Transcript

Forum: Corporate Political Spending and Foreign Influence

Hosted by Commissioner Ellen L. Weintraub

Federal Election Commission, 999 E St. NW, Washington, DC 20463

June 23, 2016

Statement of Donald Tobin, University of Maryland School of Law

DONALD TOBIN, UNIVERSITY OF MARYLAND SCHOOL OF LAW: Well, thank you, Commissioner 

Weintraub, and thank you for hosting today....

COMMISSIONER WEINTRAUB: I should say, Dean Tobin. Sorry.

DEAN DONALD TOBIN, UNIVERSITY OF MARYLAND SCHOOL OF LAW: That’s all right... for hosting 

today’s event. It was actually 12 years ago I testified before the Commission to talk about the regulation 

of 527 political organizations, so, amazingly, things haven't changed much since that time. I've lost a lot 

of hair, but beyond that, not much has changed. 

The Supreme Court's decision in Citizens United v. Federal Election Commission dramatically 

changed our campaign finance landscape by really creating an entirely new type of donor. Although 

much has been written about the decision and about the consequences of corporate spending on 

independent election advocacy, very little has looked at the ramifications of how to fit corporate 

election activity within our current regulatory framework. 

Or about what new regulations are necessary in order to ensure compliance by corporations 

with existing election laws. The Supreme Court has found that corporations have a right to engage in 

independent election advocacy, but it has not clearly enunciated what the principles are that underlie 

that right. So, as regulators think through how to ensure corporate compliance with existing election 
laws, they must consider how strongly corporations differ from individual citizens and how those 

different characteristics raise tremendous regulatory questions.

So today, what I'd like to discuss is, as we look at some of these unanswered questions, how do 

we look at tax law and maybe a little bit of corporate law to see what rules and what lessons we can 

learn? 

So, let's start with the assumption that Citizens United will remain good law. I, then, see two 

areas where the uniqueness of the corporate form creates significant regulatory challenges and those 

involve both donations by foreign nationals and by government contractors, and disclosure. 

In the tax context, policymakers have struggled for years with the corporate form and how some 

corporations can be used by people to manipulate and obfuscate tax laws. Tax shelters, tax evasion, tax 

cheats often use complex corporate arrangements including the use of holding companies or other 

sub-corporations as a means of hiding income. 

Recent public outcry surrounding the Panama Papers highlights the length that individuals will 

go to avoid U.S. tax law. What tax law teaches us is that the use of the corporate form to manipulate 

compliance with the law is not a theoretical problem. But it's a real one. 

For example, consider the existing rule that foreign nationals are prohibited from engaging in 

electioneering communication. In simple terms, a foreign individual could create a Wyoming 

corporation. The Wyoming corporation could be the sole owner of a Delaware corporation that, in turn, 

could own a Nevada corporation. The Nevada corporation could then engage in independent 

expenditures on behalf of a candidate. 

For those who don't practice corporate law, I hope I picked the four most difficult corporate 

states as far as disclosure... to be able to break the corporate structure. 
So, under existing law, it'd be incredibly difficult for any government entity, including the FEC, to 

have any idea that the funds in question came from a foreign individual. 

Similar problems exist with regard to the disclosure provisions. In Citizens United, the Court 

upheld disclosure as justified based on a government interest in providing the electorate with 

information and acknowledged there was evidence in the record in McConnell that independent groups 

were running election-related advertisements while hiding behind dubious and misleading names. 

Complex-entity relationships hide donors from both the public and from regulators. If we had 

individuals donating in the name of another person, that'd be criminal. But our existing regulatory 

regime seems perfectly comfortable allowing this to be done through the corporate form. 

So, in thinking through the regulatory responses to these problems, I suggest we actually have 

to think of three different types of corporate entities. We have our publicly held corporate entities, we 

have our privately held corporate entities, and then we have tax-exempt organizations, which have all 

been put under this corporate rubric. That doesn't even include LLCs, who have generally been 

regulated as partnerships. 

So, why do I suggest that difference? Well, these entities have very different operations, they

have very different ways of acting, that I think have significant different ramifications in the election law 

context. 

Publicly traded corporations are traded on stock exchange, they usually have diverse groups of 

shareholders, they're highly regulated under securities law. And in this case, an owner of a publicly held 

corporation is not generally contributing to the capital of the corporation. They're generally buying their 

shares from someone else. 
So when we think about corporate money in that context being spent on elections, we're 

actually thinking of shareholder profits that are being used in that way. 

So, then, when we look at that, we have to think, “Well, what are the underlying rationales for 

allowing corporations to participate in political campaigns? Are we concerned about who owns the 

corporation? Are we concerned about who controls the corporation? Are we concerned about who's 

funding the election activities?” We have to understand, in a sense, the evil we're trying to address so 

we can think about the ways to solve that problem. 

So I think there’re several ways to look at this in the publicly held context and the first is really 

when we're looking at sort of beneficial ownership. What is the way in which somebody has enough 

ownership of the corporation that they're really involved? And in a different context, the SEC has used a 

5% threshold for determining that amount. And I don't know, the 5% is not magic, it's actually in a 

totally different context, but what it does tell us is it wouldn't be overly burdensome to ask a publicly 

traded corporation to know who its owner were in the 5 to 10% range, right? It's clearly difficult for 

them to know it in the .01% range. It's clearly hard for them to know who owns any share. But if we're 

talking about somebody who owns a significant share of a publicly-traded corporation, it's not that hard, 

not that burdensome to require the shareholder to disclose that information. 

So, that's one way we've looked at that before. The second way corporate law and tax law often 

looks at this is effective control. Not just if you have a 15% share in the corporation, but do you have 

enough ownership interest that you really control the activity of the corporation? So we could look at 

effective control in making our determinations. 

And then an out-of-the-box kind of way we’ve looked at this is our CFIUS regulations, the 

Committee on Foreign Investment in the United States, which looks at foreign ownership of defenserelated activities where there's a national security interest and there, it looks at a functional definition of 
control. So there's not a bright line test. In lots of other areas of election law and tax law, we argue 

about bright line test versus not bright line test. But what CEPHEUS is really looking at is, what abilities 

do the shareholders have to control the activities of the corporation? And looks at a whole set of 

different activities there. 

So, we do have models to look at to say, when is enough, enough? When is it, when is the 

participation in a publicly held corporation, which has diffuse ownership, enough that we really want to 

think about regulating it?

The second is privately held. And that gets, to me at least, a lot scarier. We heard that a little bit 

in the earlier panel. But unlike publicly held corporations, in the privately held context, capital 

contributions to the privately held corporation may, in fact, be providing funds to the corporation that 

the corporation could use for election advocacy. So in other contexts I've written about the concern that 

taxable entities will become the new major loophole for campaign advocacy and then what you'll do is 

give to a corporation as a contribution to capital that's not taxed and then that capital contribution will 

be spent by the privately held corporation on election advocacy. 

If a foreign owner donated − excuse me, contributed − capital to a privately held corporation, 

and that privately held corporation then spent that money on election advocacy, we would have no idea 

that was happening. And our existing regulatory regime has no way for identifying that. 

So, here, we need to have some method that requires privately held corporations who engage, 

right? It’s not every privately held corporation, most do not actually engage in election advocacy, who 

engage in election advocacy to disclose how the corporation received its funds, where its funds come 

from and give us some type of disclosure about at least the owners that have effective control of the 

corporation. But I would even say we could look at the 5% threshold for privately held corporations. 
The last thing, the last area I want to talk about and to me, it’s actually the most scary, is taxexempt organizations. They don't really, you know, the Supreme Court has kind of treated them like 

corporations, but they're totally different than corporations. They don't really fit within a lot of the 

concerns we have in corporations, but what they do is shield incredibly well − donors. And, at the 

moment, at least, you could give a foreign contribution to, let’s say, the favorite social welfare 

organization and as long as that foreign contribution wasn't designated for the purpose of 

electioneering communication or for the purpose of a particular ad, there's no disclosure requirement 

on that contribution, right? And that money can be mixed with the money of lots of other people in a 

very fungible way. 

So, we’ve had a crisis, I think, on disclosure in the tax-exempt context for some time, but I think 

what we're highlighting now is this, how much that, the crisis is expanded by the fact that they can be 

used in a way of, in a sense, cleansing a donor's identity. 

So due to wanting to leave at least some time for people to ask questions, I’m going to mainly 

stop there but I want to raise a whole set of other types of questions and concerns. In both the tax and 

the corporate context, we always worry about attribution rules, right? How you become an owner. So 

we have to know, do we use family attribution rules? Do we use other types of ways of combining

ownership interest to know if there's effective control or not or if there’s some type of improper 

influence. How do we do look-throughs? This is a real problem in, I think, all of our industries. You know, 

if you can set up 12 corporations with holding companies, how do you actually get through to find out 

who the real owner is? We're seeing it in campaign finance disclosure regime, right? Where the 

disclosure is of the corporation, not of its actual members and of course, if a corporation gives to 

another corporation, we make it even further. 
What does it mean to be foreign? Do we care about where it’s organized? Do we care about 

who its members are? What about, we have, having corporate inversion now? What about when a 

standard U.S. corporation leaves and goes to a foreign country. So it's now in a foreign country, not even 

paying U.S. tax, but it maybe is made up of a majority of U.S. shareholders. Is that a foreign corporation? 

Do we want corporations that don't even pay any U.S. tax to be able to participate in our election 

process? 

So... what I'd say is what tax law really tells us about corporate involvement and campaign 

advocacy is that the situation is a mess. I mean, I wish I could give you a really more academic wonderful 

world for this but the fact is, tax law is a mess, because of the ability to manipulate corporate forms 

both here and abroad to hide income and bringing that kind of disaster into the election law context is 

only going to be a further disaster. 

So what I really urge is as much as possible, we need to get our hands on the corporate form. 

You know, the Supreme Court came in and basically said corporations have this right, but we all know 

that corporations aren't people. It's going to take me a long time to have children, raise them up enough 

so they’re voting for the people I think they should vote for and then they might not even listen to me, 

right? But in the corporate context, I can do that with people like this in a matter of minutes. So we have 

to get a hold on how these corporate entities work and how we want to have a disclosure regime and a 

regulatory regime that gives them the rights that they’re entitled to have under Citizens United while 

protecting the liberties that are so important to us. So I thank you for the opportunity to be here today, 

it's always nice to do something else as a Dean, and I appreciate the opportunity.