Rainbow Corp. and Trout Co. are related for tax purposes. Rainbow operates as a retail outlet and Trout Co. operates as a wholesale unit. During 2020, Rainbow Corp. purchased inventory for $5,000. The inventory had a market value of $7,500 in the wholesale market, and a value of $11,000 in the retail market. Rainbow sold the inventory to its sister corporation, Trout, for $5,000. Trout then sold the inventory to other retail outlets for $11,000. Required: A) Determine the total business income for tax purposes for both Rainbow and Trout in 2020 based on the facts. B) How would your answer in A) differ if Rainbow had sold the inventory to customers at the retail price instead of selling the inventory to Trout?

Short Answer