WGU - C239 Module Three

Which of the following statements regarding the U.S. taxation of non-U.S. persons is true? a. A non-U.S. person's effectively connected U.S. business income is subject to U.S. income taxation. b. A non-U.S. person's effectively connected U.S. business income is taxed by the United States only if it is portfolio income. c. A non-U.S. person must spend at least 183 days in the United States before any effectively connected income is subject to U.S. taxation. d. A non-U.S. person may earn income from selling U.S. real property without incurring any U.S. income tax.

A

Under a territorial income tax system, a country assesses an income tax on: a. Income of all entities earned within its borders. b. Income of its citizens earned in other countries. c. Both "Income of all entities earned within its borders" and "Income of its citizens earned in other countries". d. Neither "Income of all entities earned within its borders" nor "Income of its citizens earned in other countries".

A Income earned in "Income of its citizens earned in other countries". would be taxed if a worldwide taxing system were in place.

A taxpayer wishing to reduce the negative tax effects of the application of the unitary theory might: a. Add a profitable entity to the unitary group. b. Affiliate with a service division that shows an operating loss, such as one in research and development. c. Acquire a unitary affiliate in a country with a high wage structure. d. Both "Affiliate with a service division that shows an operating loss, such as one in research and development" and "Acquire a unitary affiliate in a country with a high wage structure".

B

Multistate income tax planning can be effective for the taxpayer because: a. State income tax rates generally are steeply progressive. b. Different states use different definitions of taxable income. c. Both "Different states use different definitions of taxable income" and "State income tax rates generally are steeply progressive". d. Neither "Different states use different definitions of taxable income" nor "State income tax rates generally are steeply progressive".

B

USCo, a U.S. corporation, receives $700,000 of foreign-source passive income on which foreign taxes of $70,000 are withheld. Its worldwide taxable income is $1,500,000, and its U.S. tax liability before the foreign tax credit is $315,000. What is USCo's allowed foreign tax credit? a. $385,000 b. $70,000 c. $147,000 d. $315,000

B

Zhao Company sold an asset on the first day of the tax year for $500,000. Zhao's Federal tax basis for the asset was $300,000. Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $350,000. What modification, if any, should be made to Zhao's Federal taxable income in determining the correct taxable income for the typical state? a. $150,000 b. ($50,000) c. $50,000 d. $0

B

Which of the following is not a U.S. person? a. U.S. corporation 100% owned by a foreign corporation. b. Domestic corporation. c. Citizen of Turkey with U.S. permanent residence status (i.e., green card). d. Foreign corporation 100% owned by a domestic corporation.

D

Cruz Corporation owns manufacturing facilities in States A, B, and C. State A uses a three-factor apportionment formula under which the sales, property, and payroll factors are equally weighted. State B uses a three-factor apportionment formula under which sales are double-weighted. State C employs a single-factor apportionment factor based solely on sales. Cruz's operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows. State A State B State C Totals Sales $400,000 $800,000 $300,000 $1,500,000 Payroll 100,000 150,000 50,000 300,000 Property 200,000 200,000 200,000 600,000 Cruz's apportionable income assigned to State C is: a. $0 b. $273,333 c. $1,000,000 d. $200,000

D Sales $300,000/$1,500,000 = 20.0% Sum of apportionment factors 20.0% Apportionment factor for State C 20.0% Apportionable income × $1,000,000 Income apportioned to State C $200,000

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

F 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).

Roughly 5% of all taxes paid by businesses in the United States are to state, local, and municipal jurisdictions. True False

F About 40% of all business taxes are paid to state and local agencies, including income, sales/use, and property taxes.

All of the U.S. states use an apportionment formula based on the sales, property, and payroll factors. True False

F Each state defines and weights its own factors.

Usually a business chooses a location where it will build a new plant based chiefly on tax considerations. True False

F Nontax considerations (e.g., wage rates, transportation availability) usually prevail.

A state can levy an income tax on a business only if the business was incorporated in the state. True False

F Out-of-state businesses can be subject to the tax. Nexus is the threshold authorizing the state to levy an income tax.

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. True False

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

Unused foreign tax credits are carried back two years and then forward 20 years. True False

F The carryover period is back one year and forward ten years. FTC carryovers are computed separately for each income basket.

In allocating interest expense between U.S. and foreign sources, a taxpayer elects to use either the tax book value of the income-producing assets or their fair market values. True False

F The taxpayer uses the tax book value, not the fair market value

Waltz, Inc., a U.S. taxpayer, pays foreign taxes of $50,000 on foreign-source general basket income of $90,000. Waltz's worldwide taxable income is $450,000, on which it owes U.S. taxes of $94,500 before FTC. Waltz's FTC is $50,000. True False

F Waltz calculates the FTC limitation and is allowed an FTC of the lesser of the limit or the actual foreign taxes paid. The limitation is $18,900 [$94,500 × ($90,000/$450,000)]. Thus, the FTC is $18,900.

Most states begin the computation of corporate taxable income with an amount from the Federal income tax return. True False

T

Subpart F income includes portfolio income such as dividends and interest. True False

T Foreign base company income includes foreign personal holding company income, such as interest, dividends, royalties, rents, and annuities.

The U.S. system for taxing income earned inside its borders by non-U.S. persons is referred to as inbound taxation because such foreign persons are earning income by coming into the United States. True False

T Foreign taxpayers coming into the United States are taxed under the "inbound" approach, which relates to the United States generally taxing such persons only on income earned within the United States.

An assembly worker earns a $50,000 salary and receives a fringe benefit package worth $15,000. The payroll factor assigns $65,000 for this employee. True False

T Fringe benefits usually are included in the payroll factor assigned to the state where services primarily are performed.

Property taxes generally are collected by local taxing jurisdictions, not the state or Federal governments. True False

T State-level property taxes usually apply only to business assets.

The United States has in force income tax treaties with about 70 countries. True False

T The United States has bilateral treaties with many countries

The United States has in force income tax treaties with about 70 countries. True False

T The United States has bilateral treaties with many countries.

Kipp, a U.S. shareholder under the CFC provisions, owns 40% of a CFC. If the CFC's Subpart F income for the taxable year is $200,000, Kipp is taxed on receipt of a constructive dividend of $80,000. True False

T U.S. shareholders must include their pro rata share of any Subpart F income.

Chipper Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z. Chipper's activities establish nexus for income tax purposes only in Z, the state of its incorporation. Chipper's sales, payroll, and property among the states include the following.State XState ZTotalsSales$1,000,000$2,000,000$3,000,000Property200,0002,300,0002,500,000Payroll100,0001,900,0002,000,000X utilizes a sales-only factor in its three-factor apportionment formula. How much of Chipper's taxable income is apportioned to X? a. $1,000,000 b. $0 c. $333,333 d. $500,000

B A business is not subject to tax in a state until nexus is established.

Flint Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income which is $750,000. This amount includes a $50,000 deduction for state income taxes. During the year, Flint received $10,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Flint's taxable income for X purposes is: a. $800,000 b. $790,000 c. $810,000 d. $750,000

B Federal taxable income $750,000 State income tax expense 50,000 Interest on Federal obligations (10,000) State X Taxable Income $790,000

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its State A headquarters to a customer in State B. General has not established nexus with State B. State A does not apply a throwback rule. In which state(s) will the sale be included in the sales factor numerator? a. $100,000 in State A. b. $100,000 in State B. c. $0 in State A and $0 in State B. d. In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states.

C

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its State A headquarters to a customer in State B. This activity is not sufficient for General to create nexus with State B. State A applies a throwback rule but State B does not. In which state(s) will the sale be included in the sales factor numerator? a. $0 in both State A and State B. b. $100,000 in State B. c. $100,000 in State A. d. In both State A and State B, according to the apportionment formulas of each.

C

The model law relating to the assignment of income among the states for corporations is: a. Public Law 86-272. b. The Multistate Tax Commission (MTC). c. The Uniform Division of Income for Tax Purposes Act (UDITPA). d. The Multistate Tax Treaty.

C

Which of the following is a principle used in applying the income-sourcing rules under U.S. tax law? a. The rules should favor the U.S. Treasury. b. The rules should favor the treasury of the non-U.S. country. c. The rules should be acceptable to both countries. d. The rules should apply to income items only; deductions need not be sourced in this way.

C

Wellington, Inc., a U.S. corporation, owns 30% of a CFC that has $50 million of earnings and profits for the current year. Included in that amount is $20 million of Subpart F income. Wellington has been a CFC for the entire year and makes no distributions in the current year. Wellington must include in gross income: a. $50 million. b. $0. c. $6 million. d. $20 million.

C $6 million ($20 million Subpart F income × 30% ownership interest).

Chipper Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z. Chipper's activities establish nexus for income tax purposes only in Z, the state of its incorporation. Chipper's sales, payroll, and property among the states include the following. State X State Z Totals Sales $1,000,000 $2,000,000 $3,000,000 Property 200,000 2,300,000 2,500,000 Payroll 100,000 1,900,000 2,000,000 X utilizes a sales-only factor in its three-factor apportionment formula. How much of Chipper's taxable income is apportioned to X? a. $1,000,000 b. $333,333 c. $0 d. $500,000

C A business is not subject to tax in a state until nexus is established.

José Corporation realized $900,000 taxable income from the sales of its products in States X and Z. José's activities in both states establish nexus for income tax purposes. José's sales, payroll, and property among the states include the following. State X State Z Totals Sales $1,500,000 $1,000,000 $2,500,000 Property 500,000 -0- 500,000 Payroll 2,000,000 -0- 2,000,000 X utilizes an equally weighted three-factor apportionment formula. How much of José's taxable income is apportioned to X? a. $450,000 b. $120,000 c. $780,000 d. $900,000

C Sales $1,500,000/$2,500,000= 60.0% Property $500,000/$500,000= 100.0% Payroll $2,000,000/$2,000,000= 100.0% Sum of apportionment factors 260.0% Apportionment factor for State X (260%/3) 86.7% Taxable income × $900,000 Income apportioned to X $780,000

Which of the following statements regarding the taxation of U.S. real property gains recognized by non-U.S. persons not engaged in a U.S. trade or business is false? Gains from the disposition of U.S. real property are: a. Taxed to non-U.S. persons without regard to whether such non-U.S. persons are engaged in a U.S. trade or business. b. Taxed to non-U.S. persons notwithstanding the general exemption of capital gains from U.S. taxation. c. Not taxed to non-U.S. persons because real property gains are specifically exempt from U.S. taxation. d. Taxed in the United States because such gains are treated as if they are effectively connected to a U.S. trade or business.

C The U.S. taxes gains on the sale of U.S. real property by a foreign person as though such gains were income effectively connected to a U.S. trade or business [§ 897(a)(1)].

For most taxpayers, which of the traditional apportionment factors yields the greatest opportunities for tax reduction? a. Payroll. b. Property. c. Unitary. d. Sales (gross receipts).

D

Parent and Minor form a non-unitary group of corporations. Parent is located in a state with an effective tax rate of 3% and Minor's effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should: a. Have Parent charge Minor an annual management fee. b. Execute an intercompany loan such that Minor pays deductible interest to Parent. c. Shift Parent's high-cost assembly and distribution operations to Minor. d. Do all of these choices are correct.

D