TAX6105 Final

A and B are an affiliated group that files a consolidated return. At the start of the current year, B sells a delivery truck to A for $50,000. B's adjusted basis in the truck was also $50,000 on the sale date. A still owns the truck at year end and claims annual tax depreciation of $30,000 based on B's carry over basis depreciation schedule. Also, A sells inventory to B at a loss of $24,000. Before year-end, B resells the inventory to an unrelated third party for a gain of $9,000. Before making any adjustments, a and B have separate taxable income of $300,000 and 700,000 respectively. What is their group's consolidated taxable income?

$1,000,000

Wacky Wendy produces gourmet cheese in Wisconsin. Wendy has sales as follows: Wacky Wendy's Sales: State Sales Iowa $ 350,530 Michigan $ 134,643 Minnesota. $ 849,190 Wisconsin. $ 1,323,140 Totals. $ 2,657,503 Wendy is a Wisconsin corporation and has the following operations: Wendy has income tax nexus in Iowa, Minnesota, and Wisconsin. The Michigan sales are shipped from Wisconsin (a throwback state). $100,600 of the Wisconsin sales were to the federal government. What is Wendy's Wisconsin sale numerator?

$1,457,783 $1,457,783 = $1,323,140 + $134,643. The Michigan sales are "thrown back" to Wisconsin since Wendy doesn't have income tax nexus in Michigan. Additionally, the government sales are sourced in (not "thrown back" to) the state from which they were shipped.

Della Corporation is headquartered in Carlisle, Pennsylvania. Della has a Pennsylvania state income tax base of $435,000. Of this amount, $77,000 was nonbusiness income. Della's Pennsylvania apportionment factor is 28.52 percent. The nonbusiness income allocated to Pennsylvania was $62,000. Assuming a Pennsylvania corporate tax rate of 7.75 percent, what is Della's Pennsylvania state tax liability?

$12,718 {[($435,000 − $77,000) × 28.52%] + $62,000} × 7.75%

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His adjusted tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?

$150,000 dividend and a tax basis in each of his remaining shares of $4,000. The redemption will be treated as a dividend because Sven is treated as owning 100 percent of the corporation's stock after the redemption through his wife, Olga. The exchange will be treated as a dividend of $150,000. Sven's stock basis in his redeemed shares is transferred to his remaining 25 shares ($100,000 ÷ 25 = $4,000).

Ashton Corporation is headquartered in Pennsylvania and has a state income tax base there of $585,000. Of this amount, $97,000 was nonbusiness income. Ashton's Pennsylvania apportionment factor is 42.30 percent. The nonbusiness income allocated to Pennsylvania was $68,000. Assuming a Pennsylvania corporate tax rate of 8.25 percent, what is Ashton's Pennsylvania state tax liability?

$22,640. The state tax liability is calculated as follows: ((585,000 -97,000) *.423 +68,000) *.0825 = 22,640

Mackinac Corporation, a U.S. corporation, reported total taxable income of $5 million. Taxable income included $1.5 million of foreign source taxable income from the company's branch operations in Canada. All of the branch income is foreign branch income. Mackinac paid Canadian income taxes of $375,000 (as translated) on its branch income. Compute Mackinac's allowable foreign tax credit.

$315,000 Explanation Mackinac Corporation's pre-credit U.S. tax is $1,050,000 ($5,000,000 × 21%). The company's foreign tax credit limitation is computed as: $1,500,000 ÷ $5,000,000 × $1,050,000 = $315,000. Mackinac's allowable foreign tax credit is limited to $315,000, creating an "excess credit" of $60,000 ($375,000 − $315,000), which can be carried back one year and carried forward 10 years.

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 190 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 95 of her shares for $1,900 per share on December 31, 20X3. Pam's adjusted tax basis in each share is $950. Comet has total E&P of $295,000. What are the tax consequences to Pam because of the stock redemption?

$90,250 capital gain and a tax basis in each of her remaining shares of $950. The redemption will be treated as an exchange because Pam meets the substantially disproportionate test (her 33 percent ownership after the redemption is less than 50 percent and less than 40 percent(.50*.80=.40). Her remaining shares retain a basis of $950 per share.

A, B, and C are domestic corps. A owns 100% of B and C and the 3 corps file a consolidated tax return. During the year A reports Cap Gain of $400,000, B had Cap Gain of $300,000 and C had Cap LOSS of $800,000. What amount of Cap Gain net income does the consolidated group report on line 8 of Form 1120?

0 Cannot record or deduct a loss on consolidated capital gain/loss

Santa Fe Corporation manufactured inventory in the United States and sold the inventory to customers in Mexico. Gross profit from the sale of the inventory was $253,000. Title to the inventory passed FOB: shipping point. How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year?

0 Explanation In the case of a manufacturer of inventory, 100 percent of the gross income is sourced based on where the assets producing the inventory are located. Because the assets are located in the United States, 100 percent of the gross profit is treated as U.S. source income for FTC purposes.

Handsome Rob provides transportation services in several western states. Rob has payroll as follows: Handsome Rob's Payroll: State Payroll Arizona. $ 350,557 California. $ 1,134,724 Nevada. $ 849,262 Washington. $ 323,302 Totals. $ 2,657,845 Rob is a California corporation, and the following is true: Rob has income tax nexus in Arizona, California, Nevada, and Washington. The Washington drivers spend 25 percent of their time driving through Oregon. California payroll includes $201,500 of payroll for services provided in Nevada by California-based drivers. What is Rob's California payroll numerator?

1,134,724 No allocation is made among states for payroll

Lefty provides demolition services in several southern states. Lefty has property as follows: Property State Beginning. Ending Alabama. $ 123,056. $ 204,247 Kentucky. $ 203,323. $ 185,114 Mississippi. $ 881,944. $ 1,002,408 Louisiana. $ 243,957. $ 350,316 Tennessee. $ 143,210. $ 143,210 Total. $ 1,595,490. $ 1,885,295 Lefty is a Mississippi corporation. Lefty also rents property in Mississippi and Tennessee with annual rents of $62,000 and $27,000, respectively. What is Lefty's Mississippi property numerator?

1,438,176 The beginning and ending values are averaged and the rental property is added at eight times the annual rent. ($881,944 + $1,002,408)/2 + ($62,000 × 8) = 1,438,176

Corona Company is owned equally by Maria, her sister Carlita, her mother, Gabriella, and her grandmother Olivia, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?

200 Maria is treated as owning the shares of her mother, but not those of her sister or grandmother.

x, y and z are domestic corporations. f1 and f2 are foreign corporations. x owns 80% of y and x and y file a consolidated tax return. y owns 20% of z 50% of f1 and 10% of f2. during the current year, x receives a $10,000 dividend from y and y receives three dividends, one each form z, f1 and f2. What amount of taxable income does the x-y consolidated group report as a result of these four dividends?

3,500 40,000 Gross income from 4 dividends (10,000) Elimination of 10,000 inter-company dividend paid by Y to X (6,500) 65% DRD for 10,000 dividend paid by Z to Y (10,000) 100% DRD for 10,000 dividend paid by F1 to Y (10,000) 100% DRD for 10,000 dividend paid by F2 to Y 3,500 Net taxable income

Panda Company is owned equally by Min, her husband, Bin, her sister Xiao, and her grandson, Han, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own?

300 Min is treated as owning the shares of her husband and her grandson, but not her sister.

Saginaw Steel Corporation has a precredit U.S. tax of $108,000 on $503,000 of taxable income. Saginaw has $203,000 of foreign source taxable income and paid $63,000 of income taxes to the German government on this income. All of the foreign source income is treated as foreign branch income for foreign tax credit purposes. Saginaw's foreign tax credit on its tax return will be:

43,586 Explanation The foreign tax credit is limited to the lesser of $63,000 or the FTC limitation, computed as $203,000 ÷ $503,000 × $108,000 = $43,586.

On 1/1/Y5 A Co purchases 100% of the stock of B Co for $600,000. A co and B co file a consolidated tax return in Y5. During Y5, B co reports seperate taxable income of $100,000, earns $8,00 of tax-exempt income, and distributes a $30,000 dividend to A co. B co pays its own tax liability on its separate taxable income. The corp tax rate is 21%. What is A's basis in B Co stock on 12/31/Y5

657,000 600,000 + (100,000 * (1 - .21)) + 8,000 - 30,000

Public Law 86-272 protects a taxpayer from which of the following taxes? A State Margin Tax (a tax with net income, gross receipts and capital worth components) A State Business & Occupation Tax (a Gross Receipts Tax) A State Commercial Activity Tax (an excise tax with a gross receipts base) A State Franchise Tax (A net income tax)

A State Franchise Tax (A net income tax)

Which of the following persons should not be treated as a "U.S. shareholder" of a controlled foreign corporation (CFC) for subpart F purposes?

A U.S. citizen owning 5 percent of the CFC To be a U.S. shareholder, a U.S. person must own at least 10 percent of the stock of a CFC.

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 70 shares of Sven's stock for $1,700 per share on December 31, 20X3. Viking has total E&P of $490,000. What are the tax consequences to Viking because of the stock redemption?

A reduction of $119,000 in E&P because of the exchange. The redemption will be treated as a dividend because Sven is treated as owning 100 percent of the corporation's stock after the redemption through his wife, Olga. As a result, Viking reduces its E&P by the amount distributed. (70*$1,700)

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

A reduction of $50,000 in E&P because of the exchange. In a stock redemption treated as an exchange, the distributing corporation reduces E&P by the lesser of the amount paid in the redemption or the percentage of stock redeemed times E&P at the date of the redemption. (50 shares × $1,000 = $50,000 versus 25% × $250,000 = $62,500).

Bob controls two businesses Alpha Co and Beta Co. Both businesses are highly cyclical in nature. Consequently, it is not unusual for one company to report a profit and the other report a loss in the same year. Which of the following legal structures does NOT allow for the immediate utilization of the loss of one company against the profit of the other company? Alpha and Beta are separate C corporations and Alpha owns 100% of the stock of Beta Alpha is a C corp, Beta is an LLC treated as a disregarded entity (partnership), and ABC owns 100% of Beta Alpha and Beta are separate divisions of a C corp owned by Bob

Alpha and Beta are separate divisions of a C corp owned by Bob

Cougar Company is owned equally by Cat and a partnership that is owned equally by his father and two unrelated individuals. Cat and the partnership each owns 3,000 shares in the company. Cat wants to reduce his ownership in the company and decided that the company will redeem 1,500 of his shares for $25,000 per share. Cat's tax basis in each share is $5,000. What are the income tax consequences to Cat because of the stock redemption, assuming the company has earnings and profits of $10 million?

Dividend 10M Tax Free return of Capital 15M Capital Gain from sale of stock 12.5M Cat directly owns 3,000 shares in Cougar Company and owns 1,000 shares indirectly through his father's ownership in the partnership (1 ÷ 3 × 3,000). Prior to the redemption, Cat owns 4,000 ÷ 6,000 shares = 66.67%. After the redemption of 1,500 shares, Cat owns 2,500 ÷ 4,500 shares = 55.55%. Because Cat's stock ownership remains above 50%, he will be treated as having received a dividend to the extent of the corporation's E&P ($10,000,000). Of the remaining distribution of $27,500,000, $15,000,000 will be treated as a tax-free return of capital (1,500 × $10,000 - the basis in the redeemed stock is allocated to the remaining shares) and $12,500,000 will be treated as gain from sale of stock (capital gain).

Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption?

Less than 48% Under §302(b)(2), Sara must own less than the lesser of 1) 80% × 60% = 48% or 2) 50%.

Spartan Corporation, a U.S. corporation, reported $8.4 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 15 percent, and the United States taxes corporate income at 21 percent. Required: a. If the United States provided no mechanism for mitigating double taxation, what would be the total tax (U.S. and foreign) on the $8.4 million of branch profits? b. Assume the United States allows U.S. corporations to exclude foreign source income from U.S. taxation. What would be the total tax on the $8.4 million of branch profits? c. Assume the United States allows U.S. corporations to claim a deduction for foreign income taxes. What would be the total tax on the $8.4 million of branch profits? d-1. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be the total tax on the $8.4 million of branch profits? d-2. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be your answer if Spartania taxed branch profits at 30 percent?

Explanation a. Spartania tax ($8,400,000 × 15%)$ 1,260,000 U.S. tax ($8,400,000 × 21%) 1,764,000 Total tax $ 3,024,000 b. Spartania tax ($8,400,000 × 15%) $ 1,260,000 U.S. tax ($0 × 21%) 0 Total tax $ 1,260,000 c. Spartania tax ($8,400,000 × 15%) $ 1,260,000 U.S. tax ([$8,400,000 − $1,260,000] × 21%) 1,499,400 Total tax $ 2,759,400 d-1. Spartania tax ($8,400,000 × 15%) $ 1,260,000 U.S. tax ([$8,400,000 × 21%] − $1,260,000) 504,000 Total tax $ 1,764,000 d-2. Spartania tax ($8,400,000 × 30%) $ 2,520,000 U.S. tax ([$8,400,000 × 21%] − $2,520,000) -$756,000 but reduced to $0 and loss is carried Total tax $ 2,520,000 If Spartania taxed branch profits at 30 percent, the United States would allow the foreign tax to reduce the U.S. tax to zero, but the excess $756,000 would become a carryback or carryforward to a prior or future year.

T/F Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its E&P by $100,000 because of the redemption.

FALSE Battle reduces its E&P by the lesser of $100,000 or 20 percent of E&P at the date of the redemption ($40,000).

All income earned by a Swiss corporation owned by a U.S. corporation is deferred from U.S. taxation until such income is remitted back to the United States.

FALSE Income that is characterized as subpart F income or global low-taxed intangible income (GILTI) could be subject to current-year taxation as a deemed dividend back to the United States in the year earned by the foreign corporation.

T/F Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation.

FALSE The corporation-to-shareholder attribution rule only applies if Diego owns 50 percent or more of Azul Corporation.

T/F The "family attribution" rules are AUTOMATICALLY WAIVED in a complete redemption of a shareholder's stock.

FALSE The shareholder must sign an agreement with the IRS to waive the family attribution rules in a complete redemption.

A unitary-return group includes ONLY companies included in the federal consolidated tax return filing

False Explanation A unitary-return group includes only companies determined to be unitary, whereas a federal consolidated return group includes all businesses that meet the 80 percent ownership threshold and have elected to file a consolidated return.

The Wayfair decision held that an out-of-state mail-order company did not have sales tax collection responsibility because it lacked physical presence

False Explanation South Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states' abilities to collect sales taxes from e-commerce and other remote transactions

Which of the following tax benefits DO NOT arise when a U.S. corporation forms a corporation in Ireland through which to earn business profits in Ireland? Potential exemption of U.S. tax on income earned by the corporation Treaty benefits on cross-border payments between the Irish corporation and the U.S. corporation Use of transfer pricing to shift income between the United States and Ireland Flow-through of losses from the Irish corporation to the tax return of the U.S. corporation

Flow-through of losses from the Irish corporation to the tax return of the U.S. corporation. Losses incurred in a corporation operating outside of the United States do not flow-through to the parent U.S. corporation.

Which of the following individuals is NOT considered "family" for purposes of applying the stock attribution rules to a stock redemption? Parents Grandchildren Spouse Grandparents

Grandparents Children also are considered "family" under the 318 attribution rules.

Which of the following activities will create income tax nexus through physical presence? Advertising using television commercials Hiring an agent who performs warranty services Delivery of sales by UPS Electronic delivery of software

Hiring an agent who performs warranty services Explanation Warranty work creates physical presence required for income tax nexus.

Sam Smith is a citizen and bona fide resident of Great Britain (United Kingdom). During the current year, Sam received the following income: Compensation of $30 million from performing concerts in the United States. Cash dividends of $10,000 from a French corporation's stock. Interest of $6,000 on a U.S. corporation bond. Interest of $2,000 on a loan made to a U.S. citizen residing in Australia. Gain of $80,000 on the sale of stock in a U.S. corporation. Determine the source (U.S. or foreign) of each item of income Sam received.

Income from concerts: U.S. source - based on WHERE THE EVENT TOOK PLACE DIVIDEND from French corporation: Foreign source - based on residence of the PAYER INTEREST on a U.S. corporation bond: U.S. source - based on residence of the PAYER INTEREST of $2,000 on a loan made to a U.S. citizen residing in Australia: Foreign source - based on residence of the PAYER Gain of $80,000 on the SALE OF STOCK in a U.S. corporation: Foreign source - based on residence of the SELLER

Acme Corporation has 1,000 shares outstanding. Joan and Tin are married, and each of them owns 50 shares of Acme. Joan and Tin's daughter, Kara, also owns 50 shares of Acme. Joan is an equal partner with Jeri in the J&J partnership, and this partnership owns 80 shares of Acme. Jeri is not related to Joan or Tin. How many shares of Acme is Kara deemed to own under the stock attribution rules?

Kara is deemed to own 190 shares of Acme. She owns 50 shares directly and is attributed 50 shares from Tin (family attribution). She is also attributed 90 shares from Joan (family attribution). Joan owns 50 shares directly and another 40 shares are attributed to Joan from J&J (50% of 80 shares through entity attribution). The 40 shares attributed to Joan are reattributed to Kara through family attribution.

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

Less than 50% Under §302(b)(2), Sam must own less than the lesser of 1) 80% × 70% = 56% or 2) 50%.

Which of the following is NOT a benefit derived from an income tax treaty between the United States and another country? Lower withholding tax rates imposed on cross-border dividend interest payments A higher threshold for determining when a person has nexus in the other country A higher threshold before an individual is considered a resident of the other country for tax purposes? Lower statutory tax rates imposed on effectively connected income (ECI earned by a resident of one country in the other country.

Lower statutory tax rates imposed on effectively connected income (ECI earned by a resident of one country in the other country. Explanation: Income tax treaties DO NOT decrease the statutory tax rates imposed on ECI. The treaty may exempt ECI from taxation, but it does not change the tax rates imposed on the income.

Carolina's Hats has the following sales, payroll, and property factors: North Carolina. South Carolina Sales. 75.03%. 22.51% Payroll. 68.62%. 21.28% Property. 78.45%. 14.56%

NC 74.03% SC 20.22% [(75.03 + 68.62 + 78.45)/3], [(22.51 + 22.51 + 21.28 + 14.56)/4].

Gameco, a U.S. corporation, operates gambling machines in the United States and abroad. Gameco conducts its operations in Europe through a Dutch B.V., which is treated as a branch for U.S. tax purposes. Gameco also licenses game machines to an unrelated company in Japan. During the current year, Gameco paid the following foreign taxes, translated into U.S. dollars at the appropriate exchange rate: Foreign Taxes. Amount (in $) National income taxes. 1,000,000 City (Amsterdam) income taxes. 100,000 Value-added tax. 150,000 Payroll tax (employer's share of social insurance contributions). 400,000 Withholding tax on royalties received from Japan. 50,000 Identify Gameco's creditable foreign taxes.

National income taxes City income taxes Withholding tax on royalties received from Japan Gameco's creditable foreign taxes are those taxes that qualify as income taxes or taxes paid in lieu of income taxes. The creditable income taxes are the national income taxes and the city of Amsterdam income taxes. The withholding tax is creditable because it is imposed "in lieu" of an income tax. Therefore, the total creditable foreign taxes are $1,150,000 ($1,000,000 + $100,000 + $50,000).

Which of the following tax or non-tax benefits DO NOT arise when a U.S. corporation forms a hybrid entity in Germany through which to earn business profits in Germany and elects to have the entity treated as a branch for U.S. tax purposes? Flow-through of losses from the German corporation to the tax return of the U.S. corporation Limited liability to the U.S. corporation for acts committed by the hybrid entity Free transferability of the stock of the hybrid entity by the U.S. corporation Potential exemption from U.S. tax on income earned by the corporation

Potential exemption from U.S. tax on income earned by the corporation A hybrid entity treated as a branch for U.S. tax purposes does not provide the U.S. corporation with exemption from U.S. tax on the entity's income.

Which of the following is NOT a general rule for allocating nonbusiness income? Interest and dividends to the state of commercial domicile Capital gains from rental property to state where property is located Rental income for business property to state where property is located Rental income for investment property to state of commercial domicile

Rental income for investment property to state of commercial domicile

Which of the following is NOT a general rule for calculating the sales factor? Tangible personal property sales are sourced to the destination state If the business does not have nexus in the destination state, the sales are thrown back to the state where the goods were shipped from. Government sales are sourced to the state where they were shipped from. Sales to a state where nexus exists, but no tax is imposed are thrown back to the state where the goods were shipped from.

Sales to a state where nexus exists, but no tax is imposed are thrown back to the state where the goods were shipped from. Explanation Sales to a state where nexus exists, but no tax imposed are nowhere sales and are not thrown back.

A hybrid entity established in Ireland is treated as a flow-through entity for U.S. tax purposes and a corporation for Irish tax purposes.

TRUE

Under most U.S. treaties, a resident of the other country must have a permanent establishment in the United States before being subject to U.S. taxation on business profits earned within the United States.

TRUE

Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation, a U.S. corporation. During the current year, Horton paid a dividend of C$615,000 to Cruller. The dividend qualifies for the 100 percent dividends received deduction. The dividend was subject to a withholding tax of C$34,000. Assume an exchange rate of C$1 = $1. Cruller reported U.S. source taxable income of $2,200,000 before considering the dividend received from Horton Corporation. Compute the tax consequences to Cruller as a result of this dividend.

Taxable income of $2,200,000, net U.S. tax of $462,000, and FTC carryover of $0 Explanation The precredit U.S. tax is $2,200,000 × 21% = $462,000. The withholding tax is not creditable because it was imposed on a dividend eligible for the 100 percent dividends received deduction.

Which tax rule applies to an excess foreign tax credit (FTC) that arises in 2023?

The excess FTC is first carried back to 2022 and any excess is carried forward for 10 years. The one-year carryback is mandatory

Boca Corporation, a U.S. corporation, reported U.S. taxable income of $1,000,000 in the current year. Boca also received a dividend of $100,000 from the corporation's 100 percent owned subsidiary in Italy. The dividend qualifies for the 100 percent dividends received deduction. The Italian government imposed a withholding tax of $5,000 on the dividend. Compute Boca Corporation's net U.S. tax liability for the current year.

The precredit U.S. tax is $210,000, computed as $1,000,000 × 21%. The withholding tax is not creditable because it is imposed on the dividend eligible for the 100 percent dividends received deduction.

Businesses must collect sales tax only in states where they have sales tax nexus

True

Public Law 86-272 protects only companies selling tangible personal property.

True

Sombrero Corporation, a U.S. corporation, operates through a branch in Espania. Management projects that the company's pretax income in the next taxable year will be $125,500: $104,000 from U.S. operations and $21,500 from the Espania branch. Espania taxes corporate income at a rate of 30 percent. a. If management's projections are accurate, what will be Sombrero's excess foreign tax credit in the next taxable year? Assume all of the income is foreign branch income. b. Management plans to establish a second branch in Italia. Italia taxes corporate income at a rate of 10 percent. What amount of income will the branch in Italia have to generate to eliminate the excess credit generated by the branch in Espania?

a. $1935 Pre-credit U.S Tax = 125,500*.21 (26,355) Foreign tax = 21,500*.3 (6,450) FTC Limit = 21,500/125,000)*26,355 (4,515) Foreign Tax - FTC Limit = 6,450-4,515 = $1,935 b. Income = 17,591 Each dollar of foreign taxable income earned in Italia generates an excess FTC limitation of $0.11 [$1 × (21% − 10%)]. Sombrero must generate enough low-tax general category foreign source taxable income to eliminate the $1,935 excess credit. The excess credit will be eliminated if Sombrero can generate $17,591 of income in Italia ($1,935 ÷ 0.11).

Valley View Incorporated, a U.S. corporation, formed a wholly owned Mexican corporation to conduct manufacturing and selling operations in Mexico. In its first year of operations, the Mexican corporation reported taxable income of Mex$5,000,000 and paid Mexican income tax of Mex$1,500,000 on its taxable income. In the second year of its operations, the Mexican subsidiary pays a dividend of Mex$2,000,000 to Valley View, Incorporated. The dividend is subject to a 10 percent withholding tax (Mex$200,000) under the U.S.-Mexico treaty. Assume the currency translation rate for both years is Mex$1:US$0.05. a. Assuming that Valley View Incorporated's Mexican subsidiary does not have any subpart F income or global intangible low-tax income (GILTI), how much taxable income would Valley View, Incorporated, report in U.S. dollars from its Mexican subsidiary's first year of operations? b1. How much of the dividend from the Mexican subsidiary is subject to U.S. taxation? b2. Are any of the Mexican taxes imposed on the income distributed creditable in the U.S.? c. If Valley View, Incorporated only held 5 percent of the Mexican corporation stock, how much of the dividend from the Mexican corporation wou

a. 0 Explanation Valley View will not report any income from its Mexican subsidiary because it is a corporation rather than a branch and it does not have any subpart F income or GILTI. b1. 0 b2. None of the Above Explanation None of the dividend will be taxed in the U.S. Because Valley View Incorporated owns at least 10% of the Mexican subsidiary, it will be eligible for the 100 percent dividends received deduction (participation exemption) on earnings remitted from a foreign corporation that had not previously been subject to the deemed dividend rules of subpart F. On the other hand, none of the Mexican taxes paid, including the Mexican withholding tax, is creditable in the U.S. c. Taxable Dividend income $100,000. Taxable Creditable $10,000 In this situation, Valley View Incorporated would be ineligible for the participation exemption and all of the dividend from the Mexican corporation would be included in Valley View's taxable income in the year the dividend is received. Translated into U.S. dollars, the dividend reported would equal $100,000. Finally, the Mexican withholding tax of $10,000 (translated into U.S. dollars) would be creditable by Valley View Incorporated against its U.S. tax subject to any applicable foreign tax credit limitation.

Spartan Corporation, a U.S. company, manufactures green eyeshades for sale in the United States and Europe. All manufacturing activities take place in Michigan. During the current year, Spartan sold 18,000 green eyeshades to European customers at a price of $15.00 each. Each eyeshade costs $6.50 to produce. For each independent scenario, determine the source of the gross income from sale of the green eyeshades. a. All of Spartan's production assets are located in the United States. b. Half of Spartan's production assets are located outside the United States.

a. 153,000 Gross profit from the sales is $153,000 (18,000 units × {$15.00 − $6.50}). 100 percent of gross profit is sourced to the U.S. based on the location where the production assets are located b. 76,500 each Gross profit from the sales is $153,000 (18,000 units × {$15.00 − $6.50}). 50 percent of gross profit, or $76,500, is treated as foreign source because half of the production assets are located outside the U.S.

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $3,900, and Clyde owns the remaining 40 shares with a basis of $18,000. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment. Required: a. Getaway redeems 10 of Bonnie's shares for $3,500. Getaway has $21,000 of E&P at year-end and Bonnie is unrelated to Clyde. b. Getaway redeems 30 of Bonnie's shares for $7,000. Getaway has $21,000 of E&P at year-end and Bonnie is unrelated to Clyde. c. Getaway redeems 8 of Clyde's shares for $4,000. Getaway has $21,000 of E&P at year-end and Clyde is unrelated to Bonnie.

a. Bonnie owns 60% before and 56% after the redemption. It does NOT qualify as a sale or exchange so the gain is 0. Bonnie owns 60% before the redemption and 56% after the redemption (50 ÷ 90). Thus, the redemption will fail the 50% test in § 302(b)(2). Because Bonnie still has control of the corporation after the redemption (more than 50%) the redemption will likely fail the not essentially equivalent to a dividend test under §302(b)(1). b. Bonnie owns 60% before and 43% after the redemption. It DOES qualify as a sale or exchange so the gain is 5050. Bonnie owns 60% before the redemption and 43% after the redemption (30 ÷ 70). In addition, Bonnie's share of the outstanding stock after the redemption has dropped by more than 80% (80% × 60% = 48%) of her percentage ownership before the redemption (60% before and 43% afterwards). Thus, the redemption passes both the 50% test and the 80% test in § 302(b)(2). This means that Bonnie will treat her redeemed shares as though she sold them for $7,000 resulting in a capital gain of $5,050 ($7,000 − [(30 ÷ 60) × $3,900]). c. Clyde owns 40% before and 35% after the redemption. It does NOT qualify as a sale or exchange so the gain is 0. Clyde owns 40% before the redemption and 35% after the redemption (32 ÷ 92). However, Clyde's share of the outstanding stock has not dropped by more than 80% (80% × 40% = 32%) since his ownership percentage would have to be below 32%, and his ownership percentage is 35%. Thus, the redemption passes the 50% test but fails the 80% test in § 302(b)(2). This redemption might still qualify as a redemption not essentially equivalent to a dividend under § 302(b)(1). Clyde does not have control of the corporation (Bonnie does), and he has suffered a significant reduction in his ownership.

Wildcat Company is owned equally by Evan and his sister Sara, each of whom holds 1,000 shares in the company. Sara wants to reduce her ownership in the company, and it was decided that the company will redeem 500 of her shares for $25,000 per share on December 31 of this year. Sara's tax basis in each share is $5,000. Wildcat has current E&P of $10,000,000 and at the beginning of the year accumulated E&P is $50,000,000. a. What are the amount and character (capital gain or dividend) recognized by Sara because of the stock redemption? b. What is the tax basis in the remaining 500 shares Sara owns in the company? c. By what amount does Wildcat reduce its E&P because of the redemption?

a. Capital gain = 10,000,000 Sara reduces her ownership in Wildcat Company from 50% to 33.33% (500 ÷ 1,500). Sara meets the substantially disproportionate test to treat the redemption as an exchange. Under this test, she reduces her ownership below 50%, and her ownership percentage after the redemption is less than 80% of her ownership before the redemption (80% × 50% = 40%). As a result, Sara recognizes a capital gain of $20,000 per share ($25,000 − $5,000), for a total capital gain of $10,000,000 ($20,000 × 500 shares). b. Income Tax Basis in Remaining Shares = 2,500,000 Sara's income tax basis in the remaining shares remains $5,000 per share or $2,500,000 income tax basis in remaining 500 shares. c. Reduction in E&P = $12,500,000. Wildcat reduces its accumulated E&P by the lesser of the cash distributed ($12,500,000 {500 × $25,000}) or the percentage of stock redeemed times accumulated E&P after reduction by any dividends paid during the year (500 ÷ 2,000 × $60,000,000 = $15,000,000).

Flintstone Company is owned equally by Fred and his sister Wilma, each of whom holds 1,900 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 510 of her shares for $34,500 per share on December 31 of this year. Wilma's tax basis in each share is $5,750. Flintstone has current E&P of $10,130,000 and accumulated E&P at the beginning of the year is $50,670,000. a. What are the amount and character (capital gain or dividend) recognized by Wilma because of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied? b. Given your answer to part (a), what is the tax basis in the remaining 1,390 shares Wilma owns in the company? c. By what amount does Flintstone reduce its E&P because of the redemption?

a. Dividend 17,595,000 Wilma reduces her ownership in Flintstone Company from 50% to 42.25% (1,390 ÷ 3,290). Wilma fails the "substantially disproportionate" test to treat the redemption as an exchange. Although she reduces her ownership below 50%, her ownership percentage after the redemption is not less than 80% of her ownership before the redemption (80% × 50% = 40%). As a result, Wilma recognizes a dividend of $17,595,000 ($34,500 × 510 shares). b. Income Tax Basis remaining in shares 10,925,000 Wilma adds back the "unused" tax basis of the 510 shares redeemed ($2,932,500) to the basis of her remaining 1,390 shares ($7,992,500). c. Flintstone reduces its E&P by $17,595,000, the amount of dividend income reported by Wilma.

Susie's Sweet Shop has the following sales, payroll, and property factors: Item. Iowa. Missouri Sales. 70.90%. 30.31% Payroll. 84.60%. 8.60% Property. 69.02% 27.44% What are Susie's Sweet Shop's Iowa and Missouri apportionment factors under each of the following alternative scenarios? a. Iowa and Missouri both use a three-factor apportionment formula. b. Iowa and Missouri both use a four-factor apportionment formula that double-weights sales. c. Iowa uses a three-factor formula and Missouri uses a single-factor apportionment formula (based solely on sales).

a. IA 74.84 MO 22.12 Using a three-factor formula, the total apportionment would be 96.96 percent b. IA 73.85 MO 24.17 Using a four-factor (double-weighted sales) formula, the total apportionment would be 98.02 percent. IO= ((70.9+70.9+84.6+69.02)/4) c. IA 74.84 MO 30.31 If Iowa uses a three-factor formula ([(70.90% + 84.60% + 69.02%) ÷ 3] = 74.84%) and Missouri uses a single (sales) factor apportionment factor, the total apportionment would be 105.15 percent.

Delicious Dave's Maple Syrup, a Vermont Corporation, has property in the following states: Property State. Beginning. Ending Maine. $ 991,899. $ 1,065,434 Massachusetts. $ 152,492. $ 271,041 New Hampshire. $ 436,485. $ 336,384 Vermont. $ 942,832. $ 980,376 Total. $ 2,523,708. $ 2,653,235 What are the property apportionment factors for Maine, Massachusetts, New Hampshire, and Vermont in each of the following alternative scenarios? a. Delicious Dave's has income tax nexus in each of the states. b. Delicious Dave's has income tax nexus in each of the states, but the Maine total includes $485,000 of investment property that Delicious rents out (unrelated to its business). c. Delicious Dave's has income tax nexus in each of the states, but it also pays $58,500 to rent property in Massachusetts.

a. ME 39.74 MA 8.18 NH 14.93 VT 37.15 Average the beg and end property values for each state to find the numerator and divide by the average total property. b. ME 25.85 MA 10.07 NH 18.37 VT 45.17 Delicious must remove the $485,000 investment (non-business property) from the property factors for Maine (both beginning and ending amounts) as well as the property totals. c. ME 33.66 MA 22.24 NH 12.64 VT 31.46 Delicious must add the rental property to Massachusetts. The annual rent ($58,500) is multiplied by eight and thus ($468,000) is included in both the numerator and denominator.

EG Corporation redeemed 200 shares of stock from one of its shareholders in exchange for $200,000. The redemption represented 20 percent of the corporation's outstanding stock. The redemption was treated as an exchange by the shareholder. By what amount does EG reduce its total E&P because of the redemption under the following E&P assumptions? a. EG's total E&P at the time of the distribution was $2,000,000. b. EG's total E&P at the time of the distribution was $500,000.

a. Reduction in E&P 200,000 In a redemption treated as an exchange, EG reduces its E&P by the lesser of the amount distributed ($200,000) or the percentage of stock redeemed times E&P at the time of the distribution (20% × $2,000,000 = $400,000). In this case, EG reduces its E&P by $200,000. b. Reduction in E&P 100,000 In a redemption treated as an exchange, EG reduces its E&P by the lesser of the amount distributed ($200,000) or the percentage of stock redeemed times E&P at the time of the distribution (20% × $500,000 = $100,000). In this case, EG reduces its E&P by $100,000.

Kashi Corporation is the U.S. distributor of fencing (sword fighting) equipment imported from Europe. It is incorporated in Virginia and headquartered in Arlington, Virginia; it ships goods to all 50 states. Kashi's employees attend regional and national fencing competitions, where they maintain temporary booths to market their goods. Determine whether Kashi has income tax nexus in the following situations: a. Kashi is incorporated and headquartered in Virginia. It also has property, employees, salespeople, and intangibles in Virginia. Determine whether Kashi has income tax nexus in Virginia. b. Kashi has employees who live in Washington, D.C., and Maryland, but they perform all their employment-related activities in Virginia. Does Kashi have income tax nexus in Washington, D.C., and Maryland? c. Kashi has two customers in North Dakota. It receives their orders over the phone and ships goods to them using FedEx. Determine whether Kashi has income tax nexus in North Dakota. d. Kashi has independent sales representatives in Illinois who distribute fencing and other sports-related items for many companies. Does Kashi have income tax nexus in Illinois? e.Kashi has salespeople who visit Sout

a. Yes. Kashi has income tax nexus in Virginia, its state of commercial domicile. b. No to Both. Kashi's employees living in the District of Columbia and Maryland will not create income tax nexus there. However, if the employees were to make deliveries to customers in those jurisdictions on the way home that might create income tax nexus. c. No d. No. The presence of independent contractors in Illinois does not create income tax nexus in Illinois. However, if the independent contractor only represented Kashi (no other vendors) they would likely be considered Kashi's agent and could create income tax nexus. e. Yes. Kashi has income tax nexus in South Carolina, However Kashi is protected from an income tax liability by P.L. 86-272 because it merely solicits for sales of tangible personal property. Kashi is also likely protected by the trade show rule. f. Kashi has income tax nexus in California, but Kashi is protected from an income tax liability by P.L. 86-272 because it merely solicits for sales of tangible personal property. Kashi may also be protected by the trade show rule; this would depend on whether separate trade shows days are treated separately or aggregated for purposes of calculating the 14-day trade show rule. g. Yes. The physical presence of Kashi's truck in Pennsylvania will create income tax nexus. Delivery services are not a protected activity under P.L. 86-272. h. The provision of fencing lessons (services) in Maryland will create income tax nexus there. Services are not a protected activity under P.L. 86-272. i. Yes, Kashi should create income tax nexus with any state that doesn't have an income tax. This will allow Kashi to apportion part of its business income to states which do not tax the apportioned income—this creates nowhere income. Kashi may also consider creating income tax nexus in low-tax jurisdictions but would have to balance the lower taxes against the higher tax compliance costs.

Bad Brad sells used semitrucks and tractor trailers in the Texas panhandle. Bad Brad has sales as follows: Bad Brad State. Sales Colorado. $ 234,992 New Mexico. 675,204 Oklahoma. 402,450 Texas. 1,085,249 Total. $ 2,397,895 Bad Brad is a Texas Corporation. Answer the questions in each of the following alternative scenarios. a. Bad Brad has income tax nexus in Colorado, New Mexico, Oklahoma, and Texas. What are the Colorado, New Mexico, Oklahoma, and Texas sales apportionment factors? b. Bad Brad has income tax nexus in Colorado and Texas. Oklahoma and New Mexico sales are shipped from Texas (a throwback state). What are the Colorado and Texas sales apportionment factors? c. Bad Brad has income tax nexus in Colorado and Texas. Oklahoma and New Mexico sales are shipped from Texas (a throwback state); $200,000 of Oklahoma sales were to the federal government. What are the Colorado and Texas sales apportionment factors? d. Bad Brad has income tax nexus in Colorado and Texas. Oklahoma and New Mexico sales are shipped from Texas (assume Texas is a nonthrowback state). What are the Colorado and Texas sales apportionment factors?

da. CO 9.8 OK 16.78 NM 28.16 TX 45.26 The sales factors are the state sales divided by the total sales b. CO 9.80 TX 90.20 Thrown back sales are added to the Texas numerator. Thus, the Texas sales numerator increases to $2,162,903. c. Same As part b. Federal government sales are added to the numerator of the state where they shipped from (Texas). d. CO 9.8, TX 45.26 Without the throwback rules, there are nowhere sales−less than 100% of sales are apportioned.