Multijurisdictional Tax Issues

Question 1

Woods Corporation’s federal taxable income for the current year is $250,000 which includes the following:

$15,000 of deducted state income taxes

$25,000 of interest income on United States Treasury Bonds

Woods also had $10,000 of interest from state and local bonds that it owns. Federal depreciation in excess of that allowed for state purposes was $7,000. Woods operates exclusively in State F, which does not tax income earned on federal obligations, taxes all municipal bond interest, and disallows a deduction for state income taxes. What is Wood's state taxable income?
	A.  	$257,000.
	B.  	$243,000.
	C.  	$307,000.
	D.  	$250,000

Answer 1

A -
The starting point for computing state taxable income is $250,000. Adjustments are:

State income taxes 	+ $15,000
Municipal interest income 	+ $10,000
Excess federal depreciation 	+ $ 7,000
U.S. Treasury interest income 	-$25,000
State taxable income 	$257,000

Question 2

Callaway Company manufactures its products in State F and sells them in States F and G. Callaway’s sales are as follows for the current year:

Sales shipped from State F to customers in State F $10,000
Sales shipped from State F to customers in State G 40,000

Assume that Callaway has nexus in both states F and G. What is Callaway's State F sales factor for the current year?
	A.  	0%
	B.  	20%
	C.  	50%
	D.  	100%

Answer 2

B - $10,000/($10,000 + $40,000) = 20%

Question 3

Which of the following statements is incorrect?
A. Foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary.
B. Foreign currency exchange gains and losses resulting from investment transactions are capital.
C. Foreign currency exchange gains and losses resulting from personal transactions are capital.
D. Foreign currency exchange gains and losses resulting from the normal course of business operations are capital.

Answer 3

D - they are ordinary NOT capital

Question 4

Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2015, he has the following income from Spanish sources:

Salary 	Interest Income Gross amount 	$90,000 	$20,000 Spanish income tax (20%) 	(18,000) 	(4,000) Net cash received (80%) 	$72,000 	$16,000

The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $30,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. How much of the foreign taxes paid is eligible to be used in the foreign tax credit computation?
	A.  	- $0 -
	B.  	$ 4,000
	C.  	$18,000
	D.  	$22,000

Answer 4

B - Since the $90,000 earned income was excludable from U.S. income the $18,000 in Spanish taxes is not eligible for the foreign tax credit. The $4,000 related to the interest income is eligible.

Question 5

Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2015, he has the following income from Spanish sources:

Salary 	Interest Income Gross amount 	$90,000 	$20,000 Spanish income tax (20%) 	(18,000) 	(4,000) Net cash received (80%) 	$72,000 	$16,000

The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $40,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. What is Mr. Travel's minimum includible United States gross income from these transactions? The housing exclusion is $14,112 and foreign earned income exclusion is $100,800 in 2015.
	A.  	$ 60,000.
	B.  	$105,888.
	C.  	$110,000.
	D.  	$200,000.

Answer 5

B - The $90,000 of salary is completely excluded. Foreign-earned income from personal services is limited to $100,800 in 2015.The housing is excludable to the extent it exceeds 16% × $100,800, or $16,128. This excess is $23,872 ($40,000 − $16,128). However, the housing exclusion may never exceed $14,112 in 2015, so the includible housing income is $25,888 ($40,000 − $14,112). The interest income is fully includible as is the U.S. source earned income of $60,000. Therefore, includible income is $25,888 + $20,000 + $60,000, or $105,888.

Question 6

ABC, Inc., has $120,000 U.S. source income, $80,000 of foreign source income, and $25,000 foreign taxes deemed paid. Assume that the U.S. income tax liability before the foreign tax credit is $61,250. ABC's foreign tax credit is
	A.  	- $0 -
	B.  	$24,500
	C.  	$25,000
	D.  	$61,250

Answer 6

B - $25,000, but not to exceed the foreign tax credit limitation of $80,000/($120,000 + $80,000) x $61,250 = $24,500.