Wilmington, Inc., a Pennsylvania corporation, manufactures computer components that it sells to Seine Corporation, a French company, for assembly into finished products. Wilmington owns 90% of Seine's stock. Wilmington's cost per component is $5, its selling price per component is $16, and it sold 110,000 components to Seine this year. Wilmington's taxable income as reported on its Form 1120 was $2,400,000, and Seine's taxable income as reported on its French corporate income tax return was $1,750,000. Determine the effect on the taxable incomes of both corporations if the IRS determines that an arm's length transfer price per component is $23.

Question

Quizplus · Accepted Answer

If the IRS determines that the arm's length price is $23, Wilmington's taxable income will increase because it should have reported higher sales revenue. Seine's taxable income does not change because it is a separate entity and the adjustment is made to Wilmington's income.