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.
A. Wilmington's taxable income will decrease by $770,000 and Seine's taxable income will decrease by $770,000.
B. Taxable income of both corporations will increase by $770,000.
C. Wilmington's taxable income will increase by $770,000. Seine's taxable income does not change.
D. Taxable income of both corporations will decrease by $770,000.
Answer: C
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