Question

USCo manufactures and markets electrical components. USCo operates outside the United States through a number of CFCs, each of which is organized in a different country. These CFCs derived the following income for the current year: Determine the amount of income that USCo must report as a deemed dividend under subpart F in each scenario. (Leave no answer blank. Enter zero if applicable.)

a. F1 has gross income of $8.00 million, including $400,000 of foreign personal holding company interest and $7.60 million of gross income from the sale of inventory that F1 manufactured at a factory located within its home country.

Amount of income reported in ----------- million

b. F2 has gross income of $6.2 million, including $5.0 million of foreign personal holding company interest and $1.2 million of gross income from the sale of inventory that F2 manufactured at a factory located within its home country. (Round your final answer to 1 decimal place.)
Amount of income reported in ----------- million

Answer 1

USCo
Requirement a:
The gross income from sale of inventory is not foreign base company sales income
because it was produced in the CFC’s country of incorporation. The $400,000 of
interest income is FPHC income. Under the de minimis rule of §954(b)(3)(A), the
interest income is not treated as subpart F income if it is (1) less than $1 million and
(2) less than 5 percent of gross income. The interest is less than $1 million and is less
than 5 percent of gross income ($400,000/$8,000,000 = 5%). The interest income is
treated as subpart F income in this case.
Requirement b:
The interest income is foreign personal holding company income. The gross income
from sale of inventory is not foreign base company sales income because F2
produced the inventory in its country of incorporation. Under the full inclusion rule
of §954(b)(3)(B), all gross income is subpart F income if gross subpart F income is
more than 70 percent of total gross income. F2’s subpart F income ($5 million) is 80
percent of total gross income. Therefore, F2\’s entire gross income ($6.2 million) is
subpart F income.