company's Board of Directors.

The communication with this

management employee is designed not to encourage input into company decisionmaking, or help that manager make a corporate policy

decision, but rather to influence the manager to adopt the
company's views, and, perhaps, to act on them. In Exhibit 30B,
for example, Caterpillar told its almost-200 "key" management
employees about industry's success with Congress in 1977:

Success was in large measure due to interest
in legislation expressed by constituents
around the country. Support provided by
Government Affairs Bulletin recipients is
a part of this process. Your assistance
in 1977 was a vital element in Caterpillar
communication with government.

In this light, there should be no doubt that corporate propagandizing to management employees--unless those employees

་

have a direct and significant voice in the policymaking functions of the corporation (e.g., corporate officers and board members)-must be considered as part of an attempt to influence a segment of the public on legislative matters. If a corporation determined to propagandize only its shareholders who hold more than 500 shares of stock, I cannot conceive that this limitation would make these "major" shareholders any less a "segment" of the public for purposes of Section 162 (e)(2). Similarly, management employees should receive no exemption.

Because a larger number of companies appear

to be taking tax deductions for such communications with management employees, further action by the IRS is necessary.

To summarize, there appear to be widespread problems

with assuring that businesses voluntarily comply with Section 162 (e) (2) insofar as communications to employees--whether managerial or

otherwise--are concerned.

The Subcommittee has an opportunity

to explore at these hearings the extent of non-compliance and

how enforcement could be improved.

3.

Communications With Customers,
Dealers, Suppliers and the Like.

If proselytizing of shareholders and employees falls within the category of non-deductible activities, then a fortiori similar efforts directed at customers, dealers, suppliers and the like must also be considered a form of non-deductible

grassroots conduct. These groups do, indeed, have a financial relationship to businesses; yet, it is far more attenuated

than that of shareholders or employees.

In relation to a corpor

ation these groups are more like the general public and, in this context, represent "segments" of the public.

Unfortunately, too many companies do not interpret

the law in this matter. For example, Exhibit 34E is a November/ December, 1974, edition of the "Malpractice Digest" newsletter, published by the St. Paul Fire and Marine Insurance Company. The by-line notes that it is sent to one class of the company's customers, medical liability insurance holders. This edition contains an article on "Private Malpractice Insurance Threatened," an "Editorial," a page on alleged "Case Histories," etc. The malpractice article concludes by stating that "collectively, physicians must work for remedial legislation in such areas as" retention of the

locality rule (regarding the situs of malpractice suits),

restrictions on the statute of limitations, etc. The editorial also calls upon physicians to contact legislators. The "Case Histories" contain reports of recent state legislation and why such legislation is desirable. On its closing page, the publication notes that it has a circulation of 60,000. Yet, despite the clear applicability of Section 162 (e) (2) (B) to this publication sent to customers, who are a segment of the general public, the company stated in a December 23, 1977, letter to this Subcommittee 1/ that it has not engaged in such non-deductible activities.

1/ For these same reasons, Exhibits 34A, 34B, 34C and 34D are "grassroots" activities to the extent that these publications are sent to physicians and other members of the general public. Exhibit 34A is a pamphlet on "Remedial Legislation RX for Malpractice", apparently sent to "doctors and other interested groups" according to the December 27, 1977, St. Paul letter. Exhibit 34B, entitled "Medical Malpractice in Georgia," might be a deductible expense under Section 162 (e) (1) if its distribution were limited to only state legislators; however, the opening page refers to 5,000 doctors in Georgia who are insured by St. Paul and states that the background paper is "for use by Georgia State Medical Association and its members" to discuss among themselves and with associates. Exhibit 34C is a booklet, "Enough is Enough," which will be discussed later.

Finally, Exhibit 34D is another "Position Paper and Backgrounder" which, like Exhibit 34B, appears to have been sent to doctors, medical societies, etc. It is surprising that St. Paul can argue that such material sent to customers recommending that they support legislative changes in malpractice laws is not clearly non-deductible grassroots activity.

The case is similar where the target group is dealers

and suppliers.

The fact that a company may utilize dealers, exclusive or otherwise, to market its projects does not allow activities intended to influence those dealers on legislative matters to be removed from the grassroots category. These specialized "customers" of a manufacturer's products have been used increasingly as propaganda tools. More than the ultimate consumer who may have a choice of several products, many dealers are in financial captivity; when they are propagandized and then asked by their manufacturer to lobby on behalf of the manufacturer, one may question the degree of free will that can be exercised. Thus, there are strong policy reasons to consider these customers as "segments" of the public for purposes of Section 162 (e) (2). Yet even the largest corporations do not consider attempts to use their dealers for legislative lobbying as an activity that falls within Section 162 (e) (2).

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industry.

The situation is best illustrated in the automobile 1/

Exhibits 36B and 36C contain a voluminous number

of "Dealer Legislative Coordinator Bulletins" and similar

materials.

The network of dealer political activities revealed by these documents is an example of how business can use its financial resources and superior organizational tools to crank up a propaganda mill at a moment's notice. A February 3, 1976, bulletin talks of the need to consider "who would be the best dealer to talk to the [House] Committee Members from their respective states and whether another car or truck dealer should attend the Washington meeting...." regarding the Clean Air Act. A March 16, 1976, bulletin on the Act expresses "appreciation to every dealer who participated in our all-out effort.... The mailgram to several hundred dealers from Ben Bidwell, right before the committee voted, gave an additional impetus to our

1/ Other examples also exist in other industries where analogies with dealers may be drawn. For example, independent insurance agents and brokers have frequently been contacted by Crum and Forster, according to Exhibit 40, a letter of February 17, 1978, from that company to this Subcommittee. Crum and Forster "publishes quarterly a magazine for insurance agents and brokers" which includes "occasional recommendations that the producers become involved in industry regulatory and legislative problems;" yet, it knew of "no practical means of isolating" these activities for purposes of determining costs in connection with Section 162 conduct. The company also admitted that its management employees have spoken before groups of insurance agents on legislative matters, including a "general appeal to select legislators who understand the insurance industry's problems;" vet, Crum and Forster assumed that such exchanges "are not contemplated within the matters" of grassroots activity being explored by this Subcommittee. Contrary to this company's beliefs, such contacts via written or oral communication with agents, in an attempt to persuade those persons to support this company's views on legislative matters, would come within Section 162 (e) (2).)