Kraze, Inc., a calendar year domestic corporation, owns 50 percent of the stock of Malik, a calendar year specified foreign corporation. Prior to 2018, Malik has accumulated deferred foreign earnings of $40 million and an aggregate foreign cash position of $5.1 million. Assume Malik paid zero foreign tax on its earnings.a. Calculate Kraze's mandatory inclusion amount for Malik's deferred foreign earnings and its pro rata share of Malik's foreign cash position. b. Calculate Kraze's incremental tax liability on its mandatory inclusion amount. c. Determine Kraze's installment payments of the tax liability on its mandatory inclusion amount. Assume such payments begin in 2017.
What will be an ideal response?
a. Mandatory inclusion amount is $20 million ($40 million x 50%). Share of foreign cash position is $2.55 million ($5.1 million x 50%).
b.
| Tax on portion of distribution from foreign cash position ($2.55 million x 15.5%) | $ | 395,250 | |
| Tax on remaining distribution ($20 million - $2.55 million) x 8% | 1,396,000 | ||
| Total tax due on mandatory inclusion amount | $ | 1,791,250 |
| 2017 tax return (8 percent) | $ | 143,300 | |
| 2018 tax return (8 percent) | 143,300 | ||
| 2019 tax return (8 percent) | 143,300 | ||
| 2020 tax return (8 percent) | 143,300 | ||
| 2021 tax return (8 percent) | 143,300 | ||
| 2022 tax return (15 percent) | 268,688 | ||
| 2023 tax return (20 percent) | 358,250 | ||
| 2024 tax return (25 percent) | 447,812 | ||
| Total amount due | $ | 1,791,250 |
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