26 U.S. Code § 503 - Requirements for exemption
(a)
Denial of exemption to organizations engaged in prohibited transactions
(1)
General rule
(A)
An organization described in section
501
(c)(17) shall not be exempt from taxation under section
501
(a) if it has engaged in a prohibited transaction after December 31, 1959.
(2)
Taxable years affected
An organization described in section
501
(c) (17) or (18) or paragraph (1)(B) shall be denied exemption from taxation under section
501
(a)
by reason of paragraph (1) only for taxable years after the taxable
year during which it is notified by the Secretary that it has engaged in
a prohibited transaction, unless such organization entered into such
prohibited transaction with the purpose of diverting corpus or income of
the organization from its exempt purposes, and such transaction
involved a substantial part of the corpus or income of such
organization.
(b)
Prohibited transactions
For purposes of this section, the term
“prohibited transaction” means any transaction in which an organization
subject to the provisions of this section—
(1)
lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to;
(2)
pays any compensation, in excess of a
reasonable allowance for salaries or other compensation for personal
services actually rendered, to;
(4)
makes any substantial purchase of
securities or any other property, for more than adequate consideration
in money or money’s worth, from;
(5)
sells any substantial part of its
securities or other property, for less than an adequate consideration in
money or money’s worth, to; or
(6)
engages in any other transaction which results in a substantial diversion of its income or corpus to;
the creator of such organization (if a
trust); a person who has made a substantial contribution to such
organization; a member of the family (as defined in section 267(c)(4))
of an individual who is the creator of such trust or who has made a
substantial contribution to such organization; or a corporation
controlled by such creator or person through the ownership, directly or
indirectly, of 50 percent or more of the total combined voting power of
all classes of stock entitled to vote or 50 percent or more of the total
value of shares of all classes of stock of the corporation.
(c)
Future status of organizations denied exemption
Any organization described in section
501
(c) (17) or (18) orsubsection (a)(1)(B) which is denied exemption under section
501
(a)
by reason of subsection (a) of this section, with respect to any
taxable year following the taxable year in which notice of denial of
exemption was received, may, under regulations prescribed by the
Secretary, file claim for exemption, and if the Secretary, pursuant to
such regulations, is satisfied that such organization will not knowingly
again engage in a prohibited transaction, such organization shall be
exempt with respect to taxable years after the year in which such claim
is filed.
(e)
Special rules
For purposes of subsection (b)(1), a bond,
debenture, note, or certificate or other evidence of indebtedness
(hereinafter in this subsection referred to as “obligation”) shall not
be treated as a loan made without the receipt of adequate security if—
(1)
such obligation is acquired—
(A)
on the market, either
(i)
at the price of the obligation
prevailing on a national securities exchange which is registered with
the Securities and Exchange Commission, or
(ii)
if the obligation is not
traded on such a national securities exchange, at a price not less
favorable to the trust than the offering price for the obligation as
established by current bid and asked prices quoted by persons
independent of the issuer;
(B)
from an underwriter, at a price
(i)
not in excess of the public
offering price for the obligation as set forth in a prospectus or
offering circular filed with the Securities and Exchange Commission, and
(ii)
at which a substantial portion of the same issue is acquired by persons independent of the issuer; or
(f)
Loans with respect to which employers are prohibited from pledging certain assets
Subsection (b)(1) shall not apply to a loan made by a trust described in section
401
(a)
to the employer (or to a renewal of such a loan or, if the loan is
repayable upon demand, to a continuation of such a loan) if the loan
bears a reasonable rate of interest, and if (in the case of a making or
renewal)—
(1)
the employer is prohibited (at the time
of such making or renewal) by any law of the United States or
regulation thereunder from directly or indirectly pledging, as security
for such a loan, a particular class or classes of his assets the value
of which (at such time) represents more than one-half of the value of
all his assets;
(2)
the making or renewal, as the case may
be, is approved in writing as an investment which is consistent with the
exempt purposes of the trust by a trustee who is independent of the
employer, and no other such trustee had previously refused to give such
written approval; and
(3)
immediately following the making or
renewal, as the case may be, the aggregate amount loaned by the trust to
the employer, without the receipt of adequate security, does not exceed
25 percent of the value of all the assets of the trust.
For purposes of paragraph (2), the term
“trustee” means, with respect to any trust for which there is more than
one trustee who is independent of the employer, a majority of such
independent trustees. For purposes of paragraph (3), the determination
as to whether any amount loaned by the trust to the employer is loaned
without the receipt of adequate security shall be made without regard to
subsection (e).
Source
(Aug. 16, 1954, ch. 736, 68A Stat. 166; Pub. L. 85–866, title I, § 30(a), (b),Sept. 2, 1958, 72 Stat. 1629, 1630; Pub. L. 86–667, § 2,July 14, 1960, 74 Stat. 535; Pub. L. 87–792, § 6,Oct. 10, 1962, 76 Stat. 827; Pub. L. 91–172, title I, §§ 101(j)(7)–(14), 121(b)(6)(B), Dec. 30, 1969, 83 Stat. 527, 542; Pub. L. 93–406, title II, § 2003(b),Sept. 2, 1974, 88 Stat. 978; Pub. L. 94–455, title XIX, § 1906(b)(13)(A),Oct. 4, 1976, 90 Stat. 1834; Pub. L. 101–508, title XI, § 11801(a)(22),Nov. 5, 1990, 104 Stat. 1388–521.)
Amendments
1990—Subsec. (d). Pub. L. 101–508struck
out subsec. (d) “Special rule for loans” which read as follows: “For
purposes of the application of subsection (b)(1), in the case of a loan
by a trust described in section
401
(a),
the following rules shall apply with respect to a loan made before
March 1, 1954, which would constitute a prohibited transaction if made
on or after March 1, 1954:
“(1) If any part of the loan is repayable
prior to December 31, 1955, the renewal of such part of the loan for a
period not extending beyond December 31, 1955, on the same terms, shall
not be considered a prohibited transaction.
“(2) If the loan is repayable on demand,
the continuation of the loan without the receipt of adequate security
and a reasonable rate of interest beyond December 31, 1955, shall be
considered a prohibited transaction.”
1976—Subsecs. (a)(2), (c). Pub. L. 94–455struck out “or his delegate” after “Secretary”.
1974—Subsec. (a)(1)(A). Pub. L. 93–406, § 2003(b)(1), substituted “section
501
(c)(17)” for “section
501
(c)(17) or (18)”.
Subsec. (a)(1)(B). Pub. L. 93–406, § 2003(b)(2), inserted “which is referred to in section
4975
(g)(2) or (3)”.
Subsec. (a)(2). Pub. L. 93–406, § 2003(b)(3), substituted “or paragraph (1)(B)” for “or section
401”.
Subsec. (c). Pub. L. 93–406, § 2003(b)(4), substituted “or subsection (a)(1)(B)” for “or section
401”.
Subsec. (g). Pub. L. 93–406, § 2003(b)(5), struck out subsec. (g) which covered trusts benefiting certain owner-employees.
1969—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.
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).
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).
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).
Subsec. (b). Pub. L. 91–172,
§ 101(j)(14), redesignatedsubsec. (c) as (b). Former subsec. (b),
setting out the organizations to which section applied, was struck out.
Subsec. (c). Pub. L. 91–172, §§ 101(j)(9), (14),
121
(b)(6)(B)(ii), redesignatedsubsec. (d) as (c), struck out reference to organizations described in section
501
(c)(3), and inserted reference to organizations described in section
501
(c)(17). Former subsec. (c) redesignated (b).
Subsec. (d). Pub. L. 91–172,
§ 101(j)(10), (14), redesignatedsubsec. (g) as (d) and substituted
“subsection (b)(1)” for “subsection (c)(1).” Former subsec. (d)
redesignated (c).
Subsec. (e). Pub. L. 91–172,
§ 101(j)(11), (14), redesignatedsubsec. (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) orsection
501
(c)(17)”. Former subsec. (e), covering the disallowance of certain charitable deductions, was struck out.
Subsec. (f). Pub. L. 91–172,
§ 101(j)(12), (14), redesignatedsubsec. (i) as (f) and substituted
“Subsection (b)(1)” for “Subsection (c)(1)” and “subsection (e)” for
“subsection (h)”. Former subsec. (f), defining “gift or bequest”, was
struck out.
Subsec. (g). Pub. L. 91–172,
§ 101(j)(13), (14), redesignatedsubsec. (j) as (g) and substituted
“subsection (b)” for “subsection (c)” in par. (1). Former subsec. (g)
redesignated (d).
Subsecs. (h) to (j). Pub. L. 91–172,
§ 101(j)(14), redesignatedsubsecs. (h), (i), and (j) as (e), (f),
and (g), respectively. Former subsecs. (e) and (f) were struck out and
former subsec. (g) was redesignated (d).
1962—Subsec. (j). Pub. L. 87–792added subsec. (j).
1960—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.
Subsecs. (a)(2), (b), (d). Pub. L. 86–667, § 2(a)(2), (b), (c), included organizations described in section
501
(c)(17).
1958—Subsec. (h). Pub. L. 85–866, § 30(a), added subsec. (h).
Subsec. (i). Pub. L. 85–866, § 30(b), added subsec. (i).
Effective Date of 1974 Amendment
Amendment by Pub. L. 93–406effective
Jan. 1, 1975, but with provision for an election to be exercised by an
organization so as to constitute a savings clause with reference to the
amendment, see section 2003(c) ofPub. L. 93–406, set out as an Effective Date; Savings Provisions note under section
4975 of this title.
Effective Date of 1969 Amendment
Amendment by section
101
(j)(7)–(14) of Pub. L. 91–172effective Jan. 1, 1970, see section 101(k)(1) ofPub. L. 91–172, set out as an Effective Date note under section
4940 of this title.
Amendment by section 121(b)(6)(B) ofPub. L. 91–172applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) ofPub. L. 91–172, set out as a note under section
511 of this title.
Effective Date of 1962 Amendment
Amendment by Pub. L. 87–792applicable to taxable years beginning after Dec. 31, 1962, see section 8 ofPub. L. 87–792, set out as a note under section
22 of this title.
Effective Date of 1960 Amendment
Amendment by Pub. L. 86–667applicable to taxable years beginning after Dec. 31, 1959, and in the case of loans, the amendments to this section made by Pub. L. 86–667are applicable only to loans made, renewed, or continued after Dec. 31, 1959, see section 6 ofPub. L. 86–667, set out as a note under section
501 of this title.
Effective Date of 1958 Amendment
Pub. L. 85–866, title I, § 30(c),Sept. 2, 1958, 72 Stat. 1631, as amended by Pub. L. 99–514, § 2,Oct. 22, 1986, 100 Stat. 2095, provided that:
“(1) In general.—Except as provided in
paragraph (2), the amendment made by subsection (a) [amending this
section] shall apply with respect to taxable years ending after March
15, 1956. The amendment made by subsection (b) [amending this section]
shall apply with respect to taxable years ending after the date of the
enactment of this Act [Sept. 2, 1958], but only with respect to periods
after such date.
“(2) Exceptions.—Nothing in subsection (a)
[amending this section] shall be construed to make any transaction a
prohibited transaction which, under announcements of the Internal
Revenue Service made with respect to section 503(c)(1) of the Internal
Revenue Code of 1986 [formerly I.R.C. 1954] before the date of the
enactment of this Act [Sept. 2, 1958], would not constitute a prohibited
transaction. In the case of any bond, debenture, note, or certificate
or other evidence of indebtedness acquired before the date of the
enactment of this Act [Sept. 2, 1958], by a trust described in section
401(a) of such Code which is held on such date, paragraphs (2) and (3)
of section 503(h) of such Code shall be treated as satisfied if such
requirements would have been satisfied if such obligation had been
acquired on such date of enactment [Sept. 2, 1958].”
Savings Provision
For provisions that nothing in amendment by Pub. L. 101–508be
construed to affect treatment of certain transactions occurring,
property acquired, or items of income, loss, deduction, or credit taken
into account prior to Nov. 5, 1990, for purposes of determining
liability for tax for periods ending after Nov. 5, 1990, see section
11821(b) ofPub. L. 101–508, set out as a note under section
45K of this title.
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