Relationship Between Section 501(c)(3) Taxpayer and PAC Prohibited

Mailing list for soliciting PAC contributions

According to the ruling, the taxpayer will provide to the subsidiary and PAC a mailing list of its employees to be used to solicit contributions for the PAC and will charge fair market value for the list. In addition, the taxpayer will update the list and identify which employees are within the definition of executive or administrative personnel from whom the subsidiary and PAC are permitted to solicit contributions under federal election laws. 

The ruling concludes that creating and providing a specialized mailing list constitutes participation or intervention in a political campaign by the taxpayer. Furthermore, refining the list so that the PAC can identify employees who are able to contribute under federal election laws provides a direct benefit to the subsidiary and PAC and serves private rather than public interests. 

Resource-sharing agreement

The ruling also discusses the taxpayer’s agreement to provide management and administrative services to the subsidiary and PAC. 

• Facilities and services. According to the ruling, the taxpayer agreed to provide facilities, equipment, and building maintenance and cleaning services, as well as a wide variety of other corporate, financial, and legal services, to the subsidiary and PAC. The ruling notes that the agreement “provides no guardrails or limitations with respect to services that might be inconsistent with [t]axpayer’s exempt purpose,” and that there is “no identified separation of roles” in connection with the subsidiary “directing and controlling” the taxpayer’s employees under the terms of the agreement. According to the ruling, under this arrangement the taxpayer essentially is providing the services that will cause the taxpayer to be operated for the benefit of private interests and will not further an exempt purpose. 
• Costs. The subsidiary and PAC agreed to pay the taxpayer its share of direct and indirect costs. Indirect costs will be charged at a rate of 20% of direct costs. The ruling notes that even if the subsidiary and PAC fully reimburse the taxpayer for its direct and indirect costs, the taxpayer still is engaging in an activity that does not further an exempt purpose because “the activity of preparing and maintaining the employee list furthers only the political campaign activities of PAC.”
• People. The taxpayer represented that if any of its directors, officers, or employees also serves as a director or officer of the subsidiary or PAC, that individual will not take any action with respect to the subsidiary or PAC on behalf of the taxpayer or in an official taxpayer capacity. The taxpayer also represented that time records will be maintained so that appropriate allocations can be made. The ruling concludes, however, that having the taxpayer’s employees solicit contributions to the PAC from other employees of the taxpayer and at the taxpayer’s offices during regular business hours, makes these activities inseparable from the taxpayer’s own operations and therefore furthers the political campaign purposes of the subsidiary and PAC. 

Looking ahead

Tax-exempt charitable organizations – whether healthcare systems or not – that have connected PACs should consider reviewing the structure of such entities within their organization to determine whether changes are needed given the narrow facts of this ruling. Because this is an election year, now may be a good time to undertake such a review. Furthermore, because the resource-sharing agreement between the exempt organization and its taxable subsidiary was a central focus in the ruling, organizations with similar agreements should review those agreements to ensure that they require sufficient expense detail, are consistent with actual operations, and do not have provisions that put the exempt status of the tax-exempt participant at risk.