§ 503. Requirements for exemption

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1954

   Aug. 16, 1954, ch. 736, 68A Stat. 166 · 68A Stat. 166

   Enacted · 26 U.S.C. § 503

   Aug. 16, 1954, ch. 736, 68A Stat. 166

   Source evidence

   Code source credit
   Aug. 16, 1954, ch. 736, 68A Stat. 166

2. 1958

   Technical Amendments Act of 1958

   Pub. L. 85–866 § 30(a) · 72 Stat. 1606

   Added · 26 U.S.C. § 503(h)

   Pub. L. 85–866, § 30(a), added subsec. (h)

   Source evidence

   Code amendment note
   Subsec. (h). Pub. L. 85–866, § 30(a), added subsec. (h).

   Enacted provision · exact public law section
   (a) Lending to Certain Persons.— Section 503 (relating to requirements 26 USC 503. for exemption in the case of exempt organizations) is amended by adding at the end thereof the following new subsection: “(h) Special Rules Relating to Lending by Section 401 (a) Trusts to Certain Persons.— For purposes of subsection (c) (1), a bond, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this subsection referred to as ‘obligation’) acquired 26 USC 401. by a trust described in section 401 (a) 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 (c).”

3. 1958

   Technical Amendments Act of 1958

   Pub. L. 85–866 § 30(b) · 72 Stat. 1606

   Added · 26 U.S.C. § 503(i)

   Pub. L. 85–866, § 30(b), added subsec. (i)

   Source evidence

   Code amendment note
   Subsec. (i). Pub. L. 85–866, § 30(b), added subsec. (i).

   Enacted provision · exact public law section
   (b) Loans to Employers Who Are Prohibited From Pledging Assets.— Section 503 is further amended by adding after subsection (h) (as added by subsection (a) of this section) the following new subsection: “(i) Loans With Respect to Which Employers Are Prohibited From Pledging Certain Assets.— Subsection (c) (1) shall not apply 26 USC 401. 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 Dears 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 lie, 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 (h).”

4. 1960

   Pub. L. 86–667 § 2(a)(1) · 74 Stat. 534

   Changed · 26 U.S.C. § 503(a)(1)

   Pub. L. 86–667, § 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

   Source evidence

   Code amendment note
   Subsec. (a)(1). Pub. L. 86–667, § 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.

   Enacted provision · exact public law section
   (1) by revising paragraph (1) to read as follows:

5. 1960

   Pub. L. 86–667 § 2(a)(2) · 74 Stat. 534

   Changed · 26 U.S.C. § 503(a)(2); 26 U.S.C. § 503(a)(b); 26 U.S.C. § 503(a)(d)

   Pub. L. 86–667, § 2(a)(2), (b), (c), included organizations described in section 501(c)(17)

   Source evidence

   Code amendment note
   Subsecs. (a)(2), (b), (d). Pub. L. 86–667, § 2(a)(2), (b), (c), included organizations described in section 501(c)(17).

   Enacted provision · exact public law section
   (2) by striking out “section 501(c) (3)” in paragraph (2) and inserting in lieu thereof “section 501(c) (3) or (17)”.

6. 1960

   Pub. L. 86–667 § 2(d) · 74 Stat. 534

   Changed · 26 U.S.C. § 503(h)

   Pub. L. 86–667, § 2(d), included trusts described in section 501(c)(17)

   Source evidence

   Code amendment note
   Subsec. (h). Pub. L. 86–667, § 2(d), included trusts described in section 501(c)(17).

   Enacted provision · exact public law section
   (d) Subsection (h) of such section 503 is amended— (1) by striking out “section 401(a)” in the heading and inserting in lieu thereof “section 401(a) and section 501(c) (17)”, and (2) by striking out “section 401(a)” in such subsection and inserting in lieu thereof “section 401(a) or section 501(c) (17)”.

7. 1962

   Self-Employed Individuals Tax Retirement Act of 1962

   Pub. L. 87–792 § 6 · 76 Stat. 809

   Added · 26 U.S.C. § 503(j)

   Pub. L. 87–792 added subsec. (j)

   Source evidence

   Code amendment note
   Subsec. (j). Pub. L. 87–792 added subsec. (j).

   Enacted provision · exact public law section
   SEC. 6. PROHIBITED TRANSACTIONS. Section 503 of the Internal Revenue Code of 1954 (relating to prohibited 26 USC 503. transactions) is amended by adding at the end thereof the following new subsection: “(j) Trusts Benefiting Certain Owner-Empioyees.— “(1) Prohibited transactions.— In the case of a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (as defined in section 401(c)(3)) who control (within the meaning of section 401(d)(9)(B)) the trade or business with respect Ante, p. 815. to which the plan is established, the term ‘prohibited transaction’ also means any transaction in which such trust, directly or indirectly— “(A) lends any part of the corpus or income of the trust to; “(B) pays any compensation for personal services rendered to the trust to; “(C) makes any part of its services available on a preferential basis to; or “(D) acquires for the trust any property from, or sells any property to; 26 USC 267. any person described in subsection (o) or to any such owner-employee, a member of the family (as defined in section 267 (c)(4)) of any such owner-employee, or a corporation controlled by any such owner-employee 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. “(2) Special rule for loans.— For purposes of the application of paragraph (1)(A), the following rules shall apply with respect to a loan made before the date of the enactment of this subsection which would be a prohibited transaction if made in a taxable year beginning after December 31, 1962: “(A) If any part of the loan is repayable prior to December 31, 1965, the renewal of such part of the loan for a period not extending beyond December 31, 1965, on the same terms, shall not be considered a prohibited transaction. “(B) If the loan is repayable on demand, the continuation of the loan beyond December 31, 1965, shall be considered a prohibited transaction.”

8. 1969

   Tax Reform Act of 1969

   Pub. L. 91–172 title I · 83 Stat. 487

   1. Redesignated · 26 U.S.C. § 503(a)(1)(A)

      Pub. L. 91–172, §§ 101(j)(7), 121(b)(6)(B)(ii), redesignated subpar. (B) as (A)

   2. Struck and inserted · 26 U.S.C. § 503(a)(1)(A)

      Pub. L. 91–172, §§ 101(j)(7), 121(b)(6)(B)(ii), 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

   Source evidence

   Code amendment note
   Subsec. (a)(1)(A). Pub. L. 91–172, §§ 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.

   Enacted provision · exact public law
   TITLE I— TAX EXEMPT ORGANIZATIONS Subtitle A— Private Foundations SEC. 101. PRIVATE FOUNDATIONS. (a) In General.— Subchapter F of chapter 1 (relating to exempt 68A Stat. 163.. 26 USC 501–526. organizations) is amended by redesignating parts II, III, and IV as parts III, IV, and V, respectively, and by inserting after part I the following new part: “PART II— PRIVATE FOUNDATIONS “Sec. 507. Termination of private foundation status. “Sec. 508. Special rules with respect to section 501(c)(3) organizations. “Sec. 509. Private foundation defined. “SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS. “(a) General Rule.— Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if— “(1) such organization notifies the Secretary or his delegate (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) of its intent to accomplish such termination, or “(2) (A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax Post, p. 498. under chapter 42, and “(B) the Secretary or his delegate notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c), and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g). “(b) Special Rules.— “(1) Transfer to, or operation as, public charity.— The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if— “(A) such organization distributes all of its net assets to one or more organizations described in section 170(b)(1) Post, p. 550. (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or “(B) (i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969, “(ii) such organization notifies the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and “(iii) such organization establishes to the satisfaction of the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i). If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and chapter 42 shall not apply to such organization for any taxable year Post, p. 498. within such 60-month period for which it does meet such requirements. “(2) Transferee foundations.— For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization. “(c) Imposition of Tax.— There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— “(1) the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status 68A Stat. 163. 26 USC 501. of such foundation, or “(2) the value of the net assets of such foundation. “(d) Aggregate Tax Benefit.— “(1) In general.— For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— “(A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which 26 USC 1, 2001, 2501. would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors to the foundation after February 28, 1913, had been disallowed, and “(B) the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the Post, p. 558. corresponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and Post, p. 550. “(C) interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation. “(2) Substantial contributor.— “(A) Definition.— For purposes of paragraph (1), the term ‘substantial contributor’ means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term ‘substantial contributor’ also means the creator of the trust. “(B) Special rules.— For purposes of subparagraph (A)— “(i) each contribution or bequest shall be valued at fair market value on the date it was received, “(ii) in the case of a foundation which is in existence on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date, “(iii) an individual shall be treated as making all contributions and bequests made by his spouse, and “(iv) any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods. “(3) Regulations.— For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary or his delegate. “(e) Value of Assets.— For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation. “(f) Liability in Case of Transfers of Assets From Private Foundation.— For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation. “(g) Abatement of Taxes.— The Secretary or his delegate may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if— “(1) the private foundation distributes all of its net assets to Post, p. 550. one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or “(2) following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable 68A Stat. 163. 26 USC 501. or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary or his delegate receives certification from the appropriate State officer that such action has resulted in such preservation of assets. “SEC. 508. SPECIAL RULES WITH RESPECT TO SECTION 501(c)(3) ORGANIZATIONS. “(a) New Organizations Must Notify Secretary That They Are Applying for Recognition of Section 501(c)(3) Status.— Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)— “(1) unless it has given notice to the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that it is applying for recognition of such status, or “(2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary or his delegate by regulations for giving notice under this subsection. For purposes of paragraph (2), the time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(b) Presumption That Organizations Are Private Foundations.— Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary 68A Stat. 163. 26 USC 501. or his delegate, at such time and in such manner as the Secretary or his delegate may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. The time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(c) Exceptions.— “(1) Mandatory exceptions.— Subsections (a) and (b) shall not apply to— “(A) churches, their integrated auxiliaries, and conventions or associations of churches, or “(B) any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000. “(2) Exceptions by regulations.— The Secretary or his delegate may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both— “(A) educational organizations which normally maintain a regular faculty and curriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on; and “(B) any other class of organizations with respect to which the Secretary or his delegate determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations. “(d) Disallowance of Certain Charitable, etc., Deductions.— “(1) Gift or bequest to organizations subject to section 507(c) tax.— No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— Post, pp. 549, 558, 560–562. 26 USC 170, 545, 556, 642, 2055, 2106, 2522. “(A) by any person after notification is made under section 507(a), or “(B) by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. “(2) Gift or bequest to taxable private foundation, section 4947 trust, etc.— No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— “(A) to a private foundation or a trust described in section Post, p. 517. 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)(B) and (C)), or “(B) to any organization in a period for which it is not 68A Stat. 163. 26 USC 501. treated as an organization described in section 501(c)(3) by reason of subsection (a). “(3) Exception.— Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary or his delegate under section 507(g). “(e) Governing Instruments.— “(1) General rule.— A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are— “(A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the Post, p. 502. foundation to tax under section 4942, and “(B) to prohibit the foundation from engaging in any act of Post, p. 500. Post, p. 507. self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the Post, p. 511. Post, p. 513. foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). “(2) Special rules for existing private foundations.— In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply— “(A) to any taxable year beginning before January 1, 1972, “(B) to any period after December 31, 1971, during the pendency of any judicial proceeding begun before January 1, 1972, by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and “(C) to any period after the termination of any judicial proceeding described in subparagraph (B) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1). “SEC. 509. PRIVATE FOUNDATION DEFINED. “(a) General Rule.— For purposes of this title, the term ‘private foundation’ means a domestic or foreign organization described in section 501(c)(3) other than— “(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); “(2) an organization which— “(A) normally receives more than one-third of its support in each taxable year from any combination of— “(i) gifts, grants, contributions, or membership fees, and “(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business Post, pp. 541, 542. (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section Post, p. 553. 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental Post, p. 515. units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses Post, p. 550. (vii) and (viii)), and “(B) normally receives not more than one-third of its support in each taxable year from gross investment income (as defined in subsection (e)); “(3) an organization which— “(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), “(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and “(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and “(4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph 68A Stat. 163. 26 USC 501. (2) if it were an organization described in section 501(c)(3). “(b) Continuation of Private Foundation Status.— For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507. “(c) Status of Organization After Termination of Private Foundation Status.— For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination. “(d) Definition of Support.— For purposes of this part and chapter 42, the term ‘support’ includes (but is not limited to)— Post, p. 498. “(1) gifts, grants, contributions, or membership fees, “(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), Post, pp. 541, 542. “(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business, “(4) gross investment income (as defined in subsection (e)), “(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and “(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit. “(e) Definition of Gross Investment Income.— For purposes of subsection (d), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the Post, p. 536. tax imposed by section 511.” (b) Amendment of Subtitle D.— Subtitle D (relating to miscellaneous 26 USC 4001–4931. excise taxes) is amended by adding at the end thereof the following new chapter: “CHAPTER 42.— PRIVATE FOUNDATIONS “Sec. 4940. Excise tax based on investment income. “Sec. 4941. Taxes on self-dealing. “Sec. 4942. Taxes on failure to distribute income. “Sec. 4943. Taxes on excess business holdings. “Sec. 4944. Taxes on investments which jeopardize charitable purpose. “Sec. 4945. Taxes on taxable expenditures. “Sec. 4946. Definitions and special rules. “Sec. 4947. Application of taxes to certain nonexempt trusts. “Sec. 4948. Application of taxes and denial of exemption with respect to certain foreign organizations. “SEC. 4940. EXCISE TAX BASED ON INVESTMENT INCOME. “(a) Tax-Exempt Foundations.— There is hereby imposed on each private foundation which is exempt from taxation under section 501(a) 68A Stat. 163. 26 USC 501. for the taxable year, with respect to the carrying on of its activities, a tax equal to 4 percent of the net investment income of such foundation for the taxable year. “(b) Taxable Foundations.— There is hereby imposed on each private foundation which is not exempt from taxation under section 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to— “(1) the amount (if any) by which the sum of (A) the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus (B) the amount of the tax which would have been imposed under section 511 for the taxable year if such private foundation had been exempt from taxation under section 501(a), exceeds “(2) the tax imposed under subtitle A on such private foundation for the taxable year. “(c) Net Investment Income Defined.— “(1) In general.— For purposes of subsection (a), the net investment income is the amount by which (A) the sum of the gross investment income and the net capital gain exceeds (B) the deductions allowed by paragraph (3). Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A. “(2) Gross investment income.— For purposes of paragraph (1), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. “(3) Deductions.— “(A) In general.— For purposes of paragraph (1), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of gross investment income or for the management, conservation, or maintenance of property held for the production of such income, determined with the modifications set forth in subparagraph (B). “(B) Modifications.— For purposes of subparagraph (A)— “(i) The deduction provided by section 167 shall be Post, pp. 625, 649. allowed, but only on the basis of the straight line method of depreciation. “(ii) The deduction for depletion provided by section 611 shall be allowed, but such deduction shall be determined 68A Stat. 207. 26 USC 611. without regard to section 613 (relating to percentage depletion). Post, p. 629. “(4) Capital gains and losses.— For purposes of paragraph (1) in determining net capital gain— “(A) There shall be taken into account only gains and losses from the sale or other disposition of property used for the production of interest, dividends, rents, and royalties, and property used for the production of income included in computing the tax imposed by section 511 (except to the extent Post, p. 536. gain or loss from the sale or other disposition of such property is taken into account for purposes of such tax). “(B) The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(C) Losses from sales or other dispositions of property shall be allowed only to the extent of gains from such sales or other dispositions, and there shall be no capital loss carryovers. “(5) Tax-exempt income.— For purposes of this section, net investment income shall be determined by applying section 103 Post, p. 656. (relating to interest on certain governmental obligations) and section 265 (relating to expenses and interest relating to tax-exempt 68A Stat. 78; 78 Stat. 56. income). “SEC. 4941. TAXES ON SELF-DEALING. “(a) Initial Taxes.— “(1) On self-dealer.— There is hereby imposed a tax on each act of self-dealing between a disqualified person and a private foundation. The rate of tax shall be equal to 5 percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participates in the act of self-dealing. In the case of a government official (as defined in section 4946(c)), a tax shall be imposed by this paragraph only if such disqualified person participates in the act of self-dealing knowing that it is such an act. “(2) On foundation manager.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in an act of self-dealing between a disqualified person and a private foundation, knowing that it is such an act, a tax equal to 2½ percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the act of self-dealing. “(b) Additional Taxes.— “(1) On self-dealer.— In any case in which an initial tax is imposed by subsection (a)(1) on an act of self-dealing by a disqualified person with a private foundation and the act is not corrected within the correction period, there is hereby imposed a tax equal to 200 percent of the amount involved. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participated in the act of self-dealing. “(2) On foundation manager.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount involved. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under any paragraph of subsection (a) or (b) with respect to any one act of self-dealing, all such persons shall be jointly and severally liable under such paragraph with respect to such act. “(2) $10,000 limit for management.— With respect to any one act of self-dealing, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $10,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Self-Dealing.— “(1) In general.— For purposes of this section, the term ‘self-dealing’ means any direct or indirect— “(A) sale or exchange, or leasing, of property between a private foundation and a disqualified person; “(B) lending of money or other extension of credit between a private foundation and a disqualified person; “(C) furnishing of goods, services, or facilities between a private foundation and a disqualified person; “(D) payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person; “(E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and “(F) agreement by a private foundation to make any payment of money or other property to a government official (as defined in section 4946(c)), other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period. “(2) Special rules.— For purposes of paragraph (1)— “(A) the transfer of real or personal property by a disqualified person to a private foundation shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the foundation assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer; “(B) the lending of money by a disqualified person to a private foundation shall not be an act of self-dealing if the loan is without interest or other charge and if the proceeds of the loan are used exclusively for purposes specified in 68A Stat. 163. 26 USC 501. section 501(c)(3); “(C) the furnishing of goods, services, or facilities by a disqualified person to a private foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities so furnished are used exclusively for purposes specified in section 501(c)(3); 68A Stat 163. 26 USC 501. “(D) the furnishing of goods, services, or facilities by a private foundation to a disqualified person shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public; “(E) except in the case of a government official (as defined in section 4946(c)), the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive; “(F) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946(a)), pursuant to any liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization, shall not be an act of self-dealing if all of the securities of the same class as that held by the foundation are subject to the same terms and such terms provide for receipt by the foundation of no less than fair market value; and “(G) in the case of a government official (as defined in section 4946(c)), paragraph (1) shall in addition not apply to— “(i) prizes and awards which are subject to the provisions of section 74(b), if the recipients of such prizes and awards are selected from the general public, “(ii) scholarships and fellowship grants which are subject to the provisions of section 117(a) and are to be used for study at an educational institution described in section 151(e)(4), “(iii) any annuity or other payment (forming part of a stock-bonus, pension, or profit-sharing plan) by a trust which is a qualified trust under section 401, “(iv) any annuity or other payment under a plan which meets the requirements of section 404(a)(2), “(v) any contribution or gift (other than a contribution or gift of money) to, or services or facilities made available to, any such individual, if the aggregate value of such contributions, gifts, services, and facilities to, or made available to, such individual during any calendar year does not exceed $25, “(vi) any payment made under chapter 41 of title 5, United States Code, or 80 Stat. 432. 5 USC 4101–4118. “(vii) any payment or reimbursement of traveling expenses for travel solely from one point in the United States to another point in the United States, but only if such payment or reimbursement does not exceed the actual cost of the transportation involved plus an amount for all other traveling expenses not in excess of 125 percent of the maximum amount payable under section 5702(a) of title 5, United States Code, for like travel Ante, p. 190. by employees of the United States. “(e) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection 68A Stat. 770. 26 USC 6212. (a)(1) under section 6212, or (B) the date on which correction of the act of self-dealing is completed. “(2) Amount involved.— The term ‘amount involved’ means, with respect to any act of self-dealing, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in subsection (d)(2)(E), the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value— “(A) in the case of the taxes imposed by subsection (a), shall be determined as of the date on which the act of self-dealing occurs; and “(B) in the case of the taxes imposed by subsection (b), shall be the highest fair market value during the correction period. “(3) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any act of self-dealing, undoing the transaction to the extent possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. “(4) Correction Period.— The term ‘correction period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the act of self-dealing. “SEC. 4942. TAXES ON FAILURE TO DISTRIBUTE INCOME. “(a) Initial Tax.— There is hereby imposed on the undistributed income of a private foundation for any taxable year, which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period), a tax equal to 15 percent of the amount of such income remaining undistributed at the beginning of such second (or succeeding) taxable year. The tax imposed by this subsection shall not apply to the undistributed income of a private foundation— “(1) for any taxable year for which it is an operating foundation (as defined in subsection (j)(3)), or “(2) to the extent that the foundation failed to distribute any amount solely because of an incorrect valuation of assets under subsection (e), if— “(A) the failure to value the assets properly was not willful and was due to reasonable cause, “(B) such amount is distributed as qualifying distributions (within the meaning of subsection (g)) by the foundation during the allowable distribution period (as defined in subsection (j)(4)), “(C) the foundation notifies the Secretary or his delegate that such amount has been distributed (within the meaning of subparagraph (B)) to correct such failure, and “(D) such distribution is treated under subsection (h)(2) as made out of the undistributed income for the taxable year for which a tax would (except for this paragraph) have been imposed under this subsection. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) on the undistributed income of a private foundation for any taxable year, if any portion of such income remains undistributed at the close of the correction period, there is hereby imposed a tax equal to 100 percent of the amount remaining undistributed at such time. “(c) Undistributed Income.— For purposes of this section, the Definition. term ‘undistributed income’ means, with respect to any private foundation for any taxable year as of any time, the amount by which— “(1) the distributable amount for such taxable year, exceeds “(2) the qualifying distributions made before such time out of such distributable amount. “(d) Distributable Amount.— For purposes of this section, the Definition. term ‘distributable amount’ means, with respect to any foundation for any taxable year, an amount equal to— “(1) the minimum investment return or the adjusted net income (whichever is higher), reduced by “(2) the sum of the taxes imposed on such private foundation for the taxable year under subtitle A and section 4940. 26 USC 1–1563. “(e) Minimum Investment return.— “(1) In general.— For purposes of subsection (d), the minimum investment return for any private foundation for any taxable year is the amount determined by multiplying— “(A) the excess of (i) the aggregate fair market value of all assets of the foundation other than those being used (or held for use) directly in carrying out the foundation’s exempt purpose over (ii) the acquisition indebtedness with respect to such assets (determined under section 514(c)(1), but Post, p. 545. without regard to the taxable year in which the indebtedness was incurred), by “(B) the applicable percentage for such year, determined under paragraph (3). “(2) Valuation.— For purposes of paragraph (1)(A), the fair market value of securities for which market quotations are readily available shall be determined on a monthly basis. For all other assets, the fair market value shall be determined at such times and in such manner as the Secretary or his delegate shall by regulations prescribe. “(3) Applicable percentage.— For purposes of paragraph (1)(B), the applicable percentage for taxable years beginning in 1970 is 6 percent. The applicable percentage for any taxable year beginning after 1970 shall be determined and published by the Secretary or his delegate and shall bear a relationship to 6 percent which the Secretary or his delegate determines to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1969. “(4) Transitional rules.— “For special rules applicable to organizations created before May 27, 1969, see section 101(1)(3) of the Tax Reform Act of 1969. Post, p. 534. “(f) Adjusted Net Income.— “(1) Defined.— For purposes of subsection (d), the term ‘adjusted net income’ means the excess (if any) of— “(A) the gross income for the taxable year (determined with the income modifications provided by paragraph (2)), over “(B) the sum of the deductions (determined with the deduction modifications provided by paragraph (3)) which would be allowed to a corporation subject to the tax imposed 78 Stat. 25, 118. 26 USC 11. by section 11 for the taxable year. “(2) Income modifications.— The income modifications referred to in paragraph (1)(A) are as follows: “(A) section 103 (relating to interest on certain governmental obligations) shall not apply, “(B) capital gains and losses from the sale or other disposition of property shall be taken into account only in an amount equal to any net short-term capital gain for the taxable year; and “(C) there shall be taken into account— “(i) amounts received or accrued as repayments of amounts which were taken into account as a qualifying distribution within the meaning of subsection (g)(1)(A) for any taxable year; “(ii) notwithstanding subparagraph (B), amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of such property was taken into account as a qualifying distribution (within the meaning of subsection (g)(1)(B)) for any taxable year; and “(iii) any amount set aside under subsection (g)(2) to the extent it is determined that such amount is not necessary for the purposes for which it was set aside. “(3) Deduction modifications.— The deduction modifications referred to in paragraph (1)(B) are as follows: “(A) no deduction shall be allowed other than all the ordinary and necessary expenses paid or incurred for the production or collection of gross income or for the management, conservation, or maintenance of property held for the production of such income and the allowances for depreciation and depletion determined under section 4940(c)(3)(B), and “(B) section 265 (relating to expenses and interest relating to tax-exempt interest) shall not apply. “(4) Transitional rule.— For purposes of paragraph (2)(B), the basis (for purposes of determining gain) of property held by a private foundation on December 31, 1969, and continuously thereafter to the date of its disposition, shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(g) Qualifying Distributions Defined.— “(1) In general.— For purposes of this section, the term ‘qualifying distribution’ means— “(A) any amount (including administrative expenses) paid to accomplish one or more purposes described in section Post, p. 553. 170(c)(2)(B), other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or “(B) any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in section 170(c)(2)(B). Post, p. 553. “(2) Certain set-asides.— Subject to such terms and conditions as may be prescribed by the Secretary or his delegate, an amount set aside for a specific project which comes within one or more purposes described in section 170(c)(2)(B) may be treated as a qualifying distribution, but only if, at the time of the set-aside, the private foundation establishes to the satisfaction of the Secretary or his delegate that— “(A) the amount will be paid for the specific project within 5 years, and “(B) the project is one which can be better accomplished by such set-aside than by immediate payment of funds. For good cause shown, the period for paying the amount set aside may be extended by the Secretary or his delegate. “(3) Certain contributions to section 501(c)(3) organizations.— For purposes of this section, the term ‘qualifying distribution’ includes a contribution to a section 501(c)(3) organization 68A Stat. 163. 26 USC 501. described in paragraph (1)(A)(i) or (ii) if— “(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section 501(c)(3) organization were a private foundation which is not an operating foundation), and “(B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization. “(h) Treatment of Qualifying Distributions.— “(1) In general.— Except as provided in paragraph (2), any qualifying distribution made during a taxable year shall be treated as made— “(A) first out of the undistributed income of the immediately preceding taxable year (if the private foundation was subject to the tax imposed by this section for such preceding taxable year) to the extent thereof, “(B) second out of the undistributed income for the taxable year to the extent thereof, and “(C) then out of corpus. For purposes of this paragraph, distributions shall be taken into account in the order of time in which made. “(2) Correction of deficient distributions for prior taxable years, etc.— In the case of any qualifying distribution which (under paragraph (1)) is not treated as made out of the undistributed income of the immediately preceding taxable year, the foundation may elect to treat any portion of such distribution as made out of the undistributed income of a designated prior taxable year or out of corpus. The election shall be made by the foundation at such time and in such manner as the Secretary or his delegate shall by regulations prescribe. “(i) Adjustment of Distributable Amount Where Distributions During Prior Years Have Exceeded Income.— “(1) In general.— If, for the taxable years in the adjustment period for which an organization is a private foundation— “(A) the aggregate qualifying distributions treated (under subsection (h)) as made out of the undistributed income for such taxable year or as made out of corpus (except to the extent subsection (g)(3) with respect to the recipient private Post, p. 552. foundation or section 170(b)(1)(E)(ii) applies) during such taxable years, exceed “(B) the distributable amounts for such taxable years (determined without regard to this subsection), then, for purposes of this section (other than subsection (h)), the distributable amount for the taxable year shall be reduced by an amount equal to such excess. “(2) Taxable years in adjustment period.— For purposes of paragraph (1), with respect to any taxable year of a private foundation the taxable years in the adjustment period are the taxable years (not exceeding 5) beginning after December 31, 1969, and immediately preceding the taxable year, “(j) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to the undistributed income for any taxable year, the period beginning with the first day of the taxable year and ending on the date of mailing of a notice of deficiency with respect to the tax 68A Stat. 770. 26 USC 6212. imposed by subsection (a) under section 6212. “(2) Correction period.— The term ‘correction period’ means, with respect to any private foundation for any taxable year, the period beginning with the first day of the taxable year and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(3) Operating foundation.— For purposes of this section, the term ‘operating foundation’ means any organization— “(A) which makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated equal to substantially all of its adjusted net income (as defined in subsection (f)); and “(B) (i) substantially more than half of the assets of which are devoted directly to such activities or to functionally related businesses (as defined in paragraph (5)), or to both, or are stock of a corporation which is controlled by the foundation and substantially all of the assets of which are so devoted, “(ii) which normally makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated in an amount not less than two-thirds of its minimum investment return (as defined in subsection (e)), or “(iii) substantially all of the support (other than gross investment income as defined in section 509(e)) of which is Ante, p. 496. normally received from the general public and from 5 or more exempt organizations which are not described in section 4946 (a)(1)(H) with respect to each other or the recipient foundation; not more than 25 percent of the support (other than gross investment income) of which is normally received from any one such exempt organization; and not more than half of the support of which is normally received from gross investment income. “(4) Allowable distribution period.— The term ‘allowable Definition. distribution period’ means, with respect to any private foundation, the period beginning with the first day of the first taxable year following the taxable year in which the incorrect valuation (described in subsection (a)(2)) occurred and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (a)) under section 6212 extended 68A Stat. 770. 26 USC 6212. by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(5) Functionally related business.— The term ‘functionally Definition. related business’ means— “(A) a trade or business which is not an unrelated trade or business (as defined in section 513), or Post, pp. 541, 542. “(B) an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exempt purposes of the organization. “SEC. 4943. TAXES ON EXCESS BUSINESS HOLDINGS. “(a) Initial Tax.— “(1) Imposition.— There is hereby imposed on the excess business holdings of any private foundation in a business enterprise during any taxable year which ends during the taxable period a tax equal to 5 percent of the value of such holdings. “(2) Special rules.— The tax imposed by paragraph (1)— “(A) shall be imposed on the last day of the taxable year, but “(B) with respect to the private foundation’s holdings in any business enterprise, shall be determined as of that day during the taxable year when the foundation’s excess holdings in such enterprise were the greatest. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) with respect to the holdings of a private foundation in any business enterprise, if, at the close of the correction period with respect to such holdings, the foundation still has excess business holdings in such enterprise, there is hereby imposed a tax equal to 200 percent of such excess business holdings. “(c) Excess Business Holdings.— For purposes of this section— Definition. “(1) In general.— The term ‘excess business holdings’ means, with respect to the holdings of any private foundation in any business enterprise, the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings. “(2) Permitted holdings in a corporation.— “(A) In general.— The permitted holdings of any private foundation in an incorporated business enterprise are— “(i) 20 percent of the voting stock, reduced by “(ii) the percentage of the voting stock owned by all disqualified persons. In any case in which all disqualified persons together do not own more than 20 percent of the voting stock of an incorporated business enterprise, nonvoting stock held by the private foundation shall also be treated as permitted holdings. “(B) 35 percent rule where third person has effective control of enterprise.— If— “(i) the private foundation and all disqualified persons together do not own more than 35 percent of the voting stock of an incorporated business enterprise, and “(ii) it is established to the satisfaction of the Secretary or his delegate that effective control of the corporation is in one or more persons who are not disqualified persons with respect to the foundation, then subparagraph (A) shall be applied by substituting 35 percent for 20 percent. “(C) 2 percent de minimis rule.— A private foundation shall not be treated as having excess business holdings in any corporation in which it (together with all other private foundations which are described in section 4946(a)(1)(H)) owns not more than 2 percent of the voting stock and not more than 2 percent in value of all outstanding shares of all classes of stock. “(3) Permitted holdings in partnerships, etc.— The permitted holdings of a private foundation in any business enterprise which is not incorporated shall be determined under regulations prescribed by the Secretary or his delegate. Such regulations shall be consistent in principle with paragraphs (2) and (4), except that— “(A) in the case of a partnership or joint venture, ‘profits interest’ shall be substituted for ‘voting stock’, and ‘capital interest’ shall be substituted for ‘nonvoting stock’, “(B) in the case of a proprietorship, there shall be no permitted holdings, and “(C) in any other case, ‘beneficial interest’ shall be substituted for ‘voting stock’. “(4) Present holdings.— “(A) (i) In applying this section with respect to the holdings of any private foundation in a business enterprise, if such foundation and all disqualified persons together have holdings in such enterprise in excess of 20 percent of the voting stock on May 26, 1969, the percentage of such holdings shall be substituted for ‘20 percent,’ and for ‘35 percent’ (if the percentage of such holdings is greater than 35 percent), wherever it appears in paragraph (2), but in no event shall the percentage so substituted be more than 50 percent. “(ii) If the percentage of the holdings of any private foundation and all disqualified persons together in a business enterprise (or if the percentage of the holdings of the private foundation in such enterprise) decreases for any reason, clause (i) and subparagraph (D) shall, except as provided in the next sentence, be applied for all periods after such decrease by substituting such decreased percentage for the percentage held on May 26, 1969, but in no event shall the percentage substituted be less than 20 percent. For purposes of this clause, any decrease in percentage holdings attributable to issuances of stock (or to issuances of stock coupled with redemptions of stock) shall be determined only as of the close of each taxable year of the private foundation unless the aggregate of the percentage decreases attributable to the issuances of stock (or such issuances and redemptions) during such taxable year equals or exceeds 1 percent. “(iii) The percentage substituted under clause (i), and any percentage substituted under subparagraph (D), shall be applied both with respect to the voting stock and, separately, with respect to the value of all outstanding shares of all classes of stock. “(iv) In the case of any merger, recapitalization, or other reorganization involving one or more business enterprises, the application of clauses (i), (ii), and (iii) shall be determined under regulations prescribed by the Secretary or his delegate. “(B) Any interest in a business enterprise which a private foundation holds on May 26, 1969, if the private foundation on such date has excess business holdings, shall (while held by the foundation) be treated as held by a disqualified person (rather than by the private foundation)— “(i) during the 20-year period beginning on such date, if the private foundation has more than a 95 percent voting stock interest on such date, “(ii) except as provided in clause (i), during the 15-year period beginning on such date, if the foundation and all disqualified persons have more than a 75 percent voting stock interest (or more than a 75 percent profits or beneficial interest in the case of any unincorporated enterprise) on such date or more than a 75 percent interest in the value of all outstanding shares of all classes of stock (or more than a 75 percent capital interest in the case of a partnership or joint venture) on such date, or “(iii) during the 10-year period beginning on such date, in any other case. “(C) The 20-year, 15-year, and 10-year periods described in subparagraph (B) for the disposition of excess business holdings shall be suspended during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to allow disposition of such holdings. “(D) (i) If, at any time during the second phase, all disqualified persons together have holdings in a business enterprise in excess of 2 percent of the voting stock of such enterprise, then subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘50 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(ii) If, immediately before the close of the second phase, clause (i) of this subparagraph did not apply with respect to a business enterprise, then for all periods after the close of the second phase subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘35 percent, or if at any time after the close of the second phase all disqualified persons together have had holdings in such enterprise which exceed 2 percent of the voting stock, 35 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(iii) For purposes of this subparagraph, the term ‘second phase’ means the 15-year period immediately following the 20-year, 15-year, or 10-year period described in subparagraph (B), whichever applies, as modified by subparagraph (C). “(E) Clause (ii) of subparagraph (B) shall not apply with respect to any business enterprise if before January 1, 1971, one or more individuals who are substantial contributors (or members of the family (within the meaning of section 1946(d)) of one or more substantial contributors) to the private foundation and who on May 26, 1969, held more than 15 percent of the voting stock of the enterprise elect, in such manner as the Secretary or his delegate may by regulations prescribe, not to have such clause (ii) apply with respect to such enterprise. “(5) Holdings acquired by trust or will.— Paragraph (4) (other than subparagraph (B)(i)) shall apply to any interest in a business enterprise which a private foundation acquires under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter, as if such interest were held on May 26, 1969, except that the 15-year and 10-year periods prescribed in clauses (ii) and (iii) of paragraph (4)(B) shall commence with respect to such interest on the date of distribution under the trust or will in lieu of May 26, 1969. “(6) 5-year period to dispose of gifts, bequests, etc.— Except as provided in paragraph (5), if, after May 26, 1969, there is a change in the holdings in a business enterprise (other than by purchase by the private foundation or by a disqualified person) which causes the private foundation to have— “(A) excess business holdings in such enterprise, the interest of the foundation in such enterprise (immediately after such change) shall (while held by the foundation) be treated as held by a disqualified person (rather than by the foundation) during the 5-year period beginning on the date of such change in holdings; or “(B) an increase in excess business holdings in such enterprise (determined without regard to subparagraph (A)), subparagraph (A) shall apply, except that the excess holdings immediately preceding the increase therein shall not be treated, solely because of such increase, as held by a disqualified person (rather than by the foundation). “(d) Definitions; Special Rules.— For purposes of this section— “(1) Business holdings.— In computing the holdings of a private foundation, or a disqualified person (as defined in section 4946) with respect thereto, in any business enterprise, any stock or other interest owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. The preceding sentence shall not apply with respect to an income or remainder interest of a private foundation in a trust described in section 4947(a)(2), but only if, in the case of property transferred in trust after May 26, 1969, such foundation holds only an income interest or only a remainder interest in such trust. “(2) Taxable period.— The term ‘taxable period’ means, with respect to any excess business holdings of a private foundation in a business enterprise, the period beginning on the first day on which there are such excess holdings and ending on the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a) under section 6212 in respect of such holdings. 68A Stat. 770. 26 USC 6212. “(3) Correction period.— The term ‘correction period’ means, with respect to excess business holdings of a private foundation in a business enterprise, the period ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit orderly disposition of such excess business holdings. “(4) Business enterprise.— The term ‘business enterprise’ does not include— “(A) a functionally related business (as defined in section 4942(j)(5)), or “(B) a trade or business at least 95 percent of the gross income of which is derived from passive sources. For purposes of subparagraph (B), gross income from passive sources includes the items excluded by section 512(b)(1), (2), (3), and (5), and income from the sale of goods (including Post, p. 538. 26 USC 512. charges or costs passed on at cost to purchasers of such goods or income received in settlement of a dispute concerning or in lieu of the exercise of the right to sell such goods) if the seller does not manufacture, produce, physically receive or deliver, negotiate sales of, or maintain inventories in such goods. “SEC. 4944. TAXES ON INVESTMENTS WHICH JEOPARDIZE CHARITABLE PURPOSE. “(a) Initial Taxes.— “(1) On the private foundation.— If a private foundation invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes, there is hereby imposed on the making of such investment a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in the making of the investment, knowing that it is jeopardizing the carrying out of any of the foundation’s exempt purposes, a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the making of the investment. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on the making of an investment and such investment is not removed from jeopardy within the correction period, there is hereby imposed a tax equal to 25 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the removal from jeopardy, there is hereby imposed a tax equal to 5 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the removal from jeopardy. “(c) Exception for Program-Related Investments.— For purposes of this section, investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c) Post, p. 553. (2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes. “(d) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to any one investment, all such persons shall be jointly and severally liable under such paragraph with respect to such investment. “(2) Limit for management.— With respect to any one investment, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(e) Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which the amount is so invested and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a)(1) under section 68A Stat. 770. 26 USC 6212. 6212, or (B) the date on which the amount so invested is removed from jeopardy. “(2) Removal from jeopardy.— An investment which jeopardizes the carrying out of exempt purposes shall be considered to be removed from jeopardy when such investment is sold or otherwise disposed of, and the proceeds of such sale or other disposition are not investments which jeopardize the carrying out of exempt purposes. “(3) Correction period.— The term ‘correction period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which such investment is entered into and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about removal from jeopardy. “SEC. 4945. TAXES ON TAXABLE EXPENDITURES. “(a) Initial Taxes.— “(1) On the foundation.— There is hereby imposed on each taxable expenditure (as defined in subsection (d)) a tax equal to 10 percent of the amount thereof. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— There is hereby imposed on the agreement of any foundation manager to the making of an expenditure, knowing that it is a taxable expenditure, a tax equal to 2½ percent of the amount thereof, unless such agreement is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who agreed to the making of the expenditure. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the correction period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount of the taxable expenditure. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to the making of a taxable expenditure, all such persons shall be jointly and severally liable under such paragraph with respect to such expenditure. “(2) Limit for management.— With respect to any one taxable expenditure, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Taxable Expenditure.— For purposes of this section, the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation— “(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e), “(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive, “(3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g), “(4) as a grant to an organization (other than an organization described in paragraph (1), (2), or (3) of section 509(a)), unless Ante, p. 496. the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or “(5) for any purpose other than one specified in section 170(c)(2)(B). Post, p. 553. “(e) Activities Within Subsection (d)(1).— For purposes of subsection (d)(1), the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation for— “(1) any attempt to influence any legislation through an attempt to affect the opinion of the general public or any segment thereof, and “(2) any attempt to influence legislation through communication with any member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of the legislation (except technical advice or assistance provided to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be), other than through making available the results of nonpartisan analysis, study, or research. Paragraph (2) of this subsection shall not apply to any amount paid or incurred in connection with an appearance before, or communication to, any legislative body with respect to a possible decision of such body which might affect the existence of the private foundation, its powers and duties, its tax-exempt status, or the deduction of contributions to such foundation. “(f) Nonpartisan Activities Carried on by Certain Organizations.— Subsection (d)(2) shall not apply to any amount paid or incurred by any organization— “(1) which is described in section 501(c)(3) and exempt from taxation under section 501(a), “(2) the activities of which are nonpartisan, are not confined to one specific election period, and are carried on in 5 or more States, “(3) substantially all of the income of which is expended directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, “(4) substantially all of the support (other than gross investment Ante, p. 496. income as defined in section 509(e)) of which is received from exempt organizations, the general public, governmental Post, p. 553. units described in section 170(c)(1), or any combination of the foregoing; not more than 25 percent of such support is received from any one exempt organization (for this purpose treating private foundations which are described in section 4946(a)(1)(H) with respect to each other as one exempt organization); and not more than half of the support of which is received from gross investment income, and “(5) contributions to which for voter registration drives are not subject to conditions that they may be used only in specified States, possessions of the United States, or political subdivisions or other areas of any of the foregoing, or the District of Columbia, or that they may be used in only one specific election period. In determining whether the organization meets the requirements of paragraph (4) for any taxable year of such organization, there shall be taken into account the support received by such organization during such taxable year and during the immediately preceding 4 taxable years of such organization (excluding therefrom any preceding taxable year which begins before January 1, 1970). Subsection (d)(4) shall not apply to any grant to an organization which meets the requirements of this subsection. “(g) Individual Grants.— Subsection (d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary or his delegate, if it is demonstrated to the satisfaction of the Secretary or his delegate that— “(1) the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for study at an educational institution described in section 151(e)(4), “(2) the grant constitutes a prize or award which is subject to the provisions of section 74(b), if the recipient of such prize or award is selected from the general public, or “(3) the purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. “(h) Expenditure Responsibility.— The expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures— “(1) to see that the grant is spent solely for the purpose for which made, “(2) to obtain full and complete reports from the grantee on how the funds are spent, and “(3) to make full and detailed reports with respect to such expenditures to the Secretary or his delegate. “(i) Other Definitions.— For purposes of this section— “(1) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any taxable expenditure, (A) recovering part or all of the expenditure to the extent recovery is possible, and where full recovery is not possible such additional corrective action as is prescribed by the Secretary or his delegate by regulations, or (B) in the case of a failure to comply with subsection (h)(2) or (h)(3), obtaining or making the report in question. “(2) Correction period.— The term ‘correction period’ means, with respect to any taxable expenditure, the period beginning with the date on which the taxable expenditure occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— 68A Stat. 770. 26 USC 6212. “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the taxable expenditure (except that such determination shall not be made with respect to any taxable expenditure within the meaning of paragraph (1), (2), (3), or (4) of subsection (d) because of any action by an appropriate State officer as defined in section 6104(c)(2)). Post, p. 523. “SEC. 4946. DEFINITIONS AND SPECIAL RULES. “(a) Disqualified Person.— “(1) In general.— For purposes of this chapter, the term ‘disqualified person’ means, with respect to a private foundation, a person who is— “(A) a substantial contributor to the foundation, “(B) a foundation manager (within the meaning of subsection (b)(1)), “(C) an owner of more than 20 percent of— “(i) the total combined voting power of a corporation, “(ii) the profits interest of a partnership, or “(iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, “(D) a member of the family (as defined in subsection (d)) of any individual described in subparagraph (A), (B), or (C), “(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power, “(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the profits interest, “(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest, “(H) only for purposes of section 4943, a private foundation— “(i) which is effectively controlled (directly or indirectly) by the same person or persons who control the private foundation in question, or “(ii) substantially all of the contributions to which were made (directly or indirectly) by the same person or persons described in subparagraph (A), (B), or (C), or members of their families (within the meaning of subsection (d)), who made (directly or indirectly) substantially all of the contributions to the private foundation in question, and “(I) only for purposes of section 4941, a government official (as defined in subsection (c)). “(2) Substantial contributors.— For purposes of paragraph (1), the term ‘substantial contributor’ means a person who is Ante, p. 493. described in section 507(d)(2). “(3) Stockholdings.— For purposes of paragraphs (1)(C)(i) and (1)(E), there shall be taken into account indirect stockholdings 68A Stat. 78. 26 USC 267. which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(4) Partnerships; trusts.— For purposes of paragraphs (1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(b) Foundation Manager.— For purposes of this chapter, the term ‘foundation manager’ means, with respect to any private foundation— “(1) an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), and “(2) with respect to any act (or failure to act), the employees of the foundation having authority or responsibility with respect to such act (or failure to act). “(c) Government Official.— For purposes of subsection (a)(1)(I) and section 4941, the term ‘government official’ means, with respect to an act of self-dealing described in section 4941, an individual who, at the time of such act, holds any of the following offices or positions (other than as a ‘special Government employee’, as defined in section 76 Stat. 1221; 82 Stat. 1115. 202(a) of title 18, United States Code): “(1) an elective public office in the executive or legislative branch of the Government of the United States, “(2) an office in the executive or judicial branch of the Government of the United States, appointment to which was made by the President, “(3) a position in the executive, legislative, or judicial branch of the Government of the United States— “(A) which is listed in schedule C of rule VI of the Civil Service Rules, or “(B) the compensation for which is equal to or greater than the lowest rate of compensation prescribed for GS–16 of the General Schedule under section 5332 of title 5, United States Code, 5 USC 5332 note. “(4) a position under the House of Representatives or the Senate of the United States held by an individual receiving gross compensation at an annual rate of $15,000 or more, “(5) an elective or appointive public office in the executive, legislative, or judicial branch of the government of a State, possession of the United States, or political subdivision or other area of any of the foregoing, or of the District of Columbia, held by an individual receiving gross compensation at an annual rate of $15,000 or more, or “(6) a position as personal or executive assistant or secretary to any of the foregoing. “(d) Members of Family.— For purposes of subsection (a)(1), the family of any individual shall include only his spouse, ancestors, lineal descendants, and spouses of lineal descendants. “SEC. 4947. APPLICATION OF TAXES TO CERTAIN NONEXEMPT TRUSTS. “(a) Application of Tax.— “(1) Charitable trusts.— For purposes of part II of subchapter F of chapter 1 (other than section 508(a), (b), and (c)) Ante, p. 492. and for purposes of this chapter, a trust which is not exempt from taxation under section 501(a), all of the unexpired interests in 68A Stat. 163. 26 USC 501. which are devoted to one or more of the purposes described in section 170(c)(2)(B), and for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a) Post, pp. 549, 558, 560–562. (2), or 2522 (or the corresponding provisions of prior law), shall be treated as an organization described in section 501(c)(3). For purposes of section 509(a)(3)(A), such a trust shall be treated as if organized on the day on which it first becomes subject to this paragraph. “(2) Split-interest trusts.— In the case of a trust which is not exempt from tax under section 501(a), not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to termination of private foundation status), section 508(e) (relating to governing instruments) to the extent applicable to a trust described in this paragraph, section 4941 (relating to taxes on self-dealing), section 4943 (relating to taxes on excess business holdings) except as provided in subsection (b)(3), section 4944 (relating to investments which jeopardize charitable purpose) except as provided in subsection (b)(3), and section 4945 (relating to taxes on taxable expenditures) shall apply as if such trust were a private foundation. This paragraph shall not apply with respect to— “(A) any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed under section 170(f)(2)(B), 2055(e)(2)(B), or 2522(c)(2)(B), “(B) any amounts in trust other than amounts for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such other amounts are segregated from amounts for which no deduction was allowable, or “(C) any amounts transferred in trust before May 27, 1969. “(3) Segregated amounts.— For purposes of paragraph (2)(B), a trust with respect to which amounts are segregated shall separately account for the various income, deduction, and other items properly attributable to each of such segregated amounts. “(b) Special Rules.— “(1) Regulations.— The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section. “(2) Limit to segregated amounts.— If any amounts in the trust are seggregated within the meaning of subsection (a)(2)(B) of this section, the value of the net assets for purposes of subsections Ante, p. 492. (c)(2) and (g) of section 507 shall be limited to such segregated amounts. “(3) Sections 4943 and 4944.— Sections 4943 and 4944 shall not apply to a trust which is described in subsection (a)(2) if— “(A) all the income interest (and none of the remainder interest) of such trust is devoted solely to one or more of the Post, p. 553. purposes described in section 170(c)(2)(B), and all amounts in such trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), Post, pp. 549, 558, 560–562. or 2522 have an aggregate value not more than 60 percent of the aggregate fair market value of all amounts in such trusts, or “(B) a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for amounts payable under the terms of such trust to every remainder beneficiary but not to any income beneficiary. “SEC. 4948. APPLICATION OF TAXES AND DENIAL OF EXEMPTION WITH RESPECT TO CERTAIN FOREIGN ORGANIZATIONS. “(a) Tax on Income of Certain Foreign Organizations.— In lieu of the tax imposed by section 4940, there is hereby imposed for each taxable year on the gross investment income (within the meaning of section 4940(c)(2)) derived from sources within the United States Post, p. 625. (within the meaning of section 861) by every foreign organization which is a private foundation for the taxable year a tax equal to 4 percent of such income. “(b) Certain Sections Inapplicable.— Section 507 (relating to termination of private foundation status), section 508 (relating to 68A Stat. 163. 26 USC 501. special rules with respect to section 501(c)(3) organizations), and this chapter (other than this section) shall not apply to any foreign organization which has received substantially all 01 its support (other than gross investment income) from sources outside the United States. “(c) Denial of Exemption to Foreign Organizations Engaged in Prohibited Transactions.— “(1) General rule.— A foreign organization described in subsection (b) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after December 31, 1969. “(2) Prohibited transactions.— For purposes of this subsection, the term ‘prohibited transaction’ means any act or failure to act (other than with respect to section 4942(e)) which would subject a foreign organization described in subsection (b), or a disqualified person (as defined in section 4946) with respect thereto, Post, p. 519. to liability for a penalty under section 6684 or a tax under section 507 if such foreign organization were a domestic organization. “(3) Taxable years affected.— “(A) Except as provided in subparagraph (B), a foreign organization described in subsection (b) shall be denied exemption from taxation under section 501(a) by reason of 68A Stat. 163. 26 USC 501. paragraph (1) for all taxable years beginning with the taxable year during which it is notified by the Secretary or his delegate that it has engaged in a prohibited transaction. The Publication in Federal Register. Secretary or his delegate shall publish such notice in the Federal Register on the day on which he so notifies such foreign organization. “(B) Under regulations prescribed by the Secretary or his delegate, any foreign organization described in subsection (b) which is denied exemption from taxation under section 501(a) by reason of paragraph (1) may, with respect to the second taxable year following the taxable year in which notice is given under subparagraph (A)(or any taxable year thereafter), file claim for exemption from taxation under section 501(a). If the Secretary or his delegate is satisfied that such organization will not knowingly again engage in a prohibited transaction, such organization shall not, with respect to taxable years beginning with the taxable year with respect to which such claim is filed, be denied exemption from taxation under section 501(a) by reason of any prohibited transaction which was engaged in before the date on which such notice was given under subparagraph (A). “(4) Disallowance of certain charitable deductions.— No gift or bequest shall be allowed as a deduction under section 170, Post, pp. 549, 558, 560–562. 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if made— “(A) to a foreign organization described in subsection (b) after the date on which the Secretary or his delegate publishes notice under paragraph (3)(A) that he has notified such organization that it has engaged in a prohibited transaction, and “(B) in a taxable year of such organization for which it is not exempt from taxation under section 501(a) by reason of paragraph (1).” (c) Assessable Penalties For Repeated, or Willful and Flagrant, Acts Under Chapter 42.— Subchapter B of chapter 68 68A Stat. 828; 80 Stat. 1560. 26 USC 6671–6683. (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6684. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR TAX UNDER CHAPTER 42. “If any person becomes liable for tax under any section of chapter 42 Ante, p. 498. (relating to private foundations) by reason of any act or failure to act which is not due to reasonable cause and either— “(1) such person has theretofore been liable for tax under such chapter, or “(2) such act or failure to act is both willful and flagrant, then such person shall be liable for a penalty equal to the amount of such tax.” (d) Information Returns of Exempt Organizations.— (1) In general.— Section 6033(a) (relating to information 68A Stat. 741. returns by exempt organizations) is amended to read as follows: “(a) Organizations Required To File.— “(1) In general.— Except as provided in paragraph (2), every organization exempt from taxation under section 501(a) snail file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary or his delegate may by forms or regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe; except that, in the discretion of the Secretary or his delegate, any organization 68A Stat. 134; 76 Stat. 809. described in section 401(a) may be relieved from stating in its return any information which is reported in returns filed by the employer which established such organization. “(2) Exceptions from filing.— “(A) Mandatory exceptions.— Paragraph (1) shall not apply to— “(i) churches, their integrated auxiliaries, and conventions or associations of churches, “(ii) any organization (other than a private foundation, Ante, p. 496. as defined in section 509(a)) described in subparagraph (C), the gross receipts of which in each taxable year are normally not more than $5,000, or “(iii) the exclusively religious activities of any religious order. “(B) Discretionary exceptions.— The Secretary or his delegate may relieve any organization required under paragraph (1) to file an information return from filing such a return where he determines that such filing is not necessary to the efficient administration of the internal revenue laws. “(C) Certain organizations.— The organizations referred to in subparagraph (A)(ii) are— “(i) a religious organization described in section 501 68A Stat. 163. (c)(3); “(ii) an educational organization described in section Post, p. 550. 170(b)(1)(A)(ii); “(iii) a charitable organization, or an organization for the prevention of cruelty to children or animals, described in section 501(c)(3), if such organization is supported, in whole or in part, by funds contributed by the United States or any State or political subdivision thereof, or is primarily supported by contributions of the general public; “(iv) an organization described in section 501(c)(3), if such organization is operated, supervised, or controlled by or in connection with a religious organization described in clause (i); “(v) an organization described in section 501(c)(8); and “(vi) an organization described in section 501(c)(1), if such organization is a corporation wholly owned by the United States or any agency or instrumentality thereof, or a wholly-owned subsidiary of such a corporation.” (2) Additional information.— Section 6033(b) (relating to certain organizations described in section 501(c)(3)) is amended— (A) by striking out in paragraph (3) “out of income”, (B) by striking out paragraphs (4), (5), (6), and (8), and by redesignating paragraph (7) as paragraph (4), and (C) by adding after paragraph (4) (as redesignated) the following new paragraphs: “(5) the total of the contributions and gifts received by it during the year, and the names and addresses of all substantial contributors. “(6) the names and addresses of its foundation managers (within the meaning of section 4946(b)(1)) and highly compensated employees, and “(7) the compensation and other payments made during the year to each individual described in paragraph (6).” (3) Annual report.— Part III of subchapter A of chapter 61 (relating to information returns) is amended by adding after 68A Stat. 741. 26 USC 6031–6053. subpart C, the following new subpart: “Subpart D— Information Concerning Private Foundations “Sec. 6056. Annual reports by private foundations. “SEC. 6056. ANNUAL REPORTS BY PRIVATE FOUNDATIONS. “(a) General.— The foundation managers (within the meaning of section 4946(b)) of every organization which is a private foundation Ante, p. 515. Ante, p. 496. (within the meaning of section 509(a)) having at least $5,000 of assets at any time during a taxable year shall file an annual report as of the close of the taxable year at such time and in such manner as the Secretary or his delegate may by regulations prescribe. “(b) Contents.— The foundation managers of the private foundation shall set forth in the annual report required under subsection (a) the following information: “(1) its gross income for the year, “(2) its expenses attributable to such income and incurred within the year, “(3) its disbursements (including administrative expenses) within the year, “(4) a balance sheet showing its assets, liabilities, and net worth as of the beginning of the year, “(5) an itemized statement of its securities and all other assets at the close of the year, showing both book and market value, “(6) the total of the contributions and gifts received by it during the year, “(7) an itemized list of all grants and contributions made or approved for future payment during the year, showing the amount of each such grant or contribution, the name and address of the recipient, any relationship between any individual recipient and the foundation’s managers or substantial contributors, and a concise statement of the purpose of each such grant or contribution, “(8) the address of the principal office of the foundation and (if different) of the place where its books and records are maintained, “(9) the names and addresses of its foundation managers (within the meaning of section 4946(b)), and “(10) a list of all persons described in paragraph (9) that are substantial contributors (within the meaning of section 507(d)(2)) or that own 10 percent or more of the stock of any corporation Ante, p. 492. of which the foundation owns 10 percent or more of the stock, or corresponding interests in partnerships or other entities, in which the foundation has a 10 percent or greater interest. “(c) Form.— The annual report may be prepared in printed, typewritten, or any other legible form the foundation chooses. The Secretary or his delegate shall provide forms which may be used by a private foundation for purposes of the annual report. “(d) Special Rules.— “(1) The annual report required to be filed under this section is in addition to and not in lieu of the information required to be filed under section 6033 (relating to returns by exempt organizations) 68A Stat. 74 26 USC 6033. and shall be filed at the same time as such information. “(2) A copy of the notice required by section 6104(d) (relating to public inspection of private foundations’ annual reports), together with proof of publication thereof, shall be filed by the foundation managers together with the annual report. “(3) The foundation managers shall furnish copies of the annual report required by this section to such State officials and other persons, at such times and under such conditions, as the Secretary or his delegate may by regulations prescribe.” (4) Penalty for late filing of certain information returns.— Section 6652 (relating to failure to file certain information returns) is amended by relettering subsection (d) as subsection (e) and inserting immediately after subsection (c) the following new subsection: “(d) Returns by Exempt Organizations and by Certain Trusts.— “(1) Penalty on organization or trust.— In the case of a Ante, p. 519. failure to file a return required under section 6033 (relating to returns by exempt organizations), section 6034 (relating to returns Post, p. 529. by certain trusts), or section 6043(b) (relating to exempt organizations), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the exempt organization or trust failing so to file, $10 for each day during which such failure continues, but the total amount imposed hereunder on any organization for failure to file any return shall not exceed $5,000. “(2) Managers.— The Secretary or his delegate may make written demand upon an organization failing to file under paragraph (1) specifying therein a reasonable future date by which such filing shall be made, and if such filing is not made on or before such date, and unless it is shown that failure so to file is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file, $10 for each day after the expiration of the time specified in the written demand during which such failure continues, but the total amount imposed hereunder on all persons for such failure to file shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file, all such persons shall be jointly and severally liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs. “(3) Annual reports.— In the case of a failure to file a report Ante, p. 521. required under section 6056 (relating to annual reports by private foundations) or to comply with the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file or meet the publicity requirement, $10 for each day during which such failure continues, but the total amount imposed hereunder on all such persons for such failure to file or comply with the requirements of section 6104(d) with regard to any one annual report shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file or comply with the requirements of section 6104(d), all such persons shall be jointly and severally Infra. liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs.” (e) Publicity of Information Required By Certain Exempt Organizations.— (1) Names and addresses of contributors.— Section 6104 68A Stat. 755; 72 Stat. 1660. 26 USC 6104. (relating to publicity of information required from certain exempt organizations and certain trusts) is amended by inserting at the end of subsection (b), the following sentence: “Nothing in this subsection shall authorize the Secretary or his delegate to disclose the name or address of any contributor to any organization or trust (other than a private foundation, as defined in section 509(a)) which is required to furnish such information.” (2) Publication to state officials.— Section 6104 is amended by adding after subsection (b) the following new subsection: “(c) Publication to State Officials.— “(1) General rule.— In the case of any organization which is described in section 501(c)(3) and exempt from taxation under 68A Stat. 163. Ante, p. 434. section 501(a), or has applied under section 508(a) for recognition as an organization described in section 501(c)(3), the Secretary or his delegate at such times and in such manner as he may by regulations prescribe shall— “(A) notify the appropriate State officer of a refusal to recognize such organization as an organization described in section 501(c)(3), or of the operation of such organization in a manner which does not meet, or no longer meets, the requirements of its exemption, “(B) notify the appropriate State officer of the mailing of a notice of deficiency of tax imposed under section 507 or chapter 42, and Ante, pp. 492, 498. “(C) at the request of such appropriate State officer, make available for inspection and copying such returns, filed statements, records, reports, and other information, relating to a determination under subparagraph (A) or (B) as are relevant to any determination under State law. “(2) Appropriate state officer.— For purposes of this subsection, the term ‘appropriate State officer’ means the State attorney general. State tax officer, or any State official charged with overseeing organizations of the type described in section 501(c)(3).” (3) Annual reports.— Section 6104 is amended by adding after subsection (c), as added by paragraph (2) of this subsection, the following new subsection: “(d) Public Inspection of Private Foundations’ Annual Reports.— The annual report required to be filed under section 6056 Ante, p. 521. (relating to annual reports by private foundations) shall be made available by the foundation managers for inspection at the principal office of the foundation during regular business hours by any citizen on request made within 180 days after the publication of notice of its availability. Such notice shall be published, not later than the day prescribed for filing such annual report (determined with regard to any extension of time for filing), in a newspaper having general circulation in the county in which the principal office of the private foundation is located. The notice shall state that the annual report of the private foundation is available at its principal office for inspection during regular business hours by any citizen who requests it within 180 days after the date of such publication, and shall state the address of the private foundation’s principal office and the name of its principal manager.” (4) Willful failure to provide information regarding private foundations.— Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding after section 6684 (added by subsection (c) of this section) the following new section: “SEC. 6685. ASSESSABLE PENALTIES WITH RESPECT TO PRIVATE FOUNDATION ANNUAL REPORTS. “In addition to the penalty imposed by section 7207 (relating to fraudulent returns, statements, or other documents), any person who Ante, p. 521. is required to file the report and the notice required under section 6056 (relating to annual reports by private foundations) or to comply with Ante, p. 523. the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports) and who fails so to file or comply, if such failure is willful, shall pay a penalty of $1,000 with respect to each such report or notice.” (5) Section 7207 (relating to fraudulent returns, statements, or other documents) is amended by striking out “section 6047 (b) or (c)” and inserting in lieu thereof “sections 6047 (b) or (c), 6056, or 6104(d)”. (f) Petition to Tax Court; Deficiency Procedures Made Applicable.— (1) Section 6211(a) (relating to definition of a deficiency) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and excise taxes,”, (B) by striking out “subtitles A and B,” and inserting in lieu thereof “subtitles A and B, and chapter 42,”, and (C) by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (2) Section 6212(c)(1) (relating to further deficiency letters restricted) is amended by striking out “or” before “of estate tax” and by inserting after “the same decedent,” the following: “of section Ante, p. 498. 4940 tax for the same taxable year, or of chapter 42 tax (other than under section 4940) with respect to any act (or failure to act) to which such petition relates,”. (3) Section 6213 (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by relettering subsection (e) as subsection (f) and inserting immediately after subsection (d) the following new subsection: “(e) Suspension of Filing Period for Certain Chapter 42 Taxes.— The running of the time prescribed by subsection (a) for filing a petition in the Tax Court with respect to the taxes imposed by section 4941 (relating to taxes on self-dealing), 4942 (relating to taxes on failure to distribute income), 4943 (relating to taxes on excess business holdings), 4944 (relating to investments which jeopardize charitable purpose), or 4945 (relating to taxes on taxable expenditures) shall be suspended for any period during which the Secretary or his delegate has extended the time allowed for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (g) Limitations on Assessment and Collection.— (1) Section 6501 is amended by adding at the end thereof the 68A Stat. 803; 80 Stat. 1151. following new subsection: “(n) Special Rule for Chapter 42 Taxes.— “(1) In general.— For purposes of any tax imposed by chapter 42 (other than section 4940), the return referred to in this section Ante, p. 498. shall be the return filed by the private foundation for the year in which the act (or failure to act) giving rise to liability for such tax occurred. For purposes of section 4940, such return is the return filed by the private foundation for the taxable year for which the tax is imposed. “(2) Certain contributions to section 501 (c)(3) organizations.— In the case of a deficiency of tax of a private foundation making a contribution in the manner provided in section 4942(g)(3) (relating to certain contributions to section 501(c)(3) 68A Stat. 163. 26 USC 501. organizations) attributable to the failure of a section 501(c)(3) organization to make the distribution prescribed by section 4942(g)(3), such deficiency may be assessed at any time before the expiration of one year after the expiration of the period within which a deficiency may be assessed for the taxable year with respect to which the contribution was made.” (2) Section 6501(c) is amended by adding the following new paragraph at the end thereof: “(7) Termination of private foundation status.— In the case of a tax on termination of private foundation status under section 507, such tax may be assessed, or a proceeding in court Ante, p. 492. for the collection of such tax may be begun without assessment, at any time.” (3) Section 6501(e)(3) is amended by adding at the end thereof the following sentence: “In determining the amount of tax omitted on a return, there shall not be taken into account any amount of tax imposed by chapter 42 which is omitted from the return if the transaction giving rise to such tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the existence and nature of such item.” (4) Section 6503 (relating to suspension of running of period of 80 Stat. 1140. limitation) is amended by relettering subsection (h) as subsection (i) and inserting immediately after subsection (g) the following new subsection: “(h) Suspension Pending Correction.— The running of the periods of limitations provided in sections 6501 and 6502 on the making 68A Stat. 806. of assessments or the collection by levy or a proceeding in court in respect of any tax imposed by chapter 42 or section 507 shall be suspended for any period described in section 507(g)(2) or during which the Secretary or his delegate has extended the time for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (h) Limitations on Credits or Refunds.— Section 6511 (relating to limitations on credits or refunds) is amended by relettering subsection (f) as subsection (g) and inserting immediately after subsection (e) the following new subsection: “(f) Special Rule for Chapter 42 Taxes.— For purposes of any tax imposed by chapter 42, the return referred to in subsection (a) shall be the return specified in section 6501(n)(1).” Supra. (i) Civil Action for Refund.— Section 7422 (relating to civil 68A Stat. 876; 80 Stat. 1108. actions for refund) is amended by relettering subsection (g) as subsection (h) and by inserting immediately after subsection (f) the following new subsection: “(g) Special Rules for Certain Excise Taxes Imposed by Chapter 42.— “(1) Right to bring actions.— With respect to any act (or failure to act) giving rise to liability under section 4941, 4942, 4943, 4944, or 4945, payment of the full amount of tax imposed under section 4941(a) (relating to initial taxes on self-dealing), section 4942(a) (relating to initial tax on failure to distribute income), section 4943(a) (relating to initial tax on excess business holdings), section 4944(a) (relating to initial taxes on investments which jeopardize charitable purpose), section 4945(a) (relating to initial taxes on taxable expenditures), section 4941(b) (relating to additional taxes on self-dealing), section 4942(b) (relating to additional tax on failure to distribute income), section 4943(b) (relating to additional tax on excess business holdings), section 4944(b) (relating to additional taxes on investments which jeopardize charitable purpose), or section 4945(b) (relating to additional taxes on taxable expenditures) shall constitute sufficient payment in order to maintain an action under this section with respect to such act (or failure to act). “(2) Limitation on suit for refund.— No suit may be maintained under this section for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, unless no other suit has been maintained for credit or refund of, and no petition has been filed in the Tax Court with respect to a deficiency in, any other tax imposed by such sections with respect to such act (or failure to act). “(3) Final determination of issues.— For purposes of this section, any suit for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, shall constitute a suit to determine all questions with respect to any other tax imposed with respect to such act (or failure to act) under such sections, and failure by the parties to such suit to bring any such question before the Court shall constitute a bar to such question.” (j) Technical, Conforming, and Clerical Amendments.— (1) Section 101(b)(2)(B)(iii) (relating to nonforfeitable rights) is amended by striking out “section 503(b)(1), (2), or (3)” and inserting in lieu thereof “section 170(b)(1)(A)(ii) or (vi) or which is a religious organization (other than a trust)”. (2) Section 170(i) (relating to disallowance of deductions in certain cases) (as redesignated by section 201(a)(1)(A) of this Act) is amended— (A) by striking out paragraph (1), and (B) by striking out “(2) For disallowance” and inserting in lieu thereof “For disallowance”. (3) Section 501(a) (relating to exemption from taxation) is amended by striking out “502, 503, or 504” and inserting in lieu thereof “502 or 503”. (4) Section 501(b) (relating to tax on unrelated business income) is amended to read as follows: “(b) Tax on Unrelated Business Income and Certain Other Activities.— An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II and III of this subchapter, but (notwithstanding parts II and III of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.” (5) Section 501(c)(16) (relating to list of exempt organizations) 68A Stat. 165. 26 USC 501. is amended by striking out “part III” and inserting in lieu thereof “part IV”. (6) Section 501(e) (relating to cooperative hospital service 82 Stat. 269. organizations) is amended by striking out in the last sentence thereof “section 503(b)(5).” and inserting in lieu thereof “section 170(b)(1)(A)(iii).”. (7) Section 503(a)(1) (relating to general rule) is amended to 74 Stat. 535. read as follows: “(1) General rule.— “(A) An organization described in section 501(c)(17) 74 Stat. 534. 68A Stat. 163. 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) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954.” (8) Section 503(a)(2) (relating to taxable years affected by 68A Stat. 166. denial of exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (9) Section 503(d) (relating to future status of organizations denied exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (10) Section 503(g) (relating to special rule for loans) is amended by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”. (11) Section 503(h) (relating to special rules relating to lending 72 Stat. 1629. by section 401(a) and section 501(c)(17) trusts to certain persons) is amended— (A) by striking out in the heading thereof “Special rules relating to lending by section 401(a) and section 501(c)(17) trusts to certain persons.—”, and inserting in lieu thereof “Special rules.—”, (B) by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”, (C) by striking out “acquired by a trust described in section 401(a) or section 501(c)(17)”, and (D) by striking out in paragraph (3) “subsection (c)” and inserting in lieu thereof “subsection (b)”. (12) Section 503(i) (relating to loans with respect to which 72 Stat. 1630. employers are prohibited from pledging certain assets) is amended— (A) by striking out “Subsection (c)(1)” and inserting in lieu thereof “Subsection (b)(1)”, and (B) by striking out “subsection (h)” and inserting in lieu thereof “subsection (e)”. (13) Section 503(j)(1) (relating to prohibited transactions) 76 Stat. 827. is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (b)”. (14) Section 503 (relating to requirements of exemption) is amended by striking out subsections (b), (e), and (f) and by redesignating subsections (c), (d), (g), (h), (i), and (j) (as amended), as subsections (b), (c), (d), (e), (f), and (g), respectively. (15) Section 504 (relating to denial of exemption) is repealed. Repeal 68A Stat. 168. (16) Section 542(a)(2) (relating to stock ownership requirement) is amended— (A) by striking out in the second sentence “section 503(b)” and inserting in lieu thereof “section 401(a), 501(c)(17), or 509(a)”, and (B) by amending the third sentence to read as follows: “The preceding sentence shall not apply in the case of an organization or trust organized or created before July 1, 1950, if at all times on or after July 1, 1950, and before the close of the taxable year such organization or trust has owned all of the common stock and at least 80 percent of the total number of shares of all other classes of stock of the corporation.” (17) Section 663(a)(2) (relating to charitable, etc., distributions) is amended by striking out “section 681” and inserting in lieu thereof “sections 508(d), 681, and 4948(c)(4)”. (18) Section 681(b) and (c) (relating to operations of trusts and accumulated income) is repealed. (19) Section 681(d) (relating to cross reference) is redesignated as subsection (b), and as so redesignated is amended by striking out “section 503(e)” and inserting in lieu thereof “sections 508(d) and 4948(c)(4)”. (20) Section 878 (relating to foreign educational, charitable, and certain other exempt organizations) is amended by— (A) striking out “unrelated business income of”, and (B) striking out “trusts, see section 512(a)” and inserting in lieu thereof “organizations, see sections 512(a) and 4948”. (21) Section 884 (relating to cross references) is amended by striking out paragraph (1) and by redesignating paragraphs (2), (3), (4), (5), and (6) as paragraphs (1), (2), (3), (4), and (5), respectively. (22) Section 1443 (relating to foreign tax-exempt organizations) is amended by— (A) inserting “(a) Income Subject to Section 511.—” before “In the case of”, and (B) adding subsection (b) to read as follows: “(b) Income Subject to Section 4948.— In the case of income of Ante, p. 518. a foreign organization subject to the tax imposed by section 4948(a), this chapter shall apply, except that the deduction and withholding shall be at the rate of 4 percent and shall be subject to such conditions as may be provided under regulations prescribed by the Secretary or his delegate.” (23) Section 2039(c)(3) (relating to exemption of annuities under certain trusts and plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section Post, p. 550. 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (24) Section 2517(a)(3) (relating to general rule for certain annuities under qualified plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (25) Section 4057(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (26) Section 4221(d)(5) (relating to the definition of nonprofit 72 Stat. 1282. 26 USC 4221. educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (27) Section 4253(h) (relating to nonprofit hospitals) is amended by striking out “section 503(b)(5)” and inserting in lieu thereof “section 170(b)(1)(A)(iii)”. Post, p. 550. (28) Section 4294(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (29) Section 5214(a)(3)(A) (relating to purposes for withdrawal of distilled spirits from bonded premises free of tax or without payment of tax) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (30) Section 6033(b)(4) (as redesignated by subsection (d)(2) of this section) (relating to certain balance sheet items on Ante, p. 520. returns by exempt organizations) is amended by striking out “and” at the end thereof. (31) Section 6033(c) (relating to cross reference) is amended by inserting the following at the end thereof: “For reporting requirements as to certain liquidations, dissolutions, terminations, and contractions, see section 6043(b). For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” Ante, p. 522. (32) Section 6034 (relating to returns by certain trusts) is 68A Stat. 742. amended by striking out all of such section before paragraph (1) of subsection (a) and inserting in lieu thereof the following: “SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(a) OR CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 642(c). “(a) General Rule.— Every trust described in section 4947(a) or Ante, p. 517. Post, p. 558. claiming a charitable, etc., deduction under section 642(c) for the taxable year shall furnish such information with respect to such taxable year as the Secretary or his delegate may by forms or regulations prescribe, including—”. (33) Section 6034(a)(1) (relating to returns by certain trusts) is amended by striking out “(showing separately the amount of such deduction which was paid out and the amount which was permanently set aside for charitable, etc., purposes during such year)”. (34) Section 6034 (relating to returns by certain trusts) is amended by adding the following new subsection at the end thereof: “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” (35) Section 6043 (relating to return regarding corporate dissolution 68A Stat. 746. or liquidation) is amended— (A) by striking out the heading and inserting in lieu thereof (B) by striking out “Every corporation” and inserting in lieu thereof “(a) Corporations.—Every corporation”, and (C) by adding the following new subsections at the end thereof: “(b) Exempt Organizations.— Every organization which for any of its last 5 taxable years preceding its liquidation, dissolution, termination, or substantial contraction was exempt from taxation under 68A Stat. 163. 25 USC 501. section 501(a) shall file such return and other information with respect to such liquidation, dissolution, termination, or substantial contraction as the Secretary or his delegate shall by forms or regulations prescribe; except that— “(1) no return shall be required under this subsection from churches, their integrated auxiliaries, conventions or associations of churches, or any organization which is not a private foundation Ante, p. 496. (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000, and “(2) the Secretary or his delegate may relieve any organization from such filing where he determines that such filing is not necessary to the efficient administration of the internal revenue laws or, with respect to an organization described in section 401(a), where the employer who established such organization files such a return. “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by subsection (b), see section 6652(d).” (36) Section 6104(b) (relating to inspection of annual information returns) is amended by striking out “sections 6033(b) and 6034,” and inserting in lieu thereof “sections 6033, 6034, and 6056,”. (37) Section 6161(b) (relating to the amount determined as a deficiency when granting an extension of time) is amended— (A) by striking out in paragraph (1) “chapter 1 or 12,” Ante, p. 498. and inserting in lieu thereof “chapter 1, 12, or 42,”, and (B) by striking out “chapter 1,” the last time it appears and inserting in lieu thereof “chapter 1 or 42,”. (38) Section 6201(d) (relating to deficiency proceedings) is amended by striking out “and gift taxes”, and inserting in lieu thereof “gift, and chapter 42 taxes”. (39) Section 6211(b)(2) (relating to the term “rebate”) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (40) Section 6212(a) (relating to notice of deficiency) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (41) Section 6212(b)(1) (relating to address for notice of deficiency) is amended— (A) by striking out in the title thereof “and gift taxes” and inserting in lieu thereof “and gift taxes and taxes imposed by chapter 42”, (B) by striking out “subtitle A or chapter 12,” and inserting in lieu thereof “subtitle A, chapter 12, or chapter 42,”, and (C) by inserting “chapter 42,” after “chapter 12,” the last place it appears. (42) Section 6213(a) (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by inserting “or chapter 42” after “subtitle A or B”. (43) Section 6214 (relating to determination by the Tax Court) is amended by relettering subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Taxes Imposed by Section 507 or Chapter 42.— The Tax Court, in redetermining a deficiency of any tax imposed by section 507 Ante, p. 492. or chapter 42 for any period, act, or failure to act, shall consider such Ante, p. 498. facts with relation to the taxes under chapter 42 for other periods, acts, or failures to act as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the taxes under chapter 42 for any other period, act, or failure to act have been overpaid or underpaid.” (44) Section 6214(d) (as relettered) is amended by inserting Ante, p. 530. “, chapter 42,” after “chapter”. (45) Section 6344(a)(1) (relating to certain cross references) 68A Stat. 789. 26 USC 6344. is amended by inserting “and taxes imposed by chapter 42,” after “gift taxes,”. (46) Section 6503(a)(1) (relating to issuance of statutory notice of deficiency) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift and chapter 42 taxes”. (47) Section 6512(a) (relating to effect of petition to Tax Court) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”, and (B) by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (48) Section 6512(b)(1) (relating to jurisdiction to determine overpayment determined by Tax Court) is amended by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (49) Section 6601(d) (relating to suspension of interest in certain cases) is amended— (A) by striking out in the title thereof “and Gift Tax Cases.” and inserting in lieu thereof “Gift, and Chapter 42 Tax Cases.”, and (B) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (50) Section 6653(c)(1) (relating to definition of underpayment) is amended— (A) by striking out in the heading thereof “and gift taxes.” and inserting in lieu thereof “gift, and chapter 42 taxes.”, and (B) by striking out “and gift taxes” the last time it appears and inserting in lieu thereof “gift, and chapter 42 taxes”. (51) Section 6659(b) (relating to procedure for assessing certain additions to tax) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (52) Section 6676(b) (relating to deficiency procedures not to 75 Stat. 829. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (53) Section 6677(b) (relating to deficiency procedures not to 76 Stat. 988. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (54) Section 6679(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (55) Section 6682(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (56) Section 7422(e) (relating to stay of proceeding in civil actions for refund) is amended by striking out “or gift tax” the first time it appears and inserting in lieu thereof “gift tax, or tax imposed by chapter 42”. (57) Section 7454 (relating to burden of proof in fraud and transferee cases) is amended— (A) by striking out “FRAUD AND TRANSFEREE CASES” and inserting in lieu thereof “FRAUD, FOUNDATION MANAGER, AND TRANSFEREE CASES”, (B) by redesignating subsection (b) as subsection (c), and (C) by inserting after subsection (a) the following new subsection: “(b) Foundation Managers.— In any proceeding involving the Ante, p. 515. issue whether a foundation manager (as defined in section 4946(b)) has ‘knowingly’ participated in an act of self-dealing (within the meaning of section 4941), participated in an investment which jeopardizes the carrying out of exempt purposes (within the meaning of section 4944), or agreed to the making of a taxable expenditure (within the meaning of section 4945), the burden of proof in respect of such issue shall be upon the Secretary or his delegate.” (58) The table of parts for subchapter F of chapter 1 is amended to read as follows: “Subchapter F.— Exempt Organizations “Part I. General rule. “Part II. Private foundations. “Part III. Taxation of business income of certain exempt organizations. “Part IV. Farmers’ cooperatives. “Part V. Shipowners’ protection and indemnity associations.” (59) The table of chapters for subtitle D is amended by adding at the end thereof the following new item: “Chapter 42. Private foundations.” (60) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new items: “Sec. 6684. Repeated liability for tax under chapter 42. “Sec. 6685. Assessable penalties with respect to private foundation annual reports.” (61) The table of sections for part I of subchapter F of chapter 1 is amended by striking out the item relating to section 504. (62) The heading of subchapter B of chapter 63 is amended by striking out “and Gift Taxes” and inserting in lieu thereof “Gift, and Certain Excise Taxes”. (63) The table of subchapters for chapter 63 is amended by striking out “and gift taxes” in the item relating to subchapter B and inserting in lieu thereof “gift, and certain excise taxes”. (64) The table of subparts for part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: “Subpart D. Information concerning private foundations.” (k) Effective Dates.— (1) In general.— Except as otherwise provided in this subsection and subsection (1), the amendments made by this section shall take effect on January 1, 1970. (2) Provisions effective for taxable years beginning after december 31, 1969.— The following provisions shall apply to taxable years beginning after December 31, 1969: (A) Sections 4940, 4942, 4943, and 4948 of the Internal Revenue Code of 1954 (as added by this section), and Ante, p. 498. (B) The amendments made by subsection (d) and paragraphs (3), (15), (16), (20), (21), (30), (31), (32), (33), (34), (35), and (61) of subsection (j). (3) Sections 508 (a), (b), and (c).— Sections 508 (a), (b), and (c) of the Internal Revenue Code of 1954 (as added by this Ante, p. 494. section) shall take effect on October 9, 1969. (l) Savings Provisions.— (1) References to internal revenue code provisions.— Except as otherwise expressly provided, references in the following paragraphs of this subsection are to sections of the Internal Revenue Code of 1954 as amended by this section. (2) Section 4941.— Section 4941 shall not apply to— (A) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946), pursuant to the terms of securities of such corporation in existence at the time acquired by the foundation, if such securities were acquired by the foundation before May 27, 1969; (B) the sale, exchange, or other disposition of property which is owned by a private foundation on May 26, 1969 (or which is acquired by a private foundation under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter), to a disqualified person, if such foundation is required to dispose of such property in order not to be liable for tax under section 4943 (relating to taxes on excess business holdings) applied, in the case of a disposition before January 1, 1975, without taking section 4943(c)(4) into account and it receives in return an amount which equals or exceeds the fair market value of such property at the time of such disposition or at the time a contract for such disposition was previously executed in a transaction which would not constitute a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (C) the leasing of property or the lending of money or other extension of credit between a disqualified person and a private foundation pursuant to a binding contract in effect on October 9, 1969 (or pursuant to renewals of such a contract), until taxable years beginning after December 31, 1979, if such leasing or lending (or other extension of credit) remains at least as favorable as an arm’s-length transaction with an unrelated party and if the execution of such contract was not at the time of such execution a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (D) the use of goods, services, or facilities which are shared by a private foundation and a disqualified person until taxable years beginning after December 31, 1979, if such use is pursuant to an arrangement in effect before October 9, 1969, and such arrangement was not a prohibited transaction (within Ante, p. 527. the meaning of section 503(b) or the corresponding provisions of prior law) at the time it was made and would not be a prohibited transaction if such section continued to apply; and (E) the use of property in which a private foundation and a disqualified person have a joint or common interest, if the interests of both in such property were acquired before October 9, 1969. (3) Section 4942.— In the case of organizations organized before May 27, 1969, section 4942 shall— (A) for all purposes other than the determination of the minimum investment return under section 4942(j)(3)(B)(ii), for taxable years beginning before January 1, 1972, apply without regard to section 4942(e) (relating to minimum investment return), and for taxable years beginning in 1972, 1973, and 1974, apply with an applicable percentage (as prescribed in section 4942(e)(3)) which does not exceed 4½ percent, 5 percent, and 5½ percent, respectively; (B) not apply to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on May 26, 1969, and at all times thereafter) of an instrument executed before May 27, 1969, with respect to the transfer of income producing property to such organization, except that section 4942 shall apply to such organization if the organization would have been denied exemption Ante, p. 527. Post, p. 558. Ante, p. 528. if section 504(a) had not been repealed by this Act, or would have had its deductions under section 642(c) limited if section 681(c) had not been repealed by this Act. In applying the preceding sentence, in addition to the limitations contained in section 504(a) or 681(c) before its repeal, section 504(a)(1) or 681(c)(1) shall be treated as not applying to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on January 1, 1951, and at all times thereafter) of an instrument executed before January 1, 1951, with respect to the transfer of income producing property to such organization before such date, if such transfer was irrevocable on such date; (C) apply to a grant to a private foundation described in section 4942(g)(1)(A)(ii) which is not described in section 4942(g)(1)(A)(i), pursuant to a written commitment which was binding on May 26, 1969, and at all times thereafter, as if such grant is a grant to an operating foundation (as defined in section 4942(j)(3)), if such grant is made for one or more Post, p. 553. of the purposes described in section 170(c)(2)(B) and is to be paid out to such private foundation on or before December 31, 1974; (D) apply, for purposes of section 4942(f), in such a manner as to treat any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise as not essentially equivalent to a dividend 68A Stat. 85. 26 USC 302. under section 302(b)(1) if such redemption is described in paragraph (2)(B) of this subsection; and (E) not apply to an organization which is prohibited by its governing instrument or other instrument from distributing capital or corpus to the extent the requirements of section 4942 are inconsistent with such prohibition. Ante, p. 502. With respect to taxable years beginning after December 31, 1971, subparagraphs (B) and (E) shall apply only during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to comply with the provisions of section 4942, and in the case of subparagraph (B) for all periods after the termination of such judicial proceeding during which the governing instrument or any other instrument does not permit compliance with such provisions. (4) Section 4943.— (A) In the case of a private foundation— (i) which was incorporated before January 1, 1951; (ii) substantially all of the assets of which on May 26, 1969, consist of more than 90 percent of the stock of an incorporated business enterprise which is licensed and regulated, the sales or contracts of which are regulated, and the professional representatives of which are licensed, by State regulatory agencies in at least 10 States; and (iii) which acquired such stock solely by gift, devise, or bequest, section 4943(c)(4)(A)(i) shall be applied with respect to the Ante, p. 507. holdings of such foundation in such incorporated business enterprise by substituting “51 percent” for “50 percent”, and section 4943(c)(4)(D) shall not apply with respect to such holdings. For purposes of the preceding sentence, stock of such enterprise in a trust created before May 27, 1969, of which the foundation is the remainder beneficiary shall be deemed to be held by such foundation on May 26, 1969, if such foundation held (without regard to such trust) more than 20 percent of the stock of such enterprise on May 26, 1969. (B) Subparagraph (A) shall apply to a private foundation only if— (i) the foundation does not purchase any stock or other interest in the enterprise described in subparagraph (A) after May 26, 1969, and does not acquire any stock or other interest in any other business enterprise which constitutes excess business holdings under section 4943; and (ii) in the last 5 taxable years ending on or before December 31, 1970, the foundation expends substantially all of its adjusted net income (as defined in section 4942(f)) for the purpose or function for which it is organized and operated. (C) For purposes of section 4943(c)(6), the term “purchase” does not include an exchange which is described in paragraph (2)(B) of this subsection and which is pursuant to a plan for disposition of excess business holdings. (5) Section 4945.— Section 4945(d)(4) and (h) shall not apply to a grant which is described in paragraph (3)(C) of this subsection. (6) Section 508(e).— Section 508(e) shall not apply to require Ante, p. 494. inclusion in governing instruments of any provisions inconsistent with this subsection. (7) Section 509(a).— In the case of any trust created under the terms of a will or a codicil to a will executed on or before March 30, 1924, by which the testator bequeathed all of the outstanding common stock of a corporation in trust, the income of which trust is to be used principally for the benefit of those from time to time employed by the corporation and their families, the trustees of which trust are elected or selected from among the employees of such corporation, and which trust does not own directly any stock in any other corporation, if the trust makes an irrevocable election under this paragraph within one year after the date of the enactment of this Act, such trust shall be treated as not being a private foundation for purposes of the Internal Revenue Code of 1954 but shall be treated for purposes of such Code as if it were not exempt 68A Stat. 163. 26 USC 501. from tax under section 501(a) for any taxable year beginning after the date of the enactment of this Act and before the date (if any) on which such trust has complied with the requirements of section 507 for termination of the status of an organization as a private foundation. (8) Certain redemptions.— For purposes of applying section 302(b)(1) to the determination of the amount of gross investment Ante, pp. 498, 518. income under sections 4940 and 4948(a), any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise shall be treated as not essentially equivalent to a dividend, if such redemption is described in paragraph (2)(B) of this subsection. Subtitle B— Other Tax Exempt Organizations SEC. 121. TAX ON UNRELATED BUSINESS INCOME. (a) Organizations Subject to Tax.— (1) Corporate rates.— Section 511(a)(2)(A) (relating to certain organizations subject to tax on unrelated business income at corporate rates) is amended to read as follows: “(A) Organizations described in sections 401(a) and 501(c).— The taxes 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).” (2) Individual rates.— Section 511(b)(2) (relating to charitable, etc., trusts subject to tax on unrelated business income) is amended to read as follows: “(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).” (3) Section 501(c)(2) corporations.— Section 511 (relating to tax on unrelated business income) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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).” 68A Stat. 163. 26 USC 501. (4) Conforming amendment.— Section 1504 (relating to definitions for purposes of consolidated returns) is amended by adding at the end thereof the following new subsection: “(e) Includible Tax-Exempt Organizations.— Despite the provisions of paragraph (1) of subsection (b), two or more organizations exempt from taxation under section 501, one or more of which is described in section 501(c)(2) and the others of which derive income from such 501(c)(2) organizations, shall be considered as includible corporations for the purpose of the application of subsection (a) to such organizations alone.” (b) Definition of Unrelated Business Taxable Income.— (1) In general.— Section 512(a) (relating to definition of unrelated business taxable income) is amended to read as follows: “(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, Post, p. 542. 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 Ante, p. 536. 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 section 501(c)(7) or (9).— “(A) General rule.— In the case of an organization described in section 501(c)(7) or (9), the term ‘unrelated Post, p. 541. 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). “(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 section Post, p. 541. 501(c)(9), 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 68A Stat. 163. 26 USC 501. in section 501(c)(2), the income of which is payable to an organization described in section 501(c)(7) or (9), 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 section 501(c)(7) or (9) 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 shall apply.” (2) Modifications.— (A) Rents and debt-financed property.— Section 512(b)(3) (relating to modifications with respect to rents from real property) and section 512(b)(4) (relating to modifications with respect to business leases) are amended to read as follows: “(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 76 Stat. 1032; 78 Stat. 35. 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 Post, p. 543. 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).” (B) Limit on specific deduction.— Section 512(b)(12) 69A Stat. 171. (relating to allowance of specific deduction) is amended to read as follows: “(12) Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a Post, p. 619. 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.” (C) Special rules for certain organizations.— Section 512(b) (relating to modifications in determining unrelated business taxable income) is further amended by adding at the end thereof the following: “(15) Notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the ‘controlled organization’) of which the organization deriving such amounts (in this paragraph called the ‘controlling organization’) has control (as defined in section 368(c)) shall be included as an item of gross income 68A Stat. 121. 25 USC 368. (whether or not the activity from which such amounts are derived represents a trade or business or is regularly carried on) in an amount which bears the same ratio as— “(A) (i) in the case of a controlled organization which is not exempt from taxation under section 501(a), the excess of the amount of taxable income of the controlled organization over the amount of such organization’s taxable income which if derived directly by the controlling organization would not be unrelated business taxable income, or “(ii) in the case of a controlled organization which is exempt from taxation under section 501(a), the amount of unrelated business taxable income of the controlled organization, bears to “(B) the taxable income of the controlled organization (determined in the case of a controlled organization to which subparagraph (A)(ii) applies as if it were not an organization exempt from taxation under section 501(a)), but not less than the amount determined in clause (i) or (ii), as the case may be, of subparagraph (A), both amounts computed without regard to amounts paid directly or indirectly to the controlling organization. There shall be allowed all deductions directly connected with amounts included in gross income under the preceding sentence. “(16) 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. “(17) 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 68A Stat. 42. 26 USC 151. educational institution (as defined in section 151(e)(4)) 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 or his delegate 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.” (D) Technical amendment.— Section 512(b) (relating to exceptions, additions, and limitations in determining unrelated business taxable income) is amended by striking out so much thereof as precedes paragraph (1) and inserting in lieu thereof the following: “(b) Modifications.— The modifications referred to in subsection (a) are the following:” (3) Related amendment.— (A) Part IX of Subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: “SEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGANIZATIONS IN TRANSACTIONS WITH MEMBERS. “(a) General Rule.— In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. “(b) Exceptions.— Subsection (a) shall not apply to any organization— “(1) which for the taxable year is subject to taxation under subchapter H or L, “(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization, or 75 Stat. 222. 26 USC 456. “(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the 48 Stat. 881. 15 USC 78a. 42 Stat. 998. 7 USC 1. Commodity Exchange Act.” (B) The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following: “Sec. 277. Deductions incurred by certain membership organizations in transactions with members.” (4) Local employee association.— Section 513(a)(2) (relating 68A Stat. 172. to exception to definition of unrelated trade or business) is amended by striking out “employees; or” and inserting in lieu thereof the following: “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”. (5) Voluntary employees’ beneficiary associations and certain fraternal societies. (A) In general.— Section 501(c) (relating to list of 26 USC 501. exempt organizations) is amended by striking out paragraphs (9) and (10) and inserting in lieu thereof the following: “(9) Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. “(10) Domestic fraternal societies, orders, or associations, operating under the lodge system— “(A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and “(B) which do not provide for the payment of life, sick, accident, or other benefits.” (B) Conforming amendments.— Section 801(b)(2)(relating 73 Stat. 112. to life insurance reserves) is amended— (i) by inserting “and” at the end of subparagraph (A), (ii) by striking out subparagraph (B), and (iii) by redesignating subparagraph (C) as (B). Section 810 (relating to rules for certain reserves) is amended by striking out subsection (e). (6) Certain funded pension trusts.— (A) Exemption from taxation.— Section 501(c) (relating to list of exempt organizations) is amended by adding at the end thereof the following new paragraph: “(18) A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if— “(A) under the plan, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan, “(B) such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees, and “(C) such benefits do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan.” (B) Conforming amendments.— (i) Section 503(a)(1) (as amended by section 101(j)(7) Ante, p. 527. of this Act) is amended by inserting after subparagraph (B) thereof the following new paragraph: “(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.” (ii) Section 503 (as so amended) is amended by striking out “(c)(17)” each place it appears therein and inserting in lieu thereof “(c)(17) or (18)”. (7) Special rules for feeder organizations.— Section 502 (relating to feeder organizations) is amended to read as follows: “SEC. 502. FEEDER ORGANIZATIONS. “(a) General Rule.— An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501. “(b) Special Rule.— For purposes of this section, the term “trade or business” shall not include— “(1) the deriving of rents which would be excluded under section Ante, pp. 538, 537. 512(b)(3), if section 512 applied to the organization, “(2) any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation, or “(3) any trade or business which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.” (c) Activities Included as Unrelated Trade or Business.— 68A Stat. 172. Section 513 (relating to unrelated trade or business) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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) Unrelated Debt-Financed Income.— (1) In general.— Section 514 (relating to business leases) is 68A Stat. 172. 26 USC 514. amended by striking out so much thereof as precedes subsection (b) and inserting in lieu thereof the following: “SEC. 514. UNRELATED DEBT-FINANCED INCOME. “(a) Unrelated Debt-Financed Income and Deductions.— In computing under section 512 the unrelated business taxable income for Ante, pp. 537, 538. 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 or his delegate) 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. Post, pp. 638, 639, 642. “(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 Post, p. 649. 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 68A Stat. 170. 26 USC 512. 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; or “(D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section Ante, p. 541. 513(a). 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 or his delegate 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 or his delegate 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 subsection (f)). “(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 chapter 74, relating 68A Stat. 849. 26 USC 7121–7123. to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. Interest on any overpayment for a taxable year resulting from the application of subparagraph (B) after the actual use condition is satisfied shall be allowed and paid at the rate of 4 percent per annum in lieu of 6 percent per annum. “(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, except that in the case of any taxable year beginning before January 1, 1972, any indebtedness incurred before June 28, 1966, shall not be taken into account. In the case of an organization (other than a church or convention or association of churches) such indebtedness incurred before June 28, 1966, shall be taken into account if such indebtedness constitutes business lease indebtedness (as defined in subsection(g)). “(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. “(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 80 Stat. 4. 26 USC 501. 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.— For purposes of this section, the term ‘acquisition indebtedness’ does not include 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. “(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 or his delegate, 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. “(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 or his delegate to the extent proper to carry out the purposes of this section.” (2) Related Amendments.— (A) Section 48(a)(4) (relating to definition of section 38 76 Stat. 967. 26 USC 48. property) is amended by adding at the end thereof the following new sentence: “If the property is debt-financed property (as defined in section 514(c)), the basis or cost of such Post, p. 543. property for purposes of computing qualified investment under section 46(c) shall include only that percentage of 76 Stat. 963. the basis or cost which is the same percentage as is used under section 514(b), for the year the property is placed in service, in computing the amount of gross income to be taken into account during such taxable year with respect to such property.” (B) The second sentence of section 681(a) (relating to 68A Stat. 232. limitation on charitable deduction of taxable trusts) is amended by striking out the words “certain leases” and inserting in lieu thereof “certain property acquired with borrowed funds”. (C) Section 1443(a) (relating to withholding of tax on Ante, p 528. payments to foreign tax-exempt organizations) is amended by striking out “rents” and inserting in lieu thereof “income”. (3) Technical and conforming amendments.— (A) Subsections (b), (c), and (d) of section 514 (relating to business leases) are relettered as subsections (f), (g), and (h), respectively. (B) New subsection (f)(1) (old subsection (b)(1), relating to general rule for definition of business lease) is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (g)”. (C) The table of sections for part III of subchapter F of 68A Stat. 169; Ante, p. 492. chapter 1 (as redesignated by section 101(a) of this Act) is amended by striking out— “Sec. 514. Business leases.” and inserting in lieu thereof the following: “Sec. 514. Unrelated debt-financed income.” (e) Returns.— (1) In General.— Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new section: “SEC. 6050. RETURNS RELATING TO CERTAIN TRANSFERS TO EXEMPT ORGANIZATIONS. “(a) General Rule.— On or before the 90th day after the transfer of income producing property, the transferor shall make a return in compliance with the provisions of subsection (b) if the transferee is known by the transferor to be an organization referred to in section Ante, p. 536. 511 (a) or (b) and the property (without regard to any lien) has a fair market value in excess of $50,000. “(b) Form and Contents of Returns.— The return required by subsection (a) shall be in such form and shall set forth, in respect of the transfer, such information as the Secretary or his delegate prescribes by regulations as necessary for carrying out the provisions of the income tax laws.” (2) Technical Amendment.— The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following: “Sec. 6050. Returns relating to certain transfers to exempt organizations.” (f) Restriction on Examination of Churches.— Section 7605 (relating to time and place of examination) is amended by adding at the end thereof the following new subsection: “(c) Restriction on Examination of Churches.— No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to tax under part III of subchapter F of chapter 1 of this title (sec. 511 and following, relating to taxation of business income of exempt organizations) unless the Secretary or his delegate (such officer being no lower than a principal internal revenue officer for an internal revenue region) believes that such organization may be so engaged and so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.” (g) Effective Dates.— The amendments made by this section (other than by subsections (b)(3) and (e)) shall apply to taxable years beginning after December 31, 1969. The amendments made by subsection (b)(3) shall apply to taxable years beginning after December 31, 1970. The amendments made by subsection (e) shall apply with respect to transfers of property after December 31, 1969. Where an organization makes a bargain purchase of property before October 9, 1969, which is subject to a mortgage which was placed on the property more than 5 years before the purchase, and the organization paid the seller total amount no greater than the amount of the seller’s cost (including attorneys’ fees) directly related to the transfer of such property to the organization (but in any event no more than 10 percent of the value of the seller’s equity in the property), the indebtedness secured by such mortgage shall not be treated, notwithstanding the amendments made by subsection (d)(1), as acquisition indebtedness for purposes of section 514(c)(1) of the Internal Revenue Code of 1954 Ante, p. 545. during a period of 10 years following the date of the transaction.

9. 1969

   Tax Reform Act of 1969

   Pub. L. 91–172 § 101(j)(7) · 83 Stat. 487

   1. Redesignated · 26 U.S.C. § 503(a)(1)(B)

      Pub. L. 91–172, § 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)

   2. Redesignated · 26 U.S.C. § 503(a)(1)(B)

      Pub. L. 91–172, § 101(j)(7), redesignated as subpar. (A)

   Source evidence

   Code amendment note
   Subsec. (a)(1)(B). Pub. L. 91–172, § 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).

   Enacted provision · exact public law section
   (7) Section 503(a)(1) (relating to general rule) is amended to 74 Stat. 535. read as follows: “(1) General rule.— “(A) An organization described in section 501(c)(17) 74 Stat. 534. 68A Stat. 163. 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) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954.”

10. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 title I · 83 Stat. 487

    Redesignated · 26 U.S.C. § 503(a)(1)(C)

    Pub. L. 91–172, §§ 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)

    Source evidence

    Code amendment note
    Subsec. (a)(1)(C). Pub. L. 91–172, §§ 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).

    Enacted provision · exact public law
    TITLE I— TAX EXEMPT ORGANIZATIONS Subtitle A— Private Foundations SEC. 101. PRIVATE FOUNDATIONS. (a) In General.— Subchapter F of chapter 1 (relating to exempt 68A Stat. 163.. 26 USC 501–526. organizations) is amended by redesignating parts II, III, and IV as parts III, IV, and V, respectively, and by inserting after part I the following new part: “PART II— PRIVATE FOUNDATIONS “Sec. 507. Termination of private foundation status. “Sec. 508. Special rules with respect to section 501(c)(3) organizations. “Sec. 509. Private foundation defined. “SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS. “(a) General Rule.— Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if— “(1) such organization notifies the Secretary or his delegate (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) of its intent to accomplish such termination, or “(2) (A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax Post, p. 498. under chapter 42, and “(B) the Secretary or his delegate notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c), and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g). “(b) Special Rules.— “(1) Transfer to, or operation as, public charity.— The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if— “(A) such organization distributes all of its net assets to one or more organizations described in section 170(b)(1) Post, p. 550. (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or “(B) (i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969, “(ii) such organization notifies the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and “(iii) such organization establishes to the satisfaction of the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i). If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and chapter 42 shall not apply to such organization for any taxable year Post, p. 498. within such 60-month period for which it does meet such requirements. “(2) Transferee foundations.— For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization. “(c) Imposition of Tax.— There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— “(1) the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status 68A Stat. 163. 26 USC 501. of such foundation, or “(2) the value of the net assets of such foundation. “(d) Aggregate Tax Benefit.— “(1) In general.— For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— “(A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which 26 USC 1, 2001, 2501. would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors to the foundation after February 28, 1913, had been disallowed, and “(B) the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the Post, p. 558. corresponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and Post, p. 550. “(C) interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation. “(2) Substantial contributor.— “(A) Definition.— For purposes of paragraph (1), the term ‘substantial contributor’ means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term ‘substantial contributor’ also means the creator of the trust. “(B) Special rules.— For purposes of subparagraph (A)— “(i) each contribution or bequest shall be valued at fair market value on the date it was received, “(ii) in the case of a foundation which is in existence on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date, “(iii) an individual shall be treated as making all contributions and bequests made by his spouse, and “(iv) any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods. “(3) Regulations.— For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary or his delegate. “(e) Value of Assets.— For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation. “(f) Liability in Case of Transfers of Assets From Private Foundation.— For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation. “(g) Abatement of Taxes.— The Secretary or his delegate may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if— “(1) the private foundation distributes all of its net assets to Post, p. 550. one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or “(2) following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable 68A Stat. 163. 26 USC 501. or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary or his delegate receives certification from the appropriate State officer that such action has resulted in such preservation of assets. “SEC. 508. SPECIAL RULES WITH RESPECT TO SECTION 501(c)(3) ORGANIZATIONS. “(a) New Organizations Must Notify Secretary That They Are Applying for Recognition of Section 501(c)(3) Status.— Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)— “(1) unless it has given notice to the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that it is applying for recognition of such status, or “(2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary or his delegate by regulations for giving notice under this subsection. For purposes of paragraph (2), the time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(b) Presumption That Organizations Are Private Foundations.— Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary 68A Stat. 163. 26 USC 501. or his delegate, at such time and in such manner as the Secretary or his delegate may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. The time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(c) Exceptions.— “(1) Mandatory exceptions.— Subsections (a) and (b) shall not apply to— “(A) churches, their integrated auxiliaries, and conventions or associations of churches, or “(B) any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000. “(2) Exceptions by regulations.— The Secretary or his delegate may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both— “(A) educational organizations which normally maintain a regular faculty and curriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on; and “(B) any other class of organizations with respect to which the Secretary or his delegate determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations. “(d) Disallowance of Certain Charitable, etc., Deductions.— “(1) Gift or bequest to organizations subject to section 507(c) tax.— No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— Post, pp. 549, 558, 560–562. 26 USC 170, 545, 556, 642, 2055, 2106, 2522. “(A) by any person after notification is made under section 507(a), or “(B) by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. “(2) Gift or bequest to taxable private foundation, section 4947 trust, etc.— No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— “(A) to a private foundation or a trust described in section Post, p. 517. 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)(B) and (C)), or “(B) to any organization in a period for which it is not 68A Stat. 163. 26 USC 501. treated as an organization described in section 501(c)(3) by reason of subsection (a). “(3) Exception.— Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary or his delegate under section 507(g). “(e) Governing Instruments.— “(1) General rule.— A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are— “(A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the Post, p. 502. foundation to tax under section 4942, and “(B) to prohibit the foundation from engaging in any act of Post, p. 500. Post, p. 507. self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the Post, p. 511. Post, p. 513. foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). “(2) Special rules for existing private foundations.— In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply— “(A) to any taxable year beginning before January 1, 1972, “(B) to any period after December 31, 1971, during the pendency of any judicial proceeding begun before January 1, 1972, by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and “(C) to any period after the termination of any judicial proceeding described in subparagraph (B) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1). “SEC. 509. PRIVATE FOUNDATION DEFINED. “(a) General Rule.— For purposes of this title, the term ‘private foundation’ means a domestic or foreign organization described in section 501(c)(3) other than— “(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); “(2) an organization which— “(A) normally receives more than one-third of its support in each taxable year from any combination of— “(i) gifts, grants, contributions, or membership fees, and “(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business Post, pp. 541, 542. (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section Post, p. 553. 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental Post, p. 515. units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses Post, p. 550. (vii) and (viii)), and “(B) normally receives not more than one-third of its support in each taxable year from gross investment income (as defined in subsection (e)); “(3) an organization which— “(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), “(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and “(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and “(4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph 68A Stat. 163. 26 USC 501. (2) if it were an organization described in section 501(c)(3). “(b) Continuation of Private Foundation Status.— For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507. “(c) Status of Organization After Termination of Private Foundation Status.— For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination. “(d) Definition of Support.— For purposes of this part and chapter 42, the term ‘support’ includes (but is not limited to)— Post, p. 498. “(1) gifts, grants, contributions, or membership fees, “(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), Post, pp. 541, 542. “(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business, “(4) gross investment income (as defined in subsection (e)), “(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and “(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit. “(e) Definition of Gross Investment Income.— For purposes of subsection (d), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the Post, p. 536. tax imposed by section 511.” (b) Amendment of Subtitle D.— Subtitle D (relating to miscellaneous 26 USC 4001–4931. excise taxes) is amended by adding at the end thereof the following new chapter: “CHAPTER 42.— PRIVATE FOUNDATIONS “Sec. 4940. Excise tax based on investment income. “Sec. 4941. Taxes on self-dealing. “Sec. 4942. Taxes on failure to distribute income. “Sec. 4943. Taxes on excess business holdings. “Sec. 4944. Taxes on investments which jeopardize charitable purpose. “Sec. 4945. Taxes on taxable expenditures. “Sec. 4946. Definitions and special rules. “Sec. 4947. Application of taxes to certain nonexempt trusts. “Sec. 4948. Application of taxes and denial of exemption with respect to certain foreign organizations. “SEC. 4940. EXCISE TAX BASED ON INVESTMENT INCOME. “(a) Tax-Exempt Foundations.— There is hereby imposed on each private foundation which is exempt from taxation under section 501(a) 68A Stat. 163. 26 USC 501. for the taxable year, with respect to the carrying on of its activities, a tax equal to 4 percent of the net investment income of such foundation for the taxable year. “(b) Taxable Foundations.— There is hereby imposed on each private foundation which is not exempt from taxation under section 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to— “(1) the amount (if any) by which the sum of (A) the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus (B) the amount of the tax which would have been imposed under section 511 for the taxable year if such private foundation had been exempt from taxation under section 501(a), exceeds “(2) the tax imposed under subtitle A on such private foundation for the taxable year. “(c) Net Investment Income Defined.— “(1) In general.— For purposes of subsection (a), the net investment income is the amount by which (A) the sum of the gross investment income and the net capital gain exceeds (B) the deductions allowed by paragraph (3). Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A. “(2) Gross investment income.— For purposes of paragraph (1), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. “(3) Deductions.— “(A) In general.— For purposes of paragraph (1), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of gross investment income or for the management, conservation, or maintenance of property held for the production of such income, determined with the modifications set forth in subparagraph (B). “(B) Modifications.— For purposes of subparagraph (A)— “(i) The deduction provided by section 167 shall be Post, pp. 625, 649. allowed, but only on the basis of the straight line method of depreciation. “(ii) The deduction for depletion provided by section 611 shall be allowed, but such deduction shall be determined 68A Stat. 207. 26 USC 611. without regard to section 613 (relating to percentage depletion). Post, p. 629. “(4) Capital gains and losses.— For purposes of paragraph (1) in determining net capital gain— “(A) There shall be taken into account only gains and losses from the sale or other disposition of property used for the production of interest, dividends, rents, and royalties, and property used for the production of income included in computing the tax imposed by section 511 (except to the extent Post, p. 536. gain or loss from the sale or other disposition of such property is taken into account for purposes of such tax). “(B) The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(C) Losses from sales or other dispositions of property shall be allowed only to the extent of gains from such sales or other dispositions, and there shall be no capital loss carryovers. “(5) Tax-exempt income.— For purposes of this section, net investment income shall be determined by applying section 103 Post, p. 656. (relating to interest on certain governmental obligations) and section 265 (relating to expenses and interest relating to tax-exempt 68A Stat. 78; 78 Stat. 56. income). “SEC. 4941. TAXES ON SELF-DEALING. “(a) Initial Taxes.— “(1) On self-dealer.— There is hereby imposed a tax on each act of self-dealing between a disqualified person and a private foundation. The rate of tax shall be equal to 5 percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participates in the act of self-dealing. In the case of a government official (as defined in section 4946(c)), a tax shall be imposed by this paragraph only if such disqualified person participates in the act of self-dealing knowing that it is such an act. “(2) On foundation manager.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in an act of self-dealing between a disqualified person and a private foundation, knowing that it is such an act, a tax equal to 2½ percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the act of self-dealing. “(b) Additional Taxes.— “(1) On self-dealer.— In any case in which an initial tax is imposed by subsection (a)(1) on an act of self-dealing by a disqualified person with a private foundation and the act is not corrected within the correction period, there is hereby imposed a tax equal to 200 percent of the amount involved. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participated in the act of self-dealing. “(2) On foundation manager.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount involved. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under any paragraph of subsection (a) or (b) with respect to any one act of self-dealing, all such persons shall be jointly and severally liable under such paragraph with respect to such act. “(2) $10,000 limit for management.— With respect to any one act of self-dealing, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $10,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Self-Dealing.— “(1) In general.— For purposes of this section, the term ‘self-dealing’ means any direct or indirect— “(A) sale or exchange, or leasing, of property between a private foundation and a disqualified person; “(B) lending of money or other extension of credit between a private foundation and a disqualified person; “(C) furnishing of goods, services, or facilities between a private foundation and a disqualified person; “(D) payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person; “(E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and “(F) agreement by a private foundation to make any payment of money or other property to a government official (as defined in section 4946(c)), other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period. “(2) Special rules.— For purposes of paragraph (1)— “(A) the transfer of real or personal property by a disqualified person to a private foundation shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the foundation assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer; “(B) the lending of money by a disqualified person to a private foundation shall not be an act of self-dealing if the loan is without interest or other charge and if the proceeds of the loan are used exclusively for purposes specified in 68A Stat. 163. 26 USC 501. section 501(c)(3); “(C) the furnishing of goods, services, or facilities by a disqualified person to a private foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities so furnished are used exclusively for purposes specified in section 501(c)(3); 68A Stat 163. 26 USC 501. “(D) the furnishing of goods, services, or facilities by a private foundation to a disqualified person shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public; “(E) except in the case of a government official (as defined in section 4946(c)), the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive; “(F) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946(a)), pursuant to any liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization, shall not be an act of self-dealing if all of the securities of the same class as that held by the foundation are subject to the same terms and such terms provide for receipt by the foundation of no less than fair market value; and “(G) in the case of a government official (as defined in section 4946(c)), paragraph (1) shall in addition not apply to— “(i) prizes and awards which are subject to the provisions of section 74(b), if the recipients of such prizes and awards are selected from the general public, “(ii) scholarships and fellowship grants which are subject to the provisions of section 117(a) and are to be used for study at an educational institution described in section 151(e)(4), “(iii) any annuity or other payment (forming part of a stock-bonus, pension, or profit-sharing plan) by a trust which is a qualified trust under section 401, “(iv) any annuity or other payment under a plan which meets the requirements of section 404(a)(2), “(v) any contribution or gift (other than a contribution or gift of money) to, or services or facilities made available to, any such individual, if the aggregate value of such contributions, gifts, services, and facilities to, or made available to, such individual during any calendar year does not exceed $25, “(vi) any payment made under chapter 41 of title 5, United States Code, or 80 Stat. 432. 5 USC 4101–4118. “(vii) any payment or reimbursement of traveling expenses for travel solely from one point in the United States to another point in the United States, but only if such payment or reimbursement does not exceed the actual cost of the transportation involved plus an amount for all other traveling expenses not in excess of 125 percent of the maximum amount payable under section 5702(a) of title 5, United States Code, for like travel Ante, p. 190. by employees of the United States. “(e) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection 68A Stat. 770. 26 USC 6212. (a)(1) under section 6212, or (B) the date on which correction of the act of self-dealing is completed. “(2) Amount involved.— The term ‘amount involved’ means, with respect to any act of self-dealing, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in subsection (d)(2)(E), the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value— “(A) in the case of the taxes imposed by subsection (a), shall be determined as of the date on which the act of self-dealing occurs; and “(B) in the case of the taxes imposed by subsection (b), shall be the highest fair market value during the correction period. “(3) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any act of self-dealing, undoing the transaction to the extent possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. “(4) Correction Period.— The term ‘correction period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the act of self-dealing. “SEC. 4942. TAXES ON FAILURE TO DISTRIBUTE INCOME. “(a) Initial Tax.— There is hereby imposed on the undistributed income of a private foundation for any taxable year, which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period), a tax equal to 15 percent of the amount of such income remaining undistributed at the beginning of such second (or succeeding) taxable year. The tax imposed by this subsection shall not apply to the undistributed income of a private foundation— “(1) for any taxable year for which it is an operating foundation (as defined in subsection (j)(3)), or “(2) to the extent that the foundation failed to distribute any amount solely because of an incorrect valuation of assets under subsection (e), if— “(A) the failure to value the assets properly was not willful and was due to reasonable cause, “(B) such amount is distributed as qualifying distributions (within the meaning of subsection (g)) by the foundation during the allowable distribution period (as defined in subsection (j)(4)), “(C) the foundation notifies the Secretary or his delegate that such amount has been distributed (within the meaning of subparagraph (B)) to correct such failure, and “(D) such distribution is treated under subsection (h)(2) as made out of the undistributed income for the taxable year for which a tax would (except for this paragraph) have been imposed under this subsection. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) on the undistributed income of a private foundation for any taxable year, if any portion of such income remains undistributed at the close of the correction period, there is hereby imposed a tax equal to 100 percent of the amount remaining undistributed at such time. “(c) Undistributed Income.— For purposes of this section, the Definition. term ‘undistributed income’ means, with respect to any private foundation for any taxable year as of any time, the amount by which— “(1) the distributable amount for such taxable year, exceeds “(2) the qualifying distributions made before such time out of such distributable amount. “(d) Distributable Amount.— For purposes of this section, the Definition. term ‘distributable amount’ means, with respect to any foundation for any taxable year, an amount equal to— “(1) the minimum investment return or the adjusted net income (whichever is higher), reduced by “(2) the sum of the taxes imposed on such private foundation for the taxable year under subtitle A and section 4940. 26 USC 1–1563. “(e) Minimum Investment return.— “(1) In general.— For purposes of subsection (d), the minimum investment return for any private foundation for any taxable year is the amount determined by multiplying— “(A) the excess of (i) the aggregate fair market value of all assets of the foundation other than those being used (or held for use) directly in carrying out the foundation’s exempt purpose over (ii) the acquisition indebtedness with respect to such assets (determined under section 514(c)(1), but Post, p. 545. without regard to the taxable year in which the indebtedness was incurred), by “(B) the applicable percentage for such year, determined under paragraph (3). “(2) Valuation.— For purposes of paragraph (1)(A), the fair market value of securities for which market quotations are readily available shall be determined on a monthly basis. For all other assets, the fair market value shall be determined at such times and in such manner as the Secretary or his delegate shall by regulations prescribe. “(3) Applicable percentage.— For purposes of paragraph (1)(B), the applicable percentage for taxable years beginning in 1970 is 6 percent. The applicable percentage for any taxable year beginning after 1970 shall be determined and published by the Secretary or his delegate and shall bear a relationship to 6 percent which the Secretary or his delegate determines to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1969. “(4) Transitional rules.— “For special rules applicable to organizations created before May 27, 1969, see section 101(1)(3) of the Tax Reform Act of 1969. Post, p. 534. “(f) Adjusted Net Income.— “(1) Defined.— For purposes of subsection (d), the term ‘adjusted net income’ means the excess (if any) of— “(A) the gross income for the taxable year (determined with the income modifications provided by paragraph (2)), over “(B) the sum of the deductions (determined with the deduction modifications provided by paragraph (3)) which would be allowed to a corporation subject to the tax imposed 78 Stat. 25, 118. 26 USC 11. by section 11 for the taxable year. “(2) Income modifications.— The income modifications referred to in paragraph (1)(A) are as follows: “(A) section 103 (relating to interest on certain governmental obligations) shall not apply, “(B) capital gains and losses from the sale or other disposition of property shall be taken into account only in an amount equal to any net short-term capital gain for the taxable year; and “(C) there shall be taken into account— “(i) amounts received or accrued as repayments of amounts which were taken into account as a qualifying distribution within the meaning of subsection (g)(1)(A) for any taxable year; “(ii) notwithstanding subparagraph (B), amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of such property was taken into account as a qualifying distribution (within the meaning of subsection (g)(1)(B)) for any taxable year; and “(iii) any amount set aside under subsection (g)(2) to the extent it is determined that such amount is not necessary for the purposes for which it was set aside. “(3) Deduction modifications.— The deduction modifications referred to in paragraph (1)(B) are as follows: “(A) no deduction shall be allowed other than all the ordinary and necessary expenses paid or incurred for the production or collection of gross income or for the management, conservation, or maintenance of property held for the production of such income and the allowances for depreciation and depletion determined under section 4940(c)(3)(B), and “(B) section 265 (relating to expenses and interest relating to tax-exempt interest) shall not apply. “(4) Transitional rule.— For purposes of paragraph (2)(B), the basis (for purposes of determining gain) of property held by a private foundation on December 31, 1969, and continuously thereafter to the date of its disposition, shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(g) Qualifying Distributions Defined.— “(1) In general.— For purposes of this section, the term ‘qualifying distribution’ means— “(A) any amount (including administrative expenses) paid to accomplish one or more purposes described in section Post, p. 553. 170(c)(2)(B), other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or “(B) any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in section 170(c)(2)(B). Post, p. 553. “(2) Certain set-asides.— Subject to such terms and conditions as may be prescribed by the Secretary or his delegate, an amount set aside for a specific project which comes within one or more purposes described in section 170(c)(2)(B) may be treated as a qualifying distribution, but only if, at the time of the set-aside, the private foundation establishes to the satisfaction of the Secretary or his delegate that— “(A) the amount will be paid for the specific project within 5 years, and “(B) the project is one which can be better accomplished by such set-aside than by immediate payment of funds. For good cause shown, the period for paying the amount set aside may be extended by the Secretary or his delegate. “(3) Certain contributions to section 501(c)(3) organizations.— For purposes of this section, the term ‘qualifying distribution’ includes a contribution to a section 501(c)(3) organization 68A Stat. 163. 26 USC 501. described in paragraph (1)(A)(i) or (ii) if— “(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section 501(c)(3) organization were a private foundation which is not an operating foundation), and “(B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization. “(h) Treatment of Qualifying Distributions.— “(1) In general.— Except as provided in paragraph (2), any qualifying distribution made during a taxable year shall be treated as made— “(A) first out of the undistributed income of the immediately preceding taxable year (if the private foundation was subject to the tax imposed by this section for such preceding taxable year) to the extent thereof, “(B) second out of the undistributed income for the taxable year to the extent thereof, and “(C) then out of corpus. For purposes of this paragraph, distributions shall be taken into account in the order of time in which made. “(2) Correction of deficient distributions for prior taxable years, etc.— In the case of any qualifying distribution which (under paragraph (1)) is not treated as made out of the undistributed income of the immediately preceding taxable year, the foundation may elect to treat any portion of such distribution as made out of the undistributed income of a designated prior taxable year or out of corpus. The election shall be made by the foundation at such time and in such manner as the Secretary or his delegate shall by regulations prescribe. “(i) Adjustment of Distributable Amount Where Distributions During Prior Years Have Exceeded Income.— “(1) In general.— If, for the taxable years in the adjustment period for which an organization is a private foundation— “(A) the aggregate qualifying distributions treated (under subsection (h)) as made out of the undistributed income for such taxable year or as made out of corpus (except to the extent subsection (g)(3) with respect to the recipient private Post, p. 552. foundation or section 170(b)(1)(E)(ii) applies) during such taxable years, exceed “(B) the distributable amounts for such taxable years (determined without regard to this subsection), then, for purposes of this section (other than subsection (h)), the distributable amount for the taxable year shall be reduced by an amount equal to such excess. “(2) Taxable years in adjustment period.— For purposes of paragraph (1), with respect to any taxable year of a private foundation the taxable years in the adjustment period are the taxable years (not exceeding 5) beginning after December 31, 1969, and immediately preceding the taxable year, “(j) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to the undistributed income for any taxable year, the period beginning with the first day of the taxable year and ending on the date of mailing of a notice of deficiency with respect to the tax 68A Stat. 770. 26 USC 6212. imposed by subsection (a) under section 6212. “(2) Correction period.— The term ‘correction period’ means, with respect to any private foundation for any taxable year, the period beginning with the first day of the taxable year and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(3) Operating foundation.— For purposes of this section, the term ‘operating foundation’ means any organization— “(A) which makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated equal to substantially all of its adjusted net income (as defined in subsection (f)); and “(B) (i) substantially more than half of the assets of which are devoted directly to such activities or to functionally related businesses (as defined in paragraph (5)), or to both, or are stock of a corporation which is controlled by the foundation and substantially all of the assets of which are so devoted, “(ii) which normally makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated in an amount not less than two-thirds of its minimum investment return (as defined in subsection (e)), or “(iii) substantially all of the support (other than gross investment income as defined in section 509(e)) of which is Ante, p. 496. normally received from the general public and from 5 or more exempt organizations which are not described in section 4946 (a)(1)(H) with respect to each other or the recipient foundation; not more than 25 percent of the support (other than gross investment income) of which is normally received from any one such exempt organization; and not more than half of the support of which is normally received from gross investment income. “(4) Allowable distribution period.— The term ‘allowable Definition. distribution period’ means, with respect to any private foundation, the period beginning with the first day of the first taxable year following the taxable year in which the incorrect valuation (described in subsection (a)(2)) occurred and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (a)) under section 6212 extended 68A Stat. 770. 26 USC 6212. by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(5) Functionally related business.— The term ‘functionally Definition. related business’ means— “(A) a trade or business which is not an unrelated trade or business (as defined in section 513), or Post, pp. 541, 542. “(B) an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exempt purposes of the organization. “SEC. 4943. TAXES ON EXCESS BUSINESS HOLDINGS. “(a) Initial Tax.— “(1) Imposition.— There is hereby imposed on the excess business holdings of any private foundation in a business enterprise during any taxable year which ends during the taxable period a tax equal to 5 percent of the value of such holdings. “(2) Special rules.— The tax imposed by paragraph (1)— “(A) shall be imposed on the last day of the taxable year, but “(B) with respect to the private foundation’s holdings in any business enterprise, shall be determined as of that day during the taxable year when the foundation’s excess holdings in such enterprise were the greatest. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) with respect to the holdings of a private foundation in any business enterprise, if, at the close of the correction period with respect to such holdings, the foundation still has excess business holdings in such enterprise, there is hereby imposed a tax equal to 200 percent of such excess business holdings. “(c) Excess Business Holdings.— For purposes of this section— Definition. “(1) In general.— The term ‘excess business holdings’ means, with respect to the holdings of any private foundation in any business enterprise, the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings. “(2) Permitted holdings in a corporation.— “(A) In general.— The permitted holdings of any private foundation in an incorporated business enterprise are— “(i) 20 percent of the voting stock, reduced by “(ii) the percentage of the voting stock owned by all disqualified persons. In any case in which all disqualified persons together do not own more than 20 percent of the voting stock of an incorporated business enterprise, nonvoting stock held by the private foundation shall also be treated as permitted holdings. “(B) 35 percent rule where third person has effective control of enterprise.— If— “(i) the private foundation and all disqualified persons together do not own more than 35 percent of the voting stock of an incorporated business enterprise, and “(ii) it is established to the satisfaction of the Secretary or his delegate that effective control of the corporation is in one or more persons who are not disqualified persons with respect to the foundation, then subparagraph (A) shall be applied by substituting 35 percent for 20 percent. “(C) 2 percent de minimis rule.— A private foundation shall not be treated as having excess business holdings in any corporation in which it (together with all other private foundations which are described in section 4946(a)(1)(H)) owns not more than 2 percent of the voting stock and not more than 2 percent in value of all outstanding shares of all classes of stock. “(3) Permitted holdings in partnerships, etc.— The permitted holdings of a private foundation in any business enterprise which is not incorporated shall be determined under regulations prescribed by the Secretary or his delegate. Such regulations shall be consistent in principle with paragraphs (2) and (4), except that— “(A) in the case of a partnership or joint venture, ‘profits interest’ shall be substituted for ‘voting stock’, and ‘capital interest’ shall be substituted for ‘nonvoting stock’, “(B) in the case of a proprietorship, there shall be no permitted holdings, and “(C) in any other case, ‘beneficial interest’ shall be substituted for ‘voting stock’. “(4) Present holdings.— “(A) (i) In applying this section with respect to the holdings of any private foundation in a business enterprise, if such foundation and all disqualified persons together have holdings in such enterprise in excess of 20 percent of the voting stock on May 26, 1969, the percentage of such holdings shall be substituted for ‘20 percent,’ and for ‘35 percent’ (if the percentage of such holdings is greater than 35 percent), wherever it appears in paragraph (2), but in no event shall the percentage so substituted be more than 50 percent. “(ii) If the percentage of the holdings of any private foundation and all disqualified persons together in a business enterprise (or if the percentage of the holdings of the private foundation in such enterprise) decreases for any reason, clause (i) and subparagraph (D) shall, except as provided in the next sentence, be applied for all periods after such decrease by substituting such decreased percentage for the percentage held on May 26, 1969, but in no event shall the percentage substituted be less than 20 percent. For purposes of this clause, any decrease in percentage holdings attributable to issuances of stock (or to issuances of stock coupled with redemptions of stock) shall be determined only as of the close of each taxable year of the private foundation unless the aggregate of the percentage decreases attributable to the issuances of stock (or such issuances and redemptions) during such taxable year equals or exceeds 1 percent. “(iii) The percentage substituted under clause (i), and any percentage substituted under subparagraph (D), shall be applied both with respect to the voting stock and, separately, with respect to the value of all outstanding shares of all classes of stock. “(iv) In the case of any merger, recapitalization, or other reorganization involving one or more business enterprises, the application of clauses (i), (ii), and (iii) shall be determined under regulations prescribed by the Secretary or his delegate. “(B) Any interest in a business enterprise which a private foundation holds on May 26, 1969, if the private foundation on such date has excess business holdings, shall (while held by the foundation) be treated as held by a disqualified person (rather than by the private foundation)— “(i) during the 20-year period beginning on such date, if the private foundation has more than a 95 percent voting stock interest on such date, “(ii) except as provided in clause (i), during the 15-year period beginning on such date, if the foundation and all disqualified persons have more than a 75 percent voting stock interest (or more than a 75 percent profits or beneficial interest in the case of any unincorporated enterprise) on such date or more than a 75 percent interest in the value of all outstanding shares of all classes of stock (or more than a 75 percent capital interest in the case of a partnership or joint venture) on such date, or “(iii) during the 10-year period beginning on such date, in any other case. “(C) The 20-year, 15-year, and 10-year periods described in subparagraph (B) for the disposition of excess business holdings shall be suspended during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to allow disposition of such holdings. “(D) (i) If, at any time during the second phase, all disqualified persons together have holdings in a business enterprise in excess of 2 percent of the voting stock of such enterprise, then subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘50 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(ii) If, immediately before the close of the second phase, clause (i) of this subparagraph did not apply with respect to a business enterprise, then for all periods after the close of the second phase subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘35 percent, or if at any time after the close of the second phase all disqualified persons together have had holdings in such enterprise which exceed 2 percent of the voting stock, 35 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(iii) For purposes of this subparagraph, the term ‘second phase’ means the 15-year period immediately following the 20-year, 15-year, or 10-year period described in subparagraph (B), whichever applies, as modified by subparagraph (C). “(E) Clause (ii) of subparagraph (B) shall not apply with respect to any business enterprise if before January 1, 1971, one or more individuals who are substantial contributors (or members of the family (within the meaning of section 1946(d)) of one or more substantial contributors) to the private foundation and who on May 26, 1969, held more than 15 percent of the voting stock of the enterprise elect, in such manner as the Secretary or his delegate may by regulations prescribe, not to have such clause (ii) apply with respect to such enterprise. “(5) Holdings acquired by trust or will.— Paragraph (4) (other than subparagraph (B)(i)) shall apply to any interest in a business enterprise which a private foundation acquires under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter, as if such interest were held on May 26, 1969, except that the 15-year and 10-year periods prescribed in clauses (ii) and (iii) of paragraph (4)(B) shall commence with respect to such interest on the date of distribution under the trust or will in lieu of May 26, 1969. “(6) 5-year period to dispose of gifts, bequests, etc.— Except as provided in paragraph (5), if, after May 26, 1969, there is a change in the holdings in a business enterprise (other than by purchase by the private foundation or by a disqualified person) which causes the private foundation to have— “(A) excess business holdings in such enterprise, the interest of the foundation in such enterprise (immediately after such change) shall (while held by the foundation) be treated as held by a disqualified person (rather than by the foundation) during the 5-year period beginning on the date of such change in holdings; or “(B) an increase in excess business holdings in such enterprise (determined without regard to subparagraph (A)), subparagraph (A) shall apply, except that the excess holdings immediately preceding the increase therein shall not be treated, solely because of such increase, as held by a disqualified person (rather than by the foundation). “(d) Definitions; Special Rules.— For purposes of this section— “(1) Business holdings.— In computing the holdings of a private foundation, or a disqualified person (as defined in section 4946) with respect thereto, in any business enterprise, any stock or other interest owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. The preceding sentence shall not apply with respect to an income or remainder interest of a private foundation in a trust described in section 4947(a)(2), but only if, in the case of property transferred in trust after May 26, 1969, such foundation holds only an income interest or only a remainder interest in such trust. “(2) Taxable period.— The term ‘taxable period’ means, with respect to any excess business holdings of a private foundation in a business enterprise, the period beginning on the first day on which there are such excess holdings and ending on the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a) under section 6212 in respect of such holdings. 68A Stat. 770. 26 USC 6212. “(3) Correction period.— The term ‘correction period’ means, with respect to excess business holdings of a private foundation in a business enterprise, the period ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit orderly disposition of such excess business holdings. “(4) Business enterprise.— The term ‘business enterprise’ does not include— “(A) a functionally related business (as defined in section 4942(j)(5)), or “(B) a trade or business at least 95 percent of the gross income of which is derived from passive sources. For purposes of subparagraph (B), gross income from passive sources includes the items excluded by section 512(b)(1), (2), (3), and (5), and income from the sale of goods (including Post, p. 538. 26 USC 512. charges or costs passed on at cost to purchasers of such goods or income received in settlement of a dispute concerning or in lieu of the exercise of the right to sell such goods) if the seller does not manufacture, produce, physically receive or deliver, negotiate sales of, or maintain inventories in such goods. “SEC. 4944. TAXES ON INVESTMENTS WHICH JEOPARDIZE CHARITABLE PURPOSE. “(a) Initial Taxes.— “(1) On the private foundation.— If a private foundation invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes, there is hereby imposed on the making of such investment a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in the making of the investment, knowing that it is jeopardizing the carrying out of any of the foundation’s exempt purposes, a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the making of the investment. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on the making of an investment and such investment is not removed from jeopardy within the correction period, there is hereby imposed a tax equal to 25 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the removal from jeopardy, there is hereby imposed a tax equal to 5 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the removal from jeopardy. “(c) Exception for Program-Related Investments.— For purposes of this section, investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c) Post, p. 553. (2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes. “(d) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to any one investment, all such persons shall be jointly and severally liable under such paragraph with respect to such investment. “(2) Limit for management.— With respect to any one investment, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(e) Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which the amount is so invested and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a)(1) under section 68A Stat. 770. 26 USC 6212. 6212, or (B) the date on which the amount so invested is removed from jeopardy. “(2) Removal from jeopardy.— An investment which jeopardizes the carrying out of exempt purposes shall be considered to be removed from jeopardy when such investment is sold or otherwise disposed of, and the proceeds of such sale or other disposition are not investments which jeopardize the carrying out of exempt purposes. “(3) Correction period.— The term ‘correction period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which such investment is entered into and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about removal from jeopardy. “SEC. 4945. TAXES ON TAXABLE EXPENDITURES. “(a) Initial Taxes.— “(1) On the foundation.— There is hereby imposed on each taxable expenditure (as defined in subsection (d)) a tax equal to 10 percent of the amount thereof. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— There is hereby imposed on the agreement of any foundation manager to the making of an expenditure, knowing that it is a taxable expenditure, a tax equal to 2½ percent of the amount thereof, unless such agreement is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who agreed to the making of the expenditure. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the correction period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount of the taxable expenditure. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to the making of a taxable expenditure, all such persons shall be jointly and severally liable under such paragraph with respect to such expenditure. “(2) Limit for management.— With respect to any one taxable expenditure, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Taxable Expenditure.— For purposes of this section, the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation— “(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e), “(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive, “(3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g), “(4) as a grant to an organization (other than an organization described in paragraph (1), (2), or (3) of section 509(a)), unless Ante, p. 496. the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or “(5) for any purpose other than one specified in section 170(c)(2)(B). Post, p. 553. “(e) Activities Within Subsection (d)(1).— For purposes of subsection (d)(1), the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation for— “(1) any attempt to influence any legislation through an attempt to affect the opinion of the general public or any segment thereof, and “(2) any attempt to influence legislation through communication with any member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of the legislation (except technical advice or assistance provided to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be), other than through making available the results of nonpartisan analysis, study, or research. Paragraph (2) of this subsection shall not apply to any amount paid or incurred in connection with an appearance before, or communication to, any legislative body with respect to a possible decision of such body which might affect the existence of the private foundation, its powers and duties, its tax-exempt status, or the deduction of contributions to such foundation. “(f) Nonpartisan Activities Carried on by Certain Organizations.— Subsection (d)(2) shall not apply to any amount paid or incurred by any organization— “(1) which is described in section 501(c)(3) and exempt from taxation under section 501(a), “(2) the activities of which are nonpartisan, are not confined to one specific election period, and are carried on in 5 or more States, “(3) substantially all of the income of which is expended directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, “(4) substantially all of the support (other than gross investment Ante, p. 496. income as defined in section 509(e)) of which is received from exempt organizations, the general public, governmental Post, p. 553. units described in section 170(c)(1), or any combination of the foregoing; not more than 25 percent of such support is received from any one exempt organization (for this purpose treating private foundations which are described in section 4946(a)(1)(H) with respect to each other as one exempt organization); and not more than half of the support of which is received from gross investment income, and “(5) contributions to which for voter registration drives are not subject to conditions that they may be used only in specified States, possessions of the United States, or political subdivisions or other areas of any of the foregoing, or the District of Columbia, or that they may be used in only one specific election period. In determining whether the organization meets the requirements of paragraph (4) for any taxable year of such organization, there shall be taken into account the support received by such organization during such taxable year and during the immediately preceding 4 taxable years of such organization (excluding therefrom any preceding taxable year which begins before January 1, 1970). Subsection (d)(4) shall not apply to any grant to an organization which meets the requirements of this subsection. “(g) Individual Grants.— Subsection (d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary or his delegate, if it is demonstrated to the satisfaction of the Secretary or his delegate that— “(1) the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for study at an educational institution described in section 151(e)(4), “(2) the grant constitutes a prize or award which is subject to the provisions of section 74(b), if the recipient of such prize or award is selected from the general public, or “(3) the purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. “(h) Expenditure Responsibility.— The expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures— “(1) to see that the grant is spent solely for the purpose for which made, “(2) to obtain full and complete reports from the grantee on how the funds are spent, and “(3) to make full and detailed reports with respect to such expenditures to the Secretary or his delegate. “(i) Other Definitions.— For purposes of this section— “(1) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any taxable expenditure, (A) recovering part or all of the expenditure to the extent recovery is possible, and where full recovery is not possible such additional corrective action as is prescribed by the Secretary or his delegate by regulations, or (B) in the case of a failure to comply with subsection (h)(2) or (h)(3), obtaining or making the report in question. “(2) Correction period.— The term ‘correction period’ means, with respect to any taxable expenditure, the period beginning with the date on which the taxable expenditure occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— 68A Stat. 770. 26 USC 6212. “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the taxable expenditure (except that such determination shall not be made with respect to any taxable expenditure within the meaning of paragraph (1), (2), (3), or (4) of subsection (d) because of any action by an appropriate State officer as defined in section 6104(c)(2)). Post, p. 523. “SEC. 4946. DEFINITIONS AND SPECIAL RULES. “(a) Disqualified Person.— “(1) In general.— For purposes of this chapter, the term ‘disqualified person’ means, with respect to a private foundation, a person who is— “(A) a substantial contributor to the foundation, “(B) a foundation manager (within the meaning of subsection (b)(1)), “(C) an owner of more than 20 percent of— “(i) the total combined voting power of a corporation, “(ii) the profits interest of a partnership, or “(iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, “(D) a member of the family (as defined in subsection (d)) of any individual described in subparagraph (A), (B), or (C), “(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power, “(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the profits interest, “(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest, “(H) only for purposes of section 4943, a private foundation— “(i) which is effectively controlled (directly or indirectly) by the same person or persons who control the private foundation in question, or “(ii) substantially all of the contributions to which were made (directly or indirectly) by the same person or persons described in subparagraph (A), (B), or (C), or members of their families (within the meaning of subsection (d)), who made (directly or indirectly) substantially all of the contributions to the private foundation in question, and “(I) only for purposes of section 4941, a government official (as defined in subsection (c)). “(2) Substantial contributors.— For purposes of paragraph (1), the term ‘substantial contributor’ means a person who is Ante, p. 493. described in section 507(d)(2). “(3) Stockholdings.— For purposes of paragraphs (1)(C)(i) and (1)(E), there shall be taken into account indirect stockholdings 68A Stat. 78. 26 USC 267. which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(4) Partnerships; trusts.— For purposes of paragraphs (1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(b) Foundation Manager.— For purposes of this chapter, the term ‘foundation manager’ means, with respect to any private foundation— “(1) an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), and “(2) with respect to any act (or failure to act), the employees of the foundation having authority or responsibility with respect to such act (or failure to act). “(c) Government Official.— For purposes of subsection (a)(1)(I) and section 4941, the term ‘government official’ means, with respect to an act of self-dealing described in section 4941, an individual who, at the time of such act, holds any of the following offices or positions (other than as a ‘special Government employee’, as defined in section 76 Stat. 1221; 82 Stat. 1115. 202(a) of title 18, United States Code): “(1) an elective public office in the executive or legislative branch of the Government of the United States, “(2) an office in the executive or judicial branch of the Government of the United States, appointment to which was made by the President, “(3) a position in the executive, legislative, or judicial branch of the Government of the United States— “(A) which is listed in schedule C of rule VI of the Civil Service Rules, or “(B) the compensation for which is equal to or greater than the lowest rate of compensation prescribed for GS–16 of the General Schedule under section 5332 of title 5, United States Code, 5 USC 5332 note. “(4) a position under the House of Representatives or the Senate of the United States held by an individual receiving gross compensation at an annual rate of $15,000 or more, “(5) an elective or appointive public office in the executive, legislative, or judicial branch of the government of a State, possession of the United States, or political subdivision or other area of any of the foregoing, or of the District of Columbia, held by an individual receiving gross compensation at an annual rate of $15,000 or more, or “(6) a position as personal or executive assistant or secretary to any of the foregoing. “(d) Members of Family.— For purposes of subsection (a)(1), the family of any individual shall include only his spouse, ancestors, lineal descendants, and spouses of lineal descendants. “SEC. 4947. APPLICATION OF TAXES TO CERTAIN NONEXEMPT TRUSTS. “(a) Application of Tax.— “(1) Charitable trusts.— For purposes of part II of subchapter F of chapter 1 (other than section 508(a), (b), and (c)) Ante, p. 492. and for purposes of this chapter, a trust which is not exempt from taxation under section 501(a), all of the unexpired interests in 68A Stat. 163. 26 USC 501. which are devoted to one or more of the purposes described in section 170(c)(2)(B), and for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a) Post, pp. 549, 558, 560–562. (2), or 2522 (or the corresponding provisions of prior law), shall be treated as an organization described in section 501(c)(3). For purposes of section 509(a)(3)(A), such a trust shall be treated as if organized on the day on which it first becomes subject to this paragraph. “(2) Split-interest trusts.— In the case of a trust which is not exempt from tax under section 501(a), not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to termination of private foundation status), section 508(e) (relating to governing instruments) to the extent applicable to a trust described in this paragraph, section 4941 (relating to taxes on self-dealing), section 4943 (relating to taxes on excess business holdings) except as provided in subsection (b)(3), section 4944 (relating to investments which jeopardize charitable purpose) except as provided in subsection (b)(3), and section 4945 (relating to taxes on taxable expenditures) shall apply as if such trust were a private foundation. This paragraph shall not apply with respect to— “(A) any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed under section 170(f)(2)(B), 2055(e)(2)(B), or 2522(c)(2)(B), “(B) any amounts in trust other than amounts for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such other amounts are segregated from amounts for which no deduction was allowable, or “(C) any amounts transferred in trust before May 27, 1969. “(3) Segregated amounts.— For purposes of paragraph (2)(B), a trust with respect to which amounts are segregated shall separately account for the various income, deduction, and other items properly attributable to each of such segregated amounts. “(b) Special Rules.— “(1) Regulations.— The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section. “(2) Limit to segregated amounts.— If any amounts in the trust are seggregated within the meaning of subsection (a)(2)(B) of this section, the value of the net assets for purposes of subsections Ante, p. 492. (c)(2) and (g) of section 507 shall be limited to such segregated amounts. “(3) Sections 4943 and 4944.— Sections 4943 and 4944 shall not apply to a trust which is described in subsection (a)(2) if— “(A) all the income interest (and none of the remainder interest) of such trust is devoted solely to one or more of the Post, p. 553. purposes described in section 170(c)(2)(B), and all amounts in such trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), Post, pp. 549, 558, 560–562. or 2522 have an aggregate value not more than 60 percent of the aggregate fair market value of all amounts in such trusts, or “(B) a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for amounts payable under the terms of such trust to every remainder beneficiary but not to any income beneficiary. “SEC. 4948. APPLICATION OF TAXES AND DENIAL OF EXEMPTION WITH RESPECT TO CERTAIN FOREIGN ORGANIZATIONS. “(a) Tax on Income of Certain Foreign Organizations.— In lieu of the tax imposed by section 4940, there is hereby imposed for each taxable year on the gross investment income (within the meaning of section 4940(c)(2)) derived from sources within the United States Post, p. 625. (within the meaning of section 861) by every foreign organization which is a private foundation for the taxable year a tax equal to 4 percent of such income. “(b) Certain Sections Inapplicable.— Section 507 (relating to termination of private foundation status), section 508 (relating to 68A Stat. 163. 26 USC 501. special rules with respect to section 501(c)(3) organizations), and this chapter (other than this section) shall not apply to any foreign organization which has received substantially all 01 its support (other than gross investment income) from sources outside the United States. “(c) Denial of Exemption to Foreign Organizations Engaged in Prohibited Transactions.— “(1) General rule.— A foreign organization described in subsection (b) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after December 31, 1969. “(2) Prohibited transactions.— For purposes of this subsection, the term ‘prohibited transaction’ means any act or failure to act (other than with respect to section 4942(e)) which would subject a foreign organization described in subsection (b), or a disqualified person (as defined in section 4946) with respect thereto, Post, p. 519. to liability for a penalty under section 6684 or a tax under section 507 if such foreign organization were a domestic organization. “(3) Taxable years affected.— “(A) Except as provided in subparagraph (B), a foreign organization described in subsection (b) shall be denied exemption from taxation under section 501(a) by reason of 68A Stat. 163. 26 USC 501. paragraph (1) for all taxable years beginning with the taxable year during which it is notified by the Secretary or his delegate that it has engaged in a prohibited transaction. The Publication in Federal Register. Secretary or his delegate shall publish such notice in the Federal Register on the day on which he so notifies such foreign organization. “(B) Under regulations prescribed by the Secretary or his delegate, any foreign organization described in subsection (b) which is denied exemption from taxation under section 501(a) by reason of paragraph (1) may, with respect to the second taxable year following the taxable year in which notice is given under subparagraph (A)(or any taxable year thereafter), file claim for exemption from taxation under section 501(a). If the Secretary or his delegate is satisfied that such organization will not knowingly again engage in a prohibited transaction, such organization shall not, with respect to taxable years beginning with the taxable year with respect to which such claim is filed, be denied exemption from taxation under section 501(a) by reason of any prohibited transaction which was engaged in before the date on which such notice was given under subparagraph (A). “(4) Disallowance of certain charitable deductions.— No gift or bequest shall be allowed as a deduction under section 170, Post, pp. 549, 558, 560–562. 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if made— “(A) to a foreign organization described in subsection (b) after the date on which the Secretary or his delegate publishes notice under paragraph (3)(A) that he has notified such organization that it has engaged in a prohibited transaction, and “(B) in a taxable year of such organization for which it is not exempt from taxation under section 501(a) by reason of paragraph (1).” (c) Assessable Penalties For Repeated, or Willful and Flagrant, Acts Under Chapter 42.— Subchapter B of chapter 68 68A Stat. 828; 80 Stat. 1560. 26 USC 6671–6683. (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6684. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR TAX UNDER CHAPTER 42. “If any person becomes liable for tax under any section of chapter 42 Ante, p. 498. (relating to private foundations) by reason of any act or failure to act which is not due to reasonable cause and either— “(1) such person has theretofore been liable for tax under such chapter, or “(2) such act or failure to act is both willful and flagrant, then such person shall be liable for a penalty equal to the amount of such tax.” (d) Information Returns of Exempt Organizations.— (1) In general.— Section 6033(a) (relating to information 68A Stat. 741. returns by exempt organizations) is amended to read as follows: “(a) Organizations Required To File.— “(1) In general.— Except as provided in paragraph (2), every organization exempt from taxation under section 501(a) snail file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary or his delegate may by forms or regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe; except that, in the discretion of the Secretary or his delegate, any organization 68A Stat. 134; 76 Stat. 809. described in section 401(a) may be relieved from stating in its return any information which is reported in returns filed by the employer which established such organization. “(2) Exceptions from filing.— “(A) Mandatory exceptions.— Paragraph (1) shall not apply to— “(i) churches, their integrated auxiliaries, and conventions or associations of churches, “(ii) any organization (other than a private foundation, Ante, p. 496. as defined in section 509(a)) described in subparagraph (C), the gross receipts of which in each taxable year are normally not more than $5,000, or “(iii) the exclusively religious activities of any religious order. “(B) Discretionary exceptions.— The Secretary or his delegate may relieve any organization required under paragraph (1) to file an information return from filing such a return where he determines that such filing is not necessary to the efficient administration of the internal revenue laws. “(C) Certain organizations.— The organizations referred to in subparagraph (A)(ii) are— “(i) a religious organization described in section 501 68A Stat. 163. (c)(3); “(ii) an educational organization described in section Post, p. 550. 170(b)(1)(A)(ii); “(iii) a charitable organization, or an organization for the prevention of cruelty to children or animals, described in section 501(c)(3), if such organization is supported, in whole or in part, by funds contributed by the United States or any State or political subdivision thereof, or is primarily supported by contributions of the general public; “(iv) an organization described in section 501(c)(3), if such organization is operated, supervised, or controlled by or in connection with a religious organization described in clause (i); “(v) an organization described in section 501(c)(8); and “(vi) an organization described in section 501(c)(1), if such organization is a corporation wholly owned by the United States or any agency or instrumentality thereof, or a wholly-owned subsidiary of such a corporation.” (2) Additional information.— Section 6033(b) (relating to certain organizations described in section 501(c)(3)) is amended— (A) by striking out in paragraph (3) “out of income”, (B) by striking out paragraphs (4), (5), (6), and (8), and by redesignating paragraph (7) as paragraph (4), and (C) by adding after paragraph (4) (as redesignated) the following new paragraphs: “(5) the total of the contributions and gifts received by it during the year, and the names and addresses of all substantial contributors. “(6) the names and addresses of its foundation managers (within the meaning of section 4946(b)(1)) and highly compensated employees, and “(7) the compensation and other payments made during the year to each individual described in paragraph (6).” (3) Annual report.— Part III of subchapter A of chapter 61 (relating to information returns) is amended by adding after 68A Stat. 741. 26 USC 6031–6053. subpart C, the following new subpart: “Subpart D— Information Concerning Private Foundations “Sec. 6056. Annual reports by private foundations. “SEC. 6056. ANNUAL REPORTS BY PRIVATE FOUNDATIONS. “(a) General.— The foundation managers (within the meaning of section 4946(b)) of every organization which is a private foundation Ante, p. 515. Ante, p. 496. (within the meaning of section 509(a)) having at least $5,000 of assets at any time during a taxable year shall file an annual report as of the close of the taxable year at such time and in such manner as the Secretary or his delegate may by regulations prescribe. “(b) Contents.— The foundation managers of the private foundation shall set forth in the annual report required under subsection (a) the following information: “(1) its gross income for the year, “(2) its expenses attributable to such income and incurred within the year, “(3) its disbursements (including administrative expenses) within the year, “(4) a balance sheet showing its assets, liabilities, and net worth as of the beginning of the year, “(5) an itemized statement of its securities and all other assets at the close of the year, showing both book and market value, “(6) the total of the contributions and gifts received by it during the year, “(7) an itemized list of all grants and contributions made or approved for future payment during the year, showing the amount of each such grant or contribution, the name and address of the recipient, any relationship between any individual recipient and the foundation’s managers or substantial contributors, and a concise statement of the purpose of each such grant or contribution, “(8) the address of the principal office of the foundation and (if different) of the place where its books and records are maintained, “(9) the names and addresses of its foundation managers (within the meaning of section 4946(b)), and “(10) a list of all persons described in paragraph (9) that are substantial contributors (within the meaning of section 507(d)(2)) or that own 10 percent or more of the stock of any corporation Ante, p. 492. of which the foundation owns 10 percent or more of the stock, or corresponding interests in partnerships or other entities, in which the foundation has a 10 percent or greater interest. “(c) Form.— The annual report may be prepared in printed, typewritten, or any other legible form the foundation chooses. The Secretary or his delegate shall provide forms which may be used by a private foundation for purposes of the annual report. “(d) Special Rules.— “(1) The annual report required to be filed under this section is in addition to and not in lieu of the information required to be filed under section 6033 (relating to returns by exempt organizations) 68A Stat. 74 26 USC 6033. and shall be filed at the same time as such information. “(2) A copy of the notice required by section 6104(d) (relating to public inspection of private foundations’ annual reports), together with proof of publication thereof, shall be filed by the foundation managers together with the annual report. “(3) The foundation managers shall furnish copies of the annual report required by this section to such State officials and other persons, at such times and under such conditions, as the Secretary or his delegate may by regulations prescribe.” (4) Penalty for late filing of certain information returns.— Section 6652 (relating to failure to file certain information returns) is amended by relettering subsection (d) as subsection (e) and inserting immediately after subsection (c) the following new subsection: “(d) Returns by Exempt Organizations and by Certain Trusts.— “(1) Penalty on organization or trust.— In the case of a Ante, p. 519. failure to file a return required under section 6033 (relating to returns by exempt organizations), section 6034 (relating to returns Post, p. 529. by certain trusts), or section 6043(b) (relating to exempt organizations), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the exempt organization or trust failing so to file, $10 for each day during which such failure continues, but the total amount imposed hereunder on any organization for failure to file any return shall not exceed $5,000. “(2) Managers.— The Secretary or his delegate may make written demand upon an organization failing to file under paragraph (1) specifying therein a reasonable future date by which such filing shall be made, and if such filing is not made on or before such date, and unless it is shown that failure so to file is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file, $10 for each day after the expiration of the time specified in the written demand during which such failure continues, but the total amount imposed hereunder on all persons for such failure to file shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file, all such persons shall be jointly and severally liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs. “(3) Annual reports.— In the case of a failure to file a report Ante, p. 521. required under section 6056 (relating to annual reports by private foundations) or to comply with the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file or meet the publicity requirement, $10 for each day during which such failure continues, but the total amount imposed hereunder on all such persons for such failure to file or comply with the requirements of section 6104(d) with regard to any one annual report shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file or comply with the requirements of section 6104(d), all such persons shall be jointly and severally Infra. liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs.” (e) Publicity of Information Required By Certain Exempt Organizations.— (1) Names and addresses of contributors.— Section 6104 68A Stat. 755; 72 Stat. 1660. 26 USC 6104. (relating to publicity of information required from certain exempt organizations and certain trusts) is amended by inserting at the end of subsection (b), the following sentence: “Nothing in this subsection shall authorize the Secretary or his delegate to disclose the name or address of any contributor to any organization or trust (other than a private foundation, as defined in section 509(a)) which is required to furnish such information.” (2) Publication to state officials.— Section 6104 is amended by adding after subsection (b) the following new subsection: “(c) Publication to State Officials.— “(1) General rule.— In the case of any organization which is described in section 501(c)(3) and exempt from taxation under 68A Stat. 163. Ante, p. 434. section 501(a), or has applied under section 508(a) for recognition as an organization described in section 501(c)(3), the Secretary or his delegate at such times and in such manner as he may by regulations prescribe shall— “(A) notify the appropriate State officer of a refusal to recognize such organization as an organization described in section 501(c)(3), or of the operation of such organization in a manner which does not meet, or no longer meets, the requirements of its exemption, “(B) notify the appropriate State officer of the mailing of a notice of deficiency of tax imposed under section 507 or chapter 42, and Ante, pp. 492, 498. “(C) at the request of such appropriate State officer, make available for inspection and copying such returns, filed statements, records, reports, and other information, relating to a determination under subparagraph (A) or (B) as are relevant to any determination under State law. “(2) Appropriate state officer.— For purposes of this subsection, the term ‘appropriate State officer’ means the State attorney general. State tax officer, or any State official charged with overseeing organizations of the type described in section 501(c)(3).” (3) Annual reports.— Section 6104 is amended by adding after subsection (c), as added by paragraph (2) of this subsection, the following new subsection: “(d) Public Inspection of Private Foundations’ Annual Reports.— The annual report required to be filed under section 6056 Ante, p. 521. (relating to annual reports by private foundations) shall be made available by the foundation managers for inspection at the principal office of the foundation during regular business hours by any citizen on request made within 180 days after the publication of notice of its availability. Such notice shall be published, not later than the day prescribed for filing such annual report (determined with regard to any extension of time for filing), in a newspaper having general circulation in the county in which the principal office of the private foundation is located. The notice shall state that the annual report of the private foundation is available at its principal office for inspection during regular business hours by any citizen who requests it within 180 days after the date of such publication, and shall state the address of the private foundation’s principal office and the name of its principal manager.” (4) Willful failure to provide information regarding private foundations.— Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding after section 6684 (added by subsection (c) of this section) the following new section: “SEC. 6685. ASSESSABLE PENALTIES WITH RESPECT TO PRIVATE FOUNDATION ANNUAL REPORTS. “In addition to the penalty imposed by section 7207 (relating to fraudulent returns, statements, or other documents), any person who Ante, p. 521. is required to file the report and the notice required under section 6056 (relating to annual reports by private foundations) or to comply with Ante, p. 523. the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports) and who fails so to file or comply, if such failure is willful, shall pay a penalty of $1,000 with respect to each such report or notice.” (5) Section 7207 (relating to fraudulent returns, statements, or other documents) is amended by striking out “section 6047 (b) or (c)” and inserting in lieu thereof “sections 6047 (b) or (c), 6056, or 6104(d)”. (f) Petition to Tax Court; Deficiency Procedures Made Applicable.— (1) Section 6211(a) (relating to definition of a deficiency) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and excise taxes,”, (B) by striking out “subtitles A and B,” and inserting in lieu thereof “subtitles A and B, and chapter 42,”, and (C) by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (2) Section 6212(c)(1) (relating to further deficiency letters restricted) is amended by striking out “or” before “of estate tax” and by inserting after “the same decedent,” the following: “of section Ante, p. 498. 4940 tax for the same taxable year, or of chapter 42 tax (other than under section 4940) with respect to any act (or failure to act) to which such petition relates,”. (3) Section 6213 (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by relettering subsection (e) as subsection (f) and inserting immediately after subsection (d) the following new subsection: “(e) Suspension of Filing Period for Certain Chapter 42 Taxes.— The running of the time prescribed by subsection (a) for filing a petition in the Tax Court with respect to the taxes imposed by section 4941 (relating to taxes on self-dealing), 4942 (relating to taxes on failure to distribute income), 4943 (relating to taxes on excess business holdings), 4944 (relating to investments which jeopardize charitable purpose), or 4945 (relating to taxes on taxable expenditures) shall be suspended for any period during which the Secretary or his delegate has extended the time allowed for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (g) Limitations on Assessment and Collection.— (1) Section 6501 is amended by adding at the end thereof the 68A Stat. 803; 80 Stat. 1151. following new subsection: “(n) Special Rule for Chapter 42 Taxes.— “(1) In general.— For purposes of any tax imposed by chapter 42 (other than section 4940), the return referred to in this section Ante, p. 498. shall be the return filed by the private foundation for the year in which the act (or failure to act) giving rise to liability for such tax occurred. For purposes of section 4940, such return is the return filed by the private foundation for the taxable year for which the tax is imposed. “(2) Certain contributions to section 501 (c)(3) organizations.— In the case of a deficiency of tax of a private foundation making a contribution in the manner provided in section 4942(g)(3) (relating to certain contributions to section 501(c)(3) 68A Stat. 163. 26 USC 501. organizations) attributable to the failure of a section 501(c)(3) organization to make the distribution prescribed by section 4942(g)(3), such deficiency may be assessed at any time before the expiration of one year after the expiration of the period within which a deficiency may be assessed for the taxable year with respect to which the contribution was made.” (2) Section 6501(c) is amended by adding the following new paragraph at the end thereof: “(7) Termination of private foundation status.— In the case of a tax on termination of private foundation status under section 507, such tax may be assessed, or a proceeding in court Ante, p. 492. for the collection of such tax may be begun without assessment, at any time.” (3) Section 6501(e)(3) is amended by adding at the end thereof the following sentence: “In determining the amount of tax omitted on a return, there shall not be taken into account any amount of tax imposed by chapter 42 which is omitted from the return if the transaction giving rise to such tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the existence and nature of such item.” (4) Section 6503 (relating to suspension of running of period of 80 Stat. 1140. limitation) is amended by relettering subsection (h) as subsection (i) and inserting immediately after subsection (g) the following new subsection: “(h) Suspension Pending Correction.— The running of the periods of limitations provided in sections 6501 and 6502 on the making 68A Stat. 806. of assessments or the collection by levy or a proceeding in court in respect of any tax imposed by chapter 42 or section 507 shall be suspended for any period described in section 507(g)(2) or during which the Secretary or his delegate has extended the time for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (h) Limitations on Credits or Refunds.— Section 6511 (relating to limitations on credits or refunds) is amended by relettering subsection (f) as subsection (g) and inserting immediately after subsection (e) the following new subsection: “(f) Special Rule for Chapter 42 Taxes.— For purposes of any tax imposed by chapter 42, the return referred to in subsection (a) shall be the return specified in section 6501(n)(1).” Supra. (i) Civil Action for Refund.— Section 7422 (relating to civil 68A Stat. 876; 80 Stat. 1108. actions for refund) is amended by relettering subsection (g) as subsection (h) and by inserting immediately after subsection (f) the following new subsection: “(g) Special Rules for Certain Excise Taxes Imposed by Chapter 42.— “(1) Right to bring actions.— With respect to any act (or failure to act) giving rise to liability under section 4941, 4942, 4943, 4944, or 4945, payment of the full amount of tax imposed under section 4941(a) (relating to initial taxes on self-dealing), section 4942(a) (relating to initial tax on failure to distribute income), section 4943(a) (relating to initial tax on excess business holdings), section 4944(a) (relating to initial taxes on investments which jeopardize charitable purpose), section 4945(a) (relating to initial taxes on taxable expenditures), section 4941(b) (relating to additional taxes on self-dealing), section 4942(b) (relating to additional tax on failure to distribute income), section 4943(b) (relating to additional tax on excess business holdings), section 4944(b) (relating to additional taxes on investments which jeopardize charitable purpose), or section 4945(b) (relating to additional taxes on taxable expenditures) shall constitute sufficient payment in order to maintain an action under this section with respect to such act (or failure to act). “(2) Limitation on suit for refund.— No suit may be maintained under this section for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, unless no other suit has been maintained for credit or refund of, and no petition has been filed in the Tax Court with respect to a deficiency in, any other tax imposed by such sections with respect to such act (or failure to act). “(3) Final determination of issues.— For purposes of this section, any suit for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, shall constitute a suit to determine all questions with respect to any other tax imposed with respect to such act (or failure to act) under such sections, and failure by the parties to such suit to bring any such question before the Court shall constitute a bar to such question.” (j) Technical, Conforming, and Clerical Amendments.— (1) Section 101(b)(2)(B)(iii) (relating to nonforfeitable rights) is amended by striking out “section 503(b)(1), (2), or (3)” and inserting in lieu thereof “section 170(b)(1)(A)(ii) or (vi) or which is a religious organization (other than a trust)”. (2) Section 170(i) (relating to disallowance of deductions in certain cases) (as redesignated by section 201(a)(1)(A) of this Act) is amended— (A) by striking out paragraph (1), and (B) by striking out “(2) For disallowance” and inserting in lieu thereof “For disallowance”. (3) Section 501(a) (relating to exemption from taxation) is amended by striking out “502, 503, or 504” and inserting in lieu thereof “502 or 503”. (4) Section 501(b) (relating to tax on unrelated business income) is amended to read as follows: “(b) Tax on Unrelated Business Income and Certain Other Activities.— An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II and III of this subchapter, but (notwithstanding parts II and III of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.” (5) Section 501(c)(16) (relating to list of exempt organizations) 68A Stat. 165. 26 USC 501. is amended by striking out “part III” and inserting in lieu thereof “part IV”. (6) Section 501(e) (relating to cooperative hospital service 82 Stat. 269. organizations) is amended by striking out in the last sentence thereof “section 503(b)(5).” and inserting in lieu thereof “section 170(b)(1)(A)(iii).”. (7) Section 503(a)(1) (relating to general rule) is amended to 74 Stat. 535. read as follows: “(1) General rule.— “(A) An organization described in section 501(c)(17) 74 Stat. 534. 68A Stat. 163. 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) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954.” (8) Section 503(a)(2) (relating to taxable years affected by 68A Stat. 166. denial of exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (9) Section 503(d) (relating to future status of organizations denied exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (10) Section 503(g) (relating to special rule for loans) is amended by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”. (11) Section 503(h) (relating to special rules relating to lending 72 Stat. 1629. by section 401(a) and section 501(c)(17) trusts to certain persons) is amended— (A) by striking out in the heading thereof “Special rules relating to lending by section 401(a) and section 501(c)(17) trusts to certain persons.—”, and inserting in lieu thereof “Special rules.—”, (B) by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”, (C) by striking out “acquired by a trust described in section 401(a) or section 501(c)(17)”, and (D) by striking out in paragraph (3) “subsection (c)” and inserting in lieu thereof “subsection (b)”. (12) Section 503(i) (relating to loans with respect to which 72 Stat. 1630. employers are prohibited from pledging certain assets) is amended— (A) by striking out “Subsection (c)(1)” and inserting in lieu thereof “Subsection (b)(1)”, and (B) by striking out “subsection (h)” and inserting in lieu thereof “subsection (e)”. (13) Section 503(j)(1) (relating to prohibited transactions) 76 Stat. 827. is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (b)”. (14) Section 503 (relating to requirements of exemption) is amended by striking out subsections (b), (e), and (f) and by redesignating subsections (c), (d), (g), (h), (i), and (j) (as amended), as subsections (b), (c), (d), (e), (f), and (g), respectively. (15) Section 504 (relating to denial of exemption) is repealed. Repeal 68A Stat. 168. (16) Section 542(a)(2) (relating to stock ownership requirement) is amended— (A) by striking out in the second sentence “section 503(b)” and inserting in lieu thereof “section 401(a), 501(c)(17), or 509(a)”, and (B) by amending the third sentence to read as follows: “The preceding sentence shall not apply in the case of an organization or trust organized or created before July 1, 1950, if at all times on or after July 1, 1950, and before the close of the taxable year such organization or trust has owned all of the common stock and at least 80 percent of the total number of shares of all other classes of stock of the corporation.” (17) Section 663(a)(2) (relating to charitable, etc., distributions) is amended by striking out “section 681” and inserting in lieu thereof “sections 508(d), 681, and 4948(c)(4)”. (18) Section 681(b) and (c) (relating to operations of trusts and accumulated income) is repealed. (19) Section 681(d) (relating to cross reference) is redesignated as subsection (b), and as so redesignated is amended by striking out “section 503(e)” and inserting in lieu thereof “sections 508(d) and 4948(c)(4)”. (20) Section 878 (relating to foreign educational, charitable, and certain other exempt organizations) is amended by— (A) striking out “unrelated business income of”, and (B) striking out “trusts, see section 512(a)” and inserting in lieu thereof “organizations, see sections 512(a) and 4948”. (21) Section 884 (relating to cross references) is amended by striking out paragraph (1) and by redesignating paragraphs (2), (3), (4), (5), and (6) as paragraphs (1), (2), (3), (4), and (5), respectively. (22) Section 1443 (relating to foreign tax-exempt organizations) is amended by— (A) inserting “(a) Income Subject to Section 511.—” before “In the case of”, and (B) adding subsection (b) to read as follows: “(b) Income Subject to Section 4948.— In the case of income of Ante, p. 518. a foreign organization subject to the tax imposed by section 4948(a), this chapter shall apply, except that the deduction and withholding shall be at the rate of 4 percent and shall be subject to such conditions as may be provided under regulations prescribed by the Secretary or his delegate.” (23) Section 2039(c)(3) (relating to exemption of annuities under certain trusts and plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section Post, p. 550. 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (24) Section 2517(a)(3) (relating to general rule for certain annuities under qualified plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (25) Section 4057(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (26) Section 4221(d)(5) (relating to the definition of nonprofit 72 Stat. 1282. 26 USC 4221. educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (27) Section 4253(h) (relating to nonprofit hospitals) is amended by striking out “section 503(b)(5)” and inserting in lieu thereof “section 170(b)(1)(A)(iii)”. Post, p. 550. (28) Section 4294(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (29) Section 5214(a)(3)(A) (relating to purposes for withdrawal of distilled spirits from bonded premises free of tax or without payment of tax) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (30) Section 6033(b)(4) (as redesignated by subsection (d)(2) of this section) (relating to certain balance sheet items on Ante, p. 520. returns by exempt organizations) is amended by striking out “and” at the end thereof. (31) Section 6033(c) (relating to cross reference) is amended by inserting the following at the end thereof: “For reporting requirements as to certain liquidations, dissolutions, terminations, and contractions, see section 6043(b). For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” Ante, p. 522. (32) Section 6034 (relating to returns by certain trusts) is 68A Stat. 742. amended by striking out all of such section before paragraph (1) of subsection (a) and inserting in lieu thereof the following: “SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(a) OR CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 642(c). “(a) General Rule.— Every trust described in section 4947(a) or Ante, p. 517. Post, p. 558. claiming a charitable, etc., deduction under section 642(c) for the taxable year shall furnish such information with respect to such taxable year as the Secretary or his delegate may by forms or regulations prescribe, including—”. (33) Section 6034(a)(1) (relating to returns by certain trusts) is amended by striking out “(showing separately the amount of such deduction which was paid out and the amount which was permanently set aside for charitable, etc., purposes during such year)”. (34) Section 6034 (relating to returns by certain trusts) is amended by adding the following new subsection at the end thereof: “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” (35) Section 6043 (relating to return regarding corporate dissolution 68A Stat. 746. or liquidation) is amended— (A) by striking out the heading and inserting in lieu thereof (B) by striking out “Every corporation” and inserting in lieu thereof “(a) Corporations.—Every corporation”, and (C) by adding the following new subsections at the end thereof: “(b) Exempt Organizations.— Every organization which for any of its last 5 taxable years preceding its liquidation, dissolution, termination, or substantial contraction was exempt from taxation under 68A Stat. 163. 25 USC 501. section 501(a) shall file such return and other information with respect to such liquidation, dissolution, termination, or substantial contraction as the Secretary or his delegate shall by forms or regulations prescribe; except that— “(1) no return shall be required under this subsection from churches, their integrated auxiliaries, conventions or associations of churches, or any organization which is not a private foundation Ante, p. 496. (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000, and “(2) the Secretary or his delegate may relieve any organization from such filing where he determines that such filing is not necessary to the efficient administration of the internal revenue laws or, with respect to an organization described in section 401(a), where the employer who established such organization files such a return. “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by subsection (b), see section 6652(d).” (36) Section 6104(b) (relating to inspection of annual information returns) is amended by striking out “sections 6033(b) and 6034,” and inserting in lieu thereof “sections 6033, 6034, and 6056,”. (37) Section 6161(b) (relating to the amount determined as a deficiency when granting an extension of time) is amended— (A) by striking out in paragraph (1) “chapter 1 or 12,” Ante, p. 498. and inserting in lieu thereof “chapter 1, 12, or 42,”, and (B) by striking out “chapter 1,” the last time it appears and inserting in lieu thereof “chapter 1 or 42,”. (38) Section 6201(d) (relating to deficiency proceedings) is amended by striking out “and gift taxes”, and inserting in lieu thereof “gift, and chapter 42 taxes”. (39) Section 6211(b)(2) (relating to the term “rebate”) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (40) Section 6212(a) (relating to notice of deficiency) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (41) Section 6212(b)(1) (relating to address for notice of deficiency) is amended— (A) by striking out in the title thereof “and gift taxes” and inserting in lieu thereof “and gift taxes and taxes imposed by chapter 42”, (B) by striking out “subtitle A or chapter 12,” and inserting in lieu thereof “subtitle A, chapter 12, or chapter 42,”, and (C) by inserting “chapter 42,” after “chapter 12,” the last place it appears. (42) Section 6213(a) (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by inserting “or chapter 42” after “subtitle A or B”. (43) Section 6214 (relating to determination by the Tax Court) is amended by relettering subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Taxes Imposed by Section 507 or Chapter 42.— The Tax Court, in redetermining a deficiency of any tax imposed by section 507 Ante, p. 492. or chapter 42 for any period, act, or failure to act, shall consider such Ante, p. 498. facts with relation to the taxes under chapter 42 for other periods, acts, or failures to act as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the taxes under chapter 42 for any other period, act, or failure to act have been overpaid or underpaid.” (44) Section 6214(d) (as relettered) is amended by inserting Ante, p. 530. “, chapter 42,” after “chapter”. (45) Section 6344(a)(1) (relating to certain cross references) 68A Stat. 789. 26 USC 6344. is amended by inserting “and taxes imposed by chapter 42,” after “gift taxes,”. (46) Section 6503(a)(1) (relating to issuance of statutory notice of deficiency) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift and chapter 42 taxes”. (47) Section 6512(a) (relating to effect of petition to Tax Court) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”, and (B) by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (48) Section 6512(b)(1) (relating to jurisdiction to determine overpayment determined by Tax Court) is amended by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (49) Section 6601(d) (relating to suspension of interest in certain cases) is amended— (A) by striking out in the title thereof “and Gift Tax Cases.” and inserting in lieu thereof “Gift, and Chapter 42 Tax Cases.”, and (B) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (50) Section 6653(c)(1) (relating to definition of underpayment) is amended— (A) by striking out in the heading thereof “and gift taxes.” and inserting in lieu thereof “gift, and chapter 42 taxes.”, and (B) by striking out “and gift taxes” the last time it appears and inserting in lieu thereof “gift, and chapter 42 taxes”. (51) Section 6659(b) (relating to procedure for assessing certain additions to tax) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (52) Section 6676(b) (relating to deficiency procedures not to 75 Stat. 829. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (53) Section 6677(b) (relating to deficiency procedures not to 76 Stat. 988. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (54) Section 6679(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (55) Section 6682(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (56) Section 7422(e) (relating to stay of proceeding in civil actions for refund) is amended by striking out “or gift tax” the first time it appears and inserting in lieu thereof “gift tax, or tax imposed by chapter 42”. (57) Section 7454 (relating to burden of proof in fraud and transferee cases) is amended— (A) by striking out “FRAUD AND TRANSFEREE CASES” and inserting in lieu thereof “FRAUD, FOUNDATION MANAGER, AND TRANSFEREE CASES”, (B) by redesignating subsection (b) as subsection (c), and (C) by inserting after subsection (a) the following new subsection: “(b) Foundation Managers.— In any proceeding involving the Ante, p. 515. issue whether a foundation manager (as defined in section 4946(b)) has ‘knowingly’ participated in an act of self-dealing (within the meaning of section 4941), participated in an investment which jeopardizes the carrying out of exempt purposes (within the meaning of section 4944), or agreed to the making of a taxable expenditure (within the meaning of section 4945), the burden of proof in respect of such issue shall be upon the Secretary or his delegate.” (58) The table of parts for subchapter F of chapter 1 is amended to read as follows: “Subchapter F.— Exempt Organizations “Part I. General rule. “Part II. Private foundations. “Part III. Taxation of business income of certain exempt organizations. “Part IV. Farmers’ cooperatives. “Part V. Shipowners’ protection and indemnity associations.” (59) The table of chapters for subtitle D is amended by adding at the end thereof the following new item: “Chapter 42. Private foundations.” (60) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new items: “Sec. 6684. Repeated liability for tax under chapter 42. “Sec. 6685. Assessable penalties with respect to private foundation annual reports.” (61) The table of sections for part I of subchapter F of chapter 1 is amended by striking out the item relating to section 504. (62) The heading of subchapter B of chapter 63 is amended by striking out “and Gift Taxes” and inserting in lieu thereof “Gift, and Certain Excise Taxes”. (63) The table of subchapters for chapter 63 is amended by striking out “and gift taxes” in the item relating to subchapter B and inserting in lieu thereof “gift, and certain excise taxes”. (64) The table of subparts for part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: “Subpart D. Information concerning private foundations.” (k) Effective Dates.— (1) In general.— Except as otherwise provided in this subsection and subsection (1), the amendments made by this section shall take effect on January 1, 1970. (2) Provisions effective for taxable years beginning after december 31, 1969.— The following provisions shall apply to taxable years beginning after December 31, 1969: (A) Sections 4940, 4942, 4943, and 4948 of the Internal Revenue Code of 1954 (as added by this section), and Ante, p. 498. (B) The amendments made by subsection (d) and paragraphs (3), (15), (16), (20), (21), (30), (31), (32), (33), (34), (35), and (61) of subsection (j). (3) Sections 508 (a), (b), and (c).— Sections 508 (a), (b), and (c) of the Internal Revenue Code of 1954 (as added by this Ante, p. 494. section) shall take effect on October 9, 1969. (l) Savings Provisions.— (1) References to internal revenue code provisions.— Except as otherwise expressly provided, references in the following paragraphs of this subsection are to sections of the Internal Revenue Code of 1954 as amended by this section. (2) Section 4941.— Section 4941 shall not apply to— (A) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946), pursuant to the terms of securities of such corporation in existence at the time acquired by the foundation, if such securities were acquired by the foundation before May 27, 1969; (B) the sale, exchange, or other disposition of property which is owned by a private foundation on May 26, 1969 (or which is acquired by a private foundation under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter), to a disqualified person, if such foundation is required to dispose of such property in order not to be liable for tax under section 4943 (relating to taxes on excess business holdings) applied, in the case of a disposition before January 1, 1975, without taking section 4943(c)(4) into account and it receives in return an amount which equals or exceeds the fair market value of such property at the time of such disposition or at the time a contract for such disposition was previously executed in a transaction which would not constitute a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (C) the leasing of property or the lending of money or other extension of credit between a disqualified person and a private foundation pursuant to a binding contract in effect on October 9, 1969 (or pursuant to renewals of such a contract), until taxable years beginning after December 31, 1979, if such leasing or lending (or other extension of credit) remains at least as favorable as an arm’s-length transaction with an unrelated party and if the execution of such contract was not at the time of such execution a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (D) the use of goods, services, or facilities which are shared by a private foundation and a disqualified person until taxable years beginning after December 31, 1979, if such use is pursuant to an arrangement in effect before October 9, 1969, and such arrangement was not a prohibited transaction (within Ante, p. 527. the meaning of section 503(b) or the corresponding provisions of prior law) at the time it was made and would not be a prohibited transaction if such section continued to apply; and (E) the use of property in which a private foundation and a disqualified person have a joint or common interest, if the interests of both in such property were acquired before October 9, 1969. (3) Section 4942.— In the case of organizations organized before May 27, 1969, section 4942 shall— (A) for all purposes other than the determination of the minimum investment return under section 4942(j)(3)(B)(ii), for taxable years beginning before January 1, 1972, apply without regard to section 4942(e) (relating to minimum investment return), and for taxable years beginning in 1972, 1973, and 1974, apply with an applicable percentage (as prescribed in section 4942(e)(3)) which does not exceed 4½ percent, 5 percent, and 5½ percent, respectively; (B) not apply to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on May 26, 1969, and at all times thereafter) of an instrument executed before May 27, 1969, with respect to the transfer of income producing property to such organization, except that section 4942 shall apply to such organization if the organization would have been denied exemption Ante, p. 527. Post, p. 558. Ante, p. 528. if section 504(a) had not been repealed by this Act, or would have had its deductions under section 642(c) limited if section 681(c) had not been repealed by this Act. In applying the preceding sentence, in addition to the limitations contained in section 504(a) or 681(c) before its repeal, section 504(a)(1) or 681(c)(1) shall be treated as not applying to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on January 1, 1951, and at all times thereafter) of an instrument executed before January 1, 1951, with respect to the transfer of income producing property to such organization before such date, if such transfer was irrevocable on such date; (C) apply to a grant to a private foundation described in section 4942(g)(1)(A)(ii) which is not described in section 4942(g)(1)(A)(i), pursuant to a written commitment which was binding on May 26, 1969, and at all times thereafter, as if such grant is a grant to an operating foundation (as defined in section 4942(j)(3)), if such grant is made for one or more Post, p. 553. of the purposes described in section 170(c)(2)(B) and is to be paid out to such private foundation on or before December 31, 1974; (D) apply, for purposes of section 4942(f), in such a manner as to treat any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise as not essentially equivalent to a dividend 68A Stat. 85. 26 USC 302. under section 302(b)(1) if such redemption is described in paragraph (2)(B) of this subsection; and (E) not apply to an organization which is prohibited by its governing instrument or other instrument from distributing capital or corpus to the extent the requirements of section 4942 are inconsistent with such prohibition. Ante, p. 502. With respect to taxable years beginning after December 31, 1971, subparagraphs (B) and (E) shall apply only during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to comply with the provisions of section 4942, and in the case of subparagraph (B) for all periods after the termination of such judicial proceeding during which the governing instrument or any other instrument does not permit compliance with such provisions. (4) Section 4943.— (A) In the case of a private foundation— (i) which was incorporated before January 1, 1951; (ii) substantially all of the assets of which on May 26, 1969, consist of more than 90 percent of the stock of an incorporated business enterprise which is licensed and regulated, the sales or contracts of which are regulated, and the professional representatives of which are licensed, by State regulatory agencies in at least 10 States; and (iii) which acquired such stock solely by gift, devise, or bequest, section 4943(c)(4)(A)(i) shall be applied with respect to the Ante, p. 507. holdings of such foundation in such incorporated business enterprise by substituting “51 percent” for “50 percent”, and section 4943(c)(4)(D) shall not apply with respect to such holdings. For purposes of the preceding sentence, stock of such enterprise in a trust created before May 27, 1969, of which the foundation is the remainder beneficiary shall be deemed to be held by such foundation on May 26, 1969, if such foundation held (without regard to such trust) more than 20 percent of the stock of such enterprise on May 26, 1969. (B) Subparagraph (A) shall apply to a private foundation only if— (i) the foundation does not purchase any stock or other interest in the enterprise described in subparagraph (A) after May 26, 1969, and does not acquire any stock or other interest in any other business enterprise which constitutes excess business holdings under section 4943; and (ii) in the last 5 taxable years ending on or before December 31, 1970, the foundation expends substantially all of its adjusted net income (as defined in section 4942(f)) for the purpose or function for which it is organized and operated. (C) For purposes of section 4943(c)(6), the term “purchase” does not include an exchange which is described in paragraph (2)(B) of this subsection and which is pursuant to a plan for disposition of excess business holdings. (5) Section 4945.— Section 4945(d)(4) and (h) shall not apply to a grant which is described in paragraph (3)(C) of this subsection. (6) Section 508(e).— Section 508(e) shall not apply to require Ante, p. 494. inclusion in governing instruments of any provisions inconsistent with this subsection. (7) Section 509(a).— In the case of any trust created under the terms of a will or a codicil to a will executed on or before March 30, 1924, by which the testator bequeathed all of the outstanding common stock of a corporation in trust, the income of which trust is to be used principally for the benefit of those from time to time employed by the corporation and their families, the trustees of which trust are elected or selected from among the employees of such corporation, and which trust does not own directly any stock in any other corporation, if the trust makes an irrevocable election under this paragraph within one year after the date of the enactment of this Act, such trust shall be treated as not being a private foundation for purposes of the Internal Revenue Code of 1954 but shall be treated for purposes of such Code as if it were not exempt 68A Stat. 163. 26 USC 501. from tax under section 501(a) for any taxable year beginning after the date of the enactment of this Act and before the date (if any) on which such trust has complied with the requirements of section 507 for termination of the status of an organization as a private foundation. (8) Certain redemptions.— For purposes of applying section 302(b)(1) to the determination of the amount of gross investment Ante, pp. 498, 518. income under sections 4940 and 4948(a), any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise shall be treated as not essentially equivalent to a dividend, if such redemption is described in paragraph (2)(B) of this subsection. Subtitle B— Other Tax Exempt Organizations SEC. 121. TAX ON UNRELATED BUSINESS INCOME. (a) Organizations Subject to Tax.— (1) Corporate rates.— Section 511(a)(2)(A) (relating to certain organizations subject to tax on unrelated business income at corporate rates) is amended to read as follows: “(A) Organizations described in sections 401(a) and 501(c).— The taxes 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).” (2) Individual rates.— Section 511(b)(2) (relating to charitable, etc., trusts subject to tax on unrelated business income) is amended to read as follows: “(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).” (3) Section 501(c)(2) corporations.— Section 511 (relating to tax on unrelated business income) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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).” 68A Stat. 163. 26 USC 501. (4) Conforming amendment.— Section 1504 (relating to definitions for purposes of consolidated returns) is amended by adding at the end thereof the following new subsection: “(e) Includible Tax-Exempt Organizations.— Despite the provisions of paragraph (1) of subsection (b), two or more organizations exempt from taxation under section 501, one or more of which is described in section 501(c)(2) and the others of which derive income from such 501(c)(2) organizations, shall be considered as includible corporations for the purpose of the application of subsection (a) to such organizations alone.” (b) Definition of Unrelated Business Taxable Income.— (1) In general.— Section 512(a) (relating to definition of unrelated business taxable income) is amended to read as follows: “(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, Post, p. 542. 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 Ante, p. 536. 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 section 501(c)(7) or (9).— “(A) General rule.— In the case of an organization described in section 501(c)(7) or (9), the term ‘unrelated Post, p. 541. 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). “(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 section Post, p. 541. 501(c)(9), 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 68A Stat. 163. 26 USC 501. in section 501(c)(2), the income of which is payable to an organization described in section 501(c)(7) or (9), 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 section 501(c)(7) or (9) 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 shall apply.” (2) Modifications.— (A) Rents and debt-financed property.— Section 512(b)(3) (relating to modifications with respect to rents from real property) and section 512(b)(4) (relating to modifications with respect to business leases) are amended to read as follows: “(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 76 Stat. 1032; 78 Stat. 35. 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 Post, p. 543. 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).” (B) Limit on specific deduction.— Section 512(b)(12) 69A Stat. 171. (relating to allowance of specific deduction) is amended to read as follows: “(12) Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a Post, p. 619. 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.” (C) Special rules for certain organizations.— Section 512(b) (relating to modifications in determining unrelated business taxable income) is further amended by adding at the end thereof the following: “(15) Notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the ‘controlled organization’) of which the organization deriving such amounts (in this paragraph called the ‘controlling organization’) has control (as defined in section 368(c)) shall be included as an item of gross income 68A Stat. 121. 25 USC 368. (whether or not the activity from which such amounts are derived represents a trade or business or is regularly carried on) in an amount which bears the same ratio as— “(A) (i) in the case of a controlled organization which is not exempt from taxation under section 501(a), the excess of the amount of taxable income of the controlled organization over the amount of such organization’s taxable income which if derived directly by the controlling organization would not be unrelated business taxable income, or “(ii) in the case of a controlled organization which is exempt from taxation under section 501(a), the amount of unrelated business taxable income of the controlled organization, bears to “(B) the taxable income of the controlled organization (determined in the case of a controlled organization to which subparagraph (A)(ii) applies as if it were not an organization exempt from taxation under section 501(a)), but not less than the amount determined in clause (i) or (ii), as the case may be, of subparagraph (A), both amounts computed without regard to amounts paid directly or indirectly to the controlling organization. There shall be allowed all deductions directly connected with amounts included in gross income under the preceding sentence. “(16) 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. “(17) 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 68A Stat. 42. 26 USC 151. educational institution (as defined in section 151(e)(4)) 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 or his delegate 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.” (D) Technical amendment.— Section 512(b) (relating to exceptions, additions, and limitations in determining unrelated business taxable income) is amended by striking out so much thereof as precedes paragraph (1) and inserting in lieu thereof the following: “(b) Modifications.— The modifications referred to in subsection (a) are the following:” (3) Related amendment.— (A) Part IX of Subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: “SEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGANIZATIONS IN TRANSACTIONS WITH MEMBERS. “(a) General Rule.— In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. “(b) Exceptions.— Subsection (a) shall not apply to any organization— “(1) which for the taxable year is subject to taxation under subchapter H or L, “(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization, or 75 Stat. 222. 26 USC 456. “(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the 48 Stat. 881. 15 USC 78a. 42 Stat. 998. 7 USC 1. Commodity Exchange Act.” (B) The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following: “Sec. 277. Deductions incurred by certain membership organizations in transactions with members.” (4) Local employee association.— Section 513(a)(2) (relating 68A Stat. 172. to exception to definition of unrelated trade or business) is amended by striking out “employees; or” and inserting in lieu thereof the following: “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”. (5) Voluntary employees’ beneficiary associations and certain fraternal societies. (A) In general.— Section 501(c) (relating to list of 26 USC 501. exempt organizations) is amended by striking out paragraphs (9) and (10) and inserting in lieu thereof the following: “(9) Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. “(10) Domestic fraternal societies, orders, or associations, operating under the lodge system— “(A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and “(B) which do not provide for the payment of life, sick, accident, or other benefits.” (B) Conforming amendments.— Section 801(b)(2)(relating 73 Stat. 112. to life insurance reserves) is amended— (i) by inserting “and” at the end of subparagraph (A), (ii) by striking out subparagraph (B), and (iii) by redesignating subparagraph (C) as (B). Section 810 (relating to rules for certain reserves) is amended by striking out subsection (e). (6) Certain funded pension trusts.— (A) Exemption from taxation.— Section 501(c) (relating to list of exempt organizations) is amended by adding at the end thereof the following new paragraph: “(18) A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if— “(A) under the plan, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan, “(B) such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees, and “(C) such benefits do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan.” (B) Conforming amendments.— (i) Section 503(a)(1) (as amended by section 101(j)(7) Ante, p. 527. of this Act) is amended by inserting after subparagraph (B) thereof the following new paragraph: “(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.” (ii) Section 503 (as so amended) is amended by striking out “(c)(17)” each place it appears therein and inserting in lieu thereof “(c)(17) or (18)”. (7) Special rules for feeder organizations.— Section 502 (relating to feeder organizations) is amended to read as follows: “SEC. 502. FEEDER ORGANIZATIONS. “(a) General Rule.— An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501. “(b) Special Rule.— For purposes of this section, the term “trade or business” shall not include— “(1) the deriving of rents which would be excluded under section Ante, pp. 538, 537. 512(b)(3), if section 512 applied to the organization, “(2) any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation, or “(3) any trade or business which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.” (c) Activities Included as Unrelated Trade or Business.— 68A Stat. 172. Section 513 (relating to unrelated trade or business) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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) Unrelated Debt-Financed Income.— (1) In general.— Section 514 (relating to business leases) is 68A Stat. 172. 26 USC 514. amended by striking out so much thereof as precedes subsection (b) and inserting in lieu thereof the following: “SEC. 514. UNRELATED DEBT-FINANCED INCOME. “(a) Unrelated Debt-Financed Income and Deductions.— In computing under section 512 the unrelated business taxable income for Ante, pp. 537, 538. 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 or his delegate) 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. Post, pp. 638, 639, 642. “(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 Post, p. 649. 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 68A Stat. 170. 26 USC 512. 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; or “(D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section Ante, p. 541. 513(a). 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 or his delegate 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 or his delegate 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 subsection (f)). “(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 chapter 74, relating 68A Stat. 849. 26 USC 7121–7123. to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. Interest on any overpayment for a taxable year resulting from the application of subparagraph (B) after the actual use condition is satisfied shall be allowed and paid at the rate of 4 percent per annum in lieu of 6 percent per annum. “(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, except that in the case of any taxable year beginning before January 1, 1972, any indebtedness incurred before June 28, 1966, shall not be taken into account. In the case of an organization (other than a church or convention or association of churches) such indebtedness incurred before June 28, 1966, shall be taken into account if such indebtedness constitutes business lease indebtedness (as defined in subsection(g)). “(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. “(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 80 Stat. 4. 26 USC 501. 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.— For purposes of this section, the term ‘acquisition indebtedness’ does not include 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. “(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 or his delegate, 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. “(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 or his delegate to the extent proper to carry out the purposes of this section.” (2) Related Amendments.— (A) Section 48(a)(4) (relating to definition of section 38 76 Stat. 967. 26 USC 48. property) is amended by adding at the end thereof the following new sentence: “If the property is debt-financed property (as defined in section 514(c)), the basis or cost of such Post, p. 543. property for purposes of computing qualified investment under section 46(c) shall include only that percentage of 76 Stat. 963. the basis or cost which is the same percentage as is used under section 514(b), for the year the property is placed in service, in computing the amount of gross income to be taken into account during such taxable year with respect to such property.” (B) The second sentence of section 681(a) (relating to 68A Stat. 232. limitation on charitable deduction of taxable trusts) is amended by striking out the words “certain leases” and inserting in lieu thereof “certain property acquired with borrowed funds”. (C) Section 1443(a) (relating to withholding of tax on Ante, p 528. payments to foreign tax-exempt organizations) is amended by striking out “rents” and inserting in lieu thereof “income”. (3) Technical and conforming amendments.— (A) Subsections (b), (c), and (d) of section 514 (relating to business leases) are relettered as subsections (f), (g), and (h), respectively. (B) New subsection (f)(1) (old subsection (b)(1), relating to general rule for definition of business lease) is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (g)”. (C) The table of sections for part III of subchapter F of 68A Stat. 169; Ante, p. 492. chapter 1 (as redesignated by section 101(a) of this Act) is amended by striking out— “Sec. 514. Business leases.” and inserting in lieu thereof the following: “Sec. 514. Unrelated debt-financed income.” (e) Returns.— (1) In General.— Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new section: “SEC. 6050. RETURNS RELATING TO CERTAIN TRANSFERS TO EXEMPT ORGANIZATIONS. “(a) General Rule.— On or before the 90th day after the transfer of income producing property, the transferor shall make a return in compliance with the provisions of subsection (b) if the transferee is known by the transferor to be an organization referred to in section Ante, p. 536. 511 (a) or (b) and the property (without regard to any lien) has a fair market value in excess of $50,000. “(b) Form and Contents of Returns.— The return required by subsection (a) shall be in such form and shall set forth, in respect of the transfer, such information as the Secretary or his delegate prescribes by regulations as necessary for carrying out the provisions of the income tax laws.” (2) Technical Amendment.— The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following: “Sec. 6050. Returns relating to certain transfers to exempt organizations.” (f) Restriction on Examination of Churches.— Section 7605 (relating to time and place of examination) is amended by adding at the end thereof the following new subsection: “(c) Restriction on Examination of Churches.— No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to tax under part III of subchapter F of chapter 1 of this title (sec. 511 and following, relating to taxation of business income of exempt organizations) unless the Secretary or his delegate (such officer being no lower than a principal internal revenue officer for an internal revenue region) believes that such organization may be so engaged and so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.” (g) Effective Dates.— The amendments made by this section (other than by subsections (b)(3) and (e)) shall apply to taxable years beginning after December 31, 1969. The amendments made by subsection (b)(3) shall apply to taxable years beginning after December 31, 1970. The amendments made by subsection (e) shall apply with respect to transfers of property after December 31, 1969. Where an organization makes a bargain purchase of property before October 9, 1969, which is subject to a mortgage which was placed on the property more than 5 years before the purchase, and the organization paid the seller total amount no greater than the amount of the seller’s cost (including attorneys’ fees) directly related to the transfer of such property to the organization (but in any event no more than 10 percent of the value of the seller’s equity in the property), the indebtedness secured by such mortgage shall not be treated, notwithstanding the amendments made by subsection (d)(1), as acquisition indebtedness for purposes of section 514(c)(1) of the Internal Revenue Code of 1954 Ante, p. 545. during a period of 10 years following the date of the transaction.

11. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 title I · 83 Stat. 487

    1. Struck · 26 U.S.C. § 503(a)(2)

       Pub. L. 91–172, §§ 101(j)(8), 121(b)(6)(B)(ii), struck out reference to organizations described in section 501(c)(3)

    2. Inserted · 26 U.S.C. § 503(a)(2)

       Pub. L. 91–172, §§ 101(j)(8), 121(b)(6)(B)(ii), inserted references to organizations described in section 501(c)(18)

    Source evidence

    Code amendment note
    Subsec. (a)(2). Pub. L. 91–172, §§ 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).

    Enacted provision · exact public law
    TITLE I— TAX EXEMPT ORGANIZATIONS Subtitle A— Private Foundations SEC. 101. PRIVATE FOUNDATIONS. (a) In General.— Subchapter F of chapter 1 (relating to exempt 68A Stat. 163.. 26 USC 501–526. organizations) is amended by redesignating parts II, III, and IV as parts III, IV, and V, respectively, and by inserting after part I the following new part: “PART II— PRIVATE FOUNDATIONS “Sec. 507. Termination of private foundation status. “Sec. 508. Special rules with respect to section 501(c)(3) organizations. “Sec. 509. Private foundation defined. “SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS. “(a) General Rule.— Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if— “(1) such organization notifies the Secretary or his delegate (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) of its intent to accomplish such termination, or “(2) (A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax Post, p. 498. under chapter 42, and “(B) the Secretary or his delegate notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c), and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g). “(b) Special Rules.— “(1) Transfer to, or operation as, public charity.— The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if— “(A) such organization distributes all of its net assets to one or more organizations described in section 170(b)(1) Post, p. 550. (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or “(B) (i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969, “(ii) such organization notifies the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and “(iii) such organization establishes to the satisfaction of the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i). If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and chapter 42 shall not apply to such organization for any taxable year Post, p. 498. within such 60-month period for which it does meet such requirements. “(2) Transferee foundations.— For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization. “(c) Imposition of Tax.— There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— “(1) the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status 68A Stat. 163. 26 USC 501. of such foundation, or “(2) the value of the net assets of such foundation. “(d) Aggregate Tax Benefit.— “(1) In general.— For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— “(A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which 26 USC 1, 2001, 2501. would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors to the foundation after February 28, 1913, had been disallowed, and “(B) the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the Post, p. 558. corresponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and Post, p. 550. “(C) interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation. “(2) Substantial contributor.— “(A) Definition.— For purposes of paragraph (1), the term ‘substantial contributor’ means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term ‘substantial contributor’ also means the creator of the trust. “(B) Special rules.— For purposes of subparagraph (A)— “(i) each contribution or bequest shall be valued at fair market value on the date it was received, “(ii) in the case of a foundation which is in existence on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date, “(iii) an individual shall be treated as making all contributions and bequests made by his spouse, and “(iv) any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods. “(3) Regulations.— For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary or his delegate. “(e) Value of Assets.— For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation. “(f) Liability in Case of Transfers of Assets From Private Foundation.— For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation. “(g) Abatement of Taxes.— The Secretary or his delegate may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if— “(1) the private foundation distributes all of its net assets to Post, p. 550. one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or “(2) following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable 68A Stat. 163. 26 USC 501. or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary or his delegate receives certification from the appropriate State officer that such action has resulted in such preservation of assets. “SEC. 508. SPECIAL RULES WITH RESPECT TO SECTION 501(c)(3) ORGANIZATIONS. “(a) New Organizations Must Notify Secretary That They Are Applying for Recognition of Section 501(c)(3) Status.— Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)— “(1) unless it has given notice to the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that it is applying for recognition of such status, or “(2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary or his delegate by regulations for giving notice under this subsection. For purposes of paragraph (2), the time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(b) Presumption That Organizations Are Private Foundations.— Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary 68A Stat. 163. 26 USC 501. or his delegate, at such time and in such manner as the Secretary or his delegate may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. The time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(c) Exceptions.— “(1) Mandatory exceptions.— Subsections (a) and (b) shall not apply to— “(A) churches, their integrated auxiliaries, and conventions or associations of churches, or “(B) any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000. “(2) Exceptions by regulations.— The Secretary or his delegate may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both— “(A) educational organizations which normally maintain a regular faculty and curriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on; and “(B) any other class of organizations with respect to which the Secretary or his delegate determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations. “(d) Disallowance of Certain Charitable, etc., Deductions.— “(1) Gift or bequest to organizations subject to section 507(c) tax.— No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— Post, pp. 549, 558, 560–562. 26 USC 170, 545, 556, 642, 2055, 2106, 2522. “(A) by any person after notification is made under section 507(a), or “(B) by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. “(2) Gift or bequest to taxable private foundation, section 4947 trust, etc.— No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— “(A) to a private foundation or a trust described in section Post, p. 517. 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)(B) and (C)), or “(B) to any organization in a period for which it is not 68A Stat. 163. 26 USC 501. treated as an organization described in section 501(c)(3) by reason of subsection (a). “(3) Exception.— Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary or his delegate under section 507(g). “(e) Governing Instruments.— “(1) General rule.— A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are— “(A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the Post, p. 502. foundation to tax under section 4942, and “(B) to prohibit the foundation from engaging in any act of Post, p. 500. Post, p. 507. self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the Post, p. 511. Post, p. 513. foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). “(2) Special rules for existing private foundations.— In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply— “(A) to any taxable year beginning before January 1, 1972, “(B) to any period after December 31, 1971, during the pendency of any judicial proceeding begun before January 1, 1972, by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and “(C) to any period after the termination of any judicial proceeding described in subparagraph (B) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1). “SEC. 509. PRIVATE FOUNDATION DEFINED. “(a) General Rule.— For purposes of this title, the term ‘private foundation’ means a domestic or foreign organization described in section 501(c)(3) other than— “(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); “(2) an organization which— “(A) normally receives more than one-third of its support in each taxable year from any combination of— “(i) gifts, grants, contributions, or membership fees, and “(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business Post, pp. 541, 542. (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section Post, p. 553. 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental Post, p. 515. units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses Post, p. 550. (vii) and (viii)), and “(B) normally receives not more than one-third of its support in each taxable year from gross investment income (as defined in subsection (e)); “(3) an organization which— “(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), “(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and “(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and “(4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph 68A Stat. 163. 26 USC 501. (2) if it were an organization described in section 501(c)(3). “(b) Continuation of Private Foundation Status.— For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507. “(c) Status of Organization After Termination of Private Foundation Status.— For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination. “(d) Definition of Support.— For purposes of this part and chapter 42, the term ‘support’ includes (but is not limited to)— Post, p. 498. “(1) gifts, grants, contributions, or membership fees, “(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), Post, pp. 541, 542. “(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business, “(4) gross investment income (as defined in subsection (e)), “(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and “(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit. “(e) Definition of Gross Investment Income.— For purposes of subsection (d), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the Post, p. 536. tax imposed by section 511.” (b) Amendment of Subtitle D.— Subtitle D (relating to miscellaneous 26 USC 4001–4931. excise taxes) is amended by adding at the end thereof the following new chapter: “CHAPTER 42.— PRIVATE FOUNDATIONS “Sec. 4940. Excise tax based on investment income. “Sec. 4941. Taxes on self-dealing. “Sec. 4942. Taxes on failure to distribute income. “Sec. 4943. Taxes on excess business holdings. “Sec. 4944. Taxes on investments which jeopardize charitable purpose. “Sec. 4945. Taxes on taxable expenditures. “Sec. 4946. Definitions and special rules. “Sec. 4947. Application of taxes to certain nonexempt trusts. “Sec. 4948. Application of taxes and denial of exemption with respect to certain foreign organizations. “SEC. 4940. EXCISE TAX BASED ON INVESTMENT INCOME. “(a) Tax-Exempt Foundations.— There is hereby imposed on each private foundation which is exempt from taxation under section 501(a) 68A Stat. 163. 26 USC 501. for the taxable year, with respect to the carrying on of its activities, a tax equal to 4 percent of the net investment income of such foundation for the taxable year. “(b) Taxable Foundations.— There is hereby imposed on each private foundation which is not exempt from taxation under section 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to— “(1) the amount (if any) by which the sum of (A) the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus (B) the amount of the tax which would have been imposed under section 511 for the taxable year if such private foundation had been exempt from taxation under section 501(a), exceeds “(2) the tax imposed under subtitle A on such private foundation for the taxable year. “(c) Net Investment Income Defined.— “(1) In general.— For purposes of subsection (a), the net investment income is the amount by which (A) the sum of the gross investment income and the net capital gain exceeds (B) the deductions allowed by paragraph (3). Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A. “(2) Gross investment income.— For purposes of paragraph (1), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. “(3) Deductions.— “(A) In general.— For purposes of paragraph (1), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of gross investment income or for the management, conservation, or maintenance of property held for the production of such income, determined with the modifications set forth in subparagraph (B). “(B) Modifications.— For purposes of subparagraph (A)— “(i) The deduction provided by section 167 shall be Post, pp. 625, 649. allowed, but only on the basis of the straight line method of depreciation. “(ii) The deduction for depletion provided by section 611 shall be allowed, but such deduction shall be determined 68A Stat. 207. 26 USC 611. without regard to section 613 (relating to percentage depletion). Post, p. 629. “(4) Capital gains and losses.— For purposes of paragraph (1) in determining net capital gain— “(A) There shall be taken into account only gains and losses from the sale or other disposition of property used for the production of interest, dividends, rents, and royalties, and property used for the production of income included in computing the tax imposed by section 511 (except to the extent Post, p. 536. gain or loss from the sale or other disposition of such property is taken into account for purposes of such tax). “(B) The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(C) Losses from sales or other dispositions of property shall be allowed only to the extent of gains from such sales or other dispositions, and there shall be no capital loss carryovers. “(5) Tax-exempt income.— For purposes of this section, net investment income shall be determined by applying section 103 Post, p. 656. (relating to interest on certain governmental obligations) and section 265 (relating to expenses and interest relating to tax-exempt 68A Stat. 78; 78 Stat. 56. income). “SEC. 4941. TAXES ON SELF-DEALING. “(a) Initial Taxes.— “(1) On self-dealer.— There is hereby imposed a tax on each act of self-dealing between a disqualified person and a private foundation. The rate of tax shall be equal to 5 percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participates in the act of self-dealing. In the case of a government official (as defined in section 4946(c)), a tax shall be imposed by this paragraph only if such disqualified person participates in the act of self-dealing knowing that it is such an act. “(2) On foundation manager.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in an act of self-dealing between a disqualified person and a private foundation, knowing that it is such an act, a tax equal to 2½ percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the act of self-dealing. “(b) Additional Taxes.— “(1) On self-dealer.— In any case in which an initial tax is imposed by subsection (a)(1) on an act of self-dealing by a disqualified person with a private foundation and the act is not corrected within the correction period, there is hereby imposed a tax equal to 200 percent of the amount involved. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participated in the act of self-dealing. “(2) On foundation manager.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount involved. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under any paragraph of subsection (a) or (b) with respect to any one act of self-dealing, all such persons shall be jointly and severally liable under such paragraph with respect to such act. “(2) $10,000 limit for management.— With respect to any one act of self-dealing, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $10,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Self-Dealing.— “(1) In general.— For purposes of this section, the term ‘self-dealing’ means any direct or indirect— “(A) sale or exchange, or leasing, of property between a private foundation and a disqualified person; “(B) lending of money or other extension of credit between a private foundation and a disqualified person; “(C) furnishing of goods, services, or facilities between a private foundation and a disqualified person; “(D) payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person; “(E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and “(F) agreement by a private foundation to make any payment of money or other property to a government official (as defined in section 4946(c)), other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period. “(2) Special rules.— For purposes of paragraph (1)— “(A) the transfer of real or personal property by a disqualified person to a private foundation shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the foundation assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer; “(B) the lending of money by a disqualified person to a private foundation shall not be an act of self-dealing if the loan is without interest or other charge and if the proceeds of the loan are used exclusively for purposes specified in 68A Stat. 163. 26 USC 501. section 501(c)(3); “(C) the furnishing of goods, services, or facilities by a disqualified person to a private foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities so furnished are used exclusively for purposes specified in section 501(c)(3); 68A Stat 163. 26 USC 501. “(D) the furnishing of goods, services, or facilities by a private foundation to a disqualified person shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public; “(E) except in the case of a government official (as defined in section 4946(c)), the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive; “(F) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946(a)), pursuant to any liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization, shall not be an act of self-dealing if all of the securities of the same class as that held by the foundation are subject to the same terms and such terms provide for receipt by the foundation of no less than fair market value; and “(G) in the case of a government official (as defined in section 4946(c)), paragraph (1) shall in addition not apply to— “(i) prizes and awards which are subject to the provisions of section 74(b), if the recipients of such prizes and awards are selected from the general public, “(ii) scholarships and fellowship grants which are subject to the provisions of section 117(a) and are to be used for study at an educational institution described in section 151(e)(4), “(iii) any annuity or other payment (forming part of a stock-bonus, pension, or profit-sharing plan) by a trust which is a qualified trust under section 401, “(iv) any annuity or other payment under a plan which meets the requirements of section 404(a)(2), “(v) any contribution or gift (other than a contribution or gift of money) to, or services or facilities made available to, any such individual, if the aggregate value of such contributions, gifts, services, and facilities to, or made available to, such individual during any calendar year does not exceed $25, “(vi) any payment made under chapter 41 of title 5, United States Code, or 80 Stat. 432. 5 USC 4101–4118. “(vii) any payment or reimbursement of traveling expenses for travel solely from one point in the United States to another point in the United States, but only if such payment or reimbursement does not exceed the actual cost of the transportation involved plus an amount for all other traveling expenses not in excess of 125 percent of the maximum amount payable under section 5702(a) of title 5, United States Code, for like travel Ante, p. 190. by employees of the United States. “(e) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection 68A Stat. 770. 26 USC 6212. (a)(1) under section 6212, or (B) the date on which correction of the act of self-dealing is completed. “(2) Amount involved.— The term ‘amount involved’ means, with respect to any act of self-dealing, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in subsection (d)(2)(E), the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value— “(A) in the case of the taxes imposed by subsection (a), shall be determined as of the date on which the act of self-dealing occurs; and “(B) in the case of the taxes imposed by subsection (b), shall be the highest fair market value during the correction period. “(3) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any act of self-dealing, undoing the transaction to the extent possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. “(4) Correction Period.— The term ‘correction period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the act of self-dealing. “SEC. 4942. TAXES ON FAILURE TO DISTRIBUTE INCOME. “(a) Initial Tax.— There is hereby imposed on the undistributed income of a private foundation for any taxable year, which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period), a tax equal to 15 percent of the amount of such income remaining undistributed at the beginning of such second (or succeeding) taxable year. The tax imposed by this subsection shall not apply to the undistributed income of a private foundation— “(1) for any taxable year for which it is an operating foundation (as defined in subsection (j)(3)), or “(2) to the extent that the foundation failed to distribute any amount solely because of an incorrect valuation of assets under subsection (e), if— “(A) the failure to value the assets properly was not willful and was due to reasonable cause, “(B) such amount is distributed as qualifying distributions (within the meaning of subsection (g)) by the foundation during the allowable distribution period (as defined in subsection (j)(4)), “(C) the foundation notifies the Secretary or his delegate that such amount has been distributed (within the meaning of subparagraph (B)) to correct such failure, and “(D) such distribution is treated under subsection (h)(2) as made out of the undistributed income for the taxable year for which a tax would (except for this paragraph) have been imposed under this subsection. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) on the undistributed income of a private foundation for any taxable year, if any portion of such income remains undistributed at the close of the correction period, there is hereby imposed a tax equal to 100 percent of the amount remaining undistributed at such time. “(c) Undistributed Income.— For purposes of this section, the Definition. term ‘undistributed income’ means, with respect to any private foundation for any taxable year as of any time, the amount by which— “(1) the distributable amount for such taxable year, exceeds “(2) the qualifying distributions made before such time out of such distributable amount. “(d) Distributable Amount.— For purposes of this section, the Definition. term ‘distributable amount’ means, with respect to any foundation for any taxable year, an amount equal to— “(1) the minimum investment return or the adjusted net income (whichever is higher), reduced by “(2) the sum of the taxes imposed on such private foundation for the taxable year under subtitle A and section 4940. 26 USC 1–1563. “(e) Minimum Investment return.— “(1) In general.— For purposes of subsection (d), the minimum investment return for any private foundation for any taxable year is the amount determined by multiplying— “(A) the excess of (i) the aggregate fair market value of all assets of the foundation other than those being used (or held for use) directly in carrying out the foundation’s exempt purpose over (ii) the acquisition indebtedness with respect to such assets (determined under section 514(c)(1), but Post, p. 545. without regard to the taxable year in which the indebtedness was incurred), by “(B) the applicable percentage for such year, determined under paragraph (3). “(2) Valuation.— For purposes of paragraph (1)(A), the fair market value of securities for which market quotations are readily available shall be determined on a monthly basis. For all other assets, the fair market value shall be determined at such times and in such manner as the Secretary or his delegate shall by regulations prescribe. “(3) Applicable percentage.— For purposes of paragraph (1)(B), the applicable percentage for taxable years beginning in 1970 is 6 percent. The applicable percentage for any taxable year beginning after 1970 shall be determined and published by the Secretary or his delegate and shall bear a relationship to 6 percent which the Secretary or his delegate determines to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1969. “(4) Transitional rules.— “For special rules applicable to organizations created before May 27, 1969, see section 101(1)(3) of the Tax Reform Act of 1969. Post, p. 534. “(f) Adjusted Net Income.— “(1) Defined.— For purposes of subsection (d), the term ‘adjusted net income’ means the excess (if any) of— “(A) the gross income for the taxable year (determined with the income modifications provided by paragraph (2)), over “(B) the sum of the deductions (determined with the deduction modifications provided by paragraph (3)) which would be allowed to a corporation subject to the tax imposed 78 Stat. 25, 118. 26 USC 11. by section 11 for the taxable year. “(2) Income modifications.— The income modifications referred to in paragraph (1)(A) are as follows: “(A) section 103 (relating to interest on certain governmental obligations) shall not apply, “(B) capital gains and losses from the sale or other disposition of property shall be taken into account only in an amount equal to any net short-term capital gain for the taxable year; and “(C) there shall be taken into account— “(i) amounts received or accrued as repayments of amounts which were taken into account as a qualifying distribution within the meaning of subsection (g)(1)(A) for any taxable year; “(ii) notwithstanding subparagraph (B), amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of such property was taken into account as a qualifying distribution (within the meaning of subsection (g)(1)(B)) for any taxable year; and “(iii) any amount set aside under subsection (g)(2) to the extent it is determined that such amount is not necessary for the purposes for which it was set aside. “(3) Deduction modifications.— The deduction modifications referred to in paragraph (1)(B) are as follows: “(A) no deduction shall be allowed other than all the ordinary and necessary expenses paid or incurred for the production or collection of gross income or for the management, conservation, or maintenance of property held for the production of such income and the allowances for depreciation and depletion determined under section 4940(c)(3)(B), and “(B) section 265 (relating to expenses and interest relating to tax-exempt interest) shall not apply. “(4) Transitional rule.— For purposes of paragraph (2)(B), the basis (for purposes of determining gain) of property held by a private foundation on December 31, 1969, and continuously thereafter to the date of its disposition, shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(g) Qualifying Distributions Defined.— “(1) In general.— For purposes of this section, the term ‘qualifying distribution’ means— “(A) any amount (including administrative expenses) paid to accomplish one or more purposes described in section Post, p. 553. 170(c)(2)(B), other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or “(B) any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in section 170(c)(2)(B). Post, p. 553. “(2) Certain set-asides.— Subject to such terms and conditions as may be prescribed by the Secretary or his delegate, an amount set aside for a specific project which comes within one or more purposes described in section 170(c)(2)(B) may be treated as a qualifying distribution, but only if, at the time of the set-aside, the private foundation establishes to the satisfaction of the Secretary or his delegate that— “(A) the amount will be paid for the specific project within 5 years, and “(B) the project is one which can be better accomplished by such set-aside than by immediate payment of funds. For good cause shown, the period for paying the amount set aside may be extended by the Secretary or his delegate. “(3) Certain contributions to section 501(c)(3) organizations.— For purposes of this section, the term ‘qualifying distribution’ includes a contribution to a section 501(c)(3) organization 68A Stat. 163. 26 USC 501. described in paragraph (1)(A)(i) or (ii) if— “(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section 501(c)(3) organization were a private foundation which is not an operating foundation), and “(B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization. “(h) Treatment of Qualifying Distributions.— “(1) In general.— Except as provided in paragraph (2), any qualifying distribution made during a taxable year shall be treated as made— “(A) first out of the undistributed income of the immediately preceding taxable year (if the private foundation was subject to the tax imposed by this section for such preceding taxable year) to the extent thereof, “(B) second out of the undistributed income for the taxable year to the extent thereof, and “(C) then out of corpus. For purposes of this paragraph, distributions shall be taken into account in the order of time in which made. “(2) Correction of deficient distributions for prior taxable years, etc.— In the case of any qualifying distribution which (under paragraph (1)) is not treated as made out of the undistributed income of the immediately preceding taxable year, the foundation may elect to treat any portion of such distribution as made out of the undistributed income of a designated prior taxable year or out of corpus. The election shall be made by the foundation at such time and in such manner as the Secretary or his delegate shall by regulations prescribe. “(i) Adjustment of Distributable Amount Where Distributions During Prior Years Have Exceeded Income.— “(1) In general.— If, for the taxable years in the adjustment period for which an organization is a private foundation— “(A) the aggregate qualifying distributions treated (under subsection (h)) as made out of the undistributed income for such taxable year or as made out of corpus (except to the extent subsection (g)(3) with respect to the recipient private Post, p. 552. foundation or section 170(b)(1)(E)(ii) applies) during such taxable years, exceed “(B) the distributable amounts for such taxable years (determined without regard to this subsection), then, for purposes of this section (other than subsection (h)), the distributable amount for the taxable year shall be reduced by an amount equal to such excess. “(2) Taxable years in adjustment period.— For purposes of paragraph (1), with respect to any taxable year of a private foundation the taxable years in the adjustment period are the taxable years (not exceeding 5) beginning after December 31, 1969, and immediately preceding the taxable year, “(j) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to the undistributed income for any taxable year, the period beginning with the first day of the taxable year and ending on the date of mailing of a notice of deficiency with respect to the tax 68A Stat. 770. 26 USC 6212. imposed by subsection (a) under section 6212. “(2) Correction period.— The term ‘correction period’ means, with respect to any private foundation for any taxable year, the period beginning with the first day of the taxable year and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(3) Operating foundation.— For purposes of this section, the term ‘operating foundation’ means any organization— “(A) which makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated equal to substantially all of its adjusted net income (as defined in subsection (f)); and “(B) (i) substantially more than half of the assets of which are devoted directly to such activities or to functionally related businesses (as defined in paragraph (5)), or to both, or are stock of a corporation which is controlled by the foundation and substantially all of the assets of which are so devoted, “(ii) which normally makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated in an amount not less than two-thirds of its minimum investment return (as defined in subsection (e)), or “(iii) substantially all of the support (other than gross investment income as defined in section 509(e)) of which is Ante, p. 496. normally received from the general public and from 5 or more exempt organizations which are not described in section 4946 (a)(1)(H) with respect to each other or the recipient foundation; not more than 25 percent of the support (other than gross investment income) of which is normally received from any one such exempt organization; and not more than half of the support of which is normally received from gross investment income. “(4) Allowable distribution period.— The term ‘allowable Definition. distribution period’ means, with respect to any private foundation, the period beginning with the first day of the first taxable year following the taxable year in which the incorrect valuation (described in subsection (a)(2)) occurred and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (a)) under section 6212 extended 68A Stat. 770. 26 USC 6212. by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(5) Functionally related business.— The term ‘functionally Definition. related business’ means— “(A) a trade or business which is not an unrelated trade or business (as defined in section 513), or Post, pp. 541, 542. “(B) an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exempt purposes of the organization. “SEC. 4943. TAXES ON EXCESS BUSINESS HOLDINGS. “(a) Initial Tax.— “(1) Imposition.— There is hereby imposed on the excess business holdings of any private foundation in a business enterprise during any taxable year which ends during the taxable period a tax equal to 5 percent of the value of such holdings. “(2) Special rules.— The tax imposed by paragraph (1)— “(A) shall be imposed on the last day of the taxable year, but “(B) with respect to the private foundation’s holdings in any business enterprise, shall be determined as of that day during the taxable year when the foundation’s excess holdings in such enterprise were the greatest. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) with respect to the holdings of a private foundation in any business enterprise, if, at the close of the correction period with respect to such holdings, the foundation still has excess business holdings in such enterprise, there is hereby imposed a tax equal to 200 percent of such excess business holdings. “(c) Excess Business Holdings.— For purposes of this section— Definition. “(1) In general.— The term ‘excess business holdings’ means, with respect to the holdings of any private foundation in any business enterprise, the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings. “(2) Permitted holdings in a corporation.— “(A) In general.— The permitted holdings of any private foundation in an incorporated business enterprise are— “(i) 20 percent of the voting stock, reduced by “(ii) the percentage of the voting stock owned by all disqualified persons. In any case in which all disqualified persons together do not own more than 20 percent of the voting stock of an incorporated business enterprise, nonvoting stock held by the private foundation shall also be treated as permitted holdings. “(B) 35 percent rule where third person has effective control of enterprise.— If— “(i) the private foundation and all disqualified persons together do not own more than 35 percent of the voting stock of an incorporated business enterprise, and “(ii) it is established to the satisfaction of the Secretary or his delegate that effective control of the corporation is in one or more persons who are not disqualified persons with respect to the foundation, then subparagraph (A) shall be applied by substituting 35 percent for 20 percent. “(C) 2 percent de minimis rule.— A private foundation shall not be treated as having excess business holdings in any corporation in which it (together with all other private foundations which are described in section 4946(a)(1)(H)) owns not more than 2 percent of the voting stock and not more than 2 percent in value of all outstanding shares of all classes of stock. “(3) Permitted holdings in partnerships, etc.— The permitted holdings of a private foundation in any business enterprise which is not incorporated shall be determined under regulations prescribed by the Secretary or his delegate. Such regulations shall be consistent in principle with paragraphs (2) and (4), except that— “(A) in the case of a partnership or joint venture, ‘profits interest’ shall be substituted for ‘voting stock’, and ‘capital interest’ shall be substituted for ‘nonvoting stock’, “(B) in the case of a proprietorship, there shall be no permitted holdings, and “(C) in any other case, ‘beneficial interest’ shall be substituted for ‘voting stock’. “(4) Present holdings.— “(A) (i) In applying this section with respect to the holdings of any private foundation in a business enterprise, if such foundation and all disqualified persons together have holdings in such enterprise in excess of 20 percent of the voting stock on May 26, 1969, the percentage of such holdings shall be substituted for ‘20 percent,’ and for ‘35 percent’ (if the percentage of such holdings is greater than 35 percent), wherever it appears in paragraph (2), but in no event shall the percentage so substituted be more than 50 percent. “(ii) If the percentage of the holdings of any private foundation and all disqualified persons together in a business enterprise (or if the percentage of the holdings of the private foundation in such enterprise) decreases for any reason, clause (i) and subparagraph (D) shall, except as provided in the next sentence, be applied for all periods after such decrease by substituting such decreased percentage for the percentage held on May 26, 1969, but in no event shall the percentage substituted be less than 20 percent. For purposes of this clause, any decrease in percentage holdings attributable to issuances of stock (or to issuances of stock coupled with redemptions of stock) shall be determined only as of the close of each taxable year of the private foundation unless the aggregate of the percentage decreases attributable to the issuances of stock (or such issuances and redemptions) during such taxable year equals or exceeds 1 percent. “(iii) The percentage substituted under clause (i), and any percentage substituted under subparagraph (D), shall be applied both with respect to the voting stock and, separately, with respect to the value of all outstanding shares of all classes of stock. “(iv) In the case of any merger, recapitalization, or other reorganization involving one or more business enterprises, the application of clauses (i), (ii), and (iii) shall be determined under regulations prescribed by the Secretary or his delegate. “(B) Any interest in a business enterprise which a private foundation holds on May 26, 1969, if the private foundation on such date has excess business holdings, shall (while held by the foundation) be treated as held by a disqualified person (rather than by the private foundation)— “(i) during the 20-year period beginning on such date, if the private foundation has more than a 95 percent voting stock interest on such date, “(ii) except as provided in clause (i), during the 15-year period beginning on such date, if the foundation and all disqualified persons have more than a 75 percent voting stock interest (or more than a 75 percent profits or beneficial interest in the case of any unincorporated enterprise) on such date or more than a 75 percent interest in the value of all outstanding shares of all classes of stock (or more than a 75 percent capital interest in the case of a partnership or joint venture) on such date, or “(iii) during the 10-year period beginning on such date, in any other case. “(C) The 20-year, 15-year, and 10-year periods described in subparagraph (B) for the disposition of excess business holdings shall be suspended during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to allow disposition of such holdings. “(D) (i) If, at any time during the second phase, all disqualified persons together have holdings in a business enterprise in excess of 2 percent of the voting stock of such enterprise, then subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘50 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(ii) If, immediately before the close of the second phase, clause (i) of this subparagraph did not apply with respect to a business enterprise, then for all periods after the close of the second phase subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘35 percent, or if at any time after the close of the second phase all disqualified persons together have had holdings in such enterprise which exceed 2 percent of the voting stock, 35 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(iii) For purposes of this subparagraph, the term ‘second phase’ means the 15-year period immediately following the 20-year, 15-year, or 10-year period described in subparagraph (B), whichever applies, as modified by subparagraph (C). “(E) Clause (ii) of subparagraph (B) shall not apply with respect to any business enterprise if before January 1, 1971, one or more individuals who are substantial contributors (or members of the family (within the meaning of section 1946(d)) of one or more substantial contributors) to the private foundation and who on May 26, 1969, held more than 15 percent of the voting stock of the enterprise elect, in such manner as the Secretary or his delegate may by regulations prescribe, not to have such clause (ii) apply with respect to such enterprise. “(5) Holdings acquired by trust or will.— Paragraph (4) (other than subparagraph (B)(i)) shall apply to any interest in a business enterprise which a private foundation acquires under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter, as if such interest were held on May 26, 1969, except that the 15-year and 10-year periods prescribed in clauses (ii) and (iii) of paragraph (4)(B) shall commence with respect to such interest on the date of distribution under the trust or will in lieu of May 26, 1969. “(6) 5-year period to dispose of gifts, bequests, etc.— Except as provided in paragraph (5), if, after May 26, 1969, there is a change in the holdings in a business enterprise (other than by purchase by the private foundation or by a disqualified person) which causes the private foundation to have— “(A) excess business holdings in such enterprise, the interest of the foundation in such enterprise (immediately after such change) shall (while held by the foundation) be treated as held by a disqualified person (rather than by the foundation) during the 5-year period beginning on the date of such change in holdings; or “(B) an increase in excess business holdings in such enterprise (determined without regard to subparagraph (A)), subparagraph (A) shall apply, except that the excess holdings immediately preceding the increase therein shall not be treated, solely because of such increase, as held by a disqualified person (rather than by the foundation). “(d) Definitions; Special Rules.— For purposes of this section— “(1) Business holdings.— In computing the holdings of a private foundation, or a disqualified person (as defined in section 4946) with respect thereto, in any business enterprise, any stock or other interest owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. The preceding sentence shall not apply with respect to an income or remainder interest of a private foundation in a trust described in section 4947(a)(2), but only if, in the case of property transferred in trust after May 26, 1969, such foundation holds only an income interest or only a remainder interest in such trust. “(2) Taxable period.— The term ‘taxable period’ means, with respect to any excess business holdings of a private foundation in a business enterprise, the period beginning on the first day on which there are such excess holdings and ending on the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a) under section 6212 in respect of such holdings. 68A Stat. 770. 26 USC 6212. “(3) Correction period.— The term ‘correction period’ means, with respect to excess business holdings of a private foundation in a business enterprise, the period ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit orderly disposition of such excess business holdings. “(4) Business enterprise.— The term ‘business enterprise’ does not include— “(A) a functionally related business (as defined in section 4942(j)(5)), or “(B) a trade or business at least 95 percent of the gross income of which is derived from passive sources. For purposes of subparagraph (B), gross income from passive sources includes the items excluded by section 512(b)(1), (2), (3), and (5), and income from the sale of goods (including Post, p. 538. 26 USC 512. charges or costs passed on at cost to purchasers of such goods or income received in settlement of a dispute concerning or in lieu of the exercise of the right to sell such goods) if the seller does not manufacture, produce, physically receive or deliver, negotiate sales of, or maintain inventories in such goods. “SEC. 4944. TAXES ON INVESTMENTS WHICH JEOPARDIZE CHARITABLE PURPOSE. “(a) Initial Taxes.— “(1) On the private foundation.— If a private foundation invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes, there is hereby imposed on the making of such investment a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in the making of the investment, knowing that it is jeopardizing the carrying out of any of the foundation’s exempt purposes, a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the making of the investment. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on the making of an investment and such investment is not removed from jeopardy within the correction period, there is hereby imposed a tax equal to 25 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the removal from jeopardy, there is hereby imposed a tax equal to 5 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the removal from jeopardy. “(c) Exception for Program-Related Investments.— For purposes of this section, investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c) Post, p. 553. (2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes. “(d) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to any one investment, all such persons shall be jointly and severally liable under such paragraph with respect to such investment. “(2) Limit for management.— With respect to any one investment, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(e) Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which the amount is so invested and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a)(1) under section 68A Stat. 770. 26 USC 6212. 6212, or (B) the date on which the amount so invested is removed from jeopardy. “(2) Removal from jeopardy.— An investment which jeopardizes the carrying out of exempt purposes shall be considered to be removed from jeopardy when such investment is sold or otherwise disposed of, and the proceeds of such sale or other disposition are not investments which jeopardize the carrying out of exempt purposes. “(3) Correction period.— The term ‘correction period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which such investment is entered into and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about removal from jeopardy. “SEC. 4945. TAXES ON TAXABLE EXPENDITURES. “(a) Initial Taxes.— “(1) On the foundation.— There is hereby imposed on each taxable expenditure (as defined in subsection (d)) a tax equal to 10 percent of the amount thereof. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— There is hereby imposed on the agreement of any foundation manager to the making of an expenditure, knowing that it is a taxable expenditure, a tax equal to 2½ percent of the amount thereof, unless such agreement is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who agreed to the making of the expenditure. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the correction period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount of the taxable expenditure. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to the making of a taxable expenditure, all such persons shall be jointly and severally liable under such paragraph with respect to such expenditure. “(2) Limit for management.— With respect to any one taxable expenditure, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Taxable Expenditure.— For purposes of this section, the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation— “(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e), “(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive, “(3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g), “(4) as a grant to an organization (other than an organization described in paragraph (1), (2), or (3) of section 509(a)), unless Ante, p. 496. the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or “(5) for any purpose other than one specified in section 170(c)(2)(B). Post, p. 553. “(e) Activities Within Subsection (d)(1).— For purposes of subsection (d)(1), the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation for— “(1) any attempt to influence any legislation through an attempt to affect the opinion of the general public or any segment thereof, and “(2) any attempt to influence legislation through communication with any member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of the legislation (except technical advice or assistance provided to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be), other than through making available the results of nonpartisan analysis, study, or research. Paragraph (2) of this subsection shall not apply to any amount paid or incurred in connection with an appearance before, or communication to, any legislative body with respect to a possible decision of such body which might affect the existence of the private foundation, its powers and duties, its tax-exempt status, or the deduction of contributions to such foundation. “(f) Nonpartisan Activities Carried on by Certain Organizations.— Subsection (d)(2) shall not apply to any amount paid or incurred by any organization— “(1) which is described in section 501(c)(3) and exempt from taxation under section 501(a), “(2) the activities of which are nonpartisan, are not confined to one specific election period, and are carried on in 5 or more States, “(3) substantially all of the income of which is expended directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, “(4) substantially all of the support (other than gross investment Ante, p. 496. income as defined in section 509(e)) of which is received from exempt organizations, the general public, governmental Post, p. 553. units described in section 170(c)(1), or any combination of the foregoing; not more than 25 percent of such support is received from any one exempt organization (for this purpose treating private foundations which are described in section 4946(a)(1)(H) with respect to each other as one exempt organization); and not more than half of the support of which is received from gross investment income, and “(5) contributions to which for voter registration drives are not subject to conditions that they may be used only in specified States, possessions of the United States, or political subdivisions or other areas of any of the foregoing, or the District of Columbia, or that they may be used in only one specific election period. In determining whether the organization meets the requirements of paragraph (4) for any taxable year of such organization, there shall be taken into account the support received by such organization during such taxable year and during the immediately preceding 4 taxable years of such organization (excluding therefrom any preceding taxable year which begins before January 1, 1970). Subsection (d)(4) shall not apply to any grant to an organization which meets the requirements of this subsection. “(g) Individual Grants.— Subsection (d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary or his delegate, if it is demonstrated to the satisfaction of the Secretary or his delegate that— “(1) the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for study at an educational institution described in section 151(e)(4), “(2) the grant constitutes a prize or award which is subject to the provisions of section 74(b), if the recipient of such prize or award is selected from the general public, or “(3) the purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. “(h) Expenditure Responsibility.— The expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures— “(1) to see that the grant is spent solely for the purpose for which made, “(2) to obtain full and complete reports from the grantee on how the funds are spent, and “(3) to make full and detailed reports with respect to such expenditures to the Secretary or his delegate. “(i) Other Definitions.— For purposes of this section— “(1) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any taxable expenditure, (A) recovering part or all of the expenditure to the extent recovery is possible, and where full recovery is not possible such additional corrective action as is prescribed by the Secretary or his delegate by regulations, or (B) in the case of a failure to comply with subsection (h)(2) or (h)(3), obtaining or making the report in question. “(2) Correction period.— The term ‘correction period’ means, with respect to any taxable expenditure, the period beginning with the date on which the taxable expenditure occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— 68A Stat. 770. 26 USC 6212. “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the taxable expenditure (except that such determination shall not be made with respect to any taxable expenditure within the meaning of paragraph (1), (2), (3), or (4) of subsection (d) because of any action by an appropriate State officer as defined in section 6104(c)(2)). Post, p. 523. “SEC. 4946. DEFINITIONS AND SPECIAL RULES. “(a) Disqualified Person.— “(1) In general.— For purposes of this chapter, the term ‘disqualified person’ means, with respect to a private foundation, a person who is— “(A) a substantial contributor to the foundation, “(B) a foundation manager (within the meaning of subsection (b)(1)), “(C) an owner of more than 20 percent of— “(i) the total combined voting power of a corporation, “(ii) the profits interest of a partnership, or “(iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, “(D) a member of the family (as defined in subsection (d)) of any individual described in subparagraph (A), (B), or (C), “(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power, “(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the profits interest, “(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest, “(H) only for purposes of section 4943, a private foundation— “(i) which is effectively controlled (directly or indirectly) by the same person or persons who control the private foundation in question, or “(ii) substantially all of the contributions to which were made (directly or indirectly) by the same person or persons described in subparagraph (A), (B), or (C), or members of their families (within the meaning of subsection (d)), who made (directly or indirectly) substantially all of the contributions to the private foundation in question, and “(I) only for purposes of section 4941, a government official (as defined in subsection (c)). “(2) Substantial contributors.— For purposes of paragraph (1), the term ‘substantial contributor’ means a person who is Ante, p. 493. described in section 507(d)(2). “(3) Stockholdings.— For purposes of paragraphs (1)(C)(i) and (1)(E), there shall be taken into account indirect stockholdings 68A Stat. 78. 26 USC 267. which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(4) Partnerships; trusts.— For purposes of paragraphs (1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(b) Foundation Manager.— For purposes of this chapter, the term ‘foundation manager’ means, with respect to any private foundation— “(1) an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), and “(2) with respect to any act (or failure to act), the employees of the foundation having authority or responsibility with respect to such act (or failure to act). “(c) Government Official.— For purposes of subsection (a)(1)(I) and section 4941, the term ‘government official’ means, with respect to an act of self-dealing described in section 4941, an individual who, at the time of such act, holds any of the following offices or positions (other than as a ‘special Government employee’, as defined in section 76 Stat. 1221; 82 Stat. 1115. 202(a) of title 18, United States Code): “(1) an elective public office in the executive or legislative branch of the Government of the United States, “(2) an office in the executive or judicial branch of the Government of the United States, appointment to which was made by the President, “(3) a position in the executive, legislative, or judicial branch of the Government of the United States— “(A) which is listed in schedule C of rule VI of the Civil Service Rules, or “(B) the compensation for which is equal to or greater than the lowest rate of compensation prescribed for GS–16 of the General Schedule under section 5332 of title 5, United States Code, 5 USC 5332 note. “(4) a position under the House of Representatives or the Senate of the United States held by an individual receiving gross compensation at an annual rate of $15,000 or more, “(5) an elective or appointive public office in the executive, legislative, or judicial branch of the government of a State, possession of the United States, or political subdivision or other area of any of the foregoing, or of the District of Columbia, held by an individual receiving gross compensation at an annual rate of $15,000 or more, or “(6) a position as personal or executive assistant or secretary to any of the foregoing. “(d) Members of Family.— For purposes of subsection (a)(1), the family of any individual shall include only his spouse, ancestors, lineal descendants, and spouses of lineal descendants. “SEC. 4947. APPLICATION OF TAXES TO CERTAIN NONEXEMPT TRUSTS. “(a) Application of Tax.— “(1) Charitable trusts.— For purposes of part II of subchapter F of chapter 1 (other than section 508(a), (b), and (c)) Ante, p. 492. and for purposes of this chapter, a trust which is not exempt from taxation under section 501(a), all of the unexpired interests in 68A Stat. 163. 26 USC 501. which are devoted to one or more of the purposes described in section 170(c)(2)(B), and for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a) Post, pp. 549, 558, 560–562. (2), or 2522 (or the corresponding provisions of prior law), shall be treated as an organization described in section 501(c)(3). For purposes of section 509(a)(3)(A), such a trust shall be treated as if organized on the day on which it first becomes subject to this paragraph. “(2) Split-interest trusts.— In the case of a trust which is not exempt from tax under section 501(a), not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to termination of private foundation status), section 508(e) (relating to governing instruments) to the extent applicable to a trust described in this paragraph, section 4941 (relating to taxes on self-dealing), section 4943 (relating to taxes on excess business holdings) except as provided in subsection (b)(3), section 4944 (relating to investments which jeopardize charitable purpose) except as provided in subsection (b)(3), and section 4945 (relating to taxes on taxable expenditures) shall apply as if such trust were a private foundation. This paragraph shall not apply with respect to— “(A) any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed under section 170(f)(2)(B), 2055(e)(2)(B), or 2522(c)(2)(B), “(B) any amounts in trust other than amounts for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such other amounts are segregated from amounts for which no deduction was allowable, or “(C) any amounts transferred in trust before May 27, 1969. “(3) Segregated amounts.— For purposes of paragraph (2)(B), a trust with respect to which amounts are segregated shall separately account for the various income, deduction, and other items properly attributable to each of such segregated amounts. “(b) Special Rules.— “(1) Regulations.— The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section. “(2) Limit to segregated amounts.— If any amounts in the trust are seggregated within the meaning of subsection (a)(2)(B) of this section, the value of the net assets for purposes of subsections Ante, p. 492. (c)(2) and (g) of section 507 shall be limited to such segregated amounts. “(3) Sections 4943 and 4944.— Sections 4943 and 4944 shall not apply to a trust which is described in subsection (a)(2) if— “(A) all the income interest (and none of the remainder interest) of such trust is devoted solely to one or more of the Post, p. 553. purposes described in section 170(c)(2)(B), and all amounts in such trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), Post, pp. 549, 558, 560–562. or 2522 have an aggregate value not more than 60 percent of the aggregate fair market value of all amounts in such trusts, or “(B) a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for amounts payable under the terms of such trust to every remainder beneficiary but not to any income beneficiary. “SEC. 4948. APPLICATION OF TAXES AND DENIAL OF EXEMPTION WITH RESPECT TO CERTAIN FOREIGN ORGANIZATIONS. “(a) Tax on Income of Certain Foreign Organizations.— In lieu of the tax imposed by section 4940, there is hereby imposed for each taxable year on the gross investment income (within the meaning of section 4940(c)(2)) derived from sources within the United States Post, p. 625. (within the meaning of section 861) by every foreign organization which is a private foundation for the taxable year a tax equal to 4 percent of such income. “(b) Certain Sections Inapplicable.— Section 507 (relating to termination of private foundation status), section 508 (relating to 68A Stat. 163. 26 USC 501. special rules with respect to section 501(c)(3) organizations), and this chapter (other than this section) shall not apply to any foreign organization which has received substantially all 01 its support (other than gross investment income) from sources outside the United States. “(c) Denial of Exemption to Foreign Organizations Engaged in Prohibited Transactions.— “(1) General rule.— A foreign organization described in subsection (b) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after December 31, 1969. “(2) Prohibited transactions.— For purposes of this subsection, the term ‘prohibited transaction’ means any act or failure to act (other than with respect to section 4942(e)) which would subject a foreign organization described in subsection (b), or a disqualified person (as defined in section 4946) with respect thereto, Post, p. 519. to liability for a penalty under section 6684 or a tax under section 507 if such foreign organization were a domestic organization. “(3) Taxable years affected.— “(A) Except as provided in subparagraph (B), a foreign organization described in subsection (b) shall be denied exemption from taxation under section 501(a) by reason of 68A Stat. 163. 26 USC 501. paragraph (1) for all taxable years beginning with the taxable year during which it is notified by the Secretary or his delegate that it has engaged in a prohibited transaction. The Publication in Federal Register. Secretary or his delegate shall publish such notice in the Federal Register on the day on which he so notifies such foreign organization. “(B) Under regulations prescribed by the Secretary or his delegate, any foreign organization described in subsection (b) which is denied exemption from taxation under section 501(a) by reason of paragraph (1) may, with respect to the second taxable year following the taxable year in which notice is given under subparagraph (A)(or any taxable year thereafter), file claim for exemption from taxation under section 501(a). If the Secretary or his delegate is satisfied that such organization will not knowingly again engage in a prohibited transaction, such organization shall not, with respect to taxable years beginning with the taxable year with respect to which such claim is filed, be denied exemption from taxation under section 501(a) by reason of any prohibited transaction which was engaged in before the date on which such notice was given under subparagraph (A). “(4) Disallowance of certain charitable deductions.— No gift or bequest shall be allowed as a deduction under section 170, Post, pp. 549, 558, 560–562. 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if made— “(A) to a foreign organization described in subsection (b) after the date on which the Secretary or his delegate publishes notice under paragraph (3)(A) that he has notified such organization that it has engaged in a prohibited transaction, and “(B) in a taxable year of such organization for which it is not exempt from taxation under section 501(a) by reason of paragraph (1).” (c) Assessable Penalties For Repeated, or Willful and Flagrant, Acts Under Chapter 42.— Subchapter B of chapter 68 68A Stat. 828; 80 Stat. 1560. 26 USC 6671–6683. (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6684. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR TAX UNDER CHAPTER 42. “If any person becomes liable for tax under any section of chapter 42 Ante, p. 498. (relating to private foundations) by reason of any act or failure to act which is not due to reasonable cause and either— “(1) such person has theretofore been liable for tax under such chapter, or “(2) such act or failure to act is both willful and flagrant, then such person shall be liable for a penalty equal to the amount of such tax.” (d) Information Returns of Exempt Organizations.— (1) In general.— Section 6033(a) (relating to information 68A Stat. 741. returns by exempt organizations) is amended to read as follows: “(a) Organizations Required To File.— “(1) In general.— Except as provided in paragraph (2), every organization exempt from taxation under section 501(a) snail file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary or his delegate may by forms or regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe; except that, in the discretion of the Secretary or his delegate, any organization 68A Stat. 134; 76 Stat. 809. described in section 401(a) may be relieved from stating in its return any information which is reported in returns filed by the employer which established such organization. “(2) Exceptions from filing.— “(A) Mandatory exceptions.— Paragraph (1) shall not apply to— “(i) churches, their integrated auxiliaries, and conventions or associations of churches, “(ii) any organization (other than a private foundation, Ante, p. 496. as defined in section 509(a)) described in subparagraph (C), the gross receipts of which in each taxable year are normally not more than $5,000, or “(iii) the exclusively religious activities of any religious order. “(B) Discretionary exceptions.— The Secretary or his delegate may relieve any organization required under paragraph (1) to file an information return from filing such a return where he determines that such filing is not necessary to the efficient administration of the internal revenue laws. “(C) Certain organizations.— The organizations referred to in subparagraph (A)(ii) are— “(i) a religious organization described in section 501 68A Stat. 163. (c)(3); “(ii) an educational organization described in section Post, p. 550. 170(b)(1)(A)(ii); “(iii) a charitable organization, or an organization for the prevention of cruelty to children or animals, described in section 501(c)(3), if such organization is supported, in whole or in part, by funds contributed by the United States or any State or political subdivision thereof, or is primarily supported by contributions of the general public; “(iv) an organization described in section 501(c)(3), if such organization is operated, supervised, or controlled by or in connection with a religious organization described in clause (i); “(v) an organization described in section 501(c)(8); and “(vi) an organization described in section 501(c)(1), if such organization is a corporation wholly owned by the United States or any agency or instrumentality thereof, or a wholly-owned subsidiary of such a corporation.” (2) Additional information.— Section 6033(b) (relating to certain organizations described in section 501(c)(3)) is amended— (A) by striking out in paragraph (3) “out of income”, (B) by striking out paragraphs (4), (5), (6), and (8), and by redesignating paragraph (7) as paragraph (4), and (C) by adding after paragraph (4) (as redesignated) the following new paragraphs: “(5) the total of the contributions and gifts received by it during the year, and the names and addresses of all substantial contributors. “(6) the names and addresses of its foundation managers (within the meaning of section 4946(b)(1)) and highly compensated employees, and “(7) the compensation and other payments made during the year to each individual described in paragraph (6).” (3) Annual report.— Part III of subchapter A of chapter 61 (relating to information returns) is amended by adding after 68A Stat. 741. 26 USC 6031–6053. subpart C, the following new subpart: “Subpart D— Information Concerning Private Foundations “Sec. 6056. Annual reports by private foundations. “SEC. 6056. ANNUAL REPORTS BY PRIVATE FOUNDATIONS. “(a) General.— The foundation managers (within the meaning of section 4946(b)) of every organization which is a private foundation Ante, p. 515. Ante, p. 496. (within the meaning of section 509(a)) having at least $5,000 of assets at any time during a taxable year shall file an annual report as of the close of the taxable year at such time and in such manner as the Secretary or his delegate may by regulations prescribe. “(b) Contents.— The foundation managers of the private foundation shall set forth in the annual report required under subsection (a) the following information: “(1) its gross income for the year, “(2) its expenses attributable to such income and incurred within the year, “(3) its disbursements (including administrative expenses) within the year, “(4) a balance sheet showing its assets, liabilities, and net worth as of the beginning of the year, “(5) an itemized statement of its securities and all other assets at the close of the year, showing both book and market value, “(6) the total of the contributions and gifts received by it during the year, “(7) an itemized list of all grants and contributions made or approved for future payment during the year, showing the amount of each such grant or contribution, the name and address of the recipient, any relationship between any individual recipient and the foundation’s managers or substantial contributors, and a concise statement of the purpose of each such grant or contribution, “(8) the address of the principal office of the foundation and (if different) of the place where its books and records are maintained, “(9) the names and addresses of its foundation managers (within the meaning of section 4946(b)), and “(10) a list of all persons described in paragraph (9) that are substantial contributors (within the meaning of section 507(d)(2)) or that own 10 percent or more of the stock of any corporation Ante, p. 492. of which the foundation owns 10 percent or more of the stock, or corresponding interests in partnerships or other entities, in which the foundation has a 10 percent or greater interest. “(c) Form.— The annual report may be prepared in printed, typewritten, or any other legible form the foundation chooses. The Secretary or his delegate shall provide forms which may be used by a private foundation for purposes of the annual report. “(d) Special Rules.— “(1) The annual report required to be filed under this section is in addition to and not in lieu of the information required to be filed under section 6033 (relating to returns by exempt organizations) 68A Stat. 74 26 USC 6033. and shall be filed at the same time as such information. “(2) A copy of the notice required by section 6104(d) (relating to public inspection of private foundations’ annual reports), together with proof of publication thereof, shall be filed by the foundation managers together with the annual report. “(3) The foundation managers shall furnish copies of the annual report required by this section to such State officials and other persons, at such times and under such conditions, as the Secretary or his delegate may by regulations prescribe.” (4) Penalty for late filing of certain information returns.— Section 6652 (relating to failure to file certain information returns) is amended by relettering subsection (d) as subsection (e) and inserting immediately after subsection (c) the following new subsection: “(d) Returns by Exempt Organizations and by Certain Trusts.— “(1) Penalty on organization or trust.— In the case of a Ante, p. 519. failure to file a return required under section 6033 (relating to returns by exempt organizations), section 6034 (relating to returns Post, p. 529. by certain trusts), or section 6043(b) (relating to exempt organizations), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the exempt organization or trust failing so to file, $10 for each day during which such failure continues, but the total amount imposed hereunder on any organization for failure to file any return shall not exceed $5,000. “(2) Managers.— The Secretary or his delegate may make written demand upon an organization failing to file under paragraph (1) specifying therein a reasonable future date by which such filing shall be made, and if such filing is not made on or before such date, and unless it is shown that failure so to file is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file, $10 for each day after the expiration of the time specified in the written demand during which such failure continues, but the total amount imposed hereunder on all persons for such failure to file shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file, all such persons shall be jointly and severally liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs. “(3) Annual reports.— In the case of a failure to file a report Ante, p. 521. required under section 6056 (relating to annual reports by private foundations) or to comply with the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file or meet the publicity requirement, $10 for each day during which such failure continues, but the total amount imposed hereunder on all such persons for such failure to file or comply with the requirements of section 6104(d) with regard to any one annual report shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file or comply with the requirements of section 6104(d), all such persons shall be jointly and severally Infra. liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs.” (e) Publicity of Information Required By Certain Exempt Organizations.— (1) Names and addresses of contributors.— Section 6104 68A Stat. 755; 72 Stat. 1660. 26 USC 6104. (relating to publicity of information required from certain exempt organizations and certain trusts) is amended by inserting at the end of subsection (b), the following sentence: “Nothing in this subsection shall authorize the Secretary or his delegate to disclose the name or address of any contributor to any organization or trust (other than a private foundation, as defined in section 509(a)) which is required to furnish such information.” (2) Publication to state officials.— Section 6104 is amended by adding after subsection (b) the following new subsection: “(c) Publication to State Officials.— “(1) General rule.— In the case of any organization which is described in section 501(c)(3) and exempt from taxation under 68A Stat. 163. Ante, p. 434. section 501(a), or has applied under section 508(a) for recognition as an organization described in section 501(c)(3), the Secretary or his delegate at such times and in such manner as he may by regulations prescribe shall— “(A) notify the appropriate State officer of a refusal to recognize such organization as an organization described in section 501(c)(3), or of the operation of such organization in a manner which does not meet, or no longer meets, the requirements of its exemption, “(B) notify the appropriate State officer of the mailing of a notice of deficiency of tax imposed under section 507 or chapter 42, and Ante, pp. 492, 498. “(C) at the request of such appropriate State officer, make available for inspection and copying such returns, filed statements, records, reports, and other information, relating to a determination under subparagraph (A) or (B) as are relevant to any determination under State law. “(2) Appropriate state officer.— For purposes of this subsection, the term ‘appropriate State officer’ means the State attorney general. State tax officer, or any State official charged with overseeing organizations of the type described in section 501(c)(3).” (3) Annual reports.— Section 6104 is amended by adding after subsection (c), as added by paragraph (2) of this subsection, the following new subsection: “(d) Public Inspection of Private Foundations’ Annual Reports.— The annual report required to be filed under section 6056 Ante, p. 521. (relating to annual reports by private foundations) shall be made available by the foundation managers for inspection at the principal office of the foundation during regular business hours by any citizen on request made within 180 days after the publication of notice of its availability. Such notice shall be published, not later than the day prescribed for filing such annual report (determined with regard to any extension of time for filing), in a newspaper having general circulation in the county in which the principal office of the private foundation is located. The notice shall state that the annual report of the private foundation is available at its principal office for inspection during regular business hours by any citizen who requests it within 180 days after the date of such publication, and shall state the address of the private foundation’s principal office and the name of its principal manager.” (4) Willful failure to provide information regarding private foundations.— Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding after section 6684 (added by subsection (c) of this section) the following new section: “SEC. 6685. ASSESSABLE PENALTIES WITH RESPECT TO PRIVATE FOUNDATION ANNUAL REPORTS. “In addition to the penalty imposed by section 7207 (relating to fraudulent returns, statements, or other documents), any person who Ante, p. 521. is required to file the report and the notice required under section 6056 (relating to annual reports by private foundations) or to comply with Ante, p. 523. the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports) and who fails so to file or comply, if such failure is willful, shall pay a penalty of $1,000 with respect to each such report or notice.” (5) Section 7207 (relating to fraudulent returns, statements, or other documents) is amended by striking out “section 6047 (b) or (c)” and inserting in lieu thereof “sections 6047 (b) or (c), 6056, or 6104(d)”. (f) Petition to Tax Court; Deficiency Procedures Made Applicable.— (1) Section 6211(a) (relating to definition of a deficiency) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and excise taxes,”, (B) by striking out “subtitles A and B,” and inserting in lieu thereof “subtitles A and B, and chapter 42,”, and (C) by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (2) Section 6212(c)(1) (relating to further deficiency letters restricted) is amended by striking out “or” before “of estate tax” and by inserting after “the same decedent,” the following: “of section Ante, p. 498. 4940 tax for the same taxable year, or of chapter 42 tax (other than under section 4940) with respect to any act (or failure to act) to which such petition relates,”. (3) Section 6213 (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by relettering subsection (e) as subsection (f) and inserting immediately after subsection (d) the following new subsection: “(e) Suspension of Filing Period for Certain Chapter 42 Taxes.— The running of the time prescribed by subsection (a) for filing a petition in the Tax Court with respect to the taxes imposed by section 4941 (relating to taxes on self-dealing), 4942 (relating to taxes on failure to distribute income), 4943 (relating to taxes on excess business holdings), 4944 (relating to investments which jeopardize charitable purpose), or 4945 (relating to taxes on taxable expenditures) shall be suspended for any period during which the Secretary or his delegate has extended the time allowed for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (g) Limitations on Assessment and Collection.— (1) Section 6501 is amended by adding at the end thereof the 68A Stat. 803; 80 Stat. 1151. following new subsection: “(n) Special Rule for Chapter 42 Taxes.— “(1) In general.— For purposes of any tax imposed by chapter 42 (other than section 4940), the return referred to in this section Ante, p. 498. shall be the return filed by the private foundation for the year in which the act (or failure to act) giving rise to liability for such tax occurred. For purposes of section 4940, such return is the return filed by the private foundation for the taxable year for which the tax is imposed. “(2) Certain contributions to section 501 (c)(3) organizations.— In the case of a deficiency of tax of a private foundation making a contribution in the manner provided in section 4942(g)(3) (relating to certain contributions to section 501(c)(3) 68A Stat. 163. 26 USC 501. organizations) attributable to the failure of a section 501(c)(3) organization to make the distribution prescribed by section 4942(g)(3), such deficiency may be assessed at any time before the expiration of one year after the expiration of the period within which a deficiency may be assessed for the taxable year with respect to which the contribution was made.” (2) Section 6501(c) is amended by adding the following new paragraph at the end thereof: “(7) Termination of private foundation status.— In the case of a tax on termination of private foundation status under section 507, such tax may be assessed, or a proceeding in court Ante, p. 492. for the collection of such tax may be begun without assessment, at any time.” (3) Section 6501(e)(3) is amended by adding at the end thereof the following sentence: “In determining the amount of tax omitted on a return, there shall not be taken into account any amount of tax imposed by chapter 42 which is omitted from the return if the transaction giving rise to such tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the existence and nature of such item.” (4) Section 6503 (relating to suspension of running of period of 80 Stat. 1140. limitation) is amended by relettering subsection (h) as subsection (i) and inserting immediately after subsection (g) the following new subsection: “(h) Suspension Pending Correction.— The running of the periods of limitations provided in sections 6501 and 6502 on the making 68A Stat. 806. of assessments or the collection by levy or a proceeding in court in respect of any tax imposed by chapter 42 or section 507 shall be suspended for any period described in section 507(g)(2) or during which the Secretary or his delegate has extended the time for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (h) Limitations on Credits or Refunds.— Section 6511 (relating to limitations on credits or refunds) is amended by relettering subsection (f) as subsection (g) and inserting immediately after subsection (e) the following new subsection: “(f) Special Rule for Chapter 42 Taxes.— For purposes of any tax imposed by chapter 42, the return referred to in subsection (a) shall be the return specified in section 6501(n)(1).” Supra. (i) Civil Action for Refund.— Section 7422 (relating to civil 68A Stat. 876; 80 Stat. 1108. actions for refund) is amended by relettering subsection (g) as subsection (h) and by inserting immediately after subsection (f) the following new subsection: “(g) Special Rules for Certain Excise Taxes Imposed by Chapter 42.— “(1) Right to bring actions.— With respect to any act (or failure to act) giving rise to liability under section 4941, 4942, 4943, 4944, or 4945, payment of the full amount of tax imposed under section 4941(a) (relating to initial taxes on self-dealing), section 4942(a) (relating to initial tax on failure to distribute income), section 4943(a) (relating to initial tax on excess business holdings), section 4944(a) (relating to initial taxes on investments which jeopardize charitable purpose), section 4945(a) (relating to initial taxes on taxable expenditures), section 4941(b) (relating to additional taxes on self-dealing), section 4942(b) (relating to additional tax on failure to distribute income), section 4943(b) (relating to additional tax on excess business holdings), section 4944(b) (relating to additional taxes on investments which jeopardize charitable purpose), or section 4945(b) (relating to additional taxes on taxable expenditures) shall constitute sufficient payment in order to maintain an action under this section with respect to such act (or failure to act). “(2) Limitation on suit for refund.— No suit may be maintained under this section for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, unless no other suit has been maintained for credit or refund of, and no petition has been filed in the Tax Court with respect to a deficiency in, any other tax imposed by such sections with respect to such act (or failure to act). “(3) Final determination of issues.— For purposes of this section, any suit for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, shall constitute a suit to determine all questions with respect to any other tax imposed with respect to such act (or failure to act) under such sections, and failure by the parties to such suit to bring any such question before the Court shall constitute a bar to such question.” (j) Technical, Conforming, and Clerical Amendments.— (1) Section 101(b)(2)(B)(iii) (relating to nonforfeitable rights) is amended by striking out “section 503(b)(1), (2), or (3)” and inserting in lieu thereof “section 170(b)(1)(A)(ii) or (vi) or which is a religious organization (other than a trust)”. (2) Section 170(i) (relating to disallowance of deductions in certain cases) (as redesignated by section 201(a)(1)(A) of this Act) is amended— (A) by striking out paragraph (1), and (B) by striking out “(2) For disallowance” and inserting in lieu thereof “For disallowance”. (3) Section 501(a) (relating to exemption from taxation) is amended by striking out “502, 503, or 504” and inserting in lieu thereof “502 or 503”. (4) Section 501(b) (relating to tax on unrelated business income) is amended to read as follows: “(b) Tax on Unrelated Business Income and Certain Other Activities.— An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II and III of this subchapter, but (notwithstanding parts II and III of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.” (5) Section 501(c)(16) (relating to list of exempt organizations) 68A Stat. 165. 26 USC 501. is amended by striking out “part III” and inserting in lieu thereof “part IV”. (6) Section 501(e) (relating to cooperative hospital service 82 Stat. 269. organizations) is amended by striking out in the last sentence thereof “section 503(b)(5).” and inserting in lieu thereof “section 170(b)(1)(A)(iii).”. (7) Section 503(a)(1) (relating to general rule) is amended to 74 Stat. 535. read as follows: “(1) General rule.— “(A) An organization described in section 501(c)(17) 74 Stat. 534. 68A Stat. 163. 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) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954.” (8) Section 503(a)(2) (relating to taxable years affected by 68A Stat. 166. denial of exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (9) Section 503(d) (relating to future status of organizations denied exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (10) Section 503(g) (relating to special rule for loans) is amended by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”. (11) Section 503(h) (relating to special rules relating to lending 72 Stat. 1629. by section 401(a) and section 501(c)(17) trusts to certain persons) is amended— (A) by striking out in the heading thereof “Special rules relating to lending by section 401(a) and section 501(c)(17) trusts to certain persons.—”, and inserting in lieu thereof “Special rules.—”, (B) by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”, (C) by striking out “acquired by a trust described in section 401(a) or section 501(c)(17)”, and (D) by striking out in paragraph (3) “subsection (c)” and inserting in lieu thereof “subsection (b)”. (12) Section 503(i) (relating to loans with respect to which 72 Stat. 1630. employers are prohibited from pledging certain assets) is amended— (A) by striking out “Subsection (c)(1)” and inserting in lieu thereof “Subsection (b)(1)”, and (B) by striking out “subsection (h)” and inserting in lieu thereof “subsection (e)”. (13) Section 503(j)(1) (relating to prohibited transactions) 76 Stat. 827. is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (b)”. (14) Section 503 (relating to requirements of exemption) is amended by striking out subsections (b), (e), and (f) and by redesignating subsections (c), (d), (g), (h), (i), and (j) (as amended), as subsections (b), (c), (d), (e), (f), and (g), respectively. (15) Section 504 (relating to denial of exemption) is repealed. Repeal 68A Stat. 168. (16) Section 542(a)(2) (relating to stock ownership requirement) is amended— (A) by striking out in the second sentence “section 503(b)” and inserting in lieu thereof “section 401(a), 501(c)(17), or 509(a)”, and (B) by amending the third sentence to read as follows: “The preceding sentence shall not apply in the case of an organization or trust organized or created before July 1, 1950, if at all times on or after July 1, 1950, and before the close of the taxable year such organization or trust has owned all of the common stock and at least 80 percent of the total number of shares of all other classes of stock of the corporation.” (17) Section 663(a)(2) (relating to charitable, etc., distributions) is amended by striking out “section 681” and inserting in lieu thereof “sections 508(d), 681, and 4948(c)(4)”. (18) Section 681(b) and (c) (relating to operations of trusts and accumulated income) is repealed. (19) Section 681(d) (relating to cross reference) is redesignated as subsection (b), and as so redesignated is amended by striking out “section 503(e)” and inserting in lieu thereof “sections 508(d) and 4948(c)(4)”. (20) Section 878 (relating to foreign educational, charitable, and certain other exempt organizations) is amended by— (A) striking out “unrelated business income of”, and (B) striking out “trusts, see section 512(a)” and inserting in lieu thereof “organizations, see sections 512(a) and 4948”. (21) Section 884 (relating to cross references) is amended by striking out paragraph (1) and by redesignating paragraphs (2), (3), (4), (5), and (6) as paragraphs (1), (2), (3), (4), and (5), respectively. (22) Section 1443 (relating to foreign tax-exempt organizations) is amended by— (A) inserting “(a) Income Subject to Section 511.—” before “In the case of”, and (B) adding subsection (b) to read as follows: “(b) Income Subject to Section 4948.— In the case of income of Ante, p. 518. a foreign organization subject to the tax imposed by section 4948(a), this chapter shall apply, except that the deduction and withholding shall be at the rate of 4 percent and shall be subject to such conditions as may be provided under regulations prescribed by the Secretary or his delegate.” (23) Section 2039(c)(3) (relating to exemption of annuities under certain trusts and plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section Post, p. 550. 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (24) Section 2517(a)(3) (relating to general rule for certain annuities under qualified plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (25) Section 4057(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (26) Section 4221(d)(5) (relating to the definition of nonprofit 72 Stat. 1282. 26 USC 4221. educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (27) Section 4253(h) (relating to nonprofit hospitals) is amended by striking out “section 503(b)(5)” and inserting in lieu thereof “section 170(b)(1)(A)(iii)”. Post, p. 550. (28) Section 4294(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (29) Section 5214(a)(3)(A) (relating to purposes for withdrawal of distilled spirits from bonded premises free of tax or without payment of tax) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (30) Section 6033(b)(4) (as redesignated by subsection (d)(2) of this section) (relating to certain balance sheet items on Ante, p. 520. returns by exempt organizations) is amended by striking out “and” at the end thereof. (31) Section 6033(c) (relating to cross reference) is amended by inserting the following at the end thereof: “For reporting requirements as to certain liquidations, dissolutions, terminations, and contractions, see section 6043(b). For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” Ante, p. 522. (32) Section 6034 (relating to returns by certain trusts) is 68A Stat. 742. amended by striking out all of such section before paragraph (1) of subsection (a) and inserting in lieu thereof the following: “SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(a) OR CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 642(c). “(a) General Rule.— Every trust described in section 4947(a) or Ante, p. 517. Post, p. 558. claiming a charitable, etc., deduction under section 642(c) for the taxable year shall furnish such information with respect to such taxable year as the Secretary or his delegate may by forms or regulations prescribe, including—”. (33) Section 6034(a)(1) (relating to returns by certain trusts) is amended by striking out “(showing separately the amount of such deduction which was paid out and the amount which was permanently set aside for charitable, etc., purposes during such year)”. (34) Section 6034 (relating to returns by certain trusts) is amended by adding the following new subsection at the end thereof: “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” (35) Section 6043 (relating to return regarding corporate dissolution 68A Stat. 746. or liquidation) is amended— (A) by striking out the heading and inserting in lieu thereof (B) by striking out “Every corporation” and inserting in lieu thereof “(a) Corporations.—Every corporation”, and (C) by adding the following new subsections at the end thereof: “(b) Exempt Organizations.— Every organization which for any of its last 5 taxable years preceding its liquidation, dissolution, termination, or substantial contraction was exempt from taxation under 68A Stat. 163. 25 USC 501. section 501(a) shall file such return and other information with respect to such liquidation, dissolution, termination, or substantial contraction as the Secretary or his delegate shall by forms or regulations prescribe; except that— “(1) no return shall be required under this subsection from churches, their integrated auxiliaries, conventions or associations of churches, or any organization which is not a private foundation Ante, p. 496. (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000, and “(2) the Secretary or his delegate may relieve any organization from such filing where he determines that such filing is not necessary to the efficient administration of the internal revenue laws or, with respect to an organization described in section 401(a), where the employer who established such organization files such a return. “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by subsection (b), see section 6652(d).” (36) Section 6104(b) (relating to inspection of annual information returns) is amended by striking out “sections 6033(b) and 6034,” and inserting in lieu thereof “sections 6033, 6034, and 6056,”. (37) Section 6161(b) (relating to the amount determined as a deficiency when granting an extension of time) is amended— (A) by striking out in paragraph (1) “chapter 1 or 12,” Ante, p. 498. and inserting in lieu thereof “chapter 1, 12, or 42,”, and (B) by striking out “chapter 1,” the last time it appears and inserting in lieu thereof “chapter 1 or 42,”. (38) Section 6201(d) (relating to deficiency proceedings) is amended by striking out “and gift taxes”, and inserting in lieu thereof “gift, and chapter 42 taxes”. (39) Section 6211(b)(2) (relating to the term “rebate”) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (40) Section 6212(a) (relating to notice of deficiency) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (41) Section 6212(b)(1) (relating to address for notice of deficiency) is amended— (A) by striking out in the title thereof “and gift taxes” and inserting in lieu thereof “and gift taxes and taxes imposed by chapter 42”, (B) by striking out “subtitle A or chapter 12,” and inserting in lieu thereof “subtitle A, chapter 12, or chapter 42,”, and (C) by inserting “chapter 42,” after “chapter 12,” the last place it appears. (42) Section 6213(a) (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by inserting “or chapter 42” after “subtitle A or B”. (43) Section 6214 (relating to determination by the Tax Court) is amended by relettering subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Taxes Imposed by Section 507 or Chapter 42.— The Tax Court, in redetermining a deficiency of any tax imposed by section 507 Ante, p. 492. or chapter 42 for any period, act, or failure to act, shall consider such Ante, p. 498. facts with relation to the taxes under chapter 42 for other periods, acts, or failures to act as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the taxes under chapter 42 for any other period, act, or failure to act have been overpaid or underpaid.” (44) Section 6214(d) (as relettered) is amended by inserting Ante, p. 530. “, chapter 42,” after “chapter”. (45) Section 6344(a)(1) (relating to certain cross references) 68A Stat. 789. 26 USC 6344. is amended by inserting “and taxes imposed by chapter 42,” after “gift taxes,”. (46) Section 6503(a)(1) (relating to issuance of statutory notice of deficiency) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift and chapter 42 taxes”. (47) Section 6512(a) (relating to effect of petition to Tax Court) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”, and (B) by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (48) Section 6512(b)(1) (relating to jurisdiction to determine overpayment determined by Tax Court) is amended by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (49) Section 6601(d) (relating to suspension of interest in certain cases) is amended— (A) by striking out in the title thereof “and Gift Tax Cases.” and inserting in lieu thereof “Gift, and Chapter 42 Tax Cases.”, and (B) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (50) Section 6653(c)(1) (relating to definition of underpayment) is amended— (A) by striking out in the heading thereof “and gift taxes.” and inserting in lieu thereof “gift, and chapter 42 taxes.”, and (B) by striking out “and gift taxes” the last time it appears and inserting in lieu thereof “gift, and chapter 42 taxes”. (51) Section 6659(b) (relating to procedure for assessing certain additions to tax) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (52) Section 6676(b) (relating to deficiency procedures not to 75 Stat. 829. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (53) Section 6677(b) (relating to deficiency procedures not to 76 Stat. 988. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (54) Section 6679(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (55) Section 6682(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (56) Section 7422(e) (relating to stay of proceeding in civil actions for refund) is amended by striking out “or gift tax” the first time it appears and inserting in lieu thereof “gift tax, or tax imposed by chapter 42”. (57) Section 7454 (relating to burden of proof in fraud and transferee cases) is amended— (A) by striking out “FRAUD AND TRANSFEREE CASES” and inserting in lieu thereof “FRAUD, FOUNDATION MANAGER, AND TRANSFEREE CASES”, (B) by redesignating subsection (b) as subsection (c), and (C) by inserting after subsection (a) the following new subsection: “(b) Foundation Managers.— In any proceeding involving the Ante, p. 515. issue whether a foundation manager (as defined in section 4946(b)) has ‘knowingly’ participated in an act of self-dealing (within the meaning of section 4941), participated in an investment which jeopardizes the carrying out of exempt purposes (within the meaning of section 4944), or agreed to the making of a taxable expenditure (within the meaning of section 4945), the burden of proof in respect of such issue shall be upon the Secretary or his delegate.” (58) The table of parts for subchapter F of chapter 1 is amended to read as follows: “Subchapter F.— Exempt Organizations “Part I. General rule. “Part II. Private foundations. “Part III. Taxation of business income of certain exempt organizations. “Part IV. Farmers’ cooperatives. “Part V. Shipowners’ protection and indemnity associations.” (59) The table of chapters for subtitle D is amended by adding at the end thereof the following new item: “Chapter 42. Private foundations.” (60) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new items: “Sec. 6684. Repeated liability for tax under chapter 42. “Sec. 6685. Assessable penalties with respect to private foundation annual reports.” (61) The table of sections for part I of subchapter F of chapter 1 is amended by striking out the item relating to section 504. (62) The heading of subchapter B of chapter 63 is amended by striking out “and Gift Taxes” and inserting in lieu thereof “Gift, and Certain Excise Taxes”. (63) The table of subchapters for chapter 63 is amended by striking out “and gift taxes” in the item relating to subchapter B and inserting in lieu thereof “gift, and certain excise taxes”. (64) The table of subparts for part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: “Subpart D. Information concerning private foundations.” (k) Effective Dates.— (1) In general.— Except as otherwise provided in this subsection and subsection (1), the amendments made by this section shall take effect on January 1, 1970. (2) Provisions effective for taxable years beginning after december 31, 1969.— The following provisions shall apply to taxable years beginning after December 31, 1969: (A) Sections 4940, 4942, 4943, and 4948 of the Internal Revenue Code of 1954 (as added by this section), and Ante, p. 498. (B) The amendments made by subsection (d) and paragraphs (3), (15), (16), (20), (21), (30), (31), (32), (33), (34), (35), and (61) of subsection (j). (3) Sections 508 (a), (b), and (c).— Sections 508 (a), (b), and (c) of the Internal Revenue Code of 1954 (as added by this Ante, p. 494. section) shall take effect on October 9, 1969. (l) Savings Provisions.— (1) References to internal revenue code provisions.— Except as otherwise expressly provided, references in the following paragraphs of this subsection are to sections of the Internal Revenue Code of 1954 as amended by this section. (2) Section 4941.— Section 4941 shall not apply to— (A) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946), pursuant to the terms of securities of such corporation in existence at the time acquired by the foundation, if such securities were acquired by the foundation before May 27, 1969; (B) the sale, exchange, or other disposition of property which is owned by a private foundation on May 26, 1969 (or which is acquired by a private foundation under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter), to a disqualified person, if such foundation is required to dispose of such property in order not to be liable for tax under section 4943 (relating to taxes on excess business holdings) applied, in the case of a disposition before January 1, 1975, without taking section 4943(c)(4) into account and it receives in return an amount which equals or exceeds the fair market value of such property at the time of such disposition or at the time a contract for such disposition was previously executed in a transaction which would not constitute a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (C) the leasing of property or the lending of money or other extension of credit between a disqualified person and a private foundation pursuant to a binding contract in effect on October 9, 1969 (or pursuant to renewals of such a contract), until taxable years beginning after December 31, 1979, if such leasing or lending (or other extension of credit) remains at least as favorable as an arm’s-length transaction with an unrelated party and if the execution of such contract was not at the time of such execution a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (D) the use of goods, services, or facilities which are shared by a private foundation and a disqualified person until taxable years beginning after December 31, 1979, if such use is pursuant to an arrangement in effect before October 9, 1969, and such arrangement was not a prohibited transaction (within Ante, p. 527. the meaning of section 503(b) or the corresponding provisions of prior law) at the time it was made and would not be a prohibited transaction if such section continued to apply; and (E) the use of property in which a private foundation and a disqualified person have a joint or common interest, if the interests of both in such property were acquired before October 9, 1969. (3) Section 4942.— In the case of organizations organized before May 27, 1969, section 4942 shall— (A) for all purposes other than the determination of the minimum investment return under section 4942(j)(3)(B)(ii), for taxable years beginning before January 1, 1972, apply without regard to section 4942(e) (relating to minimum investment return), and for taxable years beginning in 1972, 1973, and 1974, apply with an applicable percentage (as prescribed in section 4942(e)(3)) which does not exceed 4½ percent, 5 percent, and 5½ percent, respectively; (B) not apply to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on May 26, 1969, and at all times thereafter) of an instrument executed before May 27, 1969, with respect to the transfer of income producing property to such organization, except that section 4942 shall apply to such organization if the organization would have been denied exemption Ante, p. 527. Post, p. 558. Ante, p. 528. if section 504(a) had not been repealed by this Act, or would have had its deductions under section 642(c) limited if section 681(c) had not been repealed by this Act. In applying the preceding sentence, in addition to the limitations contained in section 504(a) or 681(c) before its repeal, section 504(a)(1) or 681(c)(1) shall be treated as not applying to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on January 1, 1951, and at all times thereafter) of an instrument executed before January 1, 1951, with respect to the transfer of income producing property to such organization before such date, if such transfer was irrevocable on such date; (C) apply to a grant to a private foundation described in section 4942(g)(1)(A)(ii) which is not described in section 4942(g)(1)(A)(i), pursuant to a written commitment which was binding on May 26, 1969, and at all times thereafter, as if such grant is a grant to an operating foundation (as defined in section 4942(j)(3)), if such grant is made for one or more Post, p. 553. of the purposes described in section 170(c)(2)(B) and is to be paid out to such private foundation on or before December 31, 1974; (D) apply, for purposes of section 4942(f), in such a manner as to treat any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise as not essentially equivalent to a dividend 68A Stat. 85. 26 USC 302. under section 302(b)(1) if such redemption is described in paragraph (2)(B) of this subsection; and (E) not apply to an organization which is prohibited by its governing instrument or other instrument from distributing capital or corpus to the extent the requirements of section 4942 are inconsistent with such prohibition. Ante, p. 502. With respect to taxable years beginning after December 31, 1971, subparagraphs (B) and (E) shall apply only during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to comply with the provisions of section 4942, and in the case of subparagraph (B) for all periods after the termination of such judicial proceeding during which the governing instrument or any other instrument does not permit compliance with such provisions. (4) Section 4943.— (A) In the case of a private foundation— (i) which was incorporated before January 1, 1951; (ii) substantially all of the assets of which on May 26, 1969, consist of more than 90 percent of the stock of an incorporated business enterprise which is licensed and regulated, the sales or contracts of which are regulated, and the professional representatives of which are licensed, by State regulatory agencies in at least 10 States; and (iii) which acquired such stock solely by gift, devise, or bequest, section 4943(c)(4)(A)(i) shall be applied with respect to the Ante, p. 507. holdings of such foundation in such incorporated business enterprise by substituting “51 percent” for “50 percent”, and section 4943(c)(4)(D) shall not apply with respect to such holdings. For purposes of the preceding sentence, stock of such enterprise in a trust created before May 27, 1969, of which the foundation is the remainder beneficiary shall be deemed to be held by such foundation on May 26, 1969, if such foundation held (without regard to such trust) more than 20 percent of the stock of such enterprise on May 26, 1969. (B) Subparagraph (A) shall apply to a private foundation only if— (i) the foundation does not purchase any stock or other interest in the enterprise described in subparagraph (A) after May 26, 1969, and does not acquire any stock or other interest in any other business enterprise which constitutes excess business holdings under section 4943; and (ii) in the last 5 taxable years ending on or before December 31, 1970, the foundation expends substantially all of its adjusted net income (as defined in section 4942(f)) for the purpose or function for which it is organized and operated. (C) For purposes of section 4943(c)(6), the term “purchase” does not include an exchange which is described in paragraph (2)(B) of this subsection and which is pursuant to a plan for disposition of excess business holdings. (5) Section 4945.— Section 4945(d)(4) and (h) shall not apply to a grant which is described in paragraph (3)(C) of this subsection. (6) Section 508(e).— Section 508(e) shall not apply to require Ante, p. 494. inclusion in governing instruments of any provisions inconsistent with this subsection. (7) Section 509(a).— In the case of any trust created under the terms of a will or a codicil to a will executed on or before March 30, 1924, by which the testator bequeathed all of the outstanding common stock of a corporation in trust, the income of which trust is to be used principally for the benefit of those from time to time employed by the corporation and their families, the trustees of which trust are elected or selected from among the employees of such corporation, and which trust does not own directly any stock in any other corporation, if the trust makes an irrevocable election under this paragraph within one year after the date of the enactment of this Act, such trust shall be treated as not being a private foundation for purposes of the Internal Revenue Code of 1954 but shall be treated for purposes of such Code as if it were not exempt 68A Stat. 163. 26 USC 501. from tax under section 501(a) for any taxable year beginning after the date of the enactment of this Act and before the date (if any) on which such trust has complied with the requirements of section 507 for termination of the status of an organization as a private foundation. (8) Certain redemptions.— For purposes of applying section 302(b)(1) to the determination of the amount of gross investment Ante, pp. 498, 518. income under sections 4940 and 4948(a), any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise shall be treated as not essentially equivalent to a dividend, if such redemption is described in paragraph (2)(B) of this subsection. Subtitle B— Other Tax Exempt Organizations SEC. 121. TAX ON UNRELATED BUSINESS INCOME. (a) Organizations Subject to Tax.— (1) Corporate rates.— Section 511(a)(2)(A) (relating to certain organizations subject to tax on unrelated business income at corporate rates) is amended to read as follows: “(A) Organizations described in sections 401(a) and 501(c).— The taxes 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).” (2) Individual rates.— Section 511(b)(2) (relating to charitable, etc., trusts subject to tax on unrelated business income) is amended to read as follows: “(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).” (3) Section 501(c)(2) corporations.— Section 511 (relating to tax on unrelated business income) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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).” 68A Stat. 163. 26 USC 501. (4) Conforming amendment.— Section 1504 (relating to definitions for purposes of consolidated returns) is amended by adding at the end thereof the following new subsection: “(e) Includible Tax-Exempt Organizations.— Despite the provisions of paragraph (1) of subsection (b), two or more organizations exempt from taxation under section 501, one or more of which is described in section 501(c)(2) and the others of which derive income from such 501(c)(2) organizations, shall be considered as includible corporations for the purpose of the application of subsection (a) to such organizations alone.” (b) Definition of Unrelated Business Taxable Income.— (1) In general.— Section 512(a) (relating to definition of unrelated business taxable income) is amended to read as follows: “(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, Post, p. 542. 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 Ante, p. 536. 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 section 501(c)(7) or (9).— “(A) General rule.— In the case of an organization described in section 501(c)(7) or (9), the term ‘unrelated Post, p. 541. 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). “(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 section Post, p. 541. 501(c)(9), 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 68A Stat. 163. 26 USC 501. in section 501(c)(2), the income of which is payable to an organization described in section 501(c)(7) or (9), 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 section 501(c)(7) or (9) 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 shall apply.” (2) Modifications.— (A) Rents and debt-financed property.— Section 512(b)(3) (relating to modifications with respect to rents from real property) and section 512(b)(4) (relating to modifications with respect to business leases) are amended to read as follows: “(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 76 Stat. 1032; 78 Stat. 35. 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 Post, p. 543. 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).” (B) Limit on specific deduction.— Section 512(b)(12) 69A Stat. 171. (relating to allowance of specific deduction) is amended to read as follows: “(12) Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a Post, p. 619. 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.” (C) Special rules for certain organizations.— Section 512(b) (relating to modifications in determining unrelated business taxable income) is further amended by adding at the end thereof the following: “(15) Notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the ‘controlled organization’) of which the organization deriving such amounts (in this paragraph called the ‘controlling organization’) has control (as defined in section 368(c)) shall be included as an item of gross income 68A Stat. 121. 25 USC 368. (whether or not the activity from which such amounts are derived represents a trade or business or is regularly carried on) in an amount which bears the same ratio as— “(A) (i) in the case of a controlled organization which is not exempt from taxation under section 501(a), the excess of the amount of taxable income of the controlled organization over the amount of such organization’s taxable income which if derived directly by the controlling organization would not be unrelated business taxable income, or “(ii) in the case of a controlled organization which is exempt from taxation under section 501(a), the amount of unrelated business taxable income of the controlled organization, bears to “(B) the taxable income of the controlled organization (determined in the case of a controlled organization to which subparagraph (A)(ii) applies as if it were not an organization exempt from taxation under section 501(a)), but not less than the amount determined in clause (i) or (ii), as the case may be, of subparagraph (A), both amounts computed without regard to amounts paid directly or indirectly to the controlling organization. There shall be allowed all deductions directly connected with amounts included in gross income under the preceding sentence. “(16) 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. “(17) 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 68A Stat. 42. 26 USC 151. educational institution (as defined in section 151(e)(4)) 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 or his delegate 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.” (D) Technical amendment.— Section 512(b) (relating to exceptions, additions, and limitations in determining unrelated business taxable income) is amended by striking out so much thereof as precedes paragraph (1) and inserting in lieu thereof the following: “(b) Modifications.— The modifications referred to in subsection (a) are the following:” (3) Related amendment.— (A) Part IX of Subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: “SEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGANIZATIONS IN TRANSACTIONS WITH MEMBERS. “(a) General Rule.— In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. “(b) Exceptions.— Subsection (a) shall not apply to any organization— “(1) which for the taxable year is subject to taxation under subchapter H or L, “(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization, or 75 Stat. 222. 26 USC 456. “(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the 48 Stat. 881. 15 USC 78a. 42 Stat. 998. 7 USC 1. Commodity Exchange Act.” (B) The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following: “Sec. 277. Deductions incurred by certain membership organizations in transactions with members.” (4) Local employee association.— Section 513(a)(2) (relating 68A Stat. 172. to exception to definition of unrelated trade or business) is amended by striking out “employees; or” and inserting in lieu thereof the following: “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”. (5) Voluntary employees’ beneficiary associations and certain fraternal societies. (A) In general.— Section 501(c) (relating to list of 26 USC 501. exempt organizations) is amended by striking out paragraphs (9) and (10) and inserting in lieu thereof the following: “(9) Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. “(10) Domestic fraternal societies, orders, or associations, operating under the lodge system— “(A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and “(B) which do not provide for the payment of life, sick, accident, or other benefits.” (B) Conforming amendments.— Section 801(b)(2)(relating 73 Stat. 112. to life insurance reserves) is amended— (i) by inserting “and” at the end of subparagraph (A), (ii) by striking out subparagraph (B), and (iii) by redesignating subparagraph (C) as (B). Section 810 (relating to rules for certain reserves) is amended by striking out subsection (e). (6) Certain funded pension trusts.— (A) Exemption from taxation.— Section 501(c) (relating to list of exempt organizations) is amended by adding at the end thereof the following new paragraph: “(18) A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if— “(A) under the plan, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan, “(B) such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees, and “(C) such benefits do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan.” (B) Conforming amendments.— (i) Section 503(a)(1) (as amended by section 101(j)(7) Ante, p. 527. of this Act) is amended by inserting after subparagraph (B) thereof the following new paragraph: “(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.” (ii) Section 503 (as so amended) is amended by striking out “(c)(17)” each place it appears therein and inserting in lieu thereof “(c)(17) or (18)”. (7) Special rules for feeder organizations.— Section 502 (relating to feeder organizations) is amended to read as follows: “SEC. 502. FEEDER ORGANIZATIONS. “(a) General Rule.— An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501. “(b) Special Rule.— For purposes of this section, the term “trade or business” shall not include— “(1) the deriving of rents which would be excluded under section Ante, pp. 538, 537. 512(b)(3), if section 512 applied to the organization, “(2) any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation, or “(3) any trade or business which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.” (c) Activities Included as Unrelated Trade or Business.— 68A Stat. 172. Section 513 (relating to unrelated trade or business) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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) Unrelated Debt-Financed Income.— (1) In general.— Section 514 (relating to business leases) is 68A Stat. 172. 26 USC 514. amended by striking out so much thereof as precedes subsection (b) and inserting in lieu thereof the following: “SEC. 514. UNRELATED DEBT-FINANCED INCOME. “(a) Unrelated Debt-Financed Income and Deductions.— In computing under section 512 the unrelated business taxable income for Ante, pp. 537, 538. 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 or his delegate) 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. Post, pp. 638, 639, 642. “(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 Post, p. 649. 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 68A Stat. 170. 26 USC 512. 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; or “(D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section Ante, p. 541. 513(a). 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 or his delegate 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 or his delegate 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 subsection (f)). “(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 chapter 74, relating 68A Stat. 849. 26 USC 7121–7123. to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. Interest on any overpayment for a taxable year resulting from the application of subparagraph (B) after the actual use condition is satisfied shall be allowed and paid at the rate of 4 percent per annum in lieu of 6 percent per annum. “(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, except that in the case of any taxable year beginning before January 1, 1972, any indebtedness incurred before June 28, 1966, shall not be taken into account. In the case of an organization (other than a church or convention or association of churches) such indebtedness incurred before June 28, 1966, shall be taken into account if such indebtedness constitutes business lease indebtedness (as defined in subsection(g)). “(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. “(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 80 Stat. 4. 26 USC 501. 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.— For purposes of this section, the term ‘acquisition indebtedness’ does not include 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. “(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 or his delegate, 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. “(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 or his delegate to the extent proper to carry out the purposes of this section.” (2) Related Amendments.— (A) Section 48(a)(4) (relating to definition of section 38 76 Stat. 967. 26 USC 48. property) is amended by adding at the end thereof the following new sentence: “If the property is debt-financed property (as defined in section 514(c)), the basis or cost of such Post, p. 543. property for purposes of computing qualified investment under section 46(c) shall include only that percentage of 76 Stat. 963. the basis or cost which is the same percentage as is used under section 514(b), for the year the property is placed in service, in computing the amount of gross income to be taken into account during such taxable year with respect to such property.” (B) The second sentence of section 681(a) (relating to 68A Stat. 232. limitation on charitable deduction of taxable trusts) is amended by striking out the words “certain leases” and inserting in lieu thereof “certain property acquired with borrowed funds”. (C) Section 1443(a) (relating to withholding of tax on Ante, p 528. payments to foreign tax-exempt organizations) is amended by striking out “rents” and inserting in lieu thereof “income”. (3) Technical and conforming amendments.— (A) Subsections (b), (c), and (d) of section 514 (relating to business leases) are relettered as subsections (f), (g), and (h), respectively. (B) New subsection (f)(1) (old subsection (b)(1), relating to general rule for definition of business lease) is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (g)”. (C) The table of sections for part III of subchapter F of 68A Stat. 169; Ante, p. 492. chapter 1 (as redesignated by section 101(a) of this Act) is amended by striking out— “Sec. 514. Business leases.” and inserting in lieu thereof the following: “Sec. 514. Unrelated debt-financed income.” (e) Returns.— (1) In General.— Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new section: “SEC. 6050. RETURNS RELATING TO CERTAIN TRANSFERS TO EXEMPT ORGANIZATIONS. “(a) General Rule.— On or before the 90th day after the transfer of income producing property, the transferor shall make a return in compliance with the provisions of subsection (b) if the transferee is known by the transferor to be an organization referred to in section Ante, p. 536. 511 (a) or (b) and the property (without regard to any lien) has a fair market value in excess of $50,000. “(b) Form and Contents of Returns.— The return required by subsection (a) shall be in such form and shall set forth, in respect of the transfer, such information as the Secretary or his delegate prescribes by regulations as necessary for carrying out the provisions of the income tax laws.” (2) Technical Amendment.— The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following: “Sec. 6050. Returns relating to certain transfers to exempt organizations.” (f) Restriction on Examination of Churches.— Section 7605 (relating to time and place of examination) is amended by adding at the end thereof the following new subsection: “(c) Restriction on Examination of Churches.— No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to tax under part III of subchapter F of chapter 1 of this title (sec. 511 and following, relating to taxation of business income of exempt organizations) unless the Secretary or his delegate (such officer being no lower than a principal internal revenue officer for an internal revenue region) believes that such organization may be so engaged and so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.” (g) Effective Dates.— The amendments made by this section (other than by subsections (b)(3) and (e)) shall apply to taxable years beginning after December 31, 1969. The amendments made by subsection (b)(3) shall apply to taxable years beginning after December 31, 1970. The amendments made by subsection (e) shall apply with respect to transfers of property after December 31, 1969. Where an organization makes a bargain purchase of property before October 9, 1969, which is subject to a mortgage which was placed on the property more than 5 years before the purchase, and the organization paid the seller total amount no greater than the amount of the seller’s cost (including attorneys’ fees) directly related to the transfer of such property to the organization (but in any event no more than 10 percent of the value of the seller’s equity in the property), the indebtedness secured by such mortgage shall not be treated, notwithstanding the amendments made by subsection (d)(1), as acquisition indebtedness for purposes of section 514(c)(1) of the Internal Revenue Code of 1954 Ante, p. 545. during a period of 10 years following the date of the transaction.

12. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 § 101(j)(14) · 83 Stat. 487

    Redesignated · 26 U.S.C. § 503(b)

    Pub. L. 91–172, § 101(j)(14), redesignated subsec. (c) as (b). Former subsec. (b), setting out the organizations to which section applied, was struck out

    Source evidence

    Code amendment note
    Subsec. (b). Pub. L. 91–172, § 101(j)(14), redesignated subsec. (c) as (b). Former subsec. (b), setting out the organizations to which section applied, was struck out.

    Enacted provision · exact public law section
    (14) Section 503 (relating to requirements of exemption) is amended by striking out subsections (b), (e), and (f) and by redesignating subsections (c), (d), (g), (h), (i), and (j) (as amended), as subsections (b), (c), (d), (e), (f), and (g), respectively.

13. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 title I · 83 Stat. 487

    1. Redesignated · 26 U.S.C. § 503(c)

       Pub. L. 91–172, §§ 101(j)(9), (14), 121(b)(6)(B)(ii), redesignated subsec. (d) as (c)

    2. Struck · 26 U.S.C. § 503(c)

       Pub. L. 91–172, §§ 101(j)(9), (14), 121(b)(6)(B)(ii), struck out reference to organizations described in section 501(c)(3)

    3. Redesignated · 26 U.S.C. § 503(c)

       Pub. L. 91–172, §§ 101(j)(9), (14), 121(b)(6)(B)(ii), inserted reference to organizations described in section 501(c)(17). Former subsec. (c) redesignated (b)

    Source evidence

    Code amendment note
    Subsec. (c). Pub. L. 91–172, §§ 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).

    Enacted provision · exact public law
    TITLE I— TAX EXEMPT ORGANIZATIONS Subtitle A— Private Foundations SEC. 101. PRIVATE FOUNDATIONS. (a) In General.— Subchapter F of chapter 1 (relating to exempt 68A Stat. 163.. 26 USC 501–526. organizations) is amended by redesignating parts II, III, and IV as parts III, IV, and V, respectively, and by inserting after part I the following new part: “PART II— PRIVATE FOUNDATIONS “Sec. 507. Termination of private foundation status. “Sec. 508. Special rules with respect to section 501(c)(3) organizations. “Sec. 509. Private foundation defined. “SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS. “(a) General Rule.— Except as provided in subsection (b), the status of any organization as a private foundation shall be terminated only if— “(1) such organization notifies the Secretary or his delegate (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) of its intent to accomplish such termination, or “(2) (A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax Post, p. 498. under chapter 42, and “(B) the Secretary or his delegate notifies such organization that, by reason of subparagraph (A), such organization is liable for the tax imposed by subsection (c), and either such organization pays the tax imposed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g). “(b) Special Rules.— “(1) Transfer to, or operation as, public charity.— The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if— “(A) such organization distributes all of its net assets to one or more organizations described in section 170(b)(1) Post, p. 550. (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months immediately preceding such distribution, or “(B) (i) such organization meets the requirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969, “(ii) such organization notifies the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) before the commencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is terminating its private foundation status, and “(iii) such organization establishes to the satisfaction of the Secretary or his delegate (in such manner as the Secretary or his delegate may by regulations prescribe) immediately after the expiration of such 12-month or 60-month period that such organization has complied with clause (i). If an organization gives notice under subparagraph (B)(ii) of the commencement of a 60-month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60-month period, this part and chapter 42 shall not apply to such organization for any taxable year Post, p. 498. within such 60-month period for which it does meet such requirements. “(2) Transferee foundations.— For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation shall not be treated as a newly created organization. “(c) Imposition of Tax.— There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of— “(1) the amount which the private foundation substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status 68A Stat. 163. 26 USC 501. of such foundation, or “(2) the value of the net assets of such foundation. “(d) Aggregate Tax Benefit.— “(1) In general.— For purposes of subsection (c), the aggregate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of— “(A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which 26 USC 1, 2001, 2501. would have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contributors to the foundation after February 28, 1913, had been disallowed, and “(B) the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been imposed with respect to the income of the private foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deductions under section 642(c) (or the Post, p. 558. corresponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of section 170(b)(1)(A)), and Post, p. 550. “(C) interest on the increases in tax determined under subparagraphs (A) and (B) from the first date on which each such increase would have been due and payable to the date on which the organization ceases to be a private foundation. “(2) Substantial contributor.— “(A) Definition.— For purposes of paragraph (1), the term ‘substantial contributor’ means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term ‘substantial contributor’ also means the creator of the trust. “(B) Special rules.— For purposes of subparagraph (A)— “(i) each contribution or bequest shall be valued at fair market value on the date it was received, “(ii) in the case of a foundation which is in existence on October 9, 1969, all contributions and bequests received on or before such date shall be treated (except for purposes of clause (i)) as if received on such date, “(iii) an individual shall be treated as making all contributions and bequests made by his spouse, and “(iv) any person who is a substantial contributor on any date shall remain a substantial contributor for all subsequent periods. “(3) Regulations.— For purposes of this section, the determination as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations prescribed by the Secretary or his delegate. “(e) Value of Assets.— For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation. “(f) Liability in Case of Transfers of Assets From Private Foundation.— For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation. “(g) Abatement of Taxes.— The Secretary or his delegate may abate the unpaid portion of the assessment of any tax imposed by subsection (c), or any liability in respect thereof, if— “(1) the private foundation distributes all of its net assets to Post, p. 550. one or more organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or “(2) following the notification prescribed in section 6104(c) to the appropriate State officer, such State officer within one year notifies the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that corrective action has been initiated pursuant to State law to insure that the assets of such private foundation are preserved for such charitable 68A Stat. 163. 26 USC 501. or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Secretary or his delegate receives certification from the appropriate State officer that such action has resulted in such preservation of assets. “SEC. 508. SPECIAL RULES WITH RESPECT TO SECTION 501(c)(3) ORGANIZATIONS. “(a) New Organizations Must Notify Secretary That They Are Applying for Recognition of Section 501(c)(3) Status.— Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)— “(1) unless it has given notice to the Secretary or his delegate, in such manner as the Secretary or his delegate may by regulations prescribe, that it is applying for recognition of such status, or “(2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary or his delegate by regulations for giving notice under this subsection. For purposes of paragraph (2), the time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(b) Presumption That Organizations Are Private Foundations.— Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary 68A Stat. 163. 26 USC 501. or his delegate, at such time and in such manner as the Secretary or his delegate may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation. The time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final. “(c) Exceptions.— “(1) Mandatory exceptions.— Subsections (a) and (b) shall not apply to— “(A) churches, their integrated auxiliaries, and conventions or associations of churches, or “(B) any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000. “(2) Exceptions by regulations.— The Secretary or his delegate may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both— “(A) educational organizations which normally maintain a regular faculty and curriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on; and “(B) any other class of organizations with respect to which the Secretary or his delegate determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provisions of this title relating to private foundations. “(d) Disallowance of Certain Charitable, etc., Deductions.— “(1) Gift or bequest to organizations subject to section 507(c) tax.— No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— Post, pp. 549, 558, 560–562. 26 USC 170, 545, 556, 642, 2055, 2106, 2522. “(A) by any person after notification is made under section 507(a), or “(B) by a substantial contributor (as defined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. “(2) Gift or bequest to taxable private foundation, section 4947 trust, etc.— No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made— “(A) to a private foundation or a trust described in section Post, p. 517. 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)(B) and (C)), or “(B) to any organization in a period for which it is not 68A Stat. 163. 26 USC 501. treated as an organization described in section 501(c)(3) by reason of subsection (a). “(3) Exception.— Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax imposed by section 507(c) is abated by the Secretary or his delegate under section 507(g). “(e) Governing Instruments.— “(1) General rule.— A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are— “(A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the Post, p. 502. foundation to tax under section 4942, and “(B) to prohibit the foundation from engaging in any act of Post, p. 500. Post, p. 507. self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the Post, p. 511. Post, p. 513. foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)). “(2) Special rules for existing private foundations.— In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply— “(A) to any taxable year beginning before January 1, 1972, “(B) to any period after December 31, 1971, during the pendency of any judicial proceeding begun before January 1, 1972, by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument in order to meet the requirements of paragraph (1), and “(C) to any period after the termination of any judicial proceeding described in subparagraph (B) during which its governing instrument or any other instrument does not permit it to meet the requirements of paragraph (1). “SEC. 509. PRIVATE FOUNDATION DEFINED. “(a) General Rule.— For purposes of this title, the term ‘private foundation’ means a domestic or foreign organization described in section 501(c)(3) other than— “(1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); “(2) an organization which— “(A) normally receives more than one-third of its support in each taxable year from any combination of— “(i) gifts, grants, contributions, or membership fees, and “(ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business Post, pp. 541, 542. (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section Post, p. 553. 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization’s support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental Post, p. 515. units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses Post, p. 550. (vii) and (viii)), and “(B) normally receives not more than one-third of its support in each taxable year from gross investment income (as defined in subsection (e)); “(3) an organization which— “(A) is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2), “(B) is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and “(C) is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and “(4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph 68A Stat. 163. 26 USC 501. (2) if it were an organization described in section 501(c)(3). “(b) Continuation of Private Foundation Status.— For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507. “(c) Status of Organization After Termination of Private Foundation Status.— For purposes of this part, an organization the status of which as a private foundation is terminated under section 507 shall (except as provided in section 507(b)(2)) be treated as an organization created on the day after the date of such termination. “(d) Definition of Support.— For purposes of this part and chapter 42, the term ‘support’ includes (but is not limited to)— Post, p. 498. “(1) gifts, grants, contributions, or membership fees, “(2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), Post, pp. 541, 542. “(3) net income from unrelated business activities, whether or not such activities are carried on regularly as a trade or business, “(4) gross investment income (as defined in subsection (e)), “(5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and “(6) the value of services or facilities (exclusive of services or facilities generally furnished to the public without charge) furnished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or exchange of a capital asset, or the value of exemption from any Federal, State, or local tax or any similar benefit. “(e) Definition of Gross Investment Income.— For purposes of subsection (d), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the Post, p. 536. tax imposed by section 511.” (b) Amendment of Subtitle D.— Subtitle D (relating to miscellaneous 26 USC 4001–4931. excise taxes) is amended by adding at the end thereof the following new chapter: “CHAPTER 42.— PRIVATE FOUNDATIONS “Sec. 4940. Excise tax based on investment income. “Sec. 4941. Taxes on self-dealing. “Sec. 4942. Taxes on failure to distribute income. “Sec. 4943. Taxes on excess business holdings. “Sec. 4944. Taxes on investments which jeopardize charitable purpose. “Sec. 4945. Taxes on taxable expenditures. “Sec. 4946. Definitions and special rules. “Sec. 4947. Application of taxes to certain nonexempt trusts. “Sec. 4948. Application of taxes and denial of exemption with respect to certain foreign organizations. “SEC. 4940. EXCISE TAX BASED ON INVESTMENT INCOME. “(a) Tax-Exempt Foundations.— There is hereby imposed on each private foundation which is exempt from taxation under section 501(a) 68A Stat. 163. 26 USC 501. for the taxable year, with respect to the carrying on of its activities, a tax equal to 4 percent of the net investment income of such foundation for the taxable year. “(b) Taxable Foundations.— There is hereby imposed on each private foundation which is not exempt from taxation under section 501(a) for the taxable year, with respect to the carrying on of its activities, a tax equal to— “(1) the amount (if any) by which the sum of (A) the tax imposed under subsection (a) (computed as if such subsection applied to such private foundation for the taxable year), plus (B) the amount of the tax which would have been imposed under section 511 for the taxable year if such private foundation had been exempt from taxation under section 501(a), exceeds “(2) the tax imposed under subtitle A on such private foundation for the taxable year. “(c) Net Investment Income Defined.— “(1) In general.— For purposes of subsection (a), the net investment income is the amount by which (A) the sum of the gross investment income and the net capital gain exceeds (B) the deductions allowed by paragraph (3). Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A. “(2) Gross investment income.— For purposes of paragraph (1), the term ‘gross investment income’ means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. “(3) Deductions.— “(A) In general.— For purposes of paragraph (1), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred for the production or collection of gross investment income or for the management, conservation, or maintenance of property held for the production of such income, determined with the modifications set forth in subparagraph (B). “(B) Modifications.— For purposes of subparagraph (A)— “(i) The deduction provided by section 167 shall be Post, pp. 625, 649. allowed, but only on the basis of the straight line method of depreciation. “(ii) The deduction for depletion provided by section 611 shall be allowed, but such deduction shall be determined 68A Stat. 207. 26 USC 611. without regard to section 613 (relating to percentage depletion). Post, p. 629. “(4) Capital gains and losses.— For purposes of paragraph (1) in determining net capital gain— “(A) There shall be taken into account only gains and losses from the sale or other disposition of property used for the production of interest, dividends, rents, and royalties, and property used for the production of income included in computing the tax imposed by section 511 (except to the extent Post, p. 536. gain or loss from the sale or other disposition of such property is taken into account for purposes of such tax). “(B) The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(C) Losses from sales or other dispositions of property shall be allowed only to the extent of gains from such sales or other dispositions, and there shall be no capital loss carryovers. “(5) Tax-exempt income.— For purposes of this section, net investment income shall be determined by applying section 103 Post, p. 656. (relating to interest on certain governmental obligations) and section 265 (relating to expenses and interest relating to tax-exempt 68A Stat. 78; 78 Stat. 56. income). “SEC. 4941. TAXES ON SELF-DEALING. “(a) Initial Taxes.— “(1) On self-dealer.— There is hereby imposed a tax on each act of self-dealing between a disqualified person and a private foundation. The rate of tax shall be equal to 5 percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participates in the act of self-dealing. In the case of a government official (as defined in section 4946(c)), a tax shall be imposed by this paragraph only if such disqualified person participates in the act of self-dealing knowing that it is such an act. “(2) On foundation manager.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in an act of self-dealing between a disqualified person and a private foundation, knowing that it is such an act, a tax equal to 2½ percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the act of self-dealing. “(b) Additional Taxes.— “(1) On self-dealer.— In any case in which an initial tax is imposed by subsection (a)(1) on an act of self-dealing by a disqualified person with a private foundation and the act is not corrected within the correction period, there is hereby imposed a tax equal to 200 percent of the amount involved. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who participated in the act of self-dealing. “(2) On foundation manager.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount involved. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under any paragraph of subsection (a) or (b) with respect to any one act of self-dealing, all such persons shall be jointly and severally liable under such paragraph with respect to such act. “(2) $10,000 limit for management.— With respect to any one act of self-dealing, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $10,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Self-Dealing.— “(1) In general.— For purposes of this section, the term ‘self-dealing’ means any direct or indirect— “(A) sale or exchange, or leasing, of property between a private foundation and a disqualified person; “(B) lending of money or other extension of credit between a private foundation and a disqualified person; “(C) furnishing of goods, services, or facilities between a private foundation and a disqualified person; “(D) payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person; “(E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and “(F) agreement by a private foundation to make any payment of money or other property to a government official (as defined in section 4946(c)), other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period. “(2) Special rules.— For purposes of paragraph (1)— “(A) the transfer of real or personal property by a disqualified person to a private foundation shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the foundation assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer; “(B) the lending of money by a disqualified person to a private foundation shall not be an act of self-dealing if the loan is without interest or other charge and if the proceeds of the loan are used exclusively for purposes specified in 68A Stat. 163. 26 USC 501. section 501(c)(3); “(C) the furnishing of goods, services, or facilities by a disqualified person to a private foundation shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities so furnished are used exclusively for purposes specified in section 501(c)(3); 68A Stat 163. 26 USC 501. “(D) the furnishing of goods, services, or facilities by a private foundation to a disqualified person shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public; “(E) except in the case of a government official (as defined in section 4946(c)), the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive; “(F) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946(a)), pursuant to any liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization, shall not be an act of self-dealing if all of the securities of the same class as that held by the foundation are subject to the same terms and such terms provide for receipt by the foundation of no less than fair market value; and “(G) in the case of a government official (as defined in section 4946(c)), paragraph (1) shall in addition not apply to— “(i) prizes and awards which are subject to the provisions of section 74(b), if the recipients of such prizes and awards are selected from the general public, “(ii) scholarships and fellowship grants which are subject to the provisions of section 117(a) and are to be used for study at an educational institution described in section 151(e)(4), “(iii) any annuity or other payment (forming part of a stock-bonus, pension, or profit-sharing plan) by a trust which is a qualified trust under section 401, “(iv) any annuity or other payment under a plan which meets the requirements of section 404(a)(2), “(v) any contribution or gift (other than a contribution or gift of money) to, or services or facilities made available to, any such individual, if the aggregate value of such contributions, gifts, services, and facilities to, or made available to, such individual during any calendar year does not exceed $25, “(vi) any payment made under chapter 41 of title 5, United States Code, or 80 Stat. 432. 5 USC 4101–4118. “(vii) any payment or reimbursement of traveling expenses for travel solely from one point in the United States to another point in the United States, but only if such payment or reimbursement does not exceed the actual cost of the transportation involved plus an amount for all other traveling expenses not in excess of 125 percent of the maximum amount payable under section 5702(a) of title 5, United States Code, for like travel Ante, p. 190. by employees of the United States. “(e) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection 68A Stat. 770. 26 USC 6212. (a)(1) under section 6212, or (B) the date on which correction of the act of self-dealing is completed. “(2) Amount involved.— The term ‘amount involved’ means, with respect to any act of self-dealing, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in subsection (d)(2)(E), the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value— “(A) in the case of the taxes imposed by subsection (a), shall be determined as of the date on which the act of self-dealing occurs; and “(B) in the case of the taxes imposed by subsection (b), shall be the highest fair market value during the correction period. “(3) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any act of self-dealing, undoing the transaction to the extent possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards. “(4) Correction Period.— The term ‘correction period’ means, with respect to any act of self-dealing, the period beginning with the date on which the act of self-dealing occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the act of self-dealing. “SEC. 4942. TAXES ON FAILURE TO DISTRIBUTE INCOME. “(a) Initial Tax.— There is hereby imposed on the undistributed income of a private foundation for any taxable year, which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period), a tax equal to 15 percent of the amount of such income remaining undistributed at the beginning of such second (or succeeding) taxable year. The tax imposed by this subsection shall not apply to the undistributed income of a private foundation— “(1) for any taxable year for which it is an operating foundation (as defined in subsection (j)(3)), or “(2) to the extent that the foundation failed to distribute any amount solely because of an incorrect valuation of assets under subsection (e), if— “(A) the failure to value the assets properly was not willful and was due to reasonable cause, “(B) such amount is distributed as qualifying distributions (within the meaning of subsection (g)) by the foundation during the allowable distribution period (as defined in subsection (j)(4)), “(C) the foundation notifies the Secretary or his delegate that such amount has been distributed (within the meaning of subparagraph (B)) to correct such failure, and “(D) such distribution is treated under subsection (h)(2) as made out of the undistributed income for the taxable year for which a tax would (except for this paragraph) have been imposed under this subsection. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) on the undistributed income of a private foundation for any taxable year, if any portion of such income remains undistributed at the close of the correction period, there is hereby imposed a tax equal to 100 percent of the amount remaining undistributed at such time. “(c) Undistributed Income.— For purposes of this section, the Definition. term ‘undistributed income’ means, with respect to any private foundation for any taxable year as of any time, the amount by which— “(1) the distributable amount for such taxable year, exceeds “(2) the qualifying distributions made before such time out of such distributable amount. “(d) Distributable Amount.— For purposes of this section, the Definition. term ‘distributable amount’ means, with respect to any foundation for any taxable year, an amount equal to— “(1) the minimum investment return or the adjusted net income (whichever is higher), reduced by “(2) the sum of the taxes imposed on such private foundation for the taxable year under subtitle A and section 4940. 26 USC 1–1563. “(e) Minimum Investment return.— “(1) In general.— For purposes of subsection (d), the minimum investment return for any private foundation for any taxable year is the amount determined by multiplying— “(A) the excess of (i) the aggregate fair market value of all assets of the foundation other than those being used (or held for use) directly in carrying out the foundation’s exempt purpose over (ii) the acquisition indebtedness with respect to such assets (determined under section 514(c)(1), but Post, p. 545. without regard to the taxable year in which the indebtedness was incurred), by “(B) the applicable percentage for such year, determined under paragraph (3). “(2) Valuation.— For purposes of paragraph (1)(A), the fair market value of securities for which market quotations are readily available shall be determined on a monthly basis. For all other assets, the fair market value shall be determined at such times and in such manner as the Secretary or his delegate shall by regulations prescribe. “(3) Applicable percentage.— For purposes of paragraph (1)(B), the applicable percentage for taxable years beginning in 1970 is 6 percent. The applicable percentage for any taxable year beginning after 1970 shall be determined and published by the Secretary or his delegate and shall bear a relationship to 6 percent which the Secretary or his delegate determines to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1969. “(4) Transitional rules.— “For special rules applicable to organizations created before May 27, 1969, see section 101(1)(3) of the Tax Reform Act of 1969. Post, p. 534. “(f) Adjusted Net Income.— “(1) Defined.— For purposes of subsection (d), the term ‘adjusted net income’ means the excess (if any) of— “(A) the gross income for the taxable year (determined with the income modifications provided by paragraph (2)), over “(B) the sum of the deductions (determined with the deduction modifications provided by paragraph (3)) which would be allowed to a corporation subject to the tax imposed 78 Stat. 25, 118. 26 USC 11. by section 11 for the taxable year. “(2) Income modifications.— The income modifications referred to in paragraph (1)(A) are as follows: “(A) section 103 (relating to interest on certain governmental obligations) shall not apply, “(B) capital gains and losses from the sale or other disposition of property shall be taken into account only in an amount equal to any net short-term capital gain for the taxable year; and “(C) there shall be taken into account— “(i) amounts received or accrued as repayments of amounts which were taken into account as a qualifying distribution within the meaning of subsection (g)(1)(A) for any taxable year; “(ii) notwithstanding subparagraph (B), amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of such property was taken into account as a qualifying distribution (within the meaning of subsection (g)(1)(B)) for any taxable year; and “(iii) any amount set aside under subsection (g)(2) to the extent it is determined that such amount is not necessary for the purposes for which it was set aside. “(3) Deduction modifications.— The deduction modifications referred to in paragraph (1)(B) are as follows: “(A) no deduction shall be allowed other than all the ordinary and necessary expenses paid or incurred for the production or collection of gross income or for the management, conservation, or maintenance of property held for the production of such income and the allowances for depreciation and depletion determined under section 4940(c)(3)(B), and “(B) section 265 (relating to expenses and interest relating to tax-exempt interest) shall not apply. “(4) Transitional rule.— For purposes of paragraph (2)(B), the basis (for purposes of determining gain) of property held by a private foundation on December 31, 1969, and continuously thereafter to the date of its disposition, shall be deemed to be not less than the fair market value of such property on December 31, 1969. “(g) Qualifying Distributions Defined.— “(1) In general.— For purposes of this section, the term ‘qualifying distribution’ means— “(A) any amount (including administrative expenses) paid to accomplish one or more purposes described in section Post, p. 553. 170(c)(2)(B), other than any contribution to (i) an organization controlled (directly or indirectly) by the foundation or one or more disqualified persons (as defined in section 4946) with respect to the foundation, except as provided in paragraph (3), or (ii) a private foundation which is not an operating foundation (as defined in subsection (j)(3)), except as provided in paragraph (3), or “(B) any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes described in section 170(c)(2)(B). Post, p. 553. “(2) Certain set-asides.— Subject to such terms and conditions as may be prescribed by the Secretary or his delegate, an amount set aside for a specific project which comes within one or more purposes described in section 170(c)(2)(B) may be treated as a qualifying distribution, but only if, at the time of the set-aside, the private foundation establishes to the satisfaction of the Secretary or his delegate that— “(A) the amount will be paid for the specific project within 5 years, and “(B) the project is one which can be better accomplished by such set-aside than by immediate payment of funds. For good cause shown, the period for paying the amount set aside may be extended by the Secretary or his delegate. “(3) Certain contributions to section 501(c)(3) organizations.— For purposes of this section, the term ‘qualifying distribution’ includes a contribution to a section 501(c)(3) organization 68A Stat. 163. 26 USC 501. described in paragraph (1)(A)(i) or (ii) if— “(A) not later than the close of the first taxable year after its taxable year in which such contribution is received, such organization makes a distribution equal to the amount of such contribution and such distribution is a qualifying distribution (within the meaning of paragraph (1) or (2), without regard to this paragraph) which is treated under subsection (h) as a distribution out of corpus (or would be so treated if such section 501(c)(3) organization were a private foundation which is not an operating foundation), and “(B) the private foundation making the contribution obtains adequate records or other sufficient evidence from such organization showing that the qualifying distribution described in subparagraph (A) has been made by such organization. “(h) Treatment of Qualifying Distributions.— “(1) In general.— Except as provided in paragraph (2), any qualifying distribution made during a taxable year shall be treated as made— “(A) first out of the undistributed income of the immediately preceding taxable year (if the private foundation was subject to the tax imposed by this section for such preceding taxable year) to the extent thereof, “(B) second out of the undistributed income for the taxable year to the extent thereof, and “(C) then out of corpus. For purposes of this paragraph, distributions shall be taken into account in the order of time in which made. “(2) Correction of deficient distributions for prior taxable years, etc.— In the case of any qualifying distribution which (under paragraph (1)) is not treated as made out of the undistributed income of the immediately preceding taxable year, the foundation may elect to treat any portion of such distribution as made out of the undistributed income of a designated prior taxable year or out of corpus. The election shall be made by the foundation at such time and in such manner as the Secretary or his delegate shall by regulations prescribe. “(i) Adjustment of Distributable Amount Where Distributions During Prior Years Have Exceeded Income.— “(1) In general.— If, for the taxable years in the adjustment period for which an organization is a private foundation— “(A) the aggregate qualifying distributions treated (under subsection (h)) as made out of the undistributed income for such taxable year or as made out of corpus (except to the extent subsection (g)(3) with respect to the recipient private Post, p. 552. foundation or section 170(b)(1)(E)(ii) applies) during such taxable years, exceed “(B) the distributable amounts for such taxable years (determined without regard to this subsection), then, for purposes of this section (other than subsection (h)), the distributable amount for the taxable year shall be reduced by an amount equal to such excess. “(2) Taxable years in adjustment period.— For purposes of paragraph (1), with respect to any taxable year of a private foundation the taxable years in the adjustment period are the taxable years (not exceeding 5) beginning after December 31, 1969, and immediately preceding the taxable year, “(j) Other Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to the undistributed income for any taxable year, the period beginning with the first day of the taxable year and ending on the date of mailing of a notice of deficiency with respect to the tax 68A Stat. 770. 26 USC 6212. imposed by subsection (a) under section 6212. “(2) Correction period.— The term ‘correction period’ means, with respect to any private foundation for any taxable year, the period beginning with the first day of the taxable year and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed 26 USC 6213. under section 6213 (a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(3) Operating foundation.— For purposes of this section, the term ‘operating foundation’ means any organization— “(A) which makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated equal to substantially all of its adjusted net income (as defined in subsection (f)); and “(B) (i) substantially more than half of the assets of which are devoted directly to such activities or to functionally related businesses (as defined in paragraph (5)), or to both, or are stock of a corporation which is controlled by the foundation and substantially all of the assets of which are so devoted, “(ii) which normally makes qualifying distributions (within the meaning of paragraph (1) or (2) of subsection (g)) directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated in an amount not less than two-thirds of its minimum investment return (as defined in subsection (e)), or “(iii) substantially all of the support (other than gross investment income as defined in section 509(e)) of which is Ante, p. 496. normally received from the general public and from 5 or more exempt organizations which are not described in section 4946 (a)(1)(H) with respect to each other or the recipient foundation; not more than 25 percent of the support (other than gross investment income) of which is normally received from any one such exempt organization; and not more than half of the support of which is normally received from gross investment income. “(4) Allowable distribution period.— The term ‘allowable Definition. distribution period’ means, with respect to any private foundation, the period beginning with the first day of the first taxable year following the taxable year in which the incorrect valuation (described in subsection (a)(2)) occurred and ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (a)) under section 6212 extended 68A Stat. 770. 26 USC 6212. by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit a distribution of undistributed income under this section. “(5) Functionally related business.— The term ‘functionally Definition. related business’ means— “(A) a trade or business which is not an unrelated trade or business (as defined in section 513), or Post, pp. 541, 542. “(B) an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exempt purposes of the organization. “SEC. 4943. TAXES ON EXCESS BUSINESS HOLDINGS. “(a) Initial Tax.— “(1) Imposition.— There is hereby imposed on the excess business holdings of any private foundation in a business enterprise during any taxable year which ends during the taxable period a tax equal to 5 percent of the value of such holdings. “(2) Special rules.— The tax imposed by paragraph (1)— “(A) shall be imposed on the last day of the taxable year, but “(B) with respect to the private foundation’s holdings in any business enterprise, shall be determined as of that day during the taxable year when the foundation’s excess holdings in such enterprise were the greatest. “(b) Additional Tax.— In any case in which an initial tax is imposed under subsection (a) with respect to the holdings of a private foundation in any business enterprise, if, at the close of the correction period with respect to such holdings, the foundation still has excess business holdings in such enterprise, there is hereby imposed a tax equal to 200 percent of such excess business holdings. “(c) Excess Business Holdings.— For purposes of this section— Definition. “(1) In general.— The term ‘excess business holdings’ means, with respect to the holdings of any private foundation in any business enterprise, the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings. “(2) Permitted holdings in a corporation.— “(A) In general.— The permitted holdings of any private foundation in an incorporated business enterprise are— “(i) 20 percent of the voting stock, reduced by “(ii) the percentage of the voting stock owned by all disqualified persons. In any case in which all disqualified persons together do not own more than 20 percent of the voting stock of an incorporated business enterprise, nonvoting stock held by the private foundation shall also be treated as permitted holdings. “(B) 35 percent rule where third person has effective control of enterprise.— If— “(i) the private foundation and all disqualified persons together do not own more than 35 percent of the voting stock of an incorporated business enterprise, and “(ii) it is established to the satisfaction of the Secretary or his delegate that effective control of the corporation is in one or more persons who are not disqualified persons with respect to the foundation, then subparagraph (A) shall be applied by substituting 35 percent for 20 percent. “(C) 2 percent de minimis rule.— A private foundation shall not be treated as having excess business holdings in any corporation in which it (together with all other private foundations which are described in section 4946(a)(1)(H)) owns not more than 2 percent of the voting stock and not more than 2 percent in value of all outstanding shares of all classes of stock. “(3) Permitted holdings in partnerships, etc.— The permitted holdings of a private foundation in any business enterprise which is not incorporated shall be determined under regulations prescribed by the Secretary or his delegate. Such regulations shall be consistent in principle with paragraphs (2) and (4), except that— “(A) in the case of a partnership or joint venture, ‘profits interest’ shall be substituted for ‘voting stock’, and ‘capital interest’ shall be substituted for ‘nonvoting stock’, “(B) in the case of a proprietorship, there shall be no permitted holdings, and “(C) in any other case, ‘beneficial interest’ shall be substituted for ‘voting stock’. “(4) Present holdings.— “(A) (i) In applying this section with respect to the holdings of any private foundation in a business enterprise, if such foundation and all disqualified persons together have holdings in such enterprise in excess of 20 percent of the voting stock on May 26, 1969, the percentage of such holdings shall be substituted for ‘20 percent,’ and for ‘35 percent’ (if the percentage of such holdings is greater than 35 percent), wherever it appears in paragraph (2), but in no event shall the percentage so substituted be more than 50 percent. “(ii) If the percentage of the holdings of any private foundation and all disqualified persons together in a business enterprise (or if the percentage of the holdings of the private foundation in such enterprise) decreases for any reason, clause (i) and subparagraph (D) shall, except as provided in the next sentence, be applied for all periods after such decrease by substituting such decreased percentage for the percentage held on May 26, 1969, but in no event shall the percentage substituted be less than 20 percent. For purposes of this clause, any decrease in percentage holdings attributable to issuances of stock (or to issuances of stock coupled with redemptions of stock) shall be determined only as of the close of each taxable year of the private foundation unless the aggregate of the percentage decreases attributable to the issuances of stock (or such issuances and redemptions) during such taxable year equals or exceeds 1 percent. “(iii) The percentage substituted under clause (i), and any percentage substituted under subparagraph (D), shall be applied both with respect to the voting stock and, separately, with respect to the value of all outstanding shares of all classes of stock. “(iv) In the case of any merger, recapitalization, or other reorganization involving one or more business enterprises, the application of clauses (i), (ii), and (iii) shall be determined under regulations prescribed by the Secretary or his delegate. “(B) Any interest in a business enterprise which a private foundation holds on May 26, 1969, if the private foundation on such date has excess business holdings, shall (while held by the foundation) be treated as held by a disqualified person (rather than by the private foundation)— “(i) during the 20-year period beginning on such date, if the private foundation has more than a 95 percent voting stock interest on such date, “(ii) except as provided in clause (i), during the 15-year period beginning on such date, if the foundation and all disqualified persons have more than a 75 percent voting stock interest (or more than a 75 percent profits or beneficial interest in the case of any unincorporated enterprise) on such date or more than a 75 percent interest in the value of all outstanding shares of all classes of stock (or more than a 75 percent capital interest in the case of a partnership or joint venture) on such date, or “(iii) during the 10-year period beginning on such date, in any other case. “(C) The 20-year, 15-year, and 10-year periods described in subparagraph (B) for the disposition of excess business holdings shall be suspended during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to allow disposition of such holdings. “(D) (i) If, at any time during the second phase, all disqualified persons together have holdings in a business enterprise in excess of 2 percent of the voting stock of such enterprise, then subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘50 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(ii) If, immediately before the close of the second phase, clause (i) of this subparagraph did not apply with respect to a business enterprise, then for all periods after the close of the second phase subparagraph (A)(i) shall be applied by substituting for ‘50 percent’ the following: ‘35 percent, or if at any time after the close of the second phase all disqualified persons together have had holdings in such enterprise which exceed 2 percent of the voting stock, 35 percent, of which not more than 25 percent shall be voting stock held by the private foundation’. “(iii) For purposes of this subparagraph, the term ‘second phase’ means the 15-year period immediately following the 20-year, 15-year, or 10-year period described in subparagraph (B), whichever applies, as modified by subparagraph (C). “(E) Clause (ii) of subparagraph (B) shall not apply with respect to any business enterprise if before January 1, 1971, one or more individuals who are substantial contributors (or members of the family (within the meaning of section 1946(d)) of one or more substantial contributors) to the private foundation and who on May 26, 1969, held more than 15 percent of the voting stock of the enterprise elect, in such manner as the Secretary or his delegate may by regulations prescribe, not to have such clause (ii) apply with respect to such enterprise. “(5) Holdings acquired by trust or will.— Paragraph (4) (other than subparagraph (B)(i)) shall apply to any interest in a business enterprise which a private foundation acquires under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter, as if such interest were held on May 26, 1969, except that the 15-year and 10-year periods prescribed in clauses (ii) and (iii) of paragraph (4)(B) shall commence with respect to such interest on the date of distribution under the trust or will in lieu of May 26, 1969. “(6) 5-year period to dispose of gifts, bequests, etc.— Except as provided in paragraph (5), if, after May 26, 1969, there is a change in the holdings in a business enterprise (other than by purchase by the private foundation or by a disqualified person) which causes the private foundation to have— “(A) excess business holdings in such enterprise, the interest of the foundation in such enterprise (immediately after such change) shall (while held by the foundation) be treated as held by a disqualified person (rather than by the foundation) during the 5-year period beginning on the date of such change in holdings; or “(B) an increase in excess business holdings in such enterprise (determined without regard to subparagraph (A)), subparagraph (A) shall apply, except that the excess holdings immediately preceding the increase therein shall not be treated, solely because of such increase, as held by a disqualified person (rather than by the foundation). “(d) Definitions; Special Rules.— For purposes of this section— “(1) Business holdings.— In computing the holdings of a private foundation, or a disqualified person (as defined in section 4946) with respect thereto, in any business enterprise, any stock or other interest owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. The preceding sentence shall not apply with respect to an income or remainder interest of a private foundation in a trust described in section 4947(a)(2), but only if, in the case of property transferred in trust after May 26, 1969, such foundation holds only an income interest or only a remainder interest in such trust. “(2) Taxable period.— The term ‘taxable period’ means, with respect to any excess business holdings of a private foundation in a business enterprise, the period beginning on the first day on which there are such excess holdings and ending on the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a) under section 6212 in respect of such holdings. 68A Stat. 770. 26 USC 6212. “(3) Correction period.— The term ‘correction period’ means, with respect to excess business holdings of a private foundation in a business enterprise, the period ending 90 days after the date of mailing of a notice of deficiency (with respect to the tax imposed by subsection (b)) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to permit orderly disposition of such excess business holdings. “(4) Business enterprise.— The term ‘business enterprise’ does not include— “(A) a functionally related business (as defined in section 4942(j)(5)), or “(B) a trade or business at least 95 percent of the gross income of which is derived from passive sources. For purposes of subparagraph (B), gross income from passive sources includes the items excluded by section 512(b)(1), (2), (3), and (5), and income from the sale of goods (including Post, p. 538. 26 USC 512. charges or costs passed on at cost to purchasers of such goods or income received in settlement of a dispute concerning or in lieu of the exercise of the right to sell such goods) if the seller does not manufacture, produce, physically receive or deliver, negotiate sales of, or maintain inventories in such goods. “SEC. 4944. TAXES ON INVESTMENTS WHICH JEOPARDIZE CHARITABLE PURPOSE. “(a) Initial Taxes.— “(1) On the private foundation.— If a private foundation invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes, there is hereby imposed on the making of such investment a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any foundation manager in the making of the investment, knowing that it is jeopardizing the carrying out of any of the foundation’s exempt purposes, a tax equal to 5 percent of the amount so invested for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who participated in the making of the investment. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on the making of an investment and such investment is not removed from jeopardy within the correction period, there is hereby imposed a tax equal to 25 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the removal from jeopardy, there is hereby imposed a tax equal to 5 percent of the amount of the investment. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the removal from jeopardy. “(c) Exception for Program-Related Investments.— For purposes of this section, investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c) Post, p. 553. (2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes. “(d) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to any one investment, all such persons shall be jointly and severally liable under such paragraph with respect to such investment. “(2) Limit for management.— With respect to any one investment, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(e) Definitions.— For purposes of this section— “(1) Taxable period.— The term ‘taxable period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which the amount is so invested and ending on whichever of the following is the earlier: (A) the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (a)(1) under section 68A Stat. 770. 26 USC 6212. 6212, or (B) the date on which the amount so invested is removed from jeopardy. “(2) Removal from jeopardy.— An investment which jeopardizes the carrying out of exempt purposes shall be considered to be removed from jeopardy when such investment is sold or otherwise disposed of, and the proceeds of such sale or other disposition are not investments which jeopardize the carrying out of exempt purposes. “(3) Correction period.— The term ‘correction period’ means, with respect to any investment which jeopardizes the carrying out of exempt purposes, the period beginning with the date on which such investment is entered into and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about removal from jeopardy. “SEC. 4945. TAXES ON TAXABLE EXPENDITURES. “(a) Initial Taxes.— “(1) On the foundation.— There is hereby imposed on each taxable expenditure (as defined in subsection (d)) a tax equal to 10 percent of the amount thereof. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— There is hereby imposed on the agreement of any foundation manager to the making of an expenditure, knowing that it is a taxable expenditure, a tax equal to 2½ percent of the amount thereof, unless such agreement is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any foundation manager who agreed to the making of the expenditure. “(b) Additional Taxes.— “(1) On the foundation.— In any case in which an initial tax is imposed by subsection (a)(1) on a taxable expenditure and such expenditure is not corrected within the correction period, there is hereby imposed a tax equal to 100 percent of the amount of the expenditure. The tax imposed by this paragraph shall be paid by the private foundation. “(2) On the management.— In any case in which an additional tax is imposed by paragraph (1), if a foundation manager refused to agree to part or all of the correction, there is hereby imposed a tax equal to 50 percent of the amount of the taxable expenditure. The tax imposed by this paragraph shall be paid by any foundation manager who refused to agree to part or all of the correction. “(c) Special Rules.— For purposes of subsections (a) and (b)— “(1) Joint and several liability.— If more than one person is liable under subsection (a)(2) or (b)(2) with respect to the making of a taxable expenditure, all such persons shall be jointly and severally liable under such paragraph with respect to such expenditure. “(2) Limit for management.— With respect to any one taxable expenditure, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $5,000, and the maximum amount of the tax imposed by subsection (b)(2) shall not exceed $10,000. “(d) Taxable Expenditure.— For purposes of this section, the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation— “(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e), “(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive, “(3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g), “(4) as a grant to an organization (other than an organization described in paragraph (1), (2), or (3) of section 509(a)), unless Ante, p. 496. the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or “(5) for any purpose other than one specified in section 170(c)(2)(B). Post, p. 553. “(e) Activities Within Subsection (d)(1).— For purposes of subsection (d)(1), the term ‘taxable expenditure’ means any amount paid or incurred by a private foundation for— “(1) any attempt to influence any legislation through an attempt to affect the opinion of the general public or any segment thereof, and “(2) any attempt to influence legislation through communication with any member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of the legislation (except technical advice or assistance provided to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be), other than through making available the results of nonpartisan analysis, study, or research. Paragraph (2) of this subsection shall not apply to any amount paid or incurred in connection with an appearance before, or communication to, any legislative body with respect to a possible decision of such body which might affect the existence of the private foundation, its powers and duties, its tax-exempt status, or the deduction of contributions to such foundation. “(f) Nonpartisan Activities Carried on by Certain Organizations.— Subsection (d)(2) shall not apply to any amount paid or incurred by any organization— “(1) which is described in section 501(c)(3) and exempt from taxation under section 501(a), “(2) the activities of which are nonpartisan, are not confined to one specific election period, and are carried on in 5 or more States, “(3) substantially all of the income of which is expended directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, “(4) substantially all of the support (other than gross investment Ante, p. 496. income as defined in section 509(e)) of which is received from exempt organizations, the general public, governmental Post, p. 553. units described in section 170(c)(1), or any combination of the foregoing; not more than 25 percent of such support is received from any one exempt organization (for this purpose treating private foundations which are described in section 4946(a)(1)(H) with respect to each other as one exempt organization); and not more than half of the support of which is received from gross investment income, and “(5) contributions to which for voter registration drives are not subject to conditions that they may be used only in specified States, possessions of the United States, or political subdivisions or other areas of any of the foregoing, or the District of Columbia, or that they may be used in only one specific election period. In determining whether the organization meets the requirements of paragraph (4) for any taxable year of such organization, there shall be taken into account the support received by such organization during such taxable year and during the immediately preceding 4 taxable years of such organization (excluding therefrom any preceding taxable year which begins before January 1, 1970). Subsection (d)(4) shall not apply to any grant to an organization which meets the requirements of this subsection. “(g) Individual Grants.— Subsection (d)(3) shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the Secretary or his delegate, if it is demonstrated to the satisfaction of the Secretary or his delegate that— “(1) the grant constitutes a scholarship or fellowship grant which is subject to the provisions of section 117(a) and is to be used for study at an educational institution described in section 151(e)(4), “(2) the grant constitutes a prize or award which is subject to the provisions of section 74(b), if the recipient of such prize or award is selected from the general public, or “(3) the purpose of the grant is to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. “(h) Expenditure Responsibility.— The expenditure responsibility referred to in subsection (d)(4) means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures— “(1) to see that the grant is spent solely for the purpose for which made, “(2) to obtain full and complete reports from the grantee on how the funds are spent, and “(3) to make full and detailed reports with respect to such expenditures to the Secretary or his delegate. “(i) Other Definitions.— For purposes of this section— “(1) Correction.— The terms ‘correction’ and ‘correct’ mean, with respect to any taxable expenditure, (A) recovering part or all of the expenditure to the extent recovery is possible, and where full recovery is not possible such additional corrective action as is prescribed by the Secretary or his delegate by regulations, or (B) in the case of a failure to comply with subsection (h)(2) or (h)(3), obtaining or making the report in question. “(2) Correction period.— The term ‘correction period’ means, with respect to any taxable expenditure, the period beginning with the date on which the taxable expenditure occurs and ending 90 days after the date of mailing of a notice of deficiency with respect to the tax imposed by subsection (b)(1) under section 6212, extended by— 68A Stat. 770. 26 USC 6212. “(A) any period in which a deficiency cannot be assessed under section 6213(a), and “(B) any other period which the Secretary or his delegate determines is reasonable and necessary to bring about correction of the taxable expenditure (except that such determination shall not be made with respect to any taxable expenditure within the meaning of paragraph (1), (2), (3), or (4) of subsection (d) because of any action by an appropriate State officer as defined in section 6104(c)(2)). Post, p. 523. “SEC. 4946. DEFINITIONS AND SPECIAL RULES. “(a) Disqualified Person.— “(1) In general.— For purposes of this chapter, the term ‘disqualified person’ means, with respect to a private foundation, a person who is— “(A) a substantial contributor to the foundation, “(B) a foundation manager (within the meaning of subsection (b)(1)), “(C) an owner of more than 20 percent of— “(i) the total combined voting power of a corporation, “(ii) the profits interest of a partnership, or “(iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, “(D) a member of the family (as defined in subsection (d)) of any individual described in subparagraph (A), (B), or (C), “(E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power, “(F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the profits interest, “(G) a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest, “(H) only for purposes of section 4943, a private foundation— “(i) which is effectively controlled (directly or indirectly) by the same person or persons who control the private foundation in question, or “(ii) substantially all of the contributions to which were made (directly or indirectly) by the same person or persons described in subparagraph (A), (B), or (C), or members of their families (within the meaning of subsection (d)), who made (directly or indirectly) substantially all of the contributions to the private foundation in question, and “(I) only for purposes of section 4941, a government official (as defined in subsection (c)). “(2) Substantial contributors.— For purposes of paragraph (1), the term ‘substantial contributor’ means a person who is Ante, p. 493. described in section 507(d)(2). “(3) Stockholdings.— For purposes of paragraphs (1)(C)(i) and (1)(E), there shall be taken into account indirect stockholdings 68A Stat. 78. 26 USC 267. which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(4) Partnerships; trusts.— For purposes of paragraphs (1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of subsection (d). “(b) Foundation Manager.— For purposes of this chapter, the term ‘foundation manager’ means, with respect to any private foundation— “(1) an officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation), and “(2) with respect to any act (or failure to act), the employees of the foundation having authority or responsibility with respect to such act (or failure to act). “(c) Government Official.— For purposes of subsection (a)(1)(I) and section 4941, the term ‘government official’ means, with respect to an act of self-dealing described in section 4941, an individual who, at the time of such act, holds any of the following offices or positions (other than as a ‘special Government employee’, as defined in section 76 Stat. 1221; 82 Stat. 1115. 202(a) of title 18, United States Code): “(1) an elective public office in the executive or legislative branch of the Government of the United States, “(2) an office in the executive or judicial branch of the Government of the United States, appointment to which was made by the President, “(3) a position in the executive, legislative, or judicial branch of the Government of the United States— “(A) which is listed in schedule C of rule VI of the Civil Service Rules, or “(B) the compensation for which is equal to or greater than the lowest rate of compensation prescribed for GS–16 of the General Schedule under section 5332 of title 5, United States Code, 5 USC 5332 note. “(4) a position under the House of Representatives or the Senate of the United States held by an individual receiving gross compensation at an annual rate of $15,000 or more, “(5) an elective or appointive public office in the executive, legislative, or judicial branch of the government of a State, possession of the United States, or political subdivision or other area of any of the foregoing, or of the District of Columbia, held by an individual receiving gross compensation at an annual rate of $15,000 or more, or “(6) a position as personal or executive assistant or secretary to any of the foregoing. “(d) Members of Family.— For purposes of subsection (a)(1), the family of any individual shall include only his spouse, ancestors, lineal descendants, and spouses of lineal descendants. “SEC. 4947. APPLICATION OF TAXES TO CERTAIN NONEXEMPT TRUSTS. “(a) Application of Tax.— “(1) Charitable trusts.— For purposes of part II of subchapter F of chapter 1 (other than section 508(a), (b), and (c)) Ante, p. 492. and for purposes of this chapter, a trust which is not exempt from taxation under section 501(a), all of the unexpired interests in 68A Stat. 163. 26 USC 501. which are devoted to one or more of the purposes described in section 170(c)(2)(B), and for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a) Post, pp. 549, 558, 560–562. (2), or 2522 (or the corresponding provisions of prior law), shall be treated as an organization described in section 501(c)(3). For purposes of section 509(a)(3)(A), such a trust shall be treated as if organized on the day on which it first becomes subject to this paragraph. “(2) Split-interest trusts.— In the case of a trust which is not exempt from tax under section 501(a), not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to termination of private foundation status), section 508(e) (relating to governing instruments) to the extent applicable to a trust described in this paragraph, section 4941 (relating to taxes on self-dealing), section 4943 (relating to taxes on excess business holdings) except as provided in subsection (b)(3), section 4944 (relating to investments which jeopardize charitable purpose) except as provided in subsection (b)(3), and section 4945 (relating to taxes on taxable expenditures) shall apply as if such trust were a private foundation. This paragraph shall not apply with respect to— “(A) any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed under section 170(f)(2)(B), 2055(e)(2)(B), or 2522(c)(2)(B), “(B) any amounts in trust other than amounts for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such other amounts are segregated from amounts for which no deduction was allowable, or “(C) any amounts transferred in trust before May 27, 1969. “(3) Segregated amounts.— For purposes of paragraph (2)(B), a trust with respect to which amounts are segregated shall separately account for the various income, deduction, and other items properly attributable to each of such segregated amounts. “(b) Special Rules.— “(1) Regulations.— The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section. “(2) Limit to segregated amounts.— If any amounts in the trust are seggregated within the meaning of subsection (a)(2)(B) of this section, the value of the net assets for purposes of subsections Ante, p. 492. (c)(2) and (g) of section 507 shall be limited to such segregated amounts. “(3) Sections 4943 and 4944.— Sections 4943 and 4944 shall not apply to a trust which is described in subsection (a)(2) if— “(A) all the income interest (and none of the remainder interest) of such trust is devoted solely to one or more of the Post, p. 553. purposes described in section 170(c)(2)(B), and all amounts in such trust for which a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), Post, pp. 549, 558, 560–562. or 2522 have an aggregate value not more than 60 percent of the aggregate fair market value of all amounts in such trusts, or “(B) a deduction was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for amounts payable under the terms of such trust to every remainder beneficiary but not to any income beneficiary. “SEC. 4948. APPLICATION OF TAXES AND DENIAL OF EXEMPTION WITH RESPECT TO CERTAIN FOREIGN ORGANIZATIONS. “(a) Tax on Income of Certain Foreign Organizations.— In lieu of the tax imposed by section 4940, there is hereby imposed for each taxable year on the gross investment income (within the meaning of section 4940(c)(2)) derived from sources within the United States Post, p. 625. (within the meaning of section 861) by every foreign organization which is a private foundation for the taxable year a tax equal to 4 percent of such income. “(b) Certain Sections Inapplicable.— Section 507 (relating to termination of private foundation status), section 508 (relating to 68A Stat. 163. 26 USC 501. special rules with respect to section 501(c)(3) organizations), and this chapter (other than this section) shall not apply to any foreign organization which has received substantially all 01 its support (other than gross investment income) from sources outside the United States. “(c) Denial of Exemption to Foreign Organizations Engaged in Prohibited Transactions.— “(1) General rule.— A foreign organization described in subsection (b) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after December 31, 1969. “(2) Prohibited transactions.— For purposes of this subsection, the term ‘prohibited transaction’ means any act or failure to act (other than with respect to section 4942(e)) which would subject a foreign organization described in subsection (b), or a disqualified person (as defined in section 4946) with respect thereto, Post, p. 519. to liability for a penalty under section 6684 or a tax under section 507 if such foreign organization were a domestic organization. “(3) Taxable years affected.— “(A) Except as provided in subparagraph (B), a foreign organization described in subsection (b) shall be denied exemption from taxation under section 501(a) by reason of 68A Stat. 163. 26 USC 501. paragraph (1) for all taxable years beginning with the taxable year during which it is notified by the Secretary or his delegate that it has engaged in a prohibited transaction. The Publication in Federal Register. Secretary or his delegate shall publish such notice in the Federal Register on the day on which he so notifies such foreign organization. “(B) Under regulations prescribed by the Secretary or his delegate, any foreign organization described in subsection (b) which is denied exemption from taxation under section 501(a) by reason of paragraph (1) may, with respect to the second taxable year following the taxable year in which notice is given under subparagraph (A)(or any taxable year thereafter), file claim for exemption from taxation under section 501(a). If the Secretary or his delegate is satisfied that such organization will not knowingly again engage in a prohibited transaction, such organization shall not, with respect to taxable years beginning with the taxable year with respect to which such claim is filed, be denied exemption from taxation under section 501(a) by reason of any prohibited transaction which was engaged in before the date on which such notice was given under subparagraph (A). “(4) Disallowance of certain charitable deductions.— No gift or bequest shall be allowed as a deduction under section 170, Post, pp. 549, 558, 560–562. 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if made— “(A) to a foreign organization described in subsection (b) after the date on which the Secretary or his delegate publishes notice under paragraph (3)(A) that he has notified such organization that it has engaged in a prohibited transaction, and “(B) in a taxable year of such organization for which it is not exempt from taxation under section 501(a) by reason of paragraph (1).” (c) Assessable Penalties For Repeated, or Willful and Flagrant, Acts Under Chapter 42.— Subchapter B of chapter 68 68A Stat. 828; 80 Stat. 1560. 26 USC 6671–6683. (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6684. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR TAX UNDER CHAPTER 42. “If any person becomes liable for tax under any section of chapter 42 Ante, p. 498. (relating to private foundations) by reason of any act or failure to act which is not due to reasonable cause and either— “(1) such person has theretofore been liable for tax under such chapter, or “(2) such act or failure to act is both willful and flagrant, then such person shall be liable for a penalty equal to the amount of such tax.” (d) Information Returns of Exempt Organizations.— (1) In general.— Section 6033(a) (relating to information 68A Stat. 741. returns by exempt organizations) is amended to read as follows: “(a) Organizations Required To File.— “(1) In general.— Except as provided in paragraph (2), every organization exempt from taxation under section 501(a) snail file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary or his delegate may by forms or regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe; except that, in the discretion of the Secretary or his delegate, any organization 68A Stat. 134; 76 Stat. 809. described in section 401(a) may be relieved from stating in its return any information which is reported in returns filed by the employer which established such organization. “(2) Exceptions from filing.— “(A) Mandatory exceptions.— Paragraph (1) shall not apply to— “(i) churches, their integrated auxiliaries, and conventions or associations of churches, “(ii) any organization (other than a private foundation, Ante, p. 496. as defined in section 509(a)) described in subparagraph (C), the gross receipts of which in each taxable year are normally not more than $5,000, or “(iii) the exclusively religious activities of any religious order. “(B) Discretionary exceptions.— The Secretary or his delegate may relieve any organization required under paragraph (1) to file an information return from filing such a return where he determines that such filing is not necessary to the efficient administration of the internal revenue laws. “(C) Certain organizations.— The organizations referred to in subparagraph (A)(ii) are— “(i) a religious organization described in section 501 68A Stat. 163. (c)(3); “(ii) an educational organization described in section Post, p. 550. 170(b)(1)(A)(ii); “(iii) a charitable organization, or an organization for the prevention of cruelty to children or animals, described in section 501(c)(3), if such organization is supported, in whole or in part, by funds contributed by the United States or any State or political subdivision thereof, or is primarily supported by contributions of the general public; “(iv) an organization described in section 501(c)(3), if such organization is operated, supervised, or controlled by or in connection with a religious organization described in clause (i); “(v) an organization described in section 501(c)(8); and “(vi) an organization described in section 501(c)(1), if such organization is a corporation wholly owned by the United States or any agency or instrumentality thereof, or a wholly-owned subsidiary of such a corporation.” (2) Additional information.— Section 6033(b) (relating to certain organizations described in section 501(c)(3)) is amended— (A) by striking out in paragraph (3) “out of income”, (B) by striking out paragraphs (4), (5), (6), and (8), and by redesignating paragraph (7) as paragraph (4), and (C) by adding after paragraph (4) (as redesignated) the following new paragraphs: “(5) the total of the contributions and gifts received by it during the year, and the names and addresses of all substantial contributors. “(6) the names and addresses of its foundation managers (within the meaning of section 4946(b)(1)) and highly compensated employees, and “(7) the compensation and other payments made during the year to each individual described in paragraph (6).” (3) Annual report.— Part III of subchapter A of chapter 61 (relating to information returns) is amended by adding after 68A Stat. 741. 26 USC 6031–6053. subpart C, the following new subpart: “Subpart D— Information Concerning Private Foundations “Sec. 6056. Annual reports by private foundations. “SEC. 6056. ANNUAL REPORTS BY PRIVATE FOUNDATIONS. “(a) General.— The foundation managers (within the meaning of section 4946(b)) of every organization which is a private foundation Ante, p. 515. Ante, p. 496. (within the meaning of section 509(a)) having at least $5,000 of assets at any time during a taxable year shall file an annual report as of the close of the taxable year at such time and in such manner as the Secretary or his delegate may by regulations prescribe. “(b) Contents.— The foundation managers of the private foundation shall set forth in the annual report required under subsection (a) the following information: “(1) its gross income for the year, “(2) its expenses attributable to such income and incurred within the year, “(3) its disbursements (including administrative expenses) within the year, “(4) a balance sheet showing its assets, liabilities, and net worth as of the beginning of the year, “(5) an itemized statement of its securities and all other assets at the close of the year, showing both book and market value, “(6) the total of the contributions and gifts received by it during the year, “(7) an itemized list of all grants and contributions made or approved for future payment during the year, showing the amount of each such grant or contribution, the name and address of the recipient, any relationship between any individual recipient and the foundation’s managers or substantial contributors, and a concise statement of the purpose of each such grant or contribution, “(8) the address of the principal office of the foundation and (if different) of the place where its books and records are maintained, “(9) the names and addresses of its foundation managers (within the meaning of section 4946(b)), and “(10) a list of all persons described in paragraph (9) that are substantial contributors (within the meaning of section 507(d)(2)) or that own 10 percent or more of the stock of any corporation Ante, p. 492. of which the foundation owns 10 percent or more of the stock, or corresponding interests in partnerships or other entities, in which the foundation has a 10 percent or greater interest. “(c) Form.— The annual report may be prepared in printed, typewritten, or any other legible form the foundation chooses. The Secretary or his delegate shall provide forms which may be used by a private foundation for purposes of the annual report. “(d) Special Rules.— “(1) The annual report required to be filed under this section is in addition to and not in lieu of the information required to be filed under section 6033 (relating to returns by exempt organizations) 68A Stat. 74 26 USC 6033. and shall be filed at the same time as such information. “(2) A copy of the notice required by section 6104(d) (relating to public inspection of private foundations’ annual reports), together with proof of publication thereof, shall be filed by the foundation managers together with the annual report. “(3) The foundation managers shall furnish copies of the annual report required by this section to such State officials and other persons, at such times and under such conditions, as the Secretary or his delegate may by regulations prescribe.” (4) Penalty for late filing of certain information returns.— Section 6652 (relating to failure to file certain information returns) is amended by relettering subsection (d) as subsection (e) and inserting immediately after subsection (c) the following new subsection: “(d) Returns by Exempt Organizations and by Certain Trusts.— “(1) Penalty on organization or trust.— In the case of a Ante, p. 519. failure to file a return required under section 6033 (relating to returns by exempt organizations), section 6034 (relating to returns Post, p. 529. by certain trusts), or section 6043(b) (relating to exempt organizations), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the exempt organization or trust failing so to file, $10 for each day during which such failure continues, but the total amount imposed hereunder on any organization for failure to file any return shall not exceed $5,000. “(2) Managers.— The Secretary or his delegate may make written demand upon an organization failing to file under paragraph (1) specifying therein a reasonable future date by which such filing shall be made, and if such filing is not made on or before such date, and unless it is shown that failure so to file is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file, $10 for each day after the expiration of the time specified in the written demand during which such failure continues, but the total amount imposed hereunder on all persons for such failure to file shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file, all such persons shall be jointly and severally liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs. “(3) Annual reports.— In the case of a failure to file a report Ante, p. 521. required under section 6056 (relating to annual reports by private foundations) or to comply with the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports), on the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause, there shall be paid (on notice and demand by the Secretary or his delegate and in the same manner as tax) by the person failing so to file or meet the publicity requirement, $10 for each day during which such failure continues, but the total amount imposed hereunder on all such persons for such failure to file or comply with the requirements of section 6104(d) with regard to any one annual report shall not exceed $5,000. If more than one person is liable under this paragraph for a failure to file or comply with the requirements of section 6104(d), all such persons shall be jointly and severally Infra. liable with respect to such failure. The term ‘person’ as used herein means any officer, director, trustee, employee, member, or other individual who is under a duty to perform the act in respect of which the violation occurs.” (e) Publicity of Information Required By Certain Exempt Organizations.— (1) Names and addresses of contributors.— Section 6104 68A Stat. 755; 72 Stat. 1660. 26 USC 6104. (relating to publicity of information required from certain exempt organizations and certain trusts) is amended by inserting at the end of subsection (b), the following sentence: “Nothing in this subsection shall authorize the Secretary or his delegate to disclose the name or address of any contributor to any organization or trust (other than a private foundation, as defined in section 509(a)) which is required to furnish such information.” (2) Publication to state officials.— Section 6104 is amended by adding after subsection (b) the following new subsection: “(c) Publication to State Officials.— “(1) General rule.— In the case of any organization which is described in section 501(c)(3) and exempt from taxation under 68A Stat. 163. Ante, p. 434. section 501(a), or has applied under section 508(a) for recognition as an organization described in section 501(c)(3), the Secretary or his delegate at such times and in such manner as he may by regulations prescribe shall— “(A) notify the appropriate State officer of a refusal to recognize such organization as an organization described in section 501(c)(3), or of the operation of such organization in a manner which does not meet, or no longer meets, the requirements of its exemption, “(B) notify the appropriate State officer of the mailing of a notice of deficiency of tax imposed under section 507 or chapter 42, and Ante, pp. 492, 498. “(C) at the request of such appropriate State officer, make available for inspection and copying such returns, filed statements, records, reports, and other information, relating to a determination under subparagraph (A) or (B) as are relevant to any determination under State law. “(2) Appropriate state officer.— For purposes of this subsection, the term ‘appropriate State officer’ means the State attorney general. State tax officer, or any State official charged with overseeing organizations of the type described in section 501(c)(3).” (3) Annual reports.— Section 6104 is amended by adding after subsection (c), as added by paragraph (2) of this subsection, the following new subsection: “(d) Public Inspection of Private Foundations’ Annual Reports.— The annual report required to be filed under section 6056 Ante, p. 521. (relating to annual reports by private foundations) shall be made available by the foundation managers for inspection at the principal office of the foundation during regular business hours by any citizen on request made within 180 days after the publication of notice of its availability. Such notice shall be published, not later than the day prescribed for filing such annual report (determined with regard to any extension of time for filing), in a newspaper having general circulation in the county in which the principal office of the private foundation is located. The notice shall state that the annual report of the private foundation is available at its principal office for inspection during regular business hours by any citizen who requests it within 180 days after the date of such publication, and shall state the address of the private foundation’s principal office and the name of its principal manager.” (4) Willful failure to provide information regarding private foundations.— Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding after section 6684 (added by subsection (c) of this section) the following new section: “SEC. 6685. ASSESSABLE PENALTIES WITH RESPECT TO PRIVATE FOUNDATION ANNUAL REPORTS. “In addition to the penalty imposed by section 7207 (relating to fraudulent returns, statements, or other documents), any person who Ante, p. 521. is required to file the report and the notice required under section 6056 (relating to annual reports by private foundations) or to comply with Ante, p. 523. the requirements of section 6104(d) (relating to public inspection of private foundations’ annual reports) and who fails so to file or comply, if such failure is willful, shall pay a penalty of $1,000 with respect to each such report or notice.” (5) Section 7207 (relating to fraudulent returns, statements, or other documents) is amended by striking out “section 6047 (b) or (c)” and inserting in lieu thereof “sections 6047 (b) or (c), 6056, or 6104(d)”. (f) Petition to Tax Court; Deficiency Procedures Made Applicable.— (1) Section 6211(a) (relating to definition of a deficiency) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and excise taxes,”, (B) by striking out “subtitles A and B,” and inserting in lieu thereof “subtitles A and B, and chapter 42,”, and (C) by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (2) Section 6212(c)(1) (relating to further deficiency letters restricted) is amended by striking out “or” before “of estate tax” and by inserting after “the same decedent,” the following: “of section Ante, p. 498. 4940 tax for the same taxable year, or of chapter 42 tax (other than under section 4940) with respect to any act (or failure to act) to which such petition relates,”. (3) Section 6213 (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by relettering subsection (e) as subsection (f) and inserting immediately after subsection (d) the following new subsection: “(e) Suspension of Filing Period for Certain Chapter 42 Taxes.— The running of the time prescribed by subsection (a) for filing a petition in the Tax Court with respect to the taxes imposed by section 4941 (relating to taxes on self-dealing), 4942 (relating to taxes on failure to distribute income), 4943 (relating to taxes on excess business holdings), 4944 (relating to investments which jeopardize charitable purpose), or 4945 (relating to taxes on taxable expenditures) shall be suspended for any period during which the Secretary or his delegate has extended the time allowed for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (g) Limitations on Assessment and Collection.— (1) Section 6501 is amended by adding at the end thereof the 68A Stat. 803; 80 Stat. 1151. following new subsection: “(n) Special Rule for Chapter 42 Taxes.— “(1) In general.— For purposes of any tax imposed by chapter 42 (other than section 4940), the return referred to in this section Ante, p. 498. shall be the return filed by the private foundation for the year in which the act (or failure to act) giving rise to liability for such tax occurred. For purposes of section 4940, such return is the return filed by the private foundation for the taxable year for which the tax is imposed. “(2) Certain contributions to section 501 (c)(3) organizations.— In the case of a deficiency of tax of a private foundation making a contribution in the manner provided in section 4942(g)(3) (relating to certain contributions to section 501(c)(3) 68A Stat. 163. 26 USC 501. organizations) attributable to the failure of a section 501(c)(3) organization to make the distribution prescribed by section 4942(g)(3), such deficiency may be assessed at any time before the expiration of one year after the expiration of the period within which a deficiency may be assessed for the taxable year with respect to which the contribution was made.” (2) Section 6501(c) is amended by adding the following new paragraph at the end thereof: “(7) Termination of private foundation status.— In the case of a tax on termination of private foundation status under section 507, such tax may be assessed, or a proceeding in court Ante, p. 492. for the collection of such tax may be begun without assessment, at any time.” (3) Section 6501(e)(3) is amended by adding at the end thereof the following sentence: “In determining the amount of tax omitted on a return, there shall not be taken into account any amount of tax imposed by chapter 42 which is omitted from the return if the transaction giving rise to such tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary or his delegate of the existence and nature of such item.” (4) Section 6503 (relating to suspension of running of period of 80 Stat. 1140. limitation) is amended by relettering subsection (h) as subsection (i) and inserting immediately after subsection (g) the following new subsection: “(h) Suspension Pending Correction.— The running of the periods of limitations provided in sections 6501 and 6502 on the making 68A Stat. 806. of assessments or the collection by levy or a proceeding in court in respect of any tax imposed by chapter 42 or section 507 shall be suspended for any period described in section 507(g)(2) or during which the Secretary or his delegate has extended the time for making correction under section 4941(e)(4), 4942(j)(2), 4943(d)(3), 4944(e)(3), or 4945(h)(2).” (h) Limitations on Credits or Refunds.— Section 6511 (relating to limitations on credits or refunds) is amended by relettering subsection (f) as subsection (g) and inserting immediately after subsection (e) the following new subsection: “(f) Special Rule for Chapter 42 Taxes.— For purposes of any tax imposed by chapter 42, the return referred to in subsection (a) shall be the return specified in section 6501(n)(1).” Supra. (i) Civil Action for Refund.— Section 7422 (relating to civil 68A Stat. 876; 80 Stat. 1108. actions for refund) is amended by relettering subsection (g) as subsection (h) and by inserting immediately after subsection (f) the following new subsection: “(g) Special Rules for Certain Excise Taxes Imposed by Chapter 42.— “(1) Right to bring actions.— With respect to any act (or failure to act) giving rise to liability under section 4941, 4942, 4943, 4944, or 4945, payment of the full amount of tax imposed under section 4941(a) (relating to initial taxes on self-dealing), section 4942(a) (relating to initial tax on failure to distribute income), section 4943(a) (relating to initial tax on excess business holdings), section 4944(a) (relating to initial taxes on investments which jeopardize charitable purpose), section 4945(a) (relating to initial taxes on taxable expenditures), section 4941(b) (relating to additional taxes on self-dealing), section 4942(b) (relating to additional tax on failure to distribute income), section 4943(b) (relating to additional tax on excess business holdings), section 4944(b) (relating to additional taxes on investments which jeopardize charitable purpose), or section 4945(b) (relating to additional taxes on taxable expenditures) shall constitute sufficient payment in order to maintain an action under this section with respect to such act (or failure to act). “(2) Limitation on suit for refund.— No suit may be maintained under this section for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, unless no other suit has been maintained for credit or refund of, and no petition has been filed in the Tax Court with respect to a deficiency in, any other tax imposed by such sections with respect to such act (or failure to act). “(3) Final determination of issues.— For purposes of this section, any suit for the credit or refund of any tax imposed under section 4941, 4942, 4943, 4944, or 4945 with respect to any act (or failure to act) giving rise to liability for tax under such sections, shall constitute a suit to determine all questions with respect to any other tax imposed with respect to such act (or failure to act) under such sections, and failure by the parties to such suit to bring any such question before the Court shall constitute a bar to such question.” (j) Technical, Conforming, and Clerical Amendments.— (1) Section 101(b)(2)(B)(iii) (relating to nonforfeitable rights) is amended by striking out “section 503(b)(1), (2), or (3)” and inserting in lieu thereof “section 170(b)(1)(A)(ii) or (vi) or which is a religious organization (other than a trust)”. (2) Section 170(i) (relating to disallowance of deductions in certain cases) (as redesignated by section 201(a)(1)(A) of this Act) is amended— (A) by striking out paragraph (1), and (B) by striking out “(2) For disallowance” and inserting in lieu thereof “For disallowance”. (3) Section 501(a) (relating to exemption from taxation) is amended by striking out “502, 503, or 504” and inserting in lieu thereof “502 or 503”. (4) Section 501(b) (relating to tax on unrelated business income) is amended to read as follows: “(b) Tax on Unrelated Business Income and Certain Other Activities.— An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II and III of this subchapter, but (notwithstanding parts II and III of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.” (5) Section 501(c)(16) (relating to list of exempt organizations) 68A Stat. 165. 26 USC 501. is amended by striking out “part III” and inserting in lieu thereof “part IV”. (6) Section 501(e) (relating to cooperative hospital service 82 Stat. 269. organizations) is amended by striking out in the last sentence thereof “section 503(b)(5).” and inserting in lieu thereof “section 170(b)(1)(A)(iii).”. (7) Section 503(a)(1) (relating to general rule) is amended to 74 Stat. 535. read as follows: “(1) General rule.— “(A) An organization described in section 501(c)(17) 74 Stat. 534. 68A Stat. 163. 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) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954.” (8) Section 503(a)(2) (relating to taxable years affected by 68A Stat. 166. denial of exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (9) Section 503(d) (relating to future status of organizations denied exemption) is amended by striking out “section 501(c)(3) or (17)” and inserting in lieu thereof “section 501(c)(17)”. (10) Section 503(g) (relating to special rule for loans) is amended by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”. (11) Section 503(h) (relating to special rules relating to lending 72 Stat. 1629. by section 401(a) and section 501(c)(17) trusts to certain persons) is amended— (A) by striking out in the heading thereof “Special rules relating to lending by section 401(a) and section 501(c)(17) trusts to certain persons.—”, and inserting in lieu thereof “Special rules.—”, (B) by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”, (C) by striking out “acquired by a trust described in section 401(a) or section 501(c)(17)”, and (D) by striking out in paragraph (3) “subsection (c)” and inserting in lieu thereof “subsection (b)”. (12) Section 503(i) (relating to loans with respect to which 72 Stat. 1630. employers are prohibited from pledging certain assets) is amended— (A) by striking out “Subsection (c)(1)” and inserting in lieu thereof “Subsection (b)(1)”, and (B) by striking out “subsection (h)” and inserting in lieu thereof “subsection (e)”. (13) Section 503(j)(1) (relating to prohibited transactions) 76 Stat. 827. is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (b)”. (14) Section 503 (relating to requirements of exemption) is amended by striking out subsections (b), (e), and (f) and by redesignating subsections (c), (d), (g), (h), (i), and (j) (as amended), as subsections (b), (c), (d), (e), (f), and (g), respectively. (15) Section 504 (relating to denial of exemption) is repealed. Repeal 68A Stat. 168. (16) Section 542(a)(2) (relating to stock ownership requirement) is amended— (A) by striking out in the second sentence “section 503(b)” and inserting in lieu thereof “section 401(a), 501(c)(17), or 509(a)”, and (B) by amending the third sentence to read as follows: “The preceding sentence shall not apply in the case of an organization or trust organized or created before July 1, 1950, if at all times on or after July 1, 1950, and before the close of the taxable year such organization or trust has owned all of the common stock and at least 80 percent of the total number of shares of all other classes of stock of the corporation.” (17) Section 663(a)(2) (relating to charitable, etc., distributions) is amended by striking out “section 681” and inserting in lieu thereof “sections 508(d), 681, and 4948(c)(4)”. (18) Section 681(b) and (c) (relating to operations of trusts and accumulated income) is repealed. (19) Section 681(d) (relating to cross reference) is redesignated as subsection (b), and as so redesignated is amended by striking out “section 503(e)” and inserting in lieu thereof “sections 508(d) and 4948(c)(4)”. (20) Section 878 (relating to foreign educational, charitable, and certain other exempt organizations) is amended by— (A) striking out “unrelated business income of”, and (B) striking out “trusts, see section 512(a)” and inserting in lieu thereof “organizations, see sections 512(a) and 4948”. (21) Section 884 (relating to cross references) is amended by striking out paragraph (1) and by redesignating paragraphs (2), (3), (4), (5), and (6) as paragraphs (1), (2), (3), (4), and (5), respectively. (22) Section 1443 (relating to foreign tax-exempt organizations) is amended by— (A) inserting “(a) Income Subject to Section 511.—” before “In the case of”, and (B) adding subsection (b) to read as follows: “(b) Income Subject to Section 4948.— In the case of income of Ante, p. 518. a foreign organization subject to the tax imposed by section 4948(a), this chapter shall apply, except that the deduction and withholding shall be at the rate of 4 percent and shall be subject to such conditions as may be provided under regulations prescribed by the Secretary or his delegate.” (23) Section 2039(c)(3) (relating to exemption of annuities under certain trusts and plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section Post, p. 550. 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (24) Section 2517(a)(3) (relating to general rule for certain annuities under qualified plans) is amended by striking out “section 503(b)(1), (2), or (3),” and inserting in lieu thereof “section 170(b)(1)(A) (ii) or (vi), or which is a religious organization (other than a trust),”. (25) Section 4057(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (26) Section 4221(d)(5) (relating to the definition of nonprofit 72 Stat. 1282. 26 USC 4221. educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (27) Section 4253(h) (relating to nonprofit hospitals) is amended by striking out “section 503(b)(5)” and inserting in lieu thereof “section 170(b)(1)(A)(iii)”. Post, p. 550. (28) Section 4294(b) (relating to the definition of nonprofit educational organization) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (29) Section 5214(a)(3)(A) (relating to purposes for withdrawal of distilled spirits from bonded premises free of tax or without payment of tax) is amended by striking out “section 503(b)(2)” and inserting in lieu thereof “section 170(b)(1)(A)(ii)”. (30) Section 6033(b)(4) (as redesignated by subsection (d)(2) of this section) (relating to certain balance sheet items on Ante, p. 520. returns by exempt organizations) is amended by striking out “and” at the end thereof. (31) Section 6033(c) (relating to cross reference) is amended by inserting the following at the end thereof: “For reporting requirements as to certain liquidations, dissolutions, terminations, and contractions, see section 6043(b). For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” Ante, p. 522. (32) Section 6034 (relating to returns by certain trusts) is 68A Stat. 742. amended by striking out all of such section before paragraph (1) of subsection (a) and inserting in lieu thereof the following: “SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(a) OR CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 642(c). “(a) General Rule.— Every trust described in section 4947(a) or Ante, p. 517. Post, p. 558. claiming a charitable, etc., deduction under section 642(c) for the taxable year shall furnish such information with respect to such taxable year as the Secretary or his delegate may by forms or regulations prescribe, including—”. (33) Section 6034(a)(1) (relating to returns by certain trusts) is amended by striking out “(showing separately the amount of such deduction which was paid out and the amount which was permanently set aside for charitable, etc., purposes during such year)”. (34) Section 6034 (relating to returns by certain trusts) is amended by adding the following new subsection at the end thereof: “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by this section, see section 6652(d).” (35) Section 6043 (relating to return regarding corporate dissolution 68A Stat. 746. or liquidation) is amended— (A) by striking out the heading and inserting in lieu thereof (B) by striking out “Every corporation” and inserting in lieu thereof “(a) Corporations.—Every corporation”, and (C) by adding the following new subsections at the end thereof: “(b) Exempt Organizations.— Every organization which for any of its last 5 taxable years preceding its liquidation, dissolution, termination, or substantial contraction was exempt from taxation under 68A Stat. 163. 25 USC 501. section 501(a) shall file such return and other information with respect to such liquidation, dissolution, termination, or substantial contraction as the Secretary or his delegate shall by forms or regulations prescribe; except that— “(1) no return shall be required under this subsection from churches, their integrated auxiliaries, conventions or associations of churches, or any organization which is not a private foundation Ante, p. 496. (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000, and “(2) the Secretary or his delegate may relieve any organization from such filing where he determines that such filing is not necessary to the efficient administration of the internal revenue laws or, with respect to an organization described in section 401(a), where the employer who established such organization files such a return. “(c) Cross Reference.— “For provisions relating to penalties for failure to file a return required by subsection (b), see section 6652(d).” (36) Section 6104(b) (relating to inspection of annual information returns) is amended by striking out “sections 6033(b) and 6034,” and inserting in lieu thereof “sections 6033, 6034, and 6056,”. (37) Section 6161(b) (relating to the amount determined as a deficiency when granting an extension of time) is amended— (A) by striking out in paragraph (1) “chapter 1 or 12,” Ante, p. 498. and inserting in lieu thereof “chapter 1, 12, or 42,”, and (B) by striking out “chapter 1,” the last time it appears and inserting in lieu thereof “chapter 1 or 42,”. (38) Section 6201(d) (relating to deficiency proceedings) is amended by striking out “and gift taxes”, and inserting in lieu thereof “gift, and chapter 42 taxes”. (39) Section 6211(b)(2) (relating to the term “rebate”) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (40) Section 6212(a) (relating to notice of deficiency) is amended by striking out “subtitles A or B” and inserting in lieu thereof “subtitle A or B or chapter 42”. (41) Section 6212(b)(1) (relating to address for notice of deficiency) is amended— (A) by striking out in the title thereof “and gift taxes” and inserting in lieu thereof “and gift taxes and taxes imposed by chapter 42”, (B) by striking out “subtitle A or chapter 12,” and inserting in lieu thereof “subtitle A, chapter 12, or chapter 42,”, and (C) by inserting “chapter 42,” after “chapter 12,” the last place it appears. (42) Section 6213(a) (relating to restrictions applicable to deficiencies; petition to Tax Court) is amended by inserting “or chapter 42” after “subtitle A or B”. (43) Section 6214 (relating to determination by the Tax Court) is amended by relettering subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Taxes Imposed by Section 507 or Chapter 42.— The Tax Court, in redetermining a deficiency of any tax imposed by section 507 Ante, p. 492. or chapter 42 for any period, act, or failure to act, shall consider such Ante, p. 498. facts with relation to the taxes under chapter 42 for other periods, acts, or failures to act as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the taxes under chapter 42 for any other period, act, or failure to act have been overpaid or underpaid.” (44) Section 6214(d) (as relettered) is amended by inserting Ante, p. 530. “, chapter 42,” after “chapter”. (45) Section 6344(a)(1) (relating to certain cross references) 68A Stat. 789. 26 USC 6344. is amended by inserting “and taxes imposed by chapter 42,” after “gift taxes,”. (46) Section 6503(a)(1) (relating to issuance of statutory notice of deficiency) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift and chapter 42 taxes”. (47) Section 6512(a) (relating to effect of petition to Tax Court) is amended— (A) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”, and (B) by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (48) Section 6512(b)(1) (relating to jurisdiction to determine overpayment determined by Tax Court) is amended by striking out “or of estate tax in respect of the taxable estate of the same decedent,” and inserting in lieu thereof “of estate tax in respect of the taxable estate of the same decedent, or of tax imposed by chapter 42 with respect to any act (or failure to act) to which such petition relates,”. (49) Section 6601(d) (relating to suspension of interest in certain cases) is amended— (A) by striking out in the title thereof “and Gift Tax Cases.” and inserting in lieu thereof “Gift, and Chapter 42 Tax Cases.”, and (B) by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (50) Section 6653(c)(1) (relating to definition of underpayment) is amended— (A) by striking out in the heading thereof “and gift taxes.” and inserting in lieu thereof “gift, and chapter 42 taxes.”, and (B) by striking out “and gift taxes” the last time it appears and inserting in lieu thereof “gift, and chapter 42 taxes”. (51) Section 6659(b) (relating to procedure for assessing certain additions to tax) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (52) Section 6676(b) (relating to deficiency procedures not to 75 Stat. 829. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (53) Section 6677(b) (relating to deficiency procedures not to 76 Stat. 988. apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (54) Section 6679(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (55) Section 6682(b) (relating to deficiency procedures not to apply) is amended by striking out “and gift taxes” and inserting in lieu thereof “gift, and chapter 42 taxes”. (56) Section 7422(e) (relating to stay of proceeding in civil actions for refund) is amended by striking out “or gift tax” the first time it appears and inserting in lieu thereof “gift tax, or tax imposed by chapter 42”. (57) Section 7454 (relating to burden of proof in fraud and transferee cases) is amended— (A) by striking out “FRAUD AND TRANSFEREE CASES” and inserting in lieu thereof “FRAUD, FOUNDATION MANAGER, AND TRANSFEREE CASES”, (B) by redesignating subsection (b) as subsection (c), and (C) by inserting after subsection (a) the following new subsection: “(b) Foundation Managers.— In any proceeding involving the Ante, p. 515. issue whether a foundation manager (as defined in section 4946(b)) has ‘knowingly’ participated in an act of self-dealing (within the meaning of section 4941), participated in an investment which jeopardizes the carrying out of exempt purposes (within the meaning of section 4944), or agreed to the making of a taxable expenditure (within the meaning of section 4945), the burden of proof in respect of such issue shall be upon the Secretary or his delegate.” (58) The table of parts for subchapter F of chapter 1 is amended to read as follows: “Subchapter F.— Exempt Organizations “Part I. General rule. “Part II. Private foundations. “Part III. Taxation of business income of certain exempt organizations. “Part IV. Farmers’ cooperatives. “Part V. Shipowners’ protection and indemnity associations.” (59) The table of chapters for subtitle D is amended by adding at the end thereof the following new item: “Chapter 42. Private foundations.” (60) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new items: “Sec. 6684. Repeated liability for tax under chapter 42. “Sec. 6685. Assessable penalties with respect to private foundation annual reports.” (61) The table of sections for part I of subchapter F of chapter 1 is amended by striking out the item relating to section 504. (62) The heading of subchapter B of chapter 63 is amended by striking out “and Gift Taxes” and inserting in lieu thereof “Gift, and Certain Excise Taxes”. (63) The table of subchapters for chapter 63 is amended by striking out “and gift taxes” in the item relating to subchapter B and inserting in lieu thereof “gift, and certain excise taxes”. (64) The table of subparts for part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: “Subpart D. Information concerning private foundations.” (k) Effective Dates.— (1) In general.— Except as otherwise provided in this subsection and subsection (1), the amendments made by this section shall take effect on January 1, 1970. (2) Provisions effective for taxable years beginning after december 31, 1969.— The following provisions shall apply to taxable years beginning after December 31, 1969: (A) Sections 4940, 4942, 4943, and 4948 of the Internal Revenue Code of 1954 (as added by this section), and Ante, p. 498. (B) The amendments made by subsection (d) and paragraphs (3), (15), (16), (20), (21), (30), (31), (32), (33), (34), (35), and (61) of subsection (j). (3) Sections 508 (a), (b), and (c).— Sections 508 (a), (b), and (c) of the Internal Revenue Code of 1954 (as added by this Ante, p. 494. section) shall take effect on October 9, 1969. (l) Savings Provisions.— (1) References to internal revenue code provisions.— Except as otherwise expressly provided, references in the following paragraphs of this subsection are to sections of the Internal Revenue Code of 1954 as amended by this section. (2) Section 4941.— Section 4941 shall not apply to— (A) any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946), pursuant to the terms of securities of such corporation in existence at the time acquired by the foundation, if such securities were acquired by the foundation before May 27, 1969; (B) the sale, exchange, or other disposition of property which is owned by a private foundation on May 26, 1969 (or which is acquired by a private foundation under the terms of a trust which was irrevocable on May 26, 1969, or under the terms of a will executed on or before such date, which are in effect on such date and at all times thereafter), to a disqualified person, if such foundation is required to dispose of such property in order not to be liable for tax under section 4943 (relating to taxes on excess business holdings) applied, in the case of a disposition before January 1, 1975, without taking section 4943(c)(4) into account and it receives in return an amount which equals or exceeds the fair market value of such property at the time of such disposition or at the time a contract for such disposition was previously executed in a transaction which would not constitute a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (C) the leasing of property or the lending of money or other extension of credit between a disqualified person and a private foundation pursuant to a binding contract in effect on October 9, 1969 (or pursuant to renewals of such a contract), until taxable years beginning after December 31, 1979, if such leasing or lending (or other extension of credit) remains at least as favorable as an arm’s-length transaction with an unrelated party and if the execution of such contract was not at the time of such execution a prohibited transaction (within the meaning of section 503(b) or the corresponding provisions of prior law); (D) the use of goods, services, or facilities which are shared by a private foundation and a disqualified person until taxable years beginning after December 31, 1979, if such use is pursuant to an arrangement in effect before October 9, 1969, and such arrangement was not a prohibited transaction (within Ante, p. 527. the meaning of section 503(b) or the corresponding provisions of prior law) at the time it was made and would not be a prohibited transaction if such section continued to apply; and (E) the use of property in which a private foundation and a disqualified person have a joint or common interest, if the interests of both in such property were acquired before October 9, 1969. (3) Section 4942.— In the case of organizations organized before May 27, 1969, section 4942 shall— (A) for all purposes other than the determination of the minimum investment return under section 4942(j)(3)(B)(ii), for taxable years beginning before January 1, 1972, apply without regard to section 4942(e) (relating to minimum investment return), and for taxable years beginning in 1972, 1973, and 1974, apply with an applicable percentage (as prescribed in section 4942(e)(3)) which does not exceed 4½ percent, 5 percent, and 5½ percent, respectively; (B) not apply to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on May 26, 1969, and at all times thereafter) of an instrument executed before May 27, 1969, with respect to the transfer of income producing property to such organization, except that section 4942 shall apply to such organization if the organization would have been denied exemption Ante, p. 527. Post, p. 558. Ante, p. 528. if section 504(a) had not been repealed by this Act, or would have had its deductions under section 642(c) limited if section 681(c) had not been repealed by this Act. In applying the preceding sentence, in addition to the limitations contained in section 504(a) or 681(c) before its repeal, section 504(a)(1) or 681(c)(1) shall be treated as not applying to an organization to the extent its income is required to be accumulated pursuant to the mandatory terms (as in effect on January 1, 1951, and at all times thereafter) of an instrument executed before January 1, 1951, with respect to the transfer of income producing property to such organization before such date, if such transfer was irrevocable on such date; (C) apply to a grant to a private foundation described in section 4942(g)(1)(A)(ii) which is not described in section 4942(g)(1)(A)(i), pursuant to a written commitment which was binding on May 26, 1969, and at all times thereafter, as if such grant is a grant to an operating foundation (as defined in section 4942(j)(3)), if such grant is made for one or more Post, p. 553. of the purposes described in section 170(c)(2)(B) and is to be paid out to such private foundation on or before December 31, 1974; (D) apply, for purposes of section 4942(f), in such a manner as to treat any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise as not essentially equivalent to a dividend 68A Stat. 85. 26 USC 302. under section 302(b)(1) if such redemption is described in paragraph (2)(B) of this subsection; and (E) not apply to an organization which is prohibited by its governing instrument or other instrument from distributing capital or corpus to the extent the requirements of section 4942 are inconsistent with such prohibition. Ante, p. 502. With respect to taxable years beginning after December 31, 1971, subparagraphs (B) and (E) shall apply only during the pendency of any judicial proceeding by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instrument or any other instrument (as in effect on May 26, 1969) in order to comply with the provisions of section 4942, and in the case of subparagraph (B) for all periods after the termination of such judicial proceeding during which the governing instrument or any other instrument does not permit compliance with such provisions. (4) Section 4943.— (A) In the case of a private foundation— (i) which was incorporated before January 1, 1951; (ii) substantially all of the assets of which on May 26, 1969, consist of more than 90 percent of the stock of an incorporated business enterprise which is licensed and regulated, the sales or contracts of which are regulated, and the professional representatives of which are licensed, by State regulatory agencies in at least 10 States; and (iii) which acquired such stock solely by gift, devise, or bequest, section 4943(c)(4)(A)(i) shall be applied with respect to the Ante, p. 507. holdings of such foundation in such incorporated business enterprise by substituting “51 percent” for “50 percent”, and section 4943(c)(4)(D) shall not apply with respect to such holdings. For purposes of the preceding sentence, stock of such enterprise in a trust created before May 27, 1969, of which the foundation is the remainder beneficiary shall be deemed to be held by such foundation on May 26, 1969, if such foundation held (without regard to such trust) more than 20 percent of the stock of such enterprise on May 26, 1969. (B) Subparagraph (A) shall apply to a private foundation only if— (i) the foundation does not purchase any stock or other interest in the enterprise described in subparagraph (A) after May 26, 1969, and does not acquire any stock or other interest in any other business enterprise which constitutes excess business holdings under section 4943; and (ii) in the last 5 taxable years ending on or before December 31, 1970, the foundation expends substantially all of its adjusted net income (as defined in section 4942(f)) for the purpose or function for which it is organized and operated. (C) For purposes of section 4943(c)(6), the term “purchase” does not include an exchange which is described in paragraph (2)(B) of this subsection and which is pursuant to a plan for disposition of excess business holdings. (5) Section 4945.— Section 4945(d)(4) and (h) shall not apply to a grant which is described in paragraph (3)(C) of this subsection. (6) Section 508(e).— Section 508(e) shall not apply to require Ante, p. 494. inclusion in governing instruments of any provisions inconsistent with this subsection. (7) Section 509(a).— In the case of any trust created under the terms of a will or a codicil to a will executed on or before March 30, 1924, by which the testator bequeathed all of the outstanding common stock of a corporation in trust, the income of which trust is to be used principally for the benefit of those from time to time employed by the corporation and their families, the trustees of which trust are elected or selected from among the employees of such corporation, and which trust does not own directly any stock in any other corporation, if the trust makes an irrevocable election under this paragraph within one year after the date of the enactment of this Act, such trust shall be treated as not being a private foundation for purposes of the Internal Revenue Code of 1954 but shall be treated for purposes of such Code as if it were not exempt 68A Stat. 163. 26 USC 501. from tax under section 501(a) for any taxable year beginning after the date of the enactment of this Act and before the date (if any) on which such trust has complied with the requirements of section 507 for termination of the status of an organization as a private foundation. (8) Certain redemptions.— For purposes of applying section 302(b)(1) to the determination of the amount of gross investment Ante, pp. 498, 518. income under sections 4940 and 4948(a), any distribution made to a private foundation in redemption of stock held by such private foundation in a business enterprise shall be treated as not essentially equivalent to a dividend, if such redemption is described in paragraph (2)(B) of this subsection. Subtitle B— Other Tax Exempt Organizations SEC. 121. TAX ON UNRELATED BUSINESS INCOME. (a) Organizations Subject to Tax.— (1) Corporate rates.— Section 511(a)(2)(A) (relating to certain organizations subject to tax on unrelated business income at corporate rates) is amended to read as follows: “(A) Organizations described in sections 401(a) and 501(c).— The taxes 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).” (2) Individual rates.— Section 511(b)(2) (relating to charitable, etc., trusts subject to tax on unrelated business income) is amended to read as follows: “(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).” (3) Section 501(c)(2) corporations.— Section 511 (relating to tax on unrelated business income) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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).” 68A Stat. 163. 26 USC 501. (4) Conforming amendment.— Section 1504 (relating to definitions for purposes of consolidated returns) is amended by adding at the end thereof the following new subsection: “(e) Includible Tax-Exempt Organizations.— Despite the provisions of paragraph (1) of subsection (b), two or more organizations exempt from taxation under section 501, one or more of which is described in section 501(c)(2) and the others of which derive income from such 501(c)(2) organizations, shall be considered as includible corporations for the purpose of the application of subsection (a) to such organizations alone.” (b) Definition of Unrelated Business Taxable Income.— (1) In general.— Section 512(a) (relating to definition of unrelated business taxable income) is amended to read as follows: “(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, Post, p. 542. 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 Ante, p. 536. 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 section 501(c)(7) or (9).— “(A) General rule.— In the case of an organization described in section 501(c)(7) or (9), the term ‘unrelated Post, p. 541. 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). “(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 section Post, p. 541. 501(c)(9), 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 68A Stat. 163. 26 USC 501. in section 501(c)(2), the income of which is payable to an organization described in section 501(c)(7) or (9), 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 section 501(c)(7) or (9) 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 shall apply.” (2) Modifications.— (A) Rents and debt-financed property.— Section 512(b)(3) (relating to modifications with respect to rents from real property) and section 512(b)(4) (relating to modifications with respect to business leases) are amended to read as follows: “(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 76 Stat. 1032; 78 Stat. 35. 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 Post, p. 543. 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).” (B) Limit on specific deduction.— Section 512(b)(12) 69A Stat. 171. (relating to allowance of specific deduction) is amended to read as follows: “(12) Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a Post, p. 619. 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.” (C) Special rules for certain organizations.— Section 512(b) (relating to modifications in determining unrelated business taxable income) is further amended by adding at the end thereof the following: “(15) Notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the ‘controlled organization’) of which the organization deriving such amounts (in this paragraph called the ‘controlling organization’) has control (as defined in section 368(c)) shall be included as an item of gross income 68A Stat. 121. 25 USC 368. (whether or not the activity from which such amounts are derived represents a trade or business or is regularly carried on) in an amount which bears the same ratio as— “(A) (i) in the case of a controlled organization which is not exempt from taxation under section 501(a), the excess of the amount of taxable income of the controlled organization over the amount of such organization’s taxable income which if derived directly by the controlling organization would not be unrelated business taxable income, or “(ii) in the case of a controlled organization which is exempt from taxation under section 501(a), the amount of unrelated business taxable income of the controlled organization, bears to “(B) the taxable income of the controlled organization (determined in the case of a controlled organization to which subparagraph (A)(ii) applies as if it were not an organization exempt from taxation under section 501(a)), but not less than the amount determined in clause (i) or (ii), as the case may be, of subparagraph (A), both amounts computed without regard to amounts paid directly or indirectly to the controlling organization. There shall be allowed all deductions directly connected with amounts included in gross income under the preceding sentence. “(16) 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. “(17) 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 68A Stat. 42. 26 USC 151. educational institution (as defined in section 151(e)(4)) 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 or his delegate 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.” (D) Technical amendment.— Section 512(b) (relating to exceptions, additions, and limitations in determining unrelated business taxable income) is amended by striking out so much thereof as precedes paragraph (1) and inserting in lieu thereof the following: “(b) Modifications.— The modifications referred to in subsection (a) are the following:” (3) Related amendment.— (A) Part IX of Subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: “SEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGANIZATIONS IN TRANSACTIONS WITH MEMBERS. “(a) General Rule.— In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. “(b) Exceptions.— Subsection (a) shall not apply to any organization— “(1) which for the taxable year is subject to taxation under subchapter H or L, “(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization, or 75 Stat. 222. 26 USC 456. “(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the 48 Stat. 881. 15 USC 78a. 42 Stat. 998. 7 USC 1. Commodity Exchange Act.” (B) The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following: “Sec. 277. Deductions incurred by certain membership organizations in transactions with members.” (4) Local employee association.— Section 513(a)(2) (relating 68A Stat. 172. to exception to definition of unrelated trade or business) is amended by striking out “employees; or” and inserting in lieu thereof the following: “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”. (5) Voluntary employees’ beneficiary associations and certain fraternal societies. (A) In general.— Section 501(c) (relating to list of 26 USC 501. exempt organizations) is amended by striking out paragraphs (9) and (10) and inserting in lieu thereof the following: “(9) Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. “(10) Domestic fraternal societies, orders, or associations, operating under the lodge system— “(A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and “(B) which do not provide for the payment of life, sick, accident, or other benefits.” (B) Conforming amendments.— Section 801(b)(2)(relating 73 Stat. 112. to life insurance reserves) is amended— (i) by inserting “and” at the end of subparagraph (A), (ii) by striking out subparagraph (B), and (iii) by redesignating subparagraph (C) as (B). Section 810 (relating to rules for certain reserves) is amended by striking out subsection (e). (6) Certain funded pension trusts.— (A) Exemption from taxation.— Section 501(c) (relating to list of exempt organizations) is amended by adding at the end thereof the following new paragraph: “(18) A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if— “(A) under the plan, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan, “(B) such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees, and “(C) such benefits do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan.” (B) Conforming amendments.— (i) Section 503(a)(1) (as amended by section 101(j)(7) Ante, p. 527. of this Act) is amended by inserting after subparagraph (B) thereof the following new paragraph: “(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.” (ii) Section 503 (as so amended) is amended by striking out “(c)(17)” each place it appears therein and inserting in lieu thereof “(c)(17) or (18)”. (7) Special rules for feeder organizations.— Section 502 (relating to feeder organizations) is amended to read as follows: “SEC. 502. FEEDER ORGANIZATIONS. “(a) General Rule.— An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501. “(b) Special Rule.— For purposes of this section, the term “trade or business” shall not include— “(1) the deriving of rents which would be excluded under section Ante, pp. 538, 537. 512(b)(3), if section 512 applied to the organization, “(2) any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation, or “(3) any trade or business which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.” (c) Activities Included as Unrelated Trade or Business.— 68A Stat. 172. Section 513 (relating to unrelated trade or business) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(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) Unrelated Debt-Financed Income.— (1) In general.— Section 514 (relating to business leases) is 68A Stat. 172. 26 USC 514. amended by striking out so much thereof as precedes subsection (b) and inserting in lieu thereof the following: “SEC. 514. UNRELATED DEBT-FINANCED INCOME. “(a) Unrelated Debt-Financed Income and Deductions.— In computing under section 512 the unrelated business taxable income for Ante, pp. 537, 538. 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 or his delegate) 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. Post, pp. 638, 639, 642. “(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 Post, p. 649. 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 68A Stat. 170. 26 USC 512. 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; or “(D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section Ante, p. 541. 513(a). 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 or his delegate 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 or his delegate 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 subsection (f)). “(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 chapter 74, relating 68A Stat. 849. 26 USC 7121–7123. to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. Interest on any overpayment for a taxable year resulting from the application of subparagraph (B) after the actual use condition is satisfied shall be allowed and paid at the rate of 4 percent per annum in lieu of 6 percent per annum. “(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, except that in the case of any taxable year beginning before January 1, 1972, any indebtedness incurred before June 28, 1966, shall not be taken into account. In the case of an organization (other than a church or convention or association of churches) such indebtedness incurred before June 28, 1966, shall be taken into account if such indebtedness constitutes business lease indebtedness (as defined in subsection(g)). “(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. “(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 80 Stat. 4. 26 USC 501. 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.— For purposes of this section, the term ‘acquisition indebtedness’ does not include 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. “(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 or his delegate, 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. “(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 or his delegate to the extent proper to carry out the purposes of this section.” (2) Related Amendments.— (A) Section 48(a)(4) (relating to definition of section 38 76 Stat. 967. 26 USC 48. property) is amended by adding at the end thereof the following new sentence: “If the property is debt-financed property (as defined in section 514(c)), the basis or cost of such Post, p. 543. property for purposes of computing qualified investment under section 46(c) shall include only that percentage of 76 Stat. 963. the basis or cost which is the same percentage as is used under section 514(b), for the year the property is placed in service, in computing the amount of gross income to be taken into account during such taxable year with respect to such property.” (B) The second sentence of section 681(a) (relating to 68A Stat. 232. limitation on charitable deduction of taxable trusts) is amended by striking out the words “certain leases” and inserting in lieu thereof “certain property acquired with borrowed funds”. (C) Section 1443(a) (relating to withholding of tax on Ante, p 528. payments to foreign tax-exempt organizations) is amended by striking out “rents” and inserting in lieu thereof “income”. (3) Technical and conforming amendments.— (A) Subsections (b), (c), and (d) of section 514 (relating to business leases) are relettered as subsections (f), (g), and (h), respectively. (B) New subsection (f)(1) (old subsection (b)(1), relating to general rule for definition of business lease) is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (g)”. (C) The table of sections for part III of subchapter F of 68A Stat. 169; Ante, p. 492. chapter 1 (as redesignated by section 101(a) of this Act) is amended by striking out— “Sec. 514. Business leases.” and inserting in lieu thereof the following: “Sec. 514. Unrelated debt-financed income.” (e) Returns.— (1) In General.— Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new section: “SEC. 6050. RETURNS RELATING TO CERTAIN TRANSFERS TO EXEMPT ORGANIZATIONS. “(a) General Rule.— On or before the 90th day after the transfer of income producing property, the transferor shall make a return in compliance with the provisions of subsection (b) if the transferee is known by the transferor to be an organization referred to in section Ante, p. 536. 511 (a) or (b) and the property (without regard to any lien) has a fair market value in excess of $50,000. “(b) Form and Contents of Returns.— The return required by subsection (a) shall be in such form and shall set forth, in respect of the transfer, such information as the Secretary or his delegate prescribes by regulations as necessary for carrying out the provisions of the income tax laws.” (2) Technical Amendment.— The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following: “Sec. 6050. Returns relating to certain transfers to exempt organizations.” (f) Restriction on Examination of Churches.— Section 7605 (relating to time and place of examination) is amended by adding at the end thereof the following new subsection: “(c) Restriction on Examination of Churches.— No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to tax under part III of subchapter F of chapter 1 of this title (sec. 511 and following, relating to taxation of business income of exempt organizations) unless the Secretary or his delegate (such officer being no lower than a principal internal revenue officer for an internal revenue region) believes that such organization may be so engaged and so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.” (g) Effective Dates.— The amendments made by this section (other than by subsections (b)(3) and (e)) shall apply to taxable years beginning after December 31, 1969. The amendments made by subsection (b)(3) shall apply to taxable years beginning after December 31, 1970. The amendments made by subsection (e) shall apply with respect to transfers of property after December 31, 1969. Where an organization makes a bargain purchase of property before October 9, 1969, which is subject to a mortgage which was placed on the property more than 5 years before the purchase, and the organization paid the seller total amount no greater than the amount of the seller’s cost (including attorneys’ fees) directly related to the transfer of such property to the organization (but in any event no more than 10 percent of the value of the seller’s equity in the property), the indebtedness secured by such mortgage shall not be treated, notwithstanding the amendments made by subsection (d)(1), as acquisition indebtedness for purposes of section 514(c)(1) of the Internal Revenue Code of 1954 Ante, p. 545. during a period of 10 years following the date of the transaction.

14. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 § 101(j)(10) · 83 Stat. 487

    1. Redesignated · 26 U.S.C. § 503(d)

       Pub. L. 91–172, § 101(j)(10), (14), redesignated subsec. (g) as (d)

    2. Redesignated · 26 U.S.C. § 503(d)

       Pub. L. 91–172, § 101(j)(10), (14), substituted “subsection (b)(1)” for “subsection (c)(1).” Former subsec. (d) redesignated (c)

    Source evidence

    Code amendment note
    Subsec. (d). Pub. L. 91–172, § 101(j)(10), (14), redesignated subsec. (g) as (d) and substituted “subsection (b)(1)” for “subsection (c)(1).” Former subsec. (d) redesignated (c).

    Enacted provision · exact public law section
    (10) Section 503(g) (relating to special rule for loans) is amended by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”.

15. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 § 101(j)(11) · 83 Stat. 487

    1. Redesignated · 26 U.S.C. § 503(e)

       Pub. L. 91–172, § 101(j)(11), (14), redesignated subsec. (h) as (e), modified heading to read: “Special rules”

    2. Substituted · 26 U.S.C. § 503(e)

       Pub. L. 91–172, § 101(j)(11), (14), 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

    Source evidence

    Code amendment note
    Subsec. (e). Pub. L. 91–172, § 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.

    Enacted provision · exact public law section
    (11) Section 503(h) (relating to special rules relating to lending 72 Stat. 1629. by section 401(a) and section 501(c)(17) trusts to certain persons) is amended— (A) by striking out in the heading thereof “Special rules relating to lending by section 401(a) and section 501(c)(17) trusts to certain persons.—”, and inserting in lieu thereof “Special rules.—”, (B) by striking out “subsection (c)(1),” and inserting in lieu thereof “subsection (b)(1),”, (C) by striking out “acquired by a trust described in section 401(a) or section 501(c)(17)”, and (D) by striking out in paragraph (3) “subsection (c)” and inserting in lieu thereof “subsection (b)”.

16. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 § 101(j)(12) · 83 Stat. 487

    1. Redesignated · 26 U.S.C. § 503(f)

       Pub. L. 91–172, § 101(j)(12), (14), redesignated subsec. (i) as (f)

    2. Substituted · 26 U.S.C. § 503(f)

       Pub. L. 91–172, § 101(j)(12), (14), substituted “Subsection (b)(1)” for “Subsection (c)(1)” . Former subsec. (f), defining “gift or bequest”, was struck out

    3. Substituted · 26 U.S.C. § 503(f)

       Pub. L. 91–172, § 101(j)(12), (14), substituted “subsection (e)” for “subsection (h)” . Former subsec. (f), defining “gift or bequest”, was struck out

    Source evidence

    Code amendment note
    Subsec. (f). Pub. L. 91–172, § 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.

    Enacted provision · exact public law section
    (12) Section 503(i) (relating to loans with respect to which 72 Stat. 1630. employers are prohibited from pledging certain assets) is amended— (A) by striking out “Subsection (c)(1)” and inserting in lieu thereof “Subsection (b)(1)”, and (B) by striking out “subsection (h)” and inserting in lieu thereof “subsection (e)”.

17. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 § 101(j)(13) · 83 Stat. 487

    1. Redesignated · 26 U.S.C. § 503(g)

       Pub. L. 91–172, § 101(j)(13), (14), redesignated subsec. (j) as (g)

    2. Redesignated · 26 U.S.C. § 503(g)

       Pub. L. 91–172, § 101(j)(13), (14), substituted “subsection (b)” for “subsection (c)” in par. (1). Former subsec. (g) redesignated (d)

    Source evidence

    Code amendment note
    Subsec. (g). Pub. L. 91–172, § 101(j)(13), (14), redesignated subsec. (j) as (g) and substituted “subsection (b)” for “subsection (c)” in par. (1). Former subsec. (g) redesignated (d).

    Enacted provision · exact public law section
    (13) Section 503(j)(1) (relating to prohibited transactions) 76 Stat. 827. is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (b)”.

18. 1969

    Tax Reform Act of 1969

    Pub. L. 91–172 § 101(j)(14) · 83 Stat. 487

    Redesignated · 26 U.S.C. § 503(h)(j)

    Pub. L. 91–172, § 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)

    Source evidence

    Code amendment note
    Subsecs. (h) to (j). Pub. L. 91–172, § 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).

    Enacted provision · exact public law section
    (14) Section 503 (relating to requirements of exemption) is amended by striking out subsections (b), (e), and (f) and by redesignating subsections (c), (d), (g), (h), (i), and (j) (as amended), as subsections (b), (c), (d), (e), (f), and (g), respectively.

19. 1974

    Employee Retirement Income Security Act of 1974

    Pub. L. 93–406 § 2003(b)(1) · 88 Stat. 829

    Substituted · 26 U.S.C. § 503(a)(1)(A)

    Pub. L. 93–406, § 2003(b)(1), substituted “section 501(c)(17)” for “section 501(c)(17) or (18)”

    Source evidence

    Code amendment note
    Subsec. (a)(1)(A). Pub. L. 93–406, § 2003(b)(1), substituted “section 501(c)(17)” for “section 501(c)(17) or (18)”.

    Enacted provision · exact public law section
    (1) by striking out “or (18)” in subsection (a)(1)(A),

20. 1974

    Employee Retirement Income Security Act of 1974

    Pub. L. 93–406 § 2003(b)(2) · 88 Stat. 829

    Inserted · 26 U.S.C. § 503(a)(1)(B)

    Pub. L. 93–406, § 2003(b)(2), inserted “which is referred to in section 4975(g)(2) or (3)”

    Source evidence

    Code amendment note
    Subsec. (a)(1)(B). Pub. L. 93–406, § 2003(b)(2), inserted “which is referred to in section 4975(g)(2) or (3)”.

    Enacted provision · exact public law section
    (2) by amending subsection (a)(1)(B) by inserting “which is referred to in section 4975(g) (2) or (3)” after “described in section 401(a)”,

21. 1974

    Employee Retirement Income Security Act of 1974

    Pub. L. 93–406 § 2003(b)(3) · 88 Stat. 829

    Substituted · 26 U.S.C. § 503(a)(2)

    Pub. L. 93–406, § 2003(b)(3), substituted “or paragraph (1)(B)” for “or section 401”

    Source evidence

    Code amendment note
    Subsec. (a)(2). Pub. L. 93–406, § 2003(b)(3), substituted “or paragraph (1)(B)” for “or section 401”.

    Enacted provision · exact public law section
    (3) by striking out “or section 401” in subsection (a)(2) and inserting in lieu thereof “or paragraph (1)(B)”,

22. 1974

    Employee Retirement Income Security Act of 1974

    Pub. L. 93–406 § 2003(b)(4) · 88 Stat. 829

    Substituted · 26 U.S.C. § 503(c)

    Pub. L. 93–406, § 2003(b)(4), substituted “or subsection (a)(1)(B)” for “or section 401”

    Source evidence

    Code amendment note
    Subsec. (c). Pub. L. 93–406, § 2003(b)(4), substituted “or subsection (a)(1)(B)” for “or section 401”.

    Enacted provision · exact public law section
    (4) by striking out “or section 401” in subsection (c) and inserting in lieu thereof “or subsection (a)(1)(B)”, and

23. 1974

    Employee Retirement Income Security Act of 1974

    Pub. L. 93–406 § 2003(b)(5) · 88 Stat. 829

    Struck · 26 U.S.C. § 503(g)

    Pub. L. 93–406, § 2003(b)(5), struck out subsec. (g) which covered trusts benefiting certain owner-employees

    Source evidence

    Code amendment note
    Subsec. (g). Pub. L. 93–406, § 2003(b)(5), struck out subsec. (g) which covered trusts benefiting certain owner-employees.

    Enacted provision · exact public law section
    (5) by striking out subsection (g).

24. 1976

    Pub. L. 94–455 title XIX § 1906(b)(13)(A) · 90 Stat. 1520

    Struck · 26 U.S.C. § 503(a)(2); 26 U.S.C. § 503(a)(c)

    Pub. L. 94–455 struck out “or his delegate” after “Secretary”

    Source evidence

    Code amendment note
    Subsecs. (a)(2), (c). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

    Enacted provision · exact public law section
    (A) The Internal Revenue Code of 1954, as amended by this Act, is amended by striking out “Secretary or his delegate” each place it appears and inserting in lieu thereof “Secretary”.

25. 1990

    Revenue Reconciliation Act of 1990

    Pub. L. 101–508 title XI § 11801(a)(22) · 104 Stat. 1388

    Struck · 26 U.S.C. § 503(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:

    Source evidence

    Code amendment note
    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.”

    Enacted provision · exact public law section
    (22) Subsection (d) of section 503 (relating to special rule for loans).

26. 2014

    Tax Technical Corrections Act of 2014

    Pub. L. 113–295 § 221(a)(63)(A) · 128 Stat. 4010

    Amended · 26 U.S.C. § 503(a)(1)

    Pub. L. 113–295, § 221(a)(63)(A), amended par. (1) generally. Prior to amendment, text read as follows:

    Source evidence

    Code amendment note
    Subsec. (a)(1). Pub. L. 113–295, § 221(a)(63)(A), amended par. (1) generally. Prior to amendment, text read as follows:

    “(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.”

    Enacted provision · exact public law section
    (A) Section 503(a)(1) is amended to read as follows: “(1) General rule.— An organization described in paragraph (17) or (18) of section 501(c), or described in section 401(a) and 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.” .

    Effective date note
    Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

27. 2014

    Tax Technical Corrections Act of 2014

    Pub. L. 113–295 § 221(a)(63)(B) · 128 Stat. 4010

    Substituted · 26 U.S.C. § 503(a)(2)

    Pub. L. 113–295, § 221(a)(63)(B), which directed amendment of par. (2) by substituting “described in paragraph (1)” for “described in section 501(c)(17) or (18) or paragraph (a)(1)(B)”, was executed by making the substitution for “described in section 501(c)(17) or (18) or paragraph (1)(B)” to reflect the probable intent of Congress

    Source evidence

    Code amendment note
    Subsec. (a)(2). Pub. L. 113–295, § 221(a)(63)(B), which directed amendment of par. (2) by substituting “described in paragraph (1)” for “described in section 501(c)(17) or (18) or paragraph (a)(1)(B)”, was executed by making the substitution for “described in section 501(c)(17) or (18) or paragraph (1)(B)” to reflect the probable intent of Congress.

    Enacted provision · exact public law section
    (B) Paragraph (2) of section 503(a) is amended by striking “described in section 501(c)(17) or (18) or paragraph (a)(1)(B)” and inserting “described in paragraph (1)”.

    Effective date note
    Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

28. 2014

    Tax Technical Corrections Act of 2014

    Pub. L. 113–295 § 221(a)(63)(C) · 128 Stat. 4010

    Substituted · 26 U.S.C. § 503(c)

    Pub. L. 113–295, § 221(a)(63)(C), substituted “described in subsection (a)(1)” for “described in section 501(c)(17) or (18) or subsection (a)(1)(B)”

    Source evidence

    Code amendment note
    Subsec. (c). Pub. L. 113–295, § 221(a)(63)(C), substituted “described in subsection (a)(1)” for “described in section 501(c)(17) or (18) or subsection (a)(1)(B)”.

    Enacted provision · exact public law section
    (C) Subsection (c) of section 503 is amended by striking “described in section 501(c)(17) or (18) or subsection (a)(1)(B)” and inserting “described in subsection (a)(1)”.

    Effective date note
    Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

29 of 38 references resolved to an enrolled provision · 9 partial