Deck 13: State and Local Taxation

Question 1

Consigning property to an independent contractor will not create nexus under P.L.86-272.

Answer 1

False

Question 2

Corporations X and Y comprise a unitary business.Corporation X operates only in State A, while Corporation Y operates only in State B.Both states impose a state income tax and employ the unitary concept.A portion of Corporation X's income will be taxed in State B.

Answer 2

True

Question 3

A corporation must own property within a state in order for nexus to exist.

Answer 3

False

Question 4

Most states allow an exclusion for interest on U.S.government obligations in computing state taxable income.

Question 5

States generally impose a capital based franchise tax in lieu of a tax based on net income.

Question 6

P.L.86-272 is applicable only to state income taxes.

Question 7

For purposes of the payroll factor, "compensation" generally includes the fair value of nontaxable fringe benefits.

Question 8

Furnishing a salesperson with a company car will generally not cause a foreign corporation to become taxable in the state in which the salesperson solicits orders.

Question 9

Most states allow a deduction for state income taxes in computing state taxable income.

Question 10

Employee X spends one-half her time in State A and one-half her time in State B.For purposes of the payroll factor, her compensation should be allocated equally to States A and B.

Question 11

Business income is allocated whereas nonbusiness income is apportioned.

Question 12

The property factor is generally calculated based on the net book value of property at year end.

Question 13

X purchases goods for resale.X will generally be liable for sales tax on such purchases.

Question 14

Leased property is generally not taken into account in computing the property factor.

Question 15

Most states employ a two-factor apportionment formula based on sales and property.

Question 16

Passive income, such as interest, dividends, rents, and royalties, always constitutes nonbusiness income.

Question 17

Most states begin with federal taxable income (line 28 or 30 of page 1, Form 1120) as the starting point for computing state taxable income.

Question 18

Y Corp.ships goods from its manufacturing plant in State A to a customer in State B.Y Corp.is taxable in both States A and B.For purposes of the sales factor, the sales are attributed to State B.

Question 19

Property taxes are typically imposed based on the historical cost of assets.

Question 20

Y Corp.ships goods from its manufacturing plant in State A to a customer in State B.Y Corp.is taxable only in State A.State A employs a throwback rule For purposes of the sales factor, the sales are not attributed to either state.

Question 21

The unitary concept has no application where a group of related businesses are organized as separate corporate entities.

Question 22

D Corporation operates in two states, Y and Z.Both states impose a state income tax.For the current year, D has taxable income of $5,000,000 (after state adjustments).Such income consists of $4,000,000 of business income and $1,000,000 of nonbusiness income attributable solely to State Y.D conducts sufficient activities in both states to create nexus.Both states allocate nonbusiness income and apportion business income using a three-factor formula in which sales, payroll, and property are equally weighted.The current year factors are as follows: $\begin{array}{lll}&\text { State } Y&\text { State } Z\\\text { Sales } & 80 \% & 20 \% \\\text { Property } & 40 \% & 60 \% \\\text { Payroll } & 60 \% & 40 \%\end{array}$ What is D's State Y taxable income for the current year.

A)$5,000,000
B)$1,000,000
C)$3,400,000
D)$2,400,000
E)$2,600,000

Question 23

X Corp.buys property in State X that imposes a sales tax of 4 percent.X transports the property into State Y for use in its business.State Y imposes a sales tax of 6 percent.As a result of this transaction, State Y will likely impose

A)A personal property tax
B)A sales tax
C)An ad valorem tax
D)A use tax
E)None of the above

Question 24

The sum of the apportionment percentages for the states in which a corporation conducts business must always equal 100 percent.

Question 25

B Corp.has a manufacturing plant in State Y.It has sales in both States Y and Z; however, its activities in State Z are insufficient to create nexus under P.L.86-272.For the current year, B has sales as follows: Sales shipped from State Y to customers in State Y
$\$ 20,000,000$
Sales shipped from State $\mathrm { Y }$ to customers in State $\mathrm { Z }$
$12,000,000$
Dock sales to State $Z$ customers $\quad 8,000,000$ State Y has enacted a throwback rule.What is B's State Y sales factor for the current year?

A)100%
B)50%
C)80%
D)70%
E)60%

Question 26

X Corp.has a manufacturing facility in State A.It has sales in State B, as well as in State A.X conducts sufficient activities in both states to create nexus.During the current year, X has sales as follows: Sales shipped from State A to customers in State A
$\$ 20,000,000$

Sales shipped from State A to customers in State B
$22,000,000$
Dock sales to State B customers $\quad 8,000,000$ What is X's State A sales factor for the current year?

A)100%
B)50%
C)80%
D)70%
E)40%

Question 27

Corporation F is a foreign subsidiary of Corporation D, a U.S.corporation operating solely in State A.Corporation F conducts no business in the United States; however, corporations D and F comprise a unitary group.If a "water's edge" election is made, none of Corporation F's income will be subject to taxation by State A.

Question 28

All states apply the same tests in determining whether a group of businesses constitutes a "unitary" business.

Question 29

T Corp.owns investment securities that are physically located in State A.T is incorporated in State B and its home office (from which the securities portfolio is managed) is located in State C.All three states impose a state income tax.The earnings on the investment securities will most likely be taxed in

A)State A
B)State B
C)State C
D)All three states
E)None of the states

Question 30

S Corp.buys tangible personal property for $100,000 in State Z that imposes a sales tax of 5 percent.S intends to use $20,000 of the property in its business and resell the remaining $80,000.What is S's sales tax liability?

A)$5,000
B)$4,000
C)$1,000
D)$0
E)Some other amount

Question 31

X Corp.has a manufacturing facility in State A.It has sales in State B, as well as in State A.X conducts sufficient activities in both states to create nexus.During the current year, X has sales as follows: Sales shipped from State A to customers in State A
$\$ 10,000,000$

Sales shipped from State A to customers in State B
$8,000,000$
Dock sales to State B customers $\quad 2,000,000$
What is X's State A sales factor for the current year?

A)100%
B)50%
C)60%
D)90%
E)Some other percentage

Question 32

Real property taxes are imposed based on

A)The historical cost of the real estate
B)The net book value of the real estate
C)The current fair market value of the real estate
D)The current fair market value of the real estate, net of accumulated depreciation
E)None of the above

Question 33

Which of the following types of income would probably be considered "business income" for state income tax purposes?

A)Rents received on a piece of residential property not used in the taxpayer's trade or business
B)Royalties from the licensing of a patent developed by the taxpayer in the ordinary course of its research and development activities
C)Gain recognized on the sale of an asset not used in the regular course of the taxpayer's trade or business
D)Dividends on long-term investments of excess funds
E)None of the above

Question 34

Where consolidated returns are required for state purposes, they include only those members of the affiliated group that possess nexus with the taxing state.

Question 35

D Corporation operates in two states, Y and Z.Both states impose a state income tax.For the current year, D has taxable income of $5,000,000 (after state adjustments).Such income consists of $4,000,000 of business income and $1,000,000 of nonbusiness income attributable solely to State Y.D conducts sufficient activities in both states to create nexus.Both states allocate nonbusiness income and apportion business income using a three-factor formula.State Y equally weights the three factors, while State Z assigns double weight to the sales factor.The current year factors are as follows: $\begin{array}{lll}&\text { State } Y&\text { State } Z\\\text { Sales } & 80 \% & 20 \% \\\text { Property } & 40 \% & 60 \% \\\text { Payroll } & 60 \% & 40 \%\end{array}$ What is D's State Z taxable income for the current year.

A)$1,866,666
B)$1,400,000
C)$1,750,000
D)$2,400,000
E)$1,600,000

Question 36

As of the close of the current year, Z Corp.holds assets with a fair market value of $1,000,000 and a book value of $800,000.Z has liabilities of $300,000, Z conducts all of its business in State A that imposes a franchise tax at a rate of 4 percent.What is Z's franchise tax liability for the current year?

A)$40,000
B)$32,000
C)$28,000
D)$20,000
E)None of the above

Question 37

T Corp.owns investment securities that are physically located in State A.T is incorporated in State B and its home office (from which the securities portfolio is managed) is located in State C.States B and C impose a state income tax.The earnings on the investment securities will most likely be taxed in

A)State A
B)State B
C)State C
D)All three states
E)None of the states

Question 38

Which of the following types of income would probably constitute "nonbusiness income" for state income tax purposes?

A)Royalties from the licensing of a patent developed by the taxpayer during the course of its ordinary research and development activities
B)Interest collected on past due accounts receivable
C)Rents received in the ordinary course of the taxpayer's equipment leasing business
D)Interest on temporary investments of excess working capital
E)None of the above

Question 39

M Corporation's federal taxable income for the current year is $200,000.Such amount includes $12,000 of interest on U.S.government obligations and excludes $10,000 of interest on state and local obligations ($8,000 on State A obligations and $2,000 on State B obligations.).M deducted $15,000 of state income taxes in arriving at federal taxable income.M is taxable only in State A.State A allows a deduction for interest incurred on federal obligations, taxes out-of-state municipal bond interest, and disallows a deduction for state income taxes.What is M's state taxable income?

A)$205,000
B)$213,000
C)$215,000
D)$200,000
E)Some other amount

Question 40

M Corporation's federal taxable income for the current year is $100,000.Such amount includes $10,000 of interest on U.S.government obligations and excludes $6,000 of interest on state and local obligations.M deducted $3,000 of state income taxes in arriving at federal taxable income.M is taxable only in State A.State A allows a deduction for interest incurred on federal obligations, taxes all municipal bond interest, and disallows a deduction for state income taxes.What is M's state taxable income?

A)$100,000
B)$99,000
C)$109,000
D)$101,000
E)Some other amount

Question 41

W Corp.owns 100 percent of the stock of three subsidiaries, X, Y, and Z.W, X, Y, and Z file a consolidated return for U.S.federal income tax purposes.W, X, and Y have nexus with both States A and B.Z has nexus only with State B.All four corporations comprise part of a unitary business.If combined reporting based on unitary principles is utilized in State A, how many corporations' income and apportionment figures will be taken into account?

A)1
B)2
C)3
D)4
E)None of the above

Question 42

W Corp.owns 100 percent of the stock of three subsidiaries, X, Y, and Z.W, X, Y, and Z file a consolidated return for U.S.federal income tax purposes.W, X, and Y have nexus with both States A and B.Z has nexus only with State B.If a consolidated state income tax return is filed in State A, how many corporations will be included in such return?

A)1
B)2
C)3
D)4
E)Consolidated state income tax returns may never be filed

Question 43

For purposes of the property factor, leased property is generally valued at

A)10 times annual rentals
B)8 times annual rentals
C)5 times annual rentals
D)The fair market value of comparable assets
E)The present value of future rental payments

Question 44

X Corp.holds property as follows: State A $\quad$ State B
$\quad$ Beginning of Year $\quad$ End of Year $\quad$$\quad$ Beginning of Year $\quad$ End of Year
Cost $\$ 1,000,000 \quad \$ 1,500,000 \quad \$ 500,000 \quad\quad\quad \$ 500,000$
Accumulated depreciation $( \$ 200,000 ) \quad ( \$ 300,000 )$ $( \$ 100,000 ) \quad ( \$ 125,000 )$ The laws of State A provide for the use of average original cost in determining the property factor.What is X's State A property factor for the current year?

A)75%
B)66.67%
C)71.43%
D)72.07%
E)76.19%

Question 45

B Corp.has a manufacturing plant in State Y.It has sales in both States Y and Z; however, its activities in State Z are insufficient to create nexus under P.L.86-272.For the current year, B has sales as follows: Sales shipped from State Y to customers in State Y $\quad\$ 10,000,000$
Sales shipped from State Y to customers in State Z $\quad15,000,000$
Dock sales to State $Z$ customers $\quad 5,000,000$ State Y has enacted a throwback rule.What is B's State Y sales factor for the current year?

A)33%
B)83%
C)50%
D)67%
E)100%

Question 46

Which of the following statements concerning the unitary concept is correct?

A)All states utilize the same definition in determining whether a group of corporations constitutes a unitary business.
B)The unitary concept applies only where a business consists of divisions of a single corporation, not where a business is operated through multiple corporations.
C)It is unconstitutional to include a foreign subsidiary in a unitary group.
D)The "operational interdependency" test looks to the extent to which common administrative functions exist to determine whether a unitary business exists.
E)The "three unities" test looks to unity of ownership, unity of operation, and unity of use to determine whether a unitary business exists.

Question 47

M Corp.earns $100,000 of business income from the licensing of a patent to an unrelated party.M's commercial domicile is State A.The licensee utilizes the patent in State B.Under the MTC regulations, royalties received by M from the license should be included in the numerator of the sales factors as follows

A)State A-$100,000; State B-$0
B)State A-$0; State B-$100,000
C)State A-$100,000; State B-$100,000
D)State A-$50,000; State B-$50,000
E)State A-$; State B-$0

Question 48

Which of the following methods is utilized by states to ensure collection of tax from nonresident shareholders?

A)Withholding from distributions to nonresident shareholders
B)Revocation of the corporation's state S election if nonresident shareholders do not properly report S corporation income
C)Imposition of a corporate level tax on income allocable to nonresident shareholders
D)Allowing the filing of a single "composite" return on behalf of all nonresident shareholders
E)All of the above

Question 49

For purposes of the payroll factor, which of the following amounts generally constitute "compensation"?

A)Cash wages paid to an employee involved in manufacturing
B)Nontaxable fringe benefits
C)Cash payments to independent contractors
D)Cash wages paid to an employee involved in the management of nonbusiness assets
E)All of the above

Question 50

W Corp.owns 100 percent of the stock of three subsidiaries, X, Y, and Z.W and X have nexus with both States A and B.Y conducts business only in State B.Z is a foreign corporation that conducts no business in the United States.All four corporations comprise part of a unitary business.If combined reporting based on unitary principles is utilized in State A and a water's edge election is made, how many corporations' income and apportionment figures will be taken into account?

A)1
B)2
C)3
D)4
E)None of the above

Question 51

D, a traveling salesman for Z Corp., spends 60 percent of his time in State A, 30 percent of his time in State B, and 10 percent of his time in State C.D has no fixed base of operations.Z Corp's.home office, from which D's activities are supervised, is located in State B.D resides in State C.How is D's compensation assigned for purposes of determining the payroll factor?

A)State A - 60%; State B - 30%; State C - 10%
B)State A - 100%; State B - 0%; State C - 0%
C)State A - 0%; State B - 100%; State C - 0%
D)State A - 0%; State B - 0%; State C - 100%
E)None of the above

Question 52

Employee X drives a company automobile 6,000 miles in State A and 4,000 miles in State B.The automobile is valued at $20,000 for purposes of the property factor.The corporation's home office is located in State C.For purposes of the payroll factor, X's compensation is assigned to State B.The value of the automobile should be included in the numerator of the property factor as follows

A)State A-$20,000
B)State A-$12,000; State B-$8,000
C)State B-$20,000
D)State C-$20,000
E)None of the above

Question 53

Which of the following statements concerning the state taxation of S corporations is true?

A)The majority of states require that a separate S election be filed for state purposes.
B)Most states impose a corporate level tax on S corporations.
C)States that recognize S status generally tax distributions to shareholders as ordinary dividends.
D)Some states impose a corporate level tax on S corporations to the extent such income is allocable to nonresident shareholders.
E)None of the above