26 C.F.R. § 1.502-1

Feeder organizations

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(a) In the case of an organization operated for the primary purpose of carrying on a trade or business for profit, exemption is not allowed under section 501 on the ground that all the profits of such organization are payable to one or more organizations exempt from taxation under section 501. In determining the primary purpose of an organization, all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of those activities of such organization which are specified in the applicable paragraph of section 501.

(b) If a subsidiary organization of a tax-exempt organization would itself be exempt on the ground that its activities are an integral part of the exempt activities of the parent organization, its exemption will not be lost because, as a matter of accounting between the two organizations, the subsidiary derives a profit from its dealings with its parent organization, for example, a subsidiary organization which is operated for the sole purpose of furnishing electric power used by its parent organization, a tax-exempt educational organization, in carrying on its educational activities. However, the subsidiary organization is not exempt from tax if it is operated for the primary purpose of carrying on a trade or business which would be an unrelated trade or business (that is, unrelated to exempt activities) if regularly carried on by the parent organization. For example, if a subsidiary organization is operated primarily for the purpose of furnishing electric power to consumers other than its parent organization (and the parent's tax-exempt subsidiary organizations), it is not exempt since such business would be an unrelated trade or business if regularly carried on by the parent organization. Similarly, if the organization is owned by several unrelated exempt organizations, and is operated for the purpose of furnishing electric power to each of them, it is not exempt since such business would be an unrelated trade or business if regularly carried on by any one of the tax-exempt organizations. For purposes of this paragraph, organizations are related only if they consist of:

(1) A parent organization and one or more of its subsidiary organizations; or

(2) Subsidiary organizations having a common parent organization

An exempt organization is not related to another exempt organization merely because they both engage in the same type of exempt activities.

(c) In certain cases an organization which carries on a trade or business for profit but is not operated for the primary purpose of carrying on such trade or business is subject to the tax imposed under section 511 on its unrelated business taxable income.

(d) Exception—(1) Taxable years beginning before January 1, 1970. For purposes of section 502 and this section, for taxable years beginning before January 1, 1970, the term trade or business does not include the rental by an organization of its real property (including personal property leased with the real property).

(2) Taxable years beginning after December 31, 1969. For purposes of section 502 and this section, for taxable years beginning after December 31, 1969, the term trade or business does not include:

(i) The deriving of rents described in section 512(b)(3)(A),

(ii) Any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation, or

(iii) Any trade or business (such as a thrift shop) which consists of the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions

For purposes of the exception described in subdivision (i) of this subparagraph, if the rents derived by an organization would not be excluded from unrelated business income pursuant to section 512(b)(3) and the regulations thereunder, the deriving of such rents shall be considered a trade or business.

(3) Cross references and special rules. (i) For determination of when rents are excluded from the tax on unrelated business income see section 512(b)(3) and the regulations thereunder.

(ii) The rules contained in § 1.513-1(e)(1) shall apply in determining whether a trade or business is described in section 502(b)(2) and subparagraph (2)(ii) of this paragraph.

(iii) The rules contained in § 1.513-1(e)(3) shall apply in determining whether a trade or business is described in section 502(b)(3) and subparagraph (2)(iii) of this paragraph.

[T.D. 6500, 25 FR 11737, No. 26, 1960, as amended by T.D. 6662, 28 FR 6973, July 29, 1963; T.D. 7033, 35 FR 19997, Dec. 31, 1970]

Notes of Decisions

Cited in 10 cases, 1974–2003 · leading case: Associated Hosp. Servs., Inc. v. Comm'r, 74 T.C. 213 (Tax Ct. 1980).

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Associated Hosp. Servs., Inc. v. Comm'r, 74 T.C. 213 (Tax Ct. 1980). · cites it 32× “Held , under the reenactment doctrine applicable to regulations and interpretations long continued without substantial change applying to unamended or reenacted statutes, and deemed to have congressional approval, petitioner is a feeder organization under sec.”

Geisinger Health Plan v. Comm'r, 100 T.C. 394 (Tax Ct. 1993). · cites it 10× “] In order to qualify for exemption under the integral part theory, petitioner must perform an essential service either to its affiliates or to the class of direct beneficiaries of the charitable activities of its affiliates (in petitioner's case, its patients), as required by…”

HCSC-Laundry v. United States, 450 U.S. 1 (1981). · cites it 2× “502-1 (b), 26 CFR § 1.502-1 (b) (1980). It provides, in pertinent part: "If a subsidiary organization of a tax-exempt organization would itself be exempt on the ground that its activities are an integral part of the exempt activities of the parent organization, its exemption…”

Florida Hosp. Trust Fund v. Comm'r, 103 T.C. 140 (Tax Ct. 1994). · cites it 4× “, states in pertinent part: (b) * * * If a subsidiary organization of a tax-exempt organization would itself be exempt on the ground that its activities are an integral part of *148 the exempt activities of the parent organization, its exemption will not be lost because, as a…”

IHC Health Plans, Inc. v. Comm'r, 325 F.3d 1188 (10th Cir. 2003). “26 C.F.R. § 1.502-1 (b). 34 . The following table, taken from petitioners' brief, presents a percentage breakdown of petitioners’ total billings for physician services: Year Employed Not employed/ Not employed/ _Panel_Non-panel 1997 23.”

Hcsc-Laundry v. United States, 624 F.2d 428 (3rd Cir. 1980). · cites it 2× “at 254 , and determined that since HCSC-Laundry was an integral part of the hospitals, it was not a feeder organization under section 502(a) as clarified by the applicable Treasury Regulation on Income Tax, 26 C.F.R. § 1.502-1 (1979). 5 473 F.Supp.”

Geisinger Health Plan v. Comm'r of Internal Revenue Serv., 30 F.3d 494 (3rd Cir. 1994). “502-1 (b), which cautions that the subsidiary organization is not exempt from tax if it is operated for the primary purpose of carrying on a trade or business which would be an unrelated trade or business (that is, unrelated to exempt activities) if regularly carried on by the…”

HCSC-Laundry v. United States, 473 F. Supp. 250 (E.D. Pa. 1979). “Also, the applicable Treasury Regulation on Income Tax, 26 C.F.R. § 1.502-1 , Feeder Organizations, provides as follows in pertinent part: “(b) If a subsidiary organization of a tax-exempt organization would itself be exempt on the ground that its activities are an integral part…”

United Hosp. Servs., Inc. v. United States, 384 F. Supp. 776 (S.D. Ind. 1974). “The government has also cited certain Treasury Regulations, and particularly 26 C.F.R. § 1.502-1 , in support of its position.”

Geisinger Health Plan v. Comm. IRS (3rd Cir. 1994). · cites it 3× “at 402 ; see 26 C.F.R. §1.502-1 (b). GHP argues that these statements require us to examine whether the Clinic or GMC could retain tax-exempt status if it were to absorb GHP.”

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