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December 13, 2004
IRS Memorandum Regarding Hospital Political Activity
On November 16, the Internal
Revenue Service released a Technical Advice Memorandum (TAM
200446033) concluding that the manner in which a 501(c)(3)
hospital system administered a payroll deduction program in
support of the state hospital association political action
committee constituted prohibited political activity. This
memorandum will describe the facts of the case, the basis
for the IRS conclusion, and the implications for the IHA
PAC. A copy of the TAM is attached (click
here).
TAMs are not legally binding and may not be used as
precedent in other cases. TAMs only address a particular
factual situation, and different facts could change the
advice given. However, TAMs can indicate IRS thinking on an
issue.
The TAM re-enforces the IHA PAC position that while individuals
can participate fully in the political process, they must
not use the financial and other resources of 501(c)(3)
hospitals to support or oppose candidates or PACs.
Facts
The TAM concerns a
health system that operates hospitals. The health system is
a 501(c)(3) organization. The system belongs to a state
hospital association that sponsors a political action
committee (PAC) that supports candidates for state office.
The PAC offers hospitals a payroll deduction plan as a
means of collecting contributions to the PAC.
The system launched an effort to make all of its employees
aware of the PACs payroll deduction plan. The system
produced and duplicated a video featuring the system
president. In the video, the president introduces himself
as the CEO of the system. The video was shown at regularly
scheduled meetings of system employees. PAC donation cards
were distributed at these meetings, and system managers
were encouraged to obtain signed cards from all employees.
Employees could use the cards to either participate or
refuse to participate in the payroll deduction plan.
The PAC payroll deduction plan was also described in the
systems employee newsletter, and the necessary forms
were included in the newsletter. The TAM notes that PAC
personnel were not present at the system employee meetings.
In other words, all communications to system employee about
the about the PAC appear to have come from system
executives and managers.
The PAC reimbursed the system for "incremental
costs" associated with its efforts to inform employees
about the payroll deduction plan for example, the cost
of producing and duplicating the video, the cost of
printing the donation cards, and even the cost of doughnuts
served at one of the employee meetings. However, the system
did not seek reimbursement for the cost of the presidents
time in making the video or the cost of producing the
newsletter because the system did not view these activities
as imposing any additional cost on the system.
IRS Analysis
The IRS analysis
begins with the well-known rule that 501(c)(3)
organizations may not directly or indirectly participate or
intervene in any political campaign on behalf of or in
opposition to any candidate for public office.
The TAM also makes the following critical distinction:
The prohibition on
political campaign activity applies only to section
501(c)(3) organizations, not to the activities of
individuals in their private capacity. The prohibition
against political campaign activity does not prevent an
organization's officials from being involved in a
political campaign so long as those officials do not in
any way utilize the organization's financial resources,
facilities, or personnel, and clearly and unambiguously
indicate that the actions taken or the statements made are
those of the individuals and not of the organization.
[Emphasis added.]
Thus, the key question in
the IRS analysis is whether the endorsement and support of
the PAC should be attributed to the system itself or to
system employees acting in their individual capacity. The
TAM explains that the answer to this question depends on
the particular facts and circumstances.
The IRS explains that "the actions of the officials
are attributed to the section 501(c)(3) organization"
in two circumstances:
- When officials of the
organization engage in political activity at official
functions of the organization.
- When officials of the
organization engage in political activity through the
organizations official publications.
The IRS also identifies
three other circumstances that are "indicative
that the actions of the individual should be
attributed" to the 501(c)(3) organization:
- Use of the organizations
financial resources.
- Use of the organizations
facilities.
- Use of the organizations
personnel.
Notice the difference in the
language used by the IRS. In the first two circumstances,
the TAM says the actions of officials are attributed
to the organization. However, the TAM says the other three
circumstances are indicative that the officials
actions should be attributed to the organization.
Applying these standards, the IRS concluded that the
actions of the system president and managers should be
attributed to the organization in other words, that the
organization itself was endorsing and promoting the PAC.
The IRS focused particular attention on the video of the
presidents message to employees. The TAM states that
"the video is essentially an endorsement of the [PAC]
by the [system] through its CEO." The TAM notes,
"Nowhere in the video does [the president] distance
himself from [the system] or make clear that his statements
are his and not [the system's]."
These two statements are critical to an understanding of
this TAM. Even though there is discussion elsewhere about
the use of system resources, I believe the result would
have been the same even if the system had been reimbursed
for 100% of all costs related to its activities. The
critical factor appears to have been that the CEO appeared
in the video in his capacity as system CEO rather than
in his individual capacity. The system employees were
being solicited by the system itself something
that the system cannot do.
Discussion: Lessons
for Hospitals and PACs
While the release of
this TAM has caused something of a stir in trade
publications, it does not break new legal ground or
establish a new legal precedent. It merely applies
well-known legal principles to reach a conclusion about the
specific facts presented in this case.
The central lesson of
the TAM is that individuals who work for 501(c)(3)
organizations can engage in political activities, but they
must so in such a way that their individual conduct
will not be attributed to the 501(c)(3) organization.
The Illinois
Hospital Association PAC solicits contributions from individuals
associated with member hospitals. It also asks individuals
associated with member hospitals to encourage other
individuals to contribute to the PAC. If done correctly,
this activity does not violate Section 501(c)(3).
The following will help ensure that individual
activity in support of the IHA PAC is not misconstrued as
the conduct of the hospital:
- An individual should avoid
the use of hospital facilities, equipment and
supplies. For example, a hospital CEO may send a
personal note encouraging other individuals to
contribute to the PAC but it should be on personal
stationery rather than hospital letterhead. However, a
hospital may make facilities available to a PAC on the
same terms that the facilities are available to other
organizations for example, renting a meeting room at
fair market rent if it can be rented by other groups.
- An individual should
"clearly and unambiguously" indicate that she
is acting in her individual capacity and not on behalf
of the hospital. The TAM makes this point very clearly:
"Nowhere in the video does [the president] distance
himself from [the system] or make clear that his
statements are his and not [the system's]." This
sentence suggests that it was not the use of the video per
se that violated the law. Rather, it was the
impression created by the video that employees were
being solicited by the system itself. This sentence also
suggests that the outcome may have been different if the
CEO had said, "I am speaking to you today as a
private individual not as the system CEO. These are
my own personal views and do not represent the views of
the system."
- Solicitation should be
done on personal time for example, over the lunch
hour, during breaks, or before or after work.
- Employees assisting with
the solicitation efforts should be doing so voluntarily
and not as part of their job responsibilities with the
hospital.
- Consider having the
solicitation done by IHA PAC representatives. The TAM
notes that no PAC representatives were present at the
employee meetings where solicitations occurred. A
solicitation coming from a PAC representative offers
greater "separation" from the hospital since
the PAC representative is an outsider not someone
who can speak on behalf of the hospital. Again, the
views expressed should be described as those of the PAC
and not of the hospital.
The legal issues raised by
the recent IRS TAM can be complex and analysis depends
heavily on the particular facts and circumstances. Thus,
this memorandum should not be construed as legal advice.
Hospitals with more detailed questions about political
activity should consult with their own legal counsel.
Staff Contact:
Mark Deaton: (630) 276-5466
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