Question - Service, Inc., an exempt organization, owns all of the stock of Blue, Inc., a retailer of boating supplies. Blue remits all of its profits to Service. According to a policy adopted by service's board, 60% of the amount received from Blue is to be spent annually in carrying out Service's tax-exempt mission, and 40% is to be invested in Service's endowment fund.
a. What are the tax consequences to Service and to Blue?
b. Would your answer in (a) change if 100% of the amount received from Blue was spent annually in carrying out Service's tax-exempt mission?