356 [7 8 O p
. A tt ’y

The e xpenses of

“grass-ro o t s ” l obbying ha ve been, and remain, 1 nondeductible. 26 U.S.C. §162(e) (1)( c). T AXAT I ON

) I NCOM E T AX

) C ORPO R A TE L OB B YI NG E X PENSES A RE N O L ONGE R D EDUCTI BLE

D ece m ber22, 1993

H o n o ra b le Ma ry L o u ise P re is H ous e of D el egat es Y ou hav e reque s t ed ouropi ni on w hethera cha nge i n fede r al i ncome t ax l aw l i m i t i ng t he deduc t i on of corpor at e l obby i ng ex p en s es aff

ect s the deduc t i bi l ityo f su ch ex p en ses u n d er M ary land ’s c o rp o ra te in c o m e ta x la w . For t he r eas ons s t at ed bel ow , w e concl ude that , t o pr eci s el yt he sa m e e x ten t a s fe d e ra l law w ill d isa llo w th e d e d u c tio n o f c o rp o ra te lo b b y in g e x p e n se s s tar tin g Ja n u a r y 1 , 1 9 9 4 , so S tate law w ill eff ect i vel ydi s al l ow t he deduct i on of s uch expe ns es forpurpos es of th e S ta te c o rp o ra te in c o m e ta x .

I

F ederalT ax L aw C hange
T he B udgetR econc i l i at i on A ct ur ged by Pr es i dent C l i nt on and pas s ed byC ongr es s on A ugus t10, 1993, cont ai ned a n u m b erof re v e n u e -ra isin g p ro v isio n s. O n e o f th e se , § 1 3 2 2 2 o f th e A c t, w ill d e n yc o rp o ra te ta x p a y e rs a f e d e ra l in c o m e tax d e d u c tio n f o r c e rta in lo b b y in g e x p e n s e s . P u b . L . N o . 1 0 3 -6 6 , 1 0 7 S ta t. 4 7 7

. U ndert he l aw ap p l i cabl e t o t he 1993 t ax y ear , expens es i ncurr ed i n “di r ect ” l obby i ng – t hat i s , i nvol vement w i t h l egi s l at i ve bodi es , as di s t i nctfr om “gr as s r oot s ” l ob b y i ng – ar e deduc t i bl e as or di naryand nec es s arybus i nes s expens es
. E ffect i ve J anuary1, 1 1 9 9 4 , C o n g re ss h a s d isa llo w e d th e d e d u c tio n “ f o r an ya m o u n t p a id ori ncurr ed i n connec t i on w i t h .

. . i nfl uenci ng l egi s l at i on .
. . . ” 26 U .S .C . § 1 6 2 (e )(1 )(A ). T h e ter m “ in f lu e n c in g leg isla tio n ” is b ro a d lyG en. 356] 357

The disallowanc e extends as well to expenses incurre d in lobbying 2 se nio r o ff

ic ia ls o f t

hee xec uti vebranc h o f t hefe deral g ov e rnme nt. §162(e) (1)( D). Th e reis also an e xcepti on fo r in- ho us e e xpe nditure s n ot in e xce ss 3 of $2,000. §162(e )(5) (B ). defi ned t o m ean “ anyat t empt t o i nfl uence anyl egi s l at i on t hr ough c o m m u n i c a t i o n w i t h a n y m e m b e ro r e m p l o ye e o f a l e g i s l a t i v e b o d y, o r w ith a n y g o v e rn m e n t o f f icia l o r em p lo y e e w h o m a y p a rticip a te in t he form ul at i on of l egi s l at i on. ” §162 (e) ( 4) ( A )

. M or eover , i f a 2 corporat i on pay s d u e s to a t ax-exem pt or gan i zat i on t hat uses a por t i on of t he dues t o i nfl uence l egi s l at i on, t hen the p ro ra ta por t i on of t hos e dues i s al s o not deduct i bl e. §162( e) ( 3)

. T he o n e m aj or e x c e p t i o n i s forexpens es i n connec t i on w i t h l obby i ng on “l egi s l at i on o f a n ylo c a l co u n c il o r sim ilar g o v e rn in g b o d y . .. w it h re sp e c t to legislat ion o f d ir ec t i n terests t o the tax p ay er ..
. . ” § 1 6 2 (e)(2). 3
I n i t s r eport, the H ous e W ay s and M eans C om m i t t ee s t at ed th a t, “in th e c o n tex t o f d e f icit red u c tio n leg isla tio n , it is a p p ro p ria te t o l i m i tt he bus i nes s deduct i on forl obby i ng expens es
. ” H

. R

. R ep. N o . 1 0 3 -1 1 1 , 1 0 3 rd C o n g ., 1 s t S e s s . a t 6 5 9 , re p rin tedin 19 93 U

. S. C ode C ong. and A dm i n. N ew s 890. T he l egi s l at i ve hi s t or ym akes c lea r th a t th e d isa llo w a n c e ru le a p p lies to a ttem p ts to in f lu e n c e sta te le g is la tio n
. Id

. II

St at e C orporat e T ax L aw “M ary l and i ncome t ax l aw s w er e w r i t t en w i t h bot h ey es on t he fede r al t ax l aw s
. ” C om ptr ol l erv. C hes apeake C or p. , 54 M d. A pp. 2 0 8 , 2 1 8 , 4 5 8 A .2 d 4 5 9 , cer t

. deni ed , 296 M d. 653 ( 1983) ( i nt ernal quot at i on om i t t ed)

. Subj ect t o cert ai n al l ocat i on rules f or corpor at i ons t hat conduct bus i nes s bot h i n M ary l and and others t at es and t o cert ai n m odi fi cat i ons t hatar e notper t i nentt o t hi s i ssue, t he M ary land taxa b le i n co m e o f a co rpo rati o n is “t h e c o rpo rati o n ’s fede r al t axabl e i ncome f or t he t axabl e y ear as det erm i ned undert he I nt ernal R evenue C ode .

. . . ” §§10-301 a nd 10- 304( 1) of the TaxG ener al A r t i cl e, M ary l and C ode. T he i ncorpor at i on by r efe r ence of t he Internal R evenue C ode i ncl udes anyamendm ent s t o t he C ode:

“ W h e n e v e r a p ro v isio n o f th e p u b lic g e n e ra l .. . law s o f th is S tate358 [7 8 O p
. A tt ’y

Th e B oa rd of Re ve nu eEs tim ate s, in f

a c t, h a s in c lud e d th einc re a se 4 in corpora

te taxes resulting f

rom the fe deral disallo wance in e stimating next year ’s tax revenue s. r efe r s t o any por t i on of thi s C ode, ort o anyot herl aw , t he r efe r ence appl i es t o anys ubs equentamendm entt o thatpor t i on of t he C ode or ot herl aw , un less t he r efe r r i ng pr ovi s i ons expr es s l ypr ovi des o th e rw is e .” A rt ic le 1 , § 2 1 o f th e M a ryla n d C o d e
. A corpor at i on’ s fede r al t axabl e i ncome i s det erm i ned af t ert he c o rp o r a t i o n t a k e s wh a t e v e rd e d u c t i o n s a r e a l l o we d b yf e d e r a l l a w. See 26 U

. S. C

. §63( a)

. H ence , w hen a c orpor at e t axpay ercal cul at es i t s fede r al t axabl e i ncome f or t he 1994 t ax y ear , t he di s al l ow ance of l obb y i n g e x p e n s e s c o n t a i n e d i n t h e f e d e r a l Bud g e tRe c o n c i l i a t i on A ctw i l l r esult in a hi gherfede r al t axabl e i ncome t han w oul d have b e e n th e c a se u n d e r f

o rm e r la w . T h a t sa m e h ig h e r f e d e ra l tax a b le in c o m e w ill a ls o b e u se d f o r c a lcu latin g th e M a ry lan d c o rp o ra te i ncome t ax. T herefo r e, t he di s al l ow ance of l obby i ng expens es for fede r al corpor at e i ncome t ax purpos es eff ect s an i dent i cal di s al l ow ance fort he M ary l and corpor at e i ncome t ax. 4

III C oncl usi on I ti s our opi ni on t hat , as a re s ul t of a di s al l ow ance of l obby i ng expens es as a deduc t i on underfede ral i ncome t ax l aw , l obby i ng expens es gener al l yw i l l no l ongerr es ul ti n a r educt i on of a c o rp o ra tio n ’s M a ryla n d c o rp o ra te in c o m e ta x lia b ility.
J. Jo sep h C u rran , Jr. A t t or ney G ener al
Ja c k S c h w a rtz C h ief C o u n se l O pi ni ons & Advi ce