The new lobby tax rules.

Final regulations take association operations into account. Compliance requirements and procedures should prove less onerous.

While the burdens of the lobby tax law itself remain, it is clear that the Internal Revenue Service (IRS) gave careful consideration to all of ASAE's comments and adopted many of them, in whole or in part, in the recently issued final rules implementing the lobbying tax deductibility provisions of the Omnibus Budget Reconciliation Act of 1993. (See sidebar on ASAE's continued efforts to fight the lobby tax law.) The act, which took effect January 1, 1994, contains provisions eliminating the business tax deductibility of lobbying expenses and also contains a special set of rules for trade and professional associations, requiring them to notify their members as to the portion of their dues that are nondeductible as a result of the association's lobbying activities. (As an alternative, associations can pay a 35 percent proxy tax directly on their lobbying expenses.) The lobby tax law also places significant record keeping and other administrative burdens on associations that lobby.

These new lobby tax rules - issued July 20, 1995, and effective immediately - are a noticeable improvement upon their predecessors from an administrative standpoint as well as in their attention to the unique operational characteristics of trade and professional associations. The three sets of rules define influencing legislation, the allocation of costs to lobbying, and which tax-exempt organizations are excepted from the so-called lobby tax law.

The influencing legislation regulations

The final regulations provide definitions of the term influencing legislation and other terms necessary to apply the lobby tax law. The regulations do not, however, address the other three categories of lobbying covered by the lobby tax law: grass-roots lobbying (influencing the general public on legislation), political expenditures (participation in political campaigns), and communication with high-level federal executive branch officials on any official matter.

Definitions. Key terms defined in the final regulations include the following:

* Influencing legislation is 1) any attempt to influence any legislation through a lobbying communication; and 2) all activities, such as research, preparation, planning, and coordination (including deciding whether to make a lobbying communication) engaged in for a purpose of making or supporting a lobbying communication, even if not yet made.

* An attempt to influence legislation is the making of a lobbying communication and all activities such as research and preparation engaged in for a purpose of making or supporting a lobbying communication. Note that this purpose test looks to the original intent for engaging in a given activity to determine whether it will be deemed to have a lobbying purpose, in whole or in part.

* A lobbying communication is any communication (other than that compelled by subpoena or otherwise compelled by federal or state law) with any member or employee of a legislative body or any other government official or employee who may participate in the formulation of legislation that 1) refers to specific legislation and reflects a view on that legislation; or 2) clarifies, amplifies, modifies, or provides support for views reflected in a prior lobbying communication.

* Legislation is any action with respect to acts, bills, resolutions, or other similar items by a legislative body.

* Specific legislation includes, among other things, a specific legislative proposal that has not been introduced in a legislative body.

* A legislative body is Congress, state legislatures, and other similar governing bodies, excluding local councils (and similar governing bodies) and executive, judicial, or administrative bodies.

Presumptions eliminated. In response to criticism, the IRS eliminated a series of rebuttable (in theory) presumptions concerning whether activities are engaged in for lobbying or nonlobbying purposes. In the final regulations, the IRS replaced these presumptions with a list of facts and circumstances to be considered in making the purpose determination.

Multiple purposes. If an association engages in an activity for both lobbying and nonlobbying purposes, it must treat the activity as engaged in partially for a lobbying purpose and partially for a nonlobbying one. The division of the activity must result in a reasonable allocation of costs.

Exceptions. The following activities are treated as having no lobbying purpose:

1. determining the existence or the procedural status of specific legislation or the time, place, and subject of a legislative hearing on specific legislation;

2. preparing routine, brief summaries of specific legislation;

3. performing an activity required by law;

4. reading any publications available to the general public or viewing or listening to other mass media communication; and

5. merely attending a widely attended speech.

Note that exceptions 1 and 2 apply only if they occur before evidencing a lobbying purpose with regard to the specific legislation at issue.

Communication with members. An association communication that urges members - either explicitly or implicitly - to contact their legislators concerning a specific piece of legislation must be treated as lobbying. As far as communication that merely informs members about the details or status of legislation, if the communication can be considered a "routine, brief summary" of legislation or its status - and if the association has not yet evidenced a purpose to influence that legislation - then the communication would not have to be treated as lobbying. Once such a lobbying purpose is evidenced, however, all subsequent communication to members on that issue - even those that merely provide routine, brief summaries of the legislation or its status - must be treated as lobbying. Of course, as with any activity, if the communication, such as a newsletter, has nonlobbying purposes as well, then a reasonable allocation of costs must be made between the lobbying and nonlobbying purposes.

Taxing intent. To address the circumstance where an activity is engaged in with an intended purpose of supporting a future lobbying communication but that lobbying communication is never made, the final regulations specify that if, at some point, an association no longer expects, under any reasonably foreseeable circumstances, that a lobbying communication will be made that is supported by the activity at issue, then that activity - regardless of its original purpose - will not be treated as having a lobbying purpose. If that point in time occurs prior to the timely filing of the organization's Form 990 for the tax year in which the activity was engaged, then the costs of the activity do not have to be counted as lobbying expenses for that tax year. If that point in time occurs after the filing of the Form 990, then the organization may reduce or offset its lobbying expenses for the subsequent year or years by the amount originally treated as having a lobbying purpose.

"Paid" volunteers. If, for the purpose of making or supporting a lobbying communication, an organization uses the services or facilities of another individual or organization and does not compensate that person or organization for the full cost of the services or facilities, then the purposes and actions of the first organization are imputed to the second. For associations, this means that if, for example, an association uses a member's employee, at no cost to the association, to conduct research in support of the association's lobbying efforts, then the association's purposes and actions are imputed to the member - even if the actual lobbying communication is made by the association, not the member. As a result, the member is treated as lobbying with respect to the employee's work on behalf of the association; the association does not count the employee's time or his or her travel or other expenses (unless those expenses are paid or reimbursed by the association) in its lobbying total. If, however, the member's employee is acting outside the scope of his or her employment when volunteering for the association, then those activities are not ascribed to the member. Furthermore, in such a circumstance, the volunteer's time need not be imputed to the association.

The cost-allocation regulations

The final regulations provide guidelines for the allocation of costs to lobbying. They generally describe the costs that are properly allocable to lobbying activities, permit organizations to use any reasonable method to allocate those costs between lobbying and other activities, and provide three illustrative allocation methods. A method will not be considered reasonable unless it is applied consistently, allocates a proper amount of costs (including overhead) to lobbying, and is consistent with certain special rules contained in the regulations. The regulations do not apply to the categories of grass-roots lobbying or political campaign activities (to which the lobby tax law is applicable); they are limited to influencing legislation and communication with high-level federal executive branch officials.

Record keeping. Like the proposed regulations, the final rules, while not requiring any specified form of record keeping, restate existing tax law and regulations that require organizations to keep permanent books and records sufficient to substantiate the information reported on the Form 990, including lobbying expenses. For all intents and purposes, the only defensible way to support an allocation of time spent on a particular function is through some sort of periodic time or effort report, such as time sheets.

De minimis rule for labor hours. Associations may treat time spent by staff on lobbying activities as zero if less than 5 percent of the person's time is spent on lobbying activities. However, any time spent by an employee on direct contact lobbying (including allocable travel time and other related time) may not be excepted trader the de minimis rule. A person who engages in research, preparation, or other background activities related to direct contact lobbying is not engaged in direct contact lobbying.

The waiver revenue procedure

The lobby tax law provides that compliance with the law is not required of tax-exempt organizations that establish to the satisfaction of the IRS that substantially all of the dues or similar amounts paid to the organization are not deductible irrespective of how they are affected by the lobby tax law. The new revenue procedure provides further details on this waiver rule.

Definitions. The final lobby tax rules include definitions of the following terms.

* Annual dues are the amount an organization requires a person, family, or entity to pay to be recognized by the organization as a member for an annual period.

* Similar amounts include, but are not limited to, voluntary payments made by people, families, or entities; assessments made by the organization to cover basic operating costs; and special assessments imposed by the organization to conduct lobbying activities.

* Member is used in its broadest sense and is not limited to people with voting rights in the organization.

501(c)(6) associations. The final rules state that 501 (c) (6) associations will be automatically excepted from compliance with the lobby tax law only if 90 percent or more of their annual dues (and similar amounts) are received from 501 (c) (3) organizations, state or local governments, or entities whose income is tax-exempt under section 115 of the Tax Code. Associations that do not meet this automatic exception may still qualify for the waiver, but they must be able to demonstrate that 90 percent or more of the dues (and similar amounts) paid to the organization are not deductible irrespective of how they are affected by the lobby tax law. To make such a demonstration, the association must maintain records substantiating its qualification and must indicate its exemption on its annual Form 990. In addition, an organization may request a private letter ruling from the IRS to confirm its exemption.

Other tax-exempt organizations. The rules for 501(c)(4) social welfare organizations and 501(c)(5) agricultural and horticultural organizations are identical to those for 501(c)(6) organizations, with one major difference: These organizations can also qualify for the automatic waiver if 90 percent or more of their annual dues (and similar amounts) are received from people, families, or entities who each pay annual dues (and similar amounts) of less than $50. All other 501(c) organizations are automatically excepted from compliance with the lobby tax law.

Affiliated organizations. In response to criticism about the difficult application of the lobby tax law to multitiered organizations (e.g., those with national, state, and local chapters), the IRS has created a new rule to simplify the law's application to such organizations. Essentially, this rule allows multitiered and affiliated organizations to be treated as a single unit for lobby tax purposes and provides flexibility for varying structures.

For a more detailed analysis of the new lobby tax rules, call ASAE's fax-on-demand line, (800) 622-ASAE, and request document 30002. As with any complicated tax law, consult with your legal and tax advisers for specific compliance questions.

RELATED ARTICLE: Continuing the Fight

While ASAE was, in many ways, successful in favorably influencing the outcome of the final lobby tax regulations, the burdens of the law itself remain. Thus, ASAE is vigorously continuing its legal and legislative efforts to repeal the lobby tax.

On the legal front, on May 15, 1995, ASAE refiled its constitutional challenge to the law in U.S. District Court. During the first round of litigation, ASAE was unable to overcome procedural hurdles. During the second round, however, because ASAE paid the proxy tax on its 1994 lobbying expenses, those procedural hurdles are gone, and the lobby tax's constitutionality can finally be challenged on its merits. Initial oral arguments will be heard by Judge STanley Sporkin this fall.

On the legislative front, ASAE continues its efforts to get Congress to repeal the lobby tax - at a 35 percent higher cost because of the lobby tax. For more information, call the ASAE Government Affairs Department, [phone].

Jeffrey S. Tenenbaum is part of the Association Practice Group at the Washington, D.C.-based law firm of Galland, Kharasch, Morse & Garfinkle. He was formerly manager of the ASAE Legal Section.