Reference no: EM131987124

Questions -

Q1. Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheely's debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheely's first year of operations are as follows:

Sales - $180 million

Interest income - $6 million

Interest expense (paid to Wheelco) - $6 million

Depreciation expense - ($30 million)

Other operating expenses - ($81 million)

Pre-tax income - $15 million

Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelco's interest income from U.S. withholding tax. Compute Wheely's interest expense deduction.

Q2. USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco's financial statements appear as follows:

BALANCE SHEET

Assets Liabilities & Owners' Equity

Cash $100

Receivables $500

Notes Payable $400

Owner's Equity $200

INCOME STATEMENT

Gross Income $500

Administrative Expenses $350

Interest Expense $100

The interest expense of $100 arises from a notes payable from USAco to FORco.

What is the maximum amount of interest USAco may deduct on its U.S. return?