Trace, Ltd., a foreign corporation, operates a trade or business in the United S

Question

Trace, Ltd., a foreign corporation, operates a trade or business in the United States. Trace’s U.S.-source income effectively connected with this trade or business is $800,000 for the current year. Trace’s current-year E & P is $600,000. Trace’s net U.S. equity was $8.2 million at the beginning of the year and $8.6 million at year-end. Trace is a resident in a country that has no income tax treaty with the United States. Prepare a letter to Tanner Martin, Trace’s Tax VP, reporting Trace’s branch profits tax liability for the current year, along with at least one planning idea for reducing the branch profits tax.

Explanation / Answer

(Amount in 000)

ECI                                                $ 800

ECEP                                       (a)    600

Ending USNE                                 8600

Beginning USNE                             8200

Increase in USNE                     (b)    400

DEA       ((a) – (b))                            200

BPT                        (200 x 30%)      $   60

Total Tax Burden                           $ 260

Idea:Have the corporation invest in securities generating capital   gains. Since the accumulated earnings tax only falls on taxable income, the corporation should invest in securities, the sale of which generates capital gains.

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