galatica corp 1. Erasmus Corporation, a calendar-year taxpayer, has one sharehol
ID: 2510633 • Letter: G
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galatica corp 1. Erasmus Corporation, a calendar-year taxpayer, has one shareholder, Ernest. Emest has a $4,000 basis in his stock. Erasmus has current E&P; of $20,000 at year end and accumulated E&P; of $10,000. On June 1, Erasmus makes a single distribution of $24,000 to Ernest. What are the income tax consequences? Galatica Corporation, a calendar-year taxpayer, has one shareholder, Golly. Golly has a $4,000 basis in her stock. Galatica has current E&P; of $20,000 at year end and accumulated E&P; of $10,000. On June 1, Galatica makes a single distribution of $32,000 to Golly. What are the income tax consequences? 2. Terre Corporation, a calendar-year taxpayer, has one shareholder, Tom. Tom has a $4,000 basis in his stock. Terre has current E&P; of $20,000 at year end and accumulated E&P; of $10,000. On June 1, Terre makes a single distribution of $35,000 to Tom. What are the income tax consequences? 3. Fang Corp, a calendar year taxpayer, has one shareholder, Fanny. Fanny has a $7,000 basis in her stock. Fang has a deficit of $10,000 in current E&P;, and has accumulated E&P; of $20,000. On July 1, Fang makes a single distribution of $25,000 to Fanny. What are the income tax consequences? 4. Hubert Corporation has two equal shareholders, Hector and Irene. Hector has a basis of $50,000 in his shares. Irene has a basis of $20,000 in her shares. Hubert Corporation has 5.Explanation / Answer
Galatica corporation Shareholder : Golly Stock holding by Golly 4000 Current E & P 20000 Accumulated E & P 10000 Total E & P 30000 Maximum E & P can be distributed is 32000 The general rule is that a foreign corporation's income is not taxed in the United States until the foreign corporation pays a dividend to its U.S. shareholder(s). The foreign corporation's dividend income is then subject to tax in the hands of its U.S. shareholder(s). Accordingly, a foreign corporation's earnings from abroad may remain outside of the U.S. tax net for extended periods (or perhaps indefinitely) and be redeployed globally without the burden of U.S. federal income tax. The benefit of deferred U.S. federal income taxation of a foreign corporation's earnings until a dividend is paid to its U.S. shareholder is referred to as "U.S. tax deferral." Several rules curtail U.S. tax deferral. These rules include the CFC regime and the PFIC regime. These regimes look to prevent U.S. tax deferral on certain types of foreign earnings in situations perceived as abusive (e.g., "portable" or "passive" income). A foreign corporation generally is a CFC when more than 50% of its stock (by vote or value) is owned by U.S. shareholders. "U.S. shareholder" has a specific meaning under the CFC regime. A U.S. shareholder is a U.S. person that owns directly or indirectly (including by attribution) 10% or more of the total combined voting power of all classes of stock entitled to vote in the foreign corporation. The CFC regime prevents U.S. tax deferral by requiring a U.S. shareholder to include in current income its pro rata share of certain types of income (e.g., Subpart F income, Sec. 956 income) as a deemed dividend. This deemed dividend income is often referred to as "phantom income," as the U.S. shareholder has a U.S. income inclusion with no corresponding receipt of cash. Importantly, the U.S. shareholder's deemed dividend inclusion is limited to the foreign corporation's E&P. For example, Subpart F income is limited to current E&P (Sec. 952(c)(1)(A)), and Sec. 956 income is limited to "applicable earnings," which generally includes both current and accumulated earnings (Sec. 956(b)(1)). A foreign corporation generally is a PFIC if 75% or more of its gross income is of certain types of passive income, or 50% or more of its average percentage of assets consists of assets that produce, or are held for the production of, this passive income. Under the PFIC regime, a U.S. shareholder is a U.S. person that owns any share(s) of stock in a foreign corporation classified as a PFIC. The PFIC regime's default "excess distribution" rule is penal and is intended to approximate the tax that would have been imposed if the income had been distributed currently from the PFIC. Excess distributions include certain dividends and/or gains from dispositions. These excess distributions are taxed at the highest ordinary income tax rates in effect for each year (except the current year), and the Code imposes interest on the deemed taxes from prior years. The PFIC regime includes the QEF rules. If properly elected by the U.S. shareholder, the QEF rules cause a U.S. shareholder to include in income its pro rata share of the PFIC's annual net capital gain income and ordinary earnings. However, the U.S. shareholder's pro rata inclusion is again limited by the PFIC's E&P. The computation of indirect foreign tax credits from a foreign corporation to a 10% or greater U.S. corporate shareholder also depends upon the proper calculation of the foreign corporation's E&P. For example, the computation of the indirect foreign tax credits carried with a dividend from a corporation to its 10% U.S. shareholder is based pro rata on the dividend amount as compared with the E&P. The CFC regime, the QEF rules under the PFIC regime, and the foreign tax credit regime generally share a key distinctive trait—these regimes are all computed/limited based on a foreign corporation's E&P. To put it another way, before the U.S. federal income tax consequences resulting from one of the international tax regimes can be determined, the foreign corporation's current and accumulated E&P must be understood and properly computed. So here shareholder Golly will be taxed on the distribution of 30000 as normal distribution of earning and profit, and on 2000 taxed at the highest ordinary income tax rates in effect for each year (except the current year), and the Code imposes interest on the deemed taxes from prior years.
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