[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.514(g)-1]

[Page 215-217]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.514(g)-1  Business lease indebtedness.

    (a) Definition. The term business lease indebtedness means, with 
respect to any real property leased by a tax-exempt organization for a 
term of more than 5 years, the unpaid amount of:
    (1) The indebtedness incurred by the lessor tax-exempt organization 
in acquiring or improving such property;
    (2) The indebtedness incurred by the lessor tax-exempt organization 
prior to the acquisition or improvement of such property if such 
indebtedness would not have been incurred but for such acquisition or 
improvement; and
    (3) The indebtedness incurred by the lessor tax-exempt organization 
subsequent to the acquisition or improvement of such property if such 
indebtedness would not have been incurred but for such acquisition or 
improvement and the incurrence of the indebtedness was reasonably 
foreseeable at the time of such acquisition or improvement.

See paragraph (i) of this section with respect to subsidiary 
corporations.
    (b) Examples. The rules of section 514(g) respecting business leases 
also cover certain cases where the leased

[[Page 216]]

property itself is not subject to an indebtedness. For example, they 
apply to cases such as the following:

    Example 1. A university pledges some of its investment securities 
with a bank for a loan and uses the proceeds of such loan to purchase 
(either directly or through a subsidiary corporation) a building, which 
building is subject to a lease that then has more than 5 years to run. 
This would be an example of a business lease indebtedness incurred prior 
to the acquisition of the property which would not have been incurred 
but for such acquisition.
    Example 2. If the building itself in example 1 in this paragraph is 
later mortgaged to raise funds to release the pledged securities, the 
lease would continue to be a business lease.
    Example 3. If a scientific organization mortgages its laboratory 
building to replace working capital used in remodeling another one of 
its buildings or a building held by its subsidiary corporation, which 
other building is free of indebtedness and is subject to a lease that 
then has more than 5 years to run, the lease would be a business lease 
inasmuch as the indebtedness though incurred subsequent to the 
improvement of such property would not have been incurred but for such 
improvement, and the incurrence of the indebtedness was reasonably 
foreseeable when, to make such improvement, the organization reduced its 
working capital below the amount necessary to continue current 
operations.

    (c) Property acquired subject to lien. Where real property is 
acquired subject to a mortgage or similar lien, whether the acquisition 
be by gift, bequest, devise, or purchase, the amount of the indebtedness 
secured by such mortgage or lien is a business lease indebtedness 
(unless paragraph (d)(1) of this section applies) even though the lessor 
does not assume or agree to pay the indebtedness. For example, a 
university pays $100,000 for real estate valued at $300,000 and subject 
to a $200,000 mortgage. For the purpose of the tax on unrelated business 
taxable income, the result is the same as if $200,000 of borrowed funds 
had been used to buy the property.
    (d) Certain property acquired by gifts, etc. (1) Where real property 
was acquired by gift, bequest, or devise, before July 1, 1950, subject 
to a mortgage or other similar lien, the amount of such mortgage or 
other similar lien shall not be considered as an indebtedness of the 
lessor tax-exempt organization incurred in acquiring such property. An 
indebtedness not otherwise covered by this exception is not brought 
within the exception by reason of a transfer of the property between a 
parent and its subsidiary corporation.
    (2) Where real property was acquired by gift, bequest, or devise, 
before July 1, 1950, subject to a lease requiring improvements in such 
property upon the happening of stated contingencies, indebtedness 
incurred in improving such property in accordance with the terms of such 
lease shall not be considered as indebtedness described in section 
514(g) and in this section. An indebtedness not otherwise covered by 
this exception is not brought within the exception by reason of a 
transfer of the property between a parent and its subsidiary 
corporation.
    (e) Certain corporations described in section 501(c)(2). In the case 
of a title holding corporation described in section 501(c)(2), all of 
the stock of which was acquired before July 1, 1950, by an organization 
described in section 501(c) (3), (5), or (6) (and more than one-third of 
such stock was acquired by such organization by gift or bequest), any 
indebtedness incurred by such corporation before July 1, 1950, and any 
indebtedness incurred by such corporation on or after such date in 
improving real property in accordance with the terms of a lease entered 
into before such date, shall not be considered an indebtedness described 
in section 514(g) and in this section with respect to either such 
section 501(c)(2) corporation or such section 501(c) (3), (5), or (6) 
organization.
    (f) Certain trusts described in section 401(a). In the case of a 
trust described in section 401(a), or in the case of a corporation 
described in section 501(c)(2) all of the stock of which was acquired 
before March 1, 1954, by such a trust, any indebtedness incurred by such 
trust or such corporation before such date, in connection with real 
property which is leased before such date, and any indebtedness incurred 
by such trust or such corporation on or after such date necessary to 
carry out the terms of such lease, shall not be considered as an 
indebtedness described in section 514(g) and in this section.
    (g) Business lease on portion of property. Where only a portion of 
the real

[[Page 217]]

property is subject to a business lease, proper allocation of the 
indebtedness applicable to the whole property must be made to the 
premises covered by the lease. See example 2 of paragraph (b)(3) of 
Sec. 1.514(a)-2.
    (h) Special rule applicable to trusts described in section 401(a). 
If an employees' trust described in section 401(a) lends any money to 
another such employees' trust of the same employer, for the purpose of 
acquiring or improving real property, such loan will not be treated as 
an indebtedness of the borrowing trust except to the extent that the 
loaning trust:
    (1) Incurs any indebtedness in order to make such loan;
    (2) Incurred indebtedness before the making of such loan which would 
not have been incurred but for the making of such loan; or
    (3) Incurred indebtedness after the making of such loan which would 
not have been incurred but for the making of such loan and which was 
reasonably foreseeable at the time of making such loan.
    (i) Subsidiary corporations. The provisions of section 514(f), (g), 
and (h) are applicable whether or not a subsidiary corporation of the 
type described in section 501(c)(2) is availed of in making the business 
lease. For example, assume a parent organization borrows funds to 
purchase realty and sets up a separate section 501(c)(2) corporation as 
a subsidiary to hold the property. Such subsidiary corporation leases 
the property for a period of more than 5 years, collects the rents and 
pays over all of the income, less expenses, to the parent organization, 
the parent organization being liable for the indebtedness. Under these 
assumed facts, the lease by section 501(c)(2) subsidiary corporation 
would be a business lease with respect to such subsidiary corporation, 
and the rental income would be subject to the tax, whether or not the 
subsidiary itself assumes the indebtedness and whether or not the 
property is subject to the indebtedness.
    (j) Certain trusts described in section 501(c)(17). (1) In the case 
of a supplemental unemployment benefit trust described in section 
501(c)(17), or in the case of a corporation described in section 
501(c)(2) all of the stock of which was acquired before January 1, 1960, 
by such a trust, any indebtedness incurred by such trust or such 
corporation before such date, in connection with real property which is 
leased before such date, and any indebtedness incurred by such trust or 
such corporation on or after such date necessary to carry out the terms 
of such lease, shall not be considered as an indebtedness described in 
section 514(g) and in this section.
    (2) If a supplemental unemployment benefit trust described in 
section 501(c)(17) lends any money to another such supplemental 
unemployment benefit trust forming part of the same plan, for the 
purpose of acquiring or improving real property, such loan will not be 
treated as an indebtedness of the borrowing trust except to the extent 
that the loaning trust:
    (i) Incurs any indebtedness in order to make such loan;
    (ii) Incurred indebtedness before the making of such loan which 
would not have been incurred but for the making of such loan; or
    (iii) Incurred indebtedness after the making of such loan which 
would not have been incurred but for the making of such loan and which 
was reasonably foreseeable at the time of making such loan.

[T.D. 7229, 37 FR 28155, Dec. 21, 1972]

                          Farmers' Cooperatives