79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 115–857 

WATER AND AGRICULTURE TAX REFORM ACT OF 2018 

JULY 23, 2018.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. BRADY of Texas, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

ADDITIONAL VIEWS 

[To accompany H.R. 519] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 519) to amend the Internal Revenue Code of 1986 to facilitate water leasing and water transfers to promote conservation 

and efficiency, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended 

do pass. 

CONTENTS 

Page 

I. SUMMARY AND BACKGROUND ................................................................. 2 

A. Purpose and Summary ......................................................................... 2 

B. Background and Need for Legislation ................................................ 3 

C. Legislative History ............................................................................... 3 

II. EXPLANATION OF THE BILL ...................................................................... 3 

A. Modify Tax Exemption Requirements for Mutual Ditch or Irrigation Companies ................................................................................... 3 

III. VOTES OF THE COMMITTEE ...................................................................... 5 

IV. BUDGET EFFECTS OF THE BILL ............................................................... 5 

A. Committee Estimate of Budgetary Effects ......................................... 5 

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority ...................................................................... 6 

C. Cost Estimate Prepared by the Congressional Budget Office ........... 6 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE 

HOUSE .......................................................................................................... 7 

A. Committee Oversight Findings and Recommendations .................... 7 

B. Statement of General Performance Goals and Objectives ................ 7 

C. Information Relating to Unfunded Mandates .................................... 7 

D. Applicability of House Rule XXI 5(b) .................................................. 8 

2 

E. Tax Complexity Analysis ..................................................................... 8 

F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 

Benefits ............................................................................................... 8 

G. Duplication of Federal Programs ........................................................ 8 

H. Disclosure of Directed Rule Makings ................................................. 8 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 9 

A. Changes in Existing Law Proposed by the Bill, as Reported ........... 9 

VII . ADDITIONAL VIEWS ................................................................................... 38 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Water and Agriculture Tax Reform Act of 2018’’. 

SEC. 2. FACILITATE WATER LEASING AND WATER TRANSFERS TO PROMOTE CONSERVATION 

AND EFFICIENCY. 

(a) IN GENERAL.—Paragraph (12) of section 501(c) of the Internal Revenue Code 

of 1986 is amended by adding at the end the following new subparagraph: 

‘‘(J) TREATMENT OF MUTUAL DITCH IRRIGATION COMPANIES.— 

‘‘(i) IN GENERAL.—In the case of a mutual ditch or irrigation company 

or of a like organization to a mutual ditch or irrigation company, subparagraph (A) shall be applied without taking into account any income 

received or accrued— 

‘‘(I) from the sale, lease, or exchange of fee or other interests in 

real and personal property, including interests in water, 

‘‘(II) from the sale or exchange of stock in a mutual ditch or irrigation company (or in a like organization to a mutual ditch or irrigation company) or contract rights for the delivery or use of water, 

or 

‘‘(III) from the investment of proceeds from sales, leases, or exchanges under subclauses (I) and (II), 

except that any income received under subclause (I), (II), or (III) which 

is distributed or expended for expenses (other than for operations, 

maintenance, and capital improvements) of the mutual ditch or irrigation company or of the like organization to a mutual ditch or irrigation 

company (as the case may be) shall be treated as nonmember income 

in the year in which it is distributed or expended. For purposes of the 

preceding sentence, expenses (other than for operations, maintenance, 

and capital improvements) include expenses for the construction of conveyances designed to deliver water outside of the system of the mutual 

ditch or irrigation company or of the like organization. 

‘‘(ii) TREATMENT OF ORGANIZATIONAL GOVERNANCE.—In the case of a 

mutual ditch or irrigation company or of a like organization to a mutual ditch or irrigation company, where State law provides that such 

a company or organization may be organized in a manner that permits 

voting on a basis which is pro rata to share ownership on corporate 

governance matters, subparagraph (A) shall be applied without taking 

into account whether its member shareholders have one vote on corporate governance matters per share held in the corporation. Nothing 

in this clause shall be construed to create any inference about the requirements of this subsection for companies or organizations not included in this clause.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2018. 

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill, H.R. 519, as reported by the Committee on Ways and 

Means, provides that income received or accrued by a mutual ditch 

or irrigation company from non-member sources will not be taken 

into account in determining whether the entity meets the qualifications for tax-exempt status. Such income generally must be used to 

fund normal operations, maintenance, and capital improvements of 

the mutual ditch or irrigation company (this does not include inVerDate Sep 11 2014 01:44 Jul 29, 2018 Jkt 079006 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 E:\HR\OC\HR857.XXX HR857
3 

come used to fund the construction of conveyances designed to deliver water outside of the organization’s system) or it will be treated as non-member income of the company (for purposes of determining its tax-exempt status) in the year in which it is distributed 

or expended. 

Additionally, the bill provides that a mutual ditch or irrigation 

company’s corporate governance issues may be decided on a pro 

rata basis based on share ownership in the organization, rather 

than on a one-member, one-vote basis, where the applicable state 

law provides for such a voting arrangement. 

B. BACKGROUND AND NEED FOR LEGISLATION

The Committee believes it is important to continually improve 

tax laws. This bill provides mutual ditch or irrigation companies 

with more flexibility with respect to funding their operations, maintenance, and improvements to their water infrastructure, especially 

in drought-stricken areas, and allows mutual ditch or irrigation 

companies to be governed in such a manner as is permitted under 

State law. The bill provides that, for the income from non-member 

sources to receive preferential treatment, it generally must be used 

for operations and maintenance, thus ensuring that these funds 

will be reinvested in the mutual ditch or irrigation companies’ 

water infrastructure. This will facilitate in more efficient water allocation and support rural economies. 

C. LEGISLATIVE HISTORY

Background 

H.R. 519 was introduced on January 17, 2017, and was referred 

to the Committee on Ways and Means. 

Committee Action 

The Committee on Ways and Means marked up H.R. 519, the 

‘‘Water and Agriculture Tax Reform Act of 2018,’’ on June 21, 2018, 

and ordered the bill, as amended, favorably reported (with a 

quorum being present). 

Committee Hearings 

Reforms to the rules for mutual ditch or irrigation companies 

were discussed at a Subcommittee on Tax Policy Member Day 

Hearing on Tax Legislation on May 12, 2016. 

II. EXPLANATION OF THE BILL 

A. MODIFY TAX EXEMPTION REQUIREMENTS FOR MUTUAL DITCH OR

IRRIGATION COMPANIES (SEC. 2 OF THE BILL AND SEC. 501(C)(12) 

OF THE CODE) 

PRESENT LAW

Section 501(c)(12) describes certain mutual or cooperative organizations that are exempt from Federal income tax under section 

501(a), namely: (1) benevolent life insurance associations of a purely local character; (2) mutual ditch or irrigation companies; (3) mutual or cooperative telephone companies; and (4) like organizations 

4 

1Sec. 501(c)(12)(A). 

2 Rev. Rul. 67–265, 1967–2 C.B. 205. 

3Sec. 501(c)(12)(A); Treas. Reg. sec. 1.501(c)(12)–1(a). 

4Secs. 501(c)(12)(B)–(H). 

5 Internal Revenue Manual sec. 7.25.12.5 (citing Puget Sound Plywood, Inc. v. Commissioner, 

44 T.C. 305 (1966), acq. 1966–2 C.B. 6). 

to any of the foregoing types of organizations.1 In 1967, the Internal Revenue Service (the ‘‘Service’’) interpreted the reference to 

‘‘like organizations’’ to include mutual or cooperative electric companies and water companies, and such mutual or cooperative electric companies and water companies have been treated as within 

section 501(c)(12).2

In general, 85 percent or more of the income of these entities 

must consist of amounts collected from members for the sole purpose of meeting losses and expenses of the organization.3 The 85- 

percent test is applied on a year-by-year basis. If an organization 

fails to satisfy the test for a year, it does not qualify for exemption 

for that particular year; it may, however, continue to qualify for exemption for any year for which the 85-percent test is satisfied. The 

Code provides certain exceptions to the 85-percent-of-income requirement for mutual or cooperative telephone and electric companies.4

The Service generally requires that mutual or cooperative organizations described in section 501(c)(12) be democratically controlled, 

meaning that election of officers is conducted on a one-member, 

one-vote basis, with all meetings having a quorum of members in 

attendance or voting by proxy.5

REASONS FOR CHANGE

The Committee wishes to facilitate the efficient allocation of limited water resources and believes that this goal can be furthered 

by permitting, in appropriate cases, mutual ditch or irrigation companies that are exempt from tax under section 501(c)(12) to supplement their member income with additional income from non-member sources without losing tax-exempt status for the year. The 

Committee also believes it is important to ensure that such companies have sufficient capital to improve the infrastructure for the 

conveyance of water within their districts. The Committee therefore believes it is appropriate to disregard certain types of nonmember income received by a mutual ditch or irrigation company 

for purposes of applying the 85-percent-of-member-income test. 

EXPLANATION OF PROVISION

First, in the case of a mutual ditch or irrigation company (or a 

like organization to a mutual ditch or irrigation company), the 85- 

percent-of-income requirement is applied without taking into account income received or accrued: (1) from the sale, lease, or exchange of fee or other interests in real property, including interests 

in water; (2) from the sale or exchange of stock in a mutual ditch 

or irrigation company (or in a like organization to a mutual ditch 

or irrigation company) or contract rights for the delivery or use of 

water; or (3) from the investment of proceeds from sales, leases, or 

exchanges under (1) or (2) above. 

Notwithstanding the foregoing, any income described in (1), (2), 

or (3) above that is distributed or expended for expenses (other 

5 

than for operations, maintenance, and capital improvements) of the 

mutual ditch or irrigation company (or of the like organization to 

a mutual ditch or irrigation company, as the case may be) shall be 

treated as non-member income in the year in which it is distributed or expended. For this purpose, ‘‘expenses (other than for operations, maintenance, and capital improvements)’’ include expenses 

for the construction of conveyances designed to deliver water outside of the system of the mutual ditch or irrigation company or of 

the like organization. 

Second, in the case of a mutual ditch or irrigation company (or 

a like organization to a mutual ditch or irrigation company), where 

State law provides that such an organization may be organized in 

a manner that permits voting on a basis that is pro rata to share 

ownership on corporate governance matters, the organization’s eligibility for tax exemption is determined without taking into account whether each of its member shareholders has one vote on 

corporate governance matters per share held in the organization. 

Nothing in this rule shall be construed to create any inference 

about the requirements of section 501(c)(12) for organizations other 

than mutual ditch or irrigation companies. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2018. 

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the House of Representatives, the following statement is made concerning the vote 

of the Committee on Ways and Means during the markup consideration of H.R. 519, the ‘‘Water and Agriculture Tax Reform Act of 

2018,’’ on June 21, 2018. 

The bill, H.R. 519, as amended, was ordered favorably reported 

to the House of Representatives by a voice vote (with a quorum 

being present). 

IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d) of rule XIII of the Rules of the 

House of Representatives, the following statement is made concerning the effects on the budget of the bill, H.R. 519, as reported. 

The following presents the estimated Federal fiscal year budget 

receipts of the bill, H.R. 519, as reported: 

FISCAL YEARS 

[Millions of dollars] 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2018–23 2018–28 

– – – ¥3 ¥3 ¥4 ¥4 ¥4 ¥4 ¥4 ¥4 ¥4 ¥4 ¥18 ¥39 

NOTE: Details do not add to totals due to rounding. 

Pursuant to clause 8 of rule XIII of the Rules of the House of 

Representatives, the following statement is made by the Joint Committee on Taxation with respect to the provisions of the bill amending the Internal Revenue Code of 1986: The gross budgetary effect 

6 

(before incorporating macroeconomic effects) in any fiscal year is 

less than 0.25 percent of the current projected gross domestic product of the United States for that fiscal year; therefore, the bill is 

not ‘‘major legislation’’ for purposes of requiring that the estimate 

include the budgetary effects of changes in economic output, employment, capital stock and other macroeconomic variables. 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue-reducing tax provision involves no new 

tax expenditure. 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided. 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, June 28, 2018. 

Hon. KEVIN BRADY, 

Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 519, the Water and Agriculture Tax Reform Act of 2018. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Cecilia Pastrone. 

Sincerely, 

KEITH HALL, Director. 

Enclosure. 

H.R. 519—Water and Agriculture Tax Reform Act of 2018 

H.R. 519 would amend the Internal Revenue Code by modifying 

the tax exemption requirements for mutual ditch and irrigation 

companies. The bill excludes certain types of income when determining whether those companies qualify for a federal income tax 

exemption in a given year, potentially qualifying more of those 

companies for the exemption. Under current law, to qualify for the 

tax exemption, at least 85 percent of the company’s income must 

be collected to meet losses and expenses. The bill generally excludes certain types of income—such as from the sale or lease of 

property, the sale of stock in a mutual ditch or irrigation company, 

and the investment of proceeds from those transactions—when determining if the 85-percent-of-income requirement is met. Thus, 

mutual ditch and irrigation companies can earn income on the sale 

of property and stock without affecting their tax-exempt status. 

The bill also broadens the corporate governance structures under 

7 

which mutual ditch and irrigation companies are eligible for the 

federal tax exemption. 

The staff of the Joint Committee on Taxation (JCT) estimates 

that enacting H.R. 519 would reduce revenues by $39 million over 

the 2018–2028 period. 

The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting revenues or direct spending. The net changes in revenues and direct 

spending that are subject to those pay-as-you-go procedures are 

shown in the following table. Only on-budget changes to revenues 

and direct spending are subject to pay-as-you-go procedures. 

CBO and JCT estimate that enacting the bill would not increase net direct spending or on-budget deficits by more than $5 billion 

in any of the four 10-year periods beginning in 2028. 

JCT has determined that the bill contains no intergovernmental 

or private-sector mandates as defined in the Unfunded Mandates 

Reform Act. 

The CBO staff contact for this estimate is Cecilia Pastrone. The 

estimate was approved by Joshua Shakin, Unit Chief, Revenue Estimating. 

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 519, AS ORDERED REPORTED BY THE 

HOUSE COMMITTEE ON WAYS AND MEANS ON JUNE 21, 2018 

By Fiscal Year, in Millions of Dollars 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2018– 

2023 

2018– 

2028 

NET INCREASE IN THE ON-BUDGET DEFICIT 

Statutory Pay-As-You-Go Effects .... 0 3 3 4 4 4 4 4 4 4 4 18 39 

Source: Staff of the Joint Committee on Taxation. 

Note: Components may not sum to total because of rounding. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee advises that the findings and 

recommendations of the Committee, based on oversight activities 

under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated into the description portions of this 

report. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has deterVerDate Sep 11 2014 01:44 Jul 29, 2018 Jkt 079006 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 E:\HR\OC\HR857.XXX HR857
8 

mined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

D. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the bill and 

states that the bill does not involve any Federal income tax rate 

increases within the meaning of the rule. 

E. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Restructuring 

and Reform Act of 1998 (‘‘IRS Reform Act’’) requires the staff of the 

Joint Committee on Taxation (in consultation with the Internal 

Revenue Service and the Treasury Department) to provide a tax 

complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code of 1986 and has widespread applicability to individuals or small businesses. 

Pursuant to clause 3(h)(1) of rule XIII of the Rules of the House 

of Representatives, the staff of the Joint Committee on Taxation 

has determined that a complexity analysis is not required under 

section 4022(b) of the IRS Reform Act because the bill contains no 

provisions that amend the Internal Revenue Code of 1986 and that 

have ‘‘widespread applicability’’ to individuals or small businesses, 

within the meaning of the rule. 

F. CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND

LIMITED TARIFF BENEFITS

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

G. DUPLICATION OF FEDERAL PROGRAMS

In compliance with Sec. 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program, 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

Law 111–139, or (3) a program related to a program identified in 

the most recent Catalog of Federal Domestic Assistance, published 

pursuant to section 6104 of title 31, United States Code. 

9 

H. DISCLOSURE OF DIRECTED RULE MAKINGS

In compliance with Sec. 3(i) of H. Res. 5 (115th Congress), the 

following statement is made concerning directed rule makings: The 

Committee advises that the bill requires no directed rule makings 

within the meaning of such section. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

A. CHANGES IN EXISTING LAW PROPOSED BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law proposed by the 

bill, as reported, are shown as follows (existing law proposed to be 

omitted is enclosed in black brackets, new matter is printed in 

italic, existing law in which no change is proposed is shown in 

roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italic 

and existing law in which no change is proposed is shown in 

roman): 

INTERNAL REVENUE CODE OF 1986 

* * * * * * * 

Subtitle A—Income Taxes 

* * * * * * * 

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * * 

Subchapter F—Exempt Organizations 

* * * * * * * 

PART I—GENERAL RULE 

* * * * * * * 

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN 

TRUSTS, ETC. 

(a) EXEMPTION FROM TAXATION.—An organization described in 

subsection (c) or (d) or section 401(a) shall be exempt from taxation 

under this subtitle unless such exemption is denied under section 

502 or 503. 

(b) TAX ON UNRELATED BUSINESS INCOME AND CERTAIN OTHER AC- TIVITIES.—An organization exempt from taxation under subsection 

(a) shall be subject to tax to the extent provided in parts II, III, 

and VI of this subchapter, but (notwithstanding parts II, III, and 

VI of this subchapter) shall be considered an organization exempt 

10 

from income taxes for the purpose of any law which refers to organizations exempt from income taxes. 

(c) LIST OF EXEMPT ORGANIZATIONS.—The following organizations 

are referred to in subsection (a): 

(1) Any corporation organized under Act of Congress which 

is an instrumentality of the United States but only if such corporation— 

(A) is exempt from Federal income taxes— 

(i) under such Act as amended and supplemented 

before July‘ 18, 1984, or 

(ii) under this title without regard to any provision 

of law which is not contained in this title and which 

is not contained in a revenue Act, or 

(B) is described in subsection (l). 

(2) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning 

over the entire amount thereof, less expenses, to an organization which itself is exempt under this section. Rules similar to 

the rules of subparagraph (G) of paragraph (25) shall apply for 

purposes of this paragraph. 

(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for 

the prevention of cruelty to children or animals, no part of the 

net earnings of which inures to the benefit of any private 

shareholder or individual, no substantial part of the activities 

of which is carrying on propaganda, or otherwise attempting, 

to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in 

(including the publishing or distributing of statements), any 

political campaign on behalf of (or in opposition to) any candidate for public office. 

(4)(A) Civic leagues or organizations not organized for profit 

but operated exclusively for the promotion of social welfare, or 

local associations of employees, the membership of which is 

limited to the employees of a designated person or persons in 

a particular municipality, and the net earnings of which are 

devoted exclusively to charitable, educational, or recreational 

purposes. 

(B) Subparagraph (A) shall not apply to an entity unless 

no part of the net earnings of such entity inures to the 

benefit of any private shareholder or individual. 

(5) Labor, agricultural, or horticultural organizations. 

(6) Business leagues, chambers of commerce, real-estate 

boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not 

organized for profit and no part of the net earnings of which 

inures to the benefit of any private shareholder or individual. 

(7) Clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which 

are for such purposes and no part of the net earnings of which 

inures to the benefit of any private shareholder. 

11 

(8) Fraternal beneficiary societies, orders, or associations— 

(A) operating under the lodge system or for the exclusive 

benefit of the members of a fraternity itself operating 

under the lodge system, and 

(B) providing for the payment of life, sick, accident, or 

other benefits to the members of such society, order, or association or their dependents. 

(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. For purposes of providing for the payment of sick and accident benefits to members of such an association and their dependents, the term ‘‘dependent’’ shall include any individual who is a child (as defined 

in section 152(f)(1)) of a member who as of the end of the calendar year has not attained age 27. 

(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. 

(11) Teachers’ retirement fund associations of a purely local 

character, if— 

(A) no part of their net earnings inures (other than 

through payment of retirement benefits) to the benefit of 

any private shareholder or individual, and 

(B) the income consists solely of amounts received from 

public taxation, amounts received from assessments on the 

teaching salaries of members, and income in respect of investments. 

(12)(A) Benevolent life insurance associations of a purely 

local character, mutual ditch or irrigation companies, mutual 

or cooperative telephone companies, or like organizations; but 

only if 85 percent or more of the income consists of amounts 

collected from members for the sole purpose of meeting losses 

and expenses. 

(B) In the case of a mutual or cooperative telephone company, subparagraph (A) shall be applied without taking 

into account any income received or accrued— 

(i) from a nonmember telephone company for the 

performance of communication services which involve 

members of the mutual or cooperative telephone company, 

(ii) from qualified pole rentals, 

(iii) from the sale of display listings in a directory 

furnished to the members of the mutual or cooperative 

telephone company, or 

(iv) from the prepayment of a loan under section 

306A, 306B, or 311 of the Rural Electrification Act of 

1936 (as in effect on January 1, 1987). 

12 

(C) In the case of a mutual or cooperative electric company, subparagraph (A) shall be applied without taking 

into account any income received or accrued— 

(i) from qualified pole rentals, or 

(ii) from any provision or sale of electric energy 

transmission services or ancillary services if such services are provided on a nondiscriminatory open access 

basis under an open access transmission tariff approved or accepted by FERC or under an independent 

transmission provider agreement approved or accepted 

by FERC (other than income received or accrued directly or indirectly from a member), 

(iii) from the provision or sale of electric energy distribution services or ancillary services if such services 

are provided on a nondiscriminatory open access basis 

to distribute electric energy not owned by the mutual 

or electric cooperative company— 

(I) to end-users who are served by distribution 

facilities not owned by such company or any of its 

members (other than income received or accrued 

directly or indirectly from a member), or 

(II) generated by a generation facility not owned 

or leased by such company or any of its members 

and which is directly connected to distribution facilities owned by such company or any of its members (other than income received or accrued directly or indirectly from a member), 

(iv) from any nuclear decommissioning transaction, 

or 

(v) from any asset exchange or conversion transaction. 

(D) For purposes of this paragraph, the term ‘‘qualified 

pole rental’’ means any rental of a pole (or other structure 

used to support wires) if such pole (or other structure)— 

(i) is used by the telephone or electric company to 

support one or more wires which are used by such 

company in providing telephone or electric services to 

its members, and 

(ii) is used pursuant to the rental to support one or 

more wires (in addition to the wires described in 

clause (i)) for use in connection with the transmission 

by wire of electricity or of telephone or other communications. 

For purposes of the preceding sentence, the term ‘‘rental’’ 

includes any sale of the right to use the pole (or other 

structure). 

(E) For purposes of subparagraph (C)(ii), the term 

‘‘FERC’’ means— 

(i) the Federal Energy Regulatory Commission, or 

(ii) in the case of any utility with respect to which 

all of the electricity generated, transmitted, or distributed by such utility is generated, transmitted, distributed, and consumed in the same State, the State agency of such State with the authority to regulate electric 

utilities. 

13 

(F) For purposes of subparagraph (C)(iv), the term ‘‘nuclear decommissioning transaction’’ means— 

(i) any transfer into a trust, fund, or instrument established to pay any nuclear decommissioning costs if 

the transfer is in connection with the transfer of the 

mutual or cooperative electric company’s interest in a 

nuclear power plant or nuclear power plant unit, 

(ii) any distribution from any trust, fund, or instrument established to pay any nuclear decommissioning 

costs, or 

(iii) any earnings from any trust, fund, or instrument established to pay any nuclear decommissioning 

costs. 

(G) For purposes of subparagraph (C)(v), the term ‘‘asset 

exchange or conversion transaction’’ means any voluntary 

exchange or involuntary conversion of any property related 

to generating, transmitting, distributing, or selling electric 

energy by a mutual or cooperative electric company, the 

gain from which qualifies for deferred recognition under 

section 1031 or 1033, but only if the replacement property 

acquired by such company pursuant to such section constitutes property which is used, or to be used, for— 

(i) generating, transmitting, distributing, or selling 

electric energy, or 

(ii) producing, transmitting, distributing, or selling 

natural gas. 

(H)(i) In the case of a mutual or cooperative electric company described in this paragraph or an organization described in section 1381(a)(2)(C), income received or accrued 

from a load loss transaction shall be treated as an amount 

collected from members for the sole purpose of meeting 

losses and expenses. 

(ii) For purposes of clause (i), the term ‘‘load loss 

transaction’’ means any wholesale or retail sale of 

electric energy (other than to members) to the extent 

that the aggregate sales during the recovery period do 

not exceed the load loss mitigation sales limit for such 

period. 

(iii) For purposes of clause (ii), the load loss mitigation sales limit for the recovery period is the sum of 

the annual load losses for each year of such period. 

(iv) For purposes of clause (iii), a mutual or cooperative electric company’s annual load loss for each year 

of the recovery period is the amount (if any) by 

which— 

(I) the megawatt hours of electric energy sold 

during such year to members of such electric company are less than 

(II) the megawatt hours of electric energy sold 

during the base year to such members. 

(v) For purposes of clause (iv)(II), the term ‘‘base 

year’’ means— 

(I) the calendar year preceding the start-up 

year, or 

14 

(II) at the election of the mutual or cooperative 

electric company, the second or third calendar 

years preceding the start-up year. 

(vi) For purposes of this subparagraph, the recovery 

period is the 7-year period beginning with the start-up 

year. 

(vii) For purposes of this subparagraph, the start-up 

year is the first year that the mutual or cooperative 

electric company offers nondiscriminatory open access 

or the calendar year which includes the date of the enactment of this subparagraph, if later, at the election 

of such company. 

(viii) A company shall not fail to be treated as a mutual or cooperative electric company for purposes of 

this paragraph or as a corporation operating on a cooperative basis for purposes of section 1381(a)(2)(C) by 

reason of the treatment under clause (i). 

(ix) For purposes of subparagraph (A), in the case of 

a mutual or cooperative electric company, income received, or accrued, indirectly from a member shall be 

treated as an amount collected from members for the 

sole purpose of meeting losses and expenses. 

(I) In the case of a mutual or cooperative electric company described in this paragraph or an organization described in section 1381(a)(2), income received or accrued in 

connection with an election under section 45J(e)(1) shall be 

treated as an amount collected from members for the sole 

purpose of meeting losses and expenses. 

(J) TREATMENT OF MUTUAL DITCH IRRIGATION COMPANIES.— 

(i) IN GENERAL.—In the case of a mutual ditch or irrigation company or of a like organization to a mutual 

ditch or irrigation company, subparagraph (A) shall be 

applied without taking into account any income received or accrued— 

(I) from the sale, lease, or exchange of fee or 

other interests in real and personal property, including interests in water, 

(II) from the sale or exchange of stock in a mutual ditch or irrigation company (or in a like organization to a mutual ditch or irrigation company) 

or contract rights for the delivery or use of water, 

or 

(III) from the investment of proceeds from sales, 

leases, or exchanges under subclauses (I) and (II), 

except that any income received under subclause (I), 

(II), or (III) which is distributed or expended for expenses (other than for operations, maintenance, and 

capital improvements) of the mutual ditch or irrigation 

company or of the like organization to a mutual ditch 

or irrigation company (as the case may be) shall be 

treated as nonmember income in the year in which it 

is distributed or expended. For purposes of the preceding sentence, expenses (other than for operations, 

maintenance, and capital improvements) include exVerDate Sep 11 2014 01:44 Jul 29, 2018 Jkt 079006 PO 00000 Frm 00014 Fmt 6659 Sfmt 6603 E:\HR\OC\HR857.XXX HR857
15 

penses for the construction of conveyances designed to 

deliver water outside of the system of the mutual ditch 

or irrigation company or of the like organization. 

(ii) TREATMENT OF ORGANIZATIONAL GOVERNANCE.— In the case of a mutual ditch or irrigation company or 

of a like organization to a mutual ditch or irrigation 

company, where State law provides that such a company or organization may be organized in a manner 

that permits voting on a basis which is pro rata to 

share ownership on corporate governance matters, subparagraph (A) shall be applied without taking into account whether its member shareholders have one vote 

on corporate governance matters per share held in the 

corporation. Nothing in this clause shall be construed 

to create any inference about the requirements of this 

subsection for companies or organizations not included 

in this clause. 

(13) Cemetery companies owned and operated exclusively for 

the benefit of their members or which are not operated for 

profit; and any corporation chartered solely for the purpose of 

the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily 

incident to that purpose and no part of the net earnings of 

which inures to the benefit of any private shareholder or individual. 

(14)(A) Credit unions without capital stock organized and operated for mutual purposes and without profit. 

(B) Corporations or associations without capital stock organized before September 1, 1957, and operated for mutual 

purposes and without profit for the purpose of providing 

reserve funds for, and insurance of shares or deposits in— 

(i) domestic building and loan associations, 

(ii) cooperative banks without capital stock organized and operated for mutual purposes and without 

profit, 

(iii) mutual savings banks not having capital stock 

represented by shares, or 

(iv) mutual savings banks described in section 

591(b). (C) Corporations or associations organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing 

reserve funds for associations or banks described in 

clause (i), (ii), or (iii) of subparagraph (B); but only if 

85 percent or more of the income is attributable to 

providing such reserve funds and to investments. This 

subparagraph shall not apply to any corporation or association entitled to exemption under subparagraph 

(B). 

(15)(A) Insurance companies (as defined in section 816(a)) 

other than life (including interinsurers and reciprocal underwriters) if— 

(i)(I) the gross receipts for the taxable year do not 

exceed $600,000, and 

(II) more than 50 percent of such gross receipts 

consist of premiums, or 

16 

(ii) in the case of a mutual insurance company— 

(I) the gross receipts of which for the taxable 

year do not exceed $150,000, and 

(II) more than 35 percent of such gross receipts 

consist of premiums. 

Clause (ii) shall not apply to a company if any employee of the 

company, or a member of the employee’s family (as defined in 

section 2032A(e)(2)), is an employee of another company exempt from taxation by reason of this paragraph (or would be 

so exempt but for this sentence). 

(B) For purposes of subparagraph (A), in determining 

whether any company or association is described in subparagraph (A), such company or association shall be treated as receiving during the taxable year amounts described 

in subparagraph (A) which are received during such year 

by all other companies or associations which are members 

of the same controlled group as the insurance company or 

association for which the determination is being made. 

(C) For purposes of subparagraph (B), the term ‘‘controlled group’’ has the meaning given such term by section 

831(b)(2)(B)(ii), except that in applying section 

831(b)(2)(B)(ii) for purposes of this subparagraph, subparagraphs (B) and (C) of section 1563(b)(2) shall be disregarded. 

(16) Corporations organized by an association subject to part 

IV of this subchapter or members thereof, for the purpose of 

financing the ordinary crop operations of such members or 

other producers, and operated in conjunction with such association. Exemption shall not be denied any such corporation because it has capital stock, if the dividend rate of such stock is 

fixed at not to exceed the legal rate of interest in the State of 

incorporation or 8 percent per annum, whichever is greater, on 

the value of the consideration for which the stock was issued, 

and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted 

to participate, directly or indirectly, in the profits of the corporation, on dissolution or otherwise, beyond the fixed dividends) is owned by such association, or members thereof; nor 

shall exemption be denied any such corporation because there 

is accumulated and maintained by it a reserve required by 

State law or a reasonable reserve for any necessary purpose. 

(17)(A) A trust or trusts forming part of a plan providing for 

the payment of supplemental unemployment compensation 

benefits, if— 

(i) 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 supplemental unemployment compensation benefits, 

(ii) such benefits are payable to employees under a 

classification which is set forth in the plan and which 

is found by the Secretary not to be discriminatory in 

17 

favor of employees who are highly compensated employees (within the meaning of section 414(q)), and 

(iii) such benefits do not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)). A plan shall not be 

considered discriminatory within the meaning of this 

clause 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) In determining whether a plan meets the requirements of subparagraph (A), any benefits provided under 

any other plan shall not be taken into consideration, except that a plan shall not be considered discriminatory— 

(i) merely because the benefits under the plan which 

are first determined in a nondiscriminatory manner 

within the meaning of subparagraph (A) are then reduced by any sick, accident, or unemployment compensation benefits received under State or Federal law 

(or reduced by a portion of such benefits if determined 

in a nondiscriminatory manner), or 

(ii) merely because the plan provides only for employees who are not eligible to receive sick, accident, 

or unemployment compensation benefits under State 

or Federal law the same benefits (or a portion of such 

benefits if determined in a nondiscriminatory manner) 

which such employees would receive under such laws 

if such employees were eligible for such benefits, or 

(iii) merely because the plan provides only for employees who are not eligible under another plan (which 

meets the requirements of subparagraph (A)) of supplemental unemployment compensation benefits provided wholly by the employer the same benefits (or a 

portion of such benefits if determined in a nondiscriminatory manner) which such employees would receive 

under such other plan if such employees were eligible 

under such other plan, but only if the employees eligible under both plans would make a classification 

which would be nondiscriminatory within the meaning 

of subparagraph (A). 

(C) A plan shall be considered to meet the requirements 

of subparagraph (A) during the whole of any year of the 

plan if on one day in each quarter it satisfies such requirements. 

(D) The term ‘‘supplemental unemployment compensation benefits’’ means only— 

(i) benefits which are paid to an employee because 

of his involuntary separation from the employment of 

the employer (whether or not such separation is temporary) resulting directly from a reduction in force, the 

discontinuance of a plant or operation, or other similar 

conditions, and 

(ii) sick and accident benefits subordinate to the 

benefits described in clause (i). 

18 

(E) Exemption shall not be denied under subsection (a) 

to any organization entitled to such exemption as an association described in paragraph (9) of this subsection merely 

because such organization provides for the payment of supplemental unemployment benefits (as defined in subparagraph (D)(i)). 

(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 not to be discriminatory in favor of employees who are highly compensated employees (within the 

meaning of section 414(q)), 

(C) such benefits do not discriminate in favor of employees who are highly compensated employees (within the 

meaning of section 414(q)). 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, and 

(D) in the case of a plan under which an employee may 

designate certain contributions as deductible— 

(i) such contributions do not exceed the amount with 

respect to which a deduction is allowable under section 219(b)(3), 

(ii) requirements similar to the requirements of section 401(k)(3)(A)(ii) are met with respect to such elective contributions, 

(iii) such contributions are treated as elective deferrals for purposes of section 402(g), and 

(iv) the requirements of section 401(a)(30) are met. 

For purposes of subparagraph (D)(ii), rules similar to the rules 

of section 401(k)(8) shall apply. For purposes of section 4979, 

any excess contribution under clause (ii) shall be treated as an 

excess contribution under a cash or deferred arrangement. 

(19) A post or organization of past or present members of the 

Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or organization— 

(A) organized in the United States or any of its possessions, 

(B) at least 75 percent of the members of which are past 

or present members of the Armed Forces of the United 

States and substantially all of the other members of which 

are individuals who are cadets or are spouses, widows, 

widowers, ancestors, or lineal descendants of past or 

19 

present members of the Armed Forces of the United States 

or of cadets, and 

(C) no part of the net earnings of which inures to the 

benefit of any private shareholder or individual. 

(21)(A) A trust or trusts established in writing, created or organized in the United States, and contributed to by any person 

(except an insurance company) if— 

(i) the purpose of such trust or trusts is exclusively— 

(I) to satisfy, in whole or in part, the liability of 

such person for, or with respect to, claims for compensation for disability or death due to pneumoconiosis under Black Lung Acts, 

(II) to pay premiums for insurance exclusively 

covering such liability, 

(III) to pay administrative and other incidental 

expenses of such trust in connection with the operation of the trust and the processing of claims 

against such person under Black Lung Acts, and 

(IV) to pay accident or health benefits for retired miners and their spouses and dependents 

(including administrative and other incidental expenses of such trust in connection therewith) or 

premiums for insurance exclusively covering such 

benefits; and 

(ii) no part of the assets of the trust may be used 

for, or diverted to, any purpose other than— 

(I) the purposes described in clause (i), 

(II) investment (but only to the extent that the 

trustee determines that a portion of the assets is 

not currently needed for the purposes described in 

clause (i)) in qualified investments, or 

(III) payment into the Black Lung Disability 

Trust Fund established under section 9501, or 

into the general fund of the United States Treasury (other than in satisfaction of any tax or other 

civil or criminal liability of the person who established or contributed to the trust). 

(B) No deduction shall be allowed under this chapter for 

any payment described in subparagraph (A)(i)(IV) from 

such trust. 

(C) Payments described in subparagraph (A)(i)(IV) may 

be made from such trust during a taxable year only to the 

extent that the aggregate amount of such payments during 

such taxable year does not exceed the excess (if any), as 

of the close of the preceding taxable year, of— 

(i) the fair market value of the assets of the trust, 

over 

(ii) 110 percent of the present value of the liability 

described in subparagraph (A)(i)(I) of such person. 

The determinations under the preceding sentence shall be 

made by an independent actuary using actuarial methods 

and assumptions (not inconsistent with the regulations 

prescribed under section 192(c)(1)(A)) each of which is reasonable and which are reasonable in the aggregate. 

20 

(D) For purposes of this paragraph: 

(i) The term ‘‘Black Lung Acts’’ means part C of title 

IV of the Federal Mine Safety and Health Act of 1977, 

and any State law providing compensation for disability or death due to that pneumoconiosis. 

(ii) The term ‘‘qualified investments’’ means— 

(I) public debt securities of the United States, 

(II) obligations of a State or local government 

which are not in default as to principal or interest, and 

(III) time or demand deposits in a bank (as defined in section 581) or an insured credit union 

(within the meaning of section 101(7) of the Federal Credit Union Act, 12 U.S.C. 1752(7)) located 

in the United States. 

(iii) The term ‘‘miner’’ has the same meaning as 

such term has when used in section 402(d) of the 

Black Lung Benefits Act (30 U.S.C. 902(d)). 

(iv) The term ‘‘incidental expenses’’ includes legal, 

accounting, actuarial, and trustee expenses. 

(22) A trust created or organized in the United States and 

established in writing by the plan sponsors of multiemployer 

plans if— 

(A) the purpose of such trust is exclusively— 

(i) to pay any amount described in section 4223(c) or 

(h) of the Employee Retirement Income Security Act of 

1974, and 

(ii) to pay reasonable and necessary administrative 

expenses in connection with the establishment and operation of the trust and the processing of claims 

against the trust, 

(B) no part of the assets of the trust may be used for, 

or diverted to, any purpose other than— 

(i) the purposes described in subparagraph (A), or 

(ii) the investment in securities, obligations, or time 

or demand deposits described in clause (ii) of paragraph (21)(D), 

(C) such trust meets the requirements of paragraphs (2), 

(3), and (4) of section 4223(b), 4223(h), or, if applicable, 

section 4223(c) of the Employee Retirement Income Security Act of 1974, and 

(D) the trust instrument provides that, on dissolution of 

the trust, assets of the trust may not be paid other than 

to plans which have participated in the plan or, in the case 

of a trust established under section 4223(h) of such Act, to 

plans with respect to which employers have participated in 

the fund. 

(23) Any association organized before 1880 more than 75 percent of the members of which are present or past members of 

the Armed Forces and a principal purpose of which is to provide insurance and other benefits to veterans or their dependents. 

(24) A trust described in section 4049 of the Employee Retirement Income Security Act of 1974 (as in effect on the date 

21 

of the enactment of the Single-Employer Pension Plan Amendments Act of 1986). 

(25)(A) Any corporation or trust which— 

(i) has no more than 35 shareholders or beneficiaries, 

(ii) has only 1 class of stock or beneficial interest, 

and 

(iii) is organized for the exclusive purposes of— 

(I) acquiring real property and holding title to, 

and collecting income from, such property, and 

(II) remitting the entire amount of income from 

such property (less expenses) to 1 or more organizations described in subparagraph (C) which are 

shareholders of such corporation or beneficiaries 

of such trust. 

For purposes of clause (iii), the term ‘‘real property’’ shall not 

include any interest as a tenant in common (or similar interest) and shall not include any indirect interest. 

(B) A corporation or trust shall be described in subparagraph (A) without regard to whether the corporation or 

trust is organized by 1 or more organizations described in 

subparagraph (C). 

(C) An organization is described in this subparagraph if 

such organization is— 

(i) a qualified pension, profit sharing, or stock bonus 

plan that meets the requirements of section 401(a), 

(ii) a governmental plan (within the meaning of section 414(d)), 

(iii) the United States, any State or political subdivision thereof, or any agency or instrumentality of any 

of the foregoing, or 

(iv) any organization described in paragraph (3). 

(D) A corporation or trust shall in no event be treated 

as described in subparagraph (A) unless such corporation 

or trust permits its shareholders or beneficiaries— 

(i) to dismiss the corporation’s or trust’s investment 

adviser, following reasonable notice, upon a vote of the 

shareholders or beneficiaries holding a majority of interest in the corporation or trust, and 

(ii) to terminate their interest in the corporation or 

trust by either, or both, of the following alternatives, 

as determined by the corporation or trust: 

(I) by selling or exchanging their stock in the 

corporation or interest in the trust (subject to any 

Federal or State securities law) to any organization described in subparagraph (C) so long as the 

sale or exchange does not increase the number of 

shareholders or beneficiaries in such corporation 

or trust above 35, or 

(II) by having their stock or interest redeemed 

by the corporation or trust after the shareholder 

or beneficiary has provided 90 days notice to such 

corporation or trust. 

(E)(i) For purposes of this title— 

22 

(I) a corporation which is a qualified subsidiary 

shall not be treated as a separate corporation, and 

(II) all assets, liabilities, and items of income, 

deduction, and credit of a qualified subsidiary 

shall be treated as assets, liabilities, and such 

items (as the case may be) of the corporation or 

trust described in subparagraph (A). 

(ii) For purposes of this subparagraph, the term 

‘‘qualified subsidiary’’ means any corporation if, at all 

times during the period such corporation was in existence, 100 percent of the stock of such corporation is 

held by the corporation or trust described in subparagraph (A). 

(iii) For purposes of this subtitle, if any corporation 

which was a qualified subsidiary ceases to meet the 

requirements of clause (ii), such corporation shall be 

treated as a new corporation acquiring all of its assets 

(and assuming all of its liabilities) immediately before 

such cessation from the corporation or trust described 

in subparagraph (A) in exchange for its stock. 

(F) For purposes of subparagraph (A), the term ‘‘real 

property’’ includes any personal property which is leased 

under, or in connection with, a lease of real property, but 

only if the rent attributable to such personal property (determined under the rules of section 856(d)(1)) for the taxable year does not exceed 15 percent of the total rent for 

the taxable year attributable to both the real and personal 

property leased under, or in connection with, such lease. 

(G)(i) An organization shall not be treated as failing to 

be described in this paragraph merely by reason of the receipt of any otherwise disqualifying income which is incidentally derived from the holding of real property. 

(ii) Clause (i) shall not apply if the amount of gross 

income described in such clause exceeds 10 percent of 

the organization’s gross income for the taxable year 

unless the organization establishes to the satisfaction 

of the Secretary that the receipt of gross income described in clause (i) in excess of such limitation was 

inadvertent and reasonable steps are being taken to 

correct the circumstances giving rise to such income. 

(26) Any membership organization if— 

(A) such organization is established by a State exclusively to provide coverage for medical care (as defined in 

section 213(d)) on a not-for-profit basis to individuals described in subparagraph (B) through— 

(i) insurance issued by the organization, or 

(ii) a health maintenance organization under an arrangement with the organization, 

(B) the only individuals receiving such coverage through 

the organization are individuals— 

(i) who are residents of such State, and 

(ii) who, by reason of the existence or history of a 

medical condition— 

23 

(I) are unable to acquire medical care coverage 

for such condition through insurance or from a 

health maintenance organization, or 

(II) are able to acquire such coverage only at a 

rate which is substantially in excess of the rate for 

such coverage through the membership organization, 

(C) the composition of the membership in such organization is specified by such State, and 

(D) no part of the net earnings of the organization inures 

to the benefit of any private shareholder or individual. 

A spouse and any qualifying child (as defined in section 24(c)) 

of an individual described in subparagraph (B) (without regard 

to this sentence) shall be treated as described in subparagraph 

(B). 

(27)(A) Any membership organization if— 

(i) such organization is established before June 1, 

1996, by a State exclusively to reimburse its members 

for losses arising under workmen’s compensation acts, 

(ii) such State requires that the membership of such 

organization consist of— 

(I) all persons who issue insurance covering 

workmen’s compensation losses in such State, and 

(II) all persons and governmental entities who 

self-insure against such losses, and 

(iii) such organization operates as a non-profit organization by— 

(I) returning surplus income to its members or 

workmen’s compensation policyholders on a periodic basis, and 

(II) reducing initial premiums in anticipation of 

investment income. 

(B) Any organization (including a mutual insurance company) if— 

(i) such organization is created by State law and is 

organized and operated under State law exclusively 

to— 

(I) provide workmen’s compensation insurance 

which is required by State law or with respect to 

which State law provides significant disincentives 

if such insurance is not purchased by an employer, and 

(II) provide related coverage which is incidental 

to workmen’s compensation insurance, 

(ii) such organization must provide workmen’s compensation insurance to any employer in the State (for 

employees in the State or temporarily assigned out-ofState) which seeks such insurance and meets other 

reasonable requirements relating thereto, 

(iii)(I) the State makes a financial commitment with 

respect to such organization either by extending the 

full faith and credit of the State to the initial debt of 

such organization or by providing the initial operating 

capital of such organization, and (II) in the case of periods after the date of enactment of this subparagraph, 

24 

the assets of such organization revert to the State 

upon dissolution or State law does not permit the dissolution of such organization, and 

(iv) the majority of the board of directors or oversight body of such organization are appointed by the 

chief executive officer or other executive branch official 

of the State, by the State legislature, or by both. 

(28) The National Railroad Retirement Investment Trust established under section 15(j) of the Railroad Retirement Act of 

1974. 

(29) CO-OP HEALTH INSURANCE ISSUERS.— (A) IN GENERAL.—A qualified nonprofit health insurance 

issuer (within the meaning of section 1322 of the Patient 

Protection and Affordable Care Act) which has received a 

loan or grant under the CO-OP program under such section, but only with respect to periods for which the issuer 

is in compliance with the requirements of such section and 

any agreement with respect to the loan or grant. 

(B) CONDITIONS FOR EXEMPTION.—Subparagraph (A) 

shall apply to an organization only if— 

(i) the organization has given notice to the Secretary, in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of 

its status under this paragraph, 

(ii) except as provided in section 1322(c)(4) of the 

Patient Protection and Affordable Care Act, no part of 

the net earnings of which inures to the benefit of any 

private shareholder or individual, 

(iii) no substantial part of the activities of which is 

carrying on propaganda, or otherwise attempting, to 

influence legislation, and 

(iv) the organization does not participate in, or intervene in (including the publishing or distributing of 

statements), any political campaign on behalf of (or in 

opposition to) any candidate for public office. 

(d) RELIGIOUS AND APOSTOLIC ORGANIZATIONS.—The following organizations are referred to in subsection (a): Religious or apostolic 

associations or corporations, if such associations or corporations 

have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit 

of the members, but only if the members thereof include (at the 

time of filing their returns) in their gross income their entire pro 

rata shares, whether distributed or not, of the taxable income of 

the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received. 

(e) COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS.—For purposes of this title, an organization shall be treated as an organization organized and operated exclusively for charitable purposes, 

if— 

(1) such organization is organized and operated solely— 

(A) to perform, on a centralized basis, one or more of the 

following services which, if performed on its own behalf by 

a hospital which is an organization described in subsection 

(c)(3) and exempt from taxation under subsection (a), 

25 

would constitute activities in exercising or performing the 

purpose or function constituting the basis for its exemption: data processing, purchasing (including the purchasing 

of insurance on a group basis), warehousing, billing and 

collection (including the purchase of patron accounts receivable on a recourse basis), food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel (including selection, testing, training, 

and education of personnel) services; and 

(B) to perform such services solely for two or more hospitals each of which is— 

(i) an organization described in subsection (c)(3) 

which is exempt from taxation under subsection (a), 

(ii) a constituent part of an organization described in 

subsection (c)(3) which is exempt from taxation under 

subsection (a) and which, if organized and operated as 

a separate entity, would constitute an organization described in subsection (c)(3), or 

(iii) owned and operated by the United States, a 

State, the District of Columbia, or a possession of the 

United States, or a political subdivision or an agency 

or instrumentality of any of the foregoing; 

(2) such organization is organized and operated on a cooperative basis and allocates or pays, within 8 1/2 months after the 

close of its taxable year, all net earnings to patrons on the 

basis of services performed for them; and 

(3) if such organization has capital stock, all of such stock 

outstanding is owned by its patrons. 

For purposes of this title, any organization which, by reason of the 

preceding sentence, is an organization described in subsection (c)(3) 

and exempt from taxation under subsection (a), shall be treated as 

a hospital and as an organization referred to in section 

170(b)(1)(A)(iii). 

(f) COOPERATIVE SERVICE ORGANIZATIONS OF OPERATING EDUCATIONAL ORGANIZATIONS.—For purposes of this title, if an organization is— 

(1) organized and operated solely to hold, commingle, and 

collectively invest and reinvest (including arranging for and supervising the performance by independent contractors of investment services related thereto) in stocks and securities, the 

moneys contributed thereto by each of the members of such organization, and to collect income therefrom and turn over the 

entire amount thereof, less expenses, to such members, 

(2) organized and controlled by one or more such members, 

and 

(3) comprised solely of members that are organizations described in clause (ii) or (iv) of section 170(b)(1)(A)— 

(A) which are exempt from taxation under subsection (a), 

or 

(B) the income of which is excluded from taxation under 

section 115, 

then such organization shall be treated as an organization organized and operated exclusively for charitable purposes. 

(g) DEFINITION OF AGRICULTURAL.—For purposes of subsection 

(c)(5), the term ‘‘agricultural’’ includes the art or science of cultiVerDate Sep 11 2014 01:44 Jul 29, 2018 Jkt 079006 PO 00000 Frm 00025 Fmt 6659 Sfmt 6601 E:\HR\OC\HR857.XXX HR857
26 

vating land, harvesting crops or aquatic resources, or raising livestock. 

(h) EXPENDITURES BY PUBLIC CHARITIES TO INFLUENCE LEGISLA- TION.— 

(1) GENERAL RULE.—In the case of an organization to which 

this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial part of the activities of such organization consists of carrying on propaganda, or otherwise attempting, to influence legislation, but 

only if such organization normally— 

(A) makes lobbying expenditures in excess of the lobbying ceiling amount for such organization for each taxable 

year, or 

(B) makes grass roots expenditures in excess of the grass 

roots ceiling amount for such organization for each taxable 

year. 

(2) DEFINITIONS.—For purposes of this subsection— 

(A) LOBBYING EXPENDITURES.—The term ‘‘lobbying expenditures’’ means expenditures for the purpose of influencing legislation (as defined in section 4911(d)). 

(B) LOBBYING CEILING AMOUNT.—The lobbying ceiling 

amount for any organization for any taxable year is 150 

percent of the lobbying nontaxable amount for such organization for such taxable year, determined under section 

4911. 

(C) GRASS ROOTS EXPENDITURES.—The term ‘‘grass roots 

expenditures’’ means expenditures for the purpose of influencing legislation (as defined in section 4911(d) without regard to paragraph (1)(B) thereof). 

(D) GRASS ROOTS CEILING AMOUNT.—The grass roots ceiling amount for any organization for any taxable year is 

150 percent of the grass roots nontaxable amount for such 

organization for such taxable year, determined under section 4911. 

(3) ORGANIZATIONS TO WHICH THIS SUBSECTION APPLIES.— This subsection shall apply to any organization which has 

elected (in such manner and at such time as the Secretary may 

prescribe) to have the provisions of this subsection apply to 

such organization and which, for the taxable year which includes the date the election is made, is described in subsection 

(c)(3) and— 

(A) is described in paragraph (4), and 

(B) is not a disqualified organization under paragraph 

(5). 

(4) ORGANIZATIONS PERMITTED TO ELECT TO HAVE THIS SUBSECTION APPLY.—An organization is described in this paragraph if it is described in— 

(A) section 170(b)(1)(A)(ii) (relating to educational institutions), 

(B) section 170(b)(1)(A)(iii) (relating to hospitals and 

medical research organizations), 

(C) section 170(b)(1)(A)(iv) (relating to organizations supporting government schools), 

(D) section 170(b)(1)(A)(vi) (relating to organizations 

publicly supported by charitable contributions), 

27 

(E) section 170(b)(1)(A)(ix) (relating to agricultural research organizations), 

(F) section 509(a)(2) (relating to organizations publicly 

supported by admissions, sales, etc.), or 

(G) section 509(a)(3) (relating to organizations supporting certain types of public charities) except that for 

purposes of this subparagraph, section 509(a)(3) shall be 

applied without regard to the last sentence of section 

509(a). 

(5) DISQUALIFIED ORGANIZATIONS.—For purposes of paragraph (3) an organization is a disqualified organization if it 

is— 

(A) described in section 170(b)(1)(A)(i) (relating to 

churches), 

(B) an integrated auxiliary of a church or of a convention 

or association of churches, or 

(C) a member of an affiliated group of organizations 

(within the meaning of section 4911(f)(2)) if one or more 

members of such group is described in subparagraph (A) or 

(B). 

(6) YEARS FOR WHICH ELECTION IS EFFECTIVE.—An election 

by an organization under this subsection shall be effective for 

all taxable years of such organization which— 

(A) end after the date the election is made, and 

(B) begin before the date the election is revoked by such 

organization (under regulations prescribed by the Secretary). 

(7) NO EFFECT ON CERTAIN ORGANIZATIONS.—With respect to 

any organization for a taxable year for which— 

(A) such organization is a disqualified organization 

(within the meaning of paragraph (5)), or 

(B) an election under this subsection is not in effect for 

such organization, 

nothing in this subsection or in section 4911 shall be construed 

to affect the interpretation of the phrase, ‘‘no substantial part 

of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation,’’ under subsection 

(c)(3). 

(8) Affiliated organizations For rules regarding affiliated organizations, see section 4911(f). 

(i) PROHIBITION OF DISCRIMINATION BY CERTAIN SOCIAL CLUBS.— 

Notwithstanding subsection (a), an organization which is described 

in subsection (c)(7) shall not be exempt from taxation under subsection (a) for any taxable year if, at any time during such taxable 

year, the charter, bylaws, or other governing instrument, of such 

organization or any written policy statement of such organization 

contains a provision which provides for discrimination against any 

person on the basis of race, color, or religion. The preceding sentence to the extent it relates to discrimination on the basis of religion shall not apply to— 

(1) an auxiliary of a fraternal beneficiary society if such society— 

(A) is described in subsection (c)(8) and exempt from tax 

under subsection (a), and 

28 

(B) limits its membership to the members of a particular 

religion, or 

(2) a club which in good faith limits its membership to the 

members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color. 

(j) SPECIAL RULES FOR CERTAIN AMATEUR SPORTS ORGANIZA- TIONS.— 

(1) IN GENERAL.—In the case of a qualified amateur sports 

organization— 

(A) the requirement of subsection (c)(3) that no part of 

its activities involve the provision of athletic facilities or 

equipment shall not apply, and 

(B) such organization shall not fail to meet the requirements of subsection (c)(3) merely because its membership 

is local or regional in nature. 

(2) QUALIFIED AMATEUR SPORTS ORGANIZATION DEFINED.—For 

purposes of this subsection, the term ‘‘qualified amateur sports 

organization’’ means any organization organized and operated 

exclusively to foster national or international amateur sports 

competition if such organization is also organized and operated 

primarily to conduct national or international competition in 

sports or to support and develop amateur athletes for national 

or international competition in sports. 

(k) TREATMENT OF CERTAIN ORGANIZATIONS PROVIDING CHILD

CARE.—For purposes of subsection (c)(3) of this section and sections 

170(c)(2), 2055(a)(2), and 2522(a)(2), the term ‘‘educational purposes’’ includes the providing of care of children away from their 

homes if— 

(1) substantially all of the care provided by the organization 

is for purposes of enabling individuals to be gainfully employed, and 

(2) the services provided by the organization are available to 

the general public. 

(l) GOVERNMENT CORPORATIONS EXEMPT UNDER SUBSECTION

(C)(1).—For purposes of subsection (c)(1), the following organizations are described in this subsection: 

(1) The Central Liquidity Facility established under title III 

of the Federal Credit Union Act (12 U.S.C. 1795 et seq.). 

(2) The Resolution Trust Corporation established under section 21A of the Federal Home Loan Bank Act. 

(3) The Resolution Funding Corporation established under 

section 21B of the Federal Home Loan Bank Act. 

(4) The Patient-Centered Outcomes Research Institute established under section 1181(b) of the Social Security Act. 

(m) CERTAIN ORGANIZATIONS PROVIDING COMMERCIAL-TYPE INSURANCE NOT EXEMPT FROM TAX.— 

(1) DENIAL OF TAX EXEMPTION WHERE PROVIDING COMMERCIAL-TYPE INSURANCE IS SUBSTANTIAL PART OF ACTIVITIES.—An 

organization described in paragraph (3) or (4) of subsection (c) 

shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercialtype insurance. 

(2) OTHER ORGANIZATIONS TAXED AS INSURANCE COMPANIES

ON INSURANCE BUSINESS.—In the case of an organization deVerDate Sep 11 2014 01:44 Jul 29, 2018 Jkt 079006 PO 00000 Frm 00028 Fmt 6659 Sfmt 6601 E:\HR\OC\HR857.XXX HR857
29 

scribed in paragraph (3) or (4) of subsection (c) which is exempt from tax under subsection (a) after the application of 

paragraph (1) of this subsection— 

(A) the activity of providing commercial-type insurance 

shall be treated as an unrelated trade or business (as defined in section 513), and 

(B) in lieu of the tax imposed by section 511 with respect 

to such activity, such organization shall be treated as an 

insurance company for purposes of applying subchapter L 

with respect to such activity. 

(3) COMMERCIAL-TYPE INSURANCE.—For purposes of this subsection, the term ‘‘commercial-type insurance’’ shall not include— 

(A) insurance provided at substantially below cost to a 

class of charitable recipients, 

(B) incidental health insurance provided by a health 

maintenance organization of a kind customarily provided 

by such organizations, 

(C) property or casualty insurance provided (directly or 

through an organization described in section 

414(e)(3)(B)(ii)) by a church or convention or association of 

churches for such church or convention or association of 

churches, 

(D) providing retirement or welfare benefits (or both) by 

a church or a convention or association of churches (directly or through an organization described in section 

414(e)(3)(A) or 414(e)(3)(B)(ii)) for the employees (including 

employees described in section 414(e)(3)(B)) of such church 

or convention or association of churches or the beneficiaries of such employees, and 

(E) charitable gift annuities. 

(4) INSURANCE INCLUDES ANNUITIES.—For purposes of this 

subsection, the issuance of annuity contracts shall be treated 

as providing insurance. 

(5) CHARITABLE GIFT ANNUITY.—For purposes of paragraph 

(3)(E), the term ‘‘charitable gift annuity’’ means an annuity if— 

(A) a portion of the amount paid in connection with the 

issuance of the annuity is allowable as a deduction under 

section 170 or 2055, and 

(B) the annuity is described in section 514(c)(5) (determined as if any amount paid in cash in connection with 

such issuance were property). 

(n) CHARITABLE RISK POOLS.— 

(1) IN GENERAL.—For purposes of this title— 

(A) a qualified charitable risk pool shall be treated as an 

organization organized and operated exclusively for charitable purposes, and 

(B) subsection (m) shall not apply to a qualified charitable risk pool. 

(2) QUALIFIED CHARITABLE RISK POOL.—For purposes of this 

subsection, the term ‘‘qualified charitable risk pool’’ means any 

organization— 

(A) which is organized and operated solely to pool insurable risks of its members (other than risks related to medVerDate Sep 11 2014 01:44 Jul 29, 2018 Jkt 079006 PO 00000 Frm 00029 Fmt 6659 Sfmt 6601 E:\HR\OC\HR857.XXX HR857
30 

ical malpractice) and to provide information to its members with respect to loss control and risk management, 

(B) which is comprised solely of members that are organizations described in subsection (c)(3) and exempt from 

tax under subsection (a), and 

(C) which meets the organizational requirements of 

paragraph (3). 

(3) ORGANIZATIONAL REQUIREMENTS.—An organization (hereinafter in this subsection referred to as the ‘‘risk pool’’) meets 

the organizational requirements of this paragraph if— 

(A) such risk pool is organized as a nonprofit organization under State law provisions authorizing risk pooling 

arrangements for charitable organizations, 

(B) such risk pool is exempt from any income tax imposed by the State (or will be so exempt after such pool 

qualifies as an organization exempt from tax under this 

title), 

(C) such risk pool has obtained at least $1,000,000 in 

startup capital from nonmember charitable organizations, 

(D) such risk pool is controlled by a board of directors 

elected by its members, and 

(E) the organizational documents of such risk pool require that— 

(i) each member of such pool shall at all times be an 

organization described in subsection (c)(3) and exempt 

from tax under subsection (a), 

(ii) any member which receives a final determination that it no longer qualifies as an organization described in subsection (c)(3) shall immediately notify 

the pool of such determination and the effective date 

of such determination, and 

(iii) each policy of insurance issued by the risk pool 

shall provide that such policy will not cover the insured with respect to events occurring after the date 

such final determination was issued to the insured. 

An organization shall not cease to qualify as a qualified charitable risk pool solely by reason of the failure of any of its members to continue to be an organization described in subsection 

(c)(3) if, within a reasonable period of time after such pool is 

notified as required under subparagraph (E)(ii), such pool 

takes such action as may be reasonably necessary to remove 

such member from such pool. 

(4) OTHER DEFINITIONS.—For purposes of this subsection— 

(A) STARTUP CAPITAL.—The term ‘‘startup capital’’ means 

any capital contributed to, and any program-related investments (within the meaning of section 4944(c)) made in, 

the risk pool before such pool commences operations. 

(B) NONMEMBER CHARITABLE ORGANIZATION.—The term 

‘‘nonmember charitable organization’’ means any organization which is described in subsection (c)(3) and exempt 

from tax under subsection (a) and which is not a member 

of the risk pool and does not benefit (directly or indirectly) 

from the insurance coverage provided by the pool to its 

members. 

31 

(o) TREATMENT OF HOSPITALS PARTICIPATING IN PROVIDER-SPON- SORED ORGANIZATIONS.—An organization shall not fail to be treated 

as organized and operated exclusively for a charitable purpose for 

purposes of subsection (c)(3) solely because a hospital which is 

owned and operated by such organization participates in a provider-sponsored organization (as defined in section 1855(d) of the 

Social Security Act), whether or not the provider-sponsored organization is exempt from tax. For purposes of subsection (c)(3), any 

person with a material financial interest in such a provider-sponsored organization shall be treated as a private shareholder or individual with respect to the hospital. 

(p) SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.— 

(1) IN GENERAL.—The exemption from tax under subsection 

(a) with respect to any organization described in paragraph (2), 

and the eligibility of any organization described in paragraph 

(2) to apply for recognition of exemption under subsection (a), 

shall be suspended during the period described in paragraph 

(3). 

(2) TERRORIST ORGANIZATIONS.—An organization is described 

in this paragraph if such organization is designated or otherwise individually identified— 

(A) under section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act as a terrorist organization or 

foreign terrorist organization, 

(B) in or pursuant to an Executive order which is related 

to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of 

the United Nations Participation Act of 1945 for the purpose of imposing on such organization an economic or 

other sanction, or 

(C) in or pursuant to an Executive order issued under 

the authority of any Federal law if— 

(i) the organization is designated or otherwise individually identified in or pursuant to such Executive 

order as supporting or engaging in terrorist activity 

(as defined in section 212(a)(3)(B) of the Immigration 

and Nationality Act) or supporting terrorism (as defined in section 140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 1988 and 1989); and 

(ii) such Executive order refers to this subsection. 

(3) PERIOD OF SUSPENSION.—With respect to any organization described in paragraph (2), the period of suspension— 

(A) begins on the later of— 

(i) the date of the first publication of a designation 

or identification described in paragraph (2) with respect to such organization, or 

(ii) the date of the enactment of this subsection, and 

(B) ends on the first date that all designations and 

identifications described in paragraph (2) with respect 

to such organization are rescinded pursuant to the law 

or Executive order under which such designation or 

identification was made. 

(4) DENIAL OF DEDUCTION.—No deduction shall be allowed 

under any provision of this title, including sections 170, 

32 

545(b)(2), 642(c), 2055, 2106(a)(2), and 2522, with respect to 

any contribution to an organization described in paragraph (2) 

during the period described in paragraph (3). 

(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL CHALLENGE OF

SUSPENSION OR DENIAL OF DEDUCTION.—Notwithstanding section 7428 or any other provision of law, no organization or 

other person may challenge a suspension under paragraph (1), 

a designation or identification described in paragraph (2), the 

period of suspension described in paragraph (3), or a denial of 

a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal tax liability of such organization or other person. 

(6) ERRONEOUS DESIGNATION.— 

(A) IN GENERAL.—If— 

(i) the tax exemption of any organization described 

in paragraph (2) is suspended under paragraph (1), 

(ii) each designation and identification described in 

paragraph (2) which has been made with respect to 

such organization is determined to be erroneous pursuant to the law or Executive order under which such 

designation or identification was made, and 

(iii) the erroneous designations and identifications 

result in an overpayment of income tax for any taxable 

year by such organization, 

credit or refund (with interest) with respect to such overpayment shall be made. 

(B) WAIVER OF LIMITATIONS.—If the credit or refund of 

any overpayment of tax described in subparagraph (A)(iii) 

is prevented at any time by the operation of any law or 

rule of law (including res judicata), such credit or refund 

may nevertheless be allowed or made if the claim therefor 

is filed before the close of the 1-year period beginning on 

the date of the last determination described in subparagraph (A)(ii). 

(7) NOTICE OF SUSPENSIONS.—If the tax exemption of any organization is suspended under this subsection, the Internal 

Revenue Service shall update the listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of 

such suspension and of the fact that contributions to such organization are not deductible during the period of such suspension. 

(q) SPECIAL RULES FOR CREDIT COUNSELING ORGANIZATIONS.— 

(1) IN GENERAL.—An organization with respect to which the 

provision of credit counseling services is a substantial purpose 

shall not be exempt from tax under subsection (a) unless such 

organization is described in paragraph (3) or (4) of subsection 

(c) and such organization is organized and operated in accordance with the following requirements: 

(A) The organization— 

(i) provides credit counseling services tailored to the 

specific needs and circumstances of consumers, 

(ii) makes no loans to debtors (other than loans with 

no fees or interest) and does not negotiate the making 

of loans on behalf of debtors, 

33 

(iii) provides services for the purpose of improving a 

consumer’s credit record, credit history, or credit rating only to the extent that such services are incidental 

to providing credit counseling services, and 

(iv) does not charge any separately stated fee for 

services for the purpose of improving any consumer’s 

credit record, credit history, or credit rating. 

(B) The organization does not refuse to provide credit 

counseling services to a consumer due to the inability of 

the consumer to pay, the ineligibility of the consumer for 

debt management plan enrollment, or the unwillingness of 

the consumer to enroll in a debt management plan. 

(C) The organization establishes and implements a fee 

policy which— 

(i) requires that any fees charged to a consumer for 

services are reasonable, 

(ii) allows for the waiver of fees if the consumer is 

unable to pay, and 

(iii) except to the extent allowed by State law, prohibits charging any fee based in whole or in part on 

a percentage of the consumer’s debt, the consumer’s 

payments to be made pursuant to a debt management 

plan, or the projected or actual savings to the consumer resulting from enrolling in a debt management 

plan. 

(D) At all times the organization has a board of directors 

or other governing body— 

(i) which is controlled by persons who represent the 

broad interests of the public, such as public officials 

acting in their capacities as such, persons having special knowledge or expertise in credit or financial education, and community leaders, 

(ii) not more than 20 percent of the voting power of 

which is vested in persons who are employed by the 

organization or who will benefit financially, directly or 

indirectly, from the organization’s activities (other 

than through the receipt of reasonable directors’ fees 

or the repayment of consumer debt to creditors other 

than the credit counseling organization or its affiliates), and 

(iii) not more than 49 percent of the voting power of 

which is vested in persons who are employed by the 

organization or who will benefit financially, directly or 

indirectly, from the organization’s activities (other 

than through the receipt of reasonable directors’ fees). 

(E) The organization does not own more than 35 percent 

of— 

(i) the total combined voting power of any corporation (other than a corporation which is an organization 

described in subsection (c)(3) and exempt from tax 

under subsection (a)) which is in the trade or business 

of lending money, repairing credit, or providing debt 

management plan services, payment processing, or 

similar services, 

34 

(ii) the profits interest of any partnership (other 

than a partnership which is an organization described 

in subsection (c)(3) and exempt from tax under subsection (a)) which is in the trade or business of lending 

money, repairing credit, or providing debt management plan services, payment processing, or similar 

services, and 

(iii) the beneficial interest of any trust or estate 

(other than a trust which is an organization described 

in subsection (c)(3) and exempt from tax under subsection (a)) which is in the trade or business of lending 

money, repairing credit, or providing debt management plan services, payment processing, or similar 

services. 

(F) The organization receives no amount for providing 

referrals to others for debt management plan services, and 

pays no amount to others for obtaining referrals of consumers. 

(2) Additional requirements for organizations described in 

subsection (c)(3) 

(A) IN GENERAL.—In addition to the requirements under 

paragraph (1), an organization with respect to which the 

provision of credit counseling services is a substantial purpose and which is described in paragraph (3) of subsection 

(c) shall not be exempt from tax under subsection (a) unless such organization is organized and operated in accordance with the following requirements: 

(i) The organization does not solicit contributions 

from consumers during the initial counseling process 

or while the consumer is receiving services from the 

organization. 

(ii) The aggregate revenues of the organization 

which are from payments of creditors of consumers of 

the organization and which are attributable to debt 

management plan services do not exceed the applicable percentage of the total revenues of the organization. 

(B) APPLICABLE PERCENTAGE.— (i) IN GENERAL.—For purposes of subparagraph 

(A)(ii), the applicable percentage is 50 percent. 

(ii) TRANSITION RULE.—Notwithstanding clause (i), 

in the case of an organization with respect to which 

the provision of credit counseling services is a substantial purpose and which is described in paragraph (3) 

of subsection (c) and exempt from tax under subsection (a) on the date of the enactment of this subsection, the applicable percentage is— 

(I) 80 percent for the first taxable year of such 

organization beginning after the date which is 1 

year after the date of the enactment of this subsection, and 

(II) 70 percent for the second such taxable year 

beginning after such date, and 

(III) 60 percent for the third such taxable year 

beginning after such date. 

35 

(3) ADDITIONAL REQUIREMENT FOR ORGANIZATIONS DESCRIBED

IN SUBSECTION (C)(4).—In addition to the requirements under 

paragraph (1), an organization with respect to which the provision of credit counseling services is a substantial purpose and 

which is described in paragraph (4) of subsection (c) shall not 

be exempt from tax under subsection (a) unless such organization notifies the Secretary, in such manner as the Secretary 

may by regulations prescribe, that it is applying for recognition 

as a credit counseling organization. 

(4) CREDIT COUNSELING SERVICES; DEBT MANAGEMENT PLAN

SERVICES.—For purposes of this subsection— 

(A) CREDIT COUNSELING SERVICES.—The term ‘‘credit 

counseling services’’ means— 

(i) the providing of educational information to the 

general public on budgeting, personal finance, financial literacy, saving and spending practices, and the 

sound use of consumer credit, 

(ii) the assisting of individuals and families with financial problems by providing them with counseling, 

or 

(iii) a combination of the activities described in 

clauses (i) and (ii). 

(B) DEBT MANAGEMENT PLAN SERVICES.—The term ‘‘debt 

management plan services’’ means services related to the 

repayment, consolidation, or restructuring of a consumer’s 

debt, and includes the negotiation with creditors of lower 

interest rates, the waiver or reduction of fees, and the 

marketing and processing of debt management plans. 

(r) ADDITIONAL REQUIREMENTS FOR CERTAIN HOSPITALS.— 

(1) IN GENERAL.—A hospital organization to which this subsection applies shall not be treated as described in subsection 

(c)(3) unless the organization— 

(A) meets the community health needs assessment requirements described in paragraph (3), 

(B) meets the financial assistance policy requirements 

described in paragraph (4), 

(C) meets the requirements on charges described in 

paragraph (5), and 

(D) meets the billing and collection requirement described in paragraph (6). 

(2) HOSPITAL ORGANIZATIONS TO WHICH SUBSECTION APPLIES.— 

(A) IN GENERAL.—This subsection shall apply to— 

(i) an organization which operates a facility which is 

required by a State to be licensed, registered, or similarly recognized as a hospital, and 

(ii) any other organization which the Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its 

exemption under subsection (c)(3) (determined without 

regard to this subsection). 

(B) ORGANIZATIONS WITH MORE THAN 1 HOSPITAL FACILITY.—If a hospital organization operates more than 1 hospital facility— 

36 

(i) the organization shall meet the requirements of 

this subsection separately with respect to each such 

facility, and 

(ii) the organization shall not be treated as described in subsection (c)(3) with respect to any such facility for which such requirements are not separately 

met. 

(3) COMMUNITY HEALTH NEEDS ASSESSMENTS.— 

(A) IN GENERAL.—An organization meets the requirements of this paragraph with respect to any taxable year 

only if the organization— 

(i) has conducted a community health needs assessment which meets the requirements of subparagraph 

(B) in such taxable year or in either of the 2 taxable 

years immediately preceding such taxable year, and 

(ii) has adopted an implementation strategy to meet 

the community health needs identified through such 

assessment. 

(B) COMMUNITY HEALTH NEEDS ASSESSMENT.—A community health needs assessment meets the requirements of 

this paragraph if such community health needs assessment— 

(i) takes into account input from persons who represent the broad interests of the community served by 

the hospital facility, including those with special 

knowledge of or expertise in public health, and 

(ii) is made widely available to the public. 

(4) FINANCIAL ASSISTANCE POLICY.—An organization meets 

the requirements of this paragraph if the organization establishes the following policies: 

(A) FINANCIAL ASSISTANCE POLICY.—A written financial 

assistance policy which includes— 

(i) eligibility criteria for financial assistance, and 

whether such assistance includes free or discounted 

care, 

(ii) the basis for calculating amounts charged to patients, 

(iii) the method for applying for financial assistance, 

(iv) in the case of an organization which does not 

have a separate billing and collections policy, the actions the organization may take in the event of nonpayment, including collections action and reporting to 

credit agencies, and 

(v) measures to widely publicize the policy within 

the community to be served by the organization. 

(B) POLICY RELATING TO EMERGENCY MEDICAL CARE.—A 

written policy requiring the organization to provide, without discrimination, care for emergency medical conditions 

(within the meaning of section 1867 of the Social Security 

Act (42 U.S.C. 1395dd)) to individuals regardless of their 

eligibility under the financial assistance policy described in 

subparagraph (A). 

(5) LIMITATION ON CHARGES.—An organization meets the requirements of this paragraph if the organization— 

37 

(A) limits amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy described in 

paragraph (4)(A) to not more than the amounts generally 

billed to individuals who have insurance covering such 

care, and 

(B) prohibits the use of gross charges. 

(6) BILLING AND COLLECTION REQUIREMENTS.—An organization meets the requirement of this paragraph only if the organization does not engage in extraordinary collection actions before the organization has made reasonable efforts to determine 

whether the individual is eligible for assistance under the financial assistance policy described in paragraph (4)(A). 

(7) REGULATORY AUTHORITY.—The Secretary shall issue such 

regulations and guidance as may be necessary to carry out the 

provisions of this subsection, including guidance relating to 

what constitutes reasonable efforts to determine the eligibility 

of a patient under a financial assistance policy for purposes of 

paragraph (6). 

* * * * * * * 

(38) 

VII. ADDITIONAL VIEWS 

H.R. 519 provides that tax-exempt entities under section 

501(c)12 of the Internal Revenue Code may retain their tax exemption so as long as certain income they derive from means other 

than membership payments is reinvested in operation and maintenance, including capital projects. 

During consideration of the bill by the Committee, I raised concerns regarding unintended consequences the policy changes in 

H.R. 519 might have on the transfer of water. Eliminating the disincentive to sell, lease or otherwise transfer water out of the mutual ditch irrigation district should not have the effect of moving 

water among regions in a way that disadvantages agricultural enterprise, impairs water quality or causes environmental harm. 

I look forward to working with the Chairman to ensure inclusion 

of provisions in the legislation that disallow revenue from the 

transfer of water outside of the basin in which the irrigation district operates for the purposes of calculating the entity’s tax exemption, and reporting requirements so the Internal Revenue Service 

can have better information in evaluating these water sales. These 

provisions should ensure that water transfers are not financially 

motivated in a way that would unintentionally harm agricultural 

interests, water quality or the environment. This protection against 

the potential for abuse resulting from the policy changes in H.R. 

519 should prevent undue harm to my Northern California constituencies. 

MIKE THOMPSON, 

Member of Congress. 

Æ