May 18, 1996
A Taxing Choice -- Lobbying Disclosure Act or Tax Code?
Legal Times
Taxable business entities and many nonprofit organizations are required to keep track of their lobbying activities in order to comply with the Internal Revenue Code's restrictions affecting lobbying expenditures. Since the enactment of the Lobbying Disclosure Act of 1995, effective Jan. 1, certain taxable business entities and nonprofit organizations will also be required to keep track of their lobbying activities for purposes of registering and reporting under the LDA.
The activities that are deemed to be lobbying under these two statutory schemes, however, differ in many significant respects. In an effort to minimize recordkeeping requirements, Congress enacted §15 of the LDA, which generally permits taxable and nonprofit organizations that already are required to keep track of their lobbying expenditures under the tax laws to elect to use the tax law definitions of lobbying in lieu of the LDA's definition of "lobbying activities."
The tax election also may prove to be a valuable planning tool because, in some cases, it could make a difference as to whether an entity is required to register under the LDA. Therefore, an entity that has the option of making the election should consider carefully the types of lobbying expenditures it incurs or expects to incur.
On Feb. 12, the secretary of the Senate and the clerk of the House -- who are responsible for administering the LDA -- jointly issued limited guidance (LDA Guidance) concerning the interpretation of certain LDA provisions, including the tax election. However, some key issues remain unclear.
DISCLOSURE EXPANDED
The LDA expands federal registration and disclosure requirements for lobbyists. In general, an organization is required to register under the LDA if it employs at least one "lobbyist" and spends or earns more than certain threshold amounts on "lobbying activities." A person is considered a "lobbyist" if (1) he or she is employed or retained for compensation by a client ("professional lobbyist") or by his or her regular employer ("in-house lobbyist"); (2) he or she makes more than one "lobbying contact" with a covered government official; and (3) "lobbying activities" constitute more than 20 percent of his or her total work time for the particular client or employer (as applicable) during a semiannual period.
A "lobbying contact" is made if an individual communicates with any "covered" executive or legislative branch official as expansively defined under the LDA. "Lobbying activities" include making lobbying contacts and "efforts in support of such contacts," such as preparatory, planning, or background work intended at the time it is conducted to support lobbying contacts. An organization that employees at least one lobbyist must register under the LDA if the organization spends or earns in excess of certain threshold amounts on "lobbying activities." Specifically, the registration requirement is triggered if the organization (1) spends more than $20,000 on lobbying activities (in-house lobbyists) or (2) earns more than $5,000 on lobbying activities (professional lobbyists).
An organization that meets or expects to meet all of these requirements must file an initial registration statement and semiannual reports thereafter, disclosing its lobbying activities.
In lieu of the LDA's definition of "lobbying activities," §15 of the LDA provides that certain entities that are required to account for their lobbying expenditures under the Internal Revenue Code may elect to use the applicable tax law definitions -- which are broader than the LDA definitions in some respects and narrower in other respects.
Specifically, under LDA §15(a), a nonprofit organization that is required to report and does report lobbying expenditures under §6033(b)(8) of the Internal Revenue Code -- that is, a "charitable" organization under I.R.C. §501(c)(3) that has elected the special limits on lobbying activities under I.R.C. §501(h) -- may elect to use good faith estimates of the amounts that would be required to be report under that Code section for the semiannual period for purposes of LDA §4(a)(3) (which provides that entities that do not meet certain lobbying expenditure thresholds are not required to register) and §5(b)(4) (which provides for good faith estimates of lobbying expenditures for entities registered on their own behalf).
In addition, in lieu of using the general definition of "lobbying activities" in LDA §3(7) (i.e., lobbying contacts and activities in support of lobbying contacts, including background work intended for use in contacts), such an organization may treat as lobbying activities only those activities that constitute "influencing legislation" as defined in I.R.C. §4911(d).
Moreover, instead of making a separate good faith estimate for the LDA, a charitable organization that has elected to report its lobbying expenditures under I.R.C. §501(h) is permitted by LDA § 5(c) to attach a copy of its IRS Form 990 to its semiannual report.
Under LDA §15(b), an entity that is "subject to" I.R.C. §162(e) (which prohibits taxpayers from taking business expense deductions for their lobbying costs) may elect to use good faith estimates of the amounts that would not be deductible pursuant to that Code section for the appropriate semiannual period for purposes of LDA §§4(a)(3) and 5(b)(4). Additionally, in lieu of using the general definition of "lobbying activities" in LDA §3(7), an electing organization may treat as lobbying activities only those activities the costs of which are not deductible under I.R.C. §162(e).
The statutory references to LDA §§4(a)(3) and 5(b)(4), as well as the recently issued LDA Guidance, make it clear that an electing entity may use the applicable tax law definitions for purposes of (1) determining whether it qualifies for the exemption from registration available to in-house lobbying organizations whose expenditures on lobbying activities do not exceed $20,000 in the semiannual period (LDA §§4(a)(3)(a)(ii)), and (2) making good faith estimates of expenses incurred in lobbying activities in the organization's semiannual reports (LDA §5(b)(4)). An eligible entity that is required to register may elect to use the tax law definitions in lieu of the LDA definitions for purposes of the good faith estimate requirement simply by checking the appropriate box on the semiannual reporting form (currently For LD-2).
Section 15, by its terms, also allow an electing organization to use the applicable tax law definitions in lieu of the definition of "lobbying activities" in LDA §3(7), which is located in the definitional section of the LDA. This broad language indicates that an electing entity may use the tax law definitions whenever the term "lobbying activities" is used in the LDA. The LDA Guidance confirms this interpretation, stating that an electing organization may use the tax law definition in order to determine whether an employee devotes 20 percent of his or her time to lobbying activities for purposes of the definition of "lobbyist" under LDA §3(10)
.LOBBYING CONTACTS' QUESTION
A more difficult question is whether the tax definitions may be used for purposes of those LDA sections that refer to "lobbying contacts" rather than "lobbying activities." For example, §3(10) of the LDA requires more than one "lobbying contact" before an individual is considered a "lobbyist," and §5(b)(2) requires disclosure in the semiannual reports of the houses of Congress and the federal agencies contacted by lobbyists.
Although the language of §15 is not clear on this point, the term "lobbying activities" under the LDA is defined as "lobbying contacts" and activities in support of "lobbying contacts." Consequently, if tax definitions are used in lieu of the definition of lobbying activities, it would seem logical for the same tax law definitions to be used in lieu of the components of lobbying activities, i.e., lobbying contacts. The legislative purpose of minimizing compliance burdens and multiple recordkeeping would seem to be furthered if the tax law definitions could also be used to define "lobbying contacts."
However, the recently issued LDA Guidance takes the position that an electing entity must use the LDA's definition of "lobbying contact" for purposes of (1) determining whether an employee has more than one lobbying contact under LDA §3(10) (which is part of the definition of a "lobbyist" under the LDA), and (2) identifying and disclosing general and specific issues and houses of Congress or federal agencies contacted under LDA §5(b)(2).
Congress apparently recognized the potential difficulties of reconciling the tax law definitions and the LDA definitions. In §15(d) of the LDA, the comptroller general is directed to study the effect of the differences in the definitions and recommend any changes in the LDA or the tax laws that would "harmonize the definitions." Since the LDA is the most recent evidence of Congress' intentions and since it contains the broadest provisions regarding executive contacts, many organizations are concerned that, rather than narrowing the lobbying law definitions, the comptroller general may propose expanding the tax definitions by, for example, sweeping in a broader range of executive branch contacts than are currently treated as lobbying for tax purposes.
WHO CAN ELECT
Certain categories of taxpayers/registrants clearly are eligible to elect to use the tax law definitions for purposes of the LDA. For other entities, the availability of the election is less clear.
· Taxable entities that lobby on their own behalf (i.e., that are not professional lobbyists working for clients) may make the tax election under the LDA since they are clearly "subject to" the nondeductibility provisions under I.R.C. §162(e).
· Taxpayers whose trade or business is the conduct of lobbying or political activities (i.e., professional lobbyists) are expressly exempted from the nondeductibility provisions of §162(e) and thus may deduct their expenses of lobbying for clients. This suggests, at first glance, that professional lobbyists are not eligible to make the tax election under the LDA. However, because the clients of professional lobbyists cannot deduct the portion of their fees allocated to nondeductible lobbying, lobbyists on behalf of those clients frequently will have to keep track of their nondeductible lobbying expenses in accordance with §162(e) in order to determine what portion of their fees is nondeductible to the clients. Accordingly, professional lobbyists arguably are "subject to" §162(e).
On the other hand, a reference in the 1994 House Conference Report on an earlier version of the LDA states that "lobbying firms" and "employees of outside lobbying firms" are "not covered by the non-deductibility provisions" of the Code and therefore may not make the tax law election. This statement seems to indicate that professional lobbyists must use the LDA's definition of "lobbying activities" in order to determine whether to register and report under the LDA. Without further guidance, the law is unclear on this issue.
· Section 501(c)(3) organizations clearly are permitted to make the tax law election if they have elected to report their lobbying expenditures under I.R.C. §501(h). Section 501(h) of the Code is a safe harbor provision allowing §501(c)(3) organizations to elect specific dollar expenditure limits for their lobbying activities. In order to comply with the §501(h) limits, electing entities must keep track of their overall lobbying expenditures, as well as their expenditures on grass-roots lobbying. The legislative history of the LDA makes it clear that Congress did not wish to impose any additional recordkeeping burdens on these organizations.
· Private foundations, which are subject to penalty taxes if they incur any lobbying expenditures under the tax law, and §501(c)(3) organizations that do not make the §501(h) election, cannot elect to use the tax law definitions for purposes of the LDA. Accordingly, these "non-electing" organizations must use the LDA's definition of "lobbying activities" in determining whether they are required to register and in filing their reports.
Nonelecting organizations should be aware that because the LDA's definition of lobbying is broader in some respects than the Code's definition, they may be required to register and report under the LDA even if they have no lobbying expenditures under the tax law definitions.
· Non-501(c)(3) tax-exempt organizations, such as §501(c)(6) trade associations and §501(c)(4) social welfare organizations, are not eligible to make the §501(h) election and generally do not deduct expenses under §162. Thus, a question arises as to whether such organizations may elect to use the tax law definitions under the LDA. Under §6033(e) of the Code, many of these organizations are required either to notify their members of the portion of their dues allocable to nondeductible lobbying expenses under §162(e) or to pay a proxy tax on their lobbying expenses as defined in §162(e). Consequently, organizations subject to §6033(e) must keep track of their non-deductible lobbying expenses in accordance with the rules under §162(e). Thus, it is reasonable to conclude that these non-501(c)(3) organizations are "subject to" §162(e). The LDA Guidance reaches this conclusion, at least for now.
The new LDA Guidance does not address non-501(e)(3) entities that are exempt from the requirements of §6033(e) pursuant to Rev. Proc. 95-35 or a private letter ruling. The underlying rationale suggests that if an organization is not actually required to report and account for its lobbying expenditures for §6033(e) purposes, it is not "subject to" §162(e). Under this reading, organizations that are exempt from the reporting and proxy tax rules would not be permitted to make the LDA tax election.
COMPARING RULES
There are four general areas in which the definitions of lobbying activities under the LDA and the tax law differ: (1) state and local lobbying, (2) grass-roots lobbying, (3) federal executive-level lobbying, and (4) the express exemptions from the definitions of lobbying. Thus, the decision whether to elect to use the tax law or LDA definitions is particularly important for any organization that devotes a significant portion of its lobbying expenditures to one or more of the first three categories of activities or that engages in activities that are expressly exempted under the tax law definitions but not under the LDA definition or vice versa.
The tax law definitions applicable to lobbying are quire complex and are the subject of detailed regulations. What follows is intended merely as an overview to highlight some of the planning considerations affecting the decision whether to make the tax election under the LDA.
The categories of expenses that are nondeductible by taxable entities under §162(e) include the costs of direct and grass-roots lobbying on federal and state legislation; grass-roots lobbying on local legislation (but not the costs of direct lobbying on local legislation); and direct communications with a "covered executive branch official" in an attempt to influence the official actions or positions of that official, whether or not relating to legislation.
Covered executive branch officials under §162(e) are: the president and vice president; any officer or employee of the Executive Officer of the President and the two most senior level officers of each of the other agencies in the Executive Office; individuals serving in Level I positions of the Executive Schedule (generally, political appointees at the secretary level and above) and any immediate deputy; and Cabinet-level appointees and their immediate deputies.
This definition is much narrower than the LDA definition of covered executive official. The LDA includes lobbying of the president and vice president; any officer or employee of the Executive Office of the President; any member of the uniformed services whose pay grade is at or above 0-7; persons holding positions at Executive Schedule Level I-V, as designated by statute or executive order; and any officer or employee serving in a position of a confidential, policy-determining, policy-making, or policy-advocating character, as described in 5 U.S.C. §7511(b)(2).
Because the LDA definition of covered executive branch official is so broad, organizations whose lobbying expenses are predominantly or substantially allocable to the lobbying of federal executive branch officials should consider using the tax law definitions under the LDA as a possible way to avoid registering and reporting under the LDA.
The definition of "influencing legislation" under the Tax Code -- §4911(d), which applies to §501(c)(3) charitable organizations electing under §501(h) -- covers direct and grass-roots lobbying on federal, state, and local legislation, including such lobbying of executive branch officials who participate in the formulation of legislation. "Legislation" includes 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, initiative, constitutional amendment, or similar procedure." Unlike the definitions under I.R.C. §162(e) and the LDA, this definition (in §4911(e)(2)) does not include lobbying of executive branch officials on nonlegislative matters.
In contrast, the LDA definition clearly was intended to exclude grass-roots lobbying at any level and also exclude all lobbying on state or local legislation.
The tax code and the LDA also differ with respect to their exceptions. Section 4911(d) of the Tax Code contains four significant exceptions to the definition of "influencing legislation": (1) nonpartisan analysis and research; (2) direct lobbying of government officials concerning legislation that could affect the existence or powers of the organization ("self-defense" lobbying); (3) responses to a governmental body's request for technical assistance on a legislative matter; and (4) communications concerning broad social, economic, and similar issues.
Lobbying activities under the LDA include communications with regard to the formulation of legislation through legislative or executive contacts and communications with covered executive branch officials on nonlegislative matters.
The following are expressly excluded from the definition of "lobbying contact" under the LDA: communications by public officials acting in their official capacity, or by the media, if the aim is gathering and disseminating news; publicly disseminated materials; communications on behalf of foreign countries or political parties, if disclosed under Foreign Agents Registration Act; administrative requests for meetings and status of an action, if no lobbying is done during the request; communications in connection with advisory committee participation; congressional testimony or communications included in the public record of a congressional hearing; a written response to a request for specific information by a covered official; communications that are compelled by subpoena or other authority; responses to a Federal Register notice, a notice in Commerce Business Daily, or another similar publication, soliciting comments from the public and directed to a designated agency official; communications not possible to report without disclosing information that cannot be disclosed by law without authorization; communications regarding judicial proceedings, criminal or civil enforcement inquiries, investigations or proceedings, or filings or proceedings that the law requires to be treated confidentially; communications made in compliance with agency adjudication procedures, or made on the record in public proceeding; a petition for agency action made in writing and on the public record; communications regarding personal matters, such as employment or benefits, affecting only that individual, unless they pertain to private legislation for that individual's relief; communications by whistleblowers, pursuant to the Whistleblower Protection Act, the Inspector General Act or other provision of law; communications by a tax-exempt church, association of churches or religious order, and between self-regulatory organizations (or similar organizations) and the Securities and Exchange Commission or the Commodity Futures Trading Commission.
Unlike the tax law provisions, the 19 LDA exceptions to the definition of "lobbying activities" do not expressly include nonpartisan analysis, communications concerning broad social, economic and similar issues, or self-defense lobbying.
Organizations that are eligible to elect the tax definitions should review their lobbying expenditures under both sets of rules. For example, assume that the lobbying activities of the Acme Co., a taxable entity lobbying on its own behalf, are almost exclusively devoted to state legislation. Further, assume that under the tax definitions, which include state-level lobbying, Acme would exceed the threshold limits (20 percent of the individual's time and $20,000) and would be required to register and report those activities under the LDA. However, because the LDA does not include state lobbying in its definition of "lobbying activities," Acme would not meet the threshold triggers under the LDA definitions and thus would not have to register and report. In this case, Acme would not want to elect the tax law definitions if it wanted to avoid registering under the LDA.
On the other hand, an organization that allocates a substantial portion of its lobbying expenditures to the lobbying of federal executive branch officials on nonlegislative matters is more likely to meet the registration and reporting thresholds under the LDA's broad definition of "covered executive." Such an organization might not, however, meet the tax code's definitions, which cover a smaller group of executive branch officials.
Notwithstanding the ambiguity of certain provisions, the tax election potentially is a significant planning opportunity. Eligible organizations should review their lobbying expenditures to determine whether they should make the tax election, either as a way to avoid registration under the LDA or as a way to ease their recordkeeping burdens.
The activities that are deemed to be lobbying under these two statutory schemes, however, differ in many significant respects. In an effort to minimize recordkeeping requirements, Congress enacted §15 of the LDA, which generally permits taxable and nonprofit organizations that already are required to keep track of their lobbying expenditures under the tax laws to elect to use the tax law definitions of lobbying in lieu of the LDA's definition of "lobbying activities."
The tax election also may prove to be a valuable planning tool because, in some cases, it could make a difference as to whether an entity is required to register under the LDA. Therefore, an entity that has the option of making the election should consider carefully the types of lobbying expenditures it incurs or expects to incur.
On Feb. 12, the secretary of the Senate and the clerk of the House -- who are responsible for administering the LDA -- jointly issued limited guidance (LDA Guidance) concerning the interpretation of certain LDA provisions, including the tax election. However, some key issues remain unclear.
DISCLOSURE EXPANDED
The LDA expands federal registration and disclosure requirements for lobbyists. In general, an organization is required to register under the LDA if it employs at least one "lobbyist" and spends or earns more than certain threshold amounts on "lobbying activities." A person is considered a "lobbyist" if (1) he or she is employed or retained for compensation by a client ("professional lobbyist") or by his or her regular employer ("in-house lobbyist"); (2) he or she makes more than one "lobbying contact" with a covered government official; and (3) "lobbying activities" constitute more than 20 percent of his or her total work time for the particular client or employer (as applicable) during a semiannual period.
A "lobbying contact" is made if an individual communicates with any "covered" executive or legislative branch official as expansively defined under the LDA. "Lobbying activities" include making lobbying contacts and "efforts in support of such contacts," such as preparatory, planning, or background work intended at the time it is conducted to support lobbying contacts. An organization that employees at least one lobbyist must register under the LDA if the organization spends or earns in excess of certain threshold amounts on "lobbying activities." Specifically, the registration requirement is triggered if the organization (1) spends more than $20,000 on lobbying activities (in-house lobbyists) or (2) earns more than $5,000 on lobbying activities (professional lobbyists).
An organization that meets or expects to meet all of these requirements must file an initial registration statement and semiannual reports thereafter, disclosing its lobbying activities.
In lieu of the LDA's definition of "lobbying activities," §15 of the LDA provides that certain entities that are required to account for their lobbying expenditures under the Internal Revenue Code may elect to use the applicable tax law definitions -- which are broader than the LDA definitions in some respects and narrower in other respects.
Specifically, under LDA §15(a), a nonprofit organization that is required to report and does report lobbying expenditures under §6033(b)(8) of the Internal Revenue Code -- that is, a "charitable" organization under I.R.C. §501(c)(3) that has elected the special limits on lobbying activities under I.R.C. §501(h) -- may elect to use good faith estimates of the amounts that would be required to be report under that Code section for the semiannual period for purposes of LDA §4(a)(3) (which provides that entities that do not meet certain lobbying expenditure thresholds are not required to register) and §5(b)(4) (which provides for good faith estimates of lobbying expenditures for entities registered on their own behalf).
In addition, in lieu of using the general definition of "lobbying activities" in LDA §3(7) (i.e., lobbying contacts and activities in support of lobbying contacts, including background work intended for use in contacts), such an organization may treat as lobbying activities only those activities that constitute "influencing legislation" as defined in I.R.C. §4911(d).
Moreover, instead of making a separate good faith estimate for the LDA, a charitable organization that has elected to report its lobbying expenditures under I.R.C. §501(h) is permitted by LDA § 5(c) to attach a copy of its IRS Form 990 to its semiannual report.
Under LDA §15(b), an entity that is "subject to" I.R.C. §162(e) (which prohibits taxpayers from taking business expense deductions for their lobbying costs) may elect to use good faith estimates of the amounts that would not be deductible pursuant to that Code section for the appropriate semiannual period for purposes of LDA §§4(a)(3) and 5(b)(4). Additionally, in lieu of using the general definition of "lobbying activities" in LDA §3(7), an electing organization may treat as lobbying activities only those activities the costs of which are not deductible under I.R.C. §162(e).
The statutory references to LDA §§4(a)(3) and 5(b)(4), as well as the recently issued LDA Guidance, make it clear that an electing entity may use the applicable tax law definitions for purposes of (1) determining whether it qualifies for the exemption from registration available to in-house lobbying organizations whose expenditures on lobbying activities do not exceed $20,000 in the semiannual period (LDA §§4(a)(3)(a)(ii)), and (2) making good faith estimates of expenses incurred in lobbying activities in the organization's semiannual reports (LDA §5(b)(4)). An eligible entity that is required to register may elect to use the tax law definitions in lieu of the LDA definitions for purposes of the good faith estimate requirement simply by checking the appropriate box on the semiannual reporting form (currently For LD-2).
Section 15, by its terms, also allow an electing organization to use the applicable tax law definitions in lieu of the definition of "lobbying activities" in LDA §3(7), which is located in the definitional section of the LDA. This broad language indicates that an electing entity may use the tax law definitions whenever the term "lobbying activities" is used in the LDA. The LDA Guidance confirms this interpretation, stating that an electing organization may use the tax law definition in order to determine whether an employee devotes 20 percent of his or her time to lobbying activities for purposes of the definition of "lobbyist" under LDA §3(10)
.LOBBYING CONTACTS' QUESTION
A more difficult question is whether the tax definitions may be used for purposes of those LDA sections that refer to "lobbying contacts" rather than "lobbying activities." For example, §3(10) of the LDA requires more than one "lobbying contact" before an individual is considered a "lobbyist," and §5(b)(2) requires disclosure in the semiannual reports of the houses of Congress and the federal agencies contacted by lobbyists.
Although the language of §15 is not clear on this point, the term "lobbying activities" under the LDA is defined as "lobbying contacts" and activities in support of "lobbying contacts." Consequently, if tax definitions are used in lieu of the definition of lobbying activities, it would seem logical for the same tax law definitions to be used in lieu of the components of lobbying activities, i.e., lobbying contacts. The legislative purpose of minimizing compliance burdens and multiple recordkeeping would seem to be furthered if the tax law definitions could also be used to define "lobbying contacts."
However, the recently issued LDA Guidance takes the position that an electing entity must use the LDA's definition of "lobbying contact" for purposes of (1) determining whether an employee has more than one lobbying contact under LDA §3(10) (which is part of the definition of a "lobbyist" under the LDA), and (2) identifying and disclosing general and specific issues and houses of Congress or federal agencies contacted under LDA §5(b)(2).
Congress apparently recognized the potential difficulties of reconciling the tax law definitions and the LDA definitions. In §15(d) of the LDA, the comptroller general is directed to study the effect of the differences in the definitions and recommend any changes in the LDA or the tax laws that would "harmonize the definitions." Since the LDA is the most recent evidence of Congress' intentions and since it contains the broadest provisions regarding executive contacts, many organizations are concerned that, rather than narrowing the lobbying law definitions, the comptroller general may propose expanding the tax definitions by, for example, sweeping in a broader range of executive branch contacts than are currently treated as lobbying for tax purposes.
WHO CAN ELECT
Certain categories of taxpayers/registrants clearly are eligible to elect to use the tax law definitions for purposes of the LDA. For other entities, the availability of the election is less clear.
· Taxpayers whose trade or business is the conduct of lobbying or political activities (i.e., professional lobbyists) are expressly exempted from the nondeductibility provisions of §162(e) and thus may deduct their expenses of lobbying for clients. This suggests, at first glance, that professional lobbyists are not eligible to make the tax election under the LDA. However, because the clients of professional lobbyists cannot deduct the portion of their fees allocated to nondeductible lobbying, lobbyists on behalf of those clients frequently will have to keep track of their nondeductible lobbying expenses in accordance with §162(e) in order to determine what portion of their fees is nondeductible to the clients. Accordingly, professional lobbyists arguably are "subject to" §162(e).
· Private foundations, which are subject to penalty taxes if they incur any lobbying expenditures under the tax law, and §501(c)(3) organizations that do not make the §501(h) election, cannot elect to use the tax law definitions for purposes of the LDA. Accordingly, these "non-electing" organizations must use the LDA's definition of "lobbying activities" in determining whether they are required to register and in filing their reports.
COMPARING RULES
There are four general areas in which the definitions of lobbying activities under the LDA and the tax law differ: (1) state and local lobbying, (2) grass-roots lobbying, (3) federal executive-level lobbying, and (4) the express exemptions from the definitions of lobbying. Thus, the decision whether to elect to use the tax law or LDA definitions is particularly important for any organization that devotes a significant portion of its lobbying expenditures to one or more of the first three categories of activities or that engages in activities that are expressly exempted under the tax law definitions but not under the LDA definition or vice versa.
The tax law definitions applicable to lobbying are quire complex and are the subject of detailed regulations. What follows is intended merely as an overview to highlight some of the planning considerations affecting the decision whether to make the tax election under the LDA.
The categories of expenses that are nondeductible by taxable entities under §162(e) include the costs of direct and grass-roots lobbying on federal and state legislation; grass-roots lobbying on local legislation (but not the costs of direct lobbying on local legislation); and direct communications with a "covered executive branch official" in an attempt to influence the official actions or positions of that official, whether or not relating to legislation.
Covered executive branch officials under §162(e) are: the president and vice president; any officer or employee of the Executive Officer of the President and the two most senior level officers of each of the other agencies in the Executive Office; individuals serving in Level I positions of the Executive Schedule (generally, political appointees at the secretary level and above) and any immediate deputy; and Cabinet-level appointees and their immediate deputies.
This definition is much narrower than the LDA definition of covered executive official. The LDA includes lobbying of the president and vice president; any officer or employee of the Executive Office of the President; any member of the uniformed services whose pay grade is at or above 0-7; persons holding positions at Executive Schedule Level I-V, as designated by statute or executive order; and any officer or employee serving in a position of a confidential, policy-determining, policy-making, or policy-advocating character, as described in 5 U.S.C. §7511(b)(2).
Because the LDA definition of covered executive branch official is so broad, organizations whose lobbying expenses are predominantly or substantially allocable to the lobbying of federal executive branch officials should consider using the tax law definitions under the LDA as a possible way to avoid registering and reporting under the LDA.
The definition of "influencing legislation" under the Tax Code -- §4911(d), which applies to §501(c)(3) charitable organizations electing under §501(h) -- covers direct and grass-roots lobbying on federal, state, and local legislation, including such lobbying of executive branch officials who participate in the formulation of legislation. "Legislation" includes 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, initiative, constitutional amendment, or similar procedure." Unlike the definitions under I.R.C. §162(e) and the LDA, this definition (in §4911(e)(2)) does not include lobbying of executive branch officials on nonlegislative matters.
In contrast, the LDA definition clearly was intended to exclude grass-roots lobbying at any level and also exclude all lobbying on state or local legislation.
The tax code and the LDA also differ with respect to their exceptions. Section 4911(d) of the Tax Code contains four significant exceptions to the definition of "influencing legislation": (1) nonpartisan analysis and research; (2) direct lobbying of government officials concerning legislation that could affect the existence or powers of the organization ("self-defense" lobbying); (3) responses to a governmental body's request for technical assistance on a legislative matter; and (4) communications concerning broad social, economic, and similar issues.
Lobbying activities under the LDA include communications with regard to the formulation of legislation through legislative or executive contacts and communications with covered executive branch officials on nonlegislative matters.
The following are expressly excluded from the definition of "lobbying contact" under the LDA: communications by public officials acting in their official capacity, or by the media, if the aim is gathering and disseminating news; publicly disseminated materials; communications on behalf of foreign countries or political parties, if disclosed under Foreign Agents Registration Act; administrative requests for meetings and status of an action, if no lobbying is done during the request; communications in connection with advisory committee participation; congressional testimony or communications included in the public record of a congressional hearing; a written response to a request for specific information by a covered official; communications that are compelled by subpoena or other authority; responses to a Federal Register notice, a notice in Commerce Business Daily, or another similar publication, soliciting comments from the public and directed to a designated agency official; communications not possible to report without disclosing information that cannot be disclosed by law without authorization; communications regarding judicial proceedings, criminal or civil enforcement inquiries, investigations or proceedings, or filings or proceedings that the law requires to be treated confidentially; communications made in compliance with agency adjudication procedures, or made on the record in public proceeding; a petition for agency action made in writing and on the public record; communications regarding personal matters, such as employment or benefits, affecting only that individual, unless they pertain to private legislation for that individual's relief; communications by whistleblowers, pursuant to the Whistleblower Protection Act, the Inspector General Act or other provision of law; communications by a tax-exempt church, association of churches or religious order, and between self-regulatory organizations (or similar organizations) and the Securities and Exchange Commission or the Commodity Futures Trading Commission.
Unlike the tax law provisions, the 19 LDA exceptions to the definition of "lobbying activities" do not expressly include nonpartisan analysis, communications concerning broad social, economic and similar issues, or self-defense lobbying.
Organizations that are eligible to elect the tax definitions should review their lobbying expenditures under both sets of rules. For example, assume that the lobbying activities of the Acme Co., a taxable entity lobbying on its own behalf, are almost exclusively devoted to state legislation. Further, assume that under the tax definitions, which include state-level lobbying, Acme would exceed the threshold limits (20 percent of the individual's time and $20,000) and would be required to register and report those activities under the LDA. However, because the LDA does not include state lobbying in its definition of "lobbying activities," Acme would not meet the threshold triggers under the LDA definitions and thus would not have to register and report. In this case, Acme would not want to elect the tax law definitions if it wanted to avoid registering under the LDA.
On the other hand, an organization that allocates a substantial portion of its lobbying expenditures to the lobbying of federal executive branch officials on nonlegislative matters is more likely to meet the registration and reporting thresholds under the LDA's broad definition of "covered executive." Such an organization might not, however, meet the tax code's definitions, which cover a smaller group of executive branch officials.
Notwithstanding the ambiguity of certain provisions, the tax election potentially is a significant planning opportunity. Eligible organizations should review their lobbying expenditures to determine whether they should make the tax election, either as a way to avoid registration under the LDA or as a way to ease their recordkeeping burdens.
