Fallow Corporation is subject to tax only in State X. Fallow generated the following income and deductions. State income taxes are not deductible for X income tax purposes.

Sales ………………………………………………………......................…….$4,000,000

Cost of sales …………………………………………………..................….. 2,800,000

State X income tax expense ……………………………………............… 200,000

Depreciation allowed for Federal tax purposes ………………….. 400,000

Depreciation allowed for state tax purposes ……………………..  250,000

Interest income on Federal obligations ………………………....…..    40,000

Interest income on X obligations ………………………….......……..      30,000

Expenses related to carrying X obligations ……………….....……..       2,000

a. The starting point in computing the X income tax base is Federal taxable income. Derive this amount.

b. Determine Fallow’s X taxable income assuming that interest on X obligations is exempt from X income tax.

c. Determine Fallow’s X taxable income assuming that interest on X obligations is subject to X income tax.