A couple of weeks ago, I had the privilege of speaking to leaders of the National Asian Pacific American Bar Association (NAPABA) attending its Western Regional Conference. Following the Conference, I participated on a NAPABA webinar – Speaking Out – Advocacy and Rapid Responses to Urgent Issues. Here are some of the tax issues I covered:
Most bar associations are organized and operated to qualify as exempt from federal income tax under Section 501(c)(6) of the Internal Revenue Code. Here are some key characteristics of 501(c)(6) business leagues:
- an association of persons having some common business interest
- purpose: to promote the common business interest and not to engage in a regular business of a kind ordinarily carried on for profit
- activities: directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons
It is a common misconception that bar associations cannot lobby, cannot endorse political candidates, and must avoid advocacy in general. Some of these misconceptions stem from volunteer board members who conflate 501(c)(6) with 501(c)(3) and from professionals providing misinformed advice. Here’s generally what’s permissible:
- Lobbying: unlimited, provided that the lobbying is related to the organization’s exempt purpose
- Political campaign intervention: permissible, provided that such intervention does not constitute the organization’s primary activity (some organizations have taken the aggressive tax position that up to 49% of their financial resources can be spent on political campaign intervention activities without such activities becoming their primary activity)
- Other: educating the public, encouraging voting, conducting research, changing corporate and consumer behavior, training others to advocate, influencing or educating legislators on non-legislative matters, influencing an administrative agency on regulations and rulings, influencing executive branch officials (e.g., mayors, governors, the President) on executive decisions, engaging in litigation, if done in a nonpartisan manner.
Dues or Contributions
Dues or contributions to a bar association may be deductible as a trade or business expense, ordinary and necessary in the conduct of the taxpayer’s business, except for amounts paid for:
- influencing federal or state (but not local) legislation;
- participating or intervening in any political campaign;
- attempting to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums; and
- directly communicating with a covered executive branch official in an attempt to influence the official actions or positions of such official.
Dues or similar amounts (including voluntary payments or special assessments) are also not deductible if the bar association notifies the taxpayer that such payments are allocable to nondeductible lobbying and political expenditures of the type described above.
If the bar association uses a portion of dues or similar amounts for nondeductible lobbying and political expenditures and does not provide the nondeductibility notice described above, it must pay the proxy tax described in Section 6033(e)(2) on the amount of such expenditures and report the tax on Form 990-T. The proxy tax rate is the highest rate imposed by on the taxable income of corporations (currently 35%).
The reporting requirements of Section 6033 do not apply to any amount on which tax is imposed by reason of Section 527(f). Under Section 527(f), an exempt organization that expends any amount for an exempt function (defined as the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed) must include as taxable income the lesser of:
- the net investment income of the organization for the taxable year, or
- the aggregate amount expended during the taxable year for such exempt function.
Note, however, that both 527(f) and 6033(e) may apply. For example, if the bar association’s taxable income under 527(f) is the amount of net investment income ($30,000) because it is less than the aggregate amount expended for an exempt function ($50,000), the difference of $20,000 could be subject to the 6033(e) proxy tax.