Question

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

Taxable income of $2,600,000, a net U.S. tax of $454,000, and a FTC carryover of $0.
       Taxable income of $2,600,000, a net U.S. tax of $680,000, and a FTC carryover of $226,000.
       Taxable income of $3,000,000, a net U.S. tax of $590,000, and a FTC carryover of $0.
       Taxable income of $3,000,000, a net U.S. tax of $680,000, and a FTC carryover of $90,000.

Answer 1

Solution: Taxable income of $3,000,000, a net U.S. tax of $680,000, and a FTC carryover of $90,000

Working:

Credit on the dividend = 600,000/2,400,000 * $1,600,000 = $400,000

Foreign source taxable income = $600,000 + $400,000 = $1,000,000

Total taxable income = $1,000,000 + $2,000,000 = $3,000,000

Total creditable taxes = $400,000 + $30,000 = $430,000

FTC limitation = $1,000,000/ $3,000,000 * $1,020,000 = $340,000

Net U.S. tax = $1,020,000 - $340,000 = $680,000

FTC carryover = $90,000