Exam 13: Jurisdictional Issues in Business Taxation

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.

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

Which of the following statements about the foreign tax credit is true?

The United States taxes its citizens on their worldwide incomes.

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.

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.

Lincoln Corporation,which has a 34% marginal tax rate,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?

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

Jovar Inc.,a U.S.multinational,began operations this year.Jovar had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Jovar paid $50,000 income tax to Country O.Compute Jovar's U.S.tax liability if it takes the foreign tax credit.

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

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.

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:

Global Corporation,a U.S.multinational,began operations this year.Global had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Global paid $25,000 income tax to Country X.What is Global's U.S.tax liability if it takes the foreign tax credit?

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%.

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

Sunny,a California corporation,earned the following income this year. Sunny owns 100% of Sun de Sud,a foreign corporation operating a business in Country M and paying foreign income tax at a 50% rate.Sunny paid $124,000 foreign income tax to Country L,$203,000 income tax to Country Q,and no foreign withholding tax on its Sun de Sud dividends.Assuming a 34% tax rate,compute Sunny's U.S.tax.

Which of the following statements concerning the taxation of a U.S.multinational corporation is true?

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 $28,500 income tax to Country Y.Compute Many Mountains' allowable foreign tax credit.

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.

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