stripmining has indeed been a controversial subject that was addressed in dozens of bills in Congress, it appears that

Exhibit 19B is sufficiently removed from a polemical, completely one-sided effort to influence the public on an industry viewpoint of the controversy.

While the ad claims that industry

reclamation has worked, it also admits problems; as such, it might be used by proponents or opponents of stripmining legislation. I think that this ad could reasonably be said to be primarily institutional in nature, attempting primarily to present the industry in a better light. If, however, it could be shown through reference to other ads that are part of the series "Coal" America's Ace in the Hole" that this ad is directly related to a legislative campaign, then a different result might obtain.

Finally, in varying degrees, Exhibits 5A, 5B and 5C can be said to be institutional or goodwill advertising. These ads, sponsored by Crum and Forster Insurance Companies, attempt to explain why insurance rates are increasing. Ad 5A refers to product liability lawsuits and higher awards, but uses virtually no polemics, invites no reader response, offers few if any opinions, etc. Although it deals with a legislative matter--i.e., insurance rates and product liability claims-it can be distinguished from other ads which I have found to be non-deductible though they concern the same subject.

Ad 5B is arguably grassroots advertising.

Although

it also treats the issue of skyrocketing insurance costs,

it uses more polemics and expresses opinion--e.g., "excessive awards eventually cost you money,' "paying exaggerated awards inflates costs," etc. Nonetheless, in a businesslike fashion the ad does attempt to explain why this particular company must raise its premiums.

Ad 5C more closely approaches the non-deductible category. It is highly polemical, chiding courts for awarding damages "even when the victims contribute to their own injuries." It speaks of "huge awards" which "have actually caused plants to close and many people to lose jobs." Furthermore, a number of the "facts" presented appear to directly conflict with the findings of the Interagency Task Force on Product Liability (e.g., the ad refers to one million product liability claims filed in 1976, and the Task Force estimates only 60,000-70,000; the ad claims high verdicts have caused plants to close, while the Task Force says that product liability problems do not appear to have been a direct and sole cause of business failure). In short, an IRS determination that Exhibit 5C was grassroots lobbying could reasonably be 1/ supported.

1/ In its February 17, 1978, letter to this Subcommittee, the advertiser states its belief that ads 5A-5C are not grassroots advertising.

27-912 O 78 - 10

In addition to the problem of classifying advertising,

a difficulty enjoyed by all taxpayers for whom Section 162 (e) (2) has relevance, other failures to comply with the tax laws may

result from the unique nature of trade association

advertising.

or union

A.

Deductions Improperly Taken For
Special Contributions.

Dues or contributions made to a trade association or

union (hereafter called "membership associations") may be used

for a number of different purposes.

Typically, non-controversial

informational-type services may be provided, new members may

be solicited, etc. However, more and more trade associations

and unions, as evidenced by the exhibits before this Subcommittee, have begun to do grassroots advertising.

Congress has created a special set of rules to govern the deductibility of dues and contributions to membership associations. Where the membership association spends such dues on activities "in direct connection with appearances before, submission of statements to, or sending communications to, the committees, or individual members of Congress....,' an activity mentioned in Section 162 (e) (1) (A), the portion of dues

"

attributable to these expenses is deductible.

Furthermore,

according to Section 162 (e) (1) (B), if the association spends dues "in direct connection with communication of information between the taxpayer" and the association "with respect to legislation or proposed legislation of direct interest to the taxpayer and to" the association, the portion of dues allocable to these expenses is also deductible.

IRS has adopted regulations to prevent circumvention

of these provisions, including IRS Regulation 1.162-20 (c) (3) which prohibits deductions for any "portion of a special assessment or similar payment (including an increase in dues)" which is used for activity which falls within the scope of Section 162 (e) (2) (B)--i.e., attempts to influence members of the public to promote or defeat legislation or referenda. Unfortunately, there is some evidence that special contributions are being utilized to circumvent the general rule, and that companies may wrongly consider these special contributions to

be deductible.

The Subcommittee is in receipt of a December 30, 1977, letter from the National Association of Electric Companies which states that in 1976, the organization "served as an intermediary in transmitting contributions by some investor-owned companies to non-profit committees in five states in connection with Yet, the Association reported

individual state referendums."

no Section 162 (e) (2) activities to its members or contributors, thus allowing the members and contributors to believe that all of their dues or contributions were used for deductible

activities. In fact, the 1976 income tax return for the

Association (which is a public document) shows that $115,000 in "gifts, grants and similar amounts received" went to defeat anti-nuclear referenda in California ($87,000), Colorado ($10,000), Oregon ($10,000) and Ohio ($6,000). A referendum on rate

structures in Missouri received $2,000.

These expenditures are clearly within the purview

of Section 162 (e) (2). Further investigation of this association, and perhaps others, is necessary to determine the scope of similar violations in regard to special dues or contributions.

B.

Failure On The Part of Organization Members
To Know What Portion of Their Dues Has Been
Spent on Section 162 (e) (2) Activities.

Virtually every single corporation that responded

Sample responses

to the Subcommittee's inquiry was unable to state what portions of its dues to various membership associations were used in connection with Section 162 (e) (2) activities. include a statement by Armco Steel Corporation, in its January 9, 1978, letter to this Subcommittee, that it "does not know what amounts are expended by various organizations of which Armco is a member to educate the general voting public on certain legislative matters." Similarly, St. Paul, in its December 23, 1977, letter to this Subcommittee, stated that "We have no way of even estimating what proportion of membership charges,

if any, are used for the purposes about which you inquire."