February 6, 1998

Establishment and Operation of a Corporate Political Action Committee (PAC)

Arnold & Porter Article
This memorandum explains how a corporation may establish and operate a political action committee ("PAC") under federal law.1 Section I provides background information on corporate PACs. Section II explains how to set up a corporate PAC and discusses the relationship between the PAC and its corporate sponsor. Section III covers fundraising activity -- that is, who may be solicited for contributions to the PAC; when they may be solicited; how they may be approached and how much they may give. Section IV explains how PACs may support candidates or other PACs. Finally, Section V details recordkeeping and reporting requirements applicable to PACs.
FECA prohibits corporations from using their treasury monies to make contributions or expenditures in connection with federal elections.2 However, a corporation may use its treasury funds to establish and administer a PAC.3 The PAC may collect contributions from a limited class of individuals and use this money, in turn, to make contributions and expenditures to influence federal elections.4 The PAC's funds, including lawful contributions from individuals, must be separated and segregated from prohibited treasury funds -- hence the technical term by which corporate PACs are identified in the Act and the regulations: "separate segregated fund" ("SSF").5
For several reasons, establishing a PAC is preferable to less formalized political giving programs such as, for example, those that involve "passing the hat" among corporate executives to satisfy a candidate's contribution request. First, the FEC, in its advisory opinions, has ruled some such arrangements unlawful. The Commission has reasoned that such arrangements inevitably entail the use of corporate resources, which would constitute unlawful corporate contributions, or that such activities constitute the unlawful operation of an unregistered PAC.6 Second, supporting candidates through a PAC facilitates a more equitable sharing among corporate personnel of the civic responsibility for such giving. Solicitations among corporate employees for donations to the PAC can be made through the use of salary-based guidelines, for example. Third, corporate PAC contributions, in contrast to individual contributions or those made through trade association PACs, are fully identified with the corporation's employees and name and, therefore, are generally more politically effective. For all of these reasons, we strongly advise that any corporation intending to be politically active establish a PAC.
We outline below the mechanics of organizing and operating a PAC.
II. SETTING UP THE PAC A. Organizational and Registration Requirements
A PAC established by a corporation must register itself with the FEC within 10 days after the date of its "establishment.""Establishment" occurs when any of the following takes place:
  • the corporation's board of directors (or comparable governing board) votes to create the PAC;

  • the administrators of the PAC are selected; or

  • the PAC's initial operating expenses (e.g., costs of office space, phones, utilities, supplies and bank charges) are paid by the corporation.7
To register the PAC, the corporation must take the following steps:
1. File a Statement of Organization
The PAC must file a "Statement of Organization" with the FEC (Form 1). The statement must disclose the name, address and type of committee (e.g., an SFF or candidate committee). The Act contains specific requirements governing the name of the PAC. For example, the name of the PAC must contain the full name of the sponsoring corporation. The Statement also must identify the PAC's sponsoring corporation.8
After the PAC files its Statement of Organization, the FEC will assign it an identification number that must appear on all statements and reports the PAC subsequently files.9 Any changes to or corrections of a Statement of Organization (such as a change in treasurer, address, or bank depository) must be made by filing an amended Statement of Organization within 10 days of the change.10
2. Appoint a Treasurer
The PAC is required to appoint a treasurer before it may accept contributions or make expenditures.11 The name of the treasurer, as well as the name of the assistant treasurer, if the PAC decides to have one, must appear on the Statement of Organization. The treasurer is responsible for the following duties:
  • depositing contributions in the PAC's designated depository institution within 10 days of receipt;
  • authorizing expenditures;
  • fulfilling recordkeeping duties;
  • signing all reports and statements, including the Statement of Organization;
  • filing reports and statements in a timely fashion; and
  • examining all contributions to determine if they are illegal and whether they exceed contribution limits.12
3. Open a Depository Account
A PAC must maintain a depository account at an "eligible institution" and must identify the institution on Form 1. Eligible institutions include: state banks, national banks, and depository institutions insured by the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation or the National Credit Union Administration.13
4. Name a Custodian of Records
The PAC must name a "custodian of records" for its operations on its Statement of Organization. The PAC may appoint anyone it wishes as custodian of records, although we would recommend appointing the treasurer or the assistant treasurer for administrative convenience.14
B. Relationship Between a Corporation and Its PAC
A corporation may use its treasury funds to pay for costs incurred in setting up and running the PAC, including:
  • office space;
  • telephones;
  • salaries of PAC personnel;
  • utilities;
  • supplies;
  • bank charges; and
  • legal and accounting fees.
A corporation also may use its treasury funds to pay for the costs of soliciting contributions to the PAC and for certain costs of other fundraising activities.15
A corporation may pay these costs in one of two ways. It may pay directly for the PAC's establishment, administration and solicitation expenses, for example, by writing checks directly to lawyers and accountants for their services to the PAC. Alternatively, the PAC may set up a separate administrative account containing corporate treasury funds that the PAC uses solely for such expenses. The administrative account may not, however, be commingled with the account from which the PAC makes contributions. If the PAC pays any expenses that lawfully could have been paid by the corporation, the company may reimburse the PAC; however, it must do so within 30 days.16
In addition to providing financial support for the establishment and operation of the PAC, a corporation may exercise decisionmaking control over its PAC, for example, with respect to selecting candidates who will receive contributions.17 FECA does not contain any rules concerning such governance aspects of administering the PAC. Nevertheless, we recommend that you set up an internal process for considering requests for contributions to candidates and for making contribution decisions. You may want to consider naming a Board of Directors for your PAC, for example, to vote upon proposed contributions. This can be accomplished by drafting a simple set of by-laws.
Once the PAC has been set up, the next step is to raise money for its fund through voluntary contributions. A corporate PAC, its corporate sponsor and other collecting agents18 may solicit contributions for the PAC from particular classes within the corporate "family" as described below. They may not, however, solicit the general public and must observe the rules described below when soliciting or accepting contributions.
A. Solicitations
1. Who May Be Solicited
A corporation and its PAC may solicit contributions only from the following groups of individuals:
  • the corporation's "restricted class" (i.e., its stockholders, executive and administrative personnel and the families of both groups) at any time;

  • the corporation's nonexecutive and nonadministrative personnel and their families, but only twice a year.19
2. Voluntariness of Contributions
  • Contributions to a corporate PAC must meet the following conditions to ensure that they are voluntary:

  • Contributions may not be secured by the use or threat of physical force, job discrimination or financial reprisals, or by dues, fees, or other monies required as a condition of employment;

  • Individuals being solicited for contributions must be informed of: (i) the political purpose of the PAC and (ii) their right to refuse to contribute without reprisal; and

  • If the solicitation includes a guideline or suggestion as to how much to contribute (e.g., X% of an employee's salary), solicitees must be informed that (i) the guidelines are merely suggestions; (ii) individuals may contribute more or less than the guidelines suggest; and (iii) the amount of the contribution, or the refusal to contribute, will not benefit or disadvantage the solicitee.20
A corporate PAC may use a payroll deduction checkoff plan by which an employee authorizes deductions from his or her paycheck, but only with respect to its restricted class. Such methods are not available for twice-yearly solicitations of all other employees. And, a PAC may not use a reverse checkoff system, i.e., a collection system in which PAC contributions are automatically deducted from an individual's paycheck without his or her approval.2
3. Conditions of Solicitation
Under IRS rules, every written PAC solicitation must state expressly either that "contributions or gifts to the PAC are not deductible as charitable contributions for Federal income tax purposes," or that "contributions or gifts to the PAC are not tax deductible." Telephone solicitations also must include a statement about nondeductibility of the contributions to the PAC although oral solicitations made in person need not contain this disclosure.22
a. Restricted Class
As stated above, a corporation may solicit its stockholders, and executive or administrative personnel and their families an unlimited number of times during the course of the year.23 Such persons may be solicited by letter, orally or through company publications, such as newsletters. In the latter case, care must be taken, however, that the solicitation does not reach persons who may not be solicited -- such as nonexecutive and nonadministrative employees and members of the general public. Therefore, certain types of company publications may not be appropriate vehicles for PAC solicitation messages
b. Twice-Yearly Solicitations of Other Employees
Other corporate employees (i.e., nonexecutive and nonadministrative) and their families may be solicited only twice a year under special solicitation rules.24 The rules are fairly restrictive, and some corporations elect not to solicit this class of employees rather than undertake the burden of compliance. The rules are as follows:
  • Appointment of Custodian: The corporation or the PAC must appoint a custodian (i) to receive contributions in order to preserve the anonymity of individuals who do not wish to contribute or who contribute small amounts, and (ii) to provide necessary recordkeeping information. The custodian may not be a stockholder, officer, employee or member of the corporation or its PAC.25
The custodian is responsible for collecting contributions; transmitting them within 10 days of receipt into a separate bank account; forwarding these funds by check to the PAC's account; and providing the PAC with information about contributors who make single contributions in excess of $50 or who contribute an aggregate of over $200 in a calendar year. The corporate sponsor or the PAC must provide the custodian with a list of all contributions that have been made directly to the PAC by the persons subject to the twice-yearly solicitation rules.26
  • Written Solicitations: Twice-yearly solicitations must (1) be made in writing and mailed to the individual's residence; (2) notify the solicitee of the custodial arrangement described above; and (3) note that the PAC will not be informed of persons who make no or small contributions.27
  • Notification of Labor Organizations: A corporation must notify any labor organization representing any of its employees of its intention to conduct a twice-yearly solicitation. This must be done within a "reasonable time" before the solicitation to give the organization the opportunity to make a similar solicitation. The corporation must make available to the labor organization the method it uses for soliciting contributions. If the corporation does not wish to disclose the names and addresses of its employees and stockholders, it may give a mailing list to an independent mailing service to be used by both the labor organization and the corporation.28
B. Contributions to Corporate PACs Individuals in a corporation's solicitable class may contribute up to $5,000 per calendar year to the PAC.29 Those contributions may take any of the following forms:
  • Gifts of money. Contributions of money may be made by check, cash, or other instrument, although cash contributions may not exceed $100.
  • In-kind contributions. Services or goods offered free or for less than usual charge are considered "in-kind" contributions subject to the contribution limits, reportable in the amount of the fair market value of the item or the value of the discount.
  • Loans. Loans to a PAC, other than bank loans made in the ordinary course of business, are considered a contribution to the extent of the outstanding balance.
  • Endorsements and guarantees of loans. The same rules that apply to loans apply to endorsements and guarantees of loans.

  • Proceeds from fundraisers or sales. The amount paid to attend a fundraiser or other political event or for any item sold for fundraising purposes is a contribution.
A PAC may make monetary contributions, in-kind contributions30and loans, and may provide endorsements or guarantees of loans to campaign committees of candidates for federal office or to other political committees, subject to the FECA's contribution limits. If the PAC qualifies as a "multicandidate committee," it may contribute in the aggregate up to $5,000 per candidate, per election (primary and general elections are considered separate elections).31 To qualify as a multicandidate committee, a PAC must:
  1. receive contributions from more than 50 persons;
  2. be registered as a PAC at least six months; and
  3. contribute to at least five federal candidates.32
All other committees or groups, including PACs that have not yet qualified as "multicandidate committees," are subject to a $1,000 limit per candidate per election.33 Note that, in addition to contributions, there are other ways in which PACs may support candidates for federal office. For example, PACs may also make "independent expenditures" which, in essence, are expenditures in support of a candidate that are not undertaken in cooperation or consultation with the candidate. This memorandum does not address issues associated with independent expenditures.
A. Recordkeeping
The treasurer will be responsible for keeping copies of each statement and report that he or she files on behalf of the PAC to the FEC, together with pertinent backup records, for three years after the report or statement is filed.34 Other specific recordkeeping requirements are set forth below. In practice, you probably will find that a paralegal or secretary, under the treasurer's supervision, will be quite able to handle the recordkeeping.
1. Recording Contributions to the PAC
The PAC must keep a record of all contributions received by or on behalf of the PAC. The records must show the name and address of the contributors, the date of receipt, the amount of each contribution, and the total amount of contributions received. Although it is not required, we recommend that the PAC issue receipts for contributions.35
2. Recording Disbursements
The records must show figures for the PAC's total disbursements and identify the date, amount, purpose, and name and address of the payee. For each single disbursement that exceeds $200, the PAC must keep a receipt or invoice from the payee or a cancelled check to the payee. For disbursements to candidates for federal office or a candidate committee, the records must include the office sought by the candidate, including the congressional district number and the state in which it is located.36
3. Best Efforts
The PAC's treasurer must make his or her "best efforts" to obtain from the PAC's donors the information required to be reported. With respect to contributions, "best efforts" is defined as keeping a "complete" record showing that the PAC made at least one written or oral request (including an accurate statement of federal law regarding the collection of contributor identification) to obtain information from contributors to enable the treasurer to determine that the contributions are legal under the FECA. A "safe harbor" provision in the regulations provides that the treasurer and the PAC will be deemed to have made their best efforts to obtain and report on information regarding contributions if they include in any written solicitations a statement that "federal law requires the PAC to use its best efforts to collect and report the name, mailing address, occupation and name of employer of individuals whose contributions exceed $200 per calendar year" and a clear request for this information for each such individual.37 As for disbursements, if the treasurer fails to receive a receipt, invoice or cancelled check for any single disbursement exceeding $200, he or she must make at least one written effort per transaction to obtain a copy of the required documentation and must document any failed efforts.38
B. Filing Reports
1. contents of Report
The form used by PACs each reporting period to disclose all receipts and disbursements is Form 3X. These reports are fairly straightforward.
2. Who Reports
The PAC's treasurer must file periodic reports
on the PAC's financial activity (i.e., receipts and disbursements) until it discontinues its activities and files a Termination Report, discussed below.
3. Where To File Reports
A corporate PAC generally files reports with the FEC. In addition to filing with FEC, the PAC must simultaneously file with each secretary of state (or other designated state official) a copy of the portion of the report that pertains to candidates seeking election in that state. In the case of contributions to presidential campaigns, the PAC should file in the states in which the campaign committee has its offices and where the PAC itself is headquartered.40
4. When To Report
During a nonelection year, the PAC will have to file semiannual reports. The first report, covering January through June, must be filed by July 31. The second report, covering July through December, must be filed by January 31 of the following year. Every PAC must adhere to this reporting schedule, even for periods when there is no new activity to report.41
During an election year, the PAC must file quarterly reports by April 15, July 15 and October 15 of the election year and by January 31 of the following year. In addition, the PAC is required to file a post-general election report 30 days after a general election. Pre-election reports (both for primary and general elections) must be filed 12 days before any election if the PAC has made contributions or expenditures in connection with that particular election that have not been reported previously in quarterly filings. As in a nonelection year, the PAC must comply with the reporting schedule, whether or not it has new activity to report.42
Since primary elections occur throughout the country on different dates, PACs may be required to file several pre-primary reports during an election year, in addition to the quarterly reports. For this reason, PACs contributing to candidates in several states may decide to file monthly, rather than quarterly, reports because monthly filers are not required to file pre-primary reports. PACs reporting monthly must file with the FEC, no later than 20 days after the last day of each month. In an election year, the pre- and post-general election reports referred to above serve in lieu of the monthly reports covering October and November. December activity is covered in the year-end report, due January 31 of the following year.43
C. Terminating the PAC
A PAC may terminate its reporting obligations if it no longer intends to receive contributions or make any expenditures and it has no outstanding debts or obligations. It may terminate by checking the "Termination Report" box on the summary page of Form 3X and filing the report at any time. Or, the PAC may terminate by filing a written statement containing the same information.44 The Termination Report must disclose all of the receipts and disbursements that have not been reported previously, including an accounting of debt retirement and a statement as to the disposition of any residual funds. The FEC, upon its own initiation, or at the request of the PAC itself, may administratively terminate a PAC on the basis of the factors outlined in the Code of Federal Regulations, such as: absence of contributions for the previous year; failure to file reports for previous year; and disclosure of minimal expenditures on last report.45
The foregoing reviews the essential steps necessary to establish a PAC and the chief requirements governing its operation. We would be pleased to answer any questions that arise and, once the PAC is up and running, to review your initial reports before you file them.
NOTES * This memorandum provides general information and does not constitute legal advice.
1 The rules governing federal PAC formation and activity are found in the Federal Election Campaign Act of 1971, as amended ("the Act" or "FECA"), 2 U.S.C. §§ 431 et seq. and the regulations promulgated pursuant to it by the Federal Election Commission ("FEC"), 11 C.F.R. §§ 100.1 et seq. The FEC also has issued a series of advisory opinions interpreting the Act and its regulations.
2 11 C.F.R. § 114.2(b).
3 Id. § 114.5(b).
4 Id. § 114.5(g).
5 Id. § 114.1(a)(2)(iii).
6 See, e.g., FEC Advisory Opinion 1986-4, Fed. Election Camp. Fin. Guide (CCH) ¶ 5846 (Feb. 27, 1986) (proposed program in which corporation would direct and supervise a system of individual giving; make, influence and direct contribution decisions; and act as a conduit or intermediary for contributions would constitute operation of an unregistered PAC and unlawful corporate giving); FEC Advisory Opinion 1976-51, Fed. Election Camp. Fin. Guide (CCH) ¶ 5846 (Sept. 2, 1976) (informal group composed of individuals who discuss the advisability of individually supporting Federal candidates and make contributions that are "bound together" constitutes an unregistered PAC).
7 11 C.F.R. § 102.1(c).
8 Id. §§ 102.2(a), 102.14(c).
9 Id. § 102.2(c).
10 Id. § 102.2(a)(2).
11 Id. § 102.7. The FEC recommends that a PAC designate an assistant treasurer to act as treasurer when the latter is unavailable or when there is a vacancy in the office.
12 See id. §§ 102.1 - 104.18 Parts 102-104. Generally, a contribution that appears to be illegal must be (1) returned to the contributor within 10 days, or (2) deposited in the PAC's bank account, reported to the FEC by the PAC, and noted as a basis for concern and a subject of investigation. If the treasurer chooses the second alternative, he or she must include in the report a statement identifying the questionable legality of the contribution. In addition, if, within a reasonable time, the PAC treasurer cannot determine the legality of the contribution, it must be returned and reported as a refund on the next scheduled report. Id. § 103.3(b).
13 Id. § 103.2. PACs may make cash disbursements of $100 or less per transaction from a petty cash fund rather than from a depository checking account at a financial institution. If such a fund is maintained, however, the treasurer must keep and maintain a written journal of all disbursements, including the name and address of the person or entity to whom any disbursement is made and the date, amount and purpose of such disbursement. Id. § 102.11.
14 Id. §§ 102.9, 104.14.
15 Id. §§ 114.1(a)(2)(iii), 114.1(b), 114.5(b).
16 Id. § 114.5(b)(3).
17 Id. § 114.5(d).
18 A "collecting agent" is an organization or committee that collects and transmits contributions to one or more PACs. Id. § 102.6(b)(1). The following organizations may function as the PAC's collecting agent:(i) the PAC's sponsoring corporation; (ii) a parent, subsidiary, branch or local unit of the corporation or (iii) an affiliated committee of the PAC. Id.
19 Id. §§ 114.5(g)(1), 114.6(a).
20 Id. § 114.5(a).
21 Id. §§ 114.5(a)(1), 114.6(e)(1).
22 Internal Revenue Code, § 6113.
23 11 C.F.R. § 114.5(g)(1).
24 See id. § 114.6.
25 Id. § 114.6(d). The PAC treasurer may act as the custodian provided that he or she preserves the anonymity of contributions, does not participate in the decisions pertaining to PAC contributions and expenditures, and continues to fulfill the regular duties of a PAC treasurer.
26 Id. §§ 114.6(d)(2)-(4). The custodian may not reveal any information to the PAC regarding noncontributors or small contributors (i.e., single contributions of $50 or less or aggregate contributions of $200 or less). Id. § 114.6(d)(3).
27 Id. § 114.6(c).
28 Id. §§ 114.6(e)(3)-(5).
29 Id. § 110.1(d).
30 The PAC could, for example, pay for consulting, polling or printing services provided to a candidate committee, or it could pay for office equipment or office supplies for a candidate committee or donate its mailing list. One cautionary note about in-kind contributions: they must be valued according to fair market value, even if providing the goods or services does not impose any additional cost on the donor.
31 Id. § 110.2(b).
32 Id. § 100.5(e)(3).
33 Id. § 110.1(b)(1).
34 Id. §§ 102.9(c), 104.14(b)(2) and (3).
35 Id. § 102.9(a).
36 Id. § 102.9(b).
37 Id. § 104.7(b)(1).
38 Id. §§ 102.9(d), 104.7(a).
39 Id. §§ 104.1(a).
40 Id. §§ 105.4, 108.
41 Id. § 104.5(c)(2).
42 Id. § 104.5(c)(1).
43 Id. § 104.5(c)(3). A PAC may change its filing frequency once a year by notifying the FEC in writing at the time the change becomes effective for the next scheduled report. Id. § 104.5(c).
44 Id. § 102.3(a)(1).
45 Id. §§ 102.3(a)(1), 102.4.
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