U.S. Code » Title 26 » Subtitle Subtitle A— Income Taxes › Chapter CHAPTER 1— NORMAL TAXES AND SURTAXES › Subchapter Subchapter F— Exempt Organizations › Part PART I— GENERAL RULE

26 U.S.C. § 502

Feeder organizations

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(a) General rule

An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501.

(b) Special ruleFor purposes of this section, the term “trade or business” shall not include—(1) the deriving of rents which would be excluded under section 512(b)(3), if section 512 applied to the organization,(2) 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(3) any trade or business which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.(Aug. 16, 1954, ch. 736, 68A Stat. 166; Pub. L. 91–172, title I, § 121(b)(7), Dec. 30, 1969, 83 Stat. 542.)Editorial NotesAmendments

1969—Pub. L. 91–172 redesignated first sentence of existing provisions as subsec. (a), and substantial portion of second sentence as subsec. (b)(1), and, in subsec. (b)(1) as so redesignated, inserted reference to section 512 of this title, and added pars. (2) and (3).

Statutory Notes and Related SubsidiariesEffective Date of 1969 Amendment

Amendment by Pub. L. 91–172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91–172, set out as a note under section 511 of this title.

Notes of Decisions
Cited in 28 cases, 1948–2010 · leading case: HCSC-Laundry v. United States, 450 U.S. 1 (1981).
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HCSC-Laundry v. United States, 450 U.S. 1 (1981). · cites it 4× “[5] See also § 502, as amended, of the 1954 Code, 26 U. S. C. § 502 . This position, however, was rejected by the Court of Claims in Hospital Bureau of Standards and Supplies, Inc.”
Comm'r v. Groetzinger, 480 U.S. 23 (1987). · cites it 2× “…See § 355(b)(2), 26 U. S. C. § 355 (b)(2) (distribution of stock of controlled corporation); §§ 502(b), and 513(b), 26 U. S. C. §§ 502 (b) and 513(b) (exempt organizations); and § 7701(a)(26), 26 U. S. C. § 7701 (a)(26) (defining the term to include "the performance of the…”
Geisinger Health Plan v. Comm'r of Internal Revenue Serv., 30 F.3d 494 (3rd Cir. 1994). · cites it 3× “26 U.S.C. § 502 (a). See generally 9 Merten’s Law of Federal Income Taxation § 34.”
United States v. George, 448 F.3d 96 (1st Cir. 2006). “See 26 U.S.C. § 502 (profits of business not tax-exempt simply because profits ultimately paid to tax-exempt organization).”
Randolph Prods. Co. v. Manning, 176 F.2d 190 (3rd Cir. 1949). · cites it 2× “The single issue presented by this appeal is whether the income of a corporation derived exclusively from the rental of its property to a partnership consisting of husband atid wife who own all of the corporation’s capital stock, is “personal holding -company income” within the…”
In Re Las Vegas Monorail Co., 429 B.R. 770 (Bankr. D. Nev. 2010). · cites it 2× “Her article suggestions looking to 26 U.S.C. § 502 (c)(27) and its four-part test to assess whether an enterprise or organization is an instrumentality for tax purposes.”
N. California Cent. Servs., Inc. v. United States, 219 Ct. Cl. 60 (Ct. Cl. 1979). “, supra, stated its objection to the Treasury Regulation and example given very clearly: Charitably put (no pun intended), the Court has difficulty in finding any basis in the statute, 26 U.S.C. § 502 , for the underlined portion of the regulation.”
Vets. Found., a Non-Profit Corp. v. United States, 281 F.2d 912 (10th Cir. 1960). · cites it 2× “The trial court found that Veterans Foundation was organized for the primary purpose of carrying on a business for profit and, although under contractual arrangements it paid a percentage of its profits to Department of Utah, Disabled American Veterans, it was a feeder…”
Elisian Guild, Inc. v. United States, 412 F.2d 121 (1st Cir. 1969). “Such “feeder” organizations generally do not qualify for exemption because of 26 U.S.C. § 502 . 6 . “We do not mean to say that a profitable operation must lead to taxation while a nonprofitable one will be exempt.”
De La Salle Inst. v. United States, 195 F. Supp. 891 (N.D. Cal. 1961). “A “feeder” corporation, which is engaged in the carrying on of a business or trade for profit, and which pays its profits over to an exempt corporation [even to a church], is also subject to tax (1939 Internal Revenue Code, § 421(b) (1) (A); 1954 Internal Revenue Code, § 502…”
Redler Conveyor Co. v. Comm'r of Internal Revenue, 303 F.2d 567 (1st Cir. 1962). “558 ; Section 502(a) of the Internal Revenue Code of 1939, 26 U.S.C. § 502 (a) quoted in the margin.”
Vets. Found. v. Comm'r of Internal Revenue, 317 F.2d 456 (10th Cir. 1963). “The net profits are delivered to the Utah Department of the Disabled American Veterans, a tax-exempt charitable organization.”
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