UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


AMER SCTY ASSN EXEC

v.

UNITED STATES


98-5563a

D.C. Cir. 1999


*	*	*


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)


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)


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


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


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 




__________

n 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


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


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


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 




__________

n 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 


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


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


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


* * *


The district court's order granting summary judgment for  the defendant
is


Affirmed.