DFJ, a Missouri Corporation, Owns 55% of Duvall, a Foreign

question 26

Multiple Choice

DFJ, a Missouri corporation, owns 55% of Duvall, a foreign corporation formed under Krunian law. Krunia is a central European country with a 22% corporate income tax and no income tax treaty with the United States. Last year, DFJ leased equipment to Duvall for a $415,000 annual rent payment. DFJ reported the rent as taxable income, while Duvall deducted it in the computation of taxable income. This year, the IRS determined that an arm's length rent for the equipment should be $600,000. The IRS can use its Section 482 authority to:

• A) Increase DFJ's taxable income by $185,000 and decrease Duvall's taxable income by $185,000.
• B) Increase DFJ's taxable income by $185,000.
• C) Require Duvall to pay $185,000 additional rent to DFJ.
• D) Require DFJ to recognize a $185,000 constructive dividend from Duvall.

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Definitions:

Organic Product

A compound containing carbon that is typically produced through the chemical reactions of organic compounds.

Reaction Sequence

A sequence of chemical processes in which the output of one reaction becomes the input for the subsequent one.

2-Bromo-4-Nitrobenzoic Acid

An organic compound with a benzene ring substituted with bromo, nitro, and carboxylic acid functional groups, used in synthetic chemistry.

Toluene

A colorless, water-insoluble liquid hydrocarbon of the benzene family, used as a solvent and in the manufacture of various chemicals.