
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: 26USC512]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                   Subchapter F--Exempt Organizations
 
  PART III--TAXATION OF BUSINESS INCOME OF CERTAIN EXEMPT ORGANIZATIONS
 
Sec. 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), (17), or (20) of section 501(c)

        (A) General rule

            In the case of an organization described in paragraph (7), 
        (9), (17), or (20) of section 501(c), the term ``unrelated 
        business taxable income'' means the gross income (excluding any 
        exempt function income), less the deductions allowed by this 
        chapter which are directly connected with the production of the 
        gross income (excluding exempt function income), both computed 
        with the modifications provided in paragraphs (6), (10), (11), 
        and (12) of subsection (b). For purposes of the preceding 
        sentence, the deductions provided by sections 243, 244, and 245 
        (relating to dividends received by corporations) shall be 
        treated as not directly connected with the production of gross 
        income.

        (B) Exempt function income

            For purposes of subparagraph (A), the term ``exempt function 
        income'' means the gross income from dues, fees, charges, or 
        similar amounts paid by members of the organization as 
        consideration for providing such members or their dependents or 
        guests goods, facilities, or services in furtherance of the 
        purposes constituting the basis for the exemption of the 
        organization to which such income is paid. Such term also means 
        all income (other than an amount equal to the gross income 
        derived from any unrelated trade or business regularly carried 
        on by such organization computed as if the organization were 
        subject to paragraph (1)), which is set aside--
                (i) for a purpose specified in section 170(c)(4), or
                (ii) in the case of an organization described in 
            paragraph (9), (17), or (20) of section 501(c), to provide 
            for the payment of life, sick, accident, or other benefits,

        including reasonable costs of administration directly connected 
        with a purpose described in clause (i) or (ii). If during the 
        taxable year, an amount which is 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), (17), or (20) of section 501(c), 
        subparagraph (A) shall apply as if such corporation were the 
        organization to which the income is payable. For purposes of the 
        preceding sentence, such corporation shall be treated as having 
        exempt function income for a taxable year only if it files a 
        consolidated return with such organization for such year.

        (D) Nonrecognition of gain

            If property used directly in the performance of the exempt 
        function of an organization described in paragraph (7), (9), 
        (17), or (20) of section 501(c) is sold by such organization, 
        and within a period 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), (17), or (20) 
                of section 501(c)

            (i) In general

                In the case of any organization described in paragraph 
            (9), (17), or (20) of section 501(c), a set-aside for any 
            purpose specified in clause (ii) of subparagraph (B) may be 
            taken into account under subparagraph (B) only to the extent 
            that such set-aside does not result in an amount of assets 
            set aside for such purpose in excess of the account limit 
            determined under section 419A (without regard to subsection 
            (f)(6) thereof) for the taxable year (not taking into 
            account any reserve described in section 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.

(b) Modifications

    The modifications referred to in subsection (a) are the following:
        (1) There shall be excluded all dividends, interest, payments 
    with respect to securities loans (as defined in section 512(a)(5)), 
    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) Special rules for certain amounts received from controlled 
    entities.--
            (A) In general.--If an organization (in this paragraph 
        referred to as the ``controlling organization'') receives or 
        accrues (directly or indirectly) a specified payment from 
        another entity which it controls (in this paragraph referred to 
        as the ``controlled entity''), notwithstanding paragraphs (1), 
        (2), and (3), the controlling organization shall include such 
        payment as an item of gross income derived from an unrelated 
        trade or business to the extent such payment reduces the net 
        unrelated income of the controlled entity (or increases any net 
        unrelated loss of the controlled entity). There shall be allowed 
        all deductions of the controlling organization directly 
        connected with amounts treated as derived from an unrelated 
        trade or business under the preceding sentence.
            (B) Net unrelated income or loss.--For purposes of this 
        paragraph--
                (i) Net unrelated income.--The term ``net unrelated 
            income'' means--
                    (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) Net unrelated loss.--The term ``net unrelated 
            loss'' means the net operating loss adjusted under rules 
            similar to the rules of clause (i).

            (C) Specified payment.--For purposes of this paragraph, the 
        term ``specified payment'' means any interest, annuity, royalty, 
        or rent.
            (D) Definition of control.--For purposes of this paragraph--
                (i) Control.--The term ``control'' means--
                    (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) Constructive ownership.--Section 318 (relating to 
            constructive ownership of stock) shall apply for purposes of 
            determining ownership of stock in a corporation. Similar 
            principles shall apply for purposes of determining ownership 
            of interests in any other entity.

            (E) Related persons.--The Secretary shall prescribe such 
        rules as may be necessary or appropriate to prevent avoidance of 
        the purposes of this paragraph through the use of related 
        persons.

        [(14) Repealed. Pub. L. 101-508, title XI, Sec. 11801(a)(23), 
    Nov. 5, 1990, 104 Stat. 1388-521.]
        (15) Except as provided in paragraph (4), in the case of a trade 
    or business--
            (A) which consists of providing services under license 
        issued by a Federal regulatory agency,
            (B) which is carried on by a religious order or by an 
        educational organization described in section 170(b)(1)(A)(ii) 
        maintained by such religious order, and which was so carried on 
        before May 27, 1959, and
            (C) less than 10 percent of the net income of which for each 
        taxable year is used for activities which are not related to the 
        purpose constituting the basis for the religious 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) Treatment of certain amounts derived from foreign 
    corporations.--
            (A) In general.--Notwithstanding paragraph (1), any amount 
        included in gross income under section 951(a)(1)(A) shall be 
        included as an item of gross income derived from an unrelated 
        trade or business to the extent the amount so included is 
        attributable to insurance income (as defined in section 953) 
        which, if derived directly by the organization, would be treated 
        as gross income from an unrelated trade or business. There shall 
        be allowed all deductions directly connected with amounts 
        included in gross income under the preceding sentence.
            (B) Exception.--
                (i) In general.--Subparagraph (A) shall not apply to 
            income attributable to a policy of insurance or reinsurance 
            with respect to which the person (directly or indirectly) 
            insured is--
                    (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) Affiliate.--For purposes of this subparagraph--
                    (I) In general.--The determination as to whether an 
                entity is an affiliate of an organization shall be made 
                under rules similar to the rules of section 
                168(h)(4)(B).
                    (II) Special rule.--Two or more organizations (and 
                any affiliates of such organizations) shall be treated 
                as affiliates if such organizations are colleges or 
                universities described in section 170(b)(1)(A)(ii) or 
                organizations described in section 170(b)(1)(A)(iii) and 
                participate in an insurance arrangement that provides 
                for any profits from such arrangement to be returned to 
                the policyholders in their capacity as such.

            (C) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this paragraph, including regulations for the 
        application of this paragraph in the case of income paid through 
        1 or more entities or between 2 or more chains of entities.

(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 
        1992'' in subparagraph (B) 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)(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, 68A Stat. 170; Pub. L. 85-367, Sec. 1(a), Apr. 
7, 1958, 72 Stat. 80; Pub. L. 88-380, Sec. 1, July 17, 1964, 78 Stat. 
333; Pub. L. 89-809, title I, Sec. 104(g), Nov. 13, 1966, 80 Stat. 1559; 
Pub. L. 91-172, title I, Sec. 121(b)(1), (2), Dec. 30, 1969, 83 Stat. 
537, 538; Pub. L. 92-418, Sec. 1(b), Aug. 29, 1972, 86 Stat. 656; Pub. 
L. 94-396, Sec. 1(a), Sept. 3, 1976, 90 Stat. 1201; Pub. L. 94-455, 
title XIX, Secs. 1901(b)(8)(F), 1906(b)(13)(A), 1951(b)(8)(A), Oct. 4, 
1976, 90 Stat. 1794, 1834, 1839; Pub. L. 94-568, Sec. 1(b), Oct. 20, 
1976, 90 Stat. 2697; Pub. L. 95-345, Sec. 2(a)(2), (b), Aug. 15, 1978, 
92 Stat. 481; Pub. L. 97-448, title I, Sec. 102(m)(3), Jan. 12, 1983, 96 
Stat. 2374; Pub. L. 98-369, div. A, title V, Sec. 511(b), July 18, 1984, 
98 Stat. 860; Pub. L. 99-514, title XVIII, Sec. 1851(a)(10), Oct. 22, 
1986, 100 Stat. 2861; Pub. L. 100-203, title X, Sec. 10213(a), Dec. 22, 
1987, 101 Stat. 1330-406; Pub. L. 100-647, title I, Sec. 1018(t)(2)(B), 
Nov. 10, 1988, 102 Stat. 3587; Pub. L. 101-508, title XI, 
Sec. 11801(a)(23), Nov. 5, 1990, 104 Stat. 1388-521; Pub. L. 103-66, 
title XIII, Secs. 13145(a), 13147(a), 13148(a), (b), Aug. 10, 1993, 107 
Stat. 443, 444; Pub. L. 104-188, title I, Secs. 1115(a), 1316(c), 
1603(a), Aug. 20, 1996, 110 Stat. 1761, 1786, 1835; Pub. L. 105-34, 
title III, Sec. 312(d)(5), title X, Sec. 1041(a), title XV, 
Sec. 1523(a), title XVI, Sec. 1601(c)(4)(A), (D), Aug. 5, 1997, 111 
Stat. 840, 938, 1070, 1087; Pub. L. 105-206, title VI, Secs. 6010(j)(1), 
(2), 6023(8), July 22, 1998, 112 Stat. 815, 825.)

Adjustment of Amount of Annual Dues Threshold for Tax Years Beginning in 
                                  2001

        For adjustment of maximum amount of annual dues paid to 
    agricultural or horticultural organizations under subsec. (d)(1) of 
    this section for tax years beginning in 2001, see section 3.12 of 
    Revenue Procedure 2001-13, set out as a note under section 1 of this 
    title.

                       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 Pub. L. 
105-34, which was approved Aug. 5, 1997.
    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 Pub. L. 98-369, which was approved July 18, 1984.


                               Amendments

    1998--Subsec. (b)(13)(A). Pub. L. 105-206, Sec. 6010(j)(1), inserted 
``or accrues'' after ``receives'' in first sentence.
    Subsec. (b)(13)(B)(i)(I). Pub. L. 105-206, Sec. 6010(j)(2), struck 
out ``(as defined in section 513A(a)(5)(A))'' after ``exempt purposes''.
    Subsec. (b)(17)(B)(ii)(II). Pub. L. 105-206, Sec. 6023(8), 
substituted ``rule'' for ``Rule'' in subcl. heading.
    1997--Subsec. (a)(3)(D). Pub. L. 105-34, Sec. 312(d)(5), inserted 
``(as in effect on the day before the date of the enactment of the 
Taxpayer Relief Act of 1997)'' after ``1034''.
    Subsec. (b)(13). Pub. L. 105-34, Sec. 1041(a), amended par. (13) 
generally. Prior to amendment, par. (13) related to inclusion in gross 
income of controlling organization of amounts of interest, annuities, 
royalties, and rents derived from a controlled organization.
    Subsec. (e)(1). Pub. L. 105-34, Sec. 1601(c)(4)(D), substituted 
``section 1361(c)(6)'' for ``section 1361(c)(7)''.
    Subsec. (e)(2). Pub. L. 105-34, Sec. 1601(c)(4)(A), substituted ``as 
defined in section 1361(e)(1)(C)'' for ``within the meaning of section 
1012''.
    Subsec. (e)(3). Pub. L. 105-34, Sec. 1523(a), added par. (3).
    1996--Subsec. (b)(17). Pub. L. 104-188, Sec. 1603(a), added par. 
(17).
    Subsec. (d). Pub. L. 104-188, Sec. 1115(a), added subsec. (d).
    Subsec. (e). Pub. L. 104-188, Sec. 1316(c), added subsec. (e).
    1993--Subsec. (b)(1). Pub. L. 103-66, Sec. 13148(a), inserted 
``amounts received or accrued as consideration for entering into 
agreements to make loans,'' before ``and annuities''.
    Subsec. (b)(5). Pub. L. 103-66, Sec. 13148(b), in second sentence, 
substituted ``all gains or losses recognized, in connection with the 
organization's investment activities, from'' for ``all gains on'', 
struck out ``, written by the organization in connection with its 
investment activities,'' after ``termination of options'', and inserted 
before period at end ``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''.
    Subsec. (b)(16). Pub. L. 103-66, Sec. 13147(a), added par. (16).
    Subsec. (c)(2), (3). Pub. L. 103-66, Sec. 13145(a), redesignated 
par. (3) as (2), substituted ``paragraph (1)'' for ``paragraph (1) or 
(2)'', and struck out heading and text of former par. (2). Text read as 
follows: ``Notwithstanding any other provision of this section--
        ``(A) any organization's share (whether or not distributed) of 
    the gross income of a publicly traded partnership (as defined in 
    section 469(k)(2)) shall be treated as gross income derived from an 
    unrelated trade or business, and
        ``(B) such organization's share of the partnership deductions 
    shall be allowed in computing unrelated business taxable income.''
    1990--Subsec. (b)(14). Pub. L. 101-508 struck out par. (14) which 
read as follows: ``Except as provided in paragraph (4), in the case of a 
church, or convention or association of churches, for taxable years 
beginning before January 1, 1976, there shall be excluded all gross 
income derived from a trade or business and all deductions directly 
connected with the carrying on of such trade or business if such trade 
or business was carried on by such organization or its predecessor 
before May 27, 1969.''
    1988--Subsec. (a)(3)(E)(ii)(II). Pub. L. 100-647 substituted 
``subclause (I)'' for ``subclause (II)'' and a period for comma at end.
    1987--Subsec. (c). Pub. L. 100-203 substituted ``for partnerships'' 
for ``applicable to partnerships'' in heading and amended text 
generally. Prior to amendment, text read as follows: ``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. If the taxable year of the 
organization is different from that of the partnership, the amounts to 
be so included or deducted in computing the unrelated business taxable 
income 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.''
    1986--Subsec. (a)(3)(E)(i). Pub. L. 99-514, Sec. 1851(a)(10)(A), 
substituted ``determined under section 419A (without regard to 
subsection (f)(6) thereof)'' for ``determined under section 419A(c)''.
    Subsec. (a)(3)(E)(ii). Pub. L. 99-514, Sec. 1851(a)(10)(B), (C), 
redesignated cl. (iii) as (ii), in subcl. I substituted ``an existing 
reserve'' for ``a existing reserve'', and substituted new subcl. (II) 
for former subcl. (II) which read as follows: ``For purposes of 
subclause (I), the term `existing reserve or post-retirement medical or 
life insurance benefit' means the amount of assets set aside as of the 
close of the last plan year ending before the date of the enactment of 
the Tax Reform Act of 1984 for purposes of post-retirement medical 
benefits or life insurance benefits to be provided to covered 
employees.'' Former cl. (ii), which provided that no set aside for 
assets used in the provision of benefits described in cl. (ii) of 
subpar. (B), could be taken into account, was struck out.
    Subsec. (a)(3)(E)(iii), (iv). Pub. L. 99-514, Sec. 1851(a)(10)(B), 
(D), redesignated former cl. (iv) as (iii) and substituted 
``subparagraph shall not'' for ``paragraph shall not''. Former cl. (iii) 
redesignated (ii).
    1984--Subsec. (a)(3). Pub. L. 98-369, Sec. 511(b)(1)(A), substituted 
``paragraph (7), (9), (17), or (20) of section 501(c)'' for ``section 
501(c)(7) or (9)'' wherever appearing in heading and in text.
    Subsec. (a)(3)(B)(ii). Pub. L. 98-369, Sec. 511(b)(1)(B), 
substituted ``paragraph (9), (17), or (20) of section 501(c)'' for 
``section 501(c)(9)''.
    Subsec. (a)(3)(C), (D). Pub. L. 98-369, Sec. 511(b)(1)(A), 
substituted in subpars. (C) and (D) ``paragraph (7), (9), (17), or (20) 
of section 501(c)'' for ``section 501(c)(7) or (9)'' wherever appearing.
    Subsec. (a)(3)(E). Pub. L. 98-369, Sec. 511(b)(2), added subpar. 
(E).
    1983--Subsec. (b)(10). Pub. L. 97-448 substituted ``10 percent'' for 
``5 percent''.
    1978--Subsec. (a)(5). Pub. L. 95-345, Sec. 2(b), added par. (5).
    Subsec. (b)(1). Pub. L. 95-345, Sec. 2(a)(2), inserted provision 
relating to payments with respect to securities loans.
    1976--Subsec. (a)(3)(A). Pub. L. 94-568 provided that for purposes 
of the general rule, the deductions provided by sections 243, 244, and 
245 (relating to dividends received by corporations) shall be treated as 
not directly connected with the production of gross income.
    Subsec. (b). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ``or 
his delegate'' after ``Secretary''.
    Subsec. (b)(5). Pub. L. 94-396 inserted provision relating to 
exclusion of gains on the lapse or termination of options to buy or sell 
securities.
    Subsec. (b)(13), (14). Pub. L. 94-455, Sec. 1951(b)(8)(A), 
redesignated pars. (15) and (16) as (13) and (14), respectively. Former 
pars. (13) and (14), relating to exceptions, additions, and limitations 
applicable in determining unrelated business taxable income, were struck 
out.
    Subsec. (b)(15). Pub. L. 94-455, Secs. 1901(b)(8)(F), 
1906(b)(13)(A), 1951(b)(8)(A), redesignated par. (17) as (15) and 
substituted in subpar. (B) ``educational organization described in 
section 170(b)(1)(A)(ii)'' for ``educational institution (as defined in 
section 151(e)(4))'' after ``order or by an'', and struck out ``or his 
delegate'' after ``Secretary''. Former par. (15) redesignated (13).
    Subsec. (b)(16), (17). Pub. L. 94-455, Sec. 1951(b)(8)(A), 
redesignated pars. (16) and (17) as (14) and (15), respectively.
    1972--Subsec. (a)(4). Pub. L. 92-418 added par. (4).
    1969--Subsec. (a). Pub. L. 91-172, Sec. 121(b)(1), designated 
existing provisions as pars. (1) and (2)(B) and added pars. (2)(A) and 
(3).
    Subsec. (b). Pub. L. 91-172, Sec. 121(b)(2)(D), substituted 
``Modifications'' for ``Exceptions, additions, and limitations'', in 
heading, and, in text preceding par. (1) substituted ``The modifications 
referred to in subsection (a)'' for ``The exceptions, additions, and 
limitations applicable in determining unrelated business taxable 
income''.
    Subsec. (b)(3)(A). Pub. L. 91-172, Sec. 121(b)(2)(A), inserted 
reference to exceptions set out in subsec. (b)(3)(B) in text preceding 
cl. (i), substituted ``property described in section 1245(a)(3)(C)'' for 
``personal property leased with the real property'' in parenthetical of 
cl. (i), and added cl. (ii).
    Subsec. (b)(3)(B). Pub. L. 91-172, Sec. 121(b)(2)(A), added subpar. 
(B).
    Subsec. (b)(3)(C). Pub. L. 91-172, Sec. 121(b)(2)(A), substituted 
``rents excluded under subparagraph (A)'' for ``such rents''.
    Subsec. (b)(4). Pub. L. 91-172, Sec. 121(b)(2)(A), inserted 
reference to pars. (1), (3) and (5) of this subsec., and substituted 
``debt financed property'' for ``a business lease''.
    Subsec. (b)(12). Pub. L. 91-172, Sec. 121(b)(2)(B), made the 
allowance of the specific $1,000 deduction inapplicable for the purposes 
of computing the net operating loss under section 172 of this title and 
par. (6) of this subsec., and provided for the allowance of specific 
deductions equal to the lower of $1,000 or the gross income derived from 
any unrelated trade or business carried on by a parish, individual 
church, district, or other local unit.
    Subsec. (b)(15) to (17). Pub. L. 91-172, Sec. 121(b)(2)(C), added 
pars. (15) to (17).
    1966--Subsec. (a). Pub. L. 89-809 substituted ``, the unrelated 
business taxable income shall be its unrelated business taxable income 
which is effectively connected with the conduct of a trade or business 
within the United States'' for '', the unrelated business taxable income 
shall be its unrelated business taxable income derived from sources 
within the United States determined under subchapter N (sec. 861 and 
following), relating to tax based on income from sources within or 
without the United States''.
    1964--Subsec. (b)(14). Pub. L. 88-380 added par. (14).
    1958--Subsec. (b)(13). Pub. L. 85-367 added par. (13).


                    Effective Date of 1998 Amendment

    Amendment by section 6023(8) of Pub. L. 105-206 effective July 22, 
1998, see section 6023(32) of Pub. L. 105-206, set out as a note under 
section 34 of this title.
    Amendment by section 6010(j)(1), (2) of Pub. L. 105-206 effective, 
except as otherwise provided, as if included in the provisions of the 
Taxpayer Relief Act of 1997, Pub. L. 105-34, to which such amendment 
relates, see section 6024 of Pub. L. 105-206, set out as a note under 
section 1 of this title.


                    Effective Date of 1997 Amendment

    Amendment by section 312(d)(5) of Pub. L. 105-34 applicable to sales 
and exchanges after May 6, 1997, with certain exceptions, see section 
312(d)[(e)] of Pub. L. 105-34, set out as a note under section 121 of 
this title.
    Section 1041(b) of Pub. L. 105-34, as amended by Pub. L. 105-206, 
title VI, Sec. 6010(j)(3), July 22, 1998, 112 Stat. 815, provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendments made by this section [amending this section] shall apply to 
taxable years beginning after the date of the enactment of this Act 
[Aug. 5, 1997].
    ``(2) Binding contracts.--The amendments made by this section shall 
not apply to any amount received or accrued during the first 2 taxable 
years beginning on or after the date of the enactment of this Act if 
such amount is received or accrued pursuant to a written binding 
contract in effect on June 8, 1997, and at all times thereafter before 
such amount is received or accrued. The preceding sentence shall not 
apply to any amount which would (but for the exercise of an option to 
accelerate payment of such amount) be received or accrued after such 2 
taxable years.''
    Section 1523(b) of Pub. L. 105-34 provided that: ``The amendments 
made by this section [amending this section] shall apply to taxable 
years beginning after December 31, 1997.''
    Amendment by section 1601(c)(4)(A), (D) of Pub. L. 105-34 effective 
as if included in the provisions of the Small Business Job Protection 
Act of 1996, Pub. L. 104-188, to which it relates, see section 1601(j) 
of Pub. L. 105-34, set out as a note under section 23 of this title.


                    Effective Date of 1996 Amendment

    Section 1115(b) of Pub. L. 104-188 provided that:
    ``(1) In general.--The amendment made by this section [amending this 
section] shall apply to taxable years beginning after December 31, 1986.
    ``(2) Transitional rule.--If--
        ``(A) for purposes of applying part III of subchapter F of 
    chapter 1 of the Internal Revenue Code of 1986 to any taxable year 
    beginning before January 1, 1987, an agricultural or horticultural 
    organization did not treat any portion of membership dues received 
    by it as income derived in an unrelated trade or business, and
        ``(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) Reasonable basis.--For purposes of paragraph (2), an 
organization shall be treated as having a reasonable basis for not 
treating membership dues as income derived in an unrelated trade or 
business if the taxpayer's treatment of such dues was in reasonable 
reliance on any of the following:
        ``(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 Pub. L. 104-188 applicable to 
taxable years beginning after Dec. 31, 1997, see section 1316(f) of Pub. 
L. 104-188, set out as a note under section 170 of this title.
    Section 1603(b) of Pub. L. 104-188 provided that: ``The amendment 
made by this section [amending this section] shall apply to amounts 
included in gross income in any taxable year beginning after December 
31, 1995.''


                    Effective Date of 1993 Amendment

    Section 13145(b) of Pub. L. 103-66 provided that: ``The amendments 
made by subsection (a) [amending this section] shall apply to 
partnership years beginning on or after January 1, 1994.''
    Section 13147(b) of Pub. L. 103-66 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to property 
acquired on or after January 1, 1994.''
    Section 13148(c) of Pub. L. 103-66 provided that: ``The amendments 
made by this section [amending this section] shall apply to amounts 
received on or after January 1, 1994.''


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1987 Amendment

    Section 10213(b) of Pub. L. 100-203 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to 
partnership interests acquired after December 17, 1987.''


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 effective, except as otherwise provided, 
as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 
98-369, div. A, to which such amendment relates, see section 1881 of 
Pub. L. 99-514, set out as a note under section 48 of this title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-369 applicable to taxable years ending after 
Dec. 31, 1985, with such amendments treated as a change in the rate of 
tax imposed by chapter 1 of this title for purposes of section 15 of 
this title, see section 511(e)(6) of Pub. L. 98-369, set out as an 
Effective Date note under section 419 of this title.


                    Effective Date of 1983 Amendment

    Amendment by Pub. L. 97-448 effective, except as otherwise provided, 
as if it had been included in the provision of the Economic Recovery Tax 
Act of 1981, Pub. L. 97-34, to which such amendment relates, see section 
109 of Pub. L. 97-448, set out as a note under section 1 of this title.


                    Effective Date of 1978 Amendment

    Amendment by Pub. L. 95-345 applicable with respect to amounts 
received after Dec. 31, 1976, as payments with respect to securities 
loans (as defined in subsec. (a)(5) of this section), and transfers of 
securities, under agreements described in section 1058 of this title, 
occurring after such date, see section 2(e) of Pub. L. 95-345, set out 
as a note under section 509 of this title.


                    Effective Date of 1976 Amendments

    Amendment by Pub. L. 94-568 applicable to taxable years beginning 
after Oct. 20, 1976, see section 1(d) of Pub. L. 94-568, set out as a 
note under section 501 of this title.
    Amendment by section 1901(b)(8)(F) of Pub. L. 94-455 applicable with 
respect to taxable years beginning after Dec. 31, 1976, see section 
1901(d) of Pub. L. 94-455, set out as a note under section 2 of this 
title.
    Amendment by section 1951(b)(8)(A) of Pub. L. 94-455 applicable with 
respect to taxable years beginning after Dec. 31, 1976, see section 
1951(d) of Pub. L. 94-455, set out as a note under section 72 of this 
title.
    Section 1(b) of Pub. L. 94-396 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to gain from 
options which lapse or terminate on or after January 1, 1976, in taxable 
years ending on or after such date.''


                    Effective Date of 1972 Amendment

    Amendment by Pub. L. 92-418 applicable to taxable years beginning 
after Dec. 31, 1969, see section 1(c) of Pub. L. 92-418, set out as a 
note under section 501 of this title.


                    Effective Date of 1969 Amendment

    Amendment by 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 1966 Amendment

    Amendment by Pub. L. 89-809 applicable with respect to taxable years 
beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set 
out as a note under section 11 of this title.


                    Effective Date of 1964 Amendment

    Section 2 of Pub. L. 88-380 provided that: ``The amendment made by 
the first section of this Act [amending this section] shall apply with 
respect to taxable years beginning after December 31, 1963.''


                    Effective Date of 1958 Amendment

    Section 1(b) of Pub. L. 85-367 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to taxable years 
of trusts beginning after December 31, 1955.''


                            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 1951(b)(8)(B) of Pub. L. 94-455 provided that: 
``Notwithstanding subparagraph (A) [amending this section], income 
received in a taxable year beginning after December 31, 1975, shall be 
excluded from gross income in determining unrelated business taxable 
income, if such income would have been excluded by paragraph (13) or 
(14) of section 512(b) if received in a taxable year beginning before 
such date. Any deductions directly connected with income excluded under 
the preceding sentence in determining unrelated business taxable income 
shall also be excluded for such purpose.''


           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 [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 263, 419A, 502, 509, 511, 
513, 514, 664, 681, 772, 851, 856, 878, 995, 1443, 4940, 4943, 4976, 
6031 of this title.
