[Federal Register Volume 64, Number 132 (Monday, July 12, 1999)]
[Rules and Regulations]
[Pages 37397-37400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16605]
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FEDERAL ELECTION COMMISSION
11 CFR Part 110
[Notice 1999-10]
Treatment of Limited Liability Companies Under the Federal
Election Campaign Act
AGENCY: Federal Election Commission.
ACTION: Final rules and transmittal of regulations to Congress.
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SUMMARY: The Commission has adopted new regulations that address the
treatment of limited liability companies (``LLC'') for purposes of the
Federal Election Campaign Act (``FECA'' or the ``Act''). The new rules
provide that LLCs will be treated as either partnerships or
corporations for FECA purposes, consistent with the tax treatment they
select under the Internal Revenue Code.
DATES: Further action, including the publication of a document in the
Federal Register announcing an effective date, will be taken after
these regulations have been before Congress for 30 legislative days
pursuant to 2 U.S.C. 438(d).
FOR FURTHER INFORMATION CONTACT: N. Bradley Litchfield, Associate
General Counsel, or Rita A. Reimer, Attorney, 999 E Street, NW,
Washington, DC 20463, (202) 694-1650 or (800) 424-9530 (toll free).
SUPPLEMENTARY INFORMATION: The Commission is publishing today new
regulations at 11 CFR 110.1(g) governing the treatment of Limited
Liability Companies under the Federal Election Campaign Act, 2 U.S.C.
431 et seq. LLCs are non-corporate business entities, created under
State law, that have characteristics of both partnerships and
corporations. These entities did not exist when the FECA was originally
enacted in 1971, and were in their infancy when the pertinent
provisions of the FECA were last amended in 1979.
On December 18, 1998, the Commission published a Notice of Proposed
rulemaking (``NPRM'') in which it sought comments on this issue. 63 FR
70065 (Dec. 18, 1998). Written comments were received from the American
Medical Association, the Internal Revenue Service, and Nicholas G.
Karambelas.
Since these rules are not major rules within the meaning of 5
U.S.C. 804(2), the FECA controls the legislative review process. See 5
U.S.C. 801(a)(4), Small Business Enforcement Fairness Act, Pubic Law
104-121, section 251, 110 Stat. 857, 869 (1996). Section 438(d) of
Title 2, United States Code, requires that any rules or regulations
prescribed by
[[Page 37398]]
the Commission to carry out the provisions of Title 2 of the United
States Code be transmitted to the Speaker of the House of
Representatives and the President of the Senate 30 legislative days
before they are finally promulgated. These regulations were transmitted
to Congress on Friday, June 25, 1999.
Explanation and Justification
The Federal Election Campaign Act, as amended, contains various
restrictions and prohibitions on the right of ``persons'' to contribute
to Federal campaigns. The Act defines ``person'' to include an
individual, partnership, committee, association, corporation, labor
organization, or any other organization or group of persons. 2 U.S.C.
431(11).
The Act prohibits corporations and labor organizations from making
any contribution or expenditure in connection with a Federal election,
2 U.S.C. 441b(a), although these entities may establish separate
segregated funds (``SSF'') and solicit contributions from their
restricted class to the SSF. 2 U.S.C. 441b(b)(2)(C). The Act also
prohibits contributions by Federal contractors, 2 U.S.C. 441c, and
foreign nationals, 2 U.S.C. 441e. Contributions by persons whose
contributions are not prohibited by the Act are subject to the limits
set out in 2 U.S.C. 441a(a), generally $1,000 per candidate per
election to Federal office; $20,000 aggregate in any calendar year to
national party committees; and $5,000 aggregate in any calendar year to
other political committees. 2 U.S.C. 441a(a)(1). Individual
contributions may not aggregate more than $25,000 in any calendar year.
2 U.S.C. 441a(a)(3).
Contributions by partnerships are permitted, subject to the 2
U.S.C. 441a(a) limits. In addition, partnership contributions are
attributed proportionately against each contributing partner's limit
for the same candidate and election. 11 CFR 110.1(e).
In recent years the Commission received several advisory opinion
requests (``AOR'') seeking guidance on the treatment of LLCs for
purposes of the Act, and has issued advisory opinions (``AO'') in
response to these AORs. See AOs 1998-15, 1998-11, 1997-17, 1997-4,
1996-13, and 1995-11. The AOs generally considered how the LLCs were
treated under State law to determine their treatment for purposes of
the Act. As the number of AORs on this topic increased, the Commission
decided that it would be advisable to draft a generally-applicable rule
to deal with these entities.
The NPRM sought comments on two alternative approaches. Under
Alternative A, LLCs would be treated as partnerships for FECA purposes.
Contributions by an LLC would be attributed to the LLC and to each
member of the LLC in direct proportion to member's share of the LLCs
profits, as reported to the recipient by the LLC, or by agreement of
the members, as long as certain conditions were met.
Under Alternative B, the Commission would defer to the IRS ``check
the box'' rules in classifying LLCs as either partnerships or
corporations for FECA purposes. The IRS rules allow certain business
entities to opt for corporate tax treatment under federal law without
regard to their State law status. See, 26 CFR 301.7701-3. Generally, an
eligible entity is one that is not required to be treated as a
corporation for federal tax purposes. Under 26 U.S.C. 7704, read in
conjunction with 26 CFR 301.7701-3, the IRS considers LLCs eligible
entities so long as the LLC is not publicly traded. If an eligible LLC
makes no election under these rules, the IRS' ``default rule'' treats
the LLC as a partnership. 26 CFR 301.7701-3(b). Alternatively, if an
LLC selects corporate tax status by ``checking the box,'' it is taxed
as a corporation for federal tax purposes. 26 CFR 301.7701-3(b)(3).
Like the IRS rules, the Commission would treat all LLCs as
partnerships unless an LLC opts for federal corporate tax treatment
pursuant to the ``check the box'' provisions. Both LLCs which ``check
the corporate box'' and those that are publicly traded would be treated
as corporations for FECA purposes.
For the reasons set forth below, the Commission is adopting
Alternative B and will follow the IRS' ``check the box'' approach for
purposes of these rules. The new rules therefore supersede AOs 1998-15,
1998-11, 1997-17, 1997-4, 1996-13, and 1995-11, in which the Commission
determined that LLCs should be treated as ``persons'' for FECA
purposes.
The Commission notes that these rules should be viewed as a narrow
exception to its general practice of looking to State law to determine
corporate status. The Commission will continue to treat all entities
that qualify as corporations under State law as corporations for FECA
purposes.
Section 110.1(g) Contributions by Limited Liability Companies
Section 110.1(g)(1) Definition
LLCs are a relatively recent creation of state law. Wyoming enacted
the first LLC statute in 1977, but the majority of these laws have been
enacted since 1990. Callison and Sullivan, Limited Liability Companies,
section 1.5 (1994). LLCs are a cross between the traditional
corporation and a partnership, sharing both corporate and partnership
attributes. Like partnerships, LLC members are generally taxed as
partners at the state level, but enjoy the liability protection of
corporate shareholders. To varying extents, LLCs possess other
corporate attributes, including free transferability of interest,
centralized management, and the ability to accumulate capital. This
section defines a limited liability company as a business entity
recognized as a limited liability company under the laws of the State
in which it is established.
Section 110.1(g)(2) Treatment of Certain LLCs as Partnerships
This section follows the IRS ``check the box'' rules at 26 CFR
301.7701-3, stating that a contribution by an LLC that elects to be
treated as a partnership by the IRS, or does not elect treatment as
either a partnership or a corporation, shall be considered a
contribution from a partnership pursuant to 11 CFR 110.1(e). Since most
LLCs choose this tax classification, or acquire it through default,
they will be covered by this paragraph.
One commenter urged the Commission to adopt Alternative A, which
would treat all LLCs as partnerships. However, the structure of LLCs
that elect corporate tax treatment is such that they would find it
impracticable, if not impossible, to comply with such a requirement. As
the Tax Court has explained, partnerships, and by analogy partnership-
like LLCs, ``must maintain a capital account for each member that
directly reflects the actual amounts paid in respect to that particular
membership interest. There is no such requirement for corporations. A
corporation is a separate legal entity, whereas a partnership is an
aggregate of its partners. A corporation does not have individual
drawing accounts for each of its shareholders.'' Board of Trade of
Chicago v. Comm. of Internal Revenue, 106 T.C. 369, 391 n.21 (1996).
Therefore, corporate-like LLCs would be hard-pressed to comply with
this requirement.
Another commenter requested that the Commission continue the
approach set forth in past advisory opinions, i.e., treat LLCs as
persons subject to the 2 U.S.C. 441a(a) contribution limits. The
Commission is concerned that this approach could lead to possible
proliferation problems, since a person who was a member of numerous
LLCs could contribute up to the statutory limits through each of them.
Also, if any
[[Page 37399]]
of the LLC's members were prohibited from contributing, e.g., were
foreign nationals or government contractors, the LLC itself would be
precluded from making contributions, under this approach.
Section 110.1(g)(3) Treatment of Certain LLCs as Corporations
This section states that an LLC that elects to be treated as a
corporation by the IRS pursuant to 26 CFR 301.7701-3, or an LLC with
publicly-traded shares, shall be considered a corporation pursuant to
11 CFR Part 114. Part 114 contains the Commission's rules governing
corporate and labor organization activity under the FECA.
The Commission notes that, in order to determine the type of
entities subject to corporate treatment under the FECA, it must first
identify those business entities that should be defined as
corporations. This term is not explicitly defined anywhere in the Act
or the regulations. The only reference in the legislative history
directs the Commission to look to State law to determine the status of
professional corporations, but is silent as to all other types of
corporations. See H.R. Rept. 1438 (Conf.), 93d Cong., 2d Sess. 68-69
(1974).
Since Congress did not ``directly address the precise question at
issue''--whether the definition of corporation includes LLCs--the
Commission is free to refer to the IRS rules, as long as its
interpretation is not ``manifestly contrary to the statute.'' Chevron
U.S.A., Inc. v. National Resources Defense Council, Inc., 837 U.S. 837,
842-44 (1984). The Chevron analysis is the standard used by Federal
courts to determine whether or not an agency has construed the statute
permissibly. See also, Clifton v. FEC, 114 F.3d 1309, 1318 (1st Cir.
1997); Bush-Quayle '92 Primary Committee, Inc. v. FEC, 104 F.3d 448,
452 (D.C.Cir. 1997)
When an LLC elects corporate status for IRS purposes, it is
essentially telling the IRS that its organizational structure and
functions are more akin to a corporation than a partnership. This
allows the LLC to accumulate capital at the corporate level, and to
take advantage of favorable tax treatment of corporate losses and
dividends received. Rather than attempting to determine whether an LLC
more closely resembles a corporation versus a partnership, or simply
classifying an LLC as a partnership without any reference to its actual
structure or form, the Commission believes it can most effectively
carry out FECA's intent by classifying LLCs according to their federal
tax status, which most accurately describes whether an LLC's structure
and function are more akin to a ``corporation'' or a ``partnership.''
The U.S. Supreme Court has interpreted congressional intent behind
the FECA's prohibition of corporate contributions as a legitimate
``need to restrict the influence of political war chests funneled
through the corporate form'' and to ``regulate the substantial
aggregations of wealth amassed by the special advantages which go with
the corporate form of organization.'' FEC v. National Conservative
Political Action Committee, 470 U.S. 480, 501 (1985), quoting National
Right to Work Committee v. FEC, 197, 210 (1982). Following the IRS'
``check the box'' approach carries out this policy.
An LLC electing federal corporate status ``checks the box'' because
it seeks to enjoy the benefits of corporate status. Such corporate
advantages include, inter alia, flexible merger rules, the avoidance of
personal income tax for LLC members, preferential tax treatment on
dividends received and deductions for corporate losses, subject to
certain rules. LLCs might also elect corporate status in preparation
for an upcoming corporate merger.
Election of IRS corporate status confers specific benefits on those
LLCs, just as State-chartered corporations enjoy similar advantages.
Thus the Commission is fulfilling the purpose behind FECA's corporate
prohibitions by regulating these entities as corporations.
As explained above, the Commission's adoption of the IRS treatment
is consistent with the underlying policy regarding the ability of
corporate-like LLCs to amass capital through the special advantages
conferred upon them by the Federal Government. Moreover, the courts
have consistently held that, where a corporation does not exist under
State law, Federal agencies may appropriately refer to the policies
behind Federal statutes in identifying the ``corporate-like''
activities of non-corporate forms. In Morrissey v. Commissioner, 296
U.S. 344 (1935), the Supreme Court held that a trust could be
classified as an association, conferring what was, at that time, the
equivalent of corporate tax status, for Federal income tax purposes.
Instead of looking to State status or ``labels,'' the Court explained
that, ``[w]hile the use of corporate forms may furnish persuasive
evidence of the existence of an association, the absence * * * of the
usual terminology of corporations cannot be regarded as decisive. Thus
an association may not have 'directors' or 'officers' but the
'trustees' may function 'in much the same manner as the directors in a
corporation' for the purpose of carrying on the enterprise.'' Id. at
358 (internal citations omitted). Similarly, in U.S. v. McDonald &
Eide, Inc., 865 F.2d 73, 76 (3d Cir. 1989), the Third Circuit Court of
Appeals held that, because there is no Federal common law of
corporations, ``state law is used where persuasive, but ignored when
not in accord with the policies'' of the underlying federal statute, in
this case the Internal Revenue Code.
The IRS' ``check the box'' rules, read in conjunction with 26
U.S.C. 7704, which requires publicly-traded partnerships to be taxed as
corporations for tax purposes, require publicly-traded LLCs to be taxed
as corporations. Paragraph 110.1(g)(3), therefore, further provides
that publicly-traded LLCs shall be treated as corporations for FECA
purposes.
Section 110.1(g)(4) Contributions by Single Member LLCs
The IRS in its comment pointed out that single member LLCs are not
eligible for treatment as partnerships--that is, they cannot ``check
the box'' to elect partnership treatment. Consistent with this
approach, section 110.1(g)(4) states that a contribution by a single-
member LLC that does not elect corporate tax treatment shall be
attributed only to that member. Because of the unity of the member and
the LLC in this situation, it is appropriate for attribution of the
contribution to pass through the LLC and attach to the single member
under these circumstances.
Section 110.1(g)(5) Information Provided to Recipient Committees
One commenter pointed out that, if this approach were adopted, a
recipient committee might inadvertently accept an illegal contribution,
because the committee would have no way of knowing whether the LLC had
opted for corporate tax treatment and was therefore prohibited from
contributing to Federal campaigns. The Commission further notes that
the recipient committee would have no way of knowing how to attribute a
contribution made by an eligible multi-member or single member LLC,
unless that information was provided. Section 110.1(g)(5) accordingly
states that an LLC that makes a contribution pursuant to paragraph
(g)(2) or (g)(4) of this section shall, at the time it makes the
contribution, provide information to the recipient committee as to how
the contribution is to be attributed, and affirm to the recipient
committee that the LLC is eligible to make the contribution.
[[Page 37400]]
Subchapter S Corporations
Subchapter S corporations are corporations that, if they meet
certain size and other requirements, can choose to be taxed as
unincorporated businesses for Federal income tax purposes under
Subchapter S of the Internal Revenue Code, 26 U.S.C. 1361-1379. Because
there is some general similarity between the Federal income taxation of
LLCs and Subchapter S corporations, the NPRM also sought comments as to
whether Subchapter S corporations should be allowed to make otherwise
lawful contributions in Federal elections. Under that approach,
contributions by a Subchapter S corporation would be attributed only to
the individual stockholders of the corporation as their personal
(noncorporate) contributions and would be subject to their limits under
the Act.
Because Subchapter S corporations are considered corporations under
the laws of all fifty States, the final rules do not address this
issue.
Certification of No Effect Pursuant to 5 U.S.C. 605(b) (Regulatory
Flexibility Act)
These proposed rules would not, if promulgated, have a significant
economic impact on a substantial number of small entities. The basis
for this certification is that limited liability companies are already
covered by the Act, and the proposed revisions would clarify the extent
to which they could contribute to Federal campaigns. In some instances
this amount would be greater than is presently the case, while in
others it would be smaller. In neither case would the amount involved
qualify as ``significant'' for purposes of the Regulatory Flexibility
Act.
List of Subjects in 11 CFR Part 110
Campaign funds, Political candidates, Political committees and
parties.
For the reasons set out in the preamble, Subchapter A, Chapter I of
Title 11 of the Code of Federal Regulations is amended to read as
follows:
PART 110--CONTRIBUTION AND EXPENDITURE LIMITATIONS AND PROHIBITIONS
1. The authority citation for Part 110 continues to read as
follows:
Authority: 2 U.S.C. 431(8), 431(9), 432(c)(2), 437d(a)(8), 441a,
441b, 441d, 441e, 441f, 441g and 441h.
2. Section 110.1 is amended by adding new paragraph (g) to read as
follows:
Sec. 110.1 Contributions by persons other than multicandidate
political committees (2 U.S.C. 441a(a)(1)
* * * * *
(g) Contributions by limited liability companies (``LLC'').
(1) Definition. A limited liability company is a business entity
that is recognized as a limited liability company under the laws of the
State in which it is established.
(2) A contribution by an LLC that elects to be treated as a
partnership by the Internal Revenue Service pursuant to 26 CFR
301.7701-3, or does not elect treatment as either a partnership or a
corporation pursuant to that section, shall be considered a
contribution from a partnership pursuant to 11 CFR 110.1(e).
(3) An LLC that elects to be treated as a corporation by the
Internal Revenue Service, pursuant to 26 CFR 301.7701-3, or an LLC with
publicly-traded shares, shall be considered a corporation pursuant to
11 CFR Part 114.
(4) A contribution by an LLC with a single natural person member
that does not elect to be treated as a corporation by the Internal
Revenue Service pursuant to 26 CFR 301.7701-3 shall be attributed only
to that single member.
(5) An LLC that makes a contribution pursuant to paragraph (g)(2)
or (g)(4) of this section shall, at the time it makes the contribution,
provide information to the recipient committee as to how the
contribution is to be attributed, and affirm to the recipient committee
that it is eligible to make the contribution.
* * * * *
Dated: June 25, 1999.
Scott E. Thomas,
Chairman, Federal Election Commission.
[FR Doc. 99-16605 Filed 7-9-99; 8:45 am]
BILLING CODE 6715-01-P
