DC, a domestic corporation, manufactures telephones for sale in
the US and abroad. DC owns 100% of the stock of CTS, a Hong Kong
sales subsidiary that was organized in Year 1.
For Year 1, CTS had $12 million sales income from selling
telephones, manufactured by DC, to customers in Japan; $3 million
interest income from US Treasury Notes; paid $3 million in foreign
income taxes; and distributed no dividends.
During Year 2, CTS had no earnings and profits, paid no
foreign income taxes, and distributed a $12 million dividend.
Assuming the U.S. corporate tax rate is 35%, what are the
U.S. tax consequences of CTS’s Year 1 and Year 2 activities? Why?
Must use primary resources as citations only.
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