Quiz 13: Jurisdictional Issues in Business Taxation

In the United States,corporations are subject only to taxes imposed by the federal government.

The federal income tax deduction allowed for state income taxes paid decreases the cost of the state taxes.

If a corporation with a 35% marginal federal income tax rate pays $20,000 state income tax,the after-tax cost of the state tax is $13,000.

Multi-state businesses can reduce their overall tax cost to the extent they can shift income from a low-tax state to a high-tax state.

A corporation is usually subject to tax by any state in which it engages in any business transactions.

Article 1 of the U.S.Constitution,referred to as the commerce clause,prohibits state governments from using a tax to discriminate against interstate commerce.

Article 1 of the U.S.Constitution,referred to as the commerce clause,prohibits a state from charging an extra 10 cent tax per gallon on gasoline sold to trucks with out-of-state license plates.

According to Public Law 86-272,the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.

If Gamma Inc.is incorporated in Ohio and has its commercial domicile in Cleveland,the state of Ohio has jurisdiction to tax 100% of Gamma's business income.

Non-resident firms selling tangible goods to in-state residents can use P.L.86-272 to avoid having income tax nexus in a state.

The UDITPA formula for state income tax apportionment consists of three factors: sales,payroll,and profit.

The UDITPA formula for apportioning income among states is based on four equally weighted factors.

The sales factor in the UDITPA state income tax apportionment formula equals in-state sales divided by total sales.

The sales factor in the UDITPA state income tax apportionment formula equals out-of-state sales divided by total sales.

All states assessing an income tax use the same formula for apportionment purposes.

The payroll factor in the UDITPA state income tax apportionment formula always includes executive compensation.

Multi-State,Inc.does business in two states.Its apportionment percentage in state A is 63%.Its apportionment percentage in the other state can be no more than 37%.

BiState Inc.conducts business in North Carolina and South Carolina.If BiState's apportionment percentage in North Carolina is 63%,its apportionment percentage in South Carolina can be no more than 37%.

Supplies,Inc.does business in Georgia (6% tax rate)and Alabama (5% tax rate).All other factors being equal,the company will reduce state taxes if it increases the compensation paid to its employees in Alabama.

Luttrix Inc.does business in Nebraska (6% tax rate)and Colorado (3% tax rate).All other factors being equal,Luttrix will reduce state taxes if it constructs a new manufacturing plant in Colorado.

In determining the portion of a firm's total income subject to a state's income tax,most states use an apportionment formula modeled after the Uniform Division of Income for Tax Purposes Act (UDITPA).

The foreign tax credit is available only for foreign income,excise,value-added,sales,property and transfer taxes.

International tax treaties generally allow a government to tax a non-resident firm that maintains a permanent residence in the treaty country.

A bilateral agreement between the governments of England and France defining and limiting each party's respective tax jurisdiction is an example of a tax treaty.

The United States taxes its citizens on their worldwide incomes.

Under the U.S.tax system,a domestic corporation pays U.S.tax only on the portion of its business income earned in the United States.

A U.S.taxpayer can make an annual election to take a credit or a deduction for foreign income taxes paid.

Under most tax treaties,income attributable to a permanent establishment through which a foreign taxpayer conducts business can be taxed only by the taxpayer's country of residence.

The foreign tax credit is available for income taxes paid to a foreign country.

The foreign tax credit is available for both income and property taxes paid to a foreign jurisdiction.

Excess foreign tax credits can only be carried to future tax years.

Foreign value-added taxes and excise taxes are eligible for the U.S.foreign tax credit.

Cross-crediting allows multinational corporations to use excess credits generated in low- tax jurisdictions to offset excess limitations generated in high-tax jurisdictions.

The foreign tax credit can reduce a corporation's alternative minimum tax.

The foreign subsidiaries of a U.S.corporation cannot be included in a U.S.consolidated tax return.

A foreign branch operation of a U.S.corporation is not a separate legal entity.

The income earned by a foreign branch operation of a U.S.corporation is taxable by the United States only when repatriated.

The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S.parent corporation.

The deemed paid foreign tax credit treats a U.S.corporation that receives a foreign source dividend as if the corporation paid tax directly to a foreign jurisdiction.

The deemed paid foreign tax credit is available only to U.S.corporations that own 30% or more of the voting stock of a foreign corporation that paid dividends during the taxable year.

A U.S.parent corporation that receives a dividend from a wholly-owned foreign subsidiary that pays a 45% income tax to its home country does not owe any U.S.tax on the dividend.

A foreign source dividend received by a U.S.corporation is eligible for the 70% dividends-received deduction.

The term "tax haven" refers to a foreign country that imposes an income tax at a rate higher than the U.S.rate.

A controlled foreign corporation is a foreign corporation in which U.S.shareholders own more than 50% of the voting power or stock value.

Section 482 of the Internal Revenue Code gives the IRS the authority to apportion or allocate gross income,deductions,or credits between/among related parties to correct any perceived distortion resulting from unrealistic prices charged by members of the group to each other for goods or services.

Transfer prices cannot be used by U.S.corporations and their foreign affiliates to shift income between taxing jurisdictions.

GAAP-based consolidated financial statements include only income earned by the consolidated group's domestic subsidiaries.

Which of the following statements concerning the nexus required for a state to tax income is false? A)Maryland has nexus if the corporate headquarters is located in Baltimore. B)Company-owned trucks driving through Arizona to deliver goods to customers residing in California creates nexus in Arizona. C)Maine has nexus if a company has retail outlets located in Maine malls. D)A New York corporation can send traveling salespeople into Massachusetts to solicit orders for tangible goods without creating nexus in Massachusetts.

Which of the following activities create state income tax nexus? A)Selling products over the Internet to customers in the state.The products are delivered by U.S.mail. B)Traveling salespersons soliciting orders for tangible goods from customers in the state. C)Ownership of manufacturing and distribution facilities within the state. D)All of the above activities create state income tax nexus

Economic nexus: A)May exist even though a firm has no physical presence in a state. B)Does not create taxing jurisdiction under the Commerce Clause of the U.S.Constitution. C)Requires a greater physical presence than traditional definitions of nexus. D)Applies only to Internet business activities.

This year,Sutton Corporation's before-tax income was $2,000,000.It paid $175,000 income tax to Nebraska and $300,000 income tax to Iowa.Compute Sutton's federal income tax. A)$680,000 B)$518,500 C)$700,000 D)$533,750

Harris Corporation's before-tax income was $400,000.It does business entirely in Pennsylvania,which has a 6% corporate income tax.Compute Harris' federal income tax. A)$24,000 B)$136,000 C)$131,600 D)$127,840

Verdi Inc.has before-tax income of $500,000.Verdi operates entirely in state Q,which has a 10% corporate income tax.Compute Verdi's combined federal and state tax burden as a percentage of its before-tax income. A)44% B)45% C)41.5% D)40.6%

Which of the following statements about the Uniform Division of Income for Tax Purposes Act (UDITPA)is false? A)UDITPA requires all states to use the same method for apportioning income of multistate businesses. B)UDITPA recommends an equally-weighted three-factor formula for apportioning income of multistate businesses. C)The UDITPA property factor equals the cost of real or tangible personal property located in a state divided by the total cost of such property. D)The UDITPA payroll factor equals the compensation paid to employees working in a state divided by total compensation.

Which of the following could result in a corporation having more than 100% of its income subject to state taxation? A)Some of the states in which the corporation conducts business have not adopted the Uniform Division of Income for Tax Purposes Act formula. B)The states in which the corporation conducts business have adopted different definitions of the specific components of the UDITPA formula. C)Some of the states in which the corporation conducts business strictly apply the UDITPA formula while others double-weight the sales factor. D)All of these factors could result in a corporation having more than 100% of its income subject to state taxation.

Tri-State's,Inc.operates in Arkansas,Oklahoma,and Kansas.Assume that each state has adopted the UDITPA formula.During the corporation's tax year ended December 31,the apportionment data indicated: Which of the following statements is true? A)The sales factor for Arkansas is approximately 35%. B)Arkansas payroll percentage is approximately 11.1%. C)The property factor for Arkansas is approximately 7.14%. D)All of the factors for Arkansas are correct.

Tri-State's,Inc.operates in Arkansas,Oklahoma,and Kansas.Assume that each state has adopted the UDITPA formula.During the corporation's tax year ended December 31,the apportionment data indicated: Tri-State's income for the current year is $250,000.Approximately how much income will be taxed by Oklahoma? A)$250,000 B)$218,125 C)$44,375 D)$173,750

Tri-State's,Inc.operates in Arkansas,Oklahoma,and Kansas.Assume that each state has adopted the UDITPA formula.During the corporation's tax year ended December 31,the apportionment data indicated: Tri-State's income for the current year is $250,000.Approximately how much will be taxed by Kansas? A)$83,000 B)$95,000 C)$32,000 D)$170,000

Lexington Corporation conducts business in four states.In state A,its sales factor is 50%,its payroll factor is 14%,and its property factor is 29%.State A uses an equally-weighted three-factor apportionment formula,but plans to change to a formula that double-weight the sales factor.Which is of the following statements is true? A)Lexington's tax liability to state A will increase. B)Any increase in Lexington's tax liability to state A will be offset by a decline in tax liability to other states. C)Lexington's tax liability to state A will decrease. D)Lexington's tax liability to state A will be unaffected by this change.

Korn,Co.was incorporated in Delaware.It has production,distribution,and sales facilities in Kansas and Nebraska.All of Korn's customers reside in Kansas or Nebraska.Assume that both states use the UDITPA formula for apportionment of income.The corporation is investing in new equipment that cost $900,000.The equipment could be used in either the Kansas or Nebraska production facilities.Assume that Kansas' corporate income tax rate is 7% and Nebraska's is 8.5%.Should the equipment be placed in Kansas or Nebraska to minimize Korn's state income tax? A)Kansas. B)Nebraska. C)Either state,because state income tax will be unaffected by this choice. D)Korn should place the equipment in a third state in which it does not have nexus.

Cambridge,Inc.conducts business in states X and Y.This year,its before-tax income was $150,000.Below is information regarding its sales,payroll,and property factors in both states. Both states apply an equally-weighted three-factor formula to apportion income.State X has a 10% corporate income tax and state Y has a 5% corporate income tax.Compute the state tax savings if Cambridge could relocate $100,000 of property and $50,000 of payroll from state X to state Y. A)$2,250 B)$12,563 C)$11,532 D)$9,094

Albany,Inc.does business in states C and D.State D uses an apportionment formula that double-weights the sales factor; state C apportions income using an equally-weighted three-factor formula.Albany's before tax income is $3,000,000,and its sales,payroll,and property factors are as follows. Calculate Albany's income taxable in each state. A)State C,$1,100,000; State D,$1,800,000. B)State C,$1,100,000; State D,$1,900,000. C)State C,$1,200,000; State D,$1,800,000. D)State C,$1,300,000; State D,$1,700,000.

Albany,Inc.does business in states C and D.State C uses an apportionment formula that double-weights the sales factor; state D apportions income using an equally-weighted three-factor formula.Albany's before tax income is $3,000,000,and its sales,payroll,and property factors are as follows. Calculate Albany's income taxable in each state. A)State C,$1,100,000; State D,$1,800,000. B)State C,$1,100,000; State D,$1,900,000. C)State C,$1,200,000; State D,$1,800,000. D)State C,$1,200,000; State D,$1,900,000.

Which of the following statements about income tax treaties is false? A)An income tax treaty is a bilateral agreement between the governments of two countries defining and limiting each country's respective tax jurisdiction. B)The provisions of income tax treaties pertain only to individuals and corporations that are residents of either treaty country. C)Under a typical treaty,the non-resident country would only tax a firm's profits if the firm maintained a permanent establishment in that country. D)Under a typical treaty,a firm's profits would be allocated to the countries in a manner similar to the apportionment of income among states under the UDITPA formula.

Which of the following statements concerning the taxation of a U.S.multinational corporation is true? A)A U.S.corporation is taxed by the United States only on its U.S.source income. B)The foreign tax credit ensures that a U.S.corporation will never pay taxes at a higher rate than the one imposed by the U.S.tax law. C)Cross-crediting allows a U.S.corporation to maximize its foreign tax credit. D)The foreign tax credit allows a U.S.corporation to defer taxation of its foreign source income until the earnings are repatriated.

Which of the following would qualify as a permanent establishment for income tax treaty purposes? A)The presence of corporate employees in the host country for a limited time period. B)Shipment of goods by the foreign corporation to customers in the host country. C)Maintenance of a sales office in the host country. D)All of the above would qualify as a permanent establishment.

Which of the following taxes is eligible for the foreign tax credit? A)Property taxes paid to a foreign country on the value of property owned in that country. B)Value-added taxes assessed on the value of inventory manufactured in a foreign country. C)Income tax assessed by a local government within a foreign country. D)Sales tax assessed on the purchase of consumer goods in a foreign country.

San Carlos Corporation,a U.S.multinational,had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. San Carlos paid $100,000 income tax to Country W.Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax. A)$100,000 B)$66,000 C)$34,000 D)$0

World Sales,Inc.,a U.S.multinational,had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. World Sales paid $50,000 income taxes to Country O.What is World Sale's U.S.tax liability if it deducts the foreign taxes paid? A)$213,000 B)$204,000 C)$221,000 D)$238,000

Jovar Inc.,a U.S.multinational,began operations this year.Jovar had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Jovar paid $50,000 income tax to Country O.Compute Jovar's U.S.tax liability if it takes the foreign tax credit. A)$213,000 B)$221,000 C)$204,000 D)$238,000

Global Corporation,a U.S.multinational,began operations this year.Global had pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Global paid $25,000 income tax to Country X.What is Global's U.S.tax liability if it takes the foreign tax credit? A)$247,000 B)$238,000 C)$222,000 D)$272,000

Mega,Inc.,a U.S.multinational,has pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Mega paid $20,000 income tax to Country M.Mega has a $25,000 foreign tax credit carryforward.What is Mega's U.S.tax liability if it takes the foreign tax credit? A)$265,600 B)$240,600 C)$285,600 D)$258,400

Fleming Corporation,a U.S.multinational,has pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Fleming paid $50,000 income tax to Country A.If Fleming takes the foreign tax credit,compute its worldwide tax burden as a percentage of its pretax income. A)34% B)35% C)44% D)45%

Fleming Corporation,a U.S.multinational,has pretax U.S.source income and foreign source income as follows.Corporate tax rate schedule. Fleming paid $200,000 income tax to Country A.If Fleming takes the foreign tax credit,compute its worldwide tax burden as a percentage of its pretax income. A)34% B)35% C)36% D)44%

Many Mountains,Inc.is a U.S.multinational corporation.This year,it had the following income.Corporate tax rate schedule. Many Mountains paid $15,000 income tax to Country X and $28,500 income tax to Country Y.Compute Many Mountains' allowable foreign tax credit. A)$57,800 B)$49,550 C)$43,500 D)$49,650

Pennworth Corporation operates in the United States and foreign country M.Its domestic subsidiary Delco,Inc.operates in foreign country N.This year,the two corporations report the following.Corporate tax rate schedule. If Pennworth and Delco file a consolidated U.S.tax return,compute consolidated income tax liability. A)$1,200,000 B)$1,260,000 C)$1,700,000 D)$1,020,000

Jenkin Corporation reported the following for its first two taxable years.Corporate tax rate schedule.Assume that the tax rates for both the years are same. Calculate Jenkin's U.S.tax liability for Year 2. A)$340,000 B)$240,000 C)$228,000 D)$204,000

Which of the following statements about the foreign tax credit is true? A)The foreign tax credit allows U.S.companies to defer U.S.tax on foreign source income. B)The foreign tax credit is available to foreign corporations doing business in the U.S. C)The foreign tax credit is allowed for all types of foreign taxes. D)By permitting a foreign tax credit,the U.S.relinquishes its taxing jurisdiction on foreign source income earned by U.S.corporations to the extent that income is taxed by a foreign jurisdiction.

Which of the following statements about the foreign tax credit limitation is false? A)The foreign tax credit cannot exceed the U.S.tax on foreign source income. B)Foreign tax credits in excess of the limit can be carried forward indefinitely. C)Cross-crediting of taxes paid in high-tax and low-tax foreign jurisdictions can increase allowable foreign tax credits. D)The foreign tax credit limitation is based on the ratio of foreign source income to total taxable income.

Southern,an Alabama corporation,has a $7 million excess FTC carryforward attributable to its foreign branch manufacturing operations.Which of the following strategies should increase Southern's use of its FTC carryforward to reduce U.S.tax? A)Southern could open a branch manufacturing operation in a foreign country with a 27% corporate income tax. B)Southern could open a branch manufacturing operation in a foreign country with a 40% corporate income tax. C)Southern could repatriate foreign source income in the form of dividends from its controlled subsidiary operating in a country with a 38% corporate income tax. D)None of these strategies would increase the use of the FTC carryforward.

Which of the following statements about organizational forms for conducting foreign operations is false? A)Income from a foreign branch office is reported on the consolidated U.S.income tax return. B)Income from foreign operations conducted through a domestic subsidiary is reported on the consolidated U.S.income tax return. C)Income from foreign operations conducted through a foreign subsidiary is reported on the consolidated U.S.income tax return. D)Dividends received by a U.S.multinational corporation from a foreign subsidiary are reported on the consolidated U.S.income tax return.

If a U.S.multinational corporation incurs start-up losses from foreign operations,which of the following organizational forms provide immediate U.S.tax savings from the deduction of the losses? A)Operation through a foreign subsidiary B)Operation through a foreign branch C)Operation through a domestic subsidiary D)Both b.and c.

Which of the following entities is not subject to U.S.federal income tax? A)U)S.corporation conducting 100 percent of its business outside the United States B)Branch of U.S.corporation operating entirely in Germany C)French subsidiary of U.S.parent operating entirely in France D)Dutch corporation operating entirely within the United States

Galaxy Corporation conducts business in the U.S.and in Country X.In which of the following situations will Galaxy not be allowed a foreign tax credit for income taxes paid to Country X? A)Country X operations are conducted through a domestic subsidiary included in Galaxy's consolidate tax return. B)Country X operations are conducted through a foreign subsidiary that paid no dividends. C)Country X operations are conducted through a foreign subsidiary that distributed 100% of its after-tax earnings as a dividend to Galaxy. D)Country X operations are conducted through a foreign branch.

The Quad affiliated group consists of Quad,a Delaware corporation,and its three wholly-owned subsidiaries.This year,the four corporations report the following net income (loss). If Quad elects to file a consolidated U.S.tax return,compute consolidated taxable income assuming that subsidiaries 1 and 2 are domestic corporations and subsidiary 3 is a foreign corporation. A)$1,000,000 B)$800,000 C)$1,400,000 D)$1,800,000

Chester,Inc.,a U.S.multinational,earns income in three foreign countries.Country A has a 25% income tax,Country B has a 35% income tax,and Country C has a 45% income tax.In which of these countries could Chester lower its world-wide tax liability by operating through a foreign subsidiary rather than a domestic subsidiary? Assume the foreign subsidiary will reinvest all after-tax earnings rather than paying dividends. A)Country A B)Country B C)Country C D)All three countries

Stockholm Imports Inc.,a U.S.multinational,received a $500,000 dividend from its foreign subsidiary.The subsidiary paid $112,000 foreign income tax with respect to this dividend.Stockholm's U.S.tax rate is 34%.If Stockholm has no other foreign source income,compute its deemed paid foreign tax credit. A)$208,080 B)$112,000 C)$58,000 D)$0

Lilly Inc.,a U.S.multinational with a 34% marginal tax rate,conducts a branch operation in a foreign country with a 25% income tax.This year,the branch generated $500,000 taxable income.What is the total tax burden (domestic and foreign)on the earnings of the branch operation? A)$170,000 B)$125,000 C)$295,000 D)$45,000

Orchid Inc.,a U.S.multinational with a 34% marginal tax rate,owns a foreign subsidiary operating in a country with a 25% income tax.This year,the subsidiary generated $400,000 taxable income.What is the total tax burden (domestic and foreign)on the earnings of the foreign subsidiary if it does not repatriate its after-tax earnings and has no subpart F income? A)$163,000 B)$136,000 C)$400,000 D)$100,000

Which of the following statements about the deemed paid foreign tax credit is false? A)If a U.S.corporation owns 10% or more of the voting stock of a foreign corporation,the U.S.corporation is entitled to a deemed paid foreign tax credit. B)When claiming a deemed paid foreign tax credit,a U.S.corporation reports dividend income equal to the dividend received grossed up by the foreign tax paid with respect to the dividend. C)A deemed paid foreign tax credit is allowed for foreign taxes paid by a domestic subsidiary of a U.S.multinational corporation. D)A deemed paid foreign tax credit is subject to the foreign tax credit limitation.

Logan,an Indiana corporation,conducts its international business through 100% controlled foreign subsidiaries.This year,Logan's U.S.source taxable income was $5,431,000,and it received $12,250,000 dividends from its foreign subsidiaries.Logan paid no foreign income tax itself,but its subsidiaries paid foreign income tax at a 30% rate.Logan's U.S.income tax (35% rate)is: A)$6,188,350 B)$2,775,850 C)$1,900,850 D)$938,350

Which of the following statements regarding controlled foreign corporations is true? A)U)S.shareholders are taxable on any income earned by a controlled foreign corporation. B)U)S.shareholders are never taxable on income earned by a controlled foreign corporation until such income is distributed to the shareholders. C)U)S.shareholders of a controlled foreign corporation can increase their basis by the amount of any constructive distributions from the corporation. D)Controlled foreign corporations are taxable in the United States on their worldwide income.

In which of the following cases are the U.S.shareholders in a controlled foreign corporation (CFC)deferring U.S.tax on the CFC's income? A)The CFC operates in a jurisdiction with a tax rate higher than the U.S.rate,has no subpart F income,and pays no dividends. B)The CFC operates in a jurisdiction with a tax rate lower than the U.S.rate,has no subpart F income,and pays no dividends. C)The CFC operates in a jurisdiction with a tax rate lower than the U.S.rate,and 100% of the CFC's income is subpart F income. D)The CFC operates in a jurisdiction with a tax rate higher than the U.S.rate,and distributes 100% of after-tax earnings as dividends.

Which of the following statements about subpart F income is false? A)Subpart F income is constructively repatriated to U.S.shareholders of a controlled foreign corporation (CFC)when earned. B)Subpart F income has no commercial or economic connection to the CFC's home country. C)Subpart F income includes income from the manufacture of goods in the CFC's home country. D)Subpart F income includes income from the purchase of goods from a related party that are subsequently sold to another related party for use outside the CFC's home country.

Lincoln Corporation,which has a 34% marginal tax rate,owns 50% of the stock of a controlled foreign corporation (CFC).At the beginning of the year,Lincoln's basis in its CFC stock was $100,000.The CFC's current-year income was $1 million,$600,000 of which was subpart F income.The CFC paid no foreign income tax and distributed no dividends.How much current taxable income must Lincoln report as a result of its ownership of the CFC? A)$100,000 B)$600,000 C)$300,000 D)$0

Lincoln Corporation,which has a 34% marginal tax rate,owns 50% of the stock of a controlled foreign corporation (CFC).At the beginning of the year,Lincoln's basis in its CFC stock was $100,000.The CFC's current year income was $1 million,$600,000 of which was subpart F income.The CFC paid no foreign income tax and distributed no dividends.What is Lincoln's tax basis in its CFC stock at the end of the taxable year? A)$100,000 B)$300,000 C)$400,000 D)$0

Tradewinds is a Bermuda corporation that is 100% owned by Larkin,a U.S.corporation.Which of the following transactions generates subpart F income for U.S.tax purposes? A)Tradewinds manufactures costume jewelry in Bermuda and sells the jewelry to Larkin for distribution in the United States and Canada. B)Tradewinds manufactures costume jewelry at its plant in Mexico and sells the jewelry to Larkin for distribution in the United States and Canada. C)Tradewinds purchases costume jewelry from a related supplier in China and sells the jewelry at retail in Bermuda. D)None of the above generates subpart F income.

Which of the following statements regarding Internal Revenue Code Section 482 is false? A)Section 482 applies if related corporations charge each other arms-length transfer prices. B)Section 482 is designed to prevent shifting of income from a high tax rate member of a related group to a low tax rate member. C)The prevailing attitude of the courts is that the IRS's determination of transfer price should be upheld unless the taxpayer can show that the IRS was arbitrary or capricious. D)Section 482 can be used to override artificial transfer prices established between related parties.

Wilmington,Inc.,a Pennsylvania corporation,manufactures computer components that it sells to Seine Corporation,a French company,for assembly into finished products.Wilmington owns 90% of Seine's stock.Wilmington's cost per component is $5,its selling price per component is $16,and it sold 110,000 components to Seine this year.Wilmington's taxable income as reported on its Form 1120 was $2,400,000,and Seine's taxable income as reported on its French corporate income tax return was $1,750,000.Determine the effect on the taxable incomes of both corporations if the IRS determines that an arm's length transfer price per component is $23. A)Taxable income of both corporations will increase by $770,000. B)Taxable income of both corporations will decrease by $770,000. C)Wilmington's taxable income will increase by $770,000.Seine's taxable income does not change. D)Wilmington's taxable income will decrease by $770,000 and Seine's taxable income will decrease by $770,000.

Transfer pricing issues arise: A)When tangible goods are transferred between related parties operating in different taxing jurisdictions. B)When rights to use intangible assets,such as patents or trademarks,are licensed between related parties operating in different taxing jurisdictions. C)Both of the above situations can create transfer pricing issues. D)Neither of the above situations creates transfer pricing issues.

DFJ,a Missouri corporation,owns 55% of Duvall,a foreign corporation formed under Krunian law.Krunia is a central European country with a 22% corporate income tax and no income tax treaty with the United States.Last year,DFJ leased equipment to Duvall for a $415,000 annual rent payment.DFJ reported the rent as taxable income,while Duvall deducted it in the computation of taxable income.This year,the IRS determined that an arm's length rent for the equipment should be $600,000.The IRS can use its Section 482 authority to: A)Increase DFJ's taxable income by $185,000 and decrease Duvall's taxable income by $185,000. B)Increase DFJ's taxable income by $185,000. C)Require Duvall to pay $185,000 additional rent to DFJ. D)Require DFJ to recognize a $185,000 constructive dividend from Duvall.

This year,Plateau,Inc.'s before-tax income was $4,765,000.Plateau paid $310,000 income tax to state A and $130,000 income tax to state B. a.Compute Plateau's federal taxable income and tax liability. b.What is Plateau's overall income tax rate?

Origami does business in states X and Y.State X uses an equally-weighted three-factor apportionment formula and has a 4 percent state tax rate.State Y uses an apportionment formula that double-weights the sales factor and has a 6 percent tax rate.Cromwell's taxable income,before apportionment,is $3 million.Its sales,payroll,and property information are as follows. a.Calculate Origami's apportionment factors,income apportioned to each state,and state tax liability. b.State Y is considering changing its apportionment formula to a single sales factor.Given its current level of activity,would such a change increase or decrease Origami's state income tax burden? Provide calculations to support your conclusion.

Koscil Inc.had the following taxable income.Corporate tax rate schedule. Koscil paid $315,000 foreign income tax.Compute its U.S.income tax liability.

Columbus Inc.owns 100 percent of the stock of Spania,a foreign corporation.All of Spania's income is foreign source,and its foreign income tax rate is 20 percent.This year,Spania distributed a $100,000 dividend to Columbus. a.Assuming that Columbus is in the 35 percent tax bracket,compute its U.S.tax on the dividend. b.How would your computation change if Spania's foreign income tax rate was 45 percent?

Pogo,Inc.,which has a 34 percent marginal tax rate,owns 50 percent of the stock of a CFC.At the beginning of the year,Pogo's basis in the CFC stock was $2 million.The CFC's current year earnings were $750,000 of which $600,000 was subpart F income.The CFC paid no foreign income tax and distributed no dividends. a.Explain Pogo's U.S.tax consequences with respect to its investment in the CFC. b.Compute Pogo's basis in its CFC stock at the end of the year.

Sunny,a California corporation,earned the following income this year. Sunny owns 100% of Sun de Sud,a foreign corporation operating a business in Country M and paying foreign income tax at a 50% rate.Sunny paid $124,000 foreign income tax to Country L,$203,000 income tax to Country Q,and no foreign withholding tax on its Sun de Sud dividends.Assuming a 34% tax rate,compute Sunny's U.S.tax.