"Taxable year beginning January 1, 1950, and ending December 31, 1950

"Taxable years (other than the calendar year 1950) beginning before October 1, 1950"

Sec. 301(a), RA of 1950, amended Supplement U of Chapter 1, IRC, to read as follows:

"Supplement U-Taxation of Business Income of Certain Section 101 Organizations

"SEC. 421. IMPOSITION OF TAX.

"(a) IN GENERAL.-There shall be levied, collected, and paid for each taxable year beginning after December 31, 1950

"(1) upon the supplement U net income (as defined in subsection (c)) of every organization described in subsection (b) (1), a normal tax of 25 per centum of the supplement U net income, and a surtax of 20 per centum of the amount of the supplement U net income in excess of $25,000.

"(2) upon the supplement U net income of every trust described in subsection (b) (2), a normal tax computed at the rate and in the manner provided in section 11 and a surtax computed at the rates and in the manner provided in section 12 (b). In making such computations for the purposes of this section, the term 'the amount of the net income in excess of the credits against net income provided in section 25' as used in section 11 shall be read as 'the amount of the supplement U net income' and the term 'surtax net income' as used in section 12 (b) shall be read as 'supplement U net income'.

"(b) ORGANIZATIONS SUBJECT TO TAX.—

"(1) ORGANIZATIONS TAXABLE AS CORPORATIONS.-The taxes imposed by subsection (a) (1) shall apply in the case of any organization (other than a church, a convention or association of churches, or a trust described in paragraph (2)) which is exempt, except as provided in this supplement, from taxation under this chapter by reason of paragraph (1), (6), or (7) of section 101. Such taxes shall also apply in the case of a corporation described in section 101 (14) if the income is payable to an organization which itself is subject to the tax imposed by subsection (a) or to a church or to a convention or association of churches.

"(2) TRUSTS TAXABLE AT INDIVIDUAL RATES.-The taxes imposed by subsection (a) (2) shall apply in the case of any trust which is exempt, except as provided in this supplement, from taxation under this chapter by reason of paragraph (6) of section 101 and which, if it were not for such exemption, would be subject to the provisions of supplement E.

"(c) DEFINITION OF SUPPLEMENT U NET INCOME.-The term 'supplement U net income' of an organization means the amount by which its unrelated business net income (as defined in section 422) exceeds $1,000.

"(d) FOREIGN ORGANIZATIONS.-The supplement U net income of an organization described in subsection (b) (1) or (2) which is a foreign organization shall be its supplement U net income derived from sources within the United States determined in accordance with the rules of section 119 and sections 212, 213 (a), 231 (c) and (d), and 232 (a).

"SEC. 422. UNRELATED BUSINESS NET INCOME.

"(a) DEFINITION.-The term 'unrelated business net income' means the gross income derived by any organization from any unrelated trade or business (as defined in subsection (b)) regularly carried on by it, less the deductions allowed by section 23 which are directly connected with the carrying on of such trade or business, subject to the following exceptions, additions, and limitations:

"(1) There shall be excluded all dividends, interest, and annuities, and all deductions directly connected with such income.

"(2) There shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or net income from the property, and all deductions directly connected with such income.

"(3) There shall be excluded all rents from real property (including personal property leased with the real property), and all deductions directly connected with such rents.

"(4) Notwithstanding paragraph (3), in the case of a supplement U lease (as defined in section 423 (a)) there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 423 (d) (1) and there shall be allowed, as a deduction, the amount ascertained under section 423 (d) (2).

"(5) There shall be excluded all gains or losses from the sale, exchange, or other disposition of property other than (A) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, or (B) property held primarily for sale to customers in the ordinary course of the trade or business. This paragraph shall not apply with respect to the cutting of timber which is considered, upon the application of section 117 (k) (1), as a sale or exchange of such timber.

"(6) The net operating loss deduction provided in section 23 (s) shall be allowed, except that—

"(A) the net operating loss for any taxable year, the amount of the net operating loss carry-back or carry-over to any taxable year, and the net operating loss deduction for any

1950 POCKET SUPPLEMENT

71

taxable year shall be determined under section 122 without
taking into account any amount of income or deduction which
is excluded under this supplement in computing the unrelated
business net income; and

"(B) the terms 'preceding taxable year' and 'preceding
taxable years' as used in section 122 shall not include any
taxable year for which the organization was not subject to
the provisions of this supplement.

"(7) There shall be excluded all income derived from research for (A) the United States, or any of its agencies or instrumentalities, or (B) any State or political subdivision thereof; and there shall be excluded all deductions directly connected with such income.

66

"(8) (A) In the case of a college, university, or hospital, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income.

"(B) In the case of an organization operated primarily for the purposes of carrying on fundamental research the results of which are freely available to the general public, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income.

"(9) (A) In the case of any organization described in section 421 (b) (1), the so-called 'charitable contribution' deduction allowed by section 23 (q) shall be allowed (whether or not directly connected with the carrying on of the trade or business), but shall not exceed 5 per centum of the unrelated business net income computed without the benefit of this subparagraph.

"(B) In the case of any trust described in section 421 (b) (2),
the so-called 'charitable contribution' deduction allowed by sec-
tion 23 (0) shall be allowed (whether or not directly connected
with the carrying on of the trade or business), and for such
purpose a distribution made by the trust to a beneficiary described
in section 23 (o) shall be considered as a gift or contribution.
The deduction allowed by this subparagraph shall not exceed 15
per centum of the unrelated business net income computed with-
out the benefit of this subparagraph.

If a trade or business regularly carried on by a partnership of which
an organization is a member is an unrelated trade or business with
respect to such organization, such organization in computing its unre-
lated business net income shall, subject to the exceptions, additions,
and limitations contained in paragraphs (1) through (9) above,
include its share (whether or not distributed) of the gross income
of the partnership from such unrelated trade or business and its share
of the partnership deductions directly connected with such gross
income. If the taxable year of the organization is different from that
of the partnership, the amounts to be so included or deducted in com-
puting the unrelated business net income shall be based upon the
income and deductions of the partnership for any taxable year of the
partnership (whether beginning on, before, or after January 1, 1951)
ending within or with the taxable year of the organization.

"(b) UNRELATED TRADE OR BUSINESS.-The term 'unrelated trade
or business' means, in the case of any organization subject to the tax

1

imposed by section 421 (a), any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits 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 101, except that such term shall not include any trade or business

"(1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or

"(2) which is carried on, in the case of an organization described in section 101 (6), by the organization primarily for the convenience of its members, students, patients, officers, or employees; or

(3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.

The term 'unrelated trade or business' means, in the case of a trust computing its unrelated business net income under this section for the purposes of section 162 (g) (1), any trade or business regularly carried on by such trust or by a partnership of which it is a member. "SEC. 423. SUPPLEMENT U LEASE.

"(a) DEFINITION OF SUPPLEMENT U LEASE.-The term 'supplement U lease' means a lease for a term of more than five years of real property by an organization (or by a partnership of which it is a member), if at the close of the lessor's taxable year there is a supplement U lease indebtedness (as defined in subsection (b)) with respect to such property. In computing the term of a lease which contains an option for renewal or extension, the term of such lease shall be considered as including any period for which such option may be exercised; and the term of any lease made pursuant to an exercise of such option shall include the period during which the prior lease was in effect. If real property is acquired subject to a lease, the term of such lease shall be considered to begin on the date of such acquisition. No lease shall be considered a supplement U lease if (A) such lease is 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 101, or (B) the lease is of premises in a building primarily designed for occupancy, and occupied, by the organization. If a lease for more than five years to a tenant is for only a portion of the real property, and space in the real property is rented during the taxable year under a lease for not more than five years to any other tenant of the organization, leases of the real property for more than five years shall be considered as supplement U leases during the taxable year only if

"(1) the rents derived from the real property during the taxable year under such leases represent 50 per centum or more of the total rents derived during the taxable year from the real property; or the area of the premises occupied under such leases represents, at any time during the taxable year, 50 per centum or