An exempt hospital receives all of the shares of stock of Co

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

Solution

Facts of the case: Compute Inc. profits are used to carry out mission of exempt hospital.

Section: Sec 11A(4) of Indian Income Tax Act,1961.

Explanation: Sec 11A(4) states that any business run by an exempt foundation like hospital, Charitable Institutions are also exempt from tax only if the following twin conditions are satisfied:

a)business is incidental to the attainment of the objectives of the Institution

and

b)separate books of account are maintained by such trust or institution in respect of such business.

In the given case the first condition is not satisfied i.e., Compute Inc is not incidental to the hospital.

Conclusion: The profits from Compute Inc. are taxable in the hands of the the hospital.