Multi State Taxation Final Exam
False
A conglomerate is always considered to be unitary.
Consolidated Return
A consolidated return, is not a unitary return.
Qualified Subchapter S subsidiary (QSSS)
A domestic corporation that qualifies as an S Corporation, is 100% owned by another S corporation, and whose parent S corporation elects to treat it as a QSSS. For reporting purposes, the assets, liabilities, income, deductions, and other tax attributes of the QSSS are combined with those of its S Corporation parent and reported on the parent's tax return.
Large Business Enterprise
A large business enterprise is often structured as a parent corporation with multiple subsidiary corporations.
Partnerships
A partnership is an unincorporated trade or business owned and managed by two or more persons. Instead it is treated as a pass through entity, whereby its gross income, deductions, and credits pass through to the partners, who report the items on their own tax returns.
Unitary Business
A single economic enterprise that is made up either of separate parts of a single business or a commonly controlled group of businesses.
Nexus Issue
A state has jurisdiction to tax a corporation organized in another state only if the out-of-state corporation's contacts with the taxing state are sufficient to create nexus. The types of contacts that create nexus are determined by U.S. constitutional law, Public Law 86-272, and the applicable state statutes. As discussed in the previous section, states generally take the position that an ownership interest in a partnership doing business in the state is sufficient to create constitutional nexus for an out of state corporation.
"Taxable in another state" test
A taxpayer does not satisfy this test if it "voluntarily files and pays one or more of such taxes when not required to do so by the laws of the state."
A large number of foreign corporations
A taxpayer is most likely to benefit from making a water's edge election if the unitary business includes:
True
A taxpayer's right to apportion its income is not automatic.
MTC adopted uniform definition of unitary business
A unitary business is a single economic enterprise that is made up either of separate parts of a single business entity or a commonly controlled group of business entities that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.
Unitary
A(n) ___________ business operates as a unit and cannot be segregated into independently operating divisions or branches.
Consolidated Filing
A. Generally authorized for a parent-subsidiary group of corporations. Ownership of at least 80%. B. States normally view consolidated filing as a privilege. Therefore, states will normally allow only members with sufficient independent nexus to be included in a consolidated return.
Combined Unitary Filing
A. If required by the state, could apply to brother-sister, or parent-subsidiary group members. Ownership percentage is usually more than 50%, but some states may not require a minimum ownership percentage, and focus on other unitary issues. B. States that impose a combined unitary filing requirement normally make this filing method mandatory. C. All members of the unitary group are required to file in the unitary return, provide at least one member of the group established sufficient nexus in the state. Therefore, unitary members are filing in states where, if filing requirements were determined on the individual's member's activity, protection may have been afforded by P.L. 86-272,
Sales, property, payroll
Although apportionment formulas vary among jurisdictions, most states use a three factor formula that equally weights these factors.
80/20 Corporation
An 80/20 corporation is generally defined as any corporation whose foreign business activity, as measured by some combination of apportionment factors, is 80% or more of its total business activity.
False
Assigning more weight to the sales factor than the property or payroll factor tends to decrease the percentage of an out of state corporation's income that is subject to tax.
Drop-shipment sales
Drop shipment sales are sales that are made by an in-state vendor to an out-of-State customer, but are not directly filed by the in-state vendor.
transfer pricing
prices charged in sales between an organization's units
Jurisdiction to tax test
This is also met if "the state is prohibited from imposing tax by reasons of the provisions of P.L. 86-272.
Throw out
Throw out is a concept that only comes into play on sales of services.
Throwback Concept
Throwback is a concept that generally only comes into play with sales of tangible personal property.
Eligible S Corporation Election
To be eligible to make an S Corporation election, a domestic corporation must have only one class of stock and no more than 100 shareholders. In addition, the shareholders must be either individuals who are U.S. citizens or resident aliens, estates, certain types of trusts. The election is made by filing form 2553.
Unitary business requirement
To be included in a combined report, a corporation must be engaged in the same trade or business as the other group members, as exhibited by such factors as functional integration, centralized management and economies of scale. The "unitary business" test is not a requirement for inclusion in an elective consolidated return.
S Corporation Qualifications
To qualify as an S Corporation, the corporation must meet the following requirements: -Domiciled in the United States -No more than 100 shareholders -Only individuals, estates, certain tax-exempt organizations, and certain trusts as shareholders -No nonresident aliens as shareholders -Only one class stock -Not a financial institution that uses the reserve method of accounting for bad debts, an insurance company taxed under Subchapter L of the Code, a corporation that taxes the tax credit for doing business in a U.S. possession,or a domestic international sales corporation (DISC), an interest charge DISC, or former DISC.
Disregarded LLC for states
Treating an LLC as a disregarded entity for income tax purposes does not necessarily relieve the LLC from liability as a separate legal entity for other tax purposes, such as registration fees, sales and use taxes, employment taxes, and property taxes.
Larger
Using a sales-factor-only apportionment typically assigns a __________ percentage of an out-of-state corporation's income tax in the state.
State require consolidated returns
Roughly 20 states, including Alabama, Florida, Georgia, Iowa, and South Carolina, permit or require affiliated corporations to file a state consolidated return if certain conditions are met.
Mandatory Combined Reporting
Roughly 25 states, including California, Illinois, New York and Texas, require members of a unitary Business group to compute their taxable income on a combined basis.
Composite
Several states allow the S Corporation to file this type of return on behalf of its out of state shareholders.
Shareholder consent agreement
Some states require withholding only if the S corporation fails to obtain a consent agreement from the shareholder or if the shareholder does not agree to be included in the composite return. A shareholder consent agreement is an agreement to submit to income tax jurisdiction in the state, file a return, and pay the tax due on the income sourced to the state.
State filing options
State filing options fall into one of the following categories: 1. Separate-company returns 2. Consolidated returns 3. Combined Unitary Reporting
State Conformity to Federal Pass-through Treatment
States generally confirm to the federal pass-through treatment of S Corporations, but only if the corporation has filed a valid S corporation election for federal tax purposes. Although most states provide that the filing of a federal S corporation election automatically qualifies the corporation as an S corporation for state tax purposes, a handful of states require taxpayers to comply with additional special procedures in order to make a valid S corporation election. For example, a federal S corporation that wishes to be recognized as an S corporation for New Jersey income tax purposes must make a separate New Jersey S corporation election using Ne Jersey form CBT-2553.
Horizontal Integration
consists of companies that acquire a similar company in the same industry
Disregarded Entity's Start-Up Losses
The disregarded entity's start up losses can be used to offset the profits of the corporate parent. If the new operations are structured as a subsidiary corporation, the losses cannot be used by the corporate parent in separate company return states, but instead have to be carried forward and offset against the future profits, if any, of the subsidiary.
Unitary Business Principle
The essential idea of the unitary business principle is that to effectively tax a business enterprise whose operations span numerous states, all of the activities constituting that a single trade or business be viewed as a whole, rather than as separate activities conducted in a given taxing state.
Double Taxation
The federal government taxes earnings of a regular corporation twice, imposing both a corporate level tax when the income is earned and a shareholder-level tax when the income is earned and a shareholder-level tax when the corporation distributes its earnings as a dividend to individual shareholders.
Limited Liability Company (LLC) Tax Treatment
The federal income tax treatment of a limited liability company is determined by an elective system of entity classification.
QSSS & Sales/Use Tax
The question that arises for sales/use tax purposes is whether the QSSS is also treated as a disregarded entity and whether transactions between the parent S corporation and the QSSS are subject to tax. If the QSSS is not treated as a disregarded entity, it is required to file a separate tax return. In some jurisdictions, even if the QSSS is required to file a separate return, the state will allow the QSSS and its parent to file consolidated sales and use tax returns.
Combined Reporting Benefit
From a state's perspective, a major benefit of combined reporting is that it limits the ability of large enterprises to erode the state's income tax base by using related party transactions to shift income from in-state affiliates to out of state affiliates.
80/20 Corporation
Generally defined as any corporation whose foreign business activity, as measured by some combination of apportionment factors, is 80% or more of its total business activity.
Apportionment
Is a means by which a corporation's business income is divided among the state in which it conducts business.
Allocation
Is a method under which specific components of a corporation's income are directly assigned to a specific state.
Lack of throwback rule
Lack of throwback rule, makes the state more appealing.
S Corporation Tax
The S Corporation form allows entity-level operating losses to pass through to the shareholders, who can claim a deduction for those losses on their individual income tax return.
Container Corporation of America
The U.S. Supreme Court established a flow of value test in which case?
Worldwide Combination
The combined report includes all members of the unitary business group, regardless of the country in which the member is incorporated or the country in which the member conducts business.
Water's Edge Combination
The combined report includes only those members of the unitary business group that meets the criteria for what constitutes a domestic corporation. The criteria varies from state to state, and often includes numerous special rules and exceptions.
False
Unity of operation is generally satisfied when 50% or more of the corporation's stock is owned directly or indirectly by another corporation in the group.
True
Unity of use is associated with common executive forces and general systems of operations.
False
Worldwide combination excludes group members that are incorporated in a foreign country or conduct most of their business abroad.
advantages of filing for bankruptcy
- The ability to offset losses of one affiliate against the profits of other affiliates. -Elimination of intercompany dividends -Deferral of gains on intercompany transactions -The use of credits that would otherwise be limited by a lack of income.
Separate-company return approach disadvantages
-The ability to offset the losses of one affiliate against the profits of other affiliates. -The need to develop acceptable arm's length transfer pricing for intercompany transactions.
True
A limited partner generally does not participate in the management of the partnership.
True
A limited partnership interest is more akin to owning shares of a corporation. As a consequence, some states treat corporate limited partners differently than corporate partners.
Electing to file a federal consolidated return advantage
A major advantage of electing to file a federal consolidated return is that losses of one affiliate can be offset against profits of other affiliates.
True
A major advantage of making a water's edge election is that it avoids the compliance burden of a worldwide combination...
True
A major disadvantage of consolidated returns and combined reporting is that losses of one affiliate can be offset against the profits of other affiliates.
Partnership Legal Forms
A partnership generally takes one of two legal forms, that of a general partnership or a limited partnership.
S corporation withholding
Another technique for promoting compliance on the part of the nonresident shareholders is to require the S corporation to withhold and remit tax from distributions to nonresident shareholders' pro rata shares of income. The amount withheld generally equals the highest marginal tax rate applicable to the nonresident shareholder multiplied by the shareholder's pro rata shares of income apportioned to the state.
Points on taxability
Any corporation selling tangible personal property becomes taxable by Oregon when the corporation conducts business activity in Oregon that is not protected under P.L. 86-272.
States that require worldwide combination
California, Idaho, Montana and North Dakota
States that require water's edge combination
Connecticut, Massachusetts, Utah, West Virginia and DC
Worldwide Combinations
Consistent with the federal approach to consolidation, corporations organized in a foreign country generally are not includible in a state consolidated return. On the other hand, some states permit the inclusion of foreign corporations in a combined unitary report.
Vertical Integration
Consists of companies that acquire a company that operates either before or after the acquire company in the production process.
False
If a group member ships goods from California to a purchaser in another state, throwback is avoided only if the selling member has nexus in the destination state. The entity-to-entity approach to applying throwback is known as the Finnigan approach.
State Taxation of S Corporation Shareholders
If a portion of a shareholder's pro rata share of income is subject to tax in two states (one by virtue of the shareholder's residence and the other by virtue of the source o the S corporation's income), the state of residence usually allows the individual to claim a credit for income taxes paid to the other state as a means of mitigating double taxation. Some states such as California, also allow a shareholder to claim a credit for income taxes imposed directly on the S corporation.
Throwback Rule
If sales of tangible personal property originate from a state that has a Throwback Rule in place, and those sales are made to a state where the company is not taxable, those sales can be "thrown back" to be included in the numerator of the origin state.
True
If water's edge election is not made, the group members that are taxable in California compute their income on a worldwide combined basis.
Mandatory Combined Reporting States
Illinois, Michigan, New York and Texas
S Corporations
In 1958, Congress enacted the Subchapter S provisions to permit closely held corporations to enjoy the nontax advantages of the corporate form (e.g., limited liability and ownership interests that are readily transferable) without being subject to the double taxation of the income.
Apportionment methodology versus type of return
In contrast, combined unitary reporting is not so much a type of return as the name given to the calculations (akin to a spreadsheet) by which a unitary business group apportions its income.
Illinois Throwback
In order to satisfy the "taxable in another state" requirement and avoid throwback for Illinois tax purposes, a taxpayer must not only be subject to tax in another state, it must pay tax in another state.
Sales
In the apportionment formula, most states assign more than one-third the weight to this factor.
True
Inclusion in a consolidated return generally requires stock ownership of 80% or more.
Common ownership requirements
Inclusion in a state consolidated return generally requires 80% or more common ownership (which piggybacks on the ownership threshold for inclusion in a federal consolidated return), whereas membership in a combined unitary report generally requires more than 50% common ownership.
Composite Return
Most states allow shareholders to file a composite return. Examples of qualification requirements include (1) the participant must be a full-year nonresident, (2) the participant's income from the S corporation must be his or her only income derived form sources within the state, and (3) a minimum number of shareholders must participate in the composite filing.
Unitary Business Principle
Once a company establishes nexus in more than one state jurisdiction, the company must divide its income among the states.
Throwback Rule
Out of state sales that are not subject tp tax in the destination state are pulled back into the origination state if that state has adopted this type of rule.
Unitary business tests
Over the years the courts have developed a number of different tests for determining the existence of a unitary business. As one Supreme Court Justice observed, "the unitary business concept.....is not, so to speak, unitary."
Increase
Overall tax liabilities will _____________ if the member of a unitary group begins o include affiliates subject to higher effective tax rates.
Throw out
Sales of tangible personal property delivered or shipped to a purchaser in a state in which the taxpayer is not taxable are excluded from the numerator and denominator.
Combined Reporting Statute
The multi state tax commission has approved a model combined reporting statute that changes every year.
Federal Taxable Income
The starting point in computing state taxable income.
True
The unitary business principle was developed in the late 1800's as states sought to impose property taxes on railroad companies that operated across state lines.
Finnigan
Under Finnigan, the unitary group is looked at as a whole. If one member of the group is taxable in the state, the entire unitary group is taxable in the state for apportionment purposes.
True
Under IRC section 1361, the separate existence of a qualified subchapter S subsidiary (QSSS) is disregarded for federal tax purposes.
Joyce
Under Joyce, each corporation of the unitary group is looked at separately when determining whether it is taxable in the state.
Throwback Rule
Under UDIPTA section 3, a corporation is "taxable in another state" if it meets either a subject to tax test or a jurisdiction to tax test.
Unitary Appointment
Under either apportionment method, the appointment factor attributes included in the denominator are the same. The denominator includes all of the unitary group's total factors, regardless of nexus.
False
Under the Joyce rule, if a group member ships goods from California to a purchaser in another state, throwback is avoided if any group member has nexus in the destination state.
State Conformity to Pass-Through Entity Treatment
Under these, regulations, the owners of a partnership organized in the United States have the option of electing to have the entity classified as a partnership under the default rules.
Three Unities Tests
Under this test, a unitary business exists if each of three factors is present: 1. Unity of ownership - control established through a 51 percent ownership interest. 2. Unity of operation - is exhibited by centralized staff functions performed by one of the corporations on behalf of the entire group. 3. Unity of use - is exhibited by a centralized executive force that makes major decisions regarding strategy and operations, as well as by intercompany transfers of products, know-how and expertise.
True
Virtually all of the states conform to the federal classification rules for partnerships.
False
Water's Edge combination includes all members of the unitary group, regardless of the country in which the group member is incorporated.
The Unitary Theory
When two affiliated corporations are subject to tax in different states, each entity must file a return and report its income in the state I which it conducts business. Each entity reports its income separately from that of its affiliated corporations. In an effort to minimize the overall state income tax, multistate entities have attempted to separate the parts of the business that are carried on in the various states.
The factors of the probability test
Which of the following judicial interpretations of a unitary business explicitly considers the economies of scale.
Delaware
Which of the following states does not use some type of 80/20 rule to determine which foreign corporations to exclude from a water's edge combined report.
