Café du Monde, a U.S. corporation that is a purveyor of coffee,

Café du Monde, a U.S. corporation that is a purveyor of coffee, transfers its trademark to wholly owned CDM Enterprises, organized in the Republic of Anastasi, which does not have an income tax. Café du Monde also transfers to CDM $5.6 million in coffee roasting equipment for lease to restaurants in the region. CDM is the only foreign corporation in which Café du Monde has an equity investment. This year, CDM earns $3.2 million in royalties from licensing the trademark to coffee houses in the Kingdom of Aspina. It also earns $630,000 in rents from leasing the equipment to restaurants in the Salduran Republic. Allocable to the royalties are $185,000 in administrative expenses. Allocable to the rents are $90,000 in selling expenses. Café du Monde’s qualified business asset investment is $17.1 million.

a. What is Café du Monde’s GILTI inclusion?

b. What is Café du Monde’s GILTI deduction?

OffshoreInvest, incorporated in Country X, is owned in equal shares by a

OffshoreInvest, incorporated in Country X, is owned in equal shares by a consortium of five U.S. companies. Country X levies a 3% value added tax, but no income tax. The only asset held by OffshoreInvest is $100 million in cash. It is considering investing all the cash in one of the following assets:

  • A U.S. bond bearing interest at an annual rate of 6%
  • A Country X bond bearing interest at an annual rate of 6%
  • A Country X building generating rents at an annual rate of 6%

OffshoreInvest plans to distribute $500,000 of its investment income to all its U.S. shareholders on an annual basis. In terms of current U.S. tax savings, which investment would you recommend, and why? Assume a 21% U.S. tax rate.

You have performed tax services for Mark Pruett, a U.S. citizen who

You have performed tax services for Mark Pruett, a U.S. citizen who is being transferred abroad by his employer. Mark’s 2020 salary and allowances in Country M will be $210,000, which is substantially above his salary for last year. The salary differential is due to the higher cost of living in Country M and Mark’s added responsibilities. Of the allowances, $30,000 is for housing although Mark’s 2020 housing costs are expected to be $40,000. The Country M income tax rate is 40%. Mark’s employer conducts business at a second location in Country T, where Mark probably will be transferred in three or four years. The Country T income tax rate is 20%.

The transfer date is February 1, 2020. Mark’s wife and three-year-old daughter will accompany him. Mark expects to return to the United States for one week of training each year starting in September 2020. Mark takes four weeks of vacation each year. Because Mark still has family in the United States, he may spend substantial vacation time in the United States.

Required:

Your tax manager has asked you to draft for her review a memorandum explaining the tax consequences of the relocation, whether Mark is entitled to the foreign earned income exclusion, and what records Mark must maintain to file his tax return for the year of transfer.

John Lawrence Bailey is employed in Country T by American Conglomerate Corporation.

John Lawrence Bailey is employed in Country T by American Conglomerate Corporation. Bailey has resided with his wife and three children in Country T for seven years. He made one five-day business trip back to the United States in the current year, and $2,000 of his salary (but none of the allowances) is allocable to the U.S. business trip. Bailey reports the following tax-related information for the current year:

Income:
Base salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Overseas premium in addition to base salary . . . . . . . . . . . . . . . . . . . . . . . . . .    15,000
Cost-of-living allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    37,500
Housing allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    30,000
Education allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16,000
Home leave travel allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11,000
Income tax reimbursement from employer for preceding tax year . . . . . . .     25,000

Expenditures:

Tuition at U.S. school . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Housing expenses (rental of home and related expenses) . . . . . . . . . . . . . . . . 32,500
Itemized deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000
Foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,000

Complete a 2019 Form 2555 for the Baileys’ current tax year. Assume Mr. Bailey established foreign residency in 2015, and all prior tax returns were filed with a Form 2555 claiming that Mr. Bailey was a bona fide foreign resident.

CyberQRX, a U.S. corporation, develops cybersecurity software for commercial use. It holds

CyberQRX, a U.S. corporation, develops cybersecurity software for commercial use. It holds the patent to the software at its headquarters in Nevada. In the current year, CyberQRX generates $4.07 million in revenues from software sales in the United States, $5.38 million in revenues from software sales in Country A, and $3.22 million from software support services in Country B for total revenues of $12.67 million. Neither Country A nor Country B has an income tax. CyberQRX records $5.28 million in cost of goods sold and $4,645,000 of operating expenses. It allocates its cost of goods sold between the United States and Country A based on relative sales revenue and allocates operating expenses among all three countries based on all revenues. CyberQRX has $14,705,000 in qualified business asset investment. It has no other items of revenue, expense, or loss.

a. What is CyberQRX’s FDII?

b. What is CyberQRX’s current year tax?

Lycos International, based in Miami, operates hotels and resorts in Florida, Nevada,

Lycos International, based in Miami, operates hotels and resorts in Florida, Nevada, and California. It books its hotel rooms through a travel agency that it owns. Lycos plans to relocate the travel agency to a designated country in the Caribbean to accommodate the needs of South American tourists. Following the relocation, the operating results of the travel agency (in U.S. dollars) are projected to be as follows:

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000
Business expenses . . . . . . . . . . . . . . . . . . . . . .   350,000
Taxable income . . . . . . . . . . . . . . . . . . . . . . . . .   400,000
Caribbean country tax . . . . . . . . . . . . . . . . . . .     20,000
Net profit (all foreign-source) . . . . . . . . . . . . . $380,000

According to plans, the travel agency would remit $100,000 of its net profits to the U.S. headquarters annually and would reinvest the remainder in its offshore operations. Lycos is considering setting up the travel agency as either a foreign branch or a foreign corporation. In the latter case, it would issue shares to foreign investors to raise capital for expansion into new overseas markets. It is reviewing the following alternatives:

  • Alternative A: Wholly owned foreign branch
  • Alternative B: 51% owned foreign corporation
  • Alternative C: 49% owned foreign corporation

Assuming a 21% U.S. tax rate:

a. Evaluate each alternative in terms of the U.S. tax consequences to Lycos.

b. Determine which alternative is most advantageous.

Dana Dodson died October 31, 2019, with a gross estate of $16.7

Dana Dodson died October 31, 2019, with a gross estate of $16.7 million, debts of $200,000, and a taxable estate of $16.5 million. Dana made no taxable gifts. All of her property passed under her will to her son, Daniel Dodson. The estate chose a June 30 year-end. Its receipts, disbursements, and gains for the period ended June 30, 2020, were as follows:

Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,000
Interest income from corporate bonds . . . . . . . . . . 18,000
Interest income from tax-exempt bonds . . . . . . . . . . 9,000
Gain on sale of land . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Executor’s fee (charged to principal) . . . . . . . . . . . . . . 4,000
Distribution to Daniel Dodson . . . . . . . . . . . . . . . . . . . . . −0−

Of the $27,000 dividends received in the estate’s first tax year, $7,000 were declared October 4, 2019, with a record date of October 25 and a payment date of November 4, 2019. The corporate bonds pay interest each August 31 and February 28. The estate collected $18,000 corporate bond interest in February 2020 and August 2020. The taxexempt bonds pay interest each June 30 and December 31. The estate collected $4,500 in December 2019 and $4,500 in June 2020 from the tax-exempt bonds. Dana, a cash basis taxpayer, sold land in 2018 for a total gain of $60,000 and used installment reporting. She collected principal in 2018 and reported gain of $40,000 on her 2018 return. The estate collected additional principal in March 2020 and the remaining principal payment in March 2021. The gain attributable to the March 2020 and March 2021 principal collections is $10,000 per tax year. Ignore interest on the sale.

Calculate the following:

a. Deductible executor’s fee.

b. Total IRD and the IRD reported on the return for the period ended  June 30, 2020.

c. Total Sec. 691(c) deduction if none of the debts are DRD.

d. Section 691(c) deduction deductible on the estate’s income tax return for the period ended June 30, 2020.

e. Taxable income of the estate for its tax year ended June 30, 2020.

f. Marginal income tax rate for the estate for its tax year ended June 30, 2020.

Refer to Problem C:14-45. Explain how your answers would change for each

Refer to Problem C:14-45. Explain how your answers would change for each independent situation indicated below:

a. At the end of the trust term, the property passes instead to Holly’s nephew Nathan.

b. Holly creates the trust in October 2020 for a term of 25 years, after which the property will revert to her.

Data from Problem C;14-45:

Holly funded the Holly Marx Trust in January 2020. The entire trust income is payable to her adult son Jack for 20 years. At the end of the twentieth year, the trust assets are to pass to Holly’s husband. In the current year, the trust realizes $30,000 of dividend income and a $15,000 long-term capital gain. How much income is taxed to the trust, the grantor, and the beneficiary in the current year?

Serena Calman has twin adult children who currently have considerable income but

Serena Calman has twin adult children who currently have considerable income but have not saved much for their retirement. She is considering funding a trust that will accumulate income until they reach age 65, ten years hence. She will fund the trust with corporate bonds plus $60,000 cash to be used over the years to pay tax on the trust income. Annual interest on the bonds will be $20,000, and the cash will produce no income. Upon termination of the trust, the trustee will distribute the accumulated income and bonds equally to the twins. In the event one twin dies before attaining age 65, the trust, nevertheless, will continue until the end of the ten year term. At that time, the trust will distribute the accumulated income and bonds to the surviving twin. If both twins die before attaining age 65, the trust will terminate at the end of the ten year term and distribute the accumulated income and bonds to Serena’s nephew, Buster Bennett.

Serena plans to name a bank as trustee, and the bank has quoted her an annual trustee’s fee of $1,000. Her accountant has suggested that instead she split the assets and set up two trusts (of equal size and with equal annual income), one for each twin. Serena is reluctant to do this because the bank would increase its total annual fee to $1,800, $900 per trust. In either situation the trustee’s fee will include fiduciary tax return preparation.

Prepare a schedule that shows the difference in the total amount to distribute to the twins at the end of ten years in each scenario, one trust and two trusts. For simplicity, ignore present values and assume that tax rates and capital gains tax rate breakpoints do not change and that the trustee continues to hold the bonds until termination of the trust. Based on your analysis, which option (one trust or two trusts) do you recommend?

Cate Cole died in 2018, and her will left her entire estate

Cate Cole died in 2018, and her will left her entire estate in equal shares to her two adult children, Calvin and Corrine. Both children anticipate being in the top income tax bracket for at least ten years. The Cate Cole Estate is a calendar year taxpayer. The year 2020 is almost over, and to date the estate has received $18,000 of interest income from a certificate of deposit (CD). The executor does not expect to collect any more income before the end of the year. However, in January 2021, the estate will collect $1,500 of interest income from the CD. The executor has distributed all the estate’s assets except for the CD, which matures in early January 2021. The executor anticipates distributing the funds from the CD when it matures, after which he will close the estate. Because Cate’s taxable estate did not exceed the tax-free amount, the executor did not deduct administration expenses on the estate tax return. The estate owes administration expenses totaling $25,000. Propose an income tax minimization strategy for timing, between 2020 and 2021, the payment of the administration expenses, and prepare a schedule to support your recommendation.