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Sushi Corporation is a 100 percent owned Japanese subsidiary of Squid, Inc., a U

ID: 2477589 • Letter: S

Question

Sushi Corporation is a 100 percent owned Japanese subsidiary of Squid, Inc., a U.S. corporation. Sushi had post-1986 earnings and profits of ¥120,000,000 and post-1986 foreign taxes of $800,000. During the current year, Sushi paid a dividend of ¥60,000,000 to Squid. The dividend was characterized as general category income for FTC purposes. The dividend was subject to a 0 percent withholding tax. Assume an exchange rate of ¥1 = $0.010. Squid reported U.S. taxable income of $2,000,000. Squid's U.S. tax rate is 34 percent. Compute Squid's net U.S. tax liability for the current year and excess FTC, if any.

Explanation / Answer

Net U.S. tax of $680,000 with a $60,000 excess FTC.

The FTC limitation is computed as 1,000,000/3,000,000 * $1,020,000 = $340,000 and is binding because the Japanese tax rate is greater than 34%. The excess FTC is $60,000

Dividend (¥60,000,000 * $0.010) $600,000 Sec 78 gross-up(60/120 * $800,000) 400,000 U.S Taxable Income 2,000,000 Taxable income $3,000,000 Tax rate * 0.34 Precredit U.S tax $1,020,000 Less Deemed paid Credit (340,000) Net U.S Tax $680,000