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Instructions:
Questions about Taxes and Auditing
Questions About Taxes And Auditing
Fill in the blanks with your answers to the questions listed below. Please give citations to the right authorities.
A. Please defend Alixco’s view on non-unitary tax filing.
B. How should each company’s items of income be classified as business or non-business income? Please construct your response as if the auditor’s audit report was prepared in accordance with MTC requirements.
C. Explain how Alixco’s sales to California would be apportioned on the joint Missouri tax return and the combined California corporation tax return (assuming California applies the “Finnigan” rule). Why?
Smith’s Home Hardware is a profitable retail enterprise situated in Arizona that makes considerable earnings from its retail hardware stores. Smith’s contributes $70 million to the formation of a subsidiary (“Alixco”). The capital investment comprises $15 million in goods, $15 million in CDs, a $10 million office building in Missouri, and $30 million in patents on high-tech power equipment. Alixco’s headquarters are located entirely in Missouri. The construction industry will be served by Alixco, which will manufacture and distribute power tools. Alixco earns $100 million in tool sales in 2001, $50,000 in interest on commercial CDs, $1.5 million in rent from 9 floors of its 10-story office building, and $3 million in royalties from international licensing of its tool patents. For the year, business deductions totaled $85 million.
In Missouri, Alixco hires a president. The remainder of the Board of Directors and Officers is made up of Smith’s Home Hardware officers. The records are kept by Smith’s own accounting staff in Arizona. Annual financial statements are prepared by a Missouri CPA firm. Alixco’s only assets are the ones listed above, as well as a recently built manufacturing factory in New Mexico and another newly built plant across the border in Mexico.
The CDs were purchased for $15 million and the office building was purchased for $10 million with proceeds from retail hardware store operations. Alixco and Smith’s Home Hardware file a joint federal tax return. Alixco submits a California tax return, while Smith’s Home Hardware does not. Alixco paid Smith’s Home Hardware $2 million in dividends in 2001, which were utilized to expand existing retail locations. There are no intercompany sales other than the original inventory contribution. Smith’s purchasing agents, on the other hand, handle about 20% of Alixco’s purchases.
Smith’s Home Hardware had a $40 million profit in 2001, with 75 percent of it going to Arizona and 25 percent to California. For the year 2001, Smith’s filed a separate return in California. Smith’s Home Hardware was audited by the California Franchise Tax Board, which determined that Smith’s and Alixco should be part of a unitary group submitting an unified California tax return. The Alixco net business income was included to the joint return by the auditor, resulting in a $300,000 tax increase in California.
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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Questions about Taxes and Auditing