
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC503]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                   Subchapter F--Exempt Organizations
 
                          PART I--GENERAL RULE
 
Sec. 503. Requirements for exemption


(a) Denial of exemption to organizations engaged in prohibited 
        transactions

                          (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 transaction 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) lends 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 other 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 ownership, 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 or more of the total value of shares of all classes of 
stock of the corporation.

(c) Future status of organizations denied exemption

    Any organization described in section 501(c) (17) or (18) or 
subsection (a)(1)(B) which is denied exemption under section 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, Sec. 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 receipt 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 by 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 employers 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 refused 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).

(Aug. 16, 1954, ch. 736, 68A Stat. 166; Pub. L. 85-866, title I, 
Sec. 30(a), (b), Sept. 2, 1958, 72 Stat. 1629, 1630; Pub. L. 86-667, 
Sec. 2, July 14, 1960, 74 Stat. 535; Pub. L. 87-792, Sec. 6, Oct. 10, 
1962, 76 Stat. 827; Pub. L. 91-172, title I, Secs. 101(j)(7)-(14), 
121(b)(6)(B), Dec. 30, 1969, 83 Stat. 527, 542; Pub. L. 93-406, title 
II, Sec. 2003(b), Sept. 2, 1974, 88 Stat. 978; Pub. L. 94-455, title 
XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 101-508, 
title XI, Sec. 11801(a)(22), Nov. 5, 1990, 104 Stat. 1388-521.)


                               Amendments

    1990--Subsec. (d). Pub. L. 101-508 struck out subsec. (d) ``Special 
rule for loans'' which read as follows: ``For purposes of the 
application of subsection (b)(1), in the case of a loan by a trust 
described in section 401(a), the following rules shall apply with 
respect to a loan made before March 1, 1954, which would constitute a 
prohibited transaction if made on or after March 1, 1954:
        ``(1) If any part of the loan is repayable prior to December 31, 
    1955, the renewal of such part of the loan for a period not 
    extending beyond December 31, 1955, on the same terms, shall not be 
    considered a prohibited transaction.
        ``(2) If the loan is repayable on demand, the continuation of 
    the loan without the receipt of adequate security and a reasonable 
    rate of interest beyond December 31, 1955, shall be considered a 
    prohibited transaction.''
    1976--Subsecs. (a)(2), (c). Pub. L. 94-455 struck out ``or his 
delegate'' after ``Secretary''.
    1974--Subsec. (a)(1)(A). Pub. L. 93-406, Sec. 2003(b)(1), 
substituted ``section 501(c)(17)'' for ``section 501(c)(17) or (18)''.
    Subsec. (a)(1)(B). Pub. L. 93-406, Sec. 2003(b)(2), inserted ``which 
is referred to in section 4975(g)(2) or (3)''.
    Subsec. (a)(2). Pub. L. 93-406, Sec. 2003(b)(3), substituted ``or 
paragraph (1)(B)'' for ``or section 401''.
    Subsec. (c). Pub. L. 93-406, Sec. 2003(b)(4), substituted ``or 
subsection (a)(1)(B)'' for ``or section 401''.
    Subsec. (g). Pub. L. 93-406, Sec. 2003(b)(5), struck out subsec. (g) 
which covered trusts benefiting certain owner-employees.
    1969--Subsec. (a)(1)(A). Pub. L. 91-172, Secs. 101(j)(7), 
121(b)(6)(B)(ii), redesignated subpar. (B) as (A) and inserted reference 
to section 501(c)(18). Former subpar. (A), referring to organizations 
described in section 501(c)(3) and to prohibited transactions engaged in 
after July 1, 1950, was struck out.
    Subsec. (a)(1)(B). Pub. L. 91-172, Sec. 101(j)(7), redesignated 
subpar. (C) as (B). Former subpar. (B), referring to organizations 
described in section 501(c)(17) was amended by addition of a reference 
to section 501(c)(18), and redesignated as subpar. (A).
    Subsec. (a)(1)(C). Pub. L. 91-172, Secs. 101(j)(7), 121(b)(6)(B)(i), 
added subpar. (C). Former subpar. (C), dealing with organizations 
described in section 401(a) and with prohibited transactions engaged in 
after Mar. 1, 1954, was redesignated as subpar. (B).
    Subsec. (a)(2). Pub. L. 91-172, Secs. 101(j)(8), 121(b)(6)(B)(ii), 
struck out reference to organizations described in section 501(c)(3), 
and inserted references to organizations described in section 
501(c)(18).
    Subsec. (b). Pub. L. 91-172, Sec. 101(j)(14), redesignated subsec. 
(c) as (b). Former subsec. (b), setting out the organizations to which 
section applied, was struck out.
    Subsec. (c). Pub. L. 91-172, Secs. 101(j)(9), (14), 
121(b)(6)(B)(ii), redesignated subsec. (d) as (c), struck out reference 
to organizations described in section 501(c)(3), and inserted reference 
to organizations described in section 501(c)(17). Former subsec. (c) 
redesignated (b).
    Subsec. (d). Pub. L. 91-172, Sec. 101(j)(10), (14), redesignated 
subsec. (g) as (d) and substituted ``subsection (b)(1)'' for 
``subsection (c)(1).'' Former subsec. (d) redesignated (c).
    Subsec. (e). Pub. L. 91-172, Sec. 101(j)(11), (14), redesignated 
subsec. (h) as (e), modified heading to read: ``Special rules'', 
substituted ``subsection (b)(1)'' for ``subsection (c)(1)'' in text 
preceding par. (1) and in par. (3), and in text preceding par. (1) 
struck out ``acquired by a trust described in section 401(a) or section 
501(c)(17)''. Former subsec. (e), covering the disallowance of certain 
charitable deductions, was struck out.
    Subsec. (f). Pub. L. 91-172, Sec. 101(j)(12), (14), redesignated 
subsec. (i) as (f) and substituted ``Subsection (b)(1)'' for 
``Subsection (c)(1)'' and ``subsection (e)'' for ``subsection (h)''. 
Former subsec. (f), defining ``gift or bequest'', was struck out.
    Subsec. (g). Pub. L. 91-172, Sec. 101(j)(13), (14), redesignated 
subsec. (j) as (g) and substituted ``subsection (b)'' for ``subsection 
(c)'' in par. (1). Former subsec. (g) redesignated (d).
    Subsecs. (h) to (j). Pub. L. 91-172, Sec. 101(j)(14), redesignated 
subsecs. (h), (i), and (j) as (e), (f), and (g), respectively. Former 
subsecs. (e) and (f) were struck out and former subsec. (g) was 
redesignated (d).
    1962--Subsec. (j). Pub. L. 87-792 added subsec. (j).
    1960--Subsec. (a)(1). Pub. L. 86-667, Sec. 2(a)(1), denied exemption 
to an organization described in section 501(c)(17) if it has engaged in 
a prohibited transaction after Dec. 31, 1959.
    Subsecs. (a)(2), (b), (d). Pub. L. 86-667, Sec. 2(a)(2), (b), (c), 
included organizations described in section 501(c)(17).
    Subsec. (h). Pub. L. 86-667, Sec. 2(d), included trusts described in 
section 501(c)(17).
    1958--Subsec. (h). Pub. L. 85-866, Sec. 30(a), added subsec. (h).
    Subsec. (i). Pub. L. 85-866, Sec. 30(b), added subsec. (i).


                    Effective Date of 1974 Amendment

    Amendment by Pub. L. 93-406 effective Jan. 1, 1975, but with 
provision for an election to be exercised by an organization so as to 
constitute a savings clause with reference to the amendment, see section 
2003(c) of Pub. L. 93-406, set out as an Effective Date; Savings 
Provisions note under section 4975 of this title.


                    Effective Date of 1969 Amendment

    Amendment by section 101(j)(7)-(14) of Pub. L. 91-172 effective Jan. 
1, 1970, see section 101(k)(1) of Pub. L. 91-172, set out as an 
Effective Date note under section 4940 of this title.
    Amendment by section 121(b)(6)(B) of Pub. L. 91-172 applicable to 
taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. 
L. 91-172, set out as a note under section 511 of this title.


                    Effective Date of 1962 Amendment

    Amendment by Pub. L. 87-792 applicable to taxable years beginning 
after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as a note 
under section 22 of this title.


                    Effective Date of 1960 Amendment

    Amendment by Pub. L. 86-667 applicable to taxable years beginning 
after Dec. 31, 1959, and in the case of loans, the amendments to this 
section made by Pub. L. 86-667 are applicable only to loans made, 
renewed, or continued after Dec. 31, 1959, see section 6 of Pub. L. 86-
667, set out as a note under section 501 of this title.


                    Effective Date of 1958 Amendment

    Section 30(c) of Pub. L. 85-866, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendment made by subsection (a) [amending this section] shall apply 
with respect to taxable years ending after March 15, 1956. The amendment 
made by subsection (b) [amending this section] shall apply with respect 
to taxable years ending after the date of the enactment of this Act 
[Sept. 2, 1958], but only with respect to periods after such date.
    ``(2) Exceptions.--Nothing in subsection (a) [amending this section] 
shall be construed to make any transaction a prohibited transaction 
which, under announcements of the Internal Revenue Service made with 
respect to section 503(c)(1) of the Internal Revenue Code of 1986 
[formerly I.R.C. 1954] before the date of the enactment of this Act 
[Sept. 2, 1958], would not constitute a prohibited transaction. In the 
case of any bond, debenture, note, or certificate or other evidence of 
indebtedness acquired before the date of the enactment of this Act 
[Sept. 2, 1958], by a trust described in section 401(a) of such Code 
which is held on such date, paragraphs (2) and (3) of section 503(h) of 
such Code shall be treated as satisfied if such requirements would have 
been satisfied if such obligation had been acquired on such date of 
enactment [Sept. 2, 1958].''


                            Savings Provision

    For provisions that nothing in amendment by Pub. L. 101-508 be 
construed to affect treatment of certain transactions occurring, 
property acquired, or items of income, loss, deduction, or credit taken 
into account prior to Nov. 5, 1990, for purposes of determining 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 501, 4941 of this title; 
title 29 section 1114.
