2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1012 - Nonprofit Organizations (§§ 30471 — 30487) › Subchapter B - Taxation Of Business Income Of Certain Exempt Organizations And Denial Of Exemption For Certain Prohibited Transactions And Improperly Accumulating Surplus (§§ 30481 — 30487) › § 30486 - Exemption requirements

(a) Denial of exemption to organizations engaged in prohibited transactions.—
(1) General rule.— An organization as described in § 30471(a)(1), § 30471(a)(2), § 30471(a)(4)(D), § 30471(a)(8)(A), § 30471(a)(9), or 30391 of this title, which is subject to the provisions of this section shall not be exempt from taxation under § 30471 of this title or under § 30391(a) of this title if it has engaged in a prohibited transaction after January 1, 1962.
(2) Taxable years affected.— An organization as described in §§ 30471(a)(1), 30471(a)(2), 30471(a)(4)(D), 30471(a)(8)(A), 30471(a)(9), or 30391 of this title shall be denied exemption from taxation by reason of clause (1) only for taxable years after the taxable year during which it is notified by the Secretary that it has engaged in a prohibited transaction, unless such organization entered into such prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purposes, and such transaction involved a substantial part of the corpus or income of such organization.
(b) Organizations to which this section applies.— This section shall apply to any organization described in § 30471(a)(1), 30471(a)(2), 30471(a)(4)(D), 30471(a)(8)(A), 30471 (a)(9), or 30391 of this title, except:
(1) An educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its education activities are regularly carried out, as defined in § 30471(a)(2)(D) of this title;
(2) an organization which normally receives a substantial part of its support (excluding income received in the exercise or performance by such organization of its charitable, educational, or other purposes or functions constituting the basis for its exemption under § 30471 or § 30391(a) of this title) from the United States, any state of the United States, the Commonwealth of Puerto Rico, or any political subdivision thereof, or from direct or indirect contributions from the general public;
(3) an organization the principal purposes or functions of which are providing medical or hospital care or medical education or medical or agricultural research.
(4) A labor, agricultural, or horticultural organization which is exempt under Section § 30471(a)(8)(A) of this title.
(c) Prohibited transactions.— For purposes of this section, the term “prohibited transaction” means any transaction in which:
(1) An organization subject to the provisions of § 30471(a), § 30471(a)(4)(D) of this title, or § 30391(a) of this title:
(A) Makes any part of its services available on a preferential basis;
(B) engages in any transaction described in clause (2);
(2) Any organization that is not described in clause (1) that is subject to the provisions of this section-
(A) Lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest to;
(B) pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;
(C) makes any substantial purchase of securities or any other property, for more than an adequate consideration in money or money’s worth, from;
(D) sells any substantial part of its securities or other property, for less than an adequate consideration in money or money’s worth to, or
(E) engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in § 30137(b)(2)(D) of this title) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or a corporation controlled by such creator or person, or by the organization itself, through the ownership, directly or indirectly, of fifty percent (50%) or more of the total combined voting power of all classes of stock entitled to vote or fifty percent (50%) or more of the total value of shares of all classes of stock of the corporation.
(F) Incurs expenses that are extravagant; expenses that are not clearly related to the exempt purposes of the organization; expenses that are intended to make profit by directors, officers, officials, or employees; or expenses incurred for personal, living, and family expenses of directors, officers, officials, or employees.
(d) Future status of organizations denied exemption.— Any organization which is denied exemption under § 30471(a), § 30471(b)(3), § 30471(b)(4)(D), § 30471(b)(5) or § 30391 by reason of subsection (a), with respect to any taxable year following the taxable year in which notice of denial of exemption was received, may, under regulations prescribed by the Secretary, file claim for exemption, and if the Secretary, pursuant to such regulations, is satisfied that such organization will not again knowingly engage in a prohibited transaction, such organization shall be exempt with respect to taxable years subsequent to the year in which such claim is filed.
(e) Disallowance of certain charitable and other deductions.— No gift or bequest for religious, charitable, scientific, literary, or educational purposes (including the encouragement of art and the prevention of cruelty to children or animals), otherwise allowable as a deduction under § 30130, § 30135(a)(3), or § 30412(a) of this title, shall be allowed as a deduction if made to an organization which, in the taxable year of the organization in which the gift or bequest is made, is not exempt under § 30471 of this title by reason of this section. With respect to any taxable year of the organization for which the organization is not exempt pursuant to subsection (a) by reason of having engaged in a prohibited transaction with the purpose of diverting the corpus or income of such organization from its exempt purposes and such transaction involved a substantial part of such corpus or income, and which taxable year is the same or prior to the taxable year of the organization in which such transaction occurred, such deduction shall be disallowed to the donor only if such donor or (if such donor is an individual) any member of his/her family (as defined in § 30137(b)(2)(D) of this title) was a party to such prohibited transaction.
(f) Definition.— For purposes of this section, the term “gift or bequest” means any gift, contribution, bequest, devise, legacy, or transfer.
(g) Special rule for loans.— For purposes of the application of subsection (c)(1), in the case of a loan by a trust described in § 30471(b)(4)(D) or 30391(a) of this title, the following rules shall apply with respect to a loan made before March 1, 1962, which would constitute a prohibited transaction if made on or after March 1, 1962.
(1) If any part of the loan is repayable prior to December 31, 1962, the renewal of such part of the loan for a period not extending beyond December 31, 1962, on the same terms, shall not be considered a prohibited transaction.
(2) If the loan is repayable on demand, the continuation of the loan without the receipt of adequate security and a reasonable rate of interest beyond December 31, 1962, shall be considered a prohibited transaction.
(h) Special rules related to lending by trusts in § 30471(b)(4)(D) or § 30391(a) of this title to certain persons.— For purposes of subsection (c)(1) of this section, a bond, debenture, note, or certificate or other evidence of indebtedness (hereinafter in this subsection referred to as “obligation”) acquired by a trust described in § 30471(b)(4)(D) or § 30391(a) shall not be treated as a loan made without the receipt of adequate security if:
(1) Such obligation is acquired:
(A) On the market, either:
(i) At the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or
(ii) if the obligation is not traded on such a national securities exchange, at a price not less favorable to the trust than the offering price for the obligation as established by the current bid and asked prices quoted by persons independent of the issuer;
(B) from an underwriter, at a price:
(i) Not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and
(ii) at which a substantial portion of the same issue is acquired by persons independent of the issuer, or
(C) directly from issuer, at a price not less favorable to the trust than the price paid currently for a substantial portion of the same issue by persons independent of the issuer;
(2) immediately following the acquisition of such obligation:
(A) Not more than twenty-five percent (25%) of the aggregate amount of obligations issued in such issue and outstanding at the time of acquisition is held by the trust, and
(B) at least fifty percent (50%) of the aggregate amount referred to in paragraph (A) is held by persons independent of the issuer, and
(3) immediately following the acquisition of the obligation, not more than twenty-five percent (25%) of the assets of the trust is invested in obligations of persons described in subsection (c).
(i) Loans with respect to which employers are prohibited from pledging certain assets.— Subsection (c)(2)(A) shall not apply to a loan made by a trust described in section § 30471(b)(4)(D) or § 30391(a) of this title to the employer (or to a renewal of such a loan or, if the loan is repayable upon demand, to a continuation of such loan) if the loan bears a reasonable rate of interest and if, (in the event that a renewal is made):
(1) The employer is prohibited (at the time of such renewal) by any law of the Government of Puerto Rico or of the United States, or regulation thereunder, from directly or indirectly pledging, as security for such a loan, a particular class or classes of his/her assets the value of which (at such time) represents more than one-half of the value of all his/her assets;
(2) the making or renewal, as the case may be, is approved in writing as an investment which is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other such trustee had previously refused to give such written approval, and
(3) immediately following the making or renewal, as the case may be, the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does not exceed twenty-five percent (25%) of the value of all the assets of the trust. For purposes of clause (2), the term “trustee” means, with respect to any trust for which there is more than one trustee who is independent of the employer, a majority of such independent trustees. For purposes of this clause, the determination as to whether any amount loaned by the trust to the employer was loaned without the receipt of adequate security shall be made without regard to subsection (h).
(j) Exemption for employee stock ownership plans.—
(1) In general.— The following shall not be deemed as a prohibited transaction:
(A) Any acquisition of employer securities, as defined in § 30391(h)(2) of this title;
(B) any loan to an employee stock ownership plan that meets the requirements of § 30391(h) of this title, for the acquisition of employer securities if:
(i) said loan is mainly for the benefit of the participants and beneficiaries of the plan, and
(ii) said loan bears interest at a reasonable rate.
History —Jan. 31, 2011, No. 1, § 1102.06, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 115; Sept. 30, 2015, No. 159, § 11.