13-9 13-9 13-9 teo, except that C Corporation owns 20% of D Corporation Form of

ID: 2589407 • Letter: 1

Question

13-9

13-9

teo, except that C Corporation owns 20% of D Corporation Form of Organization. AC Corporation intends to sell some of its products to severa rather than 60 percent. 13 Europe an customers. AC will establish a foreign manufacturing operation after the ears. Start-up costs will result in losses for two years, but profts are ex- pected in all future years. What form of organization should AC use and why? 13-9 Possessions Corporation. List and discuss the tax advantages available to a PC 13-10 Code § 482. a. Why is § 482 important to a U.S.-based multinational corporation? b. Are all transactions between the U.S. parent corporation and its subsidiaries subject to § 482? If an IRS audit results in a § 482 shift of income to the U.S. parent corporation, what is the effect on the foreign tax credit? c. 13-11 Regulation § 1.861-8. Why is Reg § 1.861-8 important to a US-based multinational corporation? If an IRS audit results in a Reg. § 1.861-8 shift of taxable income to the US. parent corporation, what is the effect on the foreign tax credit? a. b. the foreign tax authorities disallow a Reg. § 1.861-8 allocation to the foreign subsidiary? c. What is the effect on the U.S. parent corporation and foreign subsidiary if 13-12 Foreign Currency Gains and Losses. a. How are foreign currency gains and losses calculated? b. Are foreign currency gains and losses taxable as ordinary or capital? f What effect does blocked currency have on recognition of foreign currenc II S taxation are classifie

Explanation / Answer

Possessions Corporation: A type of corporation permitted under the US tax code whose branch operation in a US possession can obtain tax benefits as though it were operating as a foreign subsidiary. It is also known as 936 corporations.

They are U.S. chartered companies:

Tax Advantages:

1)Except as otherwise provided in 936 section, there shall be allowed as a credit against the tax imposed by an amount equal to the portion of the tax which is attributable to the sum of—

(A) the taxable income, from sources without the United States, from—

(B) the qualified possession source investment income.

2)Conditions which must be satisfied: If a domestic corporation elects the application of this section and if the conditions of both subparagraph (A) and subparagraph (B) are satisfied-

(A) 3-year period- If 80 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States (determined without regard to subsections (f) and (g) of section 904); and

(B)Trade or Business- If 75 percent or more of the gross income of such domestic corporation for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States.

3)Credit not allowed against certain taxes:

The credit provided by paragraph (1) shall not be allowed against the tax imposed by—

4)Limitations on credit for active business income:

(A) In general: The amount of the credit determined under paragraph (1) for any taxable year with respect to income referred to in subparagraph (A) thereof shall not exceed the sum of the following amounts:

1) 60 percent of the sum of—

2) The sum of—

3) If the possession corporation does not have an election to use the method for the taxable year, the amount of qualified possession income taxes for the taxable year allocable to non-sheltered income.

(B)Election to take reduced credit-

1)In general: If an election under this subparagraph applies to a possession corporation for any taxable year—

Notwithstanding subclause (I), a possession corporation to which an election under this subparagraph applies shall be entitled to the benefits of subsection (i)(3)(B) for taxes allocable (on a pro rata basis) to taxable income the tax on which is not offset by reason of this subparagraph.

2) Applicable percentage-

The term “applicable percentage” means the percentage determined in accordance with the following table:

In the case of taxable years

beginning in:

The percentage is:

1994

1995

1996

1997

1998 and thereafter

3)Election-