[Federal Register Volume 63, Number 243 (Friday, December 18, 1998)]
[Proposed Rules]
[Pages 70065-70068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33548]
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FEDERAL ELECTION COMMISSION
11 CFR Part 110
[Notice 1998-19]
Treatment of Limited Liability Companies Under the Federal
Election Campaign Act
AGENCY: Federal Election Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commission is seeking comments on how to treat limited
liability companies (``LLC'') for purposes of the Federal Election
Campaign Act (``FECA'' or the ``Act''). LLC's are non-corporate
business entities, created under State law, that have characteristics
of both partnerships and corporations. While the Commission is
proposing that these entities be treated as partnerships for purposes
of the Act, please note that no final decision has yet been reached on
any of the issues discussed in this Notice.
DATES: Comments must be received on or before February 1, 1999. The
Commission will hold a hearing on these proposed rules, if sufficient
requests to testify are received. If a hearing is held, its date will
be announced in the Federal Register. Persons wishing to testify at the
hearing should so indicate in their comments.
ADDRESSES: All comments should be addressed to N. Bradley Litchfield,
Associate General Counsel, and must be submitted in either written or
electronic form. Written comments should be sent to the Federal
Election Commission, 999 E Street, NW, Washington, DC 20463. Faxed
comments should be sent to (202) 219-3923, with printed copy follow-up
for clarity. Electronic mail comments should be sent to LLC[email protected]
and should include the full name, electronic mail address and postal
service address of the commenter. The hearing will be held in the
Commission's ninth floor meeting room, 999 E Street, NW, Washington,
DC.
FOR FURTHER INFORMATION CONTACT: N. Bradley Litchfield, Associate
General Counsel, or Rita A. Reimer, Attorney, 999 E Street, NW,
Washington, DC 20463, (202) 694-1300 or (800) 424-9530 (toll free).
SUPPLEMENTARY INFORMATION: The Federal Election Campaign Act, as
amended, 2 U.S.C. 431 et seq., contains various restrictions and
prohibitions on the right of ``persons'' to contribute to Federal
campaigns. The Act defines ``person'' to include an individual,
partnership, committee, association, corporation, labor organization,
or any
[[Page 70066]]
other organization or group of persons. 2 U.S.C. 431(11).
The Act prohibits corporations and labor organizations from making
any contribution or expenditure in connection with a Federal election,
2 U.S.C. 441b(a), although these entities may establish separate
segregated funds (``SSF'') and solicit contributions from their
restricted class to the SSF. 2 U.S.C. 441b(b)(2)(C). The Act also
prohibits contributions by Federal contractors, 2 U.S.C. 441c, and
foreign nationals, 2 U.S.C. 441e. Contributions by persons whose
contributions are not prohibited by the Act are subject to the limits
set out in 2 U.S.C. 441a(a), generally $1,000 per candidate per
election to Federal office; $20,000 aggregate in any calendar year to
national party committees; and $5,000 aggregate in any calendar year to
other political committees. 2 U.S.C. 441a(a)(1). Individual
contributions may not aggregate more than $25,000 in any calendar year.
2 U.S.C. 441a(a)(3).
Contributions by partnerships are permitted, subject to the 2
U.S.C. 441a(a) limits. In addition, partnership contributions are
attributed proportionately against each contributing partner's limit
for the same candidate and election. 11 CFR 110.1(e).
In recent years the Commission has received several advisory
opinion requests (``AOR'') seeking guidance on the treatment of limited
liability companies for purposes of the Act, and has issued advisory
opinions (``AO'') in response to these AOR's. See AO's 1998-15, 1998-
11, l997-17, 1997-4, 1996-13, and 1995-11. LLC's are noncorporate
business entities, established under State law, in which all members
have limited liability protection and which may be taxed as a
partnership rather than a corporation for Federal income tax purposes.
Callison and Sullivan, Limited Liability Companies section 1.1 (1994).
They thus combine the tax advantages of partnerships with the liability
protection provided to corporate members.
Wyoming enacted the first LLC statute in 1977, but the majority of
these laws have been enacted since 1990. Id. section 1.5. Thus these
entities did not exist when the FECA was originally adopted, and were
in their infancy when the FECA was last amended in 1979.
In considering the pertinent AOR's, the Commission has determined
that, since LLC's are neither partnerships nor corporations, they
should be considered ``any other organization or group of persons'' and
therefore be treated as ``persons'' under 2 U.S.C. 431(11). As persons,
but not corporations, LLC's are subject to the Act's contribution
limits rather than its prohibitions. In addition, contributions from an
LLC's general operating accounts or treasury are not attributed to any
of its members. However, the Commission's allowance of contributions by
LLC's has also been premised on the assumption that none of the
individual members of the LLC are entities prohibited by the Act from
contributing, i.e., corporations, labor organizations, Federal
contractors, or foreign nationals. If any member of the contributing
LLC falls within a category prohibited by the Act from contributing,
that contribution is impermissible. AO 1997-17; see also AO's 1997-4,
1996-13, and 1995-11.
In each of these AO's, the Commission reviewed the law of the State
in which the LLC was established regarding classification of LLC's and
their attributes, as compared with the similar attributes of both
partnerships and corporations in that State. For example, the
Commission has noted how the statutes classify the entities in
definitional terms and selection of business name. It has also
considered whether the statutes for LLC's and the rules of an entity
itself broadly reflect characteristics that are different from those of
a corporation in some instances, or a partnership in others. In one
recent opinion, the Commission stated that, even if flexibility in a
particular State's law on LLC's and other business forms might allow
LLC's to have more common attributes with corporations or partnerships
in that State, the LLC was still a separate type of business entity
with its own comprehensive statutory framework. See AO 1997-4.
As the number of AOR's on this topic has increased, the Commission
has decided that, rather than continuing to examine the various State
statutes to determine treatment of LLC's on a state-by-state basis, it
would be preferable to draft a generally-applicable rule for this
purpose. This approach would provide all LLC's with guidance under the
Act, without their having to request an advisory opinion construing the
law of their particular State.
Moreover, while the Act's legislative history directs the
Commission to look to State law to determine the status of
corporations, see, e.g., H.R. Rept. 1438 (Conf.), 93d Cong., 2d Sess.
68-69 (1974), LLC's are by definition noncorporate entities. In
California Medical Association v. FEC (``CMA''), 453 U.S. 182 (1981),
the Supreme Court rejected an effort by a nonprofit unincorporated
association to establish an SSF and otherwise be subject to the
requirements of section 441b, rather than 441a(a)'s contribution
limits.
In considering these AOR's, the Commission learned that the
Internal Revenue Service (``IRS'') has scrutinized the characteristics
of LLC's, to determine whether they should be taxed as corporations or
as partnerships for Federal income tax purposes. In view of changes by
the States allowing greater flexibility in their LLC statutes that, in
effect, blurred or narrowed the traditional differences between
corporations and partnerships, the IRS concluded in 1996 that it should
adopt regulations reflecting those altered circumstances.
``Simplification of Entity Classification Rules,'' 61 FR 66584, 66584-
85 (Dec. 18, 1996 ). The IRS regulations abandoned the past State-by-
State LLC approach in the interest of achieving greater simplification
and conserving both IRS and taxpayer resources. Known as the ``check-
the-box'' rules, they permit entities that are not corporations under
State law, such as LLC's, to designate themselves on an IRS form as
either corporations or partnerships for Federal tax purposes. 26 CFR
302.7701-3. An LLC with two or more members is automatically treated as
a partnership for tax purposes and need not file the appropriate tax
form, unless it wishes to ``check-the-box'' and elect to take corporate
tax treatment. 26 CFR 302.7701-3(b).
The Commission considered adopting the IRS' approach as part of its
discussion of AO's 1998-11 and 1998-15, but decided that any such
action should be taken as part of a notice-and-comment rulemaking
procedure rather than through the AO process. After reviewing these
AO's and other relevant material, the Commission is seeking comment on
two alternative approaches: (A) that all LLC's be treated in the same
manner as partnerships are treated for purposes of the Act; and (B)
that the Commission adopt the IRS's ``check the box approach,'' that
is, that LLC's be treated as either partnerships or corporations for
FECA purposes based on their chosen treatment under the Internal
Revenue Code. The question of whether a business entity qualified as an
LLC would continue to be determined by the law of the State in which
the business organization was established.
If Alternative A were adopted, contributions by an LLC would be
attributed to the LLC and to each member of the LLC in direct
proportion to his or her share of the LLC's profits, as reported to the
recipient by the LLC, or by agreement of the members, as long as
certain conditions were met. In addition, contributions by an LLC
[[Page 70067]]
would be subject to the contribution limitations set forth in 2 U.S.C.
441a, and no portion of any contribution could be made from the profits
of a member prohibited from making contributions under 2 U.S.C. 441b,
441c, or 441e. However, unlike their current treatment, LLC's could
still make contributions, even if some, but not all, of their members
were prohibited from doing so.
The Commission is considering whether a uniform approach is
appropriate despite the individual differences that might exist between
different LLC's. In addition, this approach would probably result in
the majority of LLC's being treated as partnerships for both Federal
taxation and FECA purposes. As explained above, the default position
under the IRS ``check-the-box'' approach is taxation as a partnership;
that is, an LLC must specifically opt to be taxed as a corporation, or
it will be treated as a partnership. The IRS has informed the
Commission that, while the figures as to how many LLC's opt for
corporate tax treatment are not readily available, the large majority
of LLC's are most likely to prefer tax treatment as partnerships,
rather than as corporations.
Treating all LLC's as partnerships would also address possible
proliferation problems that could develop if the Commission continues
the approach taken in past AO's, that is, treating LLC's as ``persons''
for purposes of the Act. Since the same persons may currently become
members of an unlimited number of LLC's, if LLC contributions are not
further attributed to individual members, a person might be able to
circumvent the section 441a(a) contribution limits by channeling
contributions through several LLC's to the same candidate or committee.
However, as noted above, the Commission also invites comment on
Alternative B for the attribution of LLC contributions that would more
rigorously follow the IRS approach.--Specifically, this approach would
mean that an LLC, which opted for taxation as a corporation under the
IRS ``check-the-box'' rules, would also be treated as a corporation
under FECA. Thus, its contributions to influence Federal elections
would be prohibited by 2 U.S.C. 441b, but it could establish a separate
segregated fund under the same regulatory regime that generally applies
to corporations and labor organizations. See 2 U.S.C. 441b(b)(2)(C) and
11 CFR 114.5. On the other hand, contributions of an LLC that did not
select tax treatment as a corporation would be treated as though made
by a partnership pursuant to current Commission regulations at 11 CFR
110.1(e).
In addition, because there is some general similarity between the
Federal income taxation of LLC's and Subchapter S corporations (26
U.S.C. 1361-1379), the Commission invites comments regarding a possible
revision to its regulations that would allow a Subchapter S corporation
to make otherwise lawful contributions in Federal elections. Under such
a regulatory exception, these contributions would be attributed only to
the individual stockholders of the corporation as their personal
(noncorporate) contributions and would be subject to their limits under
the Act. Comments are invited both as to the Commission's authority to
promulgate such a rule and its merit as a Commission policy position.
(Proposed regulatory language for this possible exception is not
published at this time.)
The Commission welcomes comments on other approaches to deal with
the above FECA policy issues, or on any other aspect of this
rulemaking.
Certification of No Effect Pursuant to 5 U.S.C. 605(b) (Regulatory
Flexibility Act)
These proposed rules would not, if promulgated, have a significant
economic impact on a substantial number of small entities. The basis
for this certification is that limited liability companies are already
covered by the Act, and the proposed revisions would clarify the extent
to which they could contribute to Federal campaigns. In some instances
this amount would be greater than is presently the case, while in
others it would be smaller. In neither case would the amount involved
qualify as ``significant'' for purposes of the Regulatory Flexibility
Act.
List of Subjects in 11 CFR Part 110
Campaign funds, Political candidates, Political committees and
parties.
For the reasons set out in the preamble, it is proposed to amend
Subchapter A, Chapter I of Title 11 of the Code of Federal Regulations
as follows:
PART 110--CONTRIBUTIONS AND EXPENDITURES LIMITATIONS AND
PROHIBITIONS
1. The authority citation for Part 110 would continue to read as
follows:
Authority: 2 U.S.C. 431(8), 431(9), 432(c)(2), 437d(a)(8), 441a,
441b, 441d, 441e, 441f, 441g and 441h.
2. Section 110.1 would be amended by adding new paragraph (g) to
read as follows:
Sec. 110.1 Contributions by persons other than multicandidate
political committees (2 U.S.C. 441a(a)(1)).
* * * * *
Alternative A
(g) Contributions by limited liability companies (``LLC''). (1)
Definition. The question of whether a business entity qualifies as a
limited liability company is determined by the law of the State in
which the business organization is established.
(2) Attribution of contributions. A contribution by an LLC shall be
attributed to the LLC and to each member--
(i) In direct proportion to his or her share of the LLC's profits,
according to instructions which shall be provided by the LLC to the
political committee or candidate; or
(ii) By agreement of the members, as long as--
(A) Only the profits of the members to whom the contribution is
attributed are reduced (or losses increased), and
(B) These members' profits are reduced (or losses increased) in
proportion to the contribution attributed to each of them.
(3) Limitation on contributions. A contribution by an LLC shall not
exceed the limitations on contributions in 11 CFR 110.1(b), (c), and
(d). No portion of such contribution may be made from the profits of a
corporation that is a member, or from a member who is prohibited from
contributing under 11 CFR 110.4 or 115.2.
Alternative B
(g) Contributions by limited liability companies (``LLC''). (1)
Definition. A limited liability company is determined by the law of the
State in which the business entity is established.
(2) A contribution by a limited liability company which elects to
be treated as a partnership by the Internal Revenue Service, pursuant
to 26 CFR 301.7701-3, shall be considered a contribution from a
partnership pursuant to 11 CFR 110.1(e).
(3) A limited liability company which elects to be treated as a
corporation by the Internal Revenue Service, pursuant to 26 CFR
301.7701-3, shall be considered a corporation pursuant to 11 CFR 114.
(4) A contribution by a limited liability company that does not
make an election pursuant to 26 CFR 301.7701-3 shall be treated as a
contribution from a partnership pursuant to 11 CFR 110.1(e).
* * * * *
[[Page 70068]]
Dated: December 15, 1998.
Scott E. Thomas,
Acting Chairman, Federal Election Commission.
[FR Doc. 98-33548 Filed 12-17-98; 8:45 am]
BILLING CODE 6715-01-P