Decisions on Lobby Taxes Affect Associations.

Recent legislation addresses constitutionality issues.

Two court decisions determining the constitutionality of lobby taxes and involving the American Society of Association Executives or an ASAE allied society of association executives were issued late last year. On November 9, 1999, the U.S. Court of Appeals for the District of Columbia rejected ASAE's challenge to the federal tax on association lobbying, but did so in a way that is potentially useful to at least some associations. A week later, the Washington Superior Court in Vermont accepted the arguments set forth by the Vermont Society of Association Executives (VSAE) and other Vermont associations, and held that Vermont's tax on lobbyists and employers of lobbyists is unconstitutional.

Federal lobby tax

ASAE challenged the special lobby tax provisions that Congress imposed only on associations in 1993. The challenge is based on the ways in which the complicated tax requires associations, or their members, to pay a special, high tax for lobbying in virtually every case, rather than merely reclassifying formerly tax-free lobbying expenditures as taxable. ASAE has maintained that the provisions violate the U.S. Constitution in several ways. They violate the First Amendment because they impose penalties on political speech, on banding together as an association, and on exercising the right to petition the government. They violate the Fifth Amendment's guarantee of equal protection under the law, because they impose a higher tax on lobbying activities of associations--or their members--than on those of commercial corporations or individuals.

ASAE's challenge was rejected by the trial court. Judge Stanley Sporkin, of the United States District Court for the District of Columbia, held that the tax provisions were constitutionally sufficient in their aim to support the government's goal of withdrawing former tax subsidies for lobbying.

The U.S. Appeals Court of the District of Columbia did not affirm any of the district court's determinations. Instead, it described ASAE's position in some detail, but held that associations could avoid the constitutionally problematic aspects of the tax by adopting a dual structure pursuant to the Supreme Court's 1983 decision in Regan v. Taxation With Representation, 461 U.S. 540 (TWR). In TWR, a charity challenged an IRS decision to withdraw the tax deduction from contributors because the Section 501(c)(3) educational organization lobbied more than the statutorily permitted amount. The Supreme Court upheld the decision on the grounds that Congress had provided a method by which TWR could protect the deduction for contributions used only for educational purposes by setting up a second organization--a section 501(c)(4) tax-exempt affinity group that could engage in unlimited lobbying. Contributions to the second organization would not be deductible as charitable donations, but those to the first organizatio n would be.

The D.C. Circuit held that the same dual structure is available to 501(c)(6) organizations, which could set up subsidiary 501(c)(6) organizations to engage in lobbying. A new separate lobbying subsidiary could elect to pay a 35 percent proxy tax, or it could elect to inform its members that dues and contributions are not deductible. The original organization would no longer undertake any lobbying, so dues paid to it would be fully deductible.

Unfortunately, the court did not answer all the relevant questions about financing such subsidiaries. What remains unclear is whether the lobbying subsidiary may fund part, or all, of its lobbying through income-generating activities, without being at risk of having its dual structure recast for lobby tax purposes. There are likely to be more detailed issues that the court did not address. ASAE is entitled to ask the Supreme Court to review the decision, but the court has discretion over which cases it will review.

Vermont lobby tax

The Vermont court held that the state's special lobbying tax is invalid because it violates both the First Amendment's protection of political speech and the 14th Amendment's guarantee of equal protection under the law. The Vermont legislature had enacted a public financing law for governor and lieutenant governor campaigns in which a key funding source was a legislature-imposed 5 percent tax on lobbyists and lobbyists' employers whose lobbying expenditures exceed a set threshold. VSAE and a number of other Vermont-based associations challenged the tax-with ASAE's full support.

The court granted the associations' motion for summary judgment, agreeing with the associations that the tax singled out political speech for unique penalties and was therefore subject to the most exacting First Amendment test. It found the tax unconstitutional under that test because the legislature lacked a compelling reason to fund the campaign grants from a special lobby tax rather than from a general tax. The court also agreed that there were no procedural obstacles to deciding the constitutional question and that the tax was not simply part of the state's general sales tax.

This decision should help remind state legislators that the First Amendment imposes significant restraints on their abilities to tax protected activities, including lobbying.

Jerald A. Jacobs is a partner at the law firm of Shaw Pittman, Washington, D.C., and is general counsel to ASAE.