Part 1
Pet Instructional Programs Corp. (PIP) and its 89% owned subsidiary, Squeak Toys Ltd
(Squeak), join in filing consolidated returns for U.S. tax purposes.
On August 12, 2017, Squeak purchased new office furniture for $17,400, which Squeak
immediately placed into service in its business. On January 1, 2018, when the office furniture
had an adjusted basis of $7,457, Squeak sold the office furniture to PIP for $10,400. Although
PIP immediately placed the office furniture into service in 2018, PIP ended up selling the office
furniture to an unrelated purchaser on February 16, 2019. Under the terms of the sale, the
unrelated purchaser agreed to pay PIP 10% of whatever profit the purchaser reported in the
month of October for nine consecutive years, starting with October 2019. Accordingly, the
unrelated purchaser made its first payment to PIP of $1,700 on November 15, 2019.
Required (25 points): Explain what depreciation, gain, and/or loss PIP and Squeak would
include in their respective separate taxable incomes (i.e., taxable income after any adjustments
for intercompany transactions) for 2018 and 2019 with respect to the office furniture.
Part 2
Common Facts for Each Situation:
Epic Feat Inc. (Epic), a U.S. corporation, took its first step toward global domination during
2020 by establishing a global enterprise that acquires goods from a manufacturer in Guatemala
and resells those goods to retail customers in Thailand (the ‘Business’). Legal title to the goods
passes to the customers in Thailand, and the Business will generate $123,000 of income (gross
income less deductible expenses, as determined under U.S. tax laws) as it gets a toehold in the
Thai market during 2020. Epic will also have $780,000 of U.S. source income (gross income less
deductible expenses, as determined under U.S. tax laws) from its business operations wholly
within the United States. The total value of Epic’s tangible assets is $8,127,000 (i.e., the original
cost of the assets less ADS straight-line depreciation). Assume the U.S. government taxes Epic at
a 21% flat rate.
Required (25 points for each INDPENDENT situation):
(A) Assume Epic conducts the Business without having any of its assets or employees
outside the United States (i.e., all $8,127,000 of the tangible assets are located within the
United States), and the Thai government will impose $12,300 of withholding taxes on
Epic’s sales to Thai customers during 2020. Explain what amount of income tax Epic
will owe the U.S government for 2020.
(B) Assume Epic moved $18,450 of its tangible assets to Thailand and conducts the Business
as a branch. Assume further that–under Thai tax law–the Thai government will treat
Epic’s branch as having taxable income of $196,800 for 2020, and the Thai government
imposes a 3% tax rate on taxable income up to $25,000 and a 5% tax rate on taxable
income in excess of $25,000. Explain what amount of income tax Epic will owe the U.S
government for 2020.
(C) Assume Epic transferred $18,450 of its tangible assets to a newly-formed Thai
corporation (a ‘foreign subsidiary’) in exchange for all of the foreign subsidiary’s stock,
and the foreign subsidiary conducts the Business. Assume further that–under Thai tax
law–the Thai government will treat the foreign subsidiary as having taxable income of
$196,800 for 2020, and the Thai government imposes a 3% tax rate on taxable income
up to $25,000 and a 5% tax rate on taxable income in excess of $25,000. Finally, assume
the foreign subsidiary will not make any distributions to Epic during 2020. Explain what
amount of income tax Epic will owe the U.S government for 2020.
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