Krebs, Inc, a U.S. corporation, operates an unincorporated branch manufacturing operation in the U.K. Krebs, Inc, reports $900,000 of taxable income from the U.K. branch on its U.S. tax return, along with $1,600,000 of taxable income from its U.S. operations. The U.K. branch income is all general limitation basket income. Krebs paid $270,000 in U.K. income taxes related to the $900,000 in branch

income. Assuming a U.S. tax rate of 35%, what is Krebs' U.S. tax liability after any allowable foreign tax credits?
a. $0
b. $270,000
c. $605,000
d. $875,000

c
RATIONALE: The U.K. branch income is $900,000 and the U.S. operations income is $1,600,000 . Accordingly, the total U.S. taxable income is $2,500,000 . The U.S. tax on this amount is $875,000 ($2,500,000 × 35%). The FTC limit in the general-income basket is $315,000 (35% × $900,000). Because the actual foreign income taxes are $270,000, Krebs' full credit is allowed. Accordingly, Krebs' net U.S. tax liability is $605,000 ($875,000 – $270,000).