporation will pay royalties to
the Bolivar Corporation as foreign source income of Bolivar Corporation. In
accordance to the ruling principle of royalties Trimingham Corporation is
selling products in their market by the use of legally protected patent of
Bolivar Corporation therefore income generated from the operations of
Trimingham is not domestic for Bolivar Corporation. 861 (a) (4) and 862 (a)
(4). The geographical location of use is
different from the location or country that has ownership rights. Royalty could
be considered as domestic source only when sales were generated in the United
States. But in this case sales incorporating by patent are outside the United
States therefore we cannot consider these royalties as domestic source even
when the ownership and license of this patent is US based (as owner of this
patent is Bolivar Corporation that belongs to the United States).
Question: 6
Revenue ruling describe that source
of income can be determined by the place of initial sales of a good or product.
Particularly when it comes to the tangible assets sales the income will be
treated on the basis of ownership rights and geographical location of sales (Bankman,
Shaviro, Stark, & Kleinbard, 2018). Suncare is parent
company of the Soin De Soleil therefore when Suncare will purchase or sale
product in the Paris with the title of Soin De Sohiel corporation it would be
treated as domestic sales or purchase (Larkins, 2003). Considering this
factor it is all clear that income generated from such purchase or sales
operations will be also treated as domestic income source rather than foreign
source income.
Now in accordance to this if
Suncare Corporation is going to going to sell products through unrelated
distributors in the market of Europe then revenue generated from these sales
will be considered as foreign source income for the company (Bankman,
Shaviro, Stark, & Kleinbard, 2018). Somehow, if company
will purchase a tangible asset for the Soin De Soleil the income generated from
this activity will be realized in different way. Company purchased the asset in
United States (domestic location) but sold that computer for treasurer office
in Paris (a foreign location or country) (Law.cornell.edu, 2019).
According to this information it
is clear that income should be treated as foreign source for Suncare
Corporation but domestic for the Soin De Soleil Corporation. Somehow, if product
sold or purchases are made by the Soin De Soleil Corporation then that income
can be considered as domestic as Suncare corporation has ownership right on the
Soin De Soleil because of the consolidation of their 100% shares (Bankman,
Shaviro, Stark, & Kleinbard, 2018). While income cannot
be considered as domestic source income for Suncare Corporation if Soin De
Soleil was fully involved in the purchase and sale of asset (computer) but it
was not wholly consolidated or merged in Suncare Corporation as in such situation
ownership rights goes to other domestic or foreign shareholders also that could
change the situation. Section 861 (a) (4) and 862 (a) (4) provide detailed
information about ruling principles that can be studied by the Sunncare
Corporation to get further understanding about these domestic or foreign source
of revenue.
Question: 7
Fabulous sold its Patent to the
German corporation entitled as Erfurt to sell out their products in the German
market or the domestic market of United States under this patent intervention (Law.cornell.edu, 2019). In accordance to
the question the original cost of patent was $400000 while amortization
adjustment relates to $200000. Somehow, patent is sold for only 1 million that
will be paid to the Fabulous corporation in the form of installments (as
mentioned in the question purchaser will pay amount in 10 equal installment)
while cost and adjustments will be deducted from the German source taxable income (Bankman,
Shaviro, Stark, & Kleinbard, 2018).
In accordance to this information company have
to find out the source of income first to calculate taxes due on German source
income. In case company cast sales prices as royalty then Fabulous company will
get that income has foreign source income while the remaining Erfurt will
consider that remaining income (after subtracting the royalty of Fabulous
corporation) as domestic (German source based income). (Larkins,
2003)
Thus in this situation only 5% of total gross income (generated by
incorporating that patented invention) will be considered as foreign royalty while
remaining will be realized as domestic source income. (Law.cornell.edu, 2019) Somehow, if Fabulous
Company sell out its German trademark to the Erfurt Company in return of 5
million dollar in five year payback period (through installments) with 10%
interest then situation will be different. Furthermore, income source will be
directly measured for the fabulous corporation through the use of percentages
of sales incorporating by the patent invention of the foreign corporation as
fabulous corporation in this case. Section
865 (d) (1) (B) provide information about these intangible trademark sales on
installment in return of royalties (Law.cornell.edu, 2019). Considering the
ruling principles for intangible asset sales and amortization of tangible or
intangible assets in foreign countries, income after paying installment and
interest to the Fabulous Corporation will be considered as domestic source
income if Erfurt Corporation has legal rights of ownership for that intangible
asset (patent) (Bankman, Shaviro, Stark, &
Kleinbard, 2018).
While if still Fabulous Corporation has legal rights of ownership then fabulous
corporation will consider this income as foreign source income (Larkins,
2003).
Question: 8
In this problem patent is not
owned by any foreign company. In fact it is sold by another corporation working
in the same domestic market therefore gain or net income generated from
incorporating this patent invention will be fully domestic source income for
the corporation working in the Germany. Income will be realized as German
source-based income. Moreover, tax exemption here does not affect the source of
income as tax is expense not the source of revenue for the corporation (Bankman,
Shaviro, Stark, & Kleinbard, 2018). Tax exemption or
tax expense will only effect the profitability of the company but income source
will remain all the same for both situations. While if it was not patent but
inventory property then situation will get change a little bit (Larkins,
2003).
According to the inventory property ruling principle (¶ 2115) income generated
from the sales or purchase of inventory will be treated directly according to
the situs of the inventory at transfer time. In inventory ruling it is also
entitled as “Passage of title”. Section 861 (a) (6), 865 (b), and 862 (a) (6)
provide information about inventory property and income source realization (Law.cornell.edu, 2019). According to this
ruling principle company will realize income on the basis of time of purchase
rather than location of incorporating sales. Section 861 (a) (6), 865 (b), and
862 (a) (6). The third situation presented in the problem is about sale of
patent as royalty-like price. In case patent is sold for royalty like price
then situation will get change from the inventory property as company will
realize income as domestic income source but only when the sales are made in
the domestic market.
Question: 9
According to the law and ruling of
revenue the income should be realized from the source when initial sale of
goods or products are made. Considering this ruling income would be realized
from the initial sales of the truck. Fabulous purchased that trucks in the
United states that indicate that first sale are from United States therefore
income will be realized as domestic income for Fabulous corporation (Law.cornell.edu, 2019). Somehow, in this
case situation is not as simple. It also includes other factors that should be
taken into considerations as the trucks are resold to the foreign purchaser
that can be a foreign resident also. Somehow, in case the foreign purchaser is
a foreign resident then Fabulous Company will consider it as domestic income
source because sales and purchases are done in the same geographical location
or country (Lieuallen, 2009).
Question: 10
If Modern Tool A.G is working in
foreign countries (as Germany and France) from more than 10 years and more than
40% of gross income generated by this company is from these countries then we
can declare that income source is both foreign and domestic as income generated
from business in Germany is domestic of the company while income of France
business is foreign income. Considering this gain is foreign source income for US
based company but domestic for Germany based company.
References of US Corporation interest payment
Bankman, J., Shaviro, D. N., Stark, K. J., &
Kleinbard, E. D. (2018). Federal Income Taxation. Wolters Kluwer Law
& Business. Retrieved 02 19, 2019
Larkins, E. R. (2003). International Applications
of U.S. Income Tax Law: Inbound and Outbound Transactions. John Wiley
& Sons. Retrieved 02 19, 2019
Law.cornell.edu. (2019). 26 U.S. Code § 863.
Special rules for determining source . Retrieved from
www.law.cornell.edu: https://www.law.cornell.edu/uscode/text/26/863
Law.cornell.edu. (2019). 26 U.S. Code § 864.
Definitions and special rules. Retrieved 02 19, 2019, from www.law.cornell.edu:
https://www.law.cornell.edu/uscode/text/26/864
Lieuallen, G. G. (2009). Basic Federal Income
Tax. Aspen Publishers Online. Retrieved 02 19, 2019
Zipursky, B. C., & Dorf, M. C. (2010). The
Oxford Introductions to U.S. Law Income Tax Law. Oxford University Press.
Retrieved 02 19, 2019
