[Code of Federal Regulations]
[Title 26, Volume 3]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.175-7]

[Page 208-209]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.175-7  Allocation of expenditures in certain circumstances.

    (a) General rule. If at the time the taxpayer paid or incurred 
expenditures for the purpose of soil or water conservation, or for the 
prevention of erosion of land, it was reasonable to believe that such 
expenditures would directly and substantially benefit land of the 
taxpayer which does not qualify as ``land used in farming,'' as defined 
in Sec. 1.175-4, as well as land of the taxpayer which does so qualify, 
then, for purposes of section 175, only a part of the taxpayer's total 
expenditures is in respect of ``land used in farming.''
    (b) Method of allocation. The part of expenditures allocable to 
``land used in farming'' generally equals the amount which bears the 
same proportion to the total amount of such expenditures as the area of 
land of the taxpayer used in farming which it was reasonable to believe 
would be directly and substantially benefited as a result of the 
expenditures bears to the total area of land of the taxpayer which it 
was reasonable to believe would be so benefited. If it is established by 
clear and convincing evidence that, in the light of all the facts and 
circumstances, another method of allocation is more reasonable than the 
method provided in the preceding sentence, the taxpayer may allocate the 
expenditures under that other method. For purposes of this section, the 
term land of the taxpayer means land with respect to which the taxpayer 
has title, leasehold, or some other substantial interest.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. A owns a 200-acre tract of land, 80 acres of which 
qualify as ``land used in

[[Page 209]]

farming.'' A makes expenditures for the purpose of soil and water 
conservation which can reasonably be expected to directly and 
substantially benefit the entire 200-acre tract. In the absence of clear 
and convincing evidence that a different allocation is more reasonable, 
A may deduct 40 percent (80/200) of such expenditures under section 175. 
The same result would obtain if A had made the expenditures after newly 
acquiring the tract from a person who had used 80 of the 200 acres in 
farming immediately prior to A's acquisition.
    Example 2. Assume the same facts as in Example (1), except that A's 
expenditures for the purpose of soil and water conservation can 
reasonably be expected to directly and substantially benefit only the 80 
acres which qualify as land used in farming; any benefit to the other 
120 acres would be minor and incidental. A may deduct all of such 
expenditures under section 175.
    Example 3. Assume the same facts as in Example (1), except that A's 
expenditures for the purpose of soil and water conservation can 
reasonably be expected to directly and substantially benefit only the 
120 acres which do not qualify as land used in farming. A may not deduct 
any of such expenditures under section 175. The same result would obtain 
even if A had leased the 200-acre tract to B in the expectation that B 
would farm the entire tract.

[T.D. 7740, 45 FR 78635, Nov. 26, 1980]