Can a 501(3)(c) charity (a hospital) have a for-profit subsidiary that is taxed as a "C" Corp?
Yes. It is not unusual for a charity, particularly a hospital, to have a wholly owned subsidiary that is a for-profit organization taxed as a business under Subchapter C of the Tax Code. There have been times when Congress has considered changes in the current rules, but they have never been passed.
A charity will often use a separate C corporation to conduct unrelated business activities, pay tax on the profit, and use the remainder to support the charitable activities.
There is no problem with this scheme so long as the charity owns 100% of the stock of the C corp. Issues may arise if there are other individual or for-profit investors in the corporation. The IRS may look in those situations to see whether the charity is using its exempt status in some way to provide an improper private benefit or private inurement to the other investors.
Pennsylvania has what I believe to be a unique rule which allows a “small business” to enjoin a charity from funding or subsidizing a for-profit in competition with the small business in the same community. (See Ready Reference Page: “Act 55 Defines ‘Charity’ Eligible for Exemption.”)
Sunday, October 30, 2011