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Lobbying expenditures of trade associations.

Much attention has been drawn to the political activities of taxexempt organizations. Sen. Alan Simpson said at a recent Finance Committee hearing that he may offer legislation to restrict the activities of certain organizations exempt under Sec. 501(c)(4) and has held hearings to scrutinize the political activities of taxexempt organizations that receive Federal funds. In addition, the director of the IRS's Exempt Organization Division stated that audits of tax-exempts will be increased significantly beginning in 1995. Potential areas of concern for Sec. 501(c)(6) entities include disclosure and lobbying.

Trade associations, chambers of commerce, business leagues and similar organizations exempt from income taxation under Sec. 501(c)(6) are permitted to sponsor or oppose legislation so long as they promote the common business interests of their members. An organization may qualify for exemption under Sec. 501(c)(6) even if its sole purpose is to influence legislation, as long as such legislation is relevant to its exempt function.

Congress amended Sec. 162(e) to disallow the deduction for lobbying expenses, except at the local level, for amounts paid or incurred after 1993. In addition, the Revenue Reconciliation Act of 1993 (RRA) imposed new disclosure requirements for taxexempt organizations. Other than those exempt under Sec. 501(c)(3), organizations must now report to their members a reasonable estimate of the portion of the dues or similar payments allocable to nondeductible lobbying expenditures, in order to prevent members from deducting the portion of their dues so allocated. Further, Sec. 6033(e) now requires taxexempt organizations to include on any return claiming a trade or business deduction the total nondeductible lobbying expenditures for the tax year and the total amount of the dues or similar payments allocable to such expenditures.

If an organization elects not to provide the required disclosures or fails to specify the actual (not estimated) amount of nondeductible lobbying expenditures, the organization is subject to a tax on the amount excluded at the highest corporate tax rate in effect. (These reporting requirements do not apply to organizations whose in-house expenditures do not exceed $2,000.) The Service is permitted to waive this tax if the organization agrees to adjust its estimates for the following tax year to correct any failures, or if the organization can satisfactorily establish that substantially all of its dues paid by persons to the organization are not deductible under any Code provision.

In addition to imposing new reporting requirements, the RRA significantly expanded the definition of lobbying. Sec. 162(e) now denies a deduction for amounts paid or incurred in connection with influencing legislation; participation or intervention in any political campaign; any attempt to influence the general public with respect to legislation or elections; or any direct communication with certain executive branch officials in an attempt to influence the official actions of such officials. Lobbying expenses also include amounts paid for research for, or preparation, planning or coordination of, any activity related to lobbying activities. The denial of the lobbying deduction does not apply to the lobbying of local governments.

While organizations exempt under Sec. 501(c)(6) do not jeopardize their exempt status by engaging in lobbying, they do run the risk of incurring a substantial tax on amounts not properly reported to their members as nondeductible. This issue is likely to be closely examined as the IRS increases its audit activity in the exempt organizations area.

From Harold Talisman, CPA, Ft. Lauderdale, Fla.
COPYRIGHT 1995 American Institute of CPA's
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Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Talisman, Harold
Publication:The Tax Adviser
Date:Sep 1, 1995
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