Reference no: EM132233917
Rastaco, a Jamaican corporation engaged in the production and sale of musical recordings, operates a branch in Miami. The branch's "U.S. net equity," as defined in Internal Revenue Code Section 884(c)(1), was $1 million as of the end of the prior tax year. During the current tax year, the Miami branch had taxable income effectively connected with its U.S. business of $1 million and a U.S. income tax liability of $350,000. During the course of the year, the corporation purchased a new recording studio in Miami for $2 million. The purchased was financed by a cash payment of $200,000, made from a corporate account in Jamaica, and from a loan of $1.8 million from a Florida bank secured by a mortgage on the studio building. At the end of the current tax year, the fair market value of assets held by the Miami branch (including the recording studio) had increased by $3 million. The adjusted basis of assets held by the Miami branch had, however, increased by only $2.3 million. Rastaco incurred no other liabilities during the current tax year relating to the Miami branch operation. The Miami branch remitted $200,000 in cash to the head office in Jamaica on September 30 of the current tax year. What, if any, is the dividend equivalent amount for the current tax year?
How would your answer in Problem 3 change if the adjusted basis of assets held by the Miami branch had increased by only $2 million? By $2.5 million? How much tax would be owed in each instance?
Suppose that the Miami branch of Rastaco had paid interest of $10,000 during the year to various unrelated creditors, but that if properly deducted interest of $15,000 in determining its effectively connected income on the basis of the interest allocation rules.
Would there be an additional branch profits tax? How much?