Reference no: EM131318291

Part A -

Exercise 1 - California Graphics is a U.S. corporation with $200 million of U.S.-source income and $10 million of foreign-source income. In addition, California Graphics has three-quarters ownership of a Canadian partnership that has total pretax income of $30 million, all of which are Canadian-source income and subject to a 40% Canadian tax rate. The Canadian partnership repatriates $5 million back to California Graphics in the current year. For U.S. purposes, California Graphics treats the Canadian partnership as a partnership under the check-the-box regulations.

a. How much taxable income will California Graphics report on its U.S. tax return?

b. Suppose that, instead of treating the Canadian partnership as a partnership, California Graphics elects to treat it as a corporation for U.S. purposes. How much taxable income will California Graphics report on its U.S. tax return?

Exercise 2 - Michigan Motors is a U.S. corporation with $1 billion of U.S.-source income. In addition, Michigan Motors owns 60% of Detroit Parts, a U.S. corporation with a total of $200 million of U.S.-source income, and 100% of Air Paris, a French corporation that has $500 million of French-source income. Neither Detroit Parts nor Air Paris repatriated any earnings in the current year. Assume no book tax differences except those caused by differences in consolidation requirements.

a. How much GAAP income will Michigan Motors report on its consolidated income statement?

b. How much taxable income will Michigan Motors report on its U.S. tax return?

Exercise 5 - Illinois Steel is a specialty steel manufacturer that does business in the United States, Canada, and Brazil. Illinois Steel is organized as follows. The parent, Illinois Steel, is incorporated in Illinois and had pretax income from its U.S. operations of $5 million in 2013. Illinois Steel owns 100% of the stock of ISB, its Brazilian subsidiary, which reported pretax income of $3 million in 2013. Illinois Steel directly owns its Canadian operations (that is, the Canadian group is a branch), which recorded pretax income of $10 million in 2013.

Assume all earnings are reinvested in the country where they were earned.

Assume the tax rates in the countries are United States, 35%; Canada, 30%; Brazil, 25%.

What is Illinois Steel's 2013U.S. tax liability after foreign tax credits?

Part B -

Exercise 1 - California Cars is a U.S. manufacturer of electric cars. California Cars has $5 billion of U.S. taxable income-$4 billion of which is U.S.-source income and $1 billion of which is foreign-source income. California Cars faces a U.S. tax rate of 35% and paid foreign taxes of $280 million. The firm's foreign source income falls in the general basket. It is the first year of California Cars' foreign operations, so don't worry about foreign tax credit carry forwards or carry backs.

a. What is California Cars' foreign tax credit, and what is its worldwide tax paid for the year?

b. Now suppose that California Cars engaged in tax-reduction strategies abroad, reducing its foreign taxes to $200 million but holding all else constant. What is California Cars' foreign tax credit, and what is its worldwide tax paid for the year?

c. What possible benefit might California Cars receive from reducing its foreign taxes paid in part b?

In particular, suppose that the foreign country in which California Cars operates is likely to enact a dramatic increase in its tax rate next year.

Exercise 3 - Wisconsin Cheese Corp. is a large producer of gourmet cheese and has recently expanded overseas. In its first year of international operations (year 1), Wisconsin Cheese had $1 billion of U.S. taxable income, faced a 35% U.S. tax rate, and paid $100 million of foreign taxes. The $1 billion of taxable income includes $200 million of foreign-source income and $800 million of U.S.-source income.

a. What is Wisconsin Cheese Corp.'s year 1 foreign tax credit, foreign tax credit carryover, and U.S. tax liability?

b. Now assume that in year 2, Wisconsin Cheese again has $1 billion of U.S.-source income, again faces a 35% U.S. tax rate, and paid $120 million of foreign taxes. In year 2, the firm reported $500 million of foreign-source income on its U.S. return. What is Wisconsin Cheese Corp.'s year 2 foreign tax credit, foreign tax credit carryover, and U.S. tax liability?

Attachment:- Assignment.rar