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:

No tax until repatriation (distribution).

The U.S. Corporation must include $500,000 in taxable income in Year 1.

The U.S. Corporation includes 50% ($250,000) under the GILTI rules.

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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