381 F.2d 399, 180 Ct. Cl. 659 (Ct. Cl. 1967)
Alice Phelan Sullivan Corp. v.
Whether the Alice Phelan Sullivan Corporation qualified as an organization exempt from federal income tax under section 501(c)(3), or was instead a taxable 'feeder organization' under section 502 because its primary purpose was carrying on a trade or business for profit, with profits merely destined for charitable use.
An organization is exempt under section 501(c)(3) if it is organized and operated exclusively (i.e., primarily) for religious, charitable, or educational purposes, no part of its net earnings inures to the benefit of private individuals, and it lacks a substantial nonexempt purpose. Under section 502, an organization operated for the primary purpose of carrying on a trade or business for profit is not exempt merely because all its profits are payable to one or more exempt organizations (the feeder-organization rule). The existence of income-producing activity does not per se defeat exemption if such activity is in furtherance of the charitable purpose or is merely incidental, and if the organization's primary purpose remains charitable.
The Court of Claims held that APSC was operated primarily for charitable purposes within the meaning of section 501(c)(3) and was not a section 502 feeder organization; therefore, it was entitled to exemption and a refund of the income taxes assessed for the years in question.
The decision is a touchstone for distinguishing exempt charities from nonexempt feeder organizations. It teaches that: (1) the primary-purpose test governs; (2) revenue-generating activity alone does not destroy exemption; (3) section 502 bars exemption where an entity's principal aim is business for profit with mere downstream charitable remittance; and (4) concerns about competitive fairness are addressed through unrelated business income rules rather than categorical denial of exemption. For students, it provides a framework for exam analysis on organizational purpose, operational test, feeder doctrine, and the interplay among sections 501(c)(3), 502, and the UBIT regime.