Advanced Tax Final

Deferral Treatment for Outbound

-US corp starts new corp outside US (§351) -US corp liquidates US sub into foreign sub (§332) -US corp incorporates non US branch of US corp forming new corp (§351) -foreign corp uses stock swap to acquire US corp (type B reorg) -foreign corp acquires substantially all of US corps net assets (type c reorg)

§ 501(c)(6)

-Underwriters Laboratories (UL) -Ladies PGA Tour

State Tax Filing Requirements

-about 1/2 of states require the corp to withhold taxes on the nonresident shareholders portion of entity income -several states allow an S corp to file a single income tax return and pay the resulting tax on behalf of some or all of its nonresident shareholders -some states require "block" or composite return

Do Not Create Nexus

-advertising -free samples -furnishing automobiles, phones, computers -passing inquiries or complaints to home office

Exempt Orgs Incurring Federal Tax

-any exempt org that engages in prohibited transaction or is "feeder" org -if org is a private foundation -unrelated business taxable income

Create Nexus

-approving/rejecting orders -repairs/maintenance -collecting delinquent accounts -installation or supervising -conducting training classes

Apportionable Income

-assigned among states by using apportionment formula -arises form TP's normal business

Assumed Relinquish Due to Tax Avoidance

-average annual net income tax for 5 years before loss of US citizenship is more than $168,000 -net worth is at least $2 million

Foreign Tax Credit

-eliminates potential for double taxation. Credit allowed up to amount would be owed in U.S.A.

Traditional Three Factor Formula

-equally weights sales, property, and payroll (10 states) -most states give sales 1/3 weight

§501(c)

-federal and related agencies -religious, charitable, etc. -civic leagues (chamber of commerce) -business leagues -domestic fraternal society -credit unionns

Foreign Investment in Real Property Tax Act

-g/l realized by NRA's and foreign corps from the sale or other disposition of US real property interest are treated as connected w/ US trade or business -NRA's must pay tax equal to lesser of applicable tax or regular US rate

Nonapportionable Income

-income/loss from sale nonbusiness real or tangible property -income/loss nonbusiness rents, royalties

Administrative Tax

-incorporation tax -license tax -transient occupancy tax

Territorial Tax System

-only taxable income generated in a countries border is taxed there -used by most countries in the developed world

Requirements for Exempt Status

-organization serves some type of "greater good" -org. is not for profit -net earnings do not benefit members of org

State Adjustments to Federal Taxable Income

-reflect differences between state and federal statutes -remove income that a state is constitutionally prohibited from taxing

Not Exempt from Sales and Use

-sales from retailers to consumers

Taxation of Partnerships or LLC's

-states usually parallel to federal -tax reporting, not paying entity -some states require entity to make estimated payments on behalf of out of staters

Code Specifically Excludes

-trade or business where individuals work for no pay -thrift shops -business like bookstore for students

Transport and Communication Income

-transportation beginning and ending in US is US-sourced -if partial US, 50% -space and ocean = persons residence -communication is 50% foreign sourced transmission if between US and other country

Tax Effects of Unitary Theory

-unitary approach eliminates tax planning techniques to shift income minimizing state taxes -states with greater rent, sales, compensation = more portion -favorable when losses from one affiliate can offset others profits

Unitary Theory

-when two affiliated corps are subject to tax in different sates, each entity must file a return and report its income in the state in which it conducts business -sales, property and payroll of related corps are combined for nexus and apportionment purposes and the WORLDWIDE income of the unitary entity is apportioned to the state -required to file combined return

Types of Exempt Organizations

-§501(c)(1-20) -§501(d) -§501(e) -§501(f) -§529 -§530

Accuracy Related Penalty

20% when transfer price adjustment is exceeding lesser of $5 million or 10% gross receipts, 200% markup

Nontaxable

A charity purchases office supplies in State A.

Sales Tax

A resident of State A purchases an automobile in State A.

Nontaxable

A resident of State A purchases groceries in State A.

Nontaxable

A resident of State A purchases in State B an item that will be in the inventory of her business.

Use Tax

A resident of State B purchases an automobile in State A.

No, it contributes

An exempt hospital operates a pharmacy that is staffed by a pharmacist 24 hours per day. The pharmacy serves only hospital patients. Is the pharmacy likely an unrelated trade or business?

Foreign source income

Doubles, Inc. a U.S. corporation, manufactures equipment in Malaysia and sells the equipment to customers in the United States.

General Tax Model

Gross Unrelated Business Income - deductions related to business income = net unrealted business income +/- adjustments - $1,000 "standard deduction" = unrelated business taxable income

Transient Occupancy Tax

Hotel tax, rental car

Interest

Interest income received from U.S. gov, D.C., U.S. corporations is US source income

Foreign source income

Suarez, an NRA, sells stock in Home Depot, a U.S. corporation, through a broker in San Antonio.

True

T/F A multinational business's U.S. tax liability may be reduced by the credit or deduction for foreign income tax paid or accrued by the U.S. taxpayer.

True

T/F A typical state income tax credit would equal 10% of the costs incurred to purchase and install solar energy panels for an existing factory.

False

T/F Aggregate state taxable incomes always equal Federal taxable income; tax rules merely split the income among the states.

True

T/F Known as worldwide income, a U.S. taxpayer is subject to Federal income tax on all income, regardless of where it is earned.

True

T/F Most of the states start with Federal taxable income in computing state taxable income.

False

T/F Tax liability is reduced by both the deduction and credit for foreign income tax paid or accrued by the U.S. taxpayer.

True

T/F Tax rules effective starting in 2018 apply a form of territorial taxation for certain taxpayers and types of income.

True

T/F The U.S. system lays territorial tax principles on top of an underlying worldwide taxing system.

False

T/F The corporate income tax systems of most states can be described as applying progressive rate structures.

True

T/F There are a wide variety of rules that the states use to compute corporate taxable income; thus, there is no "typical" state income tax computation.

Inbound Taxation

U.S. taxation of U.S. source income by non-U.S. taxpayer

Outbound Taxation

U.S. taxation of foreign-source income earned by the U.S. taxpayers

d. specifically excludes income from the research of college or hospital

Unrelated business income (UBI): -a.includes unrelated income from an activity where all the work is performed by volunteers. -b.is not created if the activity results in a loss. -c.is 100% taxable on the exempt organization's tax return. -d.specifically excludes income from the research of a college or hospital.

Unitary Business

operates as a unit and cannot be segregated into independently operating divisions. Operations are integrated, and each division depends on or contributes to the operation of the business as a whole

Commercial Traveler

personal service income must meet following to avoid US income -services performed by nonresident alien in US for 90 days or less -compensation may not exceed $3,000 in US -services performed on behalf of nonresident alien, non US corp

Transfer Pricing

process of setting internal prices for transfers of goods and services among related taxpayers -can also refer to use of charges, fees, or management services that are assessed on related parties -advantage is transferring income to lower tax jurisdictions

§529

qualified tuition programs

§501(d)

religious and apostolic

Rents/Royalties

sourced to country earned -for intangibles, wherever used

Personal Service Income

sourcing is determined by location where performed

Domicile

state of incorporation -can tax regardless of business activity volume

Controlled Foreign Corporation

subpart F of code provides certain types of income generated by CFC's are included in current year gross income by US shareholder w/o regard to actual distribution

Ultimate Destination Concept

tangible asset sales aer summed to take place at point of delivery, not at shipment origin Exceptions: -sales to US gov -dock sales = purchaser state -throwback rule: make sure that a sale does not escape income taxation because it is made to a customer in a state in which seller is not taxable

Unclaimed Property

unused gift card, uncashed paycheck -7 to 15 years (escheat laws) -property is taken by the state in which business is incorporated

Compensation

wages, salaries, commissions, any other form of remuneration -value of room and board

Multi-state Tax Commission (MTC)

writes regulations and other rules that interpret UDITPA

Nonresident Alien

not citizen of US or resident

Factor Presence Nexus

-$50,000 payroll -$50,000 property -$500,000 sales -25% total property -25% total payroll -25% total sales

International - Two Primary Concerns

-1.) U.S. citizens earning foreign income -2.) non U.S. citizens making U.S. source income

Private Foundation

-1.) classification may have adverse effect on contributions because tax consequences for donors may not be as favorable -2.) private foundation may be subject to federal taxation

§ 501(c)(3)

-Girl Scouts -St. Mary Catholic Church -American Red Cross -United Fund -Bill and Melinda Gates Foundation -The PTA

Taxation of S Corp

-NY, TN, DC, do not provide pass through for S corp ->taxed like C

Exempt - Qualified

-Newberry College (a private college). -The State of South Carolina's -Qualified Tuition Program. -American Cancer Society. -Lexington Chamber of Commerce.

Exempt Sales and Use

-Sales for resale -Casual or occasional sales that occur infrequently -Purchases by exempt organizations -Sales of targeted items, such as groceries and medicine Sales to manufacturers, producers, and processors

Exempt - Unqualified

-Six Flags (an amusement park). -Atlanta Braves baseball organization (professional sports team).

Tax Applicable to Private Foundations

-Tax on failure to distribute income -Tax based on investment income -Tax on self-dealing -Tax on excess business holdings -Tax on investments that jeopardize charitable purposes

Exempt - Yes

-The organization serves some type of common good. -Net earnings do not benefit the members of the organization. -The organization does not exert political influence.

Worldwide System for U.S. Citizens

-U.S. person is subject to U.S. income tax for all taxable income -Rare in developed world

Foreign source income

Chris sells stock in IBM, a U.S. corporation, to her brother, Rich. Both Chris and Rich are NRAs, and the sale takes place outside the United States.

US Source income

Crows, Inc. sells inventory produced in the United States to customers in Europe. Title passes in the international waters of the Atlantic Ocean.

C.

Which of the following is a false statement? -a.An annual information return (Form 990) stating gross income, receipts, contributions, and disbursements is required of most exempt organizations that are exempt from tax. -b.For organizations that normally have less than $50,000 in annual gross receipts, a Form 990 or 990-EZ is not required; however, an electronic postcard (Form 990-N) is filed with the IRS and provides only limited information. -c.An organization operated primarily for the purposes of carrying on a trade or business for profit can claim exemption from tax if all of its profits are payable to exempt organizations. -d.If an organization fails to file the required return for three consecutive years, the tax-exempt status of the organization will be revoked.

Tax Haven

a country where locally sourced income or residents are subject to Q or low levels of income taxation -Bahamas, Ireland, Netherlands, Cayman Islands, Bermuda, -establish residency w/ little presence

Effects of Lobbying

a public charity cannot as "substantial" part of activities influence legislation -lobbying expenditures subject to 5% tax, and entity tax exempt status jeopardized

CFC

any non-US bsuiness in which 50% of -1.) total combined voting power of all classes of stock -2.) total value of stock of corp owned by US SH on any day during taxable year

Feeder Organization

carries on trade or business for benefit of exempt organization

§501(e)

cooperative hospital

§501(f)

cooperative service organization - educational institutions

§482

counters transfer pricing advantages. IRS can reallocate credits, allowances, etc. to reduce effect of transferring income

§530

coverall education savings account

Functional Currency

currency of the economic environment in which the taxpayer carries on most activities and in which transacts most business

Nexus

degree of business activity that must be present before taxing jurisdiction has right to impose tax on out of state income

Unrelated Business Income Tax (UBIT)

designed to treat charitable entities as if they were subject to corporate income tax, chiefly because they compete with taxable enterprises -UBI derived from activities not related to exempt purpose -applies to all exempt orgs except federal agencies §501(c)

Payroll Factor

determined by comparing the compensation paid for services rendered within a state to the total compensation paid by corp

Foreign Personal Holding Company Income

div, interest, royalties, rent, annuities

Dividends

domestic corp = U.S. income, foreign corp = foreign income

Incorporation Tax

excise tax for corporate privilege conferred on business only at incorporation

Capital Stock and Franchise Taxes

excise tax imposed on a domestic corp for privilege of existing as corp either for doing business or transactions in the state

License Tax

excise tax on privilege of engaging in certain businesses, occupations, professions

Unrelated Trade or Business

exempt org will be subject to UBIT when following met: -org conducts trade or business -trade or business not substantially related to exempt purpose -trade or business is regular

Sales Factor

fraction whose numerator is corps total receipts in state during tax period. Denominator = corps total receipts -includes sale of inventory, services, interest, dividends,

Common Good

group being served is general public or specific interest group

Subpart F income

income w/ little to no economic effect w/ connection to location -foreign personal holding company income -foreign base company sales income -foreign base company services income

Property

land, buildings, machinery, inventory, equipment -offshore, outer space, partnership -transit items = destination state -trucks leased equip based on time -valued at average original or historical cost plus the cost of additions and improvements -leased property = annual rental * 8

Waters Edge

limitation on the worldwide scope of the unitary theory - if in effect, state can consider in the apportionment procedure activities in USA

Internal Support Test

limits amount of support normally received from the sum of sources to 1/3 -gross investment income -unrelated business income

Public Law 86-272

limits states rights to impose income ax on certain interstate activities -solicit sales of TPP

Sale or Exchange Property

location of real property determines source of income

Substantial Presence Test

mathematical test, 183 day presence

Apportionment

means by which corporation taxable income is divided among states in which it conducts business (DIVIDED)

Allocation

method under which specific components of corps income, net of related expenses, are directly assigned to certain state (ASSIGNED)

Uniform Division of Income Tax Purposes Act (UDITPA)

model law relating to the assignment of income among states for corporations that maintain operations in multiple states

External Support Test

more than 1/3 of orgs support each year comes from: -gifts, grants, contributions and member fees -gross receipts from admission, merch, etc.

Residency

must meet green card test or substantial presence -if either met, individual is US resident for that year

Public Charity

must satisfy external support test and internal support test -intent of tests is to grant favorable status to orgs serving greater good