UNITED STATES INTERNATIONAL TAXATION: CASES, MATERIALS, AND PROBLEMS

Transcription

1 UNITED STATES INTERNATIONAL TAXATION: CASES, MATERIALS, AND PROBLEMS ALLISON CHRISTIANS Assistant Professor of Law University of Wisconsin Law School SAMUEL A. DONALDSON Professor & Director, Graduate Program in Taxation University of Washington School of Law PHILIP F. POSTLEWAITE Harry Horrow Professor in International Law Northwestern University School of Law Successor édition to Philip F. Postlewaite, International Taxation: Cases, Materials, and Problems (1999) LexisNexis*

2 TABLE OF CONTENTS UNITl KESIDENCY CLASSIFICATION RULES 1 A. CODE AND REGULATION PROVISIONS 1 B. PROBLEMS FOR CLASS DISCUSSION 1 C. OVERVIEW Kesidency Classification for Individuals The Green Card Test The Substantial Présence Test The 30-Day De Minimis Rule The Tax-Home Exception Exempt and Other Spécial Catégories of Alien Individuals Residency Commencement and Termination First-Year Residency Election Spousal Residency Election General Taxing Structure for Corporations Residency Classification for Corporations 14 D. REFERENCE MATERIALS 15 COOK v. TAIT 15 UNIT 2 SOURCE RULES 17 A. CODE AND REGULATION PROVISIONS 17 B. PROBLEMS FOR CLASS DISCUSSION 17 C OVERVIEW Interest Income Exceptions to the Interest Source Rule Dividends Exceptions to the Dividend Source Rule Personal Services Compensation Rents and Royalties United States Real Property Interests Sales of Personal Property Generally Sales of Inventory Property 26 ix

3 x TABLE OF CONTENTS Sales of Noninventory Property Depreciable Property Intangible Property Scholarships and Prizes Mixed-Source Income Transactions Involving Computer Programs Other Income 32 D. REFERENCE MATERIALS 33 BOULEZ v. COMMISSIONER 33 REVENUE RULING UNIT 3 FOREIGN EARNED INCOME OF UNITED STATES PERSONS 39 A. CODE AND REGULATION PROVISIONS 39 B. PROBLEMS FOR CLASS DISCUSSION 39 C. OVERVIEW A Brief History Qualification for 911 Exclusion Requirements for Eligibility: Foreign Tax Home Bona Fide Résidence Physical Présence Test Excludable Income Amounts "Housing Cost Amount" Self-Provided Housing "Foreign Earned Income" Deferred Payments Sole Proprietorship or Partnership Computation of Tax Liability Where Exclusion Applies 49 D. REFERENCE MATERIALS 50 NOTICE NOTICE JONES v. COMMISSIONER 54 REVENUE RULING

4 TABLE OF CONTENTS xi UNIT 4 FOREIGN TAX CREDIT: OVERVIEW 61 A. CODE AND REGULATION PROVISIONS 61 B. PROBLEMS FOR CLASS DISCUSSION 61 C. OVERVIEW Crédit versus Déduction Creditable Taxes General Principles Payor of a Tax Amount of Tax Paid Subsidies Multiple Levies Refunds and Benefits Compulsory Payments Economie Benefits Prédominant Character of an Income Tax Taxes on Business Income Taxes on Dividends, Interest, and Other Passive Income Taxes on Compensation Taxes "In Lieu Of Income Taxes: Déniai of Crédit for Taxes Paid to Certain Countries 71 D. REFERENCE MATERIALS 71 WADA v. COMMISSIONER 71 EXXON CORPORATION v. COMMISSIONER 73 GUAKDIAN INDUSTRIES CORP. v. UNITED STATES 82 UNIT 5 FOREIGN TAX CREDIT: THE "DEEMED PAID" CREDIT 87 A. CODE AND REGULATION PROVISIONS 87 B. PROBLEMS FOR CLASS DISCUSSION 87 C. OVERVIEW Section 902: Basic Structure Calculating the Taxes Deemed Paid by Domestic Corporations Undistributed Earnings and Accumulated Profits The 78 Gross-Up Tax Planning with

5 xii TABLE OF CONTENTS D. REFERENCE MATERIALS 95 FIRST CHICAGO CORP. v. COMMISSIONER 95 FSA FSA UNIT 6 FOREIGN TAX CREDIT: THE 904 LIMITATIONS 107 A. CODE AND REGULATION PROVISIONS 107 B. PROBLEMS FOR CLASS DISCUSSION 107 C. OVERVIEW Section 904(a): The Overall Limitation The Basket System Passive Category Income General Category Income Spécial Rules for Capital Gains Spécial Rule for Capital Losses Recapture of Foreign Losses: 904(f) Carryback and Carryover of Excess Taxes Paid: 904(c) 118 D. REFERENCE MATERIALS 118 HOUSE REPORT PART 1 AMERICAN JOBS CREATION ACT OF UNIT 7 FOREIGN TAX CREDIT: ADVANCED ISSUES 121 A. CODE AND REGULATION PROVISIONS 121 B. PROBLEMS FOR CLASS DISCUSSION 121 C. OVERVIEW The Dividends-Received Déduction Generally Dividends from Wholly-Owned Foreign Subsidiaries Dividends from Formerly Domestic Corporations Other Foreign Dividends Carryover and Carryback Rules Accrual of Foreign Income Tax Liability Section 905(c) Redeterminations Currency Conversions Contested Taxes 127

6 TABLE OF CONTENTS xiii D. REFERENCE MATERIALS 127 REVENUE RULING REVENUE RULING UNIT 8 TREATMENT OF FOREIGN-OWNED UNITED STATES INVESTMENT INCOME 131 A. CODE AND REGULATION PROVISIONS 131 B. PROBLEMS FOR CLASS DISCUSSION 131 C. OVERVIEW Income Items Included in 871(a) and 881(a) Exception for Most Interest Payments Exception for Certain Dividends Capital Gains Income from Real Property Withholding of 30 Percent Tax at Source 136 D. REFERENCE MATERIALS 138 REVENUE RULING UNIT 9 TREATMENT OF FOREIGN-OWNED UNITED STATES BUSINESS INCOME 141 A. CODE AND REGULATION PROVISIONS 141 B. PROBLEMS FOR CLASS DISCUSSION 141 C OVERVIEW Engaged in a Trade or Business in the United States Attribution Through Agents Performance of Services as a Trade or Business Real Property Activity as a Trade or Business Sales Activity as a Trade or Business Purchasing Activity as a Trade or Business The Force of Attraction Doctrine Effectively Connected Income Step One: Identification of Gross Effectively Connected Income FDAP Income as ECI Ail Other United States Source Income as ECI Effectively Connected Foreign Source Income 149

7 xiv TABLE OF CONTENTS Step Two: Segregating Expenses Step Three: Allocation Step Four: Apportionment 151 D. REFERENCE MATERIALS 153 REVENUE RULING REVENUE RULING STEMKOWSKI v. COMMISSIONER 154 UNITED STATES v. BALANOVSKI 156 THE SCOTTISH AMERICAN INVESTMENT CO., LTD. v. COMMISSIONER 159 UNIT 10 BUSINESS INCOME ADVANCED ISSUES 167 A. CODE AND REGULATION PROVISIONS 167 B. PROBLEMS FOR CLASS DISCUSSION 167 C. OVERVIEW Inventory Income Branch Profits Taxes In General Branch Profits Tax on the Dividend Equivalent Amount Effectively Connected Earnings and Profits Secondary Withholding Tax and Branch Profits Tax The Branch Interest Tax The Branch Excess Interest Tax Some Background on the Taxation of United States Real Property Interests Section 897: The Big Picture Direct Investment in United States Real Property United States Real Property Interests Tangible Property Intangible Property Dispositions Indirect Investment Interests Held Through Domestic Corporations United States Real Property Holding Companies Indirect Investment Interests Held Through Foreign Corporations Distributions by Foreign Corporations 180

8 TABLE OF CONTENTS xv D. REFERENCE MATERIALS 181 REVENUE RULING REVENUE RULING UNIT 11 OVERVIEW OF TAX TREATIES 185 A. ASSIGNED CODE AND REGULATION PROVISIONS: 185 B. PROBLEMS FOR CLASS DISCUSSION 185 C. OVERVIEW OF TAX TREATIES The Treaty Process Interprétative Resources Relationship of Tax Treaties to United States Fédéral Law Double Taxation Saving Clause Treaty Benefit Eligibility Anti Treaty Shopping Measures Nondiscrimination Compétent Authority Procédures 192 D. REFERENCE MATERIALS 193 REVENUE RULING UNIT 12 TAX TREATIES AND INVESTMENT INCOME 195 A. CODE AND REGULATION PROVISIONS 195 B. PROBLEMS FOR CLASS DISCUSSION 195 C. OVERVIEW A Note on Interprétation Dividends Art Interest Art Royalties Art Gains from the Disposition of Property Art Income from Real Property Art Residual Income Art D. REFERENCE MATERIALS 201 REVENUE RULING

9 xvi TABLE OF CONTENTS UNIT 13 TAX TREATIES AND BUSINESS INCOME 203 A. CODE AND REGULATION PROVISIONS 203 B. PROBLEMS FOR CLASS DISCUSSION 203 C. OVERVIEW United States Trade or Business Permanent Establishment Art Duration Use of Another's Fixed Place of Business Use of Agents Dépendent Agents Income from Employment Art Independent Personal Services (Independent Contractors) Conséquences of Having a Permanent Establishment Business Profits Art The "Attributable to" Concept Gross Income Attributable to a Permanent Establishment Waiver of Business Profits Article Protection 217 D. REFERENCE MATERIALS 217 REVENUE RULING REVENUE RULING REVENUE RULING UNGER v. COMMISSIONER 217 REVENUE RULING REVENUE RULING REVENUE RULING REVENUE RULING UNIT 14 TAX TREATIES AND BUSINESS INCOME ADVANCED ISSUES 231 A. CODE AND REGULATION PROVISIONS 231 B. PROBLEMS FOR CLASS DISCUSSION 231 C. OVERVIEW 233

10 TABLE OF CONTENTS xvii Tax Treaties and Inventory Income Tax Treaties and the Branch Profits Taxes Generally Treaties and the Branch Profits Tax on Earnings Treaties and the Branch Profits Taxes on Interest Qualified Résidents Tax Treaties and United States Real Property Interests Section 897 and the Nondiscrimination Rules 238 D. REFERENCE MATERIALS 238 NOTICE UNIT 15 INTRODUCTION TO REVENUE SAFEGUARDS 241 A. CODE AND REGULATION PROVISIONS 241 B. PROBLEMS FOR CLASS DISCUSSION 241 C. OVERVIEW Personal Holding Companies and Foreign Personal Holding Companies Controlled Foreign Corporations and Subpart F Passive Foreign Investment Companies 244 D. REFERENCE MATERIALS 245 PRESIDENT JOHN F. KENNEDY SPECIAL MESSAGE TO THE CONGRESS ON TAXATION 245 JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE 248 UNIT 16 INTRODUCTION TO CONTROLLED FOREIGN CORPORATIONS 251 A. CODE AND REGULATION PROVISIONS 251 B. PROBLEMS FOR CLASS DISCUSSION 251 C. OVERVIEW CFC Defined United States Shareholder Defined Ownership Attribution Rules Limitations of the Subpart F Régime 254

11 xviii TABLE OF CONTENTS D. REFERENCE MATERIALS 256 FRAMATOME CONNECTORS USA, INC. v. COMMISSIONER 256 UNIT 17 CONTROLLED FOREIGN CORPORATIONS SUBPART F INCOME 261 A. CODE AND REGULATION PROVISIONS 261 B. PROBLEMS FOR CLASS DISCUSSION 261 C. OVERVIEW Subpart F Income Foreign Personal Holding Company Income Foreign Base Company Sales Income Foreign Base Company Services Income Foreign Base Company Oil Related Income Allocation of Déductions to Base Company Income: Rules and Limitations Spécial Exceptions to Foreign Base Company Income Pro Rata Share Basis Adjustments Exclusions from Gross Income Previously Taxed Earnings and Profits Sale of CFC Stock 271 D. REFERENCE MATERIALS 274 NOTICE UNIT 18 CONTROLLED FOREIGN CORPORATIONS ADVANCED ISSUES 279 A. CODE AND REGULATION PROVISIONS 279 B. PROBLEMS FOR CLASS DISCUSSION 279 C. OVERVIEW Investment in United States Property More on the Définition of United States Property Basis Adjustments The Exclusion for Previously Taxed Earnings and Profits Priority Rules for Distributions Interaction with the Foreign Tax Crédit 285

12 TABLE OF CONTENTS xix Section 904 Implications of CFC Imputation Déniai of 164 Déduction When 960 Is Used 286 D. REFERENCE MATERIALS 286 THE LIMITED, INC. v. COMMISSIONER 286 THE LIMITED, INC. v. COMMISSIONER 299 UNIT 19 PASSIVE FOREIGN INVESTMENT COMPANIES 313 A. CODE AND REGULATION PROVISIONS 313 B. PROBLEMS FOR CLASS DISCUSSION 313 C. OVERVIEW The 1291 Tax and Interest Régime The 1293 QEF Election The 1296 Mark-to-Market Régime Classification of a PFIC: The Passive Income and Passive Assets Tests Passive Income Test Passive Assets Test Spécial Look-Through Rule Exceptions to Passive Foreign Investment Company Status The 1291 Tax and Interest Régime Excess Distributions and Dispositions Mechanics of The Deferred Tax Amount QEF Election Pedigreed, Unpedigreed, and Nonqualified Funds Removingthe 1291 Taint The Deemed Sale Election The Deemed Dividend Election Requirements for Making the QEF Election Current 1293 Taxation of United States Shareholders Electing QEF Status Safeguards Against Double Taxation of PFIC Earnings Deemed Paid Crédit Interaction of PFIC Provisions and Other Code Sections

13 xx TABLE OF CONTENTS D. REFERENCE MATERIALS 325 NOTICE UNIT 20 TRANSFER PRICING RULES 329 A. CODE AND REGULATION PROVISIONS 329 B. PROBLEMS FOR CLASS DISCUSSION 329 C. OVERVIEW The Common Control Standard The Arm's-Length Standard Comparability Limitations on 482: The Arm's-Length Range Primary and Corrélative Adjustments Setoff Adjustments Conforming Adjustments Choice of the Best Method Sales of Tangible Property In General Use of Tangible Property Transfers and Licenses of Intangible Property Ownership of Intangible Property Provision of Services Loans or Advances Compétent Authority and Statute of Limitations Issues Burden of Proof Advance Pricing Agreements (APAs) 345 D. REFERENCE MATERIALS 346 ELI LILLY & COMPANY v. UNITED STATES 346 XILINX INC. v. COMM'R OF INTERNAL REVENUE 353 UNIT 21 NONRECOGNITION TRANSACTIONS WITH FOREIGN ENTITIES 367 A. CODE AND REGULATION PROVISIONS 367 B. PROBLEMS FOR CLASS DISCUSSION 367 C. OVERVIEW Outbound Property Transfers: General Principles Scope of 367(a) 370

14 TABLE OF CONTENTS xxi Gain Recognized Under 367(a) Exceptions to Application of 367(a) The Foreign Business Asset Exception In General Transaction-Based Exceptions to the Foreign Business Asset Exception Asset-Based Exceptions to the Foreign Business Asset Exception Outbound Transfers of Domestic Stock or Securities Outbound Transfers of Foreign Corporation Stock or Securities Section 367(b) Transfers of Intangible Assets Election to Treat Intangible Asset Transfer as a Sale Anti-Abuse Rule Other Détails of D. REFERENCE MATERIALS 380 REVENUE RULING APPENDIX 383