ExpertMedium1 markMultiple Choice
CPA · Question 15 · Area II: Entity Tax Compliance
A U.S. C Corporation owns 100% of a Foreign Subsidiary. The Foreign Subsidiary earns $100,000 of 'Subpart F income' (passive investment income) in Year 1. It distributes $0 to the U.S. parent. How is this taxed?
A U.S. C Corporation owns 100% of a Foreign Subsidiary. The Foreign Subsidiary earns $100,000 of 'Subpart F income' (passive investment income) in Year 1. It distributes $0 to the U.S. parent. How is this taxed?
Answer options:
A.
The U.S. Corporation recognizes income only when a dividend is paid.
B.
The U.S. Corporation must include the $100,000 in taxable income in Year 1.
C.
The income is exempt from U.S. tax under the participation exemption system.
D.
The U.S. Corporation pays a 10% penalty tax but no income tax.
How to approach this question
Identify 'Subpart F income' as a trigger for immediate taxation. It pierces the corporate veil of the foreign sub for tax purposes.
Full Answer
B.The U.S. Corporation must include the $100,000 in taxable income in Year 1.✓ Correct
The U.S. Corporation must include the $100,000 in taxable income in Year 1.
Under IRC §951(a), a U.S. shareholder of a Controlled Foreign Corporation (CFC) must include in gross income their pro rata share of the CFC's Subpart F income for the year, regardless of whether it is distributed.
Common mistakes
Applying the general rule of deferral to Subpart F income.
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