IRS has privately ruled that an exempt hospital's establishment and operation of a Code Sec. 501(c)(4) social welfare organization, and the Code Sec. 501(c)(4) organization's subsequent establishment of two Code Sec. 527 political action committees, won't constitute participation or intervention in a political campaign and won't jeopardize the hospital's exempt status.
Background. Under Code Sec. 501(c)(3), a corporation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes is exempt from federal income taxes so long as no part of its net earnings inure to the benefit of a private individual and no substantial part of its activities involves lobbying or political activities.
Under Code Sec. 501(c)(4), a civic league is exempt if it isn't organized or operated for profit, it is operated exclusively for the promotion of social welfare, no part of its net earnings inures to the benefit of any private shareholder or individual, and no substantial part of its activities consists of providing commercial-type insurance.
A Code Sec. 501(c)(4) organization may conduct political campaign activities and establish a political organization described in Code Sec. 527(e) (see below), so long as political campaign activity isn't its primary activity. (Reg. §1.501(c)(4)-1(a)(2)(ii)
A political organization is a party, committee, association, fund, or other organization (incorporated or unincorporated) organized and operated primarily to directly or indirectly accept contributions and/or make expenditures for an “exempt function” described in Code Sec. 527(e)(2) (i.e., influencing the selection, nomination, election, or appointment of candidates for public office). Code Sec. 527 is not an elective provision.
If a Code Sec. 501(c) organization expends any amount during the taxable year, either directly or through another organization, for an exempt function under Code Sec. 527(e)(2), then it is taxed as if it were a political organization. Accordingly, the gross income of the organization includes the lesser of: (i) its net investment income for the tax year, or (ii) the aggregate amount expended during the year for an exempt function.
Under Reg. §1.501(c)(3)-1(c)(3)(i), an “action organization” described in Reg. §1.501(c)(3)-1(c)(3)(iii) isn't an exempt organization described in Code Sec. 501(c)(3) or a social welfare organization under Code Sec. 501(c)(4). An action organization is one that participates or intervenes in any political campaign on behalf of or in opposition to any candidate for public office.
Facts. Hospital is a comprehensive, regional, integrated health care system incorporated under the non-profit laws of State. It is recognized as tax-exempt under Code Sec. 501(c)(3) and is classified as a public charity under Code Sec. 509(a)(1) and Code Sec. 170(b)(1)(A)(iii).
Hospital conducts an insubstantial amount of lobbying through its government affairs department in order to participate in state and federal “legislative and regulatory advocacy designed to maintain and improve quality and cost-effective health care services” provided by Hospital and its affiliates throughout State. Neither Hospital nor any of its tax-exempt subsidiaries participates or intervenes in political campaigns on behalf of any candidates for public office.
Hospital intends to form a separate, non-profit corporation (Org.) without capital stock in order to carry out the mission of its government affairs department. Org. will apply for exempt status as a social welfare organization under Code Sec. 501(c)(4), operate independently of Hospital and its tax-exempt subsidiaries, and have voting and non-voting classes of membership. Hospital will be the sole voting member, and a majority of Org.'s board will consist of members of Hospital's (or its tax-exempt subsidiaries') board of directors, officers, or employees.
Following Org.'s establishment, an incidental part of its activities will be the establishment of two political action committees (collectively, PACs) under Code Sec. 527. A majority of the PACs' boards will consist of members from Org.'s board. The board of each PAC will have sole and exclusive general supervision and control over its affairs and funds. Hospital, Org., and the PACs will all be operated independently of each other. The PACs will maintain separate bank accounts and records and have separate addresses and phone numbers, and any leasing or sharing of employees, goods, services, or facilitates among the parties will be conducted at arms-length.
PACs will make their own solicitations for contributions, and there will be no joint fundraising or similar efforts conducted between the PACs, Hospital, or the tax-exempt subsidiaries. Neither Hospital nor the tax-exempt subsidiaries will distribute any material produced or prepared by the PACs or provide them with mailing lists without making them available to other Code Sec. 527 organizations on an equal basis.
Employees of Hospital and the tax-exempt subsidiaries will be given the option, through a payroll deduction plan, to make a voluntary contribution to any Code Sec. 527 organization. This option was previously unavailable.
Rulings sought. Hospital requested rulings that: (i) its establishment and operation of the PACs doesn't constitute participation or intervention in a political campaign and won't jeopardize its tax-exempt status under Code Sec. 501(c)(3); and (ii) its establishment and operation of the described voluntary payroll deduction plan for its and the tax-exempt subsidiaries' employees doesn't constitute intervention in a political campaign and won't jeopardize its tax-exempt status under Code Sec. 501(c)(3).
Conclusion. IRS favorably determined that, provided Org. qualifies as a social welfare organization under Code Sec. 501(c)(4), and provided each organization operates independently of each other, Org.'s establishment of the PACs won't be attributable to Hospital. Thus, Hospital won't be treated as impermissibly participating or intervening in any political campaign on behalf of or against any candidate for public office, and its tax-exempt status won't be jeopardized.
IRS also concluded that Hospital's activity of establishing and operating a voluntary payroll deduction plan for it and its tax-exempt subsidiaries' employees to contribute to any Code Sec. 527 plan won't constitute intervention in a political campaign. IRS reasoned that the proposed plan is similar to that described in Rev Rul 62-156, 1962-2 CB 47, in which an employer's costs of encouraging its employees to be politically involved and establishing a payroll deduction plan were deductible as ordinary and necessary business expenses. IRS further noted that Code Sec. 501(c)(3)’s prohibition on political campaign activity applies to the organization, and not the employed individuals in their private capacities. Since Hospital won't select the recipient organizations or influence the employees' choices, any political intervention resulting from the voluntary payroll deduction plan is attributable to the employees themselves.
References: For political campaign activities of a social welfare organization, see FTC 2d/FIN ¶D-5102; United States Tax Reporter ¶5014.13; TaxDesk ¶672,502; TG ¶20726.