Chapter 23
Computational Exercises
12. LO.3 Helpers, Inc., a qualifying § 501(c)(3) organization, incurs lobbying expenditures of $250,000 for the taxable year and grass roots expenditures of $0.
Exempt purpose expenditures for the taxable year are $1,200,000. Helpers elects to be eligible to make lobbying expenditures on a limited basis.
a. What amount of lobbying expenditures is Helper allowed to incur under the terms of the election?
b. What is its tax liability as a result of the election?
13. LO.3 Davis, an officer for a § 501(c)(3) organization, receives benefits that are inappropriate in the context of a charitable entity. The excess benefits are determined to be $35,000. Davis does not pay back the organization the excess amount before the first-level tax is due.
a. Apply the rules for intermediate sanctions. What amount of first-level taxes are imposed on Davis? On the exempt organization management?
b. What amount of second-level taxes are imposed on Davis?
14. LO.5 Rejoice, Inc., a private foundation, has existed for 10 years. Rejoice held undistributed income of $160,000 at the end of its 2015 tax year. Of this amount, $90,000 was distributed in 2016, and $70,000 was distributed during the first quarter of 2017. The IRS mailed a deficiency notice to Rejoice on August 1, 2018.
a. What is Rejoice’s initial tax on the 2015 undistributed taxable income for 2016?
For 2017?
b. What is the additional tax for 2018?
12. LO.3 Helpers, Inc., a qualifying § 501(c)(3) organization, incurs lobbying expenditures of $250,000 for the taxable year and grass roots expenditures of $0.
Exempt purpose expenditures for the taxable year are $1,200,000. Helpers elects to be eligible to make lobbying expenditures on a limited basis.
a. What amount of lobbying expenditures is Helper allowed to incur under the terms of the election?
b. What is its tax liability as a result of the election?
13. LO.3 Davis, an officer for a § 501(c)(3) organization, receives benefits that are inappropriate in the context of a charitable entity. The excess benefits are determined to be $35,000. Davis does not pay back the organization the excess amount before the first-level tax is due.
a. Apply the rules for intermediate sanctions. What amount of first-level taxes are imposed on Davis? On the exempt organization management?
b. What amount of second-level taxes are imposed on Davis?
14. LO.5 Rejoice, Inc., a private foundation, has existed for 10 years. Rejoice held undistributed income of $160,000 at the end of its 2015 tax year. Of this amount, $90,000 was distributed in 2016, and $70,000 was distributed during the first quarter of 2017. The IRS mailed a deficiency notice to Rejoice on August 1, 2018.
a. What is Rejoice’s initial tax on the 2015 undistributed taxable income for 2016?
For 2017?
b. What is the additional tax for 2018?
Chapter 24
Computational Exercises
19. LO.3, 5 Castle Corporation conducts business in States 1, 2, and 3. Castle’s $630,000 taxable income consists of $555,000 apportionable income and $75,000 allocable income generated from transactions conducted in State 3. Castle’s sales, property, and payroll are evenly divided among the three states, and the states all employ a three-equal-factors apportionment formula. How much of Castle’s income is taxable in:
a. State 1?
b. State 2?
c. State 3?
20. LO.3 Fillon Corporation’s operations include two manufacturing facilities, one in
State A and one in State B. The plant located in A generated $200,000 of income, and the plant located in B generated a loss of $50,000. Therefore, Fillon’s total taxable income is $150,000. By applying the statutes of each state, Fillon determines that its apportionment factors for A and B are .70 and .30, respectively.
How much of Fillon’s income is apportioned to:
a. State A?
b. State B?
21. LO.3, 4 Legends Corporation owns and operates two manufacturing facilities, one in State A and the other in State B. Due to a temporary decline in sales,
Legend has rented 25% of its State A facility to an unaffiliated corporation. Legend generated $200,000 net rent income and $1,400,000 income from manufacturing.
Both states classify the rent income as allocable (nonapportionable) income. By applying the statutes of each state, Legends determines that its apportionment factors are .70 for A and .30 for B.
How much income is subject to tax in:
a. State A?
b. State B?
22. LO.5 Beckett Corporation realized $800,000 of taxable income from the sales of its products in States A and B. Beckett’s activities establish nexus for income tax purposes in both states. Beckett’s sales, payroll, and property in the states include the following.
State A State B Total
Sales $960,000 $640,000 $1,600,000
Property 180,000 –0– 180,000
Payroll 220,000 –0– 220,000
State B uses a double-weighted sales factor in its three-factor apportionment formula.
How much of Beckett’s taxable income is apportioned to State B?
23. LO.5 Isle Corporation’s entire operations are located in State A. Of Isle’s $600,000 sales, 60% are made in State A and 40% are made in State B. Isle’s solicitation of sales in State B is limited to mailing a monthly catalog to its customers in that state. However, Isle’s employees do pick up and replace damaged merchandise in State B. The pickup and replacement of damaged goods establish nexus with State A.
However, B’s definition of activities necessary to create nexus is less strict than that imposed by A; in B, the mere pickup and replacement of damaged goods does not create nexus there. Isle’s taxable income is $60,000. Both states impose a
10% corporate income tax and include only the sales factor in their apportionment formulas.
Determine Isle’s effective state income tax rate if:
a. State A has not adopted a throwback rule.
b. State A has adopted a throwback rule.
24. LO.5 Sante Fe Corporation’s sales office and manufacturing plant are located in
State A. Sante Fe also maintains a manufacturing plant and sales office in State B.
For purposes of apportionment, State A defines payroll as all compensation paid to employees, including contributions to § 401(k) deferred compensation plans. Under the statutes of State B, neither compensation paid to officers nor contributions to § 401(k) plans are included in the payroll factor. Sante Fe incurred the following personnel costs.
State A State B Total
Wages and salaries for employees other than officers $ 60,000 $40,000 $100,000
Salaries for officers 40,000 20,000 60,000
Contributions to § 401(k) plans 20,000 10,000 30,000
Total $120,000 $70,000 $190,000
What is the payroll factor for:
a. State A?
b. State B?
25. LO.6 Chirp Corporation owns two subsidiaries, Song and Bird. Song, located in
State A, generated taxable income of $500,000. During this same period, Bird, located in State B, generated a loss of $100,000.
a. Determine Song’s taxable income in States A and B, assuming that the subsidiaries constitute independent corporations under the tax law.
b. How does your answer change if the corporations constitute a unitary business?
19. LO.3, 5 Castle Corporation conducts business in States 1, 2, and 3. Castle’s $630,000 taxable income consists of $555,000 apportionable income and $75,000 allocable income generated from transactions conducted in State 3. Castle’s sales, property, and payroll are evenly divided among the three states, and the states all employ a three-equal-factors apportionment formula. How much of Castle’s income is taxable in:
a. State 1?
b. State 2?
c. State 3?
20. LO.3 Fillon Corporation’s operations include two manufacturing facilities, one in
State A and one in State B. The plant located in A generated $200,000 of income, and the plant located in B generated a loss of $50,000. Therefore, Fillon’s total taxable income is $150,000. By applying the statutes of each state, Fillon determines that its apportionment factors for A and B are .70 and .30, respectively.
How much of Fillon’s income is apportioned to:
a. State A?
b. State B?
21. LO.3, 4 Legends Corporation owns and operates two manufacturing facilities, one in State A and the other in State B. Due to a temporary decline in sales,
Legend has rented 25% of its State A facility to an unaffiliated corporation. Legend generated $200,000 net rent income and $1,400,000 income from manufacturing.
Both states classify the rent income as allocable (nonapportionable) income. By applying the statutes of each state, Legends determines that its apportionment factors are .70 for A and .30 for B.
How much income is subject to tax in:
a. State A?
b. State B?
22. LO.5 Beckett Corporation realized $800,000 of taxable income from the sales of its products in States A and B. Beckett’s activities establish nexus for income tax purposes in both states. Beckett’s sales, payroll, and property in the states include the following.
State A State B Total
Sales $960,000 $640,000 $1,600,000
Property 180,000 –0– 180,000
Payroll 220,000 –0– 220,000
State B uses a double-weighted sales factor in its three-factor apportionment formula.
How much of Beckett’s taxable income is apportioned to State B?
23. LO.5 Isle Corporation’s entire operations are located in State A. Of Isle’s $600,000 sales, 60% are made in State A and 40% are made in State B. Isle’s solicitation of sales in State B is limited to mailing a monthly catalog to its customers in that state. However, Isle’s employees do pick up and replace damaged merchandise in State B. The pickup and replacement of damaged goods establish nexus with State A.
However, B’s definition of activities necessary to create nexus is less strict than that imposed by A; in B, the mere pickup and replacement of damaged goods does not create nexus there. Isle’s taxable income is $60,000. Both states impose a
10% corporate income tax and include only the sales factor in their apportionment formulas.
Determine Isle’s effective state income tax rate if:
a. State A has not adopted a throwback rule.
b. State A has adopted a throwback rule.
24. LO.5 Sante Fe Corporation’s sales office and manufacturing plant are located in
State A. Sante Fe also maintains a manufacturing plant and sales office in State B.
For purposes of apportionment, State A defines payroll as all compensation paid to employees, including contributions to § 401(k) deferred compensation plans. Under the statutes of State B, neither compensation paid to officers nor contributions to § 401(k) plans are included in the payroll factor. Sante Fe incurred the following personnel costs.
State A State B Total
Wages and salaries for employees other than officers $ 60,000 $40,000 $100,000
Salaries for officers 40,000 20,000 60,000
Contributions to § 401(k) plans 20,000 10,000 30,000
Total $120,000 $70,000 $190,000
What is the payroll factor for:
a. State A?
b. State B?
25. LO.6 Chirp Corporation owns two subsidiaries, Song and Bird. Song, located in
State A, generated taxable income of $500,000. During this same period, Bird, located in State B, generated a loss of $100,000.
a. Determine Song’s taxable income in States A and B, assuming that the subsidiaries constitute independent corporations under the tax law.
b. How does your answer change if the corporations constitute a unitary business?