Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco
markets its motorcycles in the United States through Wheely, a wholly-owned U.S.
marketing subsidiary that derives all of its income from U.S. business operations. Wheelco
also has a creditor interest in Wheely, such that Wheely's debt to equity ratio is 3 to 1,
and Wheely makes annual interest payments of $60 million to Wheelco. The results from
Wheely's fi rst year of operations are as follows:
Sales $180 million
Interest income $6 million
Interest expense (paid to Wheelco) ($60 million)
Depreciation expense ($30 million)
Other operating expenses ($81 million)
Pre-tax income $15 million
Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts
Wheelco's interest income from U.S. withholding tax. Compute Wheely's interest expense
deduction.