335 
‘‘(3) MARKET-MAKING OR DEALER SERVICES.— 
‘Market-making or dealer services’ means services 
provided by a person who— 
‘‘(A) regularly purchases financial instru-
ments from or sells financial instruments to 
customers in the ordinary course of a trade or 
business, 
‘‘(B) regularly offers to enter into, assume, 
offset, assign, or otherwise terminate positions 
in financial instruments with customers in the 
ordinary course of a trade or business. 
‘‘SEC. 242. GENERAL RULE FOR TAXATION. 
‘‘(a) IN GENERAL.—In the case of a financial inter-
mediation business, gross profits shall be computed by— 
‘‘(1) substituting financial receipts for taxable 
receipts, and 
‘‘(2) including financial expenses as business 
purchases. 
‘‘(b) DEFINITIONS.— 
‘‘(1) FINANCIAL
RECEIPTS.—‘Financial re-
ceipts’ means all receipts other than amounts re-
ceived as contributions to capital. 
‘‘(2) FINANCIAL
EXPENSES.—‘Financial ex-
penses’ include— 
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‘‘(A) payments for principal and interest 
that is properly allocable to the provision of fi-
nancial intermediation services, 
‘‘(B) the cost of and payments under fi-
nancial instruments (other than financial in-
struments in the person subject to the tax im-
posed under this chapter and any person re-
lated to such person), 
‘‘(C) claims and cash surrender values paid 
in connection with insurance or reinsurance 
services, and 
‘‘(D) amounts paid for reinsurance. 
‘‘(3) FINANCIAL INSTRUMENT.—‘Financial in-
strument’ means any— 
‘‘(A) share of stock in a corporation, 
‘‘(B) equity ownership in any widely held 
or publicly traded partnership, trust, or other 
business entity, 
‘‘(C) note, bond, debenture, or other evi-
dence of indebtedness, 
‘‘(D) interest rate, currency, or equity no-
tional principal contract, 
‘‘(E) evidence or interest in, or a derivative 
financial instrument in, any financial instru-
ment described in subparagraph (A), (B), (C), 
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or (D), or any currency, including any option, 
forward contract, short position, and any simi-
lar financial instrument in such a financial in-
strument or currency, and 
‘‘(F) a position which— 
‘‘(i) is not a financial instrument de-
scribed in subparagraph (A), (B), (C), (D) 
or (E), 
‘‘(ii) is a hedge with respect to such 
a financial instrument, and 
‘‘(iii) is clearly identified in the deal-
er’s records as being described in this sub-
paragraph before the close of the day on 
which it was acquired or entered into. 
‘‘(c) INTERNATIONAL MATTERS.—For purposes of 
this section in the case of a financial intermediation busi-
ness with activity in and outside the United States— 
‘‘(1) INCLUSION REGARDLESS OF SOURCE.— 
‘‘(A) Financial receipts shall be determined 
without regard to whether they are received for 
property or service provided in or outside the 
United States, except that financial receipts do 
not include amounts that— 
‘‘(i) are not taxable receipts (as deter-
mined without regard to this section), but 
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‘‘(ii) would have been taxable receipts 
(as determined without regard to this sec-
tion) if they had been received for services 
or property in the United States. 
‘‘(B) Financial expenses shall be deter-
mined without regard to whether they are re-
ceived for property or services acquired in or 
outside the United States. 
‘‘(2) ALLOCATION.—Under regulations pre-
scribed by the Secretary, gross profits (as deter-
mined without regard to this paragraph) shall be re-
duced by the amount of financial intermediation 
gross profit attributable to financial intermediation 
activity provided outside the United States. 
‘‘(3) GROSS PROFIT ATTRIBUTABLE TO FINAN-
CIAL INTERMEDIATION ACTIVITY.—‘Gross profits at-
tributable to financial intermediation activity’ means 
the excess of— 
‘‘(A) gross profits as determined under 
this section (but without regard to paragraph 
(2)), over 
‘‘(B) gross profits as determined without 
regard to this subchapter. 
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339 
‘‘SEC. 243. SPECIAL RULES FOR BANKS. 
‘‘(a) IN GENERAL.—In the case of a bank, gross prof-
its shall be determined in accordance with section 242, ex-
cept that— 
‘‘(1) FINANCIAL RECEIPTS.—Financial receipts 
shall include only— 
‘‘(A) taxable receipts (as determined with-
out regard to this subchapter), 
‘‘(B) interest on loans made or acquired by 
the bank, 
‘‘(C) gain on the sale of loans, 
‘‘(D) discount points received, and 
‘‘(E) any explicit fees for financial or fidu-
ciary services not included in subparagraphs 
(A) through (E). 
‘‘(2) FINANCIAL
EXPENSES.—Financial ex-
penses shall include only— 
‘‘(A) interest paid to depositors and on 
other funds borrowed by the bank, and 
‘‘(B) reasonable additions to reserves for 
bad debts. 
‘‘(3) FORECLOSURE PROPERTY.—Gross profits 
shall properly take into account proceeds from the 
operation or sale of foreclosure property. 
‘‘(b) BANK.— 
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340 
‘‘(1) IN GENERAL.—‘Bank’ means a bank or 
trust company incorporated and doing business 
under the laws of the United States, the District of 
Columbia, or any State, a substantial part of the 
business of which consists of receiving deposits and 
making loans and discounts, or of exercising fidu-
ciary powers similar to those exercised by national 
banks under the authority of the Comptroller of the 
Currency, and which is subject by law to supervision 
and examination by State or Federal authority hav-
ing supervision over banking institutions or credit 
unions. Such term includes domestic building and 
loan associations and credit unions. 
‘‘(2) OTHER ACTIVITIES.—If a bank is engaged 
in significant amounts of activities other than those 
described in paragraph (1), the bank shall be consid-
ered as a separate business entity with respect to 
such other activity. 
‘‘SEC. 244. INSURANCE COMPANIES. 
‘‘(a) IN GENERAL.—In the case of companies pro-
viding insurance services, gross profits shall be determined 
in accordance with section 242, except— 
‘‘(1) subsection (c) of section 242 (relating to 
international operations) shall not apply, and 
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‘‘(2) the rules of subchapter J (sourcing rules) 
shall apply to determine financial receipts and finan-
cial expenses. 
‘‘(b) RESULT INCONSISTENT WITH STATUTORY IN-
TENT.—If an insurance company determines that the ap-
plication of subsection (a) produces results inconsistent 
with the territorial approach of the business tax, it may 
apply to the Secretary for permission to apply section 
242(c) in lieu of subsection (a). 
‘‘SEC. 245. FINANCIAL PASS-THROUGH ENTITIES. 
‘‘(a) IN GENERAL.—In the case of a financial pass- 
thru entity, gross profits shall be determined in accord-
ance with section 242, except— 
‘‘(1) financial receipts shall include contribu-
tions to capital, 
‘‘(2) financial expenses shall include— 
‘‘(A) distributions to persons holding inter-
ests in the pass-thru entity, 
‘‘(B) investments in related entities (in-
cluding wholly owned entities) engaging in real 
estate investment. 
‘‘(b) PASS-THRU ENTITY.— 
‘‘(1) IN GENERAL.—‘Pass-thru entity’ means a 
business entity that is intended to serve as a con-
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duit. The Secretary shall prescribe regulations defin-
ing pass-thru entity. Such term shall include— 
‘‘(A) entities that would qualify as regu-
lated investment companies under the Internal 
Revenue Code of 1986, 
‘‘(B) entities that would qualify as real es-
tate investment trusts under the Internal Rev-
enue Code of 1986, 
‘‘(C) 
entities 
that 
would 
qualify 
as 
REMICs under the Internal Revenue Code of 
1986, and 
‘‘(D) partnerships whose purposes are to 
invest the funds of the partners in financial in-
struments, distribute or reinvest the income 
from such investments, and distribute or rein-
vest the proceeds from the sale of such instru-
ments. 
‘‘(2) ENGAGEMENT IN BUSINESS ACTIVITY.— 
An entity will not qualify as a pass-thru entity if it 
engages in more than an insubstantial amount of 
rental or other business activity (other than invest-
ing in and selling financial instruments). The pre-
ceding sentence will not apply if the business entity 
treats the business activity as engaged in by a sepa-
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343 
rate business entity (separately subject to tax under 
this chapter). 
‘‘SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSI-
NESSES. 
‘‘(a) IN GENERAL.—If a business entity that is not 
regularly in the business of providing financial intermedi-
ation services to unrelated parties engages in significant 
financial intermediation activity, its gross profits shall be 
increased by its gross profits from financial intermediation 
activity (determined as if such activity were activity of a 
pass-thru entity that paid all costs of such financial inter-
mediation activity including— 
‘‘(1) compensation for persons engaging in such 
activity, 
‘‘(2) equipment involved in such activity, and 
‘‘(3) office space for persons involved in such 
activity). 
‘‘(b) PROXY.—A business entity to which subsection 
(a) applies will be treated as satisfying the requirements 
of that subsection if it increases its gross receipts by the 
portion of employee compensation properly allocable to the 
provision of financial intermediation services. 
‘‘(c) SIGNIFICANT FINANCIAL INTERMEDIATION.—A 
business will be considered as engaging in substantial fi-
nancial intermediation if— 
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344 
‘‘(1) more than 5 percent of the compensation 
paid by the business to its employees is for employ-
ees whose primary activity is the management of the 
business’s investments in financial instruments, or 
‘‘(2) at all times during the taxable year and 
the immediately preceding full taxable year, more 
than 10 percent of its assets are financial instru-
ments other than— 
‘‘(A) equity interests in business entities in 
which it holds more than 50 percent in value of 
the outstanding equity, 
‘‘(B) equity interests in joint ventures in 
which the company is actively participating, 
‘‘(C) purchase money loans to its cus-
tomers, and 
‘‘(D) business loans and equity invest-
ments that serve a direct business purpose. 
‘‘Subchapter H—Tax-Exempt Organizations 
‘‘Sec. 251. Exemption for governmental entities. 
‘‘Sec. 252. Taxable activity of governmental entities. 
‘‘Sec. 253. Tax-exempt organizations. 
‘‘Sec. 254. Special rules for (c)(3) organizations. 
‘‘Sec. 255. Tax on unrelated business activity. 
‘‘Sec. 256. Unrelated business activity. 
‘‘SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES. 
‘‘(a) STATES.—Except as provided in section 252, a 
state, political subdivision thereof and the District of Co-
lumbia shall be exempt from taxation under this chapter 
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345 
on any gross profits derived from the exercise of any es-
sential governmental function. 
‘‘(b) POSSESSIONS.—The government of any posses-
sion of the United States shall be exempt from taxation 
under this chapter on any gross profits earned by the pos-
session. 
‘‘SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTI-
TIES. 
‘‘(a) CERTAIN ACTIVITIES TAXABLE.—A govern-
mental entity shall be considered a business and subject 
to tax on any business activity of a type frequently pro-
vided by business entities subject to tax under this chap-
ter. 
‘‘(b) CERTAIN ACTIVITIES TREATED AS ESSENTIAL 
GOVERNMENT
FUNCTIONS.—Subsection (a) shall not 
apply to the following activities, which shall be treated as 
essential government functions: 
‘‘(1) Provision of mass transportation services. 
‘‘(2) Provision of public utility services. 
‘‘SEC. 253. TAX-EXEMPT ORGANIZATIONS. 
‘‘(a) EXEMPTION FROM TAXATION.—An organiza-
tion described in subsection (c) or (d) shall be exempt 
from taxation under this chapter. 
‘‘(b) TAX ON UNRELATED BUSINESS ACTIVITY.—An 
organization exempt from taxation under subsection (a) 
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shall be subject to tax to the extent provided in sections 
255 and 256, but shall be considered a tax-exempt organi-
zation for purposes of any law that refers to tax-exempt 
organizations. 
‘‘(c) LIST OF EXEMPT ORGANIZATIONS.—The fol-
lowing organizations are referred to in subsection (a): 
‘‘(1) 
INSTRUMENTALITY
OF
THE
UNITED 
STATES.—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 (h). 
‘‘(2) TITLE
HOLDING
COMPANIES.—Corpora-
tions organized for the exclusive purpose of holding 
title to property, collecting income therefrom, and 
turning over the entire amount thereof, less ex-
penses, to an organization which itself is exempt 
under this section. Rules similar to the rules of sub-
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347 
paragraph (G) of paragraph (25) shall apply for 
purposes of this paragraph. 
‘‘(3) CHARITABLE, EDUCATIONAL
AND
RELI-
GIOUS
ORGANIZATIONS.—Corporations, and any 
community chest, fund, or foundation, organized and 
operated exclusively for religious, charitable, sci-
entific, testing for public safety, literary, or edu-
cational purposes, or to foster national or inter-
national amateur sports competition (but only if no 
part of its activities involve the provision of athletic 
facilities or equipment), or for the prevention of cru-
elty to children or animals, no part of the net earn-
ings 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 oth-
erwise attempting, to influence legislation (except as 
otherwise provided in subsection (g)), and which 
does not participate in, or intervene in (including the 
publishing or distributing of statements), any polit-
ical campaign on behalf of (or in opposition to) any 
candidate for public office. 
‘‘(4) SOCIAL WELFARE ORGANIZATIONS, ETC.— 
‘‘(A) Civic leagues or organizations not or-
ganized for profit but operated exclusively for 
the promotion of social welfare, or local associa-
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348 
tions 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 pur-
poses. 
‘‘(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
AND
AGRICULTURAL
ORGANIZA-
TIONS.—Labor, agricultural, or horticultural organi-
zations. 
‘‘(6) TRADE ASSOCIATIONS.—Business leagues, 
chambers of commerce, real-estate boards, boards of 
trade, or professional football leagues (whether or 
not administering a pension fund for football play-
ers) not organized for profit and no part of the net 
earnings of which inures to the benefit of any pri-
vate shareholder or individual. 
‘‘(7) SOCIAL
CLUBS.—Clubs organized for 
pleasure, recreation, and other nonprofitable pur-
poses, substantially all of the activities of which are 
for such purposes and no part of the net earnings 
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349 
of which inures to the benefit of any private share-
holder. 
‘‘(8) CERTAIN
FRATERNAL
SOCIETIES.—Fra-
ternal 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 sys-
tem, 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) VEBA’S.—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 bene-
ficiaries, if no part of the net earnings of such asso-
ciation inures (other than through such payments) 
to the benefit of any private shareholder or indi-
vidual. 
‘‘(10) OTHER
FRATERNAL
ORGANIZATIONS.— 
Domestic fraternal societies, orders, or associations, 
operating under the lodge system— 
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350 
‘‘(A) the net earnings of which are devoted 
exclusively to religious, charitable, scientific, lit-
erary, educational, and fraternal purposes, and 
‘‘(B) which do not provide for the payment 
of life, sick, accident, or other benefits. 
‘‘(11) 
LOCAL
TEACHERS’ 
RETIREMENT 
FUNDS.—Teachers’ retirement fund associations of a 
purely local character, if— 
‘‘(A) no part of their net earnings inures 
(other than through payment of retirement ben-
efits) 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) CERTAIN COOPERATIVES.— 
‘‘(A) Benevolent life insurance associations 
of a purely local character, mutual ditch or irri-
gation companies, mutual or cooperative tele-
phone 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. 
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351 
‘‘(B) In the case of a mutual or coopera-
tive telephone company, subparagraph (A) shall 
be applied without taking into account any in-
come received or accrued— 
‘‘(i) from a nonmember telephone 
company for the performance of commu-
nication services which involve members of 
the mutual or cooperative telephone com-
pany, 
‘‘(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 com-
pany, or 
‘‘(iv) from the prepayment of a loan 
under section 306A, 306B, or 311 of the 
Rural Electrification Act of 1936 (as in ef-
fect on January 1, 1987). 
‘‘(C) In the case of a mutual or cooperative 
electric company, subparagraph (A) shall be ap-
plied without taking into account any income 
received or accrued— 
‘‘(i) from qualified pole rentals, or 
‘‘(ii) from the prepayment of a loan 
under section 306A, 306B, or 311 of the 
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352 
Rural Electrification Act of 1936 (as in ef-
fect on January 1, 1987). 
‘‘(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 elec-
tric company to support one or more wires 
which are used by such company in pro-
viding 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 com-
munications. 
For purposes of the preceding sentence, the 
term ‘rental’ includes any sale of the right to 
use the pole (or other structure). 
‘‘(13) 
NONPROFIT
CEMETERIES.—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 
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353 
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 share-
holder or individual. 
‘‘(14) GRANDFATHERED
MUTUAL
FINANCIAL 
INSTITUTIONS.— 
‘‘(A) Credit unions without capital stock 
organized and operated for mutual purposes 
and without profit, but only if organized before 
July 1, 2006. 
‘‘(B) Certain corporations or associations 
organized before September 1, 1957, and de-
scribed in subparagraphs (B) or (C) of section 
501(c)(14) of the Internal Revenue Code of 
1986. 
‘‘(15) GRANDFATHERED
SMALL
INSURANCE 
COMPANIES.—Insurance companies organized before 
July 1, 2006, and described in section 501(c)(15) of 
the Internal Revenue Code of 1986. 
‘‘(16) CROP
FINANCING
ASSOCIATIONS.—Cor-
porations 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 
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354 
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 consider-
ation for which the stock was issued, and if substan-
tially all such stock (other than nonvoting preferred 
stock, the owners of which are not entitled or per-
mitted to participate, directly or indirectly, in the 
profits of the corporation, on dissolution or other-
wise, beyond the fixed dividends) is owned by such 
association, or members thereof; nor shall exemption 
be denied any such corporation because there is ac-
cumulated and maintained by it a reserve required 
by State law or a reasonable reserve for any nec-
essary purpose. 
‘‘(17) SUPPLEMENTAL EMPLOYMENT BENEFIT 
TRUST.— 
‘‘(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 
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355 
the plan, for any part of the corpus or in-
come to be (within the taxable year or 
thereafter) used for, or diverted to, any 
purpose other than the providing of supple-
mental unemployment compensation bene-
fits, 
‘‘(ii) such benefits are payable to em-
ployees 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)), and 
‘‘(iii) such benefits do not discrimi-
nate in favor of employees who are highly 
compensated employees (within the mean-
ing of section 414(q). A plan shall not be 
considered discriminatory within the mean-
ing of this clause merely because the bene-
fits 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) Rules similar to those contained in 
subparagraphs (B) through (E) of section 
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356 
501(c)(7) of the Internal Revenue Code of 1986 
shall apply to subparagraph (A). 
‘‘(18) GRANDFATHERED TRUSTS.—A trust or 
trusts created before June 25, 1959, and described 
in section 501(c)(18) of the Internal Revenue Code 
of 1986. 
‘‘(19) CERTAIN VETERANS’ ORGANIZATIONS.— 
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 sub-
stantially all of the other members of which are 
individuals who are cadets or are spouses, wid-
ows, or widowers of past or 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. 
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357 
‘‘(20) LEGAL SERVICE PLAN TRUSTS.—An or-
ganization or trust created or organized in the 
United States, the exclusive function of which is to 
form part of a qualified group legal services plan or 
plans. 
‘‘(21) BLACK LUNG ACT TRUSTS.—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— 
‘‘(A) 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 connec-
tion 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 bene-
fits for retired miners and their spouses 
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358 
and dependents (including administrative 
and other incidental expenses of such trust 
in connection therewith) or premiums for 
insurance exclusively covering such bene-
fits; and 
‘‘(B) such trusts meets requirements simi-
lar to those contained in section 501(c)(21) of 
the Internal Revenue Code of 1986. 
‘‘(22) MULTIEMPLOYER ERISA TRUST.—A trust 
created or organized in the United States and estab-
lished in writing by the plan sponsors of multiem-
ployer plans if— 
‘‘(A) the purpose of such trust is exclu-
sively— 
‘‘(i) to pay any amount described in 
section 4223(c) or (h) of the Employee Re-
tirement 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— 
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359 
‘‘(i) the purposes described in sub-
paragraph (A), or 
‘‘(ii) prudent investment in securities, 
obligations, or time or demand deposits, 
‘‘(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) GRANDFATHERED VETERANS’ INSURANCE 
ORGANIZATION.—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 insur-
ance and other benefits to veterans or their depend-
ents. 
‘‘(24) ERISA TRUST.—A trust described in sec-
tion 4049 of the Employee Retirement Income Secu-
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360 
rity Act of 1974 (as in effect on the date of the en-
actment of the Single-Employer Pension Plan 
Amendments Act of 1986). 
‘‘(25) REAL TITLE HOLDING CORPORATION OR 
TRUST.— 
‘‘(A) Any corporation or trust which— 
‘‘(i) has no more than 35 shareholders 
or beneficiaries, 
‘‘(ii) has only 1 class of stock or bene-
ficial 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 ex-
penses) to 1 or more organizations de-
scribed in subparagraph (C) which are 
shareholders of such corporation or 
beneficiaries of such trust. 
For purposes of clause (iii), the term ‘real prop-
erty’ shall not include any interest as a tenant 
in common (or similar interest) and shall not 
include any indirect interest. 
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361 
‘‘(B) A corporation or trust shall be de-
scribed in subparagraph (A) without regard to 
whether the corporation or trust is organized by 
1 or more organizations described in subpara-
graph (C). 
‘‘(C) An organization is described in this 
subparagraph if such organization is— 
‘‘(i) a qualified pension, profit shar-
ing, or stock bonus plan that meets the re-
quirements 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 rea-
sonable notice, upon a vote of the share-
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362 
holders 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 inter-
est in the trust (subject to any Fed-
eral or State securities law) to any or-
ganization 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 in-
terest redeemed by the corporation or 
trust after the shareholder or bene-
ficiary has provided 90 days notice to 
such corporation or trust. 
‘‘(E)(i) For purposes of this paragraph— 
‘‘(I) a corporation which is a qualified 
subsidiary shall not be treated as a sepa-
rate corporation, and 
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363 
‘‘(II) all assets, liabilities, and items 
of income, deduction, and credit of a quali-
fied 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 cor-
poration if, at all times during the period such 
corporation was in existence, 100 percent of the 
stock of such corporation is held by the cor-
poration 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 cor-
poration acquiring all of its assets (and assum-
ing all of its liabilities) immediately before such 
cessation from the corporation or trust de-
scribed 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 
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364 
with, a lease of real property, but only if the 
rent attributable to such personal property 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 treat-
ed as failing to be described in this paragraph 
merely by reason of the receipt of any otherwise 
disqualifying income which is incidentally de-
rived 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 or-
ganization establishes to the satisfaction of the 
Secretary that the receipt of gross income de-
scribed 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) STATE ESTABLISHED MEDICAL CARE IN-
SURER.—Any membership organization if— 
‘‘(A) such organization is established by a 
State exclusively to provide coverage for medical 
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365 
care on a not-for-profit basis to individuals de-
scribed in subparagraph (B) through— 
‘‘(i) insurance issued by the organiza-
tion, or 
‘‘(ii) a health maintenance organiza-
tion under an arrangement with the orga-
nization, 
‘‘(B) the only individuals receiving such 
coverage through the organization are individ-
uals— 
‘‘(i) who are residents of such State, 
and 
‘‘(ii) who, by reason of the existence 
or history of a medical condition— 
‘‘(I) are unable to acquire med-
ical 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 sub-
stantially in excess of the rate for 
such coverage through the member-
ship organization, 
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366 
‘‘(C) the composition of the membership in 
such organization is specified by such State, 
and 
‘‘(D) no part of the net earnings of the or-
ganization inures to the benefit of any private 
shareholder or individual. A spouse and any 
qualifying child) of an individual described in 
subparagraph (B) (without regard to this sen-
tence) shall be treated as described in subpara-
graph (B). 
‘‘(27) GRANDFATHERED WORKERS COMPENSA-
TION
ORGANIZATION.—Any membership organiza-
tion established before June 1, 1996, by a State ex-
clusively to reimburse its members for losses arising 
under workmen’s compensation acts, and described 
in section 501(c)(27) of the Internal Revenue Code 
of 1986. 
‘‘(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 cor-
porations engage in business for the common benefit of 
the members, but only if such activity is treated as unre-
lated business activity. 
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367 
‘‘(e) COOPERATIVE HOSPITAL SERVICE ORGANIZA-
TIONS.—For purposes of this chapter, an organization 
shall be treated as an organization organized and operated 
exclusively for charitable purposes, if— 
‘‘(1) such organization is organized and oper-
ated 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), 
would constitute activities in exercising or per-
forming the purpose or function constituting 
the basis for its exemption: data processing, 
purchasing (including the purchasing of insur-
ance on a group basis), warehousing, billing 
and collection, food, clinical, industrial engi-
neering, laboratory, printing, communications, 
record center, and personnel (including selec-
tion, testing, training, and education of per-
sonnel) services; and 
‘‘(B) to perform such services solely for 
two or more hospitals each of which is— 
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368 
‘‘(i) an organization described in sub-
section (c)(3) which is exempt from tax-
ation under subsection (a), 
‘‘(ii) a constituent part of an organi-
zation 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 Co-
lumbia, 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 oper-
ated on a cooperative basis and allocates or pays, 
within 81⁄2 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 rea-
son of the preceding sentence, is an organization described 
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369 
in subsection (c)(3) and exempt from taxation under sub-
section (a), shall be treated as a hospital and as an organi-
zation referred to in section 101(b)(1)(A)(iii). 
‘‘(f) COOPERATIVE SERVICE ORGANIZATIONS OF OP-
ERATING EDUCATIONAL ORGANIZATIONS.—For purposes 
of this chapter, if an organization is— 
‘‘(1) organized and operated solely to hold, 
commingle, and collectively invest and reinvest (in-
cluding arranging for and supervising the perform-
ance by independent contractors of investment serv-
ices related thereto) in stocks and securities, the 
moneys contributed thereto by each of the members 
of such organization, and to collect income there-
from 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 orga-
nizations described in clause (ii) or (iv) of section 
101(b)(1)(A)— 
‘‘(A) which are exempt from taxation 
under subsection (a), or 
‘‘(B) the gross profits of which are ex-
cluded from taxation under section 251(a), then 
such organization shall be treated as an organi-
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372 
‘‘(4) 
DISQUALIFIED
ORGANIZATIONS.—This 
subsection does not apply to— 
‘‘(A) a church, 
‘‘(B) an integrated auxiliary of a church or 
of a convention or association of churches, or 
‘‘(C) a member of an affiliated group of or-
ganizations (within the meaning of section 
4911(f)(2)) if one or more members of such 
group is described in subparagraph (A) or (B). 
‘‘(5) YEARS FOR WHICH ELECTION IS EFFEC-
TIVE.—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). 
‘‘(6) NO
EFFECT
ON
CERTAIN
ORGANIZA-
TIONS.—With respect to any organization for a tax-
able year for which— 
‘‘(A) such organization is described in 
paragraph (5), or 
‘‘(B) an election under this subsection is 
not in effect for such organization, nothing in 
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