IRS Looking At Nonprofits And Subsidiary PACs

It’s election season. While many nonprofit leaders have been fighting to keep the Johnson Amendment in place, others are attempting to form political action committees (PACs). The Internal Revenue Service (IRS) is pumping the brakes in some cases.

The IRS recently released private letter ruling 202005020 (PLR). Without identifying the organization, it involves a 501(c)(3) organization, the parent of a healthcare system that provided management, consulting, and other services to its affiliated 501(c)(3) healthcare facilities and educational institutions. The nonprofit was also the sole shareholder of a for-profit subsidiary. The subsidiary did not have its own employees and the two had a shared services agreement. The nonprofit agreed to provide the subsidiary with management, administrative, and corporate services as well as facilities and equipment.

The subsidiary wanted to start and run a PAC to solicit political contributions from employees of the nonprofit and the nonprofit’s 501(c)(3) affiliates, so the shared services agreement was expanded to include the PAC. The nonprofit also leased to the subsidiary and the PAC mailing lists of the nonprofit’s employees and the employees of its 501(c)(3) affiliates, all in exchange for fair market payments.

The legal experts at Venable LLP in Washington wrote about the ruling that “although a private letter ruling is not precedential and not binding except on the taxpayer(s) that requested the ruling, private letter rulings nevertheless are often cited as meaningful indicators of the IRS’s current thinking on issues. To that end, insofar as the PLR addresses a multi-entity structure utilizing a shared services agreement, the PLR is noteworthy.”

The PLR emphasizes the importance of reviewing all facts and circumstances relevant to multi-entity structures and relationships between nonprofits and for-profits. The PLR further highlights that, notwithstanding the IRS’s historical practice of respecting the separate status of parent and subsidiary entities, the IRS can nevertheless choose to disregard the separateness of such entities, thereby potentially implicating the tax-exempt status of nonprofits.

Here’s a link to the attorneys’ observations