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 $8,000,000 and total gross income on Canadian and U.K. sales of $4,000,000, split equally between the two countries. Spartan paid Canadian income taxes of $480,000 on its branch profits in Canada and U.K. income taxes of $560,000 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 $2,050,000 on sales to its subsidiary during the year. The subsidiary paid Spartan a dividend of $710,200 on December 31 (the withholding tax is O percent under the U.S.- Australia treaty). Spartan paid Australian income taxes of $349,800 on the income repatriated as a dividend. Requirement: a. Compute Spartan's foreign source gross income and foreign tax (direct and withholding) for the current year. 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 part (a) and any excess FTC or excess FTC limitation (al of the foreign source income is put in the foreign branch 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 Req B 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 A Req B>

Answer 1

Part A

Foreign source gross income	$2060000
Foreign tax (creditable)	$1389800

Foreign source gross income

Foreign source gross income on Canadian sales (4000000/2*50%)	1000000
Foreign source gross income on U.K. sales (4000000/2*50%)	1000000
Dividend from Australian subsidiary	710200
§78 gross-up for deemed paid income taxes	349800
Foreign source gross income	2060000

Creditable foreign income taxes

Canadian income taxes	480000
U.K. income taxes	560000
Deemed paid credit on Australia dividend	349800
Total creditable income taxes	1389800

50% of the gross income from sales is foreign source under §863(b) as it is title to the goods passes outside the United States

Part 2

FTC limitation	$407400
Excess FTC	$982400

Gross income from U.S. sales	8000000
Gross income from Canada and U.K. sales	4000000
Gross income from Australia sales	2050000
Dividend from Australia subsidiary	710200
§78 gross-up on dividend from Australia subsidiary	349800
Total gross income	15110000
Interest expense	600000
Taxable income	14510000
× U.S. tax rate	21%
Precredit U.S. tax	3047100

FTC limitation

Foreign source gross income	2060000
Less: Apportioned interest expense ($600,000 × 20%)	120000
Foreign source taxable income	1940000
Taxable income	14510000

FTC limitation = $1940000/ 14510000× 3047100	407400
Creditable foreign income taxes	1389800
Excess foreign income tax credit	982400

Precredit U.S. income tax	3047100
Foreign tax credit	407400
Net U.S. income tax	2639700