Lobbying Expense DeductionsDues, Allocation of Costs to Lobbying Activities, and Influencing Legislation

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8602]

RIN 1545-AS18

RIN 1545-AS26

RIN 1545-AS65

Lobbying Expense Deductions--Dues, Allocation of Costs to

Lobbying Activities, and Influencing Legislation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that define

influencing legislation for purposes of the deduction disallowance for

certain amounts 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 tax-exempt

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 Secs. 1.162-20, paragraphs (c)(5)

and (d), 1.162-28(h), and 1.162-29(h).

[[Page 37569]]

FOR FURTHER INFORMATION CONTACT: James M. Guiry, (202) 622-1585 (not a

toll-free number).

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.

Lobbying Expense Deductions--Dues--Sec. 1.162-20

The proposed regulations are adopted without change.

Allocation of Costs to Lobbying Activities--Sec. 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 third-party

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.

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

[[Page 37570]]

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 para-professionals 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 calculation 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 gross-up

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 person spends in connection with direct

contact lobbying (such as background meetings) must be allocated to

lobbying activities. For this purpose, an activity is direct contact

lobbying if it is a meeting, telephone conversation, letter, or other

similar means of communication with a legislator (other than a local

legislator), or covered executive branch official (as defined in

section 162(e)(6)) and otherwise qualifies as a lobbying activity.

Commentators requested that the de minimis percentage be increased

and that the direct contact exception be eliminated. The final

regulations do not adopt these recommendations. The final regulations

do, however, clarify that the direct contact exception applies only to

the individuals who make the direct contact, not to support personnel

who engage in research, preparation, and other background activities

but who do not make a direct contact.

Influencing Legislation--Sec. 1.162-29

The proposed regulations provide definitions of influencing

legislation and other terms necessary to apply the rules. In general,

commentators approved of these definitions. The final regulations

modify the definitions only to clarify their application. However, no

substantive change is intended by these modifications.

Some commentators stated that the final regulations should

distinguish between influencing legislation and educating legislators.

The final regulations do not adopt this suggestion. The IRS and

Treasury believe that the statute does not draw this distinction and

neither should the regulations. Activities undertaken to educate a

legislator may constitute influencing legislation under definitions in

the final regulations. Further, the legislative history confirms that

Congress did not

[[Page 37571]]

intend to provide an exception for providing technical advice or

assistance.

The proposed regulations provide that a lobbying communication is

any communication that (1) refers to specific legislation and reflects

a view on that legislation, or (2) clarifies, amplifies, modifies, or

provides support for views reflected in a prior lobbying communication.

The proposed regulations provide that the term specific legislation

includes both legislation that has already been introduced in a

legislative body and a specific legislative proposal that the taxpayer

either supports or opposes.

Several commentators stated that the phrase ``reflects a view''

should be defined to mean an explicit statement of support or

opposition to legislative action. Some commentators also suggested that

the regulations should make clear that a taxpayer is not reflecting a

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

merits and defects of the legislation.

The final regulations do not adopt either of these recommendations.

A taxpayer can reflect a view on specific legislation without

specifically stating that it supports or opposes that legislation.

Thus, as illustrated in Sec. 1.162-29(b)(2), Example 8, a taxpayer

reflects a view on specific legislation even if the taxpayer does not

explicitly state its support for, or opposition to, action by a

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

of legislation reflects a view on some aspect of the legislation and,

thus, is a lobbying communication.

The proposed regulations do not contain a definition of the term

``specific legislative proposal,'' but do contain several examples to

illustrate the scope of the term. For instance, in Example 5 of

Sec. 1.162-29(b)(2) of the proposed regulations, a taxpayer prepares a

paper indicating that increased savings and local investment will spur

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

legislators with a cover letter that states, in part:

You must take action to improve the availability of new capital

in the state.

The example concludes that the taxpayer has not made a lobbying

communication because neither the summary nor the cover letter refers

to a specific legislative proposal.

In Example 6 of that section, a taxpayer prepares a paper

concerning the benefits of lowering the capital gains tax rate. The

taxpayer forwards a summary of the paper to its representative in

Congress with a cover letter that states, in part:

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

The example concludes that the taxpayer has made a lobbying

communication because the communication refers to and reflects a view

on a specific legislative proposal.

Numerous commentators stated that they do not perceive a

distinction between the two examples. In addition, certain commentators

requested that the term ``specific legislative proposal'' be defined.

Whether a communication refers to a specific legislative proposal

may vary with the context. The communication in Example 5 is not

sufficiently specific to be a specific legislative proposal, and no

other facts and circumstances indicate the existence of a specific

legislative proposal to which the communication refers. In Example 6,

however, support is limited to a proposal for reduction of a particular

tax rate. Although commentators suggested a number of definitions of

the term ``specific legislative proposal,'' none was entirely

satisfactory in capturing the full range of communications referred to

in section 162(e)(4)(A). Thus, the final regulations do not adopt these

suggestions.

The proposed regulations provide that an attempt to influence

legislation means a lobbying communication and all activities such as

research, preparation, and other background activities engaged in for a

purpose of making or supporting a lobbying communication. The purpose

or purposes for engaging in an activity are determined based on all the

facts and circumstances.

The proposed regulations provide two presumptions concerning the

purpose for engaging in an activity that is related to a lobbying

communication. The first presumption provides that if an activity

relating to a lobbying communication is engaged in for a nonlobbying

purpose prior to the first taxable year preceding the taxable year in

which the communication is made, the activity is presumed to be engaged

in for all periods solely for that nonlobbying purpose (favorable

presumption). Conversely, the second presumption provides that if an

activity relating to a lobbying communication is engaged in during the

taxable year in which the lobbying communication is made or the

immediately preceding taxable year, the activity is presumed to be

engaged in solely for a lobbying purpose (adverse presumption).

The adverse presumption was intended to prevent taxpayers from

abusing an intent- or purpose-based rule by labelling their lobbying

activities as mere monitoring. On the other hand, the favorable

presumption provides substantial certainty to taxpayers who engage in

an activity for a nonlobbying purpose a sufficient time before a

lobbying communication is made.

While commentators approved of the purpose test, many criticized

the presumptions. Many commentators argued that the presumptions would

create unreasonable recordkeeping burdens requiring detailed records

concerning the purpose of a taxpayer's every activity. Several

commentators also argued that the presumptions operated over too great

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

to a period of 6 months or, alternatively, a calendar year. A number of

commentators expressed a belief that the presumptions created a 2-year

lookback recharacterizing activities as lobbying activities. Other

commentators further argued that the presumptions used undefined terms

and would be difficult to rebut.

Although the presumptions were intended as an aid in identifying

activities that were more or less likely to be lobbying activities, the

IRS and Treasury believe that the presumptions have been viewed by the

commentators as undermining and complicating the purpose-based test.

Therefore, the final regulations eliminate the presumptions, replacing

them with a list of some of the facts and circumstances to be

considered in determining whether an activity is engaged in for a

lobbying purpose.

In addition, in response to various comments concerning the

treatment of activities engaged in for the purpose of deciding to

lobby, the final regulations clarify that the activity of deciding to

lobby is to be treated in the same manner as research, preparation, and

other background activities. Thus, a taxpayer who engages in the

decision-making process may be treated as engaged in that activity for

a lobbying purpose. This rule applies to a taxpayer who alone or as

part of a group is deciding whether a lobbying communication should be

made.

Under the proposed regulations, if a taxpayer engages in an

activity for a lobbying purpose and for some nonlobbying purpose, the

taxpayer must treat the activity as engaged in partially for a lobbying

purpose and partially for a nonlobbying purpose (multiple-purpose

rule). While many commentators approved of a facts and circumstances

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

lobbying purpose, some of these commentators thought that an activity

should be subject to section

[[Page 37572]]

162(e)(1)(A) only if the principal or primary purpose of the activity

is to make or support a lobbying communication. According to these

commentators, a principal or primary purpose rule would be easier to

administer than the proposed multiple purpose rule. Several

commentators noted that a principal or primary purpose test would

eliminate the burden of dividing the costs of an activity among

purposes under the proposed multiple-purpose rule.

The IRS and Treasury continue to believe that a principal or

primary purpose test does not avoid the necessity of determining the

various purposes for engaging in an activity and the relative

importance of those purposes, and it has a substantial ``cliff''

effect. Therefore, the final regulations do not adopt a principal or

primary purpose test.

The proposed regulations do not specify methods for accomplishing a

reasonable cost allocation in the case of multiple purpose activities.

Rather, the proposed regulations specify two methods that may not be

appropriate. A taxpayer's treatment of multiple purpose activities

will, in general, not result in a reasonable allocation if it allocates

to influencing legislation (1) only the incremental amount of costs

that would not have been incurred but for the lobbying purpose; or (2)

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

without regard to the relative importance of those purposes.

Some commentators requested additional guidance (by way of example)

concerning how a taxpayer should determine the ``relative importance''

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

clarified to treat allocations based solely upon the number of purposes

for engaging in an activity as generally not reasonable. The IRS and

Treasury intend this change to indicate that an allocation based on the

number of purposes may be reasonable if it reflects the relative

importance of various purposes, even if the allocation is not precise.

For instance, if a taxpayer engages in an activity for two purposes of

substantially similar importance, treating the activity as engaged in

50 percent for each purpose is reasonable.

The final regulations provide special rules for activities engaged

in for a lobbying purpose (including deciding to lobby) where the

taxpayer later concludes that no lobbying communication will be made

regarding that activity. Specifically, the final regulations treat

these activities as if they had not been engaged in for a lobbying

purpose if, as of the taxpayer's timely filed return, the taxpayer no

longer expects, under any reasonably foreseeable circumstances, that a

lobbying communication will be made that is supported by the activity.

Thus, the taxpayer need not treat any amount allocated to that activity

for that year under Sec. 1.162-28 as an amount to which section

162(e)(1)(A) applies. On the other hand, if the taxpayer reaches that

conclusion at any time after the filing date, then the amount (not

previously satisfying these special rules) allocated to that activity

under Sec. 1.162-28 is treated as an amount that is paid or incurred

only at that time and that is not subject to section 162(e)(1)(A).

Thus, in effect, the taxpayer is treated as if it incurred the costs

relating to that activity in that later year in connection with a

nonlobbying activity. A special rule is provided for exempt

organizations to which section 6033(e) applies, which permits those

organizations to instead treat these amounts as reducing (but not below

zero) their expenditures to which section 162(e)(1) applies beginning

with that year and continuing for subsequent years to the extent not

treated in prior years as reducing those expenditures.

The proposed regulations provide a special rule for so-called

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

lobbying communication, one taxpayer uses the services or facilities of

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

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

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

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

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

support the trade association's lobbying communication, the trade

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

result, the member is treated as influencing legislation with respect

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

communication.

The IRS and Treasury intended the special imputation rule to deny a

deduction for the amounts paid or incurred by a taxpayer participating

in a group activity involving a lobbying purpose and a lobbying

communication, even if the lobbying communication was made by a person

other than the taxpayer. The final regulations clarify the rule. In

addition, in response to commentators who requested clarification on

when an employer must account for employee volunteer lobbying

activities, the final regulations provide, by way of example, that if a

taxpayer's employee not acting within the scope of employment

volunteers to engage in activities influencing legislation, then the

taxpayer is not influencing legislation.

Certain commentators have indicated that participation in the

activities of government advisory bodies, such as federal advisory

committees, should be exempt from section 162(e). Commentators argued

that federal advisory committees provide information and advice to

assist the federal government in matters it specifies, not to influence

legislation.

The statutory term influencing legislation includes lobbying

communications with government employees or officials who may

participate in the formulation of legislation. Section 162(e) does not

except lobbying communications made by participating in federal

advisory committees. Further, the legislative history strongly suggests

that no exceptions were intended other than for communications pursuant

to subpoena or similar compulsion. Thus, participating in a federal

advisory committee is influencing legislation if the purpose of the

participant's activities is to make or support a lobbying

communication, even if the lobbying communication is made by another

participant or by the federal advisory committee as a whole.

The proposed regulations defining influencing legislation propose

an effective date of May 13, 1994. Several commentators requested that

the effective date of the final regulations be the date they are

published or later. The final regulations on influencing legislation

adopt this suggestion and are effective as of the date of publication,

as are the final regulations on allocating costs to lobbying

activities. Taxpayers must adopt a reasonable interpretation of section

162(e) for amounts paid or incurred prior to the effective date.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

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

these regulations, and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking preceding these regulations was

submitted to the Small Business

[[Page 37573]]

Administration for comment on its impact on small business.

Drafting Information: The principal author of these final

regulations is James M. Guiry of the Office of Assistant Chief

Counsel (Income Tax and Accounting), IRS. However, other personnel

from the IRS and Treasury participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

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

Par. 2. In Sec. 1.162-20, paragraphs (c)(5) and (d) are 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 (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. 1.162-20(d) and 1.162-29.

(d) Dues allocable to expenditures after 1993. No deduction is

allowed under section 162(a) for the portion of dues or other similar

amounts paid by the taxpayer to an organization exempt from tax (other

than an organization described in section 501(c)(3)) which the

organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is

allocable to expenditures to which section 162(e)(1) applies. The first

sentence of this paragraph (d) applies to dues or other similar amounts

whether or not paid on or before December 31, 1993. Section 1.162-

20(c)(3) is superseded to the extent inconsistent with this paragraph

(d).

Sec. 1.162-20T [Removed]

Par. 3. Section 1.162-20T is removed.

Par. 4. Section 1.162-28 is added to read as follows:

Sec. 1.162-28 Allocation of costs to lobbying activities.

(a) Introduction--(1) In general. Section 162(e)(1) denies a

deduction for certain amounts paid or incurred in connection with

activities described in section 162(e)(1) (A) and (D) (lobbying

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

allocate costs to lobbying activities. This section describes costs

that must be allocated to lobbying activities and prescribes rules

permitting a taxpayer to use a reasonable method to allocate those

costs. This section does not apply to taxpayers subject to section

162(e)(5)(A). In addition, this section does not apply for purposes of

sections 4911 and 4945 and the regulations thereunder.

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

and the regulations thereunder.

(b) Reasonable method of allocating costs--(1) In general. A

taxpayer must use a reasonable method to allocate the costs described

in paragraph (c) of this section to lobbying activities. A method is

not reasonable unless it is applied consistently and is consistent with

the special rules in paragraph (g) of this section. Except as provided

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

costs to lobbying activities include (but are not limited to)--

(i) The ratio method described in paragraph (d) of this section;

(ii) The gross-up method described in paragraph (e) of this

section; and

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

regulations thereunder (see paragraph (f) of this section).

(2) Taxpayers not permitted to use certain methods. A taxpayer

(other than one subject to section 6033(e)) that does not pay or incur

reasonable labor costs for persons engaged in lobbying activities may

not use the gross-up method. For example, a partnership or sole

proprietorship in which the lobbying activities are performed by the

owners who do not receive a salary or guaranteed payment for services

does not pay or incur reasonable labor costs for persons engaged in

those activities and may not use the gross-up method.

(c) Costs allocable to lobbying activities--(1) In general. Costs

properly allocable to lobbying activities include labor costs and

general and administrative costs.

(2) Labor costs. For each taxable year, labor costs include costs

attributable to full-time, part-time, and contract employees. Labor

costs include all elements of compensation, such as basic compensation,

overtime pay, vacation pay, holiday pay, sick leave pay, payroll taxes,

pension costs, employee benefits, and payments to a supplemental

unemployment benefit plan.

(3) General and administrative costs. For each taxable year,

general and administrative costs include depreciation, rent, utilities,

insurance, maintenance costs, security costs, and other administrative

department costs (for example, payroll, personnel, and accounting).

(d) Ratio method--(1) In general. Under the ratio method described

in this paragraph (d), a taxpayer allocates to lobbying activities the

sum of its third-party costs (as defined in paragraph (d)(5) of this

section) allocable to lobbying activities and the costs determined by

using the following formula:

[GRAPHIC] [TIFF OMITTED] TR21JY95.001

(2) Lobbying labor hours. Lobbying labor hours are the hours that a

taxpayer's personnel spend on lobbying activities during the taxable

year. A taxpayer may use any reasonable method to determine the number

of labor hours spent on lobbying activities and may use the de minimis

rule of paragraph (g)(1) of this section. A taxpayer may treat as zero

the lobbying labor hours of personnel engaged in secretarial, clerical,

support, and other administrative activities (as opposed to activities

involving significant judgment with respect to lobbying activities).

Thus, for example, the hours spent on lobbying activities by para-

professionals and analysts may not be treated as zero.

(3) Total labor hours. Total labor hours means the total number of

hours that a taxpayer's personnel spend on a taxpayer's trade or

business during the taxable year. A taxpayer may make reasonable

assumptions concerning total hours spent by personnel on the taxpayer's

trade or business. For example, it may be reasonable, based on all the

facts and circumstances, to assume that all full-time personnel spend

1,800 hours per year on a taxpayer's trade or business. If, under

paragraph (d)(2) of this section, a taxpayer treats as zero the

lobbying labor hours of personnel engaged in secretarial, clerical,

support, and other administrative activities, the taxpayer must also

treat as zero the total labor hours of all personnel engaged in those

activities.

(4) Total costs of operations. A taxpayer's total costs of

operations means the total costs of the taxpayer's trade or business

for a taxable year,

[[Page 37574]]

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

section).

(5) Third-party costs. Third-party costs are amounts paid or

incurred in whole or in part for lobbying activities conducted by third

parties (such as amounts paid to taxpayers subject to section

162(e)(5)(A) or dues or other similar amounts that are not deductible

in whole or in part under section 162(e)(3)) and amounts paid or

incurred for travel (including meals and lodging while away from home)

and entertainment relating in whole or in part to lobbying activities.

(6) Example. The provisions of this paragraph (d) are illustrated

by the following example.

Example. (i) In 1996, three full-time employees, A, B, and C, of

Taxpayer W engage in both lobbying activities and nonlobbying

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

1,000 hours on lobbying activities, for a total of 3,000 hours spent

on lobbying activities for W. W reasonably assumes that each of its

three employees spends 2,000 hours a year on W's business.

(ii) W's total costs of operations are $300,000. W has no third-

party costs.

(iii) Under the ratio method, X allocates $150,000 to its

lobbying activities for 1996, as follows:

[GRAPHIC] [TIFF OMITTED] TR21JY95.002

(e) Gross-up method--(1) In general. Under the gross-up method

described in this paragraph (e)(1), the taxpayer allocates to lobbying

activities the sum of its third-party costs (as defined in paragraph

(d)(5) of this section) allocable to lobbying activities and 175

percent of its basic lobbying labor costs (as defined in paragraph

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

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

method described in this paragraph (e)(2), the taxpayer allocates to

lobbying activities the sum of its third-party costs (as defined in

paragraph (d)(5) of this section) allocable to lobbying activities and

225 percent of its basic lobbying labor costs (as defined in paragraph

(e)(3)), excluding the costs of personnel who engage in secretarial,

clerical, support, and other administrative activities (as opposed to

activities involving significant judgment with respect to lobbying

activities).

(3) Basic lobbying labor costs. For purposes of this paragraph (e),

basic lobbying labor costs are the basic costs of lobbying labor hours

(as defined in paragraph (d)(2) of this section) determined for the

appropriate personnel. For purposes of this paragraph (e), basic costs

of lobbying labor hours are wages or other similar costs of labor,

including, for example, guaranteed payments for services. Basic costs

do not include pension, profit-sharing, employee benefits, and

supplemental unemployment benefit plan costs, or other similar costs.

(4) Example. The provisions of this paragraph (e) are illustrated

by the following example.

Example. (i) In 1996, three employees, A, B, and C, of Taxpayer

X engage in both lobbying activities and nonlobbying activities. A

spends 300 hours, B spends 1,700 hours, and C spends 1,000 hours on

lobbying activities.

(ii) X has no third-party costs.

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

basic labor costs are $20 per hour for A, $30 per hour for B, and

$25 per hour for C. Thus, its basic lobbying labor costs are

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

($6,000+$51,000+$25,000), for total basic lobbying labor costs for

1996 of $82,000.

(iv) Under the gross-up method, X allocates $143,500 to its

lobbying activities for 1996, as follows:

[GRAPHIC] [TIFF OMITTED] TR21JY95.003

(f) Section 263A cost allocation methods--(1) In general. A

taxpayer may allocate its costs to lobbying activities under the

principles set forth in section 263A and the regulations thereunder,

except to the extent inconsistent with paragraph (g) of this section.

For this purpose, lobbying activities are considered a service

department or function. Therefore, a taxpayer may allocate costs to

lobbying activities by applying the methods provided in Secs. 1.263A-1

through 1.263A-3. See Sec. 1.263A-1(e)(4), which describes service

costs generally; Sec. 1.263A-1(f), which sets forth cost allocation

methods available under section 263A; and Sec. 1.263A-1(g)(4), which

provides methods of allocating service costs.

(2) Example. The provisions of this paragraph (f) are illustrated

by the following example.

Example. (i) Three full-time employees, A, B, and C, work in the

Washington office of Taxpayer Y, a manufacturing concern. They each

engage in lobbying activities and nonlobbying activities. In 1996, A

spends 75 hours, B spends 1,750 hours, and C spends 2,000 hours on

lobbying activities. A's hours are not spent on direct contact

lobbying as defined in paragraph (g)(2) of this section. All three

work 2,000 hours during 1996. The Washington office also employs one

secretary, D, who works exclusively for A, B, and C.

(ii) In addition, three departments in the corporate

headquarters in Chicago benefit the Washington office: Public

affairs, human resources, and insurance.

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

method to allocate its service costs. Prior to the amendments to

section 162(e), the Washington office was treated as an overall

management function for purposes of section 263A. As such, its costs

were fully deductible and no further allocations were made under Y's

step allocation. Following the amendments to section 162(e), Y

adopts its 263A step-allocation methodology to allocate costs to

lobbying activities. Y adds a lobbying department to its step-

allocation program, which results in an allocation of costs to the

lobbying department from both the Washington office and the Chicago

office.

(iv) Y develops a labor ratio to allocate its Washington office

costs between the newly defined lobbying department and the overall

management department. To determine the

[[Page 37575]]

hours allocable to lobbying activities, Y uses the de minimis rule

of paragraph (g)(1) of this section. Under this rule, A's hours

spent on lobbying activities are treated as zero because less than 5

percent of A's time is spent on lobbying (75/2,000=3.75%). In

addition, because D works exclusively for personnel engaged in

lobbying activities, D's hours are not used to develop the

allocation ratio. Y assumes that D's allocation of time follows the

average time of all the personnel engaged in lobbying activities.

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

----------------------------------------------------------------------------------------------------------------

Departments

-----------------------------------------------

Employee Overall

Lobbying hours management Total hours

hours

----------------------------------------------------------------------------------------------------------------

A............................................................... 0 2,000 2,000

B............................................................... 1,750 250 2,000

C............................................................... 2,000 0 2,000

-----------------------------------------------

Totals.................................................... 3,750 2,250 6,000

----------------------------------------------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TR21JY95.004

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

------------------------------------------------------------------------

Account Amount

------------------------------------------------------------------------

Professional Salaries and Benefits........................... $660,000

Clerical Salaries and Benefits............................... 50,000

Rent Expense................................................. 100,000

Depreciation on Furniture and Equip.......................... 40,000

Utilities.................................................... 15,000

Outside Payroll Service...................................... 5,000

Miscellaneous................................................ 10,000

Third-Party Lobbying (Law Firm).............................. 90,000

----------

Total Washington Costs................................. $970,000

------------------------------------------------------------------------

(vi) In addition, $233,800 of costs from the public affairs

department, $30,000 of costs from the insurance department, and $5,000

of costs from the human resources department are allocable to the

Washington office from departments in Chicago. Therefore, the

Washington office costs are allocated to the Lobbying and Overall

Management departments as follows:

Total Washington department costs from above............... $970,000

Plus Costs Allocated From Other Departments................ 268,800

Less third-party costs directly allocable to lobbying...... (90,000)

------------

Total Washington office costs........................ 1,148,800

------------------------------------------------------------------------

Overall

Lobbying management

department department

------------------------------------------------------------------------

Department Allocation Ratios.................. 62.5% 37.5%

x Washington Office Costs................... $1,148,800 $1,148,800

= Costs Allocated To Departments.............. $718,000 $430,800

------------------------------------------------------------------------

(vii) Y's step-allocation for its Lobbying Department is determined

as follows:

------------------------------------------------------------------------

Lobbying

Y's step-allocation department

------------------------------------------------------------------------

Washington costs allocated to lobbying department........... $718,000

Plus third-party costs...................................... 90,000

-----------

Total costs of lobbying activities.................... 808,000

------------------------------------------------------------------------

(g) Special rules. The following rules apply to any reasonable

method of allocating costs to lobbying activities.

(1) De minimis rule for labor hours. Subject to the exception

provided in paragraph (g)(2) of this section, a taxpayer may treat time

spent by an individual on lobbying activities as zero if less than five

percent of the person's time is spent on lobbying activities.

Reasonable methods must be used to determine if less than five percent

of a person's time is spent on lobbying activities.

(2) Direct contact lobbying labor hours. Notwithstanding paragraph

(g)(1) of this section, a taxpayer must treat all hours spent by a

person on direct contact lobbying (as well as the hours that person

spends in connection with direct contact lobbying, including time spent

traveling that is allocable to the direct contact lobbying) as labor

hours allocable to lobbying activities. An activity is direct contact

lobbying if it is a meeting, telephone conversation, letter, or other

similar means of communication with a legislator (other than a local

legislator) or covered executive branch official (as defined in section

162(e)(6)) and otherwise qualifies as a lobbying activity. A person who

engages in research, preparation, and other background activities

related to direct contact lobbying but who does not make direct contact

with a legislator or covered executive branch official is not engaged

in direct contact lobbying.

(3) Taxpayer defined. For purposes of this section, a taxpayer

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

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

incurred on or after July 21, 1995. Taxpayers must adopt a reasonable

interpretation of sections 162(e)(1)(A) and (D) for amounts paid or

incurred before this date.

Par. 5. Section 1.162-29 is added to read as follows:

Sec. 1.162-29 Influencing legislation.

(a) Scope. This section provides rules for determining whether an

activity is influencing legislation for purposes of section

162(e)(1)(A). This section does not apply for purposes of sections 4911

and 4945 and the regulations thereunder.

(b) Definitions. For purposes of this section--

(1) Influencing legislation. Influencing legislation means--

(i) Any attempt to influence any legislation through a lobbying

communication; and

(ii) All activities, such as research, preparation, planning, and

coordination, including deciding whether to make a lobbying

communication, engaged in for a purpose of making or supporting a

lobbying communication, even if not yet made. See paragraph (c) of this

section for rules for determining the purposes for engaging in an

activity.

(2) Attempt to influence legislation. An attempt to influence any

legislation

[[Page 37576]]

through a lobbying communication is making the lobbying communication.

(3) Lobbying communication. A lobbying communication is any

communication (other than any communication compelled by subpoena, or

otherwise compelled by Federal or State law) with any member or

employee of a legislative body or any other government official or

employee who may participate in the formulation of the legislation

that--

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

legislation; or

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

reflected in a prior lobbying communication.

(4) Legislation. Legislation includes any action with respect to

Acts, bills, resolutions, or other similar items by a legislative body.

Legislation includes a proposed treaty required to be submitted by the

President to the Senate for its advice and consent from the time the

President's representative begins to negotiate its position with the

prospective parties to the proposed treaty.

(5) Specific legislation. Specific legislation includes a specific

legislative proposal that has not been introduced in a legislative

body.

(6) Legislative bodies. Legislative bodies are Congress, state

legislatures, and other similar governing bodies, excluding local

councils (and similar governing bodies), and executive, judicial, or

administrative bodies. For this purpose, administrative bodies include

school boards, housing authorities, sewer and water districts, zoning

boards, and other similar Federal, State, or local special purpose

bodies, whether elective or appointive.

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

by the following examples.

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

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

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

letter to members of Congress. Additionally, A personally contacts

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

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

lobbying communications. Therefore, P is influencing legislation.

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

congressional oversight hearing concerning the implementation of The

Financial Institutions Reform, Recovery, and Enforcement Act of

1989. Specifically, the hearing concerns a proposed regulation

increasing the threshold value of commercial and residential real

estate transactions for which an appraisal by a state licensed or

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

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

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

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

influencing legislation.

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

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

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

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

proposed rules that S recommends Agency B adopt to implement the

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

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

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

influencing legislation.

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

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

proposal would necessarily require the State Park Authority

eventually to seek appropriations to acquire the land and develop

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

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

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

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

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

indicates that State X residents either should invest more in local

businesses or increase their savings so that funds will be available

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

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

that states in part:

You must take action to improve the availability of new capital

in the state.

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

any specific legislative proposal and no other facts or

circumstances indicate that they refer to an existing legislative

proposal, forwarding the summary to legislators in State X is not a

lobbying communication. Therefore, U is not influencing legislation.

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

request a copy of the unpublished paper 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

(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.

Therefore, W is influencing legislation.

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

writes a letter to a United States 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) Y's views on the bill are reflected in this statement.

Thus, the communication is a lobbying communication, and 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.

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

purposes for engaging in an activity are determined based on all the

facts and circumstances. Facts and circumstances include, but are not

limited to--

(i) Whether the activity and the lobbying communication are

proximate in time;

(ii) Whether the activity and the lobbying communication relate to

similar subject matter;

(iii) Whether the activity is performed at the request of, under

the direction of,

[[Page 37577]]

or on behalf of a person making the lobbying communication;

(iv) Whether the results of the activity are also used for a

nonlobbying purpose; and

(v) Whether, at the time the taxpayer engages in the activity,

there is specific legislation to which the activity relates.

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

for the purpose of making or supporting a lobbying communication and

for some nonlobbying purpose, the taxpayer must treat the activity as

engaged in partially for a lobbying purpose and partially for a

nonlobbying purpose. 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 of these multiple-

purpose activities 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 solely on the number of purposes for engaging

in that activity without regard to the relative importance of those

purposes.

(3) 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) Before evidencing a purpose to influence any specific

legislation referred to in paragraph (c)(3)(i)(A) or (B) of this

section (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 (for example, satisfying state or federal

securities law filing requirements);

(iii) Reading any publications available to the general public or

viewing or listening to other mass media communications; and

(iv) Merely attending a widely attended speech.

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

by the following examples.

Example 1. (i) Facts. In 1997, Agency F issues proposed

regulations relating to the business of Taxpayer W. There is no

specific legislation during 1997 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 1997. In 1998, legislation is

introduced in Congress that is similar to the regulatory proposal.

Also in 1998, W writes a letter to Senator P stating that it opposes

the proposed legislation. W encloses with the letter a copy of the

comments it sent to Agency F.

(ii) Analysis. W's letter to Senator P refers to and reflects a

view on specific legislation and therefore is a lobbying

communication. Although W's study of the impact of the proposed

regulations is proximate in time and similar in subject matter to

its lobbying communication, W performed the study and incorporated

the results in comments sent to Agency F when no legislation with a

similar subject matter was pending (a nonlobbying use). On these

facts, W engaged in the study solely for a nonlobbying purpose.

Example 2. (i) Facts. The governor of State Q proposes a budget

that includes a proposed sales tax on electricity. Using its records

of electricity consumption, Taxpayer 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 proposed sales tax. In its letter, Y

includes its estimate of the costs that the sales tax would impose

on its business. Y does not demonstrate any other use of its

estimates.

(ii) Analysis. The letter is a lobbying communication (because

it refers to and reflects a view on specific legislation, the

governor's proposed budget). Y's estimate of additional costs under

the proposal supports the lobbying communication, is proximate in

time and similar in subject matter to a specific legislative

proposal then in existence, and is not used for a nonlobbying

purpose. Based on these facts, Y estimated its additional costs

under the budget proposal solely to support the lobbying

communication.

Example 3. (i) Facts. 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 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 estimate the additional cost

to cover the procedure for both groups of employees. Y's human

resources staff prepares a study estimating Y's increased costs and

forwards it to the legislative affairs staff. Y's legislative staff

then writes to members of the state legislature and explains that it

opposes the proposed change in insurance coverage based on the

study. Y's legislative affairs staff thereafter forwards the study,

prepared for its use in opposing the statutory proposal, to its

labor relations staff for use in negotiations with employees

scheduled to begin later in the year.

(ii) Analysis. The letter to legislators is a lobbying

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

legislation). The activity of estimating Y's additional costs under

the proposed legislation relate to the same subject as the lobbying

communication, occurs close in time to the lobbying communication,

is conducted at the request of a person making a lobbying

communication, and relates to specific legislation then in

existence. Although Y used the study in its labor negotiations, mere

use for that purpose does not establish that Y estimated its

additional costs under the proposed legislation in part for a

nonlobbying purpose. Thus, based on all the facts and circumstances,

Y estimated the additional costs it would incur under the proposal

solely to make or support the lobbying communication.

Example 4. (i) Facts. After several years of developmental work

under various contracts, in 1996, Taxpayer A 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 1997, 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 1998, 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.

(ii) Analysis. The letter is a lobbying communication (because

it refers to specific legislation (i.e., appropriations) and

requests passage). The described activities in 1996, 1997, and 1998

relate to the same subject as the lobbying communication. The

summary was prepared specifically for, and close in time to, that

communication. Based on these facts, the summary was prepared solely

for a lobbying purpose. In contrast, A conducted the tests and

revised the specifications to comply with its production contract

with DOD. A conducted the tests and revised the specifications

solely for a nonlobbying purpose.

Example 5. (i) Facts. 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. At the meetings with the

legislators, C makes lobbying communications by referring to and

reflecting a view on the pending bill.

(ii) Analysis. C's traveling expenses (transportation and meals

and lodging) are partially for the purpose of making or supporting

the lobbying communications and partially for a nonlobbying purpose.

As a result, under paragraph (c)(2) of this section, W must

reasonably allocate C's traveling expenses between these two

purposes. Allocating to influencing legislation only C's incremental

transportation expenses (i.e., the taxi fare to meet with the state

legislators) does not result in a reasonable allocation of traveling

expenses.

[[Page 37578]]

Example 6. (i) Facts. On February 1, 1997, a bill is introduced

in Congress that would affect Company E. 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, 1997, 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, 1997, B's position

letter in opposition to the bill is delivered to members of

Congress.

(ii) Analysis. B's letter is a lobbying communication because it

refers to and reflects a view on specific legislation. Under

paragraph (c)(3)(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. 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. In contrast,

periodically confirming the procedural status of the bill on or

after March 31 relates to the same subject as, and is close in time

to, the lobbying communication and is used for no nonlobbying

purpose. Consequently, after March 31, E determined the procedural

status of the bill for the purpose of supporting the lobbying

communication by B.

(d) Lobbying communication made by another. If a taxpayer engages

in activities for a purpose of supporting a lobbying communication to

be made by another person (or by a group of persons), the taxpayer's

activities are treated under paragraph (b) of this section as

influencing legislation. For example, if a taxpayer or an employee of

the taxpayer (as a volunteer or otherwise) engages in an activity to

assist a trade association in preparing its lobbying communication, the

taxpayer's activities are influencing legislation even if the lobbying

communication is made by the trade association and not the taxpayer.

If, however, the taxpayer's employee, acting outside the employee's

scope of employment, volunteers to engage in those activities, then the

taxpayer is not influencing legislation.

(e) No lobbying communication. Paragraph (e) of this section

applies if a taxpayer engages in an activity for a purpose of making or

supporting a lobbying communication, but no lobbying communication that

the activity supports has yet been made.

(1) Before the filing date. Under this paragraph (e)(1), if on the

filing date of the return for any taxable year the taxpayer no longer

expects, under any reasonably foreseeable circumstances, that a

lobbying communication will be made that is supported by the activity,

then the taxpayer will be treated as if it did not engage in the

activity for a purpose of making or supporting a lobbying

communication. Thus, the taxpayer need not treat any amount allocated

to that activity for that year under Sec. 1.162-28 as an amount to

which section 162(e)(1)(A) applies. The filing date for purposes of

paragraph (e) of this section is the earlier of the time the taxpayer

files its timely return for the year or the due date of the timely

return.

(2) After the filing date--(i) In general. If, at any time after

the filing date, the taxpayer no longer expects, under any reasonably

foreseeable circumstances, that a lobbying communication will be made

that is supported by the activity, then any amount previously allocated

under Sec. 1.162-28 to the activity and disallowed under section

162(e)(1)(A) is treated as an amount that is not subject to section

162(e)(1)(A) and that is paid or incurred only at the time the taxpayer

no longer expects that a lobbying communication will be made.

(ii) Special rule for certain tax-exempt organizations. For a tax-

exempt organization subject to section 6033(e), the amounts described

in paragraph (e)(2)(i) of this section are treated as reducing (but not

below zero) its expenditures to which section 162(e)(1) applies

beginning with that year and continuing for subsequent years to the

extent not treated in prior years as reducing those expenditures.

(f) Anti-avoidance rule. If a taxpayer, alone or with others,

structures its activities with a principal purpose of achieving results

that are unreasonable in light of the purposes of section 162(e)(1)(A)

and section 6033(e), the Commissioner can recast the taxpayer's

activities for federal tax purposes as appropriate to achieve tax

results that are consistent with the intent of section 162(e)(1)(A),

section 6033(e) (if applicable), and this section, and the pertinent

facts and circumstances.

(g) Taxpayer defined. For purposes of this section, a taxpayer

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

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

incurred on or after July 21, 1995. Taxpayers must adopt a reasonable

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

before this date.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: June 29, 1995

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95-17913 Filed 7-20-95; 8:45 am]

BILLING CODE 4830-01-U