AO 2005-17: Membership organization / trade association affiliation

The Red River Valley Sugarbeet Growers Association, Inc. (the Association) qualifies as a trade association under Commission regulations, and is affiliated with the American Crystal Sugar Company (American Crystal), a cooperative membership organization. As a result, both American Crystal and the Association may solicit contributions to American Crystal PAC from the stockholders and executive and administrative personnel (and families thereof) of the incorporated members of the Association that have given approval for such solicitation.

Background

The Association

The Association is a North Dakota non-profit corporation that is tax-exempt as a “labor, agricultural, or hulticultural organization” under 2 U.S.C 501(c)(5). Its purpose is to advance the interests of sugarbeet growers, to address problems of sugarbeet growing, to aid members in working with regulatory agencies and to assist in the development of policies that are relevant to sugarbeet production. The Association is governed by a member-elected board of directors, and includes 2,859 individuals, partnerships, corporations, limited liability companies, estates and trusts among its members. No member, employee or officer receives monetary gain or profit from the Association’s operations, nor may assets, income or profit inure to their benefit. The Association does not have its own separate segregated fund.

American Crystal

Membership in American Crystal is offered to any entity or person that:

• Is a sugarbeet farm operator in the territory covered by the cooperative;
• Agrees to purchase securities of the cooperative and abide by its rules; and
• Is approved by American Crystal’s board of directors.

The cooperative has 2,873 members that include individuals, corporations and unincorporated entities. Each member owns one share of common stock in American Crystal and is entitled to cast one vote regarding the cooperative’s affairs, including the board of directors. No one else holds stock in or has voting authority in American Crystal. American Crystal has established and maintained American Crystal PAC as its separate segregated fund (SSF).

Relationship between the Association and American Crystal

The Association was formed in 1926 by growers in the Red River Valley when the American Beet Sugar Company (the precursor of American Crystal) established its first sugar refinery in the Valley. In 1973, under the leadership of the Association, the Association’s members founded an agricultural cooperative that then purchased and merged with the existing American Crystal Sugar Company.

Legal analysis

Membership / trade association status

FEC regulations define the term “membership organization” to include a cooperative with bylaws that provide for members, some of whom operate or administer the organization. Members include all persons who satisfy requirements for membership, affirmatively accept the invitation to become a member and have either significant financial or organizational attachment or pay annual membership dues. See 11 CFR 114.1(e)(1) and (2). Based on the representations in the request, the Commission determined that American Crystal qualifies as a membership organization.

A trade association is, “…generally a membership organization of persons engaging in a similar or related line of commerce, organized to promote and improve business conditions in that line of commerce and not to engage in a regular business of a kind ordinarily carried on for profit, and no part of the net earnings of which inures to the benefit of any member.” 11 CFR 114.8(a). The Explanation and Justification for 11 CFR 114.8(a) states: “The general definition of a trade association is based on the treatment in the tax code of business associations. See Regulation Section 501(c)(6) of the Internal Revenue Code of 1954.”¹ Based on details provided in the request, the Commission determined that the Red River Valley Sugarbeet Growers Association qualifies as a trade association even though it is tax exempt under section 501(c)(5), rather than under 501(c)(6).

Affiliation

According to Commission regulations, SSFs that are established, financed, maintained or controlled by the same corporation, person, or group of persons, including any parent or subsidiary organization, are affiliated. See 11 CFR 100.5(g)(2) and 110.3(a)(1)(ii). Sponsoring organizations are also considered to be affiliated with each other when they meet those criteria. See 11 CFR 100.5(g)(4) and 110.3(a)(3). In the absence of per se affiliation as set out in 11 CFR 100.5(g)(3), the Commission may examine various factors in the context of the relationship between sponsoring organizations to determine whether those entities are affiliated. 11 CFR 100.5(g)(4); 110.3(a)(3).

The Commission determined that the Association and American Crystal are affiliated based on the following facts:

• The Association played a significant role in the founding of American Crystal.
• The organizations have a 99.5 percent overlap in membership.
• Each organization has the ability to exert some control over the governance and personnel of the other organization.
• American Crystal collects and transmits dues to the Association that constitute almost all of the Association’s revenue.

PAC solicitations

A membership organization may solicit contributions to an SSF from its own executive and administrative personnel, and their families, from members who are individuals (and their families), and from unincorporated entities. A trade association may solicit contributions to an SSF from that same group and from the stockholders and executive and administrative personnel (and the families thereof) of those incorporated members that provide separate and specific approval to the trade association for the making of such solicitations during a calendar year and have not approved a solicitation by any other trade association for that calendar year. 11 CFR 114.8(c) and (d).

A corporation, including a membership organization, may solicit contributions to its separate segregated fund, from the solicitable class of its affiliates. In addition, a corporation that is affiliated with the connected organization of an SSF may pay solicitation costs for the SSF or perform actual solicitation functions. However, the Commission has not addressed in previous AOs the ability of a non-trade association membership organization to solicit contributions to its PAC from the owners and personnel of an affiliated trade association’s incorporated members.

Under the affiliation provisions of the Act and regulations, contributions made to or by affiliated SSFs are considered to have been made to or by a single committee, and thus such committees share contribution limits. 2 U.S.C. 441a(a)(5); 11 CFR 100.5(g)(2) and 110.3(a)(1). Hence, affiliated SSFs may make unlimited transfers of Federally permissible funds to each other. 11 CFR 102.6(a)(1) and 110.3(c)(1). Therefore, if the Association were to establish its own SSF receiving Federally permissible contributions, that SSF could transfer such funds in an unlimited amount to American Crystal PAC, even if such funds were derived from contributions by persons that could not be solicited for contributions to American Crystal PAC under the rules for non-trade association membership organization PACs.

Based upon the principals underlying the affiliation rules, the Commission concluded that the Association need not take the extra step of forming its own SSF. After an incorporated member of the Association has granted separate and specific written approval to the Association under 11 CFR 114.8(c) and (d), either American Crystal or the Association, or both, may solicit contributions to American Crystal PAC from that member’s stockholders and executive and administrative personnel, and their families. Similarly, either organization or both may pay for and perform the solicitation.

Date issued: November 4, 2005; Length: 7 pages.

¹ Section 501(c)(6) provides tax exemption for “[b]usiness leagues, chambers of commerce [and other organizations]…not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.” See 26 CFR 1.501(c)(6).