Exam 13: Jurisdictional Issues in Business Taxation

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.

If a corporation with a 35% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $13,000.

Foreign value-added taxes and excise taxes are eligible for the U.S. foreign tax credit.

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:

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.

Columbus Inc. owns 100 percent of the stock of Spania, a foreign corporation. All of Spania's income is foreign source, and its foreign income tax rate is 20 percent. This year, Spania distributed a $100,000 dividend to Columbus. a. Assuming that Columbus is in the 35 percent tax bracket, compute its U.S. tax on the dividend. b. How would your computation change if Spania's foreign income tax rate was 45 percent?

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

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

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: Which of the following statements is true?

All states assessing an income tax use the same formula for apportionment purposes.

International tax treaties generally allow a government to tax a non-resident firm that maintains a permanent residence in the treaty country.

GAAP-based consolidated financial statements include only income earned by the consolidated group's domestic subsidiaries.

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?

Jenkin Corporation reported the following for its first two taxable years. Calculate Jenkin's U.S. tax liability for Year 2.

Pogo, Inc., which has a 34 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. The CFC paid no foreign income tax and distributed no dividends. a. Explain Pogo's U.S. tax consequences with respect to its investment in the CFC. b. Compute Pogo's basis in its CFC stock at the end of the year.

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

Which of the following would qualify as a permanent establishment for income tax treaty purposes?

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

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.

According to Public Law 86-272, the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.