Question

Comet operates solely within the United States. It owns two subsidiaries conducting business in the United States and several foreign countries. Both subsidiaries are U.S. corporations. This year, the three corporations report the following: Foreign Source Income 0 $3,650,000 4,250,000 Foreign U.S. Source Income Tax Income Paid $ 617,500 162,000 $ 362,000 635,000 1,205,000 Comet Sub 1 Sub 2 a. If Comet and its two subsidiaries file a consolidated U.S. tax return, compute consolidated income tax. b. What is the aggregate tax of the group if the three corporations file separate U.S. tax returns?

Answer 1

a.
         (1) Calculation of consolidated taxable income: all taxable income:

                    $617,500 + $3,650,000 + $162,000 + $4,250,000 + $630,000 = $9,314,000.

         (2) Multiply by U.S. tax rate of 21% = $9,314,000 x 21% = $1,956,045

         (3) Subtract consolidated foreign tax credit (the actual tax already paid) to get the U.S tax.

                   Actual tax paid: $362,000 + $1,205,000 = $1,567,000.

                                   $1,956,045 - $1,567,000 = $389,045

         (4) Calculate the foreign tax credit limitation (the annual credit cannot exceed a specific percentage of the pre-credit U.S. tax for the year)

                     Pre-credit U.S. tax x (total foreign source income / total taxable income) = tax credit limitation.

                     $1,956,045 x ($7,900,000 total foreign source income / $9,314,000 total taxable income) = $1,659,089.

                     $1,659,089 > $1,567,000.; does not exceed limitation, so consolidated income tax is still $389,045.

b.
         (1) Compute Comet's U.S. income tax.

                     Comet's taxable income $617,500 x 21% corporate tax rate = $123,500.

         (2) Compute Sub 1's taxable income.

                      Sub 1's taxable income of $3,812,000 x 21% corporate income tax = $800,520 pre-credit U.S. tax.

                     Sub 1's foreign tax credit limitation: $800,520 pre-credit U.S. tax x ($3,650,000 foreign taxable income / $3,812,000 total income) = $766,500.

                     U.S. tax for Sub 1 = $800,520 pre-credit U.S. tax - $3,62,000 tax credit = $438,520.

          (3) Compute Sub 2's taxable income.

                      Sub 2's taxable income of $4,885,000 x 21% corporate income tax = $1,025,850 pre-credit U.S. tax.

                      Sub 2's foreign tax credit limitation: $1,025,850 pre-credit U.S. tax x ($4,250,000 foreign taxable income x $4,885,000 total taxable income) = $892,500

$1,025,850 - $892,500 tax credit = $133,350

(4) Calculate aggregate tax.

Comet's tax of $123,500 + Sub 1's tax of $438,520 + Sub 2's tax of $133,350 = $695,370.

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