Internal Revenue Service
Revenue Ruling
Rev. Rul. 69-528
1969-2 C.B. 127
Sec. 502
Distinguished by Rev. Rul. 71-529
IRS Headnote
An organization regularly carrying on an investment service business that
would be unrelated trade or business if carried on by any of the exempt
organizations on whose behalf it operates, is not exempt under section
501(a) of the Code.
Full Text
Rev. Rul. 69-528
Advice has been requested whether the organization described below
qualifies for exemption from Federal income tax under section 501(a) of the
Internal Revenue Code of 1954 as an organization described in either
section 501(c)(2) or section 501(c)(3) of the Code.
The organization was formed to provide investment services on a fee basis
exclusively to organizations exempt from Federal income tax under section
501(c)(3) of the Code. It receives funds from the participating exempt
organizations, invests in common stocks, reinvests income and realized
appreciation, and upon request liquidates a participant's interest and
distributes the proceeds to the participant.
The organization is free from the control of the participants and has the
absolute and uncontrolled discretion in (1) investment of the property, (2)
sale of investments and reinvestment of the proceeds, (3) payment of taxes
and liens, (4) distributions of income and principal or the addition of
accumulated income to principal, and (5) dealing with the property and
managing the funds as if it were absolute owner thereof. In addition, a
participant's ownership interest in the property does not entitle such
participant to the whole or any part of the property or the right to call
for a partition, division, or accounting of the property.
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 from Federal income tax under section
501.
Section 1.502-1(b) of the Income Tax Regulations provides that a subsidiary
organization of an exempt 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.
Providing investment services on a regular basis for a fee is trade or
business ordinarily carried on for profit. If the services were regularly
provided by one tax-exempt organization for other tax-exempt organizations,
such activity would constitute unrelated trade or business. Based upon the
above-cited statute and regulations, it is held that this organization is
not exempt under section 501(a) of the Code as an organization described in
either section 501(c)(2) or section 501(c)(3) since it is regularly
carrying on the business of providing investment services that would be
unrelated trade or business if carried on by any of the tax-exempt
organizations on whose behalf it operates.
Compare Revenue Ruling 56-267, C.B. 1956-1, 206, which holds that where,
under certain specified conditions, exempt employees' trusts pool their
funds in a group trust to provide diversification of investment, the group
trust may qualify as an exempt employees' trust and the exempt status of
the separate trusts will not be adversely affected. That Revenue Ruling
specifies that in order to meet the qualification requirements under
section 401(a) of the Code, the group trust must itself be adopted as a
part of each employer's pension or profit-sharing plan, and that the group
trust instrument must prohibit that part of its corpus or income which
equitably belongs to any participating exempt employees' trust from being
used for or diverted to any purpose other than for the exclusive benefit of
the employees or their beneficiaries who are entitled to benefits under
such participating trust. Under such conditions, one or more trusts may
form part of a qualified plan, referred to in section 401(a), and maintain
exemption under section 501(a).
