Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation,a U.S.corporation.Horton had post-1986 earnings and profits of C$2,400,000 and post-1986 foreign taxes of $1,600,000.During the current year,Horton paid a dividend of C$600,000 to Cruller.The dividend was characterized as general category income for FTC purposes.The dividend was subject to a withholding tax of C$30,000.Assume an exchange rate of C$1 = $1.Cruller reported U.S.sourced taxable income of $2,000,000 before considering the dividend received from Horton Corporation.Cruller's U.S.tax rate is 34 percent.Compute the tax consequences to Cruller as a result of this dividend.
A) Taxable income of $3,000,000, a net U.S. tax of $590,000, and a FTC carryover of $0.
B) Taxable income of $3,000,000, a net U.S. tax of $680,000, and a FTC carryover of $90,000.
C) Taxable income of $2,600,000, a net U.S. tax of $680,000, and a FTC carryover of $226,000.
D) Taxable income of $2,600,000, a net U.S. tax of $454,000, and a FTC carryover of $0.

Question

Quizplus · Accepted Answer

The taxable income of Cruller will be $3,000,000 ($2,000,000 U.S. sourced income + C$600,000 dividend received from Horton * exchange rate of 1:1 = $600,000). The foreign tax credit is equal to the lesser of the foreign taxes paid or the U.S. tax on the foreign income. The U.S. tax on Cruller's foreign income is $816,000 ($2,400,000 post-1986 earnings and profits * 34% U.S. tax rate) and the foreign taxes paid are equivalent to $1,600,000. Therefore, the foreign tax credit allowed is $1,600,000. Cruller can claim only $1,570,000 ($1,600,000 foreign tax credit allowed – C$30,000 foreign tax withheld) as a foreign tax credit. The U.S. tax due is $680,000 ([$3,000,000 taxable income - $1,000,000 foreign tax credit] * 34% U.S. tax rate). Cruller will have a foreign tax credit carryover of $90,000 ($1,570,000 foreign tax credit allowed - $1,480,000 foreign tax credit utilized).

Horton Corporation Is a 100 Percent Owned Canadian Subsidiary of Cruller