Question

Boomerang Corporation, a New Zealand corporation, is owned by the following unrelated persons: 40 percent by a U.S. corporation, 15 percent by a U.S. individual, and 45 percent by an Australian corporation. During the year, Boomerang earned $3,000,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Boomerang?

Multiple Choice Boomerang is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of $1,200,000 and $450,000, respectively. Boomerang is a CFC and only the U.S. corporation will have a deemed dividend of $1,200,000. Boomerang is a CFC and the U.S. corporation, U.S. individual, and Australian corporation will have a deemed dividend of $1,200,000, $450,000, and $1,350,000, respectively. Boomerang is not a CFC and none of the shareholders will have a deemed dividend under subpart F.

Answer 1

Answer - Boomerang is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of $1,200,000 and $450,000, respectively.

Explanation -

A foreign corporation is called a controlled foreign corporation (CFC) for a particular year if, on any day during such year, U.S. Shareholders own more than 50% of total combined voting power of all classes of the stock, or
total value of the stock. In the given question, 55% of U.S. shareholders are there in the boomerang corporation, hence it's a CFC

Sub part F income is applicable to every person who is a United States shareholder. As per Subpart F, every U.S. shareholder of the CFC is considered to have received a pro rata share of company’s earning and profits that are attributed to the Subpart F income, it doesn't matter whether an actual distribution was made. Both U.S. corporation and U.S. individual will have received a deemed dividend, whether or not dividends were actually paid. To avoid double taxation any taxable dividends will be reduced by the deemed distribution.