Reference no: EM132047351

Questions -

Q1. Hans is a citizen and resident of Argentina. Hans does not hold a green card, and Argentina does not have an income tax treaty with the United States. At the start of Year 1, Hans paid $2.5 million for an apartment building 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 $2.9 million. Hans' adjusted basis in the building at that time was $2.4 million.

What are the United States tax consequences of Hans' United States activities?

Q2. Cocoi is a foreign corporation that produces fine chocolates for sale worldwide. Cocoi markets it chocolates in the United States through a branch sales office located in New York City. During the current year, Cocoi's effectively connected earnings and profits 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 Cocoi'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 Cocoi's stock, and $160,000 of interest to a domestic corporation.

Compute Cocoi's branch profits tax, and determine its branch interest withholding tax obligations. Assume that Cocoi does not reside in a treaty country.

Q3. Vroomco, a foreign corporation, manufactures motorcycles for sale worldwide. Vroomco markets its motorcycles in the United States through Vroomy, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Vroomco also has a creditor interest in Vroomy, such that Vroomy's debt to equity ratio is 3 to 1, and Vroomy makes annual interest payments of $60 million to Vroomco. The results from Vroomco's first year of operations are as follows:

Sales $180 million

Interest income $6 million

Interest expense (paid to Vroomco) $60 million

Depreciation expense ($30 million)

Other operating expenses ($81 million)

Pre-tax income $15 million

Assume the United States corporate tax rate is 35%, and that the applicable tax treaty exempts Vroomco's interest income from United States withholding tax. Compute Vroomy's interest expense deduction.