proposed tax on investment income
By Anna Marie Kukec
About 2,700 association executives and bar leaders and 35 U.S. senators are opposing a federal plan to tax their organization’s investment income that is in excess of $10,000.The proposal targets 501(c)(6) nonprofit organizations, which includes most bar associations. It would not tax the first $10,000 earned from passive income such as interest, dividends, rents and royalties. However, anything over $10,000 would be subject to the Unrelated Business Income Tax. UBIT ranges from 15 to 35 percent. Currently, such passive income is not taxed.
"This tax will have a detrimental impact on all associations," says Jim Clarke of Washington, D.C., vice president of public policy for the American Society of Association Executives. The proposal attacks the basic tax-exempt status of associations and runs counter to the demonstrated commitment Congress has to further the purposes of tax-exempt organizations. Exempt purposes such as training, statistical data and community services are supported by such income, according to Michael Olson, ASAE’s president and chief executive officer. He testified before the U.S. House of Representatives Committee on Ways and Means, the day after the letter with 2,700 signatures was delivered to members of Congress.
"If Congress enacts this proposal, it will alter, in a fundamental way, the tax policy that has governed the tax-exempt community for nearly a century, and will set a dangerous precedent for further changes in tax law for all tax-exempt organizations," Olson states.
Treating 501(c)(6) organizations like 501(c)(7) social organizations, which include country clubs, yacht clubs and health clubs, ignores the special, quasi-public purposes and functions of associations, and threatens their ability to provide publicly beneficial services, Olson notes.
"This proposal is a legitimate threat, albeit ill-conceived, to the ongoing viability of thousands of America’s membership organizations and should be rejected," Olson adds.
Besides the letter from association executives, 35 U.S. senators--both Democrats and Republicans--signed a joint letter dated May 6 urging Senate Finance Committee Chairman William Roth (R-Del.) and Ranking Democrat Daniel Patrick Moynihan (D-N.Y.) to oppose this tax.
"Altering the current tax treatment of investment income would dramatically reduce a trade association’s ability to maintain lower dues and their flexibility to meet extraordinary expenses," the senators’ letter states.
In February, President Clinton’s fiscal budget for 2000 included the proposed tax on association income from interest, dividends, rents and royalties. A similar attempt in 1987 was dropped in the U.S. Senate and the issue died. However, the revenue potential is much greater today than 12 years ago. Now, tax-exempt organizations pay more than $1 billion annually in local, state and federal taxes, according to ASAE figures. The new tax proposal would draw an additional $1.4 billion over the next five years.
ABA issues alert
After the Clinton budget was proposed, the American Bar Association on February 16 issued a nationwide alert to state and local bars regarding the looming tax. The alert warned that the tax would seriously threaten their financial security and urged bar leaders to express their opposition to their congressional delegation.
Then on April 16, the ABA Board of Governors approved a resolution and adopted a policy urging Congress not to enact the proposed tax. The Board also expressed its strong opposition in letters sent on April 26 to both the House Ways and Means Committee and the Senate Finance Committee.
Associations must maintain modest surplus funds every year to remain financially stable during economic downturn. These organizations cannot issue stock and are without access to credit markets often used by for-profits. Therefore, an association’s investment income becomes its only safeguard against financial disaster, according to an ABA report requesting the resolution.
"Associations depend on this targeted income to fund many of their activities and to leverage other funds for these purposes, which saves the federal government from having to fund such programs itself," says Robert Evans of Washington, D.C., associate executive director of the ABA’s Government Affairs and Public Services Group.
As ABA officials closely monitor the progress of the tax proposal, they continue to urge bar associations nationwide to adopt their own policies.
"We’re still hoping it will not be included in the final tax bill package. Additionally, states can impose a tax on this income. The final tax will vary from state to state," says Irving Daniels of Washington, D.C., the ABA’s legislative counsel. That package may be determined by August.
State bars speak out
Associations nationwide signed the March 9 letter to U.S. Congressmen, including the Maryland State Bar Association and the Tennessee Bar Association.
"The TBA has accumulated a modest amount of surplus funds over the years in order to provide a stable cushion against a financial crisis. Taxing this interest and royalty income would drastically reduce this modest cushion," states Tennessee bar President Pam Reeves of Knoxville in a letter to Tennessee’s delegation.
The estimated impact on the Tennessee bar would be about $55,000 in tax liability, adds Executive Director Allan Ramsaur of Nashville. The Maryland bar sent letters to the Maryland Congressional Delegation and the U.S. House leadership. The bar’s Board of Governors opposed this proposal, calling it "misdirected."
"Taxing such investment income would result in the imposition of an unjust and unnecessary penalty on legitimate association activities," stated Maryland bar President Charles Preston of Westminster.
Over the last decade, the Maryland bar has built up a reserve that equals about 72 percent of its annual operating expenses, according to Executive Director Paul Carlin of Baltimore.
"This reserve, generated from yearly surpluses, has been invested and brings us substantial additional income, which would obviously be lessened if taxed," says Carlin.
The author is the reporter for Bar Leader.
