Roadrunner, Inc., is an exempt medical organization. Quail, Inc., a sporting goods retailer, is a wholly owned subsidiary of Roadrunner. Roadrunner inherited the Quail stock last year from a major benefactor of the medical organization. Quail’s taxable income is $550,000. Quail will remit all of its earnings, net of any taxes, to Roadrunner to support the exempt purpose of the parent.
a. Is Quail subject to Federal income tax? If so, calculate the liability.
b. Arthur Morgan, the treasurer of Roadrunner, has contacted you regarding minimizing or eliminating Quail’s tax liability. He would like to know if the tax consequences would be better if Quail were liquidated into Roadrunner. Write a letter to Morgan that contains your advice. Roadrunner’s address is 500 Rouse Tower, Rochester, NY 14627.
c. Would your answer in (a) change if Roadrunner had acquired the Quail stock by purchase or gift rather than by inheritance? Discuss.
d. How would the tax consequences change if Quail’s taxable income was only $100,000 and it remitted only 75% of its earnings, net of taxes, to Roadrunner?