Influencing Legislation

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[IA-23-94]

RIN 1545-AS65

Influencing Legislation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations defining the

phrase ``influencing legislation'' for purposes of the deduction

disallowance for certain amounts paid or incurred in connection with

influencing legislation. 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. This document also provides notice of a public hearing on these

proposed regulations.

DATES: Written comments must be received by July 12, 1994. Outlines of

topics to be discussed at the public hearing scheduled for Monday,

September 12, 1994, at 10 a.m. must be received by Monday, August 22,

1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (IA-23-94), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (IA-23-94),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. The public hearing will be held in the Auditorium,

Internal Revenue Building, 1111 Constitution Avenue NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT: Concerning the hearing, Carol Savage,

Regulations Unit, 202-622-7190; concerning the regulations, James M.

Guiry, 202-622-1585 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed Income Tax Regulations under

section 162(e) of the Internal Revenue Code of 1986 (Code), as amended

by section 13222 of the Omnibus Budget Reconciliation Act of 1993 (OBRA

1993) (107 Stat. 477). These proposed regulations relate to the

definition of ``influencing legislation''. On December 27, 1993, a

notice of proposed rulemaking (IA-57-93) was published in the Federal

Register (52 FR 68330) concerning the rules for allocating costs to

certain activities, including influencing legislation.

Section 13222 of OBRA 1993 amended section 162(e) of the Code,

concerning the deductibility of certain lobbying and political

expenditures. As amended, section 162(e)(1)(A) denies a deduction for

amounts paid or incurred in connection with influencing legislation.

However, certain lobbying expenditures relating to local legislation

are not subject to section 162(e)(1)(A). In addition, section

162(e)(1)(D) denies a deduction for any amount paid or incurred in

connection with influencing certain federal executive branch officials.

Section 162(e)(1)(B) and (C) continues the rules disallowing business

deductions for amounts paid or incurred in connection with grassroots

lobbying and participation in political campaigns.

Section 162(e)(4)(A) defines ``influencing legislation'' as ``any

attempt to influence any legislation through communication with any

member or employee of a legislative body, or with any government

official or employee who may participate in the formulation of

legislation.'' Section 162(e)(5)(C) provides that ``[a]ny amount paid

or incurred for research for, or preparation, planning, or coordination

of, any activity described in paragraph (1) [including `influencing

legislation'] shall be treated as paid or incurred in connection with

such activity.'' The legislative history of the amendment to section

162(e) indicates that attempts to influence legislation should be

distinguished from ``mere monitoring'' of legislative activities. The

legislative history further provides, however, that if a taxpayer

monitors legislation and subsequently attempts to influence that or

similar legislation, the monitoring activity should generally be

treated as ``in connection with'' the attempt to influence legislation

(and, therefore, the costs relating to that monitoring activity would

be non-deductible).

Section 4911, relating to the excise tax on certain lobbying

activities of certain electing public charities, contains a definition

of ``influencing legislation'' that is essentially identical (as it

relates to direct, as opposed to grassroots, lobbying) to the

definition of that term in section 162(e)(4)(A). Because of this

similarity, these proposed regulations adopt rules that are similar to

the rules applicable to direct lobbying communications under

Sec. 56.4911-2(b)(1). However, section 162(e) differs from section 4911

in certain material respects. For example, section 4911(d)(2) contains

exceptions to the term ``influencing legislation,'' while section

162(e)(4) does not. Moreover, these proposed regulations under section

162(e) and the regulations under section 4911 differ in some respects

due to the nature of charitable organizations described in section

501(c)(3) as compared to, for example, organizations described in

section 501(c)(6) and for-profit entities. Accordingly, taxpayers

should not infer that these proposed regulations reflect an

interpretation of section 4911 or the regulations thereunder.

Discussion of Selected Considerations

The proposed regulations define ``influencing legislation'' in the

same terms as the statutory definition in section 162(e)(4)(A), which

requires a ``communication'' with a government official or employee.

With respect to that communication, the proposed regulations adopt

rules similar to the rules in the section 4911 regulations. Those rules

require that the communication refer to specific legislation and

reflect a view on that legislation. This approach was believed to be

more appropriate than a general facts and circumstances analysis

because it provides reasonably objective criteria for determining

whether an attempt to influence legislation has been made.

The proposed regulations also provide rules for determining which

activities support a lobbying communication and, therefore, are

considered part of the attempt to influence legislation. The principal

issue in this regard is whether the mere fact that an activity is used

in some manner to support a lobbying communication should be sufficient

to treat that activity as part of the attempt to influence legislation.

This approach has been referred to by some commentators as a

``lookback'' rule, in that lobbying activities would be identified

solely by ``looking back'' from the lobbying communication to those

activities which supported it. While a lookback approach would appear

to be consistent with the legislative history, numerous comments

suggested that the administrative burdens associated with a lookback

rule could be onerous, particularly if the period of the lookback were

long or unlimited. Accordingly, these comments recommended that a

lookback rule not be adopted, or, if adopted, that it be limited to a

brief period of time. Some of the comments suggested that an

appropriate period of time may be six months, by analogy to the limited

lookback rule applicable to certain grassroots lobbying activities

under the section 4911 regulations.

Upon consideration of the statute, its legislative history, and the

comments received, it was concluded that a lookback rule would not be

appropriate. Instead, the proposed regulations provide that only those

activities engaged in for the purpose of making or supporting a

lobbying communication will be treated as a lobbying activity. This

approach strikes an appropriate balance between taxpayers' need for

greater contemporaneous certainty regarding whether a particular

activity may be treated as a lobbying activity, and Congress' objective

of not allowing a deduction for lobbying activities.

Treasury and the IRS view the legislative history on this point as

voicing a concern that taxpayers may attempt to abuse an intent- or

purpose-based rule by labelling their lobbying activities as ``mere

monitoring.'' To protect against that potential abuse, while also

providing greater certainty regarding those activities that are less

likely to be lobbying activities, the proposed regulations provide

presumptions regarding the purpose for engaging in certain activities.

Because the temporal connection between the lobbying communication

and the related activity is an important factor in assessing whether

the related activity was engaged in for the purpose of supporting the

lobbying communication, the presumptions turn to a considerable extent

on whether the activity occurred during the taxable year in which the

lobbying communication was made or the immediately preceding year. It

was believed that the mere closing of the annual accounting period was

insufficient, in some cases, to affect this temporal connection, and,

consequently, that the presumption would need to operate in more than

one annual accounting period. Thus it was believed that the presumption

period was an appropriate period during which to treat this temporal

connection as indicating (rebuttably) the purpose for engaging in the

activity without creating significant difficulties for taxpayers in

determining, at the time they file their returns, whether the

presumption is likely to operate with respect to that activity.

The proposed regulations also address those supporting activities

that are engaged in for both lobbying and non-lobbying purposes. In

this connection, some of the comments have suggested that a principal

or primary purpose test be adopted. Under this approach, an activity

would be treated as influencing legislation if the principal or primary

purpose for engaging in that activity was to make or support a lobbying

communication, even if the activity was engaged in for other, non-

lobbying purposes as well. Conversely, an activity would be treated as

not involving lobbying if the principal or primary purpose for engaging

in that activity was a non-lobbying purpose, even though a substantial

purpose of the activity was to support lobbying.

After consideration, these suggestions have not been adopted.

Instead, the proposed regulations require an activity that is engaged

in for both lobbying and non-lobbying purposes to be treated as engaged

in partially for a lobbying purpose and partially for a non-lobbying

purpose. This division of the activity must result in a reasonable

allocation of costs to influencing legislation under Sec. 1.162-28.

This allocation approach was adopted rather than a principal or primary

purpose test because a principal/primary purpose test does not avoid

the necessity of determining the various purposes for engaging in an

activity and weighing the relative importance of those purposes, and

because it has a substantial ``cliff'' effect that an allocation

approach does not. In those situations where the taxpayer has

substantial lobbying and non-lobbying purposes, the results under a

principal/primary purpose test would differ dramatically depending on

one's views as to which of the purposes is dominant. As a result,

Treasury and the IRS have serious concerns whether that test could be

administered responsibly and fairly. Finally, nothing in section 162(e)

or its legislative history indicates that Congress intended to treat

activities engaged in for a substantial lobbying purpose as outside the

scope of 162(e).

Consideration was also given to treating an activity as influencing

legislation if any substantial purpose for the activity is lobbying.

Treasury and the IRS believe it generally would be easier to establish

a substantial purpose for engaging in an activity, rather than

examining all of the purposes to establish a principal/primary purpose.

As a result, this approach would be easier to administer than a

principal/primary purpose test. Moreover, a substantial purpose test

would appear to be more consistent with Congressional intent to treat

as influencing legislation those activities that in fact support a

lobbying communication than would a principal/primary purpose test.

However, Treasury and the IRS are concerned that this approach could be

considerably over-inclusive, in that some activities engaged in

predominantly for non-lobbying purposes would be treated entirely as

non-deductible lobbying activities. The IRS invites comments, however,

whether this approach would be more appropriate than the rule in the

proposed regulations.

Finally, to provide taxpayers greater certainty and relief from

burdensome recordkeeping regarding certain relatively minor, recurring

activities, the proposed regulations treat certain activities as

engaged in solely for non-lobbying purposes.

Explanation of Provisions

Under the proposed regulations, as under section 162(e)(4)(A),

``influencing legislation'' means any attempt to influence any

legislation through a lobbying communication with any member or

employee of a legislative body or any government official or employee

(other than a member or employee of a legislative body) who may

participate in the formulation of the legislation that the taxpayer

desires to influence. A lobbying communication is a communication that

either (i) refers to specific legislation and reflects a view on that

legislation, or (ii) clarifies, amplifies, modifies, or provides

support for views reflected in a prior lobbying communication. Specific

legislation includes both legislation that has already been introduced

in a legislative body and a specific legislative proposal that the

taxpayer either supports or opposes.

An attempt to ``influence legislation'' means the lobbying

communication and all activities, such as research, preparation, and

other background activities, engaged in for a purpose of making or

supporting the lobbying communication. Whether an activity is engaged

in for this purpose is determined based on all the facts and

circumstances.

If a taxpayer engages in an activity both for a lobbying purpose

and for some non-lobbying purpose, the taxpayer must treat the activity

as engaged in partially for a lobbying purpose and partially for a non-

lobbying purpose. This division of the activity must result in a

reasonable allocation of costs to influencing legislation under

Sec. 1.162-28. A taxpayer's allocation to influencing legislation of

only the incremental amount of costs that would not have been incurred

but for the lobbying purpose generally is not reasonable. Similarly, an

allocation based on the number of purposes for engaging in an activity

without regard to their relative importance also generally is not

reasonable.

The proposed regulations presume that if an activity relating to a

lobbying communication was engaged in for a non-lobbying purpose prior

to the first taxable year preceding the taxable year in which the

lobbying communication is made, that activity was engaged in for all

periods solely for that non- lobbying purpose. The Commissioner can

rebut this presumption in part (it cannot be rebutted entirely because

the presumption only operates if the taxpayer establishes that the

activity has been engaged in for a non-lobbying purpose) by

establishing that the activity was also engaged in for the purpose of

making or supporting a lobbying communication. Thus, for example, if a

taxpayer regularly conducts an activity in the ordinary course of its

business operations beginning at least two taxable years before the

taxable year in which the lobbying communication is made, it would be

presumed that the continuing activity was not engaged in to support the

lobbying communication, even during the taxable year in which the

lobbying communication is made (and the preceding taxable year). In

this regard, it is expected that whether a course of conduct spanning a

period of time is a single activity will be determined based on all the

facts and circumstances. In particular, it is expected that a

substantial change in the way an activity is conducted will result in

the revised activity being considered a separate activity from the

earlier conduct of the activity.

The proposed regulations also presume that if an activity relating

to a lobbying communication was engaged in during the same taxable year

as the communication is made or in the immediately preceding taxable

year, and is not within the presumption described in the preceding

paragraph, that activity was engaged in for the sole purpose of making

or supporting that communication. The taxpayer may rebut this

presumption (in whole or part) by establishing that the activity was

engaged in (entirely or partially) for a non-lobbying purpose. If,

during the same taxable year, the taxpayer commences an activity that

relates directly to the subject matter of specific legislation (then in

existence) and makes a lobbying communication with respect to that

legislation, it is expected that the taxpayer generally will be unable

to rebut the presumption.

The proposed regulations treat certain activities as engaged in

without a purpose of making or supporting a lobbying communication.

These activities consist of performing an activity for purposes of

complying with the requirements of any law, reading any general

circulation publications, or viewing or listening to other mass media

communications available to the general public. In addition, if, prior

to evidencing a purpose to influence specific legislation (or similar

legislation), a taxpayer determines the existence or procedural status

of that legislation; determines the time, place, and subject of any

hearing to be held by a legislative body with respect to that

legislation; or prepares routine, brief summaries of the provisions of

that legislation, the taxpayer is treated as engaging in that activity

without a purpose of making or supporting a lobbying communication.

The proposed regulations provide a special rule for so- called

``paid volunteers.'' If, for the purpose of making or supporting a

lobbying communication, one taxpayer uses the services or facilities of

a second taxpayer and does not compensate the second taxpayer for the

full cost of the services or facilities, the purpose and actions of the

first taxpayer are imputed to the second taxpayer. Thus, for example,

if a trade association uses the services of a member's employee, at no

cost to the association, to conduct research or similar activities to

support the trade association's lobbying communication, the trade

association's purpose and actions are imputed to the member. As a

result, the member is treated as influencing legislation with respect

to the employee's work in support of the trade association's lobbying

communication. The proposed regulations also provide a general anti-

avoidance rule.

The regulations are proposed to be effective for amounts paid or

incurred on or after May 13, 1994. Taxpayers will be required to adopt

a reasonable interpretation of section 162(e)(1)(A) for amounts paid or

incurred prior to this date.

Modification of 1993 Proposed Regulations

On December 27, 1993, the IRS issued a notice of proposed

rulemaking (IA-57-93) concerning the allocation of costs to lobbying

activities. Section 1.162-28(g)(3) of those proposed regulations

provides a general rule for determining whether a meeting with certain

specified government officials or employees constitutes a lobbying

activity (a term that includes influencing legislation). Because the

proposed regulations contained in this document provide rules for

determining whether a taxpayer is engaged in influencing legislation,

the IRS will amend Sec. 1.162- 28(g)(3), when it is promulgated as a

final regulation, to conform that provision to these proposed

regulations. As a result, whether sponsoring or attending a meeting

constitutes influencing legislation will be determined under the rules

which are the subject of these proposed regulations. Thus, for example,

if a taxpayer attends a speech by a legislator at which specific

legislation is discussed, the taxpayer will not necessarily be

considered to be influencing legislation unless the taxpayer makes a

communication with the legislator which refers to specific legislation

and reflects a view on that legislation. However, if the taxpayer makes

a lobbying communication with respect to that legislation (or similar

legislation) within the same or the succeeding taxable year, the

presumptions provided in these proposed regulations will apply.

Grass Roots Lobbying

The proposed regulations do not address grass roots lobbying.

Although the proposed regulations provide a definition of influencing

legislation that is similar to the definition of direct lobbying

communication under the section 4911 regulations, it should not be

inferred that the IRS will adopt the definition of grassroots lobbying

communication under the section 4911 regulations for purposes of

section 162(e)(1)(C). As noted above, the prior law rules disallowing

business deductions for expenses for grassroots lobbying and

participation in political campaigns remain in effect under OBRA 1993.

Special Analyses

It has been determined that this notice of proposed rulemaking 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, a copy of this notice of proposed rulemaking

will be submitted to the Chief Counsel for Advocacy of the Small

Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for Monday, September 12, 1994,

at 10 a.m. in the Auditorium, Internal Revenue Building, 1111

Constitution Avenue NW., Washington, DC. Because of access

restrictions, visitors will not be admitted beyond the building lobby

more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by July 12, 1994, and submit an outline of the

topics to be discussed and the time to be devoted to each topic (a

signed original and eight (8) copies) by Monday, August 22, 1994.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is James M. Guiry, Office

of Assistant Chief Counsel (Income Tax and Accounting), IRS. However,

other personnel from the IRS and Treasury Department participated in

their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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 1.162-29 is added to read as follows:

Sec. 1.162-29 Influencing legislation.

(a) Scope. This section provides rules for determining what is

influencing legislation for purposes of section 162(e)(1)(A). Paragraph

(b) of this section provides the general rule and necessary definitions

for determining whether a taxpayer is influencing legislation.

Paragraph (c) of this section provides rules for determining whether a

purpose of an activity is to make or support a lobbying communication

which constitutes influencing legislation. Paragraph (d) of this

section provides a special rule relating to the use by one taxpayer of

the services or facilities of another taxpayer in connection with a

lobbying communication. Paragraph (e) of this section provides a

general anti-avoidance rule. Paragraph (f) of this section provides the

effective date. See section 162(e)(2) and Sec. 1.162-20(c) for

exceptions relating to certain local legislation. These rules are not

intended to be applied for purposes of section 4911 and the regulations

thereunder. See section 4911 and Secs. 56.4911-1 through 56.4911-10 for

rules relating to excise tax on lobbying activities of certain electing

public charities.

(b) Influencing legislation--(1) Definitions. For purposes of

section 162(e) and this section--

(i) Influencing legislation. Influencing legislation means any

attempt to influence any legislation through communication (other than

any communication compelled by subpoena, or otherwise compelled by

Federal or State law) with--

(A) Any member or employee of a legislative body; or

(B) Any government official or employee (other than a member or

employee of a legislative body) who may participate in the formulation

of the legislation which the taxpayer desires to influence.

(ii) Communication. For purposes of paragraph (b)(1)(i) of this

section, the term communication is limited to any communication

(referred to as a lobbying communication) that--

(A) Refers to specific legislation and reflects a view on that

legislation; or

(B) Clarifies, amplifies, modifies, or provides support for views

reflected in a prior communication satisfying the requirements of

paragraph (b)(1)(ii)(A) of this section.

(iii) Attempt to influence legislation. An attempt to influence

legislation means the lobbying communication and all activities, such

as research, preparation, and other background activities, engaged in

for a purpose of making or supporting the lobbying communication. See

paragraph (c) of this section for rules for determining the purpose or

purposes for engaging in an activity.

(iv) Legislation. Legislation includes action with respect to Acts,

bills, resolutions, or other similar items by the Congress, any state

legislature, any local council, or similar governing body. Legislation

includes a proposed treaty required to be submitted by the President to

the Senate for its advice and consent from the time the President's

representative begins to negotiate its position with the prospective

parties to the proposed treaty.

(v) Specific legislation. Specific legislation includes both

legislation that has already been introduced in a legislative body and

a specific legislative proposal that the taxpayer either supports or

opposes.

(vi) Action. For purposes of paragraph (b)(1)(iv) of this section,

the term action is limited to the introduction, amendment, enactment,

defeat, or repeal of Acts, bills, resolutions, or similar items.

(vii) Legislative and administrative bodies. Legislative body does

not include executive, judicial, or administrative bodies.

Administrative bodies include school boards, housing authorities, sewer

and water districts, zoning boards, and other similar Federal, State,

or local special purpose bodies, whether elective or appointive.

(2) Examples. The provisions of this paragraph (b) are illustrated

by the following examples:

Example 1. Taxpayer P's employee, A, is assigned to approach

members of Congress to gain their support for a pending bill. A

drafts and P prints a position letter on the bill. P distributes the

letter to members of Congress. Additionally, A personally contacts

several members of Congress or their staffs to seek support for P's

position on the bill. The letter and the personal contacts are

lobbying communications. Therefore, P is influencing legislation.

Example 2. Taxpayer R is invited to provide testimony at a

congressional oversight hearing concerning the implementation of The

Financial Institutions Reform, Recovery, and Enforcement Act of

1989. Specifically, the hearing concerns a proposed regulation

increasing the threshold value of commercial and residential real

estate transactions for which an appraisal by a state licensed or

certified appraiser is required. In its testimony, R states that it

is in favor of the proposed regulation. Because R does not refer to

any specific legislation or reflect a view on any such legislation,

R has not made a lobbying communication. Therefore, R is not

influencing legislation.

Example 3. State X enacts a statute that requires the licensing

of all day-care providers. Agency B in State X is charged with

writing rules to implement the statute. After the enactment of the

statute, Taxpayer S sends a letter to Agency B providing detailed

proposed rules that S recommends Agency B adopt to implement the

statute on licensing of day-care providers. Because the letter to

Agency B neither refers to nor reflects a view on any specific

legislation, it is not a lobbying communication. Therefore, S is not

influencing legislation.

Example 4. Taxpayer T proposes to a State Park Authority that it

purchase a particular tract of land for a new park. Even if T's

proposal would necessarily require the State Park Authority

eventually to seek appropriations to acquire the land and develop

the new park, T has not made a lobbying communication because there

has been no reference to, nor any view reflected on, any specific

legislation. Therefore, T's proposal is not influencing legislation.

Example 5. (i) Taxpayer U prepares a paper that asserts that

lack of new capital is hurting State X's economy. The paper

indicates that State X residents either should invest more in local

businesses or increase their savings so that funds will be available

to others interested in making investments. U forwards a summary of

the unpublished paper to legislators in State X with a cover letter

that states in part:

You must take action to improve the availability of new capital

in the state.

(ii) Because neither the summary nor the cover letter refers to

any specific legislative proposal, forwarding the summary to

legislators in State X is not a lobbying communication. Therefore, U

is not influencing legislation.

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

U to request a copy of the unpublished paper from which the summary

was prepared. U forwards the paper with a cover letter that simply

refers to the enclosed materials. Because U's letter to Q and the

unpublished paper do not refer to any specific legislation or

reflect a view on any such legislation, the letter is not a lobbying

communication. Therefore, U is not influencing legislation.

Example 6. (i) Taxpayer V prepares a paper that asserts that

lack of new capital is hurting the national economy. The paper

indicates that lowering the capital gains rate would increase the

availability of capital and increase tax receipts from the capital

gains tax. V forwards the paper to its representatives in Congress

with a cover letter that says, in part:

I urge you to support a reduction in the capital gains tax rate.

(ii) V's communication is a lobbying communication because it

refers to and reflects a view on a specific legislative proposal

that V supports (i.e., lowering the capital gains rate). Therefore,

V is influencing legislation.

Example 7. Taxpayer W, based in State A, notes in a letter to a

legislator of State A that State X has passed a bill that

accomplishes a stated purpose and then says that State A should pass

such a bill. No such bill has been introduced into the State A

legislature. The communication is a lobbying communication because

it refers to and reflects a view on a specific legislative proposal

that W supports. Therefore, W is influencing legislation.

Example 8. (i) Taxpayer Y represents citrus fruit growers. Y

writes a letter to a Senator discussing how pesticide O has

benefited citrus fruit growers and disputing problems linked to its

use. The letter discusses a bill pending in Congress and states in

part:

This bill would prohibit the use of pesticide O. If citrus

growers are unable to use this pesticide, their crop yields will be

severely reduced, leading to higher prices for consumers and lower

profits, even bankruptcy, for growers.

(ii) The communication is a lobbying communication because it

refers to and reflects a view on specific legislation. Therefore, Y

is influencing legislation.

Example 9. (i) B, the president of Taxpayer Z, an insurance

company, meets with Q, who chairs the X state legislature's

committee with jurisdiction over laws regulating insurance

companies, to discuss the possibility of legislation to address

current problems with surplus-line companies. B recommends that

legislation be introduced that would create minimum capital and

surplus requirements for surplus-line companies and create clearer

guidelines concerning the risks that surplus-line companies can

insure. B's discussion with Q is a lobbying communication because B

refers to and reflects a view on a specific legislative proposal

that Z supports. Therefore, Z is influencing legislation.

(ii) Q is not convinced that the market for surplus-line

companies is substantial enough to warrant such legislation and

requests that B provide information on the amount and types of risks

covered by surplus-line companies. After the meeting, B has

employees of Z prepare estimates of the percentage of property and

casualty insurance risks handled by surplus-line companies. B sends

the estimates with a cover letter that simply refers to the enclosed

materials. Although B's follow-up letter to Q does not refer to

specific legislation or reflect a view on such legislation, B's

letter supports the views reflected in the earlier communication.

Therefore, the letter is a lobbying communication and Z is

influencing legislation.

(c) Purpose for engaging in an activity--(1) In general. The

purpose or purposes for which a taxpayer engages in an activity are

determined based on all the facts and circumstances.

(2) Multiple purposes. If a taxpayer engages in an activity both

for the purpose of making or supporting a lobbying communication and

for some non-lobbying purpose, the taxpayer must treat the activity as

engaged in partially for a lobbying purpose and partially for a non-

lobbying purpose. This division of the activity must result in a

reasonable allocation of costs to influencing legislation. See

Sec. 1.162-28 (allocation rules for certain expenditures to which

section 162(e)(1) applies). A taxpayer's treatment will, in general,

not result in a reasonable allocation if it allocates to influencing

legislation--

(i) Only the incremental amount of costs that would not have been

incurred but for the lobbying purpose; or

(ii) An amount based on the number of purposes for engaging in that

activity without regard to the relative importance of those purposes.

(3) Presumption of non-lobbying purpose. If an activity relating to

a lobbying communication is engaged in for a non-lobbying purpose prior

to the first taxable year preceding the taxable year in which the

communication is made, the activity is presumed to be engaged in for

all periods solely for that non-lobbying purpose. The Commissioner can

rebut this presumption in part by establishing that the activity was

also engaged in for a lobbying purpose. See paragraph (c)(2) of this

section relating to an activity engaged in for multiple purposes.

(4) Presumption of lobbying purpose. If an activity relating to a

lobbying communication is engaged in during the same taxable year as

the communication is made or the immediately preceding taxable year,

and is not within the presumption in paragraph (c)(3) of this section,

the activity is presumed to be engaged in for the sole purpose of

making or supporting the lobbying communication. A taxpayer can rebut

the presumption (in whole or part) by establishing that the activity

was engaged in (entirely or partially) for a non-lobbying purpose. See

paragraph (c)(2) of this section relating to an activity engaged in for

multiple purposes. If, during the same taxable year, the taxpayer

commences an activity that relates directly to the subject matter of

specific legislation (then in existence) and makes a lobbying

communication with respect to that legislation, it is expected that the

taxpayer generally will be unable to rebut the presumption.

(5) Activities treated as having no purpose to influence

legislation. A taxpayer that engages in any of the following activities

is treated as having done so without a purpose of making or supporting

a lobbying communication--

(i) Prior to evidencing a purpose to influence any specific

legislation referred to in this paragraph (c)(5)(i) (A) or (B) (or

similar legislation)--

(A) Determining the existence or procedural status of specific

legislation, or the time, place, and subject of any hearing to be held

by a legislative body with respect to specific legislation; or

(B) Preparing routine, brief summaries of the provisions of

specific legislation.

(ii) Performing an activity for purposes of complying with the

requirements of any law.

(iii) Reading any general circulation publications or viewing or

listening to other mass media communications available to the general

public.

(6) Examples. The provisions of this paragraph (c) are illustrated

by the following examples:

Example 1. In 1995, Agency F issues proposed regulations

relating to the business of Taxpayer W, a calendar year taxpayer.

There is no specific legislation during 1995 that is similar to the

regulatory proposal. W undertakes a study of the impact of the

proposed regulations on its business. W incorporates the results of

that study in comments sent to Agency F in 1995. In 1996,

legislation is introduced in Congress that is similar to the

regulatory proposal. W writes a letter to Senator P stating that it

opposes the proposed legislation. With the letter, W encloses a copy

of the comments it sent to Agency F. W's letter to Senator P refers

to and reflects a view on specific legislation and therefore is a

lobbying communication. Because W used the results of its study of

the impact of the proposed regulations in its letter to Senator P in

the taxable year following the taxable year the study was conducted,

it is presumed under paragraph (c)(4) of this section that W engaged

in the study for the sole purpose of making or supporting that

lobbying communication. Based on these facts, however, W can rebut

the presumption entirely by showing that its sole purpose for

undertaking the study was to comment on the proposed regulations.

Example 2. In the ordinary course of its business, Taxpayer Y, a

calendar year manufacturing company, regularly keeps records of

electricity consumption in its manufacturing process. Y has kept

such records since 1970, the year in which Y began business, in

order to track the cost of its manufacturing process. In 1995, the

governor of State Q proposes a budget that includes a sales tax on

electricity. Using its records of electricity consumption, Y

estimates the additional costs that the budget proposal would impose

upon its business. In the same year, Y writes to members of the

state legislature and explains that it opposes the increased sales

tax. In its letter, Y includes its estimate of the costs that the

sales tax would impose on its business. The letter is a lobbying

communication (because it refers to and reflects a view on specific

legislation, the governor's proposed budget). Both the recordkeeping

activities and the activity of estimating additional costs under the

proposed sales tax relate to the lobbying communication because Y

used the records to make the estimates, and Y used the estimates in

its opposition to the governor's proposal. However, Y had a non-

lobbying purpose for keeping the records and engaged in that

activity prior to the first taxable year preceding the taxable year

in which it made the lobbying communication. Therefore, under

paragraph (c)(3) of this section, it is presumed that Y kept these

records solely for a non-lobbying purpose during all periods. Based

on these facts, the Commissioner cannot rebut the presumption. In

contrast, it is presumed, under paragraph (c)(4) of this section,

that Y estimated the additional costs it would incur under the

proposal solely to make or support the lobbying communication,

because the activity commenced in the same taxable year as the

lobbying communication was made. Based on these facts, because Y

estimated its additional costs under the budget proposal to support

the lobbying communication, Y cannot rebut the presumption as it

relates to this activity.

Example 3. In 1995, a Senator in the State Q legislature

announces her intention to introduce legislation to require health

insurers to cover a particular medical procedure in all policies

sold in the state. Taxpayer Y, a calendar year taxpayer, has

different policies for two groups of employees, one of which covers

the procedure and one of which does not. After the bill is

introduced, Y's legislative affairs staff asks Y's human resources

staff to track claims for the procedure that are allowed, in order

to estimate the additional cost of requiring the coverage under both

policies. In 1996, Y's legislative affairs staff prepares a study

estimating Y's increased costs based on the results of tracking, in

1995, the claims made. Also in 1996, Y writes to members of the

state legislature and explains that it opposes the proposed change

in insurance coverage based on the study. The letter is a lobbying

communication (because it refers to and reflects a view on specific

legislation). Both the activity of tracking the claims and the

activity of estimating Y's additional costs under the proposed

legislation relate to the lobbying communication because they are

used to support that communication. It is presumed, under paragraph

(c)(4) of this section, that Y engaged in 1996 in the activity of

estimating the additional costs it would incur under the proposal

solely to make or support the lobbying communication, because the

activity commenced in the same taxable year as the lobbying

communication. Based on these facts, Y cannot rebut the presumption

as it relates to this activity. Further, because Y did not regularly

track these claims before 1995, it is presumed, under paragraph

(c)(4) of this section, that Y engaged in 1995 in the activity of

tracking these claims solely to make or support the lobbying

communication. Based on these facts, because Y tracked these claims

to support the lobbying communication, Y cannot rebut the

presumption.

Example 4. After several years of developmental work under

various contracts, in 1997, Taxpayer A, a calendar year aerospace

company, contracts with the Department of Defense (DOD) to produce a

prototype of a new generation military aircraft. A is aware that DOD

will be able to fund the contract only if Congress appropriates an

amount for that purpose in the upcoming appropriations process. In

1998, A conducts simulation tests of the aircraft and revises the

specifications of the aircraft's expected performance capabilities,

as required under the contract. A submits the results of the tests

and the revised specifications to DOD. In 1999, Congress considers

legislation to appropriate funds for the contract. In that

connection, A summarizes the results of the simulation tests and of

the aircraft's expected performance capabilities, and submits the

summary to interested members of Congress with a cover letter that

encourages them to support appropriations of funds for the contract.

The letter is a lobbying communication (because it refers to

specific legislation (i.e., appropriations) and requests passage).

The described activities in 1998 and 1999 relate to that lobbying

communication and, therefore, are presumed, under paragraph (c)(4)

of this section, to be for the sole purpose of making or supporting

that communication. Based on these facts, A cannot rebut the

presumption as it relates to the summary prepared specifically for

that communication. However, because A conducted the tests and

revised the specifications to comply with its production contract

with DOD, A can rebut the presumption as it relates to those

activities.

Example 5. C, president of Taxpayer W, travels to the state

capital to attend a two-day conference on new manufacturing

processes. C plans to spend a third day in the capital meeting with

state legislators to explain why W opposes a pending bill unrelated

to the subject of the conference. C's staff prepares a briefing book

on the pending bill for C's use in meetings with the state

legislators. Because the meetings with the legislators will be

lobbying communications (because C will refer to and reflect a view

on specific legislation), C's travel and the preparation of the

briefing book are presumed to be solely for the purpose of making or

supporting the lobbying communications. Based on these facts, W

cannot rebut the presumption as it relates to the preparation of the

briefing book, but can partially rebut the presumption as it relates

to C's travel by demonstrating that the travel was engaged in both

for lobbying and non-lobbying purposes. As a result, under paragraph

(c)(2) of this section, W must reasonably allocate C's travel

between attending the conference and meeting with the state

legislators.

Example 6. In 1995, Taxpayer F comments on proposed EPA

regulations and successfully contests their validity on

constitutional grounds in litigation. In 1997, Senator N introduces

environmental legislation, which F believes to be unconstitutional

on the same grounds as the previously proposed and defeated

regulations. F sends some of the documents it prepared in 1995 to

Senator N's staff with a cover letter indicating that F opposes the

environmental legislation. The letter to Senator N refers to and

reflects a view on specific legislation and thus is a lobbying

communication. F engaged in the activity of preparing the documents,

however, for a non- lobbying purpose prior to the first taxable year

preceding the taxable year in which the lobbying communication was

made. Therefore, under paragraph (c)(3) of this section, it is

presumed that the document preparation was engaged in solely for a

non- lobbying purpose. Based on these facts, the Commissioner cannot

rebut that presumption.

Example 7. On February 1, 1995, a bill is introduced in Congress

that would affect Company E, a calendar year taxpayer. Employees in

E's legislative affairs department, as is customary, prepare a brief

summary of the bill and periodically confirm the procedural status

of the bill through conversations with employees and members of

Congress. On March 31, 1995, the head of E's legislative affairs

department meets with E's President to request that B, a chemist,

temporarily help the legislative affairs department analyze the

bill. The President agrees, and suggests that B also be assigned to

draft a position letter in opposition to the bill. Employees of the

legislative affairs department continue to confirm periodically the

procedural status of the bill. On October 31, 1995, B's position

letter in opposition to the bill is delivered to members of

Congress. B's letter is a lobbying communication because it refers

to and reflects a view on specific legislation. Under paragraph

(c)(5)(i) of this section, the assignment of B to assist the

legislative affairs department in analyzing the bill and in drafting

a position letter in opposition to the bill evidences a purpose to

influence legislation. Based on these facts, neither the activity of

periodically confirming the procedural status of the bill nor the

activity of preparing the routine, brief summary of the bill before

March 31 constitutes influencing legislation. With respect to

periodically confirming the procedural status of the bill on or

after March 31, it is presumed, under paragraph (c)(4) of this

section, that E engaged in the activity solely to make or support

the lobbying communication because the activity commenced in the

same taxable year as the lobbying communication. These facts

indicate that after March 31, E determined the procedural status of

the bill for the purpose of supporting the lobbying communication by

B and, accordingly, E cannot rebut the presumption as it relates to

this activity.

Example 8. Taxpayer Z prepares a report that it is required by

state law to submit to a state corporation commission. Z sends a

copy of the report to its delegate in the state legislature along

with the taxpayer's letter opposing a bill that would increase the

state sales tax. Even though the letter to the delegate is a

lobbying communication (because it refers to, and reflects a view

on, specific legislation), under paragraph (c)(5)(ii) of this

section, the preparation of the report does not constitute

influencing legislation.

Example 9. Taxpayer Y purchases an annual subscription to a

commercial, general circulation newsletter that provides legislative

updates on proposed tax legislation. Employees in Y's legislative

affairs department read the newsletter in order to keep abreast of

legislative developments. Even if Y attempts to influence

legislation that is identified and tracked in the newsletter, under

paragraph (c)(5)(iii) of this section, the time spent by employees

of Y reading the newsletter does not constitute influencing

legislation.

(d) Special imputation rule. If one taxpayer, for the purpose of

making or supporting a lobbying communication, uses the services or

facilities of a second taxpayer and does not compensate the second

taxpayer for the full cost of the services or facilities, the purpose

and actions of the first taxpayer are imputed to the second taxpayer.

Thus, for example, if a trade association uses the services of a

member's employee, at no cost to the association, to conduct research

or similar activities to support the trade association's lobbying

communication, the trade association's purpose and actions are imputed

to the member. As a result, the member is treated as influencing

legislation with respect to the employee's work in support of the trade

association's lobbying communication.

(e) Anti-avoidance rule. If a taxpayer, alone or in coordination

with one or more other taxpayers, purposely structures its attempts to

influence legislation to achieve results that are unreasonable in light

of the purposes of section 162(e) and section 6033(e), the Commissioner

can take such steps as are appropriate to achieve reasonable results

consistent with the purposes of section 162(e), section 6033(e), and

this section.

(f) Effective date. This section is effective for amounts paid or

incurred on or after May 13, 1994. Taxpayers must adopt a reasonable

interpretation of section 162(e)(1)(A) for amounts paid or incurred

prior to this date.

Par. 3. In Sec. 1.162-20, paragraph (c)(5) is added to read as

follows:

Sec. 1.162-20 Expenditures attributable to lobbying, political

campaigns, attempts to influence legislation, etc., and certain

advertising.

* * * * *

(c) * * *

(5) Expenses paid or incurred after December 31, 1993, in

connection with influencing legislation other than certain local

legislation. The provisions of paragraphs (c)(1) through (c)(3) of this

section are superseded for expenses paid or incurred after December 31,

1993, in connection with influencing legislation (other than certain

local legislation) to the extent inconsistent with section 162(e)(1)(A)

(as limited by section 162(e)(2)) and Secs. 1.162-20T(d) and 1.162-29.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-11613 Filed 5-10-94; 11:23 am]

BILLING CODE 4830-01-U