339 
‘‘(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
340 
‘‘(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-
341 
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-
342 
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—
343 
‘‘(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
344 
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)
345 
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-
346 
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-
347 
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
348 
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—
349 
‘‘(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.
350 
‘‘(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