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Exam 13: Jurisdictional Issues in Business Taxation

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Question 1

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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

E) C) and D)
F) A) and D)

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Question 2

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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.

E) C) and D)
F) B) and C)

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Question 3

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Which of the following statements regarding Internal Revenue Code Section 482 is false?

Tradewinds is a Bermuda corporation that is 100% owned by Larkin, a U.S. corporation. Which of the following transactions generates subpart F income for U.S. tax purposes?

Wilmington, Inc., a Pennsylvania corporation, manufactures computer components that it sells to Seine Corporation, a French company, for assembly into finished products. Wilmington owns 90% of Seine's stock. Wilmington's cost per component is $5, its selling price per component is $16, and it sold 110,000 components to Seine this year. Wilmington's taxable income as reported on its Form 1120 was $2,400,000, and Seine's taxable income as reported on its French corporate income tax return was $1,750,000. Determine the effect on the taxable incomes of both corporations if the IRS determines that an arm's length transfer price per component is $23.

Which of the following statements about subpart F income is false?

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

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

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

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.

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

If a U.S. multinational corporation incurs start-up losses from foreign operations, which of the following organizational forms provide immediate U.S. tax savings from the deduction of the losses?

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

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

Chester, Inc., a U.S. multinational, earns income in three foreign countries. Country A has a 25% income tax, Country B has a 35% income tax, and Country C has a 45% income tax. In which of these countries could Chester lower its world-wide tax liability by operating through a foreign subsidiary rather than a domestic subsidiary? Assume the foreign subsidiary will reinvest all after-tax earnings rather than paying dividends.

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

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

The United States taxes its citizens on their worldwide incomes.

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

Origami does business in states X and Y. State X uses an equally-weighted three-factor apportionment formula and has a 4 percent state tax rate. State Y uses an apportionment formula that double-weights the sales factor and has a 6 percent tax rate. Cromwell's taxable income, before apportionment, is $3 million. Its sales, payroll, and property information are as follows. a. Calculate Origami's apportionment factors, income apportioned to each state, and state tax liability. b. State Y is considering changing its apportionment formula to a single sales factor. Given its current level of activity, would such a change increase or decrease Origami's state income tax burden? Provide calculations to support your conclusion.