[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
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

[[Page 209]]

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 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]