REVENUE RULE 93-56

1993-2 C.B. 76, 1993-28 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

SOIL AND WATER CONSERVATION EXPENDITURES; EXPENDITURES INCURRED IN A FOREIGN COUNTRY

Published: September 7, 1993

§ 175. Soil and Water Conservation Expenditures, 26 CFR 1.175-1: Soil and water conservation expenditures; in general.

(See Also § 7701.)

Soil and water conservation expenditures; expenditures incurred in a foreign country. Expenditures incurred for soil and water conservation in respect of land used in farming in a foreign country do not satisfy the requirement of § 175(c)(3)(A) of the Code.

ISSUE

Do expenditures incurred for soil and water conservation in respect of land used in farming in a foreign country satisfy the requirement of § 175(c)(3)(A) of the Internal Revenue Code?

FACTS

A, a United States citizen, is engaged in the business of farming within the meaning of § 1.175-3 of the Income Tax Regulations. A's farm is located in foreign country X. In 1991, A incurred expenditures for the purpose of soil and water conservation in respect of land used in farming within the meaning of § 175(a) of the Code. These expenditures were consistent with a soil conservation plan approved by foreign country X for the area in which the farm is located.

LAW AND ANALYSIS

§ 175(a) of the Code allows a taxpayer engaged in the business of farming to elect to deduct expenditures paid or incurred by the taxpayer during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming.

§ 175(b) of the Code limits the amount deductible in a taxable year under § 175(a) to 25 percent of the gross income derived from farming during the taxable year.

§ 175(c)(3)(A) of the Code, as added by the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1, 138, provides that the deduction available under § 175(a) shall not apply to soil and water conservation expenditures unless they are consistent with either a plan approved by the Soil Conservation Service of the Department of Agriculture for the area in which the land is located, or if no plan exists, a soil conservation plan of a comparable State agency. The legislative history is clear that an overall plan approved by the Soil Conservation Service or a comparable State agency must exist for the area in which the land is located. See Conference Committee Report, 2 H.R.Conf.Rep. No. 841, 99th Cong., 2d Sess. II-110 (1986), 1986-3 (Vol. 4) C.B. 110.

The term "State agency" as used in § 175(c)(3)(A)(ii) of the Code is not defined by § 175 or the regulations thereunder. A reasonable interpretation is that the term means a comparable agency of a State. The term "State" is defined in § 7701(a)(10) to include the District of Columbia. The inclusion in the Code of this modification to the usual meaning of the term suggests that without modification the term "State" would not include the District of Columbia. Thus, § 7701(a)(10), which applies for all purposes of the Code, is construed narrowly and would exclude foreign countries. Therefore, the term "State agency" does not include a governmental agency of a foreign country.

HOLDING

Expenditures incurred for soil and water conservation in respect of land used in farming in a foreign country do not satisfy the requirement of § 175(c)(3)(A) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Brian J. O'Connor of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. O'Connor on (202) 622-3120 (not a toll-free call).

Rev. Rul. 93-56, 1993-2 C.B. 76, 1993-28 I.R.B. 5.