By Anna Marie Kukec
Despite having its case thrown out of court twice, an Internal Revenue Service audit and failed legislation, the American Society of Association Executives is expecting a court decision this spring in its appeal to declare a federal lobbying tax unconstitutional.Several associations, including voluntary bar associations, have supported the case, ASAE v. the United States of America. Association leaders believe the 1994 law encroaches on their right to lobby without risking other association programs or their member’s ability to deduct their full dues.
"ASAE is prepared to go to the U.S. Supreme Court, if necessary," says Jerald Jacobs of Washington, D.C., a partner in the law firm of Jenner & Block, which is representing ASAE. Oral arguments before the U.S. Court of Appeals in the District of Columbia were held October 6, and a decision is expected this spring.
The lobbying tax is part of the 1993 Omnibus Budget Reconciliation Act, which created a law that withdrew the tax deductibility for association lobbying expenses. It became effective in January 1994. Also, associations that lobby must either inform members that this portion of their dues is not deductible, or the organization must pay a proxy tax of about 35 percent. The proxy tax runs into thousands of dollars, often causing associations to trim or eliminate other programs that further their missions in order to pay it. In comparison, corporate taxes related to lobbying are levied on a graduated scale that is less than 35 percent, according to Jacobs.
"We believe this is a direct tax on speech, in violation of the First Amendment," he adds.
Associations are required to inform members about what the lobbying expenses and dues nondeductibility will be in the coming year. That forces associations to limit their lobbying efforts that were earlier established or risk being penalized for cost overruns.
"If an association underestimates what they will do with lobbying in the next year, and actually spends more, they can be penalized," says Jacobs. He argues that this also suppresses free speech and is unconstitutional.
Some history
ASAE filed the case in U.S. District Court in December 1993 before the law went into effect in January 1994. Several associations became co-plaintiffs, and the American Civil Liberties Union filed a friend of the court brief to support ASAE.
By April 1994, District Court Judge Stanley Sporkin dismissed the case on jurisdictional grounds. The constitutional merits of the case had to wait until ASAE paid its $56,900 proxy tax and then sued the government for a refund. In May 1995, ASAE again filed suit. Immediately, the IRS initiated an audit of ASAE.
"Within a month, the IRS did a top-to-bottom look in every closet of ASAE because it filed a constitutional challenge to a program that concerns the IRS," says Jacobs. The suit was stalled until the IRS finished its audit. (ASAE declined to discuss the audit’s outcome or settlement.)
By October 1998, Judge Sporkin again threw the case out of District Court. His opinion focused on the requisite standard for determining whether the law should be overturned, disagreeing with ASAE’s position that the restrictive law should be given a high level of scrutiny. ASAE filed a brief in June in the U.S. Court of Appeals for the District of Columbia. The U.S. Department of Justice’s Tax Division, Appellate Section, filed its reply a month later. DOJ declined to comment on the case while it’s in litigation.
In the meantime, ASAE continues to pursue legislation to repeal the lobbying tax law. While previous efforts have been unsuccessful, a renewed effort is expected, says Jim Clarke of Washington, D.C., vice president for ASAE’s Public Policy Division.
Voluntary state bar associations that budget for lobbying activities have been affected by the law and support ASAE’s legislative efforts. One of those supporters includes the Massachusetts Bar Association, which informed its members that 4 percent of their dues could not be deducted once the law became effective in January 1994. Today, it’s 5 percent.
If the Massachusetts bar paid the proxy tax instead, it would lose about $150,000 each year, according to Executive Director Susan Waters of Boston.
"If we paid the proxy tax, we would have had to stop the mock trial programs or something else," she says.
About six years ago, the Indiana State Bar Association began paying the proxy tax. "Even for a mid-sized bar like Indiana, that amounts to more than $10,000 each year. The law basically keeps us from doing another project each year," says Executive Director Tom Pyrz of Indianapolis.
The Arkansas Bar Association pays a $7,000 proxy tax. "We do pay the tax, and it will become more of a budget concern as our association has to do more lobbying/education on an upcoming ballot issue and with a term-limited legislature," notes Executive Director Don Hollingsworth of Little Rock.
Like other bars, the Kansas Bar Association had to revamp its forms and renewal process to provide for that portion of bar association fees that are no longer deductible (about 7 percent).
"It has had negligible effect on the amount of lobbying efforts or resources devoted to lobbying," says Executive Director Dennis Harwick.
Kathryn Sirovey, executive director of the Oakland County (Mich.) Bar Association, agrees. "We had to do some revisions, but overall, there’s been no real impact. We signed on to the list of those organizations that supported the ASAE stand on this issue," she says.
The author is the reporter for Bar Leader
