Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in

Question

Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Trikeco operates in Europe through Trike1, a wholly owned Italian corporation that manufactures a special line of mountain bicycles for the European market. In addition, Trike1 owns 100% of Trike2, a U.K. corporation that markets Trike1’s products in the United Kingdom. At end of the current year, the undistributed earnings and foreign income taxes of Trike1 and Trike2 are as follows:

Trike 1 Trike 2

Post-1986 undistributed earnings       $180 million               $108 million

Post-1986 foreign income taxes         $72 million                 $54 million

During the current year, Trike2 distributed a $20 million dividend to Trike1, and Trike1

distributed a $10 million dividend to Trikeco. To simplify the computations, assume that

neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the

dividend received by Trike1 was exempt from Italian taxation. Compute Trikeco’s deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Trikeco received from Trike1. Assume the U.S. tax rate is 35%.

Explanation / Answer

trike 1 trike2 trikeco income 252 162 414 tax in us @35% 144.9 tax credit 126 tax to be paid in us 18.9

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