Jurisdictional Issues in Business | Complete Test Bank Ch.13

Principles of Taxation for Business and Investment Planning, 23e (Jones)

Chapter 13 Jurisdictional Issues in Business Taxation

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

Difficulty: 1 Easy

Topic: State and Local Taxation

Learning Objective: 13-01 Identify factors contributing to state and local tax burden.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: State and Local Taxation

Learning Objective: 13-01 Identify factors contributing to state and local tax burden.

Accessibility: Keyboard Navigation

Type: Static

3) 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.

Difficulty: 1 Easy

Topic: State and Local Taxation

Learning Objective: 13-01 Identify factors contributing to state and local tax burden.

Accessibility: Keyboard Navigation

Type: Static

4) 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.

Difficulty: 1 Easy

Topic: State and Local Taxation

Learning Objective: 13-01 Identify factors contributing to state and local tax burden.; 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

6) 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.

Difficulty: 2 Medium

Topic: State and Local Taxation

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

7) 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.

Difficulty: 2 Medium

Topic: State and Local Taxation

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

8) 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.

Difficulty: 2 Medium

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

9) 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.

Difficulty: 2 Medium

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

10) 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.

Difficulty: 3 Hard

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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%.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

18) 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%.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

19) 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. Assume apportionment formula modeled after the Uniform Division of Income for Tax Purposes Act (UDITPA).

Difficulty: 3 Hard

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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. Assume apportionment formula modeled after the Uniform Division of Income for Tax Purposes Act (UDITPA).

Difficulty: 3 Hard

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

21) 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).

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

24) 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.

Difficulty: 1 Easy

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

25) The United States taxes its citizens on their worldwide incomes.

Difficulty: 1 Easy

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

26) 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.

Difficulty: 1 Easy

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

28) 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.

Difficulty: 3 Hard

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

34) 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.

Difficulty: 2 Medium

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Foreign Subsidiaries

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

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.

Difficulty: 2 Medium

Topic: Tax Consequences of Operating Abroad through a Foreign Subsidiary

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

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.

Difficulty: 3 Hard

Topic: Deemed Paid Foreign Tax Credit

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

40) 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.

Difficulty: 2 Medium

Topic: Deemed Paid Foreign Tax Credit

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

41) 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 typically does not owe any U.S. tax on the dividend.

Explanation: A U.S. parent corporation that receives a dividend from a wholly-owned foreign subsidiary with a tax rate exceeding the highest corporate tax rate in the U.S. will not owe any U.S. tax on the dividend.

Difficulty: 3 Hard

Topic: Deemed Paid Foreign Tax Credit

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Post-2017 Participation Exemption for Foreign Corporations

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

45) 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.

Difficulty: 1 Easy

Topic: Transfer Pricing

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 2 Medium

Topic: Transfer Pricing

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

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

Difficulty: 1 Easy

Topic: Book/Tax Differences Related to Foreign Corporations

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

48) 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.

Difficulty: 2 Medium

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

49) 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

Difficulty: 2 Medium

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

50) 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.

Difficulty: 2 Medium

Topic: Nexus

Learning Objective: 13-02 Define nexus.

Accessibility: Keyboard Navigation

Type: Static

51) 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

Explanation: Taxable income = $2,000,000 − $475,000 state income tax = $1,525,000.

Tax = $1,525,000 × 21%.

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

52) 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

Explanation: State tax = $24,000 ($400,000 × 6%). Federal TI = $376,000 ($400,000 − $24,000). Federal tax = $376,000 × 21%.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

53) 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%

Explanation: State Q tax = $50,000. Federal TI = $450,000. Federal tax = $94,500. Total tax = $144,500. $144,500 / 500,000 = 28.9%

Difficulty: 2 Medium

Topic: State and Local Taxation

Learning Objective: 13-01 Identify factors contributing to state and local tax burden.

Accessibility: Keyboard Navigation

Type: Static

54) 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.

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

55) 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.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

56) 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.

Explanation: Sales factor is = 35% = $175,000/$500,000.

Payroll factor = 11.1% = $20,000/$180,000.

Property factor = 7.14% = $50,000/$700,000.

Apportionment percentage = 17.75% (35% + 7.14% + 11.1%)/3.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

57) 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

Explanation: $250,000 × 69.5% ($225,000/$500,000 + $140,000/$180,000 + $600,000/$700,000)/3.

Difficulty: 3 Hard

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

58) 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

Explanation: $250,000 × 12.8% ($100,000/$500,000 + $20,000/$180,000 + $50,000/$700,000)/3.

Difficulty: 3 Hard

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

59) 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.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

60) 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.

Difficulty: 1 Easy

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

61) 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

Explanation: Before any shifting, X tax = $12,563 = 10% × $150,000 × (325k/400k + 90k/100k + 200k/250k)/3. Y tax = $1,219 = 5% × $150,000 × (75k/400k + 10k/100k × 50k/250k)/3. Total state tax before shifting = $13,782. After shifting, X tax = $8,063 = 10% × $150,000 × (325k/400k + 40k/100k + 100k/250k)/3. Y tax = $3,469 = 5% × $150,000 × (75k/400k + 60k/100k + 150k/250k)/3. Total state tax after shifting = $11,532. Savings = $2,250.

Difficulty: 3 Hard

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

62) 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.

Explanation: C taxable income = $3 million × (50% + 40% + 20%)/3; D taxable income = $3,000,000 × (50% × 2 + 60% + 80%)/4.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

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.

Explanation: C taxable income = $3 million × (50% × 2 + 40% + 20%)/4; D taxable income = $3 million × (50% + 60% + 80%)/3.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

64) 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.

Difficulty: 2 Medium

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

65) 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.

Difficulty: 2 Medium

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

66) 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.

Difficulty: 2 Medium

Topic: Tax Consequences of International Business Operations

Learning Objective: 13-04 Explain the significance of a permanent establishment.

Accessibility: Keyboard Navigation

Type: Static

67) 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.

Difficulty: 1 Easy

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

68) San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows:

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

Explanation: Deduction would save $12,600 in tax ($60,000 × 21% marginal tax rate). Credit saves $60,000 in tax, so additional savings is $47,400.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

69) World Sales, Inc., a U.S. multinational, had pretax U.S. source income and foreign source income as follows:

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

Explanation: ($700,000 − $50,000) × 34%.

Difficulty: 1 Easy

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

70) Jovar Inc., a U.S. multinational, began operations this year. Jovar had pretax U.S. source income and foreign source income as follows:

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

Explanation: Pre-credit U.S. tax = $238,000. Credit is limited to $238,000 × 100k/700k = $34,000.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

71) Global Corporation, a U.S. multinational, began operations this year. Global had pretax U.S. source income and foreign source income as follows:

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

Explanation: Pre-credit tax is $168,000. Credit limited to tax paid since the foreign rate is <21%.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

72) Mega, Inc., a U.S. multinational, has pretax U.S. source income and foreign source income as follows:

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

Explanation: U.S. tax before credit = $840,000 × 34% = $285,600. Credit limited to $285,600 × $80,000/$840,000, or $27,200; total available credit is $45,000, so final tax is $285,600 − $27,200 = $258,400.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

73) Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows:

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%

Explanation: U.S. tax before FTC = $510,000. FTC = $50,000 (not limited), so U.S. tax after FTC = $460,000. Worldwide tax = $510,000.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

74) Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows:

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%

Explanation: U.S. tax before FTC = $510,000. FTC = $170,000 (limited), so U.S. tax after FTC = $340,000. Worldwide tax = $540,000.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

75) Many Mountains, Inc. is a U.S. multinational corporation. This year, it had the following income.

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

Explanation: U.S. tax before FTC = $750,000 ×  34% = $255,000. FTC Limit = $255,000 × 170/750 = $57,800; Total creditable foreign taxes = $43,500 ($15,000 + $28,500). Credit = Lesser of $43,500 or $57,800.

Difficulty: 3 Hard

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

76) 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.

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

Explanation: Taxable income = $5,000,000. Tax before credits = $1,700,000. FTC = $500,000 (no limit because of cross-crediting).

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

77) Jenkin Corporation reported the following for its first two taxable years. 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

Explanation: Year 1 FTC $68,000 (calculated as $238,000 tax × ($200,000/700,000), resulting in a  carryforward of $12,000 (Foreign tax paid Year 1 $80,000 − $68,000 Year 1 FTC).

Tax before credit = $340,000. FTC = $100,000 + $12,000 carryforward from year 1.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

78) 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.

Difficulty: 1 Easy

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

79) 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.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

80) 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.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

81) Which of the following statements about organizational forms for conducting foreign operations is false?

A) Income from a foreign branch office is reported on the consolidated U.S. income tax return.

B) Income from foreign operations conducted through a domestic subsidiary is reported on the consolidated U.S. income tax return.

C) Income from foreign operations conducted through a foreign subsidiary is reported on the consolidated U.S. income tax return.

D) Dividends received by a U.S. multinational corporation from a foreign subsidiary are reported on the consolidated U.S. income tax return.

Difficulty: 2 Medium

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

82) 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?

A) Operation through a foreign subsidiary

B) Operation through a foreign branch

C) Operation through a domestic subsidiary

D) Both b. and c.

Difficulty: 2 Medium

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

83) Which of the following entities is not subject to U.S. federal income tax?

A) U.S. corporation conducting 100 percent of its business outside the United States

B) Branch of U.S. corporation operating entirely in Germany

C) French subsidiary of U.S. parent operating entirely in France

D) Dutch corporation operating entirely within the United States

Difficulty: 1 Easy

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

84) Galaxy Corporation conducts business in the U.S. and in Country X. In which of the following situations will Galaxy not be allowed a foreign tax credit for income taxes paid to Country X?

A) Country X operations are conducted through a domestic subsidiary included in Galaxy's consolidate tax return.

B) Country X operations are conducted through a foreign subsidiary that paid no dividends.

C) Country X operations are conducted through a foreign partnership.

D) Country X operations are conducted through a foreign branch.

Difficulty: 2 Medium

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

85) The Quad affiliated group consists of Quad, a Delaware corporation, and its three wholly-owned subsidiaries. This year, the four corporations report the following net income (loss).

If Quad elects to file a consolidated U.S. tax return, compute consolidated taxable income assuming that subsidiaries 1 and 2 are domestic corporations and subsidiary 3 is a foreign corporation.

A) $1,000,000

B) $800,000

C) $1,400,000

D) $1,800,000

Difficulty: 1 Easy

Topic: Branch Offices and Foreign Partnerships

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

86) Chester, Inc., a U.S. multinational, earned $4 million this year from both domestic and international operations. Of this amount, $1.3 million qualifies as foreign-derived intangible income (FDII). If Chester pays no foreign income tax, compute its U.S. income tax liability.

A) $840,000

B) $737,625

C) $567,000

D) $170,625

Explanation: $1.3 million × 13.125% + (($4 million – $1.3 million) × 21%)

Difficulty: 2 Medium

Topic: Reduced Tax Rate on Foreign-Derived Intangible Income

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

87) Chester, Inc., a U.S. multinational, earned $4 million this year from both domestic and international operations. Of this amount, $1.3 million qualifies as foreign-derived intangible income (FDII). If Chester pays no foreign income tax, compute its worldwide tax burden as a percentage of its pretax income.

A) 21%

B) 14.18%

C) 13.125%

D) 18.44%

Explanation: [$1.3 million × 13.125% + (($4 million - $1.3 million) × 21%)] / $4 million

Difficulty: 2 Medium

Topic: Reduced Tax Rate on Foreign-Derived Intangible Income

Learning Objective: 13-06 Compare the tax consequences of a foreign branch and a foreign subsidiary.

Accessibility: Keyboard Navigation

Type: Static

88) Stockholm Imports Inc., a U.S. multinational, received a $500,000 dividend from its foreign subsidiary in 2016. The subsidiary paid $112,000 foreign income tax with respect to this dividend. Stockholm's U.S. tax rate in 2016 was 34%. If Stockholm had no other foreign source income, compute its deemed paid foreign tax credit.

A) $208,080

B) $112,000

C) $58,000

D) $0

Explanation: The grossed-up dividend is $612,000 ($500,000 + $112,000). The U.S. tax on this amount is $208,080. There is no limit on the credit since the foreign tax rate is less than U.S. rate.

Difficulty: 2 Medium

Topic: Deemed Paid Foreign Tax Credit

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

89) Lilly Inc., a calendar year U.S. corporation, owns 40 percent of the stock of Holly, Inc. a calendar year specified foreign corporation. Prior to 2018, Holly has accumulated deferred foreign earnings of $11.2 million and an aggregate foreign cash position of $1.8 million. Compute Lilly's tax liability on its mandatory inclusion amount related to its ownership of Holly.

A) $412,400

B) $694,400

C) $940,800

D) $1,031,000

Explanation: Lilly's share of Holly's accumulated earnings is $4.48 million ($11.2 x 40%) and its share of Holly's foreign cash position is $720,000 ($1.8 million x 40%). Tax on the mandatory inclusion amount is $412,400 = $720,000 x 15.5% + ($4.48 million - $720,000) x 8%

Difficulty: 3 Hard

Topic: Mandatory Inclusion from SFC

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

90) Frost Inc., a calendar year U.S. corporation, owns 20 percent of the stock of Snowflake, Inc. a calendar year specified foreign corporation. Prior to 2018, Snowflake has accumulated deferred foreign earnings of $30 million and zero aggregate foreign cash position. Compute Frost's tax liability on its mandatory inclusion amount related to its ownership of Snowflake.

A) $0

B) $1,260,000

C) $930,000

D) $480,000

Explanation: Frost's share of Snowflake's accumulated earnings is $6 million ($30 x 20%). Tax on the mandatory inclusion amount is $480,000 = $6 million x 8%.

Difficulty: 2 Medium

Topic: Mandatory Inclusion from SFC

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

91) Orchid Inc., a U.S. multinational with a 21% marginal tax rate, owns a foreign subsidiary operating in a country with a 15% income tax. This year, the subsidiary generated $400,000 taxable income. What is the total tax burden (domestic and foreign) on the earnings of the foreign subsidiary if it does not repatriate its after-tax earnings and has no subpart F income?

A) $24,000

B) $84,000

C) $400,000

D) $60,000

Explanation: Only the 15% foreign tax is paid currently.

Difficulty: 2 Medium

Topic: Deemed Paid Foreign Tax Credit

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

92) Macon, Inc., a U.S. corporation, owns stock in four corporations operating overseas. Which of the following will qualify for the 100% dividends-received deduction?

A) Levitt, Inc., is a Belgian corporation in which Macon had owned 5 percent of the outstanding stock for over 10 years.

B) Martyr Corporation is an Italian corporation in which Macon owns 20 percent of the outstanding stock. Macon acquired its investment in Martyr within the last year.

C) Jones, Inc., is a U.S. corporation operating primarily in Central America. Macon has owned 30 percent of Jones' stock for the past five years.

D) Albany Corporation is a Swiss corporation in which Macon has owned 13 percent of the outstanding stock for three years.

Difficulty: 1 Easy

Topic: Post-2017 Participation Exemption for Foreign Corporations

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

93) Fallon Inc., a U.S. corporation, owns stock in several foreign corporations. This year, Fallon received $420,000 as a dividend from Mars Corporation, and $225,000 as a dividend from Jupiter Inc. Mars is a foreign corporation in which Fallon has owned 8 percent of the outstanding stock for ten years. Jupiter is a foreign corporation in which Fallon has owned 17 percent of the outstanding stock for two years. Compute Fallon's allowable dividends-received deduction for these foreign dividends.

A) $420,000

B) $225,000

C) $665,000

D) $0

Difficulty: 1 Easy

Topic: Post-2017 Participation Exemption for Foreign Corporations

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static

94) Which of the following statements regarding controlled foreign corporations is true?

A) U.S. shareholders are taxable on any income earned by a controlled foreign corporation.

B) U.S. shareholders are never taxable on income earned by a controlled foreign corporation until such income is distributed to the shareholders.

C) U.S. shareholders of a controlled foreign corporation can increase their basis by the amount of any constructive distributions from the corporation.

D) Controlled foreign corporations are taxable in the United States on their worldwide income.

Difficulty: 2 Medium

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

95) In which of the following cases are the U.S. shareholders in a controlled foreign corporation (CFC) avoiding U.S. tax on the CFC's income?

A) The CFC operates in a jurisdiction with a tax rate lower than the U.S. rate, has no subpart F income, and 100% of its income is global-intangible low-taxed income.

B) The CFC operates in a jurisdiction with a tax rate lower than the U.S. rate, has no subpart F or global intangible low-taxed income, and pays no dividends.

C) The CFC operates in a jurisdiction with a tax rate lower than the U.S. rate, and 100% of the CFC's income is subpart F income.

D) The CFC operates in a jurisdiction with a tax rate lower than the U.S. rate; 50% of its income is subpart F income and 50% is global intangible low-taxed income.

Difficulty: 3 Hard

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

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

A) Subpart F income is constructively repatriated to U.S. shareholders of a controlled foreign corporation (CFC) when earned.

B) Subpart F income has no commercial or economic connection to the CFC's home country.

C) Subpart F income includes income from the manufacture of goods in the CFC's home country.

D) Subpart F income includes income from the purchase of goods from a related party that are subsequently sold to another related party for use outside the CFC's home country.

Difficulty: 3 Hard

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

97) Lincoln Corporation, a U.S. corporation, owns 50% of the stock of a controlled foreign corporation (CFC). At the beginning of the year, Lincoln's basis in its CFC stock was $100,000. The CFC's current-year income was $1 million, $600,000 of which was subpart F income. The CFC paid no foreign income tax and distributed no dividends. How much current taxable income must Lincoln report as a result of its ownership of the CFC?

A) $100,000

B) $600,000

C) $300,000

D) $0

Explanation: $300,000 = subpart F income × ownership %.

Difficulty: 2 Medium

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

98) Lincoln Corporation, a U.S. corporation, owns 50% of the stock of a controlled foreign corporation (CFC). At the beginning of the year, Lincoln's basis in its CFC stock was $100,000. The CFC's current year income was $1 million, $600,000 of which was subpart F income. The CFC paid no foreign income tax and distributed no dividends. What is Lincoln's tax basis in its CFC stock at the end of the taxable year?

A) $100,000

B) $300,000

C) $400,000

D) $0

Explanation: Income reported is $300,000 = subpart F income × ownership %. Thus tax basis increases to $400,000 = $100,000 + $300,000.

Difficulty: 2 Medium

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

99) 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?

A) Tradewinds manufactures costume jewelry in Bermuda and sells the jewelry to Larkin for distribution in the United States and Canada.

B) Tradewinds manufactures costume jewelry at its plant in Mexico and sells the jewelry to Larkin for distribution in the United States and Canada.

C) Tradewinds purchases costume jewelry from a related supplier in China and sells the jewelry at retail in Bermuda.

D) None of the above generates subpart F income.

Explanation: The transaction involves related parties and has no commercial or economic connection to Bermuda.

Difficulty: 2 Medium

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

100) Cheney is a controlled foreign corporation with total foreign earnings of $4 million, of which $1.3 million is considered subpart F income. Cheney owns tangible business property with an adjusted tax basis of $6 million. Compute Cheney's global intangible low-taxed income.

A) $2.7 million

B) $0

C) $2.1 million

D) $ million

Explanation: The transaction involves related parties and has no commercial or economic connection to Bermuda.

Difficulty: 2 Medium

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

101) Berger is a controlled foreign corporation with $2 million of subpart F income and $3.5 million of global intangible low-taxed income. Salter, Inc., a U.S. corporation, owns 100% of Berger's stock. Compute Salter's incremental U.S. tax liability (before credits) resulting from its ownership of Berger.

A) $1,155,000

B) $477,500

C) $787,500

D) $0

Explanation: The transaction involves related parties and has no commercial or economic connection to Bermuda.

Difficulty: 3 Hard

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

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

A) Section 482 applies if related corporations charge each other arms-length transfer prices.

B) Section 482 is designed to prevent shifting of income from a high tax rate member of a related group to a low tax rate member.

C) The prevailing attitude of the courts is that the IRS's determination of transfer price should be upheld unless the taxpayer can show that the IRS was arbitrary or capricious.

D) Section 482 can be used to override artificial transfer prices established between related parties.

Difficulty: 2 Medium

Topic: Transfer Pricing and Section 482

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

103) 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.

A) Taxable income of both corporations will increase by $770,000.

B) Taxable income of both corporations will decrease by $770,000.

C) Wilmington's taxable income will increase by $770,000. Seine's taxable income does not change.

D) Wilmington's taxable income will decrease by $770,000 and Seine's taxable income will decrease by $770,000.

Difficulty: 2 Medium

Topic: Transfer Pricing and Section 482

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

104) Transfer pricing issues arise:

A) When tangible goods are transferred between related parties operating in different taxing jurisdictions.

B) When rights to use intangible assets, such as patents or trademarks, are licensed between related parties operating in different taxing jurisdictions.

C) Both of the above situations can create transfer pricing issues.

D) Neither of the above situations creates transfer pricing issues.

Difficulty: 1 Easy

Topic: Transfer Pricing and Section 482

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

105) DFJ, a Missouri corporation, owns 55% of Duvall, a foreign corporation formed under Krunian law. Krunia is a central European country with a 22% corporate income tax and no income tax treaty with the United States. Last year, DFJ leased equipment to Duvall for a $415,000 annual rent payment. DFJ reported the rent as taxable income, while Duvall deducted it in the computation of taxable income. This year, the IRS determined that an arm's length rent for the equipment should be $600,000. The IRS can use its Section 482 authority to:

A) Increase DFJ's taxable income by $185,000 and decrease Duvall's taxable income by $185,000.

B) Increase DFJ's taxable income by $185,000.

C) Require Duvall to pay $185,000 additional rent to DFJ.

D) Require DFJ to recognize a $185,000 constructive dividend from Duvall.

Explanation: The IRS can use its Section 482 authority to allocate $185,000 income to DFJ because DFJ is a U.S. corporation. However, the IRS has no jurisdiction over Duvall, which is a foreign corporation operating in a foreign country.

Difficulty: 2 Medium

Topic: Transfer Pricing and Section 482

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

106) Crane, Inc. is a domestic corporation with several foreign subsidiaries. This year, Crane has $2.3 million domestic gross receipts and $900,000 allowable deductions. It made deductible related party payments to its foreign affiliates of $650,000. Compute Crane's base erosion and anti-abuse tax liability.

A) $0

B) $205,000

C) $294,000

D) $89,000

Explanation: Taxable income is $1,400,000 ($2.3 million - $900,000) and regular tax liability is $294,000 ($1,400,000 x 21%). Tentative BEAT is $205,000 [10% x ($1,400,000 + 650,000). Because regular tax is greater than the tentative BEAT, Crane owes no BEAT.

Difficulty: 2 Medium

Topic: BEAT Minimum Tax

Learning Objective: 13-09 Describe limitations on tax benefits from cross-border related-party transactions.

Accessibility: Keyboard Navigation

Type: Static

107) This year, Plateau, Inc.'s before-tax income was $4,765,000. Plateau paid $310,000 income tax to state A and $130,000 income tax to state B.

a. Compute Plateau's federal taxable income and tax liability.

b. What is Plateau's overall income tax rate?

a. Federal taxable income: $4,325,000 = $4,765,000 − $310,000 − $130,000. Federal tax liability: $908,250.

b. Overall income tax rate: 28.3% = ($908,250 + $310,000 + $130,000)/$4,765,000.

Difficulty: 2 Medium

Topic: State and Local Taxation

Learning Objective: 13-01 Identify factors contributing to state and local tax burden.

Accessibility: Keyboard Navigation

Type: Static

108) 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. Origami'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.

a. State X: Sales factor = 85.2% = $575,000/$675,000; Payroll factor = 70% = $140,000/$200,000; Property factor = 80% = $600,000/$750,000. Overall apportionment % = 78.4% = (85.2% + 70% + 80%)/3. Income apportioned to state X = $2,352,000 = $3 million × 78.4%. State X tax liability = $94,080 = $2,352,000 × 4%.

State Y: Sales factor = 14.8% = $100,000/$675,000; Payroll factor = 30% = $60,000/$200,000; Property factor = 20% = $150,000/$750,000. Overall apportionment % = 19.9% = (2 × 14.8% + 30% + 20%)/4. Income apportioned to state Y = $597,000 = $3 million × 19.9%. State Y tax liability = $35,820 = $597,000 × 6%.

b. The proposed change would decrease Origami's state Y liability to $26,640 = $3 million × 14.8% × 6%.

Difficulty: 2 Medium

Topic: Apportionment of Business Income

Learning Objective: 13-03 Apportion corporate taxable income among states according to UDITPA.

Accessibility: Keyboard Navigation

Type: Static

109) Koscil Inc. had the following taxable income.

Koscil paid $315,000 foreign income tax. Compute its U.S. income tax liability.

Difficulty: 2 Medium

Topic: Foreign Tax Credit

Learning Objective: 13-05 Compute a foreign tax credit.

Accessibility: Keyboard Navigation

Type: Static

110) Pogo, Inc., which has a 21 percent marginal tax rate, owns 50 percent of the stock of a CFC. At the beginning of the year, Pogo's basis in the CFC stock was $2 million. The CFC's current year earnings were $750,000 of which $600,000 was subpart F income and zero was global intangible low-taxed income. The CFC paid no foreign income tax and distributed no dividends.

a. Explain Pogo's U.S. tax consequences with respect to its investment in the CFC.

b. Compute Pogo's basis in its CFC stock at the end of the year.

a. Pogo will recognize $300,000 ($600,000 × 50%) of U.S. taxable income as a result of its investment in the CFC.

b. Its tax basis in the stock is increased by $300,000, to $2.3 million.

Difficulty: 1 Easy

Topic: Controlled Foreign Corporations

Learning Objective: 13-08 Explain the tax consequences of subpart F income and global intangible low-taxed income earned by a CFC.

Accessibility: Keyboard Navigation

Type: Static

111) Kraze, Inc., a calendar year domestic corporation, owns 50 percent of the stock of Malik, a calendar year specified foreign corporation. Prior to 2018, Malik has accumulated deferred foreign earnings of $40 million and an aggregate foreign cash position of $5.1 million. Assume Malik paid zero foreign tax on its earnings.

a. Calculate Kraze's mandatory inclusion amount for Malik's deferred foreign earnings and its pro rata share of Malik's foreign cash position.

b. Calculate Kraze's incremental tax liability on its mandatory inclusion amount.

c. Determine Kraze's installment payments of the tax liability on its mandatory inclusion amount. Assume such payments begin in 2017.  

a. Mandatory inclusion amount is $20 million ($40 million x 50%). Share of foreign cash position is $2.55 million ($5.1 million x 50%).

b.

c.

Difficulty: 2 Medium

Topic: Mandatory Inclusion from SFC

Learning Objective: 13-07 Explain when and how U.S. shareholders are taxed on dividends received from foreign corporations.

Accessibility: Keyboard Navigation

Type: Static