Chapter 24 Multistate Corporate Taxation

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Problems
26. LO.1 Use Exhibit 24.1 to compute Balboa Corporation’s State F taxable income for the year.
Addition modifications $29,000
Allocated income (total) $25,000
Allocated income (State F) $3,000
Allocated income (State G) $22,000
Apportionment percentage 40%
Credits $800
Federal taxable income $90,000
Subtraction modifications $15,000
Tax rate 5%
27. LO.1, 4 Use Exhibit 24.1 to provide the required information for Warbler Corporation, whose Federal taxable income totals $10 million.
Warbler apportions 70% of its manufacturing income to State C. Warbler generates $4 million of nonapportionable income each year, and 30% of that income is allocated to C. Applying the state income tax modifications, Warbler’s total business income from the manufacturing operation this year is $12 million.
a. How much of Warbler’s manufacturing income does State C tax?
b. How much of Warbler’s allocable income does State C tax?
c. Explain your results.
28. LO.1 For each of the following items considered independently, indicate whether the circumstances call for an addition modification (A), a subtraction modification (S), or no modification (N) in computing state taxable income. Then indicate the amount of any modification. The starting point in computing State Q taxable income is the year’s Federal taxable income, before any deduction for net operating losses.
a. Federal cost recovery ? $10,000, and Q cost recovery ? $15,000.
b. Federal cost recovery ? $15,000, and Q cost recovery ? $10,000.
c. Federal income taxes paid ? $30,000.
d. Refund received from last year’s Q income taxes ? $3,000.
e. Local property taxes, deducted on the Federal return as a business expense ? $80,000.
f. Interest income from holding U.S. Treasury bonds ? $5,000.
g. Interest income from holding Q revenue anticipation bonds ? $3,000.
h. Interest income from State P school district bonds ? $10,000.
i. Change in the excess of FIFO inventory valuation over the Federal LIFO amount ? $6,000. Q does not allow the LIFO method.
j. An asset was sold for $18,000; its purchase price was $20,000. Accumulated
Federal cost recovery ? $15,000, and accumulated Q cost recovery ? $8,000.
k. Dividend income received from State R corporation ? $30,000, subject to a Federal dividends received deduction of 70%.
29. LO.1 Perk Corporation is subject to tax only in State A. Perk generated the following income and deductions.
Federal taxable income $300,000
State A income tax expense 15,000
Refund of State A income tax 3,000
Depreciation allowed for Federal tax purposes 200,000
Depreciation allowed for state tax purposes 120,000
Federal taxable income is the starting point in computing A taxable income. State income taxes are not deductible for A tax purposes. Determine Perk’s A taxable income.
30. LO.1 Fallow Corporation is subject to tax only in State X. Fallow generated the following income and deductions. State income taxes are not deductible for X income tax purposes.
Sales $4,000,000
Cost of sales 2,800,000
State X income tax expense 200,000
Depreciation allowed for Federal tax purposes 400,000
Depreciation allowed for state tax purposes 250,000
Interest income on Federal obligations 40,000
Interest income on X obligations 30,000
Expenses related to carrying X obligations 2,000
a. The starting point in computing the X income tax base is Federal taxable income. Derive this amount.
b. Determine Fallow’s X taxable income assuming that interest on X obligations is exempt from X income tax.
c. Determine Fallow’s X taxable income assuming that interest on X obligations is subject to X income tax.
31. LO.5 Dillman Corporation has nexus in States A and B. Dillman’s activities for the year are summarized below.
State A State B Total
Sales $1,200,000 $ 400,000 $1,600,000
Property
Average historical cost 500,000 300,000 800,000
Average accumulated depreciation (300,000) (100,000) (400,000)
Payroll 2,500,000 500,000 3,000,000
Rent expense –0– 35,000 35,000
Determine the apportionment factors for A and B assuming that A uses a three-factor apportionment formula under which sales, property (net depreciated basis), and payroll are equally weighted and B employs a single-factor formula that consists solely of sales. State A has adopted the UDITPA with respect to the inclusion of rent payments in the property factor.
32. LO.5 Assume the same facts as in Problem 31, except that A uses a single-factor apportionment formula that consists solely of sales and B uses a three-factor apportionment formula that equally weights sales, property (at historical cost), and payroll. State B does not include rent payments in the property factor.
33. LO.5 Assume the same facts as in Problem 31, except that both states employ a three-factor formula, under which sales are double-weighted. The property factor in A is computed using historical cost, while this factor in B is computed using the net depreciated basis. Neither A nor B includes rent payments in the property factor.
34. LO.5 Roger Corporation operates in two states, as indicated below. This year’s operations generated $400,000 of apportionable income.
State A State B Total
Sales $800,000 $200,000 $1,000,000
Property 300,000 300,000 600,000
Payroll 200,000 50,000 250,000
Compute Roger’s State A taxable income assuming that State A apportions income based on a:
a. Three-factor formula, equally weighted.
b. Double-weighted sales factor.
c. Sales factor only.
35. LO.5, 9 State E applies a throwback rule to sales, while State F does not. State G has not adopted an income tax to date. Clay Corporation, headquartered in E, reported the following sales for the year. All of the goods were shipped from
Clay’s E manufacturing facilities.
Customer Customer’s Location This Year’s Sales
ShellTell, Inc. E $ 75,000,000
Tourists, Ltd. F 40,000,000
PageToo Corp. G 100,000,000
Total $215,000,000
a. Determine Clay’s sales factor in those states.
b. Comment on Clay’s location strategy using only your tax computations.
36. LO.5, 9 Quinn Corporation is subject to tax in States G, H, and I. Quinn’s compensation expense includes the following.
State G State H State I Total
Salaries and wages for nonofficers $200,000 $400,000 $400,000 $1,000,000
Officers’ salaries –0– –0– 500,000 500,000
Total $1,500,000
Officers’ salaries are included in the payroll factor for G and I, but not for H.
Compute Quinn’s payroll factors for G, H, and I. Comment on your results.
37. LO.5 Kim Corporation, a calendar year taxpayer, operates manufacturing facilities in States A and B. A summary of Kim’s property holdings follows.
Beginning of Year
State A State B Total
Inventory $ 300,000 $ 200,000 $ 500,000
Plant and equipment 2,500,000 1,500,000 4,000,000
Accumulated depreciation: plant and equipment (1,000,000) (600,000) (1,600,000)
Land 600,000 1,000,000 1,600,000
Rental property* 900,000 300,000 1,200,000
Accumulated depreciation: rental property (200,000) (90,000) (290,000)
End of Year
State A State B Total
Inventory $ 400,000 $ 200,000 $ 600,000
Plant and equipment 2,800,000 1,200,000 4,000,000
Accumulated depreciation: plant and equipment (1,200,000) (650,000) (1,850,000)
Land 600,000 1,200,000 1,800,000
Rental property* 1,000,000 300,000 1,300,000
Accumulated depreciation: rental property (250,000) (100,000) (350,000) * Unrelated to regular business operations.
Determine Kim’s property factors for the two states. The statutes of both A and B provide that average historical cost of business property is to be included in the property factor.
38. LO.6, 9 True Corporation, a wholly owned subsidiary of Trumaine Corporation, generated a $400,000 taxable loss in its first year of operations. True’s activities and sales are restricted to State A, which imposes an 8% income tax.
In the same year, Trumaine’s taxable income is $1 million. Trumaine’s activities and sales are restricted to State B, which imposes an 11% income tax. Both states use a three-factor apportionment formula that equally weights sales, payroll, and property, and both require a unitary group to file on a combined basis. Sales, payroll, and average property for each corporation are as follows.
True Corporation Trumaine Corporation Total
Sales $2,500,000 $4,000,000 $6,500,000
Property 1,000,000 2,500,000 3,500,000
Payroll 500,000 1,500,000 2,000,000
True and Trumaine have been found to be members of a unitary business.
a. Determine the overall state income tax for the unitary group.
b. Determine aggregate state income tax for the entities if they were nonunitary.
c. Incorporate this analysis in a letter to Trumaine’s board of directors. Corporate offices are located at 1234 Mulberry Lane, Birmingham, AL 35298.
39. LO.6 Chang Corporation is part of a three-corporation unitary business. The group has a water’s edge election in effect with respect to unitary State Q. State B does not apply the unitary concept with respect to its corporate income tax laws. Nor does
Despina, a European country towhich Saldez paid a $7 million value added tax this year.
Saldez was organized in Despina and conducts all of its business there. Given the summary of operations that follows, determine Chang’s and Elena’s sales factors in
B and Q.
Corporation Customer’s Location Sales
Chang B $20,000,000
Q 60,000,000
Elena Q 70,000,000
Saldez Despina 50,000,000
40. LO.8 Using the following information from the books and records of Grande Corporation, determine Grande’s total sales that are subject to State C’s sales tax.
Grande operates a retail general store.
Sales to C consumers, general merchandise $1,100,000
Sales to C consumers, crutches and other medical supplies 245,000
Sales to consumers in State D, via mail order 80,000
Purchases from suppliers 55,000
41. LO.8 Indicate for each transaction whether a sales (S) or use (U) tax applies or whether the transaction is nontaxable (N). Where the laws vary among states, assume that the most common rules apply. All taxpayers are individuals.
a. A resident of State A purchases an automobile in A.
b. A resident of State A purchases groceries in A.
c. A resident of State B purchases an automobile in A.
d. A charity purchases office supplies in A.
e. An A resident purchases in B an item that will be in the inventory of her business.
42. LO.5, 9 Dread Corporation operates in a high-tax state. The firm asks you for advice on a plan to outsource administrative work done in its home state to independent contractors. This work now costs the company $750,000 in wages and benefits. Dread’s total payroll for the year is $8 million, of which $6 million is for work currently done in the home state.
43. LO.2, 5, 9 Prepare a PowerPoint presentation (maximum of six slides) entitled “Planning Principles for Our Multistate Clients.” The slides will be used to lead a 20-minute discussion with colleagues in the corporate tax department.
Keep the outline general, but assume that your colleagues have clients operating in at least 15 states. Address only income tax issues.