Exam 13: Jurisdictional Issues in Business Taxation

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

Jenkin Corporation reported the following for its first two taxable years. Corporate tax rate schedule. Assume that the tax rates for both the years are the same. Calculate Jenkin's U.S. tax liability for Year 2.

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

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.

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.

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.

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.

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.

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.

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

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.

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?

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.

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.

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows. Corporate tax rate schedule. U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,000,000 Foreign source income-Country A $\quad$$\quad$$\quad$$\quad$ 500,000 Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,500,000 -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.

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

Many Mountains, Inc. is a U.S. multinational corporation. This year, it had the following income. Corporate tax rate schedule. 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.

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?

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 $\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,000,000 Subsidiary 1 $\quad$$\quad$$\quad$ (400,000 ) Subsidiary 2 $\quad$$\quad$$\quad$ 200,000 Subsidiary 3 $\quad$$\quad$$\quad$ 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.

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?