Foreign tax credit

ABC, Inc., a domestic corporation, owns 100% of HighTax, a foreign corporation. HighTax has $50 million of post-1986 undistributed earnings, all of which is attributable to general limitation income, and $50 million of post-1986 foreign income taxes. HighTax distributes a $5 million dividend to ABC. The dividend, which is subject to a 5% foreign withholding tax, is ABC’s only item of income during the year. The U.S. tax rate is 35%.

What amount of excess foreign tax credits is produced by the dividend?

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Explain why a U.S. taxpayer must recapture an overall foreign loss in calculating the foreign tax credit limitation. ABC, Inc., a domestic corporation, has $40 million of taxable income, including $12 million of general limitation foreign-source taxable income, on which ABC paid $4.8 million in foreign income taxes. The U.S. tax rate is 35%.

What is ABC’s foreign tax credit?

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