On December 6, 2012, the Commission approved a Notice of Proposed Rulemaking (NPRM) regarding the treatment of limited liability partnerships (LLPs) for purposes of the Federal Election Campaign Act (the Act). The Commission is considering amending its rules governing partnerships to address LLPs that have elected corporate tax treatment under the regulations of the Internal Revenue Service (IRS). Under the Commission’s proposed rules, those LLPs would be treated as corporations for purposes of the Act. The Commission requests public comment on the proposed rules. Comments must be submitted in writing on or before February 11, 2013.
Under the Act, partnerships are generally subject to the same limitations as individuals on the amounts of contributions they may make to federal candidates and political committees (currently $2,500 per election to candidates; $30,800 per calendar year to national party committees; and $5,000 per calendar year to other political committees. The overall biennial limit does not apply to partnerships.).
Corporations are prohibited from making contributions to federal candidates, but may choose to establish separate segregated funds (SSFs) for this purpose. An SSF may solicit voluntary contributions from its sponsoring corporation’s “restricted class,” which is generally composed of the corporation’s executive and administrative personnel, stockholders and the families of both groups. 11 CFR 114.1(c) and 114.5(g). The SSF may then use its funds to make contributions directly to federal candidates and other committees, subject to the limitations of the Act.
Currently, the Commission’s regulation governing partnerships is codified at 11 CFR 110.1(e). It requires that contributions made by partnerships to federal political committees be attributed both to the partnership and to each participating partner, either (1) in direct proportion to his or her share of the partnership profits; or (2) by agreement of the partners, as long as only the profits of the partners to whom the contribution is attributed are reduced (or losses increased) in proportion to the contribution attributed to each of them. No portion of a contribution made by a partnership may be attributed to a partner that is a corporation. 11 CFR 110.1(e)(2). The regulation does not specifically address partnerships forming SSFs.
The Commission’s regulations make no distinction between different types of partnerships such as LLPs, which are a form of general partnership that provide partners with protection against personal liability for certain partnership obligations. Under IRS rules, a partnership may opt for treatment as an association (i.e., elect corporate tax treatment), without regard to its status under state law. A partnership that chooses treatment as an association “contributes all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to its partners.” 26 CFR 301.7701-3(g)(1)(i).
The Commission proposes to amend its rules on partnership so that LLPs that opt for treatment as associations under IRS rules would essentially be treated as corporations under the Act and Commission regulations. As such, these corporate LLPs would be prohibited from making contributions directly to federal candidates. Instead, under the proposed rules they would be free to establish SSFs for the purpose of making contributions to federal candidates and other political committees.
Proposed new 11 CFR 110.21
The Commission proposes to move its current partnership regulation from 110.1(e) and create a new section 110.21. The new section would combine the Commission’s existing partnership regulation with a rule addressing the treatment of corporate LLPs. Proposed section 110.21(a) would provide that all partnerships except corporate LLPs shall attribute contributions made by the partnership to both the partnership and each individual partner. Proposed 110.21(b) would state that the requirement in current section 110.1(e) that the amount limitations apply to partnership contributions, except for corporate LLPs. Proposed section 110.21(c) would address corporate LLPs by defining a limited liability partnership and stating that LLPs that elect corporate tax treatment by the IRS shall be considered as corporations under the Act and Commission regulations. Further, under the proposed 110.21(c), the restricted class of such an LLP shall consist solely of those persons who receive stock in the association, as well as their families.
The Commission seeks comment on these proposed rules and whether it is appropriate to allow a corporate LLP to pay the costs associated with establishing, administering and soliciting on behalf of its SSF and if so, whether these payments should be attributed among the individual partners either by explicit agreement or in proportion to their partnership share. The Commission also requests comments that address solicitations of contributions to a partnership SSF and the composition of a corporate LLP’s restricted class. Specifically, the Commission asks if it should consider the executive and administrative personnel to be within the restricted class. The proposed rule only includes those persons who receive stock in the association and their families to be part of the restricted class.
Written comments must be submitted on or before February 11, 2013, either electronically or on paper. However, the Commission highly encourages submitting comments electronically to ensure timely receipt and consideration. Electronic comments may be submitted via the Commission’s website at http://sers.fec.gov/fosers/.
Paper comments should be sent to the Federal Election Commission, Attn: Robert M. Knop, Assistant General Counsel, 999 E Street, N.W., Washington, DC 20463. All comments must include the full name and postal service address of the commenter, and of each commenter if filed jointly, or they will not be considered. The Commission will post all comments to its website at the conclusion of the comment period.