Charity's support for an affiliated PAC would violate campaign and private-benefit rules

Plain-English summary

A section 501(c)(3) healthcare organization proposed to let its taxable subsidiary establish a political action committee. The charity would provide employees, facilities, administrative services, and a specially maintained employee mailing list, with the subsidiary and PAC reimbursing the charity's costs. The IRS ruled that the PAC's operation and the charity's support would constitute prohibited political campaign intervention because the services and mailing list existed to help solicit political contributions and support or oppose candidates. Reimbursement did not cure the violation, and the proposed separation of roles did not overcome the charity's direct operational involvement. The IRS also ruled that the arrangement would provide a nonincidental private benefit to the subsidiary and PAC rather than furthering an exempt purpose.

Ruling snapshot

• Question: Could a section 501(c)(3) organization provide reimbursed staff, facilities, services, and employee information to its subsidiary and affiliated PAC without campaign intervention or private benefit?
• Outcome: denied, because the support would constitute political campaign intervention and confer prohibited private benefit
• Key authorities: IRC §§ 501(c)(3) and 527; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 2007-41; American Campaign Academy v. Commissioner

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202005020 Third Party Communication: None
Release Date: 1/31/2020 Date of Communication: Not Applicable
Index Number: 501.03-00, 501.03-17,
Person To Contact:
527.00-00, 501.33-00
----------------------- , ID No. -----------------
----------------------------------------------------

                                                           Telephone Number:

                                                           --------------------

                                                           Refer Reply To:

-------------------------- CC:EEE:EOET:EO3
-------------------- PLR-134894-18

                                                           Date:
                                                           October 31, 2019

LEGEND
Taxpayer = ---------------------------------------------------------------------------
Subsidiary = -------------------------------------------------
X = ---

Dear ------------------:

This letter responds to Taxpayer’s submission dated November 27, 2018, and
subsequent correspondence requesting rulings that the operation of a political action
committee by Subsidiary, and the resource-sharing arrangement between Taxpayer and
Subsidiary, will not constitute participation or intervention in a political campaign by
Taxpayer, and the resource-sharing arrangement will not cause Taxpayer to be
operated for purposes of private benefit or result in private inurement within the
meaning of section 501(c)(3).

FACTS

Taxpayer is a nonprofit corporation that is exempt from tax under section 501(a) and
described in section 501(c)(3) pursuant to a group exemption letter issued to a central
organization. Taxpayer represents that it is not a private foundation within the meaning
of section 509(a).

Taxpayer is the parent of a healthcare system. It provides management, consulting, and
other services to its related healthcare facilities and educational institutions. Taxpayer is
the sole or partial direct or indirect member of approximately X section 501(c)(3)
organizations that own and operate hospitals, nursing homes, and provide other
healthcare services (“System Section 501(c)(3) Subsidiaries”). Taxpayer is also the sole
shareholder of Subsidiary, a for-profit corporation which holds limited liability company
(“LLC”) interests in two joint ventures and is the single member of an LLC that provides

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real estate rental management services primarily for affiliated section 501(c)(3) hospital
organizations.

Taxpayer, as Subsidiary’s sole shareholder, elects all of Subsidiary’s directors and may
remove any director with or without cause. Taxpayer also may elect or appoint
Subsidiary’s officers and assistant officers or permit the directors of Subsidiary to do so.
Subsidiary does not have any employees who are not also employees of Taxpayer.
Taxpayer’s bylaws reserve certain powers with respect to entities for which Taxpayer is
the sole member or controlling stockholder, such as Subsidiary. The enumerated
powers include to approve or disapprove the executive and/or administrative leadership,
to establish general guiding policies, to approve or disapprove the annual operating and
capital budgets, to direct the placement of funds and capital, and to approve and
disapprove salary rates for administrative and department head personnel.

Subsidiary will establish and operate a political action committee within the meaning of
section 527 (“PAC”). Subsidiary will select PAC’s board of directors, which in turn will
select PAC’s officers. Directors and officers of PAC may serve concurrently as directors
or officers of Subsidiary and as directors, officers, or employees of Taxpayer. PAC will
not have any of its own employees.

Subsidiary and PAC will solicit voluntary contributions to PAC from employees of
Subsidiary, Taxpayer, and System Section 501(c)(3) Subsidiaries. PAC will make
expenditures to support or oppose candidates for public office. Taxpayer’s employees
will engage in fundraising activities on behalf of Subsidiary in their capacities as service
providers to Subsidiary pursuant to the resource-sharing arrangement, described below;
nevertheless, Taxpayer states that it “will not coordinate with” Subsidiary or PAC with
respect to fundraising efforts or distribution of informational materials or other activities.
Taxpayer also states that it will charge Subsidiary and PAC fair market value for use of
the mailing lists of its employees and the employees of System Section 501(c)(3)
Subsidiaries.

Pursuant to federal campaign finance laws, PAC will be a connected separate
segregated fund of Subsidiary, and Subsidiary and PAC will be limited to soliciting
voluntary contributions from a restricted class that includes Subsidiary’s stockholders
and executive or administrative personnel, and their families, and the executive and
administrative personnel of Taxpayer, its subsidiaries, branches, divisions, and
departments, and their families. Subsidiary will also be permitted under the federal
campaign finance laws to make up to two written solicitations per calendar year for
contributions to its PAC from employees of Taxpayer and its affiliates who are outside of
the restricted class.

Taxpayer states that, because of these restrictions, it intends to provide Subsidiary with
information about the management and personnel of Taxpayer and its affiliates solely to
enable Subsidiary and PAC to comply with federal campaign finance law on soliciting
contributions from the directors, officers, and employees of Taxpayer and of the System

PLR-134894-18 3

Section 501(c)(3) Subsidiaries. To the extent that Subsidiary establishes one or more
state political action committees, Taxpayer will provide Subsidiary with information
about the personnel of Taxpayer and of the System Section 501(c)(3) Subsidiaries to
enable Subsidiary to comply with applicable state campaign finance law.

Taxpayer represents that PAC and Subsidiary will maintain separate bank accounts,
books, and records and prepare separate financial statements, reports, and tax returns.
Both entities will have separate letterheads, Internet addresses, and other materials.
Taxpayer states that notwithstanding its authority and rights as Subsidiary’s sole
shareholder, including those rights retained in its bylaws with respect to Subsidiary and
other entities of which it is the sole member or controlling stockholder, Taxpayer’s board
of directors will adopt a resolution prohibiting the board from any involvement in PAC.
Taxpayer represents that the board resolution will also prohibit any director, officer, or
employee of Taxpayer from any involvement in PAC on behalf of Taxpayer or in an
official Taxpayer capacity.

Taxpayer and Subsidiary have entered into a resource-sharing agreement, titled a
Management and Administrative Services Agreement (“Agreement”). Under the
Agreement, Taxpayer agrees to provide management, administrative, and corporate
services and make available facilities and equipment to Subsidiary and Subsidiary’s
subsidiaries identified on a schedule to the Agreement (“group members”), which will be
expanded to include PAC after it is formed. Taxpayer represents that to the extent that a
director, officer, or employee of Taxpayer also serves as a director or officer of
Subsidiary or PAC, that individual will not take any action with respect to Subsidiary or
PAC on behalf of Taxpayer or in an official Taxpayer capacity. Taxpayer’s directors,
officers, and employees will also track all time spent providing services to Subsidiary or
PAC so that the time is appropriately allocated to Subsidiary.

The facilities Taxpayer agrees to provide under the Agreement include but are not
limited to office space, telephones, information technology, furniture, office equipment
(e.g., copiers and scanners), building maintenance, and cleaning services. The services
Taxpayer will provide include secretarial services, such as keeping statutory books and
records and convening and documenting meetings of the boards of directors;
safekeeping and filing all original corporate documents; establishing and managing
financial accounts; collecting accounts payable and arranging for related dispute
resolution; settling inter-company accounts within the health system operated by
Taxpayer; securing financing; procuring insurance; supervising the sale and purchase of
assets; and tax and legal compliance services, which includes the preparation of tax
returns and compliance with regulatory requirements to which Subsidiary or a group
member might be subject.

The Agreement was amended to state that “[Subsidiary] shall have dominion and
control over the Services and Facilities while being used by [Subsidiary], and
employees of [Taxpayer] who provide Services or Facilities to [Subsidiary] shall be
considered employees of [Subsidiary] while providing Services or Facilities to

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[Subsidiary].” The ruling request also states that Subsidiary will “control and direct” the
employees of Taxpayer, “not only as to the result to be accomplished…but also as to
the details and means by which that result is accomplished.”

Under the Agreement, Subsidiary and each group member agrees to bear and pay to
Taxpayer its share of ”Net Costs,” which is the sum of “Direct Costs” and “Indirect
Costs.” “Direct Costs” means the sum of all external and all internal direct costs incurred
by Taxpayer directly attributable to a particular service and/or facility provided to
Subsidiary or a group member. “Indirect Costs” means all external and internal costs
incurred by Taxpayer which cannot be directly attributed to a particular service and/or
facility provided to Subsidiary or a group member, which is charged at a rate of 20% of
all Direct Costs. Taxpayer represents that 20% represents the percentage of
management and general expenses generally incurred by Taxpayer as a percentage of
its total costs and will be evaluated periodically “to ensure that it remains an arm’s-
length charge.”

Subsidiary, in addition to the Agreement with Taxpayer, intends to contract with a third
party administrator to assist in fundraising for PAC, sending solicitations permitted
under federal and state election law, maintaining accounting and other records of
contributions and expenditures, and preparing federal and state regulatory filings.
Taxpayer states that this will “limit the extent to which [Taxpayer] employees provide
services to [PAC]” under the Agreement. The ruling request also states that only
directors, officers, or common law employees of Subsidiary will make oral or written
solicitations for contributions to PAC, and that they will make clear that they are not
acting on behalf of Taxpayer in making the solicitations.

RULINGS REQUESTED

Taxpayer requests the following rulings:

1. Subsidiary’s operation of PAC will not constitute participation or intervention in a
   political campaign by Taxpayer within the meaning of section 501(c)(3).

2. Taxpayer’s provision of services and other resources to Subsidiary and PAC
   pursuant to the Agreement, in which Subsidiary reimburses Taxpayer for the
   costs incurred by Taxpayer in providing such services and resources, will not
   constitute participation or intervention in a political campaign by Taxpayer within
   the meaning of section 501(c)(3).

3. The Agreement between Taxpayer and Subsidiary, in which Taxpayer provides
   services and other resources to Subsidiary, and Subsidiary reimburses Taxpayer
   for the costs incurred by Taxpayer in providing such services and resources, will
   not cause Taxpayer to be operated for private benefit or will not result in private
   inurement within the meaning of section 501(c)(3).

PLR-134894-18 5

LAW

Section 501(c)(3) describes organizations organized and operated exclusively for
religious, charitable, or educational purposes, no substantial part of the activities of
which is carrying on propaganda, or otherwise attempting to influence legislation
(except as otherwise provided in section 501(h)), and which does not participate in, or
intervene in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in
activities which accomplish one or more of such exempt purposes specified in section
501(c)(3).

Treas. Reg. § 1.501(c)(3)-1(c)(3)(i) provides that an organization is not operated
exclusively for one or more exempt purposes if it is an “action” organization.

Treas. Reg. § 1.501(c)(3)-1(c)(3)(iii) provides that an “action” organization includes an
organization that participates or intervenes, directly or indirectly, in any political
campaign on behalf of or in opposition to any candidate for public office. Activities which
constitute participation or intervention in a political campaign on behalf of or in
opposition to a candidate include, but are not limited to, the publication or distribution of
written or printed statements or the making of oral statements on behalf of or in
opposition to such a candidate.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather
than a private interest. To meet the requirement to be organized and operated
exclusively for one or more exempt purposes, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests.

Rev. Rul. 2007-41, 2007-1 C.B. 1421, provides 21 examples illustrating the applicable
facts and circumstances to be considered in determining whether a section 501(c)(3)
organization has participated or intervened in any political campaign.

Situation 4 of Rev. Rul. 2007-41 describes a president of a section 501(c)(3)
organization who endorses a candidate for public office using the organization’s
newsletter, although the president reimburses the organization from his personal funds
for the cost of the newsletter attributable to his endorsement. Because the endorsement
appeared in an official publication of the organization, the organization has intervened in
a political campaign.

PLR-134894-18 6

Rev. Rul. 2007-41 provides that in determining whether an organization has engaged in
political campaign intervention in the context of a business activity, such as selling or
renting mailing lists, some of the factors to be considered include whether the good,
service, or facility is available to candidates in the same election on an equal basis,
whether the good, service, or facility is available only to candidates and not to the
general public, and whether the activity is an ongoing activity of the organization or
whether it is conducted only for a particular candidate.

Situation 17 of Rev. Rul. 2007-41 describes a section 501(c)(3) museum that rents to
the public on a first come, first served basis a large hall suitable for hosting dinners and
receptions. The museum charges standard fees based on the number of people in
attendance. The museum has rented the hall to a number of different organizations, and
also rents the hall to a candidate for a campaign fundraising dinner for the same
standard fee. The organization has not intervened in a political campaign.

Situation 18 of Rev. Rul. 2007-41 describes a section 501(c)(3) theater organization that
maintains a mailing list of all of its subscribers and contributors. The organization has
never rented its mailing list to a third party, but after being approached by the campaign
committee of a candidate for public office who supports increased funding for the arts,
the organization agrees to rent its mailing list to the campaign committee for a fee that is
comparable to fees charged by other similar organizations. The organization declines
similar requests from campaign committees of other candidates. The organization has
intervened indirectly in a political campaign.

In American Campaign Academy v. Commissioner of Internal Revenue, 92 T.C. 1053
(1989), the tax court affirmed the IRS’ denial of an application for recognition of
exemption as described in section 501(c)(3) of an organization that operated a school to
train individuals for careers as political campaign professionals. The organization’s
training program was an outgrowth of one previously run by a national congressional
committee of a political party, its activities were funded exclusively by a trust affiliated
with that national congressional committee, and substantially all of its graduates from
the program were placed in campaigns of the same political party. Therefore, the Tax
Court concluded that the organization was not operated exclusively for exempt
purposes within the meaning of section 501(c)(3) because more than an insubstantial
part of its activities furthered a nonexempt purpose. The organization was operated
substantially for the benefit of private interests, entities and candidates of a single
political party, and failed to show that those private interests were members of a
charitable class.

ANALYSIS

Rulings 1 and 2.

Taxpayer has stated it will provide to Subsidiary and PAC a mailing list of employees to
be used to solicit contributions for PAC, and Taxpayer will charge fair market value for

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the use of this list. Taxpayer’s provision of its mailing list of employees to Subsidiary
and PAC, for the purpose of soliciting funds for PAC constitutes political campaign
intervention by Taxpayer. The facts and circumstances in this case, like those in
Situation 18 of Rev. Rul. 2007-41, demonstrate that Taxpayer is engaging in political
campaign intervention. Rev. Rul. 2007-41 provides that one of the factors that will be
considered in determining whether an organization has engaged in political campaign
intervention in the context of a business activity, such as selling or renting mailing lists,
is whether the activity is an ongoing activity of the organization or whether it is
conducted only for a particular candidate.

Taxpayer’s mailing list of its employees would be a specifically tailored compilation of
information about its employees that Subsidiary and PAC require to comply with federal
campaign finance law for connected PACs to solicit political campaign contributions
from Taxpayer’s employees. Taxpayer would provide and continuously update this
specialized list of names and addresses of its employees and of the employees of the
System Section 501(c)(3) Subsidiaries, and identify which of the employees are within
the definition of executive or administrative personnel, whom Subsidiary and PAC would
be permitted to solicit contributions from under federal election laws more frequently
than twice per year. This is distinguishable from the museum’s ongoing rental of its hall
in Situation 17 of Rev. Rul. 2007-41. Taxpayer’s assembly and provision of a mailing list
for the Subsidiary and the PAC has as its sole purpose to assist Subsidiary and PAC in
soliciting political campaign contributions from Taxpayer’s employees so that PAC may
then make expenditures to support or oppose candidates for public office. See Section
501(c)(3), Treas. Reg. § 1.501(c)(3)-1(c)(3)(i), (c)(3)(iii). This is similar to the mailing list
in Situation 18 and in contrast with provision of the hall in Situation 17.

Taxpayer agrees to provide Subsidiary and the group members (to include PAC) certain
management, administrative, and corporate services, as well as facilities and
equipment. The Agreement was amended and restated to provide that Subsidiary “shall
have dominion and control” over the services and facilities while being used by
Subsidiary, and that Taxpayer employees providing services or facilities to Subsidiary
“shall be considered employees of” Subsidiary while providing those services and
facilities. Nevertheless, the language of the Agreement clearly states that Taxpayer is
providing services and equipment to Subsidiary. Specifically, Taxpayer reserves the
right under the Agreement to subcontract any of the services which it is required to
provide to Subsidiary or a group member, and remains “in all respects responsible for
the due and proper performance” of those services. The Agreement provides no
guardrails or limitations with respect to services that might be inconsistent with
Taxpayer’s exempt purpose under section 501(c)(3). Nor does the Agreement
demonstrate how the employees of Taxpayer providing services to Subsidiary and the
group members under the Agreement will in fact be providing such services as
employees of Subsidiary under the direction and control of Subsidiary, when the
majority of Subsidiary’s board of directors and all the employees of Subsidiary are
employees of Taxpayer and there is no identified separation of roles in connection with
directing and controlling their performance of services. Accordingly, services provided

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under the Agreement to carry out the activities of the PAC are provided by Taxpayer’s
employees under an agreement for the Taxpayer to provide such services.

Even if Subsidiary and PAC fully reimburse Taxpayer for its Direct Costs and Indirect
Costs in preparing the specialized mailing list and performing all other services provided
to PAC, Taxpayer still would be engaging in an activity that does not further an exempt
purpose. As noted earlier, the activity of preparing and maintaining the employee list
furthers only the political campaign activities of PAC. In Situation 4 of Rev. Rul. 2007-
41, the organization is deemed to have violated the prohibition against political
campaign intervention, even though the organization was fully reimbursed the cost of
the publication of the endorsement from its president’s personal funds.

Taxpayer states in the request that Subsidiary will contract with a third party
administrator to assist in fundraising, yet the request also states that directors, officers,
or common law employees of Subsidiary will make oral and/or written solicitations for
contributions to PAC, although they will make clear that they are not acting on behalf of
Taxpayer in any such solicitation. As noted earlier, neither Subsidiary nor PAC has its
own employees, office space, or equipment separate from Taxpayer. Contrary to, or at
least inconsistent with, Taxpayer’s representation that it will not coordinate with
Subsidiary with respect to fundraising efforts, it is Taxpayer’s employees who, pursuant
to the Agreement, would solicit contributions to PAC from other employees of Taxpayer.
The direct performance of these activities by Taxpayer’s employees, at Taxpayer’s
offices during regular business hours, makes these activities inseparable from
Taxpayer’s own operations. These activities further the political campaign purposes of
Subsidiary and PAC.

Accordingly, we conclude that the operation of PAC, including Taxpayer’s provision of
services and other resources to Subsidiary and PAC pursuant to the Agreement and the
creation and provision of a specialized mailing list, will constitute participation or
intervention in a political campaign by Taxpayer within the meaning of section 501(c)(3).

Ruling 3.

Taxpayer provides specific services, including management and administrative
services, under the Agreement to Subsidiary and PAC. These services are performed
by employees of Taxpayer, but they further the operations of Subsidiary and PAC. The
operations of Subsidiary and PAC do not further an exempt purpose under section
501(c)(3). In particular, the provision of information by Taxpayer about its employees
and the employees of the System Section 501(c)(3) Subsidiaries enables the solicitation
of these employees for contributions to PAC in compliance with federal election laws.
Soliciting PAC contributions and complying with federal election laws do not further an
exempt purpose under section 501(c)(3). Taxpayer would not otherwise assemble and
distribute this information about its employees except to aid Subsidiary and PAC in their
solicitation efforts. These activities provide a direct benefit to Subsidiary and PAC, a
benefit that is not incidental to the performance of any exempt purpose. Therefore,

PLR-134894-18 9

Taxpayer is providing specialized services for the benefit of Subsidiary and PAC, which
serve private rather than public interests. See Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) and
American Campaign Academy.

RULINGS

Based solely on the facts and representations submitted by Taxpayer, we rule as
follows:

1. The operation of PAC by Subsidiary will constitute participation or intervention in a
   political campaign by Taxpayer within the meaning of section 501(c)(3).

2. Taxpayer’s provision of services and other resources to Subsidiary and PAC
   pursuant to the Agreement will constitute participation or intervention in a political
   campaign by Taxpayer within the meaning of section 501(c)(3).

3. The Agreement between Taxpayer and Subsidiary, in which Taxpayer provides
   services and other resources to Subsidiary, and Subsidiary reimburses Taxpayer for the
   costs incurred by Taxpayer in providing such services and resources, will cause
   Taxpayer to be operated for the benefit of private interests and will not further an
   exempt purpose, within the meaning of section 501(c)(3).

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party, as specified in Rev. Proc. 2019-1, 2019-1
I.R.B. 1, § 7.01(16)(b). This office has not verified any of the material submitted in
support of the request for ruling, and such material is subject to verification on
examination.

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal tax consequences of the proposed transaction under any other provision of the
Code or regulations, including but not limited to whether the private benefit provided by
Taxpayer to Subsidiary and/or PAC causes Taxpayer to be operated for a substantial
nonexempt purpose or whether the payments received by Taxpayer under the
agreement do or do not constitute unrelated business taxable income.

This letter is directed only to Taxpayer. Section 6110(k)(3) provides that it may not be
used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Taxpayer’s authorized representatives.

PLR-134894-18 10

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

                                Sincerely,



                                Don Spellmann
                                Senior Counsel
                                Exempt Organizations Branch 3
                                (Employee Benefits, Exempt Organizations, and
                                Employment Taxes)