Question

MRG, LP. operated a lumber distribution center since 1999.   MRG contributed accounts receivable of $1,000,000 and accounts payable of $500,000. MRG was a cash basis taxpayer. MRG received 500 shares of voting common stock. MRG LP was owned by 2 individuals, Fred and Maryann. Fred and Maryann retired to the Dominican Republic but are US citizens. The accounts payable related to salaries, business cell phone expenses, and utilities.

Explain the significance of Fred and Maryann living in Dominican Republic and how they are impacted for federal income tax purposes as the owners of MRG LP.

Answer 1

Fred and Maryann retired to the Dominican Republic but are US citizens. MRG LP was owned by 2 individuals, Fred and Maryann.

There is no info in question on when Fred and Maryyan retired to Dominican Republic.

We assume that Fred and Maryann are living in Dominican Republic for more than 182 days in previous year, which makes them Tax resident of Dominican Republic. Also, if Fred and Maryann reside in Dominican republic for 3 continous years, their worldwide income would be taxable in Dominican Republic.

As per the tax rules, US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year regardless of where they reside.

Further, US has no tax treaty or tax agreement with Dominican Republic.

So Fred and Maryyan are required to file tax returns every year despite of being tax resident of Dominican Republic. Further, they are eligilble for certain deductions and exemptions along with tax credit for tax paid in Dominican republic.

Fred and Maryyan will be allowed the same deductions as citizens and residents living in the United States. If foreign taxes paid or accrued to a foreign country on foreign source income and are subject to U.S. tax on the same income, they may be able to take either a foreign tax credit on foreign income taxes or an itemized deduction for eligible foreign taxes. However, if they take the foreign earned income exclusion your foreign tax credit or deduction will be reduced.

If eligible, they can claim a foreign tax credit on foreign income taxes owed and paid by filing Form 1116 with his U.S. income tax return.

So income from MRG is taxable at gradual tax rates applicable to other corporations. As the owners of MRG, Fred and Maryyan are liable for tax in US only for the income arising from MRG LP and not for any income earned from outside US.