Exam 13: Jurisdictional Issues in Business Taxation

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. How much current taxable income must Lincoln report as a result of its ownership of the CFC?

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:

The United States taxes its citizens on their worldwide incomes.

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

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?

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

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.

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?

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

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.

Orchid Inc., a U.S. multinational with a 34% marginal tax rate, owns a foreign subsidiary operating in a country with a 25% 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?

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

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

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?

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.

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

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?

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

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.

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