## Facts

- Piety, Inc. was a Nebraska nonprofit corporation formed to raise funds for charitable, religious, and nonprofit ambulance organizations recognized as exempt under I.R.C. § 501(c)(3).
- Piety’s sole significant activity was operating bingo games in a rented building in Council Bluffs, Iowa.
- Under the lease arrangement, the landlord provided the premises and all labor for the bingo operation; Piety’s rental payments covered both rent and labor costs.
- Piety distributed the net profits from bingo operations to various § 501(c)(3) organizations.
- The IRS denied Piety recognition as a § 501(c)(3) organization, concluding it was a “feeder organization” under I.R.C. § 502(a) because its primary purpose was carrying on a trade or business for profit.

## Issues

1. Whether an organization that operates commercial bingo games and remits all net profits to § 501(c)(3) charities is “operated exclusively” for exempt purposes under I.R.C. § 501(c)(3).
2. Whether such an organization is a nonexempt “feeder organization” under I.R.C. § 502(a) when its primary activity is a revenue-producing business.

## Decision

- The Tax Court upheld the Commissioner’s adverse determination.
- Piety did not qualify for recognition as exempt under § 501(c)(3).
- The court held Piety was a feeder organization under § 502(a) because it was operated for the primary purpose of carrying on a trade or business (bingo).
- Distributing all profits to § 501(c)(3) organizations did not cure the organization’s primary commercial purpose.
- Declaratory judgment under I.R.C. § 7428 was entered for the Commissioner on the administrative record.

## Legal Principles

- Under I.R.C. § 502(a), an organization operated primarily to carry on a trade or business for profit is not exempt merely because it distributes its profits to § 501(c)(3) organizations.
- For § 501(c)(3), “operated exclusively” requires that any nonexempt purpose be insubstantial; a substantial commercial purpose defeats exemption even if profits are devoted to charitable recipients.
- The operational test examines the organization’s actual activities and the purposes those activities serve; indirect charitable benefit through profit distribution does not transform a commercial operation into an exempt activity.
- Continuous, business-like operation of revenue-generating gaming, particularly using paid labor supplied through a commercial arrangement, supports feeder-organization treatment.

## Conclusion

Piety’s direct operations were a commercial bingo business, and its charitable distributions were a downstream use of earnings rather than an exempt operational purpose; therefore, it failed the § 501(c)(3) operational test and was barred from exemption as a feeder organization under § 502(a).


Piety, Inc. v. Commissioner, 82 T.C. 193 (1984)