Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/fed/irc28.asc

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502. Feeder organizations
    (a) General rule. -- An organization operated for the
primary purpose of carrying on a trade or business for profit
shall not be exempt from taxation under section 501 on the ground
that all of its profits are payable to one or more organizations
exempt from taxation under section 501.
    (b) Special rule. -- For puposes of this section, the term
"trade or business" shall not include --
    (1) the deriving of rents which would be excluded under
section 512(b)(3), if section 512 applied to the organization,
    (2) any trade or business in which substantially all the
work in carrying on such trade or business is performed for the
organization without compensation, or
    (3) any trade or business which is the selling of
merchandise, substantially all of which has been received by the
organization as gifts or contributions.

503.  Requirements for exemption
    (a) Denial of exemption to organizations engaged in
prohibited trasactions. --
    (1) General rule. --
    (A) An organization described in section 501(c)(17) shall
not be exempt from taxation under section 501(a) if it has
engaged in a prohibited trasaction after December 31, 1959.
    (B) An organization described in section 401(a) which is
referred to in section 4975(g)(2) or (3) shall not be exempt from
taxation under section 501(a) if it has engaged in a prohibited
transaction after March 1, 1954.
    (C) An organization described in section 501(c)(18) shall
not be exempt from taxation under section 501(a) if it has
engaged in a prohibited transaction after December 31, 1969.
    (2) Taxable years affected. -- An organization described in
section 501(c)(17) or (18) or paragraph (1)(B) shall be denied
exemption from taxation under section 501(a) by reason of
paragraph (1) only for taxable years after the taxable year
during which it is notified by the Secretary that it has engaged
in a prohibited transaction, unless such organization entered
into such prohibited transaction with the purpose of diverting
corpus or income of the organization from its exempt purposes,
and such transaction involved a substantial part of the corpus or
income of such organization.
    (b) Prohibited transactions. -- For purposes of this
section, the term "prohibited transaction" means any transaction
in which an organization subject to the provisions of this
section --
    (1) lenda any part of its income or corpus, without the
receipt of adequate security and a reasonable rate of interest,
to;
    (2) pays any compensation, in excess of a reasonable
allowance for salaries or otherr compensation for personal
services actually rendered, to;
    (3) makes any part of its services available on a
preferential basis to;
    (4) makes any substantial purchase of securities or any

other property, for more than adequate consideration in money or
money's worth, from;
    (5) sells any substantial part of its securities or other
property, for less than an adequate consideration in money or
money's worth, to; or
    (6) engages in any other transaction which results in a
substantial diversion of its income or corpus to;
the creator of such organization (if a trust); a person who has
made a substantial contribution to such organization; a member of
the family (as defined in section 267(c)(4)) of an individual who
is the creator of such trust or who has made a substantial
contribution to such organization; or a corporation controlled by
such creator or person through the ownerwhip, directly or
indirectly, of 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent of
more of the total value of shares of all classes of stock of the
corporation.
    (c) Future status of oganizations denied exemption. -- Any
organization described in section 501(c)(17) or (18) or
subsection (a)(1)(B) which is denied exemption under 501(a) by
reason of subsection (a) of this section, with respect to any
taxable year following the taxable year in which notice of denial
of exemption was received, may, under regulations prescribed by
the Secretary, file claim for exemption, and if the Secretary,
pursuant to such regulations, is satisfied that such organization
will not knowingly again engage in a prohibited transaction, such
organization shall be exempt with respect to taxable years after
the year in which such claim is filed.
    (d) Repealed. Pub.L. 101-508, Title XI,
(Section)11801(a)(22), Nov. 5, 1990, 104 Stat. 1388-521.)
    (e) Special rules. -- For purposes of subsection (b)(1), a
bond, debenture, note, or certificate or other evidence of
indebtedness (hereinafter in this subsection referred to as
"obligation") shall not be treated as a loan made without the
recept of adequate security, if --
    (1) such obligation is acquired --
    (A) on the market, either (i) at the price of the obligation
prevailing on a national securities exchange which is registered
with the Securities and Exchange Commission, or (ii) if the
obligation is not traded on such a national securities exchange,
at a price not less favorable to the trust than the offering
price for the obligation as established by current bid and asked
prices quoted by persons independent of the issuer;
    (B) from an underwriter, at a price (i) not in excess of the
public offering price for the obligation as set forth in a
prospectus or offering circular filed with the Securities and
Exchange Commission, and (ii) at which a substantial portion of
the same issue is acquired by persons independent of the issuer;
or
    (C) directly from the issuer, at a price not less favorable
to the trust than the price paid currently for a substantial
portion of the same issue by persons independent of the issuer;
    (2) immediately following acquisition of such obligation --
    (A) not more than 25 percent of the aggregate amount of
obligations issued in such issue and outstanding at the time of
acquisition is held by the trust, and
    (B) at least 50 percent of the aggregate amount referred to
in subparagraph (A) is held py persons independent of the issuer;
and
    (3) immediately following acquisition of the obligation, not
more than 25 percent of the assets of the trust is invested in
obligations of persons described in subsection (b).
    (f) Loans with respect to which eimployers are prohibited
from pledging certain assets. -- Subsection (b)(1) shall not
apply to a loan made by a trust described in section 401(a) to
the employer (or to a renewal of such a loan or, if the loan is
repayable upon demand, to a continuation of such a loan) if the
loan bears a reasonable rate of interest, and if (in the case of
a making or renewal) --
    (1) the employer is prohibited (at the time of such making
or renewal) by any law of the United States or regulation
thereunder from directly or indirectly pledging, as security for
such a loan, a particular class or classes of his assets the
value of which (at such time) represents more than one-half of
the value of all his assets;
    (2) the making or renewal, as the case may be, is approved
in writing as an investment which is consistent with the exempt
purposes of the trust by a trustee who is independent of the
employer, and no other such trustee had previously reused to give
such written approval; and
    (3) immediately following the making or renewal, as the case
may be the aggregate amount loaned by the trust to the employer,
without the receipt of adequate security, does not exceed 25
percent of the value of all the assets of the trust.
For purposes of paragraph (2), the term "trustee" means, with
respect to any trust for which there is more than one trustee who
is independent of the employer, a majority of such independent
trustees.  For purposes of paragraph (3), the determination as to
whether any amount loaned by the trust to the employer is loaned
without the receipt of adequate security shall be made without
regard to subsection (e).

504.  Status after organization ceases to qualify for exemption
under section 501(c)(3) because of substantial lobbying or
because of political activities
    (a) General rule. -- An organization which --
    (1) was exempt (or was determined by the Secretary to be
exempt) from taxation under section 501(a) by reason of being an
organization described in section 501(c)(3), and
    (2) is not an organization described in section 501(c)(3) --
    (A) by reason of carrying on propaganda, or otherwise
attempting, to influence legislation, or
    (B) by reason of participating in, or intervening in, any
political campaign on behalf of (or in opposition to) any
candidate for public office,
shall not at any time thereafter be treated as an organization
described in section 501(c)(4).
    (b) Regulations to prevent avoidance. -- The Secretary shall
prescribe such regulations as may be necessary or appropriate to
prevent the avoidance of subsection (a), including regulations
relating to a direct or indirect transfer of all or part of the
assets of an organization to an organization controlled (directly
or indirectly) by the same person or persons who control the
transferor organization.
    (c) Churches, etc. -- Subsection (a) shall not apply to any
organization which is a disqualified organization within the
meaning of section 501(h)(5) (relating to churches, ets.) for the
taxable year immediately preceding the first taxable year for
which such organization is described in paragraph (2) of
subsection (a).

505.  Additional requirements for organizations described in
paragraph (9), (17), or (20) of section 501(c)
    (a) Certain requirements must be met in the case of
organizations described in paragraph (9) or (20) of section
501(c). --
    (1) Voluntary employees' beneficiary associations, etc. --
An organization described in paragraph (9) or (20) of subsection
(c) of section 501 which is part of a plan shall not be exempt
from tax under section 501(a) unless such plan meets the
requirements of subsection (b) of this section.
    (2) Exception for collective bargaining agreements. --
Paragraph (1) shall not apply to any organization which is part
of a plan maintained pursuant to an agreement between employee
representatives and 1 or more employers if the Secretary finds
that such agreement is a collective bargaining agreement and that
such plan was the subject of good faith bargaining between such
employee representatives and such employer or employers.
    (b) Nondiscrimination requirements. --
    (1) In general. -- Except as otherwise provided in this
subsection, a plan meets the requirements of this subsection only
if --
    (A) each class of benefits under te plan is provided under a
classification of employees which is set forth in the plan and
which if found by the Secretary not to be discriminatory in favor
of employees who are highly compensated individuals, and
    (B) in the case of each class of benefits, such benefits do
not discriminate in favor of employees who are highly compensated
individuals.
A life insurance, disability, severance pay, or supplemental
unemployment compensation benefit shall not be considered to fail
to meet the requirements of subparagraph (B) merely because the
benefits available bear a uniform relationship to the total
compensation, or the basic or regular rate of compensation, of
employees covered by the plan.
    (2) Exclusion of certain employees. -- For purposes of
paragraph (1), there may be excluded from consideration --
    (A) employees who have not completed 3 years of service,
    (B) employees who have not attained age 21,
    (C) seasonal employees or less than half-time employees,
    (D) employees not included in the plan who are included in a
unit of employees covered by an agreement between employee
representatives and 1 or more employers which the Secretary finds
to be a collective bargaining agreement if the class of benefits
involved was the subject of good faith bargaining between such
employee representatives and such employer or employers, and
    (E) employees who are nonresident aliens and who receive no
earned income (within the meaning of section 911(d)(2)) from the
employer which constitutes income from sources within the United
States (within the meaning of section 861(a)(3)).
    (3) Application of subsection where other nondiscrimination
rules provided. -- In the case of any benefit for which a
provision of this chapter other than this subsection provides
nondiscrimination rules, paragraph (1) shall not apply but the
requirements of this subsection shall be met only if the
nondiscrimination rules so provided are satisfied with respect to
such benefit.
    (4) Aggregation rules.  At the delection of the mployer, 2
or more plans of such employer may be treated as 1 plan for
purposes of this subsection.
    (5) Highly compensated individual. -- For purposes of this
subsection, the determination as to whether an individual is a
highly compensated individual shall be made under rules similar
to the rules for determining whether an individual is a highly
compensated employee (within the meaning of section 414(q)).
    (6) Compensation. -- For purposes of this subsection, the
term "compensation" has the meaning given such term by section
414(s).
    (7) $200,000 compensation limit. -- A plan shall not be
treated as meeting the requirements of this subsection unless
under the plan the annual compensation of each employee taken
into account for any year does not exceed $200,000. The Secretary
shall adjust the $200,000 amount at the same time and in the same
manner as under section 415(d).  This paragraph shall not apply
in determining whether the requirements of section 79(d) are met.
    (c) Requirement that organization notify Secretary that it
is applying for tax-exempt status. --
    (1) In generl. -- An organization shall not be treated as an
organization described in paragraph (9), (17), or (20) of section
501(c) --
    (A) unless it has given notice to the Secretary, in such
manner as the Secretary my be regulations prescribe, that it is
apploying for recognition of such status, or
    (B) for any period before the giving of such notice, if such
notice is given after the time prescribed by the Secretary by
regulations for giving notice under this subsection.
    (2) Special rule for existing organizations. -- In the case
of any organization in existence on July 18, 1984, the time for
giving notice under paragraph (1) shall not expire before the
date 1 year after such date of the enactment.

507.  Termination of private foundation status
    (a) General rule. -- Except as provided in subsection (b),
the status of any organization as a private foundation shall be
terminated only if --
    (1) such organization notifies the Secretary (at such time
and in such manner as the Secretary may be regulations prescribe)
of its intent to accomplish such termination, or
    (2)(A) with respect to such organization, there have been
either willful repeated acts (or failures to act), or a willful
and flagrant act (or failure to act), giving rise to liability
for tax under chapter 42, and
    (B) the Secretary notifies such organization that, by reason
of subparagraph (A), such organization is liable for the tax
imposed by subsection (c),
and either such organization pays the tax imposed by subsection
(c) for any portion not abated under subsection (g)) or the
entire amount of such tax is abated under subsection (g).
    (b) Special rules. --
    (1) Transfer to, or operation as, public charity. -- The
status as a private foundation of any organization, with respect
to which there have not been either willful repeated acts (or
failures to act) or a willful and flagrant act (or failure to
act) giving rise to liability for tax under chapter 42, shall be
terminated if --
    (A) such organization distributes all of its net assets to
one or more organizations described in section 170(b)(1)(A)
(other than in clauses (vii) and (viii)) each of which has been
in existence and so described for a continuous period of at least
60 calendar months immediately preceding such distribution, or
    (B)(i) such organization meets the requirements of paragraph
(1), (2), or (3) of section 509(a) by the end of the 12-month
period beginning with its first taxable year which begins after
December 31, 1969, or for a continuous period of 60 calendar
months beginning with the first day of any taxable year which
begins after December 31, 1969,
    (ii) such organization notifies the Secretary (in such
manner as the Secretary may by regulations prescribe) before the
commencement of such 12-month or 60-month period (or before the
90th day after the day on which regulations first prescribed
under this subsection become final) that it is terminating its
private foundation statue, and
    (iii) such organization establishes to the satisfaction of
the Secretary (in such manner as the Secretary may by regulations
prescribe) immediately after the expiration of such 12-month or
60-month period, that such organization has complied with clause
(i).
If an organization gives notice under subparagraph (B)(ii) of the
commencement of a 60-month period and such organization fails to
meet the requirements of paragraph (1), (2), or (3) of section
509(a) for the entire 60-month period, this part and chapter 42
shall not apply to such organization for any taxable year within
such 60-month period for which it does meet such requirements.
    (2) Transferee foundations. -- For pusposes of this part, in
the case of a transfer of assets of any private foundation to
another private foundation pursuant to any liquidation, merger,
redemption, recapitalization, or other adjustment, organization,
or reorganization, the transferee foundation shall not be treated
as a newly created organization.
    (c) Imposition of tax. -- There is hereby imposed on each
organization which is referred to in subsection (a) a tax equal
to the lower of --
    (1) the amount which the private foundation substantiates by
adequated records or other corroborating evidence as the
aggregate tax benefit resulting from the section 501(c)(3) status
of such foundation, or
(2) the value of the net assets of such foundation.
    (d) Aggregate tax benefits. --
    (1) In general. -- For purposes of subsection (c), the
aggregate tax benefit resulting from the section 501(c)(3) status
of any private foundation is the sum of --
    (A) the aggregate increases in tax under shapters 1, 11, and
12 (or the corresponding provisions of prior law) which would
have been imposed with respect to all substantial contributors to
the foundation if deductions for all contributions made by such
contributors to the foundation after February 28, 1913, had been
disallowed, and
    (B) the aggregate increses in tax under chapter 1 (or the
corresponding provisions of prior law) which would have been
imposed with respect to the income of the private foundation for
taxable years beginning after December 31, 1912, if (i) it had
not been exempt from tax under section 501(a) (or the
corresponding provisions of prior law), and (ii) in the case of a
trust, deductions under section 642(c) (or the corresponding
provisions of prior law) had been limited to 20 percent of the
taxable income of the trust (computed without benefit of secton
642(c) but with the benefits of section 170(b)(1)(A)), and
    (C) interest on the increases in tax determined under
subparagraphs (A) and (B) from the first date on which each such
increase would have been due and payable to the date on which the
organization ceases to be a private foundation.
    (2) Substantial contributor. --
    (A) Definition. -- For purposes of paragraph (1), the term
"substantial contributor" means any person who contributed or
bequeathed an aggregate amount of more than $5,000 to the private
foundation, if such amount is more than 2 percent of the total
contributions and bequests received by the foundation before the
close of the taxable year of the foundation in which the
contribution or bequest is received by the foundation from such
person.  In the case of a trust, the term "substantial
contributor" also means the creator of the trust.
    (B) Special rules. -- For purposes of subparagraph (A) --
    (i) each contribution or bequest shall be valued at fair
market value on the date it was received,
    (ii) in the case of a foundation which is in existence on
October 9, 1969, all contributions and bequests received on or
before such date shall be treated (except for purposes of clause
(i)) as is received on such date,
    (iii) an individual shall be treated as making all
contributions and bequests made by his spouse, and
    (iv) any person who is a substantial contributor on any date
shall remain a substantial contributor for all subsequent
periods.
    (C) Person ceases to be substantial contributor in certain
cases. --
    (1) In general. -- A person shall cease to be treated as a
substantial contributor with respect to any private foundation as
of the close of any taxable year of such foundation if --
    (I) during the 10-year period ending at the close of such
taxable year such person (and all related persons) have not made
any contribution to such private foundation,
    (II) at no time during such 10-year period was such person
(or any related person) a foundation manager of such private
foundation, and
    (III) the aggregate contributions made by such person (and
related persons) are determined by the Secretary to be
insignificant when compared to the aggregate amount of
contributions to such foundation by one other person.
For purposes of subclause (III), appreciation on contributions
while held by the foundation shall be taken into account.
    (ii) Related person. -- For purposes of clause (i), the term
"related person" means, with respect to any person, any other
person who would be a disqualified person (within the meaning of
section 4946) by reason of his relationship to such person.  In
the case of a contributor which is a corporation, the term also
includes any officer or director of such corporation.
    (3) Regulations. -- For purposes of this section, the
determination as to whether and to what extent there would have
been any increase in tax shall be made in accordance with
regulations prescribed by the Secretary.
    (e) Value of assets. -- For purposes of subsection (c), the
value of the net assets shall be determined at whichever time
such value is higher: (1) the first day on which action is taken
by the organization which culminates in its ceasing to be a
private foundation, or (2) the date on which it ceases to be a
private foundation.
    (f) Liability in case of transfers of assets from private
foundation. -- For purposes of determining liability for the tax
imposed by subsection (c) in the case of assets transferred by
the private foundation, such tax shall be deemed to have been
imposed on the first day on which action is taken by the
organization which culminates in its ceasing to be a private
foundation.
    (g) Abatement of taxes. -- The Secretary may abate the
unpaid portion of the assessment of any tax imposed by subsection
(c), or any liability in respect thereof, if --
    (1) the private foundation distributes all of its net assets
to one or more organizations described in section 170(b)(1)(A)
(other than in clauses (vii) and (viii)) each of which has been
in existence and so described for a continuous period of at least
60 calendar months, or
    (2) following the notification prescribed in section 6104(c)
to the appropriate State officer, such State officer within one
year notifies the Secretary, in such manner as the Secretary may
be regulations prescribe, that corrective action has been
initiated pursuant to State law to insure that the assets of such
private foundation are preserved for such charitable or other
purposes specified in section 501(c)(3) as may be ordered or
approved by a court of competent jurisdiction, and upon
completion of the corrective action, the Secretary receives
certification from the appropriate State officer that such action
has resulted in such preservation of assets.

508.  Special rules with respect to section 501(c)(3)
organizations
    (a) New organizations must notify Secretary that they are
applying for recognition of section 501(c)(3) status. -- Except
as provided in subsection (c), an organization organized after
October 9, 1969, shall not be treated as an organization
described in section 501(c)(3) --
    (1) unless it has given notice to the Secretary, in such
manner as the Secretary may by regulations prescribe, that it is
applying for recognition of such status, or
    (2) for any period before the giving of such notice, if such
notice is given after the time prescribed by the Secretary by
regulations for giving notice under this subsection.
    (b) Presumption that organizations are private foundations.
-- Except as provided in subsection (c), any organization
(including an organization in existence on October 9, 1969) which
is described in section 501(c)(3) and which does not notify the
Secretary, at such time and in such manner as the Secretary may
by regulations prescribe, that it is not a private foundation
shall be presumed to be a private foundation.
    (c) Exceptions. --
    (1) Mandatory exceptions. -- Subsections (a) and (b) shall
not apply to --
    (A) churches, their integrated auxiliaries, and conventions
or associations of churches, or
    (B) any organization which is not a private foundation (as
defined in section 509(a)) and the gross receipts of which in
each taxable year are normally not more than $5,000.
    (2) Exceptions by regulations. -- The Secretary may by
regulations exempt (to the extent and subject to such conditions
as may be prescribed in such regulations) from the provisions of
subsection (a) or (b) or both --
    (A) educational organizations described in section
170(b)(1)(A)(ii), and
    (B) any other class of organizations with respect to which
the Secretary determines that full compliance with the provisions
of subsections (a) and (b) is not necessary to the efficient
administration of the provisions of this title relating to
private foundations.
    (d) Disallowance of certain charitable, etc., deductions. --
    (1) Gift or bequest to organizations subject to section
507(c) tax. --  No gift or bequest made to an organization upon
which the tax provided by section 507(c) has been imposed shall
be allowed as a deduction under section 170, 545(b)(2),
556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or
bequest is made --
    (A) by any person after notification is made under section
507(a), or
    (B) by a substantial contributor (as defined in section
507(d)(2)) in his taxable year which includes the first day on
which action is taken by such organization which culminates in
the imposition of tax under section 507(c) and any subsequent
taxable year.
    (2) Gift or bequest to taxable private foundation, section
4947 trust, etc. -- No gift or bequest made to an organization
shall be allowed as a deduction under section 170, 545(b)(2),
556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or
bequest is made --
    (A) to a private foundation or trust described in section
4947 in a taxable year for which it fails to meet the
requirements of subsection (e) (determined without regard to
subsection (e)(2)), or
    (B) to any organization in a period for which it is not
treated as an organization described in section 501(c)(3) by
reason of subsection (a).
    (3) Exception. -- Paragraph (1) shall not apply if the
entire amount of the unpaid portion of the tax imposed by section
5079c) is abated by the Secretary under section 507(g).
    (e) Governing instruments. --
    (1) General rule. -- A private foundation shall not be
exempt from taxation under section 501(a) unless its governing
instrumet includes provisions the effects of which are --
    (A) to require its income for each taxable year to be
distributed at such time and in such manner as not to subject the
foundation to tax under section 4942, and
    (B) to prohibit the foundation from engaging in any act of
self-dealing (as defined in section 494(d)), from retaining any
excess business holdings (as defined in section 4943(c)), from
making any investments in such manner to subject the foundation
to tax under section 4944, and from making any taxable
expenditures (as defined in section 4945(d)).
    (2) Special rules for existing private foundations. -- In
the case of any organization organized before January 1, 1970,
paragraph (1) shall not apply --
    (A) to any period after December 31, 1971, during the
pendency of any judicial proceeding begun before January 1, 1972,
by the private foundation which is necessary to reform, or to
excuse such foundation from compliance with, its governing
instrument or any other instrument in order to meet the
requirements of paragraph (1), and
    (B) to any period after the termination of any judicial
proceeding described in subparagraph (A) during which its
governing instrument or any other instrument does not permit it
to meet the requirements of paragraph (1).

509.  Private foundation defined
    (a) General rule. -- For purposes of this title, the term
"private foundation" means a domestic or foreign organization
described in section 501(c)(3) other than --
    (1) an organization described in section 170(b)(1)(A) (other
than in clauses (vii) and (viii));
    (2) an organization which --
    (A) normally receives more than one-third of its support in
each taxable year from any combination of --
    (i) gifts, grants, contributions, or membership fees, and
    (ii) gross receipts from admissions, sales of merchandise,
performance of services, or furnishing of facilities, in an
activity which is not an unrelated trade or business (within the
meaning of section 513), not including such receipts from any
person, or from any bureau or similar agency of a governmental
unit (as described in section 170(c)(1)), in any taxable year to
the extent such receipts exceed the greater of $5,000 or 1
percent of the organization's support in such taxable year, from
persons other than disqualified persons (as defined in section
4946) with respect to the organization, from governmental units
described in section 170(c)(1), or from organizations described
in section 170(b)(1)(A) (other than in clauses (vii) and (viii)),
and
    (B) normally receives not more than one-third of its support
in each taxable year from the sum of --
    (i) gross investment income (as defined in subsection (e))
and
    (ii) the excess (if any) of the amount of the unrelated
business taxable income (as defined in section 512) over the
amount of the tax imposed by section 511;
    (3) an organization which --
    (A) is organized, and at all times thereafter is operated,
exclusively for the benefit of, to perform the functions of, or
to carry out the purposes of one or more specified organizations
described in paragraph (1) or (2),
    (B) is operated, supervised, or controlled by or in
connection with one or more organizations described in paragraph
(1) or (2), and
    (C) is not controlled directly or indirectly by one or more
disqualified persons (as defined in section 4946) other than
foundation managers and other than one or more organizations
described in paragraph (1) or (2); and
    (4) an organization which is organized and operated
exclusively for testing for public safety.
For purposes of paragraph (3), an organization described in
paragraph (2) shall be deemed to include an organization
described in section 501(c)(4), (5) or (6) which would be
described in paragraph (2) if it were an organization described
in section 501(c)(3).
    (b) Continuation of private foundation status. -- For
purposes of this title, if an organization is a private
foundation (within the meaning of subsection (a)) on October 9,
1969, or becomes a private foundation on any subsequent date,
such organization shall be treated as a private foundation for
all periods after October 9, 1969, or after such subsequent date,
unless its status as such is terminated under section 507.
    (c) Status of organization after termination of private
foundation status. -- For purposes of this part, an organization
the status of which as a private foundation is terminated under
section 507 shall (except as provided in section 506(b)(2)) be
treated as an organization created on the day after the date of
such termination.
    (d) Definition of support. -- For purposes of this part and
chapter 42, the term "support" includes (but is not limited to)
--
    (1) gifts, grants, contributions, or membership fees,
    (2) gross receipts from admissions, sales of merchandise,
performance of services, or furnishing of facilities in any
activity which is not an unrelated trade or business (within the
meaning of section 513),
    (3) net income from unrelated business activities, whether
or not such activities are carried on regularly as a trade or
business,
    (4) gross investment income (as defined in subsection (e)),
    (5) tax revenues levied for the benefit of an organization
and either paid to or expended on behalf of such organization,
and
    (6) the value of services or facilities (exclusive of
services or facilities generally furnished to the public without
charge) furnished by a governmental unit referred to in section
170(c)(1) to an organization without charge.
Such term does not include any gain from the sale or other
disposition of property which would be considered as gain from
the sale or exchange of a capital asset, or the value of
exemption from any Federal, State, or local tax or any similar
benefit.
    (e) Definition of gross investment income. -- For purposes
of subsection (d), the term "gross investment income" means the
gross amount of income from interest, dividends, payments with
respect to secrutities loans (as defined in section 512(a)(5)),
rents, and royalties, but not including any such income to the
extent included in computing the tax imposed by section 511.

511.  Imposition of tax on unrelated business income of
charitable, etc., organizations
    (a) Charitable, etc., organizations taxable at corporation
rates. --
    (1) Imposition of tax. -- There is hereby imposed for each
taxable year on the unrelated business taxable income (as defined
in section 512) of every organization described in paragraph (2)
a tax computed as provded in section 11.  In making such
computation for purposes of this section, the term "taxable
income" as used in section 11 shall be read as "unrelated
business taxable income".
    (2) Organizations subject to tax. --
    (A) Organizations described in sections 401(a) and 501(c).
-- The tax imposed by paragraph (1) shall apply in the case of
any organizaiton (other than a trust described in subsection (b)
or an organization described in section 501(c)(1)) which is
exempt, except as provided in this part or part II (relating to
private foundations), from taxation under this subtitle by reason
of section 501(a).
    (B) State colleges and universities. -- The tax imposed by
paragraph (1) shall apply in the case of any college or
university which is an agency or instrumentality of any
government or any political subdivision thereof, or which is
owned or operated by a government or any political subdivision
thereof, or by any agency or instrumentality of one or more
governments or political subdivisions.  Such tax shall also apply
in the case of any corporation wholly owned by one or more such
colleges or universities.
    (b) Tax on charitable, etc., trusts. --
    (1) Imposition of tax. -- There is hereby imposed for each
taxable year on the unrelated business taxable income of every
trust described in paragraph (2) a tax computed as provided in
section 1(e).  In making such computation for purposes of this
section, the term "taxable income" as used in section 1 shall be
read as "unrelated business taxable income" as defined in section
512.
    (2) Charitable, etc., trusts subject to tax. -- the tax
imposed by paragraph (1) shall apply in the case of any trust
which is exempt, except as provided in this part or part II
(relating to private foundations), from taxation under this
subtitle by reason of section 501(a) and which, if it were not
for such exemption, would be subject to subchapter J (sec. 641
and following, relating to estates, trusts, beneficiaries, and
decedents).
    (c) Special rule for section 501(c)(2) corporations. -- If a
corporation described in section 501(c)(2) --
    (1) pays any amount of its net income for a taxable year to
an organization exempt from taxation under section 501(a) (or
which would pay such an amount but for the fact that the expenses
of collecting its income exceed its income), and
    (2) such corporation and such organization file a
consolidated return for the taxable year,
such corporation shall be treated, for purposes of the tax
imposed by subsection (a), as being organized and operated for
the same purposes as such organization, in addition to the
purposes described in section 501(c)(2).

512.  Unrelated business taxable income
    (a) Definition. -- For purposes of this title --
    (1) General rule. -- Except as otherwise provided in this
subsection, the term "unrelated business taxable income" means
the gross income derived by any organization from any unrelated
trade or business (as defined in section 513) regularly carried
on by it, less the deductions allowed by this chapter which are
directly connected with the carrying on of such trade or
business, both computed with the modifications provided in
subsection (b).
    (2) Special rule for foreign organizations. -- In the case
of an organization described in section 511 which is a foreign
organization, the unrelated business taxable income shall be --
    (A) its unrelated business taxable income which is derived
from sources within the United Sates and which is not effectively
connected with the conduct of a trade or business within the
United States, plus
    (B) its unrelated business taxable income which is
effectively connected with the conduct of a trade or business
within the United STates.
    (3) Special rules applicable to organizations described in
paragraph (7), (9), (17), or (20) of section 501(c). --
    (A) General rule. -- In the case of an organization
described in paragraph (7), (9), (17), or (20) of section 501(c),
the term "unrelated business taxable income" means the gross
income (excluding any exempt function income), less the
deductions allowed by this chapter which are directly connected
with the production of the gross income (excluding exempt
function income), both computed with the modifications provided
in paragraphs (6), (10), (11), and (12) of subsection (b).  For
purposes of the preceding sentence, the deductions provided by
sections 243, 244, and 245 (relating to dividends received by
corporations) shall be treated as not directly connected with the
production of gross income.
    (B) Exempt function income. -- For purposes of subparagraph
(A), the term "exempt function income" means the gross income
from dues, fees, charges, or similar amounts paid by members of
the organization as consideration for providing such members or
their dependents or guests goods, facilities, or services in
furtherance of the purposes constituting the basis for the
exemption of the organization to which such income is paid.  Such
term also means all income (other than an amount equal to the
gross income derived from any unrelated trade or business
regularly carried on by such organization computed as if the
organization were subject to paragraph(1)), which is set aside --
    (i) for a purpose specified in section 170(c)(4), or
    (ii) in the case of an organization described in paragraph
(9), (17), or (20) of section 501(c), to provide for the payment
of life, sick, accident, or other benefits,
including reasonable costs of administration directly connected
with a purpose described in clause (i) or (ii).  If during the
taxable year, an amount which is attrbutable to income so set
aside is used for a purpose other than that described in clause
(i) or (ii), such amount shall be included, under subparagraph
(A), in unrelated business taxable income for the taxable year.
    (C) Applicability to certain corporations described in
section 501(c)(2). -- In the case of a corporation described in
section 501(c)(2), the income of which is payable to an
organization described in paragraph (7), (9), (17), or (2) of
section 501(c), subparagraph (A) shall apply as if such
corporation were the organization to which the income is payable.
For purposes of the preceding sentence, such corporation shall be
treated as having exempt function income for a taxable year only
if it files a consolidated return with such organization for such
year.
    (D) Nonrecognition of gain. -- If property used directly in
the performance of the exempt function of an organization
described in paragraph (7), (9), (17), or (20) of section 501(c)
is sold by such organization, and within a period begninning 1
year before the date of such sale, and ending 3 years after such
date, other property is purchased and used by such organization
directly in the performance of its exempt function, gain (if any)
from such sale shall be recognized only to the extent that such
organization's sales price of the old property exceeds the
organization's cost of purchasing the other property.  For
purposes of this subparagraph, the destruction in whole or in
part, theft, seizure, requisition, or condemnation of property,
shall be treated as the sale of such property, and rules similar
to the rules provided by subsection (b), (c), (e), and (j) of
section 1034 shall apply.
    (E) Limitation on amount of setaside in the case of
organizations described in paragraph (9), (17), or (20) of
section 501(c). --
    (i) In general. -- In the case of any organization described
in paragraph (9), (17), of (20) of section 501(c), a set-aside
for any purpose specified in clause (ii) of subparagraph (B) may
be taken into account under subparagraph (B) only to the extent
that such set-aside does not result in an amount of assets set
aside for such purpose in excess of the account limit determined
under section 419A (without regard to subsection (f)(6) thereof)
for the taxable year (not taking into account any reserve
described in section 419(c)(2)(A) for post-retirement medical
benefits).
    (ii) Treatment of existing reserves for post-retirement
medical or life insurance benefits. --
    (I) Clause (i) shall not apply to any income attributable to
an existing reserve for post-retirement medical or life insurance
benefits.
    (II) For purposes of subclause (I), the term "reserve for
post-retirement medical or life insurance benefits" means the
greater of the amount of assets set aside for purposes of
post-retirement medical or life insurance benefits to be provided
to covered employees as of the close of the last plan year ending
before the date of the enactment of the Tax Reform Act of 1984 or
on July 18, 1984.
    (III) All payments during plan years ending on or after the
date of the enactment of the Tax Reform Act of 1984 of
post-retirement medical benefits or life insurance benefits shall
be charged against the reserve referred to in subclause (II).
Except to the extent provided in regulations prescribed by the
Secretary, all plans of an employer shall be treated as 1 plan
for purposes of the preceding sentence.
    (iii) Treatment of tax exempt organizations. -- This
subparagraph shall not apply to any organization if substantially
all of the contributions to such organizaiton are made by
employers who were exempt from tax under this chapter throughout
the 5-taxable year period ending with the taxable year in which
the contributions are made.
    (4) Special rule applicable to organizaitons described in
section 501(c)(19). -- In the case of an organizaiton described
in section 501(c)(19), the term "unrelated business taxable
income" does not include any amount attributable to payments for
life, sick, accident, or health insurance with respect to members
of such organizations or their dependents which is set aside for
the purpose of providing for the payment of insurance benefits or
for a purpose specified in section 1709c)(4).  If an amount set
aside under the preceding sentence is used during the taxable
year for a purpose other than a purpose described in the
preceding sentence, such amount shall be included, under
paragraph (1), in unrelated business taxable income for the
taxable year.
    (5) Definition of payments with respect to securities loans.
--
    (A) The term "payments with respect to securities loans"
includes all amounts received in respect of a security (as
defined in section 1236(c)) transferred by the owner to another
person in a transaction to which section 1058 applies (whether or
not title to the security remains in the name of the lender)
including --
    (i) amounts in respect of dividends, interest, or other
distributions,
    (ii) fees computed by reference to the period beginning with
the transfer of securities by the owner and ending with the
transfer of identical securities back to the transferor by the
transferee and the fair market value of the security during such
period,
    (iii) income from collateral security for such loan, and
    (iv) income from the investment of collateral security.
    (B) Subparagraph procedures to imlement the obligation of
the transferee to furnish to the transferor, for each business
day during such period, collateral with a fair market value not
less than the fair market value of the security at the close of
business on the preceding business day,
    (ii) termination of the loan by the transferor upon notice
of not more than 5 business days, and
    (iii) return to the transferor of securities identical to
the transferred securities upon termination of the loan.
    (b) Modifications. -- The modifications referred to in
subsection (a) are the following:
    (1) There shall be excluded all dividends, interest,
payments with respect to securities loans (as defined in section
512(a)(5)), and annuities, and all deductions directly connected
with such income.
    (2) There shall be excluded all royalties (including
overriding royalties) whether measured by production or by gross
or taxable income from the property, and all deductions directly
connected with such income.
    (3) In the case of rents --
    (A) Except as provided in subparagraph (B), there shall be
excluded --
    (i) all rents from real property (including property
described in section 1245(a)(3)(C)), and
    (ii) all rents from personal property (including for
purposes of this paragraph as personal property any property
described in section 1245(a)(3) (B)) leased with such real
property, if the rents attributable to such personal property are
an incidental amount of the total rents received or accrued under
the lease, determined at the time the personal property is place
in service.
    (B) Subparagraph (A) shall not apply --
    (i) if more than 50 percent of the total rent received or
accrued under the lease is attributable to personal property
described in subparagraph (A)(ii), or
    (ii) if the determination of the amount of such rent depends
in whole or in part on the income of profits derived by any
person from the property leased (other than an amount based on a
fixed percentage or percentages of receipts or sales).
    (C) There shall be excluded all deductions directly
connected with rents excluded under subparagraph (A).
    (4) Notwithstanding paragraph (1), (2), (3), or (5), in the
case of debt-financed property (as defined in section 514) there
shall be included, as an item of gross income derived from an
unrelated trade or business, the amount ascertained under section
514(a)(1), and there shall be allowed, as a deduction, the amount
ascertained under section 514(a)(2).
    (5) There shall be excluded all gains or losses from the
sale, exchange, or other disposition of property other than --
    (A) stock in trade or other property of a kind which would
properly be includible in inventory if on hand at the close of
the taxable year, or
    (B) property held primarily for sale to customers in the
ordinary course of the trade or business.
There shall also be excluded all gains on the lapse or
termination of options, written by the organization in connection
with its investment activities, to buy or sell securities (as
defined in section 1236(c)).  This paragraph shall not apply with
respect to the cutting of timber which is considered, on the
application of section 631, as a sale or exchange of such timber.
    (6) The net operating loss deduction provided in section 172
shall be allowed, except that --
    (A) the net operating loss for any taxable year, the amount
of the net operating loss carryback or carryover to any taxable
year, and the net operating loss deduction for any taxable year
shall be determined under section 172 without taking into account
any amount of income or deduction which is excluded under this
part in computing the unrelated business taxable income; and
    (B) the terms "preceding taxable year" and "preceding
taxable years" as used in section 172 shall not include any
taxable year for which the organization was not subject to the
provisions of this part.
    (7) There shall be excluded all income derived from research
for (A) the United States, or any of its agencies or
instrumentalities, or (B) any State or political subdivision
thereof; and there shall be excluded all deductions directly
connected with such income.
    (8) In the case of a college, university, or hospital, there
shall be excluded all income derived from research performed for
any person, and all deductions directly connected with such
income.
    (9) In the case of an organizaiton operated primarily for
purposes of carrying on fundamental research the results of which
are freely available to the general public, there shall be
excluded all income derived from research performed for any
person, and all deductions directly connected with such income.
    (10) In the case of any organization described in section
511(a0, the deduction allowed by section 170 (relating to
charitable etc. contributions and gifts) shall be allowed
(whether or not directly connected with the carrying on of the
trade or business), but shall not exceed 10 percent of the
unrelated business taxable income computed without the benefit of
this paragraph.
    (11) In the case of any trust described in section 511(b),
the deduction allowed by section 170 (relating to charitable etc.
contributions and gifts) shall be allowed (whether or not
directly connected with the carrying on of the trade or
business), and for such purpose a distribution made by the trust
to a beneficiary described in section 170(b)(1)(A) and (B)
determined with reference to the unrelated business taxable
income computed without the benefit of this paragraph (in lieu of
with reference to adjusted gross income).
    (12) Except for purposes of computing the net operating loss
under section 172 and paragraph (6), there shall be allowed a
specific deduction of $1,000.  In the case of a diocese, province
of a religious order, or a convention or association of churches,
there shall also be allowed, with respect to each parish,
individual church, district, or other local unit, a specific
deduction equal to the lower of --
    (A) $1,000, or
    (B) the gross income derived from any unrelated trade or
business regularly carried on by such local unit.
    (13) Notwithstanding paragraphs (1), (2), or (3), amounts of
interest, annuities, royalties, and rents derived from any
organization (in this paragraph called the "controlled
organization") of which the organizaiton deriving such amount (in
this paragraph called the "controlling organization") has control
(as defined in section 368(c)) shall be included as an item of
gross income (whether or not the activity from which such amount
are derived represents a trade or business or is regularly
carried on) in an amount which bears the same ratio as --
    (A)(i) in the case of a controlled organization which is not
exempt from taxation under section 501(a), the excess of the
amount of taxable income of the controlled organization over the
amount of such organization's taxable income which if derived
directly by the controlling organization would not be unrelated
business taxable income, or
    (ii) in the case of a controlled organization which is
exempt from taxation under section 501(a), the amount of
unrelated business taxable income of the controlled organization,
bears to
    (B) the taxable income of the controlled organizaiton
(dettermined in the case of a controlled organization to which
subparagraph (A)(ii) applies as if it were not an organization
exempt from taxation under section 501(a)), but not less than the
amount determined in clause (i) or (ii), as the case may be, of
subparagraph (A),
both amount computed without regard to amount paid directly or
indirectly to the controlling organization.  There shall be
allowed all deductions directly connected with amount included in
gross income under the preceding sentence.
    (14) Repealed. Pub.L. 101-508, Title XI, (Section)
11801(a)(23), Nov. 5, 1990, 104 Stat. 1388-521.
    (15) Except as provided in paragraph (4), in the case of a
trade or business --
    (A) which consists of providing services under license
issued by a Federal regulatory agency,
    (B) which is carried on by a religious order or by an
educational organization described in section 170(b)(1)(A)(ii)
maintained by such religious order, and which was so carried on
before May 27, 1959, and
    (C) less than 10 percent of the net income of which for each
taxable year is used for activities which are not related to the
purpose constituting the basis for the religious ofder's
exemption,
there shall be excluded all gross income derived from such trade
or business and all deductions directly connected with the
carrying on of such trade or business, so long as it is
established to the satisfaction of the Secretary that the rates
or other charges for such services are competitive with rates or
other charges charged for similar services by persons not exempt
from taxation.
    (c) Special rules for partnerships. --
    (1) In general. -- If a trade or business regularly carried
on by a partnership of which an organization is a member is an
unrelated trade or business with respect to such organization,
such organization in computing its unrelated business taxable
income shall, subject to the exceptions, additions, and
limitations contained in subsection (b), include its share
(whether or not distributed) of the gross income of the
parnership from such unrelated trade or business and its share of
the partnership from such unrelated trade or business and its
ahre of the partnership deductions directly connected with such
gross income.
    (2) Special rule for publicly traded partnerships. --
Notwithstanding any other provision of this section --
    (A) any organization's share (whether or not distributed) of
the gross income of a publicly traded partnership (as defined in
section 469(k)(2)) shall be treated as gross income derived from
an unrelated trade or business, and
    (B) such organization's share of the partnership deductions
shall be allowed in computing unrelated business taxable income.
    (3) Special rule where partnership year is different from
organization's year. -- If the taxable year of the organization
is different from that of the partnership, the amount to be
included or deducted in compuring the unrelated business taxable
income under paragraph (1) or (2) shall be based upon the income
and deductions of the partnership for any taxable year of the
partnership ending within or with the taxable year of the
organization.