Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 68-26

1968-1 C.B. 272

Sec. 501

Sec. 502

IRS Headnote

A nonprofit organization controlled by a church to print and sell educational and religious material to the church's parochial school system is not a feeder organization defined in section 502 of the Internal Revenue Code of 1954 when it sells the material at a profit which is returned annually to the parochial school system. Thus, it may be exempt from Federal income tax under section 501(c)(3) of the Code.

Full Text

Rev. Rul. 68-26

The Internal Revenue Service has been asked whether the nonprofit organization described below is a feeder organization within the meaning of section 502 of the Internal Revenue Code of 1954.

The organization was incorporated without stock by a church to provide a standardized source of educational and religious material for the church's parochial school system. Its affairs are managed by a board of directors composed of clergymen appointed by the church and responsible to the church for the organization's finances and operations. The organization prints material which is prepared and edited by the school system. The organization sells the material exclusively to the parochial school system. All profits are returned annually to the school system.

Section 502 of the Code provides that an organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt under section 501 on the ground that all of its profits are payable to one or more organizations exempt under section 501 of the Code from taxation.

Section 1.502-1(a) of the Income Tax Regulations provides that in determining the primary purpose of an organization, all the circumstances must be considered, including the size and extent of its exempt activities.

Section 1.502-1(b) of the regulations provides that 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, the former's 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. This is illustrated by the example of an organization operated for the sole purpose of furnishing electric power to an exempt parent or to a group of related exempt organizations, having a common parent, and such power is used in carrying on exempt functions.

Although a technical parent-subsidiary relationship between the church and the organization is lacking because of the nonstock character of the organization, a substantially similar relationship does in fact exist through the control and close supervision of its affairs by the church. In printing material which has been prepared by the parochial school system, the organization is carrying out an integral part of the activities of the church, the parent organization. Accordingly, it qualifies for exemption from Federal income tax under section 501(c)(3) of the Code because it is operated as an integral part of the exempt activities of the parent. Furthermore, since the sole source of its profits is the sales made to a component of its parent organization, the profits are essentially a matter of accounting among the organizations involved and thus, it is not a feeder described in section 502 of the Code.

An organization which considers itself within the scope of this Revenue Ruling must, in order to establish exemption under section 501(c)(3) of the Code, file an application on Form 1023, Exemption Application, with the District Director of Internal Revenue for the internal revenue district in which is located the principal place of business or principal office of the organization. See section 1.501(a)-1 of the regulations.