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When a U.S. person is in an excess credit position, the non-creditable foreign income taxes increase the total tax burden on foreign-source income beyond what it would have been if only the United States had taxed that income. Identify two strategies for reducing excess credits.
USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco’s financial statements appear as follows:
In Cook v. Tait, 265 U.S. 47 (1924), what was the taxpayer’s argument for why he should not be subject to U.S. federal income tax? Why did the Supreme Court reject his argument?
USAco is a domestic corporation that manufactures products in the U.S. for distribution in the U.S. and abroad. During the current year, USAco derives a pre-tax profit of $10 million, which includes $1 million of foreign-source income derived from a country X sales office that is considered an unincorporated branch for U.S. tax purposes. The country X corporate income tax rate is 50% and the U.S. tax rate is 35%.
Engco, a domestic corporation, produces industrial engines at its U.S. plant for sale in the United States and Canada. Engco also has a plant in Canada that performs the final stages of production with respect to the engines sold in Canada. All of the output of the Canadian plant is sold in Canada, whereas only one-third of the output of the U.S. plant is shipped to Canada. The Canadian operation is classified as a branch for U.S. tax purposes. During the current year, Engco’s total sales to Canadian customers were $10 million, and the related cost of goods sold is $7 million. The average value of property, plant, and equipment is $30 million at the U.S. plant, and $5 million at the Canadian plant. Engco sells all goods with title passing at the Canadian plant in the case of Canadian sales and at the U.S. plant in the case of U.S. sales. Pursco is a domestic corporation that distributes scientific equipment worldwide. During the current year, Pursco had $100 million of sales, a gross profit of $40 million, and incurred $30 million of selling, general and administrative expenses (SG&A), for taxable income of $10 million. Pursco’s sales include $20 million of sales to foreign customers. The gross profit on these foreign sales was $10 million. Pursco transferred title abroad on all foreign sales, and therefore the entire $10 million is classified as foreign-source income. A time management survey was recently completed, and indicates that employees devote 90% of their time to the company’s domestic operations and 10% to foreign operations. Compensation expenses account for $20 million of the $30 million of total SG&A expenses. Assume Pursco’s $10 million of taxable income is subject to U.S. tax at a 35% rate.