[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.502-1]

[Page 49-50]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.502-1  Feeder organizations.

    (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

[[Page 50]]

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 Sec. 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 Sec. 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]