Question

Dividends received from a domestic corporation are totally sourced to the U.S. if:

a.         the corporation earns at least 80% of its gross income over the immediately preceding three tax years from the active conduct of a U.S. trade or business.

b.         the corporation earns at least 25% of its gross income over the immediately preceding three tax years from the active conduct of a U.S. trade or business.

c.         the corporation earns no more than 80% of its gross income over the immediately preceding three tax years from the active conduct of a foreign trade or business.

d.         the corporation earns no more than 25% of its gross income over the immediately preceding three tax years from the active conduct of a foreign trade or business.

e.         In all of the above cases.

Answer 1

Correct answer is E.

Dividends will be sourced to U.S. if it is paid by a U.S. domestic corporation as per Sec. 861(a)(2).

The source of dividend income from a foreign corporation will depend upon whether the corporation earns no more than 25% of its gross income over the immediately preceding three tax years from the active conduct of a foreign business ie, at least 25 percent ore more of its gross income is effectively connected with its U.S. business. However, if income is less than said 25%, in such a case, none of the dividend from the foreign corporation will be sourced to U.S. As per the code Sec. 861(a)(2)(B), if more than 25% of the income is effectively connected with a U.S. trade or business, then that portion of the foreign corporation's dividend will be sourced to the U.S.

The corporation earns at least 80% of its gross income over the immediately preceding three tax years from the active conduct of a U.S. trade or business. this is provided in 871(i)(2)(B) and 881(d). Hence Option E is correct.