Reference no: EM132969931

Question - On January 1 of year 1, Sam, a nonresident alien individual, Molly, also a nonresident alien individual, and Widgets, Inc., a U.S. corporation, organize a new foreign corporation, Foreign Base Company, Inc., under the laws of Ireland. Sam contributes $30,000 cash to the new foreign corporation and receives 30 shares of its stock. Molly also contributes $30,000 and receives 30 shares of stock. Widgets, Inc. contributes $40,000 and receives 40 shares of stock. On August 8 of year 1, Molly acquires a green card and becomes a lawful permanent resident of the United States.

Foreign Base Company, Inc. has net income (after payment of foreign income taxes) of $400,000 for year 1. One half of this amount (i.e., $200,000) constitutes subpart F income within the meaning of section 952. (Foreign Base Company, Inc. paid $80,000 in foreign income taxes to Ireland on its pre-foreign tax net income of $480,000. None of Foreign Base Company, Inc.'s income was subject to U.S. tax under sections 881 or 882.) Foreign Base Company, Inc. makes no dividend distributions during year 1.

What are the U.S. income tax consequences to the shareholders of Foreign Base Company, Inc. for year 1 under the subpart F provisions?