SEQ 0001 JOB C21-001-007 PAGE-0001 COVER

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Internal Revenue

cumulative

bulletin

1995–2

July–December

Department of the Treasury

Internal Revenue Service

1995–2 C.B.

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In This Issue

Mission of the Service and Statement of

Principles of Internal Revenue Tax

Administration

Introduction

Part I.—Rulings and Decisions Under the Internal Revenue

Code of 1986

Part II.—Treaties and Tax Legislation

Table of Contents

324

Subpart B.—Legislation and Related Committee

Reports

325

iii

Definition of Terms and Abbreviations

Numerical Finding List

Finding List of Current Action on Previous Published

Items

Tax Court

Part III.—Administrative, Procedural

and Miscellaneous

327

Notice of Proposed Rulemaking

463

Disbarments and Suspensions List

507

Summaries of Disciplinary Actions Taken by

the Director of Practice

510

Index

511

1995–2 C.B.

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Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of

view.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

These principles of tax administration were previously published in the

Internal Revenue Bulletin as Revenue Procedure 64–22, 1964–1 (Part 1)

C.B. 689. They are restated here to emphasize their importance to all

employees of the Internal Revenue Service.

1995–2 C.B.

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining officers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great courtesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

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Introduction

The Internal Revenue Bulletin is the authoritative

instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the

Internal Revenue Service and for publishing Treasury

Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general

interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription basis. Bulletin contents of a permanent nature are

consolidated semiannually into Cumulative Bulletins,

which are sold on a single-copy basis.

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be

considered, and Service personnel and others concerned are cautioned against reaching the same

conclusions in other cases unless the facts and

circumstances are substantially the same.

It is the policy of the Service to publish in the Bulletin

all substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published

rulings apply retroactively unless otherwise indicated.

Procedures relating solely to matters of internal

management are not published; however, statements of

internal practices and procedures that affect the rights

and duties of taxpayers are published.

The Internal Revenue Cumulative Bulletin is divided

into four parts as follows:

Revenue rulings represent the conclusions of the

Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on

positions taken in rulings to taxpayers or technical

advice to Service field offices, identifying details and

information of a confidential nature are deleted to

prevent unwarranted invasions of privacy and to comply

with statutory requirements.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary

(Enforcement).

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

Notice of Proposed Rulemaking.

The preambles and text of proposed regulations that

were published in the Federal Register during this six

month period are printed in this section. Included in

this section is a list of person disbarred or suspended

from practice before the Internal Revenue Service.

Cumulative Bulletin 1995–2 is a consolidation of all

items of permanent nature published in the weekly

Bulletins 1995–26 through 1995–52 for the period of

July 1 through December 31, 1995.

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

1995–2 C.B.

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Definition of Terms

Revenue rulings and revenue procedures (hereinafter referred to as ‘‘rulings’’) that have an effect on previous

rulings use the following defined terms

to describe the effect:

Amplified describes a situation where

no change is being made in a prior

published position, but the prior position

is being extended to apply to a variation

of the fact situation set forth therein.

Thus, if an earlier ruling held that a

principle applied to A, and the new

ruling holds that the same principle also

applies to B, the earlier ruling is

amplified. (Compare with modified,

below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in

a prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an

essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but

not to B, and the new ruling holds that

it applies to both A and B, the prior

ruling is modified because it corrects a

published position. (Compare with amplified and clarified, above).

Obsoleted describes a previously

published ruling that is not considered

determinative with respect to future

transactions. This term is most commonly used in a ruling that lists

previously published rulings that are

obsoleted because of changes in law or

regulations. A ruling may also be

obsoleted because the substance has

been included in regulations subsequently adopted.

Revoked describes situations where

the position in the previously published

ruling is not correct and the correct

position is being stated in the new

ruling.

Superseded describes a situation

where the new ruling does nothing

more than restate the substance and

situation of a previously published

ruling (or rulings). Thus, the term is

used to republish under the 1986 Code

and regulations the same position published under the 1939 Code and regulations. The term is also used when it is

desired to republish in a single ruling a

series of situations, names, etc., that

were previously published over a

period of time in separate rulings. If

the new ruling does more than restate

the substance of a prior ruling, a

combination of terms is used. For

example, modified and superseded describes a situation where the substance

of a previously published ruling is

being changed in part and is continued

without change in part and it is desired

to restate the valid portion of the

previously published ruling in a new

ruling that is self contained. In this

case the previously published ruling is

first modified and then, as modified, is

superseded.

Supplemented is used in situations in

which a list, such as a list of the names

of countries, is published in a ruling

and that list is expanded by adding

further names in subsequent rulings.

After the original ruling has been

supplemented several times, a new

ruling may be published that includes

the list in the original ruling and the

additions, and supersedes all prior

rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedural Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and

formerly used will appear in material published

in the Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

1995–2 C.B.

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Numerical Finding List

Notices:

95–41, 328

95–42, 328

95–43, 328

95–44, 330

95–45, 330

95–46, 331

95–47, 331

95–48, 332

95–49, 332

95–50, 333

95–51, 333

95–52, 334

95–53, 334

95–54, 335

95–55, 336

95–56, 336

95–57, 337

95–58, 337

95–59, 338

95–60, 338

95–61, 339

95–62, 341

95–63, 342

95–64, 342

95–65, 342

95–66, 343

95–67, 343

Proposed Regulations:

CO–19–95, 464

CO–24–95, 466

CO–26–95, 466

EE–24–93, 468

IA–36–91, 470

IA–44–94, 471

IA–10–95, 478

IA–30–95, 479

INTL–75–92, 480

INTL–24–94, 485

PS–268–82, 491

PS–29–92, 497

PS–34–92, 494

PS–25–94, 502

PS–54–94, 503

PS–8–95, 506

Public Laws:

104–7, 325

Railroad Retirement Quarterly Rate:

227

Revenue Procedures:

95–29A, 343

95–30, 354

95–31, 378

95–32, 379

95–33, 380

95–34, 385

Revenue Procedures—Continued

95–35, 391

95–35A, 392

95–36, 393

95–37, 393

95–38, 397

95–39, 399

95–40, 402

95–41, 409

95–42, 411

95–43, 412

95–44, 412

95–45, 412

95–46, 414

95–47, 417

95–48, 418

95–49, 419

95–50, 430

95–51, 430

95–52, 439

95–53, 445

95–54, 450

95–55, 457

Revenue Rulings:

95–29A, 66

95–48, 125

95–49, 7

95–50, 71

95–51, 127

95–52, 27

95–53, 30

95–54, 6

95–55, 313

95–56, 322

95–57, 62

95–58, 191

95–59, 266

95–60, 78

95–61, 72

95–62, 129

95–63, 85

95–64, 7

95–65, 73

95–66, 11

95–67, 130

95–68, 272

95–69, 38

95–70, 124

95–71, 323

95–72, 74

95–73, 132

95–74, 36

95–75, 39

95–76, 75

95–77, 122

95–78, 269

95–79, 134

95–80, 79

95–81, 70

95–82, 76

95–83, 8

Social Security Contributions & Benefit

Base:

458

Treasury Decisions:

8597, 147

8598, 188

8599, 12

8600, 135

8601, 31

8602, 15

8603, 281

8604, 227

8605, 282

8606, 3

8607, 9

8608, 67

8609, 229

8610, 306

8611, 286

8612, 192

8613, 216

8614, 80

8615, 83

8616, 263

8617, 274

8618, 89

8619, 41

8620, 63

8621, 261

8622, 237

8623, 28

8624, 258

8625, 284

8626, 34

8627, 86

8628, 253

8629, 315

Treasury Department Directives:

15–42, 459

15–43, 459

Treasury Department Orders:

150–01, 460

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Finding List of Current

Action on Previously

Published Items

Revenue Procedures—Continued

Revenue Rulings—Continued

94–35

Superseded by

95–30, 354

63–125

Obsoleted by

95–71, 323

Revenue Procedures:

94–49

Modified by

95–33, 380

64–100

Obsoleted by

95–71, 323

94–63

Superseded by

95–49, 419

64–239

Obsoleted by

95–71, 323

71–38

Obsoleted by

95–44, 412

72–15

Obsoleted by

95–44, 412

82–20

Obsoleted by

95–43, 412

82–59

Obsoleted by

95–44, 412

83–23

Supplemented by

95–48, 418

89–9

Modified by

95–34, 385

89–13

Modified by

95–34, 385

95–42, 411

90–55

Obsoleted by

95–45, 412

94–66

Obsoleted in part by

95–32, 379

94–73

Superseded by

95–54, 450

64–257

Obsoleted by

95–71, 323

65–30

Obsoleted by

95–71, 323

95–3

Amplified by

Notice 95–45, 330

95–50, 430

66–81

Obsoleted by

95–71, 323

95–8

Modified by

95–34, 385

66–306

Obsoleted by

95–71, 323

95–29

Modified and Amplified by

95–29A, 343

66–327

Obsoleted by

95–71, 323

95–35

Modified in part by

95–35A, 392

67–269

Obsoleted by

95–71, 323

Revenue Rulings:

68–21

Obsoleted by

95–71, 323

92–10

Clarified by

95–52, 439

54–171

Obsoleted by

95–71, 323

92–16

Modified & Superseded by

95–52, 439

54–257

Obsoleted by

95–71, 323

93–12

Modified by

95–34, 385

56–171

Obsoleted by

95–71, 323

93–38

Supplemented by

95–31, 378

56–286

Obsoleted by

95–71, 323

93–39

Modified by

95–34, 385

57–243

Obsoleted by

95–71, 323

93–42

Modified by

95–34, 385

57–490

Obsoleted by

95–71, 323

93–47

Modified by

95–34, 385

58–9

Obsoleted by

95–71, 323

94–13

Modified by

95–34, 385

58–241

Obsoleted by

95–71, 323

70–467

Obsoleted by

95–71, 323

94–19

Superseded by

95–52, 439

58–391

Obsoleted by

95–71, 323

70–514

Obsoleted by

95–71, 323

1995–2 C.B.

68–294

Obsoleted by

95–71, 323

68–358

Obsoleted by

95–71, 323

68–457

Obsoleted by

95–71, 323

69–95

Obsoleted by

95–71, 323

69–172

Obsoleted by

95–71, 323

69–284

Obsoleted by

95–71, 323

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Revenue Rulings—Continued

71–367

Obsoleted by

95–80, 79

75–508

Obsoleted by

95–71, 323

82–72

Obsoleted by

95–71, 323

71–522

Obsoleted by

95–71, 323

76–36

Obsoleted by

95–71, 323

82–113

Obsoleted by

95–71, 323

73–2

Obsoleted by

95–71, 323

77–190

Obsoleted by

95–71, 323

83–38

Obsoleted by

95–71, 323

73–264

Obsoleted by

95–71, 323

77–182

Modified by

95–58, 191

73–515

Obsoleted by

95–71, 323

78–285

Obsoleted by

95–71, 323

73–551

Obsoleted by

95–71, 323

78–350

Obsoleted by

95–71, 323

73–552

Obsoleted by

95–71, 323

78–422

Obsoleted by

95–71, 323

73–611

Obsoleted by

95–71, 323

79–3

Obsoleted by

95–71, 323

74–61

Obsoleted by

95–71, 323

79–41

Clarified & Superseded by

95–53, 30

74–119

Obsoleted by

95–71, 323

79–121

Obsoleted by

95–71, 323

74–295

Obsoleted by

95–71, 323

79–149

Obsoleted by

95–71, 323

74–430

Obsoleted by

95–71, 323

79–353

Revoked by

95–58, 191

74–441

Obsoleted by

95–71, 323

79–376

Obsoleted by

95–71, 323

74–522

Obsoleted by

95–71, 323

80–221

Obsoleted by

95–71, 323

75–40

Obsoleted by

95–71, 323

81–51

Revoked by

95–58, 191

75–240

Obsoleted by

95–71, 323

81–204

Obsoleted by

95–71, 323

75–324

Obsoleted by

95–71, 323

81–218

Obsoleted by

95–71, 323

75–460

Obsoleted by

95–71, 323

82–58

Obsoleted by

95–71, 323

84–152

Obsoleted by

95–56, 322

84–153

Obsoleted by

95–56, 322

85–125

Obsoleted by

95–71, 323

85–161

Obsoleted by

95–71, 323

85–163

Obsoleted by

95–56, 322

87–4

Obsoleted by

95–71, 323

87–89

Obsoleted in part by

95–56, 322

92–63

Modified and Superseded by

95–63, 85

92–84

Obsoleted by

T.D. 8600, 135

93–88

Suspended by

Notice 95–45, 330

95–35

Modified by

95–66, 338

1995–2 C.B.

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Cumulative List of Actions Relating to Court Decisions Published in the Internal

Revenue Bulletin from January 1, 1995 through December 31, 1995

It is the policy of the Internal

Revenue Service to announce at an

early date whether it will follow the

holdings in certain cases. An Action

on Decision is the document making

such an announcement. An Action

on Decision will be issued at the

discretion of the Service only on

unappealed issues decided adverse

to the government. Generally, an

Action on Decision is issued where

its guidance would be helpful to

Service personnel working with the

same or similar issues. Unlike a

Treasury Regulation or a Revenue

Ruling, an Action on Decision is not

an affirmative statement of Service

position. It is not intended to serve

as public guidance and may not be

cited as precedent.

Actions on Decisions shall be

relied upon within the Service only

as conclusions applying the law to

the facts in the particular case at the

time the Action on Decision was

issued. Caution should be exercised

in extending the recommendation of

the Action on Decision to similar

cases where the facts are different.

Moreover, the recommendation in

the Action on Decision may be

superseded by new legislation, regulations, rulings, cases, or Actions

on Decisions.

Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax

Court opinions. The Service has

expanded its acquiescence program

to include other civil tax cases where

guidance is determined to be helpful. Accordingly, the Service now

may acquiesce or nonacquiesce in

the holdings of memorandum Tax

Court opinions, as well as those of

the United States District Courts,

Claims Court, and Circuit Courts of

Appeal. Regardless of the court deciding the case, the recommendation

of any Action on Decision will be

published in the Internal Revenue

Bulletin.

The recommendation in every Action on Decision will be summarized

as acquiescence, acquiescence in

result only, or nonacquiescence.

Both ‘‘acquiescence’’ and ‘‘acquiescence in result only’’ mean that the

Service accepts the holding of the

court in a case and that the Service

will follow it in disposing of cases

with the same controlling facts.

However, ‘‘acquiescence’’ indicates

neither approval nor disapproval of

the reasons assigned by the court for

its conclusions; whereas, ‘‘acquiescence in result only’’ indicates disagreement or concern with some or

all of those reasons. Nonacquiescence signifies that, although no

further review was sought, the Service does not agree with the holding

of the court and, generally, will not

follow the decision in disposing of

cases involving other taxpayers. In

reference to an opinion of a circuit

court of appeals, a nonacquiescence

indicates that the Service will not

follow the holding on a nationwide

basis. However, the Service will

recognize the precedential impact of

the opinion on cases arising within

the venue of the deciding circuit.

The announcements published in

the weekly Internal Revenue Bulletins are consolidated semiannually

and annually. The semiannual consolidation appears in the first

Bulletin for July and in the

Cumulative Bulletin for the first half of

the year, and the annual consolidation

appears in the first Bulletin for the

following January and in the Cumulative Bulletin for the last half of the

year.

The Commissioner ACQUIESCE in

the following decisions:

Baker, Willard K. & Irene L.,1 748

F.2d 1465 (11th Cir. 1984)

Kisling, Est. of,2 32 F.3d 1222 (8th

Cir. 1994)

Louisiana Land & Exploration Co.,3

102 T.C. 21 (1994)

National Semiconductor Corp. & Consolidated Subs. v. Commissioner,4 T.C.

Memo 1994–195

Seagate Technology, Inc. & Consolidated Subs.,5 102 T.C. 149 (1994)

Taisei Fire & Marine Inc. Co., Ltd., et

al. v. Commissioner,6 104 T.C. 535

(1995)

Trump Village v. Commissioner,7 T.C.

Memo 1995–281

The Commissioner does NOT ACQUIESCE in the following decisions:

Louisiana Land & Exploration Co.,8 90

T.C. 630 (1988)

Louisiana Land & Exploration Co.,9

102 T.C. 21 (1994)

Milligan, Robert E., v. Commissioner,10 38 F.3d 1094 (9th Cir.

1994)

1Acquiescence relating to whether Rev. Rul. 80–173, 1980–2 C.B. 60, should be applied retroactively to disallow a section 162(a) deduction for flight training

course expenses.

2Acquiescence relating to whether transfers of irrevocable fractional shares in a revocable trust to donees designated by decedent within the three-year period

preceding the death of decedent are includible in decedent’s gross estate pursuant to sections 2035(d)(2) and 2038(a)(1) of the Code.

3Acquiescence in the issue relating to whether costs related to acquiring, transporting and installing gas processing equipment and the offshore modules that house

such equipment are deductible as intangible drilling and development costs. Acquiescence in result in the issue relating to whether the Claus method used by

plaintiff to recover elemental sulphur from hydrogen sulfide produced from an oil or gas well qualified as a mining process for percentage depletion purposes.

Acquiescence ‘‘in result’’ means acceptance of the Court but disagreement with some or all the reasons assigned for the decision.

4Acquiescence in result relating to whether (i) prices paid by petitioner’s offshore Asian subsidiaries for silicon wafers manufactured by petitioner in the U.S., and

incorporated by the former into electronic products, and (ii) the prices that petitioner paid the subsidiaries for the completed products were arm’s length.

Acquiescence ‘‘in result’’ means acceptance of the Court but disagreement with some or all the reasons assigned for the decision.

5Acquiescence in result relating to whether certain royalties attributable to intangibles that petitioner transferred to its wholly-owned subsidiary, and the prices that

petitioner paid the subsidiary for products manufactured by the latter, were arm’s length. Acquiescence ‘‘in result’’ means acceptance of the Court but disagreement

with some or all the reasons assigned for the decision.

1995–2 C.B.

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Cumulative List of Actions Relating to Court Decisions Published in the Internal

Revenue Bulletin from January 1, 1995 through December 31, 1995—Continued

Morganbesser, Marvin D., et al. v.

U.S.,11 984 F.2d 560 (2d Cir. 1993)

Placid Oil Co. v. IRS,12 988 F.2d 554

(5th Cir. 1993)

St. Jude Medical, Inc. v. Commis-

sioner,13 97 T.C. 457 (1991) (8th

Cir. 1994)

Sealy Power Ltd.,14 46 F.3d 382 (5th

Cir. 1995)

Security Bank Minnesota v. Commis-

sioner,15 994 F.2d 432 (8th Cir.

1993)

Vulcan Materials Co. & Subsidiaries v.

Commissioner,16 959 F.2d 973 (11th

Cir. 1992)

6Acquiescence relating to whether four Japanese reinsurance companies have agency permanent establishments in the U.S. because their U.S. agent was not ‘‘an

agent of independent status’’ under Article 9(5) of the U.S.-Japan Tax Treaty.

7Acquiescence relating to whether the limitations of section 277 apply to a cooperative housing corporation described in section 216, which is also subject to the

provisions of subchapter T of the Code.

8Nonacquiescence relating to whether section 613A(e)(2) of the Code eliminates percentage depletion under section 613 for nonhydrocarbon minerals produced

from an oil or gas well.

9Nonacquiescence relating to whether all income from the sales of oil, gas and sulphur are to be combined when calculating the taxable income from the property

under section 613(a) of the Code, even though the oil and gas income is subject to a separate depletion regimen.

10Nonacquiescence realting to whether payments to a former insurance agent, which are based on the amount of compensation during the last twelve months as an

agent, derive from a trade or business carried on by the individual, so as to be subject to tax under the Self-Employment Contributions Act (SECA).

11Nonacquiescence relating to whether the Second Circuit Court of Appeals, in affirming the U.S. District Court for Connecticut, erred as a matter of law in

determining that a multiemployer pension trust was a labor organization exempt under section 501(c)(5) of the Code.

12Nonacquiescence relating to whether the U.S. or the taxpayer bears the ultimate burden of proof in bankruptcy proceedings in which the taxpayer challenges a

federal income tax claim arising from the disallowance ofdeductions.

13Nonacquiescence relating to whether section 1.861–8(e)(3) of the regulations is invalid as applied to DISC combined taxable income calculations.

14Nonacquiescence relating to whether an electrical generating facility that produced only de minimis amounts of electricity on a sporadic basis in 1984 due to

functional deficiencies in its equipment ‘‘placed in service’’ was within the meaning of sections 46 and 167 of the Code.

15Nonacquiescence relating to whether a cash method bank that makes short-term loans with a stated interest rate to customers in the ordinary course of its

business is subject to accrual of the interest on those loans under section 1281(a)(2) of the Code.

16Nonacquiescence relating to whether the term ‘‘accumulated profits’’ as used in the denominator of the section 902 deemed paid credit fraction before the Tax

Reform Act of 1986 means all of the foreign corporation’s accumulated profits for the taxable year.

1995–2 C.B.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Subtitle A.—Income Taxes

Chapter 1.—Normal Taxes and Surtaxes

Subchapter A.—Determination of Tax Liability

Part I.—Tax on Individuals

Section 1.—Tax Imposed

26 CFR 1.1–1: Income tax on individuals.

The Service is providing adjusted tax tables

for individuals and trusts and estates for taxable

years beginning in 1996 to reflect changes in the

cost of living. Also provided are certain reductions allowed against the unearned income of

minor children in computing the ‘‘kiddie tax.’’

See Rev. Proc. 95–53, page 445.

Part IV.—Credits Against Tax

Subpart A.—Nonrefundable Personal Credits

Section 25.—Interest on Certain

Home Mortgages

26 CFR 1.25–3T: Qualified mortgage credit

certificate (temporary).

The qualified census tracts for Puerto Rico and

the Virgin Islands are set forth for use in

determining the portion of loans required to be

placed in targeted areas under section 143(h) of

the Code. See Rev. Proc. 95–31, page 378.

Definition of Qualified Electric

Vehicle, and Recapture Rules for

Qualified Electric Vehicles, Qualified

Clean-fuel Vehicle Property, and

Qualified Clean-fuel Vehicle Refueling

Property

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations on the definition of a

qualified electric vehicle, the recapture

of any credit allowable for a qualified

electric vehicle, and the recapture of

any deduction allowable for qualified

clean-fuel vehicle property or qualified

clean-fuel vehicle refueling property.

These regulations reflect changes to the

law made by the Energy Policy Act of

1992 and affect taxpayers who are

owners of qualified electric vehicles,

clean-fuel vehicles, and clean-fuel vehicle refueling property.

DATES: These regulations are effective

August 3, 1995.

For dates of applicability of these

regulations, see §1.30–1(c) and

§1.179A–1(h).

of section 30 of the Internal Revenue

Code (Code). Several commentators

recommended expanding the definition

to include a vehicle converted from a

used non-electric vehicle. The final

regulations do not adopt this recommendation because section 30(c)(1)(B)

provides that the original use of the

vehicle must commence with the taxpayer. Moreover, conversion costs are

deductible under section 179A.

Some commentators suggested including a hybrid-electric vehicle in the

definition of a qualified electric vehicle. This issue will be addressed along

with other substantive rules in additional proposed regulations under sections 30 and 179A of the Code.

Effective Date

The final regulations are effective on

October 14, 1994. If the recapture date

is before the effective date of these

regulations, a taxpayer may use any

reasonable method to recapture the

benefit of any section 30 credit allowable or section 179A deduction allowable consistent with sections 30 and

179A and their legislative history.

Special Analyses

SUPPLEMENTARY INFORMATION:

26 CFR 1.25–4T: Qualified mortgage credit

certificate program (temporary).

Guidance is provided for the use of the

national and area median gross income figures

by issuers of qualified mortgage bonds and

mortgage credit certificates in determining the

housing cost/income ratio described in section

143(f)(5) of the Code. See Rev. Proc. 95–32,

page 379.

Subpart B.—Foreign Tax Credit, etc.

Section 30.—Credit for Qualified

Electric Vehicles

26 CFR 1.30–1: Definition of qualified electric

vehicle and recapture of credit for qualified

electric vehicle.

(Also Section 179A; 1.179A–1.)

T.D. 8606

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Background

On October 14, 1994, the IRS

published in the Federal Register a

notice of proposed rulemaking providing the definition of a qualified electric

vehicle under section 30(c) and the

rules for the recapture of the section 30

credit and section 179A deduction

under sections 30(d)(2) and 179A(e)(4),

respectively (59 FR 52105 [PS–72–92,

1994–2 C.B. 894]).

Written comments responding to the

notice were received. No public hearing

was requested or held. After consideration of all the comments, this Treasury

decision adopts the regulations as

proposed.

Explanation of Provisions

In General

The final regulations define a

qualified electric vehicle for purposes

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

apply to these regulations, and, therefore, a Regulatory Flexibility Analysis

is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for Advocacy

of the Small Business Administration

for comment on its impact on small

business.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

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PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding entries

in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.30–1 also issued under 26

U.S.C. 30(d)(2) * * *

Section 1.179A–1 also issued under 26

U.S.C. 179A(e)(4) * * *

Par. 2. Section 1.30–1 is added

immediately following the undesignated

center heading ‘‘Credits Allowable’’ to

read as follows:

§1.30–1 Definition of qualified

electric vehicle and recapture of

credit for qualified electric vehicle.

(a) Definition of qualified electric

vehicle. A qualified electric vehicle is a

motor vehicle that meets the requirements of section 30(c). Accordingly, a

qualified electric vehicle does not

include any motor vehicle that has ever

been used (for either personal or

business use) as a non-electric vehicle.

(b) Recapture of credit for qualified

electric vehicle—(1) In general—(i)

Addition to tax. If a recapture event

occurs with respect to a taxpayer’s

qualified electric vehicle, the taxpayer

must add the recapture amount to the

amount of tax due in the taxable year

in which the recapture event occurs.

The recapture amount is not treated as

income tax imposed on the taxpayer by

chapter 1 of the Internal Revenue Code

for purposes of computing the alternative minimum tax or determining the

amount of any other allowable credits

for the taxable year in which the

recapture event occurs.

(ii) Reduction of carryover. If a

recapture event occurs with respect to a

taxpayer’s qualified electric vehicle,

and if a portion of the section 30 credit

for the cost of that vehicle was

disallowed under section 30(b)(3)(B)

and consequently added to the taxpayer’s minimum tax credit pursuant to

section 53(d)(1)(B)(iii), the taxpayer

must reduce its minimum tax credit

carryover by an amount equal to the

portion of any minimum tax credit

carryover attributable to the disallowed

section 30 credit, multiplied by the

recapture percentage for the taxable

year of recapture. Similarly, the taxpayer must reduce any other credit

carryover amounts (such as under

section 469) by the portion of the

carryover attributable to section 30,

multiplied by the recapture percentage.

1995–2 C.B.

(2) Recapture event—(i) In general.

A recapture event occurs if, within 3

full years from the date a qualified

electric vehicle is placed in service, the

vehicle ceases to be a qualified electric

vehicle. A vehicle ceases to be a

qualified electric vehicle if—

(A) The vehicle is modified so that

it is no longer primarily powered by

electricity;

(B) The vehicle is used in a manner

described in section 50(b); or

under section 30 sells or disposes of

the vehicle and knows or has reason to

know that the vehicle will be used in a

manner described in paragraph (b)(2)(i)(A) or (B) of this section.

(ii) Exception for disposition. Except

as provided in paragraph (b)(2)(i)(C) of

this section, a sale or other disposition

(including a disposition by reason of an

accident or other casualty) of a

qualified electric vehicle is not a

recapture event.

(3) Recapture amount. The recapture

amount is equal to the recapture

percentage times the decrease in the

credits allowed under section 30 for all

prior taxable years that would have

resulted solely from reducing to zero

the cost taken into account under

section 30 with respect to such vehicle,

including any credits allowed attributable to section 30 (such as under

sections 53 and 469).

(4) Recapture date. The recapture

date is the actual date of the recapture

event unless a recapture event described in paragraph (b)(2)(i)(B) of this

section occurs, in which case the

recapture date is the first day of the

recapture year.

(5) Recapture percentage. For purposes of this section, the recapture

percentage is—

(i) 100, if the recapture date is

within the first full year after the date

the vehicle is placed in service;

(ii) 662⁄3, if the recapture date is

within the second full year after the

date the vehicle is placed in service; or

(iii) 331⁄3, if the recapture date is

within the third full year after the date

the vehicle is placed in service.

(6) Basis adjustment. As of the first

day of the taxable year in which the

recapture event occurs, the basis of the

qualified electric vehicle is increased

by the recapture amount and the carryover reductions taken into account

under paragraphs (b)(1)(i) and (ii) of

this section, respectively. For a vehicle

that is of a character that is subject to

an allowance for depreciation, this

increase in basis is recoverable over the

remaining recovery period for the

vehicle beginning as of the first day of

the taxable year of recapture.

(7) Application of section 1245 for

sales and other dispositions. For purposes of section 1245, the amount of

the credit allowable under section 30(a)

with respect to any qualified electric

vehicle that is (or has been) of a

character subject to an allowance for

depreciation is treated as a deduction

allowed for depreciation under section

167. Therefore, upon a sale or other

disposition of a depreciable qualified

electric vehicle, section 1245 will apply

to any gain recognized to the extent the

basis of the depreciable vehicle was

reduced under section 30(d)(1) net of

any basis increase described in paragraph (b)(6) of this section.

(8) Examples. The following examples illustrate the provisions of this

section:

Example 1. A, a calendar-year taxpayer,

purchases and places in service for personal use

on January 1, 1995, a qualified electric vehicle

costing $25,000. On A’s 1995 federal income tax

return, A claims a credit of $2,500. On January

2, 1996, A sells the vehicle to an unrelated third

party who subsequently converts the vehicle into

a non-electric vehicle on October 15, 1996.

There is no recapture upon the sale of the

vehicle by A provided A did not know or have

reason to know that the purchaser intended to

convert the vehicle to non-electric use.

Example 2. B, a calendar-year taxpayer,

purchases and places in service for personal use

on October 11, 1994, a qualified electric vehicle

costing $20,000. On B’s 1994 federal income tax

return, B claims a credit of $2,000, which

reduces B’s tax by $2,000. The basis of the

vehicle is reduced to $18,000 ($20,000 –

$2,000). On March 8, 1996, B sells the vehicle

to a tax-exempt entity. Because B knowingly

sold the vehicle to a tax-exempt entity described

in section 50(b) in the second full year from the

date the vehicle was placed in service, B must

recapture $1,333 ($2,000 3 66 2⁄3 percent). This

recapture amount increases B’s tax by $1,333 on

B’s 1996 federal income tax return and is added

to the basis of the vehicle as of January 1, 1996,

the beginning of the taxable year in which the

recapture event occurred.

Example 3. X, a calendar-year taxpayer,

purchases and places in service for business use

on January 1, 1994, a qualified electric vehicle

costing $30,000. On X’s 1994 federal income tax

return, X claims a credit of $3,000, which

reduces X’s tax by $3,000. The basis of the

vehicle is reduced to $27,000 ($30,000 – $3,000)

prior to any adjustments for depreciation. On

March 8, 1995, X converts the qualified electric

vehicle into a gasoline-propelled vehicle. Because X modified the vehicle so that it is no

longer primarily powered by electricity in the

second full year from the date the vehicle was

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placed in service, X must recapture $2,000

($3,000 3 66 2/3 percent). This recapture

amount increases X’s tax by $2,000 on X’s 1995

federal income tax return. The recapture amount

of $2,000 is added to the basis of the vehicle as

of January 1, 1995, the beginning of the taxable

year of recapture, and to the extent the property

remains depreciable, the adjusted basis is recoverable over the remaining recovery period.

Example 4. The facts are the same as in

Example 3. In 1996, X sells the vehicle for

$31,000, recognizing a gain from this sale. Under

paragraph (b)(7) of this section, section 1245

will apply to any gain recognized on the sale of

a depreciable vehicle to the extent the basis of

the vehicle was reduced by the section 30 credit

net of any basis increase from recapture of the

section 30 credit. Accordingly, the gain from the

sale of the vehicle is subject to section 1245 to

the extent of the depreciation allowance for the

vehicle plus the credit allowed under section 30

($3,000), less the previous recapture amount

($2,000). Any remaining amount of gain may be

subject to other applicable provisions of the

Internal Revenue Code.

effective on October 14, 1994. If the

recapture date is before the effective

date of this section, a taxpayer may use

any reasonable method to recapture the

benefit of any credit allowable under

section 30(a) consistent with section 30

and its legislative history. For this

purpose, the recapture date is defined

in paragraph (b)(4) of this section.

Par. 3. Section 1.179A–1 is added to

read as follows:

§1.179A–1 Recapture of deduction for

qualified clean-fuel vehicle property

and qualified clean-fuel vehicle

refueling property.

(a) In general. If a recapture event

occurs with respect to a taxpayer’s

qualified clean-fuel vehicle property or

qualified clean-fuel vehicle refueling

property, the taxpayer must include the

recapture amount in taxable income for

the taxable year in which the recapture

event occurs.

(b) Recapture event—(1) Qualified

clean-fuel vehicle property—(i) In general. A recapture event occurs if,

within 3 full years from the date a

vehicle of which qualified clean-fuel

vehicle property is a part is placed in

service, the property ceases to be

qualified clean-fuel vehicle property.

Property ceases to be qualified cleanfuel vehicle property if—

(A) The vehicle is modified by the

taxpayer so that it may no longer be

propelled by a clean-burning fuel;

(B) The vehicle is used by the

taxpayer in a manner described in

section 50(b);

qualify as property defined in section

179A(c); or

(D) The taxpayer receiving the deduction under section 179A sells or

disposes of the vehicle and knows or

has reason to know that the vehicle

will be used in a manner described in

paragraph (b)(1)(i)(A), (B), or (C) of

this section.

(ii) Exception for disposition. Except

as provided in paragraph (b)(1)(i)(D) of

this section, a sale or other disposition

(including a disposition by reason of an

accident or other casualty) of qualified

clean-fuel vehicle property is not a

recapture event.

(2) Qualified clean-fuel vehicle refueling property—(i) In general. A

recapture event occurs if, at any time

before the end of its recovery period,

the property ceases to be qualified

clean-fuel vehicle refueling property.

Property ceases to be qualified cleanfuel vehicle refueling property if—

(A) The property no longer qualifies

as property described in section

179A(d);

(B) The property is no longer used

predominantly in a trade or business

(property will be treated as no longer

used predominantly in a trade or

business if 50 percent or more of the

use of the property in a taxable year is

for use other than in a trade or

business);

taxpayer in a manner described in

section 50(b); or

(D) The taxpayer receiving the deduction under section 179A sells or

disposes of the property and knows or

has reason to know that the property

will be used in a manner described in

paragraph (b)(2)(i)(A), (B), or (C) of

this section.

(ii) Exception for disposition. Except

as provided in paragraph (b)(2)(i)(D) of

this section, a sale or other disposition

(including a disposition by reason of an

accident or other casualty) of qualified

clean-fuel vehicle refueling property is

not a recapture event.

clean-fuel vehicle property. The recapture date is the actual date of the

recapture event unless an event described in paragraph (b)(1)(i)(B) of this

section occurs, in which case the

recapture date is the first day of the

recapture year.

(2) Qualified clean-fuel vehicle refueling property. The recapture date is

the actual date of the recapture event

unless the recapture occurs as a result

of an event described in paragraph

(b)(2)(i)(B) or (C) of this section, in

which case the recapture date is the

first day of the recapture year.

(d) Recapture amount—(1) Qualified

clean-fuel vehicle property. The recapture amount is equal to the benefit of

the section 179A deduction allowable

multiplied by the recapture percentage.

The recapture percentage is—

(i) 100, if the recapture date is

within the first full year after the date

the vehicle is placed in service;

(ii) 662⁄3, if the recapture date is

within the second full year after the

date the vehicle is placed in service; or

(iii) 331⁄3, if the recapture date is

within the third full year after the date

the vehicle is placed in service.

(2) Qualified clean-fuel vehicle refueling property. The recapture amount

is equal to the benefit of the section

179A deduction allowable multiplied

by the following fraction. The numerator of the fraction equals the total

recovery period for the property minus

the number of recovery years prior to,

but not including, the recapture year.

The denominator of the fraction equals

the total recovery period.

(e) Basis adjustment. As of the first

day of the taxable year in which the

recapture event occurs, the basis of the

vehicle of which qualified clean-fuel

vehicle property is a part or the basis

of qualified clean-fuel vehicle refueling

property is increased by the recapture

amount. For a vehicle or refueling

property that is of a character that is

subject to an allowance for depreciation, this increase in basis is recoverable over its remaining recovery period

beginning as of the first day of the

taxable year in which the recapture

event occurs.

(f) Application of section 1245 for

sales and other dispositions. For purposes of section 1245, the amount of

the deduction allowable under section

179A(a) with respect to any property

that is (or has been) of a character

subject to an allowance for depreciation

is treated as a deduction allowed for

depreciation under section 167. Therefore, upon a sale or other disposition of

depreciable qualified clean-fuel vehicle

refueling property or a depreciable

vehicle of which qualified clean-fuel

vehicle property is a part, section 1245

will apply to any gain recognized to

the extent the basis of the depreciable

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property or vehicle was reduced under

section 179A(e)(6) net of any basis

increase described in paragraph (e) of

this section.

(g) Examples. The following examples illustrate the provisions of this

section:

Example 1. A, a calendar-year taxpayer,

purchases and places in service for personal use

on January 1, 1995, a clean-fuel vehicle, a

portion of which is qualified clean-fuel vehicle

property, costing $25,000. The qualified cleanfuel vehicle property costs $11,000. On A’s 1995

federal income tax return, A claims a section

179A deduction of $2,000. On January 2, 1996,

A sells the vehicle to an unrelated third party

who subsequently converts the vehicle into a

gasoline-propelled vehicle on October 15, 1996.

There is no recapture upon the sale of the

vehicle by A provided A did not know or have

reason to know that the purchaser intended to

convert the vehicle to a gasoline-propelled

vehicle.

Example 2. B, a calendar-year taxpayer,

purchases and places in service for personal use

on October 11, 1994, a clean-fuel vehicle costing

$20,000, a portion of which is qualified cleanfuel vehicle property. The qualified clean-fuel

vehicle property costs $10,000. On B’s 1994

federal income tax return, B claims a deductionof

$2,000, which reduces B’s gross income by

$2,000. The basis of the vehicle is reduced to

$18,000 ($20,000 – $2,000). On January 31,

1996, B sells the vehicle to a tax-exempt entity.

Because B knowingly sold the vehicle to a taxexempt entity described in section 50(b) in the

second full year from the date the vehicle was

placed in service, B must recapture $1,333

($2,000 3 66 2⁄3 percent). This recapture amount

increases B’s gross income by $1,333 on B’s

1996 federal income tax return and is added to

the basis of the motor vehicle as of January 1,

1996, the beginning of the taxable year of

recapture.

Example 3. X, a calendar-year taxpayer,

purchases and places in service for its business

use on January 1, 1994, qualified clean-fuel

vehicle refueling property costing $400,000.

Assume this property has a 5-year recovery

period. On X’s 1994 federal income tax return, X

claims a deduction of $100,000, which reduces

X’s gross income by $100,000. The basis of the

property is reduced to $300,000 ($400,000 –

$100,000) prior to any adjustments for depreciation. In 1996, more than 50 percent of the use of

the property is other than in X’s trade or

business. Because the property is no longer used

predominantly in X’s business, X must recapture

three-fifths of the section 179A deduction or

$60,000 ($100,000 3 (5–2)/5 = $60,000) and

include that amount in gross income on its 1996

federal income tax return. The recapture amount

of $60,000 is added to the basis of the property

as of January 1, 1996, the beginning of the

taxable year of recapture, and to the extent the

property remains depreciable, the adjusted basis

is recoverable over the remaining recovery

period.

Example 4. X, a calendar-year taxpayer,

purchases and places in service for business use

on January 1, 1994, qualified clean-fuel vehicle

refueling property costing $350,000. Assume this

property has a 5-year recovery period. On X’s

1994 federal income tax return, X claims a

deduction of $100,000, which reduces X’s gross

1995–2 C.B.

income by $100,000. The basis of the property is

reduced to $250,000 ($350,000 – $100,000) prior

to any adjustments for depreciation. In 1995, X

converts the property to store and dispense

gasoline. Because the property is no longer used

as qualified clean-fuel vehicle refueling property

in 1995, X must recapture four-fifths of the

section 179A deduction or $80,000 ($100,000 3

(5–1)/5 = $80,000) and include that amount in

gross income on its 1995 federal income tax

return. The recapture amount of $80,000 is added

to the basis of the property as of January 1,

1995, the beginning of the taxable year of

recapture, and to the extent the property remains

depreciable, the adjusted basis is recoverable

over the remaining recovery period.

Example 5. The facts are the same as in

Example 4. In 1996, X sells the refueling

property for $351,000, recognizing a gain from

this sale. Under paragraph (f) of this section,

section 1245 will apply to any gain recognized

on the sale of depreciable property to the extent

the basis of the property was reduced by the

section 179A deduction net of any basis increase

from recapture of the section 179A deduction.

Accordingly, the gain from the sale of the

property is subject to section 1245 to the extent

of the depreciation allowance for the property

plus the deduction allowed under section 179A

($100,000), less the previous recapture amount

($80,000). Any remaining amount of gain may

be subject to other applicable provisions of the

Internal Revenue Code.

(h) Effective date. This section is

effective on October 14, 1994. If the

recapture date is before the effective

date of this section, a taxpayer may use

any reasonable method to recapture the

benefit of any deduction allowable

under section 179A(a) consistent with

section 179A and its legislative history.

For this purpose, the recapture date is

defined in paragraph (c) of this section.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

Approved June 21, 1995.

Leslie Samuels,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

August 2, 1995, 8:45 a.m., and published in

the issue of the Federal Register for August 3,

1995, 60 F.R. 39649)

Subpart C.—Refundable Credits

Section 32.—Earned Income

26 CFR 1.32–2: Earned income credit for

taxable years beginning after December 31,

1978.

The Service is providing inflation adjustments

to the limitations on the earned income tax credit

for taxable years beginning in 1996. See Rev.

Proc. 95–53, page 445.

Subpart D.—Business Related Credits

Section 40.—Alcohol Used as Fuel

Application of section 40. Guidance

is provided under section 40 of the

Code regarding the application of the

alcohol mixture credit with respect to

eligible alcohol that has been commingled with ineligible alcohol.

Rev. Rul. 95–54

ISSUE

If a taxpayer commingles alcohol

eligible for the alcohol mixture credit

under § 40(b)(1)(A) of the Internal

Revenue Code with other alcohol and

then uses some of the resulting commingled alcohol in a manner that

qualifies for the credit, how does the

taxpayer determine the amount of the

credit?

FACTS

X buys 300 gallons of methanol that

is derived from biomass. This methanol

(the eligible alcohol) meets the definition of alcohol in § 40(d)(1). X also

buys 700 gallons of methanol that is

derived from natural gas. This methanol (the ineligible alcohol) does not

meet the definition of alcohol in

§ 40(d)(1).

X commingles the eligible and ineligible alcohol in a storage tank. X

withdraws 100 gallons of the commingled alcohol from the storage tank

and mixes it with gasoline for sale for

use as a fuel. X sells the remaining 900

gallons of the commingled alcohol for

use in the production of paints and

plastics.

LAW AND ANALYSIS

Section 40(b)(1)(A) allows an alcohol mixture credit for alcohol used by

the taxpayer in the production of a

qualified mixture.

Section 40(b)(1)(B) provides that

qualified mixture means a mixture of

alcohol and gasoline or of alcohol and

a special fuel that is sold by the

taxpayer producing that mixture to any

person for use as a fuel, or is used as a

fuel by the taxpayer producing that

mixture.

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Section 40(d)(1) provides that alcohol

includes methanol and ethanol but does

not include (i) any alcohol produced

from petroleum, natural gas, or coal

(including peat), or (ii) alcohol with a

proof of less than 150.

Because the eligible and ineligible

alcohol are commingled in X’s storage

tank, a portion of the alcohol removed

from the tank contains both eligible and

ineligible alcohol. Therefore, a portion

of the commingled alcohol may not be

designated as composed only of either

eligible or ineligible alcohol. Because X

cannot determine the actual amounts of

eligible and ineligible alcohol contained

in the portion removed, these amounts

should be determined based on the

proportionate volume of each that was

placed into the storage tank. Thus,

because the eligible and ineligible alcohol were placed into the storage tank at

a thirty-seventy ratio, of the 100 gallons

of alcohol that X mixes with gasoline

for sale for use as a fuel, 30 gallons are

eligible for the alcohol mixture credit

allowed by § 40(b)(1)(A).

HOLDING

If a taxpayer commingles eligible

alcohol with ineligible alcohol and then

uses some of the resulting commingled

alcohol in a manner that qualifies for

the alcohol mixture credit under

§ 40(b)(1)(A), the amount of alcohol

eligible for the credit is determined

based on the proportionate amount of

eligible alcohol that is contained in the

commingled alcohol.

Section 42.—Low-Income Housing

Credit

Low-income housing tax credit. An

extended low-income commitment satisfies section 42(h)(6) of the Code even

though its provisions may be suspended

or terminated after the compliance

period when a tenant exercises a right

of first refusal to purchase a lowincome building.

Rev. Rul. 95–49

ISSUE

Does an extended low-income housing commitment satisfy § 42(h)(6) if its

provisions may be suspended or terminated after the compliance period when

a tenant exercises a right of first refusal

to purchase a low-income building?

FACTS

The owner (Owner) of a qualified

low-income building (as defined in

§ 42(c)(2) of the Internal Revenue

Code) rents the building to a single

low-income family (Tenant). In an

agreement between the Owner and the

Tenant, the Owner grants the Tenant a

right of first refusal to purchase the

building after the close of the 15-year

compliance period (as defined in § 42(i)(1)) at a minimum purchase price as

specified in § 42(i)(7)(B). The provisions of the extended low-income

housing commitment (Commitment) executed by the Owner with the applicable state housing agency (Agency) are

terminated after the compliance period

if the right is exercised by the Tenant.

The Commitment otherwise meets the

requirements of § 42(h)(6).

LAW AND ANALYSIS

Section 42 provides a tax credit for

investment in qualified low-income

buildings placed in service after December 31, 1986.

Section 42(h)(6) provides that no tax

credit is allowed for a building unless

an extended low-income housing commitment between the low-income building owner and the appropriate housing

credit agency is in effect at the end of

the taxable year. The commitment is

binding on all successors to the owner

and includes certain provisions that

continue after the close of the building’s 15-year compliance period. One

of the commitment’s provisions ensures

that a certain percentage of a lowincome building’s units will continue to

be available for rental by low-income

tenants after the close of the compliance period.

Section 42(i)(7) provides that no

federal income tax benefit fails to be

allowable to the owner of a qualified

low-income building merely by reason

of a right of first refusal held by the

building’s tenants to purchase the

building after the close of the 15-year

compliance period. Section 42(i)(7)

also continues the availability of lowincome housing beyond the compliance

period by permitting low-income tenants to be homeowners instead of

renters.

The objectives of § 42(h)(6) and

(i)(7) are similar in that both sections

attempt to promote housing for lowincome individuals beyond the compliance period, by rental in the case of

§ 42(h)(6) or by outright ownership in

the case of § 42(i)(7).

Accordingly, under § 42(h)(6) it is

appropriate for an owner and a state

housing agency to reference a right of

first refusal to be granted by the owner

to tenants (either initially or by later

amendment) in a commitment between

the owner and the agency. In this case,

the Owner and the Agency have agreed

that the provisions of the Commitment

will be terminated after the compliance

period on the exercise by the Tenant of

a right of first refusal. The Commitment nevertheless satisfies § 42(h)(6).

The Commitment would likewise have

satisfied § 42(h)(6) if it had provided

that application of its provisions would

be suspended, subject to conditions

imposed by the Agency, on the exercise of the Tenant’s right of first

refusal.

HOLDING

An extended low-income housing

commitment satisfies § 42(h)(6) even

though its provisions may be suspended

or terminated after the compliance

period when a tenant exercises a right

of first refusal to purchase a lowincome building.

Low-income housing credit; satisfactory bond; ‘‘bond factor’’ amounts for

the period January through September

1995. This ruling announces the

monthly bond factor amounts to be

used by taxpayers who dispose of

qualified low-income buildings or interests therein during the period January

through September 1995.

Rev. Rul. 95–64

In Rev. Rul. 90–60, 1990–2 C.B. 3,

the Internal Revenue Service provided

guidance to taxpayers concerning the

general methodology used by the

Treasury Department in computing the

bond factor amounts used in calculating

the amount of bond considered satisfactory by the Secretary under § 42(j)(6)

of the Internal Revenue Code. It further

announced that the Secretary would

publish in the Internal Revenue Bulletin a table of ‘‘bond factor’’ amounts

for dispositions occurring during each

calendar month.

This revenue ruling provides in

Table 1 the bond factor amounts for

calculating the amount of bond considered satisfactory under § 42(j)(6) for

dispositions of qualified low-income

buildings or interests therein during the

period January through September

1995.

1995–2 C.B.

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Table 1

Rev. Rul. 95–64

Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service

or, if Section 42(f)(1) Election Was

Made, the Succeeding Calendar Year

Month of

Disposition

1987

1988

1989

1990

1991

1992

1993

1994

1995

Jan ’95

Feb ’95

Mar ’95

Apr ’95

May ’95

Jun ’95

Jul ’95

Aug ’95

Sep ’95

85.42%

85.15

84.89

91.28

91.00

90.73

84.10

83.86

83.62

87.94%

87.66

87.39

94.91

94.62

94.34

86.58

86.34

86.10

90.66%

90.38

90.10

98.83

98.53

98.24

89.27

89.02

88.79

93.89%

93.59

93.30

103.36

103.04

102.74

92.44

92.19

91.95

97.76%

97.44

97.13

108.66

108.33

108.00

96.22

95.97

95.72

102.37%

102.00

101.66

114.82

114.45

114.09

100.65

100.37

100.11

107.25%

106.81

106.41

121.31

120.88

120.48

105.26

104.97

104.69

111.85%

111.28

110.79

127.40

126.91

126.47

109.51

109.23

108.97

112.52%

112.52

130.24

112.52

For a list of bond factor amounts

applicable to dispositions occurring during other calendar years, see the following revenue rulings: Rev. Rul. 90–60,

1990–2 C.B. 3, for dispositions occurring during calendar years 1987, 1988,

and 1989; Rev. Rul. 90–88, 1990–2

C.B. 7, for dispositions occurring during

calendar year 1990; Rev. Rul. 91–67,

1991–2 C.B. 13, for dispositions occurring during calendar year 1991; Rev.

Rul. 92–101, 1992–2 C.B. 9, for dispositions occurring during calendar year

1992; Rev. Rul 93–83, 1993–2 C.B. 6,

for dispositions occurring during calendar year 1993; and Rev. Rul. 94–71,

1994–2 C.B. 4, for dispositions occurring during calendar year 1994.

1995–2 C.B.

Low-income housing credit; satisfactory bond; ‘‘bond factor’’ amounts for

the period January through December

1995. This ruling announces the

monthly bond factor amounts to be

used by taxpayers who dispose of

qualified low-income buildings or interests therein during the period January

through December 1995.

Rev. Rul. 95–83

In Rev. Rul. 90–60, 1990–2 C.B. 3,

the Internal Revenue Service provided

guidance to taxpayers concerning the

general methodology used by the

Treasury Department in computing

the bond factor amounts used in

calculating the amount of bond considered satisfactory by the Secretary under

§ 42(j)(6) of the Internal Revenue

Code. It further announced that the

Secretary would publish in the Internal

Revenue Bulletin a table of ‘‘bond

factor’’ amounts for dispositions occurring during each calendar month.

This revenue ruling provides in

Table 1 the bond factor amounts for

calculating the amount of bond considered satisfactory under § 42(j)(6) for

dispositions of qualified low-income

buildings or interests therein during the

period January through December

1995.

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Table 1

Rev. Rul. 95–83

Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service

or, if Section 42(f)(1) Election Was

Made, the Succeeding Calendar Year

Month of

Disposition

1987

1988

1989

1990

1991

1992

1993

1994

1995

Jan ’95

Feb ’95

Mar ’95

Apr ’95

May ’95

Jun ’95

Jul ’95

Aug ’95

Sep ’95

Oct ’95

Nov ’95

Dec ’95

85.42%

85.15

84.89

91.28

91.00

90.73

84.10

83.86

83.62

83.40

83.17

82.95

87.94%

87.66

87.39

94.91

94.62

94.34

86.58

86.34

86.10

85.87

85.64

85.42

90.66%

90.38

90.10

98.83

98.53

98.24

89.27

89.02

88.79

88.55

88.32

88.10

93.89%

93.59

93.30

103.36

103.04

102.74

92.44

92.19

91.95

91.72

91.49

91.26

97.76%

97.44

97.13

108.66

108.33

108.00

96.22

95.97

95.72

95.47

95.24

95.01

102.37%

102.00

101.66

114.82

114.45

114.09

100.65

100.37

100.11

99.86

99.62

99.39

107.25%

106.81

106.41

121.31

120.88

120.48

105.26

104.97

104.69

104.43

104.19

103.96

111.85%

111.28

110.79

127.40

126.91

126.47

109.51

109.23

108.97

108.74

108.53

108.34

112.52%

112.52

130.24

112.52

For a list of bond factor amounts

applicable to dispositions occurring

during other calendar years, see the

following revenue rulings: Rev. Rul.

90–60, 1990–2 C.B. 3, for dispositions

occurring during calendar years 1987,

1988, and 1989; Rev. Rul. 90–88,

1990–2 C.B. 7, for dispositions occurring during calendar year 1990; Rev.

Rul. 91–67, 1991–2 C.B. 13, for dispositions occurring during calendar

year 1991; Rev. Rul. 92–101, 1992–2

C.B. 9, for dispositions occurring during calendar year 1992; Rev. Rul 93–

83, 1993–2 C.B. 6, for dispositions

occurring during calendar year 1993;

and Rev. Rul. 94–71, 1994–2 C.B. 4,

for dispositions occurring during calendar year 1994.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of July 1995. See Rev. Rul. 95–48,

page 125.

the month of October 1995. See Rev. Rul. 95–

67, page 130.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of November 1995. See Rev. Rul. 95–

73, page 132.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of December 1995. See Rev. Rul. 95–

79, page 134.

26 CFR 1.42–14: Allocation rules for post-1989

State housing credit ceiling amounts.

This procedure publishes the amounts of

unused housing credit carryovers allocated to

qualified states under § 421(h)(3)(D) of the Code

for calendar year 1995. See Rev. Proc. 95–36,

page 393.

Subchapter B.—Computation of Taxable Income

Part I.—Definition of Gross Income, Adjusted Gross

Income, Taxable Income, etc.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of August 1995. See Rev. Rul. 95–51,

page 127.

Section 61.—Gross Income Defined

26 CFR 1.61–2: Compensation for services,

including fees, commissions, and similar items.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of September 1995. See Rev. Rul. 95–

62, page 129.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

T.D. 8607

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Allowances Received by Members of

the Armed Forces in Connection With

Moves to New Permanent Duty

Stations

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to the exclusion from gross income under section

61 of the Internal Revenue Code of

1986 (Code) of certain allowances

received by members of the uniformed

services in connection with a change of

permanent duty station. The final regulations are required because of amendments to the law made by section

13213(a)(1) of the Omnibus Budget

Reconciliation Act of 1993 (OBRA

1993), 107 Stat. 473 (1993), which

redefined the term moving expenses

under section 217(b) of the Code.

Persons affected by the final regulations are members of the uniformed

services (the Armed Forces, the commissioned corps of the National

Oceanic and Atmospheric Administration, and the commissioned corps of

the Public Health Service).

DATES: These regulations are effective

August 7, 1995.

For dates of applicability, see

‘‘Effective date’’ portion under Supplementary Information.

1995–2 C.B.

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SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to the Income Tax Regulations (26

CFR part 1) under sections 61 and 217

of the Internal Revenue Code (Code)

that are required because of the amendment of section 217(b) by OBRA 1993.

In Notice 94–59, 1994–1 C.B. 371, the

IRS announced its intention to issue

guidance to clarify that certain allowances received by members of the

Armed Forces continue to be excludable from gross income notwithstanding the amendment of section 217(b).

On December 21, 1994, temporary

regulations (TD 8575 [1995–1 C.B. 5])

relating to military expense allowances

under sections 61 and 217 (relating to

definitions of gross income and of

moving expenses) were published in

the Federal Register (55 FR 65711). A

notice of proposed rulemaking (IA–50–

94 [1995–1 C.B. 945]) relating to the

same subjects was published in the

Federal Register for the same day (55

FR 65739). No public hearing was

requested or held.

Written comments regarding the regulations were received. After consideration of all the comments, the regulations proposed by IA–50–94 are

adopted as revised by this Treasury

decision, and the corresponding temporary regulations are withdrawn. The

comments are discussed below.

Explanation of Provisions

I. General Background

Section 217(g) of the Code provides

that a member of the Armed Forces on

active duty who moves pursuant to a

military order and incident to a permanent change of station does not include

in income reimbursements or allowances for moving or storage expenses, or the value of moving and

storage services furnished in kind. For

purposes of section 217(g), moving

expenses are defined in section 217(b).

OBRA 1993 amended section 217(b)

by narrowing the definition of deductible moving expenses.

As a result of this amendment,

questions arose concerning the federal

tax treatment of certain allowances

provided by the Department of Defense

and by the Department of Transportation under title 37 of the United States

1995–2 C.B.

Code to members of the Armed Forces

in connection with a transfer to a new

permanent duty station. Those allowances include: (1) a dislocation

allowance, intended to partially reimburse expenses (e.g., lease forfeitures,

temporary living charges in hotels, and

breakage of household goods in transit)

incurred in relocating a household; (2)

a temporary lodging expense, intended

to partially offset the added living

expenses of temporary lodging (up to

10 days) within the United States

(other than Hawaii or Alaska); (3) a

temporary lodging allowance, intended

to help defray higher than normal

living costs (for up to 60 days) outside

the United States or in Hawaii or

Alaska; and (4) a move-in housing

allowance, intended to defray costs

(e.g., rental agent fees, home-security

improvements, and supplemental heating equipment) associated with occupying leased quarters outside the United

States.

Section 1.61–2(b) of the Income Tax

Regulations provides, in part, that

subsistence and uniform allowances

granted to members of the Armed

Forces, Coast and Geodetic Survey

(now known as the National Oceanic

and Atmospheric Administration), and

Public Health Service, and amounts

received by them as commutation of

quarters, are to be excluded from gross

income. Similarly, the value of quarters

or subsistence furnished to such persons is excluded from gross income.

These exclusions from gross income of

quarters and subsistence allowances

paid to members of the uniformed

services are ones of long standing,

dating back to 1925. See Jones v.

United States, 60 Ct. Cl. 552 (1925).

The Treasury Department and the

IRS have determined that the four

above-referenced allowances, to the

extent not excluded under other provisions of the Code (such as section

217(g) or section 132(g)), are to be

treated as quarters or subsistence allowances. Section 1.61–2(b) is revised

to provide that these allowances are

excluded from the gross income of

members of the uniformed services.

Section 1.61–2(b)(2) and section

1.217–2(g)(6) clarify that no deduction

is allowed for any expenses incurred in

connection with a transfer to a new

permanent duty station to the extent the

expenses are reimbursed by an excluded allowance. However, any expense that meets the definition of a

moving expense as defined in section

217(b) and is not reimbursed continues

to be deductible under current law.

II. Public Comments

The National Oceanic and Atmospheric Administration (NOAA) requested that the regulations provide

active duty officers of the NOAA

Corps with an exclusion for the allowances covered by these regulations.

The commissioned corps of NOAA, the

commissioned corps of the Public

Health Service (PHS), and the Armed

Forces collectively comprise the uniformed services. 10 U.S.C. 101(a)(5)

(Supp. IV 1992). The Armed Forces

consist of the Army, Navy, Air Force,

Marine Corps, and Coast Guard. 10

U.S.C. 101(a)(4) (1988).

The pay and allowance provisions of

title 37 apply to all members of the

uniformed services. In particular, the

allowances that are the subject of these

regulations are the same for the NOAA

commissioned corps and the PHS commissioned corps as for the Armed

Forces. The Department of Treasury

historically has extended the holdings

of Jones v. United States to all

members of the uniformed services.

I.T. 2232, IV–2 C.B. 144 (1925); Mim.

3413, V–1 C.B. 29 (1926). Accordingly, the final regulations under section 1.61–2(b) provide that the four

earlier-referenced allowances are quarters or subsistence allowances and are

excluded from gross income for members of the uniformed services.

III. Effective Date

The final regulations are effective

with respect to allowances for expenses

incurred after December 31, 1993.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It has also been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

apply to these regulations, and, therefore, a Regulatory Flexibility Analysis

is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking was

submitted to the Chief Counsel for

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Advocacy of the Small Business Administration for comment on its impact

on small business.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.61–2 is amended

by:

1. Removing the language ‘‘Coast

and Geodetic Survey’’ from the second

sentence of paragraph (a)(1) and adding

in its place the language ‘‘National

Oceanic and Atmospheric Administration’’.

2. Revising paragraph (b) to read as

follows:

§1.61–2 Compensation for services,

including fees, commissions, and

similar items.

(b) Members of the Armed Forces,

National Oceanic and Atmospheric Administration, and Public Health Service. (1) Subsistence and uniform allowances granted commissioned

officers, chief warrant officers, warrant

officers, and enlisted personnel of the

Armed Forces, National Oceanic and

Atmospheric Administration, and Public Health Service of the United States,

and amounts received by them as

commutation of quarters, are excluded

from gross income. Similarly, the value

of quarters or subsistence furnished to

such persons is excluded from gross

income.

(2) For purposes of this section,

quarters or subsistence includes the

following allowances for expenses incurred after December 31, 1993, by

members of the Armed Forces, members of the commissioned corps of the

National Oceanic and Atmospheric Administration, and members of the commissioned corps of the Public Health

Service, to the extent that the allowances are not otherwise excluded

from gross income under another provi-

sion of the Internal Revenue Code: a

dislocation allowance, authorized by 37

U.S.C. 407; a temporary lodging allowance, authorized by 37 U.S.C. 405;

a temporary lodging expense, authorized by 37 U.S.C. 404a; and a move-in

housing allowance, authorized by 37

U.S.C. 405. No deduction is allowed

under this chapter for any expenses

reimbursed by such excluded allowances. For the exclusion from gross

income of—

(i) Disability pensions, see section

104(a)(4) and the regulations thereunder;

(ii) Miscellaneous items, see section

122.

(3) The per diem or actual expense

allowance, the monetary allowance in

lieu of transportation, and the mileage

allowance received by members of the

Armed Forces, National Oceanic and

Atmospheric Administration, and the

Public Health Service, while in a travel

status or on temporary duty away from

their permanent stations, are included

in their gross income except to the

extent excluded under the accountable

plan provisions of §1.62–2.

§1.61–22T [Removed]

Par. 3. Section 1.61–22T is removed.

Par. 4. Section 1.217–2 is amended

by adding paragraph (g)(6) to read as

follows:

§1.217–2 Deduction for moving

expenses paid or incurred in taxable

years beginning after December 31,

1969.

(g) * * *

(6) Disallowance of deduction. No

deduction is allowed under this section

for any moving or storage expense

reimbursed by an allowance that is

excluded from gross income.

§1.217–2T [Removed]

Par. 5. Section 1.217–2T is removed.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

Approved July 27, 1995.

Leslie Samuels,

Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

August 4, 1995, 8:45 a.m., and published in

the issue of the Federal Register for August 7,

1995, 60 F.R. 40075)

26 CFR 1.61–6: Gains derived from dealings in

property.

Guidance is provided concerning the use of an

optional method of accounting that treats certain

rent-to-own contracts as leases for federal income tax purposes. See Rev. Proc. 95–38,

page 397.

26 CFR 1.61–6: Gains derived from dealings in

property.

Guidance is provided concerning the use of an

optional method of accounting that treats certain

rent-to-own contracts as leases for federal income

tax purposes. See Rev. Proc. 95–38, page 397.

26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuation

formula. For purpose of section 1.61–

21(g) of the regulations, relating to the

rule for valuing non-commercial flights

on employer-provided aircraft, the

Standard Industry Fare Level (SIFL),

cents-per-mile rates and terminal

charges in effect for 1995 are set forth.

Rev. Rul. 95–35 modified.

Rev. Rul. 95–66

For purposes of the taxation of fringe

benefits under section 61 of the Internal Revenue Code, section 1.61–21(g)

of the Income Tax Regulations provides a rule for valuing noncommercial

flights on employer-provided aircraft.

Section 1.61–21(g)(5) of the Income

Tax Regulations provides an aircraft

valuation formula to determine the

value of such flights. The value of a

flight is determined under the base

aircraft valuation formula (also known

as the Standard Industry Fare Level

formula or SIFL) by multiplying the

SIFL cents-per-mile rates applicable for

the period during which the flight was

taken by the appropriate aircraft multiple provided in section 1.61–21(g)(7)

and then adding the applicable terminal

charge. The SIFL cents-per-mile rates

in the formula and the terminal charge

are calculated by the Department of

Transportation and are revised semiannually.

The following chart sets forth the

terminal charges and SIFL mileage rates:

1995–2 C.B.

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Period During Which

the Flight Was Taken

Terminal

Charge

7/1/95-12/31/95

$30.86

EFFECT ON OTHER REVENUE

RULING

Rev. Rul. 95–35, 1995–1 C.B. 4, is

modified.

SIFL Mileage Rates

Up to 500 miles = $.1688 per mile

501-1500 miles = $.1287

Over 1500 miles = $.1237

Deductions for Transfers of Property

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

Section 62.—Adjusted Gross Income

Defined

26 CFR 1.62–2: Reimbursements and other

expenses allowance arrangements.

Rules under which a reimbursement or other

expense allowance arrangement for the cost of

operating an automobile for business purposes

will satisfy the requirements of section 62(c) of

the Code as to business connection, substantiation, and returning amounts in excess of

expenses. See Rev. Proc. 95–54, page 450.

Section 63.—Taxable Income Defined

26 CFR 1.63–1: Change of treatment with

respect to the zero bracket amount and

itemized deductions.

The Service is providing inflation adjustments

to the standard deduction amounts (including the

$500 limitation in the case of certain dependents,

and $600 or $750 additional standard deduction

for the aged or blind) for taxable years beginning

in 1996. See Rev. Proc. 95–53, page 445.

Section 68.—Overall Limitation on

Itemized Deductions

The Service is providing inflation adjustments

to the overall limitation on itemized deductions

for taxable years beginning in 1996. See Rev.

Proc. 95–53, page 445.

SUMMARY: This document contains

final regulations concerning deductions

for transfers of property. The regulations amend the special rule that

required an employer to deduct and

withhold income tax as a prerequisite

for claiming a deduction for property

transferred to an employee in connection with the performance of services.

Under the former regulation, employers

that failed to deduct and withhold

income tax were denied a deduction

even where the employee reported the

income and paid the tax. The new rules

permit service recipients to claim a

deduction for the amount included in

the service provider’s gross income.

The service provider will be deemed to

have included an amount in gross

income if the service recipient provides

a timely Form W–2 or 1099, as appropriate. These regulations apply to all

service recipients who transfer property

in connection with the performance of

services.

DATES: These regulations are effective

July 19, 1995.

For dates of applicability, see §1.83–

6(a)(5).

SUPPLEMENTARY INFORMATION:

Part II.—Items Specifically Included in Gross Income

Paperwork Reduction Act

Section 83.—Property Transferred in

Connection With Performance of

Services

26 CFR 1.83–6: Deduction by employer.

T.D. 8599

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

1995–2 C.B.

The collection of information contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) under

control number 1545–1448. The estimated annual burden of reporting will

be reflected in the reporting requirements for Form 1099–MISC.

Comments concerning the accuracy

of this burden estimate and suggestions

for reducing this burden should be sent

to the Internal Revenue Service, Attn:

IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the

Office of Management and Budget,

Attn: Desk officer for the Department

of the Treasury, Office of Information

and Regulatory Affairs, Washington,

DC 20503.

Background

On December 5, 1994, the IRS

published in the Federal Register (59

FR 62370 [EE–81–88, 1994–2 C.B.

850]) proposed amendments to the

income tax regulations (26 CFR part 1)

under section 83(h) of the Internal

Revenue Code (Code), which permits a

deduction for property transferred in

connection with the performance of

services.

Three written comments were received from the public on the proposed

regulations. No public hearing was

held. After consideration of the written

comments received, the proposed regulations are adopted by this Treasury

decision with one technical clarification.

Explanation of Provisions

Under section 83(h) of the Code, in

the case of a transfer of property to

which section 83(a) applies, the person

for whom services were provided may

deduct an amount equal to the amount

included in the service provider’s gross

income. In light of the difficulty that a

service recipient may have in demonstrating that an amount has actually

been included in the service provider’s

gross income, the general rule in

former §1.83–6(a)(1) permitted the deduction for the amount ‘‘includible’’ in

the service provider’s gross income.

Thus, the deduction was allowed to the

service recipient even if the service

provider did not properly report the

includible amount. Where the service

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provider was an employee of the service recipient, however, the special rule

in §1.83–6(a)(2) provided that a deduction could be claimed only if the

service recipient (employer) deducted

and withheld income tax in accordance

with section 3402. The special rule was

designed to ensure that the service

recipient’s deduction was in fact offset

by a corresponding inclusion in the

service provider’s gross income. The

special rule was limited to employeremployee situations because in other

situations there was no underlying

withholding requirement upon which

the deduction could be conditioned.

Taxpayers expressed concern that it

was often difficult to satisfy the prerequisite that employers must deduct and

withhold income tax from payments in

kind as a condition for claiming a

deduction. These regulations address

this concern by eliminating this prerequisite, while still ensuring consistent

treatment between service recipients

and service providers as required by

the statute. In addition, because the

deduction no longer is conditioned on

withholding, there no longer is a need

to have different rules for those who

receive services from employees and

those who receive services from others.

Under these regulations, the former

general rule and special rule are

replaced by a revised general rule that

more closely follows the statutory

language of section 83(h). The service

recipient is allowed a deduction for the

amount ‘‘included’’ in the service

provider’s gross income. For this purpose, the amount included means the

amount reported on an original or

amended return or included in gross

income as a result of an IRS audit of

the service provider.

Because of the potential difficulty of

demonstrating actual inclusion by the

service provider, a special rule provides

that, if the service recipient timely

complies with applicable Form W–2 or

1099 reporting requirements under section 6041 (or 6041A), as appropriate,

with respect to the amount includible in

income by the service provider, the

service provider is deemed to have

included the amount in gross income

for this purpose. Thus, the regulations

allow the deduction without requiring

the service recipient to demonstrate

actual inclusion by the service provider. If a transfer meets the requirements for exemption from reporting for

payments aggregating less than $600 in

any taxable year, or is eligible for any

other reporting exemption, no reporting

is required in order for the service

recipient to rely on the deemed inclusion rule.

In order to allow service recipients

to take advantage of the deemed inclusion rule with respect to property

transfers to all service providers, these

regulations also permit service recipients to use the special rule in the case

of transfers to corporate service providers. To that end, service recipients

are permitted, solely for purposes of

this rule, to treat the Form 1099

reporting requirements as applicable to

transfers to corporate service providers

in the same manner as those requirements apply to transfers to noncorporate service providers. Thus, if a

service recipient who transferred property to a corporate service provider

timely reports that income on Form

1099 (to both the service provider and

the federal government), the service

recipient is entitled to rely on the

deemed inclusion rule in claiming a

deduction for the amount of that

income. If the transfer meets the

requirements for exemption from reporting for payments aggregating less

than $600 in any taxable year, or is

eligible for any other reporting exemption applicable to a service provider

that is not a corporation, no reporting

is required in order for the service

recipient to rely on the deemed inclusion rule.

The deemed inclusion rule may be

used only by a service recipient whose

compliance with applicable Form W–2

or 1099 reporting requirements is

timely. Thus, for example, under the

current reporting requirements, if

amounts attributable to one or more

section 83 transfers of property are

includible in an employee’s income in

year 1 (and are not eligible for any

reporting exemption), the employer

generally is required to furnish the

employee a Form W–2 reflecting that

amount by January 31 of year 2 and

generally is required to file a copy of

the Form W–2 with the federal government by the last day of February of

year 2. If the employer reports to the

employee and the government in a

timely manner, the employer can rely

on the deemed inclusion rule to claim a

deduction for the amount in year 1. If

the employee’s Form W–2 is not

furnished until after January 31 of year

2 or the government’s copy of Form

W–2 is not filed until after the last day

of February of year 2, the employer

generally is required to demonstrate

that the employee actually included the

amount in income in order to support

its deduction of the amount.

Under these regulations, a special

rule applies with respect to an amount

includible in an employee’s or former

employee’s income by reason of a

disqualifying disposition of stock that

had been acquired pursuant to a statutory stock option. In the case of such a

disposition, and solely for the purpose

of determining whether an employer

may use the deemed inclusion rule

under these regulations, a Form W–2 or

W–2c (as appropriate) will be considered timely if it is furnished to the

employee or former employee, and

filed with the federal government, by

the date on which the employer files its

tax return (including an amended return) claiming a deduction for that

amount.

With respect to disqualifying dispositions, these regulations modify the

conditions for an employer’s deduction

under section 83(h) in a manner that is

not inconsistent with the guidance

provided by Notice 87–49 (Changes to

Incentive Stock Option Requirements

by Section 321 of the Tax Reform Act

of 1986), 1987–2 C.B. 355. These

regulations are not intended to have

any effect on the application of Notice

87–49 or the analysis contained therein,

and therefore should not be viewed as

constituting a reconsideration of Revenue Ruling 71–52, 1971–1 C.B. 278,

within the meaning of Notice 87–49.

Three written comments were received from the public on the proposed

regulations. One dealt specifically with

the withholding requirements as they

apply to disqualifying dispositions of

stock received under an employee stock

purchase plan and, therefore, is beyond

the scope of this regulation. The

remaining two comments generally applauded the proposed amendments, but

they both expressed a concern that,

even after elimination of the withholding requirement as a prerequisite for

claiming a deduction under section

83(h), there remains a statutory requirement, under subtitle C, to withhold

income tax from compensatory transfers of property. Both commentators

suggested that regulations be published

to exclude transfers of property in

payment for services from the withholding requirements.

Treasury and the IRS have carefully

considered the comments. However,

section 3402 of the Code requires

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every employer making payment of

wages to deduct and withhold income

tax from the wages. Section 3401(a)

(relating to the definition of wages for

income tax withholding purposes), section 3121(a) (relating to the definition

of wages for FICA tax purposes), and

section 3306(b) (relating to the definition of wages for FUTA tax purposes)

of subtitle C all provide that ‘‘wages’’

means all remuneration ‘‘including the

cash value of all remuneration (including benefits) paid in any medium other

than cash,’’ except as specified otherwise in those sections. A transfer of

property in connection with the performance of services is not one of the

specified exceptions.

Therefore, although the withholding

requirement is eliminated as a prerequisite for claiming a deduction, these

regulations do not relieve the service

recipient from any applicable withholding requirements of subtitle C or from

the statutorily prescribed penalties or

additions to tax for noncompliance with

those requirements. Thus, for example,

if an employer transferred to an employee property to which section 83

applies and failed to withhold income

tax on the payment, the employer

would be liable for the tax under

section 3403. However, under section

3402(d), any tax liability assessed

against the employer would be offset

by any tax paid by the employee. In

addition, nothing in these regulations

relieves the service recipient from

penalties or additions to tax for noncompliance with the requirements of

section 6041 or 6041A (relating to

information reporting) to the extent

they otherwise apply.

These regulations are effective for

deductions allowable for taxable years

beginning on or after January 1, 1995.

However, taxpayers may apply these

regulations when claiming a deduction

for any year not closed by the statute

of limitations. For example, if substantially vested (within the meaning of

§1.83–3(b)) stock was transferred to an

employee in 1992 upon the exercise of

a nonstatutory stock option, and if the

calendar year employer furnished a

Form W–2 to the employee by January

31, 1993, reflecting the income generated by the transfer and filed the

appropriate Form W–2 with the federal

government by February 28, 1993, then

the employer could apply these regulations to claim a deduction for 1992 for

the amount of the income, even if the

employer failed to withhold in accord-

1995–2 C.B.

ance with section 3402 and could not

demonstrate actual inclusion in income

by the employee. If that employer did

not claim a deduction for the amount of

the income on its 1992 tax return, it

could file an amended return for 1992

claiming such a deduction pursuant to

these regulations, provided that 1992 is

still an open year.

The proposed regulation that was

published in the Federal Register on

November 16, 1983 (48 FR 52079),

proposing to amend the special rule in

§1.83–6(a)(2), was withdrawn by the

Notice of Proposed Rulemaking published on December 5, 1994 (59 FR

62371).

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It has also been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

apply to these regulations and, therefore, a Regulatory Flexibility Analysis

is not required. Pursuant to section

7805(f) of the Code, the notice of

proposed rulemaking preceding these

regulations was submitted to the Chief

Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and

602 are amended as follows:

Paragraph 1. The authority for part 1

continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.83–6 is amended as

follows:

1. Paragraphs (a)(1) and (2) are

revised.

2. Paragraph (a)(5) is added.

3. The revisions and addition read as

follows:

§1.83–6 Deduction by employer.

(a) Allowance of deduction—(1)

General Rule. In the case of a transfer

of property in connection with the

performance of services, or a compen-

satory cancellation of a nonlapse

restriction described in section 83(d)

and §1.83–5, a deduction is allowable

under section 162 or 212 to the person

for whom the services were performed.

The amount of the deduction is equal

to the amount included as compensation in the gross income of the service

provider under section 83(a), (b), or

(d)(2), but only to the extent the

amount meets the requirements of

section 162 or 212 and the regulations

thereunder. The deduction is allowed

only for the taxable year of that person

in which or with which ends the taxable year of the service provider in

which the amount is included as

compensation. For purposes of this

paragraph, any amount excluded from

gross income under section 79 or

section 101(b) or subchapter N is

considered to have been included in

gross income.

(2) Special Rule. For purposes of

paragraph (a)(1) of this section, the

service provider is deemed to have

included the amount as compensation

in gross income if the person for whom

the services were performed satisfies in

a timely manner all requirements of

section 6041 or section 6041A, and the

regulations thereunder, with respect to

that amount of compensation. For

purposes of the preceding sentence,

whether a person for whom services

were performed satisfies all requirements of section 6041 or section

6041A, and the regulations thereunder,

is determined without regard to

§1.6041–3(c) (exception for payments

to corporations). In the case of a

disqualifying disposition of stock described in section 421(b), an employer

that otherwise satisfies all requirements

of section 6041 and the regulations

thereunder will be considered to have

done so timely for purposes of this

paragraph (a)(2) if Form W–2 or Form

W–2c, as appropriate, is furnished to

the employee or former employee, and

is filed with the federal government, on

or before the date on which the

employer files the tax return claiming

the deduction relating to the disqualifying disposition.

(5) Effective date. Paragraphs (a)(1)

and (2) of this section apply to

deductions for taxable years beginning

on or after January 1, 1995. However,

taxpayers may also apply paragraphs

(a)(1) and (2) of this section when

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claiming deductions for taxable years

beginning before that date if the claims

are not barred by the statute of

limitations. Paragraphs (a)(3) and (4) of

this section are effective as set forth in

§1.83–8(b).

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

26 CFR 1.103–1: Interest upon obligations of

a State, Territory, etc.

Guidance is provided for the use of the

national and area median gross income figures

by issuers of qualified mortgage bonds and

mortgage credit certificates in determining the

housing cost/income ratio described in section

143(f)(5) of the Code. See Rev. Proc. 95–32,

page 379.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

Section 151.—Allowance of

Deductions for Personal Exemptions

The Service is providing inflation adjustments

to the limitation on the exclusion of a qualified

transportation fringe for taxable years beginning

in 1996. See Rev. Proc. 95–53, page 445.

26 CFR 1.151.4: Amount of deduction for

each exemption under section 151.

Section 135.—Income from United

States Savings Bonds Used to Pay

Higher Education Tuition and Fees

The Service is providing inflation adjustments

to the limitation on the exclusion of income from

United States savings bonds for taxpayers who

pay qualified higher education expenses for

taxable years beginning in 1996. See Rev. Proc.

95–53, page 445.

Approved June 19, 1995.

Leslie Samuels,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

July 18, 1995, 8:45 a.m., and published in the

issue of the Federal Register for July 19, 1995,

60 F.R. 36995)

Part III.—Items Specifically Excluded from Gross

Income

Section 103.—Interest on State and

Local Bonds

What are the conditions under which an issuer

of State or local bonds may make payments to

the U.S. to reduce the yield on investments

purchased with the proceeds of advance refunding bonds on a date when the issuer is unable to

purchase U.S. Treasury securities—State and

Local Government Series (‘‘SLGS’’) because the

Department of the Treasury has suspended sales

of SLGS? See Rev. Proc. 95–47, page 417.

26 CFR 1.103–1: Interest upon obligations of

a State, Territory, etc.

The qualified census tracts for Puerto Rico and

the Virgin Islands are set forth for use in

determining the portion of loans required to be

placed in targeted areas under section 143(h) of

the Code. See Rev. Proc. 95–31, page 378.

Part V.—Deductions for Personal Exemptions

Section 132.—Certain Fringe Benefits

§602.101 [Amended]

Par. 4. In §602.101, paragraph (c) is

amended by adding the entry ‘‘1.83–

6. . . . 1545–1448’’ in numerical order to

the table.

the U.S. to reduce the yield on investments

purchased with the proceeds of advance refunding bonds on a date when the issuer is unable to

purchase U.S. Treasury securities—State and

Local Government Series (‘‘SLGS’’) because the

Department of the Treasury has suspended sales

of SLGS? See Rev. Proc. 95–47, page 417.

Part IV.—Tax Exemption Requirements for State and

Local Bonds

The Service is providing inflation adjustments

to the personal exemption and to the threshold

amounts of adjusted gross income above which

the exemption amount phases out for taxable

years beginning in 1996. See Rev. Proc. 95–53,

page 445.

Part VI.—Itemized Deductions for Individuals and

Corporations

Section 162.—Trade or Business

Expenses

Subpart A.—Private Activity Bonds

26 CFR 1.162–17: Reporting and

substantiation of certain business expenses of

employees.

Section 143.—Mortgage Revenue

Bonds: Qualified Mortgage Bond and

Qualified Veterans’ Mortgage Bond

The rules for substantiating the amount of a

deduction or expense for business use of an

automobile that most nearly represents current

costs are set forth. See Rev. Proc. 95–54, page

450.

26 CFR 6a.103A–2: Qualified mortgage bond.

The qualified census tracts for Puerto Rico and

the Virgin Islands are set forth for use in

determining the portion of loans required to be

placed in targeted areas under section 143(h) of

the Code. See Rev. Proc. 95–31, page 378.

26 CFR 6a.103A–2: Qualified mortgage bond.

Guidance is provided for the use of the

national and area median gross income figures

by issuers of qualified mortgage bonds and

mortgage credit certificates in determining the

housing cost/income ratio described in section

143(f)(5) of the Code. See Rev. Proc. 95–32,

page 379.

26 CFR 1.162–20: Expenditures attributable to

lobbying, political campaigns, attempts to

influence legislation, etc., and certain

advertising.

T.D. 8602

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Lobbying Expense Deductions—Dues,

Allocation of Costs to Lobbying

Activities, and Influencing Legislation

AGENCY: Internal Revenue Service

(IRS), Treasury.

Subpart B.—Requirements Applicable to All State

and Local Bonds

Section 148.—Arbitrage

What are the conditions under which an issuer

of State or local bonds may make payments to

ACTION: Final regulations.

SUMMARY: This document contains

final regulations that define influencing

legislation for purposes of the deduction disallowance for certain amounts

1995–2 C.B.

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paid or incurred in connection with

influencing legislation. It also contains

final regulations concerning allocating

costs to influencing legislation or the

official actions or positions of certain

federal executive branch officials and

the deductibility of dues (and other

similar amounts) paid to certain taxexempt organizations. These regulations are necessary because of changes

made to the Internal Revenue Code by

the Omnibus Budget Reconciliation Act

of 1993. These rules will assist businesses and certain tax-exempt organizations in complying with the Internal

Revenue Code.

DATES: These regulations are effective

July 21, 1995.

For dates of applicability, see

§§1.162–20, paragraphs (c)(5) and (d),

1.162–28(h), and 1.162–29(h).

SUPPLEMENTARY INFORMATION:

Background

On December 27, 1993, the IRS

published in the Federal Register temporary regulations (58 FR 68294 [TD

8511, 1994–1 C.B. 37]) under section

162 of the Internal Revenue Code

(Code) relating to the dues deduction

disallowance and a notice of proposed

rulemaking (58 FR 68334 [IA–60–93,

1994–1 C.B. 802]) cross-referencing

the temporary regulations. On the same

day, the IRS published in the Federal

C.B. 797]) under section 162 of the

Code relating to the allocation of costs

to lobbying activities. On May 13,

1994, the IRS published in the Federal

C.B. 809]) under section 162 concerning the definition of influencing legislation. Written comments responding to

the notices were received and public

hearings were held on allocating costs

to lobbying activities on April 6, 1994,

and on influencing legislation on September 12, 1994. After careful consideration of all the comments, the proposed regulations are adopted, as

revised and renumbered by this document. The issues described in this

preamble are the principal issues considered in adopting the final regulations. However, a number of other

technical and clarifying changes were

made.

1995–2 C.B.

Lobbying Expense Deductions—

Dues—§1.162–20.

The proposed regulations are adopted

without change.

Allocation of Costs to Lobbying

Activities—§1.162–28.

The proposed regulations generally

describe the costs that are properly

allocable to lobbying activities and

permit taxpayers to use any reasonable

method to allocate those costs between

lobbying activities and other activities.

Under the proposed regulations, a

method is not reasonable unless it is

applied consistently, allocates a proper

amount of costs (including labor costs

and general and administrative costs) to

lobbying activities, and is consistent

with certain special rules of the regulations. The proposed regulations provide

that a taxpayer may use the following

methods of allocating costs to lobbying

activities: (1) the ratio method; (2) the

gross-up method; and (3) an allocation

method that applies the principles of

section 263A and the regulations thereunder.

While the proposed regulations are

intended to allow any reasonable

method, some commentators interpreted

the proposed regulations as treating

only the three specified methods as

reasonable methods of allocating costs.

The final regulations clarify that taxpayers may use any reasonable method

of allocating costs to lobbying activities, including, but not limited to,

the three specified methods.

Some commentators stated that the

regulations should provide that a cost

allocation method is not unreasonable

simply because it allocates a lesser

amount of costs to lobbying activities

than any one of the three specified

methods. Whether any other allocation

method is reasonable depends on the

facts and circumstances of a particular

case. The three specified methods,

alone or in combination, do not

establish a baseline allocation against

which to compare other methods.

The proposed regulations direct taxpayers to see section 6001 and the

regulations thereunder for recordkeeping requirements. Numerous commentators requested additional guidance concerning recordkeeping for lobbying

activities. Some commentators recommended that the regulations should

provide that the IRS will accept good

faith or reasonable estimates of time

spent on lobbying activities. Other

commentators recommended that the

regulations, like the preamble to the

proposed regulations, should state explicitly that taxpayers are not required

to maintain any particular records of

costs of lobbying activities, such as

daily time reports, daily logs, or similar

documents.

Section 6001 already requires a

taxpayer to keep records necessary for

the taxpayer to apply its reasonable

method of allocating costs to lobbying

activities. Thus, each taxpayer must use

methods appropriate for its trade or

business. The proposed regulations,

nevertheless, do not require a taxpayer

to maintain its records of costs of

lobbying activities in any particular

form. The IRS and Treasury believe

that the final regulations should not

provide guidance concerning recordkeeping in addition to that already provided in section 6001 and, therefore, no

changes were made in response to these

suggestions.

Under the ratio method of the

proposed regulations, a taxpayer multiplies its total costs of operations

(excluding third-party costs) by a fraction, the numerator of which is the

taxpayer’s lobbying labor hours and the

denominator of which is the taxpayer’s

total labor hours. The taxpayer adds the

result of this calculation to its thirdparty costs to allocate its costs to

lobbying activities.

The proposed regulations define the

term total costs of operations as the

total costs of the taxpayer’s trade or

business for a taxable year, excluding

third-party costs. Commentators questioned the scope of the definition and

suggested that certain costs should be

excluded from the definition. For example, several commentators inquired

whether total costs of operations means

costs reflected on a company’s financial statements or its tax returns.

In addition, commentators inquired

whether the term included depreciation,

charitable contributions, or federal tax

expenses. With respect to tax-exempt

organizations, commentators inquired

whether total costs of operations included the costs of educational conferences, conventions, books and other

publications, and unrelated business

activities. Among the costs that commentators recommended excluding

from the definition of total costs of

operations are purchases and other

costs of goods sold and all third-party

costs unrelated to lobbying activities.

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As indicated above, the final regulations clarify that taxpayers may use any

reasonable method of allocating costs

to lobbying activities. The regulations

set forth the ratio method as one

simplified method that taxpayers have

the option of using. If the regulations

were modified to provide a specific

definition of total costs of operations

encompassing a complex set of exclusions designed to suit the circumstances

of all businesses, the ratio method

would no longer be a simplified

method and would require complex

analysis by taxpayers and the IRS.

Therefore, the definition of total costs

of operations is not changed in the

final regulations. Taxpayers who do not

find the simple ratio method appropriate to their circumstances may use

another reasonable method.

The proposed regulations provide

that for purposes of the ratio method, a

taxpayer may treat as zero the lobbying

labor hours of personnel engaged in

secretarial, maintenance, and other similar activities. The IRS and Treasury

invited comments on whether this rule

will distort the costs allocated to

lobbying activities. Most commentators

responded favorably to this rule. Some

indicated that the administrative benefits far outweighed any minimal distortion. Commentators also requested

guidance concerning the term ‘‘other

similar activities.’’

The final regulations clarify that a

taxpayer using the ratio method may

treat as zero the hours of personnel

engaged in secretarial, clerical, support,

and other administrative activities (as

opposed to activities involving significant judgment with respect to lobbying

activities). For example, because paraprofessionals and analysts when engaged in a lobbying activity may

engage in activities involving significant judgments with respect to the

lobbying activity, taxpayers may not

treat their time as zero.

Under the gross-up method of the

proposed regulations, a taxpayer allocates costs to lobbying activities by

multiplying the taxpayer’s basic labor

costs for lobbying labor hours by 175

percent. For this purpose, the taxpayer’s basic labor costs are limited to

wages or other similar costs of labor,

such as guaranteed payments for services. Thus, for example, pension costs

and other employee benefits are not

included in basic labor costs. As with

the ratio method, third party costs are

then added to the result of the calcula-

tion to arrive at the total costs to

allocate to lobbying activities.

Although the proposed gross-up

method provides a simple way to

calculate costs allocated to lobbying

activities, some commentators noted

that the proposed gross-up method did

not simplify recordkeeping because

taxpayers had to keep track of the

lobbying labor hours of clerical and

support staff in order to determine

lobbying labor costs.

In response to this concern, the final

regulations provide an alternative

gross-up method. Under this alternative, taxpayers may treat as zero the

lobbying labor hours of personnel who

engage in secretarial, clerical, support,

and other administrative activities that

do not involve significant judgment

with respect to the lobbying activity.

However, if a taxpayer uses this

alternative, it must multiply costs for

lobbying labor hours by 225 percent.

Many commentators suggested that

the proposed gross-up percentage of

175 percent was too high, based on

information from their industry. The

gross-up factors (including the 225

percent factor added to the final

regulations) are intended to approximate the average gross-up factors for

all taxpayers. The IRS and Treasury

believe that these factors are the

appropriate factors as averages for all

taxpayers. If the regulations were further modified to provide a set of grossup factors to suit the circumstances of

various businesses or industries, the

gross-up method would no longer be a

simplified method. The final regulations clarify that taxpayers may use any

reasonable method of allocating costs

to lobbying activities. Thus, taxpayers

who do not find the gross-up method

appropriate to their circumstances may

use another reasonable method.

The proposed regulations provide

that taxpayers that do not pay or incur

reasonable labor costs for persons

engaged in lobbying activities may not

use the ratio method or the gross-up

method. Several commentators requested that the IRS reconsider this

restriction. In addition, some commentators expressed concern that this

restriction would prevent tax-exempt

organizations from using the ratio

method or gross-up method if they used

volunteers in their lobbying activities.

One commentator inquired whether an

exempt organization that uses volunteers should account for the time of

volunteers in allocating costs to lobbying activities.

The final regulations provide that all

taxpayers may use the ratio method,

but prohibit use of the gross-up method

by a taxpayer (other than one subject to

section 6033(e)) that does not pay or

incur reasonable labor costs for its

personnel engaged in lobbying. Moreover, tax-exempt organizations affected

by the lobbying disallowance rules can

use the gross-up method or the ratio

method even if some of their lobbying

activities are conducted by volunteers.

Because volunteers are not taxpayers’

personnel, time spent by volunteers is

excluded from the taxpayer’s lobbying

labor hours and total labor hours

(although the hours may be included in

their employer’s lobbying labor hours

or total labor hours).

Under the proposed regulations, taxpayers who use the ratio method or the

gross-up method must account for

certain third-party costs. The proposed

regulations define these third-party

costs as amounts paid or incurred for

lobbying activities conducted by third

parties (such as amounts paid to

lobbyists and dues that are allocable to

lobbying expenditures) and amounts

paid or incurred for travel and entertainment relating to lobbying activities.

Some commentators asked that the

final regulations clarify that the

lobbying-related travel and entertainment expenses of an employee of the

taxpayer are not treated as third-party

costs for either the ratio or gross-up

method. The IRS and Treasury intend

for taxpayers to account for employee

travel and entertainment expenses separately as third-party costs under both

methods. Thus, the final regulations do

not adopt this recommendation. However, the final regulations clarify that if

a cost defined as a third-party cost is

allocable only partially to lobbying

activities, then only that portion of the

cost must be allocated to lobbying

activities under the ratio method and

gross-up method.

The proposed regulations provide a

special de minimis rule for labor hours

spent by personnel on lobbying activities. Under this de minimis rule, a taxpayer may treat time spent by personnel on lobbying activities as zero if less

than five percent of the person’s time

is spent on lobbying activities.

The de minimis rule for labor hours

does not apply to direct contact lobbying with legislators and covered executive branch officials. Thus, all hours

spent by a person on direct contact

lobbying as well as the hours that

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person spends in connection with direct

contact lobbying (such as background

meetings) must be allocated to lobbying activities. For this purpose, an

activity is direct contact lobbying if it

is a meeting, telephone conversation,

letter, or other similar means of communication with a legislator (other than

a local legislator), or covered executive

branch official (as defined in section

162(e)(6)) and otherwise qualifies as a

lobbying activity.

Commentators requested that the de

minimis percentage be increased and

that the direct contact exception be

eliminated. The final regulations do not

adopt these recommendations. The final

regulations do, however, clarify that the

direct contact exception applies only to

the individuals who make the direct

contact, not to support personnel who

engage in research, preparation, and

other background activities but who do

not make a direct contact.

Influencing Legislation—§1.162–29.

The proposed regulations provide

definitions of influencing legislation

and other terms necessary to apply the

rules. In general, commentators approved of these definitions. The final

regulations modify the definitions only

to clarify their application. However,

no substantive change is intended by

these modifications.

Some commentators stated that the

final regulations should distinguish between influencing legislation and

educating legislators. The final regulations do not adopt this suggestion. The

IRS and Treasury believe that the

statute does not draw this distinction

and neither should the regulations.

Activities undertaken to educate a

legislator may constitute influencing

legislation under definitions in the final

regulations. Further, the legislative history confirms that Congress did not

intend to provide an exception for

providing technical advice or assistance.

The proposed regulations provide

that a lobbying communication is any

communication that (1) refers to specific legislation and reflects a view on

that legislation, or (2) clarifies, amplifies, modifies, or provides support for

views reflected in a prior lobbying

communication. The proposed regulations provide that the term specific

legislation includes both legislation that

has already been introduced in a

1995–2 C.B.

legislative body and a specific legislative proposal that the taxpayer either

supports or opposes.

Several commentators stated that the

phrase ‘‘reflects a view’’ should be

defined to mean an explicit statement

of support or opposition to legislative

action. Some commentators also suggested that the regulations should make

clear that a taxpayer is not reflecting a

view on specific legislation if it presents a balanced analysis of the merits

and defects of the legislation.

The final regulations do not adopt

either of these recommendations. A

taxpayer can reflect a view on specific

legislation without specifically stating

that it supports or opposes that legislation. Thus, as illustrated in §1.162–

29(b)(2), Example 8, a taxpayer reflects

a view on specific legislation even if

the taxpayer does not explicitly state its

support for, or opposition to, action by

a legislative body. Moreover, a taxpayer’s balanced or technical analysis

of legislation reflects a view on some

aspect of the legislation and, thus, is a

lobbying communication.

The proposed regulations do not

contain a definition of the term ‘‘specific legislative proposal,’’ but do

contain several examples to illustrate

the scope of the term. For instance, in

Example 5 of §1.162–29(b)(2) of the

proposed regulations, a taxpayer prepares a paper indicating that increased

savings and local investment will spur

the state economy. The taxpayer forwards a summary of the paper to

legislators with a cover letter that

states, in part:

You must take action to improve the

availability of new capital in the

state.

The example concludes that the taxpayer has not made a lobbying communication because neither the summary nor the cover letter refers to a

specific legislative proposal.

In Example 6 of that section, a

taxpayer prepares a paper concerning

the benefits of lowering the capital

gains tax rate. The taxpayer forwards a

summary of the paper to its representative in Congress with a cover letter that

states, in part:

I urge you to support a reduction in

the capital gains tax rate.

The example concludes that the taxpayer has made a lobbying communication because the communication refers

to and reflects a view on a specific

legislative proposal.

Numerous commentators stated that

they do not perceive a distinction

between the two examples. In addition,

certain commentators requested that the

term ‘‘specific legislative proposal’’ be

defined.

Whether a communication refers to a

specific legislative proposal may vary

with the context. The communication in

Example 5 is not sufficiently specific to

be a specific legislative proposal, and

no other facts and circumstances indicate the existence of a specific legislative proposal to which the communication refers. In Example 6, however,

support is limited to a proposal for

reduction of a particular tax rate.

Although commentators suggested a

number of definitions of the term

‘‘specific legislative proposal,’’ none

was entirely satisfactory in capturing

the full range of communications referred to in section 162(e)(4)(A). Thus,

the final regulations do not adopt these

suggestions.

The proposed regulations provide

that an attempt to influence legislation

means a lobbying communication and

all activities such as research, preparation, and other background activities

engaged in for a purpose of making or

supporting a lobbying communication.

The purpose or purposes for engaging

in an activity are determined based on

all the facts and circumstances.

The proposed regulations provide

two presumptions concerning the purpose for engaging in an activity that is

related to a lobbying communication.

The first presumption provides that if

an activity relating to a lobbying communication is engaged in for a nonlobbying purpose prior to the first taxable

year preceding the taxable year in

which the communication is made, the

activity is presumed to be engaged in

for all periods solely for that nonlobbying purpose (favorable presumption).

Conversely, the second presumption

provides that if an activity relating to a

lobbying communication is engaged in

during the taxable year in which the

lobbying communication is made or the

immediately preceding taxable year, the

activity is presumed to be engaged in

solely for a lobbying purpose (adverse

presumption).

The adverse presumption was intended to prevent taxpayers from abusing an intent- or purpose-based rule by

labelling their lobbying activities as

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mere monitoring. On the other hand,

the favorable presumption provides

substantial certainty to taxpayers who

engage in an activity for a nonlobbying

purpose a sufficient time before a

lobbying communication is made.

While commentators approved of the

purpose test, many criticized the presumptions. Many commentators argued

that the presumptions would create

unreasonable recordkeeping burdens requiring detailed records concerning the

purpose of a taxpayer’s every activity.

Several commentators also argued that

the presumptions operated over too

great a period of time and recommended that, if retained, they should

apply to a period of 6 months or,

alternatively, a calendar year. A number of commentators expressed a belief

that the presumptions created a 2-year

lookback recharacterizing activities as

lobbying activities. Other commentators

further argued that the presumptions

used undefined terms and would be

difficult to rebut.

Although the presumptions were intended as an aid in identifying activities that were more or less likely to

be lobbying activities, the IRS and

Treasury believe that the presumptions

have been viewed by the commentators

as undermining and complicating the

purpose-based test. Therefore, the final

regulations eliminate the presumptions,

replacing them with a list of some of

the facts and circumstances to be

considered in determining whether an

activity is engaged in for a lobbying

purpose.

In addition, in response to various

comments concerning the treatment of

activities engaged in for the purpose of

deciding to lobby, the final regulations

clarify that the activity of deciding to

lobby is to be treated in the same

manner as research, preparation, and

other background activities. Thus, a

taxpayer who engages in the decisionmaking process may be treated as

engaged in that activity for a lobbying

purpose. This rule applies to a taxpayer

who alone or as part of a group is

deciding whether a lobbying communication should be made.

Under the proposed regulations, if a

taxpayer engages in an activity for a

lobbying purpose and for some nonlobbying purpose, the taxpayer must

treat the activity as engaged in partially

for a lobbying purpose and partially for

a nonlobbying purpose (multiple-purpose rule). While many commentators

approved of a facts and circumstances

analysis to determine whether a taxpayer engages in an activity for a

lobbying purpose, some of these commentators thought that an activity

should be subject to section 162(e)(1)(A) only if the principal or primary

purpose of the activity is to make or

support a lobbying communication.

According to these commentators, a

principal or primary purpose rule

would be easier to administer than the

proposed multiple purpose rule. Several

commentators noted that a principal or

primary purpose test would eliminate

the burden of dividing the costs of an

activity among purposes under the

proposed multiple-purpose rule.

The IRS and Treasury continue to

believe that a principal or primary

purpose test does not avoid the necessity of determining the various purposes for engaging in an activity and

the relative importance of those purposes, and it has a substantial ‘‘cliff’’

effect. Therefore, the final regulations

do not adopt a principal or primary

purpose test.

The proposed regulations do not

specify methods for accomplishing a

reasonable cost allocation in the case of

multiple purpose activities. Rather, the

proposed regulations specify two

methods that may not be appropriate. A

taxpayer’s treatment of multiple purpose activities will, in general, not

result in a reasonable allocation if it

allocates to influencing legislation (1)

only the incremental amount of costs

that would not have been incurred but

for the lobbying purpose; or (2) an

amount based on the number of purposes for engaging in that activity

without regard to the relative importance of those purposes.

Some commentators requested additional guidance (by way of example)

concerning how a taxpayer should

determine the ‘‘relative importance’’ of

purposes. In response to these comments, the final regulations are clarified

to treat allocations based solely upon

the number of purposes for engaging in

an activity as generally not reasonable.

The IRS and Treasury intend this

change to indicate that an allocation

based on the number of purposes may

be reasonable if it reflects the relative

importance of various purposes, even if

the allocation is not precise. For

instance, if a taxpayer engages in an

activity for two purposes of substantially similar importance, treating the

activity as engaged in 50 percent for

each purpose is reasonable.

The final regulations provide special

rules for activities engaged in for a

lobbying purpose (including deciding to

lobby) where the taxpayer later concludes that no lobbying communication

will be made regarding that activity.

Specifically, the final regulations treat

these activities as if they had not been

engaged in for a lobbying purpose if,

as of the taxpayer’s timely filed return,

the taxpayer no longer expects, under

any reasonably foreseeable circumstances, that a lobbying communication

will be made that is supported by the

activity. Thus, the taxpayer need not

treat any amount allocated to that

activity for that year under §1.162–28

as an amount to which section

162(e)(1)(A) applies. On the other

hand, if the taxpayer reaches that

conclusion at any time after the filing

date, then the amount (not previously

satisfying these special rules) allocated

to that activity under §1.162–28 is

treated as an amount that is paid or

incurred only at that time and that is

not subject to section 162(e)(1)(A).

Thus, in effect, the taxpayer is treated

as if it incurred the costs relating to

that activity in that later year in

connection with a nonlobbying activity.

A special rule is provided for exempt

organizations to which section 6033(e)

applies, which permits those organizations to instead treat these amounts as

reducing (but not below zero) their

expenditures to which section 162(e)(1)

applies beginning with that year and

continuing for subsequent years to the

extent not treated in prior years as

reducing those expenditures.

The proposed regulations provide a

special rule for so-called ‘‘paid volunteers.’’ If, for the purpose of making or

supporting a lobbying communication,

one taxpayer uses the services or

facilities of a second taxpayer and does

not compensate the second taxpayer for

the full cost of the services or facilities,

the purpose and actions of the first

taxpayer are imputed to the second

taxpayer. Thus, for example, if a trade

association uses the services of a

member’s employee, at no cost to the

association, to conduct research or

similar activities to support the trade

association’s lobbying communication,

the trade association’s purpose and

actions are imputed to the member. As

a result, the member is treated as

influencing legislation with respect to

the employee’s work in support of the

trade association’s lobbying communication.

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The IRS and Treasury intended the

special imputation rule to deny a

deduction for the amounts paid or

incurred by a taxpayer participating in

a group activity involving a lobbying

purpose and a lobbying communication,

even if the lobbying communication

was made by a person other than the

taxpayer. The final regulations clarify

the rule. In addition, in response to

commentators who requested clarification on when an employer must account for employee volunteer lobbying

activities, the final regulations provide,

by way of example, that if a taxpayer’s

employee not acting within the scope

of employment volunteers to engage in

activities influencing legislation, then

the taxpayer is not influencing legislation.

Certain commentators have indicated

that participation in the activities of

government advisory bodies, such as

federal advisory committees, should be

exempt from section 162(e). Commentators argued that federal advisory

committees provide information and

advice to assist the federal government

in matters it specifies, not to influence

legislation.

The statutory term influencing legislation includes lobbying communications with government employees or

officials who may participate in the

formulation of legislation. Section

162(e) does not except lobbying communications made by participating in

federal advisory committees. Further,

the legislative history strongly suggests

that no exceptions were intended other

than for communications pursuant to

subpoena or similar compulsion. Thus,

participating in a federal advisory

committee is influencing legislation if

the purpose of the participant’s activities is to make or support a

lobbying communication, even if the

lobbying communication is made by

another participant or by the federal

advisory committee as a whole.

The proposed regulations defining

influencing legislation propose an

effective date of May 13, 1994. Several

commentators requested that the effective date of the final regulations be the

date they are published or later. The

final regulations on influencing legislation adopt this suggestion and are

effective as of the date of publication,

as are the final regulations on allocating costs to lobbying activities. Taxpayers must adopt a reasonable interpretation of section 162(e) for amounts

paid or incurred prior to the effective

date.

1995–2 C.B.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It has also been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

apply to these regulations, and, therefore, a Regulatory Flexibility Analysis

is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking

preceding these regulations was submitted to the Small Business Administration for comment on its impact on

small business.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In §1.162–20, paragraphs

(c)(5) and (d) are added to read as

follows:

§1.162–20 Expenditures attributable

to lobbying, political campaigns,

attempts to influence legislation, etc.,

and certain advertising.

(5) Expenses paid or incurred after

December 31, 1993, in connection with

influencing legislation other than certain local legislation. The provisions of

paragraphs (c)(1) through (3) of this

section are superseded for expenses

paid or incurred after December 31,

1993, in connection with influencing

legislation (other than certain local

legislation) to the extent inconsistent

with section 162(e)(1)(A) (as limited

by section 162(e)(2)) and §§1.162–

20(d) and 1.162–29.

(d) Dues allocable to expenditures

after 1993. No deduction is allowed

under section 162(a) for the portion of

dues or other similar amounts paid by

the taxpayer to an organization exempt

from tax (other than an organization

described in section 501(c)(3)) which

the organization notifies the taxpayer

under section 6033(e)(1)(A)(ii) is allocable to expenditures to which section

162(e)(1) applies. The first sentence of

this paragraph (d) applies to dues or

other similar amounts whether or not

paid on or before December 31, 1993.

Section 1.162–20(c)(3) is superseded to

the extent inconsistent with this paragraph (d).

§1.162–20T [Removed]

Par. 3. Section 1.162–20T is

removed.

Par. 4. Section 1.162–28 is added to

read as follows:

§1.162–28 Allocation of costs to

lobbying activities.

(a) Introduction—(1) In general.

Section 162(e)(1) denies a deduction

for certain amounts paid or incurred in

connection with activities described in

section 162(e)(1)(A) and (D) (lobbying

activities). To determine the nondeductible amount, a taxpayer must allocate

costs to lobbying activities. This section describes costs that must be

allocated to lobbying activities and

prescribes rules permitting a taxpayer

to use a reasonable method to allocate

those costs. This section does not apply

to taxpayers subject to section 162(e)(5)(A). In addition, this section does

not apply for purposes of sections 4911

and 4945 and the regulations thereunder.

(2) Recordkeeping. For recordkeeping requirements, see section 6001 and

the regulations thereunder.

(b) Reasonable method of allocating

costs—(1) In general. A taxpayer must

use a reasonable method to allocate the

costs described in paragraph (c) of this

section to lobbying activities. A

method is not reasonable unless it is

applied consistently and is consistent

with the special rules in paragraph (g)

of this section. Except as provided in

paragraph (b)(2) of this section, reasonable methods of allocating costs to

lobbying activities include (but are not

limited to)—

(i) The ratio method described in

paragraph (d) of this section;

(ii) The gross-up method described

in paragraph (e) of this section; and

(iii) A method that applies the principles of section 263A and the regula-

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tions thereunder (see paragraph (f) of

this section).

(2) Taxpayers not permitted to use

certain methods. A taxpayer (other than

one subject to section 6033(e)) that

does not pay or incur reasonable labor

costs for persons engaged in lobbying

activities may not use the gross-up

method. For example, a partnership or

sole proprietorship in which the lobbying activities are performed by the

owners who do not receive a salary or

guaranteed payment for services does

not pay or incur reasonable labor costs

for persons engaged in those activities

and may not use the gross-up method.

allocable to lobbying activities include

labor costs and general and administrative costs.

(2) Labor costs. For each taxable

year, labor costs include costs attributable to full-time, part-time, and contract

employees. Labor costs include all

elements of compensation, such as

basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay,

payroll taxes, pension costs, employee

benefits, and payments to a supplemental unemployment benefit plan.

(3) General and administrative

Lobbying labor hours

Total labor hours

(2) Lobbying labor hours. Lobbying

labor hours are the hours that a

taxpayer’s personnel spend on lobbying

activities during the taxable year. A

taxpayer may use any reasonable

method to determine the number of

labor hours spent on lobbying activities

and may use the de minimis rule of

paragraph (g)(1) of this section. A

taxpayer may treat as zero the lobbying

labor hours of personnel engaged in

secretarial, clerical, support, and other

administrative activities (as opposed to

activities involving significant judgment with respect to lobbying activities). Thus, for example, the hours

spent on lobbying activities by paraprofessionals and analysts may not be

treated as zero.

(3) Total labor hours. Total labor

hours means the total number of hours

that a taxpayer’s personnel spend on a

taxpayer’s trade or business during the

taxable year. A taxpayer may make

reasonable assumptions concerning to-

Total costs of operations.

tal hours spent by personnel on the

taxpayer’s trade or business. For example, it may be reasonable, based on all

the facts and circumstances, to assume

that all full-time personnel spend 1,800

hours per year on a taxpayer’s trade or

business. If, under paragraph (d)(2) of

this section, a taxpayer treats as zero

the lobbying labor hours of personnel

engaged in secretarial, clerical, support,

and other administrative activities, the

taxpayer must also treat as zero the

total labor hours of all personnel

engaged in those activities.

(4) Total costs of operations. A

taxpayer’s total costs of operations

means the total costs of the taxpayer’s

trade or business for a taxable year,

excluding third-party costs (as defined

in paragraph (d)(5) of this section).

(5) Third-party costs. Third-party

costs are amounts paid or incurred in

whole or in part for lobbying activities

conducted by third parties (such as

Lobbying labor hours

Total labor hours

[300 + 1,700 + 1,000

6,000

Total costs

of operations

$300,000]

costs. For each taxable year, general

and administrative costs include depreciation, rent, utilities, insurance,

maintenance costs, security costs, and

other administrative department costs

(for example, payroll, personnel, and

accounting).

(d) Ratio method—(1) In general.

Under the ratio method described in

this paragraph (d), a taxpayer allocates

to lobbying activities the sum of its

third-party costs (as defined in paragraph (d)(5) of this section) allocable

to lobbying activities and the costs

determined by using the following

formula:

amounts paid to taxpayers subject to

section 162(e)(5)(A) or dues or other

similar amounts that are not deductible

in whole or in part under section

162(e)(3)) and amounts paid or incurred for travel (including meals and

lodging while away from home) and

entertainment relating in whole or in

part to lobbying activities.

(6) Example.The provisions of this

paragraph (d) are illustrated by the

following example.

Example. (i) In 1996, three full-time

employees, A, B, and C, of Taxpayer W engage

in both lobbying activities and nonlobbying

activities. A spends 300 hours, B spends 1,700

hours, and C spends 1,000 hours on lobbying

activities, for a total of 3,000 hours spent on

lobbying activities for W. W reasonably assumes

that each of its three employees spends 2,000

hours a year on W’s business.

(ii) W’s total costs of operations are $300,000.

W has no third-party costs.

(iii) Under the ratio method, X allocates

$150,000 to its lobbying activities for 1996, as

follows:

Allocable

third-party costs

Costs allocable to

lobbying activities

[0]

$150,000.

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(e) Gross-up method—(1) In general. Under the gross-up method described in this paragraph (e)(1), the

taxpayer allocates to lobbying activities

the sum of its third-party costs (as

defined in paragraph (d)(5) of this

section) allocable to lobbying activities

and 175 percent of its basic lobbying

labor costs (as defined in paragraph

(e)(3) of this section) of all personnel.

(2) Alternative gross-up method. Under the alternative gross-up method

described in this paragraph (e)(2), the

taxpayer allocates to lobbying activities

the sum of its third-party costs (as

defined in paragraph (d)(5) of this

section) allocable to lobbying activities

and 225 percent of its basic lobbying

labor costs (as defined in paragraph

(e)(3)), excluding the costs of person-

1995–2 C.B.

(4) Example. The provisions of this

paragraph (e) are illustrated by the

following example.

Example. (i) In 1996, three employees, A, B,

and C, of Taxpayer X engage in both lobbying

activities and nonlobbying activities. A spends

300 hours, B spends 1,700 hours, and C spends

1,000 hours on lobbying activities.

(ii) X has no third-party costs.

(iii) For purposes of the gross-up method, X

determines that its basic labor costs are $20 per

hour for A, $30 per hour for B, and $25 per hour

for C. Thus, its basic lobbying labor costs are

($20 3 300) + ($30 3 1,700) + ($25 3 1,000),

or ($6,000 + $51,000 + $25,000), for total basic

lobbying labor costs for 1996 of $82,000.

(iv) Under the gross-up method, X allocates

$143,500 to its lobbying activities for 1996, as

follows:

175%

Basic lobbying labor

costs of all personnel

Allocable

third-party costs

Costs allocable to

lobbying activities

[175%

$82,000]

[0]

$143,500.

(f) Section 263A cost allocation

methods—(1) In general. A taxpayer

may allocate its costs to lobbying activities under the principles set forth in

section 263A and the regulations thereunder, except to the extent inconsistent

with paragraph (g) of this section. For

this purpose, lobbying activities are

considered a service department or

function. Therefore, a taxpayer may

allocate costs to lobbying activities by

applying the methods provided in

§§1.263A–1 through 1.263A–3. See

§1.263A–1(e)(4), which describes service costs generally; §1.263A–1(f), which

sets forth cost allocation methods available under section 263A; and §1.263A–

1(g)(4), which provides methods of allocating service costs.

(2) Example. The provisions of this

paragraph (f) are illustrated by the following example.

nel who engage in secretarial, clerical,

support, and other administrative activities (as opposed to activities involving significant judgment with respect to

lobbying activities).

(3) Basic lobbying labor costs. For

purposes of this paragraph (e), basic

lobbying labor costs are the basic costs

of lobbying labor hours (as defined in

paragraph (d)(2) of this section) determined for the appropriate personnel.

For purposes of this paragraph (e),

basic costs of lobbying labor hours are

wages or other similar costs of labor,

including, for example, guaranteed payments for services. Basic costs do not

include pension, profit-sharing,

employee benefits, and supplemental

unemployment benefit plan costs, or

other similar costs.

Example. (i) Three full-time employees, A, B,

and C, work in the Washington office of

Taxpayer Y, a manufacturing concern. They each

engage in lobbying activities and nonlobbying

activities. In 1996, A spends 75 hours, B spends

1,750 hours, and C spends 2,000 hours on

lobbying activities. A’s hours are not spent on

direct contact lobbying as defined in paragraph

(g)(2) of this section. All three work 2,000 hours

during 1996. The Washington office also

employs one secretary, D, who works exclusively

for A, B, and C.

(ii) In addition, three departments in the

corporate headquarters in Chicago benefit the

Washington office: public affairs, human resources, and insurance.

(iii) Y is subject to section 263A and uses the

step-allocation method to allocate its service

costs. Prior to the amendments to section 162(e),

the Washington office was treated as an overall

management function for purposes of section

263A. As such, its costs were fully deductible

and no further allocations were made under Y’s

step allocation. Following the amendments to

section 162(e), Y adopts its 263A step-allocation

methodology to allocate costs to lobbying

activities. Y adds a lobbying department to its

step-allocation program, which results in an

allocation of costs to the lobbying department

from both the Washington office and the Chicago

office.

(iv) Y develops a labor ratio to allocate its

Washington office costs between the newly

defined lobbying department and the overall

management department. To determine the hours

allocable to lobbying activities, Y uses the de

minimis rule of paragraph (g)(1) of this section.

Under this rule, A’s hours spent on lobbying

activities are treated as zero because less than 5

percent of A’s time is spent on lobbying

(75/2,000 = 3.75%). In addition, because D

works exclusively for personnel engaged in

lobbying activities, D’s hours are not used to

develop the allocation ratio. Y assumes that D’s

allocation of time follows the average time of all

the personnel engaged in lobbying activities.

Thus, Y’s labor ratio is determined as follows:

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Departments

Overall Management Hours

Employee

Lobbying Hours

1,750

2,000

250

2,000

Totals

3,750

2,250

6,000

Lobbying Department Ratio

Overall Management Department Ratio

3,750

6,000

2,250

6,000

Total Hours

62.5%

37.5%

(v) In 1996, the Washington office has the following costs:

Account

Professional Salaries and Benefits

Clerical Salaries and Benefits

Rent Expense

Depreciation on Furniture and Equip.

Utilities

Outside Payroll Service

Miscellaneous

Third-Party Lobbying (Law Firm)

Amount

$ 660,000

50,000

100,000

40,000

15,000

5,000

10,000

90,000

Total Washington Costs

$ 970,000

(vi) In addition, $233,800 of costs from the public affairs department, $30,000 of costs from the insurance department, and $5,000 of costs from the

human resources department are allocable to the Washington office from departments in Chicago. Therefore, the Washington office costs are allocated to

the Lobbying and Overall Management departments as follows:

Total Washington department costs from above

Plus Costs Allocated from Other Departments

Less third-party costs directly allocable to lobbying

$ 970,000

268,800

(90,000)

Total Washington office costs

$1,148,800

Department Allocation Ratios

2 Washington Office Costs

= Costs Allocated to Departments

Lobbying

Department

Overall Mgmt.

Department

62.5%

$1,148,800

$ 718,000

37.5%

$1,148,800

$ 430,800

(vii) Y’s step-allocation for its Lobbying Department is determined as follows:

Y’s Step-Allocation

Lobbying

Department

Washington Costs Allocated To Lobbying Department

Plus Third-Party Costs

$ 718,000

90,000

Total Costs of Lobbying Activities

$ 808,000

(g) Special rules. The following

rules apply to any reasonable method

of allocating costs to lobbying activities.

(1) De minimis rule for labor hours.

Subject to the exception provided in

paragraph (g)(2) of this section, a

taxpayer may treat time spent by an

individual on lobbying activities as

zero if less than five percent of the

person’s time is spent on lobbying

activities. Reasonable methods must be

used to determine if less than five

percent of a person’s time is spent on

lobbying activities.

(2) Direct contact lobbying labor

hours. Notwithstanding paragraph

(g)(1) of this section, a taxpayer must

treat all hours spent by a person on

direct contact lobbying (as well as the

hours that person spends in connection

with direct contact lobbying, including

time spent traveling that is allocable to

the direct contact lobbying) as labor

hours allocable to lobbying activities.

An activity is direct contact lobbying if

it is a meeting, telephone conversation,

letter, or other similar means of communication with a legislator (other than

a local legislator) or covered executive

branch official (as defined in section

162(e)(6)) and otherwise qualifies as a

lobbying activity. A person who

engages in research, preparation, and

other background activities related to

direct contact lobbying but who does

not make direct contact with a legislator or covered executive branch official

is not engaged in direct contact

lobbying.

(3) Taxpayer defined. For purposes

of this section, a taxpayer includes a

tax-exempt organization subject to section 6033(e).

(h) Effective date. This section is

effective for amounts paid or incurred

on or after July 21, 1995. Taxpayers

must adopt a reasonable interpretation

of sections 162(e)(1)(A) and (D) for

amounts paid or incurred before this

date.

Par. 5. Section 1.162–29 is added to

read as follows:

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§1.162–29 Influencing legislation.

(a) Scope. This section provides

rules for determining whether an activity is influencing legislation for

purposes of section 162(e)(1)(A). This

section does not apply for purposes of

sections 4911 and 4945 and the regulations thereunder.

(b) Definitions. For purposes of this

section—

(1) Influencing legislation. Influencing legislation means—

(i) Any attempt to influence any

legislation through a lobbying communication; and

(ii) All activities, such as research,

preparation, planning, and coordination,

including deciding whether to make a

lobbying communication, engaged in

for a purpose of making or supporting

a lobbying communication, even if not

yet made. See paragraph (c) of this

section for rules for determining the

purposes for engaging in an activity.

(2) Attempt to influence legislation.

An attempt to influence any legislation

through a lobbying communication is

making the lobbying communication.

(3) Lobbying communication. A lobbying communication is any communication (other than any communication

compelled by subpoena, or otherwise

compelled by Federal or State law)

with any member or employee of a

legislative body or any other government official or employee who may

participate in the formulation of the

legislation that—

(i) Refers to specific legislation and

reflects a view on that legislation; or

(ii) Clarifies, amplifies, modifies, or

provides support for views reflected in

a prior lobbying communication.

(4) Legislation. Legislation includes

any action with respect to Acts, bills,

resolutions, or other similar items by a

legislative body. Legislation includes a

proposed treaty required to be submitted by the President to the Senate for

its advice and consent from the time

the President’s representative begins to

negotiate its position with the prospective parties to the proposed treaty.

(5) Specific legislation. Specific legislation includes a specific legislative

proposal that has not been introduced

in a legislative body.

(6) Legislative bodies. Legislative

bodies are Congress, state legislatures,

and other similar governing bodies,

excluding local councils (and similar

1995–2 C.B.

governing bodies), and executive, judicial, or administrative bodies. For this

purpose, administrative bodies include

school boards, housing authorities,

sewer and water districts, zoning

boards, and other similar Federal, State,

or local special purpose bodies,

whether elective or appointive.

(7) Examples. The provisions of this

paragraph (b) are illustrated by the

following examples.

Example 1. Taxpayer P’s employee, A, is

assigned to approach members of Congress to

gain their support for a pending bill. A drafts and

P prints a position letter on the bill. P distributes

the letter to members of Congress. Additionally,

A personally contacts several members of Congress or their staffs to seek support for P’s

position on the bill. The letter and the personal

contacts are lobbying communications. Therefore, P is influencing legislation.

Example 2. Taxpayer R is invited to provide

testimony at a congressional oversight hearing

concerning the implementation of The Financial

Institutions Reform, Recovery, and Enforcement

Act of 1989. Specifically, the hearing concerns a

proposed regulation increasing the threshold

value of commercial and residential real estate

transactions for which an appraisal by a state

licensed or certified appraiser is required. In its

testimony, R states that it is in favor of the

proposed regulation. Because R does not refer to

any specific legislation or reflect a view on any

such legislation, R has not made a lobbying

communication. Therefore, R is not influencing

legislation.

Example 3. State X enacts a statute that

requires the licensing of all day-care providers.

Agency B in State X is charged with writing

rules to implement the statute. After the enactment of the statute, Taxpayer S sends a letter to

Agency B providing detailed proposed rules that

S recommends Agency B adopt to implement the

statute on licensing of day-care providers.

Because the letter to Agency B neither refers to

nor reflects a view on any specific legislation, it

is not a lobbying communication. Therefore, S is

not influencing legislation.

Example 4. Taxpayer T proposes to a State

Park Authority that it purchase a particular tract

of land for a new park. Even if T’s proposal

would necessarily require the State Park Authority eventually to seek appropriations to

acquire the land and develop the new park, T has

not made a lobbying communication because

there has been no reference to, nor any view

reflected on, any specific legislation. Therefore,

T’s proposal is not influencing legislation.

Example 5. (i) Taxpayer U prepares a paper

that asserts that lack of new capital is hurting

State X’s economy. The paper indicates that

State X residents either should invest more in

local businesses or increase their savings so that

funds will be available to others interested in

making investments. U forwards a summary of

the unpublished paper to legislators in State X

with a cover letter that states in part:

You must take action to improve the availability of new capital in the state.

(ii) Because neither the summary nor the

cover letter refers to any specific legislative

proposal and no other facts or circumstances

indicate that they refer to an existing legislative

proposal, forwarding the summary to legislators

in State X is not a lobbying communication.

Therefore, U is not influencing legislation.

(iii) Q, a member of the legislature of State X,

calls U to request a copy of the unpublished

paper fro

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