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Proposed lobbying disallowance regulations.

On May 10, 1994, the Internal Revenue Service issued proposed regulations under section 162(e) of the Internal Revenue Code, relating to the definition of the term "influencing legislation" for purposes of the lobbying deduction disallowance rules. The proposed regulations were published in the FEDERAL REGISTER on May 13, 1994 (59 Fed. Reg. 24992), and in the INTERNAL REVENUE BULLETIN on June 13, 1994 (1994-24 I.R.B. 20).(1) A public hearing on the regulations is scheduled for September 12, 1994.


Tax Executives Institute is the principal association of corporate tax executives in North America. Our approximately 5,000 members represent 2,700 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. In addition, certain members of the Institute participate on a voluntary, non-compensated basis in TEI's advocacy efforts, which may fall within the imputation rule of section 162(e). We believe that the diversity and professional training of our members, coupled with the Institute's status as a tax-exempt membership association, enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under section 162(e) of the Internal Revenue Code, relating to the definition of the term "influencing legislation" for purposes of the lobbying deduction disallowance rules.


Section 162(e) of the Internal Revenue Code, as amended by section 13222 of the Omnibus Budget Reconciliation Act of 1993, disallows a deduction for any amount paid or incurred in connection with--

* influencing legislation; or

* any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.(2)

The disallowance applies to lobbying expenditures to influence federal or state legislation, but not a local council or similar governing body. The term "influencing legislation" is defined in the statute as--

any attempt to influence any legislation through communication with any member or employee of a legislative body or with any government official or employee who may participate in the formulation of legislation.

"Legislation" is defined by reference to section 4911(e)(2) (which relates to the tax on lobbying expenditures by charitable organizations), which defines the term as an "action with respect to Acts, bills, resolutions, or similar items by the Congress, any State legislature, any local council, or similar governing body, or by the public in a referendum, constitutional amendment, or similar procedure." Under section 162(e)(5)(C), disallowed expenditures include amounts paid or incurred for research for, preparation, planning, or coordination of, a lobbying activity.

Consistent with the section 4911 rules, the proposed regulations narrowly define a "lobbying communication" as one that refers to specific legislation and reflects a view on that legislation, or that clarifies or supports a prior lobbying communication. "Legislation" is specifically defined as an action with respect to acts, bills, resolutions, or other similar items by the Congress, any state legislature, or similar governing body.(3) "Specific legislation" is further defined as legislation that has already been introduced and a specific legislative proposal that the taxpayer either supports or opposes.(4)

The legislative history of the 1993 amendments expresses Congress's intent that

[T]he Secretary of the Treasury will permit taxpayers to adopt reasonable methods for allocating expenses to lobbying (and related research and other background) activities in order to reduce taxpayer recordkeeping responsibilities. H.R. Rep. No. 103-213, 103d Cong., 1st Sess. 606 n.63 (1993) (emphasis added) (hereinafter referred to as the "Conference Report").

In our view, the proposed regulations pay inadequate heed to this congressional mandate. The recordkeeping requirements imposed by the proposed regulations are daunting. Indeed, we believe that the proposed regulations stand as a stark testament to the unadministrability of the statute. For example, the regulations effectively provide no cut-off point for research or "monitoring" activities that take place years prior to the lobbying communication, thereby imposing the requirement that a taxpayer track the purpose of its activities for indefinite periods of time. How are taxpayers to know--in advance--that their activities may one day lead to a lobbying communication? In addition, how are taxpayers to keep records that characterize the conduct of the persons involved? We suggest that they cannot.(5)

Moreover, the presumptions--while intended to make life easier for taxpayers--favor the IRS and will, in practice, be extraordinarily burden-some and very difficult to apply. For example, consider a taxpayer who litigates a case against the Environmental Protection Agency involving an environmental clean-up--and loses. The taxpayer decides (within the presumption period) to seek legislation to overturn the decision. The taxpayer's "lobbying communication" consists of a short letter to its congressman urging a legislative reversal of the agency decision, to which is attached the taxpayer's brief and the EPA's administrative opinion. Are the costs of the litigation, by virtue of the "look-back" presumption, suddenly transmogrified into activities in support of lobbying?

Finally, TEI is extremely concerned about the unworkable, over-reaching nature of the "paid volunteer" rule that improperly attributes an association's lobbying activities to its members--and, through them, the member's employers--regardless of the nature of the members' activities or the interests of the members' employers.

With due respect, the biggest problem with the regulations is that they cannot acknowledge that the statute, on the whole, is simply not administrable. While we appreciate that the IRS cannot engage in "agency nullification," its candid assessment of the administrative morass created by the statute might well prompt Congress to revisit the basic policy underlying the 1993 changes.(6)

Prop. Reg. [sections] 1.162-29(d): Special Imputation Rule

Prop. Reg. [sections] 1.162-29(d) provides a special imputation rule that is generally applicable to trade and professional associations. Under that section, if a taxpayer uses the services or facilities of a second taxpayer without compensation for the purpose of making or supporting a lobbying communication, then the purpose and action of the first taxpayer is imputed to the second. The proposed regulations provide an example of a trade association that uses the services of a member's employee to conduct research to support the trade association's lobbying communication. The example concludes that the member/taxpayer is treated as influencing legislation with respect to the employee's work in support of the trade association's lobbying communication.

The proposed regulations demonstrate a misunderstanding or disregard of how many membership organizations--including professional associations (such as TEI)--operate.(7) First and foremost, the proposed regulations ignore a very basic fact of life for association members: the member is generally a true "volunteer." For example, although an individual's employer may technically support membership in a professional society, that employee still has a fulltime job to perform. Indeed, association work is most often accomplished in the member's "spare time"; even when members spend time during the workday on an association activity, they often work weekends and evenings to compensate for that time.

Moreover, associations generally act by consensus; decisions on whether the organization will actively lobby on a certain bill may not be unanimous. For example, a member could be part of an association's executive committee that reviews all submissions made to Congress, state legislatures, and federal and state agencies. Under the proposed regulations, if the member participates in the review of a letter that becomes a "lobbying communication," the member's employer must allocate a portion of his time to lobbying. It makes no difference whether the executive committee member supports or opposes the association's action or whether the member's company is benefitted or harmed by the action. Hence, a dissenting member is placed in the incongruous position of having tainted lobbying activities attributed to his employer, even if the member vigorously opposes the action taken by the association.

Indeed, the proposed regulations exact a penalty for activities that may not relate to or benefit a member's employer, but operate to promote the efficiency of the tax--or any other--system as a whole. For example, a member may be asked to review a submission that recommends several simplification measures (requiring legislation) for section 936 companies. Although the member's employer may have no activities in Puerto Rico, she agrees that the proposals make sense and should be submitted. Under the proposed regulations, the member's employer is penalized for her actions as a good corporate citizen.

Finally, there is a practical problem involved in complying with the rule. If a volunteer's time (on evenings and weekends) is to be included in the numerator of the fraction, what goes in the denominator? The amount of time the volunteer spends working for the employer and volunteering for other activities since many employers encourage their employees to participate in volunteer community activities? The total number of hours in the reporting period? TEI believes that posing the questions demonstrates a fundamental flaw in the paid volunteer rule: it just doesn't work.(8)

A more sensible approach would be to provide for the allocation of an association member's direct expenses (such as travel and lodging) in influencing legislation on behalf of an association or professional organization. In addition, we recommend the regulations provide for the allocation of salaries and other indirect expenses only where the member's lobbying activity constitutes more than a de minimis period of full-time work, say, two weeks. Such an approach would minimize a member's recordkeeping burdens by capturing only significant expenditures of time, and would also encourage members to participate in activities that, while not specifically benefiting their employers, constitute good citizenship.

Prop. Reg. [sections][sections] 1.162-29(b) & (c): Activities in Support

of Lobbying

A. Rejection of Look-Back Rule. Prop. Reg. [sections] 1.162-29(b)(1)(iii) provides that "an attempt to influence legislation" includes "all activities, such as research, preparation, and other background activities engaged in for a purpose of making or supporting a lobbying communication." Paragraph (c) of the proposed regulations provides rules for determining when activities will be considered as "supporting" a lobbying communication. Although the legislative history of section 162(e) provides support for the adoption of a look-back rule,(9) the preamble concludes that such a rule would not be efficacious, ostensibly striking a balance between taxpayers' need for greater contemporaneous certainty regarding whether a particular activity may be treated as a lobbying activity and the legislative goal of not allowing a deduction for lobbying activities. 1994-24 I.R.B. at 21. Instead, the proposed regulations require an examination of the multiple purposes for which the activity was undertaken and create presumptions concerning whether an activity "relates to" a lobbying purpose.

TEI agrees that a look-back rule would impose onerous administrative burdens on taxpayers and thus would not be proper. We believe, however, that the "relates to" test of the proposed regulations, when coupled with the two-year presumption period, is in fact a "look-back" rule, albeit under another name. The proposed test and presumption will require taxpayers not only to keep detailed records of amounts expended on all kinds of business activities (just in case either in that taxable year or the immediately succeeding year, a taxpayer subsequently makes a lobbying communication to which the prior activity somehow "relates"), but also to maintain records of the non-lobbying purposes for which the activities were undertaken. Indeed, the only record-keeping benefit provided by the proposed two-year presumption rule is that it arguably allows (nay, encourages) taxpayers to discard--once the two-year period expires without a lobbying communication--the mountains of documents required to be generated to comply with the rule. The simple fact is that the proposed rule is a two-year "look-back" rule and, accordingly, should be rejected in keeping with the preamble's assertion that a "a lookback rule would not be appropriate."(10)

B. Rejection of Principal-Purpose Test. The preamble to the regulations refers to comments urging the adoption of a principal or primary purpose test whereby an activity would be treated as influencing legislation where the principal or primary purpose for engaging in that activity was to make or support a lobbying communication, even if the activity was also engaged in for other, non-lobbying purposes. The preamble states that the suggestion was not adopted because "a principal/primary purpose test does not avoid the necessity of determining the various purposes for engaging in an activity and weighing the relative importance of those purposes, and because it has a substantial 'cliff' effect that an allocation approach does not." The preamble also refers to the IRS and Treasury's serious concerns about whether a principal-purpose test could be administered "responsibly and fairly." Finally, the preamble states that nothing in the legislative history indicates that "Congress intended to treat activities engaged in for a substantial lobbying purpose as outside the scope of section 162(e)." 1994-24 I.R.B. at 21-22.

TEI continues to believe that, to minimize the recordkeeping burden on taxpayers while effectuating congressional intent, a principal-purpose test should be adopted.(11) We also recommend adoption of a rule similar to Treas. Reg. [sections] 56.4911-2(b)(2)(v)(D) whereby the characterization of an activity as lobbying shall apply only to expenditures paid less than six months before the first use of the advocacy communications or research materials in a lobbying communication. We believe that this approach would be consistent with Congress's intent that the Treasury and IRS adopt "reasonable methods for allocating expenses to lobbying (and related research and other background) activities in order to reduce taxpayer recordkeeping responsibilities." Conference Report at 606 n.63 (emphasis added).(12)

TEI believes that the preamble's rejection of a principal-purpose test is erroneous and the government's stated disenchantment with such a test is somewhat disingenuous. The rule has been used--apparently without problem--in other areas involving lobbying communications for several years. When the section 4911 rules were originally proposed in 1986, they contained a mixed-lobbying purposes rule providing that an expenditure made for both a tainted and non-tainted purpose would be treated as tainted unless the organization could show that the expenditure was incurred solely for the non-tainted purpose. Prop. Reg. [sections] 56.4911-2(d)(3) (1986). As a result of criticism, the rule was replaced in 1988 with a principal-purpose test.(13) Prop. Reg. [sections] 56.4911-3(a)(3) (1988). See also Prop. Reg. [sections][sections] 56.4911-2(c)(1)(v) & 53.4945-2(d)(1)(v) (1988) (adopting a principal-purpose test for determining whether the subsequent use of a non-partisan analysis, study, or research required an allocation of costs to lobbying). Final regulations adopting the principal-purpose test were issued in 1990. T.D. 8303 (Aug. 30, 1990). Thus, a principal-purpose test has been administered with respect to foundations and public charities for the last six years; there is no evidence--or even suggestion--that the test has not been administered "responsibly and fairly."

As for the legislative history of section 162(e), we consider the argument that "nothing in...the legislative history indicates that Congress intended to treat activities engaged in for a substantial lobbying purpose as outside the scope of section 162(e)" to be conclusory--make-weight. There is nothing in the legislative history that demonstrates Congress intended to include such activities, either. Indeed, the inference is clearly to the contrary. Congress expressly said the IRS and Treasury should minimize recordkeeping burdens. Conference Report at 606 n.63. What's more, the statute and the legislative history of the new provision demonstrate a keen awareness of the section 4911 rules.(14) Significantly, Congress stated where it intended the rules under section 162(e) to differ from section 4911.(15)

In sum, the legislative history strongly supports the adoption of a principal-purpose test in the final regulations.

C. The Multiple-Purposes Test. Prop. Reg. [sections] 1.162-29(c)(1) provides that the purpose or purposes for which a taxpayer engages in an activity are determined based on all the facts and circumstances. Subparagraph (2) provides that if a taxpayer engages in an activity both for a lobbying and a non-lobbying purpose, it must allocate the costs of the activity among the various purposes in a "reasonable" manner. Examples of a reasonable allocation are only provided in the negative: (i) the taxpayer may not allocate only the incremental amount of costs that would not have been incurred but for the lobbying purpose; and (ii) the taxpayer may not allocate its costs based on the number of purposes for engaging in the activity without regard to the "relative importance" of the purposes.

In essence, the multiple-purposes test exacerbates the recordkeeping burdens engendered by the two-year presumption rule. Thus, taxpayers will be required to maintain indefinitely background records relating to studies or analyses on the chance (real or remote) that in the future a study may become related to a lobbying communication. In addition, taxpayers will be required to determine a "value" to each purpose--a time-consuming, thankless, and likely challengeable task for little worth.

As the preamble notes, a principal-purpose test also requires a taxpayer to impute a "value" to the purposes for which an activity was undertaken. 1994-24 I.R.B. at 22. We suggest, however, that a principal-purpose test--which requires a taxpayer to value only the lobbying purpose and to weigh it against the reasons for the activity as a whole--is much easier to administer than a multiple-purposes test--which requires the taxpayer to identify and separately value each and every purpose for which an activity is undertaken. A multiple-purposes test will impose administrative and recordkeeping burdens on taxpayers that far outweigh the revenues to be gained from the enforcement of such a provision.

D. Substantial-Purpose Test. The preamble to the proposed regulations requests comments on whether a substantial-purpose test would be more appropriate than a multiple-purposes test. The IRS and Treasury express concern, however, that a substantial-purpose test would be "considerably over-inclusive." 1994-24 I.R.B. at 22.

TEI agrees that a substantial-purpose test, by itself, would include many activities that are engaged in for predominately non-lobbying purposes. The issue, however, need not be approached as an "either-or" proposition. If a principal-purpose test is not adopted, the IRS and Treasury should consider a "blended" approach involving both a substantial-purpose test and a multiple-purposes test. A substantial-purpose test could effectively act as a threshold: If the activity has a substantial (say, 20 percent) lobbying purpose, the multiple-purposes test could then be used to allocate the costs. Such an approach would have two advantages: (i) it would minimize recordkeeping burdens since only those activities with lobbying as a substantial purpose would need to be tracked; and (ii) it would properly allocate costs where a substantial lobbying purpose exists.(16)

E. Specific Legislative Proposal. Prop. Reg. [sections] 1.162-29(b)(2) provides examples of attempts to influence legislation. In Example 5, the taxpayer prepares a position paper that asserts that lack of new capital is hurting the State's economy. The paper concludes that the residents of the State should either invest more in local businesses or increase their savings. The paper is forwarded to legislators with a cover letter urging them to take actions to improve the availability of new capital in the state. The example concludes that, because the letter does not refer to a specific legislative proposal, the taxpayer is not influencing legislation.

In contrast, Example 6 discusses the situation where the taxpayer prepares a paper arguing that lowering the capital gains rate would increase the availability of capital and increase tax receipts. The taxpayer forwards the paper to representatives in Congress with a letter urging support for a reduction in capital gains rates. The example concludes that the communication reflects a view on a specific legislative proposal and therefore constitutes influencing legislation.

Distinguishing between the situations in these two examples may prove well nigh impossible. The letter in Example 5 may not expressly urge a specific action, but the taxpayer is clearly signalling that incentives should be enacted to increase investment. Example 6 may be more specific in conveying the taxpayer's view that legislative action is necessary, but there is nothing in the example indicating that the legislative proposal existed independently of the letter. The ambiguities could be significantly reduced by requiring a specific "call to action" (similar to the rule set forth in the section 4911 regulations), thereby providing a bright-line test and minimizing recordkeeping burdens. Under such a test, neither example would constitute a lobbying activity.

F. Reasonable Allocation of Costs. Prop. Reg. [sections] 1.162-29(c)(2) provides two examples of what is not a reasonable allocation of costs: the incremental amount of costs that would not have been incurred but for the lobbying purpose and an amount based on the number of purposes without regard for their "relative importance." The provision is illustrated in Example 5 of paragraph (c)(6) whereby a president of the taxpayer travels to the state capital to attend a two-day conference and spends a third day lobbying on a pending bill. The example concludes that since the president's travel is engaged in for lobbying and non-lobbying purposes, the taxpayer must reasonably allocate the travel expense between the two purposes. The example fails to address, however, the obvious question: how the taxpayer may allocate costs (e.g., on the basis of the time spent on lobbying rather than educational activities).

The proposed regulations offer only negative guidance; no examples are provided concerning what constitutes a reasonable allocation method. Moreover, the proposed regulations effectively eliminate the two most useful, administrable, and auditable methods for determining the amount of expenses associated with multiple-purpose activities--incremental costs and the number of purposes underlying the communication. We suggest that a "relative importance" standard will impose a difficult burden on taxpayers and the government.

TEI recommends that the regulations provide specific examples of what constitutes a reasonable allocation method. At a minimu, the regulations should provide guidance on how a taxpayer determines the "relative importance" of a purpose. In addition, Example 5 of Prop. Reg. [sections] 1.162-29(c)(6) should be revised to state that the taxpayer must allocate the travel costs to lobbying only if a substantial purpose of the trip was for lobbying. In those circumstances, the example should provide that the allocation may be based on the time expended for the two activities or any other reasonable method. For example, if lobbying is not the principal purpose of the activity, taxpayers should be permitted to use the incremental cost in computing the disallowed amount.

G. Year In Which Lobbying Expenses Are Allocated. The proposed regulations fail to address the issue concerning to which year an expenditure (later found to be related to a lobbying communication) is allocable--in the year in which the activity is performed or the later year in which the communication is made. With respect to activities that occur in different years, we recommend that any activity that is subsequently "converted" into a lobbying activity be reported in the later year. This would be consistent with the tax-benefit rule and would avoid the necessity of filing an amended return without significantly affecting the fisc. For example, if a taxpayer in year 1 incurs an expenditure that is deemed in year 2 to be related to a lobbying communication, the regulations should provide that the deduction for the year 1 expense will not be disturbed (e.g., either via an amended return or an audit adjustment), but that the taxpayer's year 2 liability will be adjusted (consistent with section 111 of the Code) to reflect the subsequent recharacterization of the year 1 expense.(17)

The proposed regulations also fail to address a situation where a taxpayer or an association undertakes an activity (such as a study) in year 1 with the intent to use it in connection with a lobbying activity, but abandons the project in year 2 before the lobbying communication is made. In such circumstances, the taxpayer should be permitted to recoup its "lost" expenditures in the second year. An association could be provided an election either to credit the expenses against the proxy tax in year 2 or to reduce its members' disallowance in the second year. For example, in year 1 a not-for-profit membership association undertakes a study of various health care reform proposals, with the view of developing a position for which it will lobby. On its year 1 return, the association treats the expenses associated with the study as related to a lobbying communication and pays the proxy tax. In year 2, the association concludes that the issue is so contentious it will not endorse any proposal. The association should be permitted (on its year 2 Form 990) a credit for the proxy tax paid with respect to the expenses.

H. Accounting Method. The proposed regulations do not address whether a taxpayer's method of allocating costs constitutes a method of accounting. TEI believes the regulations should permit taxpayers to employ any reasonable method to allocate costs among multiple-purpose activities on a year-by-year basis.

Prop. Reg. [sections][sections] 1.162-29(c)(3) & (4): Presumptions

A. In General. The proposed regulations provide two presumptions of non-lobbying and lobbying purposes. Under Prop. Reg. [sections] 1.162-29(c)(3), if an activity relating to a lobbying communication is engaged in for a non-lobbying purpose prior to the year preceding the year in which the lobbying communication is made, a presumption is created that the activity is engaged in for all periods for a non-lobbying purpose. In such a situation, the burden will be on the IRS to rebut this presumption. In contrast, Prop. Reg. [sections] 1.162-29(c)(4) provides that if an activity relating to a lobbying communication is engaged in during the same taxable year as the communication is made or during the immediately preceding taxable year and does not come under the non-lobbying presumption, then the activity is presumed to be engaged in for the sole purpose of making or supporting a lobbying communication. Although the taxpayer may rebut this presumption, the last sentence of paragraph (c)(4) states:

If, during the same taxable year the taxpayer commences an activity that relates directly to the subject matter of specific legislation (then in existence) and makes a lobbying communication with respect to that legislation, it is expected that the taxpayer generally will be unable to rebut the presumtion. (Emphasis added.)

While presumptions can often operate to minimize recordkeeping burdens, the proposed regulations are confusing and will prove difficult to apply, exacting a high cost for the "certainty" they provide. Nowhere do the regulations demonstrate how the presumptions are to be rebutted. Indeed, the presumption of a non-lobbying purpose may perversely encourage taxpayers to discard records. Thus, if the taxpayer commissions a study in year 1 that is used in year 4 in connection with a lobbying communication, the presumption operates to shift the burden of proof to the IRS to demonstrate that there was a lobbying purpose to the study. If the taxpayer has no records concerning the year 1 expenditure (because it is relying on the presumption), will not the presumption be conclusive? If so, we suggest the regulations explicitly so provide.

In addition, there is no guidance concerning how the presumptions work with respect to multiple-purpose communications. If in year 1 the taxpayer commissions a study that admittedly has a 30-percent lobbying purpose but does not use the study in conjunction with a lobbying communication until year 3, will the two-year presumption operate to lock in the 30/70 percent allocation or will it perhaps operate to transform all of the expenses of the study into a non-lobbying activity?

Moreover, the chameleon-like presumption of a lobbying purpose effectively captures all activities of a taxpayer on the same subject as a lobbying communication if they are undertaken in the same or preceding year--unless the "facts and circumstances" demonstrate otherwise. It is unclear what "facts and circumstances" the taxpayer must marshall to prove that an activity is not related to a lobbying communication. For example, assume that an association regularly publishes a newsletter primarily for association members which is also made available to non-member subscribers. The association regularly publishes copies of, or extracts from, its technical submissions (including those constituting lobbying communications) to keep its members informed of its activities. If the association simply reprints the lobbying communication--without any editorial comment urging its members to act--must the association allocate a portion of the newsletter's costs to lobbying activities? We suggest that, unless the association changes the manner in which it publishes its newsletter (e.g., to include a separate call for action), the answer should be "no." The newsletter is not aimed at a targeted legislator or executive branch official and does not urge any type of action on the part of its members. Rather, the reprinting of the submission is a regularly carried-on activity that serves the educational function of the association. The publication was begun solely for a non-lobbying purpose and should continuously carry that presumption so long as there is no change in the way the activity is conducted.(18)

In addition, the use of the word "generally" in the last sentence of paragraph (c)(4) seemingly erects a high barrier to a taxpayer's rebutting the presumption. Indeed, the examples illustrating the use of the presumptions in paragraph (c)(6) could be construed as creating an irrebuttable presumption of a lobbying purpose. The last two sentences of Examples 2 and 3 state that the taxpayer "cannot" rebut the presumption of a lobbying purpose. It is unclear whether these sentences are intended to be statements (i.e., on these facts the taxpayer has not met its burden of proof) or conclusions (i.e., the taxpayer is precluded from offering proof of a non-lobbying purpose).(19) We also find the use of the words "(then in existence)" confusing. Is the parenthetical intended to narrow the definition of "specific legislation" set forth in Prop. Reg. [sections] 1.162-29(b)(1)(v)? TEI recommends that the final regulations clarify that the presumptions are rebuttable and provide specific examples of how the presumptions may be overcome.

Finally, we suggest that the problems with the proposed regulations are made manifest by considering the application of the regulations to a newspaper. Assume that a newspaper assembles an investigative team to research and prepare a series of articles on the health care industry and the different interest groups pressing for and against universal health care coverage. Assume the direct and indirect expenses associated with the series--reporters' and editors' salaries, allocated typesetting and printing costs, out-of-pocket expenses--aggregate $250,000. Next, assume that the newspaper's editorial staff (within the period specified in Prop. Reg. [sections] 1.162-29(c)(4) meets and decides to endorse a specific proposal (say, an employer mandate) and to editorialize in favor of that position. The costs associated with the editorial are $2,500. Is that editorial, which includes an explicit call for action, a lobbying communication? Are the $250,000 in expenses associated with the series of news articles presumed to be for a lobbying purpose? If not, why not?(20)

B. Retroactive Nature of Presumptions. It is unclear whether the presumptions are intended to apply retroactively to expenses incurred before the effective date of OBRA. For example, if a taxpayer undertakes a study in 1993 that is used to support a lobbying communication in 1994, must the pre-effective date costs of the study be allocated between lobbying and non-lobbying purposes? If so, we believe that the proposed regulations are overreaching. The statute clearly provides that the lobbying deduction disallowance applies only to amounts "paid or incurred after December 31, 1993." We recommend that the proposed regulations clarify that the disallowance does not apply to amounts paid or incurred prior to that date.

C. Example 2. Prop. Reg. [sections] 1.162-29(c)(6), Example 2 poses the factual situation where the taxpayer regularly keeps records of electrical consumption. When legislation is proposed imposing a sales tax on electricity, the company uses the records to estimate the additional costs the legislation would impose on its customers. In the same year, the taxpayer communicates with state legislators opposing the sales tax and includes the estimate of costs. The example concludes that the regular recordkeeping is a non-lobbying activity (because the taxpayer has kept such records for more than two years), but that the estimate of increased costs that would be incurred under the legislative proposal is a lobbying activity (because it was performed in the same year as the lobbying communication). Under the facts, Example 2 holds that the presumption of lobbying purpose cannot be rebutted.

The example does not make business sense. Companies routinely engage in contingency planning whereby they estimate the costs of various proposals for budget purposes. Thus, in Example 2, an estimate is prepared because the proposed sales tax could decrease consumer demand for electricity and ultimately affect the taxpayer's profit. Reasonably prudent business persons must strive to understand the possible effects of proposed legislation, regardless of whether they decide to attempt to influence that legislation. We suggest that the example be revised to take into account the facts surrounding the request for the calculation of costs (e.g., whether the taxpayer routinely prepares such estimates and whether the request for the information was generated by the taxpayer's chief financial officer or its government affairs office). Where the estimates are not prepared in anticipation of, or to support, the lobbying communication, they should not be treated as having a lobbying purpose.(21) Such an approach would be consistent with the general publication exception provided in Prop. Reg. [sections] 1.162-29(c)(5)(i)(B)(iii) in that routine, non-lobbying functions are not transformed into lobbying by a subsequent decision to lobby.

D. Example 3. Prop. Reg. [sections] 1.162-29(c)(6), Example 3 involves a case in which a taxpayer's legislative affairs staff asks the taxpayer's human resources staff to assist in determining the additional cost of proposed legislation to the taxpayer. Once the information is used for a lobbying communication, the example concludes that the activity of the human resources staff is allocated solely to lobbying and that "based on these facts, ...[the taxpayer] cannot rebut the presumption as it relates to this activity." In our view, the example demonstrates the one-sided nature of the presumptions. Taxpayers need to know the costs or benefits of proposed legislation so they can plan their budgets and make better business decisions. Activities undertaken to determine these costs, even if later used in a lobbying communication, almost always have a business purpose in addition to the lobbying purpose. The example should be revised to provide that the taxpayer can rebut the presumption by demonstrating that the information developed by the human resources staff was also used in the taxpayer's budgeting or planning process.

Preamble: Modification of Prop. Reg. [sections] 1.162-28(g)

In the preamble, the IRS announces its intention to modify Prop. Reg. [sections] 1.162-(g)(3) which provides a general rule for determining whether a meeting with government officials constitutes a lobbying activity. The preamble states that if a taxpayer attends a speech by a legislator at which specific legislation is discussed, the taxpayer will not necessarily be considered to be influencing legislation. If, however, the taxpayer makes a communication with the legislator with respect to that legislation within the same or succeeding year, the presumptions set forth in the proposed regulations shall apply. 1994-24 I.R.B. at 23.

TEI believes that the proposed modification is a prime example of regulatory overkill. It is difficult to discern under the clear language of the statute how merely listening to a speech--without more--could be an "attempt" to influence legislation. Such an approach imposes a cost on hearing a speech live rather than watching it on C-SPAN. The "widely attended meeting" exception in the 1993 proposed regulations was a logical approach to what threatens to become a recordkeeping quagmire. It should be retained.

TEI continues to believe that rational rules can be fashioned by focusing on the distinction between public and private communications. The lobbying disallowance rules were impelled by a perception that "closed" or "back door" communications between legislators and certain taxpayers (whether labelled "constituents" or "special interests") were harmful to the democratic process. If the intent of the provisions is to "level the playing field," then the advantages conferred through privately secured agreements would be curbed by a disallowance that reaches only non-public communications.

We recommend that the Treasury and IRS consider adopting exceptions that encourage, or at least not discourage, open communications. For example, meetings where the media are admitted could be excluded from the scope of the rules. In addition, providing technical information or support in response to a congressional request--which will generally be included in the publicly accessible hearing record--should not be considered an "attempt to influence" legislation for purposes of section 162(e).

Moreover, corporate executives are often asked to volunteer to serve on presidential commissions or other governmental/quasi-governmental study groups. These advisory groups may propose legislative solutions. (Consider, for example, the Grace Commission that in the early 1980s recommended many legislative changes to curb "waste, fraud, and abuse" or the Secretary of the Treasury's "working group" on the worldwide unitary tax issues.) We recommend that service on these commissions or groups should not be considered related to a lobbying communication.

Finally, TEI believes that the regulations should exempt "inadvertent" communications where there is realistically no "attempt to influence legislation" or "participate in the formulation of legislation." Such inadvertent communication 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.(22)

Prop. Reg. [sections] 1.162-29(f): Effective Date

Prop. Reg. [sections] 1.162-29(f) provides that the proposed regulations are effective for amounts paid or incurred on or after May 13, 1994. Taxpayers must adopt a reasonable interpretation of the statute for amounts paid or incurred before that date. The proposed allocation rules released in December 1993, however, did not set an effective date, but invited comments on the issue. Thus, taxpayers are faced with the prospect of two different effective dates for the transitional period.

Given the open questions (such as the multiple-purposes v. substantial-purpose v. principal-purpose test) still remaining to be resolved, TEI recommends that the effective date of the regulations be deferred until 30 days after publication of the final regulations.


Tax Executives Institute appreciates this opportunity to present our views on the proposed regulations under section 162(e) of the Code, relating to the definition of the term "influencing legislation" for purposes of the lobbying deduction disallowance rules. If you have any questions, please do not hesitate to call Michael A. DeLuca, chair of TEI's Federal Tax Committee, at (708) 564-6108 or Mary L. Fahey of the Institute's professional staff at (202) 638-5601.

(1)For simplicity's sake, the proposed are referred to as the "proposed regulations"; specific provisions of the proposed regulations are cited as "Prop. Reg. [sections]." References to page numbers are to the proposed regulations (and preamble) as published in the Internal Revenue Bulletin.

(2)Even before OBRA, section 162(e) of the Code disallowed a deduction for participation in or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office, and for any attempt to influence the public with respect to elections, legislative matters, or referenda ("grassroots lobbying"). This disallowance was not affected by the 1993 legislation.

(3)Prop. Reg. [sections][sections] 1.162-29(b)(1)(ii) & (iv). There are several references to "local" council and administrative bodies throughout the proposed regulations. The 1993 amendments, however, exempt communications with a local body from the reach of the new disallowance provision. See I.R.C. [sections] 162(e)(2). The regulations should confirm that section 162(e) has no effect on the deductibility of expenses associated with these communications.

(4)TEI endorsed the use of the section 4911 regulations in its March 18, 1994, comments on the proposed allocation regulations. We agree that these definitions generally provide reasonably objective criteria, although the scope of the phrase "participate in the formulation of legislation" under Prop. Reg. [sections] 1.162-29(b)(1)(i)(B) is amorphous. Problems with interpreting the phrase could be minimized by adoption of the approach proposed at page 421 of this submission.

(5)A rule that recharacterizes transactions is workable only because the transaction record in the past is basically immutable.

(6)Query whether the foregoing sentence taints these comments and renders them a lobbying communication.

(7)The ensuing discussion is premised on the members of the association being individuals and employees of companies, firms, and other businesses; the principles would be the same, however, if the businesses themselves were the members of the association that "volunteer" their employees to perform association work. In addition, the results should seemingly not change merely because the volunteers are partners (e.g., in a brokerage, law, or accounting firm) or proprietors rather than employees.

(8)A related issue arises with respect to the five-percent de minimis rule in Prop. Reg. [sections] 1.162-28(g)(1) (1993). If an employee's time is excluded from the numerator of the allocation formula because the time is de minimis, are the employee's total work hours included in the denominator of the fraction under the ratio method? TEI believes that the total hours should be included in the calculation; any other result would defeat the intent of the de minimis rule.

(9)Conference Report at 606.

(10)Consider, for example, a taxpayer who undertakes a research study of the Canadian health care system in 1990. The taxpayer updates its research in 1991, 1992, and 1993; in 1994 it decides to lobby on U.S. health care reform using the research results of its four-year study. The presumptions work to transmute the expenses of the research in 1993 into tainted lobbying expenditures and shift the burden to the IRS for the years 1990-1992 to show that these expenses were also in support of a lobbying communication. The IRS could arguably meet its burden by showing the 1993 activities were a continuation of the efforts undertaken in the prior years. Thus, there is no temporal cut-off point for taxpayers.

(11)The rule could be similar to the "subsequent use" rule set forth in Treas. Reg. [sections] 56.4911-2(b)(2)(v)(C).

(12)Even this type of rule would constitute a version of a "look-back" approach. By limiting the look-back period to six months, however, taxpayer should be able to reconstruct their records for that period, rather than having to create burdensome records for numerous activities on a "just-in-case-we-lobby" basis.

(13)See Preamble to Proposed Rulemaking on Lobbying by Public Charities; Lobbying by Private Foundations; Amendment of Notices of Proposed Rulemaking (EE-154-88), 1989-1 C.B. 925, 928.

(14)See, e.g., I.R.C. [sections] 162(e)(4)(B); Conference Report at 606 & n. 55.

(15)Congress affirmatively decided not to incorporate the exceptions set forth in section 4911(d)(2) in section 162(e). Conference Report at 599-600. In addition, the restrictions on lobbying local bodies set forth in the section 4911 rules were not adopted. Conference Report at 605.

(16)The regulations could also provide that if lobbying is a substantial, but not principal, purpose of an activity, taxpayers may use an incremental cost approach to calculate its non-deductible expenses.

(17)Making the adjustment in year 2 will also protect the IRS from the problems associated with trying to open closed years.

(18)Should the newsletter contain a disclaimer that it is not intended as a lobbying communication? Would a disclaimer have any legal effect? If not, it will be difficult for a taxpayer to document the purposes of a communication with its members.

(19)The same deficiency also exists in Examples 1, 4, and 7 of paragraph (c)(6). This problem may be addressed in part by changing the "can" in the last sentence of the examples to "may." For example, the last sentence of Example 1 should read: "Based on these facts, however, W may rebut the presumption entirely because it can show that its sole purpose for undertaking the study was to comment on the proposed regulations."

(20)Consider this not-too-far-flung example. A not-for-profit membership association of corporate tax executives (i) is alerted by its members that the Internal Revenue Service is issuing broad information requests concerning the activities of the members' companies, which information the IRS seeks to use in a pending Tax Court case involving an unrelated party. In an effort to determine the scope of the issue, the organization (ii) solicits information from other members, which (iii) provide information on such requests. At this point, the organization (iv) submits a letter to the Assistant Commissioner (Examination), questioning whether the IRS has the authority to request the information under section 7602 of the Code. The release of the letter under the Freedom of Information Act (v) prompts the staff of the Oversight Subcommittee of the House Ways and Means Committee to request information on the issue from the association. After hearings on the matter, at which the (vi) organization is invited to testify, legislation is introduced in Congress to amend section 7602 to expressly provide that the IRS's summons power extends to third-party requests where no transactional nexus exists between the taxpayer and the person to whom the summons is issued. The organization (vii) expresses a view on that legislation.

Assume that actions (i) through (vi) all occur within the presumption period related to action (vii). By virtue of action (vii)(which constitutes lobbying), are the other actions tainted?

(21)At a minimum, the disallowance provision should apply only to the incremental cost incurred for the lobbying activity, where the underlying activity is generally undertaken in the normal course of business.

(22)For example, a corporate tax director contacts the IRS in connection with her company's request for a private letter ruling. In the course of discussions between the tax director and the IRS on the application of the law to the corporation's facts, an issue is identified that may require a legislative "solution" to ensure the proper application of the law. The IRS attorneys are asked either to brief other government officials on the facts of the case or to provide input on possible legislative action. We believe that the tax director's communication should not constitute an attempt to influence legislation or participate in the formulation of legislation.
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Title Annotation:Tax Executives Institute's Federal Tax Committee
Publication:Tax Executive
Date:Sep 1, 1994
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