Charity Ruled Engaged in Campaign Activity by Operation of Subsidiary

• Published date: 01 April 2020
• Date: 01 April 2020
• DOI: http://doi.org/10.1002/npc.30710

Bruce R. Hopkins’ NONPROFIT COUNSEL

April 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

conduct “appropriate research” on the 9,774 outlaws to

determine if “actions are necessary, including informing

the taxpayer of the notification requirement or assessing

delinquency penalties if warranted.” The IRS didn’t like

that one either, saying that IRS officials already engaged

in research that indicates that TIGTA “significantly over-

stated” the number of nonfiling organizations.

The IRS further nixed the proposition that it exam-

ine the untimely filings of the notice to determine if

the organizations involved had reasonable cause. The

agency said it would be “resource intensive” to assess

penalties and review requests for abatement. TIGTA

complained in response that the IRS is not “enforcing

the law consistently on similarly situated organizations.”

Startling Disclosure

This TIGTA report states that between early 2014 and

about July 2015, the IRS classified all nonprofit organiza-

tions requesting identification numbers as IRC § 501(c)(4)

entities “unless the name of the organization sounded

like a church.” (Some at the IRS have not learned lessons

from 2013.) It reports that IRS management “stated that

this practice resulted in an overstatement of the number

of IRC § 501(c)(4) organizations in IRS records.” (That is

surely true!). The IRS could not identify which of these

entities (7,274 of them) were correctly coded as exempt

social welfare organizations. TIGTA inexplicably con-

cluded: “Based on the classification in IRS systems, these

7,274 organizations are required to file a notification.”

[26.13] ◆

CHARITY RULED ENGAGED

IN CAMPAIGN ACTIVITY BY

OPERATION OF SUBSIDIARY

The IRS ruled that operation of a political action

committee by a subsidiary of a public charity, and the

contents of a resources-sharing arrangement between

the parties, cause the charity to be considered engaged

in political campaign activity (Priv. Ltr. Rul. 202005020)

Facts

A tax-exempt public charity (Charity) is the parent

of a health care system. The Charity is the sole share-

holder of a for-profit corporation (Subsidiary) that holds

limited liability interests in two joint ventures and is the

sole member of an LLC that provides real estate rental

management services primarily for its affiliated exempt

hospital organizations.

The Subsidiary will establish and operate a political

action committee. The Subsidiary will elect the PAC’s

board of directors. The directors and officers of the PAC

may serve concurrently as directors or officers of the

Subsidiary and/or the Charity.

The Subsidiary and the PAC will solicit voluntary con-

tributions to the PAC from employees of the Subsidiary,

the Charity, and the affiliates in the health care system.

The PAC will make expenditures to support or oppose

candidates for public office. Employees of the public

charity will engage in fundraising activities on behalf of

the Subsidiary in their capacities as service providers to

the Subsidiary pursuant to a resource-sharing arrange-

ment. The Charity advised the IRS that it “will not coor-

dinate with” the Subsidiary or the PAC with respect to

fundraising efforts, distribution of informational materi-

als, or other activities. The Charity will charge the Subsid-

iary and the PAC fair market value for use of the mailing

lists of its employees and the employees of the affiliates.

The Charity represented that the PAC and the Sub-

sidiary will maintain separate bank accounts, books,

and records, and prepare separate financial statements,

reports, and tax returns. It also represented that its

governing board will adopt a resolution prohibiting its

members from any involvement in the PAC.

The Charity and the Subsidiary entered into the

Agreement, pursuant to which the charity agrees to

provide management, administrative, and corporate

services, and make available facilities and equipment to

the Subsidiary and its subsidiaries. The Subsidiary and its

affiliates agree to bear and pay to the Charity its share

of net costs. In addition, the Subsidiary plans to contract

with a third party to assist in fundraising for the PAC,

sending solicitations, maintaining accounting and other

records of contributions and expenditures, and preparing

federal and state regulatory filings.

Law

An organization is not operated exclusively for one

or more charitable purposes if it is an action organiza-

tion. One of the ways to be an action organization is to

participate or intervene in a political campaign on behalf

of or in opposition to a candidate for a public office.

The IRS provided 21 examples illustrating the facts and

circumstances to be considered in determining whether

an exempt charitable organization has participated or

intervened in any political campaign (Rev. Rul. 2007-41)

(summarized in the August 2007 issue).

Analysis

The IRS first ruled that the Charity’s provision of its

mailing list of employees to the Subsidiary and the PAC,

for the purpose of soliciting funds for the PAC, constitutes

political campaign intervention by the charity. As authority

for this conclusion, the IRS cited situation 18 of Rev. Rul.

2007-41, which states that one of the factors in determin-

ing whether there is participation in a political campaign is

whether the activity is an ongoing activity of the organiza-

tion or is conducted only for a particular candidate.

As to the Agreement, which “clearly states” that

the Charity is providing services and equipment to the