IRS: Charity May Create 501(c)(4) Organization, Which Will Establish Political Action Committees, Without Endangering 501(c)(3)’s Tax Exemption

The U.S. Internal Revenue Service has ruled that a health care system operated as a 501(c)(3) public charity may establish a 501(c)(4) social welfare organization, which in turn will set up two 527 political action committees, without impermissibly participating or intervening in political campaign activities. PLR 2011-27-013 (Apr. 15, 2011).The IRS publicly released its decision last week in a private letter ruling, which does not have legal precedential value and is binding only as to the party who requested the ruling.

The U.S. Court of Appeals for the District of Columbia Circuit has stated that a 501(c)(3) charity may not directly establish a political action committee. See Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000). However, a 501(c)(3) organization may create and control a 501(c)(4) organization to carry out activities that are permissible under Internal Revenue Code (“IRC”) § 501(c)(4) but that are not allowed under § 501(c)(4). In such a situation, the organizations must be separately incorporated, and they must maintain records sufficient to show that tax-deductible contributions are not being used to pay for non-exempt purposes under § 501(c)(3).  An organization recognized as exempt under IRC § 501(c)(4) may engage in political activities and may establish a political organization described in IRC § 527(e), so long as political activity is not the primary activity of the 501(c)(4) organization.

In its private letter ruling, the IRS recognized the above principles and approved the requesting organization’s proposal for a three-tier structure, in which all organizations will be separately incorporated and independently operated, with separate finances and identities, and will deal with each other at arms-length.

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