ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area II: Entity Tax Compliance
A U.S. C Corporation owns 100% of a Foreign Corporation. The Foreign Corporation earns $500,000 of Subpart F income (passive investment income) in Year 1. It distributes $0 to the U.S. parent. What is the U.S. tax consequence?
A U.S. C Corporation owns 100% of a Foreign Corporation. The Foreign Corporation earns $500,000 of Subpart F income (passive investment income) in Year 1. It distributes $0 to the U.S. parent. What is the U.S. tax consequence?
Answer options:
A.
No tax until repatriation (distribution).
B.
The U.S. Corporation must include $500,000 in taxable income in Year 1.
C.
The U.S. Corporation includes 50% ($250,000) under the GILTI rules.
D.
The income is exempt under the participation exemption system.
How to approach this question
Identify Subpart F income (passive/moveable). Rule: Immediate inclusion for US Shareholder of CFC.
Full Answer
B.The U.S. Corporation must include $500,000 in taxable income in Year 1.✓ Correct
IRC §951(a). A U.S. shareholder of a Controlled Foreign Corporation (CFC) must include its pro rata share of Subpart F income in gross income currently, regardless of whether it is distributed.
Common mistakes
Assuming all foreign income is deferred until distributed.
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