Accounting Taxation Related Problems

Cholati is a foreign corporation that produces
fi ne chocolates for sale worldwide. Cholati markets it chocolates in
the United States through a branch sales offi ce located in New York City.
During the current year, Cholati’s effectively connected earnings and profi ts
are $3 million, and its U.S. net equity is $6 million at the beginning
of the year, and $4 million at the end of the year. In addition, a
review of Cholati’s interest expense account indicates that it paid
$440,000 of portfolio interest to an unrelated foreign corporation, $200,000
of interest to a foreign corporation which owns 15% of the combined voting
power of Cholati’s stock, and $160,000 of interest to a domestic
corporation.
Compute Cholati’s branch profi ts tax, and
determine its branch interest withholding tax obligations. Assume that
Cholati does not reside in a treaty country.
2. A foreign corporation can structure its U.S. operations
as either a branch or a subsidiary. What are the tax advantages of
operating in the United States through a separately incorporated
subsidiary? What are the tax advantages of operating in the United States
through an unincorporated branch? What general business factors should be
considered when choosing between the branch and subsidiary forms of
doing business in the United States?
Wheelco, a foreign corporation, manufactures
motorcycles for sale worldwide. Wheelco
markets its motorcycles in the United States through Wheely, a
wholly-owned U.S. marketing subsidiary that derives all of its income
from U.S. business operations. Wheelco also has a creditor interest in
Wheely, such that Wheely’s debt to equity ratio is 3 to 1, and Wheely
makes annual interest payments of $60 million to Wheelco. The results from
Wheely’s fi rst year of operations are as follows:
Sales $180 million
Interest income $6 million
Interest expense (paid to Wheelco) ($60 million)
Depreciation expense ($30 million)
Other operating expenses ($81 million)
Pre-tax income $15 million
Assume the U.S. corporate tax rate is 35%, and
that the applicable tax treaty exempts Wheelco’s interest income from
U.S. withholding tax. Compute Wheely’s interest expense deduction.Hans, a citizen and resident of Argentina, is a
retired bank executive. Hans does not hold a green card. At the start of
Year 1, Hans paid $2.5 million for a 20-unit apartment complex located
in the suburbs of Washington, D.C. Hans does not actively manage the building,
but rather leases it to an unrelated property management company that
subleases the building to the tenants. During Year 1, Hans had rental
income of $300,000 and operating expenses (depreciation, interest,
insurance, etc.) of $220,000. On the advice of his accountant, Hans made
a Code Sec. 871(d) election in Year 1. At the start of Year 2, Hans sold
the building for $350,000. Hans’ adjusted basis in the building at that
time was $290,000. What are the U.S. tax consequences of Hans’ U.S. activities?