26 U.S.C. § 503 : US Code - Section 503: Requirements for exemption

Search 26 U.S.C. § 503 : US Code - Section 503: Requirements for exemption

(a) Denial of exemption to organizations engaged in prohibited
transactions
(1) General rule
(A) An organization described in section 501(c)(17) shall not
be exempt from taxation under section 501(a) if it has engaged in
a prohibited transaction after December 31, 1959.
(B) An organization described in section 401(a) which is
referred to in section 4975(g) (2) or (3) shall not be exempt
from taxation under section 501(a) if it has engaged in a
prohibited transaction after March 1, 1954.
(C) An organization described in section 501(c)(18) shall not
be exempt from taxation under section 501(a) if it has engaged in
a prohibited transaction after December 31, 1969.
(2) Taxable years affected
An organization described in section 501(c) (17) or (18) or
paragraph (1)(B) shall be denied exemption from taxation under
section 501(a) by reason of paragraph (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) Prohibited transactions
For purposes of this section, the term "prohibited transaction"
means any transaction in which an organization subject to the
provisions of this section -
(1) lends any part of its income or corpus, without the receipt
of adequate security and a reasonable rate of interest, to;
(2) pays any compensation, in excess of a reasonable allowance
for salaries or other compensation for personal services actually
rendered, to;
(3) makes any part of its services available on a preferential
basis to;
(4) makes any substantial purchase of securities or any other
property, for more than adequate consideration in money or
money's worth, from;
(5) sells any substantial part of its securities or other
property, for less than an adequate consideration in money or
money's worth, to; or
(6) 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 section 267(c)(4)) 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 through the ownership, directly or
indirectly, of 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of the
corporation.
(c) Future status of organizations denied exemption
Any organization described in section 501(c) (17) or (18) or
subsection (a)(1)(B) which is denied exemption under section 501(a)
by reason of subsection (a) of this section, 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
knowingly again engage in a prohibited transaction, such
organization shall be exempt with respect to taxable years after
the year in which such claim is filed.
[(d) Repealed. Pub. L. 101-508, title XI, Sec. 11801(a)(22), Nov.
5, 1990, 104 Stat. 1388-521]
(e) Special rules
For purposes of subsection (b)(1), a bond, debenture, note, or
certificate or other evidence of indebtedness (hereinafter in this
subsection referred to as "obligation") 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 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 the 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 acquisition of such obligation -
(A) not more than 25 percent 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 50 percent of the aggregate amount referred to
in subparagraph (A) is held by persons independent of the
issuer; and
(3) immediately following acquisition of the obligation, not
more than 25 percent of the assets of the trust is invested in
obligations of persons described in subsection (b).
(f) Loans with respect to which employers are prohibited from
pledging certain assets
Subsection (b)(1) shall not apply to a loan made by a trust
described in section 401(a) to the employer (or to a renewal of
such a loan or, if the loan is repayable upon demand, to a
continuation of such a loan) if the loan bears a reasonable rate of
interest, and if (in the case of a making or renewal) -
(1) the employer is prohibited (at the time of such making or
renewal) by any law 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 assets the value of
which (at such time) represents more than one-half of the value
of all his 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 25
percent of the value of all the assets of the trust.
For purposes of paragraph (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 paragraph (3), the determination as to
whether any amount loaned by the trust to the employer is loaned
without the receipt of adequate security shall be made without
regard to subsection (e).