Amelia,Inc. ,a domestic corporation receives a $100,000 cash dividend from Starke,Ltd. ,a § 902 noncontrolled foreign corporation (i.e. ,Amelia owns at least 10% but Starke is not a CFC).Amelia owns 15% of Starke.Starke's post-1986 E & P is $2 million and it has paid foreign taxes of $1 million attributable to post-1986 E & P.What is the § 902 FTC allowed Amelia related to the Starke dividend?

Question

Quizplus · Accepted Answer

Since Amelia owns 15% of Starke, the deemed paid foreign tax credit allowed to Amelia under § 902 is limited to 15% of the foreign taxes paid by Starke, or $150,000 ($1,000,000 x 0.15). However, the maximum amount of the deemed paid foreign tax credit is the lesser of the foreign taxes deemed paid or the U.S. tax on the dividend. Here, the U.S. tax on the dividend is $30,000 ($100,000 x 30%), which is less than $150,000. Therefore, the § 902 FTC allowed to Amelia related to the Starke dividend is $30,000 x 50% (the U.S. tax rate on dividend income) = $15,000, which is 50% of the U.S. tax on the dividend. Thus, the correct answer is B) $50,000.