The Tax Option Under the Lobbying Disclosure Act
The Lobbying Disclosure Act (the "LDA"), as amended by Public Law 105-166, provides an optional means of calculating lobbying activity expenses for certain entities that are required to account for their lobbying expenditures under the Internal Revenue Code (the "Code"). For purposes of calculating the threshold limits under LDA section 4(a)(3) and making good faith estimates of the amounts of lobbying activity expenses on the semiannual reports on Form LD-2:
Charitable organizations described in Code section 501(c)(3) that are required to report their lobbying expenditures under section 6033(b)(8) of the Code may treat as LDA lobbying activity expenses the amounts they treat as spent for "influencing legislation" under the Code. The recent amendments eliminate the option allowing such organizations to meet their LDA filing requirements by filing the form under Code section 6033(b)(8).
The recent amendments to the LDA clarify the circumstances as to when the LDA definitions or the tax law definitions are to be used in defining "lobbying contacts" and "lobbying activities" for all other purposes, such as determining whether a purported "lobbyist" has made more than one lobbying contact so as to trigger registration and reporting obligations. Under the amendments, lobbying contacts and lobbying activities include only (A) lobbying contacts with covered legislative branch officials (as defined in LDA section 3 (4)) and lobbying activities in support of such contacts; and (B) lobbying of Federal executive branch officials (i) to the extent such activities are "influencing legislation" under Code section 4911 (d) in the case of section 501 (c)(3) organizations, and (ii) to the extents that amounts incurred in connection with such activities are not deductible under Code section 162(e) in the case of for-profit entities and trade associations. In other words, for purposes other than the threshold limits and the dollar estimates on the semi-annual reports, the LDA definitions are used with reference to legislative contacts and the tax law definitions are used with reference to Federal executive branch contacts.
II. Differences Between the LDA and Tax Definitions /1
The following notes certain of the significant differences in the coverage of the LDA and section 162(e).
Covered executive branch officials: Under section 162(e) of the Code, communications with federal executive branch officials on nonlegislative matters are covered by the nondeductibility rules only in the case of communications with certain very high level executive branch officials. The LDA treats as reportable lobbying activities communications on legislative and nonlegislative official matters with a much broader class of covered executive branch officials:
- All Executive Office of the President employees are covered officials under the LDA, but only White House employees and the two most senior level officers of each of the other agencies within the Executive Office of the President are covered officials for purposes of section 162(e). For example, every position in the Office of the United States Trade Representative is covered by the LDA while section 162(e) covers only the two most senior officers with respect to nonlegislative matters.
- The LDA covers any member of the uniformed services whose pay grade is at or above O-7, such as Brigadier Generals and Admirals. Section 162(e) has no comparable provision. This distinction would be significant for any company selling products or services to the military.
- The LDA covers all Executive Schedule positions, whereas section 162(e) treats as covered officials only Level I positions and their immediate deputies. The Commissioner of the Internal Revenue Service, for example, is a covered official under the LDA but not under the tax laws. Similarly, the Commissioner of the FDA is a covered official under the LDA but not under section 162(e).
- The LDA covers "Schedule C" political appointees, such as confidential assistants to senior officials. Many Schedule C appointees are relatively low level political appointees. Section 162(e) has no comparable provision.
Covered communications: While the LDA applies to communications with legislative branch officials relating to the formulation of rules and other executive branch action (as well as with regard to the formulation of legislation), section 162(e) only applies to communications with legislative branch officials relating to legislation. Moreover, the LDA contains a number of exemptions - such as for Congressional testimony - that leave no counterpart under section 162(e).
De minimis exception: Under section 162(e), time spent on lobbying activities other than direct lobbying contacts may be excluded from the calculation of nondeductible lobbying expenditures if it constitutes less than 5% of an individual's overall time. The LDA has no similar de minimis exception for reportable lobbying activities. In addition, certain methods of calculating nondeductible lobbying expenses under section 162(e) permit a corporation to exclude secretarial, clerical, and other kinds of administrative support personnel's time. The LDA has no comparable exception within the definition of lobbying activities.
Grassroots activity: Section 162(e) applies to "grassroots lobbying" with respect to Federal, state and local legislation. The LDA does not apply to any "grassroots" activity.
Lobbying state and local officials: The LDA does not apply to expenses for lobbying on state or local matters. Registrants using amounts calculated under section 162(e) for purposes of the semiannual reports, however, would include amounts relating to direct lobbying on state legislation as well as grassroots lobbying on state or local legislation.
III. Choosing the Tax Option
Corporations with significant expenses on grassroots or state lobbying activities may decide to forego the convenience of the tax option in order to avoid reporting these expenses, which would not be captured by the LDA.
Absent these considerations, corporations that have significant interaction with federal regulators may find the tax option useful, because it
-allows registrants to use a tracking system they already have in place (assuming
their tax reporting system allows them to capture amounts on a semi-annual basis consistent with the LDA reporting requirements).
1Sections II and III focus on the differences pertinent to for-profit organizations and exempt organizations - such as trade associations - that prepare their tax reports with reference to the section 162(e) rules.