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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Abac88cfc116c816a

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

SEQ 0001 JOB C21-001-007 PAGE-0001 COVER
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778/00000/28AUG96/C21-001

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
ii
Introduction

Part I.—Rulings and Decisions Under the Internal Revenue
Code of 1986
3
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

iv

v

Finding List of Current Action on Previous Published
Items
vi

Tax Court

1

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.

ii

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.

iv

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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

1995–2 C.B.

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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

vi

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

Revenue Rulings—Continued

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.

1

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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.

2

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:

1995–2 C.B.

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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.

4

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
(C) The taxpayer receiving the credit
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.

(c) 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 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);

(C) The vehicle otherwise ceases to
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);
(C) The property is used by the
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.
(c) Recapture date—(1) Qualified
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

6

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.

7

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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
112.52
130.24
130.24
130.24
112.52
112.52
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.

8

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
112.52
130.24
130.24
130.24
112.52
112.52
112.52
112.52
112.52
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

10

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

12

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

1995–2 C.B.

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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-

14

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
Register a notice of proposed rulemaking (58 FR 68330 [IA–57–93, 1994–1
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
Register a notice of proposed rulemaking (59 FR 24992 [IA–23–94, 1994–1
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.

16

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

1995–2 C.B.

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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 c

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Abac88cfc116c816a. Public record. Not legal advice.