Wood, a U.S. corporation, owns 30% of Hout, a foreign corporation. The remaining

Question

Wood, a U.S. corporation, owns 30% of Hout, a foreign corporation. The remaining 70% of Hout is owned by other foreign corporations not controlled by Wood. Hout’s functional currency is the euro. Wood receives a 50,000€ distribution from Hout. If the average exchange rate for the E & P to which the dividend is attributed is 1.2€: $1, the exchange rate at year end is .95€: $1, and on the date of the dividend payment the exchange rate is 1.1€: $1, what is Wood’s tax result from the distribution?

a. Wood receives a dividend of $41,667 and realizes an exchange loss of $3,788 ($41,667 minus $45,455).

b. Wood receives a dividend of $45,455 (50,000€/1.1) with no exchange gain or loss.

c. Wood receives a dividend of $45,455 and realizes an exchange gain of $3,788 [$45,455 minus $41,667 (50,000€/1.2)].

d. Wood receives a dividend of $52,632 (50,000€/.95) with no exchange gain or loss.

Explanation / Answer

Answer is option b. Wood received a dividend of $45,455 (EUR50,000/1.1) with no exchange gain or loss.

Hout paid a dividend distribution of EUR50,000 to Wood. Since the functional currency of Hout is EUR, so the dividend was paid by them in EUR only. However Wood's being a U.S. corporation, having USD as its functional currency, therefore the amount of EUR50,000 as dividend will be received by them after converting the money in USD and the exchange rate applicable will be the rate which is existing as at the date of payment fo such dividend i.e. EUR1.1/$1.

Amount of dividend distribution in EUR = 50,000

Conersion to USD = EUR50,000/1.1 = $45,455

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