On Jan. 31, 2020, the IRS released Private Letter Ruling (PLR) 202005020, in which it concludes that the proposed operation of a political action committee (PAC) by a taxable subsidiary of a tax-exempt parent of a healthcare system (the taxpayer), as well as a resource-sharing agreement between the parties, constitutes prohibited participation or intervention in a political campaign. While a PLR may not be used or cited as precedent and is binding on only the taxpayer(s) to whom the ruling was issued, the ruling provides important insight into the IRS’ current thinking on these issues. Furthermore, a significant factor in the unfavorable ruling appears to be based on the resource-sharing agreement between the healthcare system and the taxable subsidiary that operated the PAC.
The basic facts set forth in the ruling are as follows: The taxpayer provides management, consulting, and other services to its related healthcare facilities and educational institutions. The taxpayer is the sole shareholder of the taxable subsidiary. The taxpayer elects the subsidiary’s directors, who in turn select the PAC’s directors. Neither the taxable subsidiary nor the PAC has any employees of its own.
In addition, the facts describe measures the taxpayer will take to establish separation between itself and the subsidiary and PAC. The subsidiary and PAC each will maintain bank accounts, books and records, financial statements and reports, tax returns, letterheads, websites, and other materials separate from the taxpayer. The taxpayer also will adopt a board resolution prohibiting any director, officer, or employee from any involvement in the PAC on behalf of or as a representative of the taxpayer.