Question 1

Identify some state/local income tax issues facing pass-through entities such as S corporations,partnerships,and LLCs.

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Question 2

Sylvia spends time working at the offices of her employer as a consultant to clients who are located in three different U.S.states.To which state(s)' payroll factor(s) is Sylvia's compensation assigned? Apply the general UDITPA rules.

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Question 3

Your supervisor has shifted your responsibilities from the Federal corporate income tax to a multistate corporate income tax practice.In what areas might your Federal income tax knowledge also be applicable in your new assignment?

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Question 4

List at least five items that are included in the payroll factor of a typical state.Consider all forms of compensation that an employee might receive.Apply the general UDITPA rules.

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Question 5

A number of court cases in the last several decades have involved the application of a state's nexus rules concerning a business taxpayer.What is the significance of the term nexus when discussing state income taxation?

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Question 6

Kim Corporation,a calendar year taxpayer,has manufacturing facilities in States A and B.A summary of Kim's property holdings follows. Beginning of Year State A State B Total Inventory $ 300,000 $ 200,000 $ 500,000 Plant and equipment 2,200,000 1,500,000 3,700,000 Accumulated depreciation: plant and equipment (1,200,000) (500,000) (1,700,000) Land 500,000 600,000 1,100,000 Rental property* 900,000 300,000 1,200,000 Accumulated depreciation: rental property (200,000) (50,000) (250,000) ​ End of Year State A State B Total Inventory $ 400,000 $ 100,000 $ 500,000 Plant and equipment 2,500,000 1,200,000 3,700,000 Accumulated depreciation: plant and equipment (1,500,000) (450,000) (1,950,000) Land 600,000 400,000 1,000,000 Rental property* 900,000 300,000 1,200,000 Accumulated depreciation: rental property (300,000) (100,000) (400,000) *Unrelated to Kim's regular business and operations. Determine Kim's property factors for the two states.A's statutes provide that the average historical cost of business property is to be included in the property factor.B's statutes provide that the property factor is based on the average depreciated basis of in-state business property.

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Question 7

Garcia Corporation is subject to tax in States G,H,and I.Garcia's compensation expense includes the following. State G State H State I Total Salaries and wages for nonofficers $600,000 $500,000 $500,000 $1,600,000 Officers' salaries -0- -0- 800,000 800,000 Officers' salaries are included in the payroll factor for States G and H,but not for I.Compute Garcia's payroll factors for G,H,and I.

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Question 8

Franz Corporation is based in State A (corporate income tax rate 10%).It sells its goods to customers in both A and State B (corporate income tax rate 4%).Franz's state taxable income for the year is $1 million,45% of which relates to B customers.Franz's level of activities in B is insufficient to create nexus there,but A has adopted a throwback rule as to multistate sales.Would Franz reduce its total state income tax liability by creating nexus with B,say by allowing its sales force to make credit decisions? Elaborate.

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Question 9

You are completing the State A income tax return for Quaint Company,LLC.Quaint operates in various states,showing the following results. Ordinary income $800,000 Net capital loss (60,000) Interest income,IBM bond 40,000 In A,all interest is treated as business income.A uses a sales-only apportionment factor.Compute Quaint's A taxable income. ​ State A All Other States Total Sales $800,000 $1,200,000 $2,000,000 Property (average cost) 250,000 2,000,000 2,250,000 Payroll 300,000 700,000 1,000,000

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Question 10

Anders,a local business,wants your help in making a decision about a large capital investment.To assist your client,list several tax and non-tax implications of the decision.

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Question 11

Mercy Corporation,headquartered in State F,sells wireless computer devices,including keyboards and bar code readers.Mercy's degree of operations is sufficient to establish nexus only in States E and F.Determine its sales factor in those states. State E applies a throwback rule to sales,while State F does not.State G has not adopted an income tax to date.Mercy reported the following sales for the year.All of the goods were shipped from Mercy's F manufacturing facilities. Customer Customer's Location This Year's Sales NorCo E $ 60,000,000 Tools,Inc. F 20,000,000 UniBell G 50,000,000 U.S.Department of Defense All 50 U.S.States 20,000,000 Total $150,000,000

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Question 12

Hambone Corporation is subject to the State E capital stock tax.The tax is levied at 2% of the entity's net worth that is apportioned to E.Hambone conducts 30% of its operations in State E.Hambone's current book balance sheet is as follows,with amounts in millions.Compute Hambone's liability for the E capital stock tax. Cash $ 40 Payables $ 50 Receivables 20 Mortgages,principal 400 Equipment,net of accumulated depreciation 140 Common stock 10 Buildings,net of accumulated depreciation 300 Additional paid-in capital 190 Land 250 Retained earnings 100 Total assets $750 Total liabilities and equity $750

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Question 13

Discuss how a multistate business divides up its corporate taxable income among the states in which it operates.Hint: use the terms allocation and apportionment in your comments.

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Question 14

Pail Corporation is a merchandiser.It purchases overstock garments from various suppliers and sells the goods in its State L retail store.Determine the total sales that are subject to the L consumer sales tax. Sales to L residents $600,000 Sales to homeless shelter operated by a local church 80,000 Sales to residents who cross the border from nearby State M 100,000 Sales to a similar merchandiser,located in another L town 20,000

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Question 15

Compost Corporation has finished its computation of Federal taxable income.In State Q,the derivation of state corporate taxable income starts with the Federal amount and makes a number of modifications.List at least five such modifications that Compost is likely to encounter.In this regard,follow the general UDITPA rules,and list both addition and subtraction modifications.

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Question 16

State Q wants to increase its income tax collections,but politically it would be unwise to raise taxes on in-state individuals or businesses.Q currently follows all UDITPA rules and employs an equally weighted three-factor apportionment formula.Q allocates nonbusiness income amounts. Identify some changes to the income tax apportionment formula that would shift the scheduled income tax increases to out-of-state businesses.

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Question 17

Determine Drieser's sales factors for States K,M,and N. Drieser Corporation's manufacturing facility,distribution center,and retail store are located in State K.Drieser sells its products to residents located in States K,M,and N. Sales to residents of K are conducted through a retail store.Sales to residents of M are obtained by Drieser's sales representative,who has the authority to solicit,accept,and approve sales orders in State M.Residents of N can purchase Drieser's product only if they place an order online and arrange to take delivery of the product at Drieser's shipping dock. Drieser's sales this year were reported as follows. Sales to residents of State K $1,000,000 Sales to residents of State M 600,000 Sales to residents of State N 900,000 Total $2,500,000 Drieser's activities within the three states are limited to those described above.All of the states have adopted a throwback provision and utilize a three-factor apportionment formula under which sales,property,and payroll are equally weighted.State K sources dock sales to the destination state.

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Question 18

Troy,an S corporation,is subject to tax only in State A.On Schedule K of its Federal Form 1120S,Troy reported ordinary income of $2,000,000 from its business,municipal bond interest of $150,000,taxable interest of $150,000,and charitable contributions of $300,000.A does not recognize S status,but it does follow the Federal provisions with respect to the determination of taxable income for a corporation.Determine Troy's A taxable income.

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Question 19

Bobby and Sally work for the same employer,Wooster Manufacturing,which makes brushes for artists and painters.Bobby spends one-half of his time managing the company's speculative investment portfolio,and the other half working with the corporate treasurer in securing cash flow for manufacturing payrolls.Sally is a foreman in the brush factory. How are the salaries paid to Bobby and Sally treated in computing Wooster's payroll factor? Apply the general UDITPA rules.

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Question 20

In international taxation,we discuss income sourcing rules and the permanent establishment doctrine.In multistate taxation,an analogous term might be the "ultimate destination concept." Define this term,and identify at least two of the most important exceptions to the general rule.

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Quiz 24: Multistate Corporate Taxation