M Corporation is commercially domiciled in State A and is subject to tax in both state A and state B. Both states start with Federal taxable income in computing the state tax base. Both states exempt from tax their own municipal obligations (but tax interest from other states) and disallow a deduction for state income taxes.

Both states allow a 100% dividends received deduction. Both states distinguish between business and non-business income.

M Company has the following percentages of sales, property and payroll allocated to each state. Each state uses an equally weighted 3-factor apportionment formula.

State A State B Total

Sales 80% 20% 100%

Property 70% 30% 100%

Payroll 75% 25% 100%

Summary of Book Income Items:

Sales $1,500,000

Interest on Federal obligations 100,000

Interest on State A obligations 90,000

Interest on State B obligations 10,000

Dividends from State A 50% owned domestic corps. 60,000

Non business rental income-State A 140,000

Other operating expenses 1,200,000

State income tax expense- State A 30,000

State income tax expense- State B 40,000

State A depreciation (State amount allowed $130,000) 160,000

State B depreciation (State amount allowed $90,000) 140,000

A) Assume Federal tax depreciation equals book tax depreciation; compute M Corporations 2021 federal taxable income.

B) Assume interest and dividend income are business income and that the rental income is non-business income, compute State A taxable income.

C) M Corporation is planning to increase revenue in other states by expanding their sales department and developing an online sales program. What advice would you give M Corporation before they begin this expansion?

D) M Corporation is also considering transferring intangibles to a US subsidiary in a low or no tax state, and charging royalties to other domestic subsidiaries for the use of the intangibles. Briefly discuss what advice you would give M Corporation.