Qualified Nonprofit Corporations

On November 17, 1997, the Commission received a Petition for Rulemaking from the James Madison Center for Free Speech requesting that the Commission institute a rulemaking proceeding to conform its regulations at 11 CFR 114.10 to the decision of the United States Court of Appeals for the Eighth Circuit in Minnesota Citizens Concerned for Life v. Federal Election Commission, 113 F.3d 129 (8th Cir. 1997) [``Minnesota'']. In that decision, the court of appeals held that section 114.10 is unconstitutional because it infringes upon the First Amendment rights of certain nonprofit corporations. The petition urges the Commission to revise its regulations in accordance with this decision. For the reasons set out below, the Commission has decided not to revise its regulations, and is therefore denying the petition. Section 441b of the Federal Election Campaign Act, 2 U.S.C. 431 et seq. [``FECA'' or ``the Act''], broadly prohibits corporations from making independent expenditures. However,

the United States Supreme Court created a narrow exception to this prohibition in FEC v. Massachusetts Citizens for Life, 479 U.S. 238 (1986) [``MCFL'']. The Court held that the prohibition on corporate independent expenditures could not constitutionally be applied to nonprofit organizations like Massachusetts Citizens For Life [``Massachusetts Citizens''] that have certain ``essential'' features: (1) they are formed for the express purpose of promoting political ideas and cannot engage in business activities; (2) they have no shareholders or other persons affiliated so as to have a claim on their assets or earnings; and (3) they were not established by a business corporation or labor union and have a policy against accepting contributions from these entities. Id. at 263-64. In 1995, after an extended rulemaking proceeding, the Commission promulgated new regulations to implement the MCFL decision. Section 114.10 of the regulations describes those corporations that are exempt from the prohibition on independent expenditures, and refers to them as qualified nonprofit corporations. Under section 114.10(c), a qualified nonprofit corporation is a corporation (1) whose only express purpose is the promotion of political ideas; (2) that cannot engage in business activities; (3) that (a) has no shareholders or other persons (other than employees and creditors) affiliated in a way that could allow them to make a claim on the corporation's assets or earnings; and (b) offers no benefits that are a disincentive to disassociate with the corporation on the basis of a political issue; (4) that was not established by a business corporation or labor organization, and does not accept donations from such entities; and (5) that is described in 26 U.S.C. 501(c)(4) of the Internal Revenue Code. These rules went into effect on October 5, 1995. Express Advocacy; Independent Expenditures; Corporate and Labor Organization Expenditures; Final Rule, 60 FR 52069 (Oct. 5, 1995). The petition submitted by the Madison Center urges the Commission to revise these regulations to conform to the Minnesota decision. In Minnesota, the plaintiffs, a nonprofit organization called Minnesota Citizens Concerned for Life [``Minnesota Citizens''], argued that the Commission's regulations violate the First Amendment and the Administrative Procedure Act, 5 U.S.C. 551 et seq. Minnesota Citizens relied on a prior decision of the Eighth Circuit, Day v. Holohan, 34 F.3d 1356 (8th Cir. 1994), cert. denied, 513 U.S. 1127 (1995) [``Day''], in which the Eighth Circuit considered the constitutionality of a state statutory scheme that was similar to section 114.10. In Day, the Eighth Circuit concluded that the state statute was unconstitutional for two reasons. First, the court held that a nonprofit organization could engage in ``insignificant'' business activity and still be exempt from the prohibition on corporate independent expenditures. Second, the court concluded that a nonprofit organization could accept an insignificant amount of contributions from corporations and still qualify for an exemption from the independent expenditure prohibition. See also Federal Election Commission v. Survival Education Fund, 65 F.3d 285 (2d Cir. 1995). When faced with a challenge to section 114.10 of the Commission's regulations, the district court in Minnesota concluded that the Day decision was controlling, and invalidated the regulation. The Eighth Circuit affirmed the district court's decision. 113 F.3d 129, 133 (8th Cir. 1997). The Madison Center now asks the Commission to revise its regulations in accordance with the Eighth Circuit's decisions. Pursuant to its usual procedures, the Commission published a Notice of Availability in the December 10, 1997 edition of the Federal Register announcing that it had received the petition and inviting the public to submit comments on it. 62 FR 65040 (Dec. 10, 1997). The comment period closed on January 23, 1998. The Commission received three comments in response to the Notice of Availability. One of the comments was endorsed by nine organizations. All three comments supported the petition. After reviewing the petition, comments, and court decisions, the Commission has decided not to revise its regulations. Under the rule of stare decisis, a decision by a circuit court of appeals is only binding within the circuit in which it is issued. Section 114.10 reflects the Commission's interpretation of the MCFL opinion, a Supreme Court decision that is binding nationwide. Thus, if the Commission's interpretation of MCFL is correct, section 114.10 is controlling law outside the Eighth Circuit, and the Commission is entitled to implement it throughout the rest of the country. Since government agencies typically operate nationwide, it is not unusual for an agency to find that different courts have interpreted its statutes or rules in different ways. The Supreme Court has recognized that, when confronted with this situation, an agency is free to adhere to its preferred interpretation in all circuits that have not rejected that interpretation. It is collaterally estopped only from raising the same claim against the same party in any location, or from continuing to pursue the issue against any party in a circuit that has already rejected the agency's interpretation. United States v. Mendoza, 464 U.S. 154 (1984). Indeed, the Mendoza Court encouraged agencies to seek reviews in other circuits if they disagree with one circuit's view of the law, since to allow ``only one final adjudication would deprive this Court of the benefit it receives from permitting several courts of appeals to explore a difficult question before this Court grants certiorari.'' Id. at 160 (citations omitted). The Commission intends to follow the MCFL decision for the additional reason that it believes that the Eighth Circuit erroneously interpreted that decision in Day and Minnesota. In the Eighth Circuit's view, the MCFL decision allows corporations to make independent expenditures, even if they engage in business activities and accept donations from business corporations. However, the MCFL Court said that when a corporation engages in both business activity and political activity, it creates ``the potential for unfair deployment of wealth for political purposes.'' 479 U.S. at 259 (footnote omitted). Similarly, the Court said that groups that accept donations from business corporations ``serv[e] as conduits for the type of direct spending that creates a threat to the political marketplace.'' Id. at 264. This threat of corruption of the political marketplace justifies the application of the independent expenditure prohibition in section 441b. In contrast, groups like Massachusetts Citizens that ``cannot engage in business activities'' and ``[were] not established by a business corporation or labor union, and [have a] policy not to accept contributions from such entities,'' id., ``do not pose that danger of corruption.'' Id. at 259. Thus, there is no justification for the application of the independent expenditure prohibition in section 441b to these corporations. The Court emphasized that these characteristics were ``essential to [its] holding that [Massachusetts Citizens] may not constitutionally be bound by Sec. 441b's restriction on independent spending.'' Id. 263-64. Consequently, the Commission believes it has ample justification for subjecting groups that do not possess these characteristics to the full requirements of section 441b. It is also difficult to reconcile the Eighth Circuit's conclusion with the Supreme Court's decision in Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990). In Austin, the Court

reviewed the application of a state statute that was similar to section 441b to a nonprofit state chamber of commerce. The chamber did not itself engage in traditional business activities. However, its bylaws set forth ``varied purposes * * * several of which [were] not inherently political.'' 494 U.S. at 662. For example, it distributed information related to social, civic and economic conditions, trained and educated its members, and promoted ethical business practices. The Court noted that ``[m]any of its seminars, conventions, and publications [were] politically neutral and focus[ed] on business and economic issues,'' that were ``not expressly tied to political goals.'' Id. Thus, even though it was not engaged in a business for profit, ``[t]he Chamber's nonpolitical activities * * * suffice[d] to distinguish it from [Massachusetts Citizens] in the context of this characteristic.'' Id. at 663. With regard to the acceptance of corporate contributions, the Court was even more emphatic, saying that ``[o]n this score, the Chamber differs most greatly from [Massachusetts Citizens].'' Id. at 664. The Court said that, under MCFL, nonprofit organizations that accept contributions from business corporations are not entitled to any exemption from section 441b, and pointed out that if the rule were otherwise, ``[b]usiness corporations * * * could circumvent the Act's restriction by funneling money through [a nonprofit organization's] general treasury.'' Id. The Court concluded that, under this standard, the Chamber was not entitled to any exemption from the state's version of section 441b. ``Because the Chamber accepts money from for-profit corporations, it could, absent application of [the state corporate expenditure prohibition], serve as a conduit for corporate political spending.'' Id. The Commission continues to believe that section 114.10 accurately interprets these two Supreme Court cases, and the decisions of several other courts support this conclusion. In Clifton v. FEC, 114 F.3d 1309 (lst Cir. 1997), cert. denied, 118 S. Ct. 1306 (1998), the First Circuit said the MCFL Court ``stressed as `essential' the fact that the anti-abortion group there involved did not accept contributions from business corporations or unions * * *. This was important to the Court because it had previously sustained the right of Congress to limit the election influence of massed economic power in corporate or union form.'' Id. at 1312. Since the nonprofit corporation involved in that case accepted contributions from other corporations, the Court concluded that it was not entitled to the MCFL exemption, saying that it fell ``somewhere between the entity protected in [MCFL] and that held unprotected in Austin.'' Id. at 1312-13. The First Circuit also said a de minimis rule regarding the acceptance of corporate contributions would be inconsistent with the Austin decision. Id. at 1313. In dictum, the D.C. Circuit has also expressed support for the Commission's interpretation of this aspect of the MCFL decision. ``[T]he MCFL constitutional exemption * * * requires that the organization * * * not accept contributions from labor unions or corporations.'' Akins v. FEC, 101 F.3d 731, 742 n.10 (D.C. Cir. 1996) (en banc) (dictum), cert. granted, 117 S. Ct. 2451 (1997). Two district courts have also supported the Commission's interpretation. In FEC v. NRA Political Victory Fund, 778 F. Supp. 62 (D.D.C. 1991), rev'd on other grounds, 6 F.3d 821 (D.C. Cir.), cert. dismissed for want of jurisdiction, 513 U.S. 88 (1994), the court concluded that unless a corporation can show that it does not in fact accept contributions from business corporations or unions or has a policy ``equivalent to that of MCFL'' of not accepting such contributions, it does ``not fit in the group of organizations affected by the MCFL holding, a group which the Court acknowledged * * * would be ``small,''' 778 F. Supp. at 64 (quoting MCFL, 479 U.S. at 264). The district court in Faucher v. FEC, 743 F. Supp. 64 (D. Me. 1990), aff'd, 928 F.2d 468 (1st Cir.), cert. denied, 502 U.S. 820 (1991), reached a similar conclusion.

In [MCFL], the Supreme Court made clear that one of the ``essential'' factors for its holding was that the nonprofit corporation there did not receive, and had a policy of not receiving, any corporate funds. * * * [A]lthough the amounts received by [the plaintiff nonprofit organization] from corporations have been comparatively modest, they are obviously not subject to any control. Without an explicit policy against contributions from corporations, the risk remains that an organization like [the plaintiff] could ``serv[e] as [a conduit] for the type of direct spending that creates a threat to the political marketplace.'' * * * It is this potential for influence that supports the restrictions on corporate funding.

743 F. Supp. at 69-70 (emphasis in original; quoting MCFL, 479 U.S. at 264).

In sum, both because it is well settled that a decision by one circuit court of appeals is not binding in other circuits, and because the Commission believes the challenged regulation reflects a correct reading of controlling Supreme Court precedent and is therefore constitutional, the Commission has decided not to open a rulemaking in response to this Petition. Therefore, at its open meeting of May 21, 1998, the Commission voted not to initiate a rulemaking to revise its regulations regarding qualified nonprofit corporations, found at 11 CFR 114.10. Copies of the General Counsel's recommendation on which the Commission's decision is based are available for public inspection and copying in the Commission's Public Records Office, 999 E Street, NW, Washington, DC 20463, (202) 694-1120 or toll-free (800) 424-9530. Interested persons may also obtain a copy by dialing the Commission's FAXLINE service at (202) 501-3413 and following its instructions. Request document #233.

Dated: May 22, 1998. Joan D. Aikens, Chairman, Federal Election Commission. [FR Doc. 98-14193 Filed 5-28-98; 8:45 am] BILLING CODE 6715-01-P