TAX ON UNRELATED BUSINESS INCOME.

SEC. 121. TAX ON UNRELATED BUSINESS INCOME. (a) Organizations Subject to Tax.— (1) Corporate rates.—Section 511(a)(2)(A) (relating to certain organizations subject to tax on unrelated business income at corporate rates) is amended to read as follows: “(A) Organizations described in sections 401(a) and 501(c).—The taxes imposed by paragraph (1) shall apply in the case of any organization (other than a trust described in subsection (b) or an organization described in section 501(c)(1)) which is exempt, except as provided in this part or part II (relating to private foundations), from taxation under this subtitle by reason of section 501(a).” (2) Individual rates.—Section 511(b)(2) (relating to charitable, etc., trusts subject to tax on unrelated business income) is amended to read as follows: “(2) Charitable, etc., trusts subject to tax.—The tax imposed by paragraph (1) shall apply in the case of any trust which is exempt, except as provided in this part or part II (relating to private foundations), from taxation under this subtitle by reason of section 501(a) and which, if it were not for such exemption, would be subject to subchapter J (sec. 641 and following, relating to estates, trusts, beneficiaries, and decedents).” (3) Section 501(c)(2) corporations.—Section 511 (relating to tax on unrelated business income) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(c) Special Rule for Section 501(c)(2) Corporations.—If a corporation described in section 501(c)(2)— “(1) pays any amount of its net income for a taxable year to an organization exempt from taxation under section 501(a) (or 83 Stat. 537 which would pay such an amount but for the fact that the expenses of collecting its income exceed its income), and “(2) such corporation and such organization file a consolidated return for the taxable year, such corporation shall be treated, for purposes of the tax imposed by subsection (a), as being organized and operated for the same purposes as such organization, in addition to the purposes described in section 501(c)(2).” (4) Conforming amendment.—Section 1504 (relating to definitions for purposes of consolidated returns) is amended by adding at the end thereof the following new subsection: “(e) Includible Tax-Exempt Organizations.—Despite the provisions of paragraph (1) of subsection (b), two or more organizations exempt from taxation under section 501, one or more of which is described in section 501(c)(2) and the others of which derive income from such 501(c)(2) organizations, shall be considered as includible corporations for the purpose of the application of subsection (a) to such organizations alone.” (b) Definition of Unrelated Business Taxable Income.— (1) In general.—Section 512(a) (relating to definition of unrelated business taxable income) is amended to read as follows: “(a) Definition.—For purposes of this title— “(1) General rule.—Except as otherwise provided in this subsection, the term ‘unrelated business taxable income’ means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b). “(2) Special rule for foreign organizations.—In the case of an organization described in section 511 which is a foreign organization, the unrelated business taxable income shall be— “(A) its unrelated business taxable income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, plus “(B) its unrelated business taxable income which is effectively connected with the conduct of a trade or business within the United States. “(3) Special rules applicable to organizations described in section 501(c)(7) or (9).— “(A) General rule.—In the case of an organization described in section 501(c)(7) or (9), the term ‘unrelated business taxable income’ means the gross income (excluding any exempt function income), less the deductions allowed by this chapter which are directly connected with the production of the gross income (excluding exempt function income), both computed with the modifications provided in paragraphs (6), (10), (11), and (12) of subsection (b). “(B) Exempt function income.—For purposes of subparagraph (A), the term ‘exempt function income’ means the gross income from dues, fees, charges, or similar amounts paid by members of the organization as consideration for providing such members or their dependents or guests goods, facilities, or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid. Such term also means all income (other than an amount equal to the gross income derived from any unrelated trade or business regularly carried on by such 83 Stat. 538 organization computed as if the organization were subject to paragraph (1)), which is set aside— “(i) for a purpose specified in section 170(c)(4), or “(ii) in the case of an organization described in section 501(c)(9), to provide for the payment of life, sick, accident, or other benefits, including; reasonable costs of administration directly connected with a purpose described in clause (i) or (ii). If during the taxable year, an amount which is attributable to income so set aside is used for a purpose other than that described in clause (i) or (ii), such amount shall be included, under subparagraph (A), in unrelated business taxable income for the taxable year. “(C) Applicability to certain corporations described in section 501(c)(2).—In the case of a corporation described in section 501(c)(2), the income of which is payable to an organization described in section 501(c)(7) or (9), subparagraph (A) shall apply as if such corporation were the organization to which the income is payable. For purposes of the preceding sentence, such corporation shall be treated as having exempt function income for a taxable year only if it files a consolidated return with such organization for such year. “(D) Nonrecognition of gain.—If property used directly in the performance of the exempt function of an organization described in section 501(c)(7) or (9) is sold by such organization, and within a period beginning 1 year before the date of such sale, and ending 3 years after such date, other property is purchased and used by such organization directly in the performance of its exempt function, gain (if any) from such sale shall be recognized only to the extent that such organization’s sales price of the old property exceeds the organization’s cost of purchasing the other property. For purposes of this subparagraph, the destruction in whole or in part, theft, seizure, requisition, or condemnation of property, shall be treated as the sale of such property, and rules similar to the rules provided by subsections (b), (c), (e), and (j) of section 1034 shall apply.” (2) Modifications.— (A) Rents and debt-financed property.—Section 512(b)(3) (relating to modifications with respect to rents from real property) and section 512(b)(4) (relating to modifications with respect to business leases) are amended to read as follows: “(3) In the case of rents— “(A) Except as provided in subparagraph (B), there shall be excluded— “(i) all rents from real property (including property described in section 1245 (a)(3)(C)), and “(ii) all rents from personal property (including for purposes of this paragraph as personal property any property described in section 1245(a)(3)(B)) leased with such real property, if the rents attributable to such personal property are an incidental amount of the total rents received or accrued under the lease, determined at the time the personal property is placed in service. “(B) Subparagraph (A) shall not apply— 83 Stat. 539 “(i) if more than 50 percent of the total rent received or accrued under the lease is attributable to personal property described in subparagraph (A)(ii), or “(ii) if the determination of the amount of such rent depends in whole or in part on the income or profits derived by any person from the property leased (other than an amount based on a fixed percentage or percentages of receipts or sales). “(C) There shall be excluded all deductions directly connected with rents excluded under subparagraph (A). “(4) Notwithstanding paragraph (1), (2), (3), or (5), in the case of debt-financed property (as defined in section 514) there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 514(a)(1), and there shall be allowed, as a deduction, the amount ascertained under section 514(a)(2).” (B) Limit on specific deduction.—Section 512(b)(12) (relating to allowance of specific deduction) is amended to read as follows: “(12) Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a specific deduction of $1,000. In the case of a diocese, province of a religious order, or a convention or association of churches, there shall also be allowed, with respect to each parish, individual church, district, or other local unit, a specific deduction equal to the lower of— “(A) $1,000, or “(B) the gross income derived from any unrelated trade or business regularly carried on by such local unit.” (C) Special rules for certain organizations.—Section 512(b) (relating to modifications in determining unrelated business taxable income) is further amended by adding at the end thereof the following: “(15) Notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the ‘controlled organization’) of which the organization deriving such amounts (in this paragraph called the ‘controlling organization’) has control (as defined in section 368(c)) shall be included as an item of gross income (whether or not the activity from which such amounts are derived represents a trade or business or is regularly carried on) in an amount which bears the same ratio as— “(A) (i) in the case of a controlled organization which is not exempt from taxation under section 501(a), the excess of the amount of taxable income of the controlled organization over the amount of such organization’s taxable income which if derived directly by the controlling organization would not be unrelated business taxable income, or “(ii) in the case of a controlled organization which is exempt from taxation under section 501(a), the amount of unrelated business taxable income of the controlled organization, bears to “(B) the taxable income of the controlled organization (determined in the case of a controlled organization to which subparagraph (A)(ii) applies as if it were not an organization exempt from taxation under section 501(a)), but not less than the amount determined in clause (i) or (ii), as the case may be, of subparagraph (A), 83 Stat. 540 both amounts computed without regard to amounts paid directly or indirectly to the controlling organization. There shall be allowed all deductions directly connected with amounts included in gross income under the preceding sentence. “(16) Except as provided in paragraph (4), in the case of a church, or convention or association of churches, for taxable years beginning before January 1, 1976, there shall be excluded all gross income derived from a trade or business and all deductions directly connected with the carrying on of such trade or business if such trade or business was carried on by such organization or its predecessor before May 27, 1969. “(17) Except as provided in paragraph (4), in the case of a trade or business— “(A) which consists of providing services under license issued by a Federal regulatory agency, “(B) which is carried on by a religious order or by an educational institution (as defined in section 151(e)(4)) maintained by such religious order, and which was so carried on before May 27, 1959, and “(C) less than 10 percent of the net income of which for each taxable year is used for activities which are not related to the purpose constituting the basis for the religious order’s exemption, there shall be excluded all gross income derived from such trade or business and all deductions directly connected with the carrying on of such trade or business, so long as it is established to the satisfaction of the Secretary or his delegate that the rates or other charges for such services are competitive with rates or other charges charged for similar services by persons not exempt from taxation.” (D) Technical amendment.—Section 512(b) (relating to exceptions, additions, and limitations in determining unrelated business taxable income) is amended by striking out so much thereof as precedes paragraph (1) and inserting in lieu thereof the following: “(b) Modifications.—The modifications referred to in subsection (a) are the following:” (3) Related amendment.— (A) Part IX of Subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: “SEC. 277. DEDUCTIONS INCURRED BY CERTAIN MEMBERSHIP ORGANIZATIONS IN TRANSACTIONS WITH MEMBERS. “(a) General Rule.—In the case of a social club or other membership organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (including income derived during such year from institutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attributable to furnishing services, insurance, goods, or other items of value to members paid or incurred in the succeeding taxable year. “(b) Exceptions.—Subsection (a) shall not apply to any organization— “(1) which for the taxable year is subject to taxation under subchapter H or L, 83 Stat. 541 “(2) which has made an election before October 9, 1969, under section 456(c) or which is affiliated with such an organization, or “(3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regulation under the Commodity Exchange Act.” (B) The table of sections for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following: “Sec. 277. Deductions incurred by certain membership organizations in transactions with members.” (4) Local employee association.—Section 513(a)(2) (relating to exception to definition of unrelated trade or business) is amended by striking out “employees; or” and inserting in lieu thereof the following: “employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, 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”. (5) Voluntary employees’ beneficiary associations and certain fraternal societies. (A) In general.—Section 501(c) (relating to list of exempt organizations) is amended by striking out paragraphs (9) and (10) and inserting in lieu thereof the following: “(9) Voluntary employees’ beneficiary 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 payments) to the benefit of any private shareholder or individual. “(10) Domestic fraternal societies, orders, or associations, operating under the lodge system— “(A) the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and “(B) which do not provide for the payment of life, sick, accident, or other benefits.” (B) Conforming amendments.—Section 801(b)(2)(relating to life insurance reserves) is amended— (i) by inserting “and” at the end of subparagraph (A), (ii) by striking out subparagraph (B), and (iii) by redesignating subparagraph (C) as (B). Section 810 (relating to rules for certain reserves) is amended by striking out subsection (e). (6) Certain funded pension trusts.— (A) Exemption from taxation.—Section 501(c) (relating to list of exempt organizations) is amended by adding at the end thereof the following new paragraph: “(18) A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if— “(A) 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 income to be 83 Stat. 542 (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan, “(B) such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees, and “(C) such benefits do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits 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) Conforming amendments.— (i) Section 503(a)(1) (as amended by section 101(j)(7) of this Act) is amended by inserting after subparagraph (B) thereof the following new paragraph: “(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.” (ii) Section 503 (as so amended) is amended by striking out “(c)(17)” each place it appears therein and inserting in lieu thereof “(c)(17) or (18)”. (7) Special rules for feeder organizations.—Section 502 (relating to feeder organizations) is amended to read as follows: “SEC. 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 purposes 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.” (c) Activities Included as Unrelated Trade or Business.— Section 513 (relating to unrelated trade or business) is amended by striking out subsection (c) and inserting in lieu thereof the following new subsection: “(c) Advertising, Etc., Activities.—For purposes of this section, the term ‘trade or business’ includes any activity which is carried on for the production of income from the sale of goods or the performance of services. For purposes 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 83 Stat. 543 profit constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such classification merely because it does not result in profit.” (d) Unrelated Debt-Financed Income.— (1) In general.—Section 514 (relating to business leases) is amended by striking out so much thereof as precedes subsection (b) and inserting in lieu thereof the following: “SEC. 514. UNRELATED DEBT-FINANCED INCOME. “(a) Unrelated Debt-Financed Income and Deductions.—In computing under section 512 the unrelated business taxable income for any taxable year— “(1) Percentage of income taken into account.—There shall be included with respect to each debt-financed property as an item of gross income derived from an unrelated trade or business an amount which is the same percentage (but not in excess of 100 percent) of the total gross income derived during the taxable year from or on account of such property as (A) the average acquisition indebtedness (as defined in subsection (c)(7)) for the taxable year with respect to the property is of (B) the average amount (determined under regulations prescribed by the Secretary or his delegate) of the adjusted basis of such property during the period it is held by the organization during such taxable year. “(2) Percentage of deductions taken into account.—There shall be allowed as a deduction with respect to each debt-financed property an amount determined by applying (except as provided in the last sentence of this paragraph) the percentage derived under paragraph (1) to the sum determined under paragraph (3). The percentage derived under this paragraph shall not be applied with respect to the deduction of any capital loss resulting from the carryback or carryover of net capital losses under section 1212. “(3) Deductions allowable.—The sum referred to in paragraph (2) is the sum of the deductions under this chapter which are directly connected with the debt-financed property or the income therefrom, except that if the debt-financed property is of a character which is subject to the allowance for depreciation provided in section 167, the allowance shall be computed only by use of the straight-line method. “(b) Definition of Debt-Financed Property.— “(1) In general.—For purposes of this section, the term ‘debt-financed property’ means any property which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year (or, if the property was disposed of during the taxable year, with respect to which there was an acquisition indebtedness at any time during the 12-month period ending with the date of such disposition), except that such term does not include— “(A) (i) any property substantially all the use of which is substantially related (aside from the need of the organization for income or funds) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function designated in section 501(c)(3)), or (ii) any property to which clause (i) does not apply, to the extent that its use is so substantially related; 83 Stat. 544 “(B) except in the case of income excluded under section 512(b)(5), any property to the extent that the income from such property is taken into account in computing the gross income of any unrelated trade or business; “(C) any property to the extent that the income from such property is excluded by reason of the provisions of paragraph (7), (8), or (9) of section 512(b) in computing the gross income of any unrelated trade or business; or “(D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section 513(a). For purposes of subparagraph (A), substantially all the use of a property shall be considered to be substantially related to the exercise or performance by an organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 if such property is real property subject to a lease to a medical clinic entered into primarily for purposes which are substantially related (aside from the need of such organization for income or funds or the use it makes of the rents derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501. “(2) Special rule for related uses.—For purposes of applying paragraphs (1)(A), (C), and (D), the use of any property by an exempt organization which is related to an organization shall be treated as use by such organization. “(3) Special rules when land is acquired for exempt use within 10 years. “(A) Neighborhood land.—If an organization acquires real property for the principal purpose of using the land (commencing within 10 years of the time of acquisition) in the manner described in paragraph (1)(A) and at the time of acquisition the property is in the neighborhood of other property owned by the organization which is used in such manner, the real property acquired for such future use shall not be treated as debt-financed property so long as the organization does not abandon its intent to so use the land within the 10-year period. The preceding sentence shall not apply for any period after the expiration of the 10-year period, and shall apply after the first 5 years of the 10-year period only if the organization establishes to the satisfaction of the Secretary or his delegate that it is reasonably certain that the land will be used in the described manner before the expiration of the 10-year period. “(B) Other cases.—If the first sentence of subparagraph (A) is inapplicable only because— “(i) the acquired land is not in the neighborhood referred to in subparagraph (A), or “(ii) the organization (for the period after the first 5 years of the 10-year period) is unable to establish to the satisfaction of the Secretary or his delegate that it is reasonably certain that the land will be used in the manner described in paragraph (1)(A) before the expiration of the 10-year period, but the land is converted to such use by the organization within the 10-year period, the real property (subject to the provisions of subparagraph (D)) shall not be treated as debt-financed property for any period before such conversion. For 83 Stat. 545 purposes of this subparagraph, land shall not be treated as used in the manner described in paragraph (1)(A) by reason of the use made of any structure which was on the land when acquired by the organization. “(C) Limitations.—Subparagraphs (A) and (B)— “(i) shall apply with respect to any structure on the land when acquired by the organization, or to the land occupied by the structure, only if (and so long as) the intended future use of the land in the manner described in paragraph (1)(A) requires that the structure be demolished or removed in order to use the land in such manner; “(ii) shall not apply to structures erected on the land after the acquisition of the land; and “(iii) shall not apply to property subject to a lease which is a business lease as (defined in subsection (f)). “(D) Refund of taxes when subparagraph (b) applies.—If an organization for any taxable year has not used land in the manner to satisfy the actual use condition of subparagraph (B) before the time prescribed by law (including extensions thereof) for filing the return for such taxable year, the tax for such year shall be computed without regard to the application of subparagraph (B), but if and when such use condition is satisfied, the provisions of subparagraph (B) shall then be applied to such taxable year. If the actual use condition of subparagraph (B) is satisfied for any taxable year after such time for filing the return, and if credit or refund of any overpayment for the taxable year resulting from the satisfaction of such use condition is prevented at the close of the taxable year in which the use condition is satisfied, by the operation of any law or rule of law (other than chapter 74, relating to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. Interest on any overpayment for a taxable year resulting from the application of subparagraph (B) after the actual use condition is satisfied shall be allowed and paid at the rate of 4 percent per annum in lieu of 6 percent per annum. “(E) Special rule for churches.—In applying this paragraph to a church or convention or association of churches, in lieu of the 10-year period referred to in subparagraphs (A) and (B) a 15-year period shall be applied, and subparagraphs (A) and (B)(ii) shall apply whether or not the acquired land meets the neighborhood test. “(c) Acquisition Indebtedness.— “(1) General rule.—For purposes of this section, the term ‘acquisition indebtedness’ means, with respect to any debt-financed property, the unpaid amount of— “(A) the indebtedness incurred by the organization in acquiring or improving such property; “(B) the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement; and “(C) the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement 83 Stat. 546 and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement, except that in the case of any taxable year beginning before January 1, 1972, any indebtedness incurred before June 28, 1966, shall not be taken into account. In the case of an organization (other than a church or convention or association of churches) such indebtedness incurred before June 28, 1966, shall be taken into account if such indebtedness constitutes business lease indebtedness (as defined in subsection(g)). “(2) Property acquired subject to mortgage, etc.—For purposes of this subsection— “(A) General rule.—Where property (no matter how acquired) is acquired subject to a mortgage or other similar lien, the amount of the indebtedness secured by such mortgage or lien shall be considered as an indebtedness of the organization incurred in acquiring such property even though the organization did not assume or agree to pay such indebtedness. “(B) Exceptions.—Where property subject to a mortgage is acquired by an organization by bequest or devise, the indebtedness secured by the mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of the acquisition. If an organization acquires property by gift subject to a mortgage which was placed on the property more than 5 years before the gift, which property was held by the donor more than 5 years before the gift, the indebtedness secured by such mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of such gift. This subparagraph shall not apply if the organization, in order to acquire the equity in the property by bequest, devise, or gift, assumes and agrees to pay the indebtedness secured by the mortgage, or if the organization makes any payment for the equity in the property owned by the decedent or the donor. “(3) Extension of obligations.—For purposes of this section, an extension, renewal, or refinancing of an obligation evidencing a pre-existing indebtedness shall not be treated as the creation of a new indebtedness. “(4) Indebtedness incurred in performing exempt purpose.—For purposes of this section, the term ‘acquisition indebtedness’ does not include indebtedness the incurrence of which is inherent in the performance or exercise of the purpose or function constituting the basis of the organization’s exemption, such as the indebtedness incurred by a credit union described in section 501(c)(14) in accepting deposits from its members. “(5) Annuities.—For purposes of this section, the term ‘acquisition indebtedness’ does not include an obligation to pay an annuity which— “(A) is the sole consideration (other than a mortgage to which paragraph (2)(B) applies) issued in exchange for property if, at the time of the exchange, the value of the annuity is less than 90 percent of the value of the property received in the exchange, “(B) is payable over the life of one individual in being at the time the annuity is issued, or over the lives of two individuals in being at such time, and “(C) is payable under a contract which— “(i) does not guarantee a minimum amount of payments or specify a maximum amount of payments, and 83 Stat. 547 “(ii) does not provide for any adjustment of the amount of the annuity payments by reference to the income received from the transferred property or any other property. “(6) Certain federal financing.—For purposes of this section, the term ‘acquisition indebtedness’ does not include an obligation, to the extent that it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, or construction of housing for low and moderate income persons. “(7) Average acquisition indebtedness.—For purposes of this section, the term ‘average acquisition indebtedness’ for any taxable year with respect to a debt-financed property means the average amount, determined under regulations prescribed by the Secretary or his delegate, of the acquisition indebtedness during the period the property is held by the organization during the taxable year, except that for the purpose of computing the percentage of any gain or loss to be taken into account on a sale or other disposition of debt-financed property, such term means the highest amount of the acquisition indebtedness with respect to such property during the 12-month period ending with the date of the sale or other disposition. “(d) Basis of Debt-Financed Property Acquired in Corporate Liquidation.—For purposes of this subtitle, if the property was acquired in a complete or partial liquidation of a corporation in exchange for its stock, the basis of the property shall be the same as it would be in the hands of the transferor corporation, increased by the amount of gain recognized to the transferor corporation upon such distribution and by the amount of any gain to the organization which was included, on account of such distribution, in unrelated business taxable income under subsection (a). “(e) Allocation Rules.—Where debt-financed property is held for purposes described in subsection (b)(1) (A), (B), (C), or (D) as well as for other purposes, proper allocation shall be made with respect to basis, indebtedness, and income and deductions. The allocations required by this section shall be made in accordance with regulations prescribed by the Secretary or his delegate to the extent proper to carry out the purposes of this section.” (2) Related Amendments.— (A) Section 48(a)(4) (relating to definition of section 38 property) is amended by adding at the end thereof the following new sentence: “If the property is debt-financed property (as defined in section 514(c)), the basis or cost of such property for purposes of computing qualified investment under section 46(c) shall include only that percentage of the basis or cost which is the same percentage as is used under section 514(b), for the year the property is placed in service, in computing the amount of gross income to be taken into account during such taxable year with respect to such property.” (B) The second sentence of section 681(a) (relating to limitation on charitable deduction of taxable trusts) is amended by striking out the words “certain leases” and inserting in lieu thereof “certain property acquired with borrowed funds”. (C) Section 1443(a) (relating to withholding of tax on payments to foreign tax-exempt organizations) is amended by striking out “rents” and inserting in lieu thereof “income”. 83 Stat. 548 (3) Technical and conforming amendments.— (A) Subsections (b), (c), and (d) of section 514 (relating to business leases) are relettered as subsections (f), (g), and (h), respectively. (B) New subsection (f)(1) (old subsection (b)(1), relating to general rule for definition of business lease) is amended by striking out “subsection (c)” and inserting in lieu thereof “subsection (g)”. (C) The table of sections for part III of subchapter F of chapter 1 (as redesignated by section 101(a) of this Act) is amended by striking out— “Sec. 514. Business leases.” and inserting in lieu thereof the following: “Sec. 514. Unrelated debt-financed income.” (e) Returns.— (1) In General.—Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new section: “SEC. 6050. RETURNS RELATING TO CERTAIN TRANSFERS TO EXEMPT ORGANIZATIONS. “(a) General Rule.—On or before the 90th day after the transfer of income producing property, the transferor shall make a return in compliance with the provisions of subsection (b) if the transferee is known by the transferor to be an organization referred to in section 511 (a) or (b) and the property (without regard to any lien) has a fair market value in excess of $50,000. “(b) Form and Contents of Returns.—The return required by subsection (a) shall be in such form and shall set forth, in respect of the transfer, such information as the Secretary or his delegate prescribes by regulations as necessary for carrying out the provisions of the income tax laws.” (2) Technical Amendment.—The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following: “Sec. 6050. Returns relating to certain transfers to exempt organizations.” (f) Restriction on Examination of Churches.—Section 7605 (relating to time and place of examination) is amended by adding at the end thereof the following new subsection: “(c) Restriction on Examination of Churches.—No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to tax under part III of subchapter F of chapter 1 of this title (sec. 511 and following, relating to taxation of business income of exempt organizations) unless the Secretary or his delegate (such officer being no lower than a principal internal revenue officer for an internal revenue region) believes that such organization may be so engaged and so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.” 83 Stat. 549 (g) Effective Dates.—The amendments made by this section (other than by subsections (b)(3) and (e)) shall apply to taxable years beginning after December 31, 1969. The amendments made by subsection (b)(3) shall apply to taxable years beginning after December 31, 1970. The amendments made by subsection (e) shall apply with respect to transfers of property after December 31, 1969. Where an organization makes a bargain purchase of property before October 9, 1969, which is subject to a mortgage which was placed on the property more than 5 years before the purchase, and the organization paid the seller total amount no greater than the amount of the seller’s cost (including attorneys’ fees) directly related to the transfer of such property to the organization (but in any event no more than 10 percent of the value of the seller’s equity in the property), the indebtedness secured by such mortgage shall not be treated, notwithstanding the amendments made by subsection (d)(1), as acquisition indebtedness for purposes of section 514(c)(1) of the Internal Revenue Code of 1954 during a period of 10 years following the date of the transaction.