Multi-jurisdiction and exempt entities
The Multi-Jurisdiction and Exempt Test
Split income across states by factor, shield mere solicitation under P.L. 86-272, and tax an exempt entity only on unrelated business income.
How the exam words it
- -The stem gives in-state and total sales, payroll, and property and asks the apportionment percentage, each factor over the everywhere total.
- -It describes in-state activity and asks whether P.L. 86-272 protects it from state income tax.
- -It gives an exempt organization's revenue and asks the UBIT, or whether the income is excluded.
- -It contrasts a private foundation with a public charity, or asks about 501(c)(3) qualification.
The playbook
- 1Compute each apportionment factor as in-state over everywhere, then average the three (or weight sales) and apply to business income; allocate nonbusiness income to one state.
- 2Protect only the solicitation of orders for tangible goods shipped from out of state under P.L. 86-272; property, inventory, or services create nexus.
- 3Tax unrelated business income at 21 percent after the 1,000 specific deduction, but exclude passive dividends, interest, most rents, and royalties.
- 4Classify a 501(c)(3) as a private foundation unless it meets the public support test, subjecting foundations to the investment-income excise tax and self-dealing rules.
The trap
Computing a factor as in-state over in-state, or taxing passive income as UBTI. Each factor is in-state over the everywhere total, and dividends, interest, and most rents are excluded from unrelated business income.
How the exam varies it
The same pattern, re-skinned along these axes:
Three-factor apportionment versus allocation of nonbusiness incomeP.L. 86-272 nexus protectionUBIT and its passive-income exclusions versus private foundation status
Drill this pattern
8 questions of The Multi-Jurisdiction and Exempt Test from across the AUD topics. Clear it by getting 5 right with a streak of 3.