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providing an exception to the feeder organization rules under
section 502.23
Section 1.502-1(b), Income Tax Regs., provides as follows:
(b) 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, 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
23 Although these regulations relate expressly to
determining whether an organization is a feeder organization
within the meaning of sec. 502 (an issue that respondent does not
raise in the instant case), this Court previously has referred to
these regulations in applying the integral part doctrine in the
context of sec. 501(c)(3) exemptions. See Geisinger Health Plan
v. Commissioner, 100 T.C. 394, 401 (1993), affd. 30 F.3d 494 (3d
Cir. 1994).
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