339
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
‘‘(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
340
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-
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,
341
‘‘(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-
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
342
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—
‘‘(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—
343
‘‘(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
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.
344
‘‘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)
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):
345
‘‘(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-
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-
346
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-
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.
347
‘‘(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
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
348
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’ bene-
ficiary 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 pay-
ments) to the benefit of any private shareholder or
individual.
‘‘(10) OTHER
FRATERNAL
ORGANIZATIONS.—
Domestic fraternal societies, orders, or associations,
operating under the lodge system—
‘‘(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—
349
‘‘(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.
‘‘(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,
350
‘‘(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
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-
351
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
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
352
and without profit, but only if organized before
July 1, 2001.
‘‘(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, 2001, 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
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-
353
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
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
354
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
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
355
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.
‘‘(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—
356
‘‘(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
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.
357
‘‘(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
exclusively—
‘‘(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—
‘‘(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
358
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-
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—
359
‘‘(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
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 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).
360
‘‘(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-
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
361
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
‘‘(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
362
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
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
363
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
care on a not-for-profit basis to individuals de-
scribed in subparagraph (B) through—
‘‘(i) insurance issued by the organiza-
tion, or
364
‘‘(ii) a health maintenance organiza-
tion under an arrangement with the orga-
nization,
‘‘(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—
‘‘(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,
‘‘(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
365
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.
‘‘(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—
367
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
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-
368
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 organization
organized and operated exclusively for charitable purposes.
‘‘(g) EXPENDITURES BY PUBLIC CHARITIES TO IN-
FLUENCE LEGISLATION.—
‘‘(1) GENERAL RULE.—In the case of an orga-
nization 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
369
otherwise attempting, to influence legislation, but
only if such organization normally—
‘‘(A) makes lobbying expenditures in ex-
cess of the lobbying ceiling amount for such or-
ganization for each taxable year, or
‘‘(B) makes grass roots expenditures in ex-
cess of the grass roots ceiling amount for such
organization for each taxable year.
‘‘(2) DEFINITIONS.—For purposes of this
subsection—
‘‘(A) LOBBYING
EXPENDITURES.—‘Lob-
bying 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 lob-
bying nontaxable amount for such organization
for such taxable year, determined under section
4911.
‘‘(C) GRASS
ROOTS
EXPENDITURES.—
‘Grass roots expenditures’ means expenditures
for the purpose of influencing legislation (as de-
fined in section 4911(d) without regard to para-
graph (1)(B) thereof).
370
‘‘(D) GRASS
ROOTS
CEILING
AMOUNT.—
The grass roots ceiling amount for any organi-
zation for any taxable year is 150 percent of
the grass roots nontaxable amount for such or-
ganization for such taxable year, determined
under section 4911.
‘‘(3) ORGANIZATIONS
TO
WHICH
THIS
SUB-
SECTION 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 is not described in para-
graph (4) and is not a private foundation.
‘‘(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).
371
‘‘(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
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),
372
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,
‘‘(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-
373
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.
‘‘(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);
374
‘‘(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—
‘‘(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.
375
‘‘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-
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
376
‘‘(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 pur-
poses of this section, ‘trade or business’ includes any activ-
ity which is carried on for the production of income from
the sale of goods or the performance of services. For pur-
poses of the preceding sentence, an activity does not lose
identity as a trade or business merely because it is carried
on within 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 un-
related 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’
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.’
377
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.
‘‘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
378
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.
‘‘(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-
379
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
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
380
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.
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.
381
‘‘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.
‘‘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.—
382
‘‘(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.
‘‘(b) IMPORT OF SERVICES.—A business entity shall
be treated as importing a service if—
‘‘(1) the entire benefit of the service will be re-
alized in the United States, and
‘‘(2) the benefit will be realized in connection
with the United States business activities of the
business entity.
383
‘‘(c) EXPORT
OF SERVICES.—A business will be
treating as exporting a service if—
‘‘(1) the entire benefit of the service will be re-
alized outside of the United States, and
‘‘(2) the benefit will be realized solely in con-
nection with the activities of the purchaser occurring
outside the United States.
‘‘(d) SERVICES ACQUIRED FROM SERVICE PROVIDER
THAT PROVIDES SERVICES IN AND OUTSIDE THE UNITED
STATES.—
‘‘(1) IN
GENERAL.—If a business entity ac-
quires services from a service provider that provides
services both in and outside the United States and
the service provider shows on the invoice where the
services are provided—
‘‘(A) the business entity shall treat the
services as provided where stated on the invoice,
and
‘‘(B) the service provider shall treat as tax-
able receipts any services listed as provided in
the United States.
‘‘(2) NO INVOICE.—If a business entity acquires
services from a service provider that provides serv-
ices both in and outside the United States and the
395
‘‘SEC. 288. GENERAL RULES FOR THE IMPORT TAX.
‘‘(a) IMPORT TAX.—‘Import tax’ means the tax im-
posed by section 286 on the import of property and the
tax imposed by section 287 on the import of services.
‘‘(b) NO PAYROLL TAX CREDIT.—The payroll tax
credit shall not be allowed against the import tax.
‘‘Subchapter N—Transition Rules
‘‘Sec. 290. Amortization of transition basis.
‘‘Sec. 291. Sales of transition basis property.
‘‘Sec. 292. Safe harbor leases.
‘‘Sec. 293. Carryovers.
‘‘Sec. 294. Section 481 adjustments.
‘‘SEC. 290. AMORTIZATION OF TRANSITION BASIS.
‘‘(a) TRANSITION BASIS DEDUCTION.—The ‘transi-
tion basis deduction’ for a taxable year is the sum of the
amortization allowance determined under this section for
the taxable year.
‘‘(b) AMORTIZATION RULES.—The amortization al-
lowance for each category of amortizable basis shall be de-
termined by amortizing the amortizable basis of such cat-
egory ratably over the amortization period for the category
beginning January 1, 2002.
‘‘(c) AMORTIZATION PERIOD.—The amortization pe-
riods shall be determined in accordance with the following
table:
In the case of:
The amortization period is:
Category I basis ....................................................
15 years
Category II basis ...................................................
30 years
Category III basis .................................................
40 years
Unrecovered inventory costs ..................................
5 years