Exam 13: Jurisdictional Issues in Business Taxation

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. Explain Pogo's U.S. tax consequences with respect to its investment in the CFC.Compute Pogo's basis in its CFC stock at the end of the year.

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.

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 anyperceived distortion resulting from unrealistic prices charged by members of the group to each other for goods or services.

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

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

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?

San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows: U. S. source income \4 00,000 Foreign source income-Country w 300,000 Total \7 00,000 San Carlos paid $60,000 income tax to Country W. Assume San Carlos' foreign source income does not qualify as foreign-derived intangible income. Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax.

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: Arkansas Okahoma Kansas total Gross receipts/sales \ 175,000 \ 225,000 \ 100,000 \ 500,000 Payroll 20,000 140,000 20,000 180,000 Property 50,000 600,000 50,000 700,000 Which of the following statements is true?

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

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%.

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

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

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.

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. U.S. Source Foreign Foreign Income Source Income Income Tax Paid Pennworth \ 3,000,000 \ 1,000,000 \ 300,000 Delco 0 1,000,000 100,000 If Pennworth and Delco file a consolidated U.S. tax return, compute consolidated income tax liability. Assume neither corporation's foreign source income qualifies as foreign-derived intangible income.

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

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.

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.

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

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). Quad \1 ,000,000 Subsidiary 1 (400,000) Subsidiary 2 200,000 Subsidiary 3 600,000 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.