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‘‘(B) with respect to which the organization
performs the functions of, or carries out the pur-
poses of.’’.
(c) CHARITABLE TRUSTS WHICH ARE TYPE III SUP-
PORTING
ORGANIZATIONS.—For 
purposes 
of 
section
509(a)(3)(B)(iii) of the Internal Revenue Code of 1986, an
organization which is a trust shall not be considered to be
operated in connection with any organization described in
paragraph (1) or (2) of section 509(a) of such Code solely
because—
(1) it is a charitable trust under State law,
(2) the supported organization (as defined in sec-
tion 509(f)(3) of such Code) is a beneficiary of such
trust, and
(3) the supported organization (as so defined)
has the power to enforce the trust and compel an ac-
counting.
(d) EFFECTIVE DATE.—The amendments made by this
section shall take effect on the date of the enactment of this
Act.
SEC. 242. EXCISE TAX ON SUPPORTING ORGANIZATIONS
FOR FAILURE TO MEET DISTRIBUTION RE-
QUIREMENTS.
(a) IN GENERAL.—Subchapter D of chapter 42 (relat-
ing to failure by certain charitable organizations to meet
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certain qualification requirements) is amended by adding
at the end the following new section:
‘‘SEC. 4959. TAXES ON CERTAIN SUPPORTING ORGANIZA-
TIONS FAILING TO MEET DISTRIBUTION RE-
QUIREMENTS.
‘‘(a) INITIAL TAX.—There is hereby imposed on the
undistributed income of any type III supporting organiza-
tion for any taxable year, which has not been distributed
before the first day of the second (or any succeeding) taxable
year following such taxable year (if such first day falls
within the taxable period), a tax equal to 30 percent of the
amount of such income remaining undistributed at the be-
ginning of such second (or succeeding) taxable year.
‘‘(b) ADDITIONAL TAX.—In any case in which an ini-
tial tax is imposed under subsection (a) on the undistrib-
uted income of a type III supporting organization for any
taxable year, if any portion of such income remains undis-
tributed at the close of the taxable period, there is hereby
imposed a tax equal to 100 percent of the amount remain-
ing undistributed at such time.
‘‘(c) UNDISTRIBUTED INCOME.—For purposes of this
section, the term ‘undistributed income’ means, with respect
to any type III supporting organization for any taxable
year as of any time, the amount by which—
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‘‘(1) the distributable amount for such taxable
year, exceeds
‘‘(2) the qualifying distributions made before
such time out of such distributable amount.
‘‘(d) DISTRIBUTABLE AMOUNT.—For purposes of this
section—
‘‘(1) IN
GENERAL.—the term ‘distributable
amount’ means, with respect to any type III sup-
porting organization for any taxable year, an amount
equal to the sum of—
‘‘(A) the greater of—
‘‘(i) 85 percent of the adjusted net in-
come (as defined in section 4942(f)) of the
type III supporting organization for the
preceding taxable year, or
‘‘(ii) the applicable percentage of the
fair market value of the aggregate assets of
such organization (other than assets used or
held to perform the functions of, or carry
out the purposes of, a supported organiza-
tion) on the last day of the preceding tax-
able year, and
‘‘(B) any amount received during the pre-
ceding taxable year which is a repayment of
amounts paid by the organization in any prior
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taxable year to a supported organization exclu-
sively for the benefit of such supported organiza-
tion or to perform the functions of, or carry out
the purposes of such supported organization.
‘‘(2) INVESTMENT
ASSETS.—For purposes of
paragraph (1)(A)(ii), assets held for investment or for
the operation of an unrelated trade or business shall
not be considered as assets used or held to perform the
functions of, or carry out the purposes of, a supported
organization.
‘‘(3) APPLICABLE
PERCENTAGE.—For purposes
of paragraph (1)(A)(ii), the applicable percentage
is—
‘‘(A) 3 percent for the first taxable year be-
ginning after the date of the enactment of this
section,
‘‘(B) 4 percent for the second taxable year
beginning after such date, and
‘‘(C) 5 percent for any taxable year begin-
ning after the second taxable year beginning
after such date.
‘‘(e) QUALIFYING DISTRIBUTION.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘qualifying dis-
tribution’ means amounts paid by the type III sup-
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porting organization to or for the use of a supported
organization.
‘‘(2) ADMINISTRATIVE
AND
OPERATING
EX-
PENSES.—Reasonable and necessary administrative
expenses of a type III supporting organization shall
be treated as a qualifying distribution to a supported
organization.
‘‘(f) TREATMENT OF QUALIFYING DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), any qualifying distribution made during
a taxable year shall be treated as made—
‘‘(A) first out of the undistributed income of
the immediately preceding taxable year (if the
type III supporting organization was subject to
the tax imposed by this section for such pre-
ceding taxable year) to the extent thereof, and
‘‘(B) second out of the undistributed income
for the taxable year to the extent thereof.
For purposes of this paragraph, distributions shall be
taken into account in the order of time in which
made.
‘‘(2) CORRECTION OF DEFICIENT DISTRIBUTIONS
FOR PRIOR TAXABLE YEARS, ETC.—In the case of any
qualifying distribution which (under paragraph (1))
is not treated as made out of the undistributed in-