CH 16: Multijurisdictional Taxation

payroll factor

= In-state payroll/total payroll. The proportion of a multistate corporation's total payroll that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state. Payroll is assigned to the state in which the employee's services primarily are performed. Payroll includes wages, bonuses, commissions, and taxable fringe benefits. Some states exclude officer compensation because it can distort the computations. Some states exclude contributions to a § 401(k) plan.

property factor

= In-state property/total property. The proportion of a multistate corporation's total property that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state. Uses an average historical cost basis, net of accumulated depreciation. Idle property is ignored, but construction in progress is included. Property in transit is assigned to the state of its presumed destination. Property leased but not owned by the taxpayer is included in the property factor at eight times the annual rentals paid.

sales factor

= In-state sales/total sales. The proportion of a multistate corporation's total sales that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state.

throwback rule

If there is no income tax in the state to which a sale otherwise would be apportioned, the sale essentially is exempt from state income tax, even though the seller is domiciled in a state that levies an income tax. Nonetheless, if the seller's state has adopted a throwback rule, the sale is attributed to the seller's state and the transaction is subjected to a state-level tax.

Nexus

That is, a sufficient presence in the other state has been established on an ongoing basis. Such presence might come about because the corporation was organized there, the proprietor lives there, an in-state customer made a purchase, or the business employed people or equipment within the borders of the state

True or False: A business is taxable in the state in which it is resident, organized, or incorporated

True. Tax liabilities also arise in other jurisdictions where nexus exists

The business income of the taxpayer is apportioned among the states in which it operates. What factor(s) is used to estimate the taxpayer's relative activities in the state A) sales factor B) payroll factor C) property factor D) all of the above

D) all of the above

True or False: When a taxpayer operates in more than one state, total taxable income is reported to the main state their operations are in.

False. When a taxpayer operates in more than one state, total taxable income for the year is split among the jurisdictions in which the operations take place. Portions of the total income amount are assigned to each of the business locations, so several tax returns and payments will be due

True or False: Nico lives in California. She was born in Peru but holds a green card. Nico is a nonresident alien (NRA).

False. A non-U.S. person who is issued a green card is considered a U.S. resident under the immigration and naturalization laws of the United States. Tax residency is determined under § 7701(b).

True or False: the apportionment percentages will equal 100 percent of Federal taxable income.

False. Because the states do not follow identical rules in the makeup of the factors, the apportionment percentages seldom total precisely to 100 percent of Federal taxable income.

True or False: Jaime received gross foreign-source dividend income of $250,000. Foreign taxes withheld on the dividend were $25,000. Jaime's total U.S. tax liability is $840,000 (the 21% tax rate applies). Jaime's current-year FTC is $52,500.

False. The allowed FTC is $25,000 (the actual amount). The taxpayer does not encounter the FTC limit in this situation.

True or False: Twenty unrelated U.S. persons equally own all of the stock of Quigley, a foreign corporation. Quigley is a CFC.

False. If 20 unrelated U.S. persons own a foreign corporation equally, each U.S. person owns only 5% of the stock and none of the U.S. persons is a U.S. shareholder for purposes of CFC classification.

True or False: In most states, a taxpayer's income is apportioned on the basis of a formula measuring the extent of business contact and allocated according to the location of property owned or used.

True.

Application of the unitary principle generally works to the taxpayer's benefit when: a. The other affiliates operate in low-tax states. b. The other affiliates generate net operating losses. c. Both "The other affiliates generate net operating losses" and "The other affiliates operate in low-tax states". d. Neither "The other affiliates generate net operating losses" nor "The other affiliates operate in low-tax states".

c. Both "The other affiliates generate net operating losses" and "The other affiliates operate in low-tax states".

In the broadest application of the unitary theory, the U.S. unitary business files a combined tax return using factors and income amounts for all affiliates: a. Organized in the U.S., Canada, and Mexico. b. As dictated by the tax treaties between the United States and other countries. c. Organized anywhere in the world. d. Organized in the United States.

c. Organized anywhere in the world.

Parent and Junior form a unitary group of corporations. Parent is located in a state with an effective tax rate of 3% and Junior's effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should: a. Execute an intercompany loan such that Junior pays deductible interest to Parent. b. Shift Parent's high-cost assembly and distribution operations to Junior. c. Have Parent charge Junior an annual management fee. d. Do none of these choices are correct.

d. Do none of these choices are correct. Unitary taxation foils all of these techniques

Which of the following statements regarding income sourcing is correct? a. Everything else being equal, a larger foreign-source income decreases the foreign tax credit limitation for U.S. persons. b. Everything else being equal, a larger U.S.-source income increases the foreign tax credit limitation for U.S. persons. c. Everything else being equal, changing foreign-source income does not change the foreign tax credit limitation for U.S. persons. d. Everything else being equal, a larger foreign-source income increases the foreign tax credit limitation for U.S. persons.

d. Everything else being equal, a larger foreign-source income increases the foreign tax credit limitation for U.S. persons.