Source: https://www.scribd.com/doc/75536863/Federal-Taxation-II-Chapter-24-Review-Questions
Timestamp: 2017-03-25 07:05:22
Document Index: 5532250

Matched Legal Cases: ['§ 162', '§ 401', '§ 401', '§ 401', '§ 401', '§ 401', '§ 401']

Federal Taxation II Chapter 24 Review Questions | Income Tax In The United States | Taxable Income
BrowseInterestsStay InformedCareerPersonal GrowthFiction & BiographiesHealth & FitnessLifestyleCultureBrowse byBooksAudiobooksNews & MagazinesSheet MusicBrowse allUploadSign inJoinCHAPTER 24 MULTISTATE CORPORATE TAXATIONTRUE/FALSE 1. Roughly two-thirds of all taxes paid by businesses in the U.S. are to state, local, and municipal jurisdictions.
ANS: F About forty percent of all business taxes are paid to state and local agencies. PTS: 1 REF: p. 24-2 2. Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.
ANS: F Nontax considerations usually prevail. PTS: 1 REF: p. 24-2 3. Politicians use tax devices to create economic development incentives. REF: p. 24-3
ANS: T 4.
A few states have not adopted a tax based on net taxable income. REF: p. 24-3
ANS: T 5.
Only a few states have adopted an alternative minimum tax system. REF: p. 24-3
Some states enforce their tax laws more aggressively than do others. REF: p. 24-3
ANS: T 7.
In some states, the “business privilege” tax is based on net taxable income. REF: p. 24-3
ANS: T 8.
Most businesses can use the Federal tax year end for the state income tax. REF: p. 24-4
A few states have delegated the collection of their income taxes to the IRS.
ANS: F No state has done this, although legislation allowing full piggybacking already exists. PTS: 1 REF: p. 24-4 10. Most states begin the computation of taxable income with an amount from the Federal income tax return. ANS: T REF: p. 24-5
11. If a state follows Federal income tax rules, compliance and enforcement become easier to accomplish. ANS: T REF: p. 24-5
12. A typical state taxable income addition modification is the interest income earned on bonds issued by another state. ANS: T REF: Exhibit 24-1
13. A typical state taxable income addition modification is the income tax paid to the state for the year. ANS: T REF: Exhibit 24-1
14. A state cannot levy a tax on a business unless the business was incorporated in the state. ANS: F Nexus is the threshold authorizing the state to levy a tax. PTS: 1 REF: p. 24-8 15. Typical indicators of nexus include the presence of employees based in the state, and the ownership or lease of realty there. ANS: T REF: p. 24-8
16. Under P.L. 86-272, the taxpayer is exempt from state taxes on income resulting from the mere solicitation of orders for the sale of inventory in the state. ANS: T REF: p. 24-8
17. In most states, a taxpayer’s income is apportioned on the basis of a formula measuring the extent of business contact, and allocated according to the location of property owned or used. ANS: T REF: p. 24-9
18. States use the same apportionment factors and formula. ANS: F Each state chooses and defines its own factors. PTS: 1 REF: p. 24-11
19. Nonbusiness income includes rentals of investment property. ANS: T REF: p. 24-11
20. Double weighting the sales factor effectively decreases the tax burden on taxpayers based in the state, such as corporations with in-state headquarters. ANS: T Overweighting the sales factor shifts the tax to nonresidents. PTS: 1 REF: p. 24-13 21. An assembly worker earns a $30,000 salary and receives a fringe benefit package worth $15,000. The payroll factor assigns $30,000 among the states in which the employer conducts business. ANS: F Fringe benefits usually are included in the payroll factor. PTS: 1 REF: p. 24-17 22. A service engineer spends 30% of her time maintaining the employer’s productive business property and 70% maintaining the employer’s nonbusiness rental properties. This year, her compensation totaled $90,000. The payroll factor assigns $90,000 among the states in which the employer conducts business, using a “time spent” formula. ANS: F Only the compensation related to business income is used, here $27,000. PTS: 1 REF: Example 13 23. The property factor includes real property and construction in progress. ANS: T REF: p. 24-19
24. The property factor includes assets that the taxpayer owns, but not those merely used under a lease agreement. ANS: F Leased property is included, usually at eight times an average rental. PTS: 1 REF: p. 24-19 25. A unitary business is evidenced by integrated operations and cannot be segregated into independently operating divisions. Accordingly, it can be treated as a single business for state tax purposes, with a combined apportionment formula including all of the operations of the business. ANS: T REF: p. 24-21
26. By making a water’s edge election, the multinational taxpayer can limit the reach of the unitary theory to U.S.-based factors and income. ANS: T REF: See Global Tax Issues on p. 24-23
27. Some states recognize an entity’s S corporation status, such that taxable income flows through directly to shareholders, but they still assess a state-level tax on the entity. ANS: T For instance, California assesses a 1.5% tax on an amount derived from the S corporation’s in-state payroll and sales. PTS: 1 REF: p. 24-24 28. For the most part, Federal S corporations need not make a separate state-level election of the flowthrough status. ANS: T REF: p. 24-25
29. S corporations must withhold taxes on the portions of the entity’s income allocated to its shareholders. ANS: F Some states require this treatment as to nonresident shareholders. This is done to increase the chances that nonresident shareholders file returns in the host state. PTS: 1 REF: p. 24-25 | p. 24-26 30. Almost all of the states assess some form of consumer-level sales tax. ANS: T Forty-five of the states do so, such that the sales and use tax is the chief source of revenue for most state jurisdictions. PTS: 1 REF: p. 24-26 31. The use tax is designed to complement the sales tax. A use tax typically covers purchases made out of state and brought into the jurisdiction. ANS: T REF: p. 24-26
32. Most states’ consumer sales taxes apply directly to the final purchaser of the taxable asset, with the purchaser remitting the tax to the state treasury. ANS: F Usually the seller is responsible for remitting the tax due. PTS: 1 REF: p. 24-26 33. Most states exempt from the sales/use tax base the purchase of office supplies by a factory that assembles PCs. ANS: F The factory is the ultimate consumer of the supplies. PTS: 1 REF: p. 24-26 34. Most states exempt from the sales/use tax base the purchase of prescription medicines. ANS: T REF: p. 24-26
35. Most states exempt from the sales/use tax base the purchase of lumber by a do-it-yourself homeowner, when she builds a deck onto her patio. ANS: F The homeowner is the ultimate consumer of the product. PTS: 1 REF: p. 24-26 36. Most states exempt from the sales/use tax base the purchase of office supplies by a church. ANS: T REF: p. 24-26
37. Most states waive the collection of sales tax on groceries. ANS: T REF: p. 24-26
38. Most states exempt from the sales/use tax base the purchase of seed and feed by a farmer. ANS: T Under a manufacturing or targeted exemption. PTS: 1 REF: p. 24-26 39. Most states exempt from the sales/use tax base the purchase of inventory from a competitor who is closing down a long-lived business. ANS: T Under the occasional sale rule. PTS: 1 REF: p. 24-26 40. Use tax would be due if an individual purchased an auto in State A and used it at his home in State B. ANS: T Use tax backs up sales tax obligations. PTS: 1 REF: p. 24-26 41. Most states exempt from the sales/use tax base the purchase of beverages by a grocer. ANS: T Under a resale exemption. PTS: 1 REF: p. 24-26 42. Under most local property tax laws, the value of an asset is fixed after an appraisal by the taxing jurisdiction. ANS: T REF: p. 24-27
Norman Corporation owns and operates two manufacturing facilities, one in State X and the other in State Y. Due to a temporary decline in the corporation’s sales, Norman has rented 20% of its Y facility to an unaffiliated corporation. Norman generated $600,000 net rental income and $2,400,000 income from manufacturing. For X and Y purposes, rental income is classified as allocable nonbusiness income. By applying the statutes of each state, Norman determined that its apportionment factors are .60 for X and .40 for Y. Norman’s income attributed to X is: a. $3,000,000. b. $2,400,000. c. $2,040,000. d. $1,440,000. e. $0.
ANS: D Taxable Income Less: Allocable Income Apportionable Income Times: Apportionment Factor Income Apportioned to State X Plus: Income Allocated to State X Income Subject to Tax in State X PTS: 1 2. REF: Figure 24-1
$3,000,000 (600,000) $2,400,000 × 60% $1,440,000 -0$1,440,000
Wailes Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Wailes’ Federal taxable income is $650,000, which includes a $60,000 deduction for state income taxes. During the year, Wailes received $50,000 interest on Federal obligations and $250,000 of interest on State Z obligations. X does not allow a deduction for state income tax payments, but it does exclude interest earned on its own obligations. Wailes’ taxable income for X purposes is: a. $960,000. b. $910,000. c. $850,000. d. $800,000. e. $600,000.
ANS: B Federal taxable income State income tax expense Interest on State Z obligations Interest on Federal obligations State X Taxable Income PTS: 1 REF: Exhibit 24-1
$650,000 60,000 250,000 (50,000) $910,000
Perez Corporation is subject to tax only in State A. Perez generated the following income and deductions. Federal taxable income State A income tax expense Depreciation allowed for Federal tax purposes Depreciation allowed for state tax purposes $500,000 30,000 300,000 400,000
Federal taxable income is the starting point in computing A taxable income. State income taxes are not deductible for A tax purposes. Perez’s A taxable income is: a. $530,000. b. $500,000. c. $430,000. d. $400,000. ANS: C Federal taxable income State income tax expense Depreciation modification ($300,000 – $400,000) A taxable income PTS: 1 4. REF: Exhibit 24-1 $500,000 30,000 (100,000) $430,000
In determining a corporation’s taxable income for state income tax purposes, which of the following does not constitute a subtraction from Federal income? a. Interest on U.S. obligations. b. Expenses that are directly or indirectly related to state and municipal interest that is taxable for state purposes. c. The amount by which the Federal deduction for depreciation exceeds the depreciation deduction permitted for state tax purposes. d. The amount by which the state loss from the disposal of assets exceeds the Federal loss from such disposal. e. b and c
ANS: C The amount by which the Federal deduction for depreciation exceeds the depreciation deduction permitted for state tax purposes constitutes an addition, rather than a subtraction, modification. PTS: 1 REF: Exhibit 24-1 5. In determining state taxable income, all of the following are common adjustments to Federal income except: a. Net operating loss. b. Compensation expense. c. Dividend income. d. State and municipal bond interest. e. State income taxes.
ANS: B Compensation expense is not a commonly encountered adjustment to Federal taxable income in computing state taxable income. PTS: 1 REF: Exhibit 24-1
Dough Company sold an asset on the first day of the tax year for $100,000. Its regular tax basis was $60,000, and its basis for Federal AMT purposes was $85,000. Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $40,000. What adjustment, if any, should be made to Federal taxable income in determining the correct taxable income for the typical state? a. $85,000. b. $45,000. c. $20,000. d. ($20,000). e. Some other amount. REF: Exhibit 24-1
ANS: C 7.
Federal taxable income is used as the starting point in computing the state’s income tax base, but numerous state adjustments or modifications generally are required to: a. Reflect differences between state and Federal tax statutes. b. Allow state-level deductions for § 162 business expenses. c. Remove income that a state is constitutionally prohibited from taxing. d. Both a and c e. All of the above can lead to modifications.
ANS: D Federal taxable income is used as the starting point in computing the state’s income tax base, but numerous state adjustments or modifications generally are required to: (1) reflect differences between state and Federal tax statutes (e.g., different cost recovery schedules) and (2) remove income that a state is constitutionally prohibited from taxing (e.g., portfolio income on Federal obligations). PTS: 1 REF: p. 24-5 8. Under P.L. 86-272, which of the following transactions by itself would create nexus with a state? a. Order solicitation for a computer, approved and filled from another state. b. Order solicitation for a security, approved, and filled from another state. c. Order solicitation for a machine, with credit approval from another state. d. The conduct of a seminar for new subscribers as to how to install and operate a new software product. e. Carrying free samples to give to prospective customers to increase their familiarity with the product.
ANS: B Intangible property sales are not immune under P.L. 86-272. PTS: 1 REF: Exhibit 24-2 9. Under P.L. 86-272, which of the following transactions by itself would create nexus with a state? a. Maintenance of inventory in the state by an independent contractor under a consignment plan. b. An independent contractor who acts as a manufacturer’s representative for the taxpayer maintains an office in the state. c. A sales campaign is executed by an advertising agency acting as an independent contractor for the taxpayer. d. A sales employee inspects the customer’s inventory for specific product lines. e. A sales employee drives into the state in a company car owned by the taxpayer. REF: p. 24-8 | p. 24-9
10. Which of the following is not immune from state income taxation, even if P.L. 86-272 is in effect? a. Sale of a share of corporate stock. b. Sale of office equipment that constitutes inventory to the purchaser. c. Sale of office equipment to be used in the taxpayer’s business. d. All of the above are protected by P.L. 86-272 immunity provisions. ANS: A REF: Exhibit 24-2
11. Kurt Corporation realized $600,000 of taxable income from the sales of its products in States X and Z. Kurt’s activities in both states establish nexus for income tax purposes. Kurt’s sales, payroll, and property among the states include the following. Sales Property Payroll State X $1,000,000 2,000,000 1,000,000 State Z $2,000,000 -0-0Totals $3,000,000 2,000,000 1,000,000
Z utilizes an equally weighted three-factor apportionment formula. How much of Kurt’s taxable income is apportioned to Z? a. $0. b. $133,320. c. $300,000. d. $600,000. e. $2,000,000. ANS: B Sales Property Payroll Sum of apportionment factors Apportionment factor for State Z (66.67%/3) Taxable income Income apportioned to Z PTS: 1 REF: Example 8 $2,000,000/$3,000,000 $0/$2,000,000 $0/$1,000,000 = = = 66.67% -0-% -0-% 66.67% 22.22% × $600,000 $133,320
12. José Corporation realized $600,000 of taxable income from the sales of its products in States X and Z. José’s activities in both states establish nexus for income tax purposes. José’s sales, payroll, and property among the states include the following. Sales Property Payroll State X $1,500,000 600,000 1,000,000 State Z $1,000,000 -0-0Totals $2,500,000 600,000 1,000,000
Z utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of José’s taxable income is apportioned to Z? a. $1,000,000. b. $600,000. c. $300,000. d. $120,000. e. $0. ANS: D Sales Property Payroll Sum of apportionment factors Apportionment factor for State Z (80%/4) Taxable income Income apportioned to Z PTS: 1 REF: Example 8 $1,000,000/$2,500,000 = 40% × 2 $0/$0 $0/$1,000,000 = = = 80.0% -0-% -0-% 80.0% 20.0% × $600,000 $120,000
13. José Corporation realized $600,000 of taxable income from the sales of its products in States X and Z. José’s activities in both states establish nexus for income tax purposes. José’s sales, payroll, and property among the states include the following. Sales Property Payroll State X $1,500,000 2,000,000 1,000,000 State Z $1,000,000 -0-0Totals $2,500,000 2,000,000 1,000,000
X utilizes an equally weighted three-factor apportionment formula. How much of José’s taxable income is apportioned to X? a. $0. b. $120,000. c. $300,000. d. $520,200. e. $600,000. ANS: D Sales Property Payroll Sum of apportionment factors Apportionment factor for State X (260%/3) Taxable income Income apportioned to X PTS: 1 REF: Example 8 $1,500,000/$2,500,000 $2,000,000/$2,000,000 $1,000,000/$1,000,000 = = = 60.0% 100.0% 100.0% 260.0% 86.7% × $600,000 $520,200
14. Mandy Corporation realized $1,000,000 of taxable income from the sales of its products in States X and Z. Mandy’s activities establish nexus for income tax purposes only in Z. Mandy’s sales, payroll, and property among the states include the following. Sales Property Payroll State X $1,000,000 2,000,000 1,000,000 State Z $2,000,000 500,000 1,000,000 Totals $3,000,000 2,500,000 2,000,000
X utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of Mandy’s taxable income is apportioned to X? a. $1,000,000. b. $501,613. c. $491,700. d. $408,300. e. $0. ANS: E A business is not subject to tax in a state until nexus is established. PTS: 1 REF: p. 24-8
15. Helene 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. Helene’s operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows. Sales Payroll Property State A $450,000 100,000 200,000 State B $750,000 150,000 200,000 State C $300,000 50,000 200,000 Totals $1,500,000 300,000 600,000
Helene’s apportionable income assigned to A is: a. $422,200. b. $333,333. c. $322,200. d. $316,500. e. $300,000. ANS: C Sales Payroll Property Sum of apportionment factors Apportionment factor for State A (96.66%/3) Apportionable income Income apportioned to A PTS: 1 REF: Example 9 $450,000/$1,500,000 $100,000/$300,000 $200,000/$600,000 = = = 30.00% 33.33% 33.33% 96.66% 32.22% × $1,000,000 $ 322,200
16. Corolla 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. Corolla’s operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows. Sales Payroll Property State A $450,000 100,000 200,000 State B $750,000 150,000 200,000 State C $300,000 50,000 200,000 Totals $1,500,000 300,000 600,000
Corolla’s apportionable income assigned to B is: a. $611,100. b. $600,000. c. $500,000. d. $458,300. e. $444,400. ANS: D Sales Payroll Property Sum of apportionment factors $750,000/$1,500,000 = 50.00% × 2 $150,000/$300,000 $200,000/$600,000 = = = 100.00% 50.00% 33.33% 183.33% 45.83% × $1,000,000 $ 458,300
Apportionment factor for State B (183.33%/4) Apportionable income Income apportioned to B PTS: 1 REF: Example 9
17. Tripp 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. Tripp’s operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows. Sales Payroll Property State A $450,000 100,000 200,000 State B $750,000 150,000 200,000 State C $300,000 50,000 200,000 Totals $1,500,000 300,000 600,000
Tripp’s apportionable income assigned to C is: a. $1,000,000. b. $430,542. c. $333,333. d. $200,000. e. $0. ANS: D Sales Sum of apportionment factors Apportionment factor for State C Apportionable income Income apportioned to C PTS: 1 REF: Example 9 $300,000/$1,500,000 = 20.0% 20.0% 20.0% × $1,000,000 $ 200,000
18. Boot Corporation is subject to income tax in States A and B. Boot’s operations generated $1,200,000 of apportionable income, and its sales and payroll activity and average property owned in each of the states is as follows. Sales Payroll Property State A $300,000 100,000 200,000 State B $500,000 50,000 300,000 Totals $800,000 150,000 500,000
How much more (less) of Boot’s income will be subject to A income tax if, instead of using an equallyweighted three-factor apportionment formula, A uses a formula with a double-weighted sales factor? a. ($181,680). b. ($150,000). c. ($31,680). d. $31,680. e. $150,000. ANS: C Income apportioned to A if sales factor is double-weighted Sales factor Payroll factor Property factor ($300,000/$800,000) = 37.5% × 2 = ($100,000/$150,000) = ($200,000/$500,000) = 75.00% 66.67% 40.00%
181.67% 45.42%
Apportionment factor (181.67%/4) = Income apportioned to A if apportionment factors are equally weighted Sales factor Payroll factor Property factor ($300,000/$800,000) = ($100,000/$150,000) = ($200,000/$500,000) = 37.50% 66.67% 40.00%
144.17% 48.06% (2.64%) × $1,200,000 ($ 31,680)
Apportionment factor (144.17%/3) = Decrease in apportionment percentage (45.42% – 48.06%) Apportionable income Decrease in A taxable income PTS: 1 REF: Example 8
19. State A applies a throwback rule. General Corporation is taxable in a number of states and made a $100,000 sale from its A headquarters to an agency of the U.S. government. In which state(s) will the sale be included in the sales factor? a. All in A. b. In none of the states, under the doctrine of indeterminate destination. c. In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states. d. One-half in A, with the balance exempted from other states’ sales factors under the Colgate doctrine. e. Some other rule applies. ANS: A REF: p. 24-16
20. State A does not apply a throwback rule. General Corporation is taxable in a number of states and made a $100,000 sale from its A headquarters to a State B office of an agency of the U.S. government. General has not established nexus with B. In which state(s) will the sale be included in the sales factor? a. In none of the states. b. All in A. c. All in B. d. In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states. e. Some other rule applies. ANS: A REF: p. 24-16
21. State A applies a throwback rule, but State B does not. General Corporation is taxable in a number of states and made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. In which state(s) will the sale be included in the sales factor numerator? a. Only in A. b. Only in B. c. In both A and B, according to the apportionment formulas of each. d. In neither state, under the doctrine of indeterminate destination. ANS: A REF: Example 11
22. State B applies a throwback rule, but State A does not. General Corporation is taxable in a number of states and made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. In which state(s) will the sale be included in the sales factor numerator? a. Only in A. b. Only in B. c. In both A and B, according to the apportionment formulas of each. d. In neither state. ANS: D REF: Example 11
23. Fowl Corporation’s entire operations are located in State A. Seventy-five percent ($900,000) of Fowl’s sales are made in A and the remaining sales ($300,000) are made in State B. Fowl’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: a. $1,200,000. b. $900,000. c. $300,000. d. $0. ANS: A If the throwback rule has been adopted by A, all of Fowl’s sales ($1,200,000) are considered to be instate sales of A. PTS: 1 REF: Example 11 24. The throwback rule requires that: a. Services are attributed to the state of commercial domicile of the taxpayer, and are not taxable in the state where they were performed. b. Sales of tangible personal property are attributed to the state where they originated, if the taxpayer is not taxable in the state of destination. c. Sales of services are attributed to the state of commercial domicile. d. All income is apportioned to California. ANS: B Under the throwback rule, sales of tangible personal property are attributed to the state of origination if the taxpayer is not taxable in the state of destination. PTS: 1 REF: p. 24-16 25. State D has adopted the principles of UDITPA. Given the following transactions for the year, determine Comp Corporation’s D payroll factor denominator. Compensation of sales force Compensation paid to independent contractors Compensation paid to managers of nonbusiness rental property a. b. c. d. e. $800,000. $700,000. $600,000. $500,000. $200,000. $500,000 100,000 200,000
ANS: D Payments to contractors, and to produce nonbusiness income, are excluded. PTS: 1 REF: p. 24-17
26. Judy, a regional sales manager, has her office in State X. Her region includes several states, as indicated in the sales report below. Determine how much of Judy’s $200,000 compensation is assigned to the payroll factor of State X. State U V X a. b. c. d. e. Sales Generated $1,000,000 5,000,000 2,000,000 Judy’s Time Spent There 20% 55% 25%
$200,000. $66,667. $50,000. $0. Cannot be determined without more information.
ANS: A All of the compensation is assigned to the state of the employee’s home base. PTS: 1 REF: p. 24-18 27. Trayne Corporation’s sales office and manufacturing plant are located in State X. Trayne also maintains a manufacturing plant and sales office in State W. For purposes of apportionment, X defines payroll as all compensation paid to employees, including elective contributions to § 401(k) deferred compensation plans. Under the statutes of W, neither compensation paid to officers nor contributions to § 401(k) plans are included in the payroll factor. Trayne incurred the following personnel costs. State X Wages and salaries for employees other than officers Salaries for officers Contributions to § 401(k) plans Totals Trayne’s payroll factor for State X is: a. 100.00%. b. 76.00%. c. 70.00%. d. 56.00%. e. 50.00%. ANS: B The payroll factor for State X is 76%. $500,000 200,000 60,000 $760,000 State W $200,000 40,000 $240,000 Totals $ 700,000 200,000 100,000 $1,000,000
REF: Example 12
28. Net Corporation’s sales office and manufacturing plant are located in State X. Net also maintains a manufacturing plant and sales office in State W. For purposes of apportionment, X defines payroll as all compensation paid to employees, including contributions to § 401(k) deferred compensation plans. Under the statutes of W, neither compensation paid to officers nor contributions to § 401(k) plans are included in the payroll factor. Net incurred the following personnel costs. State X Wages and salaries for employees other than officers Salaries for officers Contributions to § 401(k) plans Totals Net’s payroll factor for State W is: a. 0%. b. 24.00%. c. 28.57%. d. 50.00%. e. 75.00%. ANS: C The payroll factor for State W is 28.57%. $500,000 200,000 60,000 $760,000 State W $200,000 40,000 $240,000 Totals $ 700,000 200,000 100,000 $1,000,000
29. Bert Corporation, a calendar-year taxpayer, owns property in States M and O. Both M and O require that the average value of assets be included in the property factor. M requires that the property be valued at its historical cost, and O requires that the property be included in the property factor at its net depreciated book value. Account Balances at Beginning of Year State M State O Totals $200,000 $300,000 $ 500,000 600,000 400,000 1,000,000 (150,000) (50,000) (200,000) 100,000 200,000 300,000 $750,000 $850,000 $1,600,000 Account Balances at Year-End State M State O Totals $ 400,000 $300,000 $ 700,000 800,000 500,000 1,300,000 (300,000) (100,000) (400,000) 100,000 100,000 200,000 $1,000,000 $800,000 $1,800,000 $ 55,000 $ 25,000
Inventories Building & machinery (cost) Accumulated depreciation Land Totals
Inventories Building & machinery (cost) Accumulated depreciation Land Totals Annual rent payments Bert’s M property factor is: a. 41.67%. b. 55.0%. c. 56.2%. d. 58.33%. e. 77.0%. ANS: D Historical Cost Property in M Total property Beginning of Year $ 900,000 a 1,800,000 c
Year-End $1,300,000 b 2,200,000 d
Average $1,100,000 2,000,000
a b c d PTS: 1
$200,000 + $600,000 + $100,000 = $900,000 $400,000 + $800,000 + $100,000 = $1,300,000 $500,000 + $1,000,000 + $300,000 = $1,800,000 $700,000 + $1,300,000 + $200,000 = $2,200,000 REF: p. 24-19 | Example 15
30. Valdez Corporation, a calendar-year taxpayer, owns property in States M and O. Both M and O require that the average value of assets be included in the property factor. M requires that the property be valued at its historical cost, and O requires that the property be included in the property factor at its net depreciated book value. Account Balances at Beginning of Year State M State O Totals $200,000 $300,000 $ 500,000 600,000 400,000 1,000,000 (150,000) (50,000) (200,000) 100,000 200,000 300,000 $750,000 $850,000 $1,600,000 Account Balances at Year-End State M State O Totals $ 400,000 $300,000 $ 700,000 800,000 500,000 1,300,000 (300,000) (100,000) (400,000) 100,000 100,000 200,000 $1,000,000 $800,000 $1,800,000
Inventories Building & machinery (cost) Accumulated depreciation Land Totals Valdez’s property factor for State O is: a. 41.25%. b. 44.44%. c. 45.0%. d. 48.53%. e. 51.47%. ANS: D Net Book Value Property in O Total property Beginning of Year $ 850,000 1,600,000
Year-End $ 800,000 1,800,000
Average $ 825,000 1,700,000
REF: Example 15
31. In the broadest application of the unitary theory, the unitary business files a combined tax return using factors and income amounts for all affiliates: a. organized in the U.S. b. organized in North America. c. organized anywhere in the world. d. owned more than 50% by other affiliates in the group. e. owned more than 80% by a single other affiliate in the group. ANS: C REF: p. 24-21
32. A taxpayer wishing to reduce the negative tax effects of the application of the unitary theory might: a. affiliate with a service division, like one in marketing. b. add a profitable entity to the unitary group. c. disengage unitary operations with the most profitable affiliates. d. a and c e. All of the above. ANS: D REF: p. 24-22 | p. 24-23
33. In conducting multistate tax planning, the taxpayer should: a. Review tax opportunities in light of their effect on the overall business. b. Consider additional administrative costs generated by the plan. c. Exploit inconsistencies among the statutes and formulas of the states. d. Recognize that minimizing state tax costs may not always be prudent. e. All of the above are true. ANS: E REF: p. 24-27 | p. 24-28
34. In most states, a limited liability company (LLC) is subject to the state income tax: a. As though it were a C corporation. b. As though it were a business trust. c. As a flow-through entity, similar to Federal treatment. d. LLCs typically are exempted from state income taxation. ANS: C REF: p. 24-25
35. A state sales tax usually falls upon: a. Sales made to out-of-state customers. b. Sales made to the U.S. Department of Education. c. Sales of groceries. d. Sales made to the ultimate consumer of the product or service. ANS: D Sales taxes usually apply only at the retail level. PTS: 1 REF: p. 24-25 | p. 24-26 36. A state sales tax usually falls upon: a. The purchase of a Bible by a member at the church’s bookstore. b. The sale of a used dinette set sold at a rummage sale. c. The sale of a dinette set by the manufacturer to the retailer. d. The sale of a case of Bibles by the publisher to a church bookstore. ANS: A Choice b. is exempt under the casual sale rule. Choice c. is exempt as a re-sale transaction. Choice d. is exempt as a re-sale transaction. PTS: 1 REF: p. 24-25 | p. 24-26
37. A use tax: a. Applies when a State A resident purchases a new automobile from a State A dealership. b. Applies when a State A resident purchases a new automobile from a State B dealership, then driving the car home. c. Applies when a State A resident purchases groceries from a neighborhood store. d. Applies when a State A resident purchases hardware from sears.com rather than at the Sears store at the local mall. ANS: B The other choices all generate sales taxes. PTS: 1 REF: p. 24-26
38. Slattern Co. sells one product in two states. State A levies a 9% effective tax rate, and State B levies a 2% rate. A and B have adopted sales-factor-only apportionment formulas. To reduce overall multistate income tax liabilities, Slattern should: a. remove all company cars from B. b. document that it has created nexus in B. c. reduce activities in A so as to disengage from nexus there. d. b and c e. All of the above. ANS: D REF: p. 24-31 | p. 24-32
39. For most taxpayers, which of the traditional apportionment factors yields the greatest opportunities for tax reduction? a. Sales (gross receipts). b. Property. c. Management. d. Payroll. e. Unitary. ANS: A REF: p. 24-31
Match each of the following terms with the appropriate description, in the state income tax formula. a. Addition modification b. Subtraction modification c. No modification 1. 2. 3. 4. 5. 6. 7. 1. 2. 3. 4. 5. 6. 7. Home-state bond interest income Treasury Bond interest income Excessive state depreciation deduction Deduction for Federal communications tax Federal NOL deduction Federal ACE adjustment Federal deduction for employee compensation ANS: ANS: ANS: ANS: ANS: ANS: ANS: A B B C A C C REF: REF: REF: REF: REF: REF: REF: Exhibit 24-1 Exhibit 24-1 Exhibit 24-1 Exhibit 24-1 Exhibit 24-1 Exhibit 24-1 Exhibit 24-1
Match each of the following items with the appropriate description, in applying the P.L. 86-272 definition of solicitation. a. More than solicitation, creates nexus b. Solicitation only, no nexus created 8. 9. 10. 11. 12. 13. 14. 8. 9. 10. 11. 12. 13. 14. Approving a sales order Conducting an advertising campaign on local TV stations Investigating the creditworthiness of customers Training administrative personnel An employee uses an in-state home office Operating an office to interview and hire employees Owning a company car used on sales trips to the state ANS: ANS: ANS: ANS: ANS: ANS: ANS: A B A A A A B REF: REF: REF: REF: REF: REF: REF: Exhibit 24-2 Exhibit 24-2 Exhibit 24-2 Exhibit 24-2 Exhibit 24-2 Exhibit 24-2 Exhibit 24-2
COMPLETION 1. The starting point in computing state taxable income generally is ____________________ ____________________ ____________________.
ANS: Federal taxable income PTS: 1 REF: Figure 24-1 2. In determining taxable income for state income tax purposes, state income tax refunds typically constitute a(n) ____________________ modification. REF: Exhibit 24-1
ANS: subtraction PTS: 1 3.
In determining taxable income for state income tax purposes, a Federal NOL deduction may constitute a(n) ____________________ modification. REF: Exhibit 24-1
ANS: addition PTS: 1 4.
____________________ describe(s) the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an entity’s income. REF: p. 24-8
ANS: Nexus PTS: 1 5.
Under ____________________ ____________________ ____________________, a state is prohibited from taxing a business if the only connection with the state is the solicitation of orders for sales of tangible personal property that are sent outside the state for approval or rejection and, if approved, are filled and shipped by the business from a point outside of the state.
ANS: Public Law 86-272 PTS: 1 REF: p. 24-8 6. P.L. 86-272 ____________________ (does/does not) create nexus when the seller provides its sales personnel with a computer and fax machine for order submission. REF: Exhibit 24-2
ANS: does not PTS: 1 7.
P.L. 86-272 ____________________ (does/does not) create nexus when the seller owns real estate in the state. REF: Exhibit 24-2
ANS: does PTS: 1
_________________________ is a means by which a corporation’s business income is divided among the state in which it conducts business.
ANS: Apportionment PTS: 1 REF: p. 24-9 9. ____________________ is a method under which specific components of a corporation’s income are directly assigned to a specific state. REF: p. 24-10
ANS: Allocation PTS: 1
10. Although apportionment formulas vary among jurisdictions, most states use a three-factor formula that equally weights ____________________, ____________________, and ____________________. ANS: sales, property, payroll PTS: 1 REF: p. 24-13 11. In the apportionment formula, most states assign more than a one-third weight to the ____________________ factor. ANS: sales PTS: 1 REF: p. 24-13
12. Using sales-factor-only apportionment typically assigns a ____________________ (larger/smaller) percentage of an out-of-state corporation’s income to tax in the state. ANS: larger PTS: 1 REF: p. 24-13
13. In determining the numerator of the sales factor, most states follow UDITPA’s ____________________ ____________________ concept, whereunder sales are assumed to take place at the point of delivery, as opposed to the location at which the shipment originates. ANS: ultimate destination PTS: 1 REF: p. 24-16 14. Out-of-state sales that are not subject to tax in the destination state are pulled back into the origination state if that state has adopted a(n) ____________________ ____________________. ANS: throwback rule PTS: 1 REF: p. 24-16 15. Only compensation that is related to the production of _________________________ income is included in the payroll factor. ANS: apportionable business PTS: 1
REF: p. 24-18
16. In computing the property factor, property owned by the corporation typically is valued at its ____________________, plus the cost of additions and improvements, but without adjusting for ____________________. ANS: original (historical) cost, depreciation PTS: 1 REF: p. 24-19 | p. 24-20
17. Leased property, when included in the property factor, usually is valued at ____________________ times its annual rental, less any subrentals. ANS: eight 8 PTS: 1
REF: p. 24-20
18. A(n) ____________________ business operates as a unit and cannot be segregated into independently operating divisions or branches. ANS: unitary PTS: 1 REF: p. 24-21
19. In unitary states, a(n) ____________________ ____________________ provision permits a multinational corporation to elect to limit the reach of the state’s taxing jurisdiction to activities occurring within the boundaries of the United States. ANS: water’s edge PTS: 1 REF: See Global Tax Issues on p. 24-23 20. Overall tax liabilities will ____________________ if the members of a unitary group begin to include affiliates subject to higher effective tax rates. ANS: increase PTS: 1 REF: Example 23
21. In a few states, a Federal S corporation is exempt from state corporate income tax only if ____________________ of its shareholders are state residents. ANS: all PTS: 1 REF: p. 24-25
22. Almost all of the states tax a limited liability company as a ____________________ entity for income tax purposes. ANS: flow-through or pass-through. PTS: 1 REF: p. 24-25 23. A ____________________ tax is designed to complement the local sales tax structure. ANS: use PTS: 1 REF: p. 24-26
24. The sale of a used auto probably is exempt from sales/use tax under the ____________________ ____________________ rule. ANS: occasional sale PTS: 1 REF: p. 24-26 25. The ____________________ tax usually is applied at the city or county level, as its main source of revenue. ANS: property PTS: 1 ESSAY 1. Identify several transactions by business taxpayers where state and local tax issues are important. REF: p. 24-27
ANS: Businesses operating in a multistate environment seldom make critical decisions based on tax factors alone. But the following events might bring up important state and local tax issues. • Location of a plant expansion or distribution center. • Increases in spending for high-tech or other equipment. • Concentration of sales activities using catalog and Internet exposure. PTS: 1 REF: p. 24-2 2. Why is a knowledge of Federal income tax law important in computing state taxable income?
ANS: Interactions between state and Federal income tax laws are found in the following. • • • PTS: 1 Most state taxable income computations for a corporation begin with a taxable income amount from one of the lines on the Federal Form 1120. States are allowed to piggyback their income tax collections with the Federal income taxing process. Most tax accounting periods and methods for state income tax purposes follow those of the Federal return. REF: p. 24-4 to p. 24-6
List some of the most commonly encountered state income tax modifications, used in computing state taxable income.
ANS: State income tax modifications include the following commonly encountered items. Addition modifications • Municipal bond interest • Cost recovery deductions, where the Federal deduction exceeds the state’s • State income tax expense • Federal and out-of-state net operating losses Subtraction modifications • U.S. Treasury interest income • Cost recovery deductions, where the Federal deduction is less than the state’s • State income tax refunds • Federal income tax expense. PTS: 1 REF: Exhibit 15–1 4. Define the terms allocation and apportionment as they are used in multistate income taxation.
ANS: Generally, business income is apportioned by a formula and nonbusiness income is allocated to its situs. These income assignments are made into states with which the taxpayer has established nexus. An apportionment formula generally is an average of the relative sales, property, and payroll activities of the taxpayer in a particular state. Allocation usually is made with respect to the rental income, interest, dividends, and capital gains of the taxpayer. PTS: 1 REF: p. 24-9 | p. 24-10 5. Why does the advent of telecommuting present a critical tax planning issue with respect to the mobile employee?
ANS: Both the state where the telecommuter resides and works, and the state to which the final work is submitted, want to apply an income tax to the wages or fees paid to the employee. The mobile employee wants to avoid double taxation, where the same income would be taxed by both states, even if an offsetting reciprocity, deduction, or credit system is used. A common definition of nexus for the employee for the two states would resolve the problem, but early applications of the nexus rules by the states have been quite aggressive as to the common income. PTS: 1 REF: Tax in the News, p. 24-9
Give two exceptions that the states have developed, deviating from the strict three-factor apportionment formula for business income.
ANS: • Over-weighting the sales factor. • Sales-factor only apportionment. • Apportioning nonbusiness income. • Special apportionment formula for targeted industries, e.g., telecommunications, airlines. PTS: 1 REF: p. 24-13 | p. 24-14 7. Identify some state/local income tax issues facing pass-through entities such as partnerships and LLCs. Does the owner have nexus with every state in which the entity conducts business? Does the entity have nexus with every state in which an owner resides? To which state(s) is income assigned when an owner takes a distribution, liquidating or nonliquidating? Does the state require entity-level income tax withholding for nonresident owners? Does the state levy any entity-level taxes? REF: p. 24-25 | p. 24-26
ANS: • • • • • PTS: 1 8.
List some of the most commonly encountered exemptions from the tax base for state and local sales and use taxes.
ANS: Most state and local governments allow the following exemptions from a consumer sales/use tax base. • Sales for resale. • Casual or occasional sales. • Sales to tax-exempt organizations, including governments and charities. • Sales of targeted items, such as groceries, health care goods, and business equipment. • Sales of manufacturing equipment. • Packaging and shipping materials used by a manufacturer. PTS: 1 REF: p. 24-26
9. Summarize the principles of multistate tax planning.
ANS: State and local tax planning often involves modifications in the legal, functional, or technical means by which the taxpayer conducts business, but they should be undertaken only after considering their nontax effects. Establishing nexus in a low- or no-tax state often optimizes the multistate tax liability, while eliminating nexus in high-tax, nonunitary states can accomplish the same objective. Holding companies for investment assets can take advantage of the states’ exemptions for certain interest and dividend income. PTS: 1 REF: p. 24-27 to 24-30
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