Silverado Corporation is a 100 percent owned Mexican subsidiary of Gold NuggetCorporation, a U.S. corporation. Silverado had post-1986 earnings and profits of350,000,000 pesos and post-1986 foreign taxes of $15,000,000. During the current year, Silverado paid a dividend of 70,000,000 pesos to Gold Nugget. Assume an exchange rate of 1 peso = 0.10 dollars. Compute the tax consequences to Gold Nugget as a result ofthis dividend.

Question

Quizplus · Accepted Answer

The dividend of 70,000,000 pesos converts to $7,000,000 (70,000,000 x 0.10). The taxable income is the gross-up amount, which includes the dividend and the deemed paid credit. The deemed paid credit is calculated as (15,000,000/350,000,000) x 70,000,000 = 3,000,000 pesos, which converts to $3,000,000. Therefore, the taxable income is $10,000,000 ($7,000,000 + $3,000,000).

Silverado Corporation Is a 100 Percent Owned Mexican Subsidiary of Gold