New lobbying expense disallowance rules affect certain exempt organizations earlier than anticipated.

• Author: Gladstone, Debra L.

New rules

Beginning in 1994, members of noncharitable tax-exempt organizations (such as trade associations exempt under Sec. 501(c)(6)) can no longer deduct dues paid for lobbying and political activities. However, Notice 93-55 threw a twist onto this 1994 effective date by providing that tax-exempt organizations that assess or receive member dues before 1994 are subject to the new rules to the extent these dues are allocable to lobbying expenditures paid or incurred after 1993.

The practical effect of Notice 93-55 is to give the IRS additional time to publish guidance as to the meaning of the term "allocable." This notice waives for one year the tax that otherwise might be due under the new rules. Thus, depending on future IRS guidance, tax-exempt organizations may find that they have two years' tax due at the end of the one-year waiver period.

Background

Charitable organizations (exempt under Sec. 501(c)(3)) are already subject to restrictions on lobbying activities; the new rules do not directly affect them. However, donors may lose their tax deduction for donations to a charitable organization if the donation is made to circumvent the new lobbying disallowance rules. (See Matoney, Higgins and Beausejour, "Tax Aspects of Lobbying by Public Charities," TTA, Jan. 1994, at 36.)

For charitable organizations electing to limit their lobbying expenditures under Sec. 501(h), the Revenue Reconciliation Act of 1993 (RRA) does not affect existing definitions of lobbying.

On the other hand, an IRS official informally and unofficially indicated that noneclecting charitable organizations will be subject to the new broader definitions in the RRA. However, the authority for this position is unclear.

Noncharitable exempt organizations are subject to new reporting requirements that "flow through" the deduction disallowance to their members. Alternatively, these organizations may elect to pay a proxy tax equal to 35% of their total lobbying and political expenditures (up to the amount of dues received). Failure to report results in automatic imposition of the 35% tax.

Reporting requirements

* Annual returns must disclose the total amount of the organization's lobbying and political expenditures for the reporting period and the total amount of dues paid to the organization allocable to these expenditures. Notice 93-55 only waives the proxy tax. it does not waive this reporting requirement which, apparently, may apply to dues assessed or received before...