International Taxation Exam Exam #: _____________________

ELLM Chicago

International Taxation
Final Exam — July 30-August 3
Professor Postlewaite

General Instructions:

This exam has 100 points. Please write your examination number at the upper right-
hand corner of each page and not your name. You have four hours from the time at
which you open the exam in which to complete the exam and return it.

The examination is open-book. You are entitled to utilize class materials, class notes,
outlines, and relevant commercial law statutes. You may not communicate with another
person about the exam.

The examination is worth 100 points. Allocate your efforts accordingly. Be sure to read
each question carefully. Explain your answers when necessary and arrive at
conclusions. Answer all questions.

If there are facts you need which are not provided in the questions, state them and
indicate the differing results which might ensue from different factual assumptions. For
United States persons, assume that the tax rate is 35 percent. For non-United States
persons, with respect to any business and investment income subject to tax by the
United States, assume that it is taxed at a statutory rate of 35 (active) and 30 (passive)
percent respectively unless governed by treaty, in which case the relevant treaty rate
will control. Chile has not entered a tax treaty with the United States, while Canada
has. In all foreign jurisdictions, unless otherwise specified, assume that business
income is taxed at 40 percent and investment income at 20 percent unless governed by
treaty, in which case the relevant treaty rate will control.

IT IS AN HONOR CODE VIOLATION TO CUT AND PASTE ANY PRE-TYPED

MATERIALS INTO YOUR ANSWERS. EVERYTHING IN YOUR ANSWERS MUST BE
TYPED BY YOU DURING THE EXAM PERIOD.

1
International Taxation Exam Exam #: _____________________

Question 1
[33.3 points – suggested time 80 minutes]

Three of the leading physicians in El Paso, Texas are Hamilton, Jefferson, and
Washington. Each has a medical practice, is a sole practitioner, and is a United States
citizen.

In Year 1, Hamilton conducted a medical practice earning $850,000 of net income and
also acted as an expert witness and consultant for a Canadian client in class action
litigation taking place in Montreal. Throughout Year 1, he commuted to and from
Canada as part of the litigation, advised the client and its litigation team, prepared for
trial, and testified in the case which resulted in a favorable decision. These tasks took
91 days of the year. His fee produced net income of $400,000.

Jefferson decided to relocate to Santiago, Chile on January 1, Year 1. Given the recent
tragedies in Haiti and Chile, she accepted the position of assistant chief of surgery for
one of the leading hospitals specializing in the more severe medical injuries. She found
an apartment for $1,000 per month and generated net income from her professional
activities of $78,000. She also won $2,000 from the national lottery in Chile. She
intends to spend at least three years in Chile, immersing herself in its surgical needs. If
she has not established herself by that time, she will return to the United States and
continue her medical practice in New York.

Washington, approaching retirement, decided to give up the practice of medicine and to

move to Northern Canada where he could ski and snow shoe year round. Having been
wildly successful in practice and amassing significant savings, he moved to Canada on
January 1, Year 1. Throughout the year, he derived $40,000 in dividends paid by a
United States corporation, $9,000 of interest from a United States bank, $25,000 in
dividends from a Canadian corporation, $2,000 in interest from a Canadian bank, and
$15,000 in royalties from Canada on a book he published three years ago on medical
procedures involving severe frostbite.

What tax obligations and in what amount, if any, are owed by Hamilton, Jefferson, and
Washington to the United States, Chile, and Canada for Year 1?

2
International Taxation Exam Exam #: _____________________

Question 2
[33.3 points – suggested time 80 minutes]

Julie Sandoval is a citizen and resident of Chile. She works as a full-time, high-ranking
business executive for a large oil company in Chile, earning $900,000 a year in each of
the relevant years. Three years ago (Year 1), she bought a New York City
condominium apartment for $3,000,000. Her work schedule made it impractical for her
to lease the premises to others. While she enjoyed significant appreciation in its value
during the first year of ownership, the recession dramatically affected its value. Fearing
that she might sustain an actual loss on her investment, after months of advertising, she
finally sold the apartment for $3,500,000, which closed on New Year’s Eve, December
31, Year 3.

In the first year of her ownership, she utilized the apartment periodically and was
present therein for 120 days. While there, she, her spouse, and their child enjoyed the
city’s cultural attractions, while also conducting business from her home, a ritual which
she followed annually, in part hoping that her child would become bilingual. Given the
child’s eight-month presence in Santiago and education at one of the best private
schools in all of Chile, Sandoval felt that the four-month immersion in American culture
would better prepare her child for the future.

During Years 2 and 3, Sandoval followed her same pattern of living and working during
her 120-day stay. However, while in Canada on business in Year 2, a client introduced
her to the joys and near addiction of harness racing. Thus, in Year 3, she began
frequenting a New York race track. She visited the track every day that she was in the
United States. During that time, she made a number of successful wagers, ending Year
3 with total winnings of $530,000. Unfortunately, she had losses of $375,000.

During Year 3, she also received interest income of $14,000, capital gain income of
$28,000 from sale of stock on the New York Stock Exchange, and dividend income of
$7,000. The payer of the interest income was Motorola, Inc., a Delaware corporation;
the stock sold was that of Google, Inc., a United States Corporation; and the payor of
the dividend was General Auto of Chile, a Chilean corporation that annually earns 40
percent of its income from activity within the United States. Given Chile’s system of
taxation, she paid Chilean income taxes of $260,000. What are Sandoval’s tax
obligations to the United States for Year 3?

3
International Taxation Exam Exam #: _____________________

Question 3
[33.3 points – suggested time 80 minutes]

On January 1, Year 1, Agnew Corporation, a domestic corporation, was formed by Sally

and Mary, both unrelated United States citizens, with contributions for their stock of
$100,000 each. Later that day, Agnew Corporation and Matthew and David, unrelated
United States citizens, formed Celebrate Corporation, a Chilean corporation, by
contributing $240,000 (48%), $240,000 (48%), and $20,000 (4%) respectively.

In Years 1, 2, 3, and 4, Celebrate Corporation earned annually $8,000,000 in dividend

income with no expenses from Canadian sources and paid $1,200,000 in Canadian
income taxes. In Year 4, Celebrate Corporation distributed a dividend of $2,000,000 to
Agnew Corporation, $2,000,000 to Matthew, and $42,000 to David.

On January 1, Year 5, Matthew sold his stock to Jillian, a Canadian citizen and resident,
for its fair market value of $7,000,000.

What tax results to the parties for each of Year 1, 2, 3, 4, and 5 with respect to the
United States?