PART III—TAXATION OF BUSINESS INCOME OF CERTAIN EXEMPT ORGANIZATIONS
Editorial Notes
Amendments
2018—
1969—
§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 provided 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 organization (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).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1988—Subsec. (d).
"(1)
"(2)
1982—Subsec. (d)(2).
1978—Subsec. (a)(1).
Subsec. (a)(2).
Subsec. (d).
1977—Subsec. (b)(1).
1969—Subsec. (a)(2)(A).
Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (c).
Subsec. (d).
1966—Subsec. (a)(2)(A).
1960—Subsec. (a)(2).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by section 301(b)(5)(A), (B) of
Amendment by section 421(e)(3) of
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by section 301(b)(8) of
Amendment by section 803(d)(2) of
Effective Date of 1966 Amendment
Effective Date of 1960 Amendment
Amendment by
§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 States 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), or (17) of section 501(c)
(A) General rule
In the case of an organization described in paragraph (7), (9), or (17) 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 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) or (17) 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 attributable 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), or (17) 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), or (17) of section 501(c) is sold by such organization, and within a period beginning 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 subsections (b), (c), (e), and (j) of section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) shall apply.
(E) Limitation on amount of setaside in the case of organizations described in paragraph (9) or (17) of section 501(c)
(i) In general
In the case of any organization described in paragraph (9) or (17) 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 419A(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 organization 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 organizations described in section 501(c)(19)
In the case of an organization 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 170(c)(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 (A) shall apply only with respect to securities transferred pursuant to an agreement between the transferor and the transferee which provides for—
(i) reasonable procedures to implement 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.
(6) Special rule for organization with more than 1 unrelated trade or business
In the case of any organization with more than 1 unrelated trade or business—
(A) unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business and without regard to subsection (b)(12),
(B) the unrelated business taxable income of such organization shall be the sum of the unrelated business taxable income so computed with respect to each such trade or business, less a specific deduction under subsection (b)(12), and
(C) for purposes of subparagraph (B), unrelated business taxable income with respect to any such trade or business shall not be less than zero.
(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 subsection (a)(5)), amounts received or accrued as consideration for entering into agreements to make loans, 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 placed 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 or 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 or losses recognized, in connection with the organization's investment activities, from the lapse or termination of options to buy or sell securities (as defined in section 1236(c)) or real property and all gains or losses from the forfeiture of good-faith deposits (that are consistent with established business practice) for the purchase, sale, or lease of real property in connection with the organization's investment activities. 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 organization 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(a), 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 shall be considered as a gift or contribution. The deduction allowed by this paragraph shall be allowed with the limitations prescribed 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)
(A)
(B)
(i)
(I) in the case of a controlled entity which is not exempt from tax under section 501(a), the portion of such entity's taxable income which would be unrelated business taxable income if such entity were exempt from tax under section 501(a) and had the same exempt purposes as the controlling organization, or
(II) in the case of a controlled entity which is exempt from tax under section 501(a), the amount of the unrelated business taxable income of the controlled entity.
(ii)
(C)
(D)
(i)
(I) in the case of a corporation, ownership (by vote or value) of more than 50 percent of the stock in such corporation,
(II) in the case of a partnership, ownership of more than 50 percent of the profits interests or capital interests in such partnership, or
(III) in any other case, ownership of more than 50 percent of the beneficial interests in the entity.
(ii)
(E)
(i)
(ii)
(I) such excess determined without regard to any amendment or supplement to a return of tax, or
(II) such excess determined with regard to all such amendments and supplements.
(iii)
(I) a binding written contract in effect on the date of the enactment of this subparagraph, or
(II) a contract which is a renewal, under substantially similar terms, of a contract described in subclause (I).
(F)
[(14) Repealed.
(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 order'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.
(16)(A) Notwithstanding paragraph (5)(B), there shall be excluded all gains or losses from the sale, exchange, or other disposition of any real property described in subparagraph (B) if—
(i) such property was acquired by the organization from—
(I) a financial institution described in section 581 or 591(a) which is in conservatorship or receivership, or
(II) the conservator or receiver of such an institution (or any government agency or corporation succeeding to the rights or interests of the conservator or receiver),
(ii) such property is designated by the organization within the 9-month period beginning on the date of its acquisition as property held for sale, except that not more than one-half (by value determined as of such date) of property acquired in a single transaction may be so designated,
(iii) such sale, exchange, or disposition occurs before the later of—
(I) the date which is 30 months after the date of the acquisition of such property, or
(II) the date specified by the Secretary in order to assure an orderly disposition of property held by persons described in subparagraph (A), and
(iv) while such property was held by the organization, the aggregate expenditures on improvements and development activities included in the basis of the property are (or were) not in excess of 20 percent of the net selling price of such property.
(B) Property is described in this subparagraph if it is real property which—
(i) was held by the financial institution at the time it entered into conservatorship or receivership, or
(ii) was foreclosure property (as defined in section 514(c)(9)(H)(v)) which secured indebtedness held by the financial institution at such time.
For purposes of this subparagraph, real property includes an interest in a mortgage.
(17)
(A)
(B)
(i)
(I) such organization,
(II) an affiliate of such organization which is exempt from tax under section 501(a), or
(III) a director or officer of, or an individual who (directly or indirectly) performs services for, such organization or affiliate but only if the insurance covers primarily risks associated with the performance of services in connection with such organization or affiliate.
(ii)
(I)
(II)
(C)
(18)
(19)
(A)
(B)
(i)
(I) acquires from an unrelated person a qualifying brownfield property, and
(II) pays or incurs eligible remediation expenditures with respect to such property in an amount which exceeds the greater of $550,000 or 12 percent of the fair market value of the property at the time such property was acquired by the eligible taxpayer, determined as if there was not a presence of a hazardous substance, pollutant, or contaminant on the property which is complicating the expansion, redevelopment, or reuse of the property.
(ii)
(I) potentially liable under section 107 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 with respect to the qualifying brownfield property,
(II) affiliated with any other person which is so potentially liable through any direct or indirect familial relationship or any contractual, corporate, or financial relationship (other than a contractual, corporate, or financial relationship which is created by the instruments by which title to any qualifying brownfield property is conveyed or financed or by a contract of sale of goods or services), or
(III) the result of a reorganization of a business entity which was so potentially liable.
(C)
(i)
(ii)
(D)
(i)
(I) such property is transferred by the eligible taxpayer to an unrelated person, and
(II) within 1 year of such transfer the eligible taxpayer has received a certification from the Environmental Protection Agency or an appropriate State agency (within the meaning of section 198(c)(4)) in the State in which such property is located that, as a result of the eligible taxpayer's remediation actions, such property would not be treated as a qualifying brownfield property in the hands of the transferee.
For purposes of subclause (II), before issuing such certification, the Environmental Protection Agency or appropriate State agency shall respond to comments received pursuant to clause (ii)(V) in the same form and manner as required under section 117(b) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as in effect on the date of the enactment of this paragraph).
(ii)
(I) Remedial actions which comply with all applicable or relevant and appropriate requirements (consistent with section 121(d) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980) have been substantially completed, such that there are no hazardous substances, pollutants, or contaminants which complicate the expansion, redevelopment, or reuse of the property given the property's reasonably anticipated future land uses or capacity for uses of the property.
(II) The reasonably anticipated future land uses or capacity for uses of the property are more economically productive or environmentally beneficial than the uses of the property in existence on the date of the certification described in subparagraph (C)(i). For purposes of the preceding sentence, use of property as a landfill or other hazardous waste facility shall not be considered more economically productive or environmentally beneficial.
(III) A remediation plan has been implemented to bring the property into compliance with all applicable local, State, and Federal environmental laws, regulations, and standards and to ensure that the remediation protects human health and the environment.
(IV) The remediation plan described in subclause (III), including any physical improvements required to remediate the property, is either complete or substantially complete, and, if substantially complete, sufficient monitoring, funding, institutional controls, and financial assurances have been put in place to ensure the complete remediation of the property in accordance with the remediation plan as soon as is reasonably practicable after the sale, exchange, or other disposition of such property.
(V) Public notice and the opportunity for comment on the request for certification was completed before the date of such request. Such notice and opportunity for comment shall be in the same form and manner as required for public participation required under section 117(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as in effect on the date of the enactment of this paragraph). For purposes of this subclause, public notice shall include, at a minimum, publication in a major local newspaper of general circulation.
(iii)
(iv)
(E)
(i)
(I) to manage, remove, control, contain, abate, or otherwise remediate a hazardous substance, pollutant, or contaminant on the property,
(II) to obtain a Phase II environmental site assessment of the property, including any expenditure to monitor, sample, study, assess, or otherwise evaluate the release, threat of release, or presence of a hazardous substance, pollutant, or contaminant on the property,
(III) to obtain environmental regulatory certifications and approvals required to manage the remediation and monitoring of the hazardous substance, pollutant, or contaminant on the property, and
(IV) regardless of whether it is necessary to obtain a certification described in subparagraph (D)(i)(II), to obtain remediation cost-cap or stop-loss coverage, re-opener or regulatory action coverage, or similar coverage under environmental insurance policies, or financial guarantees required to manage such remediation and monitoring.
(ii)
(I) any portion of the purchase price paid or incurred by the eligible taxpayer to acquire the qualifying brownfield property,
(II) environmental insurance costs paid or incurred to obtain legal defense coverage, owner/operator liability coverage, lender liability coverage, professional liability coverage, or similar types of coverage,
(III) any amount paid or incurred to the extent such amount is reimbursed, funded, or otherwise subsidized by grants provided by the United States, a State, or a political subdivision of a State for use in connection with the property, proceeds of an issue of State or local government obligations used to provide financing for the property the interest of which is exempt from tax under section 103, or subsidized financing provided (directly or indirectly) under a Federal, State, or local program provided in connection with the property, or
(IV) any expenditure paid or incurred before the date of the enactment of this paragraph.
For purposes of subclause (III), the Secretary may issue guidance regarding the treatment of government-provided funds for purposes of determining eligible remediation expenditures.
(F)
(G)
(i)
(ii)
(I) has a partnership agreement which satisfies the requirements of section 514(c)(9)(B)(vi) at all times beginning on the date of the first certification received by the partnership under subparagraph (C)(i),
(II) satisfies the requirements of subparagraphs (B)(i), (C), (D), and (E), if "qualified partnership" is substituted for "eligible taxpayer" each place it appears therein (except subparagraph (D)(iii)), and
(III) is not an organization which would be prevented from constituting an eligible taxpayer by reason of subparagraph (B)(ii).
(iii)
(iv)
(I) the use of special allocations of gains or losses, or
(II) changes in ownership of partnership interests held by eligible taxpayers.
(H)
(i)
(ii)
(I) beginning on the date which is the first day of the taxable year of the return in which the election is included or a later day in such taxable year selected by the eligible taxpayer or qualifying partnership, and
(II) ending on the date which is the earliest of a date of revocation selected by the eligible taxpayer or qualifying partnership, the date which is 8 years after the date described in subclause (I), or, in the case of an election by a qualifying partnership of which the eligible taxpayer is a partner, the date of the termination of the qualifying partnership.
(iii)
(I)
(J)
(i) such person bears a relationship to such other person described in section 267(b) (determined without regard to paragraph (9) thereof), or section 707(b)(1), determined by substituting "25 percent" for "50 percent" each place it appears therein, and
(ii) in the case such other person is a nonprofit organization, if such person controls directly or indirectly more than 25 percent of the governing body of such organization.
(K)
(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 partnership from such unrelated trade or business and its share of the partnership deductions directly connected with such gross income.
(2) 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 amounts to be included or deducted in computing the unrelated business taxable income under paragraph (1) 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.
(d) Treatment of dues of agricultural or horticultural organizations
(1) In general
If—
(A) an agricultural or horticultural organization described in section 501(c)(5) requires annual dues to be paid in order to be a member of such organization, and
(B) the amount of such required annual dues does not exceed $100,
in no event shall any portion of such dues be treated as derived by such organization from an unrelated trade or business by reason of any benefits or privileges to which members of such organization are entitled.
(2) Indexation of $100 amount
In the case of any taxable year beginning in a calendar year after 1995, the $100 amount in paragraph (1) shall be increased by an amount equal to—
(A) $100, multiplied by
(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 1994" for "calendar year 2016" in subparagraph (A)(ii) thereof.
(3) Dues
For purposes of this subsection, the term "dues" means any payment (whether or not designated as dues) which is required to be made in order to be recognized by the organization as a member of the organization.
(e) Special rules applicable to S corporations
(1) In general
If an organization described in section 1361(c)(2)(A)(vi) or 1361(c)(6) holds stock in an S corporation—
(A) such interest shall be treated as an interest in an unrelated trade or business, and
(B) notwithstanding any other provision of this part—
(i) all items of income, loss, or deduction taken into account under section 1366(a), and
(ii) any gain or loss on the disposition of the stock in the S corporation,
shall be taken into account in computing the unrelated business taxable income of such organization.
(2) Basis reduction
Except as provided in regulations, for purposes of paragraph (1), the basis of any stock acquired by purchase (as defined in section 1361(e)(1)(C)) shall be reduced by the amount of any dividends received by the organization with respect to the stock.
(3) Exception for ESOPs
This subsection shall not apply to employer securities (within the meaning of section 409(l)) held by an employee stock ownership plan described in section 4975(e)(7).
(Aug. 16, 1954, ch. 736,
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
References in Text
The date of the enactment of the Taxpayer Relief Act of 1997, referred to in subsec. (a)(3)(D), is the date of enactment of
The date of the enactment of the Tax Reform Act of 1984, referred to in subsec. (a)(3)(E)(ii)(II), (III), is the date of enactment of division A of
The date of the enactment of this subparagraph, referred to in subsec. (b)(13)(E)(iii)(I), is the date of enactment of
Sections 101(39), 107, 117(a), (b), and 121(d) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, referred to in subsec. (b)(19)(B)(ii)(I), (C)(i), (D)(i), (ii)(I), (V), are classified to sections 9601(39), 9607, 9617(a), (b), and 9621(d), respectively, of Title 42, The Public Health and Welfare.
The date of the enactment of this paragraph, referred to in subsec. (b)(19)(C)(i), (D)(i), (ii)(V), (E)(ii)(IV), is the date of enactment of
Amendments
2019—Subsec. (a)(7).
2018—Subsec. (a)(3).
Subsec. (a)(3)(A).
Subsec. (a)(3)(B)(ii).
Subsec. (a)(3)(C), (D).
Subsec. (a)(3)(E).
Subsec. (b)(19)(H)(iii).
2017—Subsec. (a)(6).
Subsec. (a)(7).
Subsec. (d)(2)(B).
2015—Subsec. (b)(13)(E)(iv).
2014—Subsec. (a)(3)(A).
Subsec. (b)(13)(E)(iv).
2013—Subsec. (b)(13)(E)(iv).
2010—Subsec. (b)(13)(E)(iv).
2008—Subsec. (b)(13)(E)(iv).
2006—Subsec. (b)(13)(E), (F).
2005—Subsec. (b)(1).
Subsec. (b)(18), (19).
2004—Subsec. (b)(18).
Subsec. (e)(1).
1998—Subsec. (b)(13)(A).
Subsec. (b)(13)(B)(i)(I).
Subsec. (b)(17)(B)(ii)(II).
1997—Subsec. (a)(3)(D).
Subsec. (b)(13).
Subsec. (e)(1).
Subsec. (e)(2).
Subsec. (e)(3).
1996—Subsec. (b)(17).
Subsec. (d).
Subsec. (e).
1993—Subsec. (b)(1).
Subsec. (b)(5).
Subsec. (b)(16).
Subsec. (c)(2), (3).
"(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."
1990—Subsec. (b)(14).
1988—Subsec. (a)(3)(E)(ii)(II).
1987—Subsec. (c).
1986—Subsec. (a)(3)(E)(i).
Subsec. (a)(3)(E)(ii).
Subsec. (a)(3)(E)(iii), (iv).
1984—Subsec. (a)(3).
Subsec. (a)(3)(B)(ii).
Subsec. (a)(3)(C), (D).
Subsec. (a)(3)(E).
1983—Subsec. (b)(10).
1978—Subsec. (a)(5).
Subsec. (b)(1).
1976—Subsec. (a)(3)(A).
Subsec. (b).
Subsec. (b)(5).
Subsec. (b)(13), (14).
Subsec. (b)(15).
Subsec. (b)(16), (17).
1972—Subsec. (a)(4).
1969—Subsec. (a).
Subsec. (b).
Subsec. (b)(3)(A).
Subsec. (b)(3)(B).
Subsec. (b)(3)(C).
Subsec. (b)(4).
Subsec. (b)(12).
Subsec. (b)(15) to (17).
1966—Subsec. (a).
1964—Subsec. (b)(14).
1958—Subsec. (b)(13).
Statutory Notes and Related Subsidiaries
Effective Date of 2019 Amendment
Effective Date of 2017 Amendment
Amendment by section 11002(d)(1)(Y) of
"(1)
"(2)
"(A) subparagraph (A) of section 512(a)(6) of the Internal Revenue Code of 1986, as added by this Act, shall not apply to such net operating loss, and
"(B) the unrelated business taxable income of the organization, after the application of subparagraph (B) of such section, shall be reduced by the amount of such net operating loss."
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Amendment by section 221(a)(41)(G) of
Except as otherwise provided in section 221(a) of
Effective Date of 2013 Amendment
Effective Date of 2010 Amendment
Effective Date of 2008 Amendment
Effective Date of 2006 Amendment
Effective Date of 2004 Amendment
Amendment by section 319(c) of
Effective Date of 1998 Amendment
Amendment by section 6023(8) of
Amendment by section 6010(j)(1), (2) of
Effective Date of 1997 Amendment
Amendment by section 312(d)(5) of
"(1)
"(2)
Amendment by section 1601(c)(4)(A), (D) of
Effective Date of 1996 Amendment
"(1)
"(2)
"(A) for purposes of applying part III of subchapter F of
"(B) such organization had a reasonable basis for not treating such dues as income derived in an unrelated trade or business,
then, for purposes of applying such part III to any such taxable year, in no event shall any portion of such dues be treated as derived in an unrelated trade or business.
"(3)
"(A) Judicial precedent, published rulings, technical advice with respect to the organization, or a letter ruling to the organization.
"(B) A past Internal Revenue Service audit of the organization in which there was no assessment attributable to the reclassification of membership dues for purposes of the tax on unrelated business income.
"(C) Long-standing recognized practice of agricultural or horticultural organizations."
Amendment by section 1316(c) of
Effective Date of 1993 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by
Amendment by section 1901(b)(8)(F) of
Amendment by section 1951(b)(8)(A) of
Effective Date of 1972 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Effective Date of 1964 Amendment
Effective Date of 1958 Amendment
Savings Provision
For provisions that nothing in amendment by section 401(b)(21)(E)–(H) of
For provisions that nothing in amendment by
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
§513. Unrelated trade or business
(a) General rule
The term "unrelated trade or business" means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business—
(1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or
(2) which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B), by the organization primarily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or
(3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.
(b) Special rule for trusts
The term "unrelated trade or business" means, in the case of—
(1) a trust computing its unrelated business taxable income under section 512 for purposes of section 681; or
(2) a trust described in section 401(a), or section 501(c)(17), which is exempt from tax under section 501(a);
any trade or business regularly carried on by such trust or by a partnership of which it is a member.
(c) Advertising, etc., activities
For purposes of this section, the term "trade or business" includes any activity which is carried on for the production of income from the sale of goods or the performance of services. For purposes of the preceding sentence, an activity does not lose identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. Where an activity carried on for profit constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such classification merely because it does not result in profit.
(d) Certain activities of trade shows, State fairs, etc.
(1) General rule
The term "unrelated trade or business" does not include qualified public entertainment activities of an organization described in paragraph (2)(C), or qualified convention and trade show activities of an organization described in paragraph (3)(C).
(2) Qualified public entertainment activities
For purposes of this subsection—
(A) Public entertainment activity
The term "public entertainment activity" means any entertainment or recreational activity of a kind traditionally conducted at fairs or expositions promoting agricultural and educational purposes, including, but not limited to, any activity one of the purposes of which is to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment.
(B) Qualified public entertainment activity
The term "qualified public entertainment activity" means a public entertainment activity which is conducted by a qualifying organization described in subparagraph (C) in—
(i) conjunction with an international, national, State, regional, or local fair or exposition,
(ii) accordance with the provisions of State law which permit the activity to be operated or conducted solely by such an organization, or by an agency, instrumentality, or political subdivision of such State, or
(iii) accordance with the provisions of State law which permit such an organization to be granted a license to conduct not more than 20 days of such activity on payment to the State of a lower percentage of the revenue from such licensed activity than the State requires from organizations not described in section 501(c)(3), (4), or (5).
(C) Qualifying organization
For purposes of this paragraph, the term "qualifying organization" means an organization which is described in section 501(c) (3), (4), or (5) which regularly conducts, as one of its substantial exempt purposes, an agricultural and educational fair or exposition.
(3) Qualified convention and trade show activities
(A) Convention and trade show activities
The term "convention and trade show activity" means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, industry products or services, or to educate persons engaged in the industry in the development of new products and services or new rules and regulations affecting the industry.
(B) Qualified convention and trade show activity
The term "qualified convention and trade show activity" means a convention and trade show activity carried out by a qualifying organization described in subparagraph (C) in conjunction with an international, national, State, regional, or local convention, annual meeting, or show conducted by an organization described in subparagraph (C) if one of the purposes of such organization in sponsoring the activity is the promotion and stimulation of interest in, and demand for, the products and services of that industry in general or to educate persons in attendance regarding new developments or products and services related to the exempt activities of the organization, and the show is designed to achieve such purpose through the character of the exhibits and the extent of the industry products displayed.
(C) Qualifying organization
For purposes of this paragraph, the term "qualifying organization" means an organization described in section 501(c)(3), (4), (5), or (6) which regularly conducts as one of its substantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or segment of such industry or which educates persons in attendance regarding new developments or products and services related to the exempt activities of the organization.
(4) Such activities not to affect exempt status
An organization described in section 501(c) (3), (4), or (5) shall not be considered as not entitled to the exemption allowed under section 501(a) solely because of qualified public entertainment activities conducted by it.
(e) Certain hospital services
In the case of a hospital described in section 170(b)(1)(A)(iii), the term "unrelated trade or business" does not include the furnishing of one or more of the services described in section 501(e)(1)(A) to one or more hospitals described in section 170(b)(1)(A)(iii) if—
(1) such services are furnished solely to such hospitals which have facilities to serve not more than 100 inpatients;
(2) such services, if performed on its own behalf by the recipient hospital, would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption; and
(3) such services are provided at a fee or cost which does not exceed the actual cost of providing such services, such cost including straight line depreciation and a reasonable amount for return on capital goods used to provide such services.
(f) Certain bingo games
(1) In general
The term "unrelated trade or business" does not include any trade or business which consists of conducting bingo games.
(2) Bingo game defined
For purposes of paragraph (1), the term "bingo game" means any game of bingo—
(A) of a type in which usually—
(i) the wagers are placed,
(ii) the winners are determined, and
(iii) the distribution of prizes or other property is made,
in the presence of all persons placing wagers in such game,
(B) the conducting of which is not an activity ordinarily carried out on a commercial basis, and
(C) the conducting of which does not violate any State or local law.
(g) Certain pole rentals
In the case of a mutual or cooperative telephone or electric company, the term "unrelated trade or business" does not include engaging in qualified pole rentals (as defined in section 501(c)(12)(D)).
(h) Certain distributions of low cost articles without obligation to purchase and exchanges and rentals of member lists
(1) In general
In the case of an organization which is described in section 501 and contributions to which are deductible under paragraph (2) or (3) of section 170(c), the term "unrelated trade or business" does not include—
(A) activities relating to the distribution of low cost articles if the distribution of such articles is incidental to the solicitation of charitable contributions, or
(B) any trade or business which consists of—
(i) exchanging with another such organization names and addresses of donors to (or members of) such organization, or
(ii) renting such names and addresses to another such organization.
(2) Low cost article defined
For purposes of this subsection—
(A) In general
The term "low cost article" means any article which has a cost not in excess of $5 to the organization which distributes such item (or on whose behalf such item is distributed).
(B) Aggregation rule
If more than 1 item is distributed by or on behalf of an organization to a single distributee in any calendar year, the aggregate of the items so distributed in such calendar year to such distributee shall be treated as 1 article for purposes of subparagraph (A).
(C) Indexation of $5 amount
In the case of any taxable year beginning in a calendar year after 1987, the $5 amount in subparagraph (A) shall be increased by an amount equal to—
(i) $5, multiplied by
(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 1987" for "calendar year 2016" in subparagraph (A)(ii) thereof.
(3) Distribution which is incidental to the solicitation of charitable contributions described
For purposes of this subsection, any distribution of low cost articles by an organization shall be treated as a distribution incidental to the solicitation of charitable contributions only if—
(A) such distribution is not made at the request of the distributee,
(B) such distribution is made without the express consent of the distributee, and
(C) the articles so distributed are accompanied by—
(i) a request for a charitable contribution (as defined in section 170(c)) by the distributee to such organization, and
(ii) a statement that the distributee may retain the low cost article regardless of whether such distributee makes a charitable contribution to such organization.
(i) Treatment of certain sponsorship payments
(1) In general
The term "unrelated trade or business" does not include the activity of soliciting and receiving qualified sponsorship payments.
(2) Qualified sponsorship payments
For purposes of this subsection—
(A) In general
The term "qualified sponsorship payment" means any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person's trade or business in connection with the activities of the organization that receives such payment. Such a use or acknowledgement does not include advertising such person's products or services (including messages containing qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such products or services).
(B) Limitations
(i) Contingent payments
The term "qualified sponsorship payment" does not include any payment if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events.
(ii) Safe harbor does not apply to periodicals and qualified convention and trade show activities
The term "qualified sponsorship payment" does not include—
(I) any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor's trade or business in regularly scheduled and printed material published by or on behalf of the payee organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization, or
(II) any payment made in connection with any qualified convention or trade show activity (as defined in subsection (d)(3)(B)).
(3) Allocation of portions of single payment
For purposes of this subsection, to the extent that a portion of a payment would (if made as a separate payment) be a qualified sponsorship payment, such portion of such payment and the other portion of such payment shall be treated as separate payments.
(j) Debt management plan services
The term "unrelated trade or business" includes the provision of debt management plan services (as defined in section 501(q)(4)(B)) by any organization other than an organization which meets the requirements of section 501(q).
(Aug. 16, 1954, ch. 736,
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Editorial Notes
Amendments
2017—Subsec. (h)(2)(C)(ii).
2006—Subsec. (j).
1997—Subsec. (i).
1993—Subsec. (h)(2)(C)(ii).
1990—Subsec. (h)(2)(C)(ii).
1986—Subsec. (d)(3)(B).
Subsec. (d)(3)(C).
Subsec. (h).
1980—Subsec. (g).
1978—Subsec. (f).
1976—Subsec. (d).
Subsec. (e).
1969—Subsec. (a)(2).
Subsec. (c).
1960—Subsec. (b)(2).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2006 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1986 Amendment
Effective Date of 1980 Amendment
Effective Date of 1978 Amendment
Effective Date of 1976 Amendment
Effective Date of 1969 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Conducting of Certain Games of Chance Not Treated as Unrelated Trade or Business
"(a)
"(1) such game of chance is conducted by a nonprofit organization,
"(2) the conducting of such game by such organization does not violate any State or local law, and
"(3) as of October 5, 1983—
"(A) there was a State law (originally enacted on April 22, 1977) in effect which permitted the conducting of such game of chance by such nonprofit organization, but
"(B) the conducting of such game of chance by organizations which were not nonprofit organizations would have violated such law.
"(b)
[
§514. Unrelated debt-financed income
(a) Unrelated debt-financed income and deductions
In computing under section 512 the unrelated business taxable income for any taxable year—
(1) Percentage of income taken into account
There shall be included with respect to each debt-financed property as an item of gross income derived from an unrelated trade or business an amount which is the same percentage (but not in excess of 100 percent) of the total gross income derived during the taxable year from or on account of such property as (A) the average acquisition indebtedness (as defined in subsection (c)(7)) for the taxable year with respect to the property is of (B) the average amount (determined under regulations prescribed by the Secretary) of the adjusted basis of such property during the period it is held by the organization during such taxable year.
(2) Percentage of deductions taken into account
There shall be allowed as a deduction with respect to each debt-financed property an amount determined by applying (except as provided in the last sentence of this paragraph) the percentage derived under paragraph (1) to the sum determined under paragraph (3). The percentage derived under this paragraph shall not be applied with respect to the deduction of any capital loss resulting from the carryback or carryover of net capital losses under section 1212.
(3) Deductions allowable
The sum referred to in paragraph (2) is the sum of the deductions under this chapter which are directly connected with the debt-financed property or the income therefrom, except that if the debt-financed property is of a character which is subject to the allowance for depreciation provided in section 167, the allowance shall be computed only by use of the straight-line method.
(b) Definition of debt-financed property
(1) In general
For purposes of this section, the term "debt-financed property" means any property which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year (or, if the property was disposed of during the taxable year, with respect to which there was an acquisition indebtedness at any time during the 12-month period ending with the date of such disposition), except that such term does not include—
(A)(i) any property substantially all the use of which is substantially related (aside from the need of the organization for income or funds) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function designated in section 501(c)(3)), or (ii) any property to which clause (i) does not apply, to the extent that its use is so substantially related;
(B) except in the case of income excluded under section 512(b)(5), any property to the extent that the income from such property is taken into account in computing the gross income of any unrelated trade or business;
(C) any property to the extent that the income from such property is excluded by reason of the provisions of paragraph (7), (8), or (9) of section 512(b) in computing the gross income of any unrelated trade or business;
(D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section 513(a); or
(E) any property the gain or loss from the sale, exchange, or other disposition of which would be excluded by reason of the provisions of section 512(b)(19) in computing the gross income of any unrelated trade or business.
For purposes of subparagraph (A), substantially all the use of a property shall be considered to be substantially related to the exercise or performance by an organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 if such property is real property subject to a lease to a medical clinic entered into primarily for purposes which are substantially related (aside from the need of such organization for income or funds or the use it makes of the rents derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.
(2) Special rule for related uses
For purposes of applying paragraphs (1) (A), (C), and (D), the use of any property by an exempt organization which is related to an organization shall be treated as use by such organization.
(3) Special rules when land is acquired for exempt use within 10 years
(A) Neighborhood land
If an organization acquires real property for the principal purpose of using the land (commencing within 10 years of the time of acquisition) in the manner described in paragraph (1)(A) and at the time of acquisition the property is in the neighborhood of other property owned by the organization which is used in such manner, the real property acquired for such future use shall not be treated as debt-financed property so long as the organization does not abandon its intent to so use the land within the 10-year period. The preceding sentence shall not apply for any period after the expiration of the 10-year period, and shall apply after the first 5 years of the 10-year period only if the organization establishes to the satisfaction of the Secretary that it is reasonably certain that the land will be used in the described manner before the expiration of the 10-year period.
(B) Other cases
If the first sentence of subparagraph (A) is inapplicable only because—
(i) the acquired land is not in the neighborhood referred to in subparagraph (A), or
(ii) the organization (for the period after the first 5 years of the 10-year period) is unable to establish to the satisfaction of the Secretary that it is reasonably certain that the land will be used in the manner described in paragraph (1)(A) before the expiration of the 10-year period,
but the land is converted to such use by the organization within the 10-year period, the real property (subject to the provisions of subparagraph (D)) shall not be treated as debt-financed property for any period before such conversion. For purposes of this subparagraph, land shall not be treated as used in the manner described in paragraph (1)(A) by reason of the use made of any structure which was on the land when acquired by the organization.
(C) Limitations
Subparagraphs (A) and (B)—
(i) shall apply with respect to any structure on the land when acquired by the organization, or to the land occupied by the structure, only if (and so long as) the intended future use of the land in the manner described in paragraph (1)(A) requires that the structure be demolished or removed in order to use the land in such manner;
(ii) shall not apply to structures erected on the land after the acquisition of the land; and
(iii) shall not apply to property subject to a lease which is a business lease (as defined in this section immediately before the enactment of the Tax Reform Act of 1976).
(D) Refund of taxes when subparagraph (B) applies
If an organization for any taxable year has not used land in the manner to satisfy the actual use condition of subparagraph (B) before the time prescribed by law (including extensions thereof) for filing the return for such taxable year, the tax for such year shall be computed without regard to the application of subparagraph (B), but if and when such use condition is satisfied, the provisions of subparagraph (B) shall then be applied to such taxable year. If the actual use condition of subparagraph (B) is satisfied for any taxable year after such time for filing the return, and if credit or refund of any overpayment for the taxable year resulting from the satisfaction of such use condition is prevented at the close of the taxable year in which the use condition is satisfied, by the operation of any law or rule of law (other than
(E) Special rule for churches
In applying this paragraph to a church or convention or association of churches, in lieu of the 10-year period referred to in subparagraphs (A) and (B) a 15-year period shall be applied, and subparagraphs (A) and (B)(ii) shall apply whether or not the acquired land meets the neighborhood test.
(c) Acquisition indebtedness
(1) General rule
For purposes of this section, the term "acquisition indebtedness" means, with respect to any debt-financed property, the unpaid amount of—
(A) the indebtedness incurred by the organization in acquiring or improving such property;
(B) the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement; and
(C) the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement.
(2) Property acquired subject to mortgage, etc.
For purposes of this subsection—
(A) General rule
Where property (no matter how acquired) is acquired subject to a mortgage or other similar lien, the amount of the indebtedness secured by such mortgage or lien shall be considered as an indebtedness of the organization incurred in acquiring such property even though the organization did not assume or agree to pay such indebtedness.
(B) Exceptions
Where property subject to a mortgage is acquired by an organization by bequest or devise, the indebtedness secured by the mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of the acquisition. If an organization acquires property by gift subject to a mortgage which was placed on the property more than 5 years before the gift, which property was held by the donor more than 5 years before the gift, the indebtedness secured by such mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of such gift. This subparagraph shall not apply if the organization, in order to acquire the equity in the property by bequest, devise, or gift, assumes and agrees to pay the indebtedness secured by the mortgage, or if the organization makes any payment for the equity in the property owned by the decedent or the donor.
(C) Liens for taxes or assessments
Where State law provides that—
(i) a lien for taxes, or
(ii) a lien for assessments,
made by a State or a political subdivision thereof attaches to property prior to the time when such taxes or assessments become due and payable, then such lien shall be treated as similar to a mortgage (within the meaning of subparagraph (A)) but only after such taxes or assessments become due and payable and the organization has had an opportunity to pay such taxes or assessments in accordance with State law.
(3) Extension of obligations
For purposes of this section, an extension, renewal, or refinancing of an obligation evidencing a pre-existing indebtedness shall not be treated as the creation of a new indebtedness.
(4) Indebtedness incurred in performing exempt purpose
For purposes of this section, the term "acquisition indebtedness" does not include indebtedness the incurrence of which is inherent in the performance or exercise of the purpose or function constituting the basis of the organization's exemption, such as the indebtedness incurred by a credit union described in section 501(c)(14) in accepting deposits from its members.
(5) Annuities
For purposes of this section, the term "acquisition indebtedness" does not include an obligation to pay an annuity which—
(A) is the sole consideration (other than a mortgage to which paragraph (2)(B) applies) issued in exchange for property if, at the time of the exchange, the value of the annuity is less than 90 percent of the value of the property received in the exchange,
(B) is payable over the life of one individual in being at the time the annuity is issued, or over the lives of two individuals in being at such time, and
(C) is payable under a contract which—
(i) does not guarantee a minimum amount of payments or specify a maximum amount of payments, and
(ii) does not provide for any adjustment of the amount of the annuity payments by reference to the income received from the transferred property or any other property.
(6) Certain Federal financing
(A) In general
For purposes of this section, the term "acquisition indebtedness" does not include—
(i) an obligation, to the extent that it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, or construction of housing for low and moderate income persons, or
(ii) indebtedness incurred by a small business investment company licensed after the date of the enactment of the American Jobs Creation Act of 2004 under the Small Business Investment Act of 1958 if such indebtedness is evidenced by a debenture—
(I) issued by such company under section 303(a) of such Act, and
(II) held or guaranteed by the Small Business Administration.
(B) Limitation
Subparagraph (A)(ii) shall not apply with respect to any small business investment company during any period that—
(i) any organization which is exempt from tax under this title (other than a governmental unit) owns more than 25 percent of the capital or profits interest in such company, or
(ii) organizations which are exempt from tax under this title (including governmental units other than any agency or instrumentality of the United States) own, in the aggregate, 50 percent or more of the capital or profits interest in such company.
(7) Average acquisition indebtedness
For purposes of this section, the term "average acquisition indebtedness" for any taxable year with respect to a debt-financed property means the average amount, determined under regulations prescribed by the Secretary of the acquisition indebtedness during the period the property is held by the organization during the taxable year, except that for the purpose of computing the percentage of any gain or loss to be taken into account on a sale or other disposition of debt-financed property, such term means the highest amount of the acquisition indebtedness with respect to such property during the 12-month period ending with the date of the sale or other disposition.
(8) Securities subject to loans
For purposes of this section—
(A) payments with respect to securities loans (as defined in section 512(a)(5)) shall be deemed to be derived from the securities loaned and not from collateral security or the investment of collateral security from such loans,
(B) any deductions which are directly connected with collateral security for such loan, or with the investment of collateral security, shall be deemed to be deductions which are directly connected with the securities loaned, and
(C) an obligation to return collateral security shall not be treated as acquisition indebtedness (as defined in paragraph (1)).
(9) Real property acquired by a qualified organization
(A) In general
Except as provided in subparagraph (B), the term "acquisition indebtedness" does not, for purposes of this section, include indebtedness incurred by a qualified organization in acquiring or improving any real property. For purposes of this paragraph, an interest in a mortgage shall in no event be treated as real property.
(B) Exceptions
The provisions of subparagraph (A) shall not apply in any case in which—
(i) the price for the acquisition or improvement is not a fixed amount determined as of the date of the acquisition or the completion of the improvement;
(ii) the amount of any indebtedness or any other amount payable with respect to such indebtedness, or the time for making any payment of any such amount, is dependent, in whole or in part, upon any revenue, income, or profits derived from such real property;
(iii) the real property is at any time after the acquisition leased by the qualified organization to the person selling such property to such organization or to any person who bears a relationship described in section 267(b) or 707(b) to such person;
(iv) the real property is acquired by a qualified trust from, or is at any time after the acquisition leased by such trust to, any person who—
(I) bears a relationship which is described in subparagraph (C), (E), or (G) of section 4975(e)(2) to any plan with respect to which such trust was formed, or
(II) bears a relationship which is described in subparagraph (F) or (H) of section 4975(e)(2) to any person described in subclause (I);
(v) any person described in clause (iii) or (iv) provides the qualified organization with financing in connection with the acquisition or improvement; or
(vi) the real property is held by a partnership unless the partnership meets the requirements of clauses (i) through (v) and unless—
(I) all of the partners of the partnership are qualified organizations,
(II) each allocation to a partner of the partnership which is a qualified organization is a qualified allocation (within the meaning of section 168(h)(6)), or
(III) such partnership meets the requirements of subparagraph (E).
For purposes of subclause (I) of clause (vi), an organization shall not be treated as a qualified organization if any income of such organization is unrelated business taxable income.
(C) Qualified organization
For purposes of this paragraph, the term "qualified organization" means—
(i) an organization described in section 170(b)(1)(A)(ii) and its affiliated support organizations described in section 509(a)(3);
(ii) any trust which constitutes a qualified trust under section 401;
(iii) an organization described in section 501(c)(25); or
(iv) a retirement income account described in section 403(b)(9).
(D) Other pass-thru entities; tiered entities
Rules similar to the rules of subparagraph (B)(vi) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities.
(E) Certain allocations permitted
(i) In general
A partnership meets the requirements of this subparagraph if—
(I) the allocation of items to any partner which is a qualified organization cannot result in such partner having a share of the overall partnership income for any taxable year greater than such partner's share of the overall partnership loss for the taxable year for which such partner's loss share will be the smallest, and
(II) each allocation with respect to the partnership has substantial economic effect within the meaning of section 704(b)(2).
For purposes of this clause, items allocated under section 704(c) shall not be taken into account.
(ii) Special rules
(I) Chargebacks
Except as provided in regulations, a partnership may without violating the requirements of this subparagraph provide for chargebacks with respect to disproportionate losses previously allocated to qualified organizations and disproportionate income previously allocated to other partners. Any chargeback referred to in the preceding sentence shall not be at a ratio in excess of the ratio under which the loss or income (as the case may be) was allocated.
(II) Preferred rates of return, etc.
To the extent provided in regulations, a partnership may without violating the requirements of this subparagraph provide for reasonable preferred returns or reasonable guaranteed payments.
(iii) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph, including regulations which may provide for exclusion or segregation of items.
(F) Special rules for organizations described in section 501(c)(25)
(i) In general
In computing under section 512 the unrelated business taxable income of a disqualified holder of an interest in an organization described in section 501(c)(25), there shall be taken into account—
(I) as gross income derived from an unrelated trade or business, such holder's pro rata share of the items of income described in clause (ii)(I) of such organization, and
(II) as deductions allowable in computing unrelated business taxable income, such holder's pro rata share of the items of deduction described in clause (ii)(II) of such organization.
Such amounts shall be taken into account for the taxable year of the holder in which (or with which) the taxable year of such organization ends.
(ii) Description of amounts
For purposes of clause (i)—
(I) gross income is described in this clause to the extent such income would (but for this paragraph) be treated under subsection (a) as derived from an unrelated trade or business, and
(II) any deduction is described in this clause to the extent it would (but for this paragraph) be allowable under subsection (a)(2) in computing unrelated business taxable income.
(iii) Disqualified holder
For purposes of this subparagraph, the term "disqualified holder" means any shareholder (or beneficiary) which is not described in clause (i) or (ii) of subparagraph (C).
(G) Special rules for purposes of the exceptions
Except as otherwise provided by regulations—
(i) Small leases disregarded
For purposes of clauses (iii) and (iv) of subparagraph (B), a lease to a person described in such clause (iii) or (iv) shall be disregarded if no more than 25 percent of the leasable floor space in a building (or complex of buildings) is covered by the lease and if the lease is on commercially reasonable terms.
(ii) Commercially reasonable financing
Clause (v) of subparagraph (B) shall not apply if the financing is on commercially reasonable terms.
(H) Qualifying sales by financial institutions
(i) In general
In the case of a qualifying sale by a financial institution, except as provided in regulations, clauses (i) and (ii) of subparagraph (B) shall not apply with respect to financing provided by such institution for such sale.
(ii) Qualifying sale
For purposes of this clause, there is a qualifying sale by a financial institution if—
(I) a qualified organization acquires property described in clause (iii) from a financial institution and any gain recognized by the financial institution with respect to the property is ordinary income,
(II) the stated principal amount of the financing provided by the financial institution does not exceed the amount of the outstanding indebtedness (including accrued but unpaid interest) of the financial institution with respect to the property described in clause (iii) immediately before the acquisition referred to in clause (iii) or (v), whichever is applicable, and
(III) the present value (determined as of the time of the sale and by using the applicable Federal rate determined under section 1274(d)) of the maximum amount payable pursuant to the financing that is determined by reference to the revenue, income, or profits derived from the property cannot exceed 30 percent of the total purchase price of the property (including the contingent payments).
(iii) Property to which subparagraph applies
Property is described in this clause if such property is foreclosure property, or is real property which—
(I) was acquired by the qualified organization from a financial institution which is in conservatorship or receivership, or from the conservator or receiver of such an institution, and
(II) was held by the financial institution at the time it entered into conservatorship or receivership.
(iv) Financial institution
For purposes of this subparagraph, the term "financial institution" means—
(I) any financial institution described in section 581 or 591(a),
(II) any other corporation which is a direct or indirect subsidiary of an institution referred to in subclause (I) but only if, by virtue of being affiliated with such institution, such other corporation is subject to supervision and examination by a Federal or State agency which regulates institutions referred to in subclause (I), and
(III) any person acting as a conservator or receiver of an entity referred to in subclause (I) or (II) (or any government agency or corporation succeeding to the rights or interest of such person).
(v) Foreclosure property
For purposes of this subparagraph, the term "foreclosure property" means any real property acquired by the financial institution as the result of having bid on such property at foreclosure, or by operation of an agreement or process of law, after there was a default (or a default was imminent) on indebtedness which such property secured.
(d) Basis of debt-financed property acquired in corporate liquidation
For purposes of this subtitle, if the property was acquired in a complete or partial liquidation of a corporation in exchange for its stock, the basis of the property shall be the same as it would be in the hands of the transferor corporation, increased by the amount of gain recognized to the transferor corporation upon such distribution and by the amount of any gain to the organization which was included, on account of such distribution, in unrelated business taxable income under subsection (a).
(e) Allocation rules
Where debt-financed property is held for purposes described in subsection (b)(1)(A), (B), (C), or (D) as well as for other purposes, proper allocation shall be made with respect to basis, indebtedness, and income and deductions. The allocations required by this section shall be made in accordance with regulations prescribed by the Secretary to the extent proper to carry out the purposes of this section.
(f) Personal property leased with real property
For purposes of this section, the term "real property" includes personal property of the lessor leased by it to a lessee of its real estate if the lease of such personal property is made under, or in connection with, the lease of such real estate.
(g) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the circumvention of any provision of this section through the use of segregated asset accounts.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
The Tax Reform Act of 1976, referred to in subsec. (b)(3)(C)(iii), is
The date of the enactment of the American Jobs Creation Act of 2004, referred to in subsec. (c)(6)(A)(ii), is the date of enactment of
The Small Business Investment Act of 1958, referred to in subsec. (c)(6)(A)(ii), is
Amendments
2006—Subsec. (c)(9)(C)(iv).
2005—Subsec. (b)(1)(E).
2004—Subsec. (b)(1)(E).
Subsec. (c)(6).
1993—Subsec. (c)(9)(A).
Subsec. (c)(9)(B).
Subsec. (c)(9)(G), (H).
1989—Subsec. (c)(9)(E), (F).
1988—Subsec. (c)(9)(B).
Subsec. (c)(9)(E).
Subsec. (c)(9)(E)(i).
Subsec. (c)(9)(E)(iii).
1987—Subsec. (c)(9)(B)(vi).
"(I) any partner of the partnership is not a qualified organization, and
"(II) the principal purpose of any allocation to any partner of the partnership which is a qualified organization which is not a qualified allocation (within the meaning of section 168(h)(6)) is the avoidance of income tax."
Subsec. (c)(9)(E).
1986—Subsec. (c)(9)(B).
Subsec. (c)(9)(B)(vi).
"(I) all of the partners of the partnership are qualified organizations, or
"(II) each allocation to a partner of the partnership which is a qualified organization is a qualified allocation (within the meaning of section 168(j)(9))."
Subsec. (c)(9)(B)(vi)(II).
Subsec. (c)(9)(C)(i).
Subsec. (c)(9)(C)(iii).
1984—Subsec. (c)(9).
Subsec. (c)(9)(B)(iii).
Subsec. (g).
1980—Subsec. (c)(9).
1978—Subsec. (c)(8).
1976—Subsecs. (a)(1), (b)(3)(A), (B)(ii).
Subsec. (b)(3)(C)(iii).
Subsec. (c)(1).
Subsec. (c)(2)(C).
Subsecs. (c)(7), (e).
Subsec. (f).
Subsec. (g).
Subsec. (h).
1975—Subsec. (b)(3)(D).
1969—Subsec. (a).
Subsecs. (b) to (e).
Subsec. (f).
Subsecs. (g), (h).
1960—Subsec. (c)(8).
Editorial Notes
Effective Date of 2006 Amendment
Effective Date of 2004 Amendment
Amendment by section 702(b) of
Effective Date of 1993 Amendment
"(1)
"(2)
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by sections 1016(a)(6) and 1018(u)(13) of
Amendment by section 2004(h) of
Effective Date of 1987 Amendment
"(1) property acquired by the partnership after October 13, 1987, and
"(2) partnership interests acquired after October 13, 1987,
except that such amendments shall not apply in the case of any property (or partnership interest) acquired pursuant to a written binding contract in effect on October 13, 1987, and at all times thereafter before such property (or interest) is acquired."
Effective Date of 1986 Amendment
Amendment by section 201(d)(9) of
Amendment by section 201(d)(9) of
Amendment by section 1603(b) of
Amendment by section 1878(e) of
Effective Date of 1984 Amendment
Amendment by section 174(b)(5)(B) of
"(1)
"(2)
"(A) The amendment made by subsection (a) [amending this section] shall not apply to any indebtedness incurred before January 1, 1985, by a partnership described in subparagraph (B) if such indebtedness is incurred with respect to property acquired (directly or indirectly) by such partnership before such date.
"(B) A partnership is described in this subparagraph if—
"(i) before October 21, 1983, the partnership was organized, a request for exemption with respect to such partnership was filed with the Department of Labor, and a private placement memorandum stating the maximum number of units in the partnership that would be offered had been circulated,
"(ii) the interest in the property to be acquired, directly or indirectly (including through acquiring an interest in another partnership) by such partnership was described in such private placement memorandum, and
"(iii) the marketing of partnership interests in such partnership is completed not later than 2 years after the later of the date of enactment of this Act [July 18, 1984] or the date of publication in the Federal Register of such exemption by the Department of Labor and the aggregate number of units in such partnership sold does not exceed the amount described in clause (i).
"(3)
"(A) The amendment made by subsection (a) [amending this section] shall not apply to any indebtedness incurred before January 1, 1986, by a partnership described in subparagraph (B) if such indebtedness is incurred with respect to property acquired (directly or indirectly) by such partnership before such date.
"(B) A partnership is described in this paragraph if—
"(i) before March 6, 1984, the partnership was organized and publicly announced, the maximum amount of interests which would be sold in such partnership, and
"(ii) the marketing of partnership interests in such partnership is completed not later than the 90th day after the date of the enactment of this Act [July 18, 1984] and the aggregate amount of interests in such partnership sold does not exceed the maximum amount described in clause (i).
For purposes of clause (i), the maximum amount taken into account shall be the greatest of the amounts shown in the registration statement, prospectus, or partnership agreement.
"(C)
Effective Date of 1980 Amendment
Extension of 1980 Amendment of This Section to Other Persons
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(72) of
Effective Date of 1975 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Transition Rule for Acquisition Indebtedness With Respect to Certain Land
§515. Taxes of foreign countries and possessions of the United States
The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax of an organization subject to the tax imposed by section 511 to the extent provided in section 901; and in the case of the tax imposed by section 511, the term "taxable income" as used in section 901 shall be read as "unrelated business taxable income".