§502 — Title 26 Internal Revenue Code | U.S. Code

Summary

An organization that mainly runs a for‑profit business cannot be tax‑exempt under section 501 just because it pays all its profits to one or more groups that are tax‑exempt under section 501. The term "trade or business" does not include: rental income like that described in section 512(b)(3) if that section applied; a business where almost all the work is done by unpaid people; or selling goods when most of those goods were received as gifts or donations.

Title 26, §502

Internal Revenue Code — Source: USLM XML via OLRC

(a)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)For 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.

Notes & Related Subsidiaries

Editorial Notes

Amendments

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 Subsidiaries

Effective Date

of 1969 AmendmentAmendment 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.

§502 Feeder organizations