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U.S. Taxation of International Transactions when Liquidating or Selling

Finco is a wholly owned Finnish manufacturing subsidiary of Winco, a domestic corporation that manufactures and markets residential window products throughout the world. Winco has been Finco's sole shareholder since Finco was organized in 1990. At the end of the current year, Winco sells all of Finco's stock to an unrelated foreign buyer for $25 million. At that time, Finco had $6 million of post-1986 undistributed earnings, and $2 million of post-1986 foreign income taxes that have not yet been deemed paid by Winco. Winco's basis in Finco's stock was $5 million immediately prior to the sale.

Assume Winco's capital gain on the sale of Finco's stock is not subject to any foreign taxes, and that the U.S. corporate tax rate is 35%. What are the U.S. tax consequences of this sale for Winco?

Now assume that instead of selling the stock of Finco, Winco completely liquidates Finco, and receives property with a market value of $25 million in the transaction. As in the previous scenario, at the time of the liquidation, Finco had $6 million of accumulated earnings and profits, and $2 million of foreign income taxes that have not yet been deemed paid by Winco. Assume that Winco's basis in Finco's stock was $5 million immediately prior to the liquidation, and that the U.S. corporate tax rate is 35%. What are the U.S. tax consequences of this liquidation for Winco?

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Concept of Materiality
Materiality is a concept or convention in auditing and accounting relating to the importance of an account, transaction and discrepancy. The concept of materiality recognizes that some matters are important for fair presentation of financial statements with standard accounting principles (Beasley & Carcello, 2008). The main objective of an audit of financial statements is to enable the auditor to convey an opinion regarding financial statements whether they follow identified financial reporting framework or not. The representation in the auditor's standard report regarding fair presentation indicates the auditor's belief that the financial statements taken as a whole are not materially misstated.
Evaluation of Materiality
In order to obtain reasonable assurance about financial statements and whether they are free from material misstatement, an audit procedure is important. In that, the auditor develops a plan and performs auditing to detect misstatements individually and combined with other misstatements. It would result in material misstatement of the financial statements (Crawford & Loyd, 2008). So, it is important to alert while planning and performing audit procedures for misstatements ...

Solution Summary

The expert examines the United States taxation of international transactions when liquidating or selling.

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