LO8 Norman, a U.S. corporation, owns 100% of Monterio, a foreign corporation operating in Barbados, which has no income tax. Norman ships goods directly to its foreign customers from its Atlanta manufacturing operations. Monterio processes all sales invoices and receipts in its Barbados office. Monterio reports $1.4 million of income during the year and does not pay any foreign taxes. Norman’s marginal tax rate is 34%, and Monterio did not pay a dividend during the year.

a. How is Monterio’s income taxed in the U.S.?

b. What are the tax consequences if Norman receives a $300,000 dividend from Monterio?