Deck 13: Jurisdictional Issues in Business Taxation

Question 1

The sales factor in the UDITPA state income tax apportionment formula equals out-of-state sales divided by total sales.

Answer 1

False

Question 2

The federal income tax deduction allowed for state income taxes paid decreases the cost of the state taxes.

Answer 2

True

Question 3

The payroll factor in the UDITPA state income tax apportionment formula always includes executive compensation.

Answer 3

False

Question 4

Supplies, Inc. does business in Georgia (6% tax rate) and Alabama (5% tax rate). All other factors being equal, the company will reduce state taxes if it increases the compensation paid to its employees in Alabama.

Question 5

Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits a state from charging an extra 10 cent tax per gallon on gasoline sold to trucks with out-of-state license plates.

Question 6

Multi-state businesses can reduce their overall tax cost to the extent they can shift income from a low-tax state to a high-tax state.

Question 7

According to Public Law 86-272, the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.

Question 8

A corporation is usually subject to tax by any state in which it engages in any business transactions.

Question 9

The UDITPA formula for apportioning income among states is based on four equally weighted factors.

Question 10

In the United States, corporations are subject only to taxes imposed by the federal government.

Question 11

The UDITPA formula for state income tax apportionment consists of three factors: sales, payroll, and profit.

Question 12

Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits state governments from using a tax to discriminate against interstate commerce.

Question 13

If a corporation with a 21% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $15,800.

Question 14

Non-resident firms selling tangible goods to in-state residents can use P.L. 86-272 to avoid having income tax nexus in a state.

Question 15

BiState Inc. conducts business in North Carolina and South Carolina. If BiState's apportionment percentage in North Carolina is 63%, its apportionment percentage in South Carolina can be no more than 37%.

Question 16

All states assessing an income tax use the same formula for apportionment purposes.

Question 17

Multi-State, Inc. does business in two states. Its apportionment percentage in state A is 63%. Its apportionment percentage in the other state can be no more than 37%.

Question 18

The sales factor in the UDITPA state income tax apportionment formula equals in-state sales divided by total sales.

Question 19

If Gamma Inc. is incorporated in Ohio and has its commercial domicile in Cleveland, the state of Ohio has jurisdiction to tax 100% of Gamma's business income.

Question 20

Luttrix Inc. does business in Nebraska (6% tax rate) and Colorado (3% tax rate). All other factors being equal, Luttrix will reduce state taxes if it constructs a new manufacturing plant in Colorado.

Question 21

The income earned by a foreign branch operation of a U.S. corporation is taxable by the United States only when repatriated.

Question 22

For dividends received prior to 2018, the deemed paid foreign tax credit was available only to U.S. corporations that own 30% or more of the voting stock of a foreign corporation that paid dividends during the taxable year.

Question 23

S. taxpayer can make an annual election to take a credit or a deduction for foreign income taxes paid.

Question 24

The foreign subsidiaries of a U.S. corporation cannot be included in a U.S. consolidated tax return.

Question 25

In determining the portion of a firm's total income subject to a state's income tax, most states use an apportionment formula modeled after the Uniform Division of Income for Tax Purposes Act (UDITPA).

Question 26

The foreign tax credit is available for income taxes paid to a foreign country.

Question 27

International tax treaties generally allow a government to tax a non-resident firm that maintains a permanent residence in the treaty country.

Question 28

A foreign branch operation of a U.S. corporation is not a separate legal entity.

Question 29

Excess foreign tax credits can only be carried to future tax years.

Question 30

The United States taxes its citizens on their worldwide incomes.

Question 31

A bilateral agreement between the governments of England and France defining and limiting each party's respective tax jurisdiction is an example of a tax treaty.

Question 32

The foreign tax credit is available only for foreign income, excise, value-added, sales, property and transfer taxes.

Question 33

Under the U.S. tax system, a domestic corporation pays U.S. tax only on the portion of its business income earned in the United States.

Question 34

Foreign value-added taxes and excise taxes are eligible for the U.S. foreign tax credit.

Question 35

Under most tax treaties, income attributable to a permanent establishment through which a foreign taxpayer conducts business can be taxed only by the taxpayer's country of residence.

Question 36

Cross-crediting allows multinational corporations to use excess credits generated in low- tax jurisdictions to offset excess limitations generated in high-tax jurisdictions.

Question 37

The foreign tax credit is available for both income and property taxes paid to a foreign jurisdiction.

Question 38

The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S. parent corporation.

Question 39

For dividends received prior to 2018, the deemed paid foreign tax credit treats a U.S. corporation that receives a foreign source dividend as if the corporation paid tax directly to a foreign jurisdiction.

Question 40

Sales to foreign customers through a branch office of a U.S. corporation are considered foreign-derived intangible income eligible for a preferential tax rate.

Question 41

This year, Sutton Corporation's before-tax income was $2,000,000. It paid $175,000 income tax to Nebraska and $300,000 income tax to Iowa. Compute Sutton's federal income tax.

A) $420,000
B) $320,250
C) $680,000
D) $518,500

Question 42

Verdi Inc. has before-tax income of $500,000. Verdi operates entirely in state Q, which has a 10% corporate income tax. Compute Verdi's combined federal and state tax burden as a percentage of its before-tax income.

A) 28.9%
B) 31%
C) 44%
D) 40.6%

Question 43

Tri-State's, Inc. operates in Arkansas, Oklahoma, and Kansas. Assume that each state has adopted the UDITPA formula. During the corporation's tax year ended December 31, the apportionment data indicated:
Which of the following statements is true?

A) The sales factor for Arkansas is approximately 35%.
B) Arkansas payroll percentage is approximately 11.1%.
C) The property factor for Arkansas is approximately 7.14%.
D) All of the factors for Arkansas are correct.

Question 44

Which of the following statements about the Uniform Division of Income for Tax Purposes Act (UDITPA) is false?

A) UDITPA requires all states to use the same method for apportioning income of multistate businesses.
B) UDITPA recommends an equally-weighted three-factor formula for apportioning income of multistate businesses.
C) The UDITPA property factor equals the cost of real or tangible personal property located in a state divided by the total cost of such property.
D) The UDITPA payroll factor equals the compensation paid to employees working in a state divided by total compensation.

Question 45

Korn, Co. was incorporated in Delaware. It has production, distribution, and sales facilities in Kansas and Nebraska. All of Korn's customers reside in Kansas or Nebraska. Assume that both states use the UDITPA formula for apportionment of income. The corporation is investing in new equipment that cost $900,000. The equipment could be used in either the Kansas or Nebraska production facilities. Assume that Kansas' corporate income tax rate is 7% and Nebraska's is 8.5%. Should the equipment be placed in Kansas or Nebraska to minimize Korn's state income tax?

A) Kansas.
B) Nebraska.
C) Either state, because state income tax will be unaffected by this choice.
D) Korn should place the equipment in a third state in which it does not have nexus.

Question 46

Tri-State's, Inc. operates in Arkansas, Oklahoma, and Kansas. Assume that each state has adopted the UDITPA formula. During the corporation's tax year ended December 31, the apportionment data indicated:
Tri-State's income for the current year is $250,000. Approximately how much income will be taxed by Oklahoma?

A) $250,000
B) $218,125
C) $44,375
D) $173,750

Question 47

Which of the following activities create state income tax nexus?

A) Selling products over the Internet to customers in the state. The products are delivered by U.S. mail.
B) Traveling salespersons soliciting orders for tangible goods from customers in the state.
C) Ownership of manufacturing and distribution facilities within the state.
D) All of the above activities create state income tax nexus

Question 48

Economic nexus:

A) May exist even though a firm has no physical presence in a state.
B) Does not create taxing jurisdiction under the Commerce Clause of the U.S. Constitution.
C) Requires a greater physical presence than traditional definitions of nexus.
D) Applies only to Internet business activities.

Question 49

Which of the following could result in a corporation having more than 100% of its income subject to state taxation?

A) Some of the states in which the corporation conducts business have not adopted the Uniform Division of Income for Tax Purposes Act formula.
B) The states in which the corporation conducts business have adopted different definitions of the specific components of the UDITPA formula.
C) Some of the states in which the corporation conducts business strictly apply the UDITPA formula while others double-weight the sales factor.
D) All of these factors could result in a corporation having more than 100% of its income subject to state taxation.

Question 50

Which of the following statements concerning the nexus required for a state to tax income is false?

A) Maryland has nexus if the corporate headquarters is located in Baltimore.
B) Company-owned trucks driving through Arizona to deliver goods to customers residing in California creates nexus in Arizona.
C) Maine has nexus if a company has retail outlets located in Maine malls.
D) A New York corporation can send traveling salespeople into Massachusetts to solicit orders for tangible goods without creating nexus in Massachusetts.

Question 51

Lexington Corporation conducts business in four states. In state A, its sales factor is 50%, its payroll factor is 14%, and its property factor is 29%. State A uses an equally-weighted three-factor apportionment formula, but plans to change to a formula that double-weight the sales factor. Which is of the following statements is true?

A) Lexington's tax liability to state A will increase.
B) Any increase in Lexington's tax liability to state A will be offset by a decline in tax liability to other states.
C) Lexington's tax liability to state A will decrease.
D) Lexington's tax liability to state A will be unaffected by this change.

Question 52

GAAP-based consolidated financial statements include only income earned by the consolidated group's domestic subsidiaries.

Question 53

Transfer prices cannot be used by U.S. corporations and their foreign affiliates to shift income between taxing jurisdictions.

Question 54

Tri-State's, Inc. operates in Arkansas, Oklahoma, and Kansas. Assume that each state has adopted the UDITPA formula. During the corporation's tax year ended December 31, the apportionment data indicated:
Tri-State's income for the current year is $250,000. Approximately how much will be taxed by Kansas?

A) $83,000
B) $95,000
C) $32,000
D) $170,000

Question 55

A foreign source dividend received by a U.S. corporation after 2017 is eligible for the 50% dividends-received deduction.

Question 56

S. parent corporation that receives a dividend from a wholly-owned foreign subsidiary that pays a 45% income tax to its home country typically does not owe any U.S. tax on the dividend.

Question 57

A controlled foreign corporation is a foreign corporation in which U.S. shareholders own more than 50% of the voting power or stock value.

Question 58

The term "tax haven" refers to a foreign country that imposes an income tax at a rate higher than the U.S. rate.

Question 59

Harris Corporation's before-tax income was $400,000. It does business entirely in Pennsylvania, which has a 6% corporate income tax. Compute Harris' federal income tax.

A) $84,000
B) $136,000
C) $102,960
D) $78,960

Question 60

Section 482 of the Internal Revenue Code gives the IRS the authority to apportion or allocate gross income, deductions, or credits between/among related parties to correct any perceived distortion resulting from unrealistic prices charged by members of the group to each other for goods or services.

Question 61

San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U)S. source income $ 400,000
Foreign source income-Country W 300,000
Total $ 700,000
San Carlos paid $60,000 income tax to Country W. Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax.

A) $100,000
B) $66,000
C) $47,400
D) $0

Question 62

Which of the following statements about income tax treaties is false?

A) An income tax treaty is a bilateral agreement between the governments of two countries defining and limiting each country's respective tax jurisdiction.
B) The provisions of income tax treaties pertain only to individuals and corporations that are residents of either treaty country.
C) Under a typical treaty, the non-resident country would only tax a firm's profits if the firm maintained a permanent establishment in that country.
D) Under a typical treaty, a firm's profits would be allocated to the countries in a manner similar to the apportionment of income among states under the UDITPA formula.

Question 63

Albany, Inc. does business in states C and D. State C uses an apportionment formula that double-weights the sales factor; state D apportions income using an equally-weighted three-factor formula. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows.
Calculate Albany's income taxable in each state.

A) State C, $1,100,000; State D, $1,800,000.
B) State C, $1,100,000; State D, $1,900,000.
C) State C, $1,200,000; State D, $1,800,000.
D) State C, $1,200,000; State D, $1,900,000.

Question 64

Jovar Inc., a U.S. multinational, began operations this year. Jovar had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U)S. source income $ 600,000
Foreign source income-Country O 100,000
Total $ 700,000
Jovar paid $50,000 income tax to Country O. Compute Jovar's U.S. tax liability if it takes the foreign tax credit.

A) $204,000
B) $97,000
C) $126,000
D) $147,000

Question 65

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U)S. source income $ 1,000,000
Foreign source income-Country A 500,000
Total $ 1,500,000
Fleming paid $200,000 income tax to Country A. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

A) 21%
B) 17.33%
C) 34.33%
D) 35%

Question 66

Which of the following taxes is eligible for the foreign tax credit?

A) Property taxes paid to a foreign country on the value of property owned in that country.
B) Value-added taxes assessed on the value of inventory manufactured in a foreign country.
C) Income tax assessed by a local government within a foreign country.
D) Sales tax assessed on the purchase of consumer goods in a foreign country.

Question 67

Which of the following statements about the foreign tax credit is true?

A) The foreign tax credit allows U.S. companies to defer U.S. tax on foreign source income.
B) The foreign tax credit is available to foreign corporations doing business in the U.S.
C) The foreign tax credit is allowed for all types of foreign taxes.
D) By permitting a foreign tax credit, the U.S. relinquishes its taxing jurisdiction on foreign source income earned by U.S. corporations to the extent that income is taxed by a foreign jurisdiction.

Question 68

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U)S. source income $ 1,000,000
Foreign source income-Country A 500,000
Total $ 1,500,000
Fleming paid $50,000 income tax to Country A. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

A) 21%
B) 34%
C) 33%
D) 17.33%

Question 69

Global Corporation, a U.S. multinational, began operations this year. Global had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U)S. source income $ 700,000
Foreign source income-Country X 100,000
Total $ 800,000
Global paid $15,000 income tax to Country X. What is Global's U.S. tax liability if it takes the foreign tax credit?

A) $153,000
B) $168,000
C) $147,000
D) $238,000

Question 70

Albany, Inc. does business in states C and D. State D uses an apportionment formula that double-weights the sales factor; state C apportions income using an equally-weighted three-factor formula. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows.
Calculate Albany's income taxable in each state.

A) State C, $1,100,000; State D, $1,800,000.
B) State C, $1,100,000; State D, $1,900,000.
C) State C, $1,200,000; State D, $1,800,000.
D) State C, $1,300,000; State D, $1,700,000.

Question 71

Many Mountains, Inc. is a U.S. multinational corporation. This year, it had the following income.
Corporate tax rate schedule.
Many Mountains paid $15,000 income tax to Country X and $18,500 income tax to Country Y. Compute Many Mountains' allowable foreign tax credit.

A) $15,000
B) $18,500
C) $33,500
D) $35,700

Question 72

Which of the following statements concerning the taxation of a U.S. multinational corporation is true?

A) A U.S. corporation is taxed by the United States only on its U.S. source income.
B) The foreign tax credit ensures that a U.S. corporation will never pay taxes at a higher rate than the one imposed by the U.S. tax law.
C) Cross-crediting allows a U.S. corporation to maximize its foreign tax credit.
D) The foreign tax credit allows a U.S. corporation to defer taxation of its foreign source income until the earnings are repatriated.

Question 73

World Sales, Inc., a U.S. multinational, had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U)S. source income $ 500,000
Foreign source income-Country O 200,000
Total $ 700,000
World Sales paid $50,000 income taxes to Country O. What is World Sale's U.S. tax liability if it deducts the foreign taxes paid?

A) $147,000
B) $97,000
C) $136,500
D) $221,000

Question 74

Which of the following statements about the foreign tax credit limitation is false?

A) The foreign tax credit cannot exceed the U.S. tax on foreign source income.
B) Foreign tax credits in excess of the limit can be carried forward indefinitely.
C) Cross-crediting of taxes paid in high-tax and low-tax foreign jurisdictions can increase allowable foreign tax credits.
D) The foreign tax credit limitation is based on the ratio of foreign source income to total taxable income.

Question 75

Southern, an Alabama corporation, has a $7 million excess FTC carryforward attributable to its foreign branch manufacturing operations. Which of the following strategies should increase Southern's use of its FTC carryforward to reduce U.S. tax?

A) Southern could open a branch manufacturing operation in a foreign country with a 17% corporate income tax.
B) Southern could open a branch manufacturing operation in a foreign country with a 40% corporate income tax.
C) Southern could repatriate foreign source income in the form of dividends from its controlled subsidiary operating in a country with a 32% corporate income tax.
D) None of these strategies would increase the use of the FTC carryforward.

Question 76

Jenkin Corporation reported the following for its first two taxable years. Corporate tax rate schedule. Assume that the tax rates for both the years are the same.
Calculate Jenkin's U.S. tax liability for Year 2.

A) $78,000
B) $160,000
C) $132,000
D) $210,000

Question 77

Which of the following would qualify as a permanent establishment for income tax treaty purposes?

A) The presence of corporate employees in the host country for a limited time period.
B) Shipment of goods by the foreign corporation to customers in the host country.
C) Maintenance of a sales office in the host country.
D) All of the above would qualify as a permanent establishment.

Question 78

Mega, Inc., a U.S. multinational, has pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule
U)S. source income $ 760,000
Foreign source income-Country M 80,000
Total $ 840,000
Mega paid $15,000 income tax to Country M. Mega has a $25,000 foreign tax credit carryforward. What is Mega's U.S. tax liability if it takes the foreign tax credit?

A) $16,800
B) $136,600
C) $176,600
D) $159,600

Question 79

Pennworth Corporation operates in the United States and foreign country M. Its domestic subsidiary Delco, Inc. operates in foreign country N. This year, the two corporations report the following.
Corporate tax rate schedule
If Pennworth and Delco file a consolidated U.S. tax return, compute consolidated income tax liability.

A) $650,000
B) $1,050,000
C) $630,000
D) $1,450,000

Question 80

Cambridge, Inc. conducts business in states X and Y. This year, its before-tax income was $150,000. Below is information regarding its sales, payroll, and property factors in both states.
Both states apply an equally-weighted three-factor formula to apportion income. State X has a 10% corporate income tax and state Y has a 5% corporate income tax. Compute the state tax savings if Cambridge could relocate $100,000 of property and $50,000 of payroll from state X to state Y.

A) $2,250
B) $12,563
C) $11,532
D) $9,094