Internal Revenue Service Holds that Payroll Deduction Plan Administered by a 501(C)(3) Organization Constitutes Prohibited Participation or Intervention in a Political Campaign

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Internal Revenue Service Holds that Payroll Deduction Plan Administered by a 501(C)(3) Organization Constitutes Prohibited Participation or Intervention in a Political Campaign
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On November 12, 2004 the Internal Revenue Service released Technical Advice Memorandum 200446033. The Internal Revenue Service concluded that a tax-exempt Internal Revenue Code Section 501(c)(3) organization that administered a payroll deduction plan facilitating employee contributions to a political action committee constituted prohibited participation or intervention in a political campaign. Under the Code, an organization does not qualify for tax exemption as a 501(c)(3) organization if it directly or indirectly participates or intervenes in any political campaign.

In Technical Advice Memorandum 200446033, a tax-exempt 501(c)(3) corporation was the parent ("Parent") of a system providing healthcare services. The President of Parent was also the Chairman of a tax-exempt 501(c)(6) trade association ("Association") representing hospitals and health systems. Association organized a political action committee ("PAC"). The PAC supported candidates for state legislative positions and offices. The PAC had a payroll deduction plan (the “Plan�) pursuant to which employees can have contributions deducted automatically and forwarded to the PAC. Parent made the Plan available to employees of the system.

Department heads and managers of Parent and its affiliates briefly discussed the Plan at regularly scheduled meetings. Managers were asked to inform employees of their ability to participate in the PAC through payroll deductions. A video featuring the President of Parent explaining the impact of political input on the hospital industry was produced and distributed to managers to assist in their communication efforts with employees. Donation cards were made available to employees. Employees were informed that their participation was voluntary. An employee newsletter also informed employees about the opportunity to use payroll deductions for contributions to the PAC.

The Internal Revenue Service noted that 501(c)(3) organizations may not provide or solicit financial or other forms of support for political organizations. The Internal Revenue Service determined that Parent implicitly endorsed and solicited financial support for the PAC by virtue of offering the Plan and, therefore, Parent indirectly intervened in political campaigns since the PAC supports hospital industry candidates. The Internal Revenue Service also noted that while the activities of individuals in their private capacity are not prohibited, there are situations where the acts of individuals will be attributed to 501(c)(3) organizations. The Internal Revenue Service noted that this can occur when organization officials use the organization’s resources, facilities or personnel or when the official does not clearly indicate that actions or statements are those of the individual and not of the organization. The Internal Revenue Service determined that Parent indirectly endorsed the PAC by virtue of its President's use of the video produced to assist in employee communications.

In addition to determining that the organization participated or intervened in a political campaign prohibited by Code Section 501(c)(3), the Internal Revenue Service also determined that any expenditures of the organization for the administration of the Plan were political expenditures subject to an excise tax. Generally a tax of 10% of the amount of political expenditures is imposed on the organization and 2 1/2% is imposed on certain managers of the organization.

It is important that all 501(c)(3) organizations review their activities in light of Technical Advice Memorandum 200446033. If you have any questions or need assistance with regard to issues discussed above do not hesitate to contact Robert Daleo of the Firm's tax group at rdaleo@riker.com.