Proposed lobbying disallowance regulations.

• Position: Tax Executives Institute's Federal Tax Committee

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.

Background

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.

Overview

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...