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TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1969 AMmE~mrr Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. SECTION REUERRED TO IN OTHR SECTIONS This section is referred to in section 501 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 46-301 of the District of Columbia Code. § 503. Requirements for exemption (a) Denial of exemption to organizations engaged in prohibited transactions (I) 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 sec- tion 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 transac- tion, unless such organization entered into such prohibited transaction with the purpose of diverting corpus or income of the organiza- tion 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 "pro- hibited transaction" means any transaction in which an organization subject to the provisions of thi. 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 secu- rities 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 organi- zation; or a corporation controlled by such cre- ator 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. () 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 re- spect 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 know- ingly 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) Special rule for loans For purposes of the application of subsection (b)(1), in the case of a loan by a trust described in section 401(a), the following rules shall apply with respect to a loan made before March 1, 1954, which would constitute a prohibited transaction if made on or after March 1, 1954: (1) If any part of the loan is repayable prior to December 31, 1955, the renewal of such part of the loan for a period not extending beyond December 31, 1955, on the same terms, shall not be considered a prohibited transaction. (2) If the loan is repayable on demand, the continuation of the loan without the receipt of adequate security and a reasonable rate of interest beyond December 31, 1955, shall be considered a prohibited transaction. (e) Special rules For purposes of subsection (b)(1), a bond, de- benture, 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 se- curities 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 of- fering 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 of- fering circular filed with the Securities and Exchange Commission, and (ii) at which a substantial portion of the same issue is ac- Page 382 § 503