Lobby tax Q&A: questions and answers about the law limiting association dues deductibility.
ASAE has launched a three-pronged attack on the new lobby tax law and is mobilizing the association community to join in a nationwide repeal effort. In the interim, though, associations must still comply with this complicated new law. ASAE Government Affairs has been inundated with calls, faxes, and letters from ASAE members with questions and concerns about the law and its impact. What follows are answers to some of their frequently asked questions, which may help you in sorting through the complex law.
How is the new lobby tax levied on associations?
Under the new lobby tax law, associations that are exempt from tax under sections 501 (c) (4), 501 (c) (5), or 501 (c) (6) and that do more than $2,000 worth of lobbying a year are presented with two equally undesirable options: notifying their members that their dues are not deductible to the extent of their association's lobbying expenses, or paying a flat 35 percent "proxy tax" on their association's lobbying expenses. All lobbying is deemed to be funded by membership dues income only, even if lobbying is, in reality, funded by nondues revenue. In other words, the non-deductible portion of member dues is determined by dividing lobbying expenses by dues income.
How does the new law define "lobbying"?
The lobby tax law describes five categories of activities covered by the new nondeductibility rules:
1. influencing legislation (through any member or employee of a state or federal legislative body, or through any government official or employee who may participate in the formulation of legislation);
2. grass-roots lobbying;
3. communication (on any official matter) with certain high-level federal executive branch officials;
4. participation in political campaigns; and
5. research, preparation, planning, or coordination of any of these activities.
The law includes a "look-back" rule which provides that while mere monitoring of legislation is not considered lobbying, if and when that same or similar legislation is later lobbied on, all of the previous monitoring costs will be "tainted." These previous costs from monitoring will be treated as nondeductible lobbying.
How are associations complying, and what should we be doing to comply?
Because of the new law's expansive definition of lobbying (in particular, the "look-back" rule), compliance requires extensive tracking and record keeping, not only of lobbying but of any monitoring of legislation (and potential legislation) on which lobbying may conceivably later occur. Furthermore, lobbying expenses include not only direct costs but also the allocable portion of salaries, benefits, rent, utilities, and so forth.
As a result, many associations that lobby are being forced to install completely new and complicated accounting systems to comply with the law's requirements. (This type of tracking and record keeping of lobbying activities has generally not occurred in the association community prior to this year.) As many associations have found out in the unrelated business income tax (UBIT) area, failure to comply can often result in the Internal Revenue Service (IRS) coming in and making its own determination about how much an association spent on lobbying.
Associations that lobby should keep accurate and detailed records of all lobbying activity, as well as of the monitoring of legislative activities where no lobbying is involved. Such records will be critical to any defense expected to hold up under IRS scrutiny. This includes, among other things, some form of time or effort reports to track staff time spent on lobbying. (Any employee who spends more than 5 percent of his or her time on such activities is affected).
Note that lobbying may not be the only reason for modifying an accounting system. New financial accounting standards will require association financial statements to reflect the cost of each major program--including government affairs--and recent UBIT case law has also focused on cost-allocation issues.
Even associations that opt to pay the proxy tax on their lobbying expenses (largely for internal political reasons) are not spared the onerous tracking and record-keeping requirements; they are only freed from the final step in the process--notifying their members about dues nondeductibility.
My association is a 501(c)(3) organization that engages in lobbying. Is my association in any way affected by the new lobby tax?
With one small exception, 501(c)(3) organizations are exempt from the new lobby tax law. Under an anti-avoidance rule, contributions (including dues payments) to a 501(c)(3) organization are completely nondeductible if the organization engages in lobbying on matters of direct financial interest to the donor/member's business and a principal purpose of the donation/payment is to avoid the nondeductibility rules that would otherwise apply to the donation/payment. The legislative history to the new law specifies that it does not alter existing rules regarding allowable lobbying by 501(c)(3) organizations.
The new lobby tax was signed into law on August 10, 1993. Is compliance required as of that date?
No. The effective date of the new law was January 1, 1994. Therefore, only lobbying expenses paid or incurred on or after January 1, 1994, are affected. However, dues paid in 1993 or before that overlap into 1994 are not exempt. The nondeductible portion of those dues (the portion that is allocable to 1994 lobbying) must either be rolled over and included in the following year's lobbying expense total, or the proxy tax must be paid on that amount.
Where can I get specific advice about compliance with this law by my association?
ASAE has published the Lobby Tax Compliance Guide for Associations, as well as a supplement covering recently issued IRS regulations. While many compliance questions remain unanswered pending further IRS guidance, these publications benefit from extensive informal discussions with the IRS; offer creative solutions to tackling financial, administrative, and political problems created for associations by the new law; and are written exclusively from an association perspective. A complimentary copy of the compliance guide and supplement were sent to every 501 (c)(6) organization with a member in ASAE; additional copies are available from Association Management Press, (202) 626-2748.
In addition, associations that lobby should consult with their legal and/or tax advisers to ensure proper compliance with the new law. For example, associations should make sure that a system acceptable to the IRS is being used to allocate both direct and indirect costs to lobbying. Failure to do so can be costly: If the IRS disapproves of your cost-allocation system and "recalculates" additional lobbying expenses, it is too late to notify members about dues nondeductibility, and a 35 percent proxy tax will be levied on the additional amount.
What effect is all of this having on associations?
The bottom line is that the after-tax cost of virtually all association government affairs activity is significantly increased, both through direct taxes paid and as a result of the high administrative costs of compliance--costs that dwarf the tax revenue that the new law will generate for the government.
Even more disturbing than this, though, is the effect the new law is having on association lobbying itself. In many cases, associations are dramatically reducing anticipated lobbying in response to the law. This curtailment of legislative speech not only threatens the legitimate interests of the association community but is a clear indicator of the lobby tax's unconstitutionality.
Why did ASAE file a lawsuit against the government? What was it about, and how much will ASAE's challenge cost?
ASAE filed a lawsuit asking the U.S. District Court for the District of Columbia to prevent the IRS from enforcing the association-related provisions (and only these provisions) of the new lobby tax law because of their unconstitutionality. Specifically, the lawsuit charged that these provisions single out lobbying by associations for unique and punitive burdens, and actually require associations and their members to forfeit tax deductions for other, nonlobbying activities as the price of exercising core First Amendment free speech rights.
Moreover, the challenged provisions impose greater burdens on lobbying by associations than on lobbying by businesses and individuals, thereby penalizing and deterring exercise of the First Amendment right to associate. Finally, the provisions' differential treatment of businesses and associations violates the Fifth Amendment's guarantee of equal protection.
The motion for an injunction was filed December 30, 1993, and a hearing was held February 1, 1994, before Judge Stanley Sporkin. On April 14 Judge Sporkin denied the injunction on jurisdictional grounds. The ruling means that a trial on the constitutional merits of the case will have to wait until ASAE pays the proxy tax and sues the government for a refund--expected to occur later this year.
The cost of the combined legal and legislative efforts are estimated at approximately $2.5 million over the next three years. With ASAE committed to paying one half of these expenses from ASAE funds, approximately $1.25 million needs to be raised from the association community. As of mid-April, ASAE had already achieved more than 30 percent of its goal, with more than 480 associations making contributions.
What is ASAE doing to involve all associations--not only/those in the nation's capital?
ASAE is engaged in a massive, nationwide mobilization of the association community. ASAE, its members, all 69 allied societies of association executives, members of involved associations, and other key association executives are being organized at the national, state, and local levels to lobby actively for repeal of the lobby tax. Nearly 850 associations have joined the ASAE-led Coalition to Repeal the Lobbying Tax, and the number is growing daily. ASAE is setting up a team of point people in key states to begin crafting and coordinating the grass-roots campaign. The team will develop strategies aimed at educating government leaders and the general public about key association issues, including free speech rights.
Is ASAE involved in the writing of the IRS rules implementing the new law?
The ASAE Task Force on Lobbying Regulation has been working closely with the Internal Revenue Service since last fall to soften the impact of the new law on associations as much as possible. The Task Force has been meeting regularly with top IRS and Treasury Department officials to offer guidance and advice on the regulations being drafted to implement the lobby tax. In particular, the Task Force has been making a concerted effort to educate IRS officials about the unique structures and operations of associations (something the drafters of the law clearly lacked), and to ensure that the regulations are sensitive to those characteristics.
On April 6, 1994, ASAE testified before the IRS on proposed lobby tax regulations concerning the allocation of costs to lobbying. More detailed comments and recommendations (distilled from suggestions from ASAE members nationwide) were submitted previously. To date, the Task Force's efforts have achieved a relatively good degree of success and may result in enormous savings for associations and their members. The amount from the Task Force's efforts may well total hundreds of thousands of dollars in savings.
How can my association get actively involved?
First and foremost, join the ASAE-led Coalition to Repeal the Lobbying Tax. The size and strength of this coalition are critical to the success of the legislative repeal effort. Second, contribute to ASAE's Government Relations Education Fund (GREF), the principal resource for ASAE's legal and legislative challenges to the lobby tax. Many associations have already contributed to GREF. ASAE's goal is to have 1,000 associations support the fund in 1994. For more information, call (202) 626-2703.
Finally, stay informed. ASAE considers the new lobby tax law to be one of the most devastating actions taken against associations in the past decade--and it is only one of many potential attacks to come.
The association community continues to come under fire from all sectors of government--from the IRS, from the Federal Election Commission, from the U.S. Postal Service, and in many other ways. Associations will continue to be inviting targets unless and until the association community charges a political price--through grass-roots lobbying, selective campaign contributions, and the ballot box--for such actions.
ASSOCIATIONS UNITE AMERICA
Associations need to unite through ASAE and develop a plan to educate both legislators and the media that associations, collectively, represent the public every bit as much and as well as elected and appointed officials. We are not the enemy, but rather a valuable source that can provide legislators and their staff both quantitative and subjective information about how important segments of the population may be impacted by proposed legislation and regulations.
The only way the association community can gain respect is if we unite as one voice and reinforce at every opportunity the identical message that each of our associations is part of a large number of nonprofit organizations that are providing vital information to policymakers. I believe we should form an association caucus to organize and focus those efforts.
ADDRESSING DUAL CONCERNS
By now most association executives and board members understand that associations serve two often-conflicting masters: the needs of the association as a corporate entity and the needs of the industry and profession represented by the association. No more poignant example of this is the board of directors facing a decision to increase members' dues. While the individual members may not feel the need to pay more dues, the financial needs of the association must be met in order for it to accomplish its mission.
This dichotomy of purpose extends to areas outside of financial considerations. For instance, the issues surrounding public perception of associations, and the mechanisms by which associations influence public policy, have taken center stage in recent months. The decision by Congress to tax association lobbying expenses--in other words, the taxation of our members' First Amendment rights--shows us just how negligent we are in recognizing our responsibilities in the public policy arena. We cannot put the blame on Congress or on the American public at large, because we have not done our jobs. We have failed to educate our members, so they now fail to realize just how much they have lost. By educating our members, we will in turn educate the populace that will influence our legislators.
We owe it to our members to manage the strongest organizations possible. That means we must diligently serve as guardian for both our members and their organization. Whether we're talking about financial concerns or legislative concerns, we can't afford to sacrifice one for the other.
QUESTIONS THAT NEED TO BE ANSWERED
How do correct the self-interest perception?
I think that the key ingredient to change the self-interest perception is education--educating our key publics about who we are and what we do. The association community embodies the true voluntary spirit of America. Too often associations are perceived as self-protectionist when, in fact, associations have a strong public service commitment that somehow gets lost by the wayside. That is why I believe it is incumbent on all association executives to actively demonstrate and communicate how we are serving the public. We must be as verbally aggressive about our public service commitment as we are about issues that are of concern to us and our members.
How do we gain the respect of policymakers?
By not crying wolf. I think associations gain the respect of policymakers when we do not overstate the problem but instead address concerns directly and honestly. I also think policymakers respect us collectively when they respect us as individuals. As a result, I think we, as association executives, have a personal obligation to conduct our activities with the utmost honesty, integrity, respect, and fairness. By role modelling these qualities while mentoring others along the path as well, we enhance our image while achieving the highest standards in association management excellence.
How can ASAE members work together?
I think the ASAE leadership must have a coordinated strategy that is implemented through the ASAE committee and council structure and well-communicated to its members. If members are clear on what ASAE is attempting to achieve, as well as the specific steps to achieve those goals, I think ASAE members will respond to the call. In fact, I have always been impressed with the level of enthusiasm and commitment that ASAE members demonstrate. The best example of this spirit is displayed through programs like Associations Advance America. I believe this program is worth its weight in gold because it demonstrates how associations serve the public. While I realize there is a fair amount of promotion surrounding this program, perhaps we could think of other ways to promote the award recipients locally. Perhaps it is not a matter of doing more, but of doing more with what we have.
Jeffrey S. Tenenbaum is ASAE's government affairs issues analyst.
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|Title Annotation:||Special Report; includes related articles|
|Author:||Tenenbaum, Jeffrey S.|
|Date:||May 1, 1994|
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