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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 73-127

1973-1 C.B. 221

Section 501 -- Tax-Exempt Organizations 

Caution: Distinguished by Rev. Rul. 76-94 

IRS Headnote

A nonprofit organization that operates a cut-price retail grocery outlet
and allocates a small portion of its earnings to provide on-the-job
training to hard-core unemployed does not qualify for exemption from income

Full Text

Rev. Rul. 73-127 

Advice has been requested whether the activities of the organization
described below qualify for exemption from Federal income tax under section
501(c)(3) of the Internal Revenue Code of 1954 where the organization
otherwise qualifies for such exemption. The organization was formed to
operate a retail grocery store to sell food to residents of a poverty area
at prices substantially lower than those charged by competing grocery
stores, to provide free grocery delivery service to residents who need it,
to participate in the Federal food stamp program, and to provide job
training for unemployed residents. The store is operated by a staff of
employees experienced in the retail food industry. The store is operated in
a manner similar to profit-making businesses in the area, but has a smaller
markup than the competing stores. The organization is organized as a
nonprofit corporation and no individual has any proprietary interest in its
earnings. The store's gross earnings are used principally to pay salaries
and other customary operating expenses incurred in the operation of a
retail grocery store and to expand the operations of the store. About two
percent of earnings is retained as surplus, to be used as a contingency

About four percent of the store's earnings is allocated for use in a
continuous training program for the hardcore unemployed. The organization
selects only individuals from the hardcore unemployed of the poverty area
for training in the various jobs in a retail food store. The training
program includes lectures, demonstrations of retail store techniques, and
on-the-job training. A trainee receives a small salary during the training
period. At the conclusion of his training, he is qualified for employment
in the retail food industry. The organization does not plan for the
majority of the trainees to continue as its employees. Rather, they are
expected to seek employment elsewhere in the retail food industry and new
trainees are selected for the program. 

Section 501(c)(3) of the Code provides for the exemption from Federal
income tax of organizations organized and operated exclusively for
charitable or educational purposes. 

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that to
be exempt an organization must be both organized and operated exclusively
for one or more exempt purposes. 

Section 1.501(c)(3)-1(d)(2) of the regulations defines the term
"charitable" as used in section 501(c)(3) of the Code as including the
relief of the poor and distressed or of the underprivileged and the
advancement of education. 

Section 1.501(c)(3)-1(d)(3)(i)(a) of the regulations defines the term
"educational" as including the instruction or training of the individual
for the purpose of improving or developing his capabilities. 

The organization's purpose of providing job training for the hard-core
unemployed is charitable and educational within the meaning of the common
law concept of charity, section 501(c)(3) of the Code, and sections
1.501(c)(3)-1(d)(2) and 1.501(c)(3)-1(d)(3)(i)(a) of the regulations.
However, the organization's purpose of operating a retail grocery store
where food is sold to residents of a poverty area at low prices is not
recognized as a charitable purpose under the basic common law concept of
charity and within the meaning of section 501(c)(3) of the Code and section
1.501(c)(3)-1(d)(2) of the regulations. 

Although the nature of the job training in this case is primarily
"on-the-job" training and thus requires the existence of an operating
business as its "campus," the size and manner of the food store operation
and the facts relating to the actual purpose of the undertaking evidence
that the operation of the store as a low cost retail grocery outlet is in
itself an independent objective of the organization. This is true
notwithstanding that the store operation is used in part as a vehicle for
the training program. It is conducted on a scale larger than is reasonably
necessary for the performance of the organization's training program and
was not intended to, nor does it in fact, serve solely as a vehicle for
carrying out the training program of the organization. 

Neither may the store operation be characterized as an investment or
business undertaking for the production of income for use in carrying on
qualified charitable purposes of the organization. The facts show that such
is not the purpose of the undertaking, but that the store is operated in
part for the purpose of providing a low cost retail grocery outlet in the
community as an end in itself. 

Thus, it is concluded that operation of the store and operation of the
training program are two distinct purposes, that is, ends or objects sought
to be accomplished by the organization through use of its resources. Since
the former purpose is not a recognized charitable purpose, the organization
is not organized and operated exclusively for charitable purposes. 

Accordingly, it is held that the organization does not qualify for
recognition of exemption from Federal income tax under section 501(c)(3) of
the Code. 

Compare Revenue Ruling 73-128, this page, which holds that an organization
providing job training for certain residents of an economically depressed
community may qualify as a charitable organization where the manufacture
and sale of merchandise is the means by which it accomplishes its exempt