Exam 13: Jurisdictional Issues in Business Taxation

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 regarding controlled foreign corporations is true?

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 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 activities create state income tax nexus?

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?

World Sales,Inc.,a U.S.multinational,had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. 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?

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.

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.

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.

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

Logan,an Indiana corporation,conducts its international business through 100% controlled foreign subsidiaries.This year,Logan's U.S.source taxable income was $5,431,000,and it received $12,250,000 dividends from its foreign subsidiaries.Logan paid no foreign income tax itself,but its subsidiaries paid foreign income tax at a 30% rate.Logan's U.S.income tax (35% rate)is:

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.

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

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

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

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.

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).

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

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.