26 U.S.C. § 513 — Unrelated trade or business

Page 1710 TITLE 26—INTERNAL REVENUE CODE § 513 Amendment by section 1951(b)(8)(A) of Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1951(d) of Pub. L. 94–455, set out as a note under section 72 of this title. Pub. L. 94–396, § 1(b), Sept. 3, 1976, 90 Stat. 1201, pro- vided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to gain from op- tions which lapse or terminate on or after January 1, 1976, in taxable years ending on or after such date.’’ EFFECTIVE DATE OF 1972 AMENDMENT Amendment by Pub. L. 92–418 applicable to taxable years beginning after Dec. 31, 1969, see section 1(c) of Pub. L. 92–418, set out as a note under section 501 of this title. EFFECTIVE DATE OF 1969 AMENDMENT 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 a note under section 511 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89–809 applicable with respect to taxable years beginning after Dec. 31, 1966, see sec- tion 104(n) of Pub. L. 89–809, set out as a note under sec- tion 11 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Pub. L. 88–380, § 2, July 17, 1964, 78 Stat. 333, provided that: ‘‘The amendment made by the first section of this Act [amending this section] shall apply with respect to taxable years beginning after December 31, 1963.’’ EFFECTIVE DATE OF 1958 AMENDMENT Pub. L. 85–367, § 1(b), Apr. 7, 1958, 72 Stat. 80, provided that: ‘‘The amendment made by subsection (a) [amend- ing this section] shall apply to taxable years of trusts beginning after December 31, 1955.’’ SAVINGS PROVISION For provisions that nothing in amendment by section 401(b)(21)(E)–(H) of Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. Pub. L. 108–357, title VII, § 702(c), Oct. 22, 2004, 118 Stat. 1546, provided that: ‘‘Nothing in the amendments made by this section [amending this section and sec- tion 514 of this title] shall affect any duty, liability, or other requirement imposed under any other Federal or State law. Notwithstanding section 128(b) of the Com- prehensive Environmental Response, Compensation, and Liability Act of 1980 [42 U.S.C. 9628(b)], a certifi- cation provided by the Environmental Protection Agency or an appropriate State agency (within the meaning of section 198(c)(4) of the Internal Revenue Code of 1986) shall not affect the liability of any person under section 107(a) of such Act [42 U.S.C. 9607(a)].’’ For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. Pub. L. 94–455, title XIX, § 1951(b)(8)(B), Oct. 4, 1976, 90 Stat. 1839, provided that: ‘‘Notwithstanding subpara- graph (A) [amending this section], income received in a taxable year beginning after December 31, 1975, shall be excluded from gross income in determining unrelated business taxable income, if such income would have been excluded by paragraph (13) or (14) of section 512(b) if received in a taxable year beginning before such date. Any deductions directly connected with income ex- cluded under the preceding sentence in determining un- related business taxable income shall also be excluded for such purpose.’’ PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. § 513. Unrelated trade or business (a) General rule The term ‘‘unrelated trade or business’’ means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substan- tially related (aside from the need of such orga- nization for income or funds or the use it makes of the profits derived) to the exercise or per- formance by such organization of its charitable, educational, or other purpose or function consti- tuting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or per- formance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business— (1) in which substantially all the work in carrying on such trade or business is per- formed for the organization without com- pensation; or (2) which is carried on, in the case of an or- ganization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B), by the organization pri- marily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the orga- nization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing fa- cilities, or by snack bars, for the convenience of its members at their usual places of em- ployment; or (3) which is the selling of merchandise, sub- stantially all of which has been received by the organization as gifts or contributions. (b) Special rule for trusts The term ‘‘unrelated trade or business’’ means, in the case of— (1) a trust computing its unrelated business taxable income under section 512 for purposes of section 681; or (2) a trust described in section 401(a), or sec- tion 501(c)(17), which is exempt from tax under section 501(a); any trade or business regularly carried on by such trust or by a partnership of which it is a member. (c) Advertising, etc., activities For purposes of this section, the term ‘‘trade or business’’ includes any activity which is car- Page 1711 TITLE 26—INTERNAL REVENUE CODE § 513 ried on for the production of income from the sale of goods or the performance of services. For purposes of the preceding sentence, an activity does not lose identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the or- ganization. Where an activity carried on for profit constitutes an unrelated trade or busi- ness, no part of such trade or business shall be excluded from such classification merely be- cause it does not result in profit. (d) Certain activities of trade shows, State fairs, etc. (1) General rule The term ‘‘unrelated trade or business’’ does not include qualified public entertainment ac- tivities of an organization described in para- graph (2)(C), or qualified convention and trade show activities of an organization described in paragraph (3)(C). (2) Qualified public entertainment activities For purposes of this subsection— (A) Public entertainment activity The term ‘‘public entertainment activity’’ means any entertainment or recreational ac- tivity of a kind traditionally conducted at fairs or expositions promoting agricultural and educational purposes, including, but not limited to, any activity one of the purposes of which is to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. (B) Qualified public entertainment activity The term ‘‘qualified public entertainment activity’’ means a public entertainment ac- tivity which is conducted by a qualifying or- ganization described in subparagraph (C) in— (i) conjunction with an international, national, State, regional, or local fair or exposition, (ii) accordance with the provisions of State law which permit the activity to be operated or conducted solely by such an organization, or by an agency, instrumen- tality, or political subdivision of such State, or (iii) accordance with the provisions of State law which permit such an organiza- tion to be granted a license to conduct not more than 20 days of such activity on pay- ment to the State of a lower percentage of the revenue from such licensed activity than the State requires from organizations not described in section 501(c)(3), (4), or (5). (C) Qualifying organization For purposes of this paragraph, the term ‘‘qualifying organization’’ means an organi- zation which is described in section 501(c) (3), (4), or (5) which regularly conducts, as one of its substantial exempt purposes, an agricultural and educational fair or expo- sition. (3) Qualified convention and trade show activi- ties (A) Convention and trade show activities The term ‘‘convention and trade show ac- tivity’’ means any activity of a kind tradi- tionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, indus- try products or services, or to educate per- sons engaged in the industry in the develop- ment of new products and services or new rules and regulations affecting the industry. (B) Qualified convention and trade show ac- tivity The term ‘‘qualified convention and trade show activity’’ means a convention and trade show activity carried out by a quali- fying organization described in subpara- graph (C) in conjunction with an inter- national, national, State, regional, or local convention, annual meeting, or show con- ducted by an organization described in sub- paragraph (C) if one of the purposes of such organization in sponsoring the activity is the promotion and stimulation of interest in, and demand for, the products and serv- ices of that industry in general or to educate persons in attendance regarding new devel- opments or products and services related to the exempt activities of the organization, and the show is designed to achieve such purpose through the character of the exhib- its and the extent of the industry products displayed. (C) Qualifying organization For purposes of this paragraph, the term ‘‘qualifying organization’’ means an organi- zation described in section 501(c)(3), (4), (5), or (6) which regularly conducts as one of its substantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or segment of such industry or which educates persons in attendance regarding new developments or products and services related to the ex- empt activities of the organization. (4) Such activities not to affect exempt status An organization described in section 501(c) (3), (4), or (5) shall not be considered as not en- titled to the exemption allowed under section 501(a) solely because of qualified public enter- tainment activities conducted by it. (e) Certain hospital services In the case of a hospital described in section 170(b)(1)(A)(iii), the term ‘‘unrelated trade or business’’ does not include the furnishing of one or more of the services described in section 501(e)(1)(A) to one or more hospitals described in section 170(b)(1)(A)(iii) if— (1) such services are furnished solely to such hospitals which have facilities to serve not more than 100 inpatients; Page 1712 TITLE 26—INTERNAL REVENUE CODE § 513 (2) such services, if performed on its own be- half by the recipient hospital, would con- stitute activities in exercising or performing the purpose or function constituting the basis for its exemption; and (3) such services are provided at a fee or cost which does not exceed the actual cost of pro- viding such services, such cost including straight line depreciation and a reasonable amount for return on capital goods used to provide such services. (f) Certain bingo games (1) In general The term ‘‘unrelated trade or business’’ does not include any trade or business which con- sists of conducting bingo games. (2) Bingo game defined For purposes of paragraph (1), the term ‘‘bingo game’’ means any game of bingo— (A) of a type in which usually— (i) the wagers are placed, (ii) the winners are determined, and (iii) the distribution of prizes or other property is made, in the presence of all persons placing wagers in such game, (B) the conducting of which is not an ac- tivity ordinarily carried out on a commer- cial basis, and (C) the conducting of which does not vio- late any State or local law. (g) Certain pole rentals In the case of a mutual or cooperative tele- phone or electric company, the term ‘‘unrelated trade or business’’ does not include engaging in qualified pole rentals (as defined in section 501(c)(12)(D)). (h) Certain distributions of low cost articles without obligation to purchase and ex- changes and rentals of member lists (1) In general In the case of an organization which is de- scribed in section 501 and contributions to which are deductible under paragraph (2) or (3) of section 170(c), the term ‘‘unrelated trade or business’’ does not include— (A) activities relating to the distribution of low cost articles if the distribution of such articles is incidental to the solicitation of charitable contributions, or (B) any trade or business which consists of— (i) exchanging with another such organi- zation names and addresses of donors to (or members of) such organization, or (ii) renting such names and addresses to another such organization. (2) Low cost article defined For purposes of this subsection— (A) In general The term ‘‘low cost article’’ means any ar- ticle which has a cost not in excess of $5 to the organization which distributes such item (or on whose behalf such item is distrib- uted). (B) Aggregation rule If more than 1 item is distributed by or on behalf of an organization to a single dis- tributee in any calendar year, the aggregate of the items so distributed in such calendar year to such distributee shall be treated as 1 article for purposes of subparagraph (A). (C) Indexation of $5 amount In the case of any taxable year beginning in a calendar year after 1987, the $5 amount in subparagraph (A) shall be increased by an amount equal to— (i) $5, multiplied by (ii) the cost-of-living adjustment deter- mined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting ‘‘calendar year 1987’’ for ‘‘cal- endar year 2016’’ in subparagraph (A)(ii) thereof. (3) Distribution which is incidental to the so- licitation of charitable contributions de- scribed For purposes of this subsection, any dis- tribution of low cost articles by an organiza- tion shall be treated as a distribution inci- dental to the solicitation of charitable con- tributions only if— (A) such distribution is not made at the re- quest of the distributee, (B) such distribution is made without the express consent of the distributee, and (C) the articles so distributed are accom- panied by— (i) a request for a charitable contribu- tion (as defined in section 170(c)) by the distributee to such organization, and (ii) a statement that the distributee may retain the low cost article regardless of whether such distributee makes a chari- table contribution to such organization. (i) Treatment of certain sponsorship payments (1) In general The term ‘‘unrelated trade or business’’ does not include the activity of soliciting and re- ceiving qualified sponsorship payments. (2) Qualified sponsorship payments For purposes of this subsection— (A) In general The term ‘‘qualified sponsorship payment’’ means any payment made by any person en- gaged in a trade or business with respect to which there is no arrangement or expecta- tion that such person will receive any sub- stantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person’s trade or busi- ness in connection with the activities of the organization that receives such payment. Such a use or acknowledgement does not in- clude advertising such person’s products or services (including messages containing qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such products or services). (B) Limitations (i) Contingent payments The term ‘‘qualified sponsorship pay- ment’’ does not include any payment if the Page 1713 TITLE 26—INTERNAL REVENUE CODE § 513 amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public ex- posure to one or more events. (ii) Safe harbor does not apply to periodi- cals and qualified convention and trade show activities The term ‘‘qualified sponsorship pay- ment’’ does not include— (I) any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in regularly scheduled and printed material published by or on behalf of the payee organization that is not related to and primarily dis- tributed in connection with a specific event conducted by the payee organiza- tion, or (II) any payment made in connection with any qualified convention or trade show activity (as defined in subsection (d)(3)(B)). (3) Allocation of portions of single payment For purposes of this subsection, to the ex- tent that a portion of a payment would (if made as a separate payment) be a qualified sponsorship payment, such portion of such payment and the other portion of such pay- ment shall be treated as separate payments. (j) Debt management plan services The term ‘‘unrelated trade or business’’ in- cludes the provision of debt management plan services (as defined in section 501(q)(4)(B)) by any organization other than an organization which meets the requirements of section 501(q). (Aug. 16, 1954, ch. 736, 68A Stat. 172; Pub. L. 86–667, § 4, July 14, 1960, 74 Stat. 536; Pub. L. 91–172, title I, § 121(b)(4), (c), Dec. 30, 1969, 83 Stat. 541, 542; Pub. L. 94–455, title XIII, §§ 1305(a), 1311(a), Oct. 4, 1976, 90 Stat. 1716, 1729; Pub. L. 95–502, title III, § 301(a), Oct. 21, 1978, 92 Stat. 1702; Pub. L. 96–605, title I, § 106(b), Dec. 28, 1980, 94 Stat. 3524; Pub. L. 99–514, title XVI, §§ 1601(a), 1602(a), (b), Oct. 22, 1986, 100 Stat. 2766, 2767; Pub. L. 101–508, title XI, § 11101(d)(1)(G), Nov. 5, 1990, 104 Stat. 1388–405; Pub. L. 103–66, title XIII, § 13201(b)(3)(H), Aug. 10, 1993, 107 Stat. 459; Pub. L. 105–34, title IX, § 965(a), Aug. 5, 1997, 111 Stat. 893; Pub. L. 109–280, title XII, § 1220(b), Aug. 17, 2006, 120 Stat. 1088; Pub. L. 115–97, title I, § 11002(d)(1)(Z), Dec. 22, 2017, 131 Stat. 2060.) INFLATION ADJUSTED ITEMS FOR CERTAIN YEARS For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under section 1 of this title. Editorial Notes AMENDMENTS 2017—Subsec. (h)(2)(C)(ii). Pub. L. 115–97 substituted ‘‘for ‘calendar year 2016’ in subparagraph (A)(ii)’’ for ‘‘for ‘calendar year 1992’ in subparagraph (B)’’. 2006—Subsec. (j). Pub. L. 109–280, which directed the addition of subsec. (j) to section 513, without specifying the act to be amended, was executed by making the ad- dition to this section, which is section 513 of the Inter- nal Revenue Code of 1986, to reflect the probable intent of Congress. 1997—Subsec. (i). Pub. L. 105–34 added subsec. (i). 1993—Subsec. (h)(2)(C)(ii). Pub. L. 103–66 substituted ‘‘calendar year 1992’’ for ‘‘calendar year 1989’’. 1990—Subsec. (h)(2)(C)(ii). Pub. L. 101–508 inserted be- fore period at end ‘‘, by substituting ‘calendar year 1987’ for ‘calendar year 1989’ in subparagraph (B) there- of’’. 1986—Subsec. (d)(3)(B). Pub. L. 99–514, § 1602(a), in- serted ‘‘or to educate persons in attendance regarding new developments or products and services related to the exempt activities of the organization’’. Subsec. (d)(3)(C). Pub. L. 99–514, § 1602(b), substituted ‘‘section 501(c)(3), (4), (5), or (6)’’ for ‘‘section 501(c)(5) or (6)’’ and inserted ‘‘or which educates persons in attend- ance regarding new developments or products and serv- ices related to the exempt activities of the organiza- tion’’. Subsec. (h). Pub. L. 99–514, § 1601(a), added subsec. (h). 1980—Subsec. (g). Pub. L. 96–605 added subsec. (g). 1978—Subsec. (f). Pub. L. 95–502 added subsec. (f). 1976—Subsec. (d). Pub. L. 94–455, § 1305(a), added sub- sec. (d). Subsec. (e). Pub. L. 94–455, § 1311(a), added subsec. (e). 1969—Subsec. (a)(2). Pub. L. 91–172, § 121(b)(4), inserted reference to local associations of employees described in section 501(c)(4) of this title and organized before May 27, 1969. Subsec. (c). Pub. L. 91–172, § 121(c), substituted ‘‘Ad- vertising, etc., activities’’ for ‘‘Special rule for certain publishing businesses’’, in heading, and, in text, sub- stituted provisions extending definition of trade or business to include any activity carried on for the pro- duction of income from the sale of goods or the per- formance of services, for provisions referring to pub- lishing businesses carried on by an organization during a taxable year beginning before Jan. 1, 1953. 1960—Subsec. (b)(2). Pub. L. 86–667 included trusts de- scribed in section 501(c)(17). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 11002(e) of Pub. L. 115–97, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2006 AMENDMENT Amendment by Pub. L. 109–280 applicable to taxable years beginning after Aug. 17, 2006, with transition rule for existing organizations, see section 1220(c) of Pub. L. 109–280, set out as a note under section 501 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title IX, § 965(b), Aug. 5, 1997, 111 Stat. 894, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to payments solicited or received after December 31, 1997.’’ EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable to taxable years beginning after Dec. 31, 1992, see section 13201(c) of Pub. L. 103–66, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 applicable to taxable years beginning after Dec. 31, 1990, see section 11101(e) of Pub. L. 101–508, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title XVI, § 1601(b), Oct. 22, 1986, 100 Stat. 2767, provided that: ‘‘The amendment made by this section [amending this section] shall apply to dis- tributions of low cost articles and exchanges and rent- Page 1714 TITLE 26—INTERNAL REVENUE CODE § 514 als of member lists after the date of the enactment of this Act [Oct. 22, 1986].’’ Pub. L. 99–514, title XVI, § 1602(c), Oct. 22, 1986, 100 Stat. 2768, provided that: ‘‘The amendments made by this section [amending this section] shall apply to ac- tivities in taxable years beginning after the date of the enactment of this Act [Oct. 22, 1986].’’ EFFECTIVE DATE OF 1980 AMENDMENT Pub. L. 96–605, title I, § 106(c)(2), Dec. 29, 1980, 94 Stat. 3524, provided that: ‘‘The amendment made by sub- section (b) [amending this section] shall apply to tax- able years beginning after December 31, 1969.’’ EFFECTIVE DATE OF 1978 AMENDMENT Pub. L. 95–502, title III, § 301(b), Oct. 21, 1978, 92 Stat. 1702, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to tax- able years beginning after December 31, 1969.’’ EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title XIII, § 1305(b), Oct. 4, 1976, 90 Stat. 1717, provided that: ‘‘The amendments made by sub- section (a) [amending this section] apply to qualified public entertainment activities in taxable years begin- ning after December 31, 1962, and to qualified conven- tion and trade show activities in taxable years begin- ning after the date of enactment of this Act [Oct. 4, 1976].’’ Pub. L. 94–455, title XIII, § 1311(b), Oct. 4, 1976, 90 Stat. 1730, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendment made by this section [amending this section] shall apply to all taxable years to which the Internal Revenue Code of 1986 [formerly I.R.C. 1954] [this title] applies.’’ EFFECTIVE DATE OF 1969 AMENDMENT 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 a note under section 511 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86–667 applicable to taxable years beginning after Dec. 31, 1959, see section 6 of Pub. L. 86–667, set out as a note under section 501 of this title. CONDUCTING OF CERTAIN GAMES OF CHANCE NOT TREATED AS UNRELATED TRADE OR BUSINESS Pub. L. 98–369, div. A, title III, § 311, July 18, 1984, 98 Stat. 786, as amended by Pub. L. 99–514, § 2, title XVIII, § 1834, Oct. 22, 1986, 100 Stat. 2095, 2852, provided that: ‘‘(a) GENERAL RULE.—For purposes of section 513 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (defining unrelated trade or business), the term ‘unre- lated trade or business’ does not include any trade or business which consists of conducting any game of chance if— ‘‘(1) such game of chance is conducted by a non- profit organization, ‘‘(2) the conducting of such game by such organiza- tion does not violate any State or local law, and ‘‘(3) as of October 5, 1983— ‘‘(A) there was a State law (originally enacted on April 22, 1977) in effect which permitted the con- ducting of such game of chance by such nonprofit organization, but ‘‘(B) the conducting of such game of chance by or- ganizations which were not nonprofit organizations would have violated such law. ‘‘(b) EFFECTIVE DATE.—Subsection (a) shall apply to games of chance conducted after June 30, 1981, in tax- able years ending after such date.’’ [Pub. L. 99–514, title XVIII, § 1834, Oct. 22, 1986, 100 Stat. 2852, as amended by Pub. L. 100–647, title VI, § 6201, Nov. 10, 1988, 102 Stat. 3730, provided in part that: ‘‘The amendment made by this section [amending sec- tion 311 of Pub. L. 98–369, set out above] shall apply to games of chance conducted after October 22, 1986, in taxable years ending after such date’’.] § 514. Unrelated debt-financed income (a) Unrelated debt-financed income and deduc- tions In computing under section 512 the unrelated business taxable income for any taxable year— (1) Percentage of income taken into account There shall be included with respect to each debt-financed property as an item of gross in- come derived from an unrelated trade or busi- ness an amount which is the same percentage (but not in excess of 100 percent) of the total gross income derived during the taxable year from or on account of such property as (A) the average acquisition indebtedness (as defined in subsection (c)(7)) for the taxable year with re- spect to the property is of (B) the average amount (determined under regulations pre- scribed by the Secretary) of the adjusted basis of such property during the period it is held by the organization during such taxable year. (2) Percentage of deductions taken into ac- count There shall be allowed as a deduction with respect to each debt-financed property an amount determined by applying (except as provided in the last sentence of this para- graph) the percentage derived under paragraph (1) to the sum determined under paragraph (3). The percentage derived under this paragraph shall not be applied with respect to the deduc- tion of any capital loss resulting from the carryback or carryover of net capital losses under section 1212. (3) Deductions allowable The sum referred to in paragraph (2) is the sum of the deductions under this chapter which are directly connected with the debt-fi- nanced property or the income therefrom, ex- cept that if the debt-financed property is of a character which is subject to the allowance for depreciation provided in section 167, the allow- ance shall be computed only by use of the straight-line method. (b) Definition of debt-financed property (1) In general For purposes of this section, the term ‘‘debt- financed property’’ means any property which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year (or, if the property was dis- posed of during the taxable year, with respect to which there was an acquisition indebted- ness at any time during the 12-month period ending with the date of such disposition), ex- cept that such term does not include— (A)(i) any property substantially all the use of which is substantially related (aside from the need of the organization for income or funds) to the exercise or performance by such organization of its charitable, edu- cational, or other purpose or function con- stituting the basis for its exemption under section 501 (or, in the case of an organization