Problems -
1. Cookieco, a domestic corporation, produces the world's best tasting chocolate chip cookies. In addition to its domestic sales, Cookieco markets its cookies abroad through an extensive network of branch sales offices. Cookieco's operating results for the current year are summarized below, by source and type of income:
U.S.-source manufacturing profits - $60 million
Foreign-source manufacturing profits - $40 million
Foreign-source passive investment income - $10 million
U.S. taxable income - $110 million
Cookieco paid $15 million of foreign taxes on its foreign-source manufacturing profits and $2 million of foreign taxes on its foreign- source passive investment income. Assume that the U.S. tax rate is 35%.
Compute Cookieco's total foreign tax credit, as well as the amount of excess credits (or excess limitation) in each separate basket of income.
2. Bikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Bikeco operates in Europe through Bike1, a wholly-owned Italian corporation that manufactures a special line of mountain bicycles for the European market. In addition, Bike1 owns 100% of Bike2, a U.K. corporation that markets Bike 1's products in the United Kingdom. At end of the current year, the undistributed earnings and foreign income taxes of Bike1 and Bike2 are as follows:
Bike1 Bike2
Post-1986 undistributed earnings $90 million........... $54 million
Post-1986 foreign income taxes $36 million........... $27 million
During the current year, Bike2 distributed a $10 million dividend to Bike1, and Bike1 distributed a $10 million dividend to Bikeco. To simplify the computations, assume that neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the dividend received by Bike1 was exempt from Italian taxation.
Compute Bikeco's deemed-paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Bikeco received from Bike1. Assume the U.S. tax rate is 35%.
3. Racketco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Racketco owns 100% of the stock of Teny, a foreign marketing subsidiary that was organized in Year 1. During Year 1, Teny had $15 million of foreign-based company sales income, paid $3 million in foreign income taxes, and distributed no dividends. During Year 2, Teny had no earnings and profits, paid no foreign income taxes, and distributed a $12 million dividend.
Assuming the U.S. corporate tax rate is 35%, what are the U.S. tax consequences of Teny's Year 1 and Year 2 activities?
4. Playco, an accrual basis domestic corporation, manufactures musical instruments for sale both in the United States and abroad. Ps lfauynccoti'onal currency is the U.S. dollar. Two years ago, Playco established a branch sales office in Switzerland. The sales office is a qualified business unit with the Swiss franc (CHF) as its functional currency. In Year 1, the branch had CHF40 million of taxable income, and paid CHF15 million of Swiss income taxes. The Swiss franc had an average exchange rate in Year 1 of CHF1 equals $1.10.
What are the U.S. tax consequences of the branch's activities in Year 1?
5. Powerco, a domestic corporation, manufactures batteries for sale in the United States and abroad. Powerco markets its batteries in Europe through its wholly-owned foreign marketing subsidiary, Powy. Powy was organized in Year 1, and its functional currency is the pound (£). Powy's tax attributes for its first 2 years of operations are as follows:
Year 1 Year 2
Taxable income £100 million None
Foreign income taxes (paid at end of year) £20 million None
Net Subpart F income (included in £100 million) £40 million None
Actual dividend distributions (paid at end of year) None £8 million
The pound had an average value of $1.50 during Year 1, $1.65 during Year 2, and was worth $1.60 at the end of Year 1, and $1.70 at the end of Year 2.
What are the U.S. tax consequences of Powy's results from operations in Year 1 and Year 2? Assume that the dividend distribution in Year 2 was not subject to foreign withholding taxes.