ExpertMedium1 markMultiple Choice
CPA · Question 30 · Area II: Entity Tax Compliance
US Co owns 100% of Foreign Co (a CFC). Foreign Co earns $100,000 of interest income (Subpart F income) and has no other income. Foreign Co distributes nothing. What is the tax consequence to US Co?
US Co owns 100% of Foreign Co (a CFC). Foreign Co earns $100,000 of interest income (Subpart F income) and has no other income. Foreign Co distributes nothing. What is the tax consequence to US Co?
Answer options:
A.
No tax until repatriation.
B.
US Co recognizes $100,000 of income currently.
C.
US Co recognizes $50,000 (GILTI deduction applies).
D.
Foreign Co pays U.S. tax directly.
How to approach this question
Identify Subpart F income (passive income like interest). It is taxable immediately to the U.S. shareholder regardless of distribution.
Full Answer
B.US Co recognizes $100,000 of income currently.✓ Correct
IRC §951(a). A U.S. shareholder of a CFC must include in gross income their pro rata share of the CFC's Subpart F income (which includes passive interest income) for the year, regardless of whether it is distributed.
Common mistakes
Thinking deferral applies until cash is received.
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