371 
‘‘(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
372 
this subsection or in section 4911 shall be con-
strued to affect the interpretation of the phrase, 
‘no substantial part of the activities of which is 
carrying on propaganda, or otherwise attempt-
ing, to influence legislation,’ under subsection 
(c)(3). 
‘‘(h) GOVERNMENT CORPORATIONS EXEMPT UNDER 
SUBSECTION (C)(1).—For purposes of subsection (c)(1), 
the following organizations are described in this sub-
section: 
‘‘(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 estab-
lished under section 21A of the Federal Home Loan 
Bank Act. 
‘‘(3) The Resolution Funding Corporation es-
tablished under section 21B of the Federal Home 
Loan Bank Act. 
‘‘(i) CERTAIN EDUCATIONAL ORGANIZATIONS.—An 
organization shall not be eligible for exemption as an edu-
cational organization under subsection (c)(3) if a substan-
tial amount of its activities and funds are devoted to— 
‘‘(1) conducting seminars and other similar pro-
grams,
373 
‘‘(2) conducting research to educate Congress 
or the general public about public policy issues, 
‘‘(3) producing books and pamphlets, or 
‘‘(4) a combination of the foregoing. 
‘‘SEC. 254. SPECIAL RULES FOR (C)(3) ORGANIZATIONS. 
‘‘(a) NEW ORGANIZATIONS MUST NOTIFY SEC-
RETARY.—Except as provided in subsection (c), an organi-
zation shall not be treated as an organization described 
in section 253(c)(3)— 
‘‘(1) unless that it has given notice to the Sec-
retary, in such manner as the Secretary may pre-
scribe, that it is applying for recognition of such sta-
tus, or 
‘‘(2) for any period before giving of such notice, 
if such notice is given after the time prescribed by 
the Secretary by regulations for giving notice under 
this subsection. 
‘‘(b) PRESUMPTION THAT ORGANIZATIONS ARE PRI-
VATE FOUNDATIONS.—Except as provided in subsection 
(c), any organization described in section 253(c)(3) and 
which does not notify the Secretary, at such time and in 
such manner as the Secretary may by regulations pre-
scribe, that it is not a private foundation (as defined in 
section 102) shall be presumed to be a private foundation.
374 
‘‘(c) EXCEPTIONS.—Subsections (a) and (b) shall not 
apply to— 
‘‘(1) organizations organized before October 10, 
1969; 
‘‘(2) organizations which obtained recognition 
of tax-exempt status under section 501(c)(3) of the 
Internal Revenue Code of 1986 (in the case of sub-
section (a) only); 
‘‘(3) organizations which were determined not 
to be private foundations under the Internal Rev-
enue Code of 1986; 
‘‘(4) churches, their integrated auxiliaries, and 
conventions and associations of churches; 
‘‘(5) any organization that is not a private 
foundation and the gross receipts of which in each 
taxable year are not more than $25,000, or 
‘‘(6) such other classes of organizations which 
the Secretary may exempt. 
‘‘SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY. 
‘‘(a) IN GENERAL.—Each organization described in 
subsection (b) shall be subject to the Simplified USA Tax 
for businesses under section 201 on its gross profits from 
its unrelated business activity. 
‘‘(b) ORGANIZATIONS SUBJECT TO TAX.—This sec-
tion shall apply to—
375 
‘‘(1) organizations exempt from the business 
tax under section 253(a), other than instrumental-
ities of the United States described in section 
253(c)(1). 
‘‘(2) colleges and universities which are instru-
mentalities of any government and corporations 
owned by one or more such colleges or universities. 
‘‘SEC. 256. UNRELATED BUSINESS ACTIVITY. 
‘‘(a) IN GENERAL.—‘Unrelated business activity’ 
means any trade or business the conduct of which is not 
substantially related (aside from the need of such organi-
zation for income or funds or the use it makes of the prof-
its derived) to the exercise or performance by such organi-
zation of its charitable, educational, or other purpose or 
function constituting the basis for its exemption under 
section 253, except that such term does not include any 
trade or business— 
‘‘(1) in which substantially all the work in car-
rying on such trade or business is performed for the 
organization without compensation; or 
‘‘(2) which is carried on, in the case of an orga-
nization described in section 253(c)(3) or in the case 
of a college or university described in section 255(b), 
by the organization primarily for the convenience of 
its members, students, patients, officers, or employ-
376 
ees, which is the selling by the organization of items 
of work-related clothes and equipment and items 
normally sold through vending machines, through 
food dispensing facilities, or by snack bars, for the 
convenience of its members at their usual places of 
employment; or 
‘‘(3) which is the selling of merchandise, sub-
stantially all of which has been received by the orga-
nization as gifts or contributions. 
‘‘(b) ADVERTISING, ETC., ACTIVITIES.—For purposes 
of this section, ‘trade or business’ includes any activity 
which is carried on for the production of income from the 
sale of goods or the performance of services. For purposes 
of the preceding sentence, an activity does not lose identity 
as a trade or business merely because it is carried on with-
in a larger aggregate of similar activities or within a larger 
complex of other endeavors which may, or may not, be 
related to the exempt purposes of the organization. Where 
an activity carried on for profit constitutes an unrelated 
trade or business, no part of such trade or business shall 
be excluded from such classification merely because it does 
not result in profit. 
‘‘(c) TRADE OR BUSINESS.— 
‘‘(1) CERTAIN BUSINESS ACTIVITIES.—An ac-
tivity shall not be considered a ‘trade or business’
377 
solely because the activity is a business activity 
(such as certain passive rental activity) that would 
be subject to the business tax if conducted by a busi-
ness entity other than a tax-exempt organization. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe regulations defining a ‘trade or business.’ 
Such regulations shall be consistent with the provi-
sions under sections 511 through 513 of the Internal 
Revenue Code of 1986, except to the extent such 
provisions are inconsistent with other principles of 
the business tax. The regulations shall include exclu-
sions from the definition of ‘trade or business’ simi-
lar to those contained in section 513 of the Internal 
Revenue Code for— 
‘‘(A) certain bingo games, 
‘‘(B) certain hospital services, and 
‘‘(C) certain public entertainment activity 
at fairs and expositions by an organization 
which regularly conducts, as one of its substan-
tial exempt purposes, an agricultural or edu-
cational fair or exhibition. 
‘‘(3) TRADE
SHOWS.—The conduct of trade 
shows and conventions shall not be excluded from 
the definition of trade or business.
378 
‘‘Subchapter I—Cooperatives 
‘‘Sec. 260. Patronage dividends of cooperatives. 
‘‘SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES. 
‘‘(a) PATRONAGE DIVIDENDS PAID BY SUPPLY CO-
OPERATIVES.—A qualified patronage dividend paid by a 
supply cooperative to a patron shall be treated as if it is 
a refund of a portion of the amounts paid by the patron 
for goods, services, or use of capital. In general, if the 
supply cooperative included the amount received from the 
patron in taxable receipts, the dividend shall reduce tax-
able receipts in the year incurred. If the recipient of the 
dividend is a business entity which deducted the cost of 
business purchases to which the dividend related, the re-
cipient will reduce its cost of business purchases by the 
amount of the dividend in the year the dividend is paid 
or incurred. 
‘‘(b) PATRONAGE DIVIDENDS PAID BY MARKETING 
COOPERATIVES.—A qualified patronage dividend paid to 
a patron by a marketing cooperative shall be treated as 
an upward price adjustment in the amount received by the 
patron for its goods marketed by the cooperative. In gen-
eral, the cooperative will increase its cost of business pur-
chases by the amount of the qualified patronage dividend 
and the recipient will increase its taxable receipts by the 
amount of the qualified patronage dividend.
379 
‘‘(c) DIVIDEND TREATMENT.—Only the portion of a 
patronage dividend that is not a qualified patronage divi-
dend shall be treated as a dividend under this chapter and 
chapter 2. 
‘‘(d) DEFINITIONS.— 
‘‘(1) QUALIFIED
PATRONAGE
DIVIDEND.—A 
‘qualified patronage dividend’ is that part of a pa-
tronage dividend that is attributable to the patron’s 
allocable share of patronage earnings of a marketing 
cooperative or a supply cooperative. 
‘‘(2) SUPPLY COOPERATIVE.—A ‘supply cooper-
ative’ is a cooperative that sells goods or service to 
patrons and provided patronage dividends with re-
spect to the quantity of purchases of the patrons. 
‘‘(3) MARKETING COOPERATIVE.—A ‘marketing 
cooperative’ is a cooperative that sells goods pro-
duced by its members and provides patronage divi-
dends to the members based on the quantities of 
goods sold or provided for sale. 
‘‘(e) SPECIAL RULES.— 
‘‘(1) NOTICES OF ALLOCATION AND PER-UNIT 
RETAIN
CERTIFICATES.—Except as provided in 
paragraph (2), a notice of allocation, per-unit retain 
certificate, or other similar document shall not be
380 
treated as a patronage dividend until it is redeemed 
in cash or property. 
‘‘(2) OPPORTUNITY
TO
RECEIVE
CASH.—If a 
patron is given an opportunity to receive a patron-
age dividend in cash, but instead chooses to accept 
a per-unit retain certificate or a qualified notice of 
allocation, the patron will be treated as receiving 
cash and simultaneously contributing to the capital 
of the cooperative. 
‘‘(3) APPLICATION LIMITED TO QUALIFIED CO-
OPERATIVES.—Under rules to be prescribed by the 
Secretary, this section shall apply only to coopera-
tives to which one of the following provisions of the 
Internal Revenue Code of 1986 would have applied: 
‘‘(A) Section 501(c)(12) (relating to coop-
erative telephone companies and similar organi-
zations). 
‘‘(B) Section 501(c)(14) (relating to cer-
tain cooperative banks). 
‘‘(C) Section 521 (relating to farm co-
operatives). 
‘‘(D) Section 1381 (relating to coopera-
tives generally). 
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe regulations for the application of this section.
381 
The regulations shall generally be consistent with 
subchapter T of chapter 1 of the Internal Revenue 
Code of 1986 except to the extent that such rules 
are inconsistent with provisions of this chapter. 
‘‘Subchapter J—Sourcing Rules 
‘‘Sec. 265. Exports of property or services. 
‘‘Sec. 266. Imports of property or services. 
‘‘Sec. 267. Import or export of services. 
‘‘Sec. 268. International transportation services. 
‘‘Sec. 269. International communications. 
‘‘Sec. 270. Insurance. 
‘‘SEC. 265. EXPORTS OF PROPERTY OR SERVICES. 
‘‘(a) GENERAL RULE.—Taxable receipts do not in-
clude amounts received by the exporter thereof for prop-
erty or services exported from the United States for use 
or consumption outside the United States. 
‘‘(b) EXPORT THROUGH NONBUSINESS ENTITY.— 
For purposes of subsection (a), if property or services are 
sold to a governmental entity or a tax-exempt organization 
for export and are exported other than in an activity of 
such entity which is subject to the business tax, then the 
seller of such property or services is deemed to be the ex-
porter thereof. 
‘‘(c) EXPORT OF SERVICES.—See section 267 for 
rules for determining whether services are exported or im-
ported.
382 
‘‘SEC. 266. IMPORTS OF PROPERTY OR SERVICES. 
‘‘(a) IN GENERAL.—The import of property or serv-
ices for consumption in the United States shall constitute 
a business purchase if such property or service is to be 
used in a business activity in the United States. Property 
being held for sale or retail by a business entity that is 
in the business of selling goods shall be considered held 
for ‘use in a business activity’. 
‘‘(b) AMOUNT OF BUSINESS PURCHASE.— 
‘‘(1) IN GENERAL.—The cost of business pur-
chases with respect to the import of property or 
services for use or consumption in the United States 
is the customs value, price or other amount used for 
purposes of determining the import tax under sec-
tion 286 or section 287. 
‘‘(2) IMPORT TAX.—The cost of business pur-
chases does not include any import tax paid. No de-
duction shall be allowed with respect to property or 
service imported by a business entity unless the im-
port tax is paid with respect to such import. 
‘‘SEC. 267. IMPORT OR EXPORT OF SERVICES. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this subchapter or in rules prescribed under subchapter 
G (relating to financial intermediation business), services 
shall not be treated as imported or exported from the loca-
tion in which they are performed.