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Lobbying disallowance provisions of the Omnibus Budget Reconciliation Act of 1993.

On November 4, 1993, Tax Executives Institute filed the following comments with the U.S. Department of the Treasury and Internal Revenue Service on the need for prompt guidance on the lobbying disallowance provisions of the Omnibus Budget Reconciliation Act of 1993. The comments took the form of a letter from TEl President Ralph J. Weiland to Assistant Treasury Secretary Leslie B. Samuels and IRS Commissioner Margaret M. Richardson. They were prepared under the aegis of the Institutes Federal Tax Committee whose chair is Michael A. DeLuca of Household International, Inc. Contributing to the development of TEl's letter was Michael A. Nesbitt of Paychex Inc.

The recently enacted Omnibus Budget Reconciliation Act of 1993 (OBRA) contains a number of provisions that require immediate interpretative guidance from the Treasury and IRS to assist taxpayers in their efforts to comply with its provisions. Indeed, the Treasury and IRS are to be commended for issuing guidance on a number of disparate issues already, including the package released on October 20, 1993, relating to transitional issues concerning membership dues collected in 1993 that may be allocable to lobbying expenditures incurred in 1994. Nevertheless, the lobbying expense disallowance provisions remain at once daunting and amorphous in scope and, absent further immediate guidance, taxpayers will be unable to devise information systems and accounting procedures to comply with the provisions as of OBRA's January 1, 1994, effective date.

Of all of OBRA's provisions, the disallowance of lobbying expenses (under new section 162(e)) and the related provisions requiring nonprofit associations to allocate member dues to lobbying expenditures (or pay a proxy tax) will have the most widespread effect--at least in terms of the number of potentially affected taxpayers-because the rules affect the manner in which all enterprises, whether commercial or not-for-profit, maintain records to comply with the sundry obligations imposed.(1)


The pervasive nature of government regulation in modern business makes it imperative that a business maintain a close watch on legislative and executive branch developments at both the national and state levels. Regulatory prohibitions and mandates lead to significant costs to businesses. Without an early warning system that effectively monitors the effects of legal developments, a company will be unable in many cases to remain in business. We urge the Treasury and IRS to adopt an approach to regulatory guidance that maximizes the flexibility of taxpayers to monitor legislation and regulations and thereby educate themselves concerning their activities in order to comply with proposed or actual legal mandates. In addition, clear demarcations are desirable to limit the undue conversion of deductible monitoring expenses into nondeductible expenses relating to research and preparation for lobbying through the operation of the lookback rule.

While the proper limits on business expense deductions is for Congress to decide, the Treasury and IRS should take a hard look at the administrative and enforcement burdens engendered by the implementing regulations and the lobbying disallowance provisions. In this regard, the Conference Report instructs the Treasury to permit taxpayers to adopt reasonable methods for allocating expenses to lobbying to minimize recordkeeping responsibilities. Unless care is taken in drafting the rules, the cost of developing and maintaining records associated with the lobbying expense disallowance--costs that themselves will generally be deductible--may very well exceed the $653 million in tax revenues estimated to be raised by the provisions. (Incidentally, what they do not generate in revenue, they will generate in aggravation.)

Conference Report

The Conference Report on OBRA describes how the new provisions will limit the deduction for costs incurred in any attempt to influence legislation through communication with a member or employee of a legislative body or with any other government official or employee (regardless of rank) who may participate in the formulation of legislation. The report also states that costs incurred in connection with "direct communication with covered executive branch employees'' in an "attempt to influence official actions or positions of such [an] official" are similarly nondeductible. The conferees also instructed the Secretary of the Treasury to provide guidance for distinguishing (1) attempts to influence legislation from (2) monitoring legislative activity though they also directed the Secretary to prescribe rules to recast as nondeductible lobbying expenses any costs incurred previously to monitor legislation whenever an organization subsequently attempts to influence the same legislation.

Possible Approaches

to Guidance

One approach to guidance would involve the development of a broad set of principles from which taxpayers might find guidance. Another approach would be to develop a series of broad-based safe harbors defining what is or, more properly, what is not included within the definition of lobbying. The latter approach could beneficially eliminate controversy in a number of potentially disputed areas, thereby reducing the scope and magnitude of taxpayers' costs of compliance and the government's costs of enforcement.

The Conference Report provides considerable latitude to the Treasury and IRS to interpret the statutory provisions in a reasonable manner to mitigate recordkeeping burdens on taxpayers. We believe the regulations can and should minimize potential incidents of "inadvertent" lobbying where there is realistically no "attempt to influence legislation." Inadvertent lobbying would occur whenever the primary or principal purpose of a communication relates to matters other than legislation, but proposed legislation is referred to or discussed in a tangential manner.

To assist the Treasury and IRS in developing guidance, we have developed a series of examples to illustrate common types of communication or behavior that may or may not rise to the level of lobbying. In some cases, we have posed a solution that we believe is proper under the statute or legislative history. In other examples, we only raise questions about the nature and scope of the problems of interpreting the statute. In either case, we hope to advance the discussion to a posture in which solutions may be developed.

Example 1. An employee of a corporate taxpayer contacts a member of the staff of the Committee on Ways and Means. The employee wishes to clarify the interpretation and application of proposed legislation previously passed by the Senate and under consideration by the Ways and Means Committee. In the course of the conversation with the staff member, the employee explains the circumstances of her company and summarizes her interpretation of how the bill language would affect her company. The Ways and Means staff member acknowledges the interpretation given by the employee and the staff member suggests that the intent of the bill is either (a) to operate precisely in the fashion interpreted by the employee; or (b) to achieve a different result, and that a technical amendment may be necessary to achieve the intended result. Assuming that the corporate employee does nothing more except to thank the staffer for the information provided, has she engaged in lobbying in either case (a) or (b)?

The answer should be no. In the first instance, the corporate employee has simply inquired about the interpretation of the bill (and been given an interpretation that may or may not be correct). In the second instance, the committee staff member has suggested that a technical amendment is necessary to achieve the bill's intended effect; in posing the question the employee did not "attempt to influence legislation," nor is it clear that the staff member will "participate in the formulation of legislation" to remedy the deficiency. We do not believe that the actions (or speech) of the congressional staff member should be attributed to the company as lobbying inasmuch as the employee "communicated" with the staff member in an attempt to "clarify" the operation and effect of the proposed legislation rather than in an "attempt to influence legislation." We believe that the requirements of the statute should be deemed to be met only where the corporate employee undertakes the initiative to "influence legislation."

Example 2. A corporate tax director contacts the IRS for a private letter ruling. In the course of discussions with IRS officials concerning the application of the law to the corporate taxpayer's facts, an issue is identified that may require a legislative "solution" to ensure the proper application of the law. In the event that the IRS attorneys involved in the ruling request are asked either to brief other officials on the facts of the case or to provide input on possible legislative action, has the corporate taxpayer "attempted to influence legislation?" (Is it relevant whether the legal ambiguity favors the taxpayer or the government?)

We believe that almost all communications with IRS employees (and other non-covered executive branch officials) in the course of their exercising administrative responsibilities should be exempt from the lobbying provisions.(2) This exemption should cover examination-related activities (including requests for technical assistance), requests for private letter rulings, hearings on regulations, and any other meeting where "influencing" legislation is not a principal or primary concern of the communications. Any other rule would lead to all manner of inadvertent "lobbying" (or even a "gotcha" mentality) when any party to a discussion (hearing, meeting, etc.) or written communication suggests that legislation may be necessary to achieve a particular result or resolve an ambiguous interpretation.(3) In highly regulated industries such as banking, securities, insurance, or public utilities, the level of contacts between public and private officials (at the state and national levels) regarding the interpretation of legislation is so frequent that the exemption will be especially important to avoid unduly lettering the administration of the laws.

Example 3. In connection with the controversy over California's "worldwide unitary apportionment" method of allocating income of multi-jurisdictional businesses, TEI wrote a letter to President Clinton advocating that the President direct the Department of Justice to file an amicus curiae brief with the U.S. Supreme Court supporting the grant of a writ of certiorari Barclay's PLC v. Franchise Tax Board. The letter did not advocate a particular position be adopted by the Clinton Administration with respect to the merits of the case, but rather argued only that the issue deserved the Court's review to end the continuing controversy over the propriety of the worldwide method.

Obviously, the President is a "covered executive branch official" and the letter was a "direct communication." Arguably, the letter was not an "attempt to influence the action" of the President within the meaning of the statute because there was no attempt to influence whether the United States government should support one party or the other (or one position or the other) in the underlying controversy. Concededly, this interpretation seems at odds with the statutory language encompassing attempts to influence "official action," which, of course, includes any directive by the President to Executive Branch employees, especially the Department of Justice. There are, however, many instances where a taxpayer is concerned only in getting an answer, not a particular answer. We submit that attempts to encourage or spur official action should be distinguished from attempts to influence the course of such action and could be so distinguished without undermining the basic thrust of the lobbying disallowance provisions.

Example 4. A speaker at a TEI seminar or Annual Conference (perhaps the Assistant Treasury Secretary, IRS Commissioner, or even a member of Congress) comments on the need for legislation to address concerns of taxpayers about a particular provision of the Internal Revenue Code or urges support (opposition) for a new compliance initiative (relating, say, to independent contractors) or social policy (health care tax) or entirely new tax system (value-added tax). Would the fact that proposed legislation is raised in the presence of officials who may "participate in the formulation of legislation" somehow trigger the lobbying disallowance provisions (e.g., in respect of the Institute's reimbursement of the government official's travel expenses)? Would the companies whose members are in attendance at the conference be subject to a potential disallowance of a portion of the members' salaries or the conference registration fee? We believe the costs associated with an educational conference should be considered beyond the scope of the lobbying disallowance provisions.

Suppose further that in an effort to learn more about the rationale for and intricacies of the proposed legislation, a TEI member engages a government official in a colloquy about the proposed legislation at an educational conference.(4) If the member expresses a clear viewpoint concerning legislation (or-even as "monitoring" that could be swept into the look-back rule). Alternatively, the Treasury should consider adopting a rule that provides that any public forum where representatives of the press are invited is exempt from the lobbying disallowance provisions.5

Example 5. The Internal Revenue Service and other agencies of the federal government have engaged a private consulting firm to study the feasibility of simplifying the wage and tax reporting and collection system in the United States.6 The Institute and several members have, to date, monitored developments and provided feedback and information for use by the consultants in their study. Early in the study, the consultants advised that implementation of this proposal will likely require enabling legislation. Is participation in the study after the need for enabling legislation is identified tainted as an "attempt to influence legislation"?7

In the interest of promoting participation by outside stakeholders in systemic changes (such as the wage reporting simplification), the Treasury should craft a broad safe harbor that excludes participation in such studies from the reach of the lobbying provisions. Participants who provide data for the study should be able to express opinions to the consultants (or IRS officials) regarding the operation of the system without the costs related to their participation in the study being placed beyond the pale of deductibility. Otherwise, the government may incur substantial costs in studying and implementing changes-- in a veritable vacuum--only to find that the new system is unworkable.

Example 6. A nonprofit, professional organization (such as TEl) is composed of members, elected volunteer leaders, and full-time, paid staff employees. In connection with a proposed tax bill, the President of the professional organization and other members review and approve the text of an oral statement and written submission to Congress that was prepared by organization members and staff. In addition, the President (a volunteer who retains his or her fulltime employment with a company) appears before a congressional committee to present the organization's views on the proposed legislation. The staff of the nonprofit organization keeps ample records of time spent preparing the statement and submission, and the organization otherwise complies with all requirements regarding the disallowance of lobbying expenditures. Is the time spent by the voluntary leaders and members of the nonprofit organization in the preparation or review of the statement or submission subject to disallowance under section 162(e) to the member's company?

TEl believes that the time spent on a voluntary basis to promote the activities of a nonprofit organization should not be subject to disallowance to the member's company as a cost incurred to "influence" legislation or official action. To the extent that the volunteer leadership (and members) of a nonprofit organization devote time to the preparation or advocacy of positions on behalf of the nonprofit organization, the activity of the volunteer leadership should not be attributed to the individual's employer because the activities of the members of the organization are voluntary, generally not a condition of the person's employment, and normally is over and above the duties required by the employer.(8) Furthermore, a voluntary member organization's leader's actions are generally dictated and controlled by the Board of Directors (or other controlling body) of the organization. As a result, the policy position advocated by an organization on a particular issue--while likely consistent with the views of the members of the organization as a whole--may not benefit a particular leader's (or member's) company.(9) Within the statutory scheme enacted by the Congress, the direct expenses incurred by the organization in the lobbying effort are captured and allocated to members through the dues allocation process (or the payment of a proxy tax). Thus, time spent on a voluntary basis advocating or lobbying positions through a professional organization should not result in a disallowance of deductible expenses to the member's employer.

Example 7. Company H, a diversified, multinational manufacturing and distribution company, has a fulltime government relations staff devoted to monitoring and attempting to influence legislation and official actions of both covered and non-covered executive branch officials. In addition, other departments in the company devote time to monitoring legislative developments including legal, tax, human resources, manufacturing, marketing, and finance. (Just about every part of the company must monitor regulatory and legal changes.) An omnibus bill is introduced re-authorizing the Superfund Cleanup, including proposals regarding the tax treatment of environmental remediation expenditures, new guidelines concerning mandatory use of biodegradable packaging, tightened safety and health restrictions on exposure to hazardous substances in the workplace, and multiple other requirements. The government relations group is charged with the task of assessing the effect of the bill on the company and developing a position on the bill. The cost accounting department based on data from the manufacturing and marketing departments develops estimates of the costs of compliance on product costs, the financial accounting department, with input from nearly every department, assesses the overall financial statement impact. The tax department assesses the cost of the tax proposals. Likewise, the manufacturing and human resources departments develop a cost model to assess the effect of the new workplace safety rules. The company treasurer engages in discussions with the company's insurance carriers to assess the various risk factors and premium costs to insure against any additional liability arising under the proposed legislation. Finally, all of the various activities are communicated throughout the company in a series of independent, but interrelated, meetings or memorandums. Ultimately, top management, including the CEO and CFO, based on a recommendation from the vice-president for government relations, determine that it is in the best interest of the company to develop and advocate a position on the omnibus bill.

In the event that the company develops a position either in support of or against the proposal, which activities will be subject to the special rule of section 162(e)(5), requiring any amount paid or incurred for research for, or preparation, planning, or coordination, of any attempt to influence legislation? In determining the associated costs, is it relevant whether the company lobbies only with respect to discrete portions of the bill (say, the tax piece and nothing else)? Should there not be de minimis rules regarding the types and amounts of expenses?

When should the cost data regarding monitoring (which may be subject to any look-back rule) be assembled? In the event that the proposed legislation is first introduced (and studied by the company) in 1992 and not acted upon until 1996, for how many years must a company maintain records of the time spent analyzing the proposed legislation? Is it relevant whether the government relations department assesses the risk of enactment in 1992 as low? In 1995 as medium? In 1996 as high? Is it relevant what year the cost study is completed? What if the costs are developed initially in 1992, but updated year-to-year? One approach would be to limit the look-back period to the date that legislation is introduced (or no earlier than the beginning of the congressional term.)

What is the proper year in which to report the costs that are converted by the look-back rule from monitoring to influencing as nondeductible expenses?(11) For example, are costs incurred in studying legislation first introduced in 1992 but not enacted until 1996 subject to disallowance in 1996 when the company first makes a communication in an attempt to influence legislation? Regardless of when the costs are recorded or reported, what estimation methods may the company employ in gathering the record of the costs incurred related to either its lobbying or its monitoring activities?

The Treasury and IRS Confront an enormous task in developing proper and practical guidance regarding the reach of the lobbying provisions, distinguishing lobbying activity from monitoring, and putting limits around (1) the types of expense subject to allocation and (2) the temporal reach of the look-back rule's conversion of monitoring expenses into research or preparation expenses for lobbying. If you wish to discuss any of the issues discussed in this letter, or if we can be of any assistance to you in developing these rules, please do not hesitate to call either Timothy McCormally or Jeffery P. Rasmussen at TEl (202/6385601). Alternatively, I would be delighted to hear from you at 708/9378523.


(1) Before addressing the lobbying disallowance provision, we urge the Treasury and IRS to formally put to rest the notion that professional societies such as TEl may be "clubs" within the meaning of new section 274(a)(3), which separately disallows the deduction for club dues. If payments to professional associations constitute disallowed club dues, TEl and its members would effectively not be subject to the recordkeeping, proxy tax, or dues allocation provisions of OBRA. We urge the Treasury and IRS to put this pernicious rumor to rest by confirming that professional organizations are not clubs because it would be disconcerting for the Institute (or any other membership organization) to commence a study of its accounting and information systems and procedures to comply with the lobbying provisions only to find that the "club" dues expense disallowance renders the lobbying provisions moot with respect to member dues.

(2) Similarly, activities undertaken through a professional association to influence noncovered official administrative actions should not be transmuted to "attempts to influence legislation" where the administrative official may "participate in the formulation" of future legislation. For example, TEI has worked closely with representatives of the IRS to redraft substantially the rules on records retention set forth in Rev. Proc. 91-59. In the event legislation affecting section 6001 of the Code is considered, the IRS officials involved in the administrative process may well participate in the "formulation" of legislation. The costs associated with the attempt to make the provisions of Rev. Proc. 91-59 workable (or other comparable initiatives to improve the administration of the law) should not be subject to the reach of the "look-back" rule simply because of the participation of the IRS officials.

(3) It is not uncommon for taxpayers to argue that the IRS should take a particular course of action and for the IRS to counter that such a course may not be authorized by the Code. In such cases, the taxpayer frequently responds, "we disagree with you concerning the need for clarifying legislation, but if it is necessary, you should seek it." This taxpayer rejoinder to the IRS's disclaiming of authority to act administratively is hardly "lobbying."

(4) Does it matter whether the colloquy occurs as part of a public forum or in a private sidebar conversation at the luncheon dais (or in a private conversation before or after a public address)?

(5) Based on our review of the legislative history and the rhetoric of the political campaigns impelling the enactment of these provisions, a distinction between public and private "communications" might be within the ambit of the Administration's and Congress's intent. If the intent of the provisions is to "level the playing field" between individuals and commercial "special interests," the "abuses" of lobbying (i.e., private advantages conferred through privately bargained agreements) would be curbed by a lobbying disallowance that only reaches non-public communications.

(6) The study has been identified at various times as the Wage Reporting Simplification Project (WRSP) and the Simplified Tax and Wage Reporting Simplification (STAWRS) project.

(7) In the event that a nonprofit organization such as TEl, or one of its members' companies, participates in a project until the point where enabling legislation is determined to be necessary, must the participating organization or member terminate its activities to avoid incurring nondeductible expenditures? If the participants continue with the project despite the potential disallowance of deductions for costs incurred in connection with participation in the project, will the look-back rule cause the costs incurred prior to identification of the need for enabling legislation to be swept into the disallowance provision?

(8) As a practical matter, the time devoted to activities on behalf of the nonprofit organization may occur during normal work hours. The employer's willingness to permit this, however, should not transform the activity into lobbying for the company, since the employer will still require the employee to perform his normal duties.

(9) To the extent that a benefit redounds to the leader's (or member's) company, the benefit is quite likely to be remote or attenuated.

(10) For example, we believe that the cost of general research materials (e.g., The Washington Post, Daily Tax Report, Highlights & Documents, CCH Standard Federal Tax Reports, including their on-line versions) should never be deemed to be costs of preparing for an attempt to influence legislation unless the primary purpose of the expenditure is to support attempts to influence legislation.

(11) Query how any entity will be able to keep records that characterize the conduct of the persons involved. A look-back rule that recharacterizes transactions (e.g., depreciation recapture on the sale of a fixed asset) is workable only because the transaction recorded in the past is essentially immutable. A look-back rule that attempts to recharacterize an employee's conduct from "monitoring" to "preparatory" depends upon a proper recording and evaluation of all the events surrounding the past conduct. Short of requiring excruciatingly detailed records (and perhaps even monitoring all phone calls and meetings), how will anyone possibly be able to document years (months) later whether a particular monitoring activity actually relates to a current "attempt" to influence legislation?
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Author:DeLuca, Michael A.
Publication:Tax Executive
Date:Nov 1, 1993
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