McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 55

Hannah Corporation, a U..corporation, owns 100 percent of the stock of its two foreign corporations, Red S..and Cedar A..Red and Cedar derive all of their income from active foreign business operations.Red operates in a low-tax jurisdiction (20 percent tax rate), and Cedar operates in a high-tax jurisdiction (50 percent tax rate).Red has post-1986 foreign income taxes of $200 and post-1986 undistributed earnings of 800u.Cedar has post-1986 foreign income taxes of $500 and post-1986 undistributed earnings of 500q.No withholding taxes are imposed on any dividends that Hannah receives from Red or Cedar.The exchange rate between all three currencies is 1:1.Assume a U..corporate tax rate of 35 percent.Under the look-through rules, all dividend income is treated as general category income.a.Compute the effect of an 80u dividend from Red on Hannah's net U..tax liability.b.Can you offer Hannah any suggestions regarding how it might eliminate the residual U..tax due on an 80u dividend from Red? Be specific in terms of the exact amounts involved in any planning opportunities you identify.