Deck 16: Multijurisdictional Taxation

Question 1

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

Answer 1

False

Question 2

Hendricks Corporation, a domestic corporation, owns 40 percent of Shane Corporation and 55 percent of Ferrell Corporation, both foreign corporations.Ferrell owns the other 60 percent of Shane Corporation.Both Shane and Ferrell are CFCs.

Answer 2

True

Question 3

Jaime received gross foreign-source dividend income of $250,000.Foreign taxes withheld on the dividend were $25,000.Jaime's total U.S.tax liability is $840,000 (the 21% tax rate applies).Jaime's current-year FTC is $52,500.

Answer 3

False

Question 4

Julio, a nonresident alien, realizes a gain on the sale of commercial real estate located in Omaha.The real estate was sold to Mariana, Julio's cousin who is also a nonresident alien.Julio recognizes foreign-source income from the sale because his home country is not the United States.

Question 5

Income tax treaties provide for either higher or lower withholding tax rates on interest income than the rate provided under U.S.statutory law.

Question 6

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

Question 7

ForCo, a subsidiary of a U.S.corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany.The income from the sale of widgets is not Subpart F foreign base company sales income.

Question 8

A U.S.taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

A "U.S.shareholder" for purposes of CFC classification is any U.S.person who owns directly, indirectly, and constructively at least 50% of the voting power of a foreign corporation.

Question 14

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

Question 15

Twenty unrelated U.S.persons equally own all of the stock of Quigley, a foreign corporation.Quigley is a CFC.

Question 16

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

Question 17

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

Question 18

ForCo, a non-U.S.corporation based in Aldonza, purchases widgets from USCo, Inc., its U.S.parent corporation. The widgets are sold by ForCo to an unrelated foreign corporation in Aldonza.The income from sale of the widgets by ForCo is Subpart F foreign base company sales income.

Question 19

The IRS can use § 482 reallocations to ensure that transactions between related parties are properly reflected in a tax return.

Question 20

The sourcing rules of Federal income taxation apply to deductions as well as to income items.

Question 21

If a state follows Federal income tax rules, the state's tax compliance and enforcement become easier to accomplish.

Question 22

Typically, sales/use taxes constitute about 20% of a state's annual tax collections for most states.

Question 23

The property factor includes business assets that the taxpayer owns and those merely used under a lease agreement.

Question 24

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

Question 25

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

Question 26

A typical state taxable income subtraction modification is the interest income earned from another state's bonds.

Question 27

All of the U.S.states have adopted a tax based on the net taxable income of corporations.

Question 28

Typical indicators of income tax nexus include the presence of customers in the state.

Question 29

A service engineer spends 80% of her time maintaining the employer's productive business property and 20% maintaining the employer's nonbusiness rental properties.This year, her compensation totaled $90,000.The payroll factor assigns $90,000 to the state in which the employer is based.

Question 30

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

Question 31

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

Question 32

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 stocks and bonds.

Question 33

Politicians frequently use tax credits and exemptions to create economic development incentives.

Question 34

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.

Question 35

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

Question 36

A typical state taxable income addition modification is for the state's NOL allowed the taxpayer for the tax year.

Question 37

The property factor includes land and buildings used for business purposes.

Question 38

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

Question 39

Double weighting the sales factor effectively decreases the corporate income tax burden on taxpayers based in a state such as entities with in-state headquarters.

Question 40

A unitary business applies a combined apportionment formula, including data from operations of all affiliates.

Question 41

In which of the following independent situations would Slane, a foreign corporation, be classified as a controlled foreign corporation? The Slane stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie, 10% by David, 8% by Ben, and 48% by Mike.

A)Jen, Kathy, Leslie, David, Ben, and Mike are all U.S.citizens.
B)Jen, Kathy, Leslie, David, and Ben are all U.S.citizens.David is married to Kathy.Mike is a foreign resident and citizen.
C)Jen, Kathy, Leslie, David, and Ben are all U.S.citizens.Ben is Mike's son.Mike is a foreign resident and citizen.
D)Jen, Kathy, Leslie, David, and Ben are all U.S.citizens.Mike is a foreign resident and citizen.

Question 42

Which of the following statements regarding the taxation of U.S.real property gains recognized by non-U.S.persons not engaged in a U.S.trade or business is false? Gains from the disposition of U.S.real property are:

A)Not taxed to non-U.S.persons because real property gains are specifically exempt from U.S.taxation.
B)Taxed to non-U.S.persons without regard to whether such non-U.S.persons are engaged in a U.S.trade or business.
C)Taxed in the United States because such gains are treated as if they are effectively connected to a U.S.trade or business.
D)Taxed to non-U.S.persons notwithstanding the general exemption of capital gains from U.S.taxation.

Question 43

Which of the following is a specific separate income "basket" for purposes of the foreign tax credit limitation calculation?

A)Services income.
B)Passive income.
C)Business income.
D)None of these are separate FTC limitation baskets.
E)All of these are separate FTC limitation baskets.

Question 44

A tax haven often is:

A)A country with high internal income taxes.
B)A country with no or low internal income taxes.
C)A country without income tax treaties.
D)A country that prohibits treaty shopping.

Question 45

OutCo, a controlled foreign corporation in Meena (located outside the United States), earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies.All of the dividend payors are located in Meena.OutCo's Subpart F income for the year is:

A)$0.
B)$0 only if OutCo is engaged in a trade or business in Meena.
C)$600,000.
D)$600,000 only if OutCo is engaged in a trade or business in Meena.

Question 46

By making a water's edge election, a multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S.and E.U.affiliates.

Question 47

Zhang, an NRA who is not a resident of a treaty country, receives taxable dividends of $50,000 from U.S.corporations.Zhang does not conduct a U.S.trade or business.Zhang's dividends are subject to withholding by the payor of:

A)35%.
B)30%.
C)15%.
D)0%.

Question 48

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

A)$0.
B)$6 million.
C)$20 million.
D)$50 million.

Question 49

A controlled foreign corporation (CFC) realizes Subpart F income from:

A)Purchase of inventory from an unrelated U.S.person and sale outside the CFC country.
B)Purchase of inventory from a related U.S.person and sale outside the CFC country.
C)Services performed for the U.S.parent in a country in which the CFC was organized.
D)Services performed on behalf of an unrelated party in a country outside the country in which the CFC was organized.

Question 50

Olaf, a citizen of Norway with no trade or business activities in the United States, sells at a gain 200 shares of MicroShift, Inc., a U.S.company.The sale takes place through Olaf's broker in Oslo.How is this gain treated for U.S.tax purposes?

A)It is foreign-source income subject to U.S.taxation.
B)It is foreign-source income not subject to U.S.taxation.
C)It is U.S.-source income subject to U.S.taxation.
D)It is U.S.-source income exempt from U.S.taxation.

Question 51

A unitary group of entities files a combined return that includes all of the affiliates' income and apportionment data.

Question 52

The following income of a foreign corporation is not subject to the regular U.S.corporate income tax rates.

A)FIRPTA gains.
B)Capital gains effectively connected with a U.S.trade or business.
C)Net long-term capital gains for which no U.S.trade or business exists.
D)Interest income effectively connected with a U.S.trade or business.

Question 53

Without the foreign tax credit, double taxation would result when:

A)The United States taxes the U.S.-source income of a U.S.resident.
B)A foreign country taxes the foreign-source income of a nonresident alien.
C)The United States and a foreign country both tax the foreign-source income of a U.S.resident.
D)Terms of a tax treaty assign income taxing rights to the United States.

Question 54

U.S.income tax treaties typically:

A)Provide for taxation exclusively by the source country.
B)Provide for taxation exclusively by the country of residence.
C)Provide rules by which multinational taxpayers avoid double taxation.
D)Provide that the country with the highest tax rate will be allowed exclusive tax collection rights.

Question 55

Purchase of inventory from a U.S.parent followed by which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia?

A)Sale to anyone outside Fredonia.
B)Sale to anyone inside Fredonia.
C)Sale to a related party outside Fredonia.
D)Sale to a nonrelated party outside Fredonia.

Question 56

Section 482 is used by the U.S.Treasury to:

A)Force taxpayers to use arms length transfer pricing on transactions between related parties.
B)Reallocate income, deductions, etc., to a related taxpayer to minimize tax liability.
C)Increase information that is reported about U.S.corporations with non-U.S.owners.
D)All of these.
E)None of these.

Question 57

Kunst, a U.S.corporation, generates $100,000 of foreign-source income in the general income basket and $40,000 of foreign-source income in the passive income basket.Kunst's worldwide taxable income is $1,200,000, and its U.S.tax liability before FTC is $240,000.Foreign taxes attributable to the general income basket are $60,000 and to the passive income are $4,000.What is Kunst's foreign tax credit for the tax year?

A)$64,000
B)$24,000
C)$20,000
D)$4,000

Question 58

Which of the following statements is false in regard to the U.S.income tax treaty program?

A)There are about 70 bilateral income tax treaties between the United States and other countries.
B)Tax treaties generally provide for primary taxing rights that require the other treaty partner to allow a credit for the taxes paid on the twice-taxed income.
C)U.S.income tax treaties are written to set up a "network" of up to five foreign countries that are covered by the treaty language.
D)None of these statements is false.

Question 59

Peanut, Inc., a U.S.corporation, receives $500,000 of foreign-source interest income on which foreign taxes of $5,000 are withheld.Peanut's worldwide taxable income is $900,000, and its U.S.Federal income tax liability before FTC is $189,000.What is Peanut's foreign tax credit?

A)$500,000
B)$189,000
C)$105,000
D)$5,000

Question 60

Which of the following statements regarding foreign persons not engaged in a U.S.trade or business is true?

A)Foreign persons are subject to potential withholding taxes on the gross amount of U.S.-source investment income.
B)Foreign persons with any U.S.-source income are taxed on net investment income (after expenses).
C)Foreign persons are not subject to U.S.tax if not engaged in a U.S.trade or business.
D)Foreign persons with only U.S.-source investment income are exempt from U.S.tax.

Question 61

U.S.income tax treaties can be described as:

A)Napoleonic.
B)Spoke-and-Wheel.
C)Balanced.
D)Bilateral.

Question 62

Which of the following statements regarding a non-U.S.person's U.S.tax consequences is true?

A)Non-U.S.persons may be subject to U.S.withholding tax on U.S.-source investment income.
B)Non-U.S.individuals may be subject to U.S.income tax but non-U.S.corporations are never subject to U.S.income tax.
C)Non-U.S.persons are subject to U.S.income or withholding tax only if engaged in a U.S.trade or business.
D)Non-U.S.persons must be physically present in the United States before any U.S.-source income is subject to U.S.income or withholding tax.

Question 63

Which of the following statements regarding the U.S.taxation of non-U.S.persons is true?

A)A non-U.S.person's effectively connected U.S.business income is taxed by the United States only if it is portfolio income.
B)A non-U.S.person's effectively connected U.S.business income is subject to U.S.income taxation.
C)A non-U.S.person may earn income from selling U.S.real property without incurring any U.S.income tax.
D)A non-U.S.person must spend at least 183 days in the United States before any effectively connected income is subject to U.S.taxation.

Question 64

Ramirez Corporation, which is subject to income tax only in State A, generated the following income and deductions: Federal taxable income is the starting point in computing A taxable income.State income taxes are not deductible for A tax purposes.Ramirez's A taxable income is:

A)$495,000
B)$500,000
C)$545,000
D)$595,000

Question 65

Which of the following is not a U.S.person?

A)Domestic corporation.
B)Citizen of Turkey with U.S.permanent residence status (i.e., green card).
C)U.S.corporation 100% owned by a foreign corporation.
D)Foreign corporation 100% owned by a domestic corporation.

Question 66

In working with the foreign tax credit, a U.S.corporation may be able to alleviate the problem of excess foreign taxes by:

A)Deducting the excess foreign taxes that do not qualify for the credit.
B)Repatriating more foreign income to the United States in the year there is an excess limitation.
C)Generating "same basket" foreign-source income that is subject to a tax rate higher than the U.S.tax rate.
D)Generating "same basket" foreign-source income that is subject to a tax rate lower than the U.S.tax rate.

Question 67

Mitch, an NRA, sells a building in Omaha for $1 million.His basis in the building is zero for both regular tax and AMT purposes.Mitch has no other contact with the United States other than the ownership of the building.How much Federal income tax is due from Mitch on the sale?

A)$0, because Mitch is an NRA.
B)The amount realized times the top individual tax rate.
C)The net gain times the top capital gains tax rate.
D)The net gain taxed at the lesser of the applicable regular or AMT rates.

Question 68

ForCo, a foreign corporation not engaged in a U.S.trade or business, recognizes a $3 million gain from the sale of land located in the United States.The amount realized on the sale was $50 million.Absent any exceptions, what is the required withholding amount on the part of the purchaser of this land?

A)$0
B)$300,000
C)$3 million
D)$5 million

Question 69

Which of the following statements regarding a non-U.S.person's U.S.tax consequences is true?

A)Non-U.S.persons may be subject to withholding tax on U.S.-source investment income even if not engaged in a U.S.trade or business.
B)Non-U.S.persons are subject to U.S.income or withholding tax only if they are engaged in a U.S.trade or business.
C)Non-U.S.persons are not taxed on gains from U.S.real property as long as such property is not used in a U.S.trade or business.
D)Once a non-U.S.person is engaged in a U.S.trade or business, the non-U.S.person's worldwide income is subject to U.S.taxation.

Question 70

Which of the following statements regarding income sourcing is not correct?

A)Concerning the foreign tax credit, most U.S.persons benefit from earning low-tax foreign-source income.
B)Foreign persons generally benefit from avoiding U.S.-source income classification.
C)U.S.persons are not concerned with source of income because all their income is subject to U.S.tax under a worldwide system.
D)Foreign persons may be subject to tax on U.S.-source income without regard to their actual presence in the United States.

Question 71

Adams 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, Adams has rented 20% of its Y facility to an unaffiliated corporation.Adams generated $1,000,000 net rental income and $5,000,000 income from manufacturing. Adams is incorporated in Y.For X and Y purposes, rental income is classified as allocable nonbusiness income.By applying the statutes of each state, Adams determined that its apportionment factors are 0.65 for X and 0.35 for Y. Adams's income attributed to X is:

A)$0.
B)$3,250,000.
C)$3,900,000.
D)$5,000,000.
E)$6,000,000.

Question 72

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

A)$810,000
B)$800,000
C)$790,000
D)$750,000

Question 73

Which of the following statements regarding income sourcing is correct?

A)Everything else being equal, a larger foreign-source income decreases the foreign tax credit limitation for U.S.persons.
B)Everything else being equal, a larger foreign-source income increases the foreign tax credit limitation for U.S.persons.
C)Everything else being equal, a larger U.S.-source income increases the foreign tax credit limitation for U.S.persons.
D)Everything else being equal, changing foreign-source income does not change the foreign tax credit limitation for U.S.persons.

Question 74

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

A)$70,000
B)$147,000
C)$315,000
D)$385,000

Question 75

Which of the following is a principle used in applying the income-sourcing rules under U.S.tax law?

A)The rules should be acceptable to both countries.
B)The rules should favor the U.S.Treasury.
C)The rules should favor the treasury of the non-U.S.country.
D)The rules should apply to income items only; deductions need not be sourced in this way.

Question 76

U.S.income tax treaties:

A)Involve three to seven countries as treaty partners.
B)Are renewable upon expiration every five years.
C)Are rare with countries in Africa.
D)Are rare with countries in Europe.

Question 77

Which of the following statements best describes the primary purpose of the Subpart F income provisions?

A)They allow for a deferral of non-U.S.-source income from U.S.taxation.
B)They provide certainty as to the U.S.income tax treatment of cross-border transactions.
C)They prevent shifting of income from the United States to high-tax non-U.S.jurisdictions.
D)They prevent shifting of income from the United States to low-tax non-U.S.jurisdictions.

Question 78

In determining a corporation's taxable income for state income tax purposes, which of the following does not constitute a subtraction modification 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 state depreciation deduction exceeds the corresponding Federal amount.
D)The amount by which the Federal depreciation deduction exceeds the corresponding state amount.

Question 79

Which of the following is not a foreign person?

A)A foreign corporation 51% owned by U.S.shareholders.
B)A foreign corporation 100% owned by a domestic corporation.
C)A citizen of Germany with U.S.permanent resident status (i.e., green card).
D)A citizen of Italy who spends 14 days vacationing in the United States.

Question 80

Dark, Inc., a U.S.corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany. Dark reports $100,000 of taxable income from Dunkel on its U.S.tax return along with $400,000 of taxable income from its U.S.operations.Dark paid $30,000 in German income taxes related to the $100,000 of Dunkel income.Assuming a U.S.tax rate of 21%, what is Dark's U.S.tax liability after any allowable foreign tax credits?

A)$21,000
B)$75,000
C)$84,000
D)$105,000