Tax Implications for Profit-Making Entities

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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