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October 28, 1998


The opinion of the court was delivered by: SPORKIN

This action to recover a refund of $ 56,900 in income taxes, arising out of plaintiff's election to apply the "proxy tax" option in 26 U.S.C. § 6033(e)(2) to its lobbying expenditures in fiscal year 1994 is presently before the Court on summary judgment motions by both the plaintiff and the defendant. At a hearing held before this Court on September 25, 1998 both sides agreed that the questions before the Court are questions of law, that there are no factual issues to be resolved and, accordingly, that the Court should rule on the motions.

 Plaintiff, the American Society of Association Executives ("ASAE"), is a tax-exempt trade association under 26 U.S.C. § 501(c)(6) composed of approximately 22,300 association executives and staff members. ASAE engages in lobbying on behalf of its members and contends that the enforcement provisions of the lobbying tax, codified at 26 U.S.C. §§ 162(e)(3), 162(e)(5)(C) and 6033(e), impose financial "penalties" on tax-exempt associations (and their members) that engage in lobbying and are, therefore, unconstitutional. ASAE argues that the challenged provisions violate the First Amendment by deterring ASAE and its members from exercising their rights to freedom of expression and association and to petition the government. ASAE also argues that the challenged provisions violate the Equal Protection clause of the Fifth Amendment by favoring private individuals and for-profit corporations over tax-exempt associations. Although it only was affected by the proxy tax and recordkeeping provisions of the statute, ASAE states that because it is raising a facial challenge this Court has jurisdiction to consider the challenged provisions in their entirety and not merely the provisions to which ASAE was subjected.

 I. Procedural History

 This is not the first time that this case has been before this Court. In April 1994 this Court issued a Memorandum Opinion and Order in response to a declaratory judgment action challenging the lobbying tax brought by ASAE and ten other associations. In that action the plaintiffs asked this Court to declare the lobbying tax unconstitutional and to enjoin the Government from enforcing it. This Court held that the Anti-Injunction Act ("AIA"), 26 U.S.C. § 7421(a), deprived it of jurisdiction over the case and that the two recognized exceptions to the AIA were inapplicable because: (1) plaintiffs had not shown that the Government could not prevail under any circumstances, as required by Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962); and (2) plaintiffs had alternative legal remedies available to them. See South Carolina v. Regan, 465 U.S. 367, 79 L. Ed. 2d 372, 104 S. Ct. 1107 (1984) (recognizing exception to AIA where plaintiff is left with no alternative legal remedy).

 Regarding their alternative legal remedies, the Court held that the plaintiffs could either elect to pay the "proxy tax" on tax-exempt associations created by § 6033(e) and then bring a tax refund action in the United States District Court, or if the plaintiffs elected not to pay the proxy tax and instead notified their members, the members could then bring individual suits challenging the requirements of §§ 162(e) and 6033(e) in the United States Tax Court. Accordingly, the Court dismissed the plaintiff's complaint based on a lack of subject matter jurisdiction under the AIA. See American Society of Ass'n Executives v. Lloyd H. Bentsen, 848 F. Supp. 245 (D.D.C. 1994) (hereinafter "ASAE I "). Familiarity with the Court's prior opinion is assumed.

 Following this Court's decision in ASAE I plaintiff chose not to notify its members and instead paid its proxy tax liability for fiscal year 1994, which was $ 56,900. ASAE subsequently submitted an amended return to the Internal Revenue Service ("IRS") requesting a refund of the $ 56,900 on the ground that the lobbying tax provisions applicable to tax-exempt associations violate the First and Fifth Amendments to the United States Constitution. After six months had passed without a response from the IRS, ASAE filed this lawsuit. In its complaint, filed on May 15, 1995, ASAE requests: (1) a refund of the $ 56,900 plus interest, costs and attorney's fees; and (2) injunctive relief preventing the Government from enforcing the lobbying tax against it or its members. See Cmplt. p. 17.

 II. The Lobbying Tax

 The challenged provisions, codified at 26 U.S.C. §§ 162(e)(3), 162(e)(5)(C), and 6033(e), were enacted by section 13222 of the Omnibus Budget Reconciliation Act of 1993 (H.R. 2264, 103d Cong., 1st Sess. (1993)) (the "Act"). Prior to passage of the Act, section 162(e) of the Code allowed businesses to deduct direct lobbying expenses as business expenses. The Act amended the Code to withdraw the deduction for lobbying expenses incurred by businesses. The Act also contains provisions specifically aimed at enforcing Congress' mandate against certain tax-exempt membership organizations that engage in lobbying. Those tax-exempt organizations previously had been able to deduct their lobbying expenses while their members could deduct their membership dues. Congress concluded that allowing such tax-exempt organizations to deduct their lobbying expenses amounted to a government subsidy of their lobbying activities.

 In addition to withdrawing the tax deduction, the Act also includes provisions designed to close certain loopholes thus preventing the affected taxpayers from skirting Congress' intent. These enforcement provisions include: (A) the "flow through provision;" (B) the "allocation provision;" (C) the "proxy tax;" (D) the "estimation provision;" (referred to by ASAE as the "overestimation penalty" and the "underestimation penalty"); and (E) the "carryover provision."

 A. Flow Through Provision § 162(e)(3)

 The flow through provision provides:

No deduction shall be allowed under subsection (a) for the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under § 6033(e)(1)(A)(ii) is allocable to expenditures to which paragraph (1) applies.

 26 U.S.C. § 162(e)(3). This provision was designed to prevent taxpayers who use tax-exempt associations to lobby on their behalf from retaining a tax subsidy for their lobbying activities through the tax-deductible dues paid to such associations. Thus, it would prevent lobbying expenses not otherwise deductible from being made deductible merely by conducting lobbying through a tax-exempt association. A member of such an association may not deduct that portion of the dues paid which is attributable to the association's lobbying expenses.

 B. Reporting Requirements and Allocation Provision § 6033(e)(1)

 The reporting requirements of § 6033(e)(1) work in conjunction with the flow through provision. Section 6033(e)(1) requires tax-exempt organizations to include on their annual tax returns the total amount of their lobbying expenses and the total amount of dues allocable to lobbying. 26 U.S.C. § 6033(e)(1)(A)(i). The organizations also are required under the section to notify their members of the non-deductible portion of the members' dues. 26 U.S.C. § 6033(e)(1)(A)(ii).

 The section also adds an "allocation provision" designed to prevent taxpayers from evading the withdrawal of the tax deduction for lobbying expenses. The provision requires that when calculating the percentage of dues attributable to lobbying, the association must treat the lobbying expenses as having been funded first by membership dues rather than from some other form of income. The provision states as follows:

For the purposes of this paragraph--
(i) In General--Expenditures to which section 162(e) applies shall be treated as paid out of dues or other similar amounts to the extent thereof.

 26 U.S.C. § 6033(e)(1)(C). This provision is justified on the basis that a restriction is necessary to avoid skirting Congress' intent. It is argued that without the rule, taxpayers could claim deductions for dues paid to tax-exempt organizations that engage in lobbying, because the organization could simply allocate its lobbying expenses to non-dues income, which may be tax-exempt.

 C. Notification Provision and Proxy Tax § 6033(e)(2)

 Section 6033(e)(2) gives tax-exempt associations the option of (1) placing the burden and responsibility of complying with the restriction on their members through a notification provision, or (2) paying the tax themselves in the form of a "proxy tax," which would not interfere with the members' right to deduct membership dues. The pertinent parts of section 6033(e)(2) provide:

If an organization--
(i) elects not to provide the notices described in paragraph (1)(A) for ...

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