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Volume X, Number 265

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IRS Rules that PAC Sponsored by a For-Profit Subsidiary of a 501(c)(3) Health Care System Parent Violates Prohibition on Political Campaign Intervention

In a January 31, 2020 private letter ruling (PLR 202005020), the IRS ruled that where a Parent 501(c)(3) non-profit organization was providing administrative services to a for-profit Subsidiary, the Subsidiary’s creation and operation of a political action committee (PAC) would violate the prohibition on political campaign intervention by Section 501(c)(3) organizations. This is a surprising and potentially troubling IRS ruling. We will keep a close eye on subsequent developments.


The Parent is the parent of a health care system that includes a number of Section 501(c)(3) organizations. The Parent provides management, consulting, and other services to its related health care facilities and educational institutions. The Parent also owns all of the stock in a for-profit Subsidiary.

As for-profit corporations often do, the Subsidiary planned to sponsor a PAC (the Subsidiary would have control of the PAC through common directors). The PAC would solicit contributions from employees of the Subsidiary, the Parent, and the Parent’s Section 501(c)(3) subsidiaries. The Parent would provide the Subsidiary of the PAC with a mailing list of employees to be used to solicit contributions for the PAC and charge the Subsidiary the fair market value for use of this list.

The Parent and Subsidiary also entered into a resource-sharing agreement. Under this agreement, the Parent agrees to provide management, administrative, and corporate services and make available facilities and equipment to the Subsidiary and the Subsidiary’s subsidiaries identified on a schedule to the agreement, which would be expanded to include the PAC after it is formed. The Subsidiary reimburses the Parent for the costs incurred by the Parent in providing such services and resources.


The IRS ruled that the operation of the PAC by the Subsidiary would constitute participation or intervention in a political campaign by the Parent, and that the Parent’s provision of services and other resources to its subsidiary and the PAC pursuant to the resource-sharing agreement, would also constitute participation or intervention in a political campaign by the Parent, all in violation of the requirements for Section 501(c)(3) tax exemption.

The IRS further ruled that the resource-sharing agreement between the Parent and the Subsidiary would cause the Parent to be operated for the benefit of private interests and would not further an exempt purpose, again contrary to Section 501(c)(3) requirements.


Notably, the IRS did not cite relevant precedent in its analysis. The ruling did not cite Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), which stands for the proposition that a corporation created for a business purpose or carrying on a business activity will be respected as an entity separate from its owner for federal tax purposes.

Likewise, the ruling did not cite, and potentially contradicts, Regan v. Taxation With Representation, 461 U.S. 540 (1983), in which the Supreme Court noted that a Section 501(c)(3) organization may create a Section 501(c)(4) affiliate to pursue its charitable goals through lobbying.

Other organizations with similar structures should consider how such structures would be treated by the IRS in light of this ruling. Although private letter rulings are not precedential and are not binding beyond the requesting taxpayer, these rulings can provide insight into how the IRS views these issues. This ruling potentially calls into question a number of arrangements that organizations and their advisors previously thought were acceptable to the IRS.

Organizations should also keep in mind that the IRS addressed a specific set of facts. The IRS focused on the resource-sharing agreement and the PAC’s use of the Parent’s mailing list as factors in its ruling. Organizations with dissimilar facts will not necessarily be impacted should the IRS continue to apply this approach.

Organizations should stay current as to any further clarification that the IRS provides on this topic. In the meantime, organizations with facts similar to those addressed in the PLR should examine their structure and consider whether changes are necessary to avoid the same result as the organization in this PLR.

© 2020 Foley & Lardner LLPNational Law Review, Volume X, Number 79


About this Author

 Benjamin B. Genzer Associate Milwaukee Taxation Corporate Employee Benefits & Executive Compensation

Benjamin B. Genzer is an associate and business lawyer with Foley & Lardner LLP, and he is a member of the firm’s Taxation Practice.

Ben’s practice focuses on tax planning, tax-exempt and nonprofit organizations, executive compensation, and closely-held business planning.

Jason J. Kohout, Foley Lardner, Business Lawyer, Tax corporate Attorney

Jason Kohout is a senior counsel and business lawyer practicing with Foley & Lardner LLP. His work encompasses all areas of tax and corporate law, and focuses on the areas of tax-exempt organizations, charitable giving, and political and lobbying law. Mr. Kohout is a member of the firm's Estates & Trusts, Taxation, and Government & Public Policy Practices and the Health Care Industry Team.

Mr. Kohout advises a variety of tax-exempt organizations in all aspects of formation and on-going operations. He currently assists a large membership organization in issues related to unrelated business income tax. Recently, he provided a detailed analysis of UBIT issues for a healthcare research organization. Also recently, he formed two organizations to operate national donor-advised funds. He has advised both donors and charities on how to facilitate tax-advantaged contributions, including donations of interests in operating entities.

Richard Riley Jr. Partner

Richard F. Riley, Jr. is a partner and business lawyer with Foley & Lardner LLP. Mr. Riley’s practice focuses on tax-exempt and nonprofit organizations; taxation of insurance companies; taxation of railroad companies; employment and withholding taxes; and tax litigation at the administrative, trial, and appellate level. He is a member of the firm’s Taxation Practice.

His experience in representation includes taxation and trade association cases. He is a member of the insurance & reinsurance, insurance mergers, acquisitions, & complex...