Is Quail subject to Federal income tax

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Problem - 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 every year, to support the exempt purpose of the parent.

Required -

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 Federal income tax liability. He would like to know if the tax consequences would be better if Quail were liquidated into Roadrunner. Write a letter to Arthur that contains your advice. Roadrunner's address is 500 Rouse Tower, Rochester, NY 14627.

Reference no: EM132650322

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