[Federal Register Volume 60, Number 140 (Friday, July 21, 1995)]
[Rules and Regulations]
[Pages 37568-37578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17913]



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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