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TITLE 26-INTERNAL REVENUE CODE 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 con- duct of a trade or business within the United States. (3) Special rules applicable to organizations de- scribed 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 (exclud- ing exempt function income), both comput- ed with the modifications provided in para- graphs (6), (10), (11), and (12) of subsection (b). For purposes of the preceding sentence, the deductions provided by sections 243, 244, and 245 (relating to dividends received by corporations) shall be treated as not di- rectly connected with the production of gross income. (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 or- ganization 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 unrelat- ed trade or business regularly carried on by such organization computed as if the orga- nization 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 de- scribed 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 (it). 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 de- scribed 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 sec- tion 501(c)(7) cr (9), subparagraph (A) shall apply as if such corporation were the orga- nization 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 perfor- mance of the exempt function of an organi- zation 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 perfor- mance of its exmept 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 orga- nization's cost of purchasing the other property. For purposes of this subpara- graph, 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. (4) Special rule applicable to organizations de- scribed in section 501(c)(19) In the case of an organization described in section 501(c)(19), the term "unrelated busi- ness taxable income" does not include any amount attributable to payments for life, sick, accident, or health insurance with re- spect to members of such organizations or their dependents which is set aside for the purpose of providing for the payment of in- surance benefits or for a purpose specified in section 170(c)(4). If an amount set aside under the preceding sentence is used during the taxable year for a purpose other than a purpose described in the preceding sentence, such amount shall be included, under para- graph (1), in unrelated business taxable income for the taxable year. (b) Modifications The modifications referred to in subsection (a) are the following: (1) There shall be excluded all dividends, in- terest, and annuities, and all deductions di- rectly connected with such income. (2) There shall be excluded all royalties (in- cluding overriding royalties) whether mea- sured by production or by gross or taxable income from the property, and all deductions directly connected with such income. (3) In the case of rents- (A) Except as provided in subparagraph (B), there shall be excluded- (I) all rents from real property (includ- ing property described in section 1245(a)(3)(C)), and (ii) all rents from personal property (in- cluding 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 ac- crued under the lease, determined at the time the personal property is placed in service. (B) Subparagraph (A) shall not apply- (i) if more than 50 percent of the total rent received or accrued under the lease is Page 391 § 512