like fashion, expenditures for advertising which presents views on economic, financial, social, or other subjects of a general nature, but which does not involve any of the activities specified in paragraph (b) or (c) of this section for which a deduction is not allowable, are deductible if they otherwise meet the requirements of the regulations under section 162.

(b) Tazable years beginning before January 1, 1963—(1) In general. (i) For taxable years beginning before January 1, 1963, expenditures for lobbying purposes, for the promotion or defeat of legislation, for political campaign purposes (including the support of or opposition to any candidate for public office), or for carrying on propaganda (including advertising) related to any of the foregoing purposes are not deductible from gross income. For example, the cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation is not deductible as a business expense, even though the legislation may directly affect the taxpayer's business.

(ii) If a substantial part of the activities of an organization, such as a labor union or a trade association, consists of one or more of the activities specified in the first sentence of this subparagraph, deduction will be allowed only for such portion of the dues or other payments to the organization as the taxpayer can clearly establish is attributable to activities other than those so specified. The determination of whether such specified activities constitute a substantial part of an organization's activities shall be based on all the facts and circumstances. In no event shall special assessments or similar payments (including an increase in dues) made to any organization for any of such specified purposes be deductible. For other provisions relating to the deductibility of dues and other payments to an organization, such as a labor union or a trade association, see paragraph (c) of § 1.162-15.

(2) Expenditures for promotion or defeat of legislation. For purposes of this paragraph, expenditures for the promotion or the defeat of legislation include, but shall not be limited to, expenditures for the purpose of attempting to

(1) Influence members of a legislative body directly, or indirectly by urging or

encouraging the public to contact work members for the purpose of proposing supporting, or opposing legislation, or

(ii) Influence the public to approve reject a measure in a referendum, inimative, vote on a constitutional amendment, or similar procedure.

(c) Taxable years beginning after December 31, 1962-(1) In general. For taxable years beginning after December 11 1962, certain types of expenses incurred with respect to legislative matters are deductible under section 162(a) if the otherwise meet the requirements of the regulations under section 162. These deductible expenses are described in subparagraph (2) of this paragraph. A other expenditures for lobbying purposes. for the promotion or defeat of legislat (see paragraph (b)(2) of this section for political campaign purposes including the support of or opposition to any candidate for public office), or for carrying on propaganda (including advertsing) relating to any of the foregoing purposes are not deductible from gr income for such taxable years. For the disallowance of deductions for bad debu and worthless securities of a political party, see § 1.271-1. For the disallowance of deductions for certain indirect poli cal contributions, such as the cost of ceDtain advertising and the cost of ads sion to certain dinners, programs, and inaugural events, see 1.276-1.

(2) Appearances, etc., with respect to legislation (1) General rule. Pursuant to the provisions of section 162(e), expenses incurred with respect to legisla tive matters which may be dedocuibie are those ordinary and necessary expenses (including, but not limited t traveling expenses described in secto 162(a) (2) and the cost of preparing testimony) paid or incurred by the taxpayer during a taxable year beginnin after December 31, 1962, in carrying I any trade or business which are in dress connection with—

(a) Appearances before, submiss.ce of statements to, or sending communcstions to, the committees, or individ members of Congress or of any legislative body of a State, a possession of the United States, or a political subdivinum of any of the foregoing with respect legislation or proposed legislation of erect interest to the taxpayer, or

(b) Communication of information between the taxpayer and an organ Janic of which he is a member with respect is

legislation or proposed legislation of direct interest to the taxpayer and to such organization.

For provisions relating to dues paid or incurred with respect to an organization of which the taxpayer is a member, see subparagraph (3) of this paragraph.

(ii) Legislation or proposed legislation of direct interest to the taxpayer-(a) Legislation or proposed legislation. The term "legislation or proposed legislation" includes bills and resolutions introduced by a member of Congress or other legislative body referred to in subdivision (i) (a) of this subparagraph for consideration by such body as well as oral or written proposals for legislative action submitted to the legislative body or to a committee or member of such body.

(b) Direct interest—(1) In general. (i) Legislation or proposed legislation is of direct interest to a taxpayer if the legislation or proposed legislation is of such a nature that it will, or may reasonably be expected to, affect the trade or business of the taxpayer. It is immaterial whether the effect, or expected effect, on the trade or business will be beneficial or detrimental to the trade or business or whether it will be immediate. If legislation or proposed legislation has such a relationship to a trade or business that the expenses of any appearance or communication in connection with the legislation meets the ordinary and necessary test of section 162(a), then such legislation ordinarily meets the direct interest test of section 162(e). However, if the nature of the legislation or proposed legislation is such that the likelihood of its having an effect on the trade or business of the taxpayer is remote or speculative, the legislation or proposed legislation is not of direct interest to the taxpayer. Legislation or proposed legislation which will not affect the trade or business of the taxpayer is not of direct interest to the taxpayer even though such legislation will affect the personal, living, or family activities or expenses of the taxpayer. Legislation or proposed legislation is not of direct interest to a taxpayer merely because it may affect business in general; however, if the legislation or proposed legislation will, or may reasonably be expected to, affect the taxpayer's trade or business it will be of direct interest to the taxpayer even though it also will affect the trade or business of other taxpayers or business in general.

To

meet the direct interest test, it is not necessary that all provisions of the legislation or proposed legislation have an effect, or expected effect, on the taxpayer's trade or business. The test will be met if one of the provisions of the legislation has the specified effect. Legislation or proposed legislation will be considered to be of direct interest to a membership organization if it is of direct interest to the organization, as such, or if it is of direct interest to one or more of its members.

(ii) Legislation which would increase or decrease the taxes applicable to the trade or business, increase or decrease the operating costs or earnings of the trade or business, or increase or decrease the administrative burdens connected with the trade or business meets the direct interest test. Legislation which would increase the social security benefits or liberalize the right to such benefits meets the direct interest test because such changes in the social security benefits may reasonably be expected to affect the retirement benefits which the employer will be asked to provide his employees or to increase his taxes. Legislation which would impose a retailer's sales tax is of direct interest to a retailer because, although the tax may be passed on to his customers, collection of the tax will impose additional burdens on the retailer, and because the increased cost of his products to the consumer may reduce the demand for them. Legislation which would provide an income tax credit or exclusion for shareholders is of direct interest to a corporation, because those tax benefits may increase the sources of capital available to the corporation. Legislation which would favorably or adversely affect the business of a competitor so as to affect the taxpayer's competitive position is of direct interest to the taxpayer. Legislation which would improve the school system of a community is of direct interest to a membership organization comprised of employers in the community because the improved school system is likely to make the community more attractive to prospective employees of such employOn the other hand, proposed legislation relating to Presidential succession in the event of the death of the President has only a remote and speculative effect on any trade or business and therefore does not meet the direct interest test. Similarly, if a corporation is represented before a congressional committee to op

ers.

pose an appropriation bill merely because of a desire to bring increased Government economy with the hope that such economy will eventually cause a reduction in the Federal income tax, the legislation does not meet the direct interest test because any effect it may have upon the corporation's trade or business is highly speculative.

(2) Appearances, etc., by expert witnesses. (i) An appearance or communication (of a type described in paragraph (c) (2) (1) (a) of this section) by an individual in connection with legislation or proposed legislation shall be considered to be with respect to legislation of direct interest to such individual if the legislation is in a field in which he specializes as an employee, if the appearance or communication is not on behalf of his employer, and if it is customary for individuals in his type of employment to publicly express their views in respect of matters in their field of competence. Expenses incurred by such an individual in connection with such an appearance or communication, including traveling expenses properly allocable thereto, represent ordinary and necessary business expenses and are, therefore, deductible under section 162. For example, if a university professor who teaches in the field of money and banking appears, on his own behalf, before a legislative committee to testify on proposed legislation regarding the banking system, his expenses incurred in connection with such appearance are deductible under section 162 since university professors customarily take an active part in the development of the law in their field of competence and publicly communicate the results of their work.

(ii) An appearance or communication (of a type described in paragraph (c) (2) (1) (a) of this section) by an employee or self-employed individual in connection with legislation or proposed legislation shall be considered to be with respect to legislation of direct interest to such person if the legislation is in the feld in which he specializes in his bus:ress (or as an employee) and if the appearance or communication is made pursuant to an invitation extended to him individually for the purpose of receiving his expert testimony. Expenses incurred by an employee or self-employed individual in connection with such an appearance or communication, including traveling expenses properly allocable thereto, represent ordinary and neces

sary business expenses and are, therefore, deductible under section 162. Fir example, if a self-employed individua is personally invited by a congreshota. committee to testify on proposed legslation in the field in which he spectate in his business, his expenses incurred i connection with such appearance are deductible under section 162. If a selfemployed individual makes an appearance, on his own behalf, before a legitiative committee without having been er tended an invitation his expenses v be deductible to the extent cibervie provided in this paragraph.

(3) Nominations, etc. A taxpayer does not have a direct interest in matters sott as nominations, appointments, or the operation of the legislative body.

(iii) Allowable expenses. To be de ductible under section 162 (a), expendtures which meet the tests of deductibl ity under the provisions of this paragrape must also qualify as ordinary and necessary business expenses under sect 162(a) and, in addition, be in direct conection with the carrying on of the activities specified in subdivision @ 1 or (i)(b) of this subparagraph. Fr example, a taxpayer appearing before committee of the Congress to press testimony concerning legislation or pro posed legislation in which he has a dre interest may deduct the ordinary and necessary expenses directly creat with his appearance, such as traveling expenses described in section 162 1 and the cost of preparing testimony.

(3) Deductibility of dues and othe payments to an organization. If a s stantial part of the activities of an T ganization, such as a labor union a trade association, consists of one or mo of the activities to which this paragra relates Cegislative matters, polica campaigns, etc.), exclusive of any s tivity constituting an appearance communication with respect to lensis tion or proposed legislation of direct De terest to the organization (see subpar graph (2) (11) (b)(1)), a deduction be allowed only for such portion of the dues or other payments to the cream tion as the taxpayer can clearly establis is attributable to activities to which paragraph does not relate and to a activity constituting an appearance communication with respect to legsle tion or proposed legislation of direc terest to the organization. The deta mination of whether a substantial part of an organization's activities consists of

one or more of the activities to which this paragraph relates (exclusive of appearances or communications with respect to legislation or proposed legislation of direct interest to the organization) shall be based on all the facts and circumstances. In no event shall a deduction be allowed for that portion of a special assessment or similar payment (including an increase in dues) made to any organization for any activity to which this paragraph relates if the activity does not constitute an appearance or communication with respect to legislation or proposed legislation of direct interest to the organization. If an organization pays or incurs expenses allocable to legislative activities which meet the tests of subdivisions (i) and (ii) of subparagraph (2) of this paragraph (appearances or communications with respect to legislation or proposed legislation of direct interest to the organization), on behalf of its members, the dues paid by a taxpayer are deductible to the extent used for such activities. Dues paid by a taxpayer will be considered to be used for such an activity, and thus deductible, although the legislation or proposed legislation involved is not of direct interest to the taxpayer, if, pursuant to the provisions of subparagraph (2) (ii) (b) (1) of this paragraph, the legislation or proposed legislation is of direct interest to the organization, as such, or is of direct interest to one or more members of the organization. For other provisions relating to the deductibility of dues and other payments to an organization, such as a labor union or a trade association, see paragraph (c) of §1.162-15.

(4) Limitations. No deduction shall be allowed under section 162(a) for any amount paid or incurred (whether by way of contribution, gift, or otherwise) in connection with any attempt to influence the general public, or segments thereof, with respect to legislative matters, elections, or referendums. For example, no deduction shall be allowed for any expenses incurred in connection with "grassroot" campaigns or any other attempts to urge or encourage the public to contact members of a legislative body for the purpose of proposing, supporting, or opposing legislation.

[T.D. 6819, 30 FR. 5581, Apr. 20, 1965, as amended by T.D. 6996, 34 F.R. 835, Jan. 18, 1969]

§ 1.163

Statutory provisions; interest.

SEC. 163. Interest-(a) General rule. There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.

(b) Installment purchases where interest charge is not separately stated-(1) General rule. If personal property or educational services are purchased under a contract

(A) Which provides that payment of part or all of the purchase price is to be made in installments, and

(B) In which carrying charges are separately stated but the interest charge cannot be ascertained,

then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included interest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term "educational services" means any service (including lodging) which is purchased from an educational institution (as defined in section 151(e) (4)) and which is provided for a student of such institution.

(2) Limitation. In the case of any contract to which paragraph (1) applies, the amount treated as interest for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year.

(c) Redeemable ground rents.-For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage.

(d) Cross references. (1) For disallowance of certain amounts paid in connection with insurance, endowment, or annuity contracts, see section 264.

(2) For disallowance of deduction for interest relating to tax-exempt income, see section 265 (2).

(3) For disallowance of deduction for carrying charges chargeable to capital account, see section 266.

(4) For disallowance of interest with respect to transactions between related taxpayers, see section 267.

(5) For treatment of redeemable ground rents and real property held subject to liabilities under redeemable ground rents, see section 1055.

[Sec. 163 as amended by sec. 1 (a) and (c), Act of Apr. 10, 1963 (Public Law 88-9, 77 Stat. 6); sec. 224(c), Rev. Act 1964 (78 Stat. 79)]

[T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6821, 30 F.R. 6216, May 4. 1965; T.D. 6991, 34 F.R. 742, Jan. 17, 1969]

buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches prior to the time when the productive state is reached may be regarded as investments of capital. For the treatment of soil and water conservation expenditures as expenses which are not chargeable to capital account, see section 175 and the regulations thereunder. For taxable years beginning after December 31, 1959, in the case of expenditures paid or incurred by farmers for fertilizer, lime, etc., see section 180 and the regulations thereunder. Amounts expended in purchasing work, breeding, or dairy animals are regarded as investments of capital, and shall be depreciated unless such animals are included in an inventory in accordance with 1.61-4.

The purchase price of an automobile, even when wholly used in carrying on farming operations, is not deductible, but is regarded as an investment of capital. The cost of gasoline, repairs, and upkeep of an automobile if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of farm products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deductions. (See § 1.61-4, and paragraph (b) of § 1.167(a)-6, and sections 165 and 270 and the regulations thereunder.) (74 Stat. 1001, 26 US.C. 180) [TD. 6548, 26 F.R. 1487, Feb. 22, 1961] § 1.162-13

Depositors' guaranty fund.

Banking corporations which pursuant to the laws of the State in which they are doing business are required to set apart, keep, and maintain in their banks the amount levied and assessed against them by the State authorities as a "Deposi

tors' guaranty fund," may deduct from their gross income the amount so set apart each year to this fund provided that such fund, when set aside and carried to the credit of the State banking board or duly authorized State officer, ceases to be an asset of the bank and may be withdrawn in whole or in part upon demand by such board or State c cer to meet the needs of these officers in reimbursing depositors in insolvent banks, and provided further that no portion of the amount thus set aside and credited is returnable under the laws of the State to the assets of the banking corporation. If, however, such amount is simply set up on the books of the bank as a reserve to meet a contingent liability and remains an asset of the bank, it will not be deductible except as it is actually paid out as required by law and upon demand of the proper State officers.

§ 1.162-14 Expenditures for advertis ing or promotion of good will.

A corporation which has, for the parpose of computing its excess profits tar credit under subchapter E, chapter 2. cr subchapter D, chapter 1 of the Internal Revenue Code of 1939, elected under section 733 or section 451 (applicable to the excess profits tax imposed by subchapter E of chapter 2, and subchapter D c chapter 1, respectively) to charge to capital account for taxable years in its base period expenditures for advertising or the promotion of good will which may be regarded as capital investments, may not deduct similar expenditures for the taxable year. See section 263(b). Su a taxpayer has the burden of proving that expenditures for advertising or the promotion of good will which it seeks to deduct in the taxable year may not be regarded as capital investments under the provisions of the regulations prescribed under section 733 or section 451 of the Internal Revenue Code of 1939 See 26 CFR, 1938 ed., 35.733-2 (Regula tions 112) and 26 CFR (1939) 40.451-2 (Regulations 130). For the disallowance of deductions for the cost of advertising in programs of certain conventions of political parties, or in publications par of the proceeds of which directly or inrectly inures (or is intended to intre or for the use of a political party or polical candidate, see § 1.276–1.

[T.D. 6996, 34 FR. 835, Jan. 18, 1969]