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did not exist when the FECA was originally enacted in 1971, and were in their infancy when the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