PRIA, Government Policy, Made Personal

Summary

If an organization is run mainly to make a profit, it can't be tax-exempt under section 501 because it gives all profits to one or more section 501 organizations; "trade or business" doesn't include certain rents (see section 512(b)(3) if 512 applied), work done almost entirely without pay, or sales of mostly donated goods.

Title 26, §502

Internal Revenue Code, Source: USLM XML via OLRC

(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 rule

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