LLCs and Politics at the FEC

Recently, and to significant commentary, the Federal Election Commission released dueling statements explaining the Commission’s decision not to pursue complaints brought by the Campaign Legal Center and Democracy 21 against certain Limited Liability Companies (“LLCs”) that contributed to super PACs. Three commissioners, Vice-Chairman Walther, with Commissioners Ravel and Weintraub argued, following the recent line of attack suggested by these advocacy organizations, that the actions of LLCs ought to be attributed to the LLC’s individual members and shareholders. Three commissioners – Chairman Petersen, with Commissioners Goodman and Hunter – argued that these groups had been given insufficient notice of this substantial change in how the FEC had traditionally handled such donations, and that the complaints should be dismissed accordingly.

The disagreement in this instance is not over how to scrutinize LLC donations to super PACs going forward, but whether, in the past, it was reasonable to think that such donations were above board. Based on previous precedent, might reasonable people believe, in good faith, that an individual forming an LLC to fund independent speech is legal? Yes.

First, some background. LLCs are a hybrid between a partnership and a corporation. As such, they can be treated either way, and so the FEC’s regulations treat LLCs as they elect to be treated: if they are taxed like a corporation, then campaign finance law treats the LLC like a corporation.[1] This rule has been in place since 1999. Indeed, CCP referenced this regulatory framework in a formal comment to the FEC back in 2013 as guidance for the regulation of limited liability partnerships.

The FEC’s position had long been that a contribution or expenditure was deemed to come from the corporation, not the shareholder – even in a closely held corporation. Recently, the FEC’s lawyers extended this reasoning to LLCs in an argument before the United States Court of Appeals for the DC Circuit. The Commission asserted that the “very status of separate corporation personhood” meant that if an individual wished to be both a federal contractor and make political contributions, then forming a corporation or LLC would be a permissible means to separate their work and personal activities.[2]

Historically, treating LLC donations as corporate donations has worked in favor of “strict” enforcement of straw donor prohibition rules. By keeping the corporation and the individual separate, the Commission could easily identify violations of the rules prohibiting contributions in the name of another. For example, in United States v. Danielczyk,[3] a corporation reimbursed employees who gave to then-Senator Hillary Clinton’s 2008 campaign. But because the money was really coming from the LLC, not the individual “contributors,” and because corporations are barred from contributing to candidates, the violation was clear. In this case, FEC rules regarding LLCs prevented illegal corporate donations. While this is the opposite result from the current debate (whether LLCs can make legal corporate donations to super PACs), it was more than reasonable to believe that the FEC’s rules regarding how to treat these groups would remain constant, regardless of result.

In past enforcement matters, the FEC has repeatedly held that contributions by closely held corporations were, in fact, corporate contributions, and could not be exempted from the prohibition on corporate contributions on the grounds that the funds originally came from the owner of the closely held corporation, and that the owner retained substantial control of the corporate decision to make the contributions.[4]

Given this historic treatment of LLCs, one shouldn’t be surprised by the Republican Commissioners decision to acknowledge that precedent. It is disappointing, however, that the Democratic Commissioners make no effort to grapple with this background. They do not try to distinguish these precedents from the current complaints. Beyond that, they provide no explanation for why, in their mind, no honest person could possibly have concluded that it was legal to do what was alleged here. To the pro-regulation Commissioners, this is a case about evading disclosure rules, pure and simple – knowledge of those rules, the intent of the donors, and FEC precedential rulings are irrelevant. But evasion and avoidance are not the same thing. As the Supreme Court has long acknowledged, taking lawful steps to avoid the effects of a law is perfectly legal.[5] The pro-regulation Commissioners simply do not consider, let alone address, whether a reasonable person, relying on past FEC precedent, could conclude that a contribution from a closely held corporation would be a considered a contribution by the corporation, not the individual.

Even the supposed evasion of disclosure rules is overstated in this case. In each of the LLC enforcement decisions announced this month, the real “donor in interest” was known within days. Assuming disclosure should have been required, the public was never truly kept in the dark, and the owners of these LLCs made no attempt to deny their actions or their desire to avoid public disclosure. The quick resolution of any confusion over the identity of those “behind” these LLCs provides a strong reason to believe that any mistake was an honest one, and not part of a nefarious plot to deprive the public of vital information.

The Republican Commissioners state that, pre-Citizens United precedents notwithstanding, the rule going forward in these cases should turn on the LLC-principals’ intent. If the purpose of giving through an LLC is to obfuscate the source of the money, then perhaps, with fair warning, such activity may be prohibited. This course is not without danger – it is not obviously mandated by the statute and it invites political opponents to file complaints against operational LLCs, triggering (for the respondents) costly and intrusive investigations into their intentions and the details of their business dealings. But whether that policy is wise or not, justice and fundamental fairness require that the regulated community know what is prohibited before facing the stiff penalties imposed including, not incidentally, the cost of an invasive investigation.

New rules going forward are one matter; punishing people after the fact for a reasonable interpretation of the law that happens to diverge from the thinking of some on the Commission is quite another.

It is worth noting that the FEC could have passed a regulation clarifying the law long ago. But the normally pro-regulation wing of the FEC has rejected any rulemaking that does not include provisions of the “DISCLOSE Act” and other add-ons that have been explicitly rejected by Congress. This desire to legislate, not simply enforce the law, has poisoned the Commission’s ability to address changes in the legal landscape. It is that intransigence that has created this uncertain legal regime, which those same Commissioners are now using to scapegoat honest attempts to comply with the law. That is unfortunate.

 

[1] 11 C.F.R. 110.1(g)(3): “An LLC that elects to be treated as a corporation … or an LLC with publicly-traded shares” is treated like a corporation. If the money comes from a single-member LLC that is not taxed as a corporation, the Commission counts the LLC’s contribution as coming from that member. 11 C.F.R. § 110.1(g)(4). LLCs that choose to be treated like a partnership for tax purposes are also treated as a partnership for campaign finance purposes.

[2] Transcript in Wagner v. FEC, pp. 39-40; 46-48; see also 11 C.F.R. § 115.6. An individual is a “different person” from a corporation or LLC under the campaign finance laws, just as in every other area of the law. Id. at 53.

[3] 683 F.3d 611, 614 (4th Cir. 2012) cert denied, 133 S. Ct. 1459 (2013).

[4] See FEC v. Kalogianis, 2007 WL 4247795 (M.D. Fla. 2007) (candidate’s closely held corporation loaned money to campaign); MUR 3191, Christmas Farm Inn, Inc. (1995) (candidate’s closely held corporation loaned money to campaign); MUR 4313 (Coalition for Good Government) (2002) (respondent created a corporation for purposes of making an independent expenditure, and deposited personal funds with corporation for that purpose; deemed to be illegal corporate expenditure).

[5] Gregory v. Helvering, 293 U.S. 465 (1935).

The Center for Competitive Politics is now the Institute for Free Speech.