[Federal Register Volume 63, Number 103 (Friday, May 29, 1998)]
[Proposed Rules]
[Pages 29358-29360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14193]


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FEDERAL ELECTION COMMISSION

[Notice 1998--10]

11 CFR Part 114


Qualified Nonprofit Corporations

AGENCY: Federal Election Commission.

ACTION: Notice of Disposition of Petition for Rulemaking.

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SUMMARY: The Commission announces its disposition of a Petition for 
Rulemaking filed on November 17, 1997 by James Bopp, Jr., on behalf of 
the James Madison Center for Free Speech. The petition urges the 
Commission to revise its regulations regarding qualified nonprofit 
corporations to conform them to a decision of the United States Court 
of Appeals for the Eighth Circuit. The Commission has decided not to 
initiate a rulemaking in response to this petition.

DATES: May 21, 1998.

FOR FURTHER INFORMATION CONTACT: Ms. Susan E. Propper, Assistant 
General Counsel, or Paul Sanford, Staff Attorney, 999 E Street, NW, 
Washington, DC 20463, (202) 694-1650 or (800) 424-9530.

SUPPLEMENTARY INFORMATION: 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,

[[Page 29359]]

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

[[Page 29360]]

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