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B. Expansion of UBIT Exception for Certain Trade Show Income (Sec. 1602 of the Act and sec. 513 of the Code) 2

Prior Law

Under prior and present law, charitable and other tax-exempt organizations are subject to a tax on income from an unrelated trade or business, i.e., a business the conduct of which is not substantially related to the exempt functions of the organization (secs. 511514).

An exception from the tax is provided for income derived by trade associations (sec. 501(c)(6)), or by labor, agricultural, or horticultural organizations (sec. 501(c)(5)), from qualified trade show and convention activities at which members of the sponsoring organization sell products or services (sec. 513(d)).

Reasons for Change

The Congress concluded that it was appropriate to expand the section 513(d) exception for trade show income from the unrelated business income tax.

Explanation of Provision

The Act expands the section 513(d) exception from the unrelated business income tax to cover (1) qualified trade shows or conventions at which suppliers to the sponsoring organization's members sell products or services related to the exempt activities of the organization, and (2) qualified trade show and convention activities of charitable organizations (sec. 501(c)(3)) and social welfare organizations (sec. 501(c)(4)).

Effective Date

The provision is effective for qualified trade show or convention activities conducted in taxable years beginning after the date of enactment (October 22, 1986).

Revenue Effect

The provision is estimated to reduce fiscal year budget receipts by $4 million in 1987, $8 million in 1988, $12 million in 1989, $16 million in 1990, and $22 million in 1991.

2 For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8078-79 (June 20, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), p. 823 (Conference Report).

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C. Tax-Exempt Status for Certain Title-Holding Companies (Sec. 1603 of the Act and new sec. 501(c)(25) of the Code) 3

In general

Prior Law

Under prior and present law, a corporation that is organized for the exclusive purpose of holding title to property, collecting income therefrom, and distributing the income (less expenses) to a taxexempt organization may itself be exempt from Federal income tax (sec. 501(c)(2)). The Internal Revenue Service has taken the position, in a General Counsel Memorandum (G.C.M. 37351, December 20, 1977), that in order to qualify for tax-exempt status as an organization described in section 501(c)(2), a title-holding corporation may distribute income only to one or more related tax-exempt organizations.

A corporation described in section 501(c)(2) is not tax-exempt, under prior and present law, if it has unrelated business taxable income other than income classified as such solely pursuant to sections 512(a)(3)(C), 512(b)(3)(B)(ii) or (13), or 514 (Treas. Reg. sec. 1.501(c)(2)-1(a)).

Unrelated business income tax

Under prior and present law, any income of an exempt organization from debt-financed property generally is subject to the unrelated business income tax (sec. 514). However, under an exception, certain educational institutions and pension plans generally are not subject to the unrelated business income tax on income from certain debt-financed real property (sec. 514(c)(9)), subject to specified limitations (including such limitations as are applicable to pass-through entities pursuant to sec. 514(c)(9)(D)).

Reasons for Change

The Congress concluded that smaller, unrelated tax-exempt organizations should be able to pool investment funds for purposes of investing in real property through a title-holding company, subject to certain requirements and limitations, with generally the same tax treatment as is available to a larger tax-exempt organization having a title-holding subsidiary that is tax-exempt as an organization described in section 501(c)(2).

3 For legislative background of the provision, see: H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1706; S.Rep. 99-313, pp. 885-86; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 824 (Conference Report).

In general

Explanation of Provision

The Act adds a new category of organizations that are generally exempt from Federal income tax (new Code sec. 501(c)(25)), consisting of certain corporations or trusts that are organized for the exclusive purposes of acquiring and holding title to real property, collecting income from such property, and remitting the income therefrom (less expenses) to one or more specified categories of taxexempt organizations that are shareholders of the corporation or beneficiaries of the trust. In addition to satisfying this requirement, an organization is described in section 501(c)(25) only if it has no more than 35 shareholders or beneficiaries and has only one class of stock or beneficial interest.

In order to qualify for exemption under the new category, the corporation or trust also must permit its shareholders or beneficiaries (1) to dismiss, after reasonable notice, the corporation's or trust's investment adviser by majority vote of the shareholders or beneficiaries; and (2) to terminate their interest by (a) selling or exchanging their stock or beneficial interest (subject to Federal or State securities law) to any other eligible organization, as long as such sale or exchange would not increase the total number of shareholders or beneficiaries to more than 35, or (b) redeeming their stock or beneficial interest after providing 90 days' notice to the corporation or trust.

Under the Act, the categories of tax-exempt organizations eligible to hold interests in a section 501(c)(25) title-holding company are (1) a qualified pension, profit-sharing, or stock bonus plan (sec. 401(a)); (2) a governmental pension plan (sec. 414(d)); (3) the United States, a State or political subdivision, or governmental agencies or instrumentalities; (4) tax-exempt charitable, educational, religious, or other organizations described in section 501(c)(3); and (5) other title-holding companies described in section 501(c)(25).

The Act does not amend prior law with respect to title-holding corporations (described in sec. 501(c)(2)) holding title to property for one or more related tax-exempt organizations.

Unrelated business income tax

The Act extends the exception from the unrelated business income tax under the debt-financed property rules for certain real property (sec. 514(c)(9)) to organizations described in new section 501(c)(25). As under prior and present law, this exception is subject to the limitations contained in section 514(c)(9)(B), including the limitations applicable to pass-through entities (sec. 514(c)(9)(D)).

Effective Date

The provision applies for taxable years beginning after December 31, 1986.

Revenue Effect

The provision is estimated to reduce fiscal year budget receipts by $7 million in 1987, $18 million in 1988, $33 million in 1989, $56 million in 1990, and $82 million in 1991.

D. Exception to Membership Organization Deduction Rules (Sec. 1604 of the Act and sec. 277 of the Code) 4

Prior Law

Under prior and present law, a membership organization generally may deduct expenses relating to the furnishing of goods or services to members only from income derived from members or from transactions with members (Code sec. 277). This rule does not apply to certain financial institutions, insurance companies, securities or commodities exchanges, or certain other organizations.

Reasons for Change

The Congress concluded that it was appropriate to provide an additional exception to the section 277 deduction limitation rule for membership organizations that are engaged primarily in the gathering and distribution of news to their members for publication.

Explanation of Provision

The Act provides an additional exception to the section 277 deduction limitation rule for membership organizations that are engaged primarily in the gathering and distribution of news to their members for publication.

Effective Date

The provision is effective for taxable years beginning after the date of enactment (October 22, 1986).

Revenue Effect

The provision is estimated to reduce fiscal year budget receipts by less than $5 million annually.

For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 7793-94 (June 18, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), p. 826 (Conference Report).

E. Tax-Exempt Status for a Technology Transfer Organization (Sec. 1605 of the Act and sec. 501(c)(3) of the Code) 5

Prior Law

In November 1985, the U.S. Tax Court denied tax-exempt status under section 501(c)(3) to the Washington Research Foundation, a nonprofit organization formed to assist the transfer of technology from universities and tax-exempt research institutions to the private sector. The Tax Court held that the organization was not operated exclusively for charitable purposes because its major activity of providing patenting and licensing services was commercial in nature.6

Reasons for Change

The Congress concluded that it was appropriate to provide taxexempt status to the Washington Research Foundation.

Explanation of Provision

The Act provides that an organization incorporated on July 20, 1981, that transfers technology from universities and scientific research organizations (described in secs. 41(e)(6)(A) or (B)) to the private sector is treated as organized and operated exclusively for charitable purposes if it meets certain requirements specified in the Act. The intended beneficiary of this provision is the Washington Research Foundation. No inference is intended as to whether such technology transfer or related purposes or functions of any other organization constitute purposes or functions described in Code sections 501(c)(3) or 170(c).

Effective Date

The provision is effective on the date of enactment (October 22, 1986).

Revenue Effect

The provision is estimated to have a negligible effect on budget receipts.

For legislative background of the provision, see: Senate floor amendment, 132 Cong. Rec. S 8072 (June 20, 1986); and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 826-27 (Conference Report). Washington Research Foundation v. Comm'r, 50 CCH TCM 1457 (1985).

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