Tax Strategy 13 & 16

Tuscan Company sold an asset on the first day of the tax year for $500,000. Tuscan'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 adjustment, if any, should be made to Federal taxable income in determining the correct taxable income for the typical state?

-50,000

Asker Company earned $30,000 of interest on municipal bonds this year. Asker also donated $150,000 to the Red Cross. Which of the following statements is true?

If Asker is a partnership, the contribution is reported on Schedule K-1

Rustic Corporation owns two subsidiaries, Black and Blue. Black, located in State A, generated taxable income of $600,000. During this same period, Blue, located in State B, generated a loss of $250,000. Which of the following statements is true?

If subsidiaries are independent corporations, Black is required to pay A tax on 600k income

Lauren, Ava, and Marilyn form a corp with the following contributions: Lauren: Cash - Basis $100,000; FMV $100,000 Ava: Land - Basis $60,000; FMV $100,000 Marilyn: Building - Basis $110,000; FMV $100,000

If the corporation is a C corporation, Ava has a recognized gain or loss of $0 and a stock basis of $60,000 and the corp has a basis for the land of $60,000

Corporation is recognized as a separate legal entity with the following characteristics:

continuity of life centralized management free transferability of interests limited liability

A majority of states recognize an entity's S corporation status, such that taxable income flows through directly to shareholders.

false

All S corporations must withhold taxes on the portions of the entity's income allocated to nonresident shareholders.

false

All of the states will recognize S corporation status even if there is no valid Federal S election in place.

false

Apportionment is a method under which specific components of a corporation's income, net of related expenses, are directly assigned to a certain state.

false

By making a water's edge election, the multinational taxpayer can limit the reach of the unitary theory to that state's factors and income.

false

From the perspective of the seller, the ideal form for the sale of a business is a stock sale.

false

The unitary theory is based on the separate legal existence of the entities.

false

a corp can convert to a partnership or LLC form without being liquidated

false

all states impose a tax based on a C corp's taxable income

false

if a consolidated return is filed for federal purposes, it must be filed for state tax purposes

false

sale of a partnership interest generates ordinary income

false

majority of states tax legal and accounting services

false To date, extension of the tax base for legal/accounting, medical, education, and advertising services largely has been blocked in most legislatures by the providers of these services.

working with the property factor often yields the greatest planning opportunities for a multistate corporation

false sales factor

A(n) _____ is an excise tax for the corporate privilege conferred on the business at the time the business is incorporated.

incorporation tax

What is the effect of a single-factor apportionment formula consisting solely of a sales factor?

it severely hurts out-of-state corporations The use of a higher-weighted sales factor tends to pull a larger percentage of an out-of-state corporation's income into the taxing jurisdiction of the state, because the corporation's major activity within the state—the sales of its goods and services—is weighted more heavily than are its payroll and property activities. Consequently, a single-factor apportionment formula consisting solely of a sales factor is even more detrimental to an out-of-state corporation.

Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

marking repairs or providing maintenance Activities that are usually sufficient to establish nexus include approving or rejecting orders, making repairs or providing maintenance, collecting delinquent accounts, investigating creditworthiness, and conducting installation or supervising installation.

Taupe Corporation owns all of the stock of Gray Corporation, a Delaware passive investment company. Taupe operates strictly in nonunitary State B, which levies a 6% income tax. This year, Gray earned $200,000 of portfolio interest income and paid $150,000 of this amount to Taupe in the form of a dividend. In which of the following state(s) will the interest income create an income tax liability?

neither state

Ebony Corporation realized $1,000,000 of taxable income from the sales of its products in States X and Z. Ebony's activities establish nexus for income tax purposes only in State Z. Ebony's sales, payroll, and property among the states include the following: State XState ZTotalsSales$1,000,000$2,000,000$3,000,000Property2,000,000500,0002,500,000Payroll1,000,0001,000,0002,000,000 State X utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of Ebony's taxable income is apportioned to State X?

no nexus so 0

"Check the box" regulations provide for most unincorporated business entities, including LLCs, to be either disregarded or treated as partnerships for tax purposes depending on the number of owners.

true

A few states impose a minimum income tax on flow-through entities.

true

A use tax would be due if an individual purchased a personal item on the internet from State A and used it at their home in State B.

true

If a corporation has established sufficient nexus, it is subject to apportionment.

true

If the amount realized from the sale of a sole proprietorship exceeds the fair market value of the identifiable assets, the seller prefers the excess to be attributed to goodwill.

true

Income, loss, and credit items are allocated and apportioned among the partners according to the terms of the partnership agreement and state income tax law.

true

Nonapportionable (nonbusiness) income generally includes passive and portfolio income.

true

Nonapportionable income is allocated to the state in which the income-producing asset is located.

true

Regardless of the form of the transaction, the sale of a sole proprietorship is treated as the sale of individual assets.

true

Rose and Carnation form a nonunitary group of corporations. Rose is located in a state with an effective tax rate of 3%, while Carnation's effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should have Rose charge Carnation an annual management fee.

true

S corp is restricted in both the number and type of shareholders

true

S corps provide a way to avoid double taxation and possibly subject the earnings to a lower income tax rate (the shareholder's tax rate may be lower than the flat 21 percent corp tax rate)

true

Some states allow an S corporation to file a single income tax return and pay the resulting tax on behalf of some or all its nonresident shareholders.

true

The Uniform Division of Income for Tax Purposes Act (UDITPA) is a model law relating to the assignment of income among the states for multistate corporations.

true

The majority of states that impose an income tax use taxable income as computed on the Federal return as the starting point in computing the tax base.

true

The state in which a business is incorporated has the jurisdiction to tax the corporation, regardless of the volume of its business activity within the state.

true

The use tax is designed to complement the sales tax.

true

Under P.L. 86-272, only the sale of tangible personal property is exempt.

true

When two affiliated corporations are subject to tax in different states, each entity must file a return and report its income in the state in which it conducts business.

true

the multistate tax commission (MTC) advocates for the equitable apportionment of tax bases

true

unitary operations may help a taxpayer reduce its overall state tax

true

Waleska contributes equipment (FMV of $50,000; adjusted basis of $15,000), subject to a $10,000 liability, to form Green Partnership, a general partnership. Alice contributes $40,000 cash. Waleska and Alice share equally in partnership profits and losses. What are Waleska's and Alice's bases for their partnership interests?

$10,000 to Waleska; $45,000 to Alice

Carmen and Serena each own one-half the stock of Copper, Inc., an S corporation. Each shareholder has a stock basis of $100,000. Copper has no accumulated E & P. Copper's taxable income for the current year is $80,000, and it distributes $50,000 to each shareholder. Carmen's stock basis at the end of the year is:

$100,000+40,000-50,000 = 90,000

Carlita and Santiago each own one-half the stock of Iron, INC, an S corporation. Each shareholder has a stock basis of $150,000. Iron has no accumulated E&P. Iron's taxable income for the current year is $100,000 and it distributes $75,000 to each shareholder. Carlita's stock basis at the end of the year is:

$150,000+$50,000-$75,000 = $125,000

Paper Corporation conducts business in States A, B, C, and D. Paper's $500,000 taxable income consists of $300,000 of apportionable income and $200,000 allocable income generated from transactions conducted in State A. Paper's sales, property, and payroll are evenly divided among the four states, and the states all employ an identical apportionment formula. The taxable income for State A is:

(300/4) + 200 = 275

Garcia Corporation, a wholly owned subsidiary of Sanchez Corporation, generated $2,000,000 of taxable income. Garcia's activities and sales are restricted to State A, which imposes a 7% income tax. Sanchez's income for the taxable period is $2,500,000. Sanchez's activities and sales are restricted to State B, which imposes a 4% income tax. Both states use a three-factor apportionment formula that equally weights sales, payroll, and property. Sales, payroll, and average property for each of the corporations are as follows: GarciaSanchezTotalSales$2,000,000$8,000,000$10,000,000Payroll1,500,0003,500,0005,000,000Property2,000,0003,000,0005,000,000 If the corporations are independent entities, the overall state income tax liability is:

(7% * 2M) + (4% * 2.5M) = 240k

Violet Corporation's entire operations are located in State A. Eighty percent ($800,000) of Violet's sales are made in State A, and the remaining sales ($200,000) are made in State B. Violet's activities in B are not sufficient to create nexus in that state. If A has adopted a throwback rule, the numerator of the A sales factor is:

1,000,000

Downton Corporation generates $400,000 of taxable income from selling goods; specifically, 30% of its product is sold in State A and 70% in State B. Both states levy a corporate income tax and include only the sales factor in their apportionment formulas. The tax rate in A is 10%; B's rate is only 4%. Downton's manufacturing operation is located in A; therefore, the corporation's income is subject to tax in that state. Currently, Downton is immune from tax under P.L. 86-272 in B. A has adopted a throwback provision. How much does Downton incur initially in state income taxes?

40,000 State A (100/100 × $400,000 × 10%)$40,000State B (0/100 × $400,000 × 4%) 0Tax liability$40,000

McGraw Corporation conducts business in States A, B, C, and D. McGraw's $1,200,000 taxable income consists of $1,000,000 apportionable income and $200,000 allocable income generated from transactions conducted in State D. McGraw's sales, property, and payroll are evenly divided among the four states, and the states all employ an identical apportionment formula. McGraw is subject to income tax on:

450k income in state D

Cerulean Corporation owns manufacturing facilities in States A, B, and C. A uses a three-factor apportionment formula under which the sales, property, and payroll factors are equally weighted. B uses a three-factor apportionment formula under which sales are double-weighted. C employs a single-factor apportionment factor, based solely on sales.Cerulean'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 are as follows: State AState BState CTotalsSales$450,000$750,000$300,000$1,500,000Payroll100,000150,00050,000300,000Property200,000200,000200,000600,000 Cerulean's apportionable income assigned to State B is:

458,300

Hamako owns all of the stock of a C corporation that owns the following assets: Adjusted BasisFair Market ValueAccounts receivable$0$ 60,000Inventory20,00030,000Machinery and equipment*50,00090,000Buildings**120,000170,000Land 80,000 140,000$270,000$490,000 *Potential § 1245 recapture of $45,000.**Straight-line depreciation was used.Hamako's adjusted basis for her stock is $270,000. What is Hamako's recognized gain or loss, and would it be classified as capital or ordinary if Hamako sells the stock for $500,000?

500,000 - 270,000 = 230,000 capital gain

Apricot Corporation's total payroll costs are $6,000,000. Of this amount, $4,000,000 was attributable to State A, a high-tax state. Apricot's payroll factor in State A is 67% ($4,000,000 ÷ $6,000,000). Assume that $1,000,000 of the A compensation was paid to sales representatives. If Apricot replaced its sales force with independent contractors, Apricot's payroll factor in A would be:

60% Because the amounts paid to independent contractors are excluded from the payroll factor, the taxpayer may reduce its payroll factor in a high-tax state. Apricot's payroll factor would be 60% [($4,000,000 - $1,000,000) ÷ ($6,000,000 - $1,000,000)].

State D has adopted the principles of UDITPA. Given the following transactions for Gamma Corporation's for the year, what is Gamma's State D payroll factor denominator? Compensation of sales force$ 700,000Compensation paid to independent contractors100,000Compensation paid to managers of nonbusiness rental property200,000Total compensation$1,000,000

700,000 Payments to contractors, and to produce nonbusiness income, are excluded. Only compensation that is related to the production of apportionable income is included in the payroll factor.

Kiwi Corporation is subject to tax only in State A. Kiwi generated the following income and deductions: Federal taxable income$700,000State A income tax expense50,000Depreciation allowed for Federal tax purposes400,000Depreciation allowed for state tax purposes500,000 Federal taxable income is the starting point in computing State A taxable income. State income taxes are not deductible for State A tax purposes. Kiwi's State A taxable income is:

700k + 50k - (400k-500k) = 650k

Amber Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Amber's Federal taxable income is $750,000, which includes a $75,000 deduction for state income taxes. During the year, Amber received $20,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Amber's taxable income for X purposes is:

750,000+75,000-20,000 = 805,000

Garcia Corporation, a wholly owned subsidiary of Sanchez Corporation, generated $2,000,000 of taxable income. Garcia's activities and sales are restricted to State A, which imposes a 7% income tax. Sanchez's income for the taxable period is $2,500,000. Sanchez's activities and sales are restricted to State B, which imposes a 4% income tax. Both states use a three-factor apportionment formula that equally weights sales, payroll, and property. Sales, payroll, and average property for each of the corporations are as follows: GarciaSanchezTotalSales$2,000,000$8,000,000$10,000,000Payroll1,500,0003,500,0005,000,000Property2,000,0003,000,0005,000,000 If the corporations are members of a unitary business, the state income tax liability for State A is:

94,500 Total apportionable income$4,500,000 Apportionment formula:Sales ($2,000,000 ÷ $10,000,000) 20% Payroll ($1,500,000 ÷ $5,000,000)30% Property ($2,000,000 ÷ $5,000,000)40% Total90% Average (90% ÷ 3)= 30% State A taxable income$1,350,000 Tax rate× 7% State A tax liability$ 94,500

Mr. and Ms. Harrison's partnership owns the following assets: Accounts receivable - basis $0 FMV $60,000 Inventory - basis 20,000 FMV 30,000 Machinery and equipment - basis 50,000 FMV 90,000 Buildings - basis 120,000 FMV 170,000 Land - basis 80,000 FMV 140,000 total basis $270,000 total FMV $490,000 *Potential § 1245 recapture of $45,000. **Straight-line depreciation was used. Mr. and Ms. Harrison each have a basis for their partnership interest of $135,000. What is their combined recognized gain or loss, and would it be classified as capital or ordinary if they sell their partnership interests for $250,000 each?

AR FMV (60,000)+ machinery and equipement difference (40,000) + inventory diff (10,000) = 110,000 ordinary 120 capital

Abraham purchases a building for $500,000 that is going to be used by his wholly owned corporation. Which of the following statements is true?

Leasing the building to the corporation will contribute to the tax avoidance objective of minimizing double taxation.

PTPs are treated as corps for tax purposes

True

Corps can elect to be treated as an S corp for tax purposes. S corp taxed similar to partnership. Designation has no effect on the corp for state law purposes: only relevant for tax purposes.

True.

The partnership, LLC, and S corp use the ___ concept in reporting the results of operations

conduit

techniques that can be used to minimize the current period tax liability include the following

distribution policy recognition of the interaction between the regular tax liability and the AMT liability Utilization of special allocations favorable treatment of certain fringe benefits minimization of double taxation consideration of the qualified business income deduction

State A applies a throwback rule, but State B does not. Cocoa Corporation is taxable in a number of states. This year, Cocoa made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for Cocoa to create nexus with B. In which of the following state(s) will the sale be included in the sales factor numerator?

only in state A