[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11613]


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[Federal Register: May 13, 1994]


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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