[Federal Register Volume 60, Number 129 (Thursday, July 6, 1995)]
[Rules and Regulations]
[Pages 35292-35306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16502]
[[Page 35291]]
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Part VI
Federal Election Commission
_______________________________________________________________________
11 CFR Parts 100, 106, 109, and 114
Express Advocacy; Independent Expenditures; Corporate and Labor
Organization Expenditures; Final Rule
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules
and Regulations
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[[Page 35292]]
FEDERAL ELECTION COMMISSION
11 CFR Parts 100, 106, 109, and 114
[Notice 1995-10]
Express Advocacy; Independent Expenditures; Corporate and Labor
Organization Expenditures
AGENCY: Federal Election Commission.
ACTION: Final rule; Transmittal of regulations to Congress.
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SUMMARY: The Commission is issuing revised regulations that define the
term ``express advocacy'' and describe certain nonprofit corporations
that are exempt from the prohibition on independent expenditures. The
new rules implement portions of several decisions issued by the Federal
courts in recent years. These rules were originally part of a larger
rulemaking on the scope of permissible and prohibited corporate and
labor organization expenditures. The Commission expects to complete the
remaining portions of the original rulemaking by issuing additional
revisions to the regulations at a later date.
DATES: Further action, including the announcement of 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: Ms. Susan E. Propper, Assistant
General Counsel, 999 E Street, N.W., Washington, D.C. 20463, (202) 219-
3690 or (800) 424-9530.
SUPPLEMENTARY INFORMATION: The Commission is today publishing the final
text of revisions to its regulations at 11 CFR 100.17, 106.1(d) and
109.1(b) and the text of new regulations at 11 CFR 100.22 and 114.10.
Generally, these regulations implement sections 431(17), 431(18) and
441b of the Federal Election Campaign Act of 1971, as amended, 2 U.S.C.
431 et seq. [``FECA'' or ``the Act'']. These regulations have been
revised in accordance with a number of Federal court decisions
involving section 441b.
Section 441b prohibits corporations and labor organizations from
using general treasury monies to make contributions or expenditures in
connection with Federal elections. The new regulations provide further
guidance on what constitutes an expenditure, and describe certain
corporations that are exempt from the independent expenditure
prohibition. However, these new rules do not apply to contributions,
whether monetary or in-kind.
In Federal Election Commission v. Massachusetts Citizens for Life,
Inc., 479 U.S. 238 (1986) [``MCFL''], the Supreme Court held that
expenditures must constitute express advocacy to be subject to the
prohibition of section 441b. MCFL at 249. In addition, the Court
concluded that the prohibition on independent expenditures in section
441b cannot constitutionally be applied to nonprofit corporations
having certain essential features. The Court said that corporations
that (1) are formed for the express purpose of promoting political
ideas and cannot engage in business activities; (2) have no
shareholders or other persons affiliated so as to have a claim on the
corporation's assets or earnings; and (3) are not established by a
business corporation or labor organization and have a policy against
accepting donations from such entities, cannot be subject to the
independent expenditure prohibition.
Based on this decision, the National Right to Work Committee filed
a Petition for Rulemaking urging the Commission to revise 11 CFR 114.3
and 114.4 to conform to the statement in the MCFL opinion that
``express advocacy'' is the appropriate standard for determining when
independent communications by corporations and labor organizations are
prohibited under section 441b. See Notice of Availability of Petition
for Rulemaking, National Right to Work Committee, 52 FR 16275 (May 4,
1987). Thus, the Petition took the position that the Commission's
partisan/nonpartisan standards governing corporate and labor
organization communications to the entity's restricted class and the
general public are unconstitutional under MCFL.
The Commission subsequently sought public input on whether to
initiate a rulemaking to determine the extent to which the MCFL
decision necessitated changes in the Part 114 rules governing
independent expenditures by corporations possessing the three essential
features, changes in the scope of the ``independent expenditure''
provisions at 11 CFR Part 109, or the implementation of an ``express
advocacy'' test for all corporations and labor organizations covered by
11 CFR Part 114. Advance Notice of Proposed Rulemaking, 53 FR 416
(January 7, 1988) [``Advance Notice'' or ``ANPRM''].
The Commission received over 17,000 comments in response to the
Advance Notice. Nearly all of the commenters submitted virtually
identical letters urging the Commission to act favorably on NRWC's
rulemaking petition, and to limit application of its regulations to
communications expressly advocating the election or defeat of
candidates so as to avoid impinging upon First Amendment rights. The
Commission also received detailed comments from seven sources, and held
a public hearing on November 16, 1988 at which two commenters testified
as to how the Commission should implement the MCFL opinion. The
detailed comments and testimony reflect a wide range of views as to how
the Commission should proceed in response to the MCFL decision.
In subsequent litigation, two lower courts relied upon an express
advocacy standard to evaluate corporate communications under section
441b of the FECA. In Faucher v. Federal Election Commission, 743 F.
Supp. 64 (D. Me. 1990), the court invalidated the Commission's voter
guide regulations at 11 CFR 114.4(b)(5)(i). The Court concluded that
the Commission's voter guide rule is not authorized by the FECA ``as
interpreted by the Supreme Court in [MCFL], to the extent that the
regulation makes the permissibility of voter guides * * * hinge upon on
whether such guides are `nonpartisan' in a broad sense that includes
issue advocacy rather than the narrower test of `express advocacy.' ''
Id. at 72. Similarly, in Federal Election Commission v. National
Organization of Women, 713 F. Supp. 428 (D.D.C. 1989) [``NOW''],
another district court applied an express advocacy test to determine
whether section 441b permitted an incorporated membership organization
to use general treasury funds for membership recruitment letters
directed to the general public. The court concluded that the letters in
question did not go beyond issue discussion to express electoral
advocacy. The Commission appealed both of these lower court decisions.
Shortly after the MCFL opinion, a court of appeals decision held
that speech need not include any of the specific words listed in
Buckley v. Valeo, 424 U.S. 1, 44 n.52 (1976) to constitute express
advocacy. Federal Election Commission v. Furgatch, 807 F.2d 857, 862-63
(9th Cir.), cert. denied, 484 U.S. 850 (1987). Instead, the appropriate
inquiry is whether the communication, when read as a whole and with
limited reference to external events, is susceptible to no other
reasonable interpretation but as an exhortation to vote for or against
a specific candidate. Id. at 864.
In addition, the Supreme Court provided further guidance on the
exception from the independent expenditure prohibition for nonprofit
corporations in Austin v. Michigan Chamber of Commerce, 494 U.S. 652
(1990). In Austin, the Court interpreted a Michigan statute very
similar to
[[Page 35293]]
section 441b of the FECA. The Austin decision prompted the Commission
to issue a second notice seeking further comments on what changes to
its regulations were warranted. Request for Further Comment, 55 FR
40397 (Oct. 3, 1990), comment period extended 55 FR 45809 (Oct. 31,
1990). This notice also welcomed comments on the express advocacy
questions raised by the Faucher and NOW decisions.
Eight commenters responded to the second notice, including some who
reiterated their earlier positions. Most, but not all, of the
commenters urged the Commission to adopt an express advocacy test for
expenditures under section 441b. One comment favored the development of
definitions which precisely set out what activity will be deemed within
the scope of the FECA under such a standard, while another comment
supported the use of a case by case approach. There was also some
support for revising the regulations to reflect the approach to express
advocacy taken into the Furgatch opinion. The Commission also received
specific suggestions for delineating the class of nonprofit
corporations falling within MCFL's exception from the independent
expenditure prohibition. Two comments advocated a broad scope for the
exemption, while a third comment emphasized the narrowness of the group
of organizations possessing the three essential features delineated in
MCFL and Austin.
Subsequently, the Court of Appeals for the First Circuit upheld the
district court's decision in Faucher. Faucher v. Federal Election
Commission, 928 F.2d 468 (1st Cir. 1991). cert. denied sub nom. Federal
Election Commission v. Keefer et al., 502 U.S. 820 (1991). The
Commission sought certiorari in Faucher, arguing that the express
advocacy standard should not be made applicable to the 441b prohibition
on corporate expenditures. On October 7, 1991, the Supreme Court denied
the petition for certiorari, and thus declined to consider narrowing or
otherwise modifying the statements it made in MCFL regarding the scope
of section 441b. Accordingly, the Commission moved for the dismissal of
its appeal in NOW and resumed consideration of several substantial
changes to its regulations necessitated by the MCFL decision.
The Commission published a Notice of Proposed Rulemaking on July
29, 1992 seeking public comment on draft rules codifying the reduced
scope of the prohibition on corporate expenditures. 57 FR 33548 (July
29, 1992). The proposed language set forth the general rule that
corporations and labor organizations are prohibited from making
expenditures for communications to the general public expressly
advocating the election or defeat of a clearly identified candidate.
The draft regulations also sought to establish criteria for determining
whether nonprofit corporations qualify for the exemption from section
441b's prohibition on independent expenditures.
The Commission received 35 separate comments on the NPRM from 32
commenters between July 29, 1992 and November 22, 1993. The Commission
also received 149 form comments during that period. The Commission held
a public hearing on October 15 and 16, 1992, at which 15 of these
commenters testified on the issues presented in the MCFL decision and
the proposed rules. The comments and testimony are discussed in more
detail below.
As indicated above, this rulemaking process has involved a broader
range of issues regarding the scope of permissible and prohibited
corporate and labor organization expenditures than is reflected in the
final rules being promulgated today. The rulemaking with regard to the
other issues is continuing, and the Commission expects to issue
additional new rules revising 11 CFR Parts 110 and 114 at a later date.
These subsequent changes will replace the partisan/nonpartisan
standards in sections 110.13, 114.1, 114.2, 114.3, 114.4 and 114.12(b)
with language prohibiting corporations and labor organizations from
making expenditures for communications to the general public expressly
advocating the election or defeat of clearly identified candidates.
Specifically, these provisions govern candidate debates, candidate
appearances, distributing registration and voting information, voter
guides, voting records, conducting voter registration and get-out-the-
vote drives and use of meeting rooms. At the same time, the Commission
intends to address issues which have arisen regarding activities
undertaken by incorporated colleges and universities, the use of logos,
trademarks and letterheads, endorsements of candidates, activities
which facilitate the making of contributions, and coordination between
candidates and corporations or labor organizations which results in in-
kind contributions. These issues, not previously addressed in the
rules, involve activities that are also impacted by the express
advocacy standard and the case law in this area.
Section 438(d) of Title 2, United States Code requires that any
rules or regulations prescribed by 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 June 30, 1995.
Explanation and Justification
Generally, the new and amended rules contain the following changes.
First, the definitions of ``express advocacy'' and ``clearly
identified'' at 11 CFR 109.1 (b)(2) and (b)(3) have been moved to new
11 CFR 100.22 and revised 11 CFR 100.17, respectively. They have been
reworded to provide further guidance on what types of communications
constitute express advocacy of clearly identified candidates, in
accordance with the judicial interpretations found in Buckley, MCFL,
Furgatch, NOW and Faucher.
Second, new section 114.10 has been added to implement the MCFL
Court's conclusion that nonprofit corporations possessing certain
essential features may not be bound by the restrictions on independent
expenditures contained in section 441b. This new section expressly
permits certain corporations to use general treasury funds for
independent expenditures, and sets out the reporting obligations for
these corporations.
Part 100--Scope and Definitions (2 U.S.C. 431)
Section 100.17 Clearly Identified (2 U.S.C. 431(18))
The definitions of ``clearly identified'' in 11 CFR 106.1(d) and
``clearly identified candidate'' in 11 CFR 109.1(b)(3) have been
removed and replaced by a revised definition in section 100.17. It is
not necessary for this definition to appear in multiple locations
throughout these regulations.
The NPRM sought comments on two alternative approaches regarding
the requirement that the candidates be ``clearly identified.''
Alternative A-1 indicated that this would include candidates of a
clearly identified political party and a clearly identified group of
candidates, such as the ``pro-life'' candidates in the MCFL case.
Alternative A-2 did not specifically mention clearly identified groups
of candidates or candidates of clearly identified political parties.
Several commenters and witnesses argued that under Alternative A-1,
it could be too difficult to determine the candidates in the group.
Examples cited were buttons that read ``Elect Women
[[Page 35294]]
for a Change'' or ``Vote Pro-Choice,'' without more. The language was
intended to apply to a situation, for example, where one insert in a
mailing lists voting records or positions on specific issues and
clearly indicates which of the named candidates shares the speaker's
views. If another insert urges the reader to vote in favor of
candidates who share its views, this is considered to be advocating the
election of those clearly identified candidates. Similarly, the MCFL
case involved a flyer which urged voters to vote for ``pro-life''
candidates, and included a list of ``pro-life candidates.'' Thus, in
this example, several ``pro-life'' candidates were clearly identified
to the reader.
In light of comments, the wording of new section 100.22(a) has been
reworked to refer to ``one or more clearly identified candidate(s)'' to
more clearly state what was intended. In addition, section 100.17 has
been modified to provide some additional examples of when candidates
are considered to be ``clearly identified.''
Section 100.22 Expressly Advocating
The definition of express advocacy previously located in 11 CFR
109.1(b)(2) has been replaced with a revised definition in new section
100.22. The placement of the definition of express advocacy in Part
100--Scope and Definitions is intended to ensure that the reader will
be able to locate it more easily. Also, while express advocacy is an
important component of any independent expenditure, it is also the
legal standard used in determining whether other types of activities
are expenditures by corporations or labor organizations under 11 CFR
Part 114. Please not that the terms ``communication containing express
advocacy'' and ``communication expressly advocating the election or
defeat of one or more clearly identified candidates'' have the same
meaning.
The NPRM presented the possibility of creating a separate
definition of ``express advocacy'' for inclusion in Part 114 that would
apply only to corporations and labor organizations governed by that
Part. The NPRM indicated that the purpose of promulgating a separate
definition would be to focus more specifically on implementing the MCFL
Court's dictate that ``express advocacy'' is the standard when
determining what is an expenditure under 2 U.S.C. Sec. 441b. The Notice
suggested that a separate definition could center on whether a
communication urged action with respect to a federal election rather
than on whether the communication also related to a clearly identified
candidate. Thus, this approach would have taken a different view of
``express advocacy'' for organizations subject to the prohibitions of
section 441b.
There was little support for separate definitions from the comments
and testimony. The difficulty the commenters and witnesses had in
trying to determine what the courts meant by ``express advocacy,'' and
what they thought the Commission had in mind, amply demonstrate that it
would be extremely confusing to work with separate definitions for
corporations and labor organizations on one hand, and candidates,
committees and individuals on the other. Consequently, separate
definitions of express advocacy have not been included in the final
rules.
1. Alternative Definitions Presented in the NPRM
The NPRM sought comments on two alternative sets of revisions to
the definition of express advocacy. Alternatives A-1 and A-2 were
similar in several respects. They both continued to list the specific
phrases set forth in the Buckley opinion as examples of express
advocacy. Both alternatives recognized that all statements and
expressions included in a communication must be evaluated in terms of
pertinent external factors such as the context and timing of the
communication. In addition, both proposed definitions clearly indicated
that communications consisting of several pieces of paper will be read
together.
The alternative definitions in the NPRM differed in several
respects. Under Alternative A-1, express advocacy included suggestions
to take actions to affect the result of an election, such as to
contribute or to participate in campaign activity. In contrast,
Alternative A-2 indicated that express advocacy constitutes an
exhortation to support or oppose a clearly identified candidate, and
that there must be no other reasonable interpretation of the
exhortation other than encouraging the candidate's election or defeat,
rather than another type of action on a specific issue. Nevertheless,
Alternative A-2 also specifically stated that ``with respect to an
election'' includes references such as ``Smith '92'' or ``Jones is the
One.''
There was no consensus among the commenters and witnesses regarding
either alternative definition of express advocacy. While there was more
support for Alternative A-2 than A-1, specific portions of both
alternatives troubled a number of commenters and witnesses. Some
objected that Alternative A-1 was too narrow in that it did not cover
all express, implied, or reasonably understood references to an
upcoming election. Others argued Alternative A-1 was too broad, and
preferred Alternative A-2. However, there was also considerable
sentiment expressed that Alternative A-2 was also too broad, and should
be further limited to avoid running afoul of the First Amendment
considerations that are involved.
To illustrate the difficulty involved in applying an ``express
advocacy'' standard, the Commission included Agenda Document #92-86-A
in the rulemaking record. This document contained seven hypothetical
advertisements, each of which is assumed to be published within two
weeks of an election. Several written comments and witnesses mentioned
these examples in analyzing the proposals contained in this Notice, but
there was no consensus as to which examples, if any, contained express
advocacy.
In commenting on the proposed rules, the Internal Revenue Service
indicated that 26 U.S.C. Sec. 501(c)(3) prohibits certain nonprofit
organizations from participating or intervening in political campaigns
on behalf of or in opposition to candidates for elective public office.
The IRS stated that prohibited political activity under the Internal
Revenue Code is much broader in scope than the express advocacy
standard under the FECA. The Commission expresses no opinion as to any
tax ramifications of activities conducted by nonprofit corporations,
since these questions are outside its jurisdiction.
The definition of express advocacy included in new section 100.22
includes elements from each definition, as well as the language in the
Buckley, MCFL and Furgatch opinions emphasizing the necessity for
communications to be susceptible to no other reasonable interpretation
but as encouraging actions to elect or defeat a specific candidate.
Please note that exhortations to contribute time or money to a
candidate would also fall within the revised definition of express
advocacy. The expressions enumerated in Buckley included ``support,'' a
term that encompasses a variety of activities beyond voting.
2. Examples of Phrases That Expressly Advocate
The previous definition of express advocacy in 11 CFR 109.1(b)(2)
included a list of expressions set forth in Buckley. Both alternatives
in the NPRM would have largely retained this list of phrases that
constitute express
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advocacy. The revised definition in 11 CFR 100.22(a) includes a
somewhat fuller list of examples. The expressions enumerated in
Buckley, such as ``vote for,'' ``Smith for Congress,'' and ``defeat''
have no other reasonable meaning than to urge the election or defeat of
clearly identified candidates.
3. Communications Lacking Such Phrases
The NPRM also addressed communications that contain no specific
call to take action on any issue or to vote for a candidate, but which
do discuss a candidate's character, qualifications, or accomplishments,
and which are made in close proximity to an election. An example is a
newspaper or television advertisement which simply states that the
candidate has been caring, fighting and winning for his or her
constituents. Another example is a case in which a candidate is
criticized for missing many votes, or for specific acts of misfeasance
or malfeasance while in office.
Under Alternative A-2, these types of communications would have
constituted exhortations if made within a specified number of days
before an election, and if they did not encourage any type of action on
any specific issue, such as, for example, supporting pro-life or pro-
choice legislation. Comments were requested as to what an appropriate
time frame should be--as short as 14 days, or as long as six months,
prior to an election, or some other time period considered reasonable.
Some commenters opposed treating these communications as express
advocacy on the grounds that there is not a clear call to action.
Others argued that such communications, particularly when made by a
candidate's campaign committee, were clearly intended to persuade the
listener or reader to vote for the candidate.
Communications discussing or commenting on a candidate's character,
qualifications, or accomplishments are considered express advocacy
under new section 100.22(b) if, in context, they have no other
reasonable meaning than to encourage actions to elect or defeat the
candidate in question. The revised rules do not establish a time frame
in which these communications are treated as express advocacy. Thus,
the timing of the communication would be considered on a case-by-case
basis.
4. Communications Containing Both Issue Advocacy and Electoral Advocacy
The final rules, like the proposed rules, treat communications that
include express electoral advocacy as express advocacy, despite the
fact that the communications happen to include issue advocacy, as well.
Several comments pointed out that the legislative process continues
during election periods, and argued that if a legislative issue becomes
a campaign issue, the imposition of unduly burdensome requirements on
those groups seeking to continue their legislative efforts and
communicate with their supporters is unconstitutional. These concerns
are misplaced, however, because the revised rules in section 100.22(b)
do not affect pure issue advocacy, such as attempts to create support
for specific legislation, or purely educational messages. As noted in
Buckley, the FECA applies only to candidate elections. See, e.g., 424
U.S. at 42-44, 80. For example, the rules do not preclude a message
made in close proximity to a Presidential election that only asked the
audience to call the President and urge him to veto a particular bill
that has just been passed, if the message did not refer to the upcoming
election or encourage election-related actions. In contrast, under
these rules, it is express advocacy if the communication described
above urged the audience to vote against the President if the President
does not veto the bill in question.
Nevertheless, to alleviate the commenters' concerns, the definition
of express advocacy in new section 100.22(b) has been revised to
incorporate more of the Furgatch interpretation by emphasizing that the
electoral portion of the communication must be unmistakable,
unambiguous and suggestive of only one meaning, and reasonable minds
could not differ as to whether it encourages election or defeat of
candidates or some other type of non-election action.
Both alternative definitions of express advocacy included
consideration of the context and timing of the communication, and
indicated that communications consisting of several pieces of paper
will be read together. Several commenters and witnesses were troubled
by the perceived vagueness and uncertainty inherent in the use of the
phrases ``taken as a whole,'' ``in light of the circumstances under
which they were made,'' and ``with limited reference to external
events.'' They argued that they would not be able to ascertain in
advance which facts and circumstances would be considered by the
Commission. Some of the commenters and witnesses acknowledged the
difficulty of crafting a clear and precise standard in the First
Amendment context.
The final rules in section 100.22 retain the requirement that the
communication be read ``as a whole and with limited reference to
external events'' because MCFL makes clear that isolated portions of a
communication are not to be read separately in determining whether a
communication constituted express advocacy. See 479 U.S. at 249-50.
Further, the Furgatch opinion evaluated the contents of the
communication in question ``as a whole, and with limited reference to
external events.'' 807 F.2d at 864. The external events of significance
in Furgatch included the existence of an upcoming presidential election
and the timing of the advertisement a week before the general election.
However, please note that the subjective intent of the speaker is not a
relevant consideration because Furgatch focuses the inquiry on the
audience's reasonable interpretation of the message. Furgatch, 807 F.2d
at 864-65.
5. ``Vote Democratic'' or ``Vote Republican''
In the NPRM, Alternative A-2 treated as express advocacy messages
such as ``Vote Republican'' or ``Vote Democratic'' if made within a
specified period prior to a special or general election or an open
primary. Again, comments were sought on time periods ranging from 14
days to 6 months prior to an election, or any other time period
considered reasonable. Alternatively, the period between the primary
and general elections was suggested as the time when such messages
refer to clearly identified candidates. In contrast, Alternative A-1
treated these phrases as express advocacy if made at any time after
specific individuals have become Republican or Democratic candidates
within the meaning of the FECA in the geographic area in which the
communication is made. The NPRM also sought comments on when a message
such as ``Vote Democratic'' or ``Vote Republican'' refers to one or
more clearly identified candidates, rather than being just a message of
support for a party.
The views of the commenters and witnesses reflected little
consensus regarding these messages. Several were supportive of
Alternative A-2, and suggested that a 90 day time frame would be
appropriate. Others felt that such messages are always express advocacy
because they aim at influencing the outcome of elections. Conversely,
some commenters argued that these messages cannot be express advocacy
if there are no declared candidates yet running for the party's
[[Page 35296]]
nomination or if the nominee of the party has not yet been selected.
Section 100.22 of the final rules does not specify a time frame or
triggering event that will cause these messages to be considered
express advocacy. Instead, messages such as ``Vote Democratic'' or
``Vote Republican'' will be evaluated on a case-by-case basis to
determine whether they constitute express advocacy under the criteria
set out in 11 CFR 100.22(b).
Part 106--Allocations of Candidate and Committee Activities
Section 106.1 Allocation of expenses between candidates
A conforming amendment has been made to paragraph (d) of section
106.1. Previously, this paragraph restated the definition of ``clearly
identified.'' It has been revised to refer the reader to the definition
located in 11 CFR 100.17.
Part 109--Independent Expenditures (2 U.S.C. 431(17), 434(c))
Section 109.1 Definitions (2 U.S.C. 431(17))
The revised rules incorporate a technical amendment to the
definition of ``person'' in the independent expenditure provisions in
section 109.1(b)(1). The revision clarifies that ``person'' includes
qualified nonprofit corporations, which are discussed more fully below.
This change reflects that in MCFL, the Court upheld the right of
qualified nonprofit corporations to make independent expenditures, but
this decision did not extend to other corporations.
Conforming amendments have also been made to paragraphs (b)(2) and
(b)(3) of section 109.1. These sections had contained definitions of
``expressly advocating'' and ``clearly identified candidate.'' As
explained above, they have been revised to refer the reader to the
definitions located in sections 100.22 and 100.17, respectively.
Part 114--Corporate and Labor Organization Activity
Section 114.2 Prohibitions on Contributions and Expenditures
Paragraph (b) of section 114.2 has been revised to reflect the
exception recognized in the MCFL decision, which allows certain
nonprofit corporations to use their general treasury funds to make
independent expenditures. The Commission anticipates making further
changes to this provision when it completes the remaining portions of
this rulemaking.
Section 114.10 Qualified Nonprofit Corporations
In MCFL, the Supreme Court reviewed the application of the
independent expenditure prohibition in section 441b to MCFL, a small,
nonprofit corporation organized to promote specific ideological
beliefs. The Court concluded that, because MCFL did not have the
potential to exert an undesirable influence on the electoral process,
it did not implicate the concerns that legitimately prompted regulation
by Congress. Consequently, the Court found section 441b
unconstitutional as applied to MCFL.
The Court cited ``three features essential to [its] holding that
[MCFL] may not constitutionally be bound by Sec. 441b's restriction on
independent spending.'' 479 U.S. at 264. First, MCFL was formed for the
express purpose of promoting political ideas and cannot engage in
business activities. Second, it has no shareholders or other persons
affiliated so as to have either a claim on the corporation's assets or
earnings, or any other economic disincentives to disassociate with the
corporation. Third, it was not established by a business corporation or
a labor union, and it has a policy of not accepting contributions from
such entities. MCFL at 264. The Court said that section 441b's
prohibition on independent expenditures is unconstitutional as applied
to nonprofit corporations with these three characteristics.
Section 114.10 of the final rules is based on this part of the MCFL
decision, and on the Court's subsequent decision in Austin v. Michigan
Chamber of Commerce, 494 U.S. 652 (1990). Section 114.10 lists the
features of those corporations that are exempt from section 441b's
prohibition on independent expenditures. It also sets out the reporting
requirements for these corporations. A detailed explanation of section
114.10 is set out below.
1. General Issues Raised by the NPRM and the Commenters
a. The name given to exempt corporations. One preliminary question
is the name to be used for corporations that are exempt from the
independent expenditure prohibition. The Commission specifically sought
comments on this issue in the Notice of Proposed Rulemaking. The NPRM
referred to them as ``exempt corporations.'' However, the Commission
and some of the commenters expressed concern that this name might cause
confusion, because the term ``exempt'' is so closely associated with
the Internal Revenue Code.
The NPRM contained an alternative version of proposed section
114.10 that used the phrase ``qualified corporation'' as the name for
these organizations. The Commission believes this phrase is easy to
use, and clearly distinct from terms used in other areas of the law.
However, the Commission has also added the word ``nonprofit'' to make
this phrase more descriptive. Thus, the name ``qualified nonprofit
corporation'' or ``QNC'' will be used to refer to organizations that
are exempt from the independent expenditure prohibition.
b. General concerns expressed by commenters. Some of the comments
received contained general observations on the Commission's efforts to
promulgate rules regarding the exemption recognized in MCFL. One
commenter objected to any Commission effort to issue rules in this
area, arguing that Commission action will inevitably narrow the
standards that were clearly stated in MCFL and Austin, and would make
the Commission an arbiter of First Amendment rights. The commenter
alleges that this is a role for which the Commission has no
constitutional or Congressionally conferred authority.
However, the Commission disagrees, and has decided to issue
regulations in this area. Although the MCFL opinion may be quite
specific by judicial standards, it leaves many administrative questions
unanswered. Without new rules, the Commission would have to apply the
MCFL decision on an ad hoc basis, which could result in inconsistency
and would provide no guidance to the regulated community. In addition,
the Commission's regulations are more readily available to the
regulated community than the text of court decisions, and serve as the
primary reference for Commission policy. Consequently, the rules should
reflect court decisions that significantly affect the application of
the FECA.
Many of the commenters felt that the proposed rules were too
restrictive. One commenter said that the essence of the decision is
that organizations more like voluntary political associations than
business firms cannot be subjected to section 441b. This commenter
argued that the three stated features should provide organizations with
a safe harbor but should not be absolutely required.
As will be discussed further below, several provisions specifically
criticized as too restrictive by the commenters have been eliminated
from the final rules. However, it is important that the three features
enunciated by the Supreme Court be included in the final rules as a
threshold requirement for an
[[Page 35297]]
exemption from the independent expenditure prohibition. The MCFL Court
described these three features as ``essential to [its] holding that
[MCFL] may not constitutionally be bound by Sec. 441b's restriction on
independent spending.'' 479 U.S. at 263-64. The clear implication is
that a corporation that does not have all three of these features can
be subject to this restriction.
The U.S. Court of Appeals decision in Day v. Holahan, 34 F.3d 1356
(8th Cir. 1994), does not affect this conclusion. In that case, the
Eighth Circuit decided that a Minnesota statute that closely tracked
the Supreme Court's three essential features was unconstitutional as
applied to a Minnesota nonprofit corporation. The Commission believes
the Eighth Circuit's decision, which is controlling law in only one
circuit, is contrary to the plain language used by the Supreme Court in
MCFL, and therefore is of limited authority.
The Notice sought comments on two versions of section 114.10 that
represent contrasting approaches for defining the MCFL exemption. The
first version set out the essential features listed in the MCFL opinion
as threshold requirements for an exemption from the independent
expenditure prohibition. By following the long-standing presumption
that all incorporated entities are subject to the independent
expenditure prohibition in section 441b, and requiring corporations
that claim to be exempt from that prohibition to demonstrate that they
are entitled to an exemption, this version sought to fit the MCFL
decision into the existing statutory framework.
The second version took the opposite approach. It presumed a broad
class of corporations would be exempt from section 441b's independent
expenditure prohibition, unless they have a characteristic that would
bring them within the Commission's jurisdiction.
The Commission has decided to follow the first approach and
incorporate the rules into the existing framework for section 441b. The
Supreme Court did not conclude that all of section 441b is
unconstitutional on its face. Rather, it held that one portion of
section 441b, the prohibition on independent expenditures, is
unconstitutional as applied to a narrow class of incorporated issue
advocacy organizations. The Court explicitly reaffirmed the validity of
section 441b's prohibition on corporate contributions. 479 U.S. at 259-
60. Thus, the broad prohibition on the use of corporate treasury funds
contained in section 441b still exists, and the Commission's
responsibility for enforcing that provision remains in place.
The Commission is aware that most of the comments were in accord
with the second version. These commenters argued that all organizations
are entitled to unlimited First Amendment rights regardless of whether
they are incorporated, and that any Commission action that has the
effect of limiting those rights is unconstitutional. They felt that the
first version would define the category of exempt corporations too
narrowly, and would burden the speech activity of corporations that are
entitled to an exemption.
However, there is a long history of regulating the political
activity of corporations, and the Supreme Court has recognized the
compelling governmental interest in regulating this activity on
numerous occasions. ``The overriding concern behind the enactment of
the [statutory predecessor to section 441b] was the problem of
corruption of elected representatives through the creation of political
debts. * * * The importance of the governmental interest in preventing
this occurrence has never been doubted.'' First National Bank of Boston
v. Belotti, 435 U.S. 765, 788, n.26 (1978). ``This careful legislative
adjustment of the federal electoral laws . . . to account for the
particular legal and economic attributes of corporations and labor
organizations warrants considerable deference. . . . [I]t also reflects
a permissible assessment of the dangers posed by those entities to the
electoral process.'' FEC v. National Right to Work Committee, 459 U.S.
197, 209 (1982).
The MCFL decision reaffirms, rather than casts doubt upon, the
validity of Congressional regulation of corporate political activity.
In its opinion, the MCFL Court said ``[w]e acknowledge the legitimacy
of Congress' concern that organizations that amass great wealth in the
economic marketplace not gain unfair advantage in the political
marketplace.'' MCFL, 479 U.S. at 263. The Court found the application
of section 441b to MCFL unconstitutional not because this governmental
interest was not compelling in general, but because MCFL was different
from the majority of entities addressed by section 441b. Consequently,
this governmental interest was not implicated by MCFL's activity. Id.
The Court also acknowledged that MCFL-type corporations are the
exception rather than the rule, saying that ``[i]t may be that the
class of organizations affected by our holding today will be small.''
Id. at 264. Thus, the Commission's task is to incorporate this narrow
exception to the independent expenditure prohibition into the
regulations so that they protect the interests of organizations that
are like MCFL without undermining the FECA's legitimate legislative
purposes. The Commission has concluded that the first approach is
better suited to this task.
2. Scope and Definitions
Paragraph (a) is a scope provision that explains, in general terms,
the purposes of section 114.10. Paragraph (b) defines four terms for
the purposes of this section.
a. The promotion of political ideas. The first term is the phrase
``the promotion of political ideas.'' The MCFL Court said one of MCFL's
essential features was that ``it was formed for the express purpose of
promoting political ideas, and cannot engage in business activities.''
479 U.S. at 264. Paragraph (b)(1) clarifies what this phrase means for
the purposes of section 114.10. Under paragraph (b)(1), the promotion
of political ideas includes issue advocacy, election influencing
activity, and research, training or educational activity that is
expressly tied to the organization's political goals.
The Commission added the last phrase, which is based on language in
the Austin decision, in response to several commenters who felt that
the proposed definition was too narrow. These commenters said that many
organizations engage in certain activities that are not pure advocacy
but are directly related to their advocacy activities. They argued that
organizations should be allowed to conduct these activities without
losing their exemption from the independent expenditure prohibition.
The Commission agrees, and has added the last phrase to the final rules
to serve this purpose.
b. Express purpose. Paragraph (b)(2) defines the term ``express
purpose,'' as that term is used in section 114.10. As indicated above,
the Supreme Court said that MCFL was formed for the express purpose of
promoting political ideas and cannot engage in business activities. Id.
Paragraph (b)(2) states that a qualified nonprofit corporation's
express purpose is evidenced by the purpose stated in the corporation's
charter, articles of incorporation, or bylaws. It also may be evidenced
by any purpose publicly stated by the corporation or its agents, and
any activities in which the corporation actually engages.
Generally, if an organization's organic documents set out a purpose
that cannot be characterized as issue advocacy, election influencing
activity, or research, training or educational activity
[[Page 35298]]
expressly tied to political goals, the organization will not be a
qualified nonprofit corporation. However, paragraph (b)(2)(i) contains
an exception to this rule. If a corporation's organic documents
indicate that the corporation was formed for the promotion of political
ideas and ``any lawful purpose'' or ``any lawful activity,'' the latter
statement will not preclude a finding under paragraph (c)(1) that the
corporation's only express purpose is the promotion of political ideas.
The Commission recognizes that it is common for corporations to use
boilerplate purpose statements elicited from their state's
incorporation statute when they prepare their articles of
incorporation. These statements will not prevent such an organization
from being a qualified nonprofit corporation.
One commenter objected to including those purposes evidenced by the
activities in which the corporation actually engages. The commenter
argued that this rule would allow the Commission to analyze the motives
behind the corporation's activities.
The Commission has decided to include this provision in the final
rules. Generally, corporations engage in activities that further the
goals of the corporation. Thus, the corporation's activities tend to
provide a more objective and complete indication of the corporation's
reasons for existing. In contrast, if the Commission could look only to
a corporation's organic documents for the corporation's purpose, a
corporation with an appropriate purpose statement in its organic
documents would be exempt from the independent expenditure prohibition,
regardless of whether the activities in which it actually engages were
consistent with its stated purpose or with the exemption recognized in
the MCFL opinion.
The Commission does not intend to engage in extensive speculation
about the motivations of qualified nonprofit corporations. However, it
is necessary for the Commission to consider the activities in which a
corporation actually engages in order to completely assess the
corporation's purpose.
c. Business activities. Paragraph (b)(3) defines the term
``business activities'' for the purposes of these rules. Under
paragraph (b)(3), ``business activities'' generally includes any
provision of goods and services that results in income to the
corporation. It also includes any advertising or promotional activity
that results in income to the corporation, other than in the form of
membership dues or donations. Thus, a corporation that publishers a
newsletter or magazine and sells advertising space in that publication
will be engaging in business activities, and will not be a qualified
nonprofit corporation.
However, the definition specifically excludes fundraising
activities that are expressly described as requests for donations that
may be used for political purposes, such as supporting or opposing
candidates. Fundraising activities conducted under these circumstances
will not be considered business activities under these rules.
This definition reflects a critical distinction made by the Supreme
Court in MCFL. The definition includes those activities that closely
resemble the commercial activities of a business corporation because
these activities generate financial resources that, like those of a
business corporation, ``are not an indication of popular support for
the corporation's political ideas * * * [but] reflect instead the
economically motivated decisions of investors and customers.'' 479 U.S.
at 258. Thus, these ``resources amassed in the economic marketplace''
can create ``an unfair advantage in the political marketplace.'' Id. at
257.
In contrast, the definition specifically excludes activities that
generate resources that reflect ``popular support for the corporation's
political ideas.'' Id. at 257. Fundraising activities that are
described to potential donors as requests for donations that will be
used for political purposes will generate donations that reflect
popular support for the corporation's political ideas. Consequently,
they do not pose the risk of giving the corporation an unfair advantage
in the political marketplace.
In some cases, the fundraising activities of a qualified nonprofit
corporation closely resemble business activities in that they involve a
provision of goods that results in income to the corporation. For
example, a qualified nonprofit corporation may sell T-shirts or
calendars in order to generate funds to support its political activity.
MCFL itself held garage sales, bake sales and raffles to raise funds
for these purposes. However, if the corporation discloses that the
activities are an effort to raise funds for its political activities,
such as supporting or opposing candidates, the activities will not be
considered business activities for the purposes of these rules,
notwithstanding their close resemblance to ordinary business
transactions.``This ensures that political resources reflect political
support.'' NCFL at 264.
The Commission notes that this exclusion is limited to direct
fundraising by the corporation. If a corporation sells items through a
third party, such as a retail store or catalog mail order outlet, this
will generally be considered a business activity, even if the item is
accompanied by a notification that a portion of the proceeds will be
used to support the corporation's political activities. The sale of
items by a third party that is not a qualified nonprofit corporation
justifies the application of the independent expenditure prohibition.
d. Shareholders. Paragraph (b)(4) states the term ``shareholder''
has the same meaning as the term ``stockholder,'' as defined in section
114.1(h) of the Commission's current rules.
4. The Essential Features
The Supreme Court said ``MCFL has three features essential to our
holding that it may not constitutionally be bound by Sec. 441b's
restriction on independent spending.'' MCFL at 263-64. These features
have been incorporated into paragraph 114.10(c) of the final rules. A
qualified nonprofit corporation is a corporation that has all the
characteristics set out in this paragraph. Corporations that do not
have all of these characteristics are not qualified nonprofit
corporations, and therefore are bound by the independent expenditure
prohibition.
a. Purpose. Paragraph (c)(1) states that a qualified nonprofit
corporation is one whose only express purpose is the promotion of
political ideas. In other words, if a corporation's organic documents,
authorized agents, and actual activities indicate that its purpose is
issue advocacy, election influencing activity, or research, training or
other activity expressly tied to the organization's political goals,
the corporation may be a qualified nonprofit corporation. However, if
the documents, agents or activities indicate any other purpose, the
corporation will be subject to the independent expenditure prohibition.
As indicated above, the rules contain an exception for boilerplate
purpose statements in a corporation's organic documents. If a
corporation's organic documents indicate that the corporation was
formed for the promotion of political ideas and ``any lawful purpose''
or ``any lawful activity,'' the latter statement will not preclude a
finding under paragraph (c)(1) that the corporation's only express
purpose is the promotion of political ideas.
One commenter argued that requiring the promotion of political
ideas to be an organization's only express purpose would exclude
organizations that do educational and research work on political topics
with which they are concerned. It would also exclude
[[Page 35299]]
organizations that train people in advocacy techniques, an important
part of the activities of many nonprofit corporations. The Commission
has addressed these concerns by broadening the definition of the phrase
``the promotion of political ideas'' in paragraph (b)(1) to include
these activities. This definition is discussed in detail above.
b. Business activities. Under paragraph (c)(2), a corporation must
be unable to engage in business activities in order to be a qualified
nonprofit corporation. Paragraph (c)(2) tracks the language of the MCFL
decision in that it limits the exemption to corporations that cannot
engage in business activities. Thus, in order to be exempt, business
activities must be proscribed by the corporation's organic documents or
other internal rules.
However, as indicated above, fundraising activities that are
expressly described as requests for donations to be used for political
purposes are not business activities. Consequently, a qualified
nonprofit corporation can engage in fundraising activities without
losing its exemption, so long as it makes the appropriate disclosure.
Most of the commenters objected to a complete prohibition on
business activities. One commenter argued that the presence of minimal
business activities would not have changed the result in MCFL. This
commenter said that, despite the Supreme Court's reliance on the
absence of business activities, a prohibition should not be read into
the opinion, since it would unreasonably limit the activities of these
organizations.
However, the plain language of the MCFL opinion endorses a complete
prohibition on business activities. The Court said ``MCFL has three
features essential to our holding that it cannot constitutionally be
bound by Sec. 441b's restriction on independent spending. First, it was
formed for the express purpose of promoting political ideas, and cannot
engage in business activities.'' MCFL, 479 U.S. at 264 (emphasis
added). This statement clearly supports a total ban on business
activities.
In addition, other parts of the opinion make it clear that the
Court based its conclusion on the complete absence of any business
activities, and strongly suggest that the presence of business
activities would have changed the result. Earlier, the Court said that
``the concerns underlying the regulation of corporate political
activity are simply absent with regard to MCFL. It is not the case * *
* that MCFL merely poses less of a threat of the danger that has
prompted regulation. Rather, it does not pose such a threat at all.''
479 U.S. at 263. In order to pose no such threat, a corporation must be
free from resources obtained in the economic marketplace. Only those
corporations that cannot engage in business activities are free from
these kinds of resources.
This approach will not unreasonably limit the activities of a
qualified nonprofit corporation. The corporation has at least two
options for generating revenue under the final rules. First, the
corporation can engage in unlimited fundraising activities, so long as
it informs potential donors that it is seeking donations that will be
used for political purposes, such as supporting or opposing candidates.
Second, the corporation can establish a separate segregated fund and
make its independent expenditures exclusively from that fund.
Several other commenters also felt that a limited amount of
business activity should be allowed, and argued that the Commission
should incorporate the tax law concepts of related and unrelated
business activity into the final rules. Under this approach, income
from activity that is related to the corporation's mission would not be
considered business activity, and as such, would not affect its
qualified nonprofit corporation status. In addition, qualified
nonprofit corporations would be permitted to engage in some unrelated
business activity, so long as it does not become the organization's
primary purpose.
However, reliance on these tax law concepts would be inappropriate
here because the tax code was drafted to serve different purposes.
Section 501(c)(4) of the tax code grants tax exempt status to
organizations that promote the social welfare. In exercising its
administrative discretion, the Internal Revenue Service has concluded
that it is appropriate to allow social welfare organizations to engage
in some unrelated business activity so long as it does not become their
primary purpose, apparently believing that a limited amount of business
activity is not incompatible with the promotion of social welfare.
In contrast, section 441b seeks to prevent the use of resources
amassed in the economic marketplace to gain an unfair advantage in the
political marketplace. The MCFL Court concluded that a complete
prohibition on the use of resources amassed in the economic marketplace
is necessary to serve this purpose. Thus, the Commission has
incorporated this prohibition into the final rules.
c. Shareholders/disincentives to disassociate. The second feature
that distinguished MCFL from other corporations was that ``it ha[d] no
shareholders or other persons affiliated so as to have a claim on its
assets or earnings.'' 479 U.S. at 264. The Supreme Court said this
``ensures that persons connected with the organization will have no
economic disincentive for disassociating with it if they disagree with
its political activity.'' Id. Later, in Austin, the Court said that
persons other than shareholders may also face disincentives to
disassociate with the corporation. ``Although the Chamber also lacks
shareholders, many of its members may be similarly reluctant to
withdraw as members even if they disagree with the Chamber's political
expression, because they wish to benefit from the Chamber's
nonpolitical programs. * * * The Chamber's political agenda is
sufficiently distinct from its educational and outreach programs that
members who disagree with the former may continue to pay dues to
participate in the latter.'' 494 U.S. at 663.
These characteristics have been incorporated into paragraph (c)(3)
of the final rules. In the interests of clarity, the rules separate
these two characteristics into separate subparagraphs. Only those
corporations that have the characteristics set out in both
subparagraphs are exempt from the independent expenditure prohibition.
i. Shareholders. Under paragraph (c)(3)(i), a qualified nonprofit
corporation is one that has no shareholders or other persons affiliated
in a way that could allow them to make a claim on the organization's
assets or earnings. Thus, if any of the persons affiliated with a
corporation have an equitable or ownership interest in the corporation,
the corporation will not be a qualified nonprofit corporation.
One commenter said the limitation on persons with claims against
the corporation is unnecessary, and also said it should be coupled with
an explanation that this restriction will not deprive a corporation of
the right to have dues-paying members.
The Commission believes this limitation is necessary to ensure that
associational decisions are based entirely on political considerations.
However, this limitation will not adversely affect corporations with
dues-paying members. In most cases, dues payments are not investments
made with an expectation of return or repayment. They do not give
members any right to the corporation's assets or earnings.
Consequently, the existence of
[[Page 35300]]
dues-paying members will not affect the corporation's exempt status.
Two commenters expressed concern that paragraph 114.10(c)(3)(i)
could be read to deny exempt status to corporations with employees or
creditors, because an employee of a qualified nonprofit corporation
could have a claim against the corporation for wages, and a creditor
could have a claim against the corporation on a debt.
The Commission has revised this provision in accordance with these
comments. Claims held by employees and creditors with no ownership
interest in the corporation arise out of arms-length employment or
credit relationships, rather than an equitable interest in the
corporation. Consequently, they will not be treated as claims on the
corporation's assets or earnings that affect the corporation's
exemption from the independent expenditure prohibition.
ii. Disincentives to disassociate. Paragraph (c)(3)(ii) limits the
exemption to corporations that do not offer benefits that are a
disincentive for recipients to disassociate themselves with the
corporation on the basis of its position on a political issue. Thus, if
the corporation offers a benefit that recipients lose if they end their
affiliation with the corporation, or cannot obtain unless they become
affiliated, the corporation will not be a qualified nonprofit
corporation. This provision ensures that the associational decisions of
persons who affiliate themselves with the corporation are based
exclusively on political, rather than economic, considerations.
The rule contains examples of benefits that will be considered
disincentives to disassociate with the corporation. First, credit
cards, insurance policies and savings plans will be considered
disincentives to disassociate. Consequently, corporations that offer
such things as affinity credit cards or life insurance will not be
qualified nonprofit corporations.
Second, training, education and business information will be
considered disincentives to disassociate from the corporation, unless
the corporation provides these benefits to enable the persons who
receive them to help promote the group's political ideas. This
provision allows a qualified nonprofit corporation to provide its
volunteers with the training and information they need to advocate its
issues. However, if the corporation provides other kinds of training or
information that is not needed for its issue advocacy work, the
corporation will not be a qualified nonprofit corporation.
One commenter objected to paragraph (c)(3)(ii), saying that it
would prevent most organizations from qualifying for the exemption.
Other commenters urged the Commission to distinguish between benefits
that are related to the corporation's issue advocacy work, or grow out
of it, and those that are unrelated to that work, saying that only the
latter should be regarded as disincentives to disassociate. These
commenters also recommended that a substantiality test be used, so that
benefits that are insubstantial or create an insignificant disincentive
to disassociate would not disqualify the corporation.
The Commission has revised this section to address some of the
concerns raised by the commenters. As indicated above, paragraph
114.10(c)(3)(ii) has been revised to say that, if a corporation
provides training or education that is necessary to promote the
organization's political ideas, the training will not be considered an
incentive to associate or disincentive to disassociate.
However, the Commission has decided against including a
substantiality test for benefits that ostensibly create a less
significant disincentive to disassociate with the corporation. Any
disincentive, no matter how small, can influence an individual's
associational decisions, particularly where the ``cost'' to the
individual of obtaining the benefit is only a small yearly donation to
the corporation. For example, a corporation might offer donors access
to affinity credit cards with no annual fee. Although the actual dollar
value of such a benefit may be insignificant, it could easily offset
the donor's annual donation to the corporation. Thus, membership levels
would partially reflect the popularity of the benefit being offered,
rather than exclusively reflecting the popularity of the group's
political ideas.
Including a substantiality test would also force the Commission to
determine which benefits are substantial enough to influence a
particular individual's decision whether or not to continue associating
with an organization. The Commission is reluctant to make these
difficult subjective determinations if they can be avoided.
Consequently, the final rule does not contain a substantiality
threshold for disincentives to disassociate with the corporation.
e. Relationship with business corporations and labor organizations.
The Supreme Court said that one of the reasons MCFL was exempt from the
independent expenditure prohibition was that it ``was not established
by a business corporation or labor union, and it is its policy not to
accept contributions from such entities.'' MCFL, 479 U.S. at 264. This
characteristic has been incorporated into paragraph (c)(4) of the final
rules. The final rule has been broken down into three subparagraphs for
purposes of clarity.
Paragraph (c)(4)(i) implements the first part of the Court's
statement. Only corporations that were not established by a business
corporation or labor organization can be eligible for an exemption
from, the independent expenditure prohibition. Thus, corporations that
are set up by business corporations or labor organizations cannot be
qualified nonpropfit corporations.
Paragraph (c)(4)(ii) limits the exemption to corporations that do
not directly or indirectly accept donations of anything of value from
business corporations or labor organizations. This includes donations
received directly from these entities, and donations that pass through
a third organization. Thus, if a corporation accepts donations from an
organization that accepts donations from these entities, the
corporation will not be a qualified nonprofit corporation.
The rule also limits the exemption to corporations that can provide
some assurance that they do not accept donations from business
corporations or labor organizations. Under paragraph (c)(4)(iii), if
the corporation can demonstrate, through accounting records, that it
has not accepted any donations from business corporations and labor
organizations in the past from business corporations and labor
organizations in the past, it will be eligible for the exemption. If it
is unable, for good cause, to make this showing, it can provide
adequate assurance by showing that it has a documented policy against
accepting donations from these entities. In order to be documented,
this policy must be embodied in the organic documents of the
corporation, the minutes of a meeting of the governing board, or a
directive from the person that controls the day-to-day operation of the
corporation.
Most of the commenters objected to an absolute ban on the
acceptance of business corporation and labor organization donations,
arguing that a ban is not necessary and is not supported by the court
decisions. Several commenters argued that MCFL's third requirement is
met when an organization is free from the influence of business
corporations. Others urged the Commission to focus not on the level of
donations but on whether the
[[Page 35301]]
corporation is acting as a ``conduit'' for business corporation and
labor organization funds. One commenter suggested that the Commission
engage in factual analyses to determine whether an organization is
under the influence of a business corporation or labor organization or
is acting as a conduit for the funds of such an organization.
However, the language of the MCFL opinion supports a prohibition on
business corporation and labor organization donations. The MCFL Court
said that one of the features ``essential to [its] holding that [MCFL]
may not constitutionally be bound by Sec. 441b's restriction on
independent spending'' was that ``MCFL was not established by a
business corporation or a labor union, and it is its policy not to
accept contributions from such entities.'' 479 U.S. at 263-64 (emphasis
added). The Court concluded that the existence of this policy
``prevents [qualified nonprofit] corporations from serving as conduits
for the type of direct spending that creates a threat to the political
marketplace.'' Id. Thus, although the MCFL Court was concerned that
business corporations and labor organizations could improperly
influence qualified nonprofit corporations and use them as conduits to
engage in political spending, the Court saw MCFL's policy of not
accepting business corporation or labor organization donations as the
way to address these concerns.
The Austin decision explains why a complete prohibition on these
donations is necessary to serve the purposes of section 411b. In
concluding that the Michigan Chamber of Commerce was not an MCFL-type
corporation, the Court recognized that the danger of ``unfair
deployment of wealth for political purposes'' exists whenever a
business corporation or labor organization is able to funnel donations
through a qualified nonprofit corporation. ``Because the Chamber
accepts money from for-profit corporations, it could, absent
application of [Michigan's version of section 441b], serve as a conduit
for corporate political spending.'' Austin, 494 U.S. at 664. ``Business
corporations * * * could circumvent the [independent expenditure]
restriction by funneling money through the Chamber's general
treasury.'' Id.
Therefore, the Commission has limited the exemption to corporations
that do not accept donations from business corporation or labor
organizations. The Commission believes it would be impractical to
engage in factual analyses to determine whether an organization is
actually influenced by a business corporation or labor organization or
is acting as a conduit for the funds of these entities. Furthermore,
nothing in the Court's decisions suggests that the Commission must
engage in such an inquiry. In fact, the Court has specifically said
that, with regard to the application of section 441b, it will not
``second-guess a legislative determination as to the need for
prophylactic measures where corruption is the evil feared.'' FEC v.
National Right to Work Committee, 459 U.S. 197, 210 (1982) (``NRWC'').
Two commenters said it is impossible to screen out all such
donations, and asserted that incidental or inadvertent business
corporation or labor organization receipts should be permitted. One
commenter suggested a de minimis test for a qualified nonprofit
corporation's overall level of corporate or labor support, and limits
on the percentage that could be accepted from a single contributor.
Another commenter said the Commission should allow qualified nonprofit
corporations to accept a de minimis amount of corporate or labor
organization donations, so long as the corporation segregates these
donations in a separate account and allocates expenses so that the
corporate funds are not used to make independent expenditures.
In applying this rule, the Commission will distinguish inadvertent
acceptance of prohibited donations from knowing acceptance of a de
minimis amount of prohibited donations. Inadvertently accepted
prohibited donations will not affect a corporation's qualification for
an exemption from the independent expenditure prohibition. However,
knowingly accepted prohibited donations will void a corporation's
exemption, even if the corporation accepts only a de minimis amount.
The Commission notes that political committees are required to screen
their receipts for prohibited contributions. Most committees do so
successfully, even though many of them are small and have limited
resources. Qualified nonprofit corporations will also be expected to
adopt a mechanism for screening their receipts for prohibited
contributions in order to remain exempt from the independent
expenditure prohibition.
Finally, the Commission notes that, in most cases, the prohibition
on indirect business corporation and labor organization donations in
paragraph (c)(4)(ii), discussed above, will not affect qualified
nonprofit corporations that receive grants from organizations that are
tax exempt under section 501(c)(3). Some qualified nonprofit
corporations, all of which are section 501(c)(4) tax exempt
organizations under the final rules, may receive grants from section
501(c)(3) organizations. Because section 501(c)(3) organizations can
accept donations from business corporations and labor organizations,
paragraph (c)(4)(ii) could be read to disqualify an otherwise qualified
nonprofit corporation if it receives a grant from a section 501(c)(3)
organization.
However, under IRS rules, section 501(c)(4) organizations that
receive funds from a section 501(c)(3) organization are required to use
those funds in a way that is consistent with the section 501(c)(3)
organization's exempt purpose. Since political campaign intervention is
never consistent with a section 501(c)(3) organization's exempt
purpose, the recipient section 501(c)(4) organization is not supposed
to use the grant for campaign activity. ``[O]therwise, public funds
might be spent on an activity that Congress chose not to subsidize.''
Regan v. Taxation With Representation, 461 U.S. 540, 544 (1982). So
long as these safeguards exist, the Commission will not regard a grant
from a section 501(c)(3) organization to a qualified nonprofit
corporation as an indirect donation from a business corporation or
labor organization. Consequently, the grant will not affect the
organization's exemption from the independent expenditure prohibition.
f. Section 501(c)(4) status. Paragraph (c)(5) of the final rules
limits the exemption from the independent expenditure prohibition to
corporations that are described in 26 U.S.C. 501(c)(4). Section
501(c)(4) describes a class of organizations known as social welfare
organizations that are exempt from certain tax obligations. Under
section 501(c)(4), a social welfare organization is not organized for
profit but is operated exclusively for the promotion of social welfare.
A corporation must be a social welfare organization in order to be
exempt from the prohibition on independent expenditures.
IRS regulations state that the promotion of social welfare does not
include ``direct or indirect participation or intervention in political
campaigns on behalf of or in opposition to any candidate.'' 26 CFR
1.501(c)(4)-1(a)(2)(ii). However, the rules also state that an
organization is operated exclusively for the promotion of social
welfare if it is ``primarily'' engaged in promoting the common good and
general welfare of the people of the community. 26 CFR 1.501(c)(4)-
1(a)(2)(i). Thus, the rules allow social welfare organizations to
engage in a limited amount of political activity.
[[Page 35302]]
The commenters expressed varying views on this provision and its
relationship to the rest of the proposed rules. Two commenters argued
that section 501(c)(4) organizations should be presumptively exempt,
regardless of whether they have any of the other characteristics of a
qualified nonprofit corporation. In contrast, two other commenters said
that the additional characteristics should be included in the final
rules. These two commenters noted that the Internal Revenue Code allows
business corporations and labor organizations to make direct donations
to section 501(c)(4) organizations. Thus, the additional
characteristics must be included in order to limit the exemption from
the independent expenditure prohibition to the kind of organizations
described in the MCFL opinion.
The Commission has decided not to recognize a presumption that
social welfare organizations are qualified nonprofit corporations
solely because of their section 501(c)(4) status. Although the
characteristics of a social welfare organization overlap to some extent
with MCFL's three essential features, they are not identical. This
difference results from the fact that the tax code was written to serve
different purposes than the FECA. Thus, it would be inappropriate to
presume that all social welfare organizations are entitled to an
exemption from the independent expenditure prohibition.
Furthermore, the Internal Revenue Service often uses general legal
principles to enforce the provisions of the tax code. Thus, there will
often be no clearly stated IRS rule or policy that the Commission can
refer to in making its determinations. In addition, filing for formal
recognition of tax exempt status under section 501(c)(4) is permissive,
not required. As a result, the Commission will not be able to rely on
the IRS for verification of an organization's tax exempt status.
Therefore, the Commission has decided to include the additional
characteristics in the final rules, and limit the exemption from the
independent expenditure prohibition to corporations with these
characteristics.
5. Other Requirements Not Included in the Final Rules
The Notice of Proposed Rulemaking contained a number of proposed
requirements that are not included in the final rules. These proposals
are summarized below.
a. Affiliation with a separate segregated fund. One proposal would
have denied the exemption to corporations that have a separate
segregated fund. This proposal would have the effect of requiring
corporations that have separate segregated funds to make independent
expenditures solely from that fund, regardless of whether they have the
characteristics of a qualified nonprofit corporation.
The commenters were universally opposed to this proposal. One
commenter said such a rule would be impossible to apply, and would lead
to a nonsensical result whereby small, unsuccessful groups would be
able to make independent expenditures with general treasury funds,
while larger, more successful groups would be required to use their
separate segregated funds. Another commenter said that there is no
governmental interest in denying the exemption to organizations with
separate segregated funds, because the existence of such a fund does
not create a danger that the organization will flood the electoral
process with business profits. A third commenter objected to this
criterion, arguing that the constitutional theory underlying the MCFL
decision did not rely upon MCFL's allegations of the difficulty faced
by small nonprofits attempting to comply with FEC regulations.
Although a bright line rule such as this one would be very useful
in implementing the Court decisions, the Commission has not included
this proposal in the final rules. Consequently, corporations with these
characteristics will be exempt from the independent expenditure
prohibition regardless of whether they have a separate segregated fund.
b. Eligibility to file IRS Form 990EZ. The NPRM proposed to limit
the exemption from the independent expenditure prohibition to
corporations with limited financial resources by requiring them to be
eligible to file their tax returns on Internal Revenue Service Form
990EZ. Form 990EZ is available to organizations that have gross
receipts during the year of less than $100,000 and total assets at the
end of the year of less than $250,000.
Most commenters objected to this proposal. Several commenters
observed that an organization's size was not included in the list of
essential features, and also said that it has no relationship to the
justification given for the regulation of corporate political speech.
One commenter argued that the filing eligibility levels are so low that
most ``substantial'' organizations would not qualify for an exemption.
In contrast, one commenter supported the use of the Form 990EZ
eligibility thresholds as a criterion for an exemption from the
independent expenditure prohibition. This commenter thought it should
be used to prevent groups with extensive financial resources from
exacting political debts from candidates by giving them significant
support. He argued that there is a compelling state interest in
preventing organizations from seeking a quid pro quo.
The Commission is concerned that this proposal may be difficult to
administer, and so has decided not to include it in the final rules.
The Internal Revenue Service submitted comments in which it noted that
only those section 501(c)(4) organizations that are formally recognized
as tax exempt can file Form 990 or 990EZ. Organizations that are not
formally recognized must file as taxable organizations, usually on Form
1120. Consequently, there may not be an easy way to confirm an
organization's eligibility to file Form 990EZ. In addition,
organizations with less than $25,000 in annual gross receipts have no
real need to seek formal recognition, since they are not required to
file tax returns at all. Thus, there will be no way to confirm the
filing eligibility of these organizations.
The IRS also noted that the eligibility requirements for filing
Form 990EZ may change from time to time. This would have the effect of
changing the eligibility requirements for an exemption from the
independent expenditure prohibition.
Consequently, the Commission has excluded this proposal from the
final rules. Corporations with the characteristics in paragraph (c)
will be exempt regardless of whether they are eligible to file Form
990EZ.
c. Less sophisticated fundraising techniques. The narrative portion
of the NPRM indicated that the Commission was considering limiting the
exemption to groups that use the less sophisticated fundraising
techniques typically employed by grass roots organizations. One
criterion considered would deny the exemption to organizations that
utilize more formalized fundraising methods such as direct mail
solicitation.
However, the Commission has decided not to include this in the
final rules. Corporations with the characteristics set out in paragraph
(c) will be exempt from the independent expenditure prohibition
regardless of how they raise funds, so long as their fundraising
activity is not business activity under paragraph (b)(3) of the final
rules.
6. Reconstituting as a Qualified Nonprofit Corporation
The Commission recognizes that some corporations that are not
qualified nonprofit corporations may wish to reconstitute themselves so
that they
[[Page 35303]]
qualify for an exemption from the independent expenditure prohibition.
In order to become a qualified nonprofit corporation, a corporation
must adopt the essential characteristics set out in paragraph (c) of
the final rules. In addition, the corporation must purge its accounts
of corporate and labor organization donations and implement a policy to
ensure that it does not accept these donations in the future. Once it
adopts the essential characteristics, purges its accounts, and
implements such a policy, the corporation will become a qualified
nonprofit corporation.
7. Permitted Corporate Independent Expenditures
Paragraph (d) states that qualified nonprofit corporations can make
independent expenditures, as defined in 11 CFR Part 109, without
violating the prohibitions on corporate expenditures in 11 CFR Part
114. However, this paragraph also emphasizes that qualified nonprofit
corporations remain subject to the other requirements and limitations
in Part 114, in particular, the prohibition on corporate contributions,
whether monetary or in-kind.
The Commission received no comments on this provision, and has
retained it in the final rules.
8. Reporting Requirements
Paragraph (e) requires a corporation that makes independent
expenditures to certify that it is a qualified nonprofit corporation
under this section and report its independent expenditures. The
procedures for certifying exempt status are set out in paragraph
(e)(1). The requirements for reporting independent expenditures are set
out in paragraph (e)(2).
Under paragraph (e)(1), the corporation must certify that it is
eligible for an exemption from the independent expenditure prohibition.
This certification must be submitted no later than the date upon which
the corporation's first independent expenditure report is due under
paragraph (e)(2), which will be described in detail below. However, the
corporation is not required to submit this certification prior to
making independent expenditures. The certification can be made as part
of FEC Form 5, which the Commission will be modifying for use in this
situation. Or, the corporation can submit a letter that contains the
name, address, signature and printed name of the individual filing the
report, and certifies that the corporation has the characteristics set
out in paragraph (c).
One of the alternatives set out in the NPRM would have required
qualified nonprofit corporations to submit much more detailed
information in order to qualify for exempt status. The Commission
decided not to include these requirements in the final rules in order
to minimize the reporting burdens on qualified nonprofit corporations.
Instead, the Commission has decided to require only that corporations
certify that they have the characteristics of a qualified nonprofit
corporation when they make independent expenditures. This will ensure
that corporations claiming to be exempt are aware of the
characteristics required to qualify for an exemption.
Paragraph (e)(2) states that qualified nonprofit corporations must
comply with the independent expenditure reporting persons who make
independent expenditures in excess of $250 in a calendar year to report
those expenditures using FEC Form 5. This report must include the name
and mailing address of the person to whom the expenditures was made,
the amount of the expenditure, an indication as to whether the
expenditure was in support of or in opposition to a candidate, and a
certification as to whether the corporation made the expenditure in
cooperation or consultation with the candidate. The names of persons
who contributed more than $200 towards the expenditure must also be
reported.
Thus, the final rules treat qualified nonprofit corporations as
individuals for the purposes of the reporting requirements. This is one
of the least burdensome reporting schemes contained in the FECA. The
MCFL Court specifically endorsed this approach when it said that the
disclosure provisions of 2 U.S.C. 434(c) will ``provide precisely the
information necessary to monitor [the corporation's] independent
spending activity and its receipt of contributions.'' MCFL, 479 U.S. at
262. None of the commenters discussed the proposed independent
expenditure reporting requirements.
In another part of its opinion, the MCFL Court also said that
``should MCFL's independent spending become so extensive that the
organization's major purpose may be regarded as campaign activity, the
corporation would be classified as a political committee.'' MCFL, 479
U.S. at 262. The proposed rules set out a test for determining a
corporation's major purpose, and also contained proposed reporting
requirements related to that test. These reporting requirements were
set out in paragraph (e) of the proposed rules.
As will be discussed further below, the Commission has decided not
to address this part of the Court's opinion in the final rules being
promulgated today, preferring to do so at a later date as part of a
separate rulemaking. Consequently, the reporting requirements related
to the major purpose test have been deleted from paragraph (e) of the
final rules. However, these rules may eventually be amended to require
reporting of information related to the major purpose concept. Any such
changes will be made as part of the separate rulemaking.
9. Solicitation Disclosure
Section 114.10(f) of the final rules states that when a qualified
nonprofit corporation solicits donations, the solicitation must inform
potential donors that their donations may be used for political
purposes, such as supporting or opposing candidates. This rule, which
has been modified slightly from the proposed rule, requires qualified
nonprofit corporations to include a disclosure statement in their
solicitations for donations.
One commenter called this an ``unjustifiable roadblock'' to the
exercise of constitutional rights by small nonprofit corporations, and
speculated that the people who run these organizations won't know about
this requirement until after a complaint is filed against them.
However, this disclosure requirement directly serves the purposes
of the MCFL exemption. In carving out this exemption, the Supreme Court
said ``[t]he rationale for regulation is not compelling with respect to
independent expenditures by [MCFL]'' because ``[i]ndividuals who
contribute to appellee are fully aware of its political purposes, and
in fact contribute precisely because they support those purposes.''
MCFL at 260-61. ``Given a contributor's awareness of the political
activity of [MCFL], as well as the readily available remedy of refusing
further donations, the interest [of] protecting contributors is simply
insufficient to support Sec. 441b's restriction on the independent
spending of MCFL.'' Id. at 262 (emphasis added).
The MCFL Court went on to endorse the disclosure requirement as a
way to ensure that persons who make donations are aware of how those
donations may be used. The Court said the need to make donors aware
that their donations may be used to ``urge support for or opposition to
political candidates'' can be met by ``simply requiring that
contributors be informed that their money may be used for such a
purpose.'' MCFL, 479 U.S. at 261.
[[Page 35304]]
Furthermore, the Commission does not regard anticipated ignorance
of a regulation as a legitimate argument against the promulgation of
that regulation, particularly when the regulation will implement the
Commission's statutory mandate and the holding of a Supreme Court
decision.
Therefore, the Commission has included this requirement in the
final rules. The Commission does not expect this requirement to impose
a significant burden on qualified nonprofit corporations. For example,
corporations need not say anything more than ``donations to xyz
organization may be used for political purposes, such as supporting or
opposing candidates,'' or similar language, in order to satisfy this
requirement. This will ensure that donors are aware of the
corporation's campaign activity.
10. Non-authorization Notification
Paragraph (g) of the final rules requires qualified nonprofit
corporations that make independent expenditures to comply with the
disclaimer requirements in 11 CFR 110.11. Section 110.11 requires any
person financing an express advocacy communication to include a
statement in the communication identifying who paid for it. 11 CFR
110.11(a)(1). This statement must also identify the candidate or
committee who authorized the communications, unless the communications
was not authorized by any candidate or committee, in which case, it
must so indicate. 11 CFR 110.11(a)(1)(iii). Thus, a qualified nonprofit
corporation that finances an independent expenditure must include a
disclaimer that states the name of the corporation and indicates that
the communication was not authorized by any candidate or candidate's
committee. The Commission received no comments on this provision.
11. Major Purpose
In MCFL, the Court said that ``should MCFL's independent spending
become so extensive that the organization's major purpose may be
regarded as campaign activity, the corporation would be classified as a
political committee. * * * As such, it would automatically be subject
to the obligations and restrictions applicable to those groups whose
primary objective is to influence political campaigns.'' 479 U.S. at
262 (citation omitted).
The NPRM sought comments on a number of issues related to this part
of the Court's opinion. For example, the notice set out two alternative
versions of a test for determining whether a qualified nonprofit
corporation's major purpose is making independent expenditures. The
notice also specifically sought comments on whether these tests should
turn on whether independent expenditures are ``a'' major purpose or
``the'' major purpose of the corporation. As discussed above, the
notice also contained proposed requirements for reporting the
information that the Commission would need for these tests. Several
commeters submitted views on these issues.
The Commission has decided not to address this part of MCFL in the
final rules. In its administration of the Act, the Commission is
applying a major purpose concept in other contexts that do not involve
qualified nonprofit corporations. The Commission would prefer to
promulgate a major purpose test that will govern in all of these
situations. Such a rule is beyond the scope of this rulemaking.
Therefore, the Commission has decided to initiate a separate
rulemaking to address this part of MCFL and other outstanding issues.
Any further definition or refinement of the major purpose concept and
the associated reporting requirements will be done in that rulemaking.
The comments submitted on these issues in response to the NPRM will be
considered as part of this separate rulemaking.
However, in the meantime, the Commission cautions, that, ``should
[a qualified nonprofit corporation's] independent spending become so
extensive that [its] major purpose may be regarded as campaign
activity,'' it will be treated as a political committee under the FECA
and subject to the applicable regulations.
Certification of No Effect Pursuant to 5 U.S.C. Sec. 605(b) [Regulatory
Flexibility Act]
The attached final rules will not, if promulgated, have a
significant economic impact on a substantial number of small entities.
The basis for this certification is that the definition of express
advocacy will not have a significant economic impact on a substantial
number of small entities. In addition, as anticipated by the Supreme
Court in MCFL, there may not be a substantial number of small entities
affected by the final rules. The new disclosure rules for qualified
nonprofit corporations, which are small entities, are the least
burdensome requirements possible under the FECA.
List of Subjects
11 CFR Part 100
Elections
11 CFR Part 106
Campaign funds
Political candidates
Political committees and parties
11 CFR Part 109
Campaign funds
Elections
Polticial candidates
Political committees and parties
Reporting requirements
11 CFR Part 114
Business and industry
Elections
Labor
For the reasons set out in the preamble, Subchapter A, Chapter I of
Title 11 of the Code of Federal Regulations is amended as follows:
PART 100--SCOPE AND DEFINITIONS (2 U.S.C. 431)
1. The authority citation for 11 CFR Part 100 continues to read as
follows:
Authority: 2 U.S.C. 431, 438(a)(8).
2. 11 CFR Part 100 is amended by revising section 100.17 to read as
follows:
Sec. 100.17 Clearly identified (2 U.S.C. 431(18)).
The term clearly identified means the candidate's name, nickname,
photograph, or drawing appears, or the identity of the candidate is
otherwise apparent through an unambiguous reference such as ``the
President,'' ``your Congressman,'' or ``the incumbent,'' or through an
unambiguous reference to his or her status as a candidate such as ``the
Democratic presidential nominee'' or ``the Republican candidate for
Senate in the State of Georgia.''
3. 11 CFR Part 100 is amended by adding section 100.22 to read as
follows:
Sec. 100.22 Expressly advocating (2 U.S.C. 431(17)).
Expressly advocating means any communication that--(a) Uses phrases
such as ``vote for the President,'' ``re-elect your Congressman,''
``support the Democratic nominee,'' ``cast your ballot for the
Republican challenger for U.S. Senate in Georgia,'' ``Smith for
Congress,'' ``Bill McKay in `94,'' ``vote Pro-Life'' or ``vote Pro-
Choice'' accompanied by a listing of clearly identified candidates
described as Pro-Life or Pro-Choice, ``vote against Old Hickory,''
``defeat'' accompanied by a picture of one or more candidate(s),
[[Page 35305]]
``reject the incumbent,'' or communications of campaign slogan(s) or
individual word(s), which in context can have no other reasonable
meaning than to urge the election or defeat of one or more clearly
identified candidate(s), such as posters, bumper stickers,
advertisements, etc. which say ``Nixon's the One,'' ``Carter '76,''
``Reagan/Bush'' or ``Mondale!''; or
(b) When taken as a whole and with limited reference to external
events, such as the proximity to the election, could only be
interpreted by a reasonable person as containing advocacy of the
election or defeat of one or more clearly identified candidate(s)
because--
(1) The electoral portion of the communication is unmistakable,
unambiguous, and suggestive of only one meaning; and
(2) Reasonable minds could not differ as to whether it encourages
actions to elect or defeat one or more clearly identified candidate(s)
or encourages some other kind of action.
PART 106--ALLOCATION OF CANDIDATE AND COMMITTEE ACTIVITIES
4. The authority citation for 11 CFR Part 106 continues to read as
follows:
Authority: 2 U.S.C. 438(a)(8), 441a(b), 441a(g).
5. 11 CFR Part 106 is amended by revising paragraph (d) of section
106.1 to read as follows:
Sec. 106.1 Allocation of expenses between candidates.
* * * * *
(d) For purposes of this section, clearly identified shall have the
same meaning as set forth at 11 CFR 100.17.
* * * * *
PART 109--INDEPENDENT EXPENDITURES (2 U.S.C. 431(17), 434(c))
6. The authority citation for 11 CFR Part 109 continues to read as
follows:
Authority: 2 U.S.C. 431(17), 434(c), 438(a)(8), 441d.
7. 11 CFR Part 109 is amended by revising paragraphs (b)(1), (b)(2)
and (b)(3) of section 109.1 to read as follows:
Sec. 109.1 Definitions (2 U.S.C. 431(17)).
* * * * *
(b) For purposes of this definition--
(1) Person means an individual, partnership, committee,
association, qualified nonprofit corporation under 11 CFR 114.10(c), or
any organization or group of persons, including a separate segregated
fund established by a labor organization, corporation, or national bank
(see part 114) but does not mean a labor organization, corporation not
qualified under 11 CFR 114.10(c), or national bank.
(2) Expressly advocating shall have the same meaning as set forth
at 11 CFR 100.22.
(3) Clearly identified shall have the same meaning as set forth at
11 CFR 100.17.
* * * * *
PART 114--CORPORATE AND LABOR ORGANIZATION ACTIVITY
8. The authority citation for Part 114 continues to read as
follows:
Authority: 2 U.S.C. 431(8)(B), 431(9)(B), 432, 437d(a)(8),
438(a)(8), and 441b.
9. 11 CFR Part 114 is amended by revising paragraph (b) of section
114.2 to read as follows:
Sec. 114.2 Prohibitions on contributions and expenditures.
* * * * * * *
(b) Except as provided at 11 CFR 114.10, any corporation whatever
or any labor organization is prohibited from making a contribution or
expenditure as defined in 11 CFR 114.1(a) in connection with any
Federal election.
* * * * *
10. 11 CFR Part 114 is amended by adding section 114.10 to read as
follows:
Sec. 114.10 Nonprofit corporations exempt from the prohibition on
independent expenditures.
(a) Scope. This section describes those nonprofit corporations that
qualify for an exemption from the prohibition on independent
expenditures contained in 11 CFR 114.2. It sets out the procedures for
demonstrating qualified nonprofit corporation status, for reporting
independent expenditures, and for disclosing the potential use of
donations for political purposes.
(b) Definitions. For the purposes of this section--
(1) The promotion of political ideas includes issue advocacy,
election influencing activity, and research, training or educational
activity that is expressly tied to the organization's political goals.
(2) A corporation's express purpose includes:
(i) The corporation's purpose as stated in its charter, articles of
incorporation, or bylaws, except that a statement such as ``any lawful
purpose,'' ``any lawful activity,'' or other comparable statement will
not preclude a finding under paragraph (c) of this section that the
corporation's only express purpose is the promotion of political ideas;
(ii) The corporation's purpose as publicly stated by the
corporation or its agents; and
(iii) Purposes evidenced by activities in which the corporation
actually engages.
(3) (i) The term business activities includes but is not limited
to:
(A) Any provision of goods or services that results in income to
the corporation; and
(B) Advertising or promotional activity which results in income to
the corporation, other than in the form of membership dues or
donations.
(ii) The term business activities does not include fundraising
activities that are expressly described as requests for donations that
may be used for political purposes, such as supporting or opposing
candidates.
(4) The term shareholder has the same meaning as the term
stockholder, as defined in 11 CFR 114.1(h).
(c) Qualified nonprofit corporations. For the purposes of this
section, a qualified nonprofit corporation is a corporation that has
all the characteristics set forth in paragraphs (c)(1) through (c)(5)
of this section:
(1) Its only express purpose is the promotion of political ideas,
as defined in paragraph (b)(1) of this section;
(2) It cannot engage in business activities;
(3) It has:
(i) No shareholders or other persons, other than employees and
creditors with no ownership interest, affiliated in any way that could
allow them to make a claim on the organization's assets or earnings;
and
(ii) No persons who are offered or who receive any benefit that is
a disincentive for them to disassociate themselves with the corporation
on the basis of the corporation's position on a political issue. Such
benefits include but are not limited to:
(A) Credit cards, insurance policies or savings plans; and
(B) Training, education, or business information, other than that
which is necessary to enable recipients to engage in the promotion of
the group's political ideas.
(4) It:
(i) Was not established by a business corporation or labor
organization;
(ii) Does not directly or indirectly accept donations of anything
of value from business corporations, or labor organizations; and
(iii) If unable, for good cause, to demonstrate through accounting
records that paragraph (c)(4)(ii) of this section is satisfied, has a
written policy against accepting donations from business corporations
or labor organizations; and
[[Page 35306]]
(5) It is described in 26 U.S.C. 501(c)(4).
(d) Permitted corporate independent expenditures.
(1) A qualified nonprofit corporation may make independent
expenditures, as defined in 11 CFR part 109, without violating the
prohibitions against corporate expenditures contained in 11 CFR part
114.
(2) Except as provided in paragraph (d)(1) of this section,
qualified nonprofit corporations remain subject to the requirements and
limitations of 11 CFR part 114, including those provisions prohibiting
corporate contributions, whether monetary or in-kind.
(e) Qualified nonprofit corporations; reporting requirements.
(1) Procedures for demonstrating qualified nonprofit corporation
status. If a corporation makes independent expenditures under paragraph
(d)(1) of this section that aggregate in excess of $250 in a calendar
year, the corporation shall certify, in accordance with paragraph
(e)(1)(ii) of this section, that it is eligible for an exemption from
the prohibitions against corporate expenditures contained in 11 CFR
part 114.
(i) This certification is due no later than the due date of the
first independent expenditure report required under paragraph (e)(2).
However, the corporation is not required to submit this certification
prior to making independent expenditures.
(ii) This certification may be made either as part of filing FEC
Form 5 (independent expenditure form) or by submitting a letter in lieu
of the form. The letter shall contain the name and address of the
corporation and the signature and printed name of the individual filing
the qualifying statement. The letter shall also certify that the
corporation has the characteristics set forth in paragraphs (c)(1)
through (c)(5) of this section.
(2) Reporting independent expenditures. Qualified nonprofit
corporations that make independent expenditures aggregating in excess
of $250 in a calendar year shall file reports as required by 11 CFR
109.2.
(f) Solicitation; disclosure of use of contributions for political
purposes. Whenever a qualified nonprofit corporation solicits
donations, the solicitation shall inform potential donors that their
donations may be used for political purposes, such as supporting or
opposing candidates.
(g) Non-authorization notice. Qualified nonprofit corporations
making independent expenditures under this section shall comply with
the requirements of 11 CFR 110.11.
Dated: June 30, 1995.
Danny L. McDonald,
Chairman.
[FR Doc. 95-16502 Filed 7-5-95; 8:45 am]
BILLING CODE 6715-01-M
