May public charities share personnel and other resources with other non-charitable groups? What if that group is a political campaign? For a recent article,The Los Angeles Times sought out Ryan Oberly, a principal with Wagenmaker & Oberly, to help address that question. The Times article concerns a California nonprofit’s founder and his bid for election to the Los Angeles City Council. According to the article, two former interns of the nonprofit filed a complaint with the Los Angeles ethics committee, alleging that the founder “blurred the lines between his election effort and the charity, claims [the founder] denies.” The interns claimed they should have been working for the nonprofit, but ended up working on the founder’s election campaign instead. One intern said that the nonprofit’s debit card was used for election expenses.
When Oberly was asked about the possibility of shared personnel and resources between a public charity and another entity, he explained that “such dual roles can be ‘fraught with risk’ for nonprofits, particularly if space is shared.” Section 501(c)(3) organizations are subject to strict prohibitions to ensure that their assets are not used for private benefit. In the story in the Los Angeles Times, the situation appeared more problematic because Section 501(c)(3) organizations also have an absolute prohibition against intervening in political campaign activity. In the story, it was not simply a question about whether the charitable assets of the 501(c)(3) organization were inuring to the benefit of a non-charitable organization. Rather, it was alleged that the nonprofit’s assets were used for the benefit of the founder’s political campaign. The IRS has the statutory authority to revoke a 501(c)(3) organization’s tax-exemption if the organization engages in impermissible political campaign activity and may also impose excise taxes on the expenditure under Section 4955 of the Code.
As a basic rule, a public charity that is interested in sharing personnel and resources with a non-501(c)(3) organization should have proper controls and clear agreements that set forth, at a minimum:
- Ownership of any assets with shared use;
- Compensation agreements to ensure that the charity receives fair market value for any of its assets used by the second entity;
- Provisions of insurance to protect the charity if the other organization’s activities might put it at risk;
- Appropriate indemnification provisions;
- Conditions requiring the entities’ compliance with all applicable law; and
- Rules governing dispute resolutions.
Any prospective agreement must be carefully vetted by the nonprofit’s Board of Directors to ensure the agreement is in the nonprofit’s best interest. Assuming that such an agreement is reached, both organizations should keep detailed records listing the hours shared employees worked for each entity and should maintain separate accounts and financial records. While the additional revenue a charity receives from a shared personnel or resource agreement may be attractive, nonprofit boards should tread carefully – and in consultation with qualified legal counsel – so that the agreements are legally compliant and otherwise in the organization’s best interests.