Tucson, a U.S. corporation organized in Year 1, reports the following items for a three-year period.

The foreign source and worldwide taxable income items are determined under U.S. law.

a. What is Tucson's foreign tax credit limitation for each of the three years (assume a 21% U.S. corporate tax rate and that income from all foreign activities fall into a single basket)?

b. How are Tucson's excess foreign tax credits (if any) treated? Do any carryovers remain after Year 3?

c. How would your answers to Parts a and b change if the IRS determines that $100,000 of expenses allocated to U.S. -source income should have been allocated to foreign source income?

d. What measures should Tucson consider if it expects a potential current excess foreign tax credit position to persist in the long-run?

Transcribed Image Text:

Year 2 Year 1 Year 3 Foreign tax accrual Foreign source taxable income Worldwide taxable income $ 120,000 $ 180,000 70,000 400,000 1,000,000 300,000 1,000,000 500,000 1,000,000