Legal Definitions - feeder organization

A feeder organization is a business entity that operates a trade or business with the primary purpose of generating income to support a separate tax-exempt organization, such as a charity, educational institution, or religious group. While the tax-exempt organization benefits from the feeder's profits, the feeder organization itself is not tax-exempt and must pay taxes on its income, just like any other for-profit business.

Here are some examples to illustrate this concept:

• University Bookstore Chain

  Imagine a large university, which is a tax-exempt educational institution, that owns and operates a chain of bookstores both on and off campus. These bookstores sell textbooks, university merchandise, and general supplies to students, faculty, and the public. All profits generated by these bookstores are channeled back to the university to fund scholarships, research initiatives, or campus improvements.

  How it illustrates the term: The bookstores are conducting a commercial business (selling goods). Even though the university itself is tax-exempt, the bookstores are considered a feeder organization because they operate as a commercial enterprise whose sole purpose is to benefit the university. Therefore, the bookstores must pay income taxes on their profits, even though those profits ultimately support a non-profit entity.

• Charitable Foundation's Publishing House

  Consider a prominent charitable foundation, recognized as a tax-exempt organization dedicated to promoting literacy. This foundation establishes a separate publishing house that produces and sells books, educational materials, and journals related to its mission. The publishing house operates like any commercial publisher, marketing its products to a wide audience.

  How it illustrates the term: The publishing house is a business engaged in trade (publishing and selling books). The revenue generated from these sales, after covering operational costs, is transferred to the charitable foundation to fund its literacy programs. Because the publishing house's primary role is to generate taxable income for the benefit of the tax-exempt foundation, it is classified as a feeder organization and is subject to corporate income taxes.

• Hospital System's Commercial Laundry Service

  A large non-profit hospital system, which is a tax-exempt healthcare provider, creates a separate company to manage and operate all its laundry services. This company not only handles the hospital system's linens but also contracts with other local hospitals, hotels, and nursing homes to provide commercial laundry services. The profits from these external contracts are then directed back to the non-profit hospital system.

  How it illustrates the term: This separate laundry company is operating a commercial service business, generating revenue from external clients. The profits from these commercial operations are then transferred to the non-profit hospital system to help fund patient care, medical research, or facility upgrades. Since this laundry company is conducting a commercial trade specifically to benefit the tax-exempt hospital system, it acts as a feeder organization and must pay taxes on its earnings.