Question

Spartan Corporation manufactures quidgets at its plant in Sparta, Michigan. Spartan sells its quidgets to customers in the United States, Canada, England, and Australia.

Spartan markets its products in Canada and England through branches in Toronto and London, respectively. Spartan reported total gross income on U.S. sales of $15,000,000 and total gross income on Canadian and U.K. sales of $5,000,000, split equally between the two countries. Spartan paid Canadian income taxes of $600,000 on its branch profits in Canada and U.K. income taxes of $700,000 on its branch profits in the United Kingdom. Spartan financed its Canadian operations through a $10 million capital contribution, which Spartan financed through a loan from Bank of America. During the current year, Spartan paid $600,000 in interest on the loan.

Spartan sells its quidgets to Australian customers through its wholly-owned Australian subsidiary. Title passes in the United States (FOB: shipping point) on all sales to the subsidiary. Spartan reported gross income of $3,000,000 on sales to its subsidiary during the year. The subsidiary paid Spartan a dividend of $670,000 on December 31 (the withholding tax is 0 percent under the U.S.- Australia treaty). Spartan paid Australian income taxes of $330,000 on the income repatriated as a dividend.

Requirement:

1. Compute Spartan’s foreign source gross income and foreign tax (direct and withholding) for the current year.
2. Assume 20 percent of the interest paid to Bank of America is allocated to the numerator of Spartan’s FTC limitation calculation. Compute Spartan Corporation’s FTC limitation using your calculation from part (a) and any excess FTC or excess FTC limitation (all of the foreign source income is put in the foreign branch FTC basket).

(Enter your answers in dollars not in millions of dollars.)

Answer 1

Part A

Foreign source gross income	$3500000
Foreign tax (direct)	$1300000
Foreign tax (withholding)	$330000

Foreign source gross income on Canadian sales (5000000/2*50%)	1250000
Foreign source gross income on UK sales (5000000/2*50%)	1250000
Dividend from Australian subsidiary	670000
78 gross-up for deemed paid income taxes	330000
Foreign source gross income	$3500000

Creditable foreign income taxes
Canadian income taxes	600000
UK income taxes	700000
Deemed paid credit on Australia dividend	330000
Total creditable income taxes	$1630000

* According to Section 863(b), if the title goods pass outside the U.S, then 50% of the gross income from sales is considered to be foreign source.

Part B

FTC limitation	$709800
Excess FTC	$920200

Gross income from U.S. sales	15000000
Gross income from Canada and U.K. sales	5000000
Gross income from Australia sales	3000000
Dividend from Australia subsidiary	670000
§78 gross-up on dividend from Australia subsidiary	330000
Total gross income	24000000
Interest expense	600000
Taxable income	23400000
x U.S. tax rate	21%
Precredit U.S. tax	4914000
FTC limitation
Foreign source gross income	3500000
Less: Apportioned interest expense ($600,000 × 20%)	120000
Foreign source taxable income	3380000
Taxable income	23400000
FTC limitation = $3,380,000 / $23,400,000 × $4914000	709800
Creditable foreign income taxes	1630000
Excess foreign income tax credit	920200
Precredit U.S. income tax	4914000
Foreign tax credit	709800
Net U.S. income tax	5623800