United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 6, 1999 Decided November 9, 1999
No. 98-5563
American Society of Association Executives,
Appellant
v.
United States of America,
Appellee
Appeal from the United States District Court
for the District of Columbia
(No. 95cv00918)
Nory Miller argued the cause for appellant. With her on
the briefs were Bruce J. Ennis, Jr., and Jerald A. Jacobs.
Steven W. Parks, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Loretta C. Argrett, Assistant Attorney General, Kenneth L.
Greene, Attorney, and Wilma A. Lewis, U.S. Attorney.
Thomas J. Clark, Attorney, U.S. Department of Justice,
entered an appearance.
Before: Edwards, Chief Judge, Wald and Williams,
Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: Before its amendment by the
Omnibus Budget Reconciliation Act of 1993, Pub. L. No.
103-66 (the "1993 Act" or the "Act"), s 162(e) of the Internal
Revenue Code ("I.R.C.") allowed businesses to deduct their
direct lobbying expenditures as business expenses. In the
1993 Act, Congress amended I.R.C. s 162(e) so that lobbying
expenses would no longer be deductible. 26 U.S.C. s 162(e)
(1994). It also enacted several additional provisions to ensure
that taxpayers could not evade the force of the Act by paying
dues to tax-exempt organizations that would then conduct the
desired lobbying activities. The American Society of Associa-
tion Executives, a tax-exempt trade association that lobbies
on behalf of its members, filed suit, alleging that these
provisions placed an affirmative burden on its right to lobby,
in violation of the First Amendment. The district court
rejected the constitutional challenge and granted the govern-
ment's motion for summary judgment; we affirm.
* * *
Under the 1993 Act, a tax-exempt organization that en-
gages in lobbying activities and is funded in part by member-
ship dues and other contributions may either pay a tax on its
lobbying activities (the so-called "proxy tax"), or may follow
"flow-through provisions" aimed at making sure no contribu-
tor or dues payer takes a deduction with respect to funds
used for lobbying. 26 U.S.C. s 6033(e) (1994).
The proxy tax, if the tax-exempt organization chooses that
route, falls on all lobbying expenses as defined in s 162(e)(1)
and is imposed at the highest marginal rate of the corporate
income tax under I.R.C. s 11, now 35%. Id.
s 6033(e)(2)(A)(ii). If the organization chooses the flow-
through alternative, it is required to provide donors, at the
time of "assessment or payment" of dues or other contribu-
tions, with a "reasonable estimate" of the portion of the dues
or contributions that is allocable to s 162(e)(1) expenditures.
Id. s 6033(e)(1)(A)(ii). Donors are not allowed to take a
deduction for the portion of their dues and contributions
allocable to such expenditures. Id. s 162(e)(3).
To prevent organizations from circumventing the purpose
of the flow-through provisions by artificially allocating their
dues to non-lobbying activities, Congress enacted an "alloca-
tion provision." Id. s 6033(e)(1)(C)(i). This provision dic-
tates that lobbying expenditures will be considered paid out
of membership dues or "other similar amounts" to the extent
that they exist. Id. So as to preclude the analogous manipu-
lation across years (e.g., an organization might "prepay"
lobbying expenses in excess of dues in one year and reduce
its lobbying expenses below that received from dues in the
following years, thereby artificially increasing the deductions
for which its members are eligible), a "carryover" provision
dictates that any lobbying expenditures in excess of the dues
or other amounts paid to the organization in one year will be
treated as expenditures incurred during the following year
and payable out of dues received during that year. Id.
s 6033(e)(1)(C)(ii).
The organization must include on its annual tax returns the
lobbying expenditures that it has incurred as well as the total
amount of dues "to which such expenditures are allocable."
Id. s 6033(e)(1)(A)(i). If a tax-exempt organization trying to
follow the flow-through method in fact incurs lobbying expen-
ditures in excess of the aggregate amount covered as non-
deductible by its notices to dues payers for the year, the
discrepancy will be subject to the flat 35% tax. Id.
s 6033(e)(2)(A). The Secretary may (but evidently need not)
"waive" this tax if the organization agrees to correct its
mistaken estimate by "carrying over" the excess to the follow-
ing year and allocating it to dues paid in that year. Id.
s 6033(e)(2)(B).
The American Society of Association Executives is a non-
profit professional association that lobbies on behalf of about
23,000 association executives and staff members. It is tax-
exempt under 26 U.S.C. s 501(c)(6), as a "[b]usiness league[ ]
... not organized for profit." Thus it is subject to the
lobbying tax provisions at issue in this case.
For its fiscal year ending June 30, 1994, the Society chose
to apply the "proxy tax" to its lobbying expenditures, thus
allowing its members and contributors full deductibility. On
November 7, 1994 it submitted an amended tax return,
requesting a refund of the $56,900 paid as proxy tax, and
claiming that the tax scheme was unconstitutional. After six
months passed without action on the refund claim by the
Internal Revenue Service, the Society brought suit in district
court. It alleged that the scheme placed a burden on its
freedom of expression in violation of the First Amendment,
and that it discriminated against lobbying associations and in
favor of individual businesses and private persons, in contra-
vention of the Fifth Amendment.
The district court granted the government's motion for
summary judgment, rejecting both the Society's claims. See
American Soc'y of Ass'n Executives v. United States, 23
F. Supp.2d 64 (D.D.C. 1998). On appeal, the Society argues
only its First Amendment theory.
* * *
The Society and the government agree on certain general
principles. Although the government has no obligation to
subsidize speech, see, e.g., Perry v. Sindermann, 408 U.S.
593, 597 (1972), the courts will subject to "strict scrutiny" any
affirmative burden that the government places on speech on
the basis of its content. See, e.g., Leathers v. Medlock, 499
U.S. 439, 447 (1991). The Society points to various effects of
the proxy and flow-through choices that in its view affirma-
tively burden lobbying.
First, at least for association members in relatively low
brackets, the flat 35% rate necessarily places a higher effec-
tive burden on lobbying through an association than the
generally applicable corporate tax--a graduated rate starting
at 15% and capped at 35%--places on direct lobbying. The
government counters (in part) that a dues payer in the 35%
bracket, and even well below, can get more lobbying per pre-
tax dollar by contributing to a lobbying association than by
doing its own lobbying. This is because the dues payer gets a
deduction for its full contribution to the entity, including the
amount devoted to the tax payment itself. Whereas a dues
payer can buy $100 worth of lobbying for $135 (i.e., $100 plus
the $35 proxy tax), a corporation that is taxed at a 35% rate
would have to use up $154 of pre-tax income in order to spend
$100 on lobbying (65% of $154 = $100).1 The Society con-
tests these calculations, but we need not resolve the dispute,
partly because the government figures would still leave dues
payers in tax brackets lower than the effective rate of the
proxy tax (brackets lower than 26% by the government's
calculations) more burdened by the proxy tax than by the
treatment of direct lobbying. An additional reason we need
not resolve it is that, as we shall see, associations like the
Society have an option that avoids any such possible burden.
Alternatively, argues the Society, the flow-through method
subjects lobbying to a risk of non-neutral treatment. If an
association overestimates its lobbying expenses, its dues pay-
ers will forfeit part of their deduction for nonlobbying busi-
ness activities, without the possibility of recovering this de-
duction in the future. And if it underestimates lobbying
expenditures, it is exposed to the proxy tax, from which it can
escape only if the Secretary chooses to "waive" the tax and
allow "carryover" treatment. The Secretary has failed to
adopt regulations setting forth clear sufficient conditions for
the waiver. According to the Society, his only official state-
ment on the subject consists of instructions for Form 990 (the
income tax return for associations), in which he says that he
may permit a waiver if the association's estimate was reason-
able and the association agrees to add the excess to the
following year's amount. See IRS Form 990, line 85h and
__________
1 A firm that spends $100 on direct lobbying pays tax not only on
the $100, but on the $35 needed to pay tax on the $100, and the
$12.25 needed to pay tax on that $35, etc. The formula for the sum
of an infinite geometric series is a + ar + ar2 + ar3 + ... =
a/(1-r), so that a firm in the 35% bracket, seeking to generate $100
for lobbying, needs $100/(1-.35) or $154 in pre-tax income.
Instructions (1998). The Society argues that, in light of the
First Amendment right to lobby, the Secretary's discretion is
far too broad to survive strict scrutiny.
Finally, the Society says that the allocation rules, by treat-
ing the association's lobbying expenditures as funded by dues
or similar payments (to the extent available), regardless of
their actual source, in effect limit the deductions that mem-
bers can take for dues that the association spends on ordinary
business activities. This, it says, violates the principle that
the government may not condition the receipt of an otherwise
available benefit on an entity's refraining from the exercise of
its freedom of speech. See Perry, 408 U.S. at 597.
We do not reach these arguments, however, because a tax-
exempt organization that engages in lobbying activities can
altogether sidestep the specified dilemmas. A s 501(c)(6)
association can avoid any alleged burden on its First Amend-
ment rights by splitting itself into two s 501(c)(6) organiza-
tions--one that engages exclusively in lobbying on behalf of
its members and one that completely refrains from lobbying.
Whereas the lobbying wing can be funded by dues and
contributions, for which members will not be able to take a
deduction, the non-lobbying affiliate can be funded, at least in
part, by deductible dues. This system achieves precisely
what the Society says the Constitution demands: a generally
applicable tax system that, although it does not subsidize
lobbying, imposes no burden on it by comparison with other
activities.
If this option is available, the treatment of lobbying con-
tested here is subject only to "rational basis" scrutiny, and, as
we shall see, handily survives. In Regan v. Taxation With
Representation, 461 U.S. 540 (1983), the Supreme Court
considered the operation of I.R.C. ss 170(c)(2), 501(c)(3) and
501(c)(4). Sections 501(c)(3) and (4) define the characteristics
of certain tax-exempt organizations, the key difference (for
our purposes) being that "no substantial part of the activities"
of a s 501(c)(3) organization may consist of lobbying, whereas
no such limit applies to s 501(c)(4) organizations. The trade-
off is that s 170(c)(2) permits taxpayers to deduct any contri-
butions made to s 501(c)(3) organizations, but not to organi-
zations that are tax-exempt under s 501(c)(4). Because the
plaintiff organization in Taxation With Representation could
conduct its lobbying activities through a s 501(c)(4) affiliate,
and continue to receive deductible contributions as a
s 501(c)(3) organization, the Court applied rational basis re-
view and upheld the statute. See Taxation With Representa-
tion, 461 U.S. at 547; see also Rust v. Sullivan, 500 U.S. 173,
196-98 (1991) (upholding Congress's subsidy of family plan-
ning services even though the funding could not be used for
abortion-related activities, on the basis that the grantee could
still conduct such activities through programs that were
"separate and independent" from those receiving federal
funds). In contrast with the situation in Taxation With
Representation, the Court in FCC v. League of Women
Voters, 468 U.S. 364 (1984), invalidated a grant conditioned on
a broadcasting station's not "engag[ing] in editorializing," on
the basis that the station could not "segregate its activities
according to the source of its funding." Id. at 400-01.2
In Taxation With Representation the Court noted that the
taxpayer organization must show that its s 501(c)(3) wing
does not subsidize its s 501(c)(4) affiliate, so as to ensure that
"no tax-deductible contributions are used to pay for substan-
tial lobbying." 461 U.S. at 544 & n.6. The Court found,
however, that the IRS's only requirements to that end--that
__________
2 One might wonder why a grant-dependent broadcast licensee
could not create an independent affiliate and transfer to it, for fair
market value, an entitlement to broadcast in specified time slots.
At least one answer is that the FCC has traditionally barred
broadcast licensees from creating de facto sublicensees by subdivid-
ing spectrum allocations or otherwise parceling out air time to third
parties. See Howard A. Shelanski, The Bending Line Between
Conventional "Broadcast" and Wireless "Carriage", 97 Colum. L.
Rev. 1048, 1069-70 (1997); 47 CFR s 73.3555 (1998) (requiring that
the licensee "maintain[ ] ultimate control over the station's facilities,
including specifically control over station finances, personnel and
programming").
the two organizations be "separately incorporated and keep
records adequate to show that tax-deductible contributions
are not used to pay for lobbying"--were not "unduly burden-
some." Id. at 545 n.6; see also id. at 553 (Blackmun, J.,
concurring) (stating that "[a]s long as the IRS goes no
further than this," the plaintiff's right to engage in lobbying
has not been infringed).
An organization like the Society can similarly split into two
s 501(c)(6) associations. Neither affiliate would forfeit its
tax-exempt status, as the non-lobbying wing would clearly
continue to be a "business league" for purposes of the statute,
and the lobbying wing, so long as its activity is directed at
furthering a business interest, would also remain tax-exempt
under s 501(c)(6). See Rev. Rul. 61-177, 1961-2 C.B. 117
(stating that a corporation whose sole activity is to influence
legislation relevant to a business interest is exempt under
s 501(c)(6) if it otherwise meets the requirements of that
section).
The Society argues, however, that the regulations promul-
gated in response to the 1993 Act block such a remedy. It
points in particular to the Treasury Department's regulation
precluding a taxpayer from "structur[ing] its activities with a
principal purpose of achieving results that are unreasonable
in light of the purposes of section 162(e)(1)(A) and section
6033(e)." Treas. Reg. s 1.162-29(f) (1995). Assuming that
this applies to an organization that formally segregates its
lobbying from its nonlobbying activities through dual incorpo-
ration, we see no indication that this is in any way more
onerous than the separation criteria referred to in Taxation
With Representation. So long as the organization does not
attempt to evade s 162(e)(1)(A)--by funneling resources to
the lobbying wing from the non-lobbying wing--we do not see
how it could run afoul of the regulation. In fact, a dual-entity
structure is entirely consistent with Congress's intent in
enacting the 1993 Act: to withdraw the deduction for lobby-
ing expenses without affirmatively burdening the right to
lobby.
Apart from its claims that the regulations unduly hamper
the dual-entity strategy, the Society invokes Minneapolis
Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460
U.S. 575, 587-88 (1983), for the idea that differential tax
treatment of the press is subject to heightened scrutiny even
when the taxpayer cannot prove the differential burdensome.
Similarly, any subjection of lobbying to differential treatment
must meet heightened scrutiny. But Taxation with Repre-
sentation, and the other cases cited above and using only
rational basis scrutiny, were all decided after Minneapolis
Star (indeed, Taxation with Representation was decided later
the same Term). The Court evidently regards the dual
incorporation option as obviating the need for heightened
scrutiny. Even if we reframe the Society's objection as a
claim that the need to adopt a dual incorporation is itself a
"differential" (after all, non-lobbying associations that have
multiple functions commonly need not subdivide), the Court's
decisions necessarily reject the notion.
Accordingly, we ask simply whether the provisions bear "a
rational relation to a legitimate governmental purpose." Tax-
ation With Representation, 461 U.S. at 547. The parties
agree on the legitimacy of withholding the benefits of tax
deductibility from lobbying. And the scheme overall clearly
bears a rational relation to that goal. For instance, the
estimation provision, s 6033(e)(1)(A)(ii), allows taxpayers to
continue to take a deduction for dues paid to tax-exempt
organizations not allocable to lobbying. The carryover and
allocation provisions, s 6033(e)(1)(C) ensure that taxpayers
may not circumvent the Act by taking deductions for money
that will fund lobbying activities, directly or indirectly. We
find no constitutional violation.
* * *
The district court's order granting summary judgment for
the defendant is
Affirmed.