1. Tenco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Tenco owns 100% of the stock of Teny, a foreign marketing subsidiary that was organized in Year 1. During Year 1, Teny had $15 million of foreign base company sales income, paid $3 million in foreign income taxes, and distributed no dividends.
During Year 2, Teny had no earnings and profits, paid no foreign income taxes, and distributed a $12 million dividend.
Assuming the U.S. corporate tax rate is 35%, what are the U.S. tax consequences of Teny's Year 1 and Year 2 activities?
2. Beatco, an accrual basis domestic corporation, manufactures musical instruments for sale both in the United States and abroad. Beatco's functional currency is the U.S. dollar. Two years ago, Beatco established a branch sales office in Switzerland. The sales office qualifies as a qualified business unit with the Swiss franc (SF) as its functional currency.
The branch's tax attributes for its first two years of operations are as follows:
Year 1 Year 2
Taxable income SF40 million None
Foreign income taxes (paid at end of year) SF15 million None
Remittance to Beatco (paid at end of year) None SF25 million
The Swiss franc had an average daily value of $0.50 during Year 1, $0.65 during Year 2, and was worth $0.60 at the end of Year 1, and $0.75 at the end of Year 2.
What are the U.S. tax consequences of the branch's activities in Year 1 and Year 2?
3. Joltco, a domestic corporation, manufactures batteries for sale in the United States and abroad. Joltco markets its batteries in Europe through its wholly owned foreign marketing subsidiary, Jolti. Jolti was organized in Year 1, and its functional currency is the pound (£). Jolti's tax attributes for its first two years of operations are as follows:
Year 1 Year 2
Taxable income £100 million None
Foreign income taxes (paid at end of year) £20 million None
Net Subpart F income (included in £100 million) £40 million None
Actual dividend distributions (paid at end of year) None £8 million
The pound had an average value of $1.50 during Year 1, $1.65 during Year 2, and was worth $1.60 at the end of Year 1, and $1.70 at the end of Year 2.
What are the U.S. tax consequences of Jolti's results from operations in Year 1 and Year 2? Assume that the dividend distribution in Year 2 was not subject to foreign withholding taxes.