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. Title transfers in the United States on all sales to U.S. customers and abroad (FOB: destination) on all sales to Canadian and English customers. Spartan reported total gross income on U.S. sales of $15,000,000 and total gross income on Canadian and U.K. sales of $5,000,000, split equally between the two countries. Spartan paid Canadian income taxes of $600,000 on its branch profits in Canada and U.K. income taxes of $700,000 on its branch profits in the U.K. 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) on all sales to the subsidiary. Spartan reported gross income of $3,000,000 on sales to its subsidiary during the year. The subsidiary paid Spartan a dividend of $670,000 on December 31 (the withholding tax is 0% under the U.S.-Australia treaty). Spartan was deemed to have paid Australian income taxes of $330,000 on the income repatriated as a dividend.
a. Compute Spartan's foreign source gross income and foreign tax (direct and withholding) for the current year.
b. Assume 20% 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 Question A and any excess FTC or excess FTC limitation (all of the foreign source income is put in the general category FTC basket).