U.S Code last checked for updates: May 03, 2024
§ 503.
Requirements for exemption
(a)
Denial of exemption to organizations engaged in prohibited transactions
(1)
General rule
(2)
Taxable years affected
(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
[(d)
Repealed. Pub. L. 101–508, title XI, § 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).
(Aug. 16, 1954, ch. 736, 68A Stat. 166; Pub. L. 85–866, title I, § 30(a), (b), Sept. 2, 1958, 72 Stat. 1629, 1630; Pub. L. 86–667, § 2, July 14, 1960, 74 Stat. 535; Pub. L. 87–792, § 6, Oct. 10, 1962, 76 Stat. 827; Pub. L. 91–172, title I, §§ 101(j)(7)–(14), 121(b)(6)(B), Dec. 30, 1969, 83 Stat. 527, 542; Pub. L. 93–406, title II, § 2003(b), Sept. 2, 1974, 88 Stat. 978; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 101–508, title XI, § 11801(a)(22), Nov. 5, 1990, 104 Stat. 1388–521; Pub. L. 113–295, div. A, title II, § 221(a)(63), Dec. 19, 2014, 128 Stat. 4048.)
cite as: 26 USC 503