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Federal Income Taxation of International Transactions

Professor Deborah A. Geier Remote Learning

Administrative Matters and Syllabus

Required Texts

(1) Taxation of International Transactions by Gustafson, Peroni, & Pugh (Thomson West 4th ed. 2011) ISBN 978-0-314-91171-1. In addition, as soon as I receive them from West, I’ll share the digital codes for you to obtain a rough draft of the 5th edition, which incorporates the many changes to the international provisions incorporated in the Tax Cuts and Jobs Act, enacted in late December 2017.

(2) Access to the Internal Revenue Code & Regulations. In class, I shall be using Selected Sections, United States International Taxation (Foundation Press Daniel J. Lathrope ed.) ISBN 978-64708-064-8. For those who prefer online access rather than a hard copy in class, you can type the code section (e.g., IRC 61) or treasury regulation (e.g., TR 1.61-2) into your browser’s search box, and the first item to come up will be the Legal Information Institute’s version of the code section or regulation. The LII is hosted by Cornell law school, and it is the source that I used for the hyperlinks in my e-textbook for the Tax I course.

You will not be able to access the internet during the final exam, however, so those of you choosing online access may wish to print out (or save to your hard drive) some of the Code sections and Treasury Regulations that you wish to have with you during the final exam. (That’s one advantage of having the hard copy of the Code and Regs.)

Optional Text

I do not believe that any supplemental texts are necessary, but I know that there are some students who just do not feel comfortable without them. Hence, if you are going to spend money on them, I believe that the one listed below is the most useful, as it incorporates provisions of the Tax Cuts & Jobs Act. Those students who buy it can read the corresponding pages covering a particular topic as a supplement to the required textbook if it makes you feel better. ; )

International Taxation in a Nutshell by Herzfeld and Doernberg (West 2018) ISBN 978-1-64020-905-3.

Course Game Plan

For those of you who just finished Advanced Corporate Tax with me, I'm using the same game plan. For the newcomers, here's the deal.

If we were meeting in person, this course would meet twice each week for one hour and fifteen minutes (150 minutes). For each of the two classes each week, I plan to do two voice recordings of approximately 30 minutes each, which I shall post on my OneDrive account, with a pdf document containing (in essence) accompanying slides. For both classes, that sums up to a total of 120 minutes. For each class, I shall email to the group the OneDrive links to the recordings and accompanying pdf document. I ask that you do the class work (reading the assignment carefully first, then listening to the voice recordings while working along with the slides) before we then "meet" each week (at a time that works for all near the end of the week, after you’ve completed that week’s assignment) for a scheduled 30-minute Zoom session to discuss your questions, review the material, etc., for that week’s two classes. In other words, the 30-minute Zoom meeting will be our chance to touch base and clear up any confusion. If there are no questions, I can use the time to do a brief summary of what you learned in those two assignments.

Email and Zoom Availability

Please don’t hesitate to reach out with questions via email. I am also happy to discuss an issue over Zoom. Just send to me an email, and we can arrange a convenient time.

Course Goals

By the end of this course, you should be able to:

• Analyze whether an alien (non-U.S. citizen) is considered to be “resident” in the U.S. under § 7701(b) and the regulations thereunder;

• Identify the source of Gross Income as U.S. or foreign under §§ 861, 862, and 865 and the regulations thereunder;

• Allocate and apportion deductions between U.S.-source and foreign-source Gross Income under §§ 863(a), (b) and (e)(2) and Treas. Reg. § 1.861-8;

• Analyze whether the activities of a nonresident alien or foreign corporation rise to the level of a “trade or business” in the U.S. and, if the there is a U.S. trade or business, which income and deductions are “effectively connected” to it under §§ 871(b), 882, 864, 873, 897(a)(1), 871(d)(1), and 882(d);

• In the case of a taxpayer of a country with which the U.S. has a tax treaty, whether the taxpayer has a “permanent establishment” within the U.S. and, if so, which income and deductions are properly allocated to the permanent establishment;

• Analyze how § 897 applies to the disposition of a U.S. real property interest by a nonresident alien or foreign corporation;

• Analyze the extent to which nonbusiness income of a nonresident alien or foreign corporation is subject to the 30% gross withholding tax (or a reduced treaty rate) under §§ 871(a) and 881 and how the withholding rules in §§ 1441 and 1442 apply to enforce the tax;

• Analyze how the “branch profits tax” under § 884 applies to impose a second tax on foreign corporations with U.S. effectively connected income (in addition to the § 882 tax);

• Analyze whether a foreign tax is creditable against U.S. tax under §§ 901, 903, and 904 and the regulations thereunder;

• Analyze the tax consequences for the U.S. shareholders of a controlled foreign corporation (CFC) earning so-called subpart F income, including tax credit consequences, under §§ 318, 951, 952, 954, 957, 958, 959, 960, and 961.

• Analyze the tax consequences for the U.S. shareholders of a controlled foreign corporation (CFC) earning so-called GILTI (Global Intangible Low-Taxed Income) under § 951A.

• Understand broadly how transfer pricing between related parties affects the taxation of both U.S. and foreign taxpayers and understand broadly how § 481 and the regulations thereunder seek to combat abuse; and

• Understand broadly how transactions conducted in a foreign currency (a currency other than the U.S. dollar) affect U.S. income tax consequences.

Examination and Grading

There will be one final examination at the end of the course consisting chiefly of fact patterns requiring analysis. The examination will nominally be 3 hours (180 minutes) in length and will be worth 180 points, but you will have an extra 30 minutes to use as you please. Each question or part will be assigned a suggested time allotment. A question or part for which 60 minutes is suggested is worth 60 points, one for which 40 minutes is suggested is worth 40 points, and so on. I therefore suggest that you allocate your time wisely.

You will not be examined on any topic or Code section (or subsection) not actually covered in class.

You will be able to access your personal files (but not the internet) during the exam, though you will not be permitted to copy and paste from your hard drive. You will also be able to have with you your textbook, any compilation of the Internal Revenue Code and Income Tax Regulations, any class handouts, class notes, any outline material prepared by you and your colleagues, and, if you prefer, a calculator. In other words, you can have just about anything except commercially published outlines and treatises (such as the optional text listed above).

Do not become complacent from the fact that the exam is open-book. My exams are open book primarily because no newly minted tax lawyer tries to analyze an issue without the Internal Revenue Code and other resources at hand. But simply because the exam is open book, do not fall into the trap of thinking that you can look up the relevant material and learn it during the exam itself once you recognize the topic at issue. This is a recipe for failure. To do well on the exam, you need to know the material well going into the exam, using your notes only to pinpoint a Code section, regulation, etc., to cite as authority. The time allotments are sufficient for students who know the material going into the exam but clearly are not sufficient for students who have to spend considerable time looking up material during the exam and trying to figure out at that point how the law works.

The exam grade normally will count for 100% of the final grade. Outstanding class work, however, can move a grade to a higher grade category. As noted above, absences (including a failure to prepare) beyond the 2-week period may lower a final grade.

Optional Practice Quizzes

During the course of the semester, I shall distribute two “optional practice quizzes”—one on inbound transactions and one on outbound transactions. The quizzes will provide an opportunity to review and apply the law that you are learning in real time (rather than at the end of the semester, which is a recipe for disaster), while it remains fresh in your mind. The quizzes will provide an opportunity to review and apply the law that you are learning in real time (rather than at the end of the semester, which is a recipe for disaster), while it remains fresh in your mind. The quizzes are ungraded because they are intended to be primarily a learning tool and practice tool rather than an evaluative tool. I provide detailed comments on both substance and style for each quiz submission, tailored to the strengths and weaknesses seen on that particular quiz.

While the quizzes are optional, I do not review the quizzes in class in order to encourage participation and the individualized feedback that you get with participation. The most valuable part of the exercise is not seeing the model answer, already constructed (though you will if you participate, as I include it in my remarks on your answer). Rather, it is your practice of applying law to fact, coming to conclusions yourself, and writing a well-constructed answer, citing the relevant authority. Therefore, it is to your advantage to submit answers for feedback tailored specifically to you or your group’s (if you work with another student) strengths and weaknesses.

I allow students to submit answers individually, but I nevertheless encourage you to work cooperatively. There is no limit to the number of names that may appear on a quiz; three or four names may appear if there are that many students in your study group. Moreover, I encourage you to work on drafting responses cooperatively rather than splitting up the questions for different people to answer. In the real world, lawyers work cooperatively, both in the discussion phase and in the drafting phase, and the final work product is always better for it. Students, just as lawyers, learn from each other. Your submitted answers should be better if you work on them cooperatively—correcting each other’s substantive and citation errors and helping each other to draft well-constructed sentences and paragraphs—rather than alone.

Quizzes must be submitted by the date noted on the quiz. Late submissions will not be accepted. I shall return the quizzes within one week because I believe prompt feedback is important.

Syllabus

Always read the Code provisions (and assigned Treasury Regulations) under study.

The problems will be covered only if they are specifically assigned below in writing (i.e., they will not be covered even if they are located on assigned pages unless the Problem is itself specifically assigned).

Particularly in the last half of the class (dealing with outbound transactions), the assignments below will be tweaked as necessary to incorporate the new 5th edition. I shall provide ample advance notice of these changes.

I. Introduction and Residency

Class 1: p. 1-41.

Class 2: p. 41-75, problems 2 through 5 on p. 47-48, problem 1 on p. 70-71. Focus on § 7701(b)(1)(A), (b)(3), (b)(5)(A), (b)(7); Treas. Reg. § 301.7701(b)-2(c), -3(c) & (d).

II. Source Rules

Class 3: p. 76-99, problems 1-4 on p. 128-29. Focus on § 861(a)(1), (c), (a)(2)(A)-(B), (a)(3)-(4); Treas. Reg. § 1.861-4(b)(1)(i), -4(b)(2)(ii)(A) and (C).

Class 4: p. 99-111, problems 6-7 on p. 129. Focus on §§ 861(a)(5)-(6); 865(a)-(c)(2), (d), (e); 863(b); Treas. Reg. §§ 1.861-7(c); 1.863-3(a)-(c).

Class 5: p. 111-40. Focus on Treas. Reg. § 1.863-1(d); § 864(e)(2); Treas. Reg. § 1.861-8(a)-(c) and (e)(9).

III. Foreign Persons: Trade or Business Income

Class 6: p. 141-65. Focus on §§ 871(b); 882(a); 864(b); 875(1); 897(a)(1); 871(d)(1), 882(d).

Class 7: p. 166-80, but skipping both Rev. Rul. 86-154 (p. 168) and Rev. Rul. 75-253 (p. 174), problems 1-2 on p. 180-81. Focus on §§ 864(c); 873(b); Treas. Reg. § 1.864-6(b)(3)(i). Review the last sentence in § 863(b)(2); § 865(e)(2) & (3).

Class 8: p. 181-220, problems 2 (which refers to the Traditions facts on p. 180) and 3 on p. 220-21.

IV. Foreign Persons: FDAP income, § 884 branch profits tax, and § 897 real property gain

Class 9: p. 228-59, problems 1-6 on p. 259-60 (for which you should consult Article 22 of the Model Treaty). Focus on §§ 871(a)(1), (h)(1)-(3)(B); 881(a), (c); 1441(a)-(c)(1); 1442(a)-(b).

Class 10: p. 260-77; The Tax Court’s Indefensible Decision in SDI Netherlands (handout article); 222-25, problems on p. 225. Focus on § 884(a)-(c), (e)(3), (4), (f)(1)(B), (f)(3).

Class 11: p. 276-87, skipping Rev. Rul. 84-160 (p. 282), handout problem. Focus on § 897(a)(1), (c)(1)(A), (c)(2)-(4)(A), (c)(5), (c)(6)(A), (e); skim § 1445(a)-(c).

V. The Foreign Tax Credit , Act 1

Class 12: p. 302-31, problem on p. 324: p. 333-36, problems 1-2 on p. 362-63. Focus on §§ 901(a); 903; Treas. Reg. § 1.901-2A(e)(1), -2(b)(4)(i)(B)(last third), -2(b)(4)(iv), Ex. 1; § 1.903-1(b)(3), Ex. 1.

Class 13: p. 331-33, problems 9-11 on p. 364-65 (consult Treas. Reg. § 1.903-1(b)(2)); p. 336-47. Focus on § 901(i); Treas. Reg. §§ 1.901-2(c)(1), (2), Ex. 1; 1.901-2(f)(2)(i)-(ii), Ex. 1.

Class 14: p. 406-28, problem on p. 426, problems 1-2 on p. 428-29. Focus on § 904(a), (c), (d)(1)(A), (B) & (I), (d)(2)(A)(i), (d)(2)(B)(i), (k); Treas. Reg. § 1.904-6(a)(1)(ii).

Class 15: p. 453-75. Focus on § 911(a), (b)(1) & (2), (c)(1), (2) & (4)(A), (d)(1), (2) & (3), (f).

VI. Controlled Foreign Corporations and Related Provisions

Classes 16 & 17: p. 485-504, problems 1-10 on p. 504-05 (in connection with these problems, see Treas. Reg. § 1.958-2(f)(2), Ex. 1); p. 530-40, problems 1-2 on p. 537. Focus on §§ 957(a) and (c); 951(b); 958; 318; 951(a)(1)-(2), (b); 954(b)(5); 960(a)(1); 959(a), (d); 961(a)-(b); 952(b), (c)(1)(A).

Classes 18 & 19: p. 540-81, problem 1, except problem c., on p. 581-83. In lieu of problem c., substitute the following four problems:

c.1. USP, a domestic corporation, owns 100% of the stock of FC1, incorporated in Belgium, and FC1 owns 100% of the stock of FC2, incorporated in France. FC1 earns $900,000 of active business income that is not FBC sales or services income and receives a $100,000 dividend from FC2. FC2 earns $400,000 of active business income that is not FBC sales or services income and $200,000 of FPHCI. FC1 pays no dividends to USP. What are the subpart F consequences for USP, if any?

c.2 The facts are the same as in c.1., except that the $100,000 payment from FC2 to FC1 is interest instead of a dividend and FC2 is also incorporated in Belgium (rather than France).

c.3 The facts are the same as in c.2., except that, as in c.1., FC2 is incorporated in France.

c.4. The facts are the same as in c.3., except that 100% of FC2’s $600,000 of income is active business income that is not FBC sales or services income.

Focus on § 954(a)(1)-(3), (b)(3)-(5), (c)(1)(A)-(B), (c)(2)(A), (c)(3)(A)-(B), (d)(1), (d)(3), (e)(1); Treas. Reg. §§ 1.954-3(a)(4)(i)-(iv)(a)-(d) and Ex. (1) & (2); 1.952-1(g)(1).

Classes 20 & 22: GILTI assignment (to be determined).

VII. The Foreign Tax Credit, Act 2

Classes 22 & 23: p. 664-82, problems 1-6 on p. 682-83. Focus on §§ 904(d)(3), (d)(1)(E), (d)(4), (f)(1), (f)(2), (f)(5).

Class 24: p. 683-93 and 697-99. Typo alert: The last sentence of the first full paragraph on p. 687 is incorrect. It currently reads, “Thus, (disregarding other deductions) $1,000 of the controlled foreign corporation’s gross passive foreign personal holding company income remains after deducting the $2,000 of interest it pays to its U.S. shareholder and may be the subject of a Subpart F inclusion.” That’s wrong. The authors here apparently switched the $2,000 and $3,000 figures. The $2,000 Subpart F income is entirely wiped out by the $3,000 interest deduction under the § 954(b)(5) direct-allocation-of-interest rule described here. Thus, no Subpart F income remains.

Handout problem: DC, a U.S. corporation, has FTC carryovers in its general category basket and is hoping to generate some low-taxed foreign income that can be placed in the G.C. basket to use those credits before they expire. Do the transactions in either a. or b. help?

a. DC lends to unrelated foreign borrowers and receives $100 of interest from those borrowers. No withholding tax is imposed on the interest payment.

b. DC owns 100% of the stock of FC, a Country Z corporation. Country Z imposes no income tax. DC lends to FC, which in turn loans the funds to unrelated foreign borrowers. FC has business assets with an average quarterly adjusted basis of $2,000 and has the following income and costs this year: $100 of interest expense paid to DC by FC on the note held by DC, $100 of interest income from the foreign borrowers (on which no withholding tax is imposed), and $200 of profits (Gross Income less deductions, ignoring the interest expense noted above) from an active business in Country Z that is not FBC sales or services income. FC makes no distributions to DC during the year.

In which FTC basket does DC place the interest received from FC? What other tax consequences arise for DC under § 951(a) (subpart F) and § 951A (GILTI)? Be sure to re-read the second sentence of § 954(b)(5), which we first examined in connection with subpart F. Note that it applies both for purposes of subpart F analysis and FTC basket analysis under the § 904(d)(3) look-through rule.

VIII. Transfer Pricing

Class 25: p. 710-16, United States Steel (p. 725) and Notes 1 and 2 following, p. 738-48, p. 760-68. Focus on § 482.

IX. Introduction to Foreign Currency

Class 26: p. 769-87, p. 791-93. Focus on §§ 988(c)(1)(C), (a)(1)(A), (a)(3)(A)-(B), (e), (d); 989(a). Consider Problem 9 on p. 795.

Classes 27 & 28: Catch-up days.

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