On January 1 of Year One, Sam, a nonresident alien individual, Molly, also a nonresident alien individual, and Widgets, Inc., a U.S. corporation, organize a new foreign corporation, Foreign Base Company, Inc., under the laws of Ireland. Sam contributes $30,000 cash to the new foreign corporation and receives 30 shares of its stock, Molly also contributes $30,000 and receives 30 shares of stock and Widgets, Inc. contributes $40,000 and receives 40 shares of stock. On August 8 of Year One, Molly acquires a green card and becomes a lawful permanent resident of the United States. Foreign Base Company, Inc. has net income (after payment of foreign income taxes) of $400,000 for Year One. One half of this amount (i.e., $200,000) constitutes Subpart F income within the meaning of Internal Revenue Code Section 952. (Foreign Base Company, Inc. paid $80,000 in foreign income taxes to Ireland on its pre-foreign tax net income of $480,000. None of Foreign Base Company, Inc.’s income was subject to U.S. tax under Section 881 or 882.) Foreign Base Company, Inc. makes no dividend distributions during Year One.

(a) What are the tax consequences to the shareholders of Foreign Base Company, Inc. for Year One under the Subpart F provisions?

(b) On April 1 of Year Two, Foreign Base Company, Inc. makes a dividend distribution of $15,000 cash to Sam, $15,000 cash to Molly and $20,000 cash to Widgets, Inc. Foreign Base Company, Inc. breaks even from operations during Year Two and has not net income for the year. What are the U.S. tax consequences to the shareholders of Foreign Base Company, Inc. on account of this dividend distribution?

Answer rating: 100% (QA)

1 US income tax results to the investors of Foreign Base Company Inc for year 1 under the subpart F ... View the full answer