Pennworth Corporation operates in the United States and foreign country M. Its domestic subsidiary Delco, Inc. operates in foreign country N. This year, the two corporations report the following. $\begin{array}{lccccc}
&\text { U.S. Source } & \text { Foreign } & \text { Foreign } \
&\text { Income } & \text { Source Income } & \text { Income } \
&& & \text { Tax Paid }\
\text { Pennworth } & \$ 3,000,000 & \$ 1,000,000 & \$ 300,000 \
\text { Delco } & 0 & 1,000,000 & 100,000
\end{array}$
If Pennworth and Delco file a consolidated U.S. tax return, compute consolidated income tax liability. Assume neither corporation's foreign source income qualifies as foreign-derived intangible income.

Question

Pennworth Corporation operates in the United States and foreign country M. Its domestic subsidiary Delco, Inc. operates in foreign country N. This year, the two corporations report the following. $\begin{array}{lccccc}
&\text { U.S. Source } & \text { Foreign } & \text { Foreign } \
&\text { Income } & \text { Source Income } & \text { Income } \
&& & \text { Tax Paid }\
\text { Pennworth } & \$ 3,000,000 & \$  1,000,000 & \$ 300,000 \
\text { Delco } & 0 &  1,000,000 & 100,000
\end{array}$
 If Pennworth and Delco file a consolidated U.S. tax return, compute consolidated income tax liability. Assume neither corporation's foreign source income qualifies as foreign-derived intangible income.

Quizplus · Accepted Answer

Pennworth's U.S. source income is $3,000,000, and its foreign source income is $1,000,000. Delco's foreign source income is $1,000,000. The consolidated foreign source income is $2,000,000. The consolidated U.S. tax rate is 35%. The consolidated foreign tax credit is $400,000 ($300,000 + $100,000). The consolidated income tax liability is $650,000 ($2,000,000 x 35% - $400,000).

Pennworth Corporation Operates in the United States and Foreign Country