Taxing times for association free speech.

ASAE, through its challenge of the lobby tax law, continues its major campaign to protect associations' First Amendment rights.

The federal tax on lobbyists impinges upon the freedom of speech of associations that is guaranteed by the First Amendment of the U.S. Constitution. That's the position that ASAE has taken in its constitutional challenge of the "lobby tax" law. The tax challenges the premise, in place in this country since colonial times, that associations advance America; it risks diminishing the rights of associations to speak out, to lobby, and to even exist.

Five years have passed since Congress imposed this free-speech penalty against the same associations on which state and federal governments rely day-in and day-out for information, research, and communication. During that time, ASAE has spearheaded a concerted legislative and legal effort to overturn the law. At present the association's constitutional challenge of the law is pending appeal in the U.S. Court of Appeals for the District of Columbia Circuit. (See sidebar, "Association Free Speech Campaign Timeline.") In this special report, ASAE General Counsel Jerald A. Jacobs provides answers to commonly asked questions about the law. It is vitally important that ASAE members not become complacent about the tax, or the free-speech rights it penalizes, lest this be only the first step in reducing the prerogatives of associations.

WHAT IS THIS TAX AND WHY IS ASAE FIGHTING IT?

In 1993, responding to President Clinton's call to limit prerogatives of "inside the Beltway" lobbyists, Congress withdrew the longstanding ability of businesses to deduct for federal income tax purposes their expenses for engaging in lobbying of federal or state governments. At the same time, Congress gave associations two choices: Either their members' dues would not be deductible to the extent of the associations' lobbying expenses or the associations could pay a 35 percent tax on their lobbying expenses.

ASAE's leadership has long been firmly convinced that this lobby tax on associations is an unconstitutional burden on the exercise of the First Amendment rights of associations and their members - their rights to petition government, to free speech, and to engage in activities as associations.

HOW DID THE FIGHT BEGIN?

While also vigorously pursuing a legislative correction to the tax burdens on associations, in late 1993 ASAE and 10 other associations sought an injunction to the provisions of the law that uniquely affect associations. The lawsuit was filed in the U.S. District Court for the District of Columbia Circuit and assigned to Judge Stanley Sporkin. By the spring of 1994, Judge Sporkin had ruled procedurally that advance relief was not available and dismissed the suit. ASAE then followed the procedural requirements specified by the court and paid the proxy tax. ASAE immediately sought a refund from the Internal Revenue Service (IRS), and when the refund was not awarded, the association pursued the constitutional challenge in the same court. Last fall, Judge Sporkin, after hearing arguments and reviewing briefs in the case, found against ASAE. In December, the association filed its notice of appeal in the U.S. Court of Appeals for the District of Columbia Circuit; the appeal is pending.

WHY DID IT TAKE SO MANY YEARS FOR THE LAWSUIT TO ADVANCE?

When ASAE filed its refund suit challenging the constitutionality of the law, the IRS initiated an audit of ASAE. The association suspended the lawsuit to resolve the audit issues. After three years, the comprehensive audit was resolved to ASAE's satisfaction.

HOW DOES THE TAX HURT THE FREE-SPEECH RIGHTS OF ASSOCIATIONS?

Essentially, Congress chose excessive methods to tax association lobbying. While Congress removed the federal government's subsidy of business lobbying by ending tax deductibility for businesses' lobbying expenses, it went much further with associations. Instead of merely removing on a proportional basis the government's subsidy of associations, Congress took away the tax exemption for the associations themselves or, for members, deductibility of dues spent on lobbying. The additional penalty for associations or their members when the organizations engage in lobbying at the federal or state levels can be substantial. The Supreme Court has found such penalties unconstitutional in other contexts, since they can have the effect of suppressing the exercise of free speech.

HOW DO TAX PENALTIES ARISE UNDER THIS LAW?

Basically in three ways. First, the proxy tax - an alternative to informing association members of dues nondeductibility because of association lobbying - is set at a static 35 percent. This is the highest level of federal income tax for corporations, paid only by companies with net incomes greater than $18.33 million. However, associations are denied the progressivity of the income tax schedule. Obviously, no associations ever get near that level of net income; but they must pay the proxy tax as if they did. It's like requiring a lemonade stand to pay on the same tax level as General Motors.

Second, there's the allocation rule - all lobbying expenses are allocated to dues income to determine what percentage of members' dues are not deductible. This rule takes effect if associations opt not to pay the 35 percent proxy tax. Most associations pay for their lobbying expenses using many sources of income; many associations have tar more nondues revenue than clues revenue. Under the allocation rule, it can cost more in lobby tax for a business to join an association that lobbies for a particular government policy than if the business did the lobbying itself.

Prior to the 1993 lobby tax law, the IRS had a little-noticed rule that association dues were not deductible to members to the extent of an association's grassroots lobbying (i.e., going beyond the membership to advocate legislation). For that tax, the IRS measured dues nondeductibility according to the ratio of the grass-roots lobbying expenditures to all of the association's expenses. That would have been a legitimate way to measure dues nondeductibility under the lobby tax, because it would have focused the tax only on the dues likely to have been spent for lobbying.

Finally, there's the estimation rule - associations must estimate in advance how much dues income and lobbying expense they anticipate. This approximation forms the basis for the notice of dues nondeductibility that must be given to members at the time of dues billing or collection. In effect, this rule forces associations to estimate how much free speech they will exercise. If reality turns out to be different from the estimates, the associations or their members are subject to very high penalties. There is no way to avoid the penalty for overestimating; and the only way to avoid the penalty for underestimating is for the association to stop spending money on lobbying the moment it reaches its estimate, no matter what important issues are before the legislature.

WHAT ARE THE PROSPECTS FOR THE SUCCESS OF THE APPEAL?

ASAE and its attorneys at Jenner & Block continue to feel that there are real and serious constitutional infirmities in the association provisions of this law. Though convincing a court to overturn a law on constitutional grounds is never easy, there is every reason to expect that courts will come to agree with ASAE's view.

WHAT IS THE SCHEDULE FOR THE APPEAL?

Briefs by ASAE and the IRS, represented by the Department of Justice, are likely to be filed in this spring, with arguments to follow. A decision might come in the summer or early fall of this year.

WHAT CAN ASAE MEMBERS DO TO ASSIST?

Keep ASAE informed about any state legislative initiatives that seek to impose any type of tax or fee on lobbying. If your state enacts such a law, or considers enacting one, please contact Jim Clarke, vice president of public policy. Phone: [phone]; fax: [phone]; e-mail: [e-mail].

ASSOCIATION FREE SPEECH CAMPAIGN TIMELINE

* January 1993: President Clinton's State of the Union speech promises legislation to end the tax deductibility for lobbying expenses.

* May 25, 1993: The House Committee on the Budget approves the Omnibus Budget Reconciliation Act of 1993, which includes the elimination of the deduction for lobbying expenses.

* August 10, 1993: The president signs the Omnibus Budget Reconciliation Act of 1993.

* December 23, 1993: The Internal Revenue Service (IRS) issues two sets of proposed regulations that begin the process of regulatory implementation of the lobbying tax deductibility provisions of the Omnibus Budget Reconciliation Act of 1993.

* December 30, 1993: Bruce J. Ennis, Jr., of the law firm Jenner & Block, files a motion on behalf of ASAE in the U.S. District Court for the District of Columbia Circuit for an injunction against the nondeductibility rules for lobbying expenses found in the Omnibus Budget Reconciliation Act of 1993.

* December 30, 1993: The IRS issues a proposed Revenue Procedure (Adv. Ann. 94-8) exempting unions and virtually all other tax-exempt organizations except 501(c)(6) trade and professional associations and 501 (c)(4) and 501(c)(5) organizations from compliance with the lobby tax law.

* January 1, 1994: The law takes effect.

* January 21, 1994: The American Civil Liberties Union files a "friend of the court" brief in the pending ASAE case.

* April 6, 1994: Representing ASAE, Charles Tate, of the accounting firm Tate and Tryon, Washington, D.C., and Edward Coleman, of the law firm Webster, Chamber, and Bean, Washington, D.C., urged the IRS to recognize "the unique structures and operations of exempt organizations" when revising the proposed regulations.

* April 6, 1994: ASAE testifies at an IRS public hearing on the regulations regarding the nondeductibility of lobbying expenses.

* April 14, 1994: The U.S. District Court for the District of Columbia Circuit dismisses ASAE's legal challenge on procedural grounds.

* August 17, 1994: ASAE requests an opportunity to testify at the September 12, 1994, IRS public hearing on proposed regulation section 1.162-29 (IA-23-94). ASAE also submits its comments to the IRS.

* August 28, 1994: Governor Pete Wilson (R-CA), speaking at ASAE's 74th Annual Meeting and Exposition, in San Francisco, voices his support of ASAE's position that lobbying is a legitimate business expense and the tax infringes on First Amendment rights.

* September 12, 1994: ASAE testifies at an IRS public hearing on the regulations regarding the nondeductibility of lobbying expenses.

* November 14, 1994: ASAE requests a refund of its proxy tax payment on lobbying expenses for its fiscal year ending in June 1994.

* May 15, 1995: In response to the IRS denial of ASAE's request for a refund on the proxy tax it paid, ASAE files suit in the U.S. District Court for the District of Columbia Circuit to have the tax as it applies to associations overturned on constitutional grounds.

* June 8, 1995: ASAE files a motion for summary judgment, along with related documents, in the U.S. District Court for the District of Columbia Circuit, as part of its constitutional challenge to the law.

* July 20, 1995: The IRS issues final rules implementing the budget act provisions concerning nondeductibility of lobbying expenses. Soon after, ASAE's litigation efforts are temporarily suspended while the association undergoes an IRS audit.

* March 9, 1998: The IRS audit of ASAE is completed, and a settlement is reached allowing ASAE to move forward on its constitutional challenge of the lobby tax law.

* September 25, 1998: U.S. District Court Judge Stanley Sporkin has hearing on ASAE's free-speech challenge. The hearing focuses on ASAE's and the government's motions for summary judgment.

* October 24, 1998: Judge Stanley Sporkin rules in favor of the government in ASAE's lawsuit challenging the constitutionality of the law. Sporkin's opinion focuses on the requisite standard for determining whether the law should be overturned, disagreeing with ASAE's position that the court should give the restrictive law a high level of scrutiny.

* November 1998: The ASAE Board of Directors reaffirms its commitment to fight the lobby tax law in court, voting to fund the appeal of the lower court's decision to the U.S. Court of Appeals for the District of Columbia Circuit.

* December 11, 1998: ASAE files a notice of its intent to appeal the decision to the U.S. Court of Appeals for the District of Columbia Circuit.

* January 29, 1999: ASAE files its statement of issues for the U.S. Court of Appeals for the District of Columbia Circuit.

RELATED ARTICLE: A LOOK AT THE STATES

While ASAE continues its battle against the removal of the tax deduction for lobbying expenses at the federal level, state efforts to restrict the free-speech rights of associations have increased. Some states have gone so far as to impose a direct, targeted fee on lobbyists.

Probably the most visible of these limits on association free speech has been the recently enacted tax on lobbyists as part of a sweeping Vermont campaign finance statute. The Vermont Society of Association Executives (VSAE), Monpelier, and seven other plaintiff associations filed suit against the state of Vermont in an effort to overturn the provision of the recently enacted law that calls for a 5 percent tax on annual lobbying expenditures exceeding $2,500. The money from the tax is used to pay for public financing of certain statewide political campaigns.

"The more you speak, the more you pay," Kevin Dorn, VSAE's immediate past president and chief executive officer of the Home Builders Association of Northern Vermont, Williston, says of the tax. "You're talking about a fundamental First Amendment right. . . . Anyone in this country who is concerned with free speech should be appalled by this [tax]."

While there has been no court decision yet on the substantive issues, VSAE and the other plaintiffs have won a number of early procedural victories in this case. The plaintiff associations are relying on donations from the association community to help fund this battle. For information on assisting, please contact Dorn at [phone].

In Arizona, another affront to lobbyists is taking place. Recently, voters narrowly approved a referendum that allows public financing of campaigns. A $100 per year tax on lobbyists was one of the provisions designed to raise money for public funding. Under Arizona law, many associations are required to list a number of volunteers and staff as lobbyists.

Lobby tax proponents in Michigan are pushing for a ballot initiative similar to Arizona's referendum. In addition, a Wisconsin state senator wants to fund a public financing proposal through taxes on lobbyists.

Another notable state restriction on association free speech is a Montana proposal that prohibits corporate contributions to ballot items. While the initiative was recently struck down in a challenge in federal district court, the state will most likely appeal. However, a ray of hope is shining in Texas where the Texas Society of Association Executives, Austin, and the Greater Austin Chamber of Commerce were successful in their efforts to overturn an Austin ordinance that limited association activity in the political process.

- George Constantine, staff counsel, ASAE, Washington, D.C.