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    Tax Implications for Profit-Making Entities

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    An exempt hospital receives all of the shares of stock of Compute, Inc., a retail computer chain, as a gift from a wealthy donor. Because the chain is very profitable and its CEO has offered to continue to manage it, the hospital has decided to operate the chain rather than sell the stock. All of the chain's profits will be used in carrying out the exempt mission of the hospital.

    Advise the hospital on whether better Federal income tax consequences can be achieved by operating the chain as a subsidiary or as a division of the hospital corporation.

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    Solution Preview

    Tax exempt organizations are regulated by Section 501(c) (3) of the Internal Revenue Code. Exempt purposes include "charitable, religious, educational, scientific, literary, and testing for public safety" (IRS, 2016), which would apply to the hospital in question, particularly if it is being run by a religious group or organization.

    The business that was a gift to the hospital, Compute, Inc, is a profit making entity. However, it is possible for a non-profit and tax exempt organization to create a subsidiary entity of the profit making company, and still maintain its tax exempt status. A pdf paper published by the Internal Revenue Service ...

    Solution Summary

    This is a discussion of the problems that could occur when a tax exempt hospital takes ownership of a profit making company, and also a summary of the remedies for those problems.