Impact of new antilobbying rules on trade associations.

The Revenue Reconciliation Act of 1993 (RRA) marks a significant reversal in the congressional policy regarding the tax treatment of lobbying expenses. In the past, Sec. 162(e) generally provided that expenditures to influence legislation were deductible. The RRA amended Sec. 162(e) to disallow deductions for amounts paid or incurred in connection with attempting to influence legislation or certain Federal officials, effective for expenses paid or incurred after Dec. 31, 1993. The prior law prohibitions against deductions for expenditures made to influence elections for public office or to influence public opinion (i.e., grassroots lobbying) remain.

The disallowance of lobbying deductions is extended to dues paid for membership in certain exempt organizations that conduct lobbying on behalf of their members. This article focuses on the impact of these new rules on Sec. 501(c)(6) trade associations.

Influencing legislation

As noted, the RRA generally prohibits deductions for attempts to influence legislation. Under Sec. 162(e)(4), the definition of "influencing legislation" includes "any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any governmental official or employee who may participate in the formulation of legislation." This provision clearly applies to attempts to influence legislation at the Federal level, and the Conference Report clarifies that the prohibition also applies to legislation at the state level. However, Sec. 162(e)(2) provides that the new rules do not apply to "local legislation"; the statute essentially retains the prior law rules regarding deductions for direct lobbying, but only for those expenses incurred in connection with attempts to influence any local council or similar governing body.

Influencing certain

Federal officials

The scope of the rule against attempting to influence certain Federal officials is rather narrow. It applies only to "covered executive branch officials," which include the President, Vice President and certain other top level Federal officials - generally cabinet members, their deputies and other high-ranking officials of certain Federal agencies. It appears that expenditures incurred in an effort to influence lower-level Federal officials and all state officials are still deductible, provided such efforts do not also relate to influencing legislation.

Scope of expenses

Sec. 162(e)(5)(C) defines expenses incurred in connection with lobbying and political activities as, "[a]ny amount paid or incurred for research for, or preparation, planning, or coordination of, any activity" connected with influencing legislation. Based on the Conference Report, both direct in-house lobbying expenditures and contract payments to multi-client lobbying firms are included in this definition. No special guidance on the treatment of indirect in-house expenses is provided. Presumably, the IRS will address these matters in forth-coming regulations.

The Conference Report indicates that the Service is to provide rules for distinguishing between mere monitoring of legislation and attempts to influence legislation. Mere monitoring alone will not be subject to disallowance. However, under a tainting rule, if an association's activities turn from mere monitoring to attempts to influence the legislation previously monitored, both the lobbying and the monitoring expenses will be disallowed.

Sec. 162(e)(5)(B) provides a de minimis exception for annual expenditures that do not exceed $2,000. Under this rule, if an association incurs less than $2,000 in direct in-house expenses during any tax year, the expenses will be deductible. However, once the $2,000 threshold is exceeded, all lobbying expenses will be disallowed.

Disallowance of dues

Under Sec. 162(e)(3), the portion of dues or other similar amounts paid by a taxpayer to a trade association attributable to the association's lobbying activities will not be deductible. The RRA amended Sec. 6033(e)(1)(A)(ii) to require associations to inform members of the portion of their dues that represent nondeductible lobbying expenses. Industry representatives believe an association may simply inform a member of the percentage of his dues that represents nondeductible lobbying, as opposed to identifying a specific dollar amount. Thus, it is expected that many associations will simply include a statement of the "lobbying percentage" on their annual dues invoices.

Although the statute is unclear, Sec. 6033 appears to require that the lobbying percentage be computed by dividing lobbying expenses by the amount of the association's income from dues. Under this interpretation, lobbying expenditures are construed to come entirely out of dues income. This would lead to a higher disallowance percentage for an association with a considerable amount of nondues income.

Proxy tax 

Last-minute industry lobbying succeeded in replacing the harsh penalty system that had been proposed with a "proxy tax." Associations will be able to opt out of the member dues disallowance process by paying this proxy tax instead. The tax, under Sec. 6033(e)(2), is determined by multiplying the amount of member dues subject to disallowance by the highest corporate tax rate - currently 35%. While intended by Congress as punishment in cases of noncompliance by associations with the information reporting requirements on the lobbying portion of dues, this option may actually be desirable in certain instances. For example, an association with a small number of taxable, blue chip members, such as an association of insurance companies, may find this an attractive alternative.

Waiver of notification

procedure

A safe harbor provision in Sec. 6033(e)(3) allows for waiver of the dues notification rules in the case of associations whose members in large part do not derive a tax deduction from the payment of dues. An example of such an organization is one whose members are themselves exempt organizations. While the statute requires that "substantially all" of the dues are nondeductible, the Conference Report clarifies this provision by indicating that if at least 90% of a group's members would not derive a tax benefit from the payment of dues, waiver of the reporting requirements is appropriate.

Conclusion

Given that the tide of congressional sentiment seems to be running strongly against lobbying, the enacted version of the lobbying disallowance rules is arguably much better than the original legislation proposed in Congress. Most Sec. 501(c)(6) associations will probably be subject to these rules, and will elect to disclose the lobbying portion of dues on annual dues invoices, voluntarily paying the proxy tax will be a viable alternative for some associations. Many questions still remain, however. In the meantime, associations will have to cope with the accounting issues related to identifying lobbying costs subject to the new rules, and with the process of conveying that information to their members.