Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/fed/irc28.asc

Text File | 1993-08-24 | 57KB | 1,023 lines

502. Feeder organizations
    (a) General rule. -- An organization operated for the
primary purpose of carrying on a trade or business for profit
shall not be exempt from taxation under section 501 on the ground
that all of its profits are payable to one or more organizations
exempt from taxation under section 501.
    (b) Special rule. -- For puposes of this section, the term
"trade or business" shall not include --
    (1) the deriving of rents which would be excluded under
section 512(b)(3), if section 512 applied to the organization,
    (2) any trade or business in which substantially all the
work in carrying on such trade or business is performed for the
organization without compensation, or
    (3) any trade or business which is the selling of
merchandise, substantially all of which has been received by the
organization as gifts or contributions.

503.  Requirements for exemption
    (a) Denial of exemption to organizations engaged in
prohibited trasactions. --
    (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 trasaction 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) lenda 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 otherr 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 ownerwhip, 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 of
more of the total value of shares of all classes of stock of the
corporation.
    (c) Future status of oganizations denied exemption. -- Any
organization described in section 501(c)(17) or (18) or
subsection (a)(1)(B) which is denied exemption under 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,
(Section)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
recept 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 py 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 eimployers 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 reused 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).

504.  Status after organization ceas