Question

Spartan markets its products in Canada and England through branches in Toronto and London, respectively. Title transfers in the United States on all sales to U.S. customers and abroad (FOB: destination) on all sales to Canadian and English customers. Spartan reported total gross income on U.S. sales of $27,200,000 and total gross income on Canadian and U.K. sales of $6,800,000, split equally between the two countries. Spartan paid Canadian income taxes of $816,000 on its branch profits in Canada and U.K. income taxes of $952,000 on its branch profits in the U.K. Spartan financed its Canadian operations through a $6 million capital contribution, which Spartan financed through a loan from Bank of America. During the current year, Spartan paid $360,000 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 $2,190,000 on sales to its subsidiary during the year. The subsidiary paid Spartan a dividend of $804,000 on December 31 (the withholding tax is 0 percent under the U.S.- Australia treaty). Spartan was deemed to have paid Australian income taxes of $396,000 on the income repatriated as a dividend. Refer Corporate tax table.

Requirement:

Compute Spartan’s foreign source gross income and foreign tax (direct and withholding) for the current year.

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 question a and any excess FTC or excess FTC limitation (all of the foreign source income is put in the general category FTC basket).

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

Complete this question by entering your answers in the tabs below.

Req A

Compute Spartan’s foreign source gross income and foreign tax (direct and withholding) for the current year.

	Foreign source gross income Foreign tax (creditable)

Req B

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 question a and any excess FTC or excess FTC limitation (all of the foreign source income is put in the general category FTC basket). (Do not round intermediate calculations.)

	FTC limitation Excess FTC

Answer 1

B)

Gross income from US sales	$27200000
Gross income from Canada and UK sales	$6800000
Gross income from Australia sales	$2190000
Dividend from Australia subsidiary	$804000
S78 gross-up income	$396000
Total gross income	$37390000
Interest expense	$360000
Taxable income	$37030000
* US tax rate	0.35
Precredit US tax	$12960500

FTC Limitation
Foreign source gross income (from A above)	$4600000
Apportioned interest expense (20%)	72000
Foreign source taxable income	$4528000
Taxable income	$37030000

FTC Limitation =($4528000/$37030000)*$12960500 $1584800

Creditable Foreign Income Taxes $2164000

Excess Foreign Income Tax Credit $579200

Pre Credit US Income Tax $12960500

Foreign Tax Credit $1584800

Net US Income TAX $11375700