Question

During the current year, Fco1 has total gross income of $10 million, including $400,000 of interest income that qualifies as foreign personal holding company income, and $9.6 million of gross income from the sale of goods that Fco1 manufactured in its country of incorporation.

Fco2's current year earnings and profits are $30 million, which consists of $40 million of foreign personal holding company income and a $10 million loss from sales of goods that Fco2 manufactured in its country of incorporation.

Fco3 owns 100% of Fco4. Fco3 is incorporated in Country P, whereas Fco4 is incorporated in Country Q. During the current year, Fco3 derives $10 million of interest income on a loan to Fco4, and also receives $15 million of dividends from Fco4. Fco4 is engaged in foreign manufacturing activities in Country Q, and all of Fco4's assets are located in Q. Fco4 has no Subpart F income.

Determine the amount of Subpart F income, if any, that each controlled foreign corporation must report; break up answers by subparts.

Answer 1

Solution:-

The interest income is not treated as subpart F income if it is

1) less than 1 million and

2) less than 5% of gross income

Interest is 400000 < 1000000 and

Gross income 4% (400000 / 1000000)

So the interest income is not treated as subpart F income in this case.

The interest Income is foreign personal holding company income. The gross income from the sale of inventory is not foreign base company sales income because F2 produced the inventory in its country of incorporation, under the inclusion rule of 954 (b)(3)(b), all gross income as subpart F income if gross subpart F Income is more than 70% of total Gross income.

In given case 75%( 30million /40 million) of gross income

Therefore, F2's entire gross income of 30 million is the subpart of F Income

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