[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2015 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 26
Internal Revenue
________________________
Part 1 (Sec. Sec. 1.0 to 1.60)
Revised as of April 1, 2015
Containing a codification of documents of general
applicability and future effect
As of April 1, 2015
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury 3
Findings Aids:
Table of CFR Titles and Chapters........................ 645
Alphabetical List of Agencies Appearing in the CFR...... 665
Table of OMB Control Numbers............................ 675
List of CFR Sections Affected........................... 693
[[Page iv]]
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 1.0-1 refers
to title 26, part 1,
section 0-1.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
The Code of Federal Regulations is kept up to date by the individual
issues of the Federal Register. These two publications must be used
together to determine the latest version of any given rule.
To determine whether a Code volume has been amended since its
revision date (in this case, April 1, 2015), consult the ``List of CFR
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
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those instances where a regulation published in the Federal Register
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inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
amendments to existing regulations in the CFR. These OMB numbers are
placed as close as possible to the applicable recordkeeping or reporting
requirements.
PAST PROVISIONS OF THE CODE
Provisions of the Code that are no longer in force and effect as of
the revision date stated on the cover of each volume are not carried.
Code users may find the text of provisions in effect on any given date
in the past by using the appropriate List of CFR Sections Affected
(LSA). For the convenience of the reader, a ``List of CFR Sections
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the Code prior to the LSA listings at the end of the volume, consult
previous annual editions of the LSA. For changes to the Code prior to
2001, consult the List of CFR Sections Affected compilations, published
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.
``[RESERVED]'' TERMINOLOGY
The term ``[Reserved]'' is used as a place holder within the Code of
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``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used
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not accidentally dropped due to a printing or computer error.
INCORPORATION BY REFERENCE
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This material, like any other properly issued regulation, has the force
of law.
What is a proper incorporation by reference? The Director of the
Federal Register will approve an incorporation by reference only when
the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
material published in the Federal Register.
(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
process.
(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
What if the material incorporated by reference cannot be found? If
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CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Authorities
and Rules. A list of CFR titles, chapters, subchapters, and parts and an
alphabetical list of agencies publishing in the CFR are also included in
this volume.
[[Page vii]]
An index to the text of ``Title 3--The President'' is carried within
that volume.
The Federal Register Index is issued monthly in cumulative form.
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the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
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INQUIRIES
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The e-CFR is a regularly updated, unofficial editorial compilation
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available at www.ecfr.gov.
Amy P. Bunk,
Acting Director,
Office of the Federal Register.
April 1, 2015.
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of twenty-two volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2015. The first fifteen volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Sec. Sec. 1.0-1.60;
Sec. Sec. 1.61-1.139; Sec. Sec. 1.140-1.169; Sec. Sec. 1.170-1.300;
Sec. Sec. 1.301-1.400; Sec. Sec. 1.401-1.409; Sec. Sec. 1.410-1.440;
Sec. Sec. 1.441-1.500; Sec. Sec. 1.501-1.640; Sec. Sec. 1.641-1.850;
Sec. Sec. 1.851-1.907; Sec. Sec. 1.908-1.1000; Sec. Sec. 1.1001-
1.1400; Sec. Sec. 1.1401-1.1550; and Sec. 1.1551 to end of part 1. The
sixteenth volume containing parts 2-29, includes the remainder of
subchapter A and all of Subchapter B--Estate and Gift Taxes. The last
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and
Collection of Income Tax at Source); parts 40-49; parts 50-299
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).
The OMB control numbers for Title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Cheryl E. Sirofchuck was Chief Editor. The Code of
Federal Regulations publication program is under the direction of John
Hyrum Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Sec. Sec. 1.0 to 1.60)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury.................................................. 1
[[Page 3]]
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
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Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980,
deleting statutory sections from their regulations. In chapter I cross-
references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy, the
cross-reference has been deleted. For further explanation, see 45 FR
20795, Mar. 31, 1980.
SUBCHAPTER A--INCOME TAX
Part Page
1 Income taxes................................ 5
Supplementary Publications: Internal Revenue Service Looseleaf
Regulations System, Alcohol and Tobacco Tax Regulations, and
Regulations Under Tax Conventions.
Editorial Note: Treasury Decision 6091, 19 FR 5167, Aug. 17, 1954,
provides in part as follows:
Paragraph 1. All regulations (including all Treasury decisions)
prescribed by, or under authority duly delegated by, the Secretary of
the Treasury, or jointly by the Secretary and the Commissioner of
Internal Revenue, or by the Commissioner of Internal Revenue with the
approval of the Secretary of the Treasury, or jointly by the
Commissioner of Internal Revenue and the Commissioner of Customs or the
Commissioner of Narcotics with the approval of the Secretary of the
Treasury, applicable under any provision of law in effect on the date of
enactment of the Code, to the extent such provision of law is repealed
by the Code, are hereby prescribed under and made applicable to the
provisions of the Code corresponding to the provision of law so repealed
insofar as any such regulation is not inconsistent with the Code. Such
regulations shall become effective as regulations under the various
provisions of the Code as of the dates the corresponding provisions of
law are repealed by the Code, until superseded by regulations issued
under the Code.
Par. 2. With respect to any provision of the Code which depends for
its application upon the promulgation of regulations or which is to be
applied in such manner as may be prescribed by regulations, all
instructions or rules in effect immediately prior to the enactment of
the Code, to the extent such instructions or rules could be prescribed
as regulations under authority of such provision of the Code, shall be
applied as regulations under such provision insofar as such instructions
or rules are not inconsistent with the Code. Such instructions or rules
shall be applied as regulations under the applicable provision of the
Code as of the date such provision takes effect.
Par. 3. If any election made or other act done pursuant to any
provision of the Internal Revenue Code of 1939 or prior internal revenue
laws would (except for the enactment of the Code) be effective for any
period subsequent to such enactment, and if corresponding provisions are
contained in the Code, such election or other act shall be given the
same effect under the corresponding provisions of the Code to the extent
not inconsistent therewith. The term ``act'' includes, but is not
limited to, an allocation, identification, declaration, agreement,
option, waiver, relinquishment, or renunciation.
Par. 4. The limits of the various internal revenue districts have not
been changed by the enactment of the Code. Furthermore, delegations of
authority made pursuant to the provisions of Reorganization Plan No. 26
of 1950 and Reorganization Plan No. 1 of 1952 (as well as redelegations
thereunder), including those governing the authority of the Commissioner
of Internal Revenue, the Regional Commissioners of Internal Revenue, or
the District Directors of Internal Revenue, are applicable to the
provisions of the Code to the extent consistent therewith.
[[Page 5]]
SUBCHAPTER A_INCOME TAX
PART 1_INCOME TAXES--Table of Contents
Sec.
1.0-1 Internal Revenue Code of 1954 and regulations.
Normal Taxes and Surtaxes
DETERMINATION OF TAX LIABILITY
Tax on Individuals
1.1-1 Income tax on individuals.
1.1-2 Limitation on tax.
1.1-3 Change in rates applicable to taxable year.
1.1(h)-1 Capital gains look-through rule for sales or exchanges of
interests in a partnership, S corporation, or trust.
1.1(i)-1T Questions and answers relating to the tax on unearned income
certain minor children (Temporary).
1.2-1 Tax in case of joint return of husband and wife or the return of a
surviving spouse.
1.2-2 Definitions and special rules.
1.3-1 Application of optional tax.
1.4-1 Number of exemptions.
1.4-2 Elections.
1.4-3 Husband and wife filing separate returns.
1.4-4 Short taxable year caused by death.
Tax on Corporations
1.11-1 Tax on corporations.
Changes in Rates During a Taxable Year
1.15-1 Changes in rate during a taxable year.
1.21-1 Expenses for household and dependent care services necessary for
gainful employment.
1.21-2 Limitations on amount creditable.
1.21-3 Special rules applicable to married taxpayers.
1.21-4 Payments to certain related individuals.
1.23-1 Residential energy credit.
1.23-2 Definitions.
1.23-3 Special rules.
1.23-4 Performance and quality standards. [Reserved]
1.23-5 Certification procedures.
1.23-6 Procedure and criteria for additions to the approved list of
energy-conserving components or renewable energy sources.
1.25-1T Credit for interest paid on certain home mortgages (Temporary).
1.25-2T Amount of credit (Temporary).
1.25-3 Qualified mortgage credit certificate.
1.25-3T Qualified mortgage credit certificate (Temporary).
1.25-4T Qualified mortgage credit certificate program (Temporary).
1.25-5T Limitation on aggregate amount of mortgage credit certificates
(Temporary).
1.25-6T Form of qualified mortgage credit certificate (Temporary).
1.25-7T Public notice (Temporary).
1.25-8T Reporting requirements (Temporary).
1.25A-0 Table of contents.
1.25A-1 Calculation of education tax credit and general eligibility
requirements.
1.25A-2 Definitions.
1.25A-3 Hope Scholarship Credit.
1.25A-4 Lifetime Learning Credit.
1.25A-5 Special rules relating to characterization and timing of
payments.
1.28-0 Credit for clinical testing expenses for certain drugs for rare
diseases or conditions; table of contents.
1.28-1 Credit for clinical testing expenses for certain drugs for rare
diseases or conditions.
Credits Against Tax
credits allowable under sections 30 through 45D
1.30-1 Definition of qualified electric vehicle and recapture of credit
for qualified electric vehicle.
1.31-1 Credit for tax withheld on wages.
1.31-2 Credit for ``special refunds'' of employee social security tax.
1.32-2 Earned income credit for taxable years beginning after December
31, 1978.
1.32-3 Eligibility requirements after denial of the earned income
credit.
1.34-1 Special rule for owners of certain business entities.
1.35-1 Partially tax-exempt interest received by individuals.
1.35-2 Taxpayers not entitled to credit.
1.36B-0 Table of contents.
1.36B-1 Premium tax credit definitions.
1.36B-2 Eligibility for premium tax credit.
1.36B-2T Eligibility for premium tax credit (temporary).
1.36B-3 Computing the premium assistance credit amount.
1.36B-3T Computing the premium assistance credit amount (temporary).
1.36B-4 Reconciling the premium tax credit with advance credit payments.
1.36B-4T Reconciling the premium tax credit with advance credit payments
(temporary).
1.36B-5 Information reporting by Exchanges.
1.37-1 General rules for the credit for the elderly.
1.37-2 Credit for individuals age 65 or over.
[[Page 6]]
1.37-3 Credit for individuals under age 65 who have public retirement
system income.
1.38-1 Investment in certain depreciable property.
1.40-1 Questions and answers relating to the meaning of the term
``qualified mixture'' in section 40(b)(1).
1.41-0 Table of contents.
1.41-1 Credit for increasing research activities.
1.41-2 Qualified research expenses.
1.41-3 Base amount for taxable years beginning on or after January 3,
2001.
1.41-4 Qualified research for expenditures paid or incurred in taxable
years ending on or after December 31, 2003.
1.41-4A Qualified research for taxable years beginning before January 1,
1986.
1.41-5 Basic research for taxable years beginning after December 31,
1986. [Reserved]
1.41-5A Basic research for taxable years beginning before January 1,
1987.
1.41-6 Aggregation of expenditures.
1.41-7 Special rules.
1.41-8 Alternative incremental credit applicable for taxable years
beginning on or before December 31, 2008.
1.41-9 Alternative simplified credit.
1.42-0 Table of contents.
1.42-1 Limitation on low-income housing credit allowed with respect to
qualified low-income buildings receiving housing credit
allocations from a State or local housing credit agency.
1.42-1T Limitation on low-income housing credit allowed with respect to
qualified low-income buildings receiving housing credit
allocations from a State or local housing credit agency
(temporary).
1.42-2 Waiver of requirement that an existing building eligible for the
low-income housing credit was last placed in service more than
10 years prior to acquisition by the taxpayer.
1.42-3 Treatment of buildings financed with proceeds from a loan under
an Affordable Housing Program established pursuant to section
721 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA).
1.42-4 Application of not-for-profit rules of section 183 to low-income
housing credit activities.
1.42-5 Monitoring compliance with low-income housing credit
requirements.
1.42-6 Buildings qualifying for carryover allocations.
1.42-7 Substantially bond-financed buildings. [Reserved]
1.42-8 Election of appropriate percentage month.
1.42-9 For use by the general public.
1.42-10 Utility allowances.
1.42-11 Provision of services.
1.42-12 Effective dates and transitional rules.
1.42-13 Rules necessary and appropriate; housing credit agencies'
correction of administrative errors and omissions.
1.42-14 Allocation rules for post-2000 State housing credit ceiling
amount.
1.42-15 Available unit rule.
1.42-16 Eligible basis reduced by federal grants.
1.42-17 Qualified allocation plan.
1.42A-1 General tax credit for taxable years ending after December 31,
1975, and before January 1, 1979.
1.43-0 Table of contents.
1.43-1 The enhanced oil recovery credit--general rules.
1.43-2 Qualified enhanced oil recovery project.
1.43-3 Certification.
1.43-4 Qualified enhanced oil recovery costs.
1.43-5 At-risk limitation. [Reserved]
1.43-6 Election out of section 43.
1.43-7 Effective date of regulations.
1.44-1 Allowance of credit for purchase of new principal residence after
March 12, 1975, and before January 1, 1977.
1.44-2 Property to which credit for purchase of new principal residence
applies.
1.44-3 Certificate by seller.
1.44-4 Recapture for certain dispositions.
1.44-5 Definitions.
1.44B-1 Credit for employment of certain new employees.
Research Credit--For Taxable Years Beginning Before January 1, 1990
1.41-0A Table of contents.
1.41-3A Base period research expense.
rules for computing credit for investment in certain depreciable
property
1.45D-0 Table of contents.
1.45D-1 New markets tax credit.
1.45G-0 Table of contents for the railroad track maintenance credit
rules.
1.45G-1 Railroad track maintenance credit.
1.45R-0 Table of contents.
1.45R-1 Definitions.
1.45R-2 Eligibility for the credit.
1.45R-3 Uniform percentage of premium paid.
1.45R-4 Claiming the credit.
1.46-1 Determination of amount.
1.46-2 Carryback and carryover of unused credit.
1.46-3 Qualified investment.
1.46-4 Limitations with respect to certain persons.
1.46-5 Qualified progress expenditures.
1.46-6 Limitation in case of certain regulated companies.
1.46-7 Statutory provisions; plan requirements for taxpayers electing
additional investment credit, etc.
[[Page 7]]
1.46-8 Requirements for taxpayers electing additional one-percent
investment credit (TRASOP's).
1.46-9 Requirements for taxpayers electing an extra one-half percent
additional investment credit.
1.46-10 [Reserved]
1.46-11 Commuter highway vehicles.
1.47-1 Recomputation of credit allowed by section 38.
1.47-2 ``Disposition'' and ``cessation''.
1.47-3 Exceptions to the application of Sec. 1.47-1.
1.47-4 Electing small business corporation.
1.47-5 Estates and trusts.
1.47-6 Partnerships.
1.48-1 Definition of section 38 property.
1.48-2 New section 38 property.
1.48-3 Used section 38 property.
1.48-4 Election of lessor of new section 38 property to treat lessee as
purchaser.
1.48-5 Electing small business corporations.
1.48-6 Estates and trusts.
1.48-9 Definition of energy property.
1.48-10 Single purpose agricultural or horticultural structures.
1.48-11 Qualified rehabilitated building; expenditures incurred before
January 1, 1982.
1.48-12 Qualified rehabilitated building; expenditures incurred after
December 31, 1981.
1.50-1 Restoration of credit.
rules for computing credit for expenses of work incentive programs
1.50A-1 Determination of amount.
1.50A-2 Carryback and carryover of unused credit.
1.50A-3 Recomputation of credit allowed by section 40.
1.50A-4 Exceptions to the application of Sec. 1.50A-3.
1.50A-5 Electing small business corporations.
1.50A-6 Estates and trusts.
1.50A-7 Partnerships.
1.50B-1 Definitions of WIN expenses and WIN employees.
1.50B-2 Electing small business corporations.
1.50B-3 Estates and trusts.
1.50B-4 Partnerships.
1.50B-5 Limitations with respect to certain persons.
1.51-1 Amount of credit.
Tax Surcharge
1.52-1 Trades or businesses that are under common control.
1.52-2 Adjustments for acquisitions and dispositions.
1.52-3 Limitations with respect to certain persons.
1.53-1 Limitation based on amount of tax.
1.53-2 Carryback and carryover of unused credit.
1.53-3 Separate rule for pass-through of jobs credit.
1.55-1 Alternative minimum taxable income.
1.56-0 Table of contents to Sec. 1.56-1, adjustment for book income of
corporations.
1.56-1 Adjustment for the book income of corporations.
Regulations Applicable to Taxable Years Beginning in 1969 and Ending in
1970
1.56A-1 Imposition of tax.
1.56A-2 Deferral of tax liability in case of certain net operating
losses.
1.56A-3 Effective date.
1.56A-4 Certain taxpayers.
1.56A-5 Tax carryovers.
1.56(g)-0 Table of contents.
1.56(g)-1 Adjusted current earnings.
Tax Preference Regulations
1.57-0 Scope.
1.57-1 Items of tax preference defined.
1.57-2--1.57-3 [Reserved]
1.57-4 Limitation on amounts treated as items of tax preference for
taxable years beginning before January 1, 1976.
1.57-5 Records to be kept.
1.58-1 Minimum tax exemption.
1.58-2 General rules for conduit entities; partnerships and partners.
1.58-3 Estates and trusts.
1.58-3T Treatment of non-alternative tax itemized deductions by trusts
and estates and their beneficiaries in taxable years beginning
after December 31, 1982 (temporary).
1.58-4 Electing small business corporations.
1.58-5 Common trust funds.
1.58-6 Regulated investment companies; real estate investment trusts.
1.58-7 Tax preferences attributable to foreign sources; preferences
other than capital gains and stock options.
1.58-8 Capital gains and stock options.
1.58-9 Application of the tax benefit rule to the minimum tax for
taxable years beginning prior to 1987.
1.59-1 Optional 10-year writeoff of certain tax preferences.
1.60 [Reserved]
Authority: 26 U.S.C 7805, unless otherwise noted.
Section 1.1(h)-1 also issued under 26 U.S.C. 1(h);
Section 1.21-1 also issued under 26 U.S.C. 21(f);
Section 1.21-2 also issued under 26 U.S.C. 21(f);
Section 1.21-3 also issued under 26 U.S.C. 21(f);
Section 1.21-4 also issued under 26 U.S.C. 21(f);
Sections 1.23-1--1.23-6 also issued under 26 U.S.C. 23;
[[Page 8]]
Section 1.25-1T also issued under 26 U.S.C. 25;
Section 1.25-2T also issued under 26 U.S.C. 25;
Section 1.25-3 also issued under 26 U.S.C. 25;
Section 1.25-3T also issued under 26 U.S.C. 25;
Section 1.25-4T also issued under 26 U.S.C. 25;
Section 1.25-5T also issued under 26 U.S.C. 25;
Section 1.25-6T also issued under 26 U.S.C. 25;
Section 1.25-7T also issued under 26 U.S.C. 25;
Section 1.25-8T also issued under 26 U.S.C. 25;
Section 1.25A-1 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-2 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-3 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-4 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-5 also issued under section 26 U.S.C. 25A(i);
Section 1.28-0 also issued under 26 U.S.C. 28(d)(5);
Section 1.28-1 also issued under 26 U.S.C. 28(d)(5);
Section 1.30-1 also issued under 26 U.S.C. 30(d)(2);
Section 1.36B-0 also issued under 26 U.S.C. 36B(g);
Section 1.36B-4 also issued under 26 U.S.C. 36B(g);
Section 1.36B-5 also issued under 26 U.S.C. 36B(g);
Section 1.41-6 also issued under 26 U.S.C. 1502;
Section 1.41-8 also issued under 26 U.S.C. 41(c)(4)(B);
Section 1.41-8T also issued under 26 U.S.C. 41(c)(4)(B);
Section 1.41-9 also issued under 26 U.S.C. 41(c)(5)(C);
Section 1.41-9T also issued under 26 U.S.C. 41(c)(5)(C);
Section 1.42-1 also issued under 26 U.S.C. 42(n);
Sections 1.42-1T and 1.42-2T also issued under 26 U.S.C. 42(m);
Section 1.42-2 also issued under 26 U.S.C. 42(m);
Section 1.42-3 also issued under 26 U.S.C. 42(n);
Section 1.42-4 also issued under 26 U.S.C. 42(n);
Section 1.42-5 also issued under 26 U.S.C. 42(n);
Sections 1.42-6, 1.42-8, 1.42-9, 1.42-10, 1.42-11, and 1.42-12, also
issued under 26 U.S.C. 42(n);
Section 1.42-13 also issued under 26 U.S.C. 42(n);
Section 1.42-14 also issued under 26 U.S.C. 42(n);
Section 1.42-15 also issued under 26 U.S.C. 42(n);
Section 1.42-16 also issued under 26 U.S.C. 42(n);
Section 1.42-17 also issued under 26 U.S.C. 42(n);
Section 1.42-18 also issued under 26 U.S.C. 42(h)(6)(F) and
42(h)(6)(K);
Sections 1.43-0--1.43-7 also issued under section 26 U.S.C. 43;
Section 1.45D-1 also issued under 26 U.S.C. 45D(e)(2) and (i);
Section 1.46-5 also issued under 26 U.S.C. 46(d)(6) and 26 U.S.C.
47(a)(3)(C);
Section 1.46-6 also issued under 26 U.S.C. 46(f)(7);
Section 1.47-1 also issued under 26 U.S.C. 47(a);
Section 1.48-9 also issued under 26 U.S.C. 38(b) (as in effect
before the amendments made by subtitle F of the Tax Reform Act of 1984);
Sections 1.50A--1.50B also issued under 85 Stat. 553 (26 U.S.C.
40(b));
Section 1.52-1 also issued under 26 U.S.C. 52(b);
Section 1.56-1 also issued under 26 U.S.C. 56(f)(2)(H);
Section 1.56(g)-1 also issued under section 7611(g)(3) of the
Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat.
2373); and
Section 1.58-9 also issued under 26 U.S.C. 58(h).
Source: T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21,
1960, unless otherwise noted.
Sec. 1.0-1 Internal Revenue Code of 1954 and regulations.
(a) Enactment of law. The Internal Revenue Code of 1954 which became
law upon enactment of Public Law 591, 83d Congress, approved August 16,
1954, provides in part as follows:
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That
(a) Citation. (1) The provisions of this Act set forth under the
heading ``Internal Revenue Title'' may be cited as the ``Internal
Revenue Code of 1954''
(2) The Internal Revenue Code enacted on February 10, 1939, as
amended, may be cited as the ``Internal Revenue Code of 1939''.
(b) Publication. This Act shall be published as volume 68A of the
United States Statutes at Large, with a comprehensive table of contents
and an appendix; but without an index or marginal references. The date
of enactment, bill number, public law number, and chapter number, shall
be printed as a headnote.
[[Page 9]]
(c) Cross reference. For saving provisions, effective date
provisions, and other related provisions, see chapter 80 (sec. 7801 and
following) of the Internal Revenue Code of 1954.
(d) Enactment of Internal Revenue Title into law. The Internal
Revenue Title referred to in subsection (a)(1) is as follows:
* * * * *
In general, the provisions of the Internal Revenue Code of 1954 are
applicable with respect to taxable years beginning after December 31,
1953, and ending after August 16, 1954. Certain provisions of that Code
are deemed to be included in the Internal Revenue Code of 1939. See
section 7851.
(b) Scope of regulations. The regulations in this part deal with (1)
the income taxes imposed under subtitle A of the Internal Revenue Code
of 1954, and (2) certain administrative provisions contained in subtitle
F of such Code relating to such taxes. In general, the applicability of
such regulations is commensurate with the applicability of the
respective provisions of the Internal Revenue Code of 1954 except that
with respect to the provisions of the Internal Revenue Code of 1954
which are deemed to be included in the Internal Revenue Code of 1939,
the regulations relating to such provisions are applicable to certain
fiscal years and short taxable years which are subject to the Internal
Revenue Code of 1939. Those provisions of the regulations which are
applicable to taxable years subject to the Internal Revenue Code of 1939
and the specific taxable years to which such provisions are so
applicable are identified in each instance. The regulations in 26 CFR
(1939) part 39 (Regulations 118) are continued in effect until
superseded by the regulations in this part. See Treasury Decision 6091,
approved August 16, 1954 (19 FR 5167, C.B. 1954-2, 47).
Normal Taxes and Surtaxes
DETERMINATION OF TAX LIABILITY
Tax on Individuals
Sec. 1.1-1 Income tax on individuals.
(a) General rule. (1) Section 1 of the Code imposes an income tax on
the income of every individual who is a citizen or resident of the
United States and, to the extent provided by section 871(b) or 877(b),
on the income of a nonresident alien individual. For optional tax in the
case of taxpayers with adjusted gross income of less than $10,000 (less
than $5,000 for taxable years beginning before January 1, 1970) see
section 3. The tax imposed is upon taxable income (determined by
subtracting the allowable deductions from gross income). The tax is
determined in accordance with the table contained in section 1. See
subparagraph (2) of this paragraph for reference guides to the
appropriate table for taxable years beginning on or after January 1,
1964, and before January 1, 1965, taxable years beginning after December
31, 1964, and before January 1, 1971, and taxable years beginning after
December 31, 1970. In certain cases credits are allowed against the
amount of the tax. See part IV (section 31 and following), subchapter A,
chapter 1 of the Code. In general, the tax is payable upon the basis of
returns rendered by persons liable therefor (subchapter A (sections 6001
and following), chapter 61 of the Code) or at the source of the income
by withholding. For the computation of tax in the case of a joint return
of a husband and wife, or a return of a surviving spouse, for taxable
years beginning before January 1, 1971, see section 2. The computation
of tax in such a case for taxable years beginning after December 31,
1970, is determined in accordance with the table contained in section
1(a) as amended by the Tax Reform Act of 1969. For other rates of tax on
individuals, see section 5(a). For the imposition of an additional tax
for the calendar years 1968, 1969, and 1970, see section 51(a).
(2)(i) For taxable years beginning on or after January 1, 1964, the
tax imposed upon a single individual, a head of a household, a married
individual filing a separate return, and estates and trusts is the tax
imposed by section 1 determined in accordance with the appropriate table
contained in the following subsection of section 1:
----------------------------------------------------------------------------------------------------------------
Taxable years beginning
after Dec. 31, 1970
Taxable years beginning Taxable years beginning (references in this
in 1964 after 1964 but before column are to the Code
1971 as amended by the Tax
Reform Act of 1969)
----------------------------------------------------------------------------------------------------------------
Single individual.................... Sec. 1(a)(1)........... Sec. 1(a)(2)........... Sec. 1(c).
Head of a household.................. Sec. 1(b)(1)........... Sec. 1(b)(2)........... Sec. 1(b).
[[Page 10]]
Married individual filing a separate Sec. 1(a)(1)........... Sec. 1(a)(2)........... Sec. 1(d).
return.
Estates and trusts................... Sec. 1(a)(1)........... Sec. 1(a)(2)........... Sec. 1(d).
----------------------------------------------------------------------------------------------------------------
(ii) For taxable years beginning after December 31, 1970, the tax
imposed by section 1(d), as amended by the Tax Reform Act of 1969, shall
apply to the income effectively connected with the conduct of a trade or
business in the United States by a married alien individual who is a
nonresident of the United States for all or part of the taxable year or
by a foreign estate or trust. For such years the tax imposed by section
1(c), as amended by such Act, shall apply to the income effectively
connected with the conduct of a trade or business in the United States
by an unmarried alien individual (other than a surviving spouse) who is
a nonresident of the United States for all or part of the taxable year.
See paragraph (b)(2) of Sec. 1.871-8.
(3) The income tax imposed by section 1 upon any amount of taxable
income is computed by adding to the income tax for the bracket in which
that amount falls in the appropriate table in section 1 the income tax
upon the excess of that amount over the bottom of the bracket at the
rate indicated in such table.
(4) The provisions of section 1 of the Code, as amended by the Tax
Reform Act of 1969, and of this paragraph may be illustrated by the
following examples:
Example 1. A, an unmarried individual, had taxable income for the
calendar year 1964 of $15,750. Accordingly, the tax upon such taxable
income would be $4,507.50, computed as follows from the table in section
1(a)(1):
Tax on $14,000 (from table)................................. $3,790.00
Tax on $1,750 (at 41 percent as determined from the table).. 717.50
-----------
Total tax on $15,750.................................... 4,507.50
Example 2. Assume the same facts as in example (1), except the
figures are for the calendar year 1965. The tax upon such taxable income
would be $4,232.50, computed as follows from the table in section
1(a)(2):
Tax on $14,000 (from table)................................. $3,550.00
Tax on $1,750 (at 39 percent as determined from the table).. 682.50
-----------
Total tax on $15,750.................................... 4,232.50
Example 3. Assume the same facts as in example (1), except the
figures are for the calendar year 1971. The tax upon such taxable income
would be $3,752.50, computed as follows from the table in section 1(c),
as amended:
Tax on $14,000 (from table)................................. $3,210.00
Tax on $1,750 (at 31 percent as determined from the table).. 542.50
-----------
Total tax on $15,750.................................... 3,752.50
(b) Citizens or residents of the United States liable to tax. In
general, all citizens of the United States, wherever resident, and all
resident alien individuals are liable to the income taxes imposed by the
Code whether the income is received from sources within or without the
United States. Pursuant to section 876, a nonresident alien individual
who is a bona fide resident of a section 931 possession (as defined in
Sec. 1.931-1(c)(1) of this chapter) or Puerto Rico during the entire
taxable year is, except as provided in section 931 or 933 with respect
to income from sources within such possessions, subject to taxation in
the same manner as a resident alien individual. As to tax on nonresident
alien individuals, see sections 871 and 877.
(c) Who is a citizen. Every person born or naturalized in the United
States and subject to its jurisdiction is a citizen. For other rules
governing the acquisition of citizenship, see chapters 1 and 2 of title
III of the Immigration and Nationality Act (8 U.S.C. 1401-1459). For
rules governing loss of citizenship, see sections 349 to 357, inclusive,
of such Act (8 U.S.C. 1481-1489), Schneider v. Rusk, (1964) 377 U.S.
163, and Rev. Rul. 70-506, C.B. 1970-2, 1. For rules pertaining to
persons who are nationals but not citizens at birth, e.g., a person born
in American Samoa, see section
[[Page 11]]
308 of such Act (8 U.S.C. 1408). For special rules applicable to certain
expatriates who have lost citizenship with a principal purpose of
avoiding certain taxes, see section 877. A foreigner who has filed his
declaration of intention of becoming a citizen but who has not yet been
admitted to citizenship by a final order of a naturalization court is an
alien.
(d) Effective/applicability date. The second sentence of paragraph
(b) of this section applies to taxable years ending after April 9, 2008.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 7332, 39 FR
44216, Dec. 23, 1974; T.D. 9391, 73 FR 19358, Apr. 9, 2008]
Sec. 1.1-2 Limitation on tax.
(a) Taxable years ending before January 1, 1971. For taxable years
ending before January 1, 1971, the tax imposed by section 1 (whether by
subsection (a) or subsection (b) thereof) shall not exceed 87 percent of
the taxable income for the taxable year. For purposes of determining
this limitation the tax under section 1 (a) or (b) and the tax at the
87-percent rate shall each be computed before the allowance of any
credits against the tax. Where the alternative tax on capital gains is
imposed under section 1201(b), the 87-percent limitation shall apply
only to the partial tax computed on the taxable income reduced by 50
percent of the excess of net long-term capital gains over net short-term
capital losses. Where, for purposes of computations under the income
averaging provisions, section 1201(b) is treated as imposing the
alternative tax on capital gains computed under section 1304(e)(2), the
87-percent limitation shall apply only to the tax equal to the tax
imposed by section 1, reduced by the amount of the tax imposed by
section 1 which is attributable to capital gain net income for the
computation year.
(b) Taxable years beginning after December 31, 1970. If, for any
taxable year beginning after December 31, 1970, an individual has earned
taxable income which exceeds his taxable income as defined by section
1348, the tax imposed by section 1, as amended by the Tax Reform Act of
1969, shall not exceed the sum computed under the provisions of section
1348. For imposition of minimum tax for tax preferences see sections 56
through 58.
[T.D. 7117, 36 FR 9397, May 25, 1971]
Sec. 1.1-3 Change in rates applicable to taxable year.
For computation of the tax for a taxable year during which a change
in the tax rates occurs, see section 21 and the regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960. Redesignated by T.D. 7117, 36 FR
9397, May 25, 1971]
Sec. 1.1(h)-1 Capital gains look-through rule for sales or exchanges of
interests in a partnership, S corporation, or trust.
(a) In general. When an interest in a partnership held for more than
one year is sold or exchanged, the transferor may recognize ordinary
income (e.g., under section 751(a)), collectibles gain, section 1250
capital gain, and residual long-term capital gain or loss. When stock in
an S corporation held for more than one year is sold or exchanged, the
transferor may recognize ordinary income (e.g., under sections 304, 306,
341, 1254), collectibles gain, and residual long-term capital gain or
loss. When an interest in a trust held for more than one year is sold or
exchanged, a transferor who is not treated as the owner of the portion
of the trust attributable to the interest sold or exchanged (sections
673 through 679) (a non-grantor transferor) may recognize collectibles
gain and residual long-term capital gain or loss.
(b) Look-through capital gain--(1) In general. Look-through capital
gain is the share of collectibles gain allocable to an interest in a
partnership, S corporation, or trust, plus the share of section 1250
capital gain allocable to an interest in a partnership, determined under
paragraphs (b)(2) and (3) of this section.
(2) Collectibles gain--(i) Definition. For purposes of this section,
collectibles gain shall be treated as gain from the sale or exchange of
a collectible (as defined in section 408(m) without regard to section
408(m)(3)) that is a capital asset held for more than 1 year.
(ii) Share of collectibles gain allocable to an interest in a
partnership, S corporation, or a trust. When an interest in a
partnership, S corporation, or trust
[[Page 12]]
held for more than one year is sold or exchanged in a transaction in
which all realized gain is recognized, the transferor shall recognize as
collectibles gain the amount of net gain (but not net loss) that would
be allocated to that partner (taking into account any remedial
allocation under Sec. 1.704-3(d)), shareholder, or beneficiary (to the
extent attributable to the portion of the partnership interest, S
corporation stock, or trust interest transferred that was held for more
than one year) if the partnership, S corporation, or trust transferred
all of its collectibles for cash equal to the fair market value of the
assets in a fully taxable transaction immediately before the transfer of
the interest in the partnership, S corporation, or trust. If less than
all of the realized gain is recognized upon the sale or exchange of an
interest in a partnership, S corporation, or trust, the same methodology
shall apply to determine the collectibles gain recognized by the
transferor, except that the partnership, S corporation, or trust shall
be treated as transferring only a proportionate amount of each of its
collectibles determined as a fraction that is the amount of gain
recognized in the sale or exchange over the amount of gain realized in
the sale or exchange. With respect to the transfer of an interest in a
trust, this paragraph (b)(2) applies only to transfers by non-grantor
transferors (as defined in paragraph (a) of this section). This
paragraph (b)(2) does not apply to a transaction that is treated, for
Federal income tax purposes, as a redemption of an interest in a
partnership, S corporation, or trust.
(3) Section 1250 capital gain--(i) Definition. For purposes of this
section, section 1250 capital gain means the capital gain (not otherwise
treated as ordinary income) that would be treated as ordinary income if
section 1250(b)(1) included all depreciation and the applicable
percentage under section 1250(a) were 100 percent.
(ii) Share of section 1250 capital gain allocable to interest in
partnership. When an interest in a partnership held for more than one
year is sold or exchanged in a transaction in which all realized gain is
recognized, there shall be taken into account under section
1(h)(7)(A)(i) in determining the partner's unrecaptured section 1250
gain the amount of section 1250 capital gain that would be allocated
(taking into account any remedial allocation under Sec. 1.704-3(d)) to
that partner (to the extent attributable to the portion of the
partnership interest transferred that was held for more than one year)
if the partnership transferred all of its section 1250 property in a
fully taxable transaction for cash equal to the fair market value of the
assets immediately before the transfer of the interest in the
partnership. If less than all of the realized gain is recognized upon
the sale or exchange of an interest in a partnership, the same
methodology shall apply to determine the section 1250 capital gain
recognized by the transferor, except that the partnership shall be
treated as transferring only a proportionate amount of each section 1250
property determined as a fraction that is the amount of gain recognized
in the sale or exchange over the amount of gain realized in the sale or
exchange. This paragraph (b)(3) does not apply to a transaction that is
treated, for Federal income tax purposes, as a redemption of a
partnership interest.
(iii) Limitation with respect to net section 1231 gain. In
determining a transferor partner's net section 1231 gain (as defined in
section 1231(c)(3)) for purposes of section 1(h)(7)(B), the transferor
partner's allocable share of section 1250 capital gain in partnership
property shall not be treated as section 1231 gain, regardless of
whether the partnership property is used in the trade or business (as
defined in section 1231(b)).
(c) Residual long-term capital gain or loss. The amount of residual
long-term capital gain or loss recognized by a partner, shareholder of
an S corporation, or beneficiary of a trust on account of the sale or
exchange of an interest in a partnership, S corporation, or trust shall
equal the amount of long-term capital gain or loss that the partner
would recognize under section 741, that the shareholder would recognize
upon the sale or exchange of stock of an S corporation, or that the
beneficiary would recognize upon the sale or exchange of an interest in
a trust
[[Page 13]]
(pre-look-through long-term capital gain or loss) minus the amount of
look-through capital gain determined under paragraph (b) of this
section.
(d) Special rule for tiered entities. In determining whether a
partnership, S corporation, or trust has gain from collectibles, such
partnership, S corporation, or trust shall be treated as owning its
proportionate share of the collectibles of any partnership, S
corporation, or trust in which it owns an interest either directly or
indirectly through a chain of such entities. In determining whether a
partnership has section 1250 capital gain, such partnership shall be
treated as owning its proportionate share of the section 1250 property
of any partnership in which it owns an interest, either directly or
indirectly through a chain of partnerships.
(e) Notification requirements. Reporting rules similar to those that
apply to the partners and the partnership under section 751(a) shall
apply in the case of sales or exchanges of interests in a partnership, S
corporation, or trust that cause holders of such interests to recognize
collectibles gain and in the case of sales or exchanges of interests in
a partnership that cause holders of such interests to recognize section
1250 capital gain. See Sec. 1.751-1(a)(3).
(f) Examples. The following examples illustrate the requirements of
this section:
Example 1. Collectibles gain. (i) A and B are equal partners in a
personal service partnership (PRS). B transfers B's interest in PRS to T
for $15,000 when PRS's balance sheet (reflecting a cash receipts and
disbursements method of accounting) is as follows:
------------------------------------------------------------------------
ASSETS
-------------------
Adjusted Market
basis value
------------------------------------------------------------------------
Cash................................................ $3,000 $3,000
Loans Owed to Partnership........................... 10,000 10,000
Collectibles...................................... 1,000 3,000
Other Capital Assets.............................. 6,000 2,000
-------------------
Capital Assets...................................... 7,000 5,000
Unrealized Receivables.............................. 0 14,000
-------------------
Total........................................... 20,000 32,000
------------------------------------------------------------------------
------------------------------------------------------------------------
LIABILITIES AND
CAPITAL
-------------------
Adjusted Market
basis value
------------------------------------------------------------------------
Liabilities......................................... 2,000 2,000
Capital:
A................................................. 9,000 15,000
B................................................. 9,000 15,000
-------------------
Total........................................... 20,000 32,000
------------------------------------------------------------------------
(ii) At the time of the transfer, B has held the interest in PRS for
more than one year, and B's basis for the partnership interest is
$10,000 ($9,000 plus $1,000, B's share of partnership liabilities). None
of the property owned by PRS is section 704(c) property. The total
amount realized by B is $16,000, consisting of the cash received,
$15,000, plus $1,000, B's share of the partnership liabilities assumed
by T. See section 752. B's undivided one-half interest in PRS includes a
one-half interest in the partnership's unrealized receivables and a one-
half interest in the partnership's collectibles.
(iii) If PRS were to sell all of its section 751 property in a fully
taxable transaction for cash equal to the fair market value of the
assets immediately prior to the transfer of B's partnership interest to
T, B would be allocated $7,000 of ordinary income from the sale of PRS's
unrealized receivables. Therefore, B will recognize $7,000 of ordinary
income with respect to the unrealized receivables. The difference
between the amount of capital gain or loss that the partner would
realize in the absence of section 751 ($6,000) and the amount of
ordinary income or loss determined under Sec. 1.751-1(a)(2) ($7,000) is
the partner's capital gain or loss on the sale of the partnership
interest under section 741. In this case, the transferor has a $1,000
pre-look-through long-term capital loss.
(iv) If PRS were to sell all of its collectibles in a fully taxable
transaction for cash equal to the fair market value of the assets
immediately prior to the transfer of B's partnership interest to T, B
would be allocated $1,000 of gain from the sale of the collectibles.
Therefore, B will recognize $1,000 of collectibles gain on account of
the collectibles held by PRS.
(v) The difference between the transferor's pre-look-through long-
term capital gain or loss (-$1,000) and the look-through capital gain
determined under this section ($1,000) is the transferor's residual
long-term capital gain or loss on the sale of the partnership interest.
Under these facts, B will recognize a $2,000 residual long-term capital
loss on account of the sale or exchange of the interest in PRS.
Example 2. Special allocations. Assume the same facts as in Example
1, except that under the partnership agreement, all gain from the sale
of the collectibles is specially allocated to B, and B transfers B's
interest to T for
[[Page 14]]
$16,000. All items of income, gain, loss, or deduction of PRS, other
than the gain from the collectibles, are divided equally between A and
B. Under these facts, B's amount realized is $17,000, consisting of the
cash received, $16,000, plus $1,000, B's share of the partnership
liabilities assumed by T. See section 752. B will recognize $7,000 of
ordinary income with respect to the unrealized receivables (determined
under Sec. 1.751-1(a)(2)). Accordingly, B's pre-look-through long-term
capital gain would be $0. If PRS were to sell all of its collectibles in
a fully taxable transaction for cash equal to the fair market value of
the assets immediately prior to the transfer of B's partnership interest
to T, B would be allocated $2,000 of gain from the sale of the
collectibles. Therefore, B will recognize $2,000 of collectibles gain on
account of the collectibles held by PRS. B will recognize a $2,000
residual long-term capital loss on account of the sale of B's interest
in PRS.
Example 3. Net collectibles loss ignored. Assume the same facts as
in Example 1, except that the collectibles held by PRS have an adjusted
basis of $3,000 and a fair market value of $1,000, and the other capital
assets have an adjusted basis of $4,000 and a fair market value of
$4,000. (The total adjusted basis and fair market value of the
partnership's capital assets are the same as in Example 1.) If PRS were
to sell all of its collectibles in a fully taxable transaction for cash
equal to the fair market value of the assets immediately prior to the
transfer of B's partnership interest to T, B would be allocated $1,000
of loss from the sale of the collectibles. Because none of the gain from
the sale of the interest in PRS is attributable to unrealized
appreciation in the value of collectibles held by PRS, the net loss in
collectibles held by PRS is not recognized at the time B transfers the
interest in PRS. B will recognize $7,000 of ordinary income (determined
under Sec. 1.751-1(a)(2)) and a $1,000 long-term capital loss on
account of the sale of B's interest in PRS.
Example 4. Collectibles gain in an S corporation. (i) A corporation
(X) has always been an S corporation and is owned by individuals A, B,
and C. In 1996, X invested in antiques. Subsequent to their purchase,
the antiques appreciated in value by $300. A owns one-third of the
shares of X stock and has held that stock for more than one year. A's
adjusted basis in the X stock is $100. If A were to sell all of A's X
stock to T for $150, A would realize $50 of pre-look-through long-term
capital gain.
(ii) If X were to sell its antiques in a fully taxable transaction
for cash equal to the fair market value of the assets immediately before
the transfer to T, A would be allocated $100 of gain on account of the
sale. Therefore, A will recognize $100 of collectibles gain (look-
through capital gain) on account of the collectibles held by X.
(iii) The difference between the transferor's pre-look-through long-
term capital gain or loss ($50) and the look-through capital gain
determined under this section ($100) is the transferor's residual long-
term capital gain or loss on the sale of the S corporation stock. Under
these facts, A will recognize $100 of collectibles gain and a $50
residual long-term capital loss on account of the sale of A's interest
in X.
Example 5. Sale or exchange of partnership interest where part of
the interest has a short-term holding period. (i) A, B, and C form an
equal partnership (PRS). In connection with the formation, A contributes
$5,000 in cash and a capital asset with a fair market value of $5,000
and a basis of $2,000; B contributes $7,000 in cash and a collectible
with a fair market value of $3,000 and a basis of $3,000; and C
contributes $10,000 in cash. At the time of the contribution, A had held
the contributed property for two years. Six months later, when A's basis
in PRS is $7,000, A transfers A's interest in PRS to T for $14,000 at a
time when PRS's balance sheet (reflecting a cash receipts and
disbursements method of accounting) is as follows:
------------------------------------------------------------------------
ASSETS
-------------------
Adjusted Market
basis value
------------------------------------------------------------------------
Cash................................................ $22,000 $22,000
Unrealized Receivables.............................. 0 6,000
Capital Asset..................................... 2,000 5,000
Collectible....................................... 3,000 9,000
Capital Assets...................................... 5,000 14,000
-------------------
Total........................................... 27,000 42,000
------------------------------------------------------------------------
(ii) Although at the time of the transfer A has not held A's
interest in PRS for more than one year, 50 percent of the fair market
value of A's interest in PRS was received in exchange for a capital
asset with a long-term holding period. Therefore, 50 percent of A's
interest in PRS has a long-term holding period. See Sec. 1.1223-
3(b)(1).
(iii) If PRS were to sell all of its section 751 property in a fully
taxable transaction immediately before A's transfer of the partnership
interest, A would be allocated $2,000 of ordinary income. Accordingly, A
will recognize $2,000 ordinary income and $5,000 ($7,000-$2,000) of
capital gain on account of the transfer to T of A's interest in PRS.
Fifty percent ($2,500) of that gain is long-term capital gain and 50
percent ($2,500) is short-term capital gain. See Sec. 1.1223-3(c)(1).
(iv) If the collectible were sold or exchanged in a fully taxable
transaction immediately before A's transfer of the partnership interest,
A would be allocated $2,000 of gain attributable to the collectible. The
gain attributable to the collectible that is allocable to the portion of
the transferred interest in PRS with a long-term holding period is
$1,000
[[Page 15]]
(50 percent of $2,000). Accordingly, A will recognize $1,000 of
collectibles gain on account of the transfer of A's interest in PRS.
(v) The difference between the amount of pre-look-through long-term
capital gain or loss ($2,500) and the look-through capital gain ($1,000)
is the amount of residual long-term capital gain or loss that A will
recognize on account of the transfer of A's interest in PRS. Under these
facts, A will recognize a residual long-term capital gain of $1,500 and
a short-term capital gain of $2,500.
(g) Effective date. This section applies to transfers of interests
in partnerships, S corporations, and trusts that occur on or after
September 21, 2000.
[T.D. 8902, 65 FR 57096, Sept. 21, 2000]
Sec. 1.1(i)-1T Questions and answers relating to the tax on unearned
income certain minor children (Temporary).
In General
Q-1. To whom does section 1(i) apply?
A-1. Section 1(i) applies to any child who is under 14 years of age
at the close of the taxable year, who has at least one living parent at
the close of the taxable year, and who recognizes over $1,000 of
unearned income during the taxable year.
Q-2. What is the effective date of section 1(i)?
A-2. Section 1(i) applies to taxable years of the child beginning
after December 31, 1986.
Computation of Tax
Q-3. What is the amount of tax imposed by section 1 on a child to
whom section 1(i) applies?
A-3. In the case of a child to whom section 1(i) applies, the amount
of tax imposed by section 1 equals the greater of (A) the tax imposed by
section 1 without regard to section 1(i) or (B) the sum of the tax that
would be imposed by section 1 if the child's taxable income was reduced
by the child's net unearned income, plus the child's share of the
allocable parental tax.
Q-4. What is the allocable parental tax?
A-4. The allocable parental tax is the excess of (A) the tax that
would be imposed by section 1 on the sum of the parent's taxable income
plus the net unearned income of all children of such parent to whom
section 1(i) applies, over (B) the tax imposed by section 1 on the
parent's taxable income. Thus, the allocable parental tax is not
computed with reference to unearned income of a child over 14 or a child
under 14 with less than $1,000 of unearned income. See A-10 through A-13
for rules regarding the determination of the parent(s) whose taxable
income is taken into account under section 1(i). See A-14 for rules
regarding the determination of children of the parent whose net unearned
income is taken into account under section 1(i).
Q-5. What is the child's share of the allocable parental tax?
A-5. The child's share of the allocable parental tax is an amount
that bears the same ratio to the total allocable parental tax as the
child's net unearned income bears to the total net unearned income of
all children of such parent to whom section 1(i) applies. See A-14.
Example 1. During 1988, D, and a 12 year old, receives $5,000 of
unearned income and no earned income. D has no itemized deductions and
is not eligible for a personal exemption. D's parents have two other
children, E, a 15 year old, and F, a 10 year old. E has $10,000 of
unearned income and F has $100 of unearned income. D's parents file a
joint return for 1988 and report taxable income of $70,000. Neither D's
nor his parent's taxable income is attributable to net capital gain. D's
tax liability for 1988, determined without regard to section 1(i), is
$675 on $4,500 of taxable income ($5,000 less $500 allowable standard
deduction). In applying section 1(i), D's tax would be equal to the sum
of (A) the tax that would be imposed on D's taxable income if it were
reduced by any net unearned income, plus (B) D's share of the allocable
parental tax. Only D's unearned income is taken into account in
determining the allocable parental tax because E is over 14 and F has
less than $1,000 of unearned income. See A-4. D's net unearned income is
$4,000 ($4,500 taxable unearned income less $500). The tax imposed on
D's taxable income as reduced by D's net unearned income is $75
($500x15%). The allocable parental tax is $1,225, the excess of
$16,957.50 (the tax on $74,000, the parent's taxable income plus D's net
unearned income) over $15,732.50 (the tax on $70,000, the parent's
taxable income). See A-4. Thus, D's tax under section 1(i)(1)(B) is
$1,300 ($1,225+$75). Since this amount is greater than the amount of D's
tax liability as determined without regard to section 1(i), the amount
of tax imposed on D for 1988 is $1,300. See A-3.
Example 2. H and W have 3 children, A, B, and C, who are all under
14 years of age. For
[[Page 16]]
the taxable year 1988, H and W file a joint return and report taxable
income of $129,750. The tax imposed by section 1 on H and W is $35,355.
A has $5,000 of net unearned income and B and C each have $2,500 of net
unearned income during 1988. The allocable parental tax imposed on A, B,
and C's combined net unearned income of $10,000 is $3,300. This tax is
the excess of $38,655, which is the tax imposed by section 1 on $139,750
($129,750+10,000), over $35,355 (the tax imposed by section 1 on H and
W's taxable income of $129,750). See A-4. Each child's share of the
allocable parental tax is an amount that bears the same ratio to the
total allocable parental tax as the child's net unearned income bears to
the total net unearned income of A, B, and C. Thus, A's share of the
allocable parental tax is $1,650 (5,000/10,000x3,300) and B and C's
share of the tax is $825 (2,500/10,000x3,300) each. See A-5.
Definition of Net Unearned Income
Q-6. What is net unearned income?
A-6. Net unearned income is the excess of the portion of adjusted
gross income for the taxable year that is not ``earned income'' as
defined in section 911(d)(2) (income that is not attributable to wages,
salaries, or other amounts received as compensation for personal
services), over the sum of the standard deduction amount provided for
under section 63 (c)(5)(A) ($500 for 1987 and 1988; adjusted for
inflation thereafter), plus the greater of (A) $500 (adjusted for
inflation after 1988) or (B) the amount of allowable itemized deductions
that are directly connected with the production of unearned income. A
child's net unearned income for any taxable year shall not exceed the
child's taxable income for such year.
Example 3. A is a child who is under 14 years of age at the end of
the taxable year 1987. Both of A's parents are alive at this time.
During 1987, A receives $3,000 of interest from a bank savings account
and earns $1,000 from a paper route and performing odd jobs. A has no
itemized deductions for 1987. A's standard deduction is $1,000, which is
an amount equal to A's earned income for 1987. Of this amount, $500 is
applied against A's unearned income and the remaining $500 is applied
against A's earned income. Thus, A's $500 of taxable earned income
($1,000 less the remaining $500 of the standard deduction) is taxed
without regard to section 1 (i); A has $2,500 of taxable unearned income
($3,000 gross unearned income less $500 of the standard deduction) of
which $500 is taxed without regard to section 1(i). The remaining $2,000
of taxable unearned income is A's net unearned income and is taxed under
section 1(i).
Example 4. B is a child who is subject to tax under section 1(i). B
has $400 of earned income and $2,000 of unearned income. B has itemized
deductions of $800 (net of the 2 percent of adjusted gross income (AGI)
floor on miscellaneous itemized deductions under section 67) of which
$200 are directly connected with the production of unearned income. The
amount of itemized deductions that B may apply against unearned income
is equal to the greater of $500 or the deductions directly connected
with the production of unearned income. See A-6. Thus, $500 of B's
itemized deductions are applied against the $2,000 of unearned income
and the remaining $300 of deductions are applied against earned income.
As a result, B has taxable earned income of $100 and taxable unearned
income of $1,500. Of these amounts, all of the earned income and $500 of
the unearned income are taxed without regard to section 1(i). The
remaining $1,000 of unearned income is net unearned income and is taxed
under section 1(i).
Unearned Income Subject to tax Under Section 1(i)
Q-7. Will a child be subject to tax under section 1(i) on net
unearned income (as defined in section 1(i) (4) and A-6 of this section)
that is attributable to property transferred to the child prior to 1987?
A-7. Yes. The tax imposed by section 1(i) on a child's net unearned
income applies to any net unearned income of the child for taxable years
beginning after December 31, 1986, regardless of when the underlying
assets were transferred to the child.
Q-8. Will a child be subject to tax under section 1(i) on net
unearned income that is attributable to gifts from persons other than
the child's parents or attributable to assets resulting from the child's
earned income?
A-8. Yes. The tax imposed by section 1(i) applies to all net
unearned income of the child, regardless of the source of the assets
that produced such income. Thus, the rules of section 1(i) apply to
income attributable to gifts not only from the parents but also from any
other source, such as the child's grandparents. Section 1(i) also
applies to unearned income derived with respect to assets resulting from
earned income of the child, such as interest earned on bank deposits.
[[Page 17]]
Example 5. A is a child who is under 14 years of age at the end of
the taxable year beginning on January 1, 1987. Both of A's parents are
alive at the end of the taxable year. During 1987, A receives $2,000 in
interest from his bank account and $1,500 from a paper route. Some of
the interest earned by A from the bank account is attributable to A's
paper route earnings that were deposited in the account. The balance of
the account is attributable to cash gifts from A's parents and
grandparents and interest earned prior to 1987. Some cash gifts were
received by A prior to 1987. A has no itemized deductions and is
eligible to be claimed as a dependent on his parent's return. Therefore,
for the taxable year 1987, A's standard deduction is $1,500, the amount
of A's earned income. Of this standard deduction amount, $500 is
allocated against unearned income and $1,000 is allocated against earned
income. A's taxable unearned income is $1,500 of which $500 is taxed
without regard to section 1(i). The remaining taxable unearned income of
$1,000 is net unearned income and is taxed under section 1(i). The fact
that some of A's unearned income is attributable to interest on
principal created by earned income and gifts from persons other than A's
parents or that some of the unearned income is attributable to property
transferred to A prior to 1987, will not affect the tax treatment of
this income under section 1(i). See A-8.
Q-9. For purposes of section 1(i), does income which is not earned
income (as defined in section 911(d)(2)) include social security
benefits or pension benefits that are paid to the child?
A-9. Yes. For purposes of section 1(i), earned income (as defined in
section 911(d)(2)) does not include any social security or pension
benefits paid to the child. Thus, such amounts are included in unearned
income to the extent they are includible in the child's gross income.
Determination of the Parent's Taxable Income
Q-10. If a child's parents file a joint return, what is the taxable
income that must be taken into account by the child in determining tax
liability under section 1(i)?
A-10. In the case of parents who file a joint return, the parental
taxable income to be taken into account in determining the tax liability
of a child is the total taxable income shown on the joint return.
Q-11. If a child's parents are married and file separate tax
returns, which parent's taxable income must be taken into account by the
child in determining tax liability under section 1(i)?
A-11. For purposes of determining the tax liability of a child under
section 1(i), where such child's parents are married and file separate
tax returns, the parent whose taxable income is the greater of the two
for the taxable year shall be taken into account.
Q-12. If the parents of a child are divorced, legally separated, or
treated as not married under section 7703(b), which parent's taxable
income is taken into account in computing the child's tax liability?
A-12. If the child's parents are divorced, legally separated, or
treated as not married under section 7703(b), the taxable income of the
custodial parent (within the meaning of section 152(e)) of the child is
taken into account under section 1(i) in determining the child's tax
liability.
Q-13. If a parent whose taxable income must be taken into account in
determining a child's tax liability under section 1(i) files a joint
return with a spouse who is not a parent of the child, what taxable
income must the child take into account?
A-13. The amount of a parent's taxable income that a child must take
into account for purposes of section 1(i) where the parent files a joint
return with a spouse who is not a parent of the child is the total
taxable income shown on such joint return.
Children of the Parent
Q-14. In determining a child's share of the allocable parental tax,
is the net unearned income of legally adopted children, children related
to such child by half-blood, or children from a prior marriage of the
spouse of such child's parent taken into account in addition to the
natural children of such child's parent?
A-14. Yes. In determining a child's share of the allocable parental
tax, the net unearned income of all children subject to tax under
section 1(i) and who use the same parent's taxable income as such child
to determine their tax liability under section 1(i) must be taken into
account. Such children are taken into account regardless of whether they
are adopted by the parent, related to such child by half-blood,
[[Page 18]]
or are children from a prior marriage of the spouse of such child's
parent.
Rules Regarding Income From a Trust or Similar Instrument
Q-15. Will the unearned income of a child who is subject to section
1(i) that is attributable to gifts given to the child under the Uniform
Gift to Minors Act (UGMA) be subject to tax under section 1(i)?
A-15. Yes. A gift under the UGMA vests legal title to the property
in the child although an adult custodian is given certain rights to deal
with the property until the child attains majority. Any unearned income
attributable to such a gift is the child's unearned income and is
subject to tax under section 1(i), whether distributed to the child or
not.
Q-16. Will a child who is a beneficiary of a trust be required to
take into account the income of a trust in determining the child's tax
liability under section 1(i)?
A-16. The income of a trust must be taken into account for purposes
of determining the tax liability of a beneficiary who is subject to
section 1(i) only to the extent it is included in the child's gross
income for the taxable year under sections 652(a) or 662(a). Thus,
income from a trust for the fiscal taxable year of a trust ending during
1987, that is included in the gross income of a child who is subject to
section 1(i) and who has a calendar taxable year, will be subject to tax
under section 1(i) for the child's 1987 taxable year.
Subsequent Adjustments
Q-17. What effect will a subsequent adjustment to a parent's taxable
income have on the child's tax liability if such parent's taxable income
was used to determine the child's tax liability under section 1(i) for
the same taxable year?
A-17. If the parent's taxable income is adjusted and if, for the
same taxable year as the adjustment, the child paid tax determined under
section 1(i) with reference to that parent's taxable income, then the
child's tax liability under section 1(i) must be recomputed using the
parent's taxable income as adjusted.
Q-18. In the case where more than one child who is subject to
section 1(i) uses the same parent's taxable income to determine their
allocable parental tax, what effect will a subsequent adjustment to the
net unearned income of one child have on the other child's share of the
allocable parental tax?
A-18. If, for the same taxable year, more than one child uses the
same parent's taxable income to determine their share of the allocable
parental tax and a subsequent adjustment is made to one or more of such
children's net unearned income, each child's share of the allocable
parental tax must be recomputed using the combined net unearned income
of all such children as adjusted.
Q-19. If a recomputation of a child's tax under section 1(i), as a
result of an adjustment to the taxable income of the child's parents or
another child's net unearned income, results in additional tax being
imposed by section 1(i) on the child, is the child subject to interest
and penalties on such additional tax?
A-19. Any additional tax resulting from an adjustment to the taxable
income of the child's parents or the net unearned income of another
child shall be treated as an underpayment of tax and interest shall be
imposed on such underpayment as provided in section 6601. However, the
child shall not be liable for any penalties on the underpayment
resulting from additional tax being imposed under section 1(i) due to
such an adjustment.
Example 6. D and M are the parents of C, a child under the age of
14. D and M file a joint return for 1988 and report taxable income of
$69,900. C has unearned income of $3,000 and no itemized deductions for
1988. C properly reports a total tax liability of $635 for 1988. This
amount is the sum of the allocable parental tax of $560 on C's net
unearned income of $2,000 (the excess of $3,000 over the sum of $500
standard deduction and the first $500 of taxable unearned income) plus
$75 (the tax imposed on C's first $500 of taxable unearned income). See
A-3. One year later, D and M's 1988 tax return is adjusted on audit by
adding an additional $1,000 of taxable income. No adjustment is made to
the amount reported as C's net unearned income for 1988. However, the
adjustment to D and M's taxable income causes C's tax liability under
section 1(i) for 1988 to be increased by $50 as a result of the phase-
out of the 15 percent rate bracket. See A-20. In addition to this
further tax liability,
[[Page 19]]
C will be liable for interest on the $50. However, C will not have to
pay any penalty on the delinquent amount.
Miscellaneous Rules
Q-20. Does the phase-out of the parent's 15 percent rate bracket and
personal exemptions under section 1(g), if applicable, have any effect
on the calculation of the allocable parental tax imposed on a child's
net unearned income under section 1(i)?
A-20. Yes. Any phase-out of the parent's 15 percent rate bracket or
personal exemptions under section 1(g) is given full effect in
determining the tax that would be imposed on the sum of the parent's
taxable income and the total net unearned income of all children of the
parent. Thus, any additional tax on a child's net unearned income
resulting from the phase-out of the 15 percent rate bracket and the
personal exemptions is reflected in the tax liability of the child.
Q-21. For purposes of calculating a parent's tax liability or the
allocable parental tax imposed on a child, are other phase-outs,
limitations, or floors on deductions or credits, such as the phase-out
of the $25,000 passive loss allowance for rental real estate activities
under section 469(i)(3) or the 2 percent of AGI floor on miscellaneous
itemized deductions under section 67, affected by the addition of a
child's net unearned income to the parent's taxable income?
A-21. No. A child's net unearned income is not taken into account in
computing any deduction or credit for purposes of determining the
parent's tax liability or the child's allocable parental tax. Thus, for
example, although the amounts allowable to the parent as a charitable
contribution deduction, medical expense deduction, section 212
deduction, or a miscellaneous itemized deduction are affected by the
amount of the parent's adjusted gross income, the amount of these
deductions that is allowed does not change as a result of the
application of section 1(i) because the amount of the parent's adjusted
gross income does not include the child's net unearned income.
Similarly, the amount of itemized deductions that is allowed to a child
does not change as a result of section 1(i) because section 1(i) only
affects the amount of tax liability and not the child's adjusted gross
income.
Q-22. If a child is unable to obtain information concerning the tax
return of the child's parents directly from such parents, how may the
child obtain information from the parent's tax return which is necessary
to determine the child's tax liability under section 1(i)?
A-22. Under section 6103(e)(1)(A)(iv), a return of a parent shall,
upon written request, be open to inspection or disclosure to a child of
that individual (or the child's legal representative) to the extent
necessary to comply with section 1(i). Thus, a child may request the
Internal Revenue Service to disclose sufficient tax information about
the parent to the child so that the child can properly file his or her
return.
[T.D. 8158, 52 FR 33579, Sept. 4, 1987; 52 FR 36133, Sept. 25, 1987]
Sec. 1.2-1 Tax in case of joint return of husband and wife or the
return of a surviving spouse.
(a) Taxable year ending before January 1, 1971. (1) For taxable
years ending before January 1, 1971, in the case of a joint return of
husband and wife, or the return of a surviving spouse as defined in
section 2(b), the tax imposed by section 1 shall be twice the tax that
would be imposed if the taxable income were reduced by one-half. For
rules relating to the filing of joint returns of husband and wife, see
section 6013 and the regulations thereunder.
(2) The method of computing, under section 2(a), the tax of husband
and wife in the case of a joint return, or the tax of a surviving
spouse, is as follows:
(i) First, the taxable income is reduced by one-half. Second, the
tax is determined as provided by section 1 by using the taxable income
so reduced. Third, the tax so determined, which is the tax that would be
determined if the taxable income were reduced by one-half, is then
multiplied by two to produce the tax imposed in the case of the joint
return or the return of a surviving spouse, subject, however, to the
allowance of any credits against the tax under the provisions of
sections 31 through 38 and the regulations thereunder.
(ii) The limitation under section 1(c) of the tax to an amount not
in excess
[[Page 20]]
of a specified percent of the taxable income for the taxable year is to
be applied before the third step above, that is, the limitation to be
applied upon the tax is determined as the applicable specified percent
of one-half of the taxable income for the taxable year (such one-half of
the taxable income being the actual aggregate taxable income of the
spouses, or the total taxable income of the surviving spouse, as the
case may be, reduced by one-half). For the percent applicable in
determining the limitation of the tax under section 1(c), see Sec. 1.1-
2(a). After such limitation is applied, then the tax so limited is
multiplied by two as provided in section 2(a) (the third step above).
(iii) The following computation illustrates the method of
application of section 2(a) in the determination of the tax of a husband
and wife filing a joint return for the calendar year 1965. If the
combined gross income is $8,200, and the only deductions are the two
exemptions of the taxpayers under section 151(b) and the standard
deduction under section 141, the tax on the joint return for 1965,
without regard to any credits against the tax, is $1,034.20 determined
as follows:
1. Gross income................................. $8,200.00
2. Less:
Standard deduction, section 141............. $820
Deduction for personal exemption, section 1,200 2,020.00
151........................................
-----------------------
3. Taxable income............................... 6,180.00
4. Taxable income reduced by one-half........... 3,090.00
5. Tax computed by the tax table provided under 517.10
section 1(a)(2) ($310 plus 19 percent of excess
over $2,000)...................................
6. Twice the tax in item 5...................... 1,034.20
(b) Taxable years beginning after December 31, 1970. (1) For taxable
years beginning after December 31, 1970, in the case of a joint return
of husband and wife, or the return of a surviving spouse as defined in
section 2(a) of the Code as amended by the Tax Reform Act of 1969, the
tax shall be determined in accordance with the table contained in
section 1(a) of the Code as so amended. For rules relating to the filing
of joint returns of husband and wife see section 6013 as amended and the
regulations thereunder.
(2) The following computation illustrates the method of computing
the tax of a husband and wife filing a joint return for calendar year
1971. If the combined gross income is $8,200, and the only deductions
are the two exemptions of the taxpayers under section 151(b), as
amended, and the standard deduction under section 141, as amended, the
tax on the joint return for 1971, without regard to any credits against
the tax, is $968.46, determined as follows:
1. Gross income................................. $8,200.00
2. Less:
Standard deduction, section 141............... $1,066.00
Deduction for personal exemption, section 151. 1,300.00 2,366.00
-----------------------
3. Taxable income............................... 5,834.00
4. Tax computed by the tax table provided under 968.46
section 1(a) ($620 plus 19 percent of excess
over $4,000)...................................
(3) The limitation under section 1348 with respect to the maximum
rate of tax on earned income shall apply to a married individual only if
such individual and his spouse file a joint return for the taxable year.
(c) Death of a spouse. If a joint return of a husband and wife is
filed under the provisions of section 6013 and if the husband and wife
have different taxable years solely because of the death of either
spouse, the taxable year of the deceased spouse covered by the joint
return shall, for the purpose of the computation of the tax in respect
of such joint return, be deemed to have ended on the date of the closing
of the surviving spouse's taxable year.
(d) Computation of optional tax. For computation of optional tax in
the case of a joint return or the return of a surviving spouse, see
section 3 and the regulations thereunder.
(e) Change in rates. For treatment of taxable years during which a
change in the tax rates occurs see section 21 and the regulations
thereunder.
[T.D. 7117, 36 FR 9398, May 25, 1971]
Sec. 1.2-2 Definitions and special rules.
(a) Surviving spouse. (1) If a taxpayer is eligible to file a joint
return under the Internal Revenue Code of 1954 without regard to section
6013(a) (3) thereof for the taxable year in which his spouse dies, his
return for each of the next 2 taxable years following the year of the
death of the spouse shall be
[[Page 21]]
treated as a joint return for all purposes if all three of the following
requirements are satisfied:
(i) He has not remarried before the close of the taxable year the
return for which is sought to be treated as a joint return, and
(ii) He maintains as his home a household which constitutes for the
taxable year the principal place of abode as a member of such household
of a person who is (whether by blood or adoption) a son, stepson,
daughter, or stepdaughter of the taxpayer, and
(iii) He is entitled for the taxable year to a deduction under
section 151 (relating to deductions for dependents) with respect to such
son, stepson, daughter, or stepdaughter.
(2) See paragraphs (c)(1) and (d) of this section for rules for the
determination of when the taxpayer maintains as his home a household
which constitutes for the taxable year the principal place of abode, as
a member of such household, of another person.
(3) If the taxpayer does not qualify as a surviving spouse he may
nevertheless qualify as a head of a household if he meets the
requirements of Sec. 1.2-2(b).
(4) The following example illustrates the provisions relating to a
surviving spouse:
Example: Assume that the taxpayer meets the requirements of this
paragraph for the years 1967 through 1971, and that the taxpayer, whose
wife died during 1966 while married to him, remarried in 1968. In 1969,
the taxpayer's second wife died while married to him, and he remained
single thereafter. For 1967 the taxpayer will qualify as a surviving
spouse, provided that neither the taxpayer nor the first wife was a
nonresident alien at any time during 1966 and that she (immediately
prior to her death) did not have a taxable year different from that of
the taxpayer. For 1968 the taxpayer does not qualify as a surviving
spouse because he remarried before the close of the taxable year. The
taxpayer will qualify as a surviving spouse for 1970 and 1971, provided
that neither the taxpayer nor the second wife was a nonresident alien at
any time during 1969 and that she (immediately prior to her death) did
not have a taxable year different from that of the taxpayer. On the
other hand, if the taxpayer, in 1969, was divorced or legally separated
from his second wife, the taxpayer will not qualify as a surviving
spouse for 1970 or 1971, since he could not have filed a joint return
for 1969 (the year in which his second wife died).
(b) Head of household. (1) A taxpayer shall be considered the head
of a household if, and only if, he is not married at the close of his
taxable year, is not a surviving spouse (as defined in paragraph (a) of
this section, and (i) maintains as his home a household which
constitutes for such taxable year the principal place of abode, as a
member of such household, of at least one of the individuals described
in subparagraph (3), or (ii) maintains (whether or not as his home) a
household which constitutes for such taxable year the principal place of
abode of one of the individuals described in subparagraph (4).
(2) Under no circumstances shall the same person be used to qualify
more than one taxpayer as the head of a household for the same taxable
year.
(3) Any of the following persons may qualify the taxpayer as a head
of a household:
(i) A son, stepson, daughter, or stepdaughter of the taxpayer, or a
descendant of a son or daughter of the taxpayer. For the purpose of
determining whether any of the stated relationships exist, a legally
adopted child of a person is considered a child of such person by blood.
If any such person is not married at the close of the taxable year of
the taxpayer, the taxpayer may qualify as the head of a household by
reason of such person even though the taxpayer may not claim a deduction
for such person under section 151, for example, because the taxpayer
does not furnish more than half of the support of such person. However,
if any such person is married at the close of the taxable year of the
taxpayer, the taxpayer may qualify as the head of a household by reason
of such person only if the taxpayer is entitled to a deduction for such
person under section 151 and the regulations thereunder. In applying the
preceding sentence there shall be disregarded any such person for whom a
deduction is allowed under section 151 only by reason of section 152(c)
(relating to persons covered by a multiple support agreement).
(ii) Any other person who is a dependent of the taxpayer, if the
taxpayer is entitled to a deduction for the taxable year for such person
under section 151 and paragraphs (3) through (8) of section 152(a) and
the regulations
[[Page 22]]
thereunder. Under section 151 the taxpayer may be entitled to a
deduction for any of the following persons:
(a) His brother, sister, stepbrother, or stepsister;
(b) His father or mother, or an ancestor of either;
(c) His stepfather or stepmother;
(d) A son or a daughter of his brother or sister;
(e) A brother or sister of his father or mother; or
(f) His son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother- in-law, or sister-in-law;
if such person has a gross income of less than the amount determined
pursuant to Sec. 1.151-2 applicable to the calendar year in which the
taxable year of the taxpayer begins, if the taxpayer supplies more than
one-half of the support of such person for such calendar year and if
such person does not make a joint return with his spouse for the taxable
year beginning in such calendar year. The taxpayer may not be considered
to be a head of a household by reason of any person for whom a deduction
is allowed under section 151 only by reason of sections 152 (a)(9), 152
(a)(10), or 152(c) (relating to persons not related to the taxpayer,
persons receiving institutional care, and persons covered by multiple
support agreements).
(4) The father or mother of the taxpayer may qualify the taxpayer as
a head of a household, but only if the taxpayer is entitled to a
deduction for the taxable year for such father or mother under section
151 (determined without regard to section 152(c)). For example, an
unmarried taxpayer who maintains a home for his widowed mother may not
qualify as the head of a household by reason of his maintenance of a
home for his mother if his mother has gross income equal to or in excess
of the amount determined pursuant to Sec. 1.151-2 applicable to the
calendar year in which the taxable year of the taxpayer begins, or if he
does not furnish more than one-half of the support of his mother for
such calendar year. For this purpose, a person who legally adopted the
taxpayer is considered the father or mother of the taxpayer.
(5) For the purpose of this paragraph, the status of the taxpayer
shall be determined as of the close of the taxpayer's taxable year. A
taxpayer shall be considered as not married if at the close of his
taxable year he is legally separated from his spouse under a decree of
divorce or separate maintenance, or if at any time during the taxable
year the spouse to whom the taxpayer is married at the close of his
taxable year was a nonresident alien. A taxpayer shall be considered
married at the close of his taxable year if his spouse (other than a
spouse who is a nonresident alien) dies during such year.
(6) If the taxpayer is a nonresident alien during any part of the
taxable year he may not qualify as a head of a household even though he
may comply with the other provisions of this paragraph. See the
regulations prescribed under section 871 for a definition of nonresident
alien.
(c) Household. (1) In order for a taxpayer to be considered as
maintaining a household by reason of any individual described in
paragraph (a)(1) or (b)(3) of this section, the household must actually
constitute the home of the taxpayer for his taxable year. A physical
change in the location of such home will not prevent a taxpayer from
qualifying as a head of a household. Such home must also constitute the
principal place of abode of at least one of the persons specified in
such paragraph (a)(1) or (b)(3) of this section. It is not sufficient
that the taxpayer maintain the household without being its occupant. The
taxpayer and such other person must occupy the household for the entire
taxable year of the taxpayer. However, the fact that such other person
is born or dies within the taxable year will not prevent the taxpayer
from qualifying as a head of household if the household constitutes the
principal place of abode of such other person for the remaining or
preceding part of such taxable year. The taxpayer and such other person
will be considered as occupying the household for such entire taxable
year notwithstanding temporary absences from the household due to
special circumstances. A nonpermanent failure to occupy the common abode
by reason of illness, education, business, vacation, military service,
or a custody agreement under
[[Page 23]]
which a child or stepchild is absent for less than 6 months in the
taxable year of the taxpayer, shall be considered temporary absence due
to special circumstances. Such absence will not prevent the taxpayer
from being considered as maintaining a household if (i) it is reasonable
to assume that the taxpayer or such other person will return to the
household, and (ii) the taxpayer continues to maintain such household or
a substantially equivalent household in anticipation of such return.
(2) In order for a taxpayer to be considered as maintaining a
household by reason of any individual described in paragraph (b)(4) of
this section, the household must actually constitute the principal place
of abode of the taxpayer's dependent father or mother, or both of them.
It is not, however, necessary for the purposes of such subparagraph for
the taxpayer also to reside in such place of abode. A physical change in
the location of such home will not prevent a taxpayer from qualifying as
a head of a household. The father or mother of the taxpayer, however,
must occupy the household for the entire taxable year of the taxpayer.
They will be considered as occupying the household for such entire year
notwithstanding temporary absences from the household due to special
circumstances. For example, a nonpermanent failure to occupy the
household by reason of illness or vacation shall be considered temporary
absence due to special circumstances. Such absence will not prevent the
taxpayer from qualifying as the head of a household if (i) it is
reasonable to assume that such person will return to the household, and
(ii) the taxpayer continues to maintain such household or a
substantially equivalent household in anticipation of such return.
However, the fact that the father or mother of the taxpayer dies within
the year will not prevent the taxpayer from qualifying as a head of a
household if the household constitutes the principal place of abode of
the father or mother for the preceding part of such taxable year.
(d) Cost of maintaining a household. A taxpayer shall be considered
as maintaining a household only if he pays more than one-half the cost
thereof for his taxable year. The cost of maintaining a household shall
be the expenses incurred for the mutual benefit of the occupants thereof
by reason of its operation as the principal place of abode of such
occupants for such taxable year. The cost of maintaining a household
shall not include expenses otherwise incurred. The expenses of
maintaining a household include property taxes, mortgage interest, rent,
utility charges, upkeep and repairs, property insurance, and food
consumed on the premises. Such expenses do not include the cost of
clothing, education, medical treatment, vacations, life insurance, and
transportation. In addition, the cost of maintaining a household shall
not include any amount which represents the value of services rendered
in the household by the taxpayer or by a person qualifying the taxpayer
as a head of a household or as a surviving spouse.
(e) Certain married individuals living apart. For taxable years
beginning after December 31, 1969, an individual who is considered as
not married under section 143(b) shall be considered as not married for
purposes of determining whether he or she qualifies as a single
individual, a married individual, a head of household or a surviving
spouse under sections 1 and 2 of the Code.
[T.D. 7117, 36 FR 9398, May 25, 1971]
Sec. 1.3-1 Application of optional tax.
(a) General rules. (1) For taxable years ending before January 1,
1970, an individual whose adjusted gross income is less than $5,000 (or
a husband and wife filing a joint return whose combined adjusted gross
income is less than $5,000) may elect to pay the tax imposed by section
3 in place of the tax imposed by section 1 (a) or (b). For taxable years
beginning after December 31, 1969 and before January 1, 1971 an
individual whose adjusted gross income is less than $10,000 (or a
husband and wife filing a joint return whose combined adjusted gross
income is less than $10,000) may elect to pay the tax imposed by section
3 as amended by the Tax Reform Act of 1969 in place of the tax imposed
by section 1 (a) or (b). For taxable years beginning after December 31,
1970 an individual whose adjusted gross income is less than $10,000
[[Page 24]]
(or a husband and wife filing a joint return whose combined adjusted
gross income is less than $10,000) may elect to pay the tax imposed by
section 3 as amended in place of the tax imposed by section 1 as
amended. See Sec. 1.4-2 for the manner of making such election. A
taxpayer may make such election regardless of the sources from which his
income is derived and regardless of whether his income is computed by
the cash method or the accrual method. See section 62 and the
regulations thereunder for the determination of adjusted gross income.
For the purpose of determining whether a taxpayer may elect to pay the
tax under section 3, the amount of the adjusted gross income is
controlling, without reference to the number of exemptions to which the
taxpayer may be entitled. See section 4 and the regulations thereunder
for additional rules applicable to section 3.
(2) The following examples illustrate the rule that section 3
applies only if the adjusted gross income is less than $10,000 ($5,000
for taxable years ending before January 1, 1970).
Example 1. A is employed at a salary of $9,200 for the calendar year
1970. In the course of such employment, he incurred travel expenses of
$1,500 for which he was reimbursed during the year. Such items
constitute his sole income for 1970. In such case the gross income is
$10,700 but the amount of $1,500 is deducted from gross income in the
determination of adjusted gross income and thus A's adjusted gross
income for 1970 is $9,200. Hence, the adjusted gross income being less
than $10,000, he may elect to pay his tax for 1970 under section 3.
Similarly, in the case of an individual engaged in trade or business
(excluding from the term ``engaged in trade or business'' the
performance of personal services as an employee), there may be deducted
from gross income in ascertaining adjusted gross income those expenses
directly relating to the carrying on of such trade or business.
Example 2. If B has, as his only income for 1970, a salary of
$11,600 and his spouse has no gross income, then B's adjusted gross
income is $11,600 (not $11,600 reduced by exemptions of $1,250) and he
is not for such year, entitled to pay his tax under section 3. If,
however, B has for 1970 a salary of $13,000 and incident to his
employment he incurs expenses in the amount of $3,400 for travel, meals,
and lodging while away from home, for which he is not reimbursed, the
adjusted gross income is $13,000 minus $3,400 or $9,600. In such case
his adjusted gross income being less than $10,000, B may elect to pay
the tax under section 3. However, if B's wife has adjusted gross income
of $400, the total adjusted gross income is $10,000. In such case, if B
and his wife file a joint return, they may not elect to pay the optional
tax since the combined adjusted gross income is not less than $10,000. B
may nevertheless elect to pay the optional tax, but if he makes this
election he must file a separate return and, since his wife has gross
income, he may not claim an exemption for her in computing the optional
tax.
(b) Surviving spouse. The return of a surviving spouse is treated as
a joint return for purposes of section 3. See section 2, and the
regulations thereunder, with respect to the qualifications of a taxpayer
as a surviving spouse. Accordingly, if the taxpayer qualifies as a
surviving spouse and elects to pay the optional tax, he shall use the
column in the tax table, appropriate to his number of exemptions,
provided for cases in which a joint return is filed.
(c) Use of tax table. (1) To determine the amount of the tax, the
individual ascertains the amount of his adjusted gross income, refers to
the appropriate table set forth in section 3 or the regulations
thereunder, ascertains the income bracket into which such income falls,
and, using the number of exemptions applicable to his case, finds the
tax in the vertical column having at the top thereof a number
corresponding to the number of exemptions to which the taxpayer is
entitled.
(2) Section 3(b) (relating to taxable years beginning after Dec. 31,
1964 and ending before Jan. 1, 1970) contains 5 tables for use in
computing the tax. Table I is to be used by a single person who is not a
head of household. Table II is to be used by a head of household. Table
III is to be used by married persons filing joint returns and by a
surviving spouse. Table IV is to be used by married persons filing
separate returns using the 10 percent standard deduction. Table V is to
be used by married persons filing separate returns using the minimum
standard deduction. For an explanation of the standard deduction see
section 141 and the regulations thereunder.
(3) 30 tables are provided for use in computing the tax under the
Tax Reform Act of 1969. Tables I through XV
[[Page 25]]
apply for taxable years beginning after December 31, 1969 and ending
before January 1, 1971. Tables XVI through XXX apply for taxable years
beginning after December 31, 1970. The standard deduction for Tables I
through XV, applicable to taxable years beginning in 1970, is 10
percent. The standard deduction for Tables XVI through XXX, applicable
to taxable years beginning in 1971, is 13 percent. For an explanation of
the standard deduction and the low income allowance see section 141 as
amended by the Tax Reform Act of 1969.
(4) In the case of married persons filing separate returns who
qualify to use the optional tax imposed by section 3, such persons shall
use the tax imposed by the table for the applicable year in accordance
with the rules prescribed by sections 4(c) and 141 and the regulations
thereunder governing the use and application of the standard deduction
and the low income allowance.
(5) The tax shown in the tax tables set forth in section 3 or the
regulations thereunder reflects full income splitting in the case of a
joint return (including the return of a surviving spouse) and lesser
income splitting in the case of a head of household. Therefore, it is
possible for the tax shown in the tables relating to joint returns, or
relating to a return of a head of a household, to be lower than that
shown in the table for separate returns even though the amounts of
adjusted gross income and the number of exemptions are the same.
[T.D. 7117, 36 FR 9420, May 25, 1971]
Sec. 1.4-1 Number of exemptions.
(a) For the purpose of determining the optional tax imposed under
section 3, the taxpayer shall use the number of exemptions allowable to
him as deductions under section 151. See sections 151, 152, and 153, and
the regulations thereunder. In general, one exemption is allowed for the
taxpayer; one exemption for his spouse if a joint return is made, or if
a separate return is made by the taxpayer and his spouse has no gross
income for the calendar year in which the taxable year of the taxpayer
begins and is not the dependent of another taxpayer for such calendar
year; and one exemption for each dependent whose gross income for the
calendar year in which the taxable year of the taxpayer begins is less
than the applicable amount determined pursuant to Sec. 1.151-2. No
exemption is allowed for any dependent who has made a joint return with
his spouse for the taxable year beginning in the calendar year in which
the taxable year of the taxpayer begins. The taxpayer may, in certain
cases, be allowed an exemption for a dependent child of the taxpayer
notwithstanding the fact that such child has gross income equal to or in
excess of the amount determined pursuant to Sec. 1.151-2 applicable to
the calendar year in which the taxable year of the taxpayer begins. The
requirements for the allowance of such an exemption are set forth in
paragraph (c) of Sec. 1.152-1. See paragraphs (c) and (d) of Sec.
1.151-1 with respect to additional exemptions for a taxpayer or spouse
who has attained the age 65 years and for a blind taxpayer or blind
spouse
(b) The application of this section may be illustrated by the
following examples:
Example 1. A, a married man whose duties as an employee require
traveling away from his home, has as his sole gross income a salary of
$5,600 for the calendar year 1954. His traveling expenses, including
cost of meals and lodging, amount in such year to $750, and hence, his
adjusted gross income is $4,850. His wife, B, has as her sole income
interest in the amount of $85, and thus the aggregate adjusted gross
income of A and B is $4,935. A has two dependent children neither of
whom has any income. A and B file a joint return for 1954 on Form 1040.
In such case four exemptions are allowable. The adjusted gross income
falls within the tax bracket $4,900-4,950. By referring to such tax
bracket in the tax table in section 3 and to the column headed ``4''
therein, the tax is found to be $407.
Example 2. C, a married man, has as his sole income in 1954 wages of
$4,600, and has two dependent children neither of whom has any income.
His wife, D, has adjusted gross income of $400. C files a separate
return for 1954 and is entitled to claim three exemptions. C's income
falls within the tax bracket $4,600-4,650 and hence, with three
exemptions his tax is $480. No exemption is allowed with respect to
since D has gross income and a joint return was not filed.
Example 3. D, a married man with no dependents, attains the age of
65 on September 1, 1954. The aggregate adjusted gross income of D and
his wife for 1954 is $4,840. D and his
[[Page 26]]
wife file a joint return for 1954 and are entitled to three exemptions,
one for each taxpayer and one additional exemption for D because of his
age. Since the adjusted gross income of D and his wife falls within the
tax bracket $4,800-4,850, the tax on a joint return is $509.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 7114, 36 FR
9018, May 18, 1971]
Sec. 1.4-2 Elections.
(a) Making of election. The election to pay the optional tax imposed
under section 3 shall be made by (1) filing a return on Form 1040A, or
(2) filing a return on Form 1040 and electing in such return, in
accordance with the provisions of section 144 and the regulations
thereunder, to take the standard deduction provided by section 141.
(b) Election under section 3 and election of standard deduction.
Section 144 (a) and the regulations thereunder provide rules for
treating an election to pay the tax under section 3 as an election to
take the standard deduction, and for treating an election to take the
standard deduction as an election to pay the tax under section 3. For
example, if the taxpayer's return shows $5,000 or more of adjusted gross
income and he elects to take the standard deduction, he will be deemed
to have elected to pay the tax under section 3 if it is subsequently
determined that his correct adjusted gross income is less than $5,000.
(c) [Reserved]
(d) Change of election. For rules relating to a change of election
to pay, or not to pay, the optional tax imposed under section 3, see
section 144 (b) and the regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6581, 26 FR
11677, Dec. 6, 1961; T.D. 7269, 38 FR 9295, Apr. 13, 1973]
Sec. 1.4-3 Husband and wife filing separate returns.
(a) In general. If the separate adjusted gross income of a husband
is less than $5,000 and the separate adjusted gross income of his wife
is less than $5,000, and if each is required to file a return, the
husband and the wife must each elect to pay the optional tax imposed
under section 3 or neither may so elect. If the separate adjusted gross
income of each spouse is $5,000 or more, then neither spouse can elect
to pay the optional tax imposed under section 3. If the adjusted gross
income of one spouse is $5,000 or more and that of the other spouse is
less than $5,000, the election to pay the optional tax imposed under
section 3 may be exercised by the spouse having adjusted gross income of
less than $5,000 only if the spouse having adjusted gross income of
$5,000 or more, in computing taxable income, uses the standard deduction
provided by section 141. If the spouse having adjusted gross income of
$5,000 or more does not use the standard deduction, then the spouse
having adjusted gross income of less than $5,000 may not elect to pay
the optional tax and must compute taxable income without regard to the
standard deduction. Accordingly, if the spouse having adjusted gross
income of $5,000 or more itemizes the deductions allowed by sections 161
and 211 in computing taxable income, the spouse having adjusted gross
income of less than $5,000 must also compute taxable income by itemizing
the deductions allowed by sections 161 and 211, and must pay the tax
imposed by section 1. For rules relative to the election to take the
standard deduction by husband and wife, see part IV (section 141 and
following), subchapter B, chapter 1 of the Code, and the regulations
thereunder.
(b) Taxable years beginning after December 31, 1963, and before
January 1, 1970. (1) In the case of a husband and wife filing a separate
return for a taxable year beginning after December 31, 1963, and before
January 1, 1970, the optional tax imposed by section 3 shall be--
(i) For taxable years beginning in 1964, the lesser of the tax shown
in Table IV (relating to the 10-percent standard deduction for married
persons filing separate returns) or Table V (relating to the minimum
standard deduction for married persons filing separate returns) of
section 3(a), and
(ii) For a taxable year beginning after December 31, 1964, and
before January 1, 1970, the lesser of the tax shown in Table IV
(relating to the 10-percent standard deduction for married persons
filing separate returns) or Table V (relating to minimum standard
deduction for married persons filing separate returns) of section 3(b).
[[Page 27]]
(2) If the tax of one spouse is determined with regard to the 10-
percent standard deduction provided for in Table IV of section 3(a) or
3(b) or if such spouse in computing taxable income uses the 10-percent
standard deduction provided for in section 141(b), then the minimum
standard deduction provided for in Table V of section 3(a) or 3(b) shall
not apply in the case of the other spouse, if such spouse elects to pay
the optional tax imposed under section (3). Thus, if a husband and wife
compute their tax with reference to the standard deduction, one cannot
elect to use the 10-percent standard deduction and the other elect to
use the minimum standard deduction. However, an individual described in
section 141(d)(2) may elect pursuant to such section and the regulations
thereunder to pay the tax shown in Table V of section 3(a) or 3(b) in
lieu of the tax shown in Table IV of section 3(a) or 3(b). See section
141(d) and the regulations thereunder for rules relating to the standard
deduction in the case of married individuals filing separate returns.
(c) Taxable years beginning after December 31, 1969. (1) In the case
of a husband and wife filing a separate return for a taxable year
beginning after December 31, 1969, the optional tax imposed by section 3
shall be the lesser of the tax shown in--
(i) The table prescribed under section 3 applicable to such taxable
year in the case of married persons filing separate returns which
applies the percentage standard deduction, or
(ii) The table prescribed under section 3 applicable to such taxable
year in the case of married persons filing separate returns which
applies the low income allowance.
(2) If the tax of one spouse is determined by the table described in
subparagraph (1)(i) of this paragraph or if such spouse in computing
taxable income uses the percentage standard deduction provided for in
section 141(b), then the table described in subparagraph (1)(ii) of this
paragraph shall not apply in the case of the other spouse, if such other
spouse elects to pay the optional tax imposed under section 3. Thus, if
a husband and wife compute the tax with reference to the standard
deduction, one cannot elect to use the percentage standard deduction and
the other elect to use the low income allowance. A married individual
described in section 141(d)(2) may elect pursuant to such section and
the regulations thereunder to pay the tax shown in the table described
by subparagraph (1)(ii) of this paragraph in lieu of the tax shown in
the table described by subparagraph (1)(i) of this paragraph. See
section 141(d) and the regulations thereunder for rules relating to the
standard deduction in the case of married individuals filing separate
returns.
(d) Determination of marital status. For the purpose of applying the
restrictions upon the right of a married person to elect to pay the tax
under section 3, (1) the determination of marital status is made as of
the close of the taxpayer's taxable year or, if his spouse died during
such year, as of the date of death; (2) a person legally separated from
his spouse under a decree of divorce or separate maintenance on the last
day of his taxable year (or the date of death of his spouse, whichever
is applicable) is not considered as married; and (3) with respect to
taxable years beginning after December 31, 1969, a person, although
considered as married within the meaning of section 143(a), is
considered as not married if he lives apart from his spouse and
satisfies the requirements set forth in section 143(b). See section 143
and the regulations thereunder.
[T.D. 6792, 30 FR 529, Jan. 15, 1965, as amended by T.D. 7123, 36 FR
11084, June 9, 1971]
Sec. 1.4-4 Short taxable year caused by death.
An individual making a return for a period of less than 12 months on
account of a change in his accounting period may not elect to pay the
optional tax under section 3. However, the fact that the taxable year is
less than 12 months does not prevent the determination of the tax for
the taxable year under section 3 if the short taxable year results from
the death of the taxpayer.
[[Page 28]]
Tax on Corporations
Sec. 1.11-1 Tax on corporations.
(a) Every corporation, foreign or domestic, is liable to the tax
imposed under section 11 except (1) corporations specifically excepted
under such section from such tax; (2) corporations expressly exempt from
all taxation under subtitle A of the Code (see section 501); and (3)
corporations subject to tax under section 511(a). For taxable years
beginning after December 31, 1966, foreign corporations engaged in trade
or business in the United States shall be taxable under section 11 only
on their taxable income which is effectively connected with the conduct
of a trade or business in the United States (see section 882(a)(1)). For
definition of the terms ``corporations,'' ``domestic,'' and ``foreign,''
see section 7701(a) (3), (4), and (5), respectively. It is immaterial
that a domestic corporation, and for taxable years beginning after
December 31, 1966, a foreign corporation engaged in trade or business in
the United States, which is subject to the tax imposed by section 11 may
derive no income from sources within the United States. The tax imposed
by section 11 is payable upon the basis of the returns rendered by the
corporations liable thereto, except that in some cases a tax is to be
paid at the source of the income. See subchapter A (sections 6001 and
following), chapter 61 of the Code, and section 1442.
(b) The tax imposed by section 11 consists of a normal tax and a
surtax. The normal tax and the surtax are both computed upon the taxable
income of the corporation for the taxable year, that is, upon the gross
income of the corporation minus the deductions allowed by chapter 1 of
the Code. However, the deduction provided in section 242 for partially
tax-exempt interest is not allowed in computing the taxable income
subject to the surtax.
(c) The normal tax is at the rate of 22 percent and is applied to
the taxable income for the taxable year. However, in the case of a
taxable year ending after December 31, 1974, and before January 1, 1976,
the normal tax is at the rate of 20 percent of so much of the taxable
income as does not exceed $25,000 and at the rate of 22 percent of so
much of the taxable income as does exceed $25,000 and is applied to the
taxable income for the taxable year.
(d) The surtax is at the rate of 26 percent and is upon the taxable
income (computed without regard to the deduction, if any, provided in
section 242 for partially tax-exempt interest) in excess of $25,000.
However, in the case of a taxable year ending after December 31, 1974,
and before January 1, 1976, the surtax is upon the taxable income
(computed as provided in the preceding sentence) in excess of $50,000.
In certain circumstances the exemption from surtax may be disallowed in
whole or in part. See sections 269, 1551, 1561, and 1564 and the
regulations thereunder. For purposes of sections 244, 247, 804, 907, 922
and Sec. Sec. 1.51-1 and 1.815-4, when the phrase ``the sum of the
normal tax rate and the surtax rate for the taxable year'' is used in
any such section, the normal tax rate for all taxable years beginning
after December 31, 1963, and ending before January 1, 1976, shall be
considered to be 22 percent.
(e) The computation of the tax on corporations imposed under section
11 may be illustrated by the following example:
Example. The X Corporation, a domestic corporation, has gross income
of $86,000 for the calendar year 1964. The gross income includes
interest of $5,000 on United States obligations for which a deduction
under section 242 is allowable in determining taxable income subject to
the normal tax. It has other deductions of $11,000. The tax of the X
Corporation under section 11 for the calendar year is $28,400 ($15,400
normal tax and $13,000 surtax) computed as follows:
Computation of Normal Tax
Gross income.................................... $86,000
Deductions:
Partially tax-exempt interest................. $5,000
Other......................................... 11,000 16,000
-----------------------
Taxable income.................................. 70,000
Normal tax (22 percent of $70,000).............. 15,400
Computation of Surtax
Taxable income.................................. 70,000
Add: Amount of partially tax-exempt interest 5,000
deducted in computing taxable income...........
-------------
Taxable income subject to surtax................ 75,000
Less: Exemption from surtax..................... 25,000
-------------
Excess of taxable income subject to surtax over 50,000
exemption......................................
Surtax (26 percent of $50,000).................. 13,000
(f) For special rules applicable to foreign corporations engaged in
trade or
[[Page 29]]
business within the United States, see section 882 and the regulations
thereunder. For additional tax on personal holding companies, see part
II (section 541 and following), subchapter G, chapter 1 of the Code, and
the regulations thereunder. For additional tax on corporations
improperly accumulating surplus, see part I (section 531 and following),
subchapter G, chapter 1 of the Code, and the regulations thereunder. For
treatment of China Trade Act corporations, see sections 941 and 942 and
the regulations thereunder. For treatment of Western Hemisphere trade
corporations, see sections 921 and 922 and the regulations thereunder.
For treatment of capital gains and losses, see subchapter P (section
1201 and following), chapter 1 of the Code. For computation of the tax
for a taxable year during which a change in the tax rates occurs, see
section 21 and the regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 7293, 38 FR
32792, Nov. 28, 1973; T.D. 74-13, 41 FR 12639, Mar. 26, 1976]
Changes in Rates During a Taxable Year
Sec. 1.15-1 Changes in rate during a taxable year.
(a) Section 21 applies to all taxpayers, including individuals and
corporations. It provides a general rule applicable in any case where
(1) any rate of tax imposed by chapter 1 of the Code upon the taxpayer
is increased or decreased, or any such tax is repealed, and (2) the
taxable year includes the effective date of the change, except where
that date is the first day of the taxable year. For example, the normal
tax on corporations under section 11(b) was decreased from 30 percent to
22 percent in the case of a taxable year beginning after December 31,
1963. Accordingly, the tax for a taxable year of a corporation beginning
on January 1, 1964, would be computed under section 11(b) at the new
rate without regard to section 21. However, for any taxable year
beginning before January 1, 1964, and ending on or after that date, the
tax would be computed under section 21. For additional circumstances
under which section 21 is not applicable, see paragraph (k) of this
section.
(b) In any case in which section 21 is applicable, a tentative tax
shall be computed by applying to the taxable income for the entire
taxable year the rate for the period within the taxable year before the
effective date of change, and another tentative tax shall be computed by
applying to the taxable income for the entire taxable year the rate for
the period within the taxable year on or after such effective date. The
tax imposed on the taxpayer is the sum of--
(1) An amount which bears the same ratio to the tentative tax
computed at the rate applicable to the period within the taxable year
before the effective date of the change that the number of days in such
period bears to the number of days in the taxable year, and
(2) An amount which bears the same ratio to the tentative tax
computed at the rate applicable to the period within the taxable year on
and after the effective date of the change that the number of days in
such period bears to the number of days in the taxable year.
(c) If the rate of tax is changed for taxable years ``beginning
after'' or ``ending after'' a certain date, the following day is
considered the effective date of the change for purposes of section 21.
If the rate is changed for taxable years ``beginning on or after'' a
certain date, that date is considered the effective date of the change
for purposes of section 21. This rule may be illustrated by the
following examples:
Example 1. Assume that the law provides that a change in a certain
rate of tax shall be effective only with respect to taxable years
beginning after December 31, 1969. The effective date of change for
purposes of section 21 is January 1, 1970, and section 21 must be
applied to any taxable year which begins before and ends on or after
January 1, 1970.
Example 2. Assume that the law provides that a change in a certain
rate of tax shall be applicable only with respect to taxable years
ending after December 31, 1970. For purposes of section 21, the
effective date of change is January 1, 1971, and section 21 must be
applied to any taxable year which begins before and ends on or after
January 1, 1971.
Example 3. Assume that the law provides that a change in a certain
rate of tax shall be effective only with respect to taxable years
beginning on or after January 1, 1971. The effective date of change for
purposes of section 21 is January 1, 1971, and section 21
[[Page 30]]
must be applied to any taxable year which begins before and ends on or
after January 1, 1971.
(d) If a tax is repealed, the repeal will be treated as a change of
rate for purposes of section 21, and the rate for the period after the
repeal (for purposes of computing the tentative tax with respect to that
period) will be considered zero. For example, the Tax Reform Act of 1969
repealed section 1562, which imposed a 6 percent additional tax on
controlled corporations electing multiple surtax exemptions, effective
for taxable years beginning after December 31, 1974. For such controlled
corporations having taxable years beginning in 1974 and ending in 1975,
the rate for the period ending before January 1, 1975, would be 6
percent; the rate for the period beginning after December 31, 1974,
would be zero. However, subject to the rules stated in this section,
section 21 does not apply to the imposition of a new tax. For example,
if a new tax is imposed for taxable years beginning on or after July 1,
1972, a computation under section 21 would not be required with respect
to such new tax in the case of taxable years beginning before July 1,
1972, and ending on or after that date. If the effective date of the
imposition of a new tax and the effective date of a change in rate of
such tax fall in the same taxable year, section 21 is not applicable in
computing the taxpayer's liability for such tax for such year unless the
new tax is expressly imposed upon the taxpayer for a portion of his
taxable year prior to the change in rate.
(e) If a husband and wife have different taxable years because of
the death of either spouse, and if a joint return is filed with respect
to the taxable year of each, then, for purposes of section 21, the joint
return shall be treated as if the taxable years of both spouses ended on
the date of the closing of the surviving spouse's taxable year. See
section 6013 (c), relating to treatment of joint return after death of
either spouse. Accordingly, if a change in the rate of tax is effective
during the taxable year of the surviving spouse, the tentative taxes
with respect to the joint return shall be computed on the basis of the
number of days during which each rate of tax was in effect for the
taxable year of the surviving spouse.
(f) Section 21 applies whether or not the taxpayer has a taxable
year of less than 12 months. Moreover, section 21 applies whether or not
the taxable income for a taxable year of less than 12 months is required
to be placed on an annual basis under section 443. If the taxable income
is required to be computed under section 443(b) then the tentative taxes
under section 21 are computed as provided in paragraph (1) or (2) of
section 443(b) and are reduced as provided in those paragraphs. The
tentative taxes so computed and reduced are then apportioned as provided
in section 21(a)(2) to determine the tax for such taxable year as
computed under section 21.
(g) If a taxpayer has made the election under section 441(f)
(relating to computation of taxable income on the basis of an annual
accounting period varying from 52 to 53 weeks), the rules provided in
section 441(f)(2) shall be applicable for purposes of determining
whether section 21 applies to the taxable year of the taxpayer. Where a
taxpayer has made the election under section 441(f) and where section 21
applies to the taxable year of the taxpayer the computation under
section 21(a)(2) shall be made upon the basis of the actual number of
days in the taxable year and in each period thereof.
(h)(1) Section 21 is applicable only if the rate of tax imposed by
chapter 1 changes. Sections in which rates of tax are specified or
incorporated by reference include the following: 1, 2, 3, 11, 511, 531,
541, 821, 831, 871, 881, 1201, and 1348 (for taxable years beginning
after December 31, 1970). Except as provided in subparagraph (3) of this
paragraph, section 21 is not applicable with respect to changes in the
law relating to deductions from gross income, exclusions from or
inclusions in gross income, or other items taken into account in
determining the amount or character of income subject to tax. Moreover,
section 21 is not applicable with respect to changes in the law relating
to credits against the tax or with respect to changes in the law
relating to limitations on the amount of tax. Section 21 is applicable,
however, to all those computations specified in
[[Page 31]]
the section providing the rate of tax which are implicit in determining
the rate. For example, if one of the tax brackets in the tax tables
under section 3 were to be changed, section 21 would be applicable to
that change. Thus, if the bracket relating to ``at least $4,200 but not
less than $4,250'' for heads of households should be changed to increase
or decrease the last sum specified, with corresponding changes being
made in subsequent brackets, section 21 would be applicable. The
enactment of sections 1561 and 1562 is considered a change in section
11(d) which constitutes a change in rate for the period ending after
December 31, 1963. The amendment of section 1561 and the repeal of
section 1562 by the Tax Reform Act of 1969 is considered a change in
section 11(d) which constitutes a change in rate for the period ending
after December 31, 1974. The repeal of the 2 percent additional tax
imposed under section 1503 on corporations filing consolidated returns
constitutes a change in rate for the period ending after December 31,
1963. The addition to the Code of section 1348 (relating to 50 percent
maximum rate on earned income) is a change in rate to which section
21(a) is applicable. The amendment of section 11(d) by the Tax Reduction
Act of 1975 which increases to $50,000 the surtax exemption for a
taxable year ending during 1975 constitutes a change in rate for such
portion of the taxable year (if less than the entire taxable year) as
follows December 31, 1974. Similarly, the return of the surtax exemption
to $25,000 for a taxable year ending during 1976 constitutes a change in
rate for such portion of the taxable year (if less than the entire
taxable year) as follows December 31, 1975.
(2) Ordinarily, both the old and the new rates are applied to the
same amount of taxable income. However, where the rate of tax is itself
taken into account in determining taxable income (for example, the
special deduction for Western Hemisphere trade corporations under
section 922), the taxable income used in determining the tentative tax
employing the rate before the effective date of change shall be
determined by reference to that rate of tax, and the taxable income for
the purpose of determining the tentative tax employing the rate for the
period on and after the effective date of the change shall be determined
by reference to the new tax rate.
(3) Section 21 is applicable with respect to changes in the law
relating to the standard deduction for individuals provided in part IV
of subchapter B and to the deduction for personal exemptions for
individuals provided in part V of subchapter B.
(i) If the rate of tax changes more than once during the taxable
year, section 21 is applicable to each change in rate. For example, if
the rate of normal tax changed for taxable years beginning on or after
March 1, 1954, and changed again for taxable years beginning on or after
June 1, 1954, section 21 requires computation of 3 tentative taxes for
any taxable year which began before March 1, 1954, and ended on or after
June 1, 1954: One tentative tax at the rate in effect before the March 1
change; another tentative tax at the rate in effect from March 1 to May
31; and a third tentative tax at the rate in effect from June 1 to the
end of the taxable year. The proportion of each such tentative tax taken
into account in determining the tax imposed on the taxpayer is computed
by reference to the portion of the taxable year before March 1, 1954, by
reference to the portion of the taxable year from March 1, 1954, through
May 31, 1954, and by reference to the portion of the taxable year from
June 1, 1954, to the end of the taxable year, respectively.
(j)(1) If a change in the rate of one tax imposed by chapter 1 of
the Code does not affect the amount of other taxes imposed by chapter 1
of the Code the other taxes may be determined without regard to section
21 and section 21 will be applied only to the tax for which a change in
rate is made. However, if the change of rate of one tax does affect the
amount of other taxes imposed under chapter 1 of the Code, then the
computation of the taxes under chapter 1 of the Code so affected shall
be made by applying section 21. For example, if section 1201 applies to
an individual taxpayer for a taxable year containing the effective date
of a change in a rate of tax provided in section 1, then under section
[[Page 32]]
21 the taxpayer must compute a tentative tax for each period for which a
different rate of tax is effective under section 1. The tentative tax
for each such period as computed under section 1201 will reflect the
rate of tax provided by section 1 for such period.
(2) In certain cases chapter 1 of the Code provides that the
particular tax to be imposed upon the taxpayer shall be one of several
taxes, the basis of selection being the tax that is greater or lesser.
See, for example, sections 821 and 1201. If in any such case the rate of
any one of these taxes changes, then the tentative taxes computed as
provided by section 21 for each period shall be computed employing the
tax selected in accordance with the general rule of selection for such a
case, at the rate of tax in effect for such period. Thus, if a change in
the rate of the alternative tax under section 1201 is such that the
alternative tax under section 1201 is applicable if the old rate is used
and is not applicable if the new rate is used, one tentative tax will
consist of the alternative tax under section 1201 and the other
tentative tax will consist of the tax imposed by the other applicable
sections of chapter 1 of the Code. The two tentative taxes so computed
are then prorated in accordance with section 21(a)(2) and the sum of the
proportionate amounts is the tax imposed for the taxable year under
chapter 1 of the Code. See the examples in paragraph (n) of this
section.
(k) Section 21 does not apply in the following situations:
(1) The provisions of section 21 do not apply to the imposition of
the tax surcharge by section 51. The proration rules of section 51(a)
apply in the case of a taxable year ending on or after the effective
date of the surcharge and beginning before July 1, 1970.
(2) The provisions of section 21 do not apply to the imposition of
the minimum tax for tax preferences by section 56. The proration rules
of section 301(c) of the Tax Reform Act of 1969 (83 Stat. 586) apply in
the case of a taxable year beginning in 1969 and ending in 1970.
(l) In computing the number of days each rate of tax is in effect
during the taxable year for purposes of section 21(a)(2), the effective
date of the change in rate shall be counted in the period for which the
new rate is in effect.
(m) Any credits against tax, and any limitation in any credit
against tax, shall be based upon the tax computed under section 21. For
credits against tax, see part IV (section 31 and following), subchapter
A, chapter 1 of the Code.
(n) The application of section 21 may be illustrated by the
following examples: (See also the examples in Sec. 1.1561-2A(a)(3).)
Example 1. A, a married taxpayer filing a joint return, reports his
income on the basis of a fiscal year ending June 30. For his fiscal year
ending June 30, 1970, A reports taxable income (exclusive of capital
gains and losses) of $50,000 and net long-term capital gain (section
1201 gain (net capital gain for taxable years beginning after December
31, 1976)) of $75,000. The rate of tax on capital gains under section
1201(b) relating to the alternative tax has been increased from 25
percent to a maximum rate of 29\1/2\ percent with respect to gain in
excess of $50,000 and the effective date of the change in rate is
January 1, 1970. The income tax for the taxable year ended June 30,
1970, would be computed under section 21 as follows:
Tentative Tax
Taxable income exclusive of capital $50,000
gains and losses...................
Long-term capital gain.............. 75,000
-------------
125,000
Deduct 50% of long-term capital gain 37,500
-------------
Taxable income................ 87,500
=============
Tax under section 1 (1969 and 1970 37,690
rates).............................
=============
Alternative Tax Under Section 1201(b) (1969 Rates)
Taxable income ($50,000+50% of $87,500
$75,000)...........................
Less 50% of long-term capital gain.. 37,500
-------------
Taxable income exclusive of capital 50,000
gains..............................
=============
Partial tax (tax on $50,000)........ 17,060
Plus 25% of $75,000................. 18,750
-------------
Alternative tax under section 35,810
1201(b) at 1969 rates..............
[[Page 33]]
Alternative Tax Under Section 1201(b) (1970 Rates)
step i
Taxable income ($50,000 + 50% of $87,500
$75,000)...........................
Deduct 50% of net section 1201 gain 37,500
(net capital gain for taxable years
beginning after December 31, 1976).
------------
50,000
============
Tax on $50,000 (taxable income .......... $17,060
exclusive of capital gains)........
step ii
(a) Net section 1201 gain (net 75,000
capital gain for taxable years
beginning after December 31, 1976).
(b) Subsection (d) gain............. 50,000
25% of $50,000 (lesser of (a) or .......... 12,500
(b))...............................
step iii
(c) 29\1/2\% of $25,000 (excess of 7,375
(a) over (b))......................
============
(d) Ordinary income................. $50,000
50% of net section 1201 gain (net 37,500
capital gain for taxable years
beginning after December 31, 1976).
------------
87,500
============
Tax on $87,500...................... $37,690
Ordinary income..................... $50,000
50% of subsection (d) gain.......... 25,000
------------
75,000
============
Tax on $75,000...................... 30,470
------------
Difference.......................... 7,220
============
Lesser of (c) or (d)................ $7,220
-------------
Alternative tax (total of 3 steps) 36,780
at rates effective on and after
January 1, 1970....................
=============
Since the alternative tax is less than the tax imposed under section 1
for both the period in 1969 and the period in 1970, the alternative tax
applies for both periods. Thus, since the effective date of the change
in the rate of tax on capital gains is January 1, 1970, the old rate of
alternative tax is effective for 184 days of the taxable year and the
new rate of alternative tax is effective for 181 days of the taxable
year. The alternative taxes are apportioned as follows:
1969--184/365 of $35,810.................................... $18,052.16
1970--181/365 of $36,780.................................... 18,238.85
-----------
36,291.01
Tax surcharge (See Sec. 1.51-1(d)(1)(i)).................. 2,729.28
-----------
Total tax for the taxable year........................ 39,020.29
Example 2. B, a single individual not a head of a household, has a
taxable year ending March 31. For the taxable year ending March 31,
1971, B has adjusted gross income of $18,500. His computation of the tax
imposed is as follows:
1970 Tentative Tax
Adjusted gross income........................... $18,500.00
Less:
Standard deduction.......................... $1,000.00
Personal exemption.......................... 625.00 1,625.00
-----------------------
Taxable income under 1970 deduction provisions.. 16,875.00
=============
Tax on $16,875 (1970 rates):
Tax on first $16,000.......................... 4,330.00
42 percent of $875............................ 367.50
------------
Tentative tax at rates and deduction provisions 4,697.50
effective on or after January 1, 1970..........
=============
1971 Tentative Tax
Adjusted gross income........................... $18,500.00
Less:
Standard deduction.......................... $1,500
Personal exemption.......................... 650 2,150.00
-----------------------
Taxable income under 1971 deduction provisions.. 16,350.00
=============
Tax on $16,350 (1971 rates):
Tax on first $16,000.......................... 3,830
34 percent of $350............................ 119
------------
Tentative tax at rates and deduction provisions 3,949.00
effective on or after Januray 1, 1971..........
=============
The 1970 and 1971 tentative taxes are
apportioned as follows:
1970--275/365 of $4,697.50.................... 3,539.21
1971--90/365 of $3,949.00..................... 973.73
-------------
4,512.94
Tax surcharge (see Sec. 1.51-1(d)(1)(i))...... 56.26
-------------
Total tax for the taxable year................. 4,569.20
=============
Example 3. H and W, husband and wife, have a foster child, C, who
qualifies as a dependent under section 152(b)(2) for the period
beginning after December 31, 1969. H and W file a joint return on the
basis of a taxable year ending August 31. For the taxable year ending
August 31, 1970, H and W have adjusted gross income of $12,500. Their
computation of the tax imposed is as follows:
1969 Tentative Tax
Adjusted gross income........................... $12,500.00
[[Page 34]]
Less:
Standard deduction............................. $1,000.00
Personal exemption (2)......................... 1,200.00 2,200.00
-----------------------
Taxable income under 1969 deduction provisions.. 10,300.00
=============
Taxable income reduced by one-half.............. .......... 5,150.00
===========
Tax on $5,150 (1969 rates):
Tax on first $4,000........................... $690.00
22 percent of $1,150.......................... 253.00 943.00
-----------------------
Twice the tax on $5,150......................... $1,886.00
============
Tentative tax at rates and deduction provisions 1,886.00
effective on or after January 1, 1969..........
=============
1970 Tentative Tax
Adjusted gross income........................... $12,500.00
Less:
Standard deduction.......................... $1,000.00
Personal exemption (3)...................... 1,875.00 2,875.00
-----------------------
Taxable income under 1970 deduction provisions.. $9,625.00
=============
Tax on $9,625 (1970 rates):
Tax on first $8,000........................... $1,380.00
22 percent of $1,625.......................... 357.50
------------
Tentative tax at rates and deduction provisions 1,737.50
effective on or after January 1, 1970..........
=============
The 1969 and 1970 tentative taxes are
apportioned as follows:
1969--122/365 of $1,886....................... $630.39
1970--243/365 of $1,737.50.................... 1,156.75
-------------
1,787.14
Tax surcharge (see Sec. 1.51-1(d)(1)(i))...... 104.05
-------------
Total tax for the taxable year................ 1,891.19
=============
Example 4. B, a single individual with one exemption, reports his
income on the basis of a fiscal year ending June 30. For fiscal year
ending June 30, 1971, B reports adjusted gross income of $250,000,
consisting of earned net income of $240,000 and investment income of
$10,000. In addition, on April 24, 1971, stock was transferred to B
pursuant to his exercise of a qualified stock option, and the fair
market value of such stock at that time exceeded the option price by
$175,000. This $175,000 constitutes an item of tax preference described
in section 57(a)(6). B claims itemized deductions in the amount of
$34,000. By reason of section 1348, the maximum rate of tax on earned
taxable income for a taxable year beginning after 1970 but before 1972
is 60 percent. The income tax for the taxable year ending June 30, 1971,
would be computed under section 21 as follows:
1970 Tentative Tax
Adjusted gross income................... $250,000.00
Less:
Itemized deductions................. $34,000.00
Personal exemption.................. 625.00 34,625.00
-------------------------------
Taxable income under 1970 deduction 215,375.00
provisions.............................
=================
Tax on $215,375 (1970 rates)
Tax on first $100,000................... $55,490.00
70 percent of $115,375.................. 80,762.50
----------------
Tentative tax at rates and deduction 136,252.50
provisions effective on or after
January 1, 1970........................
=================
Minimum tax:
Total tax preference items............ 175,000.00
Less:
Exemption........................... $30,000.00
Income tax.......................... 136,252.50 166,252.50
-------------------------------
Subject to 10 percent tax............... 8,747.50
=================
10 percent tax.......................... 874.75
=================
Total tentative tax ($136,252.50 + 137,127.25
$874.75).........................
=================
1971 Tentative Tax
Adjusted gross income................... $250,000.00
Less:
Itemized deductions................. $34,000.00
Personal exemption.................. 650.00 34,650.00
-------------------------------
Taxable income under 1971 deduction 215,350.00
provisions.............................
=================
(a) Tax on highest amount of taxable 20,190.00
income on which rate does not exceed 60
percent ($50,000) (1971 rates).........
(b) Earned taxable
income:
($215,350x
$240,000/
$250,000)............................. $206,736.00
Less: Tax
preference offset:
($175,000
-$30,000)............................... 145,000.00
-----------------
61,736.00
================
(c) 60% of the amount by which $61,736 7,041.60
exceeds $50,000........................
(d) Tax on $215,350 (1971 rates)
Tax on first $100,000................. 53,090.00
70% of $115,350....................... 80,745.00
----------------
Total............................. 133,835.00
================
(e) Tax on $61,736 (1971 rates)
Tax on first $60,000.................. 26,390.00
64% of $1,736......................... 1,111.04
----------------
Total............................. 27,501.04
================
(f) Excess of $133,835 over $27,501.04.. 106,333.96
-----------------
[[Page 35]]
Tentative tax (total of Steps (a), (c), 133,565.56
and (f)) at rates and deduction
provisions effective on or after
January 1, 1971........................
=================
Minimum tax:
Total tax preference items............ 175,000.00
Less:
Exemption........................... $30,000.00
Income tax.......................... 133,565.56 163,565.56
-------------------------------
Subject to 10 percent tax............. $11,434.44
=================
10 percent tax........................ 1,143.44
=================
Total tentative tax ($133,565.56 + 134,709.00
$1,143.44).........................
=================
The 1970 and 1971 tentative taxes are
apportioned as follows:
1970--184/365 of $137,127.25.......... 69,127.16
1971--181/365 of $134,709............. 66,800.90
=================
Total tax for the taxable year...... 135,928.06
=================
Example 5. The surtax exemption of corporation M (one of 4
subsidiary corporations of W corporation), which files its income tax
returns on the basis of a fiscal year ending March 31, 1964, is less
than $25,000, by reason of section 1561 of the Code applicable to
taxable years ending after December 31, 1963, and beginning before
January 1, 1975. The taxable income of corporation M is $100,000, and
the amount of the surtax exemption determined under the new rule for the
1964 taxable year is $5,000 ($25,000/5). M's income tax liability for
the taxable year ending March 31, 1964, is computed as follows:
1963 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1963 rates) 30 $30,000
percent of $100,000....................
Surtax on $75,000 (1963 rates and 16,500
$25,000 surtax exemption) 22 percent of
$75,000................................
-----------------
Total tentative tax at rates and 46,500
surtax exemption effective before
January 1, 1964..................
=================
1964 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1964 rates) 22 $22,000
percent of $100,000....................
Surtax on $95,000 (1964 rates and a 26,600
$5,000 surtax exemption) 28 percent of
$95,000................................
----------------
Total tentative tax at rates and 48,600
surtax exemption effective after
January 1, 1964..................
=================
The 1963 and 1964 tentative taxes are
apportioned as follows:
1963--275/366 of $46,500.............. 34,938.52
1964--91/366 of $48,600............... 12,083.61
-----------------
Total tax for the taxable year.... 47,022.13
=================
M has the same amount of taxable income in 1965. Its income tax
liability for the fiscal year ending March 31, 1965, is computed as
follows:
1964 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1964 rates) 22 $22,000
percent of $100,000....................
Surtax on $95,000 (1964 rates and a 26,600
$5,000 surtax exemption) 28 percent of
$95,000................................
-----------------
Total tentative tax at the 1964 48,600
rates............................
=================
1965 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1965 rates) 22 $22,000
percent of $100,000....................
Surtax on $95,000 (1965 rates and a 24,700
$5,000 surtax exemption) 26 percent of
$95,000................................
----------------
Total tentative tax at the 1965 46,700
rates............................
=================
The 1964 and 1965 tentative taxes are
apportioned as follows:
1964--275/365 of $48,600.............. $36,616.44
1965--90/365 of $46,700............... 11,515.07
-----------------
Total tax for the taxable year.... 48,131.51
=================
Example 6. Assume the same facts as in example (5), except that M
elected the additional tax under section 1562 for its fiscal year ending
March 31, 1964. M's tax liability is completed as follows:
1963 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1963 rates) 30 $30,000
percent of $100,000....................
Surtax on $75,000 (1963 rates and 16,500
$25,000 surtax exemption) 22 percent of
$75,000................................
----------------
[[Page 36]]
Total tentative tax at rates and 46,500
surtax exemption effective before
January 1, 1964..................
=================
1964 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1964 rates) 22 $22,000
percent of $100,000....................
Surtax on $75,000 (1964 rates and 21,000
$25,000 surtax exemption) 28 percent of
$75,000................................
Additional tax on $25,000 6 percent of 1,500
$25,000................................
----------------
Total tentative tax at rates and 44,500
surtax exemption effective on and
after January 1, 1964............
=================
The 1963 and 1964 tentative taxes are
apportioned as follows:
1963--275/366 of $46,500.............. $34,938.52
1964--91/366 of $44,500............... 11,064.21
-----------------
Total tax for the taxable year.... 46,002.73
=================
Example 7. Corporation N files its income tax returns on the basis
of a fiscal year ending June 30. For its taxable year ending in 1976,
the taxable income of N is $100,000. N's income tax liability is
determined for the period July 1, 1975, through December 31, 1975, by
taking into account two rates of normal tax under section 11(b)(2) (A)
and (B) and the increase to $50,000 in the surtax exemption under
section 11(d). For the period January 1, 1976, through June 30, 1976,
N's income tax liability is determined by taking into account the single
normal tax rate under section 11(b)(1) and the $25,000 surtax exemption
under section 11(d). N's tax liability for the taxable year ending June
30, 1976, is computed as follows:
1975 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1975 rates) 20 $5,000
percent of $25,000...................
22 percent of $75,000................. 16,500
Surtax on $50,000 (1975 rates and 13,000
$50,000 surtax exemption) 26 percent
of $50,000...........................
----------------
Total tentative tax at rates and 34,500
surtax exemption effective on and
after January 1, 1975............
=================
1976 Tentative Tax
Taxable income.......................... $100,000
=================
Normal tax on $100,000 (1976 rates) 22 $22,000
percent of $100,000..................
Surtax on $75,000 (1976 rates and 19,500
$25,000 surtax exemption) 26 percent
of $75,000...........................
----------------
Total tentative tax at rates and 41,500
surtax exemption effective on and
after January 1, 1976............
=================
The 1975 and 1976 tentative taxes are
apportioned as follows:
1975--184/366 of $34,500.............. $17,344
1976--182/366 of $41,500.............. 20,637
-----------------
Total tax for the taxable year.... 37,981
(Secs. 1561(a) (83 Stat. 599; 26 U.S.C. 1561(a)) of the Internal Revenue
Code)
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7164, 37 FR 4190, Feb. 29, 1972; T.D. 74-13, 41 FR
12639, Mar. 26, 1976; T.D. 7528, 42 FR 64694, Dec. 28, 1977; T.D. 7728,
45 FR 72651, Nov. 3, 1980. Redesignated by T.D. 9354, 72 FR 45341, Aug.
14, 2007]
Sec. 1.21-1 Expenses for household and dependent care services necessary
for gainful employment.
(a) In general. (1) Section 21 allows a credit to a taxpayer against
the tax imposed by chapter 1 for employment-related expenses for
household services and care (as defined in paragraph (d) of this
section) of a qualifying individual (as defined in paragraph (b) of this
section). The purpose of the expenses must be to enable the taxpayer to
be gainfully employed (as defined in paragraph (c) of this section). For
taxable years beginning after December 31, 2004, a qualifying individual
must have the same principal place of abode (as defined in paragraph (g)
of this section) as the taxpayer for more than one-half of the taxable
year. For taxable years beginning before January 1, 2005, the taxpayer
must maintain a household (as defined in paragraph (h) of this section)
that includes one or more qualifying individuals.
(2) The amount of the credit is equal to the applicable percentage
of the employment-related expenses that may be taken into account by the
taxpayer during the taxable year (but subject to
[[Page 37]]
the limits prescribed in Sec. 1.21-2). Applicable percentage means 35
percent reduced by 1 percentage point for each $2,000 (or fraction
thereof) by which the taxpayer's adjusted gross income for the taxable
year exceeds $15,000, but not less than 20 percent. For example, if a
taxpayer's adjusted gross income is $31,850, the applicable percentage
is 26 percent.
(3) Expenses may be taken as a credit under section 21, regardless
of the taxpayer's method of accounting, only in the taxable year the
services are performed or the taxable year the expenses are paid,
whichever is later.
(4) The requirements of section 21 and Sec. Sec. 1.21-1 through
1.21-4 are applied at the time the services are performed, regardless of
when the expenses are paid.
(5) Examples. The provisions of this paragraph (a) are illustrated
by the following examples.
Example 1. In December 2007, B pays for the care of her child for
January 2008. Under paragraph (a)(3) of this section, B may claim the
credit in 2008, the later of the years in which the expenses are paid
and the services are performed.
Example 2. The facts are the same as in Example 1, except that B's
child turns 13 on February 1, 2008, and B pays for the care provided in
January 2008 on February 3, 2008. Under paragraph (a)(4) of this
section, the determination of whether the expenses are employment-
related expenses is made when the services are performed. Assuming other
requirements are met, the amount B pays will be an employment-related
expense under section 21, because B's child is a qualifying individual
when the services are performed, even though the child is not a
qualifying individual when B pays the expenses.
(b) Qualifying individual--(1) In general. For taxable years
beginning after December 31, 2004, a qualifying individual is--
(i) The taxpayer's dependent (who is a qualifying child within the
meaning of section 152) who has not attained age 13;
(ii) The taxpayer's dependent (as defined in section 152, determined
without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) who is
physically or mentally incapable of self-care and who has the same
principal place of abode as the taxpayer for more than one-half of the
taxable year; or
(iii) The taxpayer's spouse who is physically or mentally incapable
of self-care and who has the same principal place of abode as the
taxpayer for more than one-half of the taxable year.
(2) Taxable years beginning before January 1, 2005. For taxable
years beginning before January 1, 2005, a qualifying individual is--
(i) The taxpayer's dependent for whom the taxpayer is entitled to a
deduction for a personal exemption under section 151(c) and who is under
age 13;
(ii) The taxpayer's dependent who is physically or mentally
incapable of self-care; or
(iii) The taxpayer's spouse who is physically or mentally incapable
of self-care.
(3) Qualification on a daily basis. The status of an individual as a
qualifying individual is determined on a daily basis. An individual is
not a qualifying individual on the day the status terminates.
(4) Physical or mental incapacity. An individual is physically or
mentally incapable of self-care if, as a result of a physical or mental
defect, the individual is incapable of caring for the individual's
hygiene or nutritional needs, or requires full-time attention of another
person for the individual's own safety or the safety of others. The
inability of an individual to engage in any substantial gainful activity
or to perform the normal household functions of a homemaker or care for
minor children by reason of a physical or mental condition does not of
itself establish that the individual is physically or mentally incapable
of self-care.
(5) Special test for divorced or separated parents or parents living
apart--(i) Scope. This paragraph (b)(5) applies to a child (as defined
in section 152(f)(1) for taxable years beginning after December 31,
2004, and in section 151(c)(3) for taxable years beginning before
January 1, 2005) who--
(A) Is under age 13 or is physically or mentally incapable of self-
care;
(B) Receives over one-half of his or her support during the calendar
year from one or both parents who are divorced or legally separated
under a decree of divorce or separate maintenance, are separated under a
written
[[Page 38]]
separation agreement, or live apart at all times during the last 6
months of the calendar year; and
(C) Is in the custody of one or both parents for more than one-half
of the calendar year.
(ii) Custodial parent allowed the credit. A child to whom this
paragraph (b)(5) applies is the qualifying individual of only one parent
in any taxable year and is the qualifying child of the custodial parent
even if the noncustodial parent may claim the dependency exemption for
that child for that taxable year. See section 21(e)(5). The custodial
parent is the parent having custody for the greater portion of the
calendar year. See section 152(e)(4)(A).
(6) Example. The provisions of this paragraph (b) are illustrated by
the following examples.
Example. C pays $420 for the care of her child, a qualifying
individual, to be provided from January 2 through January 31, 2008 (21
days of care). On January 20, 2008, C's child turns 13 years old. Under
paragraph (b)(3) of this section, C's child is a qualifying individual
from January 2 through January 19, 2008 (13 days of care). C may take
into account $260, the pro rata amount C pays for the care of her child
for 13 days, under section 21. See Sec. 1.21-2(a)(4).
(c) Gainful employment--(1) In general. Expenses are employment-
related expenses only if they are for the purpose of enabling the
taxpayer to be gainfully employed. The expenses must be for the care of
a qualifying individual or household services performed during periods
in which the taxpayer is gainfully employed or is in active search of
gainful employment. Employment may consist of service within or outside
the taxpayer's home and includes self-employment. An expense is not
employment-related merely because it is paid or incurred while the
taxpayer is gainfully employed. The purpose of the expense must be to
enable the taxpayer to be gainfully employed. Whether the purpose of an
expense is to enable the taxpayer to be gainfully employed depends on
the facts and circumstances of the particular case. Work as a volunteer
or for a nominal consideration is not gainful employment.
(2) Determination of period of employment on a daily basis--(i) In
general. Expenses paid for a period during only part of which the
taxpayer is gainfully employed or in active search of gainful employment
must be allocated on a daily basis.
(ii) Exception for short, temporary absences. A taxpayer who is
gainfully employed is not required to allocate expenses during a short,
temporary absence from work, such as for vacation or minor illness,
provided that the care-giving arrangement requires the taxpayer to pay
for care during the absence. An absence of 2 consecutive calendar weeks
is a short, temporary absence. Whether an absence longer than 2
consecutive calendar weeks is a short, temporary absence is determined
based on all the facts and circumstances.
(iii) Part-time employment. A taxpayer who is employed part-time
generally must allocate expenses for dependent care between days worked
and days not worked. However, if a taxpayer employed part-time is
required to pay for dependent care on a periodic basis (such as weekly
or monthly) that includes both days worked and days not worked, the
taxpayer is not required to allocate the expenses. A day on which the
taxpayer works at least 1 hour is a day of work.
(3) Examples. The provisions of this paragraph (c) are illustrated
by the following examples:
Example 1. D works during the day and her husband, E, works at night
and sleeps during the day. D and E pay for care for a qualifying
individual during the hours when D is working and E is sleeping. Under
paragraph (c)(1) of this section, the amount paid by D and E for care
may be for the purpose of allowing D and E to be gainfully employed and
may be an employment-related expense under section 21.
Example 2. F works at night and pays for care for a qualifying
individual during the hours when F is working. Under paragraph (c)(1) of
this section, the amount paid by F for care may be for the purpose of
allowing F to be gainfully employed and may be an employment-related
expense under section 21.
Example 3. G, the custodial parent of two children who are
qualifying individuals, hires a housekeeper for a monthly salary to care
for the children while G is gainfully employed. G becomes ill and as a
result is absent from work for 4 months. G continues to pay the
housekeeper to care for the children while G is absent from work. During
this 4-month period, G performs no employment
[[Page 39]]
services, but receives payments under her employer's wage continuation
plan. Although G may be considered to be gainfully employed during her
absence from work, the absence is not a short, temporary absence within
the meaning of paragraph (c)(2)(ii) of this section, and her payments
for household and dependent care services during the period of illness
are not for the purpose of enabling her to be gainfully employed. G's
expenses are not employment-related expenses, and she may not take the
expenses into account under section 21.
Example 4. To be gainfully employed, H sends his child to a
dependent care center that complies with all state and local
requirements. The dependent care center requires payment for days when a
child is absent from the center. H takes 8 days off from work as
vacation days. Because the absence is less than 2 consecutive calendar
weeks, under paragraph (c)(2)(ii) of this section, H's absence is a
short, temporary absence. H is not required to allocate expenses between
days worked and days not worked. The entire fee for the period that
includes the 8 vacation days may be an employment-related expense under
section 21.
Example 5. J works 3 days per week and her child attends a dependent
care center (that complies with all state and local requirements) to
enable her to be gainfully employed. The dependent care center allows
payment for any 3 days per week for $150 or 5 days per week for $250. J
enrolls her child for 5 days per week, and her child attends the care
center for 5 days per week. Under paragraph (c)(2)(iii) of this section,
J must allocate her expenses for dependent care between days worked and
days not worked. Three-fifths of the $250, or $150 per week, may be an
employment-related expense under section 21.
Example 6. The facts are the same as in Example 5, except that the
dependent care center does not offer a 3-day option. The entire $250
weekly fee may be an employment-related expense under section 21.
(d) Care of qualifying individual and household services--(1) In
general. To qualify for the dependent care credit, expenses must be for
the care of a qualifying individual. Expenses are for the care of a
qualifying individual if the primary function is to assure the
individual's well-being and protection. Not all expenses relating to a
qualifying individual are for the individual's care. Amounts paid for
food, lodging, clothing, or education are not for the care of a
qualifying individual. If, however, the care is provided in such a
manner that the expenses cover other goods or services that are
incidental to and inseparably a part of the care, the full amount is for
care.
(2) Allocation of expenses. If an expense is partly for household
services or for the care of a qualifying individual and partly for other
goods or services, a reasonable allocation must be made. Only so much of
the expense that is allocable to the household services or care of a
qualifying individual is an employment-related expense. An allocation
must be made if a housekeeper or other domestic employee performs
household duties and cares for the qualifying children of the taxpayer
and also performs other services for the taxpayer. No allocation is
required, however, if the expense for the other purpose is minimal or
insignificant or if an expense is partly attributable to the care of a
qualifying individual and partly to household services.
(3) Household services. Expenses for household services may be
employment-related expenses if the services are performed in connection
with the care of a qualifying individual. The household services must be
the performance in and about the taxpayer's home of ordinary and usual
services necessary to the maintenance of the household and attributable
to the care of the qualifying individual. Services of a housekeeper are
household services within the meaning of this paragraph (d)(3) if the
services are provided, at least in part, to the qualifying individual.
Such services as are performed by chauffeurs, bartenders, or gardeners
are not household services.
(4) Manner of providing care. The manner of providing care need not
be the least expensive alternative available to the taxpayer. The cost
of a paid caregiver may be an expense for the care of a qualifying
individual even if another caregiver is available at no cost.
(5) School or similar program. Expenses for a child in nursery
school, pre-school, or similar programs for children below the level of
kindergarten are for the care of a qualifying individual and may be
employment-related expenses. Expenses for a child in kindergarten or a
higher grade are not for the care of a qualifying individual. However,
expenses for before- or after-school care of a child in kindergarten
[[Page 40]]
or a higher grade may be for the care of a qualifying individual.
(6) Overnight camps. Expenses for overnight camps are not
employment-related expenses.
(7) Day camps. (i) The cost of a day camp or similar program may be
for the care of a qualifying individual and an employment-related
expense, without allocation under paragraph (d)(2) of this section, even
if the day camp specializes in a particular activity. Summer school and
tutoring programs are not for the care of a qualifying individual and
the costs are not employment-related expenses.
(ii) A day camp that meets the definition of dependent care center
in section 21(b)(2)(D) and paragraph (e)(2) of this section must comply
with the requirements of section 21(b)(2)(C) and paragraph (e)(2) of
this section.
(8) Transportation. The cost of transportation by a dependent care
provider of a qualifying individual to or from a place where care of
that qualifying individual is provided may be for the care of the
qualifying individual. The cost of transportation not provided by a
dependent care provider is not for the care of the qualifying
individual.
(9) Employment taxes. Taxes under sections 3111 (relating to the
Federal Insurance Contributions Act) and 3301 (relating to the Federal
Unemployment Tax Act) and similar state payroll taxes are employment-
related expenses if paid in respect of wages that are employment-related
expenses.
(10) Room and board. The additional cost of providing room and board
for a caregiver over usual household expenditures may be an employment-
related expense.
(11) Indirect expenses. Expenses that relate to, but are not
directly for, the care of a qualifying individual, such as application
fees, agency fees, and deposits, may be for the care of a qualifying
individual and may be employment-related expenses if the taxpayer is
required to pay the expenses to obtain the related care. However,
forfeited deposits and other payments are not for the care of a
qualifying individual if care is not provided.
(12) Examples. The provisions of this paragraph (d) are illustrated
by the following examples:
Example 1. To be gainfully employed, K sends his 3-year old child to
a pre-school. The pre-school provides lunch and snacks. Under paragraph
(d)(1) of this section, K is not required to allocate expenses between
care and the lunch and snacks, because the lunch and snacks are
incidental to and inseparably a part of the care. Therefore, K may treat
the full amount paid to the pre-school as for the care of his child.
Example 2. L, a member of the armed forces, is ordered to a combat
zone. To be able to comply with the orders, L places her 10-year old
child in boarding school. The school provides education, meals, and
housing to L's child in addition to care. Under paragraph (d)(2) of this
section, L must allocate the cost of the boarding school between
expenses for care and expenses for education and other services not
constituting care. Only the part of the cost of the boarding school that
is for the care of L's child is an employment-related expense under
section 21.
Example 3. To be gainfully employed, M employs a full-time
housekeeper to care for M's two children, aged 9 and 13 years. The
housekeeper regularly performs household services of cleaning and
cooking and drives M to and from M's place of employment, a trip of 15
minutes each way. Under paragraph (d)(3) of this section, the chauffeur
services are not household services. M is not required to allocate a
portion of the expense of the housekeeper to the chauffeur services
under paragraph (d)(2) of this section, however, because the chauffeur
services are minimal and insignificant. Further, no allocation under
paragraph (d)(2) of this section is required to determine the portion of
the expenses attributable to the care of the 13-year old child (not a
qualifying individual) because the household expenses are in part
attributable to the care of the 9-year-old child. Accordingly, the
entire expense of employing the housekeeper is an employment-related
expense. The amount that M may take into account as an employment-
related expense under section 21, however, is limited to the amount
allowable for one qualifying individual.
Example 4. To be gainfully employed, N sends her 9-year-old child to
a summer day camp that offers computer activities and recreational
activities such as swimming and arts and crafts. Under paragraph
(d)(7)(i) of this section, the full cost of the summer day camp may be
for care.
Example 5. To be gainfully employed, O sends her 9-year-old child to
a math tutoring program for two hours per day during the summer. Under
paragraph (d)(7)(i) of this section, the cost of the tutoring program is
not for care.
Example 6. To be gainfully employed, P hires a full-time housekeeper
to care for her 8-year old child. In order to accommodate
[[Page 41]]
the housekeeper, P moves from a 2-bedroom apartment to a 3-bedroom
apartment that otherwise is comparable to the 2-bedroom apartment. Under
paragraph (d)(10) of this section, the additional cost to rent the 3-
bedroom apartment over the cost of the 2-bedroom apartment and any
additional utilities attributable to the housekeeper's residence in the
household may be employment-related expenses under section 21.
Example 7. Q pays a fee to an agency to obtain the services of an au
pair to care for Q's children, qualifying individuals, to enable Q to be
gainfully employed. An au pair from the agency subsequently provides
care for Q's children. Under paragraph (d)(11) of this section, the fee
may be an employment-related expense.
Example 8. R places a deposit with a pre-school to reserve a place
for her child. R sends the child to a different pre-school and forfeits
the deposit. Under paragraph (d)(11) of this section, the forfeited
deposit is not an employment-related expense.
(e) Services outside the taxpayer's household--(1) In general. The
credit is allowable for expenses for services performed outside the
taxpayer's household only if the care is for one or more qualifying
individuals who are described in this section at--
(i) Paragraph (b)(1)(i) or (b)(2)(i); or
(ii) Paragraph (b)(1)(ii), (b)(2)(ii), (b)(1)(iii), or (b)(2)(iii)
and regularly spend at least 8 hours each day in the taxpayer's
household.
(2) Dependent care centers--(i) In general. The credit is allowable
for services performed by a dependent care center only if--
(A) The center complies with all applicable laws and regulations, if
any, of a state or local government, such as state or local licensing
requirements and building and fire code regulations; and
(B) The requirements provided in this paragraph (e) are met.
(ii) Definition. The term dependent care center means any facility
that provides full-time or part-time care for more than six individuals
(other than individuals who reside at the facility) on a regular basis
during the taxpayer's taxable year, and receives a fee, payment, or
grant for providing services for the individuals (regardless of whether
the facility is operated for profit). For purposes of the preceding
sentence, a facility is presumed to provide full-time or part-time care
for six or fewer individuals on a regular basis during the taxpayer's
taxable year if the facility has six or fewer individuals (including the
taxpayer's qualifying individual) enrolled for full-time or part-time
care on the day the qualifying individual is enrolled in the facility
(or on the first day of the taxable year the qualifying individual
attends the facility if the qualifying individual was enrolled in the
facility in the preceding taxable year) unless the Internal Revenue
Service demonstrates that the facility provides full-time or part-time
care for more than six individuals on a regular basis during the
taxpayer's taxable year.
(f) Reimbursed expenses. Employment-related expenses for which the
taxpayer is reimbursed (for example, under a dependent care assistance
program) may not be taken into account for purposes of the credit.
(g) Principal place of abode. For purposes of this section, the term
principal place of abode has the same meaning as in section 152.
(h) Maintenance of a household--(1) In general. For taxable years
beginning before January 1, 2005, the credit is available only to a
taxpayer who maintains a household that includes one or more qualifying
individuals. A taxpayer maintains a household for the taxable year (or
lesser period) only if the taxpayer (and spouse, if applicable) occupies
the household and furnishes over one-half of the cost for the taxable
year (or lesser period) of maintaining the household. The household must
be the principal place of abode for the taxable year of the taxpayer and
the qualifying individual or individuals.
(2) Cost of maintaining a household. (i) Except as provided in
paragraph (h)(2)(ii) of this section, for purposes of this section, the
term cost of maintaining a household has the same meaning as in Sec.
1.2-2(d) without regard to the last sentence thereof.
(ii) The cost of maintaining a household does not include the value
of services performed in the household by the taxpayer or by a
qualifying individual described in paragraph (b) of this section or any
expense paid or reimbursed by another person.
(3) Monthly proration of annual costs. In determining the cost of
maintaining a household for a period of less than a
[[Page 42]]
taxable year, the cost for the entire taxable year must be prorated on
the basis of the number of calendar months within that period. A period
of less than a calendar month is treated as a full calendar month.
(4) Two or more families. If two or more families occupy living
quarters in common, each of the families is treated as maintaining a
separate household. A taxpayer is maintaining a household if the
taxpayer provides more than one-half of the cost of maintaining the
separate household. For example, if two unrelated taxpayers with their
respective children occupy living quarters in common and each taxpayer
pays more than one-half of the household costs for each respective
family, each taxpayer is treated as maintaining a household.
(i) Reserved.
(j) Expenses qualifying as medical expenses--(1) In general. A
taxpayer may not take an amount into account as both an employment-
related expense under section 21 and an expense for medical care under
section 213.
(2) Examples. The provisions of this paragraph (j) are illustrated
by the following examples:
Example 1. S has $6,500 of employment-related expenses for the care
of his child who is physically incapable of self-care. The expenses are
for services performed in S's household that also qualify as expenses
for medical care under section 213. Of the total expenses, S may take
into account $3,000 under section 21. S may deduct the balance of the
expenses, or $3,500, as expenses for medical care under section 213 to
the extent the expenses exceed 7.5 percent of S's adjusted gross income.
Example 2. The facts are the same as in Example 1, however, S first
takes into account the $6,500 of expenses under section 213. S deducts
$500 as an expense for medical care, which is the amount by which the
expenses exceed 7.5 percent of his adjusted gross income. S may not take
into account the $6,000 balance as employment-related expenses under
section 21, because he has taken the full amount of the expenses into
account in computing the amount deductible under section 213.
(k) Substantiation. A taxpayer claiming a credit for employment-
related expenses must maintain adequate records or other sufficient
evidence to substantiate the expenses in accordance with section 6001
and the regulations thereunder.
(l) Effective/applicability date. This section and Sec. Sec. 1.21-2
through 1.21-4 apply to taxable years ending after August 14, 2007.
[T.D. 9354, 72 FR 45341, Aug. 14, 2007]
Sec. 1.21-2 Limitations on amount creditable.
(a) Annual dollar limitation. (1) The amount of employment-related
expenses that may be taken into account under Sec. 1.21-1(a) for any
taxable year cannot exceed--
(i) $2,400 ($3,000 for taxable years beginning after December 31,
2002, and before January 1, 2011) if there is one qualifying individual
with respect to the taxpayer at any time during the taxable year; or
(ii) $4,800 ($6,000 for taxable years beginning after December 31,
2002, and before January 1, 2011) if there are two or more qualifying
individuals with respect to the taxpayer at any time during the taxable
year.
(2) The amount determined under paragraph (a)(1) of this section is
reduced by the aggregate amount excludable from gross income under
section 129 for the taxable year.
(3) A taxpayer may take into account the total amount of employment-
related expenses that do not exceed the annual dollar limitation
although the amount of employment-related expenses attributable to one
qualifying individual is disproportionate to the total employment-
related expenses. For example, a taxpayer with expenses in 2007 of
$4,000 for one qualifying individual and $1,500 for a second qualifying
individual may take into account the full $5,500.
(4) A taxpayer is not required to prorate the annual dollar
limitation if a qualifying individual ceases to qualify (for example, by
turning age 13) during the taxable year. However, the taxpayer may take
into account only amounts that qualify as employment-related expenses
before the disqualifying event. See also Sec. 1.21-1(b)(6).
(b) Earned income limitation--(1) In general. The amount of
employment-related expenses that may be taken into account under section
21 for any taxable year cannot exceed--
(i) For a taxpayer who is not married at the close of the taxable
year, the
[[Page 43]]
taxpayer's earned income for the taxable year; or
(ii) For a taxpayer who is married at the close of the taxable year,
the lesser of the taxpayer's earned income or the earned income of the
taxpayer's spouse for the taxable year.
(2) Determination of spouse. For purposes of this paragraph (b), a
taxpayer must take into account only the earned income of a spouse to
whom the taxpayer is married at the close of the taxable year. The
spouse's earned income for the entire taxable year is taken into
account, however, even though the taxpayer and the spouse were married
for only part of the taxable year. The taxpayer is not required to take
into account the earned income of a spouse who died or was divorced or
separated from the taxpayer during the taxable year. See Sec. 1.21-3(b)
for rules providing that certain married taxpayers legally separated or
living apart are treated as not married.
(3) Definition of earned income. For purposes of this section, the
term earned income has the same meaning as in section 32(c)(2) and the
regulations thereunder.
(4) Attribution of earned income to student or incapacitated spouse.
(i) For purposes of this section, a spouse is deemed, for each month
during which the spouse is a full-time student or is a qualifying
individual described in Sec. 1.21-1(b)(1)(iii) or (b)(2)(iii), to be
gainfully employed and to have earned income of not less than--
(A) $200 ($250 for taxable years beginning after December 31, 2002,
and before January 1, 2011) if there is one qualifying individual with
respect to the taxpayer at any time during the taxable year; or
(B) $400 ($500 for taxable years beginning after December 31, 2002,
and before January 1, 2011) if there are two or more qualifying
individuals with respect to the taxpayer at any time during the taxable
year.
(ii) For purposes of this paragraph (b)(4), a full-time student is
an individual who, during each of 5 calendar months of the taxpayer's
taxable year, is enrolled as a student for the number of course hours
considered to be a full-time course of study at an educational
organization as defined in section 170(b)(1)(A)(ii). The enrollment for
5 calendar months need not be consecutive.
(iii) Earned income may be attributed under this paragraph (b)(4),
in the case of any husband and wife, to only one spouse in any month.
(c) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. In 2007, T, who is married to U, pays employment-related
expenses of $5,000 for the care of one qualifying individual. T's earned
income for the taxable year is $40,000 and her husband's earned income
is $2,000. T did not exclude any dependent care assistance under section
129. Under paragraph (b)(1) of this section, T may take into account
under section 21 only the amount of employment-related expenses that
does not exceed the lesser of her earned income or the earned income of
U, or $2,000.
Example 2. The facts are the same as in Example 1 except that U is a
full-time student at an educational organization within the meaning of
section 170(b)(1)(A)(ii) for 9 months of the taxable year and has no
earned income. Under paragraph (b)(4) of this section, U is deemed to
have earned income of $2,250. T may take into account $2,250 of
employment-related expenses under section 21.
Example 3. For all of 2007, V is a full-time student and W, V's
husband, is an individual who is incapable of self-care (as defined in
Sec. 1.21-1(b)(1)(iii)). V and W have no earned income and pay expenses
of $5,000 for W's care. Under paragraph (b)(4) of this section, either V
or W may be deemed to have $3,000 of earned income. However, earned
income may be attributed to only one spouse under paragraph (b)(4)(iii)
of this section. Under the limitation in paragraph (b)(1)(ii) of this
section, the lesser of V's and W's earned income is zero. V and W may
not take the expenses into account under section 21.
(d) Cross-reference. For an additional limitation on the credit
under section 21, see section 26.
[T.D. 9354, 72 FR 45341, Aug. 14, 2007]
Sec. 1.21-3 Special rules applicable to married taxpayers.
(a) Joint return requirement. No credit is allowed under section 21
for taxpayers who are married (within the meaning of section 7703 and
the regulations thereunder) at the close of the taxable year unless the
taxpayer and spouse file a joint return for the taxable year. See
section 6013 and the regulations thereunder relating to joint
[[Page 44]]
returns of income tax by husband and wife.
(b) Taxpayers treated as not married. The requirements of paragraph
(a) of this section do not apply to a taxpayer who is legally separated
under a decree of divorce or separate maintenance or who is treated as
not married under section 7703(b) and the regulations thereunder
(relating to certain married taxpayers living apart). A taxpayer who is
treated as not married under this paragraph (b) is not required to take
into account the earned income of the taxpayer's spouse for purposes of
applying the earned income limitation on the amount of employment-
related expenses under Sec. 1.21-2(b).
(c) Death of married taxpayer. If a married taxpayer dies during the
taxable year and the survivor may make a joint return with respect to
the deceased spouse under section 6013(a)(3), the credit is allowed for
the year only if a joint return is made. If, however, the surviving
spouse remarries before the end of the taxable year in which the
deceased spouse dies, a credit may be allowed on the decedent spouse(s
separate return.
[T.D. 9354, 72 FR 45341, Aug. 14, 2007]
Sec. 1.21-4 Payments to certain related individuals.
(a) In general. A credit is not allowed under section 21 for any
amount paid by the taxpayer to an individual--
(1) For whom a deduction under section 151(c) (relating to
deductions for personal exemptions for dependents) is allowable either
to the taxpayer or the taxpayer's spouse for the taxable year;
(2) Who is a child of the taxpayer (within the meaning of section
152(f)(1) for taxable years beginning after December 31, 2004, and
section 151(c)(3) for taxable years beginning before January 1, 2005)
and is under age 19 at the close of the taxable year;
(3) Who is the spouse of the taxpayer at any time during the taxable
year; or
(4) Who is the parent of the taxpayer's child who is a qualifying
individual described in Sec. 1.21-1(b)(1)(i) or (b)(2)(i).
(b) Payments to partnerships or other entities. In general,
paragraph (a) of this section does not apply to services performed by
partnerships or other entities. If, however, the partnership or other
entity is established or maintained primarily to avoid the application
of paragraph (a) of this section to permit the taxpayer to claim the
credit, for purposes of section 21, the payments of employment-related
expenses are treated as made directly to each partner or owner in
proportion to that partner's or owner's ownership interest. Whether a
partnership or other entity is established or maintained to avoid the
application of paragraph (a) of this section is determined based on the
facts and circumstances, including whether the partnership or other
entity is established for the primary purpose of caring for the
taxpayer's qualifying individual or providing household services to the
taxpayer.
(c) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. During 2007, X pays $5,000 to her mother for the care of
X's 5-year old child who is a qualifying individual. The expenses
otherwise qualify as employment-related expenses. X's mother is not her
dependent. X may take into account under section 21 the amounts paid to
her mother for the care of X's child.
Example 2. Y is divorced and has custody of his 5-year old child,
who is a qualifying individual. Y pays $6,000 during 2007 to Z, who is
his ex-wife and the child's mother, for the care of the child. The
expenses otherwise qualify as employment-related expenses. Under
paragraph (a)(4) of this section, Y may not take into account under
section 21 the amounts paid to Z because Z is the child's mother.
Example 3. The facts are the same as in Example 2, except that Z is
not the mother of Y's child. Y may take into account under section 21
the amounts paid to Z.
[T.D. 9354, 72 FR 45341, Aug. 14, 2007]
Sec. 1.23-1 Residential energy credit.
(a) General rule. Section 23 or former section 44C provides a
residential energy credit against the tax imposed by chapter 1 of the
Internal Revenue Code. The credit is an amount equal to the individual's
qualified energy conservation expenditures (set out in paragraph (b))
plus the individual's qualified renewable energy source expenditures
(set out in paragraph (c)) for the taxable year. However, the credit is
subject to the limitations described in
[[Page 45]]
paragraph (d) and the special rules contained in Sec. 1.23-3. The
credit is nonrefundable (that is, the credit may not exceed an
individual's tax liability for the taxable year). However, any unused
credit may be carried over to succeeding years to the extent permitted
under paragraph (e). Renters as well as owners of a dwelling unit may
qualify for the credit. See Sec. 1.23-3(h) for the rules relating to
the allocation of the credit in the case of joint occupants of a
dwelling unit.
(b) Qualified energy conservation expenditures. In the case of any
dwelling unit, the qualified energy conservation expenditures are 15
percent of the energy conservation expenditures made by the taxpayer
with respect to the dwelling unit during the taxable year, but not in
excess of $2,000 of such expenditures. See Sec. 1.23-2(a) for the
definition of energy conservation expenditures.
(c) Qualified renewable energy source expenditures. In the case of
taxable years beginning after December 31, 1979, the qualified renewable
energy source expenditures are 40 percent of the renewable energy source
expenditures made by the taxpayer during the taxable year (and before
January 1, 1986) with respect to the dwelling units that do not exceed
$10,000. In the case of taxable years beginning before January 1, 1980,
the qualified renewable energy source expenditures are the renewable
energy source expenditures made by the taxpayer with respect to the
dwelling unit during the taxable year, but not in excess of--
(1) 30 percent of the expenditures up to $2,000, plus
(2) 20 percent of the expenditures over $2,000, but not more than
$10,000.
See Sec. 1.23-2(b) for the definition of renewable energy source
expenditures.
(d) Limitations--(1) Minimum dollar amount. No residential energy
credit shall be allowed with respect to any return (whether joint or
separate) for any taxable year if the amount of the credit otherwise
allowable (determined without regard to the tax liability limitation
imposed by paragraph (d)(3) of this section) is less than $10.
(2) Prior expenditures taken into account--(i) In general. For
purposes of determining the credit for expenditures made during a
taxable year, the taxpayer must reduce the maximum amount of allowable
expenditures with respect to the dwelling until in computing qualified
energy conservation expenditures (under paragraph (b)) or qualified
renewable energy conservation expenditures (under paragraph (c)) by
prior expenditures which were made by the taxpayer or by joint occupants
(see Sec. 1.23-3(h)) with respect to the same dwelling unit, and which
were taken into account in computing the credit for prior taxable years.
In the case of expenditures made during taxable years beginning before
January 1, 1980, the reduction of the maximum amount under paragraph (c)
must first be made with respect to the first $2,000 of expenditures (to
which a 30 percent rate applies) and then with respect to the next
$8,000 of expenditures (to which a 20 percent rate applies). This
reduction must be made if all or any part of the credit was allowed in
or was carried over from a prior taxable year.
(ii) Change of principal residence. A taxpayer is eligible for the
maximum credit for qualifying expenditures made with respect to a new
principal residence notwithstanding the allowance of a credit for
qualifying expenditures made with respect to the taxpayer's previous
principal residence. Furthermore, except in certain cases involving
joint occupancy (see Sec. 1.23-3(h)), a taxpayer is eligible for the
maximum credit notwithstanding the allowance of a credit to a prior
owner of the taxpayer's new principal residence.
(iii) Example. The rules with respect to the reduction for prior
expenditures are illustrated by the following example:
Example. In 1978, A has $1,000 of energy conservation expenditures
and $5,000 of renewable energy source expenditures in connection with
A's principal residence. A's residential energy credit for 1978 is
$1,350, made up of $150 of qualified energy conservation expenditures
(15 percent of $1,000) plus $1,200 of qualified renewable energy source
expenditures (30 percent of the first $2,000 plus 20 percent of the next
$3,000). In 1979 A has an additional $2,000 of energy conservation
expenditures and $3,000 of renewable energy source expenditures in
connection with the same principal residence. A's residential energy
credit for 1979 is $750, made up of $150 of qualified energy
conservation expenditures (15 percent of the new maximum $1,000,
[[Page 46]]
which was reduced from $2,000 by $1,000 of energy conservation
expenditures taken into account in 1978) plus $600 of qualified
renewable energy source expenditures (20 percent of $3,000, which
reflects the reduction of the maximum allowable expenditures by the
$5,000 of renewable energy source expenditures taken into account in
1978). The maximum residential energy credit allowable to A with respect
to the same principal residence in subsequent years in which the credit
is allowable is $400 (20 percent of the new maximum of $2,000 for
renewable energy source expenditures and none for energy conservation
expenditures).
(3) Effects of grants and subsidized energy financing--(i) In
general. Qualified expenditures financed with Federal, State, or local
grants shall be taken into account for purposes of computing the
residential energy credit only if the amount of such grants is taxable
as gross income to the taxpayer under section 61 (relating to the
definition of gross income) and the regulations thereunder. In the case
of taxable years beginning after December 31, 1980, qualified
expenditures made from subsidized energy financing (as defined in Sec.
1.23-2(i)) shall not be taken into account (except as provided in the
following sentence) for purposes of computing the residential energy
credit. In addition, the taxpayer must reduce the maximum amount
allowable expenditures (reduced as provided in paragraph (d)(2) of this
section) with respect to the dwelling unit in computing qualified energy
conservation expenditures (under paragraph (b) of this section) or
qualified renewable energy source expenditures (under paragraph (c) of
this section), whichever is appropriate, by an amount equal to the sum
of--
(A) The amount of expenditures from subsidized energy financing (as
defined in Sec. 1.23-2(i)) that were made by the taxpayer during the
taxable year or any prior taxable year beginning after December 31,
1980, with respect to the same dwelling unit, and
(B) The amount of any funds received by the taxpayer during the
taxable year or any prior taxable year beginning after December 31,
1980, as a Federal, State, or local government grant made in taxable
years beginning after December 31, 1980, that were used to make
qualified expenditures with respect to the same dwelling unit and that
were not included in the gross income of the taxpayer.
(ii) Example. The provisions of this paragraph (d)(3) may be
illustrated by the following example:
Example. A had in 1979 made a renewable energy source expenditure of
$2,000 in connection with A's residence for which he took the then
allowed credit of $600. In 1981 A made additional renewable energy
source expenditures of $9,000 with respect to which he received a loan
of $5,000 from the Federal Solar-Energy and Energy Conservation Bank.
Assume that the loan is subsidized energy financing. A computes the
credit as follows: The initial maximum allowable dollar limit is $10,000
which is reduced by the sum of the prior year expenditures of $2,000 and
the subsidized energy financing loan of $5,000 leaving a dollar limit of
$3,000 ($10,000-($2,000+$5,000)). The $5,000 portion of the $9,000
funded by the subsidized energy financing loan is not allowed as a
renewable energy source expenditure. The remaining expenditures in 1981
are $4,000 ($9,000-$5,000). However, this amount exceeds the allowed
maximum dollar limit of $3,000. Therefore, A's creditable expenses for
1981 are only $3,000 on which the credit is $1,200 (40 percent of
$3,000).
(4) Tax liability limitation--(i) For taxable years beginning after
December 31, 1983. For taxable years beginning after December 31, 1983,
the credit allowed by this section shall not exceed the amount of tax
imposed by chapter 1 of the Internal Revenue Code of 1954 for the
taxable year, reduced by the sum of credits allowable under--
(A) Section 21 (relating to expenses for household and dependent
care services necessary for gainful employment),
(B) Section 22 (relating to credit for the elderly and the
permanently and totally disabled), and
(C) Section 24 (relating to contributions to candidates for public
office).
See section 26 (b) and (c) for certain taxes that are not treated as
imposed by chapter 1.
(ii) For taxable years beginning before January 1, 1984. For taxable
years beginning before January 1, 1984, the credit allowed by this
section shall not exceed the amount of the tax imposed by chapter 1 of
the Internal Revenue Code of 1954 for the taxable year, reduced by the
sum of the credits allowable under--
[[Page 47]]
(A) Section 32 (relating to tax withheld at source on nonresident
aliens and foreign corporations and on tax-free covenant bonds),
(B) Section 33 (relating to the taxes of foreign countries and
possessions of the United States),
(C) Section 37 (relating to retirement income),
(D) Section 38 (relating to investment in certain depreciable
property),
(E) Section 40 (relating to expenses of work incentive programs),
(F) Section 41 (relating to contributions to candidates for public
office),
(G) Section 42 (relating to the general tax credit),
(H) Section 44 (relating to purchase of new personal residence),
(I) Section 44A (relating to expenses for household and dependent
care services), and
(J) Section 44B (relating to employment of certain new employees).
(e) Carryforward of unused credit. If the credit allowable by this
section exceeds the tax liability limitation imposed by section 23(b)(5)
(or former section 44C(b)(5)) and paragraph (d)(4) of this section, the
excess credit shall be carried forward to the succeeding taxable year
and added to the credit allowable under this section for the succeeding
taxable year. A carryforward that is not used in the succeeding year
because it exceeds the tax liability limitation shall be carried forward
to later taxable years until used, except that no excess credit may be
carried forward to any taxable year beginning after December 31, 1987.
[T.D. 7717, 45 FR 57715, Aug. 29, 1980. Redesignated and amended by T.D.
8146, 52 FR 26669, July 16, 1987]
Sec. 1.23-2 Definitions.
For purposes of section 23 or former section 44C and regulations
thereunder--
(a) Energy conservation expenditures--(1) In general. The term
``energy conservation expenditure'' means an expenditure made on or
after April 20, 1977, and before January 1, 1986, by a taxpayer for
insulation or any other energy-conserving component, or for labor costs
allocable to the original installation of such insulation or other
component, if all of the following conditions are satisfied:
(i) The insulation (as defined in paragraph (c)) or other energy-
conserving component (as defined in paragraph (d)) is installed in or on
a dwelling unit that is used as the taxpayer's principal residence when
the installation is completed. See Sec. 1.23-3(e) for the definition of
principal residence.
(ii) The dwelling unit is located in the United States (as defined
in section 7701(a)(9)).
(iii) The construction of the dwelling unit was substantially
completed before April 20, 1977. See Sec. 1.23-3(f) for the definition
of the terms ``construction'' and ``substantially completed''. In the
case of expenditures made with respect to the enlargement of a dwelling
unit, the construction of the enlargement must have been substantially
completed before April 20, 1977.
(2) Examples. The application of this paragraph may be illustrated
by the following examples:
Example 1. In 1978, A spent $500 for the purchase and installation
of new storm windows to replace old storm windows, $100 to reinstall old
storm windows, and $150 to transfer a A's house insulation which had
been installed in A's garage. Only the $500 spent for new storm windows
qualifies as an energy conservation expenditure. The $100 spent to
reinstall storm windows and the $150 spent to transfer insulation to A's
house do not qualify since the only installation costs that qualify are
those for the original installation of energy conservation property the
original use of which commences with the taxpayer.
Example 2. In June 1977, B purchased for B's principal residence a
new house that was substantially completed before April 20, 1977.
Pursuant to B's request the builder installed storm windows on May 1,
1977, the cost of this option being included in the purchase price of
the house. The portion of the purchase price of the residence allocable
to the storm windows constitutes an energy conservation expenditure.
However, no other part of the purchase price may be allocated to energy
conservation property (insulation and other energy conserving
components) installed before April 20, 1977. To qualify as an energy
conservation expenditure, an expenditure must be made (i.e.,
installation of the energy conservation property must be completed) on
or after April 20, 1977.
(b) Renewable energy source expenditures. The term ``renewable
energy source expenditures'' means an expenditure made on or after April
20, 1977,
[[Page 48]]
and before January 1, 1986, by a taxpayer for renewable energy source
property (as defined in paragraph (e)), or for labor costs properly
allocable to the on-site preparation, assembly, or original installation
such property, if both of the following conditions are satisfied:
(1) The renewable energy source property is installed in connection
with a dwelling unit that is used as the taxpayer's principal residence
when the installation is completed. See Sec. 1.23-3(e).
(2) The dwelling unit is located in the United States (as defined in
section 7701(a)(9)).
Additionally, the term ``renewable energy source expenditures'' includes
expenditures made after December 31, 1979, and before January 1, 1986,
for an onsite well drilled for any geothermal deposit (as defined in
paragraph (h)), or for labor costs properly allocable to onsite
preparation, assembly, or original installation of such well, but only
if the requirements of paragraphs (b) (1) and (2) of this section are
met and the taxpayer has not elected under section 263(c) to deduct any
portion of such expenditures or allocable labor costs.
Eligibility as a renewable energy source expenditure does not depend on
the date of construction of the dwelling unit. Thus, such an expenditure
may be made in connection with either a new or an existing dwelling
unit. Renewable energy source expenditures need only be made in
connection with a dwelling, rather than in or on a dwelling unit. For
example, a solar collector that otherwise constitutes renewable energy
source property is not ineligible merely because it is installed
separately from the dwelling unit. The term ``renewable energy source
expenditure'' does not include any expenditure allocable to a swimming
pool even when used as an energy storage medium or to any other energy
storage medium whose primary function is other than the storage of
energy. It also does not include the cost of maintenance of an installed
system or the cost of leasing renewable energy source property.
(c) Insulation. The term ``insulation'' means any item that
satisfies all of the following conditions:
(1) The item is specifically and primarily designed to reduce, when
installed in or on a dwelling or on a water heater, the heat loss or
gain of such dwelling or water heater. To qualify as insulation the item
must be installed between a conditioned area and a nonconditioned area
(except when installed on a water heater, water pipe, or heating/cooling
duct). Thus for example, awnings do not qualify as insulation. For
purposes of this section the term ``conditioned area'' means an area
that has been heated or cooled by conventional or renewable energy
source means. Insulation includes materials made of fiberglass, rock
wool, cellulose, urea based foam, urethane, vermiculite, perlite,
polystyrene, and extruded polystyrene foam.
(2) The original use of the item begins with the taxpayer.
(3) The item can reasonably be expected to remain in operation at
least 3 years.
(4) The item meets the applicable performance and quality standards
prescribed in Sec. 1.23-4 (if any) that are in effect at the time the
taxpayer acquires the item. The term ``insulation'' shall not include
items whose primary purpose is not insulation (e.g., whose function is
primarily structural, decorative, or safety-related). For example,
carpeting, drapes (including linings), shades, wood paneling, fireplace
screens (including those made of glass), new or replacement walls
(except for qualifying insulation therein) and exterior siding do not
qualify although they may have been designed in part to have an
insulating effect.
(d) Other energy-conserving components. The term ``other energy-
conserving component'' means any item (other than insulation) that
satisfies all of the following conditions:
(1) The original use of the item begins with the taxpayer.
(2) The item can reasonably be expected to remain in operation for
at least 3 years.
(3) The item meets the applicable performance and quality standards
prescribed in Sec. 1.23-4 (if any) that are in effect at the time of
the taxpayer's acquisition of the item.
(4) The item is one of the following items:
[[Page 49]]
(i) A furnace replacement burner. The term ``furnace replacement
burner'' means a device (for oil and gas-fired furnaces or boilers) that
is designed to achieve a reduction in the amount of fuel consumed as a
result of increased combustion efficiency. The burner must replace an
existing burner. It does not qualify if it is acquired as a component
of, or for use in, a new furnace or boiler.
(ii) A device for modifying flue openings. The term ``device for
modifying flue openings'' means an automatically operated damper that--
(A) Is designed for installation in the flue, between the barometric
damper or draft hood and the chimney, of a furnace; and
(B) Conserves energy by substantially reducing the flow of
conditioned air through the chimney when the furnace is not in
operation. Conditioned air is air that has been heated or cooled by
conventional or renewable energy source means.
(iii) A furnace ignition system. The term ``furnace ignition
system'' means an electrical or mechanical device, designed for
installation in a gas-fired furnace or boiler that automatically ignites
the gas burner. In order to qualify, the device must replace a gas pilot
light. Furthermore, it does not qualify if it is acquired as a component
of, or for use in, a new furnace or boiler.
(iv) A storm or thermal window or door. The terms ``storm or thermal
window'' and ``storm or thermal door'' mean the following:
(A)(1) A window placed outside or inside an ordinary or prime
window, creating an insulating air space.
(2) A window with enhanced resistance to heat flow through the
glazed area by multi-glazing.
(3) A window that consists of glass or other glazing materials that
have exceptional heat-absorbing or heat-reflecting properties. For
purposes of this subdivision (iv), the term ``glazing material'' does
not include films and coatings applied on the surface of a window.
(B)(1) A second door, installed outside or inside a prime exterior
door, creating an insulating air space.
(2) A door with enhanced resistance to heat flow through the glazed
area by multi-glazing.
(3) A prime exterior door that has an R-value (a measurement of the
ability of insulation to resist the flow of heat) of at least 2
throughout.
For purposes of this subdivision, ``multi-glazing'' is an arrangement in
which two or more sheets of glazing material are affixed in a window or
door frame to create one or more insulating air spaces. Multi-glazing
can be achieved by installing a preassembled, sealed insulating glass
unit or by affixing one or more additional sheets of glazing onto an
existing window (or sash) or door. For purposes of this subdivision, a
storm or thermal window or door does not include any film applied on or
over the surface of a window or door.
(v) Automatic energy-saving setback thermostat. The term ``automatic
energy-saving setback thermostat'' means a device that is designed to
reduce energy consumption by regulating the demand on the heating or
cooling system in which it is installed, and uses--
(A) A temperature control device for interior spaces incorporating
more than one temperature control level, and
(B) A clock or other automatic mechanism for switching from one
control level to another.
(vi) Caulking and weatherstripping. The term ``caulking'' means
pliable materials used to fill small gaps at fixed joints on buildings
to reduce the passage of air and moisture. Caulking includes, but is not
limited to, materials commonly known as ``sealants'', ``putty'', and
``glazing compounds''. The term ``weatherstripping'' means narrow strips
of material placed over or in movable joints of windows and doors to
reduce the passage of air and moisture.
(vii) Energy usage display meter. The term ``energy usage display
meter'' means a device the sole purpose of which is to display the cost
(in money) of energy usage in the dwelling. It may show cost information
for electricity usage, gas usage, oil usage, or any combination thereof.
The device may measure energy usage of the whole dwelling,
[[Page 50]]
or individual appliances or systems on an instantaneous or cumulative
basis.
(viii) Components specified by the Secretary. The Secretary (or his
delegate) may, in his discretion, after consultation with the Secretary
of Energy and the Secretary of Housing and Urban Development (or their
delegates), and any other appropriate Federal officers, specify by
regulation other energy-conserving components for addition to the list
of qualified items. See Sec. 1.23-6 for the procedures and criteria to
be used in determining whether an item will be considered for addition
to the list of qualified items by the Secretary.
The term ``other energy-conserving component'' is limited to items in a
category specifically listed in section 44(c)(4)(A) (i) through (vii) or
added by the Secretary.
(e) Renewable energy source property--(1) In general. The term
``renewable energy source property'' includes any solar energy property,
wind energy property, geothermal energy property, or property referred
to in subparagraph (2), which meets the following conditions:
(i) The original use of the property begins with the taxpayer.
(ii) The property can reasonably be expected to remain in operation
for at least 5 years.
(iii) The property meets the applicable performance and quality
standards prescribed in Sec. 1.23-4 (if any) that are in effect at the
time of the taxpayer's acquisition of the property.
Renewable energy source property does not include heating or cooling
systems, nor systems to provide hot water or electricity, which serve to
supplement renewable energy source equipment in heating, cooling, or
providing hot water or electricity to a dwelling unit, and which employ
a form of energy (such as oil or gas) other than solar, wind, or
geothermal energy (or other forms of renewable energy provided in
paragraph (e)(2) of this section. Thus, heat pumps or oil or gas
furnaces, used in connection with renewable energy source property, are
not eligible for the credit. In order to be eligible for the credit for
renewable energy source property, the property (as well as labor costs
properly allocable to onsite preparation, assembly or installation of
equipment) must be clearly identifiable. See Sec. 1.23-3(l) for
recordkeeping rules.
(2) Renewable energy source specified by the Secretary. In addition
to solar, wind, and geothermal energy property, renewable energy source
property includes property that transmits or uses another renewable
energy source that the Secretary (or his delegate) specifies by
regulations, after consultation with the Secretary of Energy and the
Secretary of Housing and Urban Development (or their delegates), and any
other appropriate Federal officers, to be of a kind that is appropriate
for the purpose of heating or cooling the dwelling or providing hot
water or (in the case of expenditures made after December 31, 1979)
electricity for use within the dwelling. For purposes of this section,
references to the transmission or use of energy include its collection
and storage. See Sec. 1.23-6 for the procedures and criteria to be used
in determining when another energy source will be considered for
addition to the list of qualified renewable energy sources.
(f) Solar energy property--(1) In general. The term ``solar energy
property'' means equipment and materials of a solar energy system as
defined in this paragraph (and parts solely related to the functioning
of such equipment) which, when installed in connection with a dwelling,
transmits or uses solar energy to heat or cool the dwelling or to
provide hot water or (in the case of expenditures made after December
31, 1979) electricity for use within the dwelling. For this purpose,
solar energy is energy derived directly from sunlight (solar radiation).
Property which uses, as an energy source, fuel or energy which is
indirectly derived from sunlight (solar radiation), such as fossil fuel
or wood or heat in underground water, is not considered solar energy
property. Materials and components of ``passive solar systems'' as well
as ``active solar systems'', or a combination of both types of systems
may qualify as solar energy property.
(2) Active solar system. An active solar system is based on the use
of mechanically forced energy transfer, such as the use of fans or pumps
to circulate solar generated energy, or thermal energy transfer, such as
systems utilizing
[[Page 51]]
thermal siphon principles. Generally, this is accomplished through the
use of equipment such as collectors (to absorb sunlight and create hot
liquids or air), storage tanks (to store hot liquids), rockbeds (to
store hot air), thermostats (to activate pumps or fans which circulate
the hot liquids or air), and heat exchangers (to utilize hot liquids or
air to heat air or water).
(3) Passive solar system. A passive solar system is based on the use
of conductive, convective, or radiant energy transfer. In order to
qualify as a passive solar system, a solar system used for heating
purposes must contain all of the following: a solar collection area, an
absorber, a storage mass, a heat distribution method, and heat
regulation devices. The term ``solar collection area'' means an expanse
of transparent or translucent material, such as glass which is
positioned in such a manner that the rays of the sun directly strike an
absorber. The term ``absorber'' means a surface, such as a floor, that
is exposed to the rays of the sun admitted through the solar collection
area, which converts solar radiation into heat, and then transfers the
heat to a storage mass. The term ``storage mass'' means material, such
as masonry, that receives and holds heat from the absorber and later
releases the heat to the interior of the dwelling. The storage mass must
be of sufficient volume, depth, and thermal energy capacity to store and
deliver adequate amounts of solar heat for the relative size of the
dwelling. In addition, the storage mass must be located so that it is
capable of distributing the stored heat directly to the habitable areas
of the dwelling through a heat distribution method. The term ``heat
distribution method'' means the release of radiant heating from the
storage mass within the habitable areas of the dwelling, or convective
heating from the storage mass through airflow paths provided by openings
or by ducts in the storage mass, to habitable areas of the dwelling. The
term ``heat regulations devices'' means shading or venting mechanisms
(such as awnings or insulated drapes) to control the amount of solar
heat admitted through the solar collection areas and nighttime
insulation or its equivalent to control the amount of heat permitted to
escape from the interior of the dwelling.
(4) Components with dual function. To the extent that a passive or
active solar system utilizes portions of the structure of a residence,
only the materials and components whose sole purpose is to transmit or
use solar radiation (and labor costs associated with installing such
materials and components) are included within the term ``solar energy
property''. Accordingly, materials and components that serve a dual
purpose, e.g., they have a significant structural function or are
structural components of the dwelling (and labor costs associated with
installing such materials and components) are not included within the
term ``solar energy property''. For example, roof ponds that form part
of a roof (including additional structural components to support the
roof), windows (including clerestories and skylights), and greenhouses
do not qualify as solar energy property. However, with respect to
expenditures made after December 31, 1979, a solar collector panel
installed as a roof or portion thereof (including additional structural
components to support the roof attributable to the collector) does not
fail to qualify as solar energy property solely because it constitutes a
structural component of the dwelling on which it is installed. For this
purpose, the term ``solar collector panel'' does not include a skylight
or other type of window. In the case of a trombe wall (a south facing
wall composed of a mass wall and exterior glazing), the mass wall (and
labor costs associated with installing the mass wall) will not qualify.
However, the exterior (non-window) glazing will qualify. Any shading,
venting and heat distribution mechanisms or storage systems that do not
have a dual function will also qualify.
(g) Wind energy property. The term ``wind energy property'' means
equipment (and parts solely related to the functioning of such
equipment) which, when installed in connection with a dwelling,
transmits or uses wind energy to produce energy in a useful form for
personal residential purposes. Examples of equipment using wind energy
to produce energy in a useful form are windmills, wind-driven
generators,
[[Page 52]]
power conditioning and storage devices that use wind to generate
electricity or mechanical forms of energy. Devices that use wind merely
to ventilate do not qualify as wind energy property.
(h) Geothermal energy property. The term ``geothermal energy
property'' means equipment (and parts solely related to the functioning
of such equipment) necessary to transmit or use energy from a geothermal
deposit to heat or cool a dwelling or provide hot water for use within
the dwelling. With respect to expenditures made after December 31, 1979,
the term ``geothermal energy property'' also means equipment (and parts
solely related to the functioning of such equipment) necessary to
transmit or use energy from a geothermal deposit to produce electricity
for use within the dwelling. Equipment such as a pipe that serves both a
geothermal function (by transmitting hot geothermal water within a
dwelling) and a non-geothermal function (by transmitting hot water from
a water heater within a dwelling) does not qualify as geothermal
property. A geothermal deposit is a geothermal reservoir consisting of
natural heat which is from an underground source and is stored in rocks
or in an aqueous liquid or vapor (whether or not under pressure), having
a temperature exceeding 50 degrees Celsius as measured at the wellhead
or, in the case of a natural hot spring (where no well is drilled), at
the intake to the distribution system.
(i) Subsidized energy financing--(1) In general. The term
``subsidized energy financing'' means financing (e.g., a loan) made
directly or indirectly (such as in association with, or through the
facilities of, a bank or other lender) during a taxable year beginning
after December 31, 1980, under a Federal, State, or local program, a
principal purpose of which is to provide subsidized financing for
projects designed to conserve or produce energy. For purposes of this
paragraph (i), financing is made when funds that constitute subsidized
energy financing are disbursed. Subsidized energy financing includes
financing under a Federal, State, or local program having two or more
principal purposes (provided that at least one of the principal purposes
is to provide subsidized financing for projects designed to conserve or
produce energy), but only to the extent that the financing--
(i) Is to be used for energy production or conservation purposes, or
(ii) Is provided out of funds designated specifically for energy
production or conservation.
Loan proceeds meet the use test of paragraph (i)(l)(i) of this section
only to the extent that the loan application, the loan instrument, or
any other loan-related documents indicate that the funds are intended
for such use. However, loan proceeds designated for the purchase either
of property that contains ``insulation'' or any ``other energy-
conserving component'' or of ``renewable energy source property'' as
defined in paragraphs (c), (d), and (e), respectively, of this section
meet the test of paragraph (i)(l)(i) of this section. Financing is
subsidized if the interest rate or other terms of the financing
(including any special tax treatment) provided to the taxpayer in
connection with the program or used to raise funds for the program are
more favorable than the terms generally available commercially. In
addition, financing is subsidized if the principal obligation of the
financing provided to the taxpayer is reduced by funds provided under
the program. The source from which the funds for the program are derived
is not a factor to be taken into account in determining whether the
financing is subsidized. If a public utility disburses funds for the
financing of energy conservation or renewable energy source property
under a program that obtains the funds through sales to the utility's
ratepayers, the program is not considered to be a Federal, State or
local program even though the utility is a governmental agency, and,
thus, the funds are not subsidized energy financing. Subsidized energy
financing does not include a grant includible in gross income under
section 61, nontaxable grants, a credit against State or local taxes
made directly to the taxpayer claiming the credit provided for in
section 23, or a loan guarantee made directly to the taxpayer claiming
the credit provided for in section 23.
(2) Examples. The provisions of this paragraph (i) may be
illustrated by the following examples:
[[Page 53]]
Example 1. State A has a farm and home loan program. The program is
used to provide low interest mortgage loans. In 1984 State A's
legislature enacted statutory amendments to its farm and home loan
program in an effort to encourage energy conservation-type measures. Low
interest loans for such improvements were made available to qualified
purchasers and owners under the farm and home loan program. The energy
conservation measures subsidized by the program include energy
conserving components and renewable energy source devices. State A's tax
exempt bonds are the source of funds for loans under the program.
Although the 1984 legislation authorizing loans for energy conserving
components and renewable energy source improvements did not diminish the
original purpose of the farm and home loan program, the 1984 legislation
added another principal purpose to the program. Therefore, State A's
program which has two principal purposes, one of which is the
conservation or production of energy, is considered as providing
subsidized energy financing for purposes of section 23 (c)(10) of the
Code, to the extent that financing is provided by State A out of funds
designated specifically for energy production or conservation. State A's
program will also be considered as providing subsidized energy financing
to the extent that the loan proceeds are to be used for energy
production or conservation purposes. Loan proceeds meet the use test of
the preceding sentence only to the extent that loan application, the
loan instruments, or any other loan-related documents indicate that the
funds are intended for such use.
Example 2. The United States Department of Energy disburses funds to
State B that the Department received from settlements from alleged
petroleum pricing and allocation violations. State B establishes a
program under which B will use the funds to make loans at below market
interest rates directly to qualified applicants for the purchase of
renewable energy source property. B's loans are subsidized energy
financing.
Example 3. State C establishes a program under which C will make
loans at below market interest rates directly to qualified applicants
for the purchases of renewable energy source property. The program is
funded with money that State C was able to borrow after it obtained a
loan guarantee from a Federal agency. C's loans provided under the
program are subsidized energy financing.
Example 4. Company D is an electric utility that is a Federal
agency. D purchases its electricity from another federal agency,
transmits the electricity over its own distribution system, and sells
the electricity to numerous local public utilities that in turn sell the
electricity to their customers. D wishes to start a program under which
D will make loans at below market interest rates directly to customers
of the local utilities for the purchase of renewable energy source
property from D. The local public utility will act as the collection
agent for repayment of the loans. The loans will be repayable over a
period of time not in excess of 15 years. Under law, D must cover its
full costs through its own revenues derived from the sale of power and
other services. While D may borrow by sale of bonds to the United States
Treasury, D must borrow at rates comparable to the rates prevailing in
the market for similar bonds. Thus, the subsidized loans made under D's
program will be financed by the profits from the sale of electricity to
consumers and not by the federal government. D's program, which is
substantially the same as that carried out by private (investor-owned)
utilities, is not considered to be a Federal, State or local
governmental program. Therefore, D's loans are not subsidized energy
financing.
Example 5. The Solar Energy and Energy Conservation Bank (Bank)
disburses funds to State E. E disburses a portion of the funds to
Financial Institution F. Both the Bank and State E make these
disbursements under a program the principal purpose of which is to
provide subsidized financing for projects designed to conserve or
produce energy. F uses the funds to reduce a portion of the principal
obligation on loans it issues to finance energy conservation or solar
energy expenditures. Taxpayer G borrows $3,000 from F in order to
purchase a solar water heating system. F uses $500 of the funds it
received from the Bank to reduce the principal obligation of the loan to
G to $2,500. The amount of subsidized energy financing to G is $3,000.
Example 6. State H allows a tax credit to Financial Institution J
under a program the principal purpose of which is to provide loans at
below market interest rates directly to qualified applicants for the
purchase of renewable energy source property. J receives a credit each
year in the amount of the excess of the interest that would have been
paid at private market rates over the actual interest paid on such
loans. The State H tax credit arrangement is an interest subsidy. Thus,
any low-interest loans made pursuant to this credit arrangement are
subsidized energy financing.
[T.D. 7717, 45 FR 57716, Aug. 29, 1980. Redesignated and amended by T.D.
8146, 52 FR 26670, July 16, 1987]
Sec. 1.23-3 Special rules.
(a) When expenditures are treated as made--(1) Timeliness of an
expenditure for the energy credit. In general, for the purpose of
determining whether an expenditure qualifies as being timely for the
residential energy credit under section 23 or former section 44C (i.e.,
is made after April 19, 1977, and before
[[Page 54]]
January 1, 1986), the expenditure is treated as made when original
installation of the item is completed. Thus, solely for that purpose,
the time of payment or accrual is irrelevant.
(2) Special rule for renewable energy source expenditures in the
case of construction or reconstruction of a dwelling. In the case of
renewable energy source expenditures in connection with the construction
or reconstruction of a dwelling that becomes the taxpayer's new
principal residence, the expenditures are to be treated as made (for the
purpose of determining the timeliness of an expenditure for the
residential energy credit) when the taxpayer commences use of the
dwelling as his or her principal residence following its construction or
reconstruction. The term ``reconstruction'' means the replacement of
most of a dwelling's major structural components such as floors, walls,
and ceiling. When a taxpayer reoccupies a reconstructed dwelling that
was the taxpayer's principal residence prior to reconstruction, a
renewable energy source expenditure is considered made when the original
installation of the renewable energy source property is completed.
(3) Taxable year in which credit is allowable. For the purpose of
determining the taxable year in which the credit for an expenditure is
allowable (once it has qualified as timely under subparagraph (1) or
(2)), an expenditure is treated as made on the later of (i) the date on
which it qualifies as timely; or (ii) the date on which it is paid or
incurred by the taxpayer.
(b) Expenditures in 1977. No credit under section 23 or former
section 44C shall be allowed for any taxable year beginning before 1978.
However, the amount of any credit under section 23 or former section 44C
for the taxpayer's first taxable year beginning after December 31, 1977,
shall take into account qualified energy conservation expenditures and
qualified renewable energy source expenditures made during the period
beginning April 20, 1977, and ending on the last day of such first
taxable year.
(c) Cross reference. For rules relating to expenditures financed
with Federal, State, or local government grants or subsidized financing
see paragraph (d)(3) of Sec. 1.23-1 and paragraph (i) of Sec. 1.23-2.
(d) Expenditures qualifying both as energy conservation expenditures
and renewable source expenditures. In the case of an expenditure which
meets both the definition of an energy conservation expenditure (as
defined in Sec. 1.23-2(a)) and a renewable energy source expenditure
(as defined in Sec. 1.23-2(b)), the taxpayer may claim either a credit
under Sec. 1.23-1(b) (relating to qualified energy conservation
expenditures) or Sec. 1.23-1(c) (relating to qualified renewable energy
source expenditures) but may not claim both credits with respect to the
same expenditure.
(e) Principal residence. For purposes of section 23 or former
section 44C the determination of whether a dwelling unit is the
taxpayer's principal residence shall be made under principles similar to
those applicable to section 1034 and the regulations thereunder
(relating to sale or exchange of a principal residence) except that
ownership of the dwelling unit is not required. In making this
determination, the period for which a dwelling is treated as a
taxpayer's principal residence includes the 30-day period ending on the
first day on which the dwelling unit would (but for this sentence) be
treated as being used as the taxpayer's principal residence under
principles similar to those applicable to section 1034. Thus,
installation that are completed within that 30-day period may be
eligible for the credit although, in the absence of the 30-day rule, the
date of habitation of the dwelling unit by the taxpayer would mark the
beginning of the taxpayer's use of the unit as a principal residence.
(f) Construction substantially completed. Construction of a dwelling
unit is substantially completed when construction has progressed to the
point where the unit could be put to use as a personal residence, even
though comparatively minor items remain to be finished or performed in
order to conform to the plans or specifications of the completed
building. For this purpose, construction includes reconstruction as
defined in paragraph (a)(2). This rule may be illustrated by the
following example:
[[Page 55]]
Example. On January 1, 1979, A purchases a dwelling that is to
become A's principal residence. The dwelling unit was originally
constructed in 1950. A spends $50,000 to reconstruct the dwelling by
replacing most of the dwelling's major structural components such as
floors, walls, and ceilings. Included in the cost is $3,000 attributable
to energy-conserving components. Reconstruction is substantially
completed on April 1, 1979, and A moves into the reconstructed residence
on May 1, 1979. Since construction includes reconstruction, A's
reconstructed residence is not considered substantially completed before
April 20, 1977. Thus, amounts spent with respect to A's reconstructed
residence for energy-conserving components do not qualify as energy
conservation expenditures.
(g) Residential use of property. To be eligible for the residential
energy credit, expenditures must be made for personal residential
purposes. If at least 80 percent of the use of a component or item of
property is for personal residential purposes, the entire amount of the
energy conservation expenditure or the renewable energy source
expenditure is taken into account in computing the credit under this
section. If less than 80 percent of the use of a component or item of
property is for personal residential purposes, the amount of an
expenditure taken into account is the amount that bears the same ratio
to the amount of the expenditure as the amount of personal residential
use of the component or item bears to its total use. For purposes of
this paragraph, use of a component or an item of property with respect
to a swimming pool is not a use for a personal residential purpose. The
rules with respect to residential use of property are illustrated by the
following examples:
Example 1. In 1978 A makes an expenditure of $3,000 for the
installation of storm windows of which 50 percent is on the portion of
A's dwelling used as the principal family residence and 50 percent is on
the portion of the dwelling used as an office. A has made no other
energy conservation expenditures for the residence. The allowable energy
conservation expenditure is $1,500 (50 percent of $3,000), the portion
attributable to residential use. Therefore, the residential energy
credit is $225 (the qualified conservation expenditure of 15 percent of
$1.500).
Example 2. During 1979, B makes $10,000 of renewable energy source
expenditures on solar energy property for B's principal residence.
Approximately 60 percent of the use of the solar energy property will be
for heating B's swimming pool; the other 40 percent will be for heating
the dwelling unit. B had not previously made renewable energy source
expenditures with respect to the residence. Since use for a swimming
pool is not considered a residential use, less than 80 percent of the
use of B's solar energy property is considered used for personal
residential purposes. Therefore, only $4,000 (40 percent of $10,000),
the proportionate part of B's expenditures representing personal
residential use, is treated as a renewable energy source expenditure. B
is allowed a $1,000 residential energy credit (30 percent of $2,000 plus
20 percent of $2,000) for 1979.
(h) Joint occupancy--(1) In general. If two or more individuals
jointly occupied and used a dwelling unit as their principal residence
during any portion of a calendar year--
(i) The amount of the credit allowable under section 23 or former
section 44C by reason of energy conservation expenditures or by reason
of renewable energy source expenditures shall be determined by treating
all of the joint occupants as one taxpayer whose taxable year is such
calendar year; and
(ii) The credit under section 23 or former section 44C allowable to
each joint occupant for the taxable year with which or in which such
calendar year ends shall be an amount which bears the same ratio to the
amount determined under paragraph (h)(1)(i) of this section as the
amount of energy conservation expenditures or renewable energy source
expenditures made by that occupant bears to the total amount of each
type of such expenditures made by all joint occupants during such
calendar year.
The provisions of this subparagraph may be illustrated by the following
example:
Example. A, a calendar year taxpayer, and B, a June 1 fiscal year
taxpayer, make energy conservation exenditures of $2,000 (A making
expenditures of $500 and B making expenditures of $1,500) on their
principal and jointly occupied residence in 1978. A and B have not
previously make energy conservation expenditures with respect to this
residence. Of the $300 credit (15 percent of $2,000), $75 will be
allocated to A ($500 / $2,000 x $300) and $225 to B ($1,500 / $2,000 x
300). A will claim the allocable share of the credit on A's 1978 tax
return and B will claim the allocable share of the credit on B's tax
return for the fiscal year ending May 31, 1979.
[[Page 56]]
(2) Minimum credit. The fact that one joint occupant may be unable
to claim all or part of the credit under section 23 of former section
44C because of insufficient tax liability or because that occupant's
allowable credit does not exceed the $10 minimum credit (as set forth in
paragraph (d)(1) of Sec. 1.23-1) shall have no effect upon the
computation of the amount of the allowable credits for the other joint
occupants.
(3) Prior expenditures. Because joint occupants are treated as one
taxpayer for purposes of determining the residential energy credit, the
maximum amount of energy conservation expenditures or renewable energy
source expenditures must be reduced by the total amount of such
expenditures made in connection with the dwelling unit during prior
calendar years in which any one of the residents of the unit during the
current calendar year was a resident (whether made by the current
resident or by an individual previously occupying the dwelling with the
current resident). However, the preceding sentence shall not apply to
prior expenditures no part of which was taken into account in computing
the credits under section 23 of former section 44C for such years. Prior
years' expenditures are not to be allocated among joint occupants to
take into account the specific expenditures of each of the occupants in
prior years.
(4) The rules of this paragraph may be illustrated by the following
examples:
Example 1. Assume A and B have together made prior years' energy
conservation expenditures of $1,600 (A having made $1,200 of
expenditures and B having made $400) on their principal and jointly
occupied residence. In the current year, each makes energy conservation
expenditures of $300 with respect to the same residence. The maximum
qualified expenditure with respect to the residence is reduced by the
$1,600 of prior expenditures made by A and B. Therefore, only $400 of
the $600 current expenditures are eligible as energy conservation
expenditures. The resulting residential energy credit is $60 (15 percent
of $400) of which $30 apiece will be allocated to A and B ($300/$600 x
$60). The fact that A had previously computed the credit in prior years
with respect to $1,200 of the total $1,600 of expenditures is irrelevant
to the apportionment of the credit in the current year.
Example 2. In 1978, spouses C and D make $10,000 of renewable energy
source expenditures with respect to their principal residence, half of
which is paid by each spouse. No prior renewable energy source
expenditures have been taken into account with respect to that residence
by either C or D. C and D file separate returns for the calendar year.
Under the joint occupancy rule, the maximum allowable renewable energy
source credit with respect to C and D's principal residence is $2,200
(30 percent of the first $2,000, and 20 percent of the next $8,000 of
expenditures). Half of this amount or $1,100, will be allowed to each
spouse. If either spouse makes renewable energy source expenditures with
respect to the same principal residence in future years, none of those
expenditures would be qualified renewable energy source expenditures for
which a credit can be claimed. That is, not more than $2,200 may be
taken in the aggregate by C and D as a renewable energy source credit
with respect to their principal residence.
Example 3. In 1978, E and F make energy conservation expenditures of
$1,500 on their principal and jointly occupied residence. In 1979, E
moves away and G becomes the other joint occupant of the residence. F
and G make energy conservation expenditures of $1,000 in 1979. In 1980 F
moves away and H moves in with G. G and H make energy conservation
expenditures of $500. The maximum qualified expenditure made by F and G
with respect to the residence is reduced by the $1,500 of prior
expenditures made in 1978 by E and F. The maximum qualified expenditures
made by G and H with respect to the residence is reduced only by the
expenditures in prior years in connection with the residence during
which either G or H was a joint occupant. Accordingly, the maximum
qualified expenditures made by G and H with respect to the residence is
reduced only by the $1,000 of prior expenditures made in 1979 by F and
G.
(i) Condominiums and cooperative housing corporations. An individual
who is a tenant stockholder in a cooperative housing corporation (as
defined in section 216) or who is a member of a condominium management
association with respect to a condominium which he or she owns shall be
treated as having made a proportionate share of the energy conservation
expenditures or renewable energy source expenditures of such corporation
or association. The cooperative stockholder's allocable share of the
expenditures is to be the same as his or her proportionate share of the
cooperative's total outstanding stock (including any stock held by the
corporation). However, in the case
[[Page 57]]
where only certain cooperative stockholders are assessed for the
expenditures made by the cooperative housing corporation, only those
cooperative stockholders that are assessed shall be treated as having
made a share of the expenditures of such corporation. In such case, the
cooperative stockholder's share of the expenditures is the amount that
the stockholder is assessed. The allocable share of a condominium
management association member's energy conservation of renewable energy
source expenditures is the amount that the member is assessed (or would
be assessed in the case where expenditures are from general funds) by
the association as a result of such expenditures. The residential energy
credit for a qualified expenditure is allowable for the year in which
the association or corporation has completed original installation of
the item (or has paid or incurred the expenditure, if later). For
purposes of this paragraph, the term ``condominium management
association'' means an organization meeting the requirements of section
528(c)(1) of the Code (other than subparagraph (E) of that section),
with respect to a condominium project substantially all the units of
which are used as residences.
(j) Joint ownership of energy conservation property or renewable
energy source property--(1) In general. Energy conservation property
renewable energy source property include property which is jointly owned
by the taxpayer and another person (or persons) and installed in
connection with two or more dwelling units. For example, the fact that a
windmill, solar collector, or geothermal well and distribution system is
owned by two or more individuals does not preclude its qualification as
renewable energy source property. The amount of the credit allowable
under section 23 shall be computed separately with respect to the amount
of the expenditures made by each individual, subject to the limitations
of $2,000 imposed by section 23(b)(1) and $10,000 imposed by section
23(b)(2), per dwelling units of jointly owned property. For example, in
1982, A, B, and C purchased as joint owners renewable energy source
property that serviced two houses. One of the houses is jointly owned
and occupied by A and B and the other is owned and occupied by C alone.
The renewable energy source property cost $30,000 of which A paid
$9,000, B paid $6,000, and C paid $15,000. A and B must share the $4,000
credit (40% of $10,000 maximum) with respect to the expenditures for the
jointly owned house. Therefore, A is allowed a $2,400 credit ($4,000
times $9,000 divided by $9,000 plus $6,000) and B is allowed a $1,600
credit ($4,000 times $6,000 divided by $9,000 plus $6,000) with respect
to the expenditures attributable to the jointly owned house. C is
entitled to a credit of $4,000 with respect to the expenditures
attributable to the other house.
(2) Example. The application of this subparagraph may be illustrated
by the following example:
Example. A, B, and C each has a separate principal residence. They
agree to finance jointly the construction of a solar collector, each
providing one-third of the costs and taking one-third of the output of
the collector. Each will separately pay for the costs of connecting the
solar collector with his or her principal residence. Provided the solar
collector and connection equipment otherwise qualify as renewable energy
source property, A, B, and C will each be considered to have made
renewable energy source expenditures equal to one-third of the cost of
the collector plus his or her separate connection costs. Such
expenditures will be subject to the limitations and other rules
separately applicable to A, B, and C with respect to each principal
residence, such as those with respect to the $10 minimum (Sec. 1.23-
1(d)(1)), prior expenditures (Sec. 1.23-1(d)(2)), residential use
(paragraph (g) of this section), and joint occupancy (paragraph (h) of
this section).
(k) Basic adjustments. If a credit is allowed under section 23 or
former section 44C for any expenditure with respect to any property, the
increase in the basis of that property which would (but for this
paragraph) result from such expenditure shall be reduced by the amount
of the credit allowed.
(l) Recordkeeping--(1) In general. No residential energy credit is
allowable unless the taxpayer maintains the records described in
paragraph (l)(2) of this section. The records shall be retained so long
as the contents thereof may become material in the administration of any
internal revenue law.
(2) Records. The taxpayer must maintain records that clearly
identify the
[[Page 58]]
energy-conserving components and renewable energy source property with
respect to which a residential energy credit is claimed, and
substantiate their cost to the taxpayer, any labor costs properly
allocable to them paid for by the taxpayer, and the method used for
allocating such labor costs.
[T.D. 7717, 45 FR 57719, Aug. 29, 1980. Redesignated and amended by T.D.
8146, 52 FR 26672, July 16, 1987]
Sec. 1.23-4 Performance and quality standards. [Reserved]
[T.D. 7717, 45 FR 57721, Aug. 29, 1980. Redesignated by T.D. 8146, 52 FR
26672, July 16, 1987]
Sec. 1.23-5 Certification procedures.
(a) Certification that an item meets the definition of an energy-
conserving component or renewable energy source property. Upon the
request of a manufacturer of an item pursuant to paragraph (b) of this
section which is supported by proof that the item is entitled to be
certified, the Assistant Commissioner (Technical) shall certify (or
shall notify the manufacturer that the request is denied) that:
(1) The item meets the definition of insulation (see Sec. 1.23-
2(c)(1)).
(2) The item meets the definition of an other energy-conserving
component specified in section 23(c)(4) or former section 44C(c)(4) see
(Sec. 1.23-2(d)(4)).
(3) The item meets the definition of solar energy property (see
Sec. 1.23-2(f)), wind energy property (see Sec. 1.23-2(g)), or
geothermal energy property (see Sec. 1.23-2(h)).
(4) The item meets the definition of a category of energy-conserving
component that has been added to the list of approved items pursuant to
paragraph (d)(4)(viii) of Sec. 1.23-2.
(5) The item meets the definition of renewable energy source
property that transmits or uses a renewable energy source that has been
added to the list of approved renewable energy sources pursuant to
paragraph (e)(2) of Sec. 1.23-2.
(b) Procedure--(1) In general. A manufacturer of an item desiring to
apply under paragraph (a) shall submit the application to the
Commissioner of Internal Revenue, Attention: Associate Chief Counsel
(Technical), CC:C:E, 1111 Constitution Avenue NW., Washington, DC 20224.
Upon being advised by the National Office, orally or in writing, that an
adverse decision is contemplated a manufacturer may request a
conference. The conference must be held within 21 calendar days from the
date of that advice. Procedures for requesting an extension of the 21-
day period and notifying the manufacturer of the Service's decision on
that request are the same as those applicable to conferences on ruling
requests by taxpayers (see section 9.05 of Rev. Proc. 80-20).
(2) Contents of application. The application shall include a
description of the item (including appropriate design drawings and
specifications) and an explanation of the purpose and function of the
item. There shall accompany the application a declaration in the
following form: ``Under penalties of perjury, I declare that I have
examined this application, including accompanying documents and, to the
best of my knowledge and belief, the facts presented in support of the
application are true, correct, and complete.'' The statement must be
signed by the person or persons making the application.
(c) Effect of certification under paragraph (a). Certifications
granted under paragraph (a)(1), (2), or (3) will be applied
retroactively to April 20, 1977. However, certifications granted under
paragraph (a) (4) or (5) will be applied retroactively only to the date
the applicable energy-conserving component or renewable energy source
was added by Treasury decision to the list of qualifying components or
sources. Certification of an item under this section means that the
applicable definitional requirement of Sec. 1.23-2 is considered
satisfied in the case of any person claiming a residential energy credit
with respect to such item. However, it does not relieve manufacturers of
the need to establish that their items conform to performance and
quality standards (if any) provided under Sec. 1.23-4 and that their
items can reasonably be expected to remain in operation at least 3
years, in the case of insulation and other energy-conserving components,
or at least 5 years, in the case of renewable energy source property.
[T.D. 7717, 45 FR 57721, Aug. 29, 1980. Redesignated and amended by T.D.
8146, 52 FR 26672, July 16, 1987]
[[Page 59]]
Sec. 1.23-6 Procedure and criteria for additions to the approved list
of energy-conserving components or renewable energy sources.
(a) Procedures for additions to the list of energy-conserving
components or renewable energy sources--(1) In general. A manufacturer
of an item (or a group of manufacturers) desiring to apply for addition
to the approved list of energy-conserving components or renewable energy
sources pursuant to paragraph (d)(4)(viii) or (e)(2) of Sec. 1.23-2
shall submit an application to the Internal Revenue Service, Attention:
Associate Chief Counsel (Technical), CC:C:E, 1111 Constitution Avenue,
NW., Washington, DC 20224. The term ``manufacturer'' includes a person
who assembles an item or a system from components manufactured by other
persons. The application shall provide the information required under
paragraph (b) of this section. An application may request that more than
one item be added to the approved list. It will be the responsibility of
the Office of the Associate Chief Counsel (Technical) upon receipt of
the application to determine whether all the information required under
paragraph (b) of this section has been furnished with the application.
If an application lacks essential information, the applicant will be
advised of the additional information required. If the information (or a
reasonable explanation of the reason why the information cannot be made
available) is not forthcoming within 30 days of the date of that advice,
the application will be closed and the applicant will be so informed.
Any resubmission of information beyond the 30-day period will be treated
as a new application. If the Office of the Associate Chief Counsel
(Technical) already is considering an application with respect to the
same or a similar item, it may consolidate applications. The Office of
the Associate Chief Counsel will make a report and recommendation to the
ad hoc advisory board as to whether each item that is the subject to an
application should be added in accordance with the manufacturer's
request to the approved list of energy-conserving components or
renewable energy sources in light of the applicable criteria provided in
paragraph (c) and the standards for Secretarial determination provided
in paragraph (d) of this section. In making this recommendation, the
Office of the Associate Chief Counsel shall consult with the Secretary
of Energy and the Secretary of Housing and Urban Development (or their
delegates) and any other appropriate Federal officers to obtain their
views concerning the item in question. In addition, the Office of the
Associate Chief Counsel may request from the manufacturer clarification
of information submitted with the application. The Office of the
Associate Chief Counsel shall report its recommendation and forward the
application to the ad hoc advisory board for further consideration.
(2) Ad hoc advisory board. The Commissioner of Internal Revenue and
the Assistant Secretary (Tax Policy) shall establish an ad hoc advisory
board to consider applications and recommendations forwarded by the
Office of the Associate Chief Counsel (Technical). If a finding in favor
of addition of any item is made, the board shall report its
recommendation and forward the application to the Commissioner for
further consideration. If the item is approved by the Commissioner, the
application will be forwarded to the Secretary (or his delegate) for
further consideration. The application will be closed with respect to an
item if the board, the Commissioner, or the Secretary (or his delegate)
determines that, under the applicable criteria or the standards for
Secretarial determination, the item should not be added to the list of
energy-conserving components or renewable energy sources.
(3) Action on application. (i) A final decision to grant or deny any
application filed under paragraph (a)(1) shall be made within 1 year
after the application and all information required to be filed with such
request under paragraph (b) have been received by the Office of the
Associate Chief Counsel (Technical). The applicant manufacturer shall be
notified in writing of the final decision. In the event of a favorable
determination, a regulation will be issued in accordance with the
procedures contained in Sec. 601.601 to include the item as an energy-
conserving component or as a renewable energy
[[Page 60]]
source. A final decision to grant approval of an application is made
when a Treasury decision adding the item (that is subject of the
application) as an energy-conserving component or as a renewable energy
source is published in the Federal Register.
(ii) The applicant manufacturer shall be entitled to a conference
and be so notified anytime an adverse action is contemplated by the
Office of the Associate Chief Counsel, the ad hoc advisory board, the
Commissioner of Internal Revenue, or the Secretary (or his delegate) and
no conference was previously conducted. Upon being advised in writing
that an adverse recommendation or decision as to any item that is the
subject of an application is contemplated, a manufacturer may request a
conference. The conference must be held within 21 calendar days from the
mailing of that advice. Procedures for requesting an extension of the
21-day period and notifying the manufacturer of the recommendation or
decision with respect to that request are the same as those applicable
to conferences on ruling requests by taxpayers. The applicant is
entitled to only one conference. There is no right to another conference
when a favorable recommendation or decision is reversed at a higher
level.
(iii) A report of any application which has been denied during the
preceding month and the reasons for the denial shall be published each
month.
(b) Contents of application. The application by the manufacturer
shall include the following information:
(1) A description of the item and the generic class to which it
belongs, including any features relating to safe installation and use of
the item. This description shall include appropriate design drawings and
technical specifications (or representative drawings and specifications
when application by a group of manufacturers).
(2) An explanation of the purpose, function, and each recommended
use of the item.
(3) An estimate (and explanation of the estimation methods employed
and the assumptions made) of the total number of units that would be
sold for each recommended use during the first 4 years following the
addition of the item to the approved list and of the total number that
would be sold for each recommended use during that period in the absence
of addition. If the item is sold in more than one size, the estimate
shall indicate the projected sales for each size. This estimate shall
reflect total industry sales of the item. Past industry sales
information for each recommended use for the previous two years shall
also be provided.
(4) Whether sufficient capacity is available to increase production
to meet any increase in demand for the item, or for associated fuels and
materials, caused by such addition. This determination shall be based on
industry-wide data and not just the manufacturing capability of the
applicant. If the applicant has the exclusive right to manufacture the
item, this information shall also be provided in the application.
(5) An estimate (including estimation methods and assumptions) of
the energy in Btu's of oil and natural gas used directly or indirectly
per unit by the applicant in the manufacture of the item and other items
necessary for its use, the type of energy source (e.g., oil, natural
gas, coal, electricity), and the extent of its use in the manufacturing
process of the item. The applicant must also provide a list of the major
components of the item and their composition and weight.
(6) Test data and experience data (where experience data is
available) to substantiate for each recommended use the energy savings
in Btu's that are claimed will be achieved by one unit during a period
of one year. The data shall be obtained by controlled tests in which, if
possible, the addition of the item is the only variable. If the item may
be sold in various configurations, data shall be provided with respect
to energy savings from each configuration with significantly different
energy use characteristics. Test methods are to conform to recognized
industry or government standards. This determination shall take into
account the seasonal use of the item. If the energy savings of the item
varies with climatic conditions, data shall be provided with respect to
each climate zone. The applicant may use the Department of Energy's
climatic zones for heating and
[[Page 61]]
cooling (see Sec. 450.35 of 10 CFR part 450 (1980)).
(7) The impact of increased demand on the price of the item and the
energy source used by the item.
(8) The energy source which will be replaced or conserved by the
item, and, in the case of a request for addition to the approved list of
renewable energy sources, data establishing that the energy source is
inexhaustible.
(9) Data to show the total estimated savings of energy in Btu's
attributable to reduced consumption of oil or natural gas whether
directly or indirectly from use of the item, including assumptions
underlying this estimate. If the consumption of both oil and natural gas
will be reduced, data to show the energy savings in Btu's attributable
to each shall be provided. The estimate is to be based on energy savings
in Btu's per unit determined under paragraph (b)(6) of this section for
the first four years of the useful life of the item and is to take into
account only the additional units of the item estimated to be placed in
service as a result of the addition using data obtained under paragraph
(b)(3) of this section. If the item will result in reduction of oil or
natural gas consumption by replacing an item which uses such an energy
source, the application shall indicate the item replaced and the extent
to which this reduction will occur.
(10) Geographical information if required under paragraph (b)(6) of
this section to show the climatic zones of the country where the item is
expected to be used, including an estimate of the total number of
additional units to be placed in service during the first 4 years
following the addition of the item in the area as a result of the
addition of the item to the list of qualifying items.
(11) The retail cost of the item (or items if the item is sold in
more than one size) including all installation costs necessary for safe
and effective use.
(12) Whether the item is designed for residential use.
(13) The estimated useful life of the item and associated equipment
necessary for its use.
(14) The type and amount of waste and emissions in weight per unit
of energy saved resulting from use of the item.
(15) If the item might reasonably be suspected of presenting any
health or safety hazard, test data to show that the item does not
present such hazard.
With respect to applications for addition to the approved list of
renewable energy sources, the term ``item'' as used in this paragraph
refers to the property which uses the energy source and not the energy
source itself. The application should clearly indicate whether the
request is for addition to the approved list of energy-conserving
components or renewable energy sources, identify the provisions for
which data is being submitted, and present the data in the order
requested. The tests required under this paragraph may be conducted by
independent laboratories but the underlying data must be submitted along
with the test results. There shall accompany the request a declaration
in the following form: ``Under penalties of perjury, I declare that I
have examined this application, including accompanying documents, and,
to the best of my knowledge and belief, the facts presented in support
of the application are true, correct and complete.'' The statement must
be signed by the person or persons making the application. The
declaration shall not be made by the taxpayer's representative.
(c) Criteria for additions--(1) Additions to the approved list of
energy-conserving components. For an item to be considered for addition
to the approved list of energy-conserving components, the manufacturer
must show that the item increases the energy efficiency of a dwelling.
For an item to be considered as increasing the energy efficiency of a
dwelling, all of the following criteria must be met:
(i) The use of the item must improve the energy efficiency of the
dwelling structure, structural components of the dwelling, hot water
heating, or heating or cooling systems.
(ii) The use of the item must result, directly or indirectly, in a
significant reduction in the consumption of oil or natural gas.
(iii) The increase in energy efficiency must be established by test
data and in
[[Page 62]]
accordance with accepted testing standards.
(iv) The item must not present a safety, fire, environmental, or
health hazard when properly installed.
(2) Additions to the approved list of renewable energy sources. For
an energy source to be considered for addition to the approved list of
renewable energy sources, the manufacturer must show that the following
criteria are met:
(i) As in the case of solar, wind, and geothermal energy, the energy
source must be an inexhaustible energy supply. Accordingly, wood and
agricultural products and by-products are not considered renewable
energy sources. Similarly, no exhaustible or depletable energy source
(such as sources that are depletable under 611) will be considered.
(ii) The energy source must be capable of being used for heating or
cooling a residential dwelling or providing hot water or electricity for
use in such a dwelling.
(iii) A practical working device, machine, or mechanism, etc., must
exist and be commercially available to use such renewable energy source.
(iv) The use of the renewable energy source must not present a
significant safety, fire, environmental, or health hazard.
(d) Standards for Secretarial determination--(1) In general. The
Secretary will not make any addition to the approved list of energy-
conserving components or renewable energy sources unless the Secretary
determines that--
(i) There will be a reduction in the total consumption of oil or
natural gas as a result of the addition, and that reduction is
sufficient to justify any resulting decrease in Federal revenues.
(ii) The addition will not result in an increased use of any item
which is known to be, or reasonably suspected to be, environmentally
hazardous or a threat to public health or safety, and
(iii) Available Federal subsidies do not make the addition
unnecessary or inappropriate (in the light of the most advantageous
allocation of economic resources).
(2) Factors taken into account. In making any determination under
paragraph (d)(1)(i) of this section, the Secretary will--
(i) Make an estimate of the amount by which the addition will reduce
oil and natural gas consumption, and
(ii) Determine whether the addition compares favorably, on the basis
of the reduction in oil and natural gas consumption per dollar of cost
to the Federal Government (including revenue loss), with other Federal
programs in existence or being proposed.
(3) Factors taken into account in making estimates. In making any
estimate under subparagraph (2)(i), the Secretary will take into account
(among other factors)--
(i) The extent to which the use of any item will be increased as a
result of the addition,
(ii) Whether sufficient capacity is available to increase production
to meet any increase in demand for the item or associated fuels and
materials caused by the addition,
(iii) The amount of oil and natural gas used directly or indirectly
in the manufacture of the item and other items necessary for its use,
(iv) The estimated useful life of the item, and
(v) The extent additional use of the item leads, directly or
indirectly, to the reduced use of oil or natural gas. Indirect uses of
oil or natural gas include use of electricity derived from oil or
natural gas.
(e) Effective date of addition to approved lists. In the case of
additions to the approved list of energy-conserving components or
renewable energy sources, the credit allowable by Sec. 1.23-1 shall
apply with respect to expenditures which are made on or after the date a
Treasury decision amending the regulations pursuant to the application
is published in the Federal Register. However, the Secretary may
prescribe by regulations that expenditures for additions made on or
after the date referred to in the preceding sentence and before the
close of the taxable year in which such date occurs shall be taken into
account in the following taxable year. Additions to the list will be
subject to the performance and quality standards (if any) provided under
Sec. 1.23-4 which are in effect at the time of the addition.
Furthermore, any addition made to the approved list will be subject to
reevaluation by the Secretary
[[Page 63]]
for the purpose of determining whether the item still meets the
requisite criteria and standards for addition to the list. If it is
determined by the Secretary that an item no longer meets the requisite
criteria, the Secretary will amend the regulations to delete the item
from the approved list. Removal of an item from the list will be
prospective from the date a Treasury decision amending the regulations
is published in the Federal Register.
(Secs. 44C and 7805 of the Internal Revenue Code of 1954 (92 Stat. 3175,
26 U.S.C. 44C; 68A Stat. 917, 26 U.S.C. 7805). The amendments to the
Statement of Procedural Rules are issued under the authority contained
in 5 U.S.C. 301 and 552)
[T.D. 7861, 47 FR 56331, Dec. 16, 1982. Redesignated and amended by T.D.
8146, 52 FR 26673, July 16, 1987]
Sec. 1.25-1T Credit for interest paid on certain home mortgages
(Temporary).
(a) In general. Section 25 permits States and political subdivisions
to elect to issue mortgage credit certificates in lieu of qualified
mortgage bonds. An individual who holds a qualified mortgage credit
certificate (as defined in Sec. 1.25-3T) is entitled to a credit
against his Federal income taxes. The amount of the credit depends upon
(1) the amount of mortgage interest paid or accrued during the year and
(2) the applicable certificate credit rate. See Sec. 1.25-2T. The
amount of the deduction under section 163 for interest paid or accrued
during any taxable year is reduced by the amount of the credit allowable
under section 25 for such year. See Sec. 1.163-6T. The holder of a
qualified mortgage credit certificate may be entitled to additional
withholding allowances. See section 3402 (m) and the regulations
thereunder.
(b) Definitions. For purposes of Sec. Sec. 1.25-2T through 1.25-8T
and this section, the following definitions apply:
(1) Mortgage. The term ``mortgage'' includes deeds of trust,
conditional sales contracts, pledges, agreements to hold title in
escrow, and any other form of owner financing.
(2) State. (i) The term ``State'' includes a possession of the
United States and the District of Columbia.
(ii) Mortgage credit certificates issued by or on behalf of any
State or political subdivision (``governmental unit'') by constituted
authorities empowered to issue such certificates are the certificates of
such governmental unit.
(3) Qualified home improvement loan. The term ``qualified home
improvement loan'' has the meaning given that term under section 103A
(1)(6) and the regulations thereunder.
(4) Qualified rehabilitation loan. The term ``qualified
rehabilitation loan'' has the meaning given that term under section 103A
(1)(7)(A) and the regulations thereunder.
(5) Single-family and owner-occupied residences. The terms ``single-
family'' and ``owner-occupied'' have the meaning given those terms under
section 103A (1)(9) and the regulations thereunder.
(6) Constitutional home rule city. The term ``constitutional home
rule city'' means, with respect to any calendar year, any political
subdivision of a State which, under a State constitution which was
adopted in 1970 and effective on July 1, 1971, had home rule powers on
the 1st day of the calendar year.
(7) Targeted area residence. The term ``targeted area residence''
has the meaning given that term under section 103A (k) and the
regulations thereunder.
(8) Acquisition cost. The term ``acquisition cost'' has the meaning
given that term under section 103A (1)(5) and the regulations
thereunder.
(9) Average area purchase price. The term ``average area purchase
price'' has the meaning given that term under subparagraphs (2), (3),
and (4) of section 103A (f) and the regulations thereunder. For purposes
of this paragraph (b)(9), all determinations of average area purchase
price shall be made with respect to residences as that term is defined
in section 103A and the regulations thereunder.
(10) Total proceeds. The ``total proceeds'' of an issue is the sum
of the products determined by multiplying--
(i) The certified indebtedness amount of each mortgage credit
certificate issued pursuant to such issue, by
[[Page 64]]
(ii) The certificate credit rate specified in such certificate.
Each qualified mortgage credit certificate program shall be treated as a
separate issue of mortgage credit certificates.
(11) Residence. The term ``residence'' includes stock held by a
tenant-stockholder in a cooperative housing corporation (as those terms
are defined in section 216(b) (1) and (2)). It does not include property
such as an appliance, a piece of furniture, a radio, etc., which, under
applicable local law, is not a fixture. The term also includes any
manufactured home which has a minimum of 400 square feet of living space
and a minimum width in excess of 102 inches and which is of a kind
customarily used at a fixed location. The preceding sentence shall not
apply for purposes of determining the average area purchase price for
single-family residences, nor shall it apply for purposes of determining
the State ceiling amount. The term ``residence'' does not, however,
include recreational vehicles, campers, and other similar vehicles.
(12) Related person. The term ``related person'' has the meaning
given that term under section 103(b)(6)(C)(i) and Sec. 1.103-10(e)(1).
(13) Date of issue. A mortgage credit certificate is considered
issued on the date on which a closing agreement is signed with respect
to the certified indebtedness amount.
(c) Affidavits. For purposes of Sec. Sec. 1.25-1T through 1.25-8T,
an affidavit filed in connection with the requirements of Sec. Sec.
1.25-1T through 1.25-8T shall be made under penalties of perjury.
Applicants for mortgage credit certificates who are required by a lender
or the issuer to sign affidavits must be informed that any fraudulent
statement will result in (1) the revocation of the individual's mortgage
credit certificate, and (2) a $10,000 penalty under section 6709. Other
persons required by a lender or an issuer to provide affidavits must
receive similar notice. A person may not rely on an affidavit where that
person knows or has reason to know that the information contained in the
affidavit is false.
[T.D. 8023, 50 FR 19346, May 8, 1985]
Sec. 1.25-2T Amount of credit (Temporary).
(a) In general. Except as otherwise provided, the amount of the
credit allowable for any taxable year to an individual who holds a
qualified mortgage credit certificate is equal to the product of the
certificate credit rate (as defined in paragraph (b)) and the amount of
the interest paid or accrued by the taxpayer during the taxable year on
the certified indebtedness amount (as defined in paragraph (c)).
(b) Certificate credit rate--(1) In general. For purposes of
Sec. Sec. 1.25-1T through 1.25-8T, the term ``certificate credit rate''
means the rate specified by the issuer on the mortgage credit
certificate. The certificate credit rate shall not be less than 10
percent nor more than 50 percent.
(2) Limitation in certain States. (i) In the case of a State which--
(A) Has a State ceiling for the calendar year in which an election
is made that exceeds 20 percent of the average annual aggregate
principal amount of mortgages executed during the immediately preceding
3 calendar years for single-family owner-occupied residences located
within the jurisdiction of such State, or
(B) Issued qualified mortgage bonds in an aggregate amount less than
$150 million for calendar year 1983.
the certificate credit rate for any mortgage credit certificate issued
under such program shall not exceed 20 percent unless the issuing
authority submits a plan to the Commissioner to ensure that the weighted
average of the certificate credit rates in such mortgage credit
certificate program does not exceed 20 percent and the Commissioner
approves such plan. For purposes of determining the average annual
aggregate principal amount of mortgages executed during the immediately
preceding 3 calendar years for single-family owner-occupied residences
located within the jurisdiction of such State, an issuer may rely upon
the amount published by the Treasury Department for such calendar years.
An issuer may rely on a different amount from that safe-harbor
limitation where the issuer has made a more accurate and comprehensive
determination of that amount. The weighted
[[Page 65]]
average of the certificate credit rates in a mortgage credit certificate
program is determined by dividing the sum of the products obtained by
multiplying the certificate credit rate of each certificate by the
certified indebtedness amount with respect to that certificate by the
sum of the certified indebtedness amounts of the certificates issued.
See section 103A(g) and the regulations thereunder for the definition of
the term ``State ceiling''.
(ii) The following example illustrates the application of this
paragraph (b)(2):
Example. City Z issues four qualified mortgage credit certificates
pursuant to its qualified mortgage credit certificate program. H
receives a certificate with a certificate credit rate of 30 percent and
a certified indebtedness amount of $50,000. I receives a certificate
with a certificate credit rate of 25 percent and a certified
indebtedness amount of $100,000. J and K each receive certificates with
certificate credit rates of 10 percent; their certified indebtedness
amounts are $50,000 and $100,000, respectively. The weighted average of
the certificate credit rates is determined by dividing the sum of the
products obtained by multiplying the certificate credit rate of each
certificate by the certified indebtedness amount with respect to that
certificate ((.3x$50,000) + (.25x$100,000) + (.1x$50,000) +
(.1x$100,000)) by the sum of the certified indebtedness amounts of the
certificates issued ($50,000+$100,000+$50,000+$100,000). Thus, the
weighted average of the certificate credit rates is 18.33 percent
($55,000/$300,000).
(c) Certified indebtedness amount--(1) In general. The term
``certified indebtedness amount'' means the amount of indebtedness which
is--
(i) Incurred by the taxpayer--
(A) To acquire his principal residence, Sec. 1.25-2T(c)(1)(i),
(B) As a qualified home improvement loan, or
(C) As a qualified rehabilitation loan, and
(ii) Specified in the mortgage credit certificate.
(2) Example. The following example illustrates the application of
this paragraph:
Example. On March 1, 1986, State X, pursuant to its qualified
mortgage credit certificate program, provides a mortgage credit
certificate to B. State X specifies that the maximum amount of the
mortgage loan for which B may claim a credit is $65,000. On March 15, B
purchases for $67,000 a single-family dwelling for use as his principal
residence. B obtains from Bank M a mortgage loan for $60,000. State X,
or Bank M acting on behalf of State X, indicates on B's mortgage credit
certificate that the certified indebtedness amount of B's loan is
$60,000. B may claim a credit under section 25 (e) based on this amount.
(d) Limitation on credit--(1) Limitation where certificate credit
rate exceeds 20 percent. (i) If the certificate credit rate of any
mortgage credit certificate exceeds 20 percent, the amount of the credit
allowed to the taxpayer by section 25(a)(1) for any year shall not
exceed $2,000. Any amount denied under this paragraph (d)(1) may not be
carried forward under section 25(e)(1) and paragraph (d)(2) of this
section.
(ii) If two or more persons hold interests in any residence, the
limitation of paragraph (d)(1)(i) shall be allocated among such persons
in proporation to their respective interests in the residence.
(2) Carryforward of unused credit. (i) If the credit allowable under
section 25 (a) and Sec. 1.25-2T for any taxable year exceeds the
applicable tax limit for that year, the excess (the ``unused credit'')
will be a carryover to each of the 3 succeeding taxable years and,
subject to the limitations of paragraph (d)(2)(ii), will be added to the
credit allowable by section 25 (a) and Sec. 1.25-2T for that succeeding
year.
(ii) The amount of the unused credit for any taxable year (the
``unused credit year'') which may be taken into account under this
paragraph (d)(2) for any subsequent taxable year may not exceed the
amount by which the applicable tax limit for that subsequent taxable
year exceeds the sum of (A) the amount of the credit allowable under
section 25 (a) and Sec. 1.25-1T for the current taxable year, and (B)
the sum of the unused credits which, by reason of this paragraph (d)(2),
are carried to that subsequent taxable year and are attributable to
taxable years before the unused credit year. Thus, if by reason of this
paragraph (d)(2), unused credits from 2 prior taxable years are carried
forward to a subsequent taxable year, the unused credit from the earlier
of those 2 prior years must be taken into account before the unused
credit from the later of those 2 years is taken into account.
[[Page 66]]
(iii) For purposes of this paragraph (d)(2) the term ``applicable
tax limit'' means the limitation imposed by section 26 (a) for the
taxable year reduced by the sum of the credits allowable for that year
under section 21, relating to expenses for household and dependent care
services necessary for gainful employment, section 22, relating to the
credit for the elderly and the permanently disabled, section 23,
relating to the residential energy credit, and section 24, relating to
contributions to candidates for public office. The limitation imposed by
section 26 (a) for any taxable year is equal to the taxpayer's tax
liability (as defined in section 26 (b)) for that year.
(iv) The following examples illustrate the application of this
paragraph (d)(2):
Example 1. (i) B, a calendar year taxpayer, holds a qualified
mortgage credit certificate. For 1986 B's applicable tax limit (i.e.,
tax liability) is $1,100. The amount of the credit under section 25 (a)
and Sec. 1.25-2T for 1986 is $1,700. For 1986 B is not entitled to any
of the credits described in sections 21 through 24. Under Sec. 1.25-2T
(d)(2), B's unused credit for 1986 is $600, and B is entitled to carry
forward that amount to the 3 succeeding years.
(ii) For 1987 B's applicable tax limit is $1,500, the amount of the
credit under section 25 (a) and Sec. 1.25-2T is $1,700, and the unused
credit is $200. For 1988 B's applicable tax limit is $2,000, the amount
of the credit under section 25 (a) and Sec. 1.25-2T is $1,300, and
there is no unused credit. For 1987 and 1988 B is not entitled to any of
the credits described in sections 21 through 24. No portion of the
unused credit for 1986 my be used in 1987. For 1988 B is entitled to
claim a credit of $2,000 under section 25 (a) and Sec. 1.25-2T,
consisting of a $1,300 credit for 1988, the $600 unused credit for 1986,
and $100 of the $200 unused credit for 1987. In addition, B may carry
forward the remaining unused credit for 1987 ($100) to 1989 and 1990.
Example 2. The facts are the same as in Example (1) except that for
1988 B is entitled to a credit of $400 under section 23. B's applicable
tax limit for 1988 is $1,600 ($2,000 less $400). For 1988 B is entitled
to claim a credit of $1,600 under section 25 (a) and Sec. 1.25-2T,
consisting of a $1,300 credit for 1988 and $300 of the unused credit for
1986. In addition, B may carry forward the remaining unused credits of
$300 for 1986 to 1989 and of $200 for 1987 to 1989 and 1990.
[T.D. 8023, 50 FR 19346, May 8, 1985]
Sec. 1.25-3 Qualified mortgage credit certificate.
(a)-(g)(1)(ii) [Reserved]. For further guidance, see Sec. 1.25-
3T(a) through (g)(1)(ii).
(g)(1)(iii) Reissued certificate exception. See paragraph (p) of
this section for rules regarding the exception in the case of
refinancing existing mortgages.
(g)(2)-(o) [Reserved]. For further guidance, see Sec. 1.25-3T(g)(2)
through (o).
(p) Reissued certificates for certain refinancings--(1) In general.
If the issuer of a qualified mortgage credit certificate reissues a
certificate in place of an existing mortgage credit certificate to the
holder of that existing certificate, the reissued certificate is treated
as satisfying the requirements of this section. The period for which the
reissued certificate is in effect begins with the date of the
refinancing (that is, the date on which interest begins accruing on the
refinancing loan).
(2) Meaning of existing certificate. For purposes of this paragraph
(p), a mortgage credit certificate is an existing certificate only if it
satisfies the requirements of this section. An existing certificate may
be the original certificate, a certificate issued to a transferee under
Sec. 1.25-3T(h)(2)(ii), or a certificate previously reissued under this
paragraph (p).
(3) Limitations on reissued certificate. An issuer may reissue a
mortgage credit certificate only if all of the following requirements
are satisfied:
(i) The reissued certificate is issued to the holder of an existing
certificate with respect to the same property to which the existing
certificate relates.
(ii) The reissued certificate entirely replaces the existing
certificate (that is, the holder cannot retain the existing certificate
with respect to any portion of the outstanding balance of the certified
mortgage indebtedness specified on the existing certificate).
(iii) The certified mortgage indebtedness specified on the reissued
certificate does not exceed the remaining outstanding balance of the
certified mortgage indebtedness specified on the existing certificate.
(iv) The reissued certificate does not increase the certificate
credit rate specified in the existing certificate.
[[Page 67]]
(v) The reissued certificate does not result in an increase in the
tax credit that would otherwise have been allowable to the holder under
the existing certificate for any taxable year. The holder of a reissued
certificate determines the amount of tax credit that would otherwise
have been allowable by multiplying the interest that was scheduled to
have been paid on the refinanced loan by the certificate rate of the
existing certificate. In the case of a series of refinancings, the tax
credit that would otherwise have been allowable is determined from the
amount of interest that was scheduled to have been paid on the original
loan and the certificate rate of the original certificate.
(A) In the case of a refinanced loan that is a fixed interest rate
loan, the interest that was scheduled to be paid on the refinanced loan
is determined using the scheduled interest method described in paragraph
(p)(3)(v)(C) of this section.
(B) In the case of a refinanced loan that is not a fixed interest
rate loan, the interest that was scheduled to be paid on the refinanced
loan is determined using either the scheduled interest method described
in paragraph (p)(3)(v)(C) of this section or the hypothetical interest
method described in paragraph (p)(3)(v)(D) of this section.
(C) The scheduled interest method determines the amount of interest
for each taxable year that was scheduled to have been paid in the
taxable year based on the terms of the refinanced loan including any
changes in the interest rate that would have been required by the terms
of the refinanced loan and any payments of principal that would have
been required by the terms of the refinanced loan (other than repayments
required as a result of any refinancing of the loan).
(D) The hypothetical interest method (which is available only for
refinanced loans that are not fixed interest rate loans) determines the
amount of interest treated as having been scheduled to be paid for a
taxable year by constructing an amortization schedule for a hypothetical
self-amortizing loan with level payments. The hypothetical loan must
have a principal amount equal to the remaining outstanding balance of
the certified mortgage indebtedness specified on the existing
certificate, a maturity equal to that of the refinanced loan, and
interest equal to the annual percentage rate (APR) of the refinancing
loan that is required to be calculated for the Federal Truth in Lending
Act.
(E) A holder must consistently apply the scheduled interest method
or the hypothetical interest method for all taxable years beginning with
the first taxable year the tax credit is claimed by the holder based
upon the reissued certificate.
(4) Examples. The following examples illustrate the application of
paragraph (p)(3)(v) of this section:
Example 1. A holder of an existing certificate that meets the
requirements of this section seeks to refinance the mortgage on the
property to which the existing certificate relates. The final payment on
the holder's existing mortgage is due on December 31, 2000; the final
payment on the new mortgage would not be due until January 31, 2004. The
holder requests that the issuer provide to the holder a reissued
mortgage credit certificate in place of the existing certificate. The
requested certificate would have the same certificate credit rate as the
existing certificate. For each calendar year through the year 2000, the
credit that would be allowable to the holder with respect to the new
mortgage under the requested certificate would not exceed the credit
allowable for that year under the existing certificate. The requested
certificate, however, would allow the holder credits for the years 2001
through 2004, years for which, due to the earlier scheduled retirement
of the existing mortgage, no credit would be allowable under the
existing certificate. Under paragraph (p)(3)(v) of this section, the
issuer may not reissue the certificate as requested because, under the
existing certificate, no credit would be allowable for the years 2001
through 2004. The issuer may, however, provide a reissued certificate
that limits the amount of the credit allowable in each year to the
amount allowable under the existing certificate. Because the existing
certificate would allow no credit after December 31, 2000, the reissued
certificate could expire on December 31, 2000.
Example 2. (a) The facts are the same as Example 1 except that the
existing mortgage loan has a variable rate of interest and the
refinancing loan will have a fixed rate of interest. To determine
whether the limit under paragraph (p)(3)(v) of this section is met for
any taxable year, the holder must calculate the amount of credit that
otherwise would have been allowable absent the refinancing. This
requires a determination of the amount
[[Page 68]]
of interest that would have been payable on the refinanced loan for the
taxable year. The holder may determine this amount by--
(1) Applying the terms of the refinanced loan, including the
variable interest rate or rates, for the taxable year as though the
refinanced loan continued to exist; or
(2) Obtaining the amount of interest, and calculating the amount of
credit that would have been available, from the schedule of equal
payments that fully amortize a hypothetical loan with the principal
amount equal to the remaining outstanding balance of the certified
mortgage indebtedness specified on the existing certificate, the
interest equal to the annual percentage rate (APR) of the refinancing
loan, and the maturity equal to that of the refinanced loan.
(b) The holder must apply the same method for each taxable year the
tax credit is claimed based upon the reissued mortgage credit
certificate.
(5) Coordination with Section 143(m)(3). A refinancing loan
underlying a reissued mortgage credit certificate that replaces a
mortgage credit certificate issued on or before December 31, 1990, is
not a federally subsidized indebtedness for the purposes of section
143(m)(3) of the Internal Revenue Code.
[T.D. 8692, 61 FR 66214, Dec. 17, 1996]
Sec. 1.25-3T Qualified mortgage credit certificate (Temporary).
(a) Definition of qualified mortgage credit certificate. For
purposes of Sec. Sec. 1.25-1T through 1.25-8T, the term ``qualified
mortgage credit certificate'' means a certificate that meets all of the
requirements of this section.
(b) Qualified mortgage credit certificate program. A certificate
meets the requirements of this paragraph if it is issued under a
qualified mortgage credit certificate program (as defined in Sec. 1.25-
4T).
(c) Required form and information. A certificate meets the
requirements of this paragraph if it is in the form specified in Sec.
1.25-6T and if all the information required by the form is specified on
the form.
(d) Residence requirement--(1) In general. A certificate meets the
requirements of this paragraph only if it is provided in connection with
the acquisition, qualified rehabilitation, or qualified home improvement
of a residence, that is--
(i) A single-family residence (as defined in Sec. 1.25-1T(b)(5))
which, at the time the financing on the residence is executed or
assumed, can reasonably be expected by the issuer to become (or, in the
case of a qualified home improvement loan, to continue to be) the
principal residence (as defined in section 1034 and the regulations
thereunder) of the holder of the certificate within a reasonable time
after the financing is executed or assumed, and
(ii) Located within the jurisdiction of the governmental unit
issuing the certificate.
See section 103a(d) and the regulations thereunder for further
definitions and requirements.
(2) Certification procedure. The requirements of this paragraph will
be met if the issuer or its agent obtains from the holder of the
certificate an affidavit stating his intent to use (or, in the case of a
qualified home improvement loan, that he is currently using and intends
to continue to use) the residence as his principal residence within a
reasonable time (e.g., 60 days) after the mortgage credit certificate is
issued and stating that the holder will notify the issuer of the
mortgage credit certificate if the residence ceases to be his principal
residence. The affidavit must also state facts that are sufficient for
the issuer or his agent to determine whether the residence is located
within the jurisdiction of the issuer that issued the mortgage credit
certificate.
(e) 3-year requirement--(1) In general. A certificate meets the
requirements of this paragraph only if the holder of the certificate had
no present ownership interest in a principal residence at any time
during the 3-year period prior to the date on which the mortgage on the
residence in connection with which the certificate is provided is
executed. For purposes of the preceding sentence, the holder's interest
in the residence with respect to which the certificate is being provided
shall not be taken into account. See section 103A(e) and the regulations
thereunder for further definitions and requirements.
(2) Exceptions. Paragraph (e)(1) shall not apply with respect to--
(i) Any certificate provided with respect to a targeted area
residence (as defined in Sec. 1.25-1T(b)(7)),
[[Page 69]]
(ii) Any qualified home improvement loan (as defined in Sec. 1.25-
1T(b)(3)), and
(iii) Any qualified rehabilitation loan (as defined in Sec. 1.25-
1T(b)(4)).
(3) Certification procedure. The requirements of paragraph (e)(1)
will be met if the issuer or its agent obtains from the holder of the
certificate an affidavit stating that he had no present ownership
interest in a principal residence at any time during the 3-year period
prior to the date of which the certificate is issued and the issuer or
its agent obtains from the applicant copies of the applicant's Federal
tax returns for the preceding 3 years and examines each statement to
determine whether the applicant has claimed a deduction for taxes on
property which was the applicant's principal residence pursuant to
section 164(a)(1) or a deduction pursuant to section 163 for interest
paid on a mortgage secured by property which was the applicant's
principal residence. Where the mortgage is executed during the period
between January 1 and February 15 and the applicant has not yet filed
has Federal income tax return with the Internal Revenue Service, the
issuer may, with respect to such year, rely on an affidavit of the
applicant that the applicant is not entitled to claim deductions for
taxes or interest on indebtedness with respect to property constituting
his principal residence for the preceding calendar year. In the
alternative, when applicable, the holder may provide an affidavit
stating that one of the exceptions provided in paragraph (e)(2) applies.
(4) Special rule. An issuer may submit a plan to the Commissioner
for distributing certificates, in an amount not to exceed 10 percent of
the proceeds of the issue, to individuals who do not meet the
requirements of this paragraph. Such plan must describe a procedure for
ensuring that no more than 10 percent of the proceeds of a such issue
will be used to provide certificates to such individuals. If the
Commissioner approves the issuer's plan, certificates issued in
accordance with the terms of the plan to holders who do not meet the 3-
year requirement do not fail to satisfy the requirements of this
paragraph.
(f) Purchase price requirement--(1) In general. A certificate meets
the requirements of this paragraph only if the acquisition cost (as
defined in Sec. 1.25-1T(b)(8)) of the residence, other than a targeted
area residence, in connection with which the certificate is provided
does not exceed 110 percent of the average area purchase price (as
defined in Sec. 1.25-1T(b)(9)) applicable to that residence. In the
case of a targeted area residence (as defined in Sec. 1.251T(b)(7)) the
acquisition cost may not exceed 120 percent of the average area purchase
price applicable to such residence. See section 1093A(f) and the
regulations thereunder for further definitions and requirements.
(2) Certification procedure. The requirements of paragraph (f)(1)
will be met if the issuer or its agent obtains affidavits executed by
the seller and the buyer that state these requirements have been met.
Such affidavits must include an itemized list of--
(i) Any payments made by the buyer (or a related person) or for the
benefit of the buyer,
(ii) If the residence is incomplete, an estimate of the reasonable
cost of completing the residence, and
(iii) If the residence is purchased subject to a ground rent, the
capitalized value of the ground rent.
The issuer or his agent must examine such affidavits and determine
whether, on the basis of information contained therein, the purchase
price requirement is met.
(g) New mortgage requirement--(1) In general. (i) A certificate
meets the requirements of this paragraph only if the certificate is not
issued in connection with the acquisition or replacement of an existing
mortgage. Except in the case of a qualified home improvement loan, the
certificate must be issued to an individual who did not have a mortgage
(whether or not paid off) on the residence with respect to which the
certificate is issued at any time prior to the execution of the
mortgage.
(ii) Exceptions. For purposes of this paragraph, a certificate used
in connection with the replacement of--
(A) Construction period loans,
(B) Bridge loans or similar temporary initial financing, and
(C) In the case of a qualified rehabilitation loan, an existing
mortgage,
[[Page 70]]
shall not be treated as being used to acquire or replace an existing
mortgage. Generally, temporary initial financing is any financing which
has a term of 24 months or less. See section 103A(j)(1) and the
regulations thereunder for examples illustrating the application of
these requirements.
(2) Certification procedure. The requirements of paragraph (g)(1)
will be met if the issuer or its agent obtains from the holder of the
certificate an affidavit stating that the mortage being acquired in
connection with the certificate will not be used to acquire or replace
an existing mortgage (other than one that falls within the exceptions
described in paragraph (g)(1)(ii)).
(h) Transfer of mortgage credit certificates--(1) In general. A
certificate meets the requirements of this paragraph only if it is (i)
not transferable or (ii) transferable only with the approval of the
issuer.
(2) Transfer procedure. A certificate that is transferred with the
approval of the issuer is a qualified mortgage credit certificate in the
hands of the transferee only if each of the following requirements is
met:
(i) The transferee assumed liability for the remaining balance of
the certified indebtedness amount in connection with the acquisition of
the residence from the transferor,
(ii) The issuer issues a new certificate to the transferee, and
(iii) The new certificate meets each of the requirements of
paragraphs (d), (e), (f), and (i) of this section based on the facts as
they exist at the time of the transfer as if the mortgage credit
certificate were being issued for the first time. For example, the
purchase price requirement is to be determined by reference to the
average area purchase price at the time of the assumption and not when
the mortgage credit certificate was originally issued.
(3) Statement on certificate. The requirements of paragraph (h)(1)
will be met if the mortgage credit certificate states that the
certificate may not be transferred or states that the certificate may
not be transferred unless the issuer issues a new certificate in place
of the original certificate.
(i) Prohibited mortgages--(1) In general. A certificate meets the
requirements of this paragraph only if it is issued in connection with
the acquisition of a residence none of the financing of which is
provided from the proceeds of--
(i) A qualified mortgage bond (as defined under section 103A(c)(1)
and the regulations thereunder), or
(ii) A qualified veterans' mortgage bond (as defined under section
103A(c)(3) and the regulations thereunder).
Thus, for example, if a mortgagor has a mortgage on his principal
residence that was obtained from the proceeds of a qualified mortgage
bond, a mortgage credit certificate issued to such mortgagor in
connection with a qualified home improvement loan with respect to such
residence is not a qualified mortgage credit certificate. If, however,
the financing provided from the proceeds of the qualified mortgage bond
had been paid off in full, the certificate would be a qualified mortgage
credit certificate (assuming all the requirements of this paragraph are
met).
(2) Certification procedure. The requirements of paragraph (i)(1)
will be met if the issuer or its agent obtains from the holder of the
certificate an affidavit stating that no portion of the financing of the
residence in connection with which the certificate is issued is provided
from the proceeds of a qualified mortgage bond or a qualified veterans'
mortgage bond.
(j) Particular lenders--(1) In general. Except as otherwise provided
in paragraph (j)(2), a certificate meets the requirements of this
paragraph only if the certificate is not limited to indebtedness
incurred from particular lenders. A certificate is limited to
indebtedness from particular lenders if the issuer, directly or
indirectly, prohibits the holder of a certificate from obtaining
financing from one or more lenders or requires the holder of a
certificate to obtain financing from one or more lenders. For purposes
of this paragraph, a lender is any person, including an issuer of
mortgage credit certificates, that provides financing for the
acquisition, qualified rehabilitation, or qualified home improvement of
a residence.
(2) Exception. A mortgage credit certificate that is limited to
indebtedness
[[Page 71]]
incurred from particular lenders will not cease to meet the requirements
of this paragraph if the Commissioner approves the basis for such
limitation. The Commissioner may approve the basis for such limitation
if the issuer establishes to the satisfaction of the Commissioner that
it will result in a significant economic benefit to the holders of
mortgage credit certificates (e.g., substantially lower financing costs)
compared to the result without such limitation.
(3) Taxable bonds. The requirements of this paragraph do not prevent
an issuer of mortgage credit certificates from issuing mortgage subsidy
bonds (other than obligations described in section 103 (a)) the proceeds
of which are to be used to provide mortgages to holders of mortgage
credit certificates provided that the holders of such certificates are
not required to obtain financing from the proceeds of the bond issue.
See Sec. 1.25-4T (h) with respect to permissible fees.
(4) Lists of participating lenders. The requirements of this
paragraph do not prohibit an issuer from maintaining a list of lenders
that have stated that they will make loans to qualified holders of
mortgage credit certificates, provided that (i) the issuer solicits such
statements in a public notice similar to the notice described in Sec.
1.25-7T, (ii) lenders are provided a reasonable period of time in which
to express their interest in being included in such a list, and (iii)
holders of mortgage credit certificates are not required to obtain
financing from the lenders on the list. If an issuer maintains such a
list, it must update the list at least annually.
(5) Certification procedure. The requirements of this paragraph will
be met if (i) the issuer or its agent obtains from the holder of the
certificate an affidavit stating that the certificate was not limited to
indebtedness incurred from particular lenders or (ii) the issuer obtains
a ruling from the Commissioner under paragraph (j)(2).
(6) Examples. The following examples illustrate the application of
this paragraph:
Example 1. Under its mortgage credit certificate program, County Z
distributes all the certificates to be issued to a group of 60
participating lenders. Residents of County Z may obtain mortgage credit
certificates only from the participating lenders and only in connection
with the acquisition of mortgage financing from that lender or one of
the other participating lenders. Certificates issued under this program
do not meet the requirements of this paragraph since the certificates
are limited to indebtedness incurred from particular lenders. The
certificates, therefore, are not qualified mortgage credit certificates.
Example 2. In connection with its mortgage credit certificate
program, County Y arranges with Bank P for a line of credit to be used
to provide mortgage financing to holders of mortgage credit
certificates. County Y, pursuant to paragraph (j)(4), maintains a list
of lenders participating in the mortgage credit certificate program.
County Y distributes the certificates directly to applicants. Holders of
the certificates are not required to obtain mortgage financing through
the line of credit or through a lender on the list of participating
lenders. Certificates issued pursuant to County Y's program satisfy the
requirements of this paragraph.
(k) Developer certification--(1) In general. A mortgage credit
certificate that is allocated by the issuer to any particular
development meets the requirements of this paragraph only if the
developer provides a certification to the purchaser of the residence and
the issuer stating that the purchase price of that residence is not
higher than the price would be if the issuer had not allocated mortgage
credit certificates to the development. The certification must be made
by the developer if a natural person or, if not, by a duly authorized
official of the developer.
(2) Certification procedure. The requirements of this paragraph will
be met if the issuer or its agent obtains from the holder of the
certificate an affidavit stating that he has received from the developer
the certification described in this paragraph.
(l) Expiration--(1) In general. A certificate meets the requirements
of this paragraph if the certified indebtedness amount is incurred prior
to the close of the second calendar year following the calendar year for
which the issuer elected not to issue qualified mortgage bonds under
Sec. 1.25-4T with respect to that issue of mortgage credit
certificates. Thus, for example, if on October 1, 1984, an issuing
authority elects under Sec. 1.25-4T not to issue qualified
[[Page 72]]
mortgage bonds, a mortgage credit certificate provided under that
program does not meet the requirements of this paragraph unless the
indebtedness is incurred on or before December 31, 1986.
(2) Issuer-imposed expiration dates. An issuer of mortgage credit
certificates may provide that a certificate shall expire if the holder
of the certificate does not incure certified indebtedness by a date that
is prior to the expiration date provided in paragraph (l)(1). A
certificate that expires prior to the date provided in paragraph (l)(1)
may be reissued provided that the requirements of this paragraph are
met.
(m) Revocation. A certificate meets the requirements of this
paragraph only if it has not been revoked. Thus, the credit provided by
section 25 and Sec. 1.25-1T does not apply to interest paid or accrued
following the revocation of a certificate. A certificate is treated as
revoked when the residence to which the certificate relates ceases to be
the holder's principal residence. An issuer may revoke a mortgage credit
certificate if the certificate does not meet all the requirements of
Sec. 1.25-3T (d), (e), (f), (g), (h), (i), (j), (k), and (n). The
certificate is revoked by the issure's notifying the holder of the
certificate and the Internal Revenue Service that the certificate is
revoked. The notice to the Internal Revenue Service shall be made as
part of the report requred by Sec. 1.25-8T (b)(2).
(n) Interest paid to related person--(1) In general. A certificate
does not meet the requirements of this paragraph if interest on the
certified indebtedness amount is paid to a person who is a related
person to the holder of the certificate.
(2) Certification procedure. The requirements of this paragraph will
be met if the issuer or its agent obtains from the holder of the
certificate an affidavit stating that a related person does not have,
and is not expected to have, an interest as a creditor in the certified
indebtedness amount.
(o) Fraud. Notwithstanding any other provision of this section, a
mortgage credit certificate does not meet the requirements of this
section and, therefore, the certificate is not a qualified mortgage
credit certificate for any calendar year, if the holder of the
certificate provides a certification or any other information to the
lender providing the mortgage or to the issuer of the certificate
containing a material misstatement and such misstatement is due to
fraud. In determining whether any misstatement is due to fraud, the
rules generally applicable to underpayments of tax due to fraud
(including rules relating to the statute of limitations) shall apply.
See Sec. 1.6709-1T with respect to the penalty for filing negligent or
fraudulent statements.
[T.D. 8023, 50 FR 19348, May 8, 1985, as amended at T.D. 8502, 58 FR
67689, Dec. 22, 1993; T.D. 8692, 61 FR 66215, Dec. 17, 1996]
Sec. 1.25-4T Qualified mortgage credit certificate program (Temporary).
(a) In general--(1) Definition of qualified mortgage credit
certificate program. For purposes of Sec. Sec. 1.25-1T through 1.25-8T,
the term ``qualified mortgage credit certificate program'' means a
program to issue qualified mortgage credit certificates which meets all
of the requirements of paragraphs (b) through (i) of this section.
(2) Requirements are a minimum. Except as otherwise provided in this
section, the requirements of this section are minimum requirements.
Issuers may establish more stringent criteria for participation in a
qualified mortgage credit certificate program. Thus, for example, an
issuer may target 30 percent of the proceeds of an issue of mortgage
credit certificates to targeted areas. Further, issuers may establish
additional eligibility criteria for participation in a qualified
mortgage credit certificate program. Thus, for example, issuers may
impose an income limitation designed to ensure that only those
individuals who could not otherwise purchase a residence will benefit
from the credit.
(3) Except as otherwise provided in this section and Sec. 1.25-3T,
issuers may use mortgage credit certificates in connection with other
Federal, State, and local programs provided that such use complies with
the requirements of Sec. 1.25-3T(j). Thus, for example, a mortgage
credit certificate may be issued in connection with the qualified
rehabilitation of a residence part of the cost of which will be paid
from the proceeds of a State grant.
[[Page 73]]
(b) Establishment of program. A program meets the requirements of
this paragraph only if it is established by a State or political
subdivision thereof for any calendar year for which it has the authority
to issue qualified mortgage bonds.
(c) Election not to issue qualified mortgage bonds--(1) In general.
A program meets the requirements of this paragraph only if the issuer
elects, in the time and manner specified in this paragraph, not to issue
an amount of qualified mortgage bonds that it may otherwise issue during
the calendar year under section 103A and the regulations thereunder.
(2) Manner of making election. On or before the earlier of the date
of distribution of mortgage credit certificates under a program or
December 31, 1987, the issuer must file an election not to issue an
amount of qualified mortgage bonds. The election (and the certification
(or affidavit) described in paragraph (d)) shall be filed with the
Internal Revenue Service Center, Philadelphia, Pennsylvania 19255. The
election should be titled ``Mortgage Credit Certificate Election'' and
must include--
(i) The name, address, and TIN of the issuer,
(ii) The issuer's applicable limit, as defined in section 103A (g)
and the regulations thereunder,
(iii) The aggregate amount of qualified mortgage bonds issued by the
issuing authority during the calendar year,
(iv) The amount of the issuer's applicable limit that it has
surrendered to other issuers during the calendar year,
(v) The date and amount of any previous elections under this
paragraph for the calendar year, and
(vi) The amount of qualfied mortgage bonds that the issuer elects
not to issue.
(3) Revocation of election. Any election made under this paragraph
may be revoked, in whole or in part, at any time during the calendar
year in which the election was made. The revocation, however, may not be
made with respect to any part of the nonissued bond amount that has been
used to issue mortgage credit certificates pursuant to the election. The
revocation shall be filed with the Internal Revenue Service Center,
Philadelphia, Pennsylvania 19255. The revocation should be titled
``Revocation of Mortgage Credit Certificate Election'' and must
include--
(i) The name, address, and TIN of the issuer,
(ii) The nonissued bond amount as originally elected, and
(iii) The portion of the nonissued bond amount with respect to which
the election is being revoked.
(4) Special rule. If at the time that an issuer makes an election
under this paragraph it does not know its applicable limit, the issuer
may elect not to use all of its remaining authority to issue qualified
mortgage bonds; this form of election will be treated as meeting the
requirements of paragraph (c)(2) if, prior to the later of the end of
the calendar year and December 31, 1985, the issuer amends its election
so as to indicate the exact amount of qualified mortgage bond authority
that it elected not to issue.
(5) Limitation on nonissued bond amount. The amount of qualified
mortgage bonds which an issuer elects not to issue may not exceed the
issuer's applicable limit (as determined under section 103A (g) and the
regulations thereunder). For example, a governmental unit that, pursuant
to section 103A (g)(3), may issue $10 million of qualified mortgage
bonds that elects to trade in $11 million in qualified mortgage bond
authority has not met the requirements of this paragraph, and mortgage
credit certificates issued pursuant to such election are not qualified
mortgage credit certificates.
(d) State certification requirement--(1) In general. A program meets
the requirements of this paragraph only if the State official designated
by law (or, where there is no State official, the Governor) certifies,
based on facts and circumstances as of the date on which the
certification is requested, following a request for such certification,
that the issue meets the requirements of section 103A(g) (relating to
volume limitation) and the regulations thereunder. A copy of the State
certification must be attached to the issuer's election not to issue
qualified mortgage bonds, except that, in the case of elections made
during calendar year 1984,
[[Page 74]]
the certification may be filed with the Service prior to July 8, 1985
provided that mortgage credit certificates may not be distributed until
the certification is filed. In the case of any constitutional home rule
city, the certification shall be made by the chief executive officer of
the city.
(2) Certification procedure. The official making the certification
described in this paragraph (d) need not perform an independent
investigation to determine whether the issuer has met the requirements
of section 103A(g). In determining the aggregate amount of qualified
mortgage bonds previously issued by that issuer during the calendar year
the official may rely on copies of prior elections under paragraph (c)
of this section made by the issuer for that year, together with an
affidavit executed by an official of the issuer who is responsible for
issuing bonds stating that the issuer has not, to date, issued any other
issues of qualified mortgage bonds during the calendar year and stating
the amount, if any, of the issuer's applicable limit that it has
surrendered to other issuers during the calendar year; for any calendar
year prior to 1985, the official may rely on an affidavit executed by a
duly authorized official of the issuer who states the aggregate amount
of qualified mortgage bonds issued by the issuer during the year. In
determining the aggregate amount of qualified mortgage bonds that the
issuer has previously elected not to issue during that calendar year,
the official may rely on copies of any elections not to issue qualified
mortgage bonds filed by the issuer for that calendar year, together with
an affidavit executed by an official of the issuer responsible for
issuing mortgage credit certificates stating that the issuer has not, to
date, made any other elections not to issue qualified mortgage bonds.
If, based on such information, the certifying official determines that
the issuer has not, as of the date on which the certification is
provided, exceeded its applicable limit for the year, the official may
certify that the issue meets the requirements of section 103A(g). The
fact that the certification described in this paragraph (d) is provided
does not ensure that the issuer has met the requirements of section
103A(g) and the regulations thereunder, nor does it preclude the
application of the penalty for over-issuance of mortgage credit
certificates if such over-issuance actually occurs. See Sec. 1.25-5T.
(3) Special rule. If within 30 days after the issuer files a proper
request for the certification described in this paragraph (d) the issuer
has not received from the State official designated by law (or, if there
is no State official, the Governor) certification that the issue meets
the requirements of section 103A(g) or, in the alternative, a statement
that the issue does not meet such requirements, the issuer may submit,
in lieu of the certification required by this paragraph (d), an
affidavit executed by an officer of the issuer responsible for issuing
mortgage credit certificates stating that--
(i) The issue meets the requirements of section 103A(g) and the
regulations thereunder,
(ii) At least 30 days before the execution of the affidavit the
issuer filed a proper request for the certification described in this
paragraph (d), and
(iii) The State official designated by law (or, if there is no State
official, the Governor) has not provided the certification described in
this paragraph (d) or a statement that the issue does not meet such
requirements.
For purposes of this paragraph, a request for certification is proper if
the request includes the reports and affidavits described in paragraph
(d)(2).
(e) Information reporting requirement--(1) Reports. With respect to
mortgage credit certificates issued after September 30, 1985, a program
meets the requirements of this paragraph only if the issuer submits a
report containing the information concerning the holders of certificates
issued during the preceding reporting period required by this paragraph.
The report must be filed for each reporting period in which certificates
(other than transferred certificates) are issued under the program. The
issuer is not responsible for false information provided by a holder if
the issuer did not know or have reason to know that the information was
false. The report must be filed on the form prescribed by the Internal
Revenue Service. If no form is prescribed,
[[Page 75]]
or if the form prescribed is not readily available, the issuer may use
its own form provided that such form is in the format set forth in this
paragraph and contains the information required by this paragraph. The
report must be titled ``Mortgage Credit Certificate Information Report''
and must include the name, address, and TIN of the issuer, the reporting
period for which the information is provided, and the following tables
containing information concerning the holders of certificates issued
during the reporting period for which the report is filed:
(i) A table titled ``Number of Mortgage Credit Certificates by
Income and Acquisition Cost'' showing the number of mortgage credit
certificates issued (other than those issued in connection with
qualified home improvement and rehabilitation loans) according to the
annualized gross income of the holders (categorized in the following
intervals of income:
$0-$9,999;
$10,000-$19,999;
$20,000-$29,999;
$30,000-$39,999;
$40,000-$49,999;
$50,000-$74,999; and
$75,000 or more)
and according to the acquisition cost of the residences acquired in
connection with the mortgage credit certificates (categorized in the
following intervals of acquisition cost:
$0-$19,999;
$20,000-$39,999;
$40,000-$59,999;
$60,000-$79,999;
$80,000-$99,999;
$100,000-$119,999;
$120,000-$149,999;
$150,000-$199,999; and
$200,000 or more).
For each interval of income and acquisition cost the table must also be
categorized according to--
(A) The aggregate amount of fees charged to holders to cover any
administrative costs incurred by the issuer in issuing mortgage credit
certificates, and
(B) The number of holders that--
(1) Did not have a present ownership interest in a principal
residence at any time during the 3-year period ending on the date the
mortgage credit certificate is executed (i.e., satisfied the 3-year
requirement) and purchased residences in targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not
located in targeted areas,
(3) Did have a present ownership interest in a principal residence
at any time during the 3-year period ending on the date the mortgage
credit certificate is executed (i.e., did not satisfy the 3-year
requirement) and purchased residences in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences
not located in targeted areas.
(ii) A table titled ``Volume of Mortgage Credit Certificates by
Income and Acquisition Cost'' containing data on--
(A) The total of the certified indebtedness amounts of the
certificates issued (other than those issued in connection with
qualified home improvement and rehabilitation loans);
(B) The sum of the products of the certified indebtedness amount and
the certificate credit rate for each certificate (other than those
issued in connection with qualified home improvement and rehabilitation
loans) according to annualized gross income (categorized in the same
intervals of income as the preceding table) and according to the
acquisition cost of the residences acquired in connection with mortgage
credit certificates (categorized in the same intervals of acquisition
cost as the preceding table); and
(C) For each interval of income and acquisition cost, the
information described in paragraph (e)(1)(ii) (A) and (B) categorized
according to the holders that--
(1) Satisfied the 3-year requirement and purchased residences in
targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not
located in targeted areas,
(3) Did not satisfy the 3-year requirement and purchased residences
in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences
not located in targeted areas.
(iii) A table titled ``Mortgage Credit Certificates for Qualified
Home Improvement and Rehabilitation Loans'' showing the number of
mortgage credit
[[Page 76]]
certificates issued in connection with qualified home improvement loans
and qualified rehabilitation loans, the total of the certified
indebtedness amount with respect to such certificates, and the sum of
the products of the certified indebtedness amount and the certificate
credit rate for each certificate; the information contained in the table
must also be categorized according to whether the residences with
respect to which the certificates were provided are located in targeted
areas.
(2) Format. If no form is prescribed by the Internal Revenue
Service, or if the prescribed form is not readily available, the issuer
must submit the report in the format specified in this paragraph (e)(2).
The specified format of the report is the following:
Mortgage Credit Certificate Information Report
Name of issuer:
Address of issuer:
TIN of issuer:
Reporting period:
Number of Mortgage Credit Certificates by Income and Acquisition Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Satisfied Not satisfied
3-year requirement: Annualized gross monthly income of ---------------------------------------------------------------------------- Totals fees
borrowers Nontargeted area Targeted area Nontargeted area Targeted area
--------------------------------------------------------------------------------------------------------------------------------------------------------
$0 to $9,999.............................................
$10,000 to $19,999.......................................
$20,000 to $29,999.......................................
$30,000 to $39,999.......................................
$40,000 to $49,999.......................................
$50,000 to $74,999.......................................
$75,000 or more..........................................
----------------------------------------------------------------------------------------------
Total..................................................
Acquisition Cost
0 to $19,999.............................................
$20,000 to $39,999.......................................
$40,000 to $59,999.......................................
$60,000 to $79,999.......................................
$80,000 to $99,999.......................................
$100,000 to $119,999.....................................
$120,000 to $149,999.....................................
$150,000 to $199,999.....................................
$200,000 or more.........................................
----------------------------------------------------------------------------------------------
Total................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 77]]
Volume of Mortgage Credit Certificates by Income and Acouisition Cost
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Holders satisfying the 3-year requirement 3-year requirement not satisfied Totals
-------------------------------------------------------------------------------------------------------------------------------------------
Nontargeted area Targeted area Nontargeted area Targeted area
---------------------------------------------------------------------------------------------------------------- Total sum of
Sum of Sum of Sum of Sum of Total of the products of
Annualized gross monthly income of holders Total of the products of Total of the products of Total of the products of Total of the products of certified certified
certified certified certified certified certified certified certified certified indebtedness indebtedness
indebtedness indebtedness indebtedness indebtedness indebtedness indebtedness indebtedness indebtedness amounts amounts and
amounts amounts and amounts amounts and amounts amounts and amounts amounts and credit rates
credit rates credit rates credit rates credit rates
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$0 to $9,999........................................
$10,000 to $19,999..................................
$20,000 to $29,999..................................
$30,000 to $39,999..................................
$40,000 to $49,999..................................
$50,000 to $74,999..................................
$75,000 to more.....................................
-------------------------------------------------------------------------------------------------------------------------------------------
Total...........................................
Acquisition Cost
$0 to $19,999.......................................
$20,000 to $39,999..................................
$40,000 to $59,999..................................
$60,000 to $79,999..................................
$80,000 to $99,999..................................
$100,000 to $119,999................................
$120,000 to $149,999................................
$150,000 to $199,999................................
$200,000 or more....................................
-------------------------------------------------------------------------------------------------------------------------------------------
Total...........................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 78]]
Mortgage Credit Certificates for Qualified Home Improvement and
Rehabilitation Loans
------------------------------------------------------------------------
Nontargeted Targeted
area area Totals
------------------------------------------------------------------------
Home Improvement Loans
Number of mortgage credit certificates..
Total of the certified indebtedness
amounts................................
Product of certified indebtedness
amounts and credit rates...............
Rehabilitation Loans
Number of mortgage credit certificates..
Total of the certified indebtedness
amounts................................
Product of certified indebtedness
amounts and credit rates...............
------------------------------------------------------------------------
(3) Definitions and special rules. (i) For purposes of this
paragraph the term ``annualized gross income'' means the borrower's
gross monthly income multiplied by 12. Gross monthly income is the sum
of monthly gross pay, any additional income from investments, pensions,
Veterans Administration (VA) compensation, part-time employment,
bonuses, dividends, interest, current overtime pay, net rental income,
etc., and other income (such as alimony and child support, if the
borrower chooses to disclose such income). Information with respect to
gross monthly income may be obtained from available loan documents,
e.g., the sum of lines 23D and 23E on the Application for VA or FmHA
Home Loan Guaranty or for HUD/FHA Insured Mortgage (VA Form 26-1802a,
HUD 92900, Jan. 1982), or the total line from the Gross Monthly Income
section of FHLMC Residential Loan Application form (FHLMC 65 Rev. 8/78).
(ii) For purposes of this paragraph, the term ``reporting period''
means each one year period beginning July 1 and ending June 30, except
that issuers need not provide data with respect to the period prior to
October 1, 1985.
(iii) For purposes of this paragraph, verification of information
concerning a holder's gross monthly income by utilizing other available
information concerning the holder's income (e.g., Federal income tax
returns) is not required. In determining whether the holder of a
mortgage credit certificate acquiring a residence in a targeted area
satisfies the 3-year requirement, the issuer may rely on a statement
signed by the holder.
(4) Time for filing. The report required by this paragraph shall be
filed not later than the 15th day of the second calendar month after the
close of the reporting period. The Commissioner may grant an extension
of time for the filing of a report required by this paragraph if there
is reasonable cause for the failure to file such report in a timely
fashion. The report may be filed at any time before such date but must
be complete based on facts and reasonable expectations as of the date
the report is filed. The report need not be amended to reflect
information learned subsequent to the date of filing, or to reflect
changed circumstances with respect to any holder.
(5) Place for filing. The report required by this paragraph is to be
filed at the Internal Revenue Service Center, Philadelphia, Pennsylvania
19255.
(f) Policy statement. A program established pursuant to an election
under paragraph (c) made after 1984 meets the requirements of this
paragraph only if the applicable elected representative of the
governmental unit--
(1) Which is the issuer, or
(2) On whose behalf the certificates were issued,
has published (after a public hearing following reasonable public
notice) a policy statement described in Sec. 1.103A-2(1) by the last
day of the year preceding the year in which the election under paragraph
(c) is made, and a copy of such report has been submitted to the
Commissioner on or before such last day. See Sec. 1.103A-2(1) for
further definitions and requirements.
(g) Targeted areas requirement--(1) In general. A program meets the
requirements of this paragraph only if--
(i) The portion of the total proceeds of the issue specified in
paragraph (g)(2) is made available to provide mortgage credit
certificates in connection with owner financing of targeted area
residents for at least 1 year after the date on which mortgage credit
certificates are first made available with respect to targeted area
residences, and
[[Page 79]]
(ii) The issuer attempts with reasonable diligence to place such
proceeds with qualified persons.
Mortgage credit certificates are considered first made available with
respect to targeted area residences on the date on which the issuer
first begins to accept applications for mortgage credit certificates
provided under that issue.
(2) Specified portion. (i) The specified portion of the total
proceeds of an issue is the lesser of--
(A) 20 percent of the total proceeds, or
(B) 8 percent of the average annual aggregate principal amount of
mortgages executed during the immediately preceding 3 calendar years for
single-family, owner-occupied residences in targeted areas within the
jurisdiction of the issuing authority.
For purposes of computing the required portion of the total proceeds
specified in paragraph (g)(2)(i)(B) where such provision is applicable,
an issuer may rely upon the safe-harbor formula provided in the
regulations under section 103A(h).
(ii) See Sec. 1.25-1T(b)(10)(ii) for the definition of ``total
proceeds''.
(h) Fees--(1) In general. A program meets the requirements of this
paragraph only if each applicant is required to pay, directly or
indirectly, no fee other than those fees permitted under this paragraph.
(2) Permissible fees. Applicants may be required to pay the
following fees provided that they are reasonable:
(i) Points, origination fees, servicing fees, and other fees in
amounts that are customarily charged with respect to mortgages not
provided in connection with mortgage credit certificates,
(ii) Application fees, survey fees, credit report fees, insurance
fees, or similar settlement or financing costs to the extent such
amounts do not exceed the amounts charged in the area in cases where
mortgages are not provided in connection with mortgage credit
certificates. For example, amounts charged for FHA, VA, or similar
private mortgage insurance on an individual's mortgage are permissible
so long as such amounts do not exceed the amounts charged in the area
with respect to a similar mortgage that is not provided in connection
with a mortgage credit certificate, and
(iii) Other fees that, taking into account all the facts and
circumstances, are reasonably necessary to cover any administrative
costs incurred by the issuer or its agent in issuing mortgage credit
certificates.
(i) Qualified mortgage credit certificate. A program meets the
requirements of this paragraph only if each mortgage credit certificate
issued under the program meets each of the requirements of paragraphs
(c) through (o) of Sec. 1.25-3T.
(j) Good faith compliance efforts--(1) Eligibility requirements. (i)
A program under which each of the mortgage credit certificates issued
does not meet each of the requirements of paragraphs (c) through (o) of
Sec. 1.25-3T shall be treated as meeting the requirements of paragraph
(i) of this section if each of the requirements of this paragraph (j)(1)
is satisfied. A mortgage credit certificate program meets the
requirements of this paragraph (j)(1) only if each of the following
provisions is met:
(A) The issuer in good faith attempted to issue mortgage credit
certificates only to individuals meeting each of the requirements of
paragraphs (c) through (o) of Sec. 1.25-3T. Good faith requires that
agreements with lenders and agents and other relevant instruments
contain restrictions that permit the approval of mortgage credit
certificates only in accordance with the requirements of paragraphs (c)
through (o) of Sec. 1.25-3T. In addition, the issuer must establish
reasonable procedures to ensure compliance with those requirements.
Reasonable procedures include reasonable investigations by the issuer to
determine whether individuals satisfy the requirements of paragraphs (c)
through (o) of Sec. 1.25-3T.
(B) 95 percent or more of the total proceeds of the issue were
devoted to individuals with respect to whom, at the time that the
certificate was issued, all the requirements of paragraphs (c) through
(o) of Sec. 1.25-3T were met. If a holder of a mortgage credit
certificate fails to meet more than one of these requirements, the
amount of the certificate (i.e., the certificate credit rate multiplied
by the certified
[[Page 80]]
indebtedness amount) issued to that individual will be taken into
account only once in determining whether the 95-percent requirement is
met. However, all of the defects in that individual's certificate must
be corrected pursuant to paragraph (j)(1)(i)(C).
(C) Any failure to meet the requirements of paragraphs (c) through
(o) of Sec. 1.25-3T is corrected within a reasonable period after that
failure is discovered. For example, if an individual fails to meet one
or more of such requirements those failures can be corrected by revoking
that individual's certificate.
(ii) Examples. The following examples illustrate the application of
this paragraph (j)(1):
Example 1. County X only distributes mortgage credit certificates to
individuals who have contracted to purchase a principal residence.
County X requires that applicants for mortgage credit certificates
present the following information:
(i) An affidavit stating that the applicant intends to use the
residence in connection with which the mortgage credit certificate is
issued as his principal residence within a reasonable time after the
certificate is issued by County X, that the applicant will notify the
County if the residence ceases to be his principal residence, and facts
that are sufficient for County X to determine whether the residence is
located within the jurisdiction of County X,
(ii) An affidavit stating that the applicant had no present
ownership interest in a principal residence at any time during the 3-
year period prior to the date on which the certificate is issued,
(iii) Copies of the applicant's Federal tax returns for the
preceding 3 years,
(iv) Affidavits from the seller of the residence with respect to
which the certificate is issued and the applicant stating the purchase
price of the residence, including an itemized list of (A) payments made
by or for the benefit of the applicant, (B) if the residence is
incomplete, an estimate of the reasonable cost of completing the
residence, and (C) if the residence is subject to a ground rent, the
capitalized value of the ground rent,
(v) An affidavit executed by the applicant stating that the mortgage
being acquired in connection with the certificate will not be used to
acquire or replace an existing mortgage,
(vi) An affidavit executed by the applicant stating that no portion
of the financing for the residence in connection with which the
certificate is issued is provided from the proceeds of a qualified
mortgage bond or qualified veterans' mortgage bond and that no portion
of the mortgage for the residence is provided by a person related to the
applicant (as defined in Sec. 1.25-3T(n)),
(vii) An affidavit executed by the applicant stating that the
certificate was not limited to indebtedness incurred from particular
lenders, and
(viii) In the case of a mortgate credit certificate allocated for
use in connection with a particular development, and affidavit executed
by the applicant stating that the applicant received from the developer
a certification stating that the price of the residence with respect to
which the certificate was issued is no higher than it would be without
the use of a mortgage credit certificate.
County X examines the information submitted by the applicant to
determine whether the requirements of paragraphs (c), (d), (e), (f),
(g), (i), (j), (k), and (n) of Sec. 1.25-3T are met. County X
determines that the certificate has not expired. The mortgage credit
certificates issued by County X are in the form prescribed by Sec.
1.25-6T and County X provides all the required information and
statements. After determining that the applicant meets all these
requirements County X issues a mortgage credit certificate to the
applicant. This procedure for issuing mortgage credit certificates is
sufficient evidence of the good faith of County X to meet the
requirements of Sec. 1.25-4T(j)(1)(i)(A).
Example 2. County W distributes preliminary mortgage credit
certificates to individuals who have not entered into contracts to
purchase a principal residence. County W issues preliminary certificates
in the form prescribed by Sec. 1.25-6T to those applicants that have
submitted statements that they (i) intend to purchase a single-family
residence located within the jurisdiction of County W which they will
occupy as a principal residence, (ii) have had no present ownership
interest in a principal residence within the preceding 3-year period,
and (iii) will not use the certificate in connection with the
acquisition or replacement of an existing mortgage. The certificates
contain a maximum purchase price, the certificate credit rate, and a
statement that the certificate will expire if the applicant does not
enter into a closing agreement with respect to a loan within 6 months
from the date of preliminary issuance. Holders of these certificates may
apply for a mortgage loan from any lender. When the holder of the
certificate applies for a loan the lender requires that he submit the
following:
(i) An affidavit stating that the applicant intends to use the
residence in connection with which the mortgage credit certificate is
issued as his principal residence within a reasonable time after the
certificate is issued by County W, that the applicant will notify the
County if the residence ceases to be his principal residence, and facts
that are
[[Page 81]]
sufficient for County W to determine whether the residence is located
within the jurisdication of County W,
(ii) An affidavit stating that the applicant had no present
ownership interest in a principal residence at any time during the 3-
year period prior to the date on which the certificate is issued,
(iii) Copies of the applicant's Federal tax returns for the
preceding 3 years,
(iv) Affidavits from the seller of the residence with respect to
which the certificate is issued and the applicant stating the purchase
price of the residence, including an itemized list of (A) payments made
by or for the benefit of the applicant, (B) if the residence is
incomplete, an estimate of the reasonable cost of completing the
residence, and (C) if the residence is subject to a ground rent, the
capitalized value of the ground rent,
(v) An affidavit executed by the applicant stating that the mortgage
being acquired in connection with the certificate will not be used to
acquire or replace an existing mortgage,
(vi) An affidavit executed by the applicant stating that no portion
of the financing for the residence in connection with which the
certificate is issued in provided from the proceeds of a qualified
mortgage bond or qualified veterans' mortgage bond and that no portion
of the mortgage for the residence is provided by a person related to the
applicant (as defined in Sec. 1.25-3T(n)),
(vii) An affidavit executed by the applicant stating that the
certificate was not limited to indebtedness incurred from particular
lenders, and
(viii) In the case of a mortgage credit certificate allocated for
use in connection with a particular development, an affidavit executed
by the applicant stating that the applicant received from the developer
a certification stating that the price of the residence with respect to
which the certificate was issued is no higher than it would be without
the use of a mortgage credit certificate.
The lender then submits those affidavits, together with its statement as
to the amount of the indebtedness incurred, to County W. After
determining that the requirements of paragraphs (c), (d), (e), (f), (g),
(i), (j), (k) and (n) of Sec. 1.25-3T are met and determining that the
certificate has not expired, County W completes the mortgage credit
certificate. This procedure for issuing mortgage credit certificates is
sufficient evidence of the good faith of County W to meet the
requirements of Sec. 1.25-4T(j)(1)(i)(A).
(2) Program requirements. (i) A mortgage credit certificate program
which fails to meet one or more of the requirements of paragraphs (b)
through (h) of this section shall be treated as meeting such
requirements if the requirements of this paragraph (j)(2) are satisfied.
A mortgage credit certificate program meets the requirements of this
paragraph (j)(2) only if each of the following provisions is met:
(A) The issuer in good faith attempted to meet all of the
requirements of paragraphs (b) through (h) of this section. This good
faith requirement will be met if all reasonable steps are taken by the
issuer to ensure that the program complies with these requirements.
(B) Any failure to meet such requirements is due to inadvertent
error, e.g., mathematical error, after taking reasonable steps to comply
with such requirements.
(ii) The following example illustrate the application of this
paragraph (j)(2):
Example. City X issues an issue of mortgage credit certificates.
However, despite taking all reasonable steps to determine accurately the
size of the applicable limit, as provided in section 103A (g)(3) and the
regulations thereunder, the limit is exceeded because the amount of the
mortgages, originated in the area during the past 3 years is incorrectly
computed as a result of mathematical error. Such facts are sufficient
evidence of the good faith of the issuer to meet the requirements of
paragraph (j)(2).
[T.D. 8023, 50 FR 19350, May 8, 1985, as amended by T.D. 8048, 50 FR
35538, Sept. 3, 1985]
Sec. 1.25-5T Limitation on aggregate amount of mortgage credit
certificates (Temporary).
(a) In general. If the aggregate amount of qualified mortgage credit
certificates (as defined in paragraph (b)) issued by an issuer under a
qualified mortgage credit certificate program exceeds 20 percent of the
nonissued bond amount (as defined in paragraph (c)), the provisions of
paragraph (d) shall apply.
(b) Aggregate amount of mortgage credit certificates--(1) In
general. The aggregate amount of qualified mortgage credit certificates
issued under a qualified mortgage credit certificate program is the sum
of the products determined by multiplying--
(i) The certified indebtedness amount of each qualified mortgage
credit certificate issued under that program, by
(ii) The certificate credit rate with respect to such certificate.
[[Page 82]]
(2) Examples. The following examples illustrate the application of
this paragraph (b):
Example 1. For 1986 City Q has a nonissued bond amount of $100
million. After making a proper election, Q issues 2,000 qualified
mortgage credit certificates each with a certificate credit rate of 20
percent and a certified indebtedness amount of $50,000. The aggregate
amount of qualified mortgage credit certificates is $20 million
(2,000x(.2x$50,000)). Since this amount does not exceed 20 percent of
the nonissued bond amount (.2x$100 million = $20 million), Q has
complied with the limitation on the aggregate amount of mortgage credit
certificates, provided that it does not issue any additional
certificates.
Example 2. The facts are the same as in example (1) except that
instead of issuing all its certificates at the 20 percent rate, Q issues
(i) qualified mortgage credit certificates with a certificate credit
rate of 10 percent and an aggregate principal amount of $25 million,
(ii) qualified mortgage credit certificates with a certificate credit
rate of 40 percent and an aggregate principal amount of $25 million, and
(iii) qualified mortgage credit certificates with a certificate credit
rate of 30 percent and an aggregate principal amount of $25 million. The
aggregate amount of qualified mortgage credit certificates is $20
million ((10 percent of $25 million) plus (40 percent of $25 million)
plus (30 percent of $25 million)). Q has complied with the limitation on
the aggregate amount of qualified mortgage credit certificates, provided
that it does not issue any additional certificates pursuant to the same
program.
(c) Nonissued bond amount. The term ``nonissued bond amount'' means,
with respect to any qualified mortgage credit certificate program, the
amount of qualified mortgage bonds (as defined in section 103A(c)(1) and
the regulations thereunder) which the issuer is otherwise authorized to
issue and elects not to issue under section 25(c)(2) and Sec. 1.25-
4T(b). The amount of qualified mortgage bonds which an issuing authority
is authorized to issue is determined under section 103A(g) and the
regulations thereunder; such determination shall take into account any
prior elections by the issuer not to issue qualified mortgage bonds, the
amount of any reduction in the State ceiling under paragraph (d) of this
section, and the aggregate amount of qualified mortgage bonds issued by
the issuer prior to its election not to issue qualified mortgage bonds.
(d) Noncompliance with limitation on aggregate amount of mortgage
credit certificates--(1) In general. If the provisions of this paragraph
apply, the State ceiling under section 103A(g)(4) and the regulations
thereunder for the calendar year following the calendar year in which
the Commissioner determines the correction amount for the State in which
the issuer which exceeded the limitation on the aggregate amount of
mortgage credit certificates is located shall be reduced by 1.25 times
the correction amount with respect to such failure.
(2) Correction amount. (i) The term ``correction amount'' means an
amount equal to the excess credit amount divided by .20.
(ii) The term ``excess credit amount'' means the excess of--
(A) The credit amount for any mortgage credit certificate program,
over
(B) The amount which would have been the credit amount for such
program had such program met the requirements of section 25(d)(2) and
paragraph (a) of this section.
(iii) The term ``credit amount'' means the sum of the products
determined by multiplying--
(A) The certified indebtedness amount of each qualified mortgage
credit certificate issued under the program, by
(B) The certificate credit rate with respect to such certificate.
(3) Example. The following example illustrates the application of
this paragraph:
Example. For 1987 City R has a nonissued bond amount of $100
million. City R issues all of its mortgage credit certificates with a
certificate credit rate of 20 percent. City R issues certificates with
an aggregate certified indebtedness amount of $120 million. The
aggregate amount of mortgage credit certificates issued by City R is $24
million, which exceeds 20 percent of the nonissued bond amount. The
State ceiling for the calendar year following the calendar year in which
the Commissioner determines the correction amount is reduced by $25
million (the correction amount multiplied by 1.25). The correction
amount is determined as follows: The credit amount is $24 million (.2 x
$120 million); the amount which would have been the credit amount for
the program had it met the requirements of section 25(d)(2) is $20
million (.2x$100 million); the excess credit
[[Page 83]]
amount is $4 million ($24 million--$20 million); therefore, the
correction amount is $20 million ($4 million/.2).
(4) Cross-references. See section 103A(g)(4) and the regulations
thereunder with respect to the reduction of the applicable State
ceiling.
[T.D. 8023, 50 FR 19353, May 8, 1985]
Sec. 1.25-6T Form of qualified mortgage credit certificate (Temporary).
(a) In general. Qualified mortgage credit certificates are to be
issued on the form prescribed by the Internal Revenue Service. If no
form is prescribed by the Internal Revenue Service, or if the form
prescribed by the Internal Revenue Service is not readily available, the
issuer may use its own form provided that such form contains the
information required by this section. Each mortgage credit certificate
must be issued in a form such that there are at least three copies of
the form. One copy of the certificate shall be retained by the issuer;
one copy shall be retained by the lender; and one copy shall be
forwarded to the State official who issued the certification required by
Sec. 1.25-4T(d), unless that State official has stated in writing that
he does not want to receive such copies.
(b) Required information. Each qualified mortgage credit certificate
must include the following information:
(1) The name, address, and TIN of the issuer,
(2) The date of the issuer's election not to issue qualified
mortgage bonds pursuant to which the certificate is being issued,
(3) The number assigned to the certificate,
(4) The name, address, and TIN of the holder of the certificate,
(5) The certificate credit rate,
(6) The certified indebtness amount,
(7) The acquisition cost of the residence being acquired in
connection with the certificate,
(8) The average area purchase price applicable to the residence,
(9) Whether the certificate meets the requirements of Sec. 1.25-
3T(d), relating to residence requirement,
(10) Whether the certificate meets the requirements of Sec. 1.25-
3T(e), relating to 3-year requirement,
(11) Whether the certificate meets the requirements of Sec. 1.25-
3T(g), relating to new mortgage requirement,
(12) Whether the certificate meets the requirements of Sec. 1.25-
3T(i), relating to prohibited mortgages,
(13) Whether the certificate meets the requirements of Sec. 1.25-
3T(j), relating to particular lenders,
(14) Whether the certificate meets the requirements of Sec. 1.25-
3T(k), relating to allocations to particular developments,
(15) Whether the certificate meets the requirements of Sec. 1.25-
3T(n), relating to interest paid to related persons,
(16) Whether the residence in connection with which the certificate
is issued is a targeted area residence,
(17) The date on which a closing agreement is signed with respect to
the certified indebtness amount,
(18) The expiration date of the certificate,
(19) A statement that the certificate is not transferable or a
statement that the certificate may be transferred only if the issuer
issues a new certificate, and
(20) A statement, signed under penalties of perjury by an authorized
official of the issuer or its agent, that such person has made the
determinations specified in paragraph (b) (9) through (16).
[T.D. 8023, 50 FR 19354, May 8, 1985]
Sec. 1.25-7T Public notice (Temporary).
(a) In general. At least 90 days prior to the issuance of any
mortgage credit certificate under a qualified mortgage credit
certificate program, the issuer shall provide reasonable public notice
of--
(1) The eligibility requirements for such certificate,
(2) The methods by which such certificates are to be issued, and
(3) The other information required by this section.
(b) Reasonable public notice--(1) In general. Reasonable public
notice means published notice which is reasonably designed to inform
individuals who would be eligible to receive mortgage credit
certificates of the proposed issuance. Reasonable public notice may be
provided through newspapers of general circulation.
[[Page 84]]
(2) Contents of notice. The public notice required by paragraph (a)
must include a brief description of the principal residence requirement,
3-year requirement, purchase price requirement, and new mortgage
requirement. The notice must also provide a brief description of the
methods by which the certificates are to be issued and the address and
telephone number for obtaining further information.
[T.D. 8023, 50 FR 19354, May 8, 1985]
Sec. 1.25-8T Reporting requirements (Temporary).
(a) Lender--(1) In general. Each person who makes a loan that is a
certified indebtedness amount with respect to any mortgage credit
certificate must file the report described in paragraph (a)(2) and must
retain on its books and records the information described in paragraph
(a)(3). The report described in paragraph (a)(2) is an annual report and
must be filed on or before January 31 of the year following the calendar
year to which the report relates. See section 6709(c) and the
regulations thereunder for the applicable penalties with respect to
failure to file reports.
(2) Information required. The report shall be submitted on Form 8329
and shall contain the information required therein. A separate Form 8329
shall be filed for each issue of mortgage credit certificates with
respect to which the lender made mortgage loans during the preceding
calendar year. Thus, for example, if during 1986 Bank M makes three
mortgage loans which are certified indebtedness amounts with respect to
State Z's January 15, 1986, issue of mortgage credit certificates, and
two mortgage loans which are certified indebtedness amounts with respect
to State Z's April 15, 1986, issue of mortgage credit certificates, and
fifty mortgage loans which are certified indebtedness amounts with
respect to County X's December 31, 1985, issue of mortgage credit
certificates, Bank M must file three separate reports for calendar year
1986. The lender must submit the Form 8329 with the information required
therein, including--
(i) The name, address, and TIN of the issuer of the mortgage credit
certificates,
(ii) The date on which the election not to issue qualified mortgage
bonds with respect to that mortgage credit certificate was made,
(iii) The name, address, and TIN of the lender, and
(iv) The sum of the products determined by multiplying--
(A) The certified indebtedness amount of each mortgage credit
certificate issued under such program, by
(B) The certificate credit rate with respect to such certificate.
(3) Recordkeeping requirements. Each person who makes a loan that is
a certified indebtedness amount with respect to any mortgage credit
certificate must retain the information specified in this paragraph
(a)(3) on its books and records for 6 years following the year in which
the loan was made. With respect to each loan the lender must retain the
following information:
(i) The name, address, and TIN of each holder of a qualified
mortgage credit certificate with respect to which a loan is made,
(ii) The name, address, and TIN of the issuer of such certificate,
and
(iii) The date the loan for the certified indebtedness amount is
closed, the certified indebtedness amount, and the certificate credit
rate of such certificate.
(b) Issuers--(1) In general. Each issuer of mortgage credit
certificates shall file the report described in paragraph (b)(2) of this
section.
(2) Quarterly reports. (i) Each issuer which elects to issue
mortgage credit certificates shall file reports on Form 8330. These
reports shall be filed on a quarterly basis, beginning with the quarter
in which the election is made, and are due on the following dates: April
30 (for the quarter ending March 31), July 31 (for the quarter ending
June 30), October 31 (for the quarter ending September 30), and January
31 (for the quarter ending December 31). For elections made prior to May
8, 1985, the first report need not be filed until July 31, 1985. An
issuer shall file a separate report for each issue of mortgage credit
certificates. In the quarter in which the last qualified mortgage credit
certificate that may be issued under a program is issued, the issuer
must state that fact on the report to be filed
[[Page 85]]
for that quarter; the issuer is not required to file any subsequent
reports with respect to that program. See section 6709(c) for the
penalties with respect to failure to file a report.
(ii) The report shall be submitted on Form 8330 and shall contain
the information required therein, including--
(A) The name, address, and TIN of the issuer of the mortgage credit
certificates,
(B) The date of the issuer's election not to issue qualified
mortgage bonds with respect to the mortgage credit certificate program
and the nonissued bond amount of the program,
(C) The sum of the products determined by multiplying--
(1) The certified indebtedness amount of each qualified mortgage
credit certificate issued under that program during the calendar
quarter, by
(2) The certificate credit rate with respect to such certificate,
and
(D) A listing of the name, address, and TIN of each holder of a
qualified mortgage credit certificate which has been revoked during the
calendar quarter.
(c) Extensions of time for filing reports. The Commissioner may
grant an extension of time for the filing of a report required by this
section if there is reasonable cause for the failure to file such report
in a timely fashion.
(d) Place for filing. The reports required by this section are to be
filed at the Internal Revenue Service Center, Philadelphia, Pennsylvania
19225.
(e) Cross reference. See section 6709 and the regulations thereunder
with respect to the penalty for failure to file a report required by
this section.
[T.D. 8023, 50 FR 19354, May 8, 1985]
Sec. 1.25A-0 Table of contents.
This section lists captions contained in Sec. Sec. 1.25A-1, 1.25A-
2, 1.25A-3, 1.25A-4, and 1.25A-5.
Sec. 1.25A-1 Calculation of Education Tax Credit and General
Eligibility Requirements
(a) Amount of education tax credit.
(b) Coordination of Hope Scholarship Credit and Lifetime Learning
Credit.
(1) In general.
(2) Hope Scholarship Credit.
(3) Lifetime Learning Credit.
(4) Examples.
(c) Limitation based on modified adjusted gross income.
(1) In general.
(2) Modified adjusted gross income defined.
(3) Inflation adjustment.
(d) Election.
(e) Identification requirement.
(f) Claiming the credit in the case of a dependent.
(1) In general.
(2) Examples.
(g) Married taxpayers.
(h) Nonresident alien taxpayers and dependents.
Sec. 1.25A-2 Definitions
(a) Claimed dependent.
(b) Eligible educational institution.
(1) In general.
(2) Rules on Federal financial aid programs.
(c) Academic period.
(d) Qualified tuition and related expenses.
(1) In general.
(2) Required fees.
(i) In general.
(ii) Books, supplies, and equipment.
(iii) Nonacademic fees.
(3) Personal expenses.
(4) Treatment of a comprehensive or bundled fee.
(5) Hobby courses.
(6) Examples.
Sec. 1.25A-3 Hope Scholarship Credit
(a) Amount of the credit.
(1) In general.
(2) Maximum credit.
(b) Per student credit.
(1) In general.
(2) Example.
(c) Credit allowed for only two taxable years.
(d) Eligible student.
(1) Eligible student defined.
(i) Degree requirement.
(ii) Work load requirement.
(iii) Year of study requirement.
(iv) No felony drug conviction.
(2) Examples.
(e) Academic period for prepayments.
(1) In general.
(2) Example.
(f) Effective date.
Sec. 1.25A-4 Lifetime Learning Credit
(a) Amount of the credit.
(1) Taxable years beginning before January 1, 2003.
(2) Taxable years beginning after December 31, 2002.
(3) Coordination with the Hope Scholarship Credit.
(4) Examples.
(b) Credit allowed for unlimited number of taxable years.
[[Page 86]]
(c) Both degree and nondegree courses are eligible for the credit.
(1) In general.
(2) Examples.
(d) Effective date.
Sec. 1.25A-5 Special Rules Relating to Characterization and Timing of
Payments
(a) Educational expenses paid by claimed dependent.
(b) Educational expenses paid by a third party.
(1) In general.
(2) Special rule for tuition reduction included in gross income of
employee.
(3) Examples.
(c) Adjustment to qualified tuition and related expenses for certain
excludable educational assistance.
(1) In general.
(2) No adjustment for excludable educational assistance attributable
to expenses paid in a prior year.
(3) Scholarships and fellowship grants.
(4) Examples.
(d) No double benefit.
(e) Timing rules.
(1) In general.
(2) Prepayment rule.
(i) In general.
(ii) Example.
(3) Expenses paid with loan proceeds.
(4) Expenses paid through third party installment payment plans.
(i) In general.
(ii) Example.
(f) Refund of qualified tuition and related expenses.
(1) Payment and refund of qualified tuition and related expenses in
the same taxable year.
(2) Payment of qualified tuition and related expenses in one taxable
year and refund in subsequent taxable year before return filed for prior
taxable year.
(3) Payment of qualified tuition and related expenses in one taxable
year and refund in subsequent taxable year.
(i) In general.
(ii) Recapture amount.
(4) Refund of loan proceeds treated as refund of qualified tuition
and related expenses.
(5) Excludable educational assistance received in a subsequent
taxable year treated as a refund.
(6) Examples.
[T.D. 9034, 67 FR 78691, Dec. 26, 2002]
Sec. 1.25A-1 Calculation of education tax credit and general eligibility
requirements.
(a) Amount of education tax credit. An individual taxpayer is
allowed a nonrefundable education tax credit against income tax imposed
by chapter 1 of the Internal Revenue Code for the taxable year. The
amount of the education tax credit is the total of the Hope Scholarship
Credit (as described in Sec. 1.25A-3) plus the Lifetime Learning Credit
(as described in Sec. 1.25A-4). For limitations on the credits allowed
by subpart A of part IV of subchapter A of chapter 1 of the Internal
Revenue Code, see section 26.
(b) Coordination of Hope Scholarship Credit and Lifetime Learning
Credit--(1) In general. In the same taxable year, a taxpayer may claim a
Hope Scholarship Credit for each eligible student's qualified tuition
and related expenses (as defined in Sec. 1.25A-2(d)) and a Lifetime
Learning Credit for one or more other students' qualified tuition and
related expenses. However, a taxpayer may not claim both a Hope
Scholarship Credit and a Lifetime Learning Credit with respect to the
same student in the same taxable year.
(2) Hope Scholarship Credit. Subject to certain limitations, a Hope
Scholarship Credit may be claimed for the qualified tuition and related
expenses paid during a taxable year with respect to each eligible
student (as defined in Sec. 1.25A-3(d)). Qualified tuition and related
expenses paid during a taxable year with respect to one student may not
be taken into account in computing the amount of the Hope Scholarship
Credit with respect to any other student. In addition, qualified tuition
and related expenses paid during a taxable year with respect to any
student for whom a Hope Scholarship Credit is claimed may not be taken
into account in computing the amount of the Lifetime Learning Credit.
(3) Lifetime Learning Credit. Subject to certain limitations, a
Lifetime Learning Credit may be claimed for the aggregate amount of
qualified tuition and related expenses paid during a taxable year with
respect to students for whom no Hope Scholarship Credit is claimed.
(4) Examples. The following examples illustrate the rules of this
paragraph (b):
Example 1. In 1999, Taxpayer A pays qualified tuition and related
expenses for his dependent, B, to attend College Y during 1999. Assuming
all other relevant requirements are met, Taxpayer A may claim either a
[[Page 87]]
Hope Scholarship Credit or a Lifetime Learning Credit with respect to
dependent B, but not both. See Sec. 1.25A-3(a) and Sec. 1.25A-4(a).
Example 2. In 1999, Taxpayer C pays $2,000 in qualified tuition and
related expenses for her dependent, D, to attend College Z during 1999.
In 1999, Taxpayer C also pays $500 in qualified tuition and related
expenses to attend a computer course during 1999 to improve Taxpayer C's
job skills. Assuming all other relevant requirements are met, Taxpayer C
may claim a Hope Scholarship Credit for the $2,000 of qualified tuition
and related expenses attributable to dependent D (see Sec. 1.25A-3(a))
and a Lifetime Learning Credit (see Sec. 1.25A-4(a)) for the $500 of
qualified tuition and related expenses incurred to improve her job
skills.
Example 3. The facts are the same as in Example 2, except that
Taxpayer C pays $3,000 in qualified tuition and related expenses for her
dependent, D, to attend College Z during 1999. Although a Hope
Scholarship Credit is available only with respect to the first $2,000 of
qualified tuition and related expenses paid with respect to D (see Sec.
1.25A-3(a)), Taxpayer C may not add the $1,000 of excess expenses to her
$500 of qualified tuition and related expenses in computing the amount
of the Lifetime Learning Credit.
(c) Limitation based on modified adjusted gross income--(1) In
general. The education tax credit that a taxpayer may otherwise claim is
phased out ratably for taxpayers with modified adjusted gross income
between $40,000 and $50,000 ($80,000 and $100,000 for married
individuals who file a joint return). Thus, taxpayers with modified
adjusted gross income above $50,000 (or $100,000 for joint filers) may
not claim an education tax credit.
(2) Modified adjusted gross income defined. The term modified
adjusted gross income means the adjusted gross income (as defined in
section 62) of the taxpayer for the taxable year increased by any amount
excluded from gross income under section 911, 931, or 933 (relating to
income earned abroad or from certain U.S. possessions or Puerto Rico).
(3) Inflation adjustment. For taxable years beginning after 2001,
the amounts in paragraph (c)(1) of this section will be increased for
inflation occurring after 2000 in accordance with section 1(f)(3). If
any amount adjusted under this paragraph (c)(3) is not a multiple of
$1,000, the amount will be rounded to the next lowest multiple of
$1,000.
(d) Election. No education tax credit is allowed unless a taxpayer
elects to claim the credit on the taxpayer's federal income tax return
for the taxable year in which the credit is claimed. The election is
made by attaching Form 8863, ``Education Credits (Hope and Lifetime
Learning Credits),'' to the federal income tax return.
(e) Identification requirement. No education tax credit is allowed
unless a taxpayer includes on the federal income tax return claiming the
credit the name and the taxpayer identification number of the student
for whom the credit is claimed. For rules relating to assessment for an
omission of a correct taxpayer identification number, see section
6213(b) and (g)(2)(J).
(f) Claiming the credit in the case of a dependent--(1) In general.
If a student is a claimed dependent of another taxpayer, only that
taxpayer may claim the education tax credit for the student's qualified
tuition and related expenses. However, if another taxpayer is eligible
to, but does not, claim the student as a dependent, only the student may
claim the education tax credit for the student's qualified tuition and
related expenses.
(2) Examples. The following examples illustrate the rules of this
paragraph (f):
Example 1. In 1999, Taxpayer A pays qualified tuition and related
expenses for his dependent, B, to attend University Y during 1999.
Taxpayer A claims B as a dependent on his federal income tax return.
Therefore, assuming all other relevant requirements are met, Taxpayer A
is allowed an education tax credit on his federal income tax return, and
B is not allowed an education tax credit on B's federal income tax
return. The result would be the same if B paid the qualified tuition and
related expenses. See Sec. 1.25A-5(a).
Example 2. In 1999, Taxpayer C has one dependent, D. In 1999, D pays
qualified tuition and related expenses to attend University Z during
1999. Although Taxpayer C is eligible to claim D as a dependent on her
federal income tax return, she does not do so. Therefore, assuming all
other relevant requirements are met, D is allowed an education tax
credit on D's federal income tax return, and Taxpayer C is not allowed
an education tax credit on her federal income tax return, with respect
to D's education expenses. The result would be the same if C paid the
qualified tuition and related expenses on behalf of D. See Sec. 1.25A-
5(b).
[[Page 88]]
(g) Married taxpayers. If a taxpayer is married (within the meaning
of section 7703), no education tax credit is allowed to the taxpayer
unless the taxpayer and the taxpayer's spouse file a joint Federal
income tax return for the taxable year.
(h) Nonresident alien taxpayers and dependents. If a taxpayer or the
taxpayer's spouse is a nonresident alien for any portion of the taxable
year, no education tax credit is allowed unless the nonresident alien is
treated as a resident alien by reason of an election under section
6013(g) or (h). In addition, if a student is a nonresident alien, a
taxpayer may not claim an education tax credit with respect to the
qualified tuition and related expenses of the student unless the student
is a claimed dependent (as defined in Sec. 1.25A-2(a)).
[T.D. 9034, 67 FR 78691, Dec. 26, 2002]
Sec. 1.25A-2 Definitions.
(a) Claimed dependent. A claimed dependent means a dependent (as
defined in section 152) for whom a deduction under section 151 is
allowed on a taxpayer's federal income tax return for the taxable year.
Among other requirements under section 152, a nonresident alien student
must be a resident of a country contiguous to the United States in order
to be treated as a dependent.
(b) Eligible educational institution--(1) In general. In general, an
eligible educational institution means a college, university, vocational
school, or other postsecondary educational institution that is--
(i) Described in section 481 of the Higher Education Act of 1965 (20
U.S.C. 1088) as in effect on August 5, 1997, (generally all accredited
public, nonprofit, and proprietary postsecondary institutions); and
(ii) Participating in a Federal financial aid program under title IV
of the Higher Education Act of 1965 or is certified by the Department of
Education as eligible to participate in such a program but chooses not
to participate.
(2) Rules on Federal financial aid programs. For rules governing an
educational institution's eligibility to participate in Federal
financial aid programs, see 20 U.S.C. 1070; 20 U.S.C. 1094; and 34 CFR
600 and 668.
(c) Academic period. Academic period means a quarter, semester,
trimester, or other period of study as reasonably determined by an
eligible educational institution. In the case of an eligible educational
institution that uses credit hours or clock hours, and does not have
academic terms, each payment period (as defined in 34 CFR 668.4, revised
as of July 1, 2002) may be treated as an academic period.
(d) Qualified tuition and related expenses--(1) In general.
Qualified tuition and related expenses means tuition and fees required
for the enrollment or attendance of a student for courses of instruction
at an eligible educational institution.
(2) Required fees--(i) In general. Except as provided in paragraph
(d)(3) of this section, the test for determining whether any fee is a
qualified tuition and related expense is whether the fee is required to
be paid to the eligible educational institution as a condition of the
student's enrollment or attendance at the institution.
(ii) Books, supplies, and equipment. Qualified tuition and related
expenses include fees for books, supplies, and equipment used in a
course of study only if the fees must be paid to the eligible
educational institution for the enrollment or attendance of the student
at the institution.
(iii) Nonacademic fees. Except as provided in paragraph (d)(3) of
this section, qualified tuition and related expenses include fees
charged by an eligible educational institution that are not used
directly for, or allocated to, an academic course of instruction only if
the fee must be paid to the eligible educational institution for the
enrollment or attendance of the student at the institution.
(3) Personal expenses. Qualified tuition and related expenses do not
include the costs of room and board, insurance, medical expenses
(including student health fees), transportation, and similar personal,
living, or family expenses, regardless of whether the fee must be paid
to the eligible educational institution for the enrollment or attendance
of the student at the institution.
(4) Treatment of a comprehensive or bundled fee. If a student is
required to
[[Page 89]]
pay a fee (such as a comprehensive fee or a bundled fee) to an eligible
educational institution that combines charges for qualified tuition and
related expenses with charges for personal expenses described in
paragraph (d)(3) of this section, the portion of the fee that is
allocable to personal expenses is not included in qualified tuition and
related expenses. The determination of what portion of the fee relates
to qualified tuition and related expenses and what portion relates to
personal expenses must be made by the institution using a reasonable
method of allocation.
(5) Hobby courses. Qualified tuition and related expenses do not
include expenses that relate to any course of instruction or other
education that involves sports, games, or hobbies, or any noncredit
course, unless the course or other education is part of the student's
degree program, or in the case of the Lifetime Learning Credit, the
student takes the course to acquire or improve job skills.
(6) Examples. The following examples illustrate the rules of this
paragraph (d). In each example, assume that the institution is an
eligible educational institution and that all other relevant
requirements to claim an education tax credit are met. The examples are
as follows:
Example 1. University V offers a degree program in dentistry. In
addition to tuition, all students enrolled in the program are required
to pay a fee to University V for the rental of dental equipment. Because
the equipment rental fee must be paid to University V for enrollment and
attendance, the tuition and the equipment rental fee are qualified
tuition and related expenses.
Example 2. First-year students at College W are required to obtain
books and other reading materials used in its mandatory first-year
curriculum. The books and other reading materials are not required to be
purchased from College W and may be borrowed from other students or
purchased from off-campus bookstores, as well as from College W's
bookstore. College W bills students for any books and materials
purchased from College W's bookstore. The fee that College W charges for
the first-year books and materials purchased at its bookstore is not a
qualified tuition and related expense because the books and materials
are not required to be purchased from College W for enrollment or
attendance at the institution.
Example 3. All students who attend College X are required to pay a
separate student activity fee in addition to their tuition. The student
activity fee is used solely to fund on-campus organizations and
activities run by students, such as the student newspaper and the
student government (no portion of the fee covers personal expenses).
Although labeled as a student activity fee, the fee is required for
enrollment or attendance at College X. Therefore, the fee is a qualified
tuition and related expense.
Example 4. The facts are the same as in Example 3, except that
College X offers an optional athletic fee that students may pay to
receive discounted tickets to sports events. The athletic fee is not
required for enrollment or attendance at College X. Therefore, the fee
is not a qualified tuition and related expense.
Example 5. College Y requires all students to live on campus. It
charges a single comprehensive fee to cover tuition, required fees, and
room and board. Based on College Y's reasonable allocation, sixty
percent of the comprehensive fee is allocable to tuition and other
required fees not allocable to personal expenses, and the remaining
forty percent of the comprehensive fee is allocable to charges for room
and board and other personal expenses. Therefore, only sixty percent of
College Y's comprehensive fee is a qualified tuition and related
expense.
Example 6. As a degree student at College Z, Student A is required
to take a certain number of courses outside of her chosen major in
Economics. To fulfill this requirement, Student A enrolls in a square
dancing class offered by the Physical Education Department. Because
Student A receives credit toward her degree program for the square
dancing class, the tuition for the square dancing class is included in
qualified tuition and related expenses.
[T.D. 9034, 67 FR 78691, Dec. 26, 2002]
Sec. 1.25A-3 Hope Scholarship Credit.
(a) Amount of the credit--(1) In general. Subject to the phaseout of
the education tax credit described in Sec. 1.25A-1(c), the Hope
Scholarship Credit amount is the total of--
(i) 100 percent of the first $1,000 of qualified tuition and related
expenses paid during the taxable year for education furnished to an
eligible student (as defined in paragraph (d) of this section) who is
the taxpayer, the taxpayer's spouse, or any claimed dependent during any
academic period beginning in the taxable year (or treated as beginning
in the taxable year, see Sec. 1.25A-5(e)(2)); plus
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(ii) 50 percent of the next $1,000 of such expenses paid with
respect to that student.
(2) Maximum credit. For taxable years beginning before 2002, the
maximum Hope Scholarship Credit allowed for each eligible student is
$1,500. For taxable years beginning after 2001, the amounts used in
paragraph (a)(1) of this section to determine the maximum credit will be
increased for inflation occurring after 2000 in accordance with section
1(f)(3). If any amount adjusted under this paragraph (a)(2) is not a
multiple of $100, the amount will be rounded to the next lowest multiple
of $100.
(b) Per student credit--(1) In general. A Hope Scholarship Credit
may be claimed for the qualified tuition and related expenses of each
eligible student (as defined in paragraph (d) of this section).
(2) Example. The following example illustrates the rule of this
paragraph (b). In the example, assume that all the requirements to claim
an education tax credit are met. The example is as follows:
Example. In 1999, Taxpayer A has two dependents, B and C, both of
whom are eligible students. Taxpayer A pays $1,600 in qualified tuition
and related expenses for dependent B to attend a community college.
Taxpayer A pays $5,000 in qualified tuition and related expenses for
dependent C to attend University X. Taxpayer A may claim a Hope
Scholarship Credit of $1,300 ($1,000 + (.50 x $600)) for dependent B,
and the maximum $1,500 Hope Scholarship Credit for dependent C, for a
total Hope Scholarship Credit of $2,800.
(c) Credit allowed for only two taxable years. For each eligible
student, the Hope Scholarship Credit may be claimed for no more than two
taxable years.
(d) Eligible student--(1) Eligible student defined. For purposes of
the Hope Scholarship Credit, the term eligible student means a student
who satisfies all of the following requirements--
(i) Degree requirement. For at least one academic period that begins
during the taxable year, the student enrolls at an eligible educational
institution in a program leading toward a postsecondary degree,
certificate, or other recognized postsecondary educational credential;
(ii) Work load requirement. For at least one academic period that
begins during the taxable year, the student enrolls for at least one-
half of the normal full-time work load for the course of study the
student is pursuing. The standard for what is half of the normal full-
time work load is determined by each eligible educational institution.
However, the standard for half-time may not be lower than the applicable
standard for half-time established by the Department of Education under
the Higher Education Act of 1965 and set forth in 34 CFR 674.2(b)
(revised as of July 1, 2002) for a half-time undergraduate student;
(iii) Year of study requirement. As of the beginning of the taxable
year, the student has not completed the first two years of postsecondary
education at an eligible educational institution. Whether a student has
completed the first two years of postsecondary education at an eligible
educational institution as of the beginning of a taxable year is
determined based on whether the institution in which the student is
enrolled in a degree program (as described in paragraph (d)(1)(i) of
this section) awards the student two years of academic credit at that
institution for postsecondary course work completed by the student prior
to the beginning of the taxable year. Any academic credit awarded by the
eligible educational institution solely on the basis of the student's
performance on proficiency examinations is disregarded in determining
whether the student has completed two years of postsecondary education;
and
(iv) No felony drug conviction. The student has not been convicted
of a Federal or State felony offense for possession or distribution of a
controlled substance as of the end of the taxable year for which the
credit is claimed.
(2) Examples. The following examples illustrate the rules of this
paragraph (d). In each example, assume that the student has not been
convicted of a felony drug offense, that the institution is an eligible
educational institution unless otherwise stated, that the qualified
tuition and related expenses are paid during the same taxable year that
the academic period begins, and that a
[[Page 91]]
Hope Scholarship Credit has not previously been claimed for the student
(see paragraph (c) of this section). The examples are as follows:
Example 1. Student A graduates from high school in June 1998 and is
enrolled in an undergraduate degree program at College U for the 1998
Fall semester on a full-time basis. For the 1999 Spring semester,
Student A again is enrolled at College U on a full-time basis. For the
1999 Fall semester, Student A is enrolled in less than half the normal
full-time course work for her degree program. Because Student A is
enrolled in an undergraduate degree program on at least a half-time
basis for at least one academic period that begins during 1998 and at
least one academic period that begins during 1999, Student A is an
eligible student for taxable years 1998 and 1999 (including the 1999
Fall semester when Student A enrolls at College U on less than a half-
time basis).
Example 2. Prior to 1998, Student B attended college for several
years on a full-time basis. Student B transfers to College V for the
1998 Spring semester. College V awards Student B credit for some (but
not all) of the courses he previously completed, and College V
classifies Student B as a first-semester sophomore. During both the
Spring and Fall semesters of 1998, Student B is enrolled in at least
one-half the normal full-time work load for his degree program at
College V. Because College V does not classify Student B as having
completed the first two years of postsecondary education as of the
beginning of 1998, Student B is an eligible student for taxable year
1998.
Example 3. The facts are the same as in Example 2. After taking
classes on a half-time basis for the 1998 Spring and Fall semesters,
Student B is enrolled at College V for the 1999 Spring semester on a
full-time basis. College V classifies Student B as a second-semester
sophomore for the 1999 Spring semester and as a first-semester junior
for the 1999 Fall semester. Because College V does not classify Student
B as having completed the first two years of postsecondary education as
of the beginning of 1999, Student B is an eligible student for taxable
year 1999. Therefore, the qualified expenses and required fees paid for
the 1999 Spring semester and the 1999 Fall semester are taken into
account in calculating any Hope Scholarship Credit.
Example 4. Prior to 1998, Student C was not enrolled at another
eligible educational institution. At the time that Student C enrolls in
a degree program at College W for the 1998 Fall semester, Student C
takes examinations to demonstrate her proficiency in several subjects.
On the basis of Student C's performance on these examinations, College W
classifies Student C as a second-semester sophomore as of the beginning
of the 1998 Fall semester. Student C is enrolled at College W during the
1998 Fall semester and during the 1999 Spring and Fall semesters on a
full-time basis and is classified as a first-semester junior as of the
beginning of the 1999 Spring semester. Because Student C was not
enrolled in a college or other eligible educational institution prior to
1998 (but rather was awarded three semesters of academic credit solely
because of proficiency examinations), Student C is not treated as having
completed the first two years of postsecondary education at an eligible
educational institution as of the beginning of 1998 or as of the
beginning of 1999. Therefore, Student C is an eligible student for both
taxable years 1998 and 1999.
Example 5. During the 1998 Fall semester, Student D is a high school
student who takes classes on a half-time basis at College X. Student D
is not enrolled as part of a degree program at College X because College
X does not admit students to a degree program unless the student has a
high school diploma or equivalent. Because Student D is not enrolled in
a degree program at College X during 1998, Student D is not an eligible
student for taxable year 1998.
Example 6. The facts are the same as in Example 5. In addition,
during the 1999 Spring semester, Student D again attends College X but
not as part of a degree program. Student D graduates from high school in
June 1999. For the 1999 Fall semester, Student D enrolls in College X as
part of a degree program, and College X awards Student D credit for her
prior course work at College X. During the 1999 Fall semester, Student D
is enrolled in more than one-half the normal full-time work load of
courses for her degree program at College X. Because Student D is
enrolled in a degree program at College X for the 1999 Fall term on at
least a half-time basis, Student D is an eligible student for all of
taxable year 1999. Therefore, the qualified tuition and required fees
paid for classes taken at College X during both the 1999 Spring semester
(during which Student D was not enrolled in a degree program) and the
1999 Fall semester are taken into account in computing any Hope
Scholarship Credit.
Example 7. Student E completed two years of undergraduate study at
College S. College S is not an eligible educational institution for
purposes of the education tax credit. At the end of 1998, Student E
enrolls in an undergraduate degree program at College Z, an eligible
educational institution, for the 1999 Spring semester on a full-time
basis. College Z awards Student E two years of academic credit for his
previous course work at College S and classifies Student E as a first-
semester junior for the 1999 Spring semester. Student E is treated as
having completed the first two years of postsecondary education at an
eligible educational institution as of the beginning of 1999. Therefore,
Student E is not an eligible student for taxable year 1999.
[[Page 92]]
Example 8. Student F received a degree in 1998 from College R.
College R is not an eligible educational institution for purposes of the
education tax credit. During 1999, Student F is enrolled in a graduate-
degree program at College Y, an eligible educational institution, for
the 1999 Fall semester on a full-time basis. By admitting Student F to
its graduate degree program, College Y treats Student F as having
completed the first two years of postsecondary education as of the
beginning of 1999. Therefore, Student F is not an eligible student for
taxable year 1999.
Example 9. Student G graduates from high school in June 2001. In
January 2002, Student G is enrolled in a one-year postsecondary
certificate program on a full-time basis to obtain a certificate as a
travel agent. Student G completes the program in December 2002 and is
awarded a certificate. In January 2003, Student G enrolls in a one-year
postsecondary certificate program on a full-time basis to obtain a
certificate as a computer programer. Student G meets the degree
requirement, the work load requirement, and the year of study
requirement for the taxable years 2002 and 2003. Therefore, Student G is
an eligible student for both taxable years 2002 and 2003.
(e) Academic period for prepayments--(1) In general. For purposes of
determining whether a student meets the requirements in paragraph (d) of
this section for a taxable year, if qualified tuition and related
expenses are paid during one taxable year for an academic period that
begins during January, February or March of the next taxable year (for
taxpayers on a fiscal taxable year, use the first three months of the
next taxable year), the academic period is treated as beginning during
the taxable year in which the payment is made.
(2) Example. The following example illustrates the rule of this
paragraph (e). In the example, assume that all the requirements to claim
a Hope Scholarship Credit are met. The example is as follows:
Example. Student G graduates from high school in June 1998. After
graduation, Student G works full-time for several months to earn money
for college. Student G is enrolled on a full-time basis in an
undergraduate degree program at University W, an eligible educational
institution, for the 1999 Spring semester, which begins in January 1999.
Student G pays tuition to University W for the 1999 Spring semester in
December 1998. Because the tuition paid by Student G in 1998 relates to
an academic period that begins during the first three months of 1999,
Student G's eligibility to claim a Hope Scholarship Credit in 1998 is
determined as if the 1999 Spring semester began in 1998. Thus, assuming
Student G has not been convicted of a felony drug offense as of December
31, 1998, Student G is an eligible student for 1998.
(f) Effective date. The Hope Scholarship Credit is applicable for
qualified tuition and related expenses paid after December 31, 1997, for
education furnished in academic periods beginning after December 31,
1997.
[T.D. 9034, 67 FR 78691, Dec. 26, 2002; 68 FR 15940, Apr. 2, 2003]
Sec. 1.25A-4 Lifetime Learning Credit.
(a) Amount of the credit--(1) Taxable years beginning before January
1, 2003. Subject to the phaseout of the education tax credit described
in Sec. 1.25A-1(c), for taxable years beginning before 2003, the
Lifetime Learning Credit amount is 20 percent of up to $5,000 of
qualified tuition and related expenses paid during the taxable year for
education furnished to the taxpayer, the taxpayer's spouse, and any
claimed dependent during any academic period beginning in the taxable
year (or treated as beginning in the taxable year, see Sec. 1.25A-
5(e)(2)).
(2) Taxable years beginning after December 31, 2002. Subject to the
phaseout of the education tax credit described in Sec. 1.25A-1(c), for
taxable years beginning after 2002, the Lifetime Learning Credit amount
is 20 percent of up to $10,000 of qualified tuition and related expenses
paid during the taxable year for education furnished to the taxpayer,
the taxpayer's spouse, and any claimed dependent during any academic
period beginning in the taxable year (or treated as beginning in the
taxable year, see Sec. 1.25A-5(e)(2)).
(3) Coordination with the Hope Scholarship Credit. Expenses paid
with respect to a student for whom the Hope Scholarship Credit is
claimed are not eligible for the Lifetime Learning Credit.
(4) Examples. The following examples illustrate the rules of this
paragraph (a). In each example, assume that all the requirements to
claim a Lifetime Learning Credit or a Hope Scholarship Credit, as
applicable, are met. The examples are as follows:
[[Page 93]]
Example 1. In 1999, Taxpayer A pays qualified tuition and related
expenses of $3,000 for dependent B to attend an eligible educational
institution, and Taxpayer A pays qualified tuition and related expenses
of $4,000 for dependent C to attend an eligible educational institution.
Taxpayer A does not claim a Hope Scholarship Credit with respect to
either B or C. Although Taxpayer A paid $7,000 of qualified tuition and
related expenses during the taxable year, Taxpayer A may claim the
Lifetime Learning Credit with respect to only $5,000 of such expenses.
Therefore, the maximum Lifetime Learning Credit Taxpayer A may claim for
1999 is $1,000 (.20 x $5,000).
Example 2. In 1999, Taxpayer D pays $6,000 of qualified tuition and
related expenses for dependent E, and $2,000 of qualified tuition and
related expenses for dependent F, to attend eligible educational
institutions. Dependent F has already completed the first two years of
postsecondary education. For 1999, Taxpayer D claims the maximum $1,500
Hope Scholarship Credit with respect to dependent E. In computing the
amount of the Lifetime Learning Credit, Taxpayer D may not include any
of the $6,000 of qualified tuition and related expenses paid on behalf
of dependent E but may include the $2,000 of qualified tuition and
related expenses of dependent F.
(b) Credit allowed for unlimited number of taxable years. There is
no limit to the number of taxable years that a taxpayer may claim a
Lifetime Learning Credit with respect to any student.
(c) Both degree and nondegree courses are eligible for the credit--
(1) In general. For purposes of the Lifetime Learning Credit, amounts
paid for a course at an eligible educational institution are qualified
tuition and related expenses if the course is either part of a
postsecondary degree program or is not part of a postsecondary degree
program but is taken by the student to acquire or improve job skills.
(2) Examples. The following examples illustrate the rule of this
paragraph (c). In each example, assume that all the requirements to
claim a Lifetime Learning Credit are met. The examples are as follows:
Example 1. Taxpayer A, a professional photographer, enrolls in an
advanced photography course at a local community college. Although the
course is not part of a degree program, Taxpayer A enrolls in the course
to improve her job skills. The course fee paid by Taxpayer A is a
qualified tuition and related expense for purposes of the Lifetime
Learning Credit.
Example 2. Taxpayer B, a stockbroker, plans to travel abroad on a
``photo-safari'' for his next vacation. In preparation for the trip,
Taxpayer B enrolls in a noncredit photography class at a local community
college. Because Taxpayer B is not taking the photography course as part
of a degree program or to acquire or improve his job skills, amounts
paid by Taxpayer B for the course are not qualified tuition and related
expenses for purposes of the Lifetime Learning Credit.
(d) Effective date. The Lifetime Learning Credit is applicable for
qualified tuition and related expenses paid after June 30, 1998, for
education furnished in academic periods beginning after June 30, 1998.
[T.D. 9034, 67 FR 78691, Dec. 26, 2002]
Sec. 1.25A-5 Special rules relating to characterization and timing
of payments.
(a) Educational expenses paid by claimed dependent. For any taxable
year for which the student is a claimed dependent of another taxpayer,
qualified tuition and related expenses paid by the student are treated
as paid by the taxpayer to whom the deduction under section 151 is
allowed.
(b) Educational expenses paid by a third party--(1) In general.
Solely for purposes of section 25A, if a third party (someone other than
the taxpayer, the taxpayer's spouse if the taxpayer is treated as
married within the meaning of section 7703, or a claimed dependent)
makes a payment directly to an eligible educational institution to pay
for a student's qualified tuition and related expenses, the student is
treated as receiving the payment from the third party and, in turn,
paying the qualified tuition and related expenses to the institution.
(2) Special rule for tuition reduction included in gross income of
employee. Solely for purposes of section 25A, if an eligible educational
institution provides a reduction in tuition to an employee of the
institution (or to the spouse or dependent child of an employee, as
described in section 132(h)(2)) and the amount of the tuition reduction
is included in the employee's gross income, the employee is treated as
receiving payment of an amount equal to the tuition reduction and, in
turn, paying such amount to the institution.
[[Page 94]]
(3) Examples. The following examples illustrate the rules of this
paragraph (b). In each example, assume that all the requirements to
claim an education tax credit are met. The examples are as follows:
Example 1. Grandparent D makes a direct payment to an eligible
educational institution for Student E's qualified tuition and related
expenses. Student E is not a claimed dependent in 1999. For purposes of
claiming an education tax credit, Student E is treated as receiving the
money from her grandparent and, in turn, paying her qualified tuition
and related expenses.
Example 2. Under a court-approved divorce decree, Parent A is
required to pay Student C's college tuition. Parent A makes a direct
payment to an eligible educational institution for Student C's 1999
tuition. Under paragraph (b)(1) of this section, Student C is treated as
receiving the money from Parent A and, in turn, paying the qualified
tuition and related expenses. Under the divorce decree, Parent B has
custody of Student C for 1999. Parent B properly claims Student C as a
dependent on Parent B's 1999 federal income tax return. Under paragraph
(a) of this section, expenses paid by Student C are treated as paid by
Parent B. Thus, Parent B may claim an education tax credit for the
qualified tuition and related expenses paid directly to the institution
by Parent A.
Example 3. University A, an eligible educational institution, offers
reduced tuition charges to its employees and their dependent children. F
is an employee of University A. F's dependent child, G, enrolls in a
graduate-level course at University A. Section 117(d) does not apply,
because it is limited to tuition reductions provided for education below
the graduate level. Therefore, the amount of the tuition reduction
received by G is treated as additional compensation from University A to
F and is included in F's gross income. For purposes of claiming a
Lifetime Learning Credit, F is treated as receiving payment of an amount
equal to the tuition reduction from University A and, in turn, paying
such amount to University A on behalf of F's child, G.
(c) Adjustment to qualified tuition and related expenses for certain
excludable educational assistance--(1) In general. In determining the
amount of an education tax credit, qualified tuition and related
expenses for any academic period must be reduced by the amount of any
tax-free educational assistance allocable to such period. For this
purpose, tax-free educational assistance means--
(i) A qualified scholarship that is excludable from income under
section 117;
(ii) A veterans' or member of the armed forces' educational
assistance allowance under chapter 30, 31, 32, 34 or 35 of title 38,
United States Code, or under chapter 1606 of title 10, United States
Code;
(iii) Employer-provided educational assistance that is excludable
from income under section 127; or
(iv) Any other educational assistance that is excludable from gross
income (other than as a gift, bequest, devise, or inheritance within the
meaning of section 102(a)).
(2) No adjustment for excludable educational assistance attributable
to expenses paid in a prior year. A reduction is not required under
paragraph (c)(1) of this section if the amount of excludable educational
assistance received during the taxable year is treated as a refund of
qualified tuition and related expenses paid in a prior taxable year. See
paragraph (f)(5) of this section.
(3) Scholarships and fellowship grants. For purposes of paragraph
(c)(1)(i) of this section, a scholarship or fellowship grant is treated
as a qualified scholarship excludable under section 117 except to the
extent--
(i) The scholarship or fellowship grant (or any portion thereof) may
be applied, by its terms, to expenses other than qualified tuition and
related expenses within the meaning of section 117(b)(2) (such as room
and board) and the student reports the grant (or the appropriate portion
thereof) as income on the student's federal income tax return if the
student is required to file a return; or
(ii) The scholarship or fellowship grant (or any portion thereof)
must be applied, by its terms, to expenses other than qualified tuition
and related expenses within the meaning of section 117(b)(2) (such as
room and board) and the student reports the grant (or the appropriate
portion thereof) as income on the student's federal income tax return if
the student is required to file a return.
(4) Examples. The following examples illustrate the rules of this
paragraph (c). In each example, assume that all the requirements to
claim an education
[[Page 95]]
tax credit are met. The examples are as follows:
Example 1. University X charges Student A, who lives on University
X's campus, $3,000 for tuition and $5,000 for room and board. University
X awards Student A a $2,000 scholarship. The terms of the scholarship
permit it to be used to pay any of a student's costs of attendance at
University X, including tuition, room and board, and other incidental
expenses. University X applies the $2,000 scholarship against Student
A's $8,000 total bill, and Student A pays the $6,000 balance of her bill
from University X with a combination of savings and amounts she earns
from a summer job. University X does not require A to pay any additional
fees beyond the $3,000 in tuition in order to enroll in or attend
classes. Student A does not report any portion of the scholarship as
income on her federal income tax return. Since Student A does not report
the scholarship as income, the scholarship is treated under paragraph
(c)(3) of this section as a qualified scholarship that is excludable
under section 117. Therefore, for purposes of calculating an education
tax credit, Student A is treated as having paid only $1,000 ($3,000
tuition-$2,000 scholarship) in qualified tuition and related expenses to
University X.
Example 2. The facts are the same as in Example 1, except that
Student A reports the entire scholarship as income on the student's
federal income tax return. Since the full amount of the scholarship may
be applied to expenses other than qualified expenses (room and board)
and Student A reports the scholarship as income, the exception in
paragraph (c)(3) of this section applies and the scholarship is not
treated as a qualified scholarship excludable under section 117.
Therefore, for purposes of calculating an education tax credit, Student
A is treated as having paid $3,000 of qualified tuition and related
expenses to University X.
Example 3. The facts are the same as in Example 1, except that the
terms of the scholarship require it to be used to pay tuition. Under
paragraph (c)(3) of this section, the scholarship is treated as a
qualified scholarship excludable under section 117. Therefore, for
purposes of calculating an education tax credit, Student A is treated as
having paid only $1,000 ($3,000 tuition-$2,000 scholarship) in qualified
tuition and related expenses to University X.
Example 4. The facts are the same as in Example 1, except that the
terms of the scholarship require it to be used to pay tuition or room
and board charged by University X, and the scholarship amount is $6,000.
Under the terms of the scholarship, Student A may allocate the
scholarship between tuition and room and board in any manner. However,
because room and board totals $5,000, that is the maximum amount that
can be applied under the terms of the scholarship to expenses other than
qualified expenses and at least $1,000 of the scholarship must be
applied to tuition. Therefore, the maximum amount of the exception under
paragraph (c)(3) of this section is $5,000 and at least $1,000 is
treated as a qualified scholarship excludable under section 117 ($6,000
scholarship-$5,000 room and board). If Student A reports $5,000 of the
scholarship as income on the student's federal income tax return, then
Student A will be treated as having paid $2,000 ($3,000 tuition-$1,000
qualified scholarship excludable under section 117) in qualified tuition
and related expenses to University X.
Example 5. The facts are the same as in Example 1, except that in
addition to the scholarship that University X awards to Student A,
University X also provides Student A with an education loan and pays
Student A for working in a work/study job in the campus dining hall. The
loan is not excludable educational assistance within the meaning of
paragraph (c) of this section. In addition, wages paid to a student who
is performing services for the payor are neither a qualified scholarship
nor otherwise excludable from gross income. Therefore, Student A is not
required to reduce her qualified tuition and related expenses by the
amounts she receives from the student loan or as wages from her work/
study job.
Example 6. In 1999, Student B pays University Y $1,000 in tuition
for the 1999 Spring semester. University Y does not require Student B to
pay any additional fees beyond the $1,000 in tuition in order to enroll
in classes. Student B is an employee of Company Z. At the end of the
academic period and during the same taxable year that Student B paid
tuition to University Y, Student B provides Company Z with proof that he
has satisfactorily completed his courses at University Y. Pursuant to an
educational assistance program described in section 127(b), Company Z
reimburses Student B for all of the tuition paid to University Y.
Because the reimbursement from Company Z is employer-provided
educational assistance that is excludable from Student B's gross income
under section 127, the reimbursement reduces Student B's qualified
tuition and related expenses. Therefore, for purposes of calculating an
education tax credit, Student B is treated as having paid no qualified
tuition and related expenses to University Y during 1999.
Example 7. The facts are the same as in Example 6 except that the
reimbursement from Company Z is not pursuant to an educational
assistance program described in section 127(b), is not otherwise
excludable from Student B's gross income, and is taxed as additional
compensation to Student B. Because the reimbursement is not excludable
educational assistance within the meaning of
[[Page 96]]
paragraph (c)(1) of this section, Student B is not required to reduce
his qualified tuition and related expenses by the $1,000 reimbursement
he received from his employer. Therefore, for purposes of calculating an
education tax credit, Student B is treated as paying $1,000 in qualified
tuition and related expenses to University Y during 1999.
(d) No double benefit. Qualified tuition and related expenses do not
include any expense for which a deduction is allowed under section 162,
section 222, or any other provision of chapter 1 of the Internal Revenue
Code.
(e) Timing rules--(1) In general. Except as provided in paragraph
(e)(2) of this section, an education tax credit is allowed only for
payments of qualified tuition and related expenses for an academic
period beginning in the same taxable year as the year the payment is
made. Except for certain individuals who do not use the cash receipts
and disbursements method of accounting, qualified tuition and related
expenses are treated as paid in the year in which the expenses are
actually paid. See Sec. 1.461-1(a)(1).
(2) Prepayment rule--(i) In general. If qualified tuition and
related expenses are paid during one taxable year for an academic period
that begins during the first three months of the taxpayer's next taxable
year (i.e., in January, February, or March of the next taxable year for
calendar year taxpayers), an education tax credit is allowed with
respect to the qualified tuition and related expenses only in the
taxable year in which the expenses are paid.
(ii) Example. The following example illustrates the rule of this
paragraph (e)(2). In the example, assume that all the requirements to
claim an education tax credit are met. The example is as follows:
Example. In December 1998, Taxpayer A, a calendar year taxpayer,
pays College Z $1,000 in qualified tuition and related expenses to
attend classes during the 1999 Spring semester, which begins in January
1999. Taxpayer A may claim an education tax credit only in 1998 for
payments made in 1998 for the 1999 Spring semester.
(3) Expenses paid with loan proceeds. An education tax credit may be
claimed for qualified tuition and related expenses paid with the
proceeds of a loan only in the taxable year in which the expenses are
paid, and may not be claimed in the taxable year in which the loan is
repaid. Loan proceeds disbursed directly to an eligible educational
institution will be treated as paid on the date the institution credits
the proceeds to the student's account. For example, in the case of any
loan issued or guaranteed as part of a Federal student loan program
under title IV of the Higher Education Act of 1965, loan proceeds will
be treated as paid on the date of disbursement (as defined in 34 CFR
668.164(a), revised as of July 1, 2002) by the eligible educational
institution. If a taxpayer does not know the date the institution
credits the student's account, the taxpayer must treat the qualified
tuition and related expenses as paid on the last date for payment
prescribed by the institution.
(4) Expenses paid through third party installment payment plans--(i)
In general. A taxpayer, an eligible educational institution, and a third
party installment payment company may enter into an agreement in which
the company agrees to collect installment payments of qualified tuition
and related expenses from the taxpayer and to remit the installment
payments to the institution. If the third party installment payment
company is the taxpayer's agent for purposes of paying qualified tuition
and related expenses to the eligible educational institution, the
taxpayer is treated as paying the qualified expenses on the date the
company pays the institution. However, if the third party installment
payment company is the eligible educational institution's agent for
purposes of collecting payments of qualified tuition and related
expenses from the taxpayer, the taxpayer is treated as paying the
qualified expenses on the date the taxpayer pays the company.
(ii) Example. The following example illustrates the rule of this
paragraph (e)(4). The example is as follows:
Example. Student A, Company B, and College C enter into a written
agreement in which Student A agrees to pay the tuition required to
attend College C in 10 equal monthly installments to Company B. Under
the written agreement, Student A is not relieved of her obligation to
pay College C until Company B remits the payments to College C. Under
the written agreement, Company B agrees to disburse the monthly
installment payments to College C within 30
[[Page 97]]
days of receipt. Because Company B acts as Student A's agent for
purposes of paying qualified expenses to College C, Student A is treated
as paying qualified expenses on the date Company B disburses payments to
College C.
(f) Refund of qualified tuition and related expenses--(1) Payment
and refund of qualified tuition and related expenses in the same taxable
year. With respect to any student, the amount of qualified tuition and
related expenses for a taxable year is calculated by adding all
qualified tuition and related expenses paid for the taxable year, and
subtracting any refund of such expenses received from the eligible
educational institution during the same taxable year (including refunds
of loan proceeds described in paragraph (f)(4) of this section).
(2) Payment of qualified tuition and related expenses in one taxable
year and refund in subsequent taxable year before return filed for prior
taxable year. If, in a taxable year, a taxpayer or someone other than
the taxpayer receives a refund (including refunds of loan proceeds
described in paragraph (f)(4) of this section) of qualified tuition and
related expenses paid on behalf of a student in a prior taxable year and
the refund is received before the taxpayer files a federal income tax
return for the prior taxable year, the amount of the qualified tuition
and related expenses for the prior taxable year is reduced by the amount
of the refund.
(3) Payment of qualified tuition and related expenses in one taxable
year and refund in subsequent taxable year--(i) In general. If, in a
taxable year (refund year), a taxpayer or someone other than the
taxpayer receives a refund (including refunds of loan proceeds described
in paragraph (f)(4) of this section) of qualified tuition and related
expenses paid on behalf of a student for which the taxpayer claimed an
education tax credit in a prior taxable year, the tax imposed by chapter
1 of the Internal Revenue Code for the refund year is increased by the
recapture amount.
(ii) Recapture amount. The recapture amount is the difference in tax
liability for the prior taxable year (taking into account any
redetermination of such tax liability by audit or amended return) that
results when the tax liability for the prior year is calculated using
the taxpayer's redetermined credit. The redetermined credit is computed
by reducing the amount of the qualified tuition and related expenses
taken into account in determining any credit claimed in the prior
taxable year by the amount of the refund of the qualified tuition and
related expenses (redetermined qualified expenses), and computing the
allowable credit using the redetermined qualified expenses and the
relevant facts and circumstances of the prior taxable year, such as
modified adjusted gross income (redetermined credit).
(4) Refund of loan proceeds treated as refund of qualified tuition
and related expenses. If loan proceeds used to pay qualified tuition and
related expenses (as described in paragraph (e)(3) of this section)
during a taxable year are refunded by an eligible educational
institution to a lender on behalf of the borrower, the refund is treated
as a refund of qualified tuition and related expenses for purposes of
paragraphs (f)(1), (2), and (3) of this section.
(5) Excludable educational assistance received in a subsequent
taxable year treated as a refund. If, in a taxable year, a taxpayer or
someone other than the taxpayer receives any excludable educational
assistance (described in paragraph (c)(1) of this section) for the
qualified tuition and related expenses paid on behalf of a student
during a prior taxable year (or attributable to enrollment at an
eligible educational institution during a prior taxable year), the
educational assistance is treated as a refund of qualified tuition and
related expenses for purposes of paragraphs (f)(2) and (3) of this
section. If the excludable educational assistance is received before the
taxpayer files a federal income tax return for the prior taxable year,
the amount of the qualified tuition and related expenses for the prior
taxable year is reduced by the amount of the excludable educational
assistance as provided in paragraph (f)(2) of this section. If the
excludable educational assistance is received after the taxpayer has
filed a federal income tax return for the prior taxable year, any
education tax credit claimed for the prior taxable year is
[[Page 98]]
subject to recapture as provided in paragraph (f)(3) of this section.
(6) Examples. The following examples illustrate the rules of this
paragraph (f). In each example, assume that all the requirements to
claim an education tax credit are met. The examples are as follows:
Example 1. In January 1998, Student A, a full-time freshman at
University X, pays $2,000 for qualified tuition and related expenses for
a 16-hour work load for the 1998 Spring semester. Prior to beginning
classes, Student A withdraws from 6 course hours. On February 15, 1998,
Student A receives a $750 refund from University X. In September 1998,
Student A pays University X $1,000 to enroll half-time for the 1998 Fall
semester. Prior to beginning classes, Student A withdraws from a 2-hour
course, and she receives a $250 refund in October 1998. Student A
computes the amount of qualified tuition and related expenses she may
claim for 1998 by:
(i) Adding all qualified expenses paid during the taxable year
($2,000 + 1,000 = $3,000);
(ii) Adding all refunds of qualified tuition and related expenses
received during the taxable year ($750 + $250 = $1,000); and, then
(iii) Subtracting paragraph (ii) of this Example 1 from paragraph
(i) of this Example 1 ($3,000 -$1,000 = $2,000). Therefore, Student A's
qualified tuition and related expenses for 1998 are $2,000.
Example 2. (i) In December 1998, Student B, a senior at College Y,
pays $2,000 for qualified tuition and related expenses for a 16-hour
work load for the 1999 Spring semester. Prior to beginning classes,
Student B withdraws from a 4-hour course. On January 15, 1999, Student B
files her 1998 income tax return and claims a $400 Lifetime Learning
Credit for the $2,000 qualified expenses paid in 1998, which reduces her
tax liability for 1998 by $400. On February 15, 1999, Student B receives
a $500 refund from College Y.
(ii) Student B calculates the increase in tax for 1999 by--
(A) Calculating the redetermined qualified expenses for 1998 ($2,000
- $500 = $1,500);
(B) Calculating the redetermined credit for the redetermined
qualified expenses ($1,500 x .20 = $300); and
(C) Calculating the difference in tax liability for 1998 resulting
from the redetermined credit. Because Student B's tax liability for 1998
was reduced by the full amount of the $400 education tax credit claimed
on her 1998 income tax return, the difference in tax liability can be
determined by subtracting the redetermined credit from the credit
claimed in 1998 ($400-$300 = $100).
(iii) Therefore, Student B must increase the tax on her 1999 federal
income tax return by $100.
Example 3. In September 1998, Student C pays College Z $1,200 in
qualified tuition and related expenses to attend evening classes during
the 1998 Fall semester. Student C is an employee of Company R. On
January 15, 1999, Student C files a federal income tax return for 1998
claiming a Lifetime Learning Credit of $240 (.20 x $1,200), which
reduces Student C's tax liability for 1998 by $240. Pursuant to an
educational assistance program described in section 127(b), Company R
reimburses Student C in February 1999 for the $1,200 of qualified
tuition and related expenses paid by Student C in 1998. The $240
education tax credit claimed by Student C for 1998 is subject to
recapture. Because Student C paid no net qualified tuition and related
expenses for 1998, the redetermined credit for 1998 is zero. Student C
must increase the amount of Student C's 1999 tax by the recapture
amount, which is $240 (the difference in tax liability for 1998
resulting from the redetermined credit for 1998 ($0)). Because the
$1,200 reimbursement relates to expenses for which the taxpayer claimed
an education tax credit in a prior year, the reimbursement does not
reduce the amount of any qualified tuition and related expenses that
Student C paid in 1999.
[T.D. 9034, 67 FR 78691, Dec. 26, 2002; 68 FR 15940, Apr. 2, 2003]
Sec. 1.28-0 Credit for clinical testing expenses for certain drugs for
rare diseases or conditions; table of contents.
In order to facilitate use of Sec. 1.28-1, this section lists the
paragraphs, subparagraphs, and subdivisions contained in Sec. 1.28-1.
(a) General rule.
(b) Qualified clinical testing expenses.
(1) In general.
(2) Modification of section 41(b).
(3) Exclusion for amounts funded by another person.
(i) In general.
(ii) Clinical testing in which taxpayer retains no rights.
(iii) Clinical testing in which taxpayer retains substantial rights.
(A) In general.
(B) Drug by drug determination.
(iv) Funding for qualified clinical testing expenses determinable
only in subsequent taxable years.
(4) Special rule governing the application of section 41(b) beyond
its expiration date.
(c) Clinical testing.
(1) In general.
(2) Definition of ``human clinical testing''.
(3) Definition of ``carried out under'' section 505(i).
(d) Definition and special rules.
[[Page 99]]
(1) Definition of ``rare disease or condition''.
(i) In general.
(ii) Cost of developing and making available the designated drug.
(A) In general.
(B) Exclusion of costs funded by another person.
(C) Computation of cost.
(D) Allocation of common costs. Costs for developing and making
available the designated drug for both the disease or condition for
which it is designated and one or more other diseases or conditions.
(iii) Recovery from sales.
(iv) Recordkeeping requirements.
(2) Tax liability limitation.
(i) Taxable years beginning after December 31, 1986.
(ii) Taxable years beginning before January 1, 1987, and after
December 31, 1983.
(iii) Taxable years beginning before January 1, 1984.
(3) Special limitations on foreign testing.
(i) Clinical testing conducted outside the United States--In
general.
(ii) Insufficient testing population in the United States.
(A) In general.
(B) ``Insufficient testing population''.
(C) ``Unrelated to the taxpayer''.
(4) Special limitations for certain corporations.
(i) Corporations to which section 936 applies.
(ii) Corporations to which section 934(b) applies.
(5) Aggregation of expenditures.
(i) Controlled group of corporations: organizations under common
control.
(A) In general.
(B) Definition of controlled group of corporations.
(C) Definition of organization.
(D) Determination of common control.
(ii) Tax accounting periods used.
(A) In general.
(B) Special rule where the timing of clinical testing is
manipulated.
(iii) Membership during taxable year in more than one group.
(iv) Intra-group transactions.
(A) In general.
(B) In-house research expenses.
(C) Contract research expenses.
(D) Lease payments.
(E) Payments for supplies.
(6) Allocations.
(i) Pass-through in the case of an S corporation
(ii) Pass-through in the case of an estate or a trust.
(iii) Pass-through in the case of a partnership.
(A) In general.
(B) Certain partnership non-business expenditures.
(C) Apportionment.
(iv) Year in which taken into account.
(v) Credit allowed subject to limitation.
(7) Manner of making an election.
[T.D. 8232, 53 FR 38710, Oct. 3, 1988; 53 FR 40879, Oct. 19, 1988]
Sec. 1.28-1 Credit for clinical testing expenses for certain drugs
for rare diseases or conditions.
(a) General rule. Section 28 provides a credit against the tax
imposed by chapter 1 of the Internal Revenue Code. The amount of the
credit is equal to 50 percent of the qualified clinical testing expenses
(as defined in paragraph (b) of this section) for the taxable year. The
credit applies to qualified clinical testing expenses paid or incurred
by the taxpayer after December 31, 1982, and before January 1, 1991. The
credit may not exceed the taxpayer's tax liability for the taxable year
(as determined under paragraph (d)(2) of this section).
(b) Qualified clinical testing expenses--(1) In general. Except as
otherwise provided in paragraph (b)(3) of this section, the term
``qualified clinical testing expenses'' means the amounts which are paid
or incurred during the taxable year which would constitute ``qualified
research expenses'' within the meaning of section 41(b) (relating to the
credit for increasing research activities) as modified by section
28(b)(1)(B) and paragraph (b)(2) of this section. For example, amounts
paid or incurred for the acquisition of depreciable property used in the
conduct of clinical testing (as defined in paragraph (c) of this
section) are not qualified clinical testing expenses.
(2) Modification of section 41(b). For purposes of paragraph (b)(1)
of this section, section 41(b) is modified by substituting ``clinical
testing'' for ``qualified research'' each place it appears in paragraph
(2) of section 41(b) (relating to in-house research expenses) and
paragraph (3) of section 41(b) (relating to contract research expenses).
In addition, ``100 percent'' is substituted for ``65 percent'' in
paragraph (3)(A) of section 41(b).
(3) Exclusion for amounts funded by another person--(i) In general.
The term ``qualified clinical testing expenses'' shall not include any
amount which would otherwise constitute qualified clinical testing
expenses, to the extent
[[Page 100]]
such amount is funded by a grant, contract, or otherwise by another
person (or any governmental entity). The determination of the extent to
which an amount is funded shall be made in light of all the facts and
circumstances. For a special rule regarding funding between commonly
controlled businesses, see paragraph (d)(5)(iv) of Sec. 1.28-1.
(ii) Clinical testing in which taxpayer retains no rights. If a
taxpayer conducting clinical testing with respect to the designated drug
for another person retains no substantial rights in the clinical testing
under the agreement providing for the clinical testing the taxpayer's
clinical testing expenses are treated as fully funded for purposes of
section 28(b)(1)(C). Thus, for example, if the taxpayer incurs clinical
testing expenses under an agreement that confers on another person the
exclusive right to exploit the results of the clinical testing, those
expenses do not constitute qualified clinical testing expenses because
they are fully funded under this paragraph (b)(3)(ii). Incidental
benefits to the taxpayer from the conduct of the clinical testing (for
example, increased experience in the field of human clinical testing) do
not constitute substantial rights in the clinical testing.
(iii) Clinical testing in which taxpayer retains substantial
rights--(A) In general. If a taxpayer conducting clinical testing with
respect to the designated drug for another person retains substantial
rights in the clinical testing under the agreement providing for the
clinical testing, the clinical testing expenses are funded to the extent
of the payments (and fair market value of any property at the time of
transfer) to which the taxpayer becomes entitled by conducting the
clinical testing. The taxpayer shall reduce the amount paid or incurred
by the taxpayer for the clinical testing expenses that would, but for
section 28(b)(1)(C) constitute qualified clinical testing expenses of
the taxpayer by the amount of the funding determined under the preceding
sentence. Rights retained in the clinical testing are not treated as
property for purposes of this paragraph (b)(3)(iii)(A). If the property
that is transferred to the taxpayer is to be consumed in the clinical
testing (for example, supplies), the taxpayer should exclude the value
of that property from both the payments received and the expenses paid
or incurred for the clinical testing.
(B) Drug by drug determination. The provisions of this paragraph
(b)(3) shall be applied separately to each designated drug tested by the
taxpayer.
(iv) Funding for qualified clinical testing expenses determinable
only in subsequent taxable years. If, at the time the taxpayer files its
return for a taxable year, it is impossible to determine to what extent
some or all of the qualified clinical testing expenses may be funded,
the taxpayer shall treat the clinical testing expenses as fully funded
for purposes of that return. When the amount of funding for qualified
clinical testing expenses is finally determined, the taxpayer should
amend the return and any interim returns to reflect the amount of
funding for qualified clinical testing expenses.
(4) Special rule governing the application of section 41(b) beyond
its expiration date. For purposes of section 28 and this section,
section 41(b), as amended, and the regulations thereunder shall be
deemed to remain in effect after December 31, 1988.
(c) Clinical testing--(1) In general. The term ``clinical testing''
means any human clinical testing which--
(i) Is carried out under an exemption under section 505(i) of the
Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(i)) and the
regulations relating thereto (21 CFR part 312) for the purpose of
testing a drug for a rare disease or condition as defined in paragraph
(d)(1) of this section,
(ii) Occurs after the date the drug is designated as a drug for a
rare disease or condition under section 526 of the Federal Food, Drug,
and Cosmetic Act (21 U.S.C. 360bb),
(iii) Occurs before the date on which an application for the
designated drug is approved under section 505(b) of the Federal Food,
Drug, and Cosmetic Act (21 U.S.C. 355(b)) or, if the drug is a
biological product (other than a radioactive biological product intended
for human use), before the date on which a license for such drug is
issued under section 351 of the Public Health Services Act (42 U.S.C.
262), and
[[Page 101]]
(iv) Is conducted by or on behalf of the taxpayer to whom the
designation under section 526 of the Federal Food, Drug, and Cosmetic
Act applies.
Human clinical testing shall be taken into account under this paragraph
(c)(1) only to the extent that the testing relates to the use of a drug
for the rare disease or condition for which the drug was designated
under section 526 of the Federal Food, Drug, and Cosmetic Act. For
purposes of paragraph (c)(1)(i) of this section the testing under
section 505(i) exemption procedures (21 CFR part 312) of a biological
product (other than a radioactive biological product intended for human
use) pursuant to 21 CFR Sec. 601.21 is deemed to be carried out under
an exemption under section 505(i) of the Federal Food, Drug, and
Cosmetic Act.
(2) Definition of ``human clinical testing.'' Testing is considered
to be human clinical testing only to the extent that it uses human
subjects to determine the effect of the designated drug on humans and is
necessary for the designated drug either to be approved under section
505(b) of the Federal Food, Drug, and Cosmetic Act and the regulations
thereunder (21 CFR part 314), or if the designated drug is a biological
product (other than a radioactive biological product intended for human
use), to be licensed under section 351 of the Public Health Services Act
and the regulations thereunder (21 CFR part 601). For purposes of this
paragraph (c)(2), a human subject is an individual who is a participant
in research, either as a recipient of the drug or as a control. A
subject may be either a healthy individual or a patient.
(3) Definition of ``carried out under'' section 505(i). Human
clinical testing is not carried out under section 505(i) of the Federal
Food, Drug, and Cosmetic Act and the regulations thereunder (21 CFR part
312) unless the primary purpose of the human clinical testing is to
ascertain the data necessary to qualify the designated drug for sale in
the United States, and not to ascertain data unrelated or only
incidentally related to that needed to qualify the designated drug.
Whether or not this primary purpose test is met shall be determined in
light of all of the facts and circumstances.
(d) Definition and special rules--(1) Definition of ``rare disease
or condition''--(i) In general. The term ``rare disease or condition''
means any disease or condition which--
(A) Afflicts 200,000 or fewer persons in the United States, or
(B) Afflicts more than 200,000 persons in the United States but for
which there is no reasonable expectation that the cost of developing and
making available in the United States (as defined in section 7701(a)(9))
a drug for such disease or condition will be recovered from sales in the
United States (as so defined) of such drug.
Determinations under paragraph (d)(1)(i)(B) of this section with respect
to any drug shall be made on the basis of the facts and circumstances as
of the date such drug is designated under section 526 of the Federal
Food, Drug, and Cosmetic Act. Examples of diseases or conditions which
in 1987 afflicted 200,000 or fewer persons in the United States are
Duchenne dystrophy, one of the muscular dystrophies; Huntington's
disease, a hereditary chorea; myoclonus; Tourette's syndrome; and
amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease).
(ii) Cost of developing and making available the designated drug--
(A) In general. Except as otherwise provided in this paragraph
(d)(1)(ii), the taxpayer's computation of the cost of developing and
making available in the United States the designated drug shall include
only the costs that the taxpayer (or any person whose right to make
sales of the drug is directly or indirectly derived from the taxpayer,
e.g., a licensee or transferee) has incurred or reasonably expects to
incur in developing and making available in the United States the
designated drug for the disease or condition for which it is designated.
For example, if, prior to designation under section 526, the taxpayer
incurred costs of $125,000 to test the drug for the rare disease or
condition for which it is subsequently designated and incurred $500,000
to test the same drug for other diseases, and if, on the date of
designation, the taxpayer expects to incur costs of $1.2 million to test
the drug for the rare disease or condition for which it is designated,
the taxpayer shall include in
[[Page 102]]
its cost computation both the $125,000 incurred prior to designation and
the $1.2 million expected to be incurred after designation to test the
drug for the rare disease or condition for which it is designated. The
taxpayer shall not include the $500,000 incurred to test the drug for
other diseases.
(B) Exclusion of costs funded by another person. In computing the
cost of developing and making available in the United States the
designated drug, the taxpayer shall not include any cost incurred or
expected to be incurred by the taxpayer to the extent that the cost is
funded or is reasonably expected to be funded (determined under the
principles of paragraph (b)(3)) by a grant, contract, or otherwise by
another person (or any governmental entity).
(C) Computation of cost. The cost computation shall use only
reasonable costs incurred after the first indication of an orphan
application for the designated drug. Such costs shall include the costs
of obtaining data needed, and of meetings to be held, in connection with
a request for FDA assistance under section 525 of the Federal, Food,
Drug, and Cosmetic Act (21 U.S.C. 360aa) or a request for orphan
designation under section 526 of that Act; costs of determining
patentability of the drug; costs of screening, animal and clinical
studies; costs associated with preparation of a Notice of Claimed
Investigational Exemption for a New Drug (IND) and a New Drug
Application (NDA); costs of possible distribution of drug under a
``treatment'' protocol; costs of development of a dosage form;
manufacturing costs; distribution costs; promotion costs; costs to
maintain required records and reports; and costs of the taxpayer in
acquiring the right to market a drug from the owner of that right prior
to designation. The taxpayer shall also include general overhead,
depreciation costs and premiums for insurance against liability losses
to the extent that the taxpayer can demonstrate that these costs are
properly allocable to the designated drug under the established
standards of financial accounting and reporting of research and
development costs.
(D) Allocation of common costs. Costs for developing and making
available the designated drug for both the disease or condition for
which it is designated and one or more other diseases or conditions. In
the case where the costs incurred or expected to be incurred in
developing and making available the designated drug for the disease or
condition for which it is designated are also incurred or expected to be
incurred in developing and making available in the United States the
same drug for one or more other diseases or conditions (whether or not
they are also designated or expected to be designated), the costs shall
be allocated between the cost of developing and making available the
designated drug for the disease or condition for which the drug is
designated and the cost of developing and making available the
designated drug for the other diseases or conditions. The amount of the
common costs to be allocated to the cost of developing and making
available the designated drug for the disease or condition for which it
is designated is determined by multiplying the common costs by a
fraction the numerator of which is the sum of the expected amount of
sales in the United States of the designated drug for the disease or
condition for which the drug is designated and the denominator of which
is the total expected amount of sales in the United States of the
designated drug. For example, if prior to designation, the taxpayer
incurs (among other costs) costs of $100,000 in testing the designated
drug for its toxic effect on animals (without reference to any disease
or condition), and if the taxpayer expects to recover $500,000 from
sales in the United States of the designated drug for disease X, the
disease for which the drug is designated, and further expects to recover
another $1.5 million from the sales in the United States of the
designated drug for disease Y, the taxpayer must allocate a
proportionate amount of the common costs of $100,000 to the cost of
developing and making available the designated drug for both disease X
and disease Y. Since the ratio of the expected amount of sales in the
United States of the designated drug for disease X to the total of both
the expected amount
[[Page 103]]
of sales in the United States of the designated drug for disease X and
the expected amount of sales in the United States of the designated drug
for disease Y is $500,000/$2,000,000, 25% of the common costs of
$100,000 (i.e., $25,000) is allocated to the cost of developing and
making available the designated drug for disease X.
(iii) Recovery from sales. In determining whether the taxpayer's
cost described in paragraph (d)(1)(ii) of this section will be recovered
from sales in the United States of the designated drug for the disease
or condition for which the drug is designated, the taxpayer shall
include anticipated sales by the taxpayer or any person whose right to
make such sales is directly or indirectly derived from the taxpayer
(such as a licensee or transferee). The anticipated sales shall be based
upon the size of the anticipated patient population for which the
designated drug would be useful, including the following factors: the
degree of effectiveness and safety of the designated drug, if known: the
projected fraction of the anticipated patient population expected to be
given the designated drug and to continue to take it; other available
agents and other types of therapy; the likelihood that superior agents
will become available within a few years; and the number of years during
which the designated drug would be exclusively available, e.g., under a
patent.
(iv) Recordkeeping requirements. The taxpayer shall keep records
sufficient to substantiate the cost and sales estimates made pursuant to
this paragraph (d)(1). The records required by this paragraph (d)(1)(iv)
shall be retained so long as the contents thereof may become material in
the administration of section 28.
(2) Tax liability limitation--(i) Taxable years beginning after
December 31, 1986. The credit allowed by section 28 shall not exceed the
excess (if any) of--
(A) The taxpayer's regular tax liability for the taxable year (as
defined in section 26(b)), reduced by the sum of the credits allowable
under--
(1) Section 21 (relating to expenses for household and dependent
care services necessary for gainful employment),
(2) Section 22 (relating to the elderly and permanently and totally
disabled),
(3) Section 23 (relating to residential energy),
(4) Section 25 (relating to interest on certain home mortgages), and
(5) Section 27 (relating to taxes on foreign countries and
possessions of the United States), over
(B) The tentative minimum tax for the taxable year (as determined
under section 55(b)(1)).
(ii) Taxable years beginning before January 1, 1987, and after
December 31, 1983. The credit allowed by section 28 shall not exceed the
taxpayer's tax liability for the taxable year (as defined in section 26
(b) prior to its amendment by the Tax Reform Act of 1986 (Pub. L. 99-
514)), reduced by the sum of the credits allowable under--
(A) Section 21 (relating to expenses for household dependent care
services necessary for gainful employment),
(B) Section 22 (relating to the elderly and permanently and totally
disabled),
(C) Section 23 (relating to residential energy),
(D) Section 24 (relating to contributions to candidates for public
office),
(E) Section 25 (relating to interest on certain home mortgages), and
(F) Section 27 (relating to the taxes on foreign countries and
possessions of the United States).
(iii) Taxable years beginning before January 1, 1984. The credit
allowed by section 28 shall not exceed the amount of the tax imposed by
chapter 1 of the Internal Revenue Code for the taxable year, reduced by
the sum of the credits allowable under the following sections as
designated prior to the enactment of the Tax Reform Act of 1984 (Pub.
Law 98-369):
(A) Section 32 (relating to tax withheld at source on nonresident
aliens and foreign corporations and on tax-free convenant bonds),
(B) Sections 33 (relating to taxes of foreign countries and
possessions of the United States),
(C) Section 37 (relating to the retirement income),
(D) Section 38 (relating to investment in certain depreciable
property),
(E) Section 40 (relating to expenses of work incentive programs).
[[Page 104]]
(F) Section 41 (relating to contributions to candidates for public
office).
(G) Section 44 (relating to purchase of new principal residence).
(H) Section 44A (relating to expenses for household and dependent
care services necessary for gainful employment).
(I) Section 44B (relating to employment of certain new employees).
(J) Section 44C (relating to residential energy).
(K) Section 44D (relating to producing fuel from a nonconventional
source).
(L) Section 44E (relating to alcohol used as fuel).
(M) Section 44F (relating to increasing research activities), and
(N) Section 44G (relating to employee stock ownership).
The term ``tax imposed by chapter 1'' as used in this paragraph
(d)(2)(iii) does not include any tax treated as not imposed by chapter 1
of the Internal Revenue Code under the last sentence of section 53(a).
(3) Special limitations on foreign testing--(i) Clinical testing
conducted outside of the United States--In general. Except as otherwise
provided in this paragraph (d)(3), expenses paid or incurred with
respect to clinical testing conducted outside the United States (as
defined in section 7701(a)(9)) are not eligible for credit under this
section. Thus, for example, wages paid an employee clinical investigator
for clinical testing conducted in medical facilities in the United
States and Mexico generally must be apportioned between the clinical
testing conducted within the United States and the clinical testing
conducted outside the United States, and only the wages apportioned to
the clinical testing conducted within the United States are qualified
clinical testing expenses.
(ii) Insufficient testing population in the United States--(A) In
general. If clinical testing is conducted outside of the United States
because there is an insufficient testing population in the United
States, and if the clinical testing is conducted by a United States
person (as defined in section 7701(a)(30)) or is conducted by any other
person unrelated to the taxpayer to whom the designation under section
526 of the Federal Food, Drug, and Cosmetic Act applies, then the
expenses paid or incurred for clinical testing conducted outside of the
United States are eligible for the credit provided by section 28.
(B) ``Insufficient testing population.'' The testing population in
the United States is insufficient if there are not within the United
States the number of available and appropriate human subjects needed to
produce reliable data from the clinical investigation.
(C) ``Unrelated to the taxpayer.'' For the purpose of determining
whether a person is unrelated to the taxpayer to whom the designation
under section 526 of the Federal Food, Drug, and Cosmetic Act and the
regulations thereunder applies, the rules of section 613A(d)(3) shall
apply except that the number ``5'' in section 613A(d)(3) (A), (B), and
(C) shall be deleted and the number ``10'' inserted in lieu thereof.
(4) Special limitations for certain corporations--(i) Corporations
to which section 936 applies. Expenses paid or incurred for clinical
testing conducted either inside or outside the United States by a
corporation to which section 936 (relating to Puerto Rico and
possessions tax credit) applies are not eligible for the credit under
section 28.
(ii) Corporations to which section 934(b) applies. For taxable years
beginning before January 1, 1987, expenses paid or incurred for clinical
testing conducted either inside or outside the United States by a
corporation to which section 934(b) (relating to the limitation on
reduction in income tax liability incurred to the Virgin Islands), as in
effect prior to its amendment by the Tax Reform Act of 1986, applies are
not eligible for the credit under section 28. For taxable years
beginning after December 31, 1986, see section 1277(c)(1) of the Tax
Reform Act of 1986 (100 Stat. 2600) which makes the rule set forth in
the preceding sentence inapplicable with respect to corporations created
or organized in the Virgin Islands only if (and so long as) an
implementing agreement described in that section is in effect between
the United States and the Virgin Islands.
(5) Aggregation of expenditures--(i) Controlled group of
corporations; organizations under common control--(A) In
[[Page 105]]
general. In determining the amount of the credit allowable with respect
to an organization that at the end of its taxable year is a member of a
controlled group of corporations or a member of a group of organizations
under common control, all members of the group are treated as a single
taxpayer and the credit (if any) allowable to the member is determined
on the basis of its proportionate share of the qualified clinical
testing expenses of the aggregated group.
(B) Definition of controlled group of corporations. For purposes of
this section, the term ``controlled group of corporations'' shall have
the meaning given to the term by section 41(f)(5).
(C) Definition of organization. For purposes of this section, an
organization is a sole proprietorship, a partnership, a trust, an
estate, or a corporation, that is carrying on a trade or business
(within the meaning of section 162). For purposes of this section, any
corporation that is a member of a commonly controlled group shall be
deemed to be carrying on a trade or business if any other member of that
group is carrying on any trade or business.
(D) Determination of common control. Whether organizations are under
common control shall be determined under the principles set forth in
paragraphs (b) through (g) of 26 CFR 1.52-1.
(ii) Tax accounting periods used--(A) In general. The credit
allowable to a member of a controlled group of corporations or a group
of organizations under common control is that member's share of the
aggregate credit computed as of the end of such member's taxable year.
(B) Special rule where the timing of clinical testing is
manipulated. If the timing of clinical testing by members using
different tax accounting periods is manipulated to generate a credit in
excess of the amount that would be allowable if all members of the group
used the same tax accounting period, the district director may require
all members of the group to calculate the credit in the current taxable
year and all future years by using the ``conformed years'' method. Each
member computing a credit under the ``conformed years'' method shall
compute the credit as if all members of the group had the same taxable
year as the computing member.
(iii) Membership during taxable year in more than one group. An
organization may be a member of only one group for a taxable year. If,
without application of this paragraph (d)(5)(iii), an organization would
be a member of more than one group at the end of its taxable year, the
organization shall be treated as a member of the group in which it was
included for its preceding taxable year. If the organization was not
included for its preceding taxable year in any group in which it could
be included as of the end of its taxable year, the organization shall
designate in its timely filed return the group in which it is being
included. If the return for a taxable year is due before May 1, 1985,
the organization may designate its group membership through an amended
return for that year filed on or before April 30, 1985. If the
organization does not so designate, then the district director with
audit jurisdiction of the return will determine the group in which the
business is to be included.
(iv) Intra-group transactions--(A) In general. Because all members
of a group under common control are treated as a single taxpayer for
purposes of determining the credit, transactions between members of the
group are generally disregarded.
(B) In-house research expenses. If one member of a group conducts
clinical testing on behalf of another member, the member conducting the
clinical testing shall include in its qualified clinical testing
expenses any in-house research expenses for that work and shall not
treat any amount received or accrued from the other member as funding
the clinical testing. Conversely, the member for whom the clinical
testing is conducted shall not treat any part of any amount paid or
incurred as a contract research expense. For purposes of determining
whether the in-house research for that work is clinical testing, the
member performing the clinical testing shall be treated as carrying on
any trade or business carried on by the member on whose behalf the
clinical testing is performed.
[[Page 106]]
(C) Contract research expenses. If a member of a group pays or
incurs contract research expenses to a person outside the group in
carrying on the member's trade or business, that member shall include
those expenses as qualified clinical testing expenses. However, if the
expenses are not paid or incurred in carrying on any trade or business
of that member, those expenses may be taken into account as contract
research expenses by another member of the group provided that the other
member--
(1) Reimburses the member paying or incurring the expenses, and
(2) Carries on a trade or business to which the clinical testing
relates.
(D) Lease payments. Amounts paid or incurred to another member of
the group for the lease of personal property owned by a person outside
the group shall be taken into account as in-house research expenses for
purposes of section 28 only to the extent of the lesser of--
(1) The amount paid or incurred to the other member, or
(2) The amount of the lease expense paid to a person outside the
group.
The amount paid or incurred to another member of the group for the
lease of personal property owned by a member of the group is not taken
into account for purposes of section 28.
(E) Payment for supplies. Amounts paid or incurred to another member
of the group for supplies shall be taken into account as in-house
research expenses for purposes of section 28 only to the extent of the
lesser of--
(1) The amount paid or incurred to the other member, or
(2) The amount of the other member's basis in the supplies.
(6) Allocations--(i) Pass-through in the case of an S corporation.
In the case of an S corporation (as defined in section 1361), the amount
of the credit for qualified clinical testing expenses computed for the
corporation for any taxable year shall be allocated among the persons
who are shareholders of the corporation during the taxable year
according to the provisions of section 1366 and section 1377.
(ii) Pass-through in the case of an estate or a trust. In the case
of an estate or a trust, the amount of the credit for qualified clinical
testing expenses computed for the estate or trust for any taxable year
shall be apportioned between the estate or trust and the beneficiaries
on the basis of the income of the estate or trust allocable to each.
(iii) Pass-through in the case of a partnership--(A) In general. In
the case of a partnership, the credit for qualified clinical testing
expenses computed for the partnership for any taxable year shall be
apportioned among the persons who are partners during the taxable year
in accordance with section 704 and the regulations thereunder.
(B) Certain partnership non-business expenditures. A partner's share
of an in-house research expense or contract research expense paid or
incurred by a partnership other than in carrying on a trade or business
of the partnership constitutes a qualified clinical testing expense of
the partner if--
(1) The partner is entitled to make independent use of the result of
the clinical testing, and
(2) The clinical testing expense paid or incurred in carrying on the
clinical testing would have been paid or incurred by the partner in
carrying on a trade or business of the partner if the partner had
carried on the clinical testing that was in fact carried on by the
partnership.
(C) Apportionment. Qualified clinical testing expenses to which
paragraph (d)(6)(iii)(B) of this section applies shall be apportioned
among the persons who are partners during the taxable year in accordance
with section 704 and the regulations thereunder. For purposes of section
28, these expenses shall be treated as paid or incurred directly by the
partners rather than by the partnership. Thus, the partnership shall
disregard these expenses in computing the credit to be apportioned under
paragraph (d)(6)(iii)(A) of this section, and each partner shall
aggregate the portion of these expenses allocated to the partner with
other qualified clinical testing expenses of the partner in making the
computations under section 28.
(iv) Year in which taken into account. An amount apportioned to a
person under paragraph (d)(6) of this section shall be taken into
account by the person in the taxable year of such person
[[Page 107]]
in which or with which the taxable year of the corporation, estate,
trust, or partnership (as the case may be) ends.
(v) Credit allowed subject to limitation. Any person to whom any
amount has been apportioned under paragraph (d)(6)(i), (ii), or (iii) of
this section is allowed, subject to the limitation provided in section
28(d)(2), a credit for that amount.
(7) Manner of making an election. To make an election to have
section 28 apply for its taxable year, the taxpayer shall file Form 6765
(Credit for Increasing Research Activities (or for claiming the orphan
drugs credit)) containing all the information required by that form.
[T.D. 8232, 53 FR 38711, Oct. 3, 1988; 53 FR 40879, Oct. 19, 1988; 53 FR
41013, Oct. 19, 1988]
Credits Against Tax
credits allowable under sections 30 through 45D
Sec. 1.30-1 Definition of qualified electric vehicle and recapture of
credit for qualified electric vehicle.
(a) Definition of qualified electric vehicle. A qualified electric
vehicle is a motor vehicle that meets the requirements of section 30(c).
Accordingly, a qualified electric vehicle does not include any motor
vehicle that has ever been used (for either personal or business use) as
a non-electric vehicle.
(b) Recapture of credit for qualified electric vehicle--(1) In
general--(i) Addition to tax. If a recapture event occurs with respect
to a taxpayer's qualified electric vehicle, the taxpayer must add the
recapture amount to the amount of tax due in the taxable year in which
the recapture event occurs. The recapture amount is not treated as
income tax imposed on the taxpayer by chapter 1 of the Internal Revenue
Code for purposes of computing the alternative minimum tax or
determining the amount of any other allowable credits for the taxable
year in which the recapture event occurs.
(ii) Reduction of carryover. If a recapture event occurs with
respect to a taxpayer's qualified electric vehicle, and if a portion of
the section 30 credit for the cost of that vehicle was disallowed under
section 30(b)(3)(B) and consequently added to the taxpayer's minimum tax
credit pursuant to section 53(d)(1)(B)(iii), the taxpayer must reduce
its minimum tax credit carryover by an amount equal to the portion of
any minimum tax credit carryover attributable to the disallowed section
30 credit, multiplied by the recapture percentage for the taxable year
of recapture. Similarly, the taxpayer must reduce any other credit
carryover amounts (such as under section 469) by the portion of the
carryover attributable to section 30, multiplied by the recapture
percentage.
(2) Recapture event--(i) In general. A recapture event occurs if,
within 3 full years from the date a qualified electric vehicle is placed
in service, the vehicle ceases to be a qualified electric vehicle. A
vehicle ceases to be a qualified electric vehicle if--
(A) The vehicle is modified so that it is no longer primarily
powered by electricity;
(B) The vehicle is used in a manner described in section 50(b); or
(C) The taxpayer receiving the credit under section 30 sells or
disposes of the vehicle and knows or has reason to know that the vehicle
will be used in a manner described in paragraph (b)(2)(i)(A) or (B) of
this section.
(ii) Exception for disposition. Except as provided in paragraph
(b)(2)(i)(C) of this section, a sale or other disposition (including a
disposition by reason of an accident or other casualty) of a qualified
electric vehicle is not a recapture event.
(3) Recapture amount. The recapture amount is equal to the recapture
percentage times the decrease in the credits allowed under section 30
for all prior taxable years that would have resulted solely from
reducing to zero the cost taken into account under section 30 with
respect to such vehicle, including any credits allowed attributable to
section 30 (such as under sections 53 and 469).
(4) Recapture date. The recapture date is the actual date of the
recapture event unless a recapture event described in paragraph
(b)(2)(i)(B) of this section occurs, in which case the recapture date is
the first day of the recapture year.
[[Page 108]]
(5) Recapture percentage. For purposes of this section, the
recapture percentage is--
(i) 100, if the recapture date is within the first full year after
the date the vehicle is placed in service;
(ii) 66\2/3\, if the recapture date is within the second full year
after the date the vehicle is placed in service; or
(iii) 33\1/3\, if the recapture date is within the third full year
after the date the vehicle is placed in service.
(6) Basis adjustment. As of the first day of the taxable year in
which the recapture event occurs, the basis of the qualified electric
vehicle is increased by the recapture amount and the carryover
reductions taken into account under paragraphs (b)(1)(i) and (ii) of
this section, respectively. For a vehicle that is of a character that is
subject to an allowance for depreciation, this increase in basis is
recoverable over the remaining recovery period for the vehicle beginning
as of the first day of the taxable year of recapture.
(7) Application of section 1245 for sales and other dispositions.
For purposes of section 1245, the amount of the credit allowable under
section 30(a) with respect to any qualified electric vehicle that is (or
has been) of a character subject to an allowance for depreciation is
treated as a deduction allowed for depreciation under section 167.
Therefore, upon a sale or other disposition of a depreciable qualified
electric vehicle, section 1245 will apply to any gain recognized to the
extent the basis of the depreciable vehicle was reduced under section
30(d)(1) net of any basis increase described in paragraph (b)(6) of this
section.
(8) Examples. The following examples illustrate the provisions of
this section:
Example 1. A, a calendar-year taxpayer, purchases and places in
service for personal use on January 1, 1995, a qualified electric
vehicle costing $25,000. On A's 1995 federal income tax return, A claims
a credit of $2,500. On January 2, 1996, A sells the vehicle to an
unrelated third party who subsequently converts the vehicle into a non-
electric vehicle on October 15, 1996. There is no recapture upon the
sale of the vehicle by A provided A did not know or have reason to know
that the purchaser intended to convert the vehicle to non-electric use.
Example 2. B, a calendar-year taxpayer, purchases and places in
service for personal use on October 11, 1994, a qualified electric
vehicle costing $20,000. On B's 1994 federal income tax return, B claims
a credit of $2,000, which reduces B's tax by $2,000. The basis of the
vehicle is reduced to $18,000 ($20,000-$2,000). On March 8, 1996, B
sells the vehicle to a tax-exempt entity. Because B knowingly sold the
vehicle to a tax-exempt entity described in section 50(b) in the second
full year from the date the vehicle was placed in service, B must
recapture $1,333 ($2,000 x 66\2/3\ percent). This recapture amount
increases B's tax by $1,333 on B's 1996 federal income tax return and is
added to the basis of the vehicle as of January 1, 1996, the beginning
of the taxable year in which the recapture event occurred.
Example 3. X, a calendar-year taxpayer, purchases and places in
service for business use on January 1, 1994, a qualified electric
vehicle costing $30,000. On X's 1994 federal income tax return, X claims
a credit of $3,000, which reduces X's tax by $3,000. The basis of the
vehicle is reduced to $27,000 ($30,000-$3,000) prior to any adjustments
for depreciation. On March 8, 1995, X converts the qualified electric
vehicle into a gasoline-propelled vehicle. Because X modified the
vehicle so that it is no longer primarily powered by electricity in the
second full year from the date the vehicle was placed in service, X must
recapture $2,000 ($3,000 x 66\2/3\ percent). This recapture amount
increases X's tax by $2,000 on X's 1995 federal income tax return. The
recapture amount of $2,000 is added to the basis of the vehicle as of
January 1, 1995, the beginning of the taxable year of recapture, and to
the extent the property remains depreciable, the adjusted basis is
recoverable over the remaining recovery period.
Example 4. The facts are the same as in Example 3. In 1996, X sells
the vehicle for $31,000, recognizing a gain from this sale. Under
paragraph (b)(7) of this section, section 1245 will apply to any gain
recognized on the sale of a depreciable vehicle to the extent the basis
of the vehicle was reduced by the section 30 credit net of any basis
increase from recapture of the section 30 credit. Accordingly, the gain
from the sale of the vehicle is subject to section 1245 to the extent of
the depreciation allowance for the vehicle plus the credit allowed under
section 30 ($3,000), less the previous recapture amount ($2,000). Any
remaining amount of gain may be subject to other applicable provisions
of the Internal Revenue Code.
(c) Effective date. This section is effective on October 14, 1994.
If the recapture date is before the effective date of this section, a
taxpayer may use any reasonable method to recapture the
[[Page 109]]
benefit of any credit allowable under section 30(a) consistent with
section 30 and its legislative history. For this purpose, the recapture
date is defined in paragraph (b)(4) of this section.
[60 FR 39649, Aug. 3, 1995]
Sec. 1.31-1 Credit for tax withheld on wages.
(a) The tax deducted and withheld at the source upon wages under
chapter 24 of the Internal Revenue Code of 1954 (or in the case of
amounts withheld in 1954, under subchapter D, chapter 9 of the Internal
Revenue Code of 1939) is allowable as a credit against the tax imposed
by Subtitle A of the Internal Revenue Code of 1954, upon the recipient
of the income. If the tax has actually been withheld at the source,
credit or refund shall be made to the recipient of the income even
though such tax has not been paid over to the Government by the
employer. For the purpose of the credit, the recipient of the income is
the person subject to tax imposed under Subtitle A upon the wages from
which the tax was withheld. For instance, if a husband and wife
domiciled in a State recognized as a community property State for
Federal tax purposes make separate returns, each reporting for income
tax purposes one- half of the wages received by the husband, each spouse
is entitled to one-half of the credit allowable for the tax withheld at
source with respect to such wages.
(b) The tax withheld during any calendar year shall be allowed as a
credit against the tax imposed by Subtitle A for the taxable year of the
recipient of the income which begins in that calendar year. If such
recipient has more than one taxable year beginning in that calendar
year, the credit shall be allowed against the tax for the last taxable
year so beginning.
Sec. 1.31-2 Credit for ``special refunds'' of employee social security
tax.
(a) In general. (1) In the case of an employee receiving wages from
more than one employer during the calendar year, amounts may be deducted
and withheld as employee social security tax with respect to more than
$3,600 of wages received during the calendar year 1954, and with respect
to more than $4,200 of wages received during a calendar year after 1954.
For example, employee social security tax may be deducted and withheld
on $5,000 of wages received by an employee during a particular calendar
year if the employee is paid wages in such year in the amount of $3,000
by one employer and in the amount of $2,000 by another employer. Section
6413(c) (as amended by section 202 of the Social Security Amendments of
1954 (68 Stat. 1089)), permits, under certain conditions, a so-called
``special refund'' of the amount of employee social security tax
deducted and withheld with respect to wages paid to an employee in a
calendar year after 1954 in excess of $4,200 ($3,600 for the calendar
year 1954) by reason of the employee receiving wages from more than one
employer during the calendar year. For provisions relating to the
imposition of the employee tax and the limitation on wages, see with
respect to the calendar year 1954, sections 1400 and 1426(a)(1) of the
Internal Revenue Code of 1939 and, with respect to calendar years after
1954, sections 3101 and 3121(a)(1) of the Internal Revenue Code of 1954,
as amended by sections 208(b) and 204(a), respectively, of the Social
Security Amendments of 1954 (68 Stat. 1094, 1091).
(2) An employee who is entitled to a special refund of employee tax
with respect to wages received during a calendar year and who is also
required to file an income tax return for such calendar year (or for his
last taxable year beginning in such calendar year) may obtain the
benefits of such special refund only by claiming credit for such special
refund in the same manner as if such special refund were an amount
deducted and withheld as income tax at the source. For provisions for
claiming special refunds for 1955 and subsequent years in the case of
employees not required to file income tax returns, see section 6413(c)
and the regulations thereunder. For provisions relating to such refunds
for 1954, see 26 CFR (1939) 408.802 (regulations 128).
(3) The amount of the special refund allowed as a credit shall be
considered as an amount deducted and withheld as income tax at the
source under chapter 24 of the Internal Revenue Code of 1954 (or, in the
case of a special refund for
[[Page 110]]
1954, subchapter D, chapter 9 of the Internal Revenue Code of 1939). If
the amount of such special refund when added to amounts deducted and
withheld as income tax exceeds the taxes imposed by subtitle A of the
Internal Revenue Code of 1954, the amount of the excess constitutes an
overpayment of income tax under Subtitle A, and interest on such
overpayment is allowed to the extent provided under section 6611 upon an
overpayment of income tax resulting from a credit for income tax
withheld at source. See section 6401(b).
(b) Federal and State employees and employees of certain foreign
corporations. The provisions of this section shall apply to the amount
of a special refund allowable to an employee of a Federal agency or a
wholly owned instrumentality of the United States, to the amount of a
special refund allowable to an employee of any State or political
subdivision thereof (or any instrumentality of any one or more of the
foregoing), and to the amount of a special refund allowable to employees
of certain foreign corporations. See, with respect to such special
refunds for 1954, section 1401(d)(4) of the Internal Revenue Code of
1939, and with respect to such special refunds for 1955 and subsequent
years, section 6413(c)(2) of the Internal Revenue Code of 1954, as
amended by section 202 of the Social Security amendments of 1954.
Sec. 1.32-2 Earned income credit for taxable years beginning after
December 31, 1978.
(a) [Reserved]
(b) Limitations. (1) [Reserved]
(2) Married individuals. No credit is allowed by section 32 in the
case of an eligible individual who is married (within the meaning of
section 7703 and the regulations thereunder) unless the individual and
spouse file a single return jointly (a joint return) for the taxable
year (see section 6013 and the regulations thereunder relating to joint
returns of income tax by husband and wife). The requirements of the
preceding sentence do not apply to an eligible individual who is not
considered as married under section 7703(b) and the regulations
thereunder (relating to certain married individuals living apart).
(3) Length of taxable year. No credit is allowed by section 32 in
the case of a taxable year covering a period of less than 12 months.
However, the rule of the preceding sentence does not apply to a taxable
year closed by reason of the death of the eligible individual.
(c) Definitions. (1) [Reserved]
(2) Earned income. For purposes of this section, earned income is
computed without regard to any community property laws which may
otherwise be applicable. Earned income is reduced by any net loss in
earnings from self-employment. Earned income does not include amounts
received as a pension, an annuity, unemployment compensation, or
workmen's compensation, or an amount to which section 871(a) and the
regulations thereunder apply (relating to income of nonresident alien
individuals not connected with United States business).
(d) [Reserved]
(e) Coordination of credit with advance payments--(1) Recapture of
excess advance payments. If any advance payment of earned income credit
under section 3507 is made to an individual by an employer during any
calendar year, then the total amount of these advance payments to the
individual in that calendar year is treated as an additional amount of
tax imposed (by chapter 1 of the Code) upon the individual on the tax
return for the individual's last taxable year beginning in that calendar
year.
(2) Reconciliation of payments advanced and credit allowed. Any
additional amount of tax under paragraph (e)(1) of this section is not
treated as a tax imposed by chapter 1 of the Internal Revenue Code for
purposes of determining the amount of any credit (other than the earned
income credit) allowable under part IV, subchapter A, chapter 1 of the
Internal Revenue Code.
[T.D. 7683, 45 FR 16175, Mar. 13, 1980. Redesignated by T.D. 8448, 57 FR
54923, Nov. 23, 1992; T.D. 9045, 68 FR 10656, Mar. 6, 2003]
Sec. 1.32-3 Eligibility requirements after denial of the earned
income credit.
(a) In general. A taxpayer who has been denied the earned income
credit (EIC), in whole or in part, as a result of
[[Page 111]]
the deficiency procedures under subchapter B of chapter 63 (deficiency
procedures) is ineligible to file a return claiming the EIC subsequent
to the denial until the taxpayer demonstrates eligibility for the EIC in
accordance with paragraph (c) of this section. If a taxpayer
demonstrates eligibility for a taxable year in accordance with paragraph
(c) of this section, the taxpayer need not comply with those
requirements for any subsequent taxable year unless the Service again
denies the EIC as a result of the deficiency procedures.
(b) Denial of the EIC as a result of the deficiency procedures. For
purposes of this section, denial of the EIC as a result of the
deficiency procedures occurs when a tax on account of the EIC is
assessed as a deficiency (other than as a mathematical or clerical error
under section 6213(b)(1)).
(c) Demonstration of eligibility. In the case of a taxpayer to whom
paragraph (a) of this section applies, and except as otherwise provided
by the Commissioner in the instructions for Form 8862, ``Information To
Claim Earned Income Credit After Disallowance,'' no claim for the EIC
filed subsequent to the denial is allowed unless the taxpayer properly
completes Form 8862, demonstrating eligibility for the EIC, and
otherwise is eligible for the EIC. If any item of information on Form
8862 is incorrect or inconsistent with any item on the return, the
taxpayer will be treated as not demonstrating eligibility for the EIC.
The taxpayer must follow the instructions for Form 8862 to determine the
income tax return to which Form 8862 must be attached. If the taxpayer
attaches Form 8862 to an incorrect tax return, the taxpayer will not be
relieved of the requirement that the taxpayer attach Form 8862 to the
correct tax return and will, therefore, not be treated as meeting the
taxpayer's obligation under paragraph (a) of this section.
(d) Failure to demonstrate eligibility. If a taxpayer to whom
paragraph (a) of this section applies fails to satisfy the requirements
of paragraph (c) of this section with respect to a particular taxable
year, the IRS can deny the EIC as a mathematical or clerical error under
section 6213(g)(2)(K).
(e) Special rule where one spouse denied EIC. The eligibility
requirements set forth in this section apply to taxpayers filing a joint
return where one spouse was denied the EIC for a taxable year prior to
marriage and has not established eligibility as either an unmarried or
married taxpayer for a subsequent taxable year.
(f) Effective date. This section applies to returns claiming the EIC
for taxable years beginning after December 31, 1997, where the EIC was
denied for a taxable year beginning after December 31, 1996.
[T.D. 8953, 66 FR 33637, June 25, 2001]
Sec. 1.34-1 Special rule for owners of certain business entities.
Amounts payable under sections 6420, 6421, and 6427 to a business
entity that is treated as separate from its owner under Sec. 1.1361-
4(a)(8) (relating to certain qualified subchapter S subsidiaries) or
Sec. 301.7701-2(c)(2)(v) of this chapter (relating to certain wholly-
owned entities) are, for purposes of section 34, treated as payable to
the owner of that entity.
[T.D. 9356, 72 FR 45893, Aug. 16, 2007]
Sec. 1.35-1 Partially tax-exempt interest received by individuals.
(a) The credit against tax under section 35 shall be allowed only to
individuals and if the requirements of both paragraphs (1) and (2) of
section 35(a) are met. Where the alternative tax on capital gains is
imposed under section 1201(b), the taxable income for such taxable year
is the taxable income as defined in section 63, which includes 50
percent of the excess of net long-term capital gain over net short-term
capital loss.
(b) For the treatment of partially tax-exempt interest in the case
of amounts not allocable to any beneficiary of an estate or trust, see
section 642(a)(1), and for treatment of amounts allocable to a
beneficiary, see sections 652 and 662. For treatment of partially tax-
exempt interest received by a partnership, see section 702(a)(7). For
treatment of such interest received by a common trust fund, see section
584(c)(2).
[[Page 112]]
(c) The application of section 35 may be illustrated by the
following example:
Example. In his taxable year, 1955, A received $4,500 of partially
tax-exempt interest. A's taxable income is $4,000 upon which the tax
prior to any credits against tax is $840. His foreign tax credit under
section 33 is $610, and his dividends received credit under section 34
is $120. A's credit under section 35 for partially tax-exempt interest
is $110, determined as follows:
Section 35(a)
Partially tax-exempt interest................................ $4,500
Credit computed under section 35(a); 3 percent of $4,500..... 135
Section 35(b)(1)
Tax imposed by chapter 1..................................... 840
Less:
Credit allowed under section 33................. $610
Credit allowed under section 34................. 120
-------- $730
----------
Limitation on credit under section 35(b)(1).................. 110
Section 35(b)(2)
Taxable income............................................... 4,000
Limitation on credit under section 35(b)(2); 3 percent of 120
$4,000......................................................
Since of the three figures ($135, $110, and $120), the lesser is $110,
A's credit under section 35 is limited to $110.
Sec. 1.35-2 Taxpayers not entitled to credit.
For taxable years beginning after December 31, 1957, no credit shall
be allowed under section 35 to a nonresident alien individual with
respect to whom a tax is imposed for such taxable year under section
871(a).
Sec. 1.36B-0 Table of contents.
This section lists the captions contained in Sec. Sec. 1.36B-1
through 1.36B-5.
Sec. 1.36B-1 Premium tax credit definitions.
(a) In general.
(b) Affordable Care Act.
(c) Qualified health plan.
(d) Family and family size.
(e) Household income.
(1) In general.
(2) Modified adjusted gross income.
(f) Dependent.
(g) Lawfully present.
(h) Federal poverty line.
(i) [Reserved]
(j) Advance credit payment.
(k) Exchange.
(l) Self-only coverage.
(m) Family coverage.
(n) Rating area.
(o) Effective/applicability date.
Sec. 1.36B-2 Eligibility for premium tax credit.
(a) In general.
(b) Applicable taxpayer.
(1) In general.
(2) Married taxpayers must file joint return.
(3) Dependents.
(4) Individuals not lawfully present or incarcerated.
(5) Individuals lawfully present.
(6) Special rule for taxpayers with household income below 100 percent
of the Federal poverty line for the taxable year.
(7) Computation of premium assistance amounts for taxpayers with
household income below 100 percent of the Federal poverty line.
(c) Minimum essential coverage.
(1) In general.
(2) Government-sponsored minimum essential coverage.
(i) In general.
(ii) Obligation to complete administrative requirements to obtain
coverage.
(iii) Special rule for coverage for veterans and other individuals under
chapter 17 or 18 of title 38, U.S.C.
(iv) Retroactive effect of eligibility determination.
(v) Determination of Medicaid or Children's Health Insurance Program
(CHIP) ineligibility.
(vi) Examples.
(3) Employer-sponsored minimum essential coverage.
(i) In general.
(ii) Plan year.
(iii) Eligibility for months during a plan year.
(A) Failure to enroll in plan.
(B) Waiting periods.
(C) Example.
(iv) Continuation coverage.
(v) Affordable coverage.
(A) In general.
(1) Affordability for employee.
(2) Affordability for related individual.
(3) Employee safe harbor.
(4) Wellness incentives and employer contributions to health
reimbursement arrangements.
(B) Affordability for part-year period.
(C) Required contribution percentage.
(D) Examples.
(vi) Minimum value.
(vii) Enrollment in eligible employer-sponsored plan.
(A) In general.
(B) Automatic enrollment.
(C) Examples.
(4) Related individual not claimed as a personal exemption deduction.
Sec. 1.36B-3 Computing the premium assistance credit amount.
(a) In general.
(b) Definitions.
[[Page 113]]
(c) Coverage month.
(1) In general.
(2) Premiums paid for a taxpayer.
(3) Examples.
(d) Premium assistance amount.
(e) Adjusted monthly premium.
(f) Applicable benchmark plan.
(1) In general.
(2) Family coverage.
(3) Silver level plan not covering a taxpayer's family.
(4) Family members residing at different locations.
(5) Plan closed to enrollment.
(6) Benchmark plan terminates or closes to enrollment during the year.
(7) Examples.
(g) Applicable percentage.
(1) In general.
(2) Applicable percentage table.
(3) Examples.
(h) Plan covering more than one family.
(1) In general.
(2) Example.
(i) [Reserved]
(j) Additional benefits.
(1) In general.
(2) Method of allocation.
(3) Examples.
(k) Pediatric dental coverage.
(1) In general.
(2) Method of allocation.
(3) Example.
(l) Families including individuals not lawfully present.
(1) In general.
(2) Revised household income computation.
(i) Statutory method.
(ii) Comparable method.
Sec. 1.36B-4 Reconciling the premium tax credit with advance credit
payments.
(a) Reconciliation.
(1) Coordination of premium tax credit with advance credit payments.
(i) In general.
(ii) Responsibility for advance credit payments.
(iii) Advance credit payment for a month in which an issuer does not
provide coverage.
(2) Credit computation.
(3) Limitation on additional tax.
(i) In general.
(ii) Additional tax limitation table.
(4) Examples.
(b) Changes in filing status.
(1) In general.
(2) Taxpayers who marry during the taxable year.
(i) In general.
(ii) Alternative computation of additional tax liability.
(A) In general.
(B) Alternative premium assistance amounts for pre-marriage months.
(C) Premium assistance amounts for marriage months.
(3) Taxpayers not married to each other at the end of the taxable year.
(4) Married taxpayers filing separate returns.
(5) Taxpayers filing returns as head of household and married filing
separately.
(6) Examples.
Sec. 1.36B-5 Information reporting by Exchanges.
(a) In general.
(b) Individual filing a return.
(c) Information required to be reported.
(1) Information reported annually.
(2) Information reported monthly.
(3) Special rules for information reported.
(i) Multiple families enrolled in a single qualified health plan.
(ii) Alternative to reporting applicable benchmark plan.
(4) Exemptions.
(d) Time for reporting.
(1) Annual reporting.
(2) Monthly reporting.
(i) In general.
(ii) Initial monthly reporting in 2014.
(3) Corrections to information reported.
(e) Electronic reporting.
(f) Annual statement to be furnished to individuals.
(1) In general.
(2) Form of statements.
(3) Time and manner for furnishing statements.
(g) Electronic furnishing of statements.
(1) In general.
(2) Consent.
(i) In general.
(ii) Withdrawal of consent.
(iii) Change in hardware or software requirements.
(iv) Examples.
(3) Required disclosures.
(i) In general.
(ii) Paper statement.
(iii) Scope and duration of consent.
(iv) Post-consent request for a paper statement.
(v) Withdrawal of consent.
(vi) Notice of termination.
(vii) Updating information.
(viii) Hardware and software requirements.
(4) Format.
(5) Notice.
(i) In general.
(ii) Undeliverable electronic address.
(iii) Corrected statement.
(6) Access period.
(7) Paper statements after withdrawal of consent.
[T.D. 9590, 77 FR 30385, May 23, 2012, as amended by T.D. 9663, 79 FR
26117, May 7, 2014]
[[Page 114]]
Sec. 1.36B-1 Premium tax credit definitions.
(a) In general. Section 36B allows a refundable premium tax credit
for taxable years ending after December 31, 2013. The definitions in
this section apply to this section and Sec. Sec. 1.36B-2 through 1.36B-
5.
(b) Affordable Care Act. The term Affordable Care Act refers to the
Patient Protection and Affordable Care Act, Public Law 111-148 (124
Stat. 119 (2010)), and the Health Care and Education Reconciliation Act
of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), as amended by the
Medicare and Medicaid Extenders Act of 2010, Public Law 111-309 (124
Stat. 3285 (2010)), the Comprehensive 1099 Taxpayer Protection and
Repayment of Exchange Subsidy Overpayments Act of 2011, Public Law 112-9
(125 Stat. 36 (2011)), the Department of Defense and Full-Year
Continuing Appropriations Act, 2011, Public Law 112-10 (125 Stat. 38
(2011)), and the 3% Withholding Repeal and Job Creation Act, Public Law
112-56 (125 Stat. 711 (2011)).
(c) Qualified health plan. The term qualified health plan has the
same meaning as in section 1301(a) of the Affordable Care Act (42 U.S.C.
18021(a)) but does not include a catastrophic plan described in section
1302(e) of the Affordable Care Act (42 U.S.C. 18022(e)).
(d) Family and family size. A taxpayer's family means the
individuals for whom a taxpayer properly claims a deduction for a
personal exemption under section 151 for the taxable year. Family size
means the number of individuals in the family. Family and family size
may include individuals who are not subject to or are exempt from the
penalty under section 5000A for failing to maintain minimum essential
coverage.
(e) Household income--(1) In general. Household income means the sum
of--
(i) A taxpayer's modified adjusted gross income; plus
(ii) The aggregate modified adjusted gross income of all other
individuals who--
(A) Are included in the taxpayer's family under paragraph (d) of
this section; and
(B) Are required to file a return of tax imposed by section 1 for
the taxable year (determined without regard to the exception under
section (1)(g)(7) to the requirement to file a return).
(2) Modified adjusted gross income. Modified adjusted gross income
means adjusted gross income (within the meaning of section 62) increased
by--
(i) Amounts excluded from gross income under section 911;
(ii) Tax-exempt interest the taxpayer receives or accrues during the
taxable year; and
(iii) Social security benefits (within the meaning of section 86(d))
not included in gross income under section 86.
(f) Dependent. Dependent has the same meaning as in section 152.
(g) Lawfully present. Lawfully present has the same meaning as in 45
CFR 155.20.
(h) Federal poverty line. The Federal poverty line means the most
recently published poverty guidelines (updated periodically in the
Federal Register by the Secretary of Health and Human Services under the
authority of 42 U.S.C. 9902(2)) as of the first day of the regular
enrollment period for coverage by a qualified health plan offered
through an Exchange for a calendar year. Thus, the Federal poverty line
for computing the premium tax credit for a taxable year is the Federal
poverty line in effect on the first day of the initial or annual open
enrollment period preceding that taxable year. See 45 CFR 155.410. If a
taxpayer's primary residence changes during a taxable year from one
state to a state with different Federal poverty guidelines or married
taxpayers reside in separate states with different Federal poverty
guidelines (for example, Alaska or Hawaii and another state), the
Federal poverty line that applies for purposes of section 36B and the
associated regulations is the higher Federal poverty guideline
(resulting in a lower percentage of the Federal poverty line for the
taxpayers' household income and family size).
(i) [Reserved]
(j) Advance credit payment. Advance credit payment means an advance
payment of the premium tax credit as provided in section 1412 of the
Affordable Care Act (42 U.S.C. 18082).
(k) Exchange. Exchange has the same meaning as in 45 CFR 155.20.
[[Page 115]]
(l) Self-only coverage. Self-only coverage means health insurance
that covers one individual.
(m) Family coverage. Family coverage means health insurance that
covers more than one individual.
(n) Rating area. [Reserved]
(o) Effective/applicability date. This section and Sec. Sec. 1.36B-
2 through 1.36B-5 apply for taxable years ending after December 31,
2013.
[T.D. 9590, 77 FR 30385, May 23, 2012]
Sec. 1.36B-2 Eligibility for premium tax credit.
(a) In general. An applicable taxpayer (within the meaning of
paragraph (b) of this section) is allowed a premium assistance amount
only for any month that one or more members of the applicable taxpayer's
family (the applicable taxpayer or the applicable taxpayer's spouse or
dependent)--
(1) Is enrolled in one or more qualified health plans through an
Exchange; and
(2) Is not eligible for minimum essential coverage (within the
meaning of paragraph (c) of this section) other than coverage described
in section 5000A(f)(1)(C) (relating to coverage in the individual
market).
(b) Applicable taxpayer--(1) In general. Except as otherwise
provided in this paragraph (b), an applicable taxpayer is a taxpayer
whose household income is at least 100 percent but not more than 400
percent of the Federal poverty line for the taxpayer's family size for
the taxable year.
(2) [Reserved]. For further guidance, see Sec. 1.36B-2T(b)(2).
(3) Dependents. An individual is not an applicable taxpayer if
another taxpayer may claim a deduction under section 151 for the
individual for a taxable year beginning in the calendar year in which
the individual's taxable year begins.
(4) Individuals not lawfully present or incarcerated. An individual
who is not lawfully present in the United States or is incarcerated
(other than incarceration pending disposition of charges) is not
eligible to enroll in a qualified health plan through an Exchange.
However, the individual may be an applicable taxpayer if a family member
is eligible to enroll in a qualified health plan. See sections
1312(f)(1)(B) and 1312(f)(3) of the Affordable Care Act (42 U.S.C.
18032(f)(1)(B) and (f)(3)) and Sec. 1.36B-3(b)(2).
(5) Individuals lawfully present. If a taxpayer's household income
is less than 100 percent of the Federal poverty line for the taxpayer's
family size and the taxpayer or a member of the taxpayer's family is an
alien lawfully present in the United States, the taxpayer is treated as
an applicable taxpayer if--
(i) The lawfully present taxpayer or family member is not eligible
for the Medicaid program; and
(ii) The taxpayer would be an applicable taxpayer if the taxpayer's
household income for the taxable year was between 100 and 400 percent of
the Federal poverty line for the taxpayer's family size.
(6) Special rule for taxpayers with household income below 100
percent of the Federal poverty line for the taxable year. A taxpayer
(other than a taxpayer described in paragraph (b)(5) of this section)
whose household income for a taxable year is less than 100 percent of
the Federal poverty line for the taxpayer's family size is treated as an
applicable taxpayer if--
(i) The taxpayer or a family member enrolls in a qualified health
plan through an Exchange;
(ii) An Exchange estimates at the time of enrollment that the
taxpayer's household income will be between 100 and 400 percent of the
Federal poverty line for the taxable year;
(iii) Advance credit payments are authorized and paid for one or
more months during the taxable year; and
(iv) The taxpayer would be an applicable taxpayer if the taxpayer's
household income for the taxable year was between 100 and 400 percent of
the Federal poverty line for the taxpayer's family size.
(7) Computation of premium assistance amounts for taxpayers with
household income below 100 percent of the Federal poverty line. If a
taxpayer is treated as an applicable taxpayer under paragraph (b)(5) or
(b)(6) of this section, the taxpayer's actual household income for the
taxable year is used to compute the premium assistance amounts under
Sec. 1.36B-3(d).
[[Page 116]]
(c) Minimum essential coverage--(1) In general. Minimum essential
coverage is defined in section 5000A(f) and regulations issued under
that section. As described in section 5000A(f), government-sponsored
programs, eligible employer-sponsored plans, grandfathered health plans,
and certain other health benefits coverage are minimum essential
coverage.
(2) Government-sponsored minimum essential coverage--(i) In general.
An individual is eligible for government-sponsored minimum essential
coverage if the individual meets the criteria for coverage under a
government-sponsored program described in section 5000A(f)(1)(A) as of
the first day of the first full month the individual may receive
benefits under the program, subject to the limitation in paragraph
(c)(2)(ii) of this section. The Commissioner may define eligibility for
specific government-sponsored programs further in additional published
guidance, see Sec. 601.601(d)(2) of this chapter.
(ii) Obligation to complete administrative requirements to obtain
coverage. An individual who meets the criteria for eligibility for
government-sponsored minimum essential coverage must complete the
requirements necessary to receive benefits. An individual who fails by
the last day of the third full calendar month following the event that
establishes eligibility under paragraph (c)(2)(i) of this section to
complete the requirements to obtain government-sponsored minimum
essential coverage (other than a veteran's health care program) is
treated as eligible for government-sponsored minimum essential coverage
as of the first day of the fourth calendar month following the event
that establishes eligibility.
(iii) Special rule for coverage for veterans and other individuals
under chapter 17 or 18 of title 38, U.S.C. An individual is eligible for
minimum essential coverage under a health care program under chapter 17
or 18 of title 38, U.S.C. only if the individual is enrolled in a health
care program under chapter 17 or 18 of title 38, U.S.C. identified as
minimum essential coverage in regulations issued under section 5000A.
(iv) Retroactive effect of eligibility determination. If an
individual receiving advance credit payments is determined to be
eligible for government-sponsored minimum essential coverage that is
effective retroactively (such as Medicaid), the individual is treated as
eligible for minimum essential coverage under that program no earlier
than the first day of the first calendar month beginning after the
approval.
(v) Determination of Medicaid or Children's Health Insurance Program
(CHIP) ineligibility. An individual is treated as not eligible for
Medicaid, CHIP, or a similar program for a period of coverage under a
qualified health plan if, when the individual enrolls in the qualified
health plan, an Exchange determines or considers (within the meaning of
45 CFR 155.302(b)) the individual to be not eligible for Medicaid or
CHIP.
(vi) Examples. The following examples illustrate the provisions of
this paragraph (c)(2):
Example 1. Delay in coverage effectiveness. On April 10, 2015,
Taxpayer D applies for coverage under a government-sponsored health care
program. D's application is approved on July 12, 2015, but her coverage
is not effective until September 1, 2015. Under paragraph (c)(2)(i) of
this section, D is eligible for government-sponsored minimum essential
coverage on September 1, 2015.
Example 2. Time of eligibility. Taxpayer E turns 65 on June 3, 2015,
and becomes eligible for Medicare. Under section 5000A(f)(1)(A)(i),
Medicare is minimum essential coverage. However, E must enroll in
Medicare to receive benefits. E enrolls in Medicare in September, which
is the last month of E's initial enrollment period. Thus, E may receive
Medicare benefits on December 1, 2015. Because E completed the
requirements necessary to receive Medicare benefits by the last day of
the third full calendar month after the event that establishes E's
eligibility (E turning 65), under paragraph (c)(2)(i) and (c)(2)(ii) of
this section E is eligible for government-sponsored minimum essential
coverage on December 1, 2015, the first day of the first full month that
E may receive benefits under the program.
Example 3. Time of eligibility, individual fails to complete
necessary requirements. The facts are the same as in Example 2, except
that E fails to enroll in the Medicare coverage during E's initial
enrollment period. E is treated as eligible for government-sponsored
minimum essential coverage under paragraph (c)(2)(ii) of this section as
of October 1, 2015, the first day of the fourth month following the
event that establishes E's eligibility (E turning 65).
[[Page 117]]
Example 4. Retroactive effect of eligibility. In November 2014,
Taxpayer F enrolls in a qualified health plan for 2015 and receives
advance credit payments. F loses her part-time employment and on April
10, 2015 applies for coverage under the Medicaid program. F's
application is approved on May 15, 2015, and her Medicaid coverage is
effective as of April 1, 2015. Under paragraph (c)(2)(iv) of this
section, F is eligible for government-sponsored minimum essential
coverage on June 1, 2015, the first day of the first calendar month
after approval.
Example 5. Determination of Medicaid ineligibility. In November
2014, Taxpayer G applies through the Exchange to enroll in health
coverage for 2015. The Exchange determines that G is not eligible for
Medicaid and estimates that G's household income will be 140 percent of
the Federal poverty line for G's family size for purposes of determining
advance credit payments. G enrolls in a qualified health plan and begins
receiving advance credit payments. G experiences a reduction in
household income during the year and his household income for 2015 is
130 percent of the Federal poverty line (within the Medicaid income
threshold). However, under paragraph (c)(2)(v) of this section, G is
treated as not eligible for Medicaid for 2015.
Example 6. Mid-year Medicaid eligibility redetermination. The facts
are the same as in Example 5, except that G returns to the Exchange in
July 2015 and the Exchange determines that G is eligible for Medicaid.
Medicaid approves G for coverage and the Exchange discontinues G's
advance credit payments effective August 1. Under paragraphs (c)(2)(iv)
and (c)(2)(v) of this section, G is treated as not eligible for Medicaid
for the months when G is covered by a qualified health plan. G is
eligible for government-sponsored minimum essential coverage for the
months after G is approved for Medicaid and can receive benefits, August
through December 2015.
(3) Employer-sponsored minimum essential coverage--(i) In general.
For purposes of section 36B, an employee who may enroll in an eligible
employer-sponsored plan (as defined in section 5000A(f)(2)) and an
individual who may enroll in the plan because of a relationship to the
employee (a related individual) are eligible for minimum essential
coverage under the plan for any month only if the plan is affordable and
provides minimum value. Government-sponsored programs described in
section 5000A(f)(1)(A) are not eligible employer-sponsored plans.
(ii) Plan year. For purposes of this paragraph (c)(3), a plan year
is an eligible employer-sponsored plan's regular 12-month coverage
period (or the remainder of a 12-month coverage period for a new
employee or an individual who enrolls during a special enrollment
period).
(iii) Eligibility for months during a plan year--(A) Failure to
enroll in plan. An employee or related individual may be eligible for
minimum essential coverage under an eligible employer-sponsored plan for
a month during a plan year if the employee or related individual could
have enrolled in the plan for that month during an open or special
enrollment period.
(B) Waiting periods. An employee or related individual is not
eligible for minimum essential coverage under an eligible employer-
sponsored plan during a required waiting period before the coverage
becomes effective.
(C) Example. The following example illustrates the provisions of
this paragraph (c)(3)(iii):
Example. (i) Taxpayer B is an employee of Employer X. X offers its
employees a health insurance plan that has a plan year (within the
meaning of paragraph (c)(3)(ii) of this section) from October 1 through
September 30. Employees may enroll during an open season from August 1
to September 15. B does not enroll in X's plan for the plan year October
1, 2014, to September 30, 2015. In November 2014, B enrolls in a
qualified health plan through an Exchange for calendar year 2015.
(ii) B could have enrolled in X's plan during the August 1 to
September 15 enrollment period. Therefore, unless X's plan is not
affordable for B or does not provide minimum value, B is eligible for
minimum essential coverage under X's plan for the months that B is
enrolled in the qualified health plan during X's plan year (January
through September 2015).
(iv) Continuation coverage. An individual who may enroll in
continuation coverage required under Federal law or a State law that
provides comparable continuation coverage is eligible for minimum
essential coverage only for months that the individual is enrolled in
the coverage.
(v) Affordable coverage--(A) In general--(1) Affordability for
employee. Except as provided in paragraph (c)(3)(v)(A)(3) of this
section, an eligible employer-sponsored plan is affordable for an
employee if the portion of the annual premium the employee must pay,
whether by salary reduction
[[Page 118]]
or otherwise (required contribution), for self-only coverage does not
exceed the required contribution percentage (as defined in paragraph
(c)(3)(v)(C) of this section) of the applicable taxpayer's household
income for the taxable year.
(2) Affordability for related individual. Except as provided in
paragraph (c)(3)(v)(A)(3) of this section, an eligible employer-
sponsored plan is affordable for a related individual if the portion of
the annual premium the employee must pay for self-only coverage does not
exceed the required contribution percentage, as described in paragraph
(c)(3)(v)(A)(1) of this section.
(3) Employee safe harbor. An employer-sponsored plan is not
affordable for an employee or a related individual for a plan year if,
when the employee or a related individual enrolls in a qualified health
plan for a period coinciding with the plan year (in whole or in part),
an Exchange determines that the eligible employer-sponsored plan is not
affordable for that plan year. This paragraph (c)(3)(v)(A)(3) does not
apply to a determination made as part of the redetermination process
described in 45 CFR 155.335 unless the individual receiving an Exchange
redetermination notification affirmatively responds and provides current
information on affordability. This paragraph (c)(3)(v)(A)(3) does not
apply for an individual who, with reckless disregard for the facts,
provides incorrect information to an Exchange concerning the portion of
the annual premium for coverage for the employee or related individual
under the plan.
(4) Wellness incentives and employer contributions to health
reimbursement arrangements. The Commissioner may provide rules in
published guidance, see Sec. 601.601(d)(2) of this chapter, for
determining how wellness incentives and amounts made available under a
health reimbursement arrangement are treated in determining the
affordability of eligible employer-sponsored coverage under this
paragraph (c)(3)(v).
(B) Affordability for part-year period. Affordability under
paragraph (c)(3)(v)(A) of this section is determined separately for each
employment period that is less than a full calendar year or for the
portions of an employer's plan year that fall in different taxable years
of an applicable taxpayer (a part-year period). An eligible employer-
sponsored plan is affordable for a part-year period if the employee's
annualized required contribution for self-only coverage under the plan
for the part-year period does not exceed the required contribution
percentage of the applicable taxpayer's household income for the taxable
year. The employee's annualized required contribution is the employee's
required contribution for the part-year period times a fraction, the
numerator of which is 12 and the denominator of which is the number of
months in the part-year period during the applicable taxpayer's taxable
year. Only full calendar months are included in the computation under
this paragraph (c)(3)(v)(B).
(C) [Reserved]. For further guidance, see Sec. 1.36B-
2T(c)(3)(v)(C).
(D) Examples. The following examples illustrate the provisions of
this paragraph (c)(3)(v). Unless stated otherwise, in each example the
taxpayer is single and has no dependents, the employer's plan is an
eligible employer-sponsored plan and provides minimum value, the
employee is not eligible for other minimum essential coverage, and the
taxpayer, related individual, and employer-sponsored plan have a
calendar taxable year:
Example 1. Basic determination of affordability. In 2014 Taxpayer C
has household income of $47,000. C is an employee of Employer X, which
offers its employees a health insurance plan that requires C to
contribute $3,450 for self-only coverage for 2014 (7.3 percent of C's
household income). Because C's required contribution for self-only
coverage does not exceed 9.5 percent of household income, under
paragraph (c)(3)(v)(A)(1) of this section, X's plan is affordable for C,
and C is eligible for minimum essential coverage for all months in 2014.
Example 2. Basic determination of affordability for a related
individual. The facts are the same as in Example 1, except that C is
married to J and X's plan requires C to contribute $5,300 for coverage
for C and J for 2014 (11.3 percent of C's household income). Because C's
required contribution for self-only coverage ($3,450) does not exceed
9.5 percent of household income, under paragraph (c)(3)(v)(A)(2) of this
section, X's plan is affordable for C and J, and C and J are eligible
for minimum essential coverage for all months in 2014.
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Example 3. Determination of unaffordability at enrollment. (i)
Taxpayer D is an employee of Employer X. In November 2013 the Exchange
for D's rating area projects that D's 2014 household income will be
$37,000. It also verifies that D's required contribution for self-only
coverage under X's health insurance plan will be $3,700 (10 percent of
household income). Consequently, the Exchange determines that X's plan
is unaffordable. D enrolls in a qualified health plan and not in X's
plan. In December 2014, X pays D a $2,500 bonus. Thus, D's actual 2014
household income is $39,500 and D's required contribution for coverage
under X's plan is 9.4 percent of D's household income.
(ii) Based on D's actual 2014 household income, D's required
contribution does not exceed 9.5 percent of household income and X's
health plan is affordable for D. However, when D enrolled in a qualified
health plan for 2014, the Exchange determined that X's plan was not
affordable for D for 2014. Consequently, under paragraph (c)(3)(v)(A)(3)
of this section, X's plan is not affordable for D and D is not eligible
for minimum essential coverage under X's plan for 2014.
Example 4. Determination of unaffordability for plan year. The facts
are the same as in Example 3, except that X's employee health insurance
plan year is September 1 to August 31. The Exchange for D's rating area
determines in August 2014 that X's plan is unaffordable for D based on
D's projected household income for 2014. D enrolls in a qualified health
plan as of September 1, 2014. Under paragraph (c)(3)(v)(A)(3) of this
section, X's plan is not affordable for D and D is not eligible for
minimum essential coverage under X's plan for the coverage months
September to December 2014 and January through August 2015.
Example 5. No affordability information affirmatively provided for
annual redetermination. (i) The facts are the same as in Example 3,
except the Exchange redetermines D's eligibility for advance credit
payments for 2015. D does not affirmatively provide the Exchange with
current information regarding affordability and the Exchange determines
that D's coverage is not affordable for 2015 and approves advance credit
payments based on information from the previous enrollment period. In
2015, D's required contribution for coverage under X's plan is 9.4
percent of D's household income.
(ii) Because D does not respond to the Exchange notification and the
Exchange makes an affordability determination based on information from
an earlier year, the employee safe harbor in paragraph (c)(3)(v)(A)(3)
of this section does not apply. D's required contribution for 2015 does
not exceed 9.5 percent of D's household income. Thus, X's plan is
affordable for D for 2015 and D is eligible for minimum essential
coverage for all months in 2015.
Example 6. Determination of unaffordability for part of plan year
(part-year period). (i) Taxpayer E is an employee of Employer X
beginning in May 2015. X's employee health insurance plan year is
September 1 to August 31. E's required contribution for self-only
coverage for May through August is $150 per month ($1,800 for the full
plan year). The Exchange for E's rating area projects E's household
income for purposes of eligibility for advance credit payments as
$18,000. E's actual household income for the 2015 taxable year is
$20,000.
(ii) Under paragraph (c)(3)(v)(B) of this section, whether coverage
under X's plan is affordable for E is determined for the remainder of
X's plan year (May through August). E's required contribution for a full
plan year ($1,800) exceeds 9.5 percent of E's household income (1,800/
18,000 = 10 percent). Therefore, the Exchange determines that X's
coverage is unaffordable for May through August. Although E's actual
household income for 2015 is $20,000 (and E's required contribution of
$1,800 does not exceed 9.5 percent of E's household income), under
paragraph (c)(3)(v)(A)(3) of this section, X's plan is unaffordable for
E for the part of the plan year May through August 2015. Consequently, E
is not eligible for minimum essential coverage under X's plan for the
period May through August 2015.
Example 7. Affordability determined for part of a taxable year
(part-year period). (i) Taxpayer F is an employee of Employer X. X's
employee health insurance plan year is September 1 to August 31. F's
required contribution for self-only coverage for the period September
2014 through August 2015 is $150 per month or $1,800 for the plan year.
F does not enroll in X's plan during X's open season but enrolls in a
qualified health plan for September through December 2014. F does not
request advance credit payments and does not ask the Exchange for his
rating area to determine whether X's coverage is affordable for F. F's
household income in 2014 is $18,000.
(ii) Because F is a calendar year taxpayer and Employer X's plan is
not a calendar year plan, F must determine the affordability of X's
coverage for the part-year period in 2014 (September-December) under
paragraph (c)(3)(v)(B) of this section. F determines the affordability
of X's plan for the September through December 2014 period by comparing
the annual premiums ($1,800) to F's 2014 household income. F's required
contribution of $1,800 is 10 percent of F's 2014 household income.
Because F's required contribution exceeds 9.5 percent of F's 2014
household income, X's plan is not affordable for F for the part-year
period September through December 2014 and F is not eligible for minimum
essential coverage under X's plan for that period.
(iii) F enrolls in Exchange coverage for 2015 and does not ask the
Exchange to approve
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advance credit payments or determine whether X's coverage is affordable.
F's 2015 household income is $20,000.
(iv) F must determine if X's plan is affordable for the part-year
period January 2015 through August 2015. F's annual required
contribution ($1,800) is 9 percent of F's 2015 household income. Because
F's required contribution does not exceed 9.5 percent of F's 2015
household income, X's plan is affordable for F for the part-year period
January through August 2015 and F is eligible for minimum essential
coverage for that period.
Example 8. Coverage unaffordable at year end. Taxpayer G is employed
by Employer X. In November 2014, the Exchange for G's rating area
determines that G is eligible for affordable employer-sponsored coverage
for 2015. G nonetheless enrolls in a qualified health plan for 2015 but
does not receive advance credit payments. G's 2015 household income is
less than expected and G's required contribution for employer-sponsored
coverage for 2015 exceeds 9.5 percent of G's actual 2015 household
income. Under paragraph (c)(3)(v)(A)(1) of this section, G is not
eligible for minimum essential coverage under X's plan for 2015.
(vi) Minimum value. An eligible employer-sponsored plan provides
minimum value only if the plan's share of the total allowed costs of
benefits provided to the employee under the plan (as determined under
guidance issued by the Secretary of Health and Human Services under
section 1302(d)(2) of the Affordable Care Act (42 U.S.C. 18022(d)(2)))
is at least 60 percent.
(vii) Enrollment in eligible employer-sponsored plan--(A) In
general. Except as provided in paragraph (c)(3)(vii)(B) of this section,
the requirements of affordability and minimum value do not apply for
months that an individual is enrolled in an eligible employer-sponsored
plan.
(B) Automatic enrollment. An employee or related individual is
treated as not enrolled in an eligible employer-sponsored plan for a
month in a plan year or other period for which the employee or related
individual is automatically enrolled if the employee or related
individual terminates the coverage before the later of the first day of
the second full calendar month of that plan year or other period or the
last day of any permissible opt-out period provided by the employer-
sponsored plan or in regulations to be issued by the Department of
Labor, for that plan year or other period.
(C) Examples. The following examples illustrate the provisions of
this paragraph (c)(3)(vii):
Example 1. Taxpayer H is employed by Employer X in 2014. H's
required contribution for self-only employer coverage exceeds 9.5
percent of H's 2014 household income. H enrolls in X's calendar year
plan for 2014. Under paragraph (c)(3)(vii)(A) of this section, H is
eligible for minimum essential coverage for 2014 because H is enrolled
in an eligible employer-sponsored plan for 2014.
Example 2. The facts are the same as in Example 1, except that H
terminates plan coverage on June 30, 2014. Under paragraph
(c)(3)(vii)(A) of this section, H is eligible for minimum essential
coverage under X's plan for January through June 2014 but is not
eligible for minimum essential coverage under X's plan for July through
December 2014.
Example 3. The facts are the same as in Example 1, except that
Employer X automatically enrolls H in the plan for calendar year 2015. H
terminates the coverage on January 20, 2015. Under paragraph
(c)(3)(vii)(B) of this section, H is not eligible for minimum essential
coverage under X's plan for January 2015.
(4) Related individual not claimed as a personal exemption
deduction. An individual who may enroll in minimum essential coverage
because of a relationship to another person eligible for the coverage,
but for whom the other eligible person does not claim a personal
exemption deduction under section 151, is treated as eligible for
minimum essential coverage under the coverage only for months that the
related individual is enrolled in the coverage.
(d) [Reserved]. For further guidance, see Sec. 1.36B-2T(d).
[T.D. 9590, 77 FR 30385, May 23, 2012, as amended by T.D. 9611, 78 FR
7265, Feb. 1, 2013; T.D. 9683, 79 FR 43626, July 28, 2014]
Sec. 1.36B-2T Eligibility for premium tax credit (temporary).
(a) through (b)(1) [Reserved]. For further guidance, see Sec.
1.36B-2(a) through (b)(1).
(2) Married taxpayers must file joint return--(i) In general. Except
as provided in paragraph (b)(2)(ii) of this section, a taxpayer who is
married (within the meaning of section 7703) at the close of the taxable
year is an applicable taxpayer only if the taxpayer and the taxpayer's
spouse file a joint return for the taxable year.
[[Page 121]]
(ii) Victims of domestic abuse and abandonment. Except as provided
in paragraph (b)(2)(v) of this section, a married taxpayer satisfies the
joint filing requirement of paragraph (b)(2)(i) of this section if the
taxpayer files a tax return using a filing status of married filing
separately and the taxpayer--
(A) Is living apart from the taxpayer's spouse at the time the
taxpayer files the tax return;
(B) Is unable to file a joint return because the taxpayer is a
victim of domestic abuse, as described in paragraph (b)(2)(iii) of this
section, or spousal abandonment, as described in paragraph (b)(2)(iv) of
this section; and
(C) Certifies on the return, in accordance with the relevant
instructions, that the taxpayer meets the criteria of this paragraph
(b)(2)(ii).
(iii) Domestic abuse. For purposes of paragraph (b)(2)(ii) of this
section, domestic abuse includes physical, psychological, sexual, or
emotional abuse, including efforts to control, isolate, humiliate, and
intimidate, or to undermine the victim's ability to reason
independently. All the facts and circumstances are considered in
determining whether an individual is abused, including the effects of
alcohol or drug abuse by the victim's spouse. Depending on the facts and
circumstances, abuse of the victim's child or another family member
living in the household may constitute abuse of the victim.
(iv) Abandonment. For purposes of paragraph (b)(2)(ii) of this
section, a taxpayer is a victim of spousal abandonment for a taxable
year if, taking into account all facts and circumstances, the taxpayer
is unable to locate his or her spouse after reasonable diligence.
(v) Three-year rule. Paragraph (b)(2)(ii) of this section does not
apply if the taxpayer met the requirements of paragraph (b)(2)(ii) of
this section for each of the three preceding taxable years.
(b)(3) through (c)(3)(v)(B) [Reserved]. For further guidance, see
Sec. 1.36B-2(b)(3) through (c)(3)(v)(B).
(C) Required contribution percentage. The required contribution
percentage is 9.5 percent. For plan years beginning in a calendar year
after 2014, the percentage will be adjusted by the ratio of premium
growth to income growth for the preceding calendar year and may be
further adjusted to reflect changes to the data used to compute the
ratio of premium growth to income growth for the 2014 calendar year or
the data sources used to compute the ratio of premium growth to income
growth. Premium growth and income growth will be determined under
published guidance, see Sec. 601.601(d)(2) of this chapter. In
addition, the percentage may be adjusted for plan years beginning in a
calendar year after 2018 to reflect rates of premium growth relative to
growth in the consumer price index.
(c)(3)(v)(D) through (c)(4) [Reserved]. For further guidance, see
Sec. 1.36B-2(c)(3)(v)(D) through (c)(4).
(d) Effective/applicability date. Paragraphs (b)(2) and (c)(3)(v)(C)
of this section apply to taxable years beginning after December 31,
2013.
(e) Expiration date. Paragraphs (b)(2) and (c)(3)(v)(C) of this
section expire on July 24, 2017.
[T.D. 9683, 79 FR 43627, July 28, 2014]
Sec. 1.36B-3 Computing the premium assistance credit amount.
(a) In general. A taxpayer's premium assistance credit amount for a
taxable year is the sum of the premium assistance amounts determined
under paragraph (d) of this section for all coverage months for
individuals in the taxpayer's family.
(b) Definitions. For purposes of this section--
(1) The cost of a qualified health plan is the premium the plan
charges; and
(2) The term coverage family refers to members of the taxpayer's
family who enroll in a qualified health plan and are not eligible for
minimum essential coverage (other than coverage in the individual
market).
(c) Coverage month--(1) In general. A month is a coverage month for
an individual if--
(i) As of the first day of the month, the individual is enrolled in
a qualified health plan through an Exchange;
(ii) The taxpayer pays the taxpayer's share of the premium for the
individual's coverage under the plan for the month by the unextended due
date for filing the taxpayer's income tax return
[[Page 122]]
for that taxable year, or the full premium for the month is paid by
advance credit payments; and
(iii) The individual is not eligible for the full calendar month for
minimum essential coverage (within the meaning of Sec. 1.36B-2(c))
other than coverage described in section 5000A(f)(1)(C) (relating to
coverage in the individual market).
(2) Premiums paid for a taxpayer. Premiums another person pays for
coverage of the taxpayer, taxpayer's spouse, or dependent are treated as
paid by the taxpayer.
(3) Examples. The following examples illustrate the provisions of
this paragraph (c):
Example 1. (i) Taxpayer M is single with no dependents. In December
2013, M enrolls in a qualified health plan for 2014 and the Exchange
approves advance credit payments. M pays M's share of the premiums. On
May 15, 2014, M enlists in the U.S. Army and is eligible immediately for
government-sponsored minimum essential coverage.
(ii) Under paragraph (c)(1) of this section, January through May
2014 are coverage months for M. June through December 2014 are not
coverage months because M is eligible for minimum essential coverage for
those months. Thus, under paragraph (a) of this section, M's premium
assistance credit amount for 2014 is the sum of the premium assistance
amounts for the months January through May.
Example 2. (i) Taxpayer N has one dependent, S. S is eligible for
government-sponsored minimum essential coverage. N is not eligible for
minimum essential coverage. N enrolls in a qualified health plan for
2014 and the Exchange approves advance credit payments. On August 1,
2014, S loses eligibility for minimum essential coverage. N terminates
enrollment in the qualified health plan that covers only N and enrolls
in a qualified health plan that covers N and S for August through
December 2014. N pays all premiums not covered by advance credit
payments.
(ii) Under paragraph (c)(1) of this section, January through
December of 2014 are coverage months for N and August through December
are coverage months for N and S. N's premium assistance credit amount
for 2014 is the sum of the premium assistance amounts for these coverage
months.
Example 3. (i) O and P are the divorced parents of T. Under the
divorce agreement between O and P, T resides with P and P claims T as a
dependent. However, O must pay premiums for health insurance for T. P
enrolls T in a qualified health plan for 2014. O pays the portion of T's
qualified health plan premiums not covered by advance credit payments.
(ii) Because P claims T as a dependent, P (and not O) may claim a
premium tax credit for coverage for T. See Sec. 1.36B-2(a). Under
paragraph (c)(2) of this section, the premiums that O pays for coverage
for T are treated as paid by P. Thus, the months when T is covered by a
qualified health plan and not eligible for other minimum essential
coverage are coverage months under paragraph (c)(1) of this section in
computing P's premium tax credit under paragraph (a) of this section.
Example 4. Q, an American Indian, enrolls in a qualified health plan
for 2014. Q's tribe pays the portion of Q's qualified health plan
premiums not covered by advance credit payments. Under paragraph (c)(2)
of this section, the premiums that Q's tribe pays for Q are treated as
paid by Q. Thus, the months when Q is covered by a qualified health plan
and not eligible for other minimum essential coverage are coverage
months under paragraph (c)(1) of this section in computing Q's premium
tax credit under paragraph (a) of this section.
(d) Premium assistance amount. The premium assistance amount for a
coverage month is the lesser of--
(1) The premiums for the month for one or more qualified health
plans in which a taxpayer or a member of the taxpayer's family enrolls;
or
(2) The excess of the adjusted monthly premium for the applicable
benchmark plan over \1/12\ of the product of a taxpayer's household
income and the applicable percentage for the taxable year.
(e) Adjusted monthly premium. The adjusted monthly premium is the
premium an issuer would charge for the applicable benchmark plan to
cover all members of the taxpayer's coverage family, adjusted only for
the age of each member of the coverage family as allowed under section
2701 of the Public Health Service Act (42 U.S.C. 300gg). The adjusted
monthly premium is determined without regard to any premium discount or
rebate under the wellness discount demonstration project under section
2705(d) of the Public Health Service Act (42 U.S.C. 300gg-4(d)) and may
not include any adjustments for tobacco use.
(f) Applicable benchmark plan--(1) In general. Except as otherwise
provided in this paragraph (f), the applicable benchmark plan for each
coverage month is the second lowest cost silver
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plan (as described in section 1302(d)(1)(B) of the Affordable Care Act
(42 U.S.C. 18022(d)(1)(B))) offered through the Exchange for the rating
area where the taxpayer resides for--
(i) Self-only coverage for a taxpayer--
(A) Who computes tax under section 1(c) (unmarried individuals other
than surviving spouses and heads of household) and is not allowed a
deduction under section 151 for a dependent for the taxable year;
(B) Who purchases only self-only coverage for one individual; or
(C) Whose coverage family includes only one individual; and
(ii) Family coverage for all other taxpayers.
(2) Family coverage. The applicable benchmark plan for family
coverage is the second lowest cost silver plan that applies to the
members of the taxpayer's coverage family (such as a plan covering two
adults if the members of a taxpayer's coverage family are two adults).
(3) Silver level plan not covering a taxpayer's family. If one or
more silver level plans for family coverage offered through an Exchange
do not cover all members of a taxpayer's coverage family under one
policy (for example, because of the relationships within the family),
the premium for the applicable benchmark plan determined under
paragraphs (f)(1) and (f)(2) of this section may be the premium for a
single policy or for more than one policy, whichever is the second
lowest cost silver option.
(4) Family members residing at different locations. [Reserved]
(5) Plan closed to enrollment. A qualified health plan that is not
open to enrollment by a taxpayer or family member at the time the
taxpayer or family member enrolls in a qualified health plan is
disregarded in determining the applicable benchmark plan.
(6) Benchmark plan terminates or closes to enrollment during the
year. A qualified health plan that is the applicable benchmark plan
under this paragraph (f) for a taxpayer does not cease to be the
applicable benchmark plan solely because the plan or a lower cost plan
terminates or closes to enrollment during the taxable year.
(7) Examples. The following examples illustrate the rules of this
paragraph (f). Unless otherwise stated, in each example the plans are
open to enrollment to a taxpayer or family member at the time of
enrollment and are offered through the Exchange for the rating area
where the taxpayer resides:
Example 1. Single taxpayer enrolls. Taxpayer M is single, has no
dependents and enrolls in a qualified health plan. Under paragraph
(f)(1)(i) of this section, M's applicable benchmark plan is the second
lowest cost silver plan providing self-only coverage for M.
Example 2. Family enrolls. The facts are the same as in Example 1,
except that M, her spouse N, and their dependent enroll in a qualified
health plan. Under paragraphs (f)(1)(ii) and (f)(2) of this section, M's
and N's applicable benchmark plan is the second lowest cost silver plan
covering M, N, and their dependent.
Example 3. Single taxpayer enrolls with nondependent. Taxpayer O is
single and resides with his daughter, K, but may not claim K as a
dependent. O purchases family coverage for himself and K. Under
paragraphs (f)(1)(i)(A) and (f)(1)(i)(C) of this section, O's applicable
benchmark plan is the second lowest cost silver plan providing self-only
coverage for O. However, K may qualify for a premium tax credit if K is
otherwise eligible. See paragraph (h) of this section.
Example 4. Single taxpayer enrolls with dependent and nondependent.
The facts are the same as in Example 3, except that O also resides with
his teenage son, L, and claims L as a dependent. O purchases family
coverage for himself, K, and L. Under paragraphs (f)(1)(ii) and (f)(2)
of this section, O's applicable benchmark plan is the second lowest cost
silver plan covering O and L.
Example 5. Children only enroll. The facts are the same as in
Example 4, except that O enrolls only K and L in the coverage. Under
paragraph (f)(1)(i)(C) of this section, O's applicable benchmark plan is
the second lowest cost silver plan providing self-only coverage for L.
Example 6. Applicable benchmark plan unrelated to coverage
purchased. Taxpayers P and Q, who are married, reside with Q's two
teenage daughters, M and N, whom they claim as dependents. P and Q
purchase self-only coverage for P and family coverage for Q, M, and N.
Under paragraphs (f)(1)(ii) and (f)(2) of this section, P's and Q's
applicable benchmark plan is the second lowest cost silver plan covering
P, Q, M, and N.
Example 7. Change in coverage family. Taxpayer R is single and has
no dependents when she enrolls in a qualified health plan for 2014. On
August 1, 2014, R has a child, O, whom she claims as a dependent for
2014. R enrolls in a
[[Page 124]]
qualified health plan covering R and O effective August 1. Under
paragraph (f)(1)(i) of this section, R's applicable benchmark plan for
January through July is the second lowest cost silver plan providing
self-only coverage for R. Under paragraphs (f)(1)(ii) and (f)(2) of this
section, R's applicable benchmark plan for the months August through
December is the second lowest cost silver plan covering R and O.
Example 8. Minimum essential coverage for some coverage months.
Taxpayer S claims his daughter, P, as a dependent. S and P enroll in a
qualified health plan for 2014. S, but not P, is eligible for
government-sponsored minimum essential coverage for September to
December 2014. Thus, under paragraph (c)(1)(iii) of this section,
January through December are coverage months for P and January through
August are coverage months for S. Because, under paragraphs (d) and
(f)(1) of this section, the premium assistance amount for a coverage
month is computed based on the applicable benchmark plan for that
coverage month, S's applicable benchmark plan for January through August
is the second lowest cost silver plan under paragraphs (f)(1)(ii) and
(f)(2) of this section covering S and P. Under paragraph (f)(1)(i)(C) of
this section, S's applicable benchmark plan for September through
December is the second lowest cost silver plan providing self-only
coverage for P.
Example 9. Family member eligible for minimum essential coverage for
the taxable year. The facts are the same as in Example 8, except that S
is not eligible for government-sponsored minimum essential coverage for
any months and P is eligible for government-sponsored minimum essential
coverage for the entire year. Under paragraph (f)(1)(i)(C) of this
section, S's applicable benchmark plan is the second lowest cost silver
plan providing self-only coverage for S.
Example 10. Qualified health plans not covering certain families.
(i) Taxpayers V and W are married and live with W's mother, K, whom they
claim as a dependent. The Exchange for their rating area offers self-
only and family coverage at the silver level through Issuers A, B, and
C, who each offer only one silver level plan. Issuers A and B
respectively charge V and W a monthly premium of $900 and $700 for
family coverage, but do not allow individuals to enroll a parent in
family coverage. Issuers A and B respectively charge $600 and $400 for
self-only coverage for K. Issuer C offers a qualified health plan that
provides family coverage for V, W, and K under one policy for a $1,200
monthly premium. Thus, the Exchange offers the following silver level
options for covering V's and W's coverage family:
Issuer A: $1,500 for premiums for two policies ($900 for V and W,
$600 for K)
Issuer B: $1,100 for premiums for two policies ($700 for V and W,
$400 for K)
Issuer C: $1,200 for premiums for one policy ($1,200 for V, W, and
K)
(ii) Because some silver level qualified health plans for family
coverage offered on the Exchange do not cover all members of their
coverage family under one policy, under paragraph (f)(3) of this
section, the premium for V's and W's applicable benchmark plan may be
the premium for a single policy or for more than one policy. The
coverage offered by Issuer C is the second lowest cost silver level
option for covering V's and W's family. The premium for their applicable
benchmark plan is the premium for the Issuer C coverage.
Example 11. (i) The facts are the same as in Example 10, except that
Issuer B covers V, W, and K under one policy for a premium of $1,100,
and Issuer C does not allow individuals to enroll parents in family
coverage. Issuer C charges a monthly premium of $700 for family coverage
for V and W and a monthly premium of $500 for self-only coverage for K.
Thus, the Exchange offers the following silver level options for
covering V's and W's coverage family:
Issuer A: $1,500 for premiums for two policies ($900 for V and W,
$600 for K)
Issuer B: $1,100 for premiums for one policy ($1,100 for V, W, and
K)
Issuer C: $1,200 for premiums for two policies ($700 for V and W,
$500 for K)
(ii) The coverage offered by Issuer C is the second lowest cost
silver level option for covering V's and W's family. The premium for
their applicable benchmark plan is the premiums for the two policies
available through Issuer C.
Example 12. Family members residing in different locations.
[Reserved]
Example 13. Qualified health plan closed to enrollment. Taxpayer Y
has two dependents, R and S. Y, R, and S enroll in a qualified health
plan. The Exchange for the rating area where the family resides offers
silver level plans J, K, L, and M, which are the first, second, third,
and fourth lowest cost silver plans covering Y's family. When Y's family
enrolls, Plan J is closed to enrollment. Under paragraph (f)(5) of this
section, Plan J is disregarded in determining Y's applicable benchmark
plan, and Plan L is Y's applicable benchmark plan.
Example 14. Benchmark plan closes to new enrollees during the year.
(i) Taxpayers X, Y, and Z each have coverage families consisting of two
adults. In the rating area where X, Y, and Z reside, Plan 2 is the
second lowest cost silver plan and Plan 3 is the third lowest cost
silver plan covering the two adults in each coverage family offered
through the Exchange. The X and Y families each enroll in a qualified
health plan that is not the applicable benchmark plan (Plan 4) in
November during the annual open enrollment period. Plan 2 closes to new
enrollees the following June. Thus, on July 1, Plan 3 is the second
[[Page 125]]
lowest cost silver plan available to new enrollees through the Exchange.
The Z family enrolls in a qualified health plan in July.
(ii) Under paragraphs (f)(1), (f)(2), and (f)(6) of this section,
the applicable benchmark plan is Plan 2 for X and Y for all coverage
months during the year. The applicable benchmark plan for Z is Plan 3,
because Plan 2 is not open to enrollment through the Exchange when the Z
family enrolls.
Example 15. Benchmark plan terminates for all enrollees during the
year. The facts are the same as in Example 14, except that Plan 2
terminates for all enrollees on June 30. Under paragraphs (f)(1),
(f)(2), and (f)(6) of this section, Plan 2 is the applicable benchmark
plan for X and Y for all coverage months during the year, and Plan 3 is
the applicable benchmark plan for Z.
(g) Applicable percentage--(1) [Reserved]. For further guidance, see
Sec. 1.36B-3T(g)(1).
(2) Applicable percentage table.
------------------------------------------------------------------------
Household income percentage of Federal Initial Final
poverty line percentage percentage
------------------------------------------------------------------------
Less than 133%.......................... 2.0 2.0
At least 133% but less than 150%........ 3.0 4.0
At least 150% but less than 200%........ 4.0 6.3
At least 200% but less than 250%........ 6.3 8.05
At least 250% but less than 300%........ 8.05 9.5
At least 300% but less than 400%........ 9.5 9.5
------------------------------------------------------------------------
(3) Examples. The following examples illustrate the rules of this
paragraph (g):
Example 1. A's household income is 275 percent of the Federal
Poverty line for A's family size for that taxable year. In the table in
paragraph (g)(2) of this section, the initial percentage for a taxpayer
with household income of 250 to 300 percent of the Federal poverty line
is 8.05 and the final percentage is 9.5. A's Federal poverty line
percentage of 275 percent is halfway between 250 percent and 300
percent. Thus, rounded to the nearest one-hundredth of one percent, A's
applicable percentage is 8.78, which is halfway between the initial
percentage of 8.05 and the final percentage of 9.5.
Example 2. (i) B's household income is 210 percent of the Federal
poverty line for B's family size. In the table in paragraph (g)(2) of
this section, the initial percentage for a taxpayer with household
income of 200 to 250 percent of the Federal poverty line is 6.3 and the
final percentage is 8.05. B's applicable percentage is 6.65, computed as
follows.
(ii) Determine the excess of B's Federal poverty line percentage
(210) over the initial household income percentage in B's range (200),
which is 10. Determine the difference between the initial household
income percentage in the taxpayer's range (200) and the ending household
income percentage in the taxpayer's range (250), which is 50. Divide the
first amount by the second amount:
210 - 200 = 10
250 - 200 = 50
10 / 50 = .20
(iii) Compute the difference between the initial premium percentage
(6.3) and the second premium percentage (8.05) in the taxpayer's range;
8.05-6.3 = 1.75.
(iv) Multiply the amount in the first calculation (.20) by the
amount in the second calculation (1.75) and add the product (.35) to the
initial premium percentage in B's range (6.3), resulting in B's
applicable percentage of 6.65:
.20 x 1.75 = .35
6.3 + .35 = 6.65.
(h) Plan covering more than one family--(1) In general. If a
qualified health plan covers more than one family under a single policy,
each applicable taxpayer covered by the plan may claim a premium tax
credit, if otherwise allowable. Each taxpayer computes the credit using
that taxpayer's applicable percentage, household income, and the
benchmark plan that applies to the taxpayer under paragraph (f) of this
section. In determining whether the amount computed under paragraph
(d)(1) of this section (the premiums for the qualified health plan in
which the taxpayer enrolls) is less than the amount computed under
paragraph (d)(2) of this section (the benchmark plan premium minus the
product of household income and the applicable percentage), the premiums
paid are allocated to each taxpayer in proportion to the premiums for
each taxpayer's applicable benchmark plan.
(2) Example. The following example illustrates the rules of this
paragraph (h):
Example. (i) Taxpayers A and B enroll in a single policy under a
qualified health plan. B
[[Page 126]]
is A's 25-year old child who is not A's dependent. B has no dependents.
The plan covers A, B, and A's two additional children who are A's
dependents. The premium for the plan in which A and B enroll is $15,000.
The premium for the second lowest cost silver family plan covering only
A and A's dependents is $12,000 and the premium for the second lowest
cost silver plan providing self-only coverage to B is $6,000. A and B
are applicable taxpayers and otherwise eligible to claim the premium tax
credit.
(ii) Under paragraph (h)(1) of this section, both A and B may claim
premium tax credits. A computes her credit using her household income, a
family size of three, and a benchmark plan premium of $12,000. B
computes his credit using his household income, a family size of one,
and a benchmark plan premium of $6,000.
(iii) In determining whether the amount in paragraph (d)(1) of this
section (the premiums for the qualified health plan A and B purchase) is
less than the amount in paragraph (d)(2) of this section (the benchmark
plan premium minus the product of household income and the applicable
percentage), the $15,000 premiums paid are allocated to A and B in
proportion to the premiums for their applicable benchmark plans. Thus,
the portion of the premium allocated to A is $10,000 ($15,000 x $12,000/
$18,000) and the portion allocated to B is $5,000 ($15,000 x $6,000/
$18,000).
(i) [Reserved]
(j) Additional benefits--(1) In general. If a qualified health plan
offers benefits in addition to the essential health benefits a qualified
health plan must provide under section 1302 of the Affordable Care Act
(42 U.S.C. 18022), or a State requires a qualified health plan to cover
benefits in addition to these essential health benefits, the portion of
the premium for the plan properly allocable to the additional benefits
is excluded from the monthly premiums under paragraph (d)(1) or (d)(2)
of this section.
(2) Method of allocation. The portion of the premium properly
allocable to additional benefits is determined under guidance issued by
the Secretary of Health and Human Services. See section 36B(b)(3)(D).
(3) Examples. The following examples illustrate the rules of this
paragraph (j):
Example 1. (i) Taxpayer B enrolls in a qualified health plan that
provides benefits in addition to the essential health benefits the plan
must provide (additional benefits). The monthly premium for the plan in
which B enrolls is $385 (Amount 1), of which $35 is allocable to the
additional benefits. The premium for B's applicable benchmark plan is
$440, of which $40 is allocable to the additional benefits. The excess
of the premium for B's applicable benchmark plan over B's $60
contribution amount (which is the product of B's household income and
the applicable percentage) is $380 per month (Amount 2).
(ii) Under this paragraph (j), the premium for the qualified health
plan in which B enrolls and the applicable benchmark premium each is
reduced by the portion of the premium that is allocable to the
additional benefits provided under that plan. Therefore, Amount 1 is
reduced to $350 ($385-$35), the premium for B's applicable benchmark
plan is reduced to $400 ($440-$40), and Amount 2 is reduced to $340
($400 less $60). B's premium assistance amount for a coverage month is
$340, the lesser of Amount 1 and Amount 2.
Example 2. (i) The facts are the same as in Example 1, except that
B's applicable benchmark plan provides no benefits in addition to the
essential health benefits required to be provided by the plan. Thus,
under paragraph (j) of this section, only the amount of the monthly
premium for the plan in which B enrolls is reduced by the portion of the
premium that is allocable to the additional benefits provided under that
plan, and Amount 1 is $350 ($385-$35). The premium for B's applicable
benchmark plan is not reduced under this paragraph (j), and Amount 2 is
$380 ($440-$60). B's premium assistance amount for a coverage month is
$350, the lesser of these two amounts.
(k) Pediatric dental coverage--(1) In general. For purposes of
determining the amount of the monthly premium a taxpayer pays for
coverage under paragraph (d)(1) of this section, if an individual
enrolls in both a qualified health plan and a plan described in section
1311(d)(2)(B)(ii) of the Affordable Care Act (42 U.S.C.
13031(d)(2)(B)(ii)) (a stand-alone dental plan), the portion of the
premium for the stand-alone dental plan that is properly allocable to
pediatric dental benefits that are essential benefits required to be
provided by a qualified health plan is treated as a premium payable for
the individual's qualified health plan.
(2) Method of allocation. The portion of the premium for a stand-
alone dental plan properly allocable to pediatric dental benefits is
determined under guidance issued by the Secretary of Health and Human
Services.
(3) Example. The following example illustrates the rules of this
paragraph (k):
[[Page 127]]
Example. (i) Taxpayer C and C's dependent, R, enroll in a qualified
health plan. The premium for the plan in which C and R enroll is $7,200
($600/month) (Amount 1). The plan does not provide dental coverage. C
also enrolls in a stand-alone dental plan covering C and R. The portion
of the premium for the dental plan allocable to pediatric dental
benefits that are essential health benefits is $240 ($20 per month). The
excess of the premium for C's applicable benchmark plan over C's
contribution amount (the product of C's household income and the
applicable percentage) is $7,260 ($605/month) (Amount 2).
(ii) Under this paragraph (k), the amount C pays for premiums
(Amount 1) for purposes of computing the premium assistance amount is
increased by the portion of the premium for the stand-alone dental plan
allocable to pediatric dental benefits that are essential health
benefits. Thus, the amount of the premiums for the plan in which C
enrolls is treated as $620 for purposes of computing the amount of the
premium tax credit. C's premium assistance amount for each coverage
month is $605 (Amount 2), the lesser of Amount 1 (increased by the
premiums allocable to pediatric dental benefits) and Amount 2.
(l) Families including individuals not lawfully present--(1) In
general. If one or more individuals for whom a taxpayer is allowed a
deduction under section 151 are not lawfully present (within the meaning
of Sec. 1.36B-1(g)), the percentage a taxpayer's household income bears
to the Federal poverty line for the taxpayer's family size for purposes
of determining the applicable percentage under paragraph (g) of this
section is determined by excluding individuals who are not lawfully
present from family size and by determining household income in
accordance with paragraph (l)(2) of this section.
(2) Revised household income computation--(i) Statutory method. For
purposes of paragraph (l)(1) of this section, household income is equal
to the product of the taxpayer's household income (determined without
regard to this paragraph (l)(2)) and a fraction--
(A) The numerator of which is the Federal poverty line for the
taxpayer's family size determined by excluding individuals who are not
lawfully present; and
(B) The denominator of which is the Federal poverty line for the
taxpayer's family size determined by including individuals who are not
lawfully present.
(ii) Comparable method. The Commissioner may describe a comparable
method in additional published guidance, see Sec. 601.601(d)(2) of this
chapter.
(m) [Reserved]. For further guidance, see Sec. 1.36B-3T(m).
[T.D. 9590, 77 FR 30385, May 23, 2012; 77 FR 41048, July 12, 2012; T.D.
9683, 79 FR 43627, July 28, 2014]
Sec. 1.36B-3T Computing the premium assistance credit amount (temporary).
(a) through (f) [Reserved]. For further guidance, see Sec. 1.36B-
3(a) through (f).
(g) Applicable percentage--(1) In general. The applicable percentage
multiplied by a taxpayer's household income determines the taxpayer's
annual required share of premiums for the benchmark plan. The required
share is divided by 12 and this monthly amount is subtracted from the
adjusted monthly premium for the applicable benchmark plan when
computing the premium assistance amount. The applicable percentage is
computed by first determining the percentage that the taxpayer's
household income bears to the Federal poverty line for the taxpayer's
family size. The resulting Federal poverty line percentage is then
compared to the income categories described in the table in paragraph
(g)(2) of this section (or successor tables). An applicable percentage
within an income category increases on a sliding scale in a linear
manner and is rounded to the nearest one-hundredth of one percent. For
taxable years beginning after December 31, 2014, the applicable
percentages in the table will be adjusted by the ratio of premium growth
to income growth for the preceding calendar year and may be further
adjusted to reflect changes to the data used to compute the ratio of
premium growth to income growth for the 2014 calendar year or the data
sources used to compute the ratio of premium growth to income growth.
Premium growth and income growth will be determined in accordance with
published guidance, see Sec. 601.601(d)(2) of this chapter. In
addition, the applicable percentages in the table may be adjusted for
taxable years beginning after December 31, 2018, to
[[Page 128]]
reflect rates of premium growth relative to growth in the consumer price
index.
(g)(2) through (l) [Reserved]. For further guidance, see Sec.
1.36B-3(g)(2) through (l).
(m) Effective/applicability date. Paragraph (g)(1) of this section
applies to taxable years beginning after December 31, 2013.
(n) Expiration date. Paragraph (g)(1) of this section expires on
July 24, 2017.
[T.D. 9683, 79 FR 43627, July 28, 2014]
Sec. 1.36B-4 Reconciling the premium tax credit with advance credit
payments.
(a) Reconciliation--(1) Coordination of premium tax credit with
advance credit payments--(i) In general. A taxpayer must reconcile the
amount of credit allowed under section 36B with advance credit payments
on the taxpayer's income tax return for a taxable year. A taxpayer whose
premium tax credit for the taxable year exceeds the taxpayer's advance
credit payments may receive the excess as an income tax refund. A
taxpayer whose advance credit payments for the taxable year exceed the
taxpayer's premium tax credit owes the excess as an additional income
tax liability.
(ii) [Reserved]. For further guidance, see Sec. 1.36B-4T(a)(1)(ii).
(iii) Advance credit payment for a month in which an issuer does not
provide coverage. For purposes of reconciliation, a taxpayer does not
have an advance credit payment for a month if the issuer of the
qualified health plan in which the taxpayer or a family member is
enrolled does not provide coverage for that month.
(2) Credit computation. The premium assistance credit amount is
computed on the taxpayer's return using the taxpayer's household income
and family size for the taxable year. Thus, the taxpayer's contribution
amount (household income for the taxable year times the applicable
percentage) is determined using the taxpayer's household income and
family size at the end of the taxable year. The applicable benchmark
plan for each coverage month is determined under Sec. 1.36B-3(f).
(3) Limitation on additional tax--(i) In general. The additional tax
imposed under paragraph (a)(1) of this section on a taxpayer whose
household income is less than 400 percent of the Federal poverty line is
limited to the amounts provided in the table in paragraph (a)(3)(ii) of
this section (or successor tables). For taxable years beginning after
December 31, 2014, the limitation amounts may be adjusted in published
guidance, see Sec. 601.601(d)(2) of this chapter, to reflect changes in
the consumer price index.
(ii) Additional tax limitation table.
----------------------------------------------------------------------------------------------------------------
Limitation amount for
taxpayers whose tax is Limitation amount for
Household income percentage of Federal poverty line determined under all other taxpayers
section 1(c)
----------------------------------------------------------------------------------------------------------------
Less than 200%................................................ $300 $600
At least 200% but less than 300%.............................. 750 1,500
At least 300% but less than 400%.............................. 1,250 2,500
----------------------------------------------------------------------------------------------------------------
(iii) [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(3)(iii).
(4) Examples. The following examples illustrate the rules of this
paragraph (a). In each example the taxpayer enrolls in a higher cost
qualified health plan than the applicable benchmark plan:
Example 1. Household income increases. (i) Taxpayer A is single and
has no dependents. The Exchange for A's rating area projects A's 2014
household income to be $27,925 (250 percent of the Federal poverty line
for a family of one, applicable percentage 8.05). A enrolls in a
qualified health plan. The annual premium for the applicable benchmark
plan is $5,200. A's advance credit payments are $2,952, computed as
follows: benchmark plan premium of $5,200 less contribution amount of
$2,248 (projected household income of $27,925 x .0805) = $2,952.
(ii) A's household income for 2014 is $33,622, which is 301 percent
of the Federal poverty line for a family of one (applicable percentage
9.5). Consequently, A's premium tax credit for 2014 is $2,006 (benchmark
plan premium of $5,200 less contribution amount of
[[Page 129]]
$3,194 (household income of $33,622 x .095)). Because A's advance credit
payments for 2014 are $2,952 and A's 2014 credit is $2,006, A has excess
advance payments of $946. Under paragraph (a)(1) of this section, A's
tax liability for 2014 is increased by $946. Because A's household
income is between 300 percent and 400 percent of the Federal poverty
line, if A's excess advance payments exceeded $1,250, under the
limitation of paragraph (a)(3) of this section, A's additional tax
liability would be limited to that amount.
Example 2. Household income increases, repayment limitation applies.
The facts are the same as in Example 1, except that A's household income
for 2014 is $43,560 (390 percent of the Federal poverty line for a
family of one, applicable percentage 9.5). Consequently, A's premium tax
credit for 2014 is $1,062 ($5,200 benchmark plan premium less
contribution amount of $4,138 (household income of $43,560 x .095)). A's
advance credit payments for 2014 are $2,952; therefore, A has excess
advance payments of $1,890. Because A's household income is between 300
percent and 400 percent of the Federal poverty line, A's additional tax
liability for the taxable year is $1,250 under the repayment limitation
of paragraph (a)(3) of this section.
Example 3. Household income decreases. The facts are the same as in
Example 1, except that A's actual household income for 2014 is $22,340
(200 percent of the Federal poverty line for a family of one, applicable
percentage 6.3). Consequently, A's premium tax credit for 2014 is $3,793
($5,200 benchmark plan premium less contribution amount of $1,407
(household income of $22,340 x .063)). Because A's advance credit
payments for 2014 are $2,952, A is allowed an additional credit of $841
($3,793 less $2,952).
Example 4. [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(4), Example 4.
Example 5. Repayment limitation does not apply. (i) Taxpayer D is
single and has no dependents. The Exchange for D's rating area approves
advance credit payments for D based on 2014 household income of $39,095
(350 percent of the Federal poverty line for a family of one, applicable
percentage 9.5). D enrolls in a qualified health plan. The annual
premium for the applicable benchmark plan is $5,200. D's advance credit
payments are $1,486, computed as follows: benchmark plan premium of
$5,200 less contribution amount of $3,714 (projected household income of
$39,095 x .095) = $1,486.
(ii) D's actual household income for 2014 is $44,903, which is 402
percent of the Federal poverty line for a family of one. D is not an
applicable taxpayer and may not claim a premium tax credit.
Additionally, the repayment limitation of paragraph (a)(3) of this
section does not apply. Consequently, D has excess advance payments of
$1,486 (the total amount of the advance credit payments in 2014). Under
paragraph (a)(1) of this section, D's tax liability for 2014 is
increased by $1,486.
Example 6. Coverage for less than a full taxable year. (i) Taxpayer
F is single and has no dependents. In November 2013, the Exchange for
F's rating area projects F's 2014 household income to be $27,925 (250
percent of the Federal poverty line for a family of one, applicable
percentage 8.05). F enrolls in a qualified health plan. The annual
premium for the applicable benchmark plan is $5,200. F's monthly advance
credit payment is $246, computed as follows: benchmark plan premium of
$5,200 less contribution amount of $2,248 (projected household income of
$27,925 x .0805) = $2,952; $2,952/12 = $246.
(ii) F begins a new job in August 2014 and is eligible for employer-
sponsored minimum essential coverage for the period September through
December 2014. F discontinues her Exchange coverage effective November
1, 2014. F's household income for 2014 is $28,707 (257 percent of the
Federal poverty line for a family size of one, applicable percentage
8.25).
(iii) Under Sec. 1.36B-3(a), F's premium assistance credit amount
is the sum of the premium assistance amounts for the coverage months.
Under Sec. 1.36B-3(c)(1)(iii), a month in which an individual is
eligible for minimum essential coverage other than coverage in the
individual market is not a coverage month. Because F is eligible for
employer-sponsored minimum essential coverage as of September 1, only
the months January through August of 2014 are coverage months.
(iv) If F had 12 coverage months in 2014, F's premium tax credit
would be $2,832 (benchmark plan premium of $5,200 less contribution
amount of $2,368 (household income of $28,707 x .0825)). Because F has
only eight coverage months in 2014, F's credit is $1,888 ($2,832/12 x
8). Because F does not discontinue her Exchange coverage until November
1, 2014, F's advance credit payments for 2014 are $2,460 ($246 x 10).
Consequently, F has excess advance payments of $572 ($2,460 less $1,888)
and F's tax liability for 2014 is increased by $572 under paragraph
(a)(1) of this section.
Example 7. Changes in coverage months and applicable benchmark plan.
(i) Taxpayer E claims one dependent, F. E is eligible for government-
sponsored minimum essential coverage. E enrolls F in a qualified health
plan for 2014. The Exchange for E's rating area projects E's 2014
household income to be $30,260 (200 percent of the Federal poverty line
for a family of two, applicable percentage 6.3). The annual premium for
E's applicable benchmark plan is $5,200. E's monthly advance credit
payment is $275, computed as follows: benchmark plan premium of $5,200
less contribution amount of $1,906 (projected household income of
$30,260 x .063) = $3,294; $3,294/12 = $275.
[[Page 130]]
(ii) On August 1, 2014, E loses her eligibility for government-
sponsored minimum essential coverage. E enrolls in the qualified health
plan that covers F for August through December 2014. The annual premium
for the applicable benchmark plan is $10,000. The Exchange computes E's
monthly advance credit payments for the period September through
December to be $675 as follows: benchmark plan premium of $10,000 less
contribution amount of $1,906 (projected household income of $30,260 x
.063) = $8,094; $8,094/12 = $675. E's household income for 2014 is
$28,747 (190 percent of the Federal poverty line, applicable percentage
5.84).
(iii) Under Sec. 1.36B-3(c)(1), January through July of 2014 are
coverage months for F and August through December are coverage months
for E and F. Under paragraph (a)(2) of this section, E must compute her
premium tax credit using the premium for the applicable benchmark plan
for each coverage month. E's premium assistance credit amount for 2014
is the sum of the premium assistance amounts for all coverage months. E
reconciles her premium tax credit with advance credit payments as
follows:
Advance credit payments (Jan. to July)....... $1,925 ($275 x 7)
Advance credit payments (Aug. to Dec.)....... 3,375 ($675 x 5)
----------------
Total advance credit payments............ 5,300
Benchmark plan premium (Jan. to July)........ 3,033 (($5,200/12) x 7)
Benchmark plan premium (Aug. to Dec.)........ 4,167 (($10,000/12) x 5)
----------------
Total benchmark plan premium............. 7,200
Contribution amount (taxable year household 1,679 ($28,747 x .0584)
income x applicable percentage).
----------------
Credit (total benchmark plan premium less 5,521
contribution amount).
(iv) E's advance credit payments for 2014 are $5,300. E's premium
tax credit is $5,521. Thus, E is allowed an additional credit of $221.
Example 8. Part-year coverage and changes in coverage months and
applicable benchmark plan. (i) The facts are the same as in Example 7,
except that F is eligible for government-sponsored minimum essential
coverage for January and February 2014, and E enrolls F in a qualified
health plan beginning in March 2014. Thus, March through July are
coverage months for F and August through December are coverage months
for E and F.
(ii) E reconciles her premium tax credit with advance credit
payments as follows:
Advance credit payments (March to July)...... $1,375 ($275 x 5)
Advance credit payments (Aug. to Dec.)....... 3,375 ($675 x 5)
----------------
Total advance credit payments............ 4,750
Benchmark plan premium (March to July)....... 2,167 (($5,200/12) x 5)
Benchmark plan premium (Aug. to Dec.)........ 4,167 (($10,000/12) x 5)
----------------
Total benchmark plan premium............. 6,334
Contribution amount for 10 coverage months 1,399 ($28,747 x .0584 x 10/12)
(taxable year household income x applicable
percentage x 10/12).
----------------
Credit (total benchmark plan premium less 4,935
contribution amount).
(iii) E's advance credit payments for 2014 are $4,750. E's premium
tax credit is $4,935. Thus, E is allowed an additional credit of $185.
Example 9. Advance credit payments for months an issuer does not
provide coverage. (i) Taxpayer F enrolls in a qualified health plan for
2014 and the Exchange approves advance credit payments. F pays the
portion of the premium not covered by advance credit payments for
January through April of 2014 but fails to make payments in May, June,
and July. As a result, the issuer of the qualified health plan initiates
the 3-month grace period under section 1412(c)(2)(B)(iv)(II) of the
Affordable Care Act and 45 CFR 156.270(d). During the grace period the
issuer continues to receive advance credit payments on behalf
[[Page 131]]
of F. On July 1 the issuer rescinds F's coverage retroactive to the end
of the first month of the grace period, May 31.
(ii) Under paragraph (a)(1)(iii) of this section, F does not take
into account advance credit payments for June or July of 2014 when
reconciling the premium tax credit with advance credit payments under
paragraph (a)(1) of this section.
Example 10. [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(4), Example 10.
Example 11. [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(4), Example 11.
Example 12. [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(4), Example 12.
Example 13. [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(4), Example 13.
Example 14. [Reserved]. For further guidance, see Sec. 1.36B-
4T(a)(4), Example 14.
(b) Changes in filing status--(1) In general. Except as provided in
paragraph (b)(2) or (b)(3) of this section, a taxpayer whose marital
status changes during the taxable year computes the premium tax credit
by using the applicable benchmark plan or plans for the taxpayer's
marital status as of the first day of each coverage month. The
taxpayer's contribution amount (household income for the taxable year
times the applicable percentage) is determined using the taxpayer's
household income and family size at the end of the taxable year.
(2) Taxpayers who marry during the taxable year--(i) In general.
Taxpayers who marry during and file a joint return for the taxable year
may compute the additional tax imposed under paragraph (a)(1) of this
section under paragraph (b)(2)(ii) of this section. Only taxpayers who
are unmarried at the beginning of the taxable year and are married
(within the meaning of section 7703) at the end of the taxable year, at
least one of whom receives advance credit payments, may use this
alternative computation.
(ii) Alternative computation of additional tax liability--(A) In
general. The additional tax liability determined under this paragraph
(b)(2)(ii) is equal to the excess of the taxpayers' advance credit
payments for the taxable year over the amount of the alternative
marriage-year credit. The alternative marriage-year credit is the sum of
both taxpayers' alternative premium assistance amounts for the pre-
marriage months and the premium assistance amounts for the marriage
months. This paragraph (b)(2)(ii) may not be used to increase the
additional premium tax credit computed under paragraph (a)(1)(i) of this
section.
(B) Alternative premium assistance amounts for pre-marriage months.
Taxpayers compute the alternative premium assistance amounts for each
taxpayer for each full or partial month the taxpayers are unmarried as
described in paragraph (a)(2) of this section, except that each taxpayer
treats the amount of household income as one-half of the actual
household income for the taxable year and treats family size as the
number of individuals in the taxpayer's family prior to the marriage.
The taxpayers may include a dependent of the taxpayers for the taxable
year in either taxpayer's family size for the pre-marriage months.
(C) Premium assistance amounts for marriage months. Taxpayers
compute the premium assistance amounts for each full month the taxpayers
are married as described in paragraph (a)(2) of this section.
(3) [Reserved]. For further guidance, see Sec. 1.36B-4T(b)(3).
(4) [Reserved]. For further guidance, see Sec. 1.36B-4T(b)(4).
(5) Examples. The following examples illustrate the provisions of
this paragraph (b). In each example the taxpayer enrolls in a higher
cost qualified health plan than the applicable benchmark plan:
Example 1. Taxpayers marry during the taxable year, general rule for
computing additional tax. (i) P is a single taxpayer with no dependents.
In 2013 the Exchange for the rating area where P resides determines that
P's 2014 household income will be $40,000 (358 percent of the Federal
poverty line, applicable percentage 9.5). P enrolls in a qualified
health plan. The premium for the applicable benchmark plan is $5,200.
P's monthly advance credit payment is $117, computed as follows: $5,200
benchmark plan premium minus contribution amount of $3,800 ($40,000 x
.095) equals $1,400 (total advance credit payment); $1,400/12 = $117.
(ii) Q is a single taxpayer with two dependents. In 2013 the
Exchange for the rating area where Q resides determines that Q's 2014
[[Page 132]]
household income will be $35,000 (183 percent of the Federal poverty
line, applicable percentage 5.52). Q enrolls in a qualified health plan.
The premium for the applicable benchmark plan is $10,000. Q's monthly
advance credit payment is $672, computed as follows: $10,000 benchmark
plan premium minus contribution amount of $1,932 ($35,000 x .0552)
equals $8,068 (total advance credit); $8,068/12 = $672.
(iii) P and Q marry on July 17, 2014 and enroll in a single policy
for a qualified health plan covering four family members, effective
August 1, 2014. The premium for the applicable benchmark plan is
$14,000. Based on household income of $75,000 and a family size of four
(325 percent of the Federal poverty line, applicable percentage 9.5),
the Exchange approves advance credit payments of $573 per month,
computed as follows: $14,000 benchmark plan premium minus contribution
amount of $7,125 ($75,000 x .095) equals $6,875 (total advance credit);
$6,875/12 = $573.
(iv) P and Q file a joint return for 2014 and report $75,000 in
household income and a family size of four. P and Q compute their credit
at reconciliation under paragraph (b)(1) of this section. They use the
premiums for the applicable benchmark plans that apply for the months
married and the months not married, and their contribution amount is
based on their Federal poverty line percentage at the end of the taxable
year. P and Q reconcile their premium tax credit with advance credit
payments as follows:
Advance payments for P (Jan. to July)................... $819
Advance payments for Q (Jan. to July)................... 4,704
Advance payments for P and Q (Aug. to Dec.)............. 2,865
---------------
Total advance payments.............................. 8,388
===============
Benchmark plan premium for P (Jan. to July)............. 3,033
Benchmark plan premium for Q (Jan. to July)............. 5,833
Benchmark plan premium for P and Q (Aug. to Dec.)....... 5,833
---------------
Total benchmark plan premium........................ 14,699
===============
Contribution amount (taxable year household income x 7,125
applicable percentage).................................
---------------
Credit (total benchmark plan premium less 7,574
contribution amount)...............................
Additional tax.......................................... 814
(v) P's and Q's tax liability for 2014 is increased by $814 under
paragraph (a)(1) of this section.
Example 2. Taxpayers marry during the taxable year, alternative
computation of additional tax. (i) The facts are the same as in Example
1, except that P and Q compute their additional tax liability under
paragraph (b)(2)(ii) of this section. P's and Q's additional tax is the
excess of their advance credit payments for the taxable year ($8,388)
over their alternative marriage-year credit, which is the sum of the
alternative premium assistance amounts for the pre-marriage months and
the premium assistance amounts for the marriage months.
(ii) P and Q compute the alternative marriage-year credit as
follows:
Alternative premium assistance amounts for
pre-marriage months:
Benchmark plan premium for P (Jan. to $3,033 (($5,200/12) x 7)
July).
Contribution amount (\1/2\ taxable year 2,078 ($37,500 x .095 x 7/12)
household income x applicable
percentage) x 7/12).
Alternative premium assistance amount for 955 ($3,033-$2,078)
P's pre-marriage months.
Benchmark plan premium for Q (Jan. to 5,833 (($10,000/12) x 7)
July).
Contribution amount (\1/2\ taxable year 1,339 ($37,500 x .0612 x 7/12)
household income x applicable percentage
x 7/12).
Alternative premium assistance amount for 4,494 ($5,833-$1,339)
Q's pre-marriage months.
Premium assistance amount for marriage
months:
Benchmark plan premium for P and Q (Aug. 5,833 (($14,000/12 x 5)
to Dec.).
[[Page 133]]
Contribution amount (taxable year 2,969 ($75,000 x .095 x 5/12)
household income x applicable percentage
x 5/12).
Premium assistance amount for marriage 2,864 ($5,833-$2,969)
months.
Alternative marriage-year credit (sum of premium assistance amounts
for pre-marriage months and marriage months): $955 + $4,494 + $2,864 =
$8,313.
(iii) P and Q reconcile their premium tax credit with advance credit
payments by determining the excess of their advance credit payments
($8,388) over their alternative marriage-year credit ($8,313). P and Q
must increase their tax liability by $75 under paragraph (a)(1) of this
section.
Example 3. Taxpayers marry during the taxable year, alternative
computation of additional tax, alternative marriage-year tax credit
exceeds advance credit payments. The facts are the same as in Example 2,
except that the amount of P's and Q's advance credit payments is $8,301.
Thus, their alternative marriage-year credit ($8,313) exceeds the amount
of their advance credit payments ($8,301). Under paragraph (b)(2)(ii)(A)
of this section, the amount of additional tax liability and additional
tax credit that P and Q report on their tax return is $0.
Example 4. Taxpayers marry during the taxable year, alternative
computation of additional tax. (i) Taxpayer R is single and has no
dependents. In 2013, the Exchange for the rating area where R resides
determines that R's 2014 household income will be $40,000 (358 percent
of the Federal poverty line, applicable percentage 9.5). R enrolls in a
qualified health plan. The premium for the applicable benchmark plan is
$5,200. R's monthly advance credit payment is $117, computed as follows:
$5,200 benchmark plan premium minus contribution amount of $3,800
($40,000 x .095) = $1,400 (total advance credit); $1,400/12 = $117.
(ii) Taxpayer S is single with no dependents. In 2013, the Exchange
for the rating area where S resides determines that S's 2014 household
income will be $20,000 (179 percent of the Federal poverty line,
applicable percentage 5.33). S enrolls in a qualified health plan. The
premium for the applicable benchmark plan is $5,200. S's monthly advance
credit payment is $345, computed as follows: $5,200 benchmark plan
premium minus contribution amount of $1,066 ($20,000 x .0533) = $4,134
(total advance credit); $4,134/12 = $345.
(iii) R and S marry in September 2014 and enroll in a single policy
for a qualified health plan covering them both, beginning October 1,
2014. The premium for the applicable benchmark plan is $10,000. Based on
household income of $60,000 and a family size of two (397 percent of the
Federal poverty line, applicable percentage 9.5), R's and S's monthly
advance credit payment is $358, computed as follows: $10,000 benchmark
plan premium minus contribution amount of $5,700 ($60,000 x .095) =
$4,300; $4,300/12 = $358. R's and S's advance credit payments for 2014
are $5,232, computed as follows:
Advance payments for R (Jan. to Sept.)....... $1,053 ($117 x 9)
Advance payments for S (Jan. to Sept.)....... 3,105 ($345 x 9)
Advance payments for R and S (Oct. to Dec.).. 1,074 ($358 x 3)
-----------------
Total advance payments................... 5,232
(iv) R and S file a joint return for 2014 and report $62,000 in
household income and a family size of two (410 percent of the FPL for a
family of 2). Thus, under Sec. 1.36B-2(b)(2), R and S are not
applicable taxpayers for 2014 and may not claim a premium tax credit for
2014. However, they compute their additional tax liability under
paragraph (b)(2)(ii) of this section. R's and S's additional tax is the
excess of their advance credit payments for the taxable year ($5,232)
over their alternative marriage-year credit, which is the sum of the
alternative premium assistance amounts for the pre-marriage months and
the premium assistance amounts for the marriage months. In this case, R
and S have no premium assistance amounts for the married months because
their household income is over 400 percent of the Federal poverty line
for a family of 2.
(v) R and S compute their alternative marriage-year credit as
follows:
Premium assistance amount for pre-marriage
months:
Benchmark plan premium for R (Jan. to $3,900 (($5,200/12) x 9)
Sept.).
Contribution amount ((\1/2\ taxable year 2,053 ($31,000 x .0883 x 9/12)
household income x applicable
percentage) x 9/12).
[[Page 134]]
Premium assistance amount for R's pre- 1,847 ($3,900 - $2,053)
marriage months.
Benchmark plan premium for S (Jan. to 3,900 (($5,200/12) x 9)
Sept.).
Contribution amount ((\1/2\ taxable year 2,053 ($31,000 x .0883 x 9/12)
household income x applicable
percentage) x 9/12).
Premium assistance amount for S's pre- 1,847 ($3,900-$2,053)
marriage months.
Premium assistance amount for marriage months 0
Alternative marriage-year credit (sum of premium assistance amounts
for pre-marriage months and marriage months): $1,847 + 1,847 + 0 =
$3,694.
(vi) R and S reconcile their premium tax credit with advance credit
payments by determining the excess of their advance credit payments
($5,232) over their alternative marriage-year credit ($3,694). R and S
must increase their tax liability by $1,538 under paragraph (a)(1) of
this section.
Example 5. (i) Taxpayers marry during the taxable year, no
additional tax liability. The facts are the same as in Example 4, except
that S has no income and is enrolled in Medicaid for January through
September 2014 and R's and S's household income for 2014 is $37,000 (245
percent of the Federal poverty line, applicable percentage 7.88). Their
advance credit payments for 2014 are $2,707 ($1,053 for R for January to
September and $1,654 for R and S for October to December). Their premium
tax credit for 2014 is $3,484 (total benchmark premium of $6,400 less
contribution amount of $2,916).
(ii) Because R's and S's premium tax credit of $3,484 exceeds their
advance credit payments of $2,707, R and S are allowed an additional
credit of $777. Although R and S marry in 2014, paragraph (b)(2) of this
section (the alternative computation of additional tax for taxpayers who
marry during the taxable year) does not apply because they do not owe
additional tax for 2014.
Example 6. Taxpayers divorce during the taxable year, 50 percent
allocation. (i) Taxpayers V and W are married and have two dependents.
In 2013, the Exchange for the rating area where the family resides
determines that their 2014 household income will be $76,000 (330 percent
of the Federal poverty line for a family of 4, applicable percentage
9.5). V and W enroll in a qualified health plan for 2014. The premium
for the applicable benchmark plan is $14,100. The Exchange approves
advance credit payments of $573 per month, computed as follows: $14,100
benchmark plan premium minus V and W's contribution amount of $7,220
($76,000 x .095) equals $6,880 (total advance credit); $6,880/12 = $573.
(ii) V and W divorce on June 17, 2014, and obtain separate qualified
health plans beginning July 1, 2014. V enrolls based on household income
of $60,000 and a family size of three (314 percent of the Federal
poverty line, applicable percentage 9.5). The premium for the applicable
benchmark plan is $10,000. The Exchange approves advance credit payments
of $358 per month, computed as follows: $10,000 benchmark plan premium
minus V's contribution amount of $5,700 ($60,000 x .095) equals $4,300
(total advance credit); $4,300/12 = $358.
(iii) W enrolls based on household income of $16,420 and a family
size of one (147 percent of the Federal poverty line, applicable
percentage 3.82). The premium for the applicable benchmark plan is
$5,200. The Exchange approves advance credit payments of $381 per month,
computed as follows: $5,200 benchmark plan premium minus W's
contribution amount of $627 ($16,420 x .0382) equals $4,573 (total
advance credit); $4,573/12 = $381. V and W do not agree on an allocation
of the premium for the applicable benchmark plan, the premiums for the
plan in which they enroll, and the advance credit payments for the
period they were married in the taxable year.
(iv) V and W each compute their credit at reconciliation under
paragraph (b)(1) of this section, using the premiums for the applicable
benchmark plans that apply to them for the months married and the months
not married, and the contribution amount based on their Federal poverty
line percentages at the end of the taxable year. Under paragraph (b)(3)
of this section, because V and W do not agree on an allocation, V and W
must equally allocate the benchmark plan premium ($7,050) and the
advance credit payments ($3,438) for the six-month period January
through June 2014 when they are married and enrolled in the same
qualified health plan. Thus, V and W each are allocated $3,525 of the
benchmark plan premium ($7,050/2) and $1,719 of the advance credit
payments ($3,438/2) for January through June.
(v) V reports on his 2014 tax return $60,000 in household income and
family size of three. W reports on her 2014 tax return $16,420 in
household income and family size of one. V and W reconcile their premium
tax credit with advance credit payments as follows:
[[Page 135]]
------------------------------------------------------------------------
V W
------------------------------------------------------------------------
Allocated advance payments (Jan. to June)..... $1,719 $1,719
Actual advance payments (July to Dec.)........ 2,148 2,286
-------------------------
Total advance payments.................... 3,867 4,005
Allocated benchmark plan premium (Jan. to 3,525 3,525
June)........................................
Actual benchmark plan premium (July to Dec.).. 5,000 2,600
-------------------------
Total benchmark plan premium.............. 8,525 6,125
Contribution amount (taxable year household 5,700 627
income x applicable percentage)..............
-------------------------
Credit (total benchmark plan premium less 2,825 5,498
contribution amount).....................
Additional credit............................. ........... 1,493
Additional tax................................ 1,042 ...........
------------------------------------------------------------------------
(vi) Under paragraph (a)(1) of this section, on their tax returns
V's tax liability is increased by $1,042 and W is allowed $1,493 as
additional credit.
Example 7. Taxpayers divorce during the taxable year, allocation in
proportion to household income. (i) The facts are the same as in Example
6, except that V and W decide to allocate the benchmark plan premium
($7,050) and the advance credit payments ($3,438) for January through
June 2014 in proportion to their household incomes (79 percent and 21
percent). Thus, V is allocated $5,570 of the benchmark plan premiums
($7,050 x .79) and $2,716 of the advance credit payments ($3,438 x .79),
and W is allocated $1,481 of the benchmark plan premiums ($7,050 x .21)
and $722 of the advance credit payments ($3,438 x .21). V and W
reconcile their premium tax credit with advance credit payments as
follows:
------------------------------------------------------------------------
V W
------------------------------------------------------------------------
Allocated advance payments (Jan. to June)..... $2,716 $722
Actual advance payments (July to Dec.)........ 2,148 2,286
-------------------------
Total advance payments.................... 4,864 3,008
Allocated benchmark plan premium (Jan. to 5,570 1,481
June)........................................
Actual benchmark plan premium (July to Dec.).. 5,000 2,600
-------------------------
Total benchmark plan premium.............. 10,570 4,081
Contribution amount (taxable year household 5,700 627
income x applicable percentage)..............
-------------------------
Credit (total benchmark plan premium less 4,870 3,454
contribution amount).....................
Additional credit............................. 6 446
------------------------------------------------------------------------
(ii) Under paragraph (a)(1) of this section, on their tax returns V
is allowed an additional credit of $6 and W is allowed an additional
credit of $446.
Example 8. Married taxpayers filing separate tax returns. (i)
Taxpayers X and Y are married and have two dependents. In 2013, the
Exchange for the rating area where the family resides determines that
their 2014 household income will be $76,000 (330 percent of the Federal
poverty line for a family of 4, applicable percentage 9.5). W and Y
enroll in a qualified health plan for 2014. The premium for the
applicable benchmark plan is $14,100. X's and Y's monthly advance credit
payment is $573, computed as follows: $14,100 benchmark plan premium
minus X's and Y's contribution amount of $7,220 ($76,000 x .095) equals
$6,880 (total advance credit); $6,880/12 = $573.
(ii) X and Y file income tax returns for 2014 using a married filing
separately filing status. X reports household income of $60,000 and a
family size of three (314 percent of the Federal poverty line). Y
reports household income of $16,420 and a family size of one (147
percent of the Federal poverty line).
(iii) Because X and Y are married but do not file a joint return for
2014, X and Y are not applicable taxpayers and are not allowed a premium
tax credit for 2014. See Sec. 1.36B-2(b)(2). Under paragraph (b)(4) of
this section, half of the advance credit payments ($6,880/2 = $3,440) is
allocated to X and half is allocated to Y for purposes of determining
their excess advance payments. The repayment limitation described in
paragraph (a)(3) of this section applies to X and Y based on the
household income and family size reported on each return. Consequently,
X's tax liability for 2014 is increased by $2,500 and Y's tax liability
for 2014 is increased by $600.
Example 9. [Reserved]. For further guidance, see Sec. 1.36B-
4T(b)(5), Example 9.
[[Page 136]]
Example 10. [Reserved]. For further guidance, see Sec. 1.36B-
4T(b)(5), Example 10.
(c) [Reserved]. For further guidance, see Sec. 1.36B-4T(c).
[T.D. 9590, 77 FR 30385, May 23, 2012; 77 FR 41048, July 12, 2012; 77 FR
41270, July 13, 2012, as amended by T.D. 9683, 79 FR 43627, July 28,
2014]
Sec. 1.36B-4T Reconciling the premium tax credit with advance credit
payments (temporary).
(a)(1)(i) [Reserved]. For further guidance, see Sec. 1.36B-
4(a)(1)(i).
(ii) Allocation rules and responsibility for advance credit
payments--(A) In general. A taxpayer must reconcile all advance credit
payments for coverage of any member of the taxpayer's family.
(B) Individuals enrolled by a taxpayer and claimed as a personal
exemption deduction by another taxpayer--(1) In general. If a taxpayer
(the enrolling taxpayer) enrolls an individual in a qualified health
plan and another taxpayer (the claiming taxpayer) claims a personal
exemption deduction for the individual (the shifting enrollee), then for
purposes of computing each taxpayer's premium tax credit and reconciling
any advance credit payments, the premiums and advance credit payments
for the plan in which the shifting enrollee was enrolled are allocated
under this paragraph (a)(1)(ii)(B) according to the allocation
percentage described in paragraph (a)(1)(ii)(B)(2) of this section. If
advance credit payments are allocated under paragraph (a)(1)(ii)(B)(4)
of this section, the claiming taxpayer and enrolling taxpayer must use
this same allocation percentage to calculate their Sec. 1.36B-3(d)(2)
adjusted monthly premiums for the applicable benchmark plan (benchmark
plan premiums). This paragraph (a)(1)(ii)(B) does not apply to amounts
allocated under Sec. 1.36B-3(h) (qualified health plan covering more
than one family) or if the shifting enrollee or enrollees are the only
individuals enrolled in the qualified health plan. For purposes of this
paragraph (a)(1)(ii)(B)(1), a taxpayer who is expected at enrollment in
a qualified health plan to be the taxpayer filing an income tax return
for the year of coverage with respect to an individual enrolling in the
plan has enrolled that individual.
(2) Allocation percentage. The enrolling taxpayer and claiming
taxpayer may agree on any allocation percentage between zero and one
hundred percent. If the enrolling taxpayer and claiming taxpayer do not
agree on an allocation percentage, the percentage is equal to the number
of shifting enrollees claimed as a personal exemption deduction by the
claiming taxpayer divided by the number of individuals enrolled by the
enrolling taxpayer in the same qualified health plan as the shifting
enrollee.
(3) Allocating premiums. In computing the premium tax credit, the
claiming taxpayer is allocated a portion of the premiums for the plan in
which the shifting enrollee was enrolled equal to the premiums for the
plan times the allocation percentage. The enrolling taxpayer is
allocated the remainder of the premiums not allocated to one or more
claiming taxpayers.
(4) Allocating advance credit payments. In reconciling any advance
credit payments, the claiming taxpayer is allocated a portion of the
advance credit payments for the plan in which the shifting enrollee was
enrolled equal to the enrolling taxpayer's advance credit payments for
the plan times the allocation percentage. The enrolling taxpayer is
allocated the remainder of the advance credit payments not allocated to
one or more claiming taxpayers. This paragraph (a)(1)(ii)(B)(4) only
applies in situations in which advance credit payments are made for
coverage of a shifting enrollee.
(5) Premiums for the applicable benchmark plan. If paragraph
(a)(1)(ii)(B)(4) of this section applies, the claiming taxpayer's
benchmark plan premium is the sum of the benchmark plan premium for the
claiming taxpayer's coverage family, excluding the shifting enrollee or
enrollees, and the allocable portion. The allocable portion for purposes
of this paragraph (a)(1)(ii)(B)(5) is the product of the benchmark plan
premium for the enrolling taxpayer's coverage family if the shifting
enrollee was a member of the enrolling taxpayer's coverage family and
the allocation percentage. If the enrolling taxpayer's coverage family
is enrolled in
[[Page 137]]
more than one qualified health plan, the allocable portion is determined
as if the enrolling taxpayer's coverage family includes only the
coverage family members who enrolled in the same plan as the shifting
enrollee or enrollees. The enrolling taxpayer's benchmark plan premium
is the benchmark plan premium for the enrolling taxpayer's coverage
family had the shifting enrollee or enrollees remained a part of the
enrolling taxpayer's coverage family, minus the allocable portion.
(C) Responsibility for advance credit payments for an individual for
whom no personal exemption deduction is claimed. If advance credit
payments are made for coverage of an individual for whom no taxpayer
claims a personal exemption deduction, the taxpayer who attested to the
Exchange to the intention to claim a personal exemption deduction for
the individual as part of the advance credit payment eligibility
determination for coverage of the individual must reconcile the advance
credit payments.
(a)(1)(iii) through (a)(3)(ii) [Reserved]. For further guidance, see
Sec. 1.36B-4(a)(1)(iii) through (a)(3)(ii).
(iii) Limitation on additional tax for taxpayers who claim a section
162(l) deduction for a qualified health plan--(A) In general. A taxpayer
who receives advance credit payments and deducts premiums for a
qualified health plan under section 162(l) must use paragraphs
(a)(3)(iii)(B) and (C) of this section to determine the limitation on
additional tax in this paragraph (a)(3) (limitation amount). Taxpayers
must make this determination before calculating their section 162(l)
deduction and premium tax credit. For additional rules for taxpayers who
may claim a deduction under section 162(l) for a qualified health plan
for which advance credit payments are made, see Sec. 1.162(l)-1T.
(B) Determining the limitation amount. A taxpayer described in
paragraph (a)(3)(iii)(A) of this section must use the limitation amount
for which the taxpayer qualifies under the requirements of paragraph
(a)(3)(iii)(C) of this section. The limitation amount determined under
this paragraph (a)(3)(iii) replaces the limitation amount that would
otherwise be determined under the additional tax limitation table in
paragraph (a)(3)(ii) of this section. In applying paragraph
(a)(3)(iii)(C) of this section, a taxpayer must first determine whether
he or she qualifies for the limitation amount applicable to taxpayers
with household income of less than 200 percent of the Federal poverty
line for the taxpayer's family size. If the taxpayer is unable to meet
the requirements of paragraph (a)(3)(iii)(C) of this section for that
limitation amount, the taxpayer must next determine whether he or she
qualifies for the limitation applicable to taxpayers with household
income of less than 300 percent of the Federal poverty line for the
taxpayer's family size. If the taxpayer is unable to meet the
requirements of paragraph (a)(3)(iii)(C) of this section for taxpayers
with household income of less than 300 percent of the Federal poverty
line for the taxpayer's family size, the taxpayer must next determine
whether he or she qualifies for the limitation applicable to taxpayers
with household income of less than 400 percent of the Federal poverty
line for the taxpayer's family size. If the taxpayer is unable to meet
the requirements of paragraph (a)(3)(iii)(C) of this section for any
limitation amount, the limitation on additional tax under section
36B(f)(2)(B) does not apply to the taxpayer.
(C) Requirements. A taxpayer meets the requirements of this
paragraph (a)(3)(iii)(C) for a limitation amount if the taxpayer's
household income as a percentage of the Federal poverty line is less
than or equal to the maximum household income as a percentage of the
Federal poverty line for which that limitation is available. Household
income for this purpose is determined by using a section 162(l)
deduction equal to the sum of the specified premiums for the plan not
paid through advance credit payments and the limitation amount in
addition to any deduction allowable under section 162(l) for premiums
other than specified premiums. For purposes of this paragraph
(a)(3)(iii)(C), specified premiums not paid through advance credit
payments means specified premiums, as defined in Sec. 1.162(l)-
1T(a)(2), minus advance
[[Page 138]]
credit payments made with respect to the specified premiums.
(D) Examples. For examples illustrating the rules of this paragraph
(a)(3)(iii), see Examples 13 and 14 of paragraph (a)(4) of this section.
(a)(4), Example 1, through Example 3 [Reserved]. For further
guidance, see Sec. 1.36B-4(a)(4), Example 1 through Example 3.
Example 4. Family size decreases. (i) Taxpayers B and C are married
and have two children, K and L (ages 17 and 20), whom they claim as
dependents in 2013. The Exchange for their rating area projects their
2014 household income to be $63,388 (275 percent of the Federal poverty
line for a family of four, applicable percentage 8.78). B and C enroll
in a qualified health plan for 2014 that covers the four family members.
The annual premium for the applicable benchmark plan is $14,100. B's and
C's advance credit payments for 2014 are $8,535, computed as follows:
benchmark plan premium of $14,100 less contribution amount of $5,565
(projected household income of $63,388 x .0878) = $8,535.
(ii) In 2014, B and C do not claim L as their dependent (and no
taxpayer claims a personal exemption deduction for L). Consequently, B's
and C's family size for 2014 is three, their household income of $63,388
is 332 percent of the Federal poverty line for a family of three
(applicable percentage 9.5), and the annual premium for their applicable
benchmark plan is $12,000. Their premium tax credit for 2014 is $5,978
($12,000 benchmark plan premium less $6,022 contribution amount
(household income of $63,388 x .095)). Because B's and C's advance
credit payments for 2014 are $8,535 and their 2014 credit is $5,978, B
and C have excess advance payments of $2,557. B's and C's additional tax
liability for 2014 under paragraph (a)(1) of this section, however, is
limited to $2,500 under paragraph (a)(3) of this section.
Example 5 through Example 9 [Reserved]. For further guidance, see
1.36B-4(a)(4), Example 5 through Example 9.
Example 10. Allocation percentage, agreement on allocation. (i)
Taxpayers G and H are divorced and have two children, J and K. G enrolls
herself and J and K in a qualified health plan for 2014. The premium for
the plan in which G enrolls is $13,000. The Exchange in G's rating area
approves advance credit payments for G based on a family size of three,
an annual benchmark plan premium of $12,000 and projected 2014 household
income of $58,590 (300 percent of the Federal poverty line for a family
of three, applicable percentage 9.5). G's advance credit payments for
2014 are $6,434 ($12,000 benchmark plan premium less $5,566 contribution
amount (household income of $58,590 x .095)). G's actual household
income for 2014 is $58,900.
(ii) K lives with H for more than half of 2014 and H claims K as a
dependent for 2014. G and H agree to an allocation percentage, as
described in paragraph (a)(1)(ii)(B)(2) of this section, of 20 percent.
Under the agreement, H is allocated 20 percent of the items to be
allocated and G is allocated the remainder of those items.
(iii) If H is eligible for a premium tax credit, H takes into
account $2,600 of the premiums for the plan in which K was enrolled
($13,000 x .20) and $2,400 of G's benchmark plan premium ($12,000 x
.20). In addition, H is responsible for reconciling $1,287 ($6,434 x
.20) of the advance credit payments for K's coverage.
(iv) G's family size for 2014 includes only G and J and G's
household income of $58,900 is 380 percent of the Federal poverty line
for a family of two (applicable percentage 9.5). G's benchmark plan
premium for 2014 is $9,600 (the benchmark premium for the plan covering
G, J and K ($12,000), minus the amount allocated to H ($2,400).
Consequently, G's premium tax credit is $4,004 (G's benchmark plan
premium of $9,600 minus G's contribution amount of $5,596 ($58,900 x
.095)). G has an excess advance payment of $1,143 (the excess of the
advance credit payments of $5,147 ($6,434 - $1,287 allocated to H) over
the premium tax credit of $4,004).
Example 11. Allocation percentage, no agreement on allocation. (i)
The facts are the same as in Example 10, except that G and H do not
agree on an allocation percentage. Under paragraph (a)(1)(ii)(B)(2) of
this section, the allocation percentage is 33 percent, computed as
follows: The number of shifting enrollees, 1 (K), divided by the number
of individuals enrolled by the enrolling taxpayer on the same qualified
health plan as the shifting enrollee, 3 (G,J, and K). Thus, H is
allocated 33 percent of the items to be allocated and G is allocated the
remainder of those items.
(ii) If H is eligible for a premium tax credit, H takes into account
$4,290 of the premiums for the plan in which K was enrolled ($13,000 x
.33). H, in computing H's benchmark plan premium must include $3,960 of
G's benchmark plan premium ($12,000 x .33). In addition, H is
responsible for reconciling $2,123 ($6,434 x .33) of the advance credit
payments for K's coverage.
(iii) G's benchmark plan premium for 2014 is $8,040 (the benchmark
premium for the plan covering G, J, and K ($12,000), minus the amount
allocated to H ($3,960). Consequently, G's premium tax credit is $2,444
(G's benchmark plan premium of $8,040 minus G's contribution amount of
$5,596 ($58,900 x .095)). G has an excess advance credit payment of
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$1,867 (the excess of the advance credit payments of $4,311 ($6,434 -
$2,123 allocated to H) over the premium tax credit of $2,444).
Example 12. Allocations for an emancipated child. Spouses L and M
enroll in a qualified health plan with their child, N. L and M attest
that they will claim N as a dependent and advance credit payments are
made for the coverage of all three family members. However, N files his
own return and claims a personal exemption deduction for himself for the
taxable year. Under paragraph (a)(1)(ii)(B)(1) of this section, L and M
are enrolling taxpayers, N is a claiming taxpayer and all are subject to
the allocation rules in paragraph (a)(1)(ii)(B) of this section.
Example 13. Taxpayer with advance credit payments allowed a section
162(l) deduction but not a limitation on additional tax. (i) In 2014, B,
B's spouse, and their two dependents enroll in the applicable second
lowest cost silver plan with an annual premium of $14,000. B's advance
credit payments attributable to the premiums are $8,000. B is self-
employed for all of 2014 and derives $75,000 of earnings from B's trade
or business. B's household income without including a deduction under
section 162(l) for specified premiums is $103,700. The Federal poverty
line for a family the size of B's family is $23,550.
(ii) Because B received advance credit payments and deducts premiums
for a qualified health plan under section 162(l), B must determine
whether B is allowed a limitation on additional tax under paragraph
(a)(3)(iii) of this section. B begins by testing eligibility for the
$600 limitation amount for taxpayers with household income at less than
200 percent of the Federal poverty line for the taxpayer's family size.
B determines household income as a percentage of the Federal poverty
line by taking a section 162(l) deduction equal to the sum of the amount
of premiums not paid through advance credit payments, $6,000 ($14,000-
$8,000), and the limitation amount, $600. The result is $97,100
($103,700-$6,600) or 412 percent of the Federal poverty line for B's
family size. Since 412 percent is not less than 200 percent, B may not
use a $600 limitation amount.
(iii) B performs the same calculation for the $1,500 ($103,700-
$7,500 = $96,200 or 408 percent of the Federal poverty line) and $2,500
limitation amounts ($103,700-$8,500 = $95,200 or 404 percent of the
Federal poverty line), the amounts for taxpayers with household income
of less than 300 percent or 400 percent, respectively, of the Federal
poverty line for the taxpayer's family size, and determines that B may
not use either of those limitation amounts. Because B does not meet the
requirements of paragraph (a)(3)(iii) of this section for any of the
limitation amounts in section 36B(f)(2)(B), B is not eligible for the
limitation on additional tax for excess advance credit payments.
(iv) Although B may not claim a limitation on additional tax for
excess advance credit payments, B may still be eligible for a premium
tax credit. B would determine eligibility for the premium tax credit and
the amounts of the premium tax credit and the section 162(l) deduction
using other rules, including the regulations under section 36B and
section 162(l), applying no limitation on additional tax.
Example 14. Taxpayer with advance credit payments allowed a section
162(l) deduction and a limitation on additional tax. (i) Same facts as
Example 13, except that B's household income without including a
deduction under section 162(l) for specified premiums is $78,802.
(ii) Because B received advance credit payments and deducts premiums
for a qualified health plan under section 162(l), B must determine
whether B is allowed a limitation on additional tax under paragraph
(a)(3)(iii) of this section. B first determines that B does not meet the
requirements of paragraph (a)(3)(iii)(C) of this section for using the
$600 or $1,500 limitation amounts, the amounts for taxpayers with
household income of less than 200 percent or 300 percent, respectively,
of the Federal poverty line for the taxpayer's family size. That is
because B's household income as a percentage of the Federal poverty
line, determined by using a section 162(l) deduction for premiums for
the qualified health plan equal to the sum of the premiums for the plan
not paid through advance credit payments and the limitation amount, is
more than the maximum household income as a percentage of the Federal
poverty line for which that limitation is available (using the $600
limitation, B's household income would be $72,202 ($78,802-($6,000 +
$600)), which is 307 percent of the Federal poverty line for B's family
size; and using the $1,500 limitation, B's household income would be
$71,302 ($78,802-($6,000 + $1,500)), which is 303 percent of the Federal
poverty line for B's family size).
(iii) However, B meets the requirements of paragraph (a)(3)(iii)(C)
of this section using the $2,500 limitation amount for taxpayers with
household income of less than 400 percent of the Federal poverty line
for the taxpayer's family size. This is because B's household income as
a percentage of the Federal poverty line by taking a section 162(l)
deduction equal to the sum of the amount of premiums not paid through
advance credit payments, $6,000, and the limitation amount, $2,500, is
$70,302 (299 percent of the Federal poverty line), which is below 400
percent of the Federal poverty line for B's family size, and is less
than the maximum amount for which that limitation is available. Thus, B
uses a limitation amount of $2,500 in computing B's additional tax on
excess advance credit payments.
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(iv) B may then determine the amount of the premium tax credit and
section 162(l) deduction using the rules under section 36B and section
162(l), applying the $2,500 limitation amount determined above.
(b)(1) through (b)(2) [Reserved]. For further guidance, see Sec.
1.36B-4(b)(1) through (b)(2).
(3) Taxpayers not married to each other at the end of the taxable
year. Taxpayers who are married (within the meaning of section 7703) to
each other during a taxable year but legally separate under a decree of
divorce or of separate maintenance during the taxable year, and who are
enrolled in the same qualified health plan at any time during the
taxable year must allocate the benchmark plan premium, the premium for
the plan in which the taxpayers enroll, and the advance credit payments
for the period the taxpayers are married during the taxable year.
Taxpayers must also allocate these items if one of the taxpayers has a
dependent enrolled in the same plan as the taxpayer's former spouse or
enrolled in the same plan as a dependent of the taxpayer's former
spouse. The taxpayers may allocate these items to each former spouse in
any proportion but must allocate all items in the same proportion. If
the taxpayers do not agree on an allocation that is reported to the IRS
in accordance with the relevant forms and instructions, 50 percent of
the premium for the applicable benchmark plan, the premium for the plan
in which the taxpayers enroll, and the advance credit payments for the
married period are allocated to each taxpayer. If for a period a plan
covers only one of the taxpayers and no dependents, only one of the
taxpayers and one or more dependents of that same taxpayer, or only one
or more dependents of one of the taxpayers, then the benchmark plan
premium, the premium for the plan in which the taxpayers enroll, and the
advance credit payments for that period are allocated entirely to that
taxpayer.
(4) Taxpayers filing returns as married filing separately or head of
household--(i) Allocation of advance credit payments. Except as provided
in Sec. 1.36B-2(b)(2)(ii), the premium tax credit is allowed to married
(within the meaning of section 7703) taxpayers only if they file joint
returns. See Sec. 1.36B-2(b)(2)(i). Taxpayers who receive advance
credit payments as married taxpayers and do not file a joint return must
allocate the advance credit payments for coverage under a qualified
health plan equally to each taxpayer for any period the plan covers and
advance credit payments are made for both taxpayers, only one of the
taxpayers and one or more dependents of the other taxpayer, or one or
more dependents of both taxpayers. If for a period a plan covers or
advance credit payments are made for only one of the taxpayers and no
dependents, only one of the taxpayers and one or more dependents of that
same taxpayer, or only one or more dependents of one of the taxpayers,
the advance credit payments for that period are allocated entirely to
that taxpayer. If one or both of the taxpayers is an applicable taxpayer
eligible for a premium tax credit for the taxable year, the premium tax
credit is computed by allocating the premiums for the plan in which the
taxpayers or their family members enroll under paragraph (b)(4)(ii) of
this section. The repayment limitation described in paragraph (a)(3) of
this section applies to each taxpayer based on the household income and
family size reported on that taxpayer's return. This paragraph (b)(4)
also applies to taxpayers who receive advance credit payments as married
taxpayers and file a tax return using the head of household filing
status.
(ii) Allocation of premiums. If taxpayers who are married within the
meaning of section 7703, without regard to section 7703(b), do not file
a joint return, 50 percent of the premiums for a period of coverage in a
qualified health plan are allocated to each taxpayer. However, all of
the premiums are allocated to only one of the taxpayers for a period in
which a qualified health plan covers only that taxpayer, only that
taxpayer and one or more dependents of that taxpayer, or only one or
more dependents of that taxpayer.
(b)(5), Example 1 through Example 8 [Reserved]. For further
guidance, see Sec. 1.36B-4(b)(5), Example 1 through Example 8.
Example 9. (i) The facts are the same as in Example 8, except that X
and Y live apart for over 6 months of the year and X properly
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files an income tax return as head of household. Under section 7703(b),
X is treated as unmarried and therefore is not required to file a joint
return. If X otherwise qualifies as an applicable taxpayer, X may claim
the premium tax credit based on the household income and family size X
reports on the return. Y is not an applicable taxpayer and is not
eligible to claim the premium tax credit.
(ii) X must reconcile the amount of credit with advance credit
payments under paragraph (a) of this section. The premium for the
applicable benchmark plan covering X and his two dependents is $9,800.
X's premium tax credit is computed as follows: $9,800 benchmark plan
premium minus X's contribution amount of $5,700 ($60,000 x .095) equals
$4,100.
(iii) Under paragraph (b)(4) of this section, half of the advance
payments ($6,880/2 = $3,440) is allocated to X and half is allocated to
Y. Thus, X is entitled to $660 additional premium tax credit ($4,100-
$3,440). Y has $3,440 excess advance payments, which is limited to $600
under paragraph (a)(3) of this section.
Example 10. (i) A is married to B at the close of 2014 and they have
no dependents. A and B are enrolled in a qualified health plan for 2014
with an annual premium of $10,000 and advance credit payments of $6,500.
A is not eligible for minimum essential coverage (other than coverage
described in section 5000A(f)(1)(C)) for any month in 2014. A is a
victim of domestic abuse as described in Sec. 1.36B-2(b)(2)(iii). At
the time A files her tax return for 2014, A is unable to file a joint
return with B for 2014 because of the domestic abuse. A certifies on her
2014 return, in accordance with relevant instructions, that she is
living apart from B and is unable to file a joint return because of
domestic abuse. Thus, under Sec. 1.36B-2(b)(2)(ii), A satisfies the
joint return filing requirement in section 36B(c)(1)(C) for 2014.
(ii) A's family size for 2014 for purposes of computing the premium
tax credit is one and A is the only member of her coverage family. Thus,
A's benchmark plan for all months of 2014 is the second lowest cost
silver plan offered by the Exchange for A's rating area that covers A.
A's household income includes only A's modified adjusted gross income.
Under paragraph (b)(4)(ii) of this section, A takes into account $5,000
($10,000 x .50) of the premiums for the plan in which she was enrolled
in determining her premium tax credit. Further, A must reconcile $3,250
($6,500 x .50) of the advance credit payments for her coverage under
paragraph (b)(4)(i) of this section.
(c) Effective/applicability date. Paragraphs (a)(1)(ii),
(a)(3)(iii), (a)(4), Examples 4, 10, 11, 12, 13, and 14, (b)(3), (b)(4),
and (b)(5), Examples 9 and 10 apply to taxable years beginning after
December 31, 2013.
(d) Expiration date. Paragraphs (a)(1)(ii), (a)(3)(iii), (a)(4),
Examples 4, 10, 11, 12, 13, and 14, (b)(3), (b)(4), and (b)(5), Examples
9 and 10 expire on July 24, 2017.
[T.D. 9683, 79 FR 43628, July 28, 2014]
Sec. 1.36B-5 Information reporting by Exchanges.
(a) In general. An Exchange must report to the Internal Revenue
Service (IRS) information required by section 36B(f)(3) and this section
relating to individual market qualified health plans in which
individuals enroll through the Exchange. No reporting is required under
this section for enrollment in plans through the Small Business Health
Options Exchange.
(b) Individual filing a return. For purposes of this section, the
terms tax filer and responsible adult describe the individual who is
expected to be the taxpayer filing an income tax return for the year of
coverage with respect to individuals enrolling in a qualified health
plan. A tax filer is an individual on behalf of whom advance payments of
the premium tax credit are made. A responsible adult is an individual on
behalf of whom advance payments of the premium tax credit are not made.
An individual may be a tax filer or responsible adult whether or not
enrolled in coverage. If more than one family (within the meaning of
Sec. 1.36B-1(d)) enrolls in the same qualified health plan, there is a
tax filer or responsible adult for each family.
(c) Information required to be reported--(1) Information reported
annually. An Exchange must report to the IRS the following information
for each qualified health plan--
(i) The name, address, and taxpayer identification number (TIN), or
date of birth if a TIN is not available, of the tax filer or responsible
adult;
(ii) The name and TIN, or date of birth if a TIN is not available,
of a tax filer's spouse;
(iii) The amount of the advance credit payments paid for coverage
under the plan each month;
(iv) For plans for which advance credit payments are made, the
premium (excluding the premium allocated to
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benefits in excess of essential health benefits, see Sec. 1.36B-3(j))
for the applicable benchmark plan for purposes of computing advance
credit payments;
(v) Except as provided in paragraph (c)(3)(ii) of this section, for
plans for which advance credit payments are not made, the premium
(excluding the premium allocated to benefits in excess of essential
health benefits, see Sec. 1.36B-3(j)) for the applicable benchmark plan
that would apply to all individuals enrolled in the qualified health
plan if advance credit payments were made for the coverage;
(vi) The name and TIN, or date of birth if a TIN is not available,
and dates of coverage for each individual covered under the plan;
(vii) The coverage start and end dates of the qualified health plan;
(viii) The monthly premium for the plan in which the individuals
enroll, however--
(A) The premium allocated to benefits in excess of essential health
benefits is excluded, see Sec. 1.36B-3(j);
(B) The premium for a stand-alone dental plan allocated to pediatric
dental benefits is added, see Sec. 1.36B-3(k), but if a family (within
the meaning of Sec. 1.36B-1(d)) is enrolled in more than one qualified
health plan, the pediatric dental premium is added to the premium for
only one qualified health plan; and
(C) The amount is not reduced for advance credit payments;
(ix) The name of the qualified health plan issuer;
(x) The Exchange-assigned policy identification number;
(xi) The Exchange's unique identifier; and
(xii) Any other information specified by forms or instructions or in
published guidance, see Sec. 601.601(d) of this chapter.
(2) Information reported monthly. For each calendar month, an
Exchange must report to the IRS for each qualified health plan, the
information described in paragraph (c)(1) of this section and the
following information--
(i) For plans for which advance credit payments are made--
(A) The names, TINs, or dates of birth if no TIN is available, of
the individuals enrolled in the qualified health plan who are expected
to be the tax filer's dependent; and
(B) Information on employment (to the extent this information is
provided to the Exchange) consisting of--
(1) The name, address, and EIN of each employer of the tax filer,
the tax filer's spouse, and each individual covered by the plan; and
(2) An indication of whether an employer offered affordable minimum
essential coverage that provided minimum value, and, if so, the amount
of the employee's required contribution for self-only coverage;
(ii) The unique identifying number the Exchange uses to report data
that enables the IRS to associate the data with the proper account from
month to month;
(iii) The issuer's employer identification number (EIN); and
(iv) Any other information specified by forms or instructions or in
published guidance, see Sec. 601.601(d) of this chapter.
(3) Special rules for information reported--(i) Multiple families
enrolled in a single qualified health plan. An Exchange must report the
information specified in paragraphs (c)(1) and (c)(2) of this section
for each family (within the meaning of Sec. 1.36B-1(d)) enrolled in a
qualified health plan, including families submitting a single
application or enrolled in a single qualified health plan.
(ii) Alternative to reporting applicable benchmark plan. An Exchange
satisfies the requirement in paragraph (c)(1)(v) of this section if, on
or before January 1 of each year after 2014, the Exchange provides a
reasonable method that a responsible adult may use to determine the
premium (after adjusting for benefits in excess of essential health
benefits) for the applicable benchmark plan that applies to the
responsible adult's coverage family for the prior calendar year for
purposes of determining the premium tax credit on the tax return.
(4) Exemptions. For each calendar month, an Exchange must report to
the IRS the name and TIN, or date of birth if a TIN is not available, of
each individual for whom the Exchange has granted an exemption from
coverage under section 5000A(e) and the related regulations, the months
for which the
[[Page 143]]
exemption is in effect, and the exemption certificate number.
(d) Time for reporting--(1) Annual reporting. An Exchange must
submit to the IRS the annual report required under paragraph (c)(1) of
this section on or before January 31 of the year following the calendar
year of coverage.
(2) Monthly reporting--(i) In general. Except as provided in
paragraph (d)(2)(ii) of this section, an Exchange must submit to the IRS
the monthly reports required under paragraphs (c)(2) and (c)(4) of this
section on or before the 15th day following each month of coverage.
(ii) Initial monthly reporting in 2014. Exchanges must submit to the
IRS the initial monthly report required under paragraphs (c)(2) and
(c)(4) of this section on a date that the Commissioner may establish in
other guidance, see Sec. 601.601(d) of this section, but no earlier
than June 15, 2014. The initial report must include cumulative
information for enrollments for the period January 1, 2014, through the
last day of the month preceding the month for submitting the initial
monthly report.
(3) Corrections to information reported. In general, an Exchange
must correct erroneous or outdated monthly-reported information in the
next monthly report. If the information must be corrected after the
final monthly submission on January 15 following the coverage year,
corrections should be submitted by the 15th day of the month following
the month in which the incorrect information is identified. However, no
monthly report correction is permitted after April 15 following the year
of coverage. Errors on the annual report must be corrected and reported
to the IRS and to the individual recipient identified in paragraph (f)
of this section as soon as possible.
(e) Electronic reporting. An Exchange must submit the reports to the
IRS required under this section in electronic format. The information
reported monthly will be submitted to the IRS through the Department of
Health and Human Services.
(f) Annual statement to be furnished to individuals--(1) In general.
An Exchange must furnish to each tax filer or responsible adult (the
recipient for purposes of paragraphs (f) and (g) of this section) a
written statement showing--
(i) The name and address of the recipient and
(ii) The information described in paragraph (c)(1) of this section
for the previous calendar year.
(2) Form of statements. A statement required under this paragraph
(f) may be made by furnishing to the recipient identified in the annual
report either a copy of the report filed with the IRS or a substitute
statement. A substitute statement must include the information required
to be shown on the report filed with the IRS and must comply with
requirements in published guidance (see Sec. 601.601(d)(2) of this
chapter) relating to substitute statements. A reporting entity may use
an IRS truncated taxpayer identification number as the identification
number for an individual in lieu of the identification number appearing
on the corresponding information report filed with the IRS.
(3) Time and manner for furnishing statements. An Exchange must
furnish the statements required under this paragraph (f) on or before
January 31 of the year following the calendar year of coverage. If
mailed, the statement must be sent to the recipient's last known
permanent address or, if no permanent address is known, to the
recipient's temporary address. For purposes of this paragraph (f)(3), an
Exchange's first class mailing to the last known permanent address, or
if no permanent address is known, the temporary address, discharges the
Exchange's requirement to furnish the statement. An Exchange may furnish
the statement electronically in accordance with paragraph (g) of this
section.
(g) Electronic furnishing of statements--(1) In general. An Exchange
required to furnish a statement under paragraph (f) of this section may
furnish the statement to the recipient in an electronic format in lieu
of a paper format. An Exchange that meets the requirements of paragraphs
(g)(2) through (g)(7) of this section is treated as furnishing the
statement in a timely manner.
(2) Consent--(i) In general. A recipient must have affirmatively
consented to receive the statement in an electronic
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format. The consent may be made electronically in any manner that
reasonably demonstrates that the recipient is able to access the
statement in the electronic format in which it will be furnished.
Alternatively, the consent may be made in a paper document that is
confirmed electronically.
(ii) Withdrawal of consent. The consent requirement of this
paragraph (g)(2) is not satisfied if the recipient withdraws the consent
and the withdrawal takes effect before the statement is furnished. An
Exchange may provide that the withdrawal of consent takes effect either
on the date the Exchange receives it or on another date no more than 60
days later. The Exchange may provide that a request by the recipient for
a paper statement will be treated as a withdrawal of consent to receive
the statement in an electronic format. If the Exchange furnishes a
statement after the withdrawal of consent takes effect, the recipient
has not consented to receive the statement in electronic format.
(iii) Change in hardware or software requirements. If a change in
the hardware or software required to access the statement creates a
material risk that a recipient will not be able to access a statement,
an Exchange must, prior to changing the hardware or software, notify the
recipient. The notice must describe the revised hardware and software
required to access the statement and inform the recipient that a new
consent to receive the statement in the revised electronic format must
be provided to the Exchange. After implementing the revised hardware and
software, the Exchange must obtain a new consent or confirmation of
consent from the recipient to receive the statement electronically.
(iv) Examples. The following examples illustrate the rules of this
paragraph (g)(2):
Example 1. Furnisher F sends Recipient R a letter stating that R may
consent to receive the statement required under section 36B
electronically on a Web site instead of in a paper format. The letter
contains instructions explaining how to consent to receive the statement
electronically by accessing the Web site, downloading and completing the
consent document, and emailing the completed consent to F. The consent
document posted on the Web site uses the same electronic format that F
will use for the electronically furnished statement. R reads the
instructions and submits the consent in the manner provided in the
instructions. R has consented to receive the statement required under
section 36B electronically in the manner described in paragraph
(g)(2)(i) of this section.
Example 2. Furnisher F sends Recipient R an email stating that R may
consent to receive the statement required under section 36B
electronically instead of in a paper format. The email contains an
attachment instructing R how to consent to receive the statement
required under section 36B electronically. The email attachment uses the
same electronic format that F will use for the electronically furnished
statement. R opens the attachment, reads the instructions, and submits
the consent in the manner provided in the instructions. R has consented
to receive the statement required under section 36B electronically in
the manner described in paragraph (g)(2)(i) of this section.
Example 3. Furnisher F posts a notice on its Web site stating that
Recipient R may receive the statement required under section 36B
electronically instead of in a paper format. The Web site contains
instructions on how R may access a secure Web page and consent to
receive the statements electronically. R accesses the secure Web page
and follows the instructions for giving consent. R has consented to
receive the statement required under section 36B electronically in the
manner described in paragraph (g)(2)(i) of this section.
(3) Required disclosures--(i) In general. Prior to, or at the time
of, a recipient's consent, an Exchange must provide to the recipient a
clear and conspicuous disclosure statement containing each of the
disclosures described in paragraphs (g)(3)(ii) through (g)(3)(viii) of
this section.
(ii) Paper statement. An Exchange must inform the recipient that the
statement will be furnished on paper if the recipient does not consent
to receive it electronically.
(iii) Scope and duration of consent. An Exchange must inform the
recipient of the scope and duration of the consent. For example, the
Exchange must inform the recipient whether the consent applies to each
statement required to be furnished after the consent is given until it
is withdrawn or only to the first statement required to be furnished
following the consent.
(iv) Post-consent request for a paper statement. An Exchange must
inform
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the recipient of any procedure for obtaining a paper copy of the
recipient's statement after giving the consent described in paragraph
(g)(2)(i) of this section and whether a request for a paper statement
will be treated as a withdrawal of consent.
(v) Withdrawal of consent. An Exchange must inform the recipient
that--
(A) The recipient may withdraw consent by writing (electronically or
on paper) to the person or department whose name, mailing address,
telephone number, and email address is provided in the disclosure
statement;
(B) An Exchange will confirm the withdrawal and the date on which it
takes effect in writing (either electronically or on paper); and
(C) A withdrawal of consent does not apply to a statement that was
furnished electronically in the manner described in this paragraph (g)
before the date on which the withdrawal of consent takes effect.
(vi) Notice of termination. An Exchange must inform the recipient of
the conditions under which the Exchange will cease furnishing statements
electronically to the recipient.
(vii) Updating information. An Exchange must inform the recipient of
the procedures for updating the information needed to contact the
recipient and notify the recipient of any change in the Exchange's
contact information.
(viii) Hardware and software requirements. An Exchange must provide
the recipient with a description of the hardware and software required
to access, print, and retain the statement, and the date when the
statement will no longer be available on the Web site. The Exchange must
advise the recipient that the statement may be required to be printed
and attached to a Federal, State, or local income tax return.
(4) Format. The electronic version of the statement must contain all
required information and comply with applicable published guidance (see
Sec. 601.601(d) of this chapter) relating to substitute statements to
recipients.
(5) Notice--(i) In general. If a statement is furnished on a Web
site, the Exchange must notify the recipient. The notice may be
delivered by mail, electronic mail, or in person. The notice must
provide instructions on how to access and print the statement and
include the following statement in capital letters, ``IMPORTANT TAX
RETURN DOCUMENT AVAILABLE.'' If the notice is provided by electronic
mail, this statement must be on the subject line of the electronic mail.
(ii) Undeliverable electronic address. If an electronic notice
described in paragraph (g)(5)(i) of this section is returned as
undeliverable, and the Exchange cannot obtain the correct electronic
address from the Exchange's records or from the recipient, the Exchange
must furnish the notice by mail or in person within 30 days after the
electronic notice is returned.
(iii) Corrected statement. An Exchange must furnish a corrected
statement to the recipient electronically if the original statement was
furnished electronically. If the original statement was furnished
through a Web site posting, the Exchange must notify the recipient that
it has posted the corrected statement on the Web site in the manner
described in paragraph (g)(5)(i) of this section within 30 days of the
posting. The corrected statement or the notice must be furnished by mail
or in person if--
(A) An electronic notice of the Web site posting of an original
statement or the corrected statement was returned as undeliverable; and
(B) The recipient has not provided a new email address.
(6) Access period. Statements furnished on a Web site must be
retained on the Web site through October 15 of the year following the
calendar year to which the statements relate (or the first business day
after October 15, if October 15 falls on a Saturday, Sunday, or legal
holiday). The furnisher must maintain access to corrected statements
that are posted on the Web site through October 15 of the year following
the calendar year to which the statements relate (or the first business
day after October 15, if October 15 falls on a Saturday, Sunday, or
legal holiday) or the date 90 days after the corrected forms are posted,
whichever is later.
(7) Paper statements after withdrawal of consent. An Exchange must
furnish a
[[Page 146]]
paper statement if a recipient withdraws consent to receive a statement
electronically and the withdrawal takes effect before the statement is
furnished. A paper statement furnished under this paragraph (g)(7) after
the statement due date is timely if furnished within 30 days after the
date the Exchange receives the withdrawal of consent.
[T.D. 9663, 79 FR 26117, May 7, 2014]
Sec. 1.37-1 General rules for the credit for the elderly.
(a) In general. In the case of an individual, section 37 provides a
credit against the tax imposed by chapter 1 of the Internal Revenue Code
of 1954. This section and Sec. Sec. 1.37-2 and 1.37-3 provide guidance
in the computation of the credit for the elderly provided under section
37 for taxable years beginning after 1975. For rules relating to the
computation of the retirement income credit provided under section 37
for taxable years beginning before 1976, see 26 CFR 1.37-1 through 1.37-
5 (Rev. as of April 1, 1980). Note that section 403 of the Tax Reduction
and Simplification Act of 1977 provides that a taxpayer may elect to
compute the credit under section 37 for the taxpayer's first taxable
year beginning in 1976 in accordance with the rules applicable to
taxable years beginning before 1976.
(b) Limitation on the amount of the credit. The credit allowed by
section 37 for a taxable year shall not exceed the tax imposed by
chapter 1 of the Code for the taxable year (reduced, in the case of a
taxable year beginning before 1979, by the general tax credit allowed by
section 42).
(c) Married couples must file joint returns. If the taxpayer is
married at the close of the taxable year, the credit provided by section
37 shall be allowed only if the taxpayer and the taxpayer's spouse file
a joint return for the taxable year. The preceding sentence shall not
apply in the case of a husband and wife who are not members of the same
household at any time during the taxable year. For the determination of
marital status, see Sec. Sec. 143 and 1.143-1.
(d) Nonresident aliens ineligible. No credit is allowed under
section 37 to any individual for any taxable year during which that
individual is at any time a nonresident alien unless the individual is
treated, by reason of an election under section 6013 (g) or (h), as a
resident of the United States for that taxable year.
[T.D. 7743, 45 FR 84049, Dec. 22, 1980]
Sec. 1.37-2 Credit for individuals age 65 or over.
(a) In general. This section illustrates the computation of the
credit for the elderly in the case of an individual who has attained the
age of 65 before the close of the taxable year. This section shall not
apply to an individual for any taxable year for which the individual
makes the election described in section 37(e)(2) and paragraph (b) of
Sec. 1.37-3.
(b) Computation of credit. The credit for the elderly for an
individual to whom this section applies equals 15 percent of the
individual's ``section 37 amount'' for the taxable year. An individual's
``section 37 amount'' for a taxable year is the initial amount
determined under section 37(b)(2), reduced as provided in section
37(b)(3) and (c)(1).
(c) Examples. The computation of the credit for the elderly for
individuals to whom this section applies may be illustrated by the
following examples:
Example 1. A, a single individual who is 67 years old, has adjusted
gross income of $8,000 for the calendar year 1977. A also receives
social security payments of $1,450 during 1977. A does not itemize
deductions. A's credit for the elderly is $120, computed as follows:
Initial amount under section 37(b)(2)......................... $2,500
Reductions required by section 37 (b)(3) and (c)(1):
Social security payments........................ $1,450
One-half the excess of adjusted gross income 250 1,700
over $7,500....................................
----------
Section 37 amount............................................. 800
=========
15 pct. of $800............................................... $120
A's tax from the tax tables, which reflect the allowance of the general
tax credit, is $662. Accordingly, the limitation of section 37(c)(2) and
paragraph (b) of Sec. 1.37-1 does not reduce A's credit for the
elderly.
Example 2. H and W, who have both attained the age of 65, file a
joint return for calendar year 1977. For that year H and W have adjusted
gross income of $8,120; H also receives a railroad retirement pension of
$1,550, and W receives social security payments of $1,200. H and W do
not itemize deductions. The credit for the elderly allowed
[[Page 147]]
to H and W for 1977 is $139, computed as follows:
Initial amount under section 37(b)(2)......................... $3,750
Reductions required by section 37 (b)(3):
Railroad retirement pension..................... $1,550
Social Security payments........................ 1,200 2,750
----------
Section 37 amount............................................. 1,000
=========
15 pct. of $1,000............................................. 150
Limitation based upon amount of tax (derived from table $139
reflecting allowance of general tax credit)..................
Since the adjusted gross income of H and W is not greater than $10,000,
no reduction of the initial amount is required under section 37 (c)(1).
[T.D. 7743, 45 FR 84050, Dec. 22, 1980]
Sec. 1.37-3 Credit for individuals under age 65 who have public
retirement system income.
(a) In general. This section provides rules for the computation of
the credit for the elderly under section 37(e) in the case of an
individual who has not attained the age of 65 before the close of the
taxable year and whose gross income for the taxable year includes
retirement income within the meaning of paragraph (d)(1)(ii) of this
section (i.e., under a public retirement system). If such an individual
is married within the meaning of section 143 at the close of the taxable
year and the spouse of the individual has attained the age of 65 before
the close of the taxable year, this section shall apply to the
individual for the taxable year only if both spouses make the election
described in paragraph (b) of this section. If both spouses make the
election described in paragraph (b) of this section for the taxable
year, the credit of each spouse shall be determined under the rules of
this section. See paragraph (f)(2) of this section for a limitation on
the effects of community property laws in making determinations and
computations under section 37(e) and this section.
(b) Election by certain married taxpayers. If a married individual
under age 65 at the close of the taxable year has retirement income and
the spouse of that individual has attained the age of 65 before the
close of the taxable year, both spouses may elect to compute the credit
provided by section 37 under the rules of section 37(e) and this
section. The spouses shall signify the election on the return (or
amended return) for the taxable year in the manner prescribed in the
instructions accompanying the return. The election may be made at any
time before the expiration of the period of limitation for filing claim
for credit or return for the taxable year. The election may be revoked
without the consent of the Commissioner at any time before the
expiration of that period by filing an amended return.
(c) Computation of credit. The credit of an individual under section
37(e) and this section equals 15 percent of the individual's credit base
for the taxable year. The credit base of an individual for a taxable
year is the lesser of--
(1) The retirement income of the individual for the taxable year, or
(2) The amount determined under section 37(e)(5), as modified by
section 37(e) (6) and (7).
(d) Retirement income--(1) General rule--(i) For individuals 65 or
over. Section 37(e)(4)(A) enumerates the kinds of income which may be
treated as the retirement income of an individual who has attained the
age of 65 before the close of the taxable year. They include income from
pensions and annuities, interest, rents, dividends, certain bonds
received under a qualified bond purchase plan, and certain individual
retirement accounts or annuities.
(ii) For individuals under 65. In the case of an individual who has
not attained the age of 65 before the close of the taxable year,
retirement income consists only of income from pensions and annuities
(including disability annuity payments) under a public retirement system
which arises from services performed by that individual or by a present
or former spouse of that individual. The term ``public retirement
system'' means a pension, annuity, or retirement, or similar fund or
system established by the United States, a State, a possession of the
United States, any political subdivision of any of the foregoing, or the
District of Columbia.
(2) Rents. For purposes of section 37(e)(4)(A)(iii), income from
rents shall be the gross amount received, not reduced by depreciation or
other expenses, except that beneficiaries of a trust or estate shall
treat as retirement income only their proportionate
[[Page 148]]
shares, of the taxable rents of the trust or estate. In the case of an
amount received for board and lodging, only the portion of the amount
received for lodging is income from rents.
(3) Disability annuity payments received by individual under age 65.
Disability annuity payments received under a public retirement system by
an individual under age 65 at the close of the taxable year shall not be
treated as retirement income unless the payments are for periods after
the date on which the individual reached minimum retirement age, that
is, the age at which the individual would be eligible to receive a
pension or annuity without regard to disability, and any of the
following conditions is satisfied--
(i) The individual is precluded from seeking the benefits of section
105(d) (relating to certain disability payments) for that taxable year
by reason of an irrevocable election;
(ii) The individual was not permanently and totally disabled at the
time of retirement (and was not permanently and totally disabled either
on January 1, 1976, or on January 1, 1977, if the individual retired
before the later date on disability or under circumstances which
entitled the individual to retire on disability); or
(iii) The payments are for periods after the individual reached
mandatory retirement age.
For purposes of this paragraph, disability annuity payments include
payments to an individual who retired on partial or temporary
disability.
(4) Compensation of personal services rendered during taxable year.
Retirement income does not include any amount representing compensation
for personal services rendered during the taxable year. For this
purpose, amounts received as a pension shall not be treated as
representing compensation for personal services rendered during the
taxable year if the period of service during the taxable year is not
substantial when compared with the total years of service. For example,
an individual on the calendar year basis retires on November 30 after 5
years of service and receives a pension during the remainder of his
taxable year. The pension is not treated as representing compensation
for personal services rendered during such taxable year merely because
it is paid by reason of the services of the individual for a period of 5
years which includes a portion of the taxable year.
(5) Amounts not includible in gross income. Retirement income does
not include any amount not includible in the gross income of the
individual for the taxable year. For example, if a portion of an annuity
is excluded from gross income under section 72, relating to annuities,
that portion of the annuity is not retirement income; similarly, the
portion of dividend income excluded from gross income under section 116,
relating to the partial exclusion of dividends received by individuals
is not retirement income.
(e) Earned income--(1) In general. The term ``earned income'' in
section 37(e)(5)(B) generally has the same meaning as in section 911(b),
except that earned income does not include any amount received as a
pension or annuity. See section 911(b) and the regulations thereunder.
Section 911(b) provides, in general, that earned income includes wages,
salaries, professional fees, and other amounts received as compensation
for personal services rendered.
(2) Earned income from self-employment. For purposes of section
37(e)(5)(B), the earned income of a taxpayer from self-employment in a
trade or business shall not exceed--
(i) The taxpayer's share of the net profits from the trade or
business if capital is not a material income-producing factor in that
trade or business; or
(ii) Thirty percent of the taxpayer's share of the net profits from
the trade or business if capital is a material income-producing factor
in that trade or business.
For other rules relating to the determination of earned income from
self-employment in a trade or business, see section 911(b) and the
regulations thereunder.
(3) Disability annuity payments received by individuals under age
65. Disability annuity payments received under a public retirement
system by an individual under age 65 at the close of the taxable year
shall be treated as earned income for purposes of section
[[Page 149]]
37(e)(5)(B) unless the payments are treated as retirement income under
paragraph (d)(3) of this section.
(f) Computation of credit under section 37(e) in the case of joint
returns--(1) In general. In the case of a joint return of husband and
wife, the credit base of each spouse under section 37(e) is computed
separately. The spouses then combine their credit bases and compute a
single credit. The limitation in section 37(c)(2) and paragraph (b) of
Sec. 1.37-1 on the amount of the credit is determined by reference to
the joint tax liability of the spouses. Thus, regardless of whether a
spouse would be liable for the tax imposed by chapter 1 of the Code if
the joint return had not been filed, the credit base of that spouse is
taken into account in computing the credit.
(2) Community property laws. For taxable years beginning after 1977,
married individuals filing joint returns shall disregard community
property laws in making any determination or computation required under
section 37(e) or this section. Each item of income is attributed in full
to the spouse whose income it would have been in the absence of
community property laws. Thus, if a 67-year old individual files a joint
return with a 62-year old spouse for 1979 and the only income of the
couple is from a public pension of the older spouse, that public pension
is attributed in full to the older spouse for purposes of section 37(e)
even though the applicable community property law may treat one-half of
the pension as the income of the 62-year old spouse. Since the younger
spouse consequently has no retirement income within the meaning of
paragraph (d) of this section, the couple may not make the election
described in paragraph (b) of this section.
(g) Examples. The computation of the credit for the elderly under
section 37(e) and this section is illustrated by the following examples:
Example 1. B, who is 62 years old and single, receives a fully
taxable pension of $2,400 from a public retirement system during 1977. B
performed the services giving rise to the pension. During that year, B
also earns $2,650 from a part-time job. B receives no tax-exempt pension
or annuity in 1977. Subject to the limitation of section 37(c)(2) and
paragraph (b) of Sec. 1.37-1, B's credit for the elderly for 1977 under
section 37(e) is $195, computed as follows:
Maximum retirement income level under section 37(e)(5)...... $2,500
Earned income offset under section
37(e)(5)(B)(ii):
Earned income in excess of $1,700........... $950
One-half of earned income in excess of 250 1,200
$1,200, but not in excess of $1,700........
------------
Amount determined under section 37(e)(5).................... 1,300
===========
Retirement income........................................... 2,400
===========
Credit for the elderly (15 pct. of $1,300).................. 195
Example 2. During 1978 H, who is 67 years old, has earnings of
$1,300 and retirement income (rents, interest, etc.) of $6,000. H also
receives social security payments totalling $1,400. During 1978 W, who
is 63 years old, earns $1,600 and receives a fully taxable pension of
$1,400 from a public retirement system that constitutes retirement
income. W performed the services giving rise to the pension. H and W
file a joint return for 1978 and elect to compute the credit for the
elderly under section 37(e). Under the applicable law these items of
income are community income, and both spouses share equally in each
item. Because H and W are filing a joint return, they disregard
community property laws in computing their credit under section 37(e).
The couple allocates $1,600 of the $3,750 referred to in section
37(e)(6) to W and $2,150 to H. Subject to the limitation of section
37(c)(2) and paragraph (b) of Sec. 1.37-1, their credit for the elderly
is $315, computed as follows:
Credit base of H:
Amount allocated to H under section 37(e)(6).............. $2,150
Reductions required by section 37(e)(5):
Social Security payments.................. $1,400
One-half of excess of earnings over $1,200 50 1,450
------------
Amount determined under section 37(e)(5).................. 700
===========
Retirement income......................................... 6,000
===========
Credit base of H.......................................... 700
Credit base of W:
Amount allocated to W under section 37(e)(6).............. $1,600
Reduction required by section 37(e)(5)(B):
One-half of excess of earnings over $1,200............ $200
-----------
Amount determined under section 37(e)(5).............. 1,400
===========
Retirement income......................................... 1,400
===========
Credit base of W.......................................... 1,400
===========
[[Page 150]]
Computation of credit:
Credit base of H...................................... 700
Credit base of W...................................... 1,400
-----------
Combined credit base.................................. 2,100
===========
Credit for the elderly (15 pct. of $2,100)................ 315
Example 3. (a) Assume the same facts as in example (2) of this
paragraph, except that H and W live apart at all times during 1978 and
file separate returns. Under these circumstances, H and W must give
effect to the applicable community property law in determining their
credits under section 37(e). Thus, each spouse must take into account
one-half of each item of income.
(b) Subject to the limitation of section 37(c)(2) and paragraph (b)
of Sec. 1.37-1, H's credit for the elderly is $157.50, computed as
follows:
Maximum retirement income level under section 37(e)(7)...... $1,875
Reductions required by section 37(e)(5):
Social security payments.................... $700
One-half of excess of earnings over $1,200 125 825
(taking into account one-half of combined
earnings of $2,900)........................
------------
Amount determined under section 37(e)(5).................... 1,050
===========
Retirement income........................................... 3,700
===========
Credit of H (15 pct. of $1,050)............................. 157.50
(c) Subject to the limitation of section 37(c)(2) and paragraph (b)
of Sec. 1.37-1, W's credit for the elderly is computed as follows:
Maximum retirement income level under section $1,875
37(e)(7).......................................
Reductions required by section 37(e)(5):
Social security payments.................... $700
One-half of excess of earnings over $1,200.. 125 825
------------
Amount determined under section 37(e)(5)........ 1,050
=============
Retirement income (limited to W's share of 700
public pension)................................
=============
Credit of W (15 pct. of $700)................... 105
[T.D. 7743, 45 FR 84050, Dec. 22, 1980]
Sec. 1.38-1 Investment in certain depreciable property.
Regulations under sections 46 through 50 are prescribed under the
authority granted the Secretary by section 38(b) to prescribe
regulations as may be necessary to carry out the purposes of section 38
and subpart B, part IV, subchapter A, chapter 1 of the Code.
[44 FR 20417, Apr. 5, 1979]
Sec. 1.40-1 Questions and answers relating to the meaning of the term
``qualified mixture'' in section 40(b)(1).
Q-1. What is a ``qualified mixture'' within the meaning of section
40(b)(1)?
A-1. A ``qualified mixture'' is a mixture of alcohol and gasoline or
of alcohol and special fuel which (1) is sold by the taxpayer producing
such mixture to any person for use as a fuel, or (2) is used as a fuel
by the taxpayer producing such mixture.
Q-2. Must alcohol be present in a product in order for that product
to be considered a mixture of alcohol and either gasoline or a special
fuel?
A-2. No. A product is considered to be a mixture of alcohol and
gasoline or of alcohol and a special fuel if the product is derived from
alcohol and either gasoline or a special fuel even if the alcohol is
chemically transformed in producing the product so that the alcohol is
no longer present as a separate chemical in the final product, provided
that there is no significant loss in the energy content of the alcohol.
Thus, a product may be considered to be ``mixture of alcohol and
gasoline or of alcohol and a special fuel'' within the meaning of
section 40(b)(1)(B) if such product is produced in a chemical reaction
between alcohol and either gasoline or a special fuel. Similarly a
product may be considered to be a ``mixture of alcohol and gasoline or
of alcohol and a special fuel'' if such product is produced by blending
a chemical compound derived from alcohol with either gasoline or a
special fuel.
Thus, for example, a blend of gasoline and ethyl tertiary butyl
ether (ETBE), a compound derived from ethanol (a qualified alcohol), in
a chemical reaction in which there is no significant loss in the energy
content of the ethanol, is considered for purposes of section
40(b)(1)(B) to be a mixture of gasoline and the ethanol used to produce
the ETBE, even though the ethanol is chemically transformed in the
production of ETBE and is not present in the final product.
[T.D. 8291, 55 FR 8948, Mar. 9, 1990]
Sec. 1.41-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.41-1
through 1.41-9.
[[Page 151]]
Sec. 1.41-1 Credit for increasing research activities.
(a) Amount of credit.
(b) Introduction to regulations under section 41.
Sec. 1.41-2 Qualified research expenses.
(a) Trade or business requirement.
(1) In general.
(2) New business.
(3) Research performed for others.
(i) Taxpayer not entitled to results.
(ii) Taxpayer entitled to results.
(4) Partnerships.
(i) In general.
(ii) Special rule for certain partnerships and joint ventures.
(b) Supplies and personal property used in the conduct of qualified
research.
(1) In general.
(2) Certain utility charges.
(i) In general.
(ii) Extraordinary expenditures.
(3) Right to use personal property.
(4) Use of personal property in taxable years beginning after
December 31, 1985.
(c) Qualified services.
(1) Engaging in qualified research.
(2) Direct supervision.
(3) Direct support.
(d) Wages paid for qualified services.
(1) In general.
(2) ``Substantially all.''
(e) Contract research expenses.
(1) In general.
(2) Performance of qualified research.
(3) ``On behalf of.''
(4) Prepaid amounts.
(5) Examples.
Sec. 1.41-3 Base amount for taxable years beginning on or after January
3, 2001.
(a) New taxpayers.
(b) Special rules for short taxable years.
(1) Short credit year.
(2) Short taxable year preceding credit year.
(3) Short taxable year in determining fixed-base percentage.
(c) Definition of gross receipts.
(1) In general.
(2) Amounts excluded.
(3) Foreign corporations.
(d) Consistency requirement.
(1) In general.
(2) Illustrations.
(e) Effective date.
Sec. 1.41-4 Qualified research for expenditures paid or incurred in
taxable years ending on or after December 31, 2003.
(a) Qualified research.
(1) General rule.
(2) Requirements of section 41(d)(1).
(3) Undertaken for the purpose of discovering information.
(i) In general.
(ii) Application of the discovering information requirement.
(iii) Patent safe harbor.
(4) Technological in nature.
(5) Process of experimentation.
(i) In general.
(ii) Qualified purpose.
(6) Substantially all requirement.
(7) Use of computers and information technology.
(8) Illustrations.
(b) Application of requirements for qualified research.
(1) In general.
(2) Shrinking-back rule.
(3) Illustration.
(c) Excluded activities.
(1) In general.
(2) Research after commercial production.
(i) In general.
(ii) Certain additional activities related to the business
component.
(iii) Activities related to production process or technique.
(iv) Clinical testing.
(3) Adaptation of existing business components.
(4) Duplication of existing business component.
(5) Surveys, studies, research relating to management functions,
etc.
(6) Internal use software for taxable years beginning on or after
December 31, 1985. [Reserved].
(7) Activities outside the United States, Puerto Rico, and other
possessions.
(i) In general.
(ii) Apportionment of in-house research expenses.
(iii) Apportionment of contract research expenses.
(8) Research in the social sciences, etc.
(9) Research funded by any grant, contract, or otherwise.
(10) Illustrations.
(d) Recordkeeping for the research credit.
(e) Effective dates.
Sec. 1.41-5 Basic research for taxable years beginning after December
31, 1986. [Reserved]
Sec. 1.41-6 Aggregation of expenditures.
(a) Controlled groups of corporations; trades or businesses under
common control.
(1) In general.
(2) Consolidated groups.
(3) Definitions.
(b) Computation of the group credit.
(1) In general.
(2) Start-up companies.
(c) Allocation of the group credit.
(1) In general.
(2) Stand-alone entity credit.
(d) Special rules for consolidated groups.
(1) In general.
(2) Start-up company status.
[[Page 152]]
(3) Special rule for allocation of group credit among consolidated
group members.
(e) Examples.
(f) For taxable years beginning before January 1, 1990.
(g) Tax accounting periods used.
(1) In general.
(2) Special rule when timing of research is manipulated.
(h) Membership during taxable year in more than one group.
(i) Intra-group transactions.
(1) In general.
(2) In-house research expenses.
(3) Contract research expenses.
(4) Lease payments.
(5) Payment for supplies.
(j) Effective/applicability dates.
(1) In general.
(2) Consolidated group rule.
(3) Taxable years ending after June 9, 2011.
Sec. 1.41-7 Special rules.
(a) Allocations.
(1) Corporation making an election under subchapter S.
(i) Pass-through, for taxable years beginning after December 31,
1982, in the case of an S corporation.
(ii) Pass-through, for taxable years beginning before January 1,
1983, in the case of a subchapter S corporation.
(2) Pass-through in the case of an estate or trust.
(3) Pass-through in the case of a partnership.
(i) In general.
(ii) Certain expenditures by joint ventures.
(4) Year in which taken into account.
(5) Credit allowed subject to limitation.
(b) Adjustments for certain acquisitions and dispositions--Meaning
of terms.
(c) Special rule for pass-through of credit.
(d) Carryback and carryover of unused credits.
Sec. 1.41-8 Alternative incremental credit applicable for taxable years
beginning on or before December 31, 2008.
(a) Determination of credit.
(b) Election.
(1) In general.
(2) Time and manner of election.
(3) Revocation.
(4) Special rules for controlled groups.
(i) In general.
(ii) Designated member.
(5) Effective/applicability dates.
Sec. 1.41-9 Alternative simplified credit.
(a) Determination of credit.
(b) Election.
(1) In general.
(2) Time and manner of election.
(3) Revocation.
(4) Special rules for controlled groups.
(i) In general.
(ii) Designated member.
(c) Special rules.
(1) Qualified research expenditures (QREs) required in all years.
(2) Section 41(c)(6) applicability.
(3) Short taxable years.
(i) General rule.
(ii) Limited exception.
(4) Controlled groups.
(d) Effective/applicability dates.
[T.D. 8930, 65 FR 287, Jan. 3, 2001, as amended by T.D. 9104, 69 FR 26,
Jan. 2, 2004; T.D. 9205, 70 FR 29601, May 24, 2005; T.D. 9296, 71 FR
65725, Nov. 9, 2006; T.D. 9401, 73 FR 34187, June 17, 2008; T.D. 9528,
76 FR 33995, June 10, 2011]
Sec. 1.41-1 Credit for increasing research activities.
(a) Amount of credit. The amount of a taxpayer's credit is
determined under section 41(a). For taxable years beginning after June
30, 1996, and at the election of the taxpayer, the portion of the credit
determined under section 41(a)(1) may be calculated using the
alternative incremental credit set forth in section 41(c)(4). For
taxable years ending after December 31, 2006, and at the election of the
taxpayer, the portion of the credit determined under section 41(a)(1)
may be calculated using either the alternative incremental credit set
forth in section 41(c)(4), or the alternative simplified credit set
forth in section 41(c)(5).
(b) Introduction to regulations under section 41. (1) Sections 1.41-
2 through 1.41-8 and 1.41-3A through 1.41-5A address only certain
provisions of section 41. The following table identifies the provisions
of section 41 that are addressed, and lists each provision with the
section of the regulations in which it is covered.
------------------------------------------------------------------------
Section of the Internal
Section of the regulation Revenue Code
------------------------------------------------------------------------
Sec. 1.41-2............................. 41(b).
Sec. 1.41-3............................. 41(c).
Sec. 1.41-4............................. 41(d).
Sec. 1.41-5............................. 41(e).
Sec. 1.41-6............................. 41(f).
Sec. 1.41-7............................. 41(f).
41(g).
Sec. 1.41-8............................. 41(c).
Sec. 1.41-3A............................ 41(c) (taxable years
beginning before January 1,
1990).
Sec. 1.41-4A............................ 41(d) (taxable years
beginning before January 1,
1986).
[[Page 153]]
Sec. 1.41-5A............................ 41(e) (taxable years
beginning before January 1,
1987).
------------------------------------------------------------------------
(2) Section 1.41-3A also addresses the special rule in section
221(d)(2) of the Economic Recovery Tax Act of 1981 relating to taxable
years overlapping the effective dates of section 41. Section 41 was
formerly designated as sections 30 and 44F. Sections 1.41-0 through
1.41-8 and 1.41-0A through 1.41-5A refer to these sections as section 41
for conformity purposes. Whether section 41, former section 30, or
former section 44F applies to a particular expenditure depends upon when
the expenditure was paid or incurred.
[T.D. 8930, 65 FR 288, Jan. 3, 2001, as amended by T.D. 9401, 73 FR
34187, June 17, 2008]
Sec. 1.41-2 Qualified research expenses.
(a) Trade or business requirement--(1) In general. An in-house
research expense of the taxpayer or a contract research expense of the
taxpayer is a qualified research expense only if the expense is paid or
incurred by the taxpayer in carrying on a trade or business of the
taxpayer. The phrase ``in carrying on a trade or business'' has the same
meaning for purposes of section 41(b)(1) as it has for purposes of
section 162; thus, expenses paid or incurred in connection with a trade
or business within the meaning of section 174(a) (relating to the
deduction for research and experimental expenses) are not necessarily
paid or incurred in carrying on a trade or business for purposes of
section 41. A research expense must relate to a particular trade or
business being carried on by the taxpayer at the time the expense is
paid or incurred in order to be a qualified research expense. For
purposes of section 41, a contract research expense of the taxpayer is
not a qualified research expense if the product or result of the
research is intended to be transferred to another in return for license
or royalty payments and the taxpayer does not use the product of the
research in the taxpayer's trade or business.
(2) New business. Expenses paid or incurred prior to commencing a
new business (as distinguished from expanding an existing business) may
be paid or incurred in connection with a trade or business but are not
paid or incurred in carrying on a trade or business. Thus, research
expenses paid or incurred by a taxpayer in developing a product the sale
of which would constitute a new trade or business for the taxpayer are
not paid or incurred in carrying on a trade or business.
(3) Research performed for others--(i) Taxpayer not entitled to
results. If the taxpayer performs research on behalf of another person
and retains no substantial rights in the research, that research shall
not be taken into account by the taxpayer for purposes of section 41.
See Sec. 1.41-4A(d)(2).
(ii) Taxpayer entitled to results. If the taxpayer in carrying on a
trade or business performs research on behalf of other persons but
retains substantial rights in the research, the taxpayer shall take
otherwise qualified expenses for that research into account for purposes
of section 41 to the extent provided in Sec. 1.41-4A(d)(3).
(4) Partnerships--(i) In general. An in-house research expense or a
contract research expense paid or incurred by a partnership is a
qualified research expense of the partnership if the expense is paid or
incurred by the partnership in carrying on a trade or business of the
partnership, determined at the partnership level without regard to the
trade or business of any partner.
(ii) Special rule for certain partnerships and joint ventures. (A)
If a partnership or a joint venture (taxable as a partnership) is not
carrying on the trade or business to which the research relates, then
the general rule in paragraph (a)(4)(i) of this section would not allow
any of such expenditures to qualify as qualified research expenses.
(B) Notwithstanding paragraph (a)(4)(ii)(A) of this section, if all
the partners or venturers are entitled to make independent use of the
results of the research, this paragraph (a)(4)(ii) may allow a portion
of such expenditures to be treated as qualified research expenditures by
certain partners or venturers.
(C) First, in order to determine the amount of credit that may be
claimed by certain partners or venturers, the
[[Page 154]]
amount of qualified research expenditures of the partnership or joint
venture is determined (assuming for this purpose that the partnership or
joint venture is carrying on the trade or business to which the research
relates).
(D) Second, this amount is reduced by the proportionate share of
such expenses allocable to those partners or venturers who would not be
able to claim such expenses as qualified research expenditures if they
had paid or incurred such expenses directly. For this purpose such
partners' or venturers' proportionate share of such expenses shall be
determined on the basis of such partners' or venturers' share of
partnership items of income or gain (excluding gain allocated under
section 704(c)) which results in the largest proportionate share. Where
a partner's or venturer's share of partnership items of income or gain
(excluding gain allocated under section 704(c)) may vary during the
period such partner or venturer is a partner or venturer in such
partnership or joint venture, such share shall be the highest share such
partner or venturer may receive.
(E) Third, the remaining amount of qualified research expenses is
allocated among those partners or venturers who would have been entitled
to claim a credit for such expenses if they had paid or incurred the
research expenses in their own trade or business, in the relative
proportions that such partners or venturers share deductions for
expenses under section 174 for the taxable year that such expenses are
paid or incurred.
(F) For purposes of section 41, research expenditures to which this
paragraph (a)(4)(ii) applies shall be treated as paid or incurred
directly by such partners or venturers. See Sec. 1.41-7(a)(3)(ii) for
special rules regarding these expenses.
(iii) The following examples illustrate the application of the
principles contained in paragraph (a)(4)(ii) of this section.
Example 1. A joint venture (taxable as a partnership) is formed by
corporations A, B, and C to develop and market a supercomputer. A and B
are in the business of developing computers, and each has a 30 percent
distributive share of each item of income, gain, loss, deduction, credit
and basis of the joint venture. C, which is an investment banking firm,
has a 40 percent distributive share of each item of income, gain, loss,
deduction, credit and basis of the joint venture. The joint venture
agreement provides that A's, B's and C's distributive shares will not
vary during the life of the joint venture, liquidation proceeds are to
be distributed in accordance with the partners' capital account
balances, and any partner with a deficit in its capital account
following the distribution of liquidation proceeds is required to
restore the amount of such deficit to the joint venture. Assume in Year
1 that the joint venture incurs $100x of ``qualified research
expenses.'' Assume further that the joint venture cannot claim the
research credit for such expenses because it is not carrying on the
trade or business to which the research relates. In addition A, B, and C
are all entitled to make independent use of the results of the research.
First, the amount of qualified research expenses of the joint venture is
$l00x. Second, this amount is reduced by the proportionate share of such
expenses allocable to C, the venturer which would not have been able to
claim such expenses as qualified research expenditures if it had paid or
incurred them directly, C's proportionate share of such expenses is $40x
(40% of $100x). The reduced amount is $60x. Third, the remaining $60x of
qualified research expenses is allocated between A and B in the relative
proportions that A and B share deductions for expenses under section
174. A is entitled to treat $30x ((30%/(30%+30%)) $60x) as a qualified
research expense. B is also entitled to treat $30x ((30%/(30%+30%))
$60x) as a qualified research expense.
Example 2. Assume the same facts as in example (1) except that the
joint venture agreement provides that during the first 2 years of the
joint venture, A and B are each allocated 10 percent of each item of
income, gain, loss, deduction, credit and basis, and C is allocated 80
percent of each item of income, gain, loss, deduction, credit and basis.
Thereafter the allocations are the same as in example (1). Assume for
purposes of this example that such allocations have substantial economic
effect for purposes of section 704 (b). C's highest share of such items
during the life of the joint venture is 80 percent. Therefore C's
proportionate share of the joint venture's qualified research expenses
is $80x (80% of $100x). The reduced amount of qualified research
expenses is $20x ($100x-$80x). A is entitled to treat $10x ((10%/
(10%+10%)) $20x) as a qualified research expense in Year 1. B is also
entitled to treat $10x ((10%/(10%+10%)) $20x) as a qualified research
expense in Year 1.
(b) Supplies and personal property used in the conduct of qualified
research--(1) In general. Supplies and personal property (except to the
extent provided in paragraph (b)(4) of this section) are
[[Page 155]]
used in the conduct of qualified research if they are used in the
performance of qualified services (as defined in section 41(b)(2)(B),
but without regard to the last sentence thereof) by an employee of the
taxpayer (or by a person acting in a capacity similar to that of an
employee of the taxpayer; see example (6) of Sec. 1.41-2(e)(5)).
Expenditures for supplies or for the use of personal property that are
indirect research expenditures or general and administrative expenses do
not qualify as inhouse research expenses.
(2) Certain utility charges--(i) In general. In general, amounts
paid or incurred for utilities such as water, electricity, and natural
gas used in the building in which qualified research is performed are
treated as expenditures for general and administrative expenses.
(ii) Extraordinary expenditures. To the extent the taxpayer can
establish that the special character of the qualified research required
additional extraordinary expenditures for utilities, the additional
expenditures shall be treated as amounts paid or incurred for supplies
used in the conduct of qualified research. For example, amounts paid for
electricity used for general laboratory lighting are treated as general
and administrative expenses, but amounts paid for electricity used in
operating high energy equipment for qualified research (such as laser or
nuclear research) may be treated as expenditures for supplies used in
the conduct of qualified research to the extent the taxpayer can
establish that the special character of the research required an
extraordinary additional expenditure for electricity.
(3) Right to use personal property. The determination of whether an
amount is paid to or incurred for another person for the right to use
personal property in the conduct of qualified research shall be made
without regard to the characterization of the transaction as a lease
under section 168(f)(8) (as that section read before it was repealed by
the Tax Reform Act of 1986). See Sec. 5c.168(f)(8)-1(b).
(4) Use of personal property in taxable years beginning after
December 31, 1985. For taxable years beginning after December 31, 1985,
amounts paid or incurred for the use of personal property are not
qualified research expenses, except for any amount paid or incurred to
another person for the right to use (time-sharing) computers in the
conduct of qualified research. The computer must be owned and operated
by someone other than the taxpayer, located off the taxpayer's premises,
and the taxpayer must not be the primary user of the computer.
(c) Qualified services--(1) Engaging in qualified research. The term
``engaging in qualified research'' as used in section 41(b)(2)(B) means
the actual conduct of qualified research (as in the case of a scientist
conducting laboratory experiments).
(2) Direct supervision. The term ``direct supervision'' as used in
section 41(b)(2)(B) means the immediate supervision (first-line
management) of qualified research (as in the case of a research
scientist who directly supervises laboratory experiments, but who may
not actually perform experiments). ``Direct supervision'' does not
include supervision by a higher-level manager to whom first-line
managers report, even if that manager is a qualified research scientist.
(3) Direct support. The term ``direct support'' as used in section
41(b)(2)(B) means services in the direct support of either--
(i) Persons engaging in actual conduct of qualified research, or
(ii) Persons who are directly supervising persons engaging in the
actual conduct of qualified research. For example, direct support of
research includes the services of a secretary for typing reports
describing laboratory results derived from qualified research, of a
laboratory worker for cleaning equipment used in qualified research, of
a clerk for compiling research data, and of a machinist for machining a
part of an experimental model used in qualified research. Direct support
of research activities does not include general administrative services,
or other services only indirectly of benefit to research activities. For
example, services of payroll personnel in preparing salary checks of
laboratory scientists, of an accountant for accounting for research
expenses, of a janitor for general cleaning of a research laboratory,
[[Page 156]]
or of officers engaged in supervising financial or personnel matters do
not qualify as direct support of research. This is true whether general
administrative personnel are part of the research department or in a
separate department. Direct support does not include supervision.
Supervisory services constitute ``qualified services'' only to the
extent provided in paragraph (c)(2) of this section.
(d) Wages paid for qualified services--(1) In general. Wages paid to
or incurred for an employee constitute in-house research expenses only
to the extent the wages were paid or incurred for qualified services
performed by the employee. If an employee has performed both qualified
services and nonqualified services, only the amount of wages allocated
to the performance of qualified services constitutes an in-house
research expense. In the absence of another method of allocation that
the taxpayer can demonstrate to be more appropriate, the amount of in-
house research expense shall be determined by multiplying the total
amount of wages paid to or incurred for the employee during the taxable
year by the ratio of the total time actually spent by the employee in
the performance of qualified services for the taxpayer to the total time
spent by the employee in the performance of all services for the
taxpayer during the taxable year.
(2) ``Substantially all.'' Notwithstanding paragraph (d)(1) of this
section, if substantially all of the services performed by an employee
for the taxpayer during the taxable year consist of services meeting the
requirements of section 41(b)(2)(B) (i) or (ii), then the term
``qualified services'' means all of the services performed by the
employee for the taxpayer during the taxable year. Services meeting the
requirements of section 41(b)(2)(B) (i) or (ii) constitute substantially
all of the services performed by the employee during a taxable year only
if the wages allocated (on the basis used for purposes of paragraph
(d)(1) of this section) to services meeting the requirements of section
41(b)(2)(B) (i) or (ii) constitute at least 80 percent of the wages paid
to or incurred by the taxpayer for the employee during the taxable year.
(e) Contract research expenses--(1) In general. A contract research
expense is 65 percent of any expense paid or incurred in carrying on a
trade or business to any person other than an employee of the taxpayer
for the performance on behalf of the taxpayer of--
(i) Qualified research as defined in Sec. 1.41-4 or 1.41-4A,
whichever is applicable, or
(ii) Services which, if performed by employees of the taxpayer,
would constitute qualified services within the meaning of section
41(b)(2)(B).
Where the contract calls for services other than services described in
this paragraph (e)(1), only 65 percent of the portion of the amount paid
or incurred that is attributable to the services described in this
paragraph (e)(1) is a contract research expense.
(2) Performance of qualified research. An expense is paid or
incurred for the performance of qualified research only to the extent
that it is paid or incurred pursuant to an agreement that--
(i) Is entered into prior to the performance of the qualified
research,
(ii) Provides that research be performed on behalf of the taxpayer,
and
(iii) Requires the taxpayer to bear the expense even if the research
is not successful.
If an expense is paid or incurred pursuant to an agreement under which
payment is contingent on the success of the research, then the expense
is considered paid for the product or result rather than the performance
of the research, and the payment is not a contract research expense. The
previous sentence applies only to that portion of a payment which is
contingent on the success of the research.
(3) ``On behalf of.'' Qualified research is performed on behalf of
the taxpayer if the taxpayer has a right to the research results.
Qualified research can be performed on behalf of the taxpayer
notwithstanding the fact that the taxpayer does not have exclusive
rights to the results.
(4) Prepaid amounts. Notwithstanding paragraph (e)(1) of this
section, if any contract research expense paid or incurred during any
taxable year is attributable to qualified research to be conducted after
the close of such taxable year, the expense so attributable
[[Page 157]]
shall be treated for purposes of section 41(b)(1)(B) as paid or incurred
during the period during which the qualified research is conducted.
(5) Examples. The following examples illustrate provisions contained
in paragraphs (e) (1) through (4) of this section.
Example 1. A, a cash-method taxpayer using the calendar year as the
taxable year, enters into a contract with B Corporation under which B is
to perform qualified research on behalf of A. The contract requires A to
pay B $300x, regardless of the success of the research. In 1982, B
performs all of the research, and A makes full payment of $300x under
the contract. Accordingly, during the taxable year 1982, $195x (65
percent of the payment of $300x) constitutes a contract research expense
of A.
Example 2. The facts are the same as in example (1), except that B
performs 50 percent of the research in 1983. Of the $195x of contract
research expense paid in 1982, paragraph (e)(4) of this section provides
that $97.5x (50 percent of $195x) is a contract research expense for
1982 and the remaining $97.5x is contract research expense for 1983.
Example 3. The facts are the same as in example (1), except that
instead of calling for a flat payment of $300x, the contract requires A
to reimburse B for all expenses plus pay B $l00x. B incurs expenses
attributable to the research as follows:
Labor.......................................................... $90x
Supplies....................................................... 20x
Depreciation on equipment...................................... 50x
Overhead....................................................... 40x
--------
Total.................................................... 200x
Under this agreement A pays B $300x during 1982. Accordingly, during
taxable year 1982, $195x (65 percent of $300x) of the payment
constitutes a contract research expense of A.
Example 4. The facts are the same as in example (3), except that A
agrees to reimburse B for all expenses and agrees to pay B an additional
amount of $100x, but the additional $100x is payable only if the
research is successful. The research is successful and A pays B $300x
during 1982. Paragraph (e)(2) of this section provides that the
contingent portion of the payment is not an expense incurred for the
performance of qualified research. Thus, for taxable year 1982, $130x
(65 percent of the payment of $200x) constitutes a contract research
expense of A.
Example 5. C conducts in-house qualified research in carrying on a
trade or business. In addition, C pays D Corporation, a provider of
computer services, $100x to develop software to be used in analyzing the
results C derives from its research. Because the software services, if
performed by an employee of C, would constitute qualified services, $65x
of the $100x constitutes a contract research expense of C.
Example 6. C conducts in-house qualified research in carrying on C's
trade or business. In addition, C contracts with E Corporation, a
provider of temporary secretarial services, for the services of a
secretary for a week. The secretary spends the entire week typing
reports describing laboratory results derived from C's qualified
research. C pays E $400 for the secretarial service, none of which
constitutes wages within the meaning of section 41(b)(2)(D). These
services, if performed by employees of C, would constitute qualified
services within the meaning of section 41(b)(2)(B). Thus, pursuant to
paragraph (e)(1) of this section, $260 (65 percent of $400) constitutes
a contract research expense of C.
Example 7. C conducts in-house qualified research in carrying on C's
trade or business. In addition, C pays F, an outside accountant, $100x
to keep C's books and records pertaining to the research project. The
activity carried on by the accountant does not constitute qualified
research as defined in section 41(d). The services performed by the
accountant, if performed by an employee of C, would not constitute
qualified services (as defined in section 41(b)(2)(B)). Thus, under
paragraph (e)(1) of this section, no portion of the $100x constitutes a
contract research expense.
[T.D. 8251, 54 FR 21204, May 17, 1989, as amended by T.D. 8930, 65 FR
287, Jan. 3, 2001]
Sec. 1.41-3 Base amount for taxable years beginning on or after
January 3, 2001.
(a) New taxpayers. If, with respect to any credit year, the taxpayer
has not been in existence for any previous taxable year, the average
annual gross receipts of the taxpayer for the four taxable years
preceding the credit year shall be zero. If, with respect to any credit
year, the taxpayer has been in existence for at least one previous
taxable year, but has not been in existence for four taxable years
preceding the taxable year, then the average annual gross receipts of
the taxpayer for the four taxable years preceding the credit year shall
be the average annual gross receipts for the number of taxable years
preceding the credit year for which the taxpayer has been in existence.
(b) Special rules for short taxable years--(1) Short credit year. If
a credit year is a short taxable year, then the base amount determined
under section 41(c)(1) (but not section 41(c)(2)) shall
[[Page 158]]
be modified by multiplying that amount by the number of months in the
short taxable year and dividing the result by 12.
(2) Short taxable year preceding credit year. If one or more of the
four taxable years preceding the credit year is a short taxable year,
then the gross receipts for such year are deemed to be equal to the
gross receipts actually derived in that year multiplied by 12 and
divided by the number of months in that year.
(3) Short taxable year in determining fixed-base percentage. No
adjustment shall be made on account of a short taxable year to the
computation of a taxpayer's fixed-base percentage.
(c) Definition of gross receipts--(1) In general. For purposes of
section 41, gross receipts means the total amount, as determined under
the taxpayer's method of accounting, derived by the taxpayer from all
its activities and from all sources (e.g., revenues derived from the
sale of inventory before reduction for cost of goods sold).
(2) Amounts excluded. For purposes of this paragraph (c), gross
receipts do not include amounts representing--
(i) Returns or allowances;
(ii) Receipts from the sale or exchange of capital assets, as
defined in section 1221;
(iii) Repayments of loans or similar instruments (e.g., a repayment
of the principal amount of a loan held by a commercial lender);
(iv) Receipts from a sale or exchange not in the ordinary course of
business, such as the sale of an entire trade or business or the sale of
property used in a trade or business as defined under section 1221(2);
(v) Amounts received with respect to sales tax or other similar
state and local taxes if, under the applicable state or local law, the
tax is legally imposed on the purchaser of the good or service, and the
taxpayer merely collects and remits the tax to the taxing authority; and
(vi) Amounts received by a taxpayer in a taxable year that precedes
the first taxable year in which the taxpayer derives more than $25,000
in gross receipts other than investment income. For purposes of this
paragraph (c)(2)(vi), investment income is interest or distributions
with respect to stock (other than the stock of a 20-percent owned
corporation as defined in section 243(c)(2).
(3) Foreign corporations. For purposes of section 41, in the case of
a foreign corporation, gross receipts include only gross receipts that
are effectively connected with the conduct of a trade or business within
the United States, the Commonwealth of Puerto Rico, or other possessions
of the United States. See section 864(c) and applicable regulations
thereunder for the definition of effectively connected income.
(d) Consistency requirement--(1) In general. In computing the credit
for increasing research activities for taxable years beginning after
December 31, 1989, qualified research expenses and gross receipts taken
into account in computing a taxpayer's fixed-base percentage and a
taxpayer's base amount must be determined on a basis consistent with the
definition of qualified research expenses and gross receipts for the
credit year, without regard to the law in effect for the taxable years
taken into account in computing the fixed-base percentage or the base
amount. This consistency requirement applies even if the period for
filing a claim for credit or refund has expired for any taxable year
taken into account in computing the fixed-base percentage or the base
amount.
(2) Illustrations. The following examples illustrate the application
of the consistency rule of paragraph (d)(1) of this section:
Example 1. (i) X, an accrual method taxpayer using the calendar year
as its taxable year, incurs qualified research expenses in 2001. X wants
to compute its research credit under section 41 for the tax year ending
December 31, 2001. As part of the computation, X must determine its
fixed-base percentage, which depends in part on X's qualified research
expenses incurred during the fixed-base period, the taxable years
beginning after December 31, 1983, and before January 1, 1989.
(ii) During the fixed-base period, X reported the following amounts
as qualified research expenses on its Form 6765:
1984........................................................... $100x
1985........................................................... 120x
1986........................................................... 150x
1987........................................................... 180x
1988........................................................... 170x
--------
[[Page 159]]
Total...................................................... 720x
(iii) For the taxable years ending December 31, 1984, and December
31, 1985, X based the amounts reported as qualified research expenses on
the definition of qualified research in effect for those taxable years.
The definition of qualified research changed for taxable years beginning
after December 31, 1985. If X used the definition of qualified research
applicable to its taxable year ending December 31, 2001, the credit
year, its qualified research expenses for the taxable years ending
December 31, 1984, and December 31, 1985, would be reduced to $ 80x and
$ 100x, respectively. Under the consistency rule in section 41(c)(5) and
paragraph (d)(1) of this section, to compute the research credit for the
tax year ending December 31, 2001, X must reduce its qualified research
expenses for 1984 and 1985 to reflect the change in the definition of
qualified research for taxable years beginning after December 31, 1985.
Thus, X's total qualified research expenses for the fixed-base period
(1984-1988) to be used in computing the fixed-base percentage is $80 +
100 + 150 + 180 + 170 = $680x.
Example 2. The facts are the same as in Example 1, except that, in
computing its qualified research expenses for the taxable year ending
December 31, 2001, X claimed that a certain type of expenditure incurred
in 2001 was a qualified research expense. X's claim reflected a change
in X's position, because X had not previously claimed that similar
expenditures were qualified research expenses. The consistency rule
requires X to adjust its qualified research expenses in computing the
fixed-base percentage to include any similar expenditures not treated as
qualified research expenses during the fixed-base period, regardless of
whether the period for filing a claim for credit or refund has expired
for any year taken into account in computing the fixed-base percentage.
(e) Effective date. The rules in paragraphs (c) and (d) of this
section are applicable for taxable years beginning on or after the date
final regulations are published in the Federal Register.
[T.D. 8930, 66 FR 289, Jan. 3, 2001]
Sec. 1.41-4 Qualified research for expenditures paid or incurred in
taxable years ending on or after December 31, 2003.
(a) Qualified research--(1) General rule. Research activities
related to the development or improvement of a business component
constitute qualified research only if the research activities meet all
of the requirements of section 41(d)(1) and this section, and are not
otherwise excluded under section 41(d)(3)(B) or (d)(4), or this section.
(2) Requirements of section 41(d)(1). Research constitutes qualified
research only if it is research--
(i) With respect to which expenditures may be treated as expenses
under section 174, see Sec. 1.174-2;
(ii) That is undertaken for the purpose of discovering information
that is technological in nature, and the application of which is
intended to be useful in the development of a new or improved business
component of the taxpayer; and
(iii) Substantially all of the activities of which constitute
elements of a process of experimentation that relates to a qualified
purpose.
(3) Undertaken for the purpose of discovering information--(i) In
general. For purposes of section 41(d) and this section, research must
be undertaken for the purpose of discovering information that is
technological in nature. Research is undertaken for the purpose of
discovering information if it is intended to eliminate uncertainty
concerning the development or improvement of a business component.
Uncertainty exists if the information available to the taxpayer does not
establish the capability or method for developing or improving the
business component, or the appropriate design of the business component.
(ii) Application of the discovering information requirement. A
determination that research is undertaken for the purpose of discovering
information that is technological in nature does not require the
taxpayer be seeking to obtain information that exceeds, expands or
refines the common knowledge of skilled professionals in the particular
field of science or engineering in which the taxpayer is performing the
research. In addition, a determination that research is undertaken for
the purpose of discovering information that is technological in nature
does not require that the taxpayer succeed in developing a new or
improved business component.
(iii) Patent safe harbor. For purposes of section 41(d) and
paragraph (a)(3)(i) of this section, the issuance of a patent by the
Patent and Trademark Office under the provisions of 35 U.S.C. 151
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(other than a patent for design issued under the provisions of 35 U.S.C.
171) is conclusive evidence that a taxpayer has discovered information
that is technological in nature that is intended to eliminate
uncertainty concerning the development or improvement of a business
component. However, the issuance of such a patent is not a precondition
for credit availability.
(4) Technological in nature. For purposes of section 41(d) and this
section, information is technological in nature if the process of
experimentation used to discover such information fundamentally relies
on principles of the physical or biological sciences, engineering, or
computer science. A taxpayer may employ existing technologies and may
rely on existing principles of the physical or biological sciences,
engineering, or computer science to satisfy this requirement.
(5) Process of experimentation--(i) In general. For purposes of
section 41(d) and this section, a process of experimentation is a
process designed to evaluate one or more alternatives to achieve a
result where the capability or the method of achieving that result, or
the appropriate design of that result, is uncertain as of the beginning
of the taxpayer's research activities. A process of experimentation must
fundamentally rely on the principles of the physical or biological
sciences, engineering, or computer science and involves the
identification of uncertainty concerning the development or improvement
of a business component, the identification of one or more alternatives
intended to eliminate that uncertainty, and the identification and the
conduct of a process of evaluating the alternatives (through, for
example, modeling, simulation, or a systematic trial and error
methodology). A process of experimentation must be an evaluative process
and generally should be capable of evaluating more than one alternative.
A taxpayer may undertake a process of experimentation if there is no
uncertainty concerning the taxpayer's capability or method of achieving
the desired result so long as the appropriate design of the desired
result is uncertain as of the beginning of the taxpayer's research
activities. Uncertainty concerning the development or improvement of the
business component (e.g., its appropriate design) does not establish
that all activities undertaken to achieve that new or improved business
component constitute a process of experimentation.
(ii) Qualified purpose. For purposes of section 41(d) and this
section, a process of experimentation is undertaken for a qualified
purpose if it relates to a new or improved function, performance,
reliability or quality of the business component. Research will not be
treated as conducted for a qualified purpose if it relates to style,
taste, cosmetic, or seasonal design factors.
(6) Substantially all requirement. In order for activities to
constitute qualified research under section 41(d)(1), substantially all
of the activities must constitute elements of a process of
experimentation that relates to a qualified purpose. The substantially
all requirement of section 41(d)(1)(C) and paragraph (a)(2)(iii) of this
section is satisfied only if 80 percent or more of a taxpayer's research
activities, measured on a cost or other consistently applied reasonable
basis (and without regard to section 1.41-2(d)(2)), constitute elements
of a process of experimentation for a purpose described in section
41(d)(3). Accordingly, if 80 percent (or more) of a taxpayer's research
activities with respect to a business component constitute elements of a
process of experimentation for a purpose described in section 41(d)(3),
the substantially all requirement is satisfied even if the remaining 20
percent (or less) of a taxpayer's research activities with respect to
the business component do not constitute elements of a process of
experimentation for a purpose described in section 41(d)(3), so long as
these remaining research activities satisfy the requirements of section
41(d)(1)(A) and are not otherwise excluded under section 41(d)(4). The
substantially all requirement is applied separately to each business
component.
(7) Use of computers and information technology. The employment of
computers or information technology, or the reliance on principles of
computer science or information technology to store, collect,
manipulate, translate, disseminate, produce, distribute, or
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process data or information, and similar uses of computers and
information technology does not itself establish that qualified research
has been undertaken.
(8) Illustrations. The following examples illustrate the application
of paragraph (a)(5) of this section:
Example 1. (i) Facts. X is engaged in the business of developing and
manufacturing widgets. X wants to change the color of its blue widget to
green. X obtains from various suppliers several different shades of
green paint. X paints several sample widgets, and surveys X's customers
to determine which shade of green X's customers prefer.
(ii) Conclusion. X's activities to change the color of its blue
widget to green are not qualified research under section 41(d)(1) and
paragraph (a)(5) of this section because substantially all of X's
activities are not undertaken for a qualified purpose. All of X's
research activities are related to style, taste, cosmetic, or seasonal
design factors.
Example 2. (i) Facts. The facts are the same as in Example 1, except
that X chooses one of the green paints. X obtains samples of the green
paint from a supplier and determines that X must modify its painting
process to accommodate the green paint because the green paint has
different characteristics from other paints X has used. X obtains
detailed data on the green paint from X's paint supplier. X also
consults with the manufacturer of X's paint spraying machines. The
manufacturer informs X that X must acquire a new nozzle that operates
with the green paint X wants to use. X tests the nozzles to ensure that
they work as specified by the manufacturer of the paint spraying
machines.
(ii) Conclusion. X's activities to modify its painting process are a
separate business component under section 41(d)(2)(A). X's activities to
modify its painting process to change the color of its blue widget to
green are not qualified research under section 41(d)(1) and paragraph
(a)(5) of this section. X did not conduct a process of evaluating
alternatives in order to eliminate uncertainty regarding the
modification of its painting process. Rather, the manufacturer of the
paint machines eliminated X's uncertainty regarding the modification of
its painting process. X's activities to test the nozzles to determine if
the nozzles work as specified by the manufacturer of the paint spraying
machines are in the nature of routine or ordinary testing or inspection
for quality control.
Example 3. (i) Facts. X is engaged in the business of manufacturing
food products and currently manufactures a large-shred version of a
product. X seeks to modify its current production line to permit it to
manufacture both a large-shred version and a fine-shred version of one
of its food products. A smaller, thinner shredding blade capable of
producing a fine-shred version of the food product, however, is not
commercially available. Thus, X must develop a new shredding blade that
can be fitted onto its current production line. X is uncertain
concerning the design of the new shredding blade, because the material
used in its existing blade breaks when machined into smaller, thinner
blades. X engages in a systematic trial and error process of analyzing
various blade designs and materials to determine whether the new
shredding blade must be constructed of a different material from that of
its existing shredding blade and, if so, what material will best meet
X's functional requirements.
(ii) Conclusion. X's activities to modify its current production
line by developing the new shredding blade meet the requirements of
qualified research as set forth in paragraph (a)(2) of this section.
Substantially all of X's activities constitute elements of a process of
experimentation because X evaluated alternatives to achieve a result
where the method of achieving that result, and the appropriate design of
that result, were uncertain as of the beginning of the taxpayer's
research activities. X identified uncertainties related to the
development of a business component, and identified alternatives
intended to eliminate these uncertainties. Furthermore, X's process of
evaluating identified alternatives was technological in nature, and was
undertaken to eliminate the uncertainties.
Example 4. (i) Facts. X is in the business of designing, developing
and manufacturing automobiles. In response to government-mandated fuel
economy requirements, X seeks to update its current model vehicle and
undertakes to improve aerodynamics by lowering the hood of its current
model vehicle. X determines, however, that lowering the hood changes the
air flow under the hood, which changes the rate at which air enters the
engine through the air intake system, and which reduces the
functionality of the cooling system. X's engineers are uncertain how to
design a lower hood to obtain the increased fuel economy, while
maintaining the necessary air flow under the hood. X designs, models,
simulates, tests, refines, and re-tests several alternative designs for
the hood and associated proposed modifications to both the air intake
system and cooling system. This process enables X to eliminate the
uncertainties related to the integrated design of the hood, air intake
system, and cooling system, and such activities constitute eighty-five
percent of X's total activities to update its current model vehicle. X
then engages in additional activities that do not involve a process of
evaluating alternatives in order to eliminate uncertainties.
[[Page 162]]
The additional activities constitute only fifteen percent of X's total
activities to update its current model vehicle.
(ii) Conclusion. In general, if eighty percent or more of a
taxpayer's research activities measured on a cost or other consistently
applied reasonable basis constitute elements of a process of
experimentation for a qualified purpose under section 41(d)(3)(A) and
paragraph (a)(5)(ii) of this section, then the substantially all
requirement of section 41(d)(1)(C) and paragraph (a)(2)(iii) of this
section is satisfied. Substantially all of X's activities constitute
elements of a process of experimentation because X evaluated
alternatives to achieve a result where the method of achieving that
result, and the appropriate design of that result, were uncertain as of
the beginning of X's research activities. X identified uncertainties
related to the improvement of a business component and identified
alternatives intended to eliminate these uncertainties. Furthermore, X's
process of evaluating the identified alternatives was technological in
nature and was undertaken to eliminate the uncertainties. Because
substantially all (in this example, eighty-five percent) of X's
activities to update its current model vehicle constitute elements of a
process of experimentation for a qualified purpose described in section
41(d)(3)(A), all of X's activities to update its current model vehicle
meet the requirements of qualified research as set forth in paragraph
(a)(2) of this section, provided that X's remaining activities (in this
example, fifteen percent of X's total activities) satisfy the
requirements of section 41(d)(1)(A) and are not otherwise excluded under
section 41(d)(4).
(b) Application of requirements for qualified research--(1) In
general. The requirements for qualified research in section 41(d)(1) and
paragraph (a) of this section, must be applied separately to each
business component, as defined in section 41(d)(2)(B). In cases
involving development of both a product and a manufacturing or other
commercial production process for the product, research activities
relating to development of the process are not qualified research unless
the requirements of section 41(d) and this section are met for the
research activities relating to the process without taking into account
the research activities relating to development of the product.
Similarly, research activities relating to development of the product
are not qualified research unless the requirements of section 41(d) and
this section are met for the research activities relating to the product
without taking into account the research activities relating to
development of the manufacturing or other commercial production process.
(2) Shrinking-back rule. The requirements of section 41(d) and
paragraph (a) of this section are to be applied first at the level of
the discrete business component, that is, the product, process, computer
software, technique, formula, or invention to be held for sale, lease,
or license, or used by the taxpayer in a trade or business of the
taxpayer. If these requirements are not met at that level, then they
apply at the most significant subset of elements of the product,
process, computer software, technique, formula, or invention to be held
for sale, lease, or license. This shrinking back of the product is to
continue until either a subset of elements of the product that satisfies
the requirements is reached, or the most basic element of the product is
reached and such element fails to satisfy the test. This shrinking-back
rule is applied only if a taxpayer does not satisfy the requirements of
section 41(d)(1) and paragraph (a)(2) of this section with respect to
the overall business component. The shrinking-back rule is not itself
applied as a reason to exclude research activities from credit
eligibility.
(3) Illustration. The following example illustrates the application
of this paragraph (b):
Example. X, a motorcycle engine builder, develops a new carburetor
for use in a motorcycle engine. X also modifies an existing engine
design for use with the new carburetor. Under the shrinking-back rule,
the requirements of section 41(d)(1) and paragraph (a) of this section
are applied first to the engine. If the modifications to the engine when
viewed as a whole, including the development of the new carburetor, do
not satisfy the requirements of section 41(d)(1) and paragraph (a) of
this section, those requirements are applied to the next most
significant subset of elements of the business component. Assuming that
the next most significant subset of elements of the engine is the
carburetor, the research activities in developing the new carburetor may
constitute qualified research within the meaning of section 41(d)(1) and
paragraph (a) of this section.
(c) Excluded activities--(1) In general. Qualified research does not
include any
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activity described in section 41(d)(4) and paragraph (c) of this
section.
(2) Research after commercial production--(i) In general. Activities
conducted after the beginning of commercial production of a business
component are not qualified research. Activities are conducted after the
beginning of commercial production of a business component if such
activities are conducted after the component is developed to the point
where it is ready for commercial sale or use, or meets the basic
functional and economic requirements of the taxpayer for the component's
sale or use.
(ii) Certain additional activities related to the business
component. The following activities are deemed to occur after the
beginning of commercial production of a business component--
(A) Preproduction planning for a finished business component;
(B) Tooling-up for production;
(C) Trial production runs;
(D) Trouble shooting involving detecting faults in production
equipment or processes;
(E) Accumulating data relating to production processes; and
(F) Debugging flaws in a business component.
(iii) Activities related to production process or technique. In
cases involving development of both a product and a manufacturing or
other commercial production process for the product, the exclusion
described in section 41(d)(4)(A) and paragraphs (c)(2)(i) and (ii) of
this section applies separately for the activities relating to the
development of the product and the activities relating to the
development of the process. For example, even after a product meets the
taxpayer's basic functional and economic requirements, activities
relating to the development of the manufacturing process still may
constitute qualified research, provided that the development of the
process itself separately satisfies the requirements of section 41(d)
and this section, and the activities are conducted before the process
meets the taxpayer's basic functional and economic requirements or is
ready for commercial use.
(iv) Clinical testing. Clinical testing of a pharmaceutical product
prior to its commercial production in the United States is not treated
as occurring after the beginning of commercial production even if the
product is commercially available in other countries. Additional
clinical testing of a pharmaceutical product after a product has been
approved for a specific therapeutic use by the Food and Drug
Administration and is ready for commercial production and sale is not
treated as occurring after the beginning of commercial production if
such clinical testing is undertaken to establish new functional uses,
characteristics, indications, combinations, dosages, or delivery forms
for the product. A functional use, characteristic, indication,
combination, dosage, or delivery form shall be considered new only if
such functional use, characteristic, indication, combination, dosage, or
delivery form must be approved by the Food and Drug Administration.
(3) Adaptation of existing business components. Activities relating
to adapting an existing business component to a particular customer's
requirement or need are not qualified research. This exclusion does not
apply merely because a business component is intended for a specific
customer.
(4) Duplication of existing business component. Activities relating
to reproducing an existing business component (in whole or in part) from
a physical examination of the business component itself or from plans,
blueprints, detailed specifications, or publicly available information
about the business component are not qualified research. This exclusion
does not apply merely because the taxpayer examines an existing business
component in the course of developing its own business component.
(5) Surveys, studies, research relating to management functions,
etc. Qualified research does not include activities relating to--
(i) Efficiency surveys;
(ii) Management functions or techniques, including such items as
preparation of financial data and analysis, development of employee
training programs and management organization plans, and management-
based changes in production processes (such as rearranging work stations
on an assembly line);
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(iii) Market research, testing, or development (including
advertising or promotions);
(iv) Routine data collections; or
(v) Routine or ordinary testing or inspections for quality control.
(6) Internal use software for taxable years beginning on or after
December 31, 1985. [Reserved].
(7) Activities outside the United States, Puerto Rico, and other
possessions--(i) In general. Research conducted outside the United
States, as defined in section 7701(a)(9), the Commonwealth of Puerto
Rico and other possessions of the United States does not constitute
qualified research.
(ii) Apportionment of in-house research expenses. In-house research
expenses paid or incurred for qualified services performed both in the
United States, the Commonwealth of Puerto Rico and other possessions of
the United States and outside the United States, the Commonwealth of
Puerto Rico and other possessions of the United States must be
apportioned between the services performed in the United States, the
Commonwealth of Puerto Rico and other possessions of the United States
and the services performed outside the United States, the Commonwealth
of Puerto Rico and other possessions of the United States. Only those
in-house research expenses apportioned to the services performed within
the United States, the Commonwealth of Puerto Rico and other possessions
of the United States are eligible to be treated as qualified research
expenses, unless the in-house research expenses are wages and the 80
percent rule of Sec. 1.41-2(d)(2) applies.
(iii) Apportionment of contract research expenses. If contract
research is performed partly in the United States, the Commonwealth of
Puerto Rico and other possessions of the United States and partly
outside the United States, the Commonwealth of Puerto Rico and other
possessions of the United States, only 65 percent (or 75 percent in the
case of amounts paid to qualified research consortia) of the portion of
the contract amount that is attributable to the research activity
performed in the United States, the Commonwealth of Puerto Rico and
other possessions of the United States may qualify as a contract
research expense (even if 80 percent or more of the contract amount is
for research performed in the United States, the Commonwealth of Puerto
Rico and other possessions of the United States).
(8) Research in the social sciences, etc. Qualified research does
not include research in the social sciences (including economics,
business management, and behavioral sciences), arts, or humanities.
(9) Research funded by any grant, contract, or otherwise. Qualified
research does not include any research to the extent funded by any
grant, contract, or otherwise by another person (or governmental
entity). To determine the extent to which research is so funded, Sec.
1.41-4A(d) applies.
(10) Illustrations. The following examples illustrate provisions
contained in paragraphs (c)(1) through (9) (excepting paragraphs (c)(6)
of this section) of this section. No inference should be drawn from
these examples concerning the application of section 41(d)(1) and
paragraph (a) of this section to these facts. The examples are as
follows:
Example 1. (i) Facts. X, a tire manufacturer, develops a new
material to use in its tires. X conducts research to determine the
changes that will be necessary for X to modify its existing
manufacturing processes to manufacture the new tire. X determines that
the new tire material retains heat for a longer period of time than the
materials X currently uses for tires, and, as a result, the new tire
material adheres to the manufacturing equipment during tread cooling. X
evaluates several alternatives for processing the treads at cooler
temperatures to address this problem, including a new type of belt for
its manufacturing equipment to be used in tread cooling. Such a belt is
not commercially available. Because X is uncertain of the belt design, X
develops and conducts sophisticated engineering tests on several
alternative designs for a new type of belt to be used in tread cooling
until X successfully achieves a design that meets X's requirements. X
then manufactures a set of belts for its production equipment, installs
the belts, and tests the belts to make sure they were manufactured
correctly.
(ii) Conclusion. X's research with respect to the design of the new
belts to be used in its manufacturing of the new tire may be qualified
research under section 41(d)(1) and paragraph (a) of this section.
However, X's expenses to implement the new belts, including the costs to
manufacture, install, and test
[[Page 165]]
the belts were incurred after the belts met the taxpayer's functional
and economic requirements and are excluded as research after commercial
production under section 41(d)(4)(A) and paragraph (c)(2) of this
section.
Example 2. (i) Facts. For several years, X has manufactured and sold
a particular kind of widget. X initiates a new research project to
develop a new or improved widget.
(ii) Conclusion. X's activities to develop a new or improved widget
are not excluded from the definition of qualified research under section
41(d)(4)(A) and paragraph (c)(2) of this section. X's activities
relating to the development of a new or improved widget constitute a new
research project to develop a new business component. X's research
activities relating to the development of the new or improved widget, a
new business component, are not considered to be activities conducted
after the beginning of commercial production under section 41(d)(4)(A)
and paragraph (c)(2) of this section.
Example 3. (i) Facts. X, a computer software development firm, owns
all substantial rights in a general ledger accounting software core
program that X markets and licenses to customers. X incurs expenditures
in adapting the core software program to the requirements of C, one of
X's customers.
(ii) Conclusion. Because X's activities represent activities to
adapt an existing software program to a particular customer's
requirement or need, X's activities are excluded from the definition of
qualified research under section 41(d)(4)(B) and paragraph (c)(3) of
this section.
Example 4. (i) Facts. The facts are the same as in Example 3, except
that C pays X to adapt the core software program to C's requirements.
(ii) Conclusion. Because X's activities are excluded from the
definition of qualified research under section 41(d)(4)(B) and paragraph
(c)(3) of this section, C's payments to X are not for qualified research
and are not considered to be contract research expenses under section
41(b)(3)(A).
Example 5. (i) Facts. The facts are the same as in Example 3, except
that C's own employees adapt the core software program to C's
requirements.
(ii) Conclusion. Because C's employees' activities to adapt the core
software program to C's requirements are excluded from the definition of
qualified research under section 41(d)(4)(B) and paragraph (c)(3) of
this section, the wages C paid to its employees do not constitute in-
house research expenses under section 41(b)(2)(A).
Example 6. (i) Facts. X manufacturers and sells rail cars. Because
rail cars have numerous specifications related to performance,
reliability and quality, rail car designs are subject to extensive,
complex testing in the scientific or laboratory sense. B orders
passenger rail cars from X. B's rail car requirements differ from those
of X's other existing customers only in that B wants fewer seats in its
passenger cars and a higher quality seating material and carpet that are
commercially available. X manufactures rail cars meeting B's
requirements.
(ii) Conclusion. X's activities to manufacture rail cars for B are
excluded from the definition of qualified research. The rail car sold to
B was not a new business component, but merely an adaptation of an
existing business component that did not require a process of
experimentation. Thus, X's activities to manufacture rail cars for B are
excluded from the definition of qualified research under section
41(d)(4)(B) and paragraph (c)(3) of this section because X's activities
represent activities to adapt an existing business component to a
particular customer's requirement or need.
Example 7. (i) Facts. X, a manufacturer, undertakes to create a
manufacturing process for a new valve design. X determines that it
requires a specialized type of robotic equipment to use in the
manufacturing process for its new valves. Such robotic equipment is not
commercially available, and X, therefore, purchases the existing robotic
equipment for the purpose of modifying it to meet its needs. X's
engineers identify uncertainty that is technological in nature
concerning how to modify the existing robotic equipment to meet its
needs. X's engineers develop several alternative designs, and conduct
experiments using modeling and simulation in modifying the robotic
equipment and conduct extensive scientific and laboratory testing of
design alternatives. As a result of this process, X's engineers develop
a design for the robotic equipment that meets X's needs. X constructs
and installs the modified robotic equipment on its manufacturing
process.
(ii) Conclusion. X's research activities to determine how to modify
X's robotic equipment for its manufacturing process are not excluded
from the definition of qualified research under section 41(d)(4)(B) and
paragraph (c)(3) of this section, provided that X's research activities
satisfy the requirements of section 41(d)(1).
Example 8. (i) Facts. An existing gasoline additive is manufactured
by Y using three ingredients, A, B, and C. X seeks to develop and
manufacture its own gasoline additive that appears and functions in a
manner similar to Y's additive. To develop its own additive, X first
inspects the composition of Y's additive, and uses knowledge gained from
the inspection to reproduce A and B in the laboratory. Any differences
between ingredients A and B that are used in Y's additive and those
reproduced by X are insignificant and are not material to the viability,
effectiveness, or cost of A and B. X desires to use
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with A and B an ingredient that has a materially lower cost than
ingredient C. Accordingly, X engages in a process of experimentation to
develop, analyze and test potential alternative formulations of the
additive.
(ii) Conclusion. X's activities in analyzing and reproducing
ingredients A and B involve duplication of existing business components
and are excluded from the definition of qualified research under section
41(d)(4)(C) and paragraph (c)(4) of this section. X's experimentation
activities to develop potential alternative formulations of the additive
do not involve duplication of an existing business component and are not
excluded from the definition of qualified research under section
41(d)(4)(C) and paragraph (c)(4) of this section.
Example 9. (i) Facts. X, a manufacturing corporation, undertakes to
restructure its manufacturing organization. X organizes a team to design
an organizational structure that will improve X's business operations.
The team includes X's employees as well as outside management
consultants. The team studies current operations, interviews X's
employees, and studies the structure of other manufacturing facilities
to determine appropriate modifications to X's current business
operations. The team develops a recommendation of proposed modifications
which it presents to X's management. X's management approves the team's
recommendation and begins to implement the proposed modifications.
(ii) Conclusion. X's activities in developing and implementing the
new management structure are excluded from the definition of qualified
research under section 41(d)(4)(D) and paragraph (c)(5) of this section.
Qualified research does not include activities relating to management
functions or techniques including management organization plans and
management-based changes in production processes.
Example 10. (i) Facts. X, an insurance company, develops a new life
insurance product. In the course of developing the product, X engages in
research with respect to the effect of pricing and tax consequences on
demand for the product, the expected volatility of interest rates, and
the expected mortality rates (based on published data and prior
insurance claims).
(ii) Conclusion. X's activities related to the new product represent
research in the social sciences (including economics and business
management) and are thus excluded from the definition of qualified
research under section 41(d)(4)(G) and paragraph (c)(8) of this section.
(d) Recordkeeping for the research credit. A taxpayer claiming a
credit under section 41 must retain records in sufficiently usable form
and detail to substantiate that the expenditures claimed are eligible
for the credit. For the rules governing record retention, see Sec.
1.6001-1. To facilitate compliance and administration, the IRS and
taxpayers may agree to guidelines for the keeping of specific records
for purposes of substantiating research credits.
(e) Effective dates. This section is applicable for taxable years
ending on or after December 31, 2003.
[T.D. 8930, 66 FR 290, Jan. 3, 2001, as amended by T.D. 9104, 69 FR 26,
Jan. 2, 2004]
Sec. 1.41-4A Qualified research for taxable years beginning before
January 1, 1986.
(a) General rule. Except as otherwise provided in section 30(d) (as
that section read before amendment by the Tax Reform Act of 1986) and in
this section, the term ``qualified research'' means research,
expenditures for which would be research and experimental expenditures
within the meaning of section 174. Expenditures that are ineligible for
the section 174 deduction elections are not expenditures for qualified
research. For example, expenditures for the acquisition of land or
depreciable property used in research, and mineral exploration costs
described in section 174(d), are not expenditures for qualified
research.
(b) Activities outside the United States--(1) In-house research. In-
house research conducted outside the United States (as defined in
section 7701(a)(9)) cannot constitute qualified research. Thus, wages
paid to an employee scientist for services performed in a laboratory in
the United States and in a test station in Antarctica must be
apportioned between the services performed within the United States and
the services performed outside the United States, and only the wages
apportioned to the services conducted within the United States are
qualified research expenses unless the 80 percent rule of Sec. 1.41-
2(d)(2) applies.
(2) Contract research. If contract research is performed partly
within the United States and partly without, only 65 percent of the
portion of the contract amount that is attributable to the research
performed within the United States can qualify as contract research
expense (even if 80 percent or more of the contract amount was for
[[Page 167]]
research performed in the United States).
(c) Social sciences or humanities. Qualified research does not
include research in the social sciences or humanities. For purposes of
section 30(d)(2) (as that section read before amendment by the Tax
Reform Act of 1986) and of this section, the phrase ``research in the
social sciences or humanities'' encompasses all areas of research other
than research in a field of laboratory science (such as physics or
biochemistry), engineering or technology. Examples of research in the
social sciences or humanities include the development of a new life
insurance contract, a new economic model or theory, a new accounting
procedure or a new cookbook.
(d) Research funded by any grant, contract, or otherwise--(1) In
general. Research does not constitute qualified research to the extent
it is funded by any grant, contract, or otherwise by another person
(including any governmental entity). All agreements (not only research
contracts) entered into between the taxpayer performing the research and
other persons shall be considered in determining the extent to which the
research is funded. Amounts payable under any agreement that are
contingent on the success of the research and thus considered to be paid
for the product or result of the research (see Sec. 1.41-2(e)(2)) are
not treated as funding. For special rules regarding funding between
commonly controlled businesses, see Sec. 1.41-6(e).
(2) Research in which taxpayer retains no rights. If a taxpayer
performing research for another person retains no substantial rights in
research under the agreement providing for the research, the research is
treated as fully funded for purposes of section 41(d)(4)(H), and no
expenses paid or incurred by the taxpayer in performing the research are
qualified research expenses. For example, if the taxpayer performs
research under an agreement that confers on another person the exclusive
right to exploit the results of the research, the taxpayer is not
performing qualified research because the research is treated as fully
funded under this paragraph (d)(2). Incidental benefits to the taxpayer
from performance of the research (for example, increased experience in a
field of research) do not constitute substantial rights in the research.
If a taxpayer performing research for another person retains no
substantial rights in the research and if the payments to the researcher
are contingent upon the success of the research, neither the performer
nor the person paying for the research is entitled to treat any portion
of the expenditures as qualified research expenditures.
(3) Research in which the taxpayer retains substantial rights--(i)
In general. If a taxpayer performing research for another person retains
substantial rights in the research under the agreement providing for the
research, the research is funded to the extent of the payments (and fair
market value of any property) to which the taxpayer becomes entitled by
performing the research. A taxpayer does not retain substantial rights
in the research if the taxpayer must pay for the right to use the
results of the research. Except as otherwise provided in paragraph
(d)(3)(ii) of this section, the taxpayer shall reduce the amount paid or
incurred by the taxpayer for the research that would, but for section
41(d)(4)(H), constitute qualified research expenses of the taxpayer by
the amount of funding determined under the preceding sentence.
(ii) Pro rata allocation. If the taxpayer can establish to the
satisfaction of the district director--
(A) The total amount of research expenses,
(B) That the total amount of research expenses exceed the funding,
and
(C) That the otherwise qualified research expenses (that is, the
expenses which would be qualified research expenses if there were no
funding) exceed 65 percent of the funding, then the taxpayer may
allocate the funding pro rata to nonqualified and otherwise qualified
research expenses, rather than allocating it 100 percent to otherwise
qualified research expenses (as provided in paragraph (d)(3)(i) of this
section). In no event, however, shall less than 65 percent of the
funding be applied against the otherwise qualified research expenses.
(iii) Project-by-project determination. The provisions of this
paragraph (d)(3)
[[Page 168]]
shall be applied separately to each research project undertaken by the
taxpayer.
(4) Independent research and development under the Federal
Acquisition Regulations System and similar provisions. The Federal
Acquisition Regulations System and similar rules and regulations
relating to contracts (fixed price, cost plus, etc.) with government
entities provide for allocation of certain ``independent research and
development costs'' and ``bid and proposal costs'' of a contractor to
contracts entered into with that contractor. In general, any
``independent research and development costs'' and ``bid and proposal
costs'' paid to a taxpayer by reason of such a contract shall not be
treated as funding the underlying research activities except to the
extent the ``independent research and development costs'' and ``bid and
proposal costs'' are properly severable from the contract. See Sec.
1.451-3(e); see also section 804(d)(2) of the Tax Reform Act of 1986.
(5) Funding determinable only in subsequent taxable year. If at the
time the taxpayer files its return for a taxable year, it is impossible
to determine to what extent particular research performed by the
taxpayer during that year may be funded, then the taxpayer shall treat
the research as completely funded for purposes of completing that
return. When the amount of funding is finally determined, the taxpayer
should amend the return and any interim returns to reflect the proper
amount of funding.
(6) Examples. The following examples illustrate the application of
the principles contained in this paragraph.
Example 1. A enters into a contract with B Corporation, a cash-
method taxpayer using the calendar year as its taxable year, under which
B is to perform research that would, but for section 41(d)(3)(H), be
qualified research of B. The agreement calls for A to pay B $120x,
regardless of the outcome of the research. In 1982, A makes full payment
of $120x under the contract, B performs all the research, and B pays all
the expenses connected with the research, as follows:
In-house research expenses..................................... $100x
Outside research:
(Amount B paid to third parties for research, 65 percent of 40x
which ($26x) is treated as a contract research expense of B)
Overhead and other expenses.................................... 10x
--------
Total...................................................... 150x
If B has no rights to the research, B is fully funded.
Alternatively, assume that B retains the right to use the results of the
research in carrying on B's business. Of B's otherwise qualified
research expenses of $126x + $26x), $120x is treated as funded by A.
Thus $6x ($126x - $120x) is treated as a qualified research expense of
B. However, if B establishes the facts required under paragraph (d)(3)
of this section, B can allocate the funding pro rata to nonqualified and
otherwise qualified research expenses. Thus $100.8x ($120x ($126x/
$150x)) would be allocated to otherwise qualified research expenses. B's
qualified research expenses would be $25.2x ($126x - $100.8x). For
purposes of the following examples (2), (3) and (4) assume that B
retains substantial rights to use the results of the research in
carrying on B's business.
Example 2. The facts are the same as in example (1) (assuming that B
retains the right to use the results of the research in carrying on B's
business) except that, although A makes full payment of $120x during
1982, B does not perform the research or pay the associated expenses
until 1983. The computations are unchanged. However, B's qualified
research expenses determined in example (1) are qualified research
expenses during 1983.
Example 3. The facts are the same as in example (1) (assuming that B
retains the right to use the results of the research in carrying on B's
business) except that, although B performs the research and pays the
associated expenses during 1982, A does not pay the $120x until 1983.
The computations are unchanged and the amount determined in example (1)
is a qualified research expense of B during 1982.
Example 4. The facts are the same as in example (1) (assuming that B
retains the right to use the results of the research in carrying on B's
business) except that, instead of agreeing to pay B $120x, A agrees to
pay $100x regardless of the outcome and an additional $20x only if B's
research produces a useful product. B's research produces a useful
product and A pays B $120x during 1982. The $20x payment that is
conditional on the success of the research is not treated as funding.
Assuming that B establishes to the satisfaction of the district director
the actual research expenses, B can allocate the funding to nonqualified
and otherwise qualified research expenses. Thus $84x ($100x ($126x/
$150x)) would be allocated to otherwise qualified research expenses. B's
qualified research expenses would be $42x ($126x - $84x).
Example 5. C enters into a contract with D, a cash-method taxpayer
using the calendar year as its taxable year, under which D is to perform
research in which both C and D will
[[Page 169]]
have substantial rights. C agrees to reimburse D for 80 percent of D's
expenses for the research. D performs part of the research in 1982 and
the rest in 1983. At the time that D files its return for 1982, D is
unable to determine the extent to which the research is funded under the
provisions of this paragraph. Under these circumstances, D may not treat
any of the expenses paid by D for this research during 1982 as qualified
research expenses on its 1982 return. When the project is complete and D
can determine the extent of funding, D should file an amended return for
1982 to take into account any qualified research expense for 1982.
[T.D. 8251, 54 FR 21204, May 17, 1989. Redesignated and amended by T.D.
8930, 66 FR 295, Jan. 3, 2001]
Sec. 1.41-5 Basic research for taxable years beginning after
December 31, 1986. [Reserved]
Sec. 1.41-5A Basic research for taxable years beginning before
January 1, 1987.
(a) In general. The amount expended for basic research within the
meaning of section 30(e) (before amended by the Tax Reform Act of 1986)
equals the sum of money plus the taxpayer's basis in tangible property
(other than land) transferred for use in the performance of basic
research.
(b) Trade or business requirement. Any amount treated as a contract
research expense under section 30(e) (before amendment by the Tax Reform
Act of 1986) shall be deemed to have been paid or incurred in carrying
on a trade or business, if the corporation that paid or incurred the
expenses is actually engaged in carrying on some trade or business.
(c) Prepaid amounts--(1) In general. If any basic research expense
paid or incurred during any taxable year is attributable to research to
be conducted after the close of such taxable year, the expense so
attributable shall be treated for purposes of section 30(b)(1)(B)
(before amendment by the Tax Reform Act of 1986) as paid or incurred
during the period in which the basic research is conducted.
(2) Transfers of property. In the case of transfers of property to
be used in the performance of basic research, the research in which that
property is to be used shall be considered to be conducted ratably over
a period beginning on the day the property is first so used and
continuing for the number of years provided with respect to property of
that class under section 168(c)(2) (before amendment by the Tax Reform
Act of 1986). For example, if an item of property which is 3-year
property under section 168(c) is transferred to a university for basic
research on January 12, 1983, and is first so used by the university on
March 1, 1983, then the research in which that property is used is
considered to be conducted ratably from March 1, 1983, through February
28, 1986.
(d) Written research agreement--(1) In general. A written research
agreement must be entered into prior to the performance of the basic
research.
(2) Agreement between a corporation and a qualified organization
after June 30, 1983--(i) In general. A written research agreement
between a corporation and a qualified organization (including a
qualified fund) entered into after June 30, 1983, shall provide that the
organization shall inform the corporation within 60 days after the close
of each taxable year of the corporation what amount of funds provided by
the corporation pursuant to the agreement was expended on basic research
during the taxable year of the corporation. In determining amounts
expended on basic research, the qualified organization shall take into
account the exclusions specified in section 30(e)(3) (before amendment
by the Tax Reform Act of 1986) and in paragraph (e) of this section.
(ii) Transfers of property. In the case of transfers of property to
be used in basic research, the agreement shall provide that
substantially all use of the property is to be for basic research, as
defined in section 30(e)(3) (before amendment by the Tax Reform Act of
1986).
(3) Agreement between a qualified fund and a qualified educational
organization after June 30, 1983. A written research agreement between a
qualified fund and a qualified educational organization (see section
30(e)(4)(B)(iii) (before amendment by the Tax Reform Act of 1986))
entered into after June 30, 1983, shall provide that the qualified
educational organization shall furnish sufficient information to the
qualified
[[Page 170]]
fund to enable the qualified fund to comply with the written research
agreements it has entered into with grantor corporations, including the
requirement set forth in paragraph (d)(2) of this section.
(e) Exclusions--(1) Research conducted outside the United States. If
a taxpayer pays or incurs an amount for basic research to be performed
partly within the United States and partly without, only 65 percent of
the portion of the amount attributable to research performed within the
United States can be treated as a contract research expense (even if 80
percent or more of the contract amount was for basic research performed
in the United States).
(2) Research in the social sciences or humanities. Basic research
does not include research in the social sciences or humanities, within
the meaning of Sec. 1.41-4A(c).
(f) Procedure for making an election to be treated as a qualified
fund. In order to make an election to be treated as a qualified fund
within the meaning of section 30(e)(4)(B)(iii) (before amendment by the
Tax Reform Act of 1986) or as an organization described in section
41(e)(6)(D), the organization shall file with the Internal Revenue
Service center with which it files its annual return a statement that--
(1) Sets out the name, address, and taxpayer identification number
of the electing organization (the ``taxpayer'') and of the organization
that established and maintains the electing organization (the
``controlling organization''),
(2) Identifies the election as an election under section 41(e)(6)(D)
of the Code,
(3) Affirms that the controlling organization and the taxpayer are
section 501(c)(3) organizations,
(4) Provides that the taxpayer elects to be treated as a private
foundation for all Code purposes other than section 4940,
(5) Affirms that the taxpayer satisfies the requirement of section
41(e)(6)(D)(iii), and
(6) Specifies the date on which the election is to become effective.
If an election to be treated as a qualified fund is filed before
February 1, 1982, the election may be made effective as of any date
after June 30, 1981, and before January 1, 1986. If an election is filed
on or after February 1, 1982, the election may be made effective as of
any date on or after the date on which the election is filed.
[T.D. 8251, 54 FR 21204, May 17, 1989. Redesignated and amended by T.D.
8930, 66 FR 295, Jan. 3, 2001]
Sec. 1.41-6 Aggregation of expenditures.
(a) Controlled group of corporations; trades or businesses under
common control--(1) In general. To determine the amount of research
credit (if any) allowable to a trade or business that at the end of its
taxable year is a member of a controlled group, a taxpayer must--
(i) Compute the group credit in the manner described in paragraph
(b) of this section; and
(ii) Allocate the group credit among the members of the group in the
manner described in paragraph (c) of this section.
(2) Consolidated groups. For special rules relating to consolidated
groups, see paragraph (d) of this section.
(3) Definitions. For purposes of this section--
(i) Consolidated group has the meaning set forth in Sec. 1.1502-
1(h).
(ii) Controlled group and group mean a controlled group of
corporations, as defined in section 41(f)(5), or a group of trades or
businesses under common control. For rules for determining whether
trades or businesses are under common control, see Sec. 1.52-1 (b)
through (g).
(iii) Credit year means the taxable year for which the member is
computing the credit.
(iv) Group credit means the research credit (if any) allowable to a
controlled group.
(v) Trade or business means a sole proprietorship, a partnership, a
trust, an estate, or a corporation that is carrying on a trade or
business (within the meaning of section 162). Any corporation that is a
member of a commonly controlled group shall be deemed to be carrying on
a trade or business if any other member of that group is carrying on any
trade or business.
(b) Computation of the group credit--(1) In general. All members of
a controlled
[[Page 171]]
group are treated as a single taxpayer for purposes of computing the
research credit. The group credit is compute2d by applying all of the
section 41 computational rules on an aggregate basis. All members of a
controlled group must use the same method of computation: The method
described in section 41(a)(1), the alternative incremental credit (AIRC)
method described in section 41(c)(4) (available for years beginning on
or before December 31, 2008), or the alternative simplified credit (ASC)
method described in section 41(c)(5), in computing the group credit for
a credit year.
(2) Start-up companies--(i) In general. For purposes of computing
the group credit, a controlled group is treated as a start-up company
for purposes of section 41(c)(3)(B)(i) if--
(A) There was no taxable year beginning before January 1, 1984, in
which a member of the group had gross receipts and either the same
member or another member also had qualified research expenditures
(QREs); or
(B) There were fewer than three taxable years beginning after
December 31, 1983, and before January 1, 1989, in which a member of the
group had gross receipts and either the same member or another member
also had QREs.
(ii) Example. The following example illustrates the principles of
paragraph (b)(2)(i) of this section:
Example. A, B, and C, all of which are calendar year taxpayers, are
members of a controlled group. During the 1983 taxable year, A had QREs,
but no gross receipts; B had gross receipts, but no QREs; and C had no
QREs or gross receipts. The 1984 taxable year was the first taxable year
for which each of A, B, and C had both QREs and gross receipts. A, B,
and C had both QREs and gross receipts in 1985, 1986, 1987, and 1988.
Because the first taxable year for which each of A, B, and C had both
QREs and gross receipts began after December 31, 1983, each of A, B, and
C is a start-up company under section 41(c)(3)(B)(i) and each is a
start-up company for purposes of computing the stand-alone entity
credit. During the 1983 taxable year, at least one member of the group,
A, had QREs and at least one member of the group, B, had gross receipts,
thus, the group had both QREs and gross receipts in 1983. Therefore, the
controlled group is not a start-up company because the first taxable
year for which the group had both QREs and gross receipts did not begin
after December 31, 1983, and there were not fewer than three taxable
years beginning after December 31, 1983, and before January 1, 1989, in
which a member of the group had gross receipts and QREs.
(iii) First taxable year after December 31, 1993, for which the
controlled group had QREs. In the case of a controlled group that is
treated as a start-up company under section 41(c)(3)(B)(i) and paragraph
(b)(2)(i) of this section, for purposes of determining the group's
fixed-base percentage under section 41(c)(3)(B)(ii), the first taxable
year after December 31, 1993, for which the group has QREs is the first
taxable year in which at least one member of the group has QREs.
(iv) Example. The following example illustrates the principles of
paragraph (b)(2)(iii) of this section:
Example. D, E, and F, all of which are calendar year taxpayers, are
members of a controlled group. The group is treated as a start-up
company under section 41(c)(3)(B)(i) and paragraph (b)(2)(i) of this
section. The first taxable year after December 31, 1993, for which D had
QREs was 1994. The first taxable year after December 31, 1993, for which
E had QREs was 1995. The first taxable year after December 31, 1993, for
which F had QREs was 1996. Because the 1994 taxable year was the first
taxable year after December 31, 1993, for which at least one member of
the group, D, had QREs, for purposes of determining the group's fixed-
based percentage under section 41(c)(3)(B)(ii), the 1994 taxable year
was the first taxable year after December 31, 1993, for which the group
had QREs.
(c) Allocation of the group credit--(1) In general. (i) To the
extent the group credit (if any) computed under paragraph (b) of this
section does not exceed the sum of the stand-alone entity credits of all
of the members of a controlled group, computed under paragraph (c)(2) of
this section, such group credit shall be allocated among the members of
the controlled group in proportion to the stand-alone entity credits of
the members of the controlled group, computed under paragraph (c)(2) of
this section:
[[Page 172]]
[GRAPHIC] [TIFF OMITTED] TR09NO06.005
(ii) To the extent that the group credit (if any) computed under
paragraph (b) of this section exceeds the sum of the stand-alone entity
credits of all of the members of the controlled group, computed under
paragraph (c)(2) of this section, such excess shall be allocated among
the members of a controlled group in proportion to the QREs of the
members of the controlled group:
[GRAPHIC] [TIFF OMITTED] TR09NO06.006
(2) Stand-alone entity credit. The term stand-alone entity credit
means the research credit (if any) that would be allowable to a member
of a controlled group if the credit were computed as if section 41(f)(1)
did not apply, except that the member must apply the rules provided in
Sec. 1.41-6(d)(1) (relating to consolidated groups) and Sec. 1.41-6(i)
(relating to intra-group transactions). Each member's stand-alone entity
credit for any credit year must be computed under whichever available
method (the method described in section 41(a)(1), the method described
in section 41(c)(4), or the method described in section 41(c)(5))
results in the greatest stand-alone entity credit for that member,
without regard to the method used to compute the group credit.
(d) Special rules for consolidated groups--(1) In general. For
purposes of applying paragraph (c) of this section, a consolidated group
whose members are members of a controlled group is treated as a single
member of the controlled group and a single stand-alone entity credit is
computed for the consolidated group.
(2) Start-up company status. A consolidated group's status as a
start-up company and the first taxable year after December 31, 1993, for
which a consolidated group has QREs are determined in accordance with
the principles of paragraph (b)(2) of this section.
(3) Special rule for allocation of group credit among consolidated
group members. The portion of the group credit that is allocated to a
consolidated group is allocated to the members of the consolidated group
in accordance with the principles of paragraph (c) of this section.
However, for this purpose, the stand-alone entity credit of a member of
a consolidated group is computed without regard to section 41(f)(1), but
with regard to paragraph (i) of this section.
(e) Examples. The following examples illustrate the provisions of
this section. Unless otherwise stated, no members of a controlled group
are members of a consolidated group, no member of the group made any
basic research payments or paid or incurred any amounts to an energy
research consortium, and the group has not made an AIRC election (except
as provided in Example 6) or an ASC election (except as provided in
Example 7).
Example 1. Group credit is less than sum of members' stand-alone
entity credits. (i) Facts. A, B, and C, all of which are calendar-year
taxpayers, are members of a controlled group. For purposes of computing
the group credit for the 2004 taxable year (the credit year), A, B, and
C had the following:
----------------------------------------------------------------------------------------------------------------
Group
A B C aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $200x $20x $110x $330x
1984-1988 QREs.................................. $40x $10x $100x $150x
1984-1988 Gross Receipts........................ $1,000x $350x $150x $1,500x
Average Annual Gross Receipts for 4 Years $1,200x $200x $300x $1,700x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
[[Page 173]]
(ii) Computation of the group credit--(A) In general. The research
credit allowable to the group is computed as if A, B, and C were one
taxpayer. The group credit is equal to 20 percent of the excess of the
group's aggregate credit year QREs ($330x) over the group's base amount
($170x). The group credit is 0.20 x ($330x-$170x), which equals $32x.
(B) Group's base amount--(1) Computation. The group's base amount
equals the greater of: The group's fixed-base percentage (10 percent)
multiplied by the group's aggregate average annual gross receipts for
the 4 taxable years preceding the credit year ($1,700x), or the group's
minimum base amount ($165x). The group's base amount, therefore, is
$170x, which is the greater of: 0.10 x $1,700x, which equals $170x, or
$165x.
(2) Group's minimum base amount. The group's minimum base amount is
50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $330x, which equals $165x.
(3) Group's fixed-base percentage. The group's fixed-base percentage
is the lesser of: The ratio that the group's aggregate QREs for the
taxable years beginning after December 31, 1983, and before January 1,
1989, bear to the group's aggregate gross receipts for the same period,
or 16 percent (the statutory maximum). The group's fixed-base
percentage, therefore, is 10 percent, which is the lesser of: $150x/
$1,500x, which equals 10 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this
section, each member's stand-alone entity credit must be computed using
the method that results in the greater stand-alone entity credit for
that member. The stand-alone entity credit for each of A, B, and C is
greater using the method described in section 41(a). Therefore, the
stand-alone entity credit for each of A, B, and C must be computed using
the method described in section 41(a). A's stand-alone entity credit is
$20x. B's stand-alone entity credit is $2x. C's stand-alone entity
credit is $11x. The sum of the members' stand-alone entity credits is
$33x. Because the group credit of $32x is less than the sum of the
stand-alone entity credits of all the members of the group ($33x), the
group credit is allocated among the members of the group based on the
ratio that each member's stand-alone entity credit bears to the sum of
the stand-alone entity credits of all the members of the group. The $32x
group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
A B C Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $20x $2x $11x $33x
Allocation Ratio (Stand-Alone Entity Credit/Sum 20/33 2/33 11/33 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $32x $32x $32x ..............
Equals: Credit Allocated to Member.............. $19.39x $1.94x $10.67x $32x
----------------------------------------------------------------------------------------------------------------
Example 2. Group credit exceeds sum of members' stand-alone entity
credits. (i) Facts. D, E, F, and G, all of which are calendar-year
taxpayers, are members of a controlled group. For purposes of computing
the group credit for the 2004 taxable year (the credit year), D, E, F,
and G had the following:
----------------------------------------------------------------------------------------------------------------
Group
D E F G aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................ $580x $10x $70x $15x $675x
1984-1988 QREs.................. $500x $25x $100x $25x $650x
1984-1988 Gross Receipts........ $4,000x $5,000x $2,000x $10,000x $21,000x
Average Annual Gross Receipts $5,000x $5,000x $2,000x $5,000x $17,000x
for 4 Years Preceding the
Credit Year....................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The research
credit allowable to the group is computed as if D, E, F, and G were one
taxpayer. The group credit is equal to 20 percent of the excess of the
group's aggregate credit year QREs ($675x) over the group's base amount
($527x). The group credit is 0.20 x ($675x-$527x), which equals $29.76x.
(B) Group's base amount--(1) Computation. The group's base amount
equals the greater of: The group's fixed-base percentage (3.10 percent)
multiplied by the group's aggregate average annual gross receipts for
the 4 taxable years preceding the credit year ($17,000x), or the group's
minimum base amount ($337.50x). The group's base amount, therefore, is
$527x, which is the greater of: 0.031 x $17,000x, which equals $527x, or
$337.50x.
(2) Group's minimum base amount. The group's minimum base amount is
50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $675x, which equals $337.50x.
[[Page 174]]
(3) Group's fixed-base percentage. The group's fixed-base percentage
is the lesser of: The ratio that the group's aggregate QREs for the
taxable years beginning after December 31, 1983, and before January 1,
1989, bear to the group's aggregate gross receipts for the same period,
or 16 percent (the statutory maximum). The group's fixed-base
percentage, therefore, is 3.10 percent, which is the lesser of: $650x/
$21,000x, which equals 3.10 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this
section, each member's stand-alone entity credit must be computed using
the method that results in the greater stand-alone entity credit for
that member. The stand-alone entity credits for D ($19.46x) and F
($1.71x) are greater using the AIRC method. Therefore, the stand-alone
entity credits for D and F must be computed using the AIRC method. The
stand-alone entity credit for G ($0.50x) is greater using the method
described in section 41(a). Therefore, the stand-alone entity credit for
G must be computed using the method described in section 41(a). E's
stand-alone entity credit computed under either method is zero. The sum
of the members' stand-alone entity credits is $21.67x. Because the group
credit of $29.76x is greater than the sum of the stand-alone entity
credits of all the members of the group ($21.67x), each member of the
group is allocated an amount of the group credit equal to that member's
stand-alone entity credit. The excess of the group credit over the sum
of the members' stand alone entity credits ($8.09x) is allocated among
the members of the group based on the ratio that each member's QREs bear
to the sum of the QREs of all the members of the group. The $29.76x
group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
D E F G Total
----------------------------------------------------------------------------------------------------------------
Group Credit.................... .............. .............. .............. .............. $29.76x
Minus: Sum of Stand-Alone Entity $19.46x $0.00x $1.71x $0.50x $21.67x
Credits........................
Equals: Excess Group Credit..... .............. .............. .............. .............. $8.09x
.............. .............. .............. .............. ..............
Excess Group Credit............. $8.09x $8.09x $8.09x $8.09x ..............
Multiplied By Allocation Ratio: 580/675 10/675 70/675 15/675 ..............
QREs/Sum of QREs...............
Excess Group Credit Allocated... $6.95x $0.12x $0.84x $0.18x ..............
Plus: Stand-Alone Entity Credit. $19.46x $0.00x $1.71x $0.50x ..............
Equals: Credit Allocated to $26.41x $0.12x $2.55x $0.68x $29.76x
Member.........................
----------------------------------------------------------------------------------------------------------------
Example 3. Consolidated group within a controlled group. (i) Facts.
The facts are the same as in Example 2, except that D and E file a
consolidated return.
(ii) Allocation of the group credit--(A) In general. For purposes of
allocating the controlled group's research credit of $29.76x among the
members of the controlled group, D and E are treated as a single member
of the controlled group.
(B) Computation of stand-alone entity credits. The stand-alone
entity credit for the consolidated group is computed by treating D and E
as a single entity. Under paragraph (c)(2) of this section, the stand-
alone entity credit for each member must be computed using the method
that results in the greater stand-alone entity credit for that member.
The stand-alone entity credit for each of the DE consolidated group
($17.55x) and F ($1.71x) is greater using the AIRC method. Therefore,
the stand-alone entity credit for each of the DE consolidated group and
F must be computed using the AIRC method. The stand-alone entity credit
for G ($0.50x) is greater using the method described in section 41(a).
Therefore, the stand-alone entity credit for G must be computed using
the method described in section 41(a). The sum of the members' stand-
alone entity credits is $19.76x.
(C) Allocation of controlled group credit. Because the group credit
of $29.76x is greater than the sum of the stand-alone entity credits of
all the members of the group ($19.76x), each member of the group is
allocated an amount of the group credit equal to that member's stand-
alone entity credit. The excess of the group credit over the sum of the
members' stand-alone entity credits ($10.00x) is allocated among the
members of the group based on the ratio that each member's QREs bear to
the sum of the QREs of all the members of the group. The group credit of
$29.76x is allocated as follows:
----------------------------------------------------------------------------------------------------------------
DE F G Total
----------------------------------------------------------------------------------------------------------------
Group Credit.................................... .............. .............. .............. $29.76x
Minus: Sum of Stand-Alone Entity Credits........ $17.55x $1.71x $0.50x $19.76x
Equals: Excess Group Credit..................... .............. .............. .............. $10.00x
.............. .............. .............. ..............
Excess Group Credit............................. $10.00x $10.00x $10.00x ..............
Multiplied By Allocation Ratio: QREs/Sum of QREs 590/675 70/675 15/675 ..............
Excess Group Credit Allocated................... $8.74x $1.04x $0.22x ..............
Plus: Stand-Alone Entity Credit................. $17.55x $1.71x $0.50x ..............
[[Page 175]]
Equals: Credit Allocated to Member.............. $26.29x $2.75x $0.72x $29.76x
----------------------------------------------------------------------------------------------------------------
(iii) Allocation of the group credit allocated to consolidated
group--(A) In general. The group credit that is allocated to a
consolidated group is allocated among the members of the consolidated
group in accordance with the principles of paragraph (c) of this
section.
(B) Computation of stand-alone entity credits. Under paragraph
(c)(2) of this section, the stand-alone entity credit for each member of
the consolidated group must be computed using the method that results in
the greater stand-alone entity credit for that member. The stand-alone
entity credit for D ($19.46x) is greater using the AIRC method.
Therefore, the stand-alone entity credit for D must be computed using
the AIRC method. The stand-alone entity credit for E is zero under
either method. The sum of the stand-alone entity credits of the members
of the consolidated group is $19.46x.
(C) Allocation among members of consolidated group. Because the
amount of the group credit allocated to the consolidated group ($26.29x)
is greater than $19.46x, the sum of the stand-alone entity credits of
all the members of the consolidated group, each member of the
consolidated group is allocated an amount of the group credit allocated
to the consolidated group equal to that member's stand-alone entity
credit The excess of the group credit allocated to the consolidated
group over the sum of the consolidated group members' stand alone entity
credits ($6.83x) is allocated among the members of the consolidated
group based on the ratio that each member's QREs bear to the sum of the
QREs of all the members of the consolidated group. The group credit of
$26.29x allocated to the DE consolidated group is allocated between D
and E as follows:
----------------------------------------------------------------------------------------------------------------
D E Total
----------------------------------------------------------------------------------------------------------------
Group Credit.................................................... .............. .............. $26.29x
Minus: Sum of Stand-Alone Entity Credits........................ $19.46x $0.00x $19.46x
Excess Group Credit............................................. .............. .............. $6.83x
.............. .............. ..............
Excess Group Credit............................................. $6.83x $6.83x ..............
Multiplied By Allocation Ratio: QREs/Sum of QREs................ 580/590 10/590 ..............
Excess Group Credit Allocated................................... $6.71x $0.12x ..............
Plus: Stand-Alone Entity Credit................................. $19.46x $0.00x ..............
Equals: Credit Allocated to Member.............................. $26.17x $0.12x $26.29x
----------------------------------------------------------------------------------------------------------------
Example 4. Member is a start-up company. (i) Facts. H, I, and J, all
of which are calendar-year taxpayers, are members of a controlled group.
The first taxable year for which J has both QREs and gross receipts
begins after December 31, 1983, therefore, J is a start-up company under
section 41(c)(3)(B)(i). The first taxable year for which H and I had
both QREs and gross receipts began before December 31, 1983, therefore,
H and I are not start-up companies under section 41(c)(3)(B)(i). For
purposes of computing the group credit for the 2004 taxable year (the
credit year), H, I, and J had the following:
----------------------------------------------------------------------------------------------------------------
Group
H I J aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $200x $20x $50x $270x
1984-1988 QREs.................................. $55x $15x $0x $70x
1984-1988 Gross Receipts........................ $1,000x $400x $0x $1,400x
Average Annual Gross Receipts for 4 Years $1,200x $200x $0x $1,400x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The research
credit allowable to the group is computed as if H, I, and J were one
taxpayer. The group credit is equal to 20 percent of the excess of the
group's aggregate credit year QREs ($270x) over the group's base amount
($135x). The group credit is 0.20 x ($270x-$135x), which equals $27x.
(B) Group's base amount--(1) Computation. The group's base amount
equals the greater of: the group's fixed-base percentage (5 percent)
multiplied by the group's aggregate average annual gross receipts for
the 4 taxable years preceding the credit year ($1,400x), or the group's
minimum base amount ($135x). The group's base amount, therefore, is
$135x,
[[Page 176]]
which is the greater of: 0.05 x $1,400x, which equals $70x, or $135x.
(2) Group's minimum base amount. The group's minimum base amount is
50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $270x, which equals $135x.
(3) Group's fixed-base percentage. Because the first taxable year in
which at least one member of the group has QREs and at least one member
of the group has gross receipts does not begin after December 31, 1983,
the group is not a start-up company. Therefore, the group's fixed-base
percentage is the lesser of: the ratio that the group's aggregate QREs
for the taxable years beginning after December 31, 1983, and before
January 1, 1989, bear to the group's aggregate gross receipts for the
same period, or 16 percent (the statutory maximum). The group's fixed-
base percentage, therefore, is 5 percent, which is the lesser of: $70x/
$1,400x, which equals 5 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this
section, the stand-alone entity credit for each member of the group must
be computed using the method that results in the greater stand-alone
entity credit for that member. The stand-alone entity credits for H
($20x), I ($2x), and J ($5x) are greater using the method described in
section 41(a). Therefore, the stand-alone entity credits for each of H,
I, and J must be computed using the method described in section 41(a).
The sum of the stand-alone entity credits of the members of the group is
$27x. Because the group credit of $27x is equal to the sum of the stand-
alone entity credits of all the members of the group ($27x), the group
credit is allocated among the members of the group based on the ratio
that each member's stand-alone entity credit bears to the sum of the
stand-alone entity credits of all the members of the group. The group
credit of $27x is allocated as follows:
----------------------------------------------------------------------------------------------------------------
H I J Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $20x $2x $5x $27x
Allocation Ratio (Stand-Alone Entity Credit/Sum 20/27 2/27 5/27 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $27x $27x $27x ..............
Equals: Credit Allocated to Member.............. $20x $2x $5x $27x
----------------------------------------------------------------------------------------------------------------
Example 5. Group is a start-up company. (i) Facts. K, L, and M, all
of which are calendar-year taxpayers, are members of a controlled group.
The taxable year ending on December 31, 1999, is the first taxable year
in which a member of the group had QREs and either the same member or
another member also had gross receipts. In that year, each of K, L, and
M had both QREs and gross receipts. The 2004 taxable year is the fifth
taxable year beginning after December 31, 1993, for which at least one
member of the group had QREs For purposes of computing the group credit
for the 2004 taxable year (the credit year), K, L, and M had the
following:
----------------------------------------------------------------------------------------------------------------
Group
K L M aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $255x $25x $100x $380x
1984-1988 QREs.................................. $0x $0x $0x $0x
1984-1988 Gross Receipts........................ $0x $0x $0x $0x
Average Annual Gross Receipts for 4 Years $1,600x $340x $300x $2,240x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit--(A) In general. The research
credit allowable to the group is computed as if K, L, and M were one
taxpayer. The group credit is equal to 20 percent of the excess of the
group's aggregate credit year QREs ($380x) over the group's base amount
($190x). The group credit is 0.20x ($380x - $190x), which equals $38x.
(B) Group's base amount--(1) Computation. The group's base amount
equals the greater of: the group's fixed-base percentage (3 percent)
multiplied by the group's aggregate average annual gross receipts for
the 4 taxable years preceding the credit year ($2,240x), or the group's
minimum base amount ($190x). The group's base amount, therefore, is
$190x, which is the greater of: 0.03 x $2,240x, which equals $67.20x, or
$190x.
(2) Group's minimum base amount. The group's minimum base amount is
50 percent of the group's aggregate credit year QREs. The group's
minimum base amount is 0.50 x $380x, which equals $190x.
(3) Group's fixed-base percentage. Because the first taxable year in
which at least one member of the group has QREs and at least one member
of the group has gross receipts begins after December 31, 1983, the
group is treated as a start-up company under section 41(c)(3)(B)(i) and
paragraph (b)(2)(i) of this
[[Page 177]]
section. Because the 2004 taxable year is the fifth taxable year
beginning after December 31, 1993, for which at least one member of the
group had QREs, under section 41(c)(3)(B)(ii)(I), the group's fixed-base
percentage is 3 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this
section, the stand-alone entity credit for each member of the group must
be computed using the method that results in the greater stand-alone
entity credit for that member. The stand-alone entity credit for each of
K ($25.5x), L ($2.5x), and M ($10x) is greater using the method
described in section 41(a). Therefore the stand-alone entity credits for
each of K, L, and M must be computed using the method described in
section 41(a). The sum of the stand-alone entity credits of all the
members of the group is $38x. Because the group credit of $38x is equal
to sum of the stand-alone entity credits of all the members of the group
($38x), the group credit is allocated among the members of the group
based on the ratio that each member's stand-alone entity credit bears to
the sum of the stand-alone entity credits of all the members of the
group. The $38x group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
K L M Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $25.5x $2.5x $10x $38x
Allocation Ratio (Stand-Alone Entity Credit/Sum 25.5/38 2.5/38 10/38 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $38x $38x $38x ..............
Equals: Credit Allocated to Member.............. $25.5x $2.5x $10x $38x
----------------------------------------------------------------------------------------------------------------
Example 6. Group alternative incremental research credit. (i) Facts.
N, O, and P, all of which are calendar-year taxpayers, are members of a
controlled group. The research credit under section 41(a) is not
allowable to the group for the 2004 taxable year because the group's
aggregate QREs for the 2004 taxable year are less than the group's base
amount. The group credit is computed using the AIRC rules of section
41(c)(4). For purposes of computing the group credit for the 2004
taxable year (the credit year), N, O, and P had the following:
----------------------------------------------------------------------------------------------------------------
Group
N O P aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs................................ $0x $20x $110x $130x
Average Annual Gross Receipts for 4 Years $1,200x $200x $300x $1,700x
Preceding the Credit Year......................
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit. The research credit allowable
to the group is computed as if N, O, and P were one taxpayer. The group
credit is equal to the sum of: 2.65 percent of so much of the group's
aggregate QREs for the taxable year as exceeds 1 percent of the group's
aggregate average annual gross receipts for the 4 taxable years
preceding the credit year, but does not exceed 1.5 percent of such
average; 3.2 percent of so much of the group's aggregate QREs as exceeds
1.5 percent of such average but does not exceed 2 percent of such
average; and 3.75 percent of so much of such QREs as exceeds 2 percent
of such average. The group credit is [0.0265 x [($1,700x x 0.015) -
($1,700x x 0.01)]] + [0.032 x [($1,700x x 0.02) - ($1,700x x 0.015)]] +
[0.0375 x [$130x - ($1,700x x 0.02)]], which equals $4.10x.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this
section, the stand-alone entity credit for each member of the group must
be computed using the method that results in the greater stand-alone
entity credit for that member. The stand-alone entity credit for N is
zero under either method. The stand-alone entity credit for each of O
($0.66x) and P ($3.99x) is greater using the AIRC method. Therefore, the
stand-alone entity credits for each of O and P must be computed using
the AIRC method. The sum of the stand-alone entity credits of the
members of the group is $4.65x. Because the group credit of $4.10x is
less than the sum of the stand-alone entity credits of all the members
of the group ($4.65x), the group credit is allocated among the members
of the group based on the ratio that each member's stand-alone entity
credit bears to the sum of the stand-alone entity credits of all the
members of the group. The $4.10x group credit is allocated as follows:
----------------------------------------------------------------------------------------------------------------
N O P Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit....................... $0.00x $0.66x $3.99x $4.65x
Allocation Ratio (Stand-Alone Entity Credit/Sum 0/4.65 0.66/4.65 3.99/4.65 ..............
of Stand-Alone Entity Credits).................
Multiplied by: Group Credit..................... $4.10x $4.10x $4.10x ..............
[[Page 178]]
Equals: Credit Allocated to Member.............. $0.00x $0.58x $3.52x $4.10x
----------------------------------------------------------------------------------------------------------------
Example 7. Group alternative simplified credit. The following
example illustrates a group computation in a year for which the ASC
method under section 41(c)(5) is in effect. No members of the controlled
group are members of a consolidated group and no member of the group
made any basic research payments or paid or incurred any amounts to an
energy research consortium.
(i) Facts. Q, R, and S, all of which are calendar-year taxpayers,
are members of a controlled group. The research credit under section
41(a)(1) is not allowable to the group for the 2011 taxable year (the
credit year) because the group's aggregate QREs for the credit year are
less than the group's base amount. The group does not use the AIRC
method of section 41(c)(4) because it is unavailable for taxable years
beginning after December 31, 2008. The group credit is computed using
the ASC rules of section 41(c)(5). Assume that each member of the group
had QREs in each of the three years preceding the credit year. For
purposes of computing the group credit for the credit year, Q, R, and S
had the following:
----------------------------------------------------------------------------------------------------------------
Group
Q R S aggregate
----------------------------------------------------------------------------------------------------------------
Credit Year QREs............................................ $0x $20x $30x $50x
Average QREs for 3 Years Preceding the Credit Year.......... $10x $20x $10x $40x
----------------------------------------------------------------------------------------------------------------
(ii) Computation of the group credit. The research credit allowable
to the group is computed as if Q, R, and S are one taxpayer. The group
credit is equal to 14 percent of so much of the QREs for the credit year
as exceeds 50 percent of the average QREs for the three taxable years
preceding the credit year. The group credit is 0.14 x ($50x - (0.5 x
$40x)), which equals $4.2x.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this
section, the stand-alone entity credit for each member of the group must
be computed using the method that results in the greatest stand-alone
entity credit for that member. The stand-alone entity credit for Q is
zero under the regular or ASC methods. Assume that the stand-alone
entity credit for each of R ($1.4x) and S ($3.5x) is greatest using the
ASC method. Therefore, the stand-alone entity credits for each of R and
S must be computed using the ASC method. The sum of the stand-alone
entity credits of the members of the group is $4.9x. Because the group
credit of $4.2x is less than the sum of the stand-alone entity credits
of all the members of the group ($4.9x), the group credit is allocated
among the members of the group based on the ratio that each member's
stand-alone entity credit bears to the sum of the stand-alone entity
credits of all the members of the group. The $4.2x group credit is
allocated as follows:
----------------------------------------------------------------------------------------------------------------
Q R S Total
----------------------------------------------------------------------------------------------------------------
Stand-Alone Entity Credit................................... $0x $1.4x $3.5x $4.9x
Allocation Ratio (Stand-Alone Entity Credit/Sum of Stand- 0/4.9 1.4/4.9 3.5/4.9
Alone Entity Credits)......................................
Multiplied by: Group Credit................................. $4.2x $4.2x $4.2x
Equals: Credit Allocated to Member.......................... $0x $1.2x $3x $4.2x
----------------------------------------------------------------------------------------------------------------
(f) For taxable years beginning before January 1, 1990. For taxable
years beginning before January 1, 1990, see Sec. 1.41-6 as contained in
26 CFR part 1, revised April 1, 2005.
(g) Tax accounting periods used--(1) In general. The credit
allowable to a member of a controlled group is that member's share of
the group credit computed as of the end of that member's taxable year.
In computing the group credit for a group whose members have different
taxable years, a member generally should treat the taxable year of
another member that ends with or within the credit year of the computing
member as the credit year of that other member. For example, Q, R, and S
are members of a controlled group of corporations. Both Q and R are
calendar year taxpayers. S files a return using a fiscal year ending
June 30. For purposes of computing the group credit at the end of Q's
and R's taxable year on December 31, S's fiscal year ending June 30,
which ends within
[[Page 179]]
Q's and R's taxable year, is treated as S's credit year.
(2) Special rule when timing of research is manipulated. If the
timing of research by members using different tax accounting periods is
manipulated to generate a credit in excess of the amount that would be
allowable if all members of the group used the same tax accounting
period, then the appropriate Internal Revenue Service official in the
operating division that has examination jurisdiction of the return may
require each member of the group to calculate the credit in the current
taxable year and all future years as if all members of the group had the
same taxable year and base period as the computing member.
(h) Membership during taxable year in more than one group. A trade
or business may be a member of only one group for a taxable year. If,
without application of this paragraph, a business would be a member of
more than one group at the end of its taxable year, the business shall
be treated as a member of the group in which it was included for its
preceding taxable year. If the business was not included for its
preceding taxable year in any group in which it could be included as of
the end of its taxable year, the business shall designate in its timely
filed (including extensions) return the group in which it is being
included. If the return for a taxable year is due before July 1, 1983,
the business may designate its group membership through an amended
return for that year filed on or before June 30, 1983. If the business
does not so designate, then the appropriate Internal Revenue Service
official in the operating division that has examination jurisdiction of
the return will determine the group in which the business is to be
included.
(i) Intra-group transactions--(1) In general. Because all members of
a group under common control are treated as a single taxpayer for
purposes of determining the research credit, transfers between members
of the group are generally disregarded.
(2) In-house research expenses. If one member of a group performs
qualified research on behalf of another member, the member performing
the research shall include in its QREs any in-house research expenses
for that work and shall not treat any amount received or accrued as
funding the research. Conversely, the member for whom the research is
performed shall not treat any part of any amount paid or incurred as a
contract research expense. For purposes of determining whether the in-
house research for that work is qualified research, the member
performing the research shall be treated as carrying on any trade or
business carried on by the member on whose behalf the research is
performed.
(3) Contract research expenses. If a member of a group pays or
incurs contract research expenses to a person outside the group in
carrying on the member's trade or business, that member shall include
those expenses as QREs. However, if the expenses are not paid or
incurred in carrying on any trade or business of that member, those
expenses may be taken into account as contract research expenses by
another member of the group provided that the other member--
(i) Reimburses the member paying or incurring the expenses; and
(ii) Carries on a trade or business to which the research relates.
(4) Lease payments. The amount paid or incurred to another member of
the group for the lease of personal property owned by a member of the
group is not taken into account for purposes of section 41. Amounts paid
or incurred to another member of the group for the lease of personal
property owned by a person outside the group shall be taken into account
as in-house research expenses for purposes of section 41 only to the
extent of the lesser of--
(i) The amount paid or incurred to the other member; or
(ii) The amount of the lease expenses paid to the person outside the
group.
(5) Payment for supplies. Amounts paid or incurred to another member
of the group for supplies shall be taken into account as in-house
research expenses for purposes of section 41 only to the extent of the
lesser of--
(i) The amount paid or incurred to the other member; or
(ii) The amount of the other member's basis in the supplies.
(j) Effective/applicability dates--(1) In general. Except for
paragraph (d) of this
[[Page 180]]
section, these regulations are applicable for taxable years ending on or
after May 24, 2005. Generally, a taxpayer may use any reasonable method
of computing and allocating the credit (including use of the
consolidated group rule contained in paragraph (d) of this section) for
taxable years ending before May 24, 2005. However, paragraph (b) of this
section, relating to the computation of the group credit, and paragraph
(c) of this section, relating to the allocation of the group credit,
(applied without regard to paragraph (d) of this section) will apply to
taxable years ending on or after December 29, 1999, if the members of a
controlled group, as a whole, claimed more than 100 percent of the
amount that would be allowable under paragraph (b) of this section. In
the case of a controlled group whose members have different taxable
years and whose members use inconsistent methods of allocation, the
members of the controlled group shall be deemed to have, as a whole,
claimed more than 100 percent of the amount that would be allowable
under paragraph (b) of this section.
(2) Consolidated group rule. Paragraph (d) of this section is
applicable for taxable years ending on or after November 9, 2006. For
taxable years ending on or after May 24, 2005, and before November 9,
2006, see Sec. 1.41-6T(d) as contained in 26 CFR part 1, revised April
1, 2006.
(3) Taxable years ending after June 9, 2011. Paragraphs (b)(1),
(c)(2), and (e) of this section are applicable for taxable years ending
after June 9, 2011. For taxable years ending on or before June 9, 2011,
see Sec. Sec. 1.41-6T and 1.41-6 as contained in 26 CFR part 1, revised
April 1, 2011.
[T.D. 9296, 71 FR 65725, Nov. 9, 2006; 71 FR 70875, Dec. 7, 2006; 71 FR
75614, Dec. 15, 2006; T.D. 9401, 73 FR 34188, June 17, 2008; T.D. 9528,
76 FR 33995, June 10, 2011]
Sec. 1.41-7 Special rules.
(a) Allocations--(1) Corporation making an election under subchapter
S--(i) Pass-through, for taxable years beginning after December 31,
1982, in the case of an S corporation. In the case of an S corporation
(as defined in section 1361) the amount of research credit computed for
the corporation shall be allocated to the shareholders according to the
provisions of section 1366 and section 1377.
(ii) Pass-through, for taxable years beginning before January 1,
1983, in the case of a subchapter S corporation. In the case of an
electing small business corporation (as defined in section 1371 as that
section read before the amendments made by the subchapter S Revision Act
of 1982), the amount of the research credit computed for the corporation
for any taxable year shall be apportioned pro rata among the persons who
are shareholders of the corporation on the last day of the corporation's
taxable year.
(2) Pass-through in the case of an estate or trust. In the case of
an estate or trust, the amount of the research credit computed for the
estate or trust for any taxable year shall be apportioned among the
estate or trust and the beneficiaries on the basis of the income of the
estate or trust allocable to each.
(3) Pass-through in the case of a partnership--(i) In general. In
the case of a partnership, the research credit computed for the
partnership for any taxable year shall be apportioned among the persons
who are partners during the taxable year in accordance with section 704
and the regulations thereunder. See, for example, Sec. 1.704-
1(b)(4)(ii). Because the research credit is an expenditure-based credit,
the credit is to be allocated among the partners in the same proportion
as section 174 expenditures are allocated for the year.
(ii) Certain expenditures by joint ventures. Research expenses to
which Sec. 1.41-2(a)(4)(ii) applies shall be apportioned among the
persons who are partners during the taxable year in accordance with the
provisions of that section. For purposes of section 41, these expenses
shall be treated as paid or incurred directly by the partners rather
than by the partnership. Thus, the partnership shall disregard these
expenses in computing the credit to be apportioned under paragraph
(a)(3)(i) of this section, and in making the computations under section
41 each partner shall aggregate its distributive share of these expenses
with other research expenses of the partner. The limitation on the
amount of the credit set out in section 41(g) and in paragraph (c) of
[[Page 181]]
this section shall not apply because the credit is computed by the
partner, not the partnership.
(4) Year in which taken into account. An amount apportioned to a
person under this paragraph shall be taken into account by the person in
the taxable year of such person which or within which the taxable year
of the corporation, estate, trust, or partnership (as the case may be)
ends.
(5) Credit allowed subject to limitation. The credit allowable to
any person to whom any amount has been apportioned under paragraph
(a)(1), (2) or (3)(i) of this section is subject to section 41(g) and
sections 38 and 39 of the Code, if applicable.
(b) Adjustments for certain acquisitions and dispositions--Meaning
of terms. For the meaning of ``acquisition,'' ``separate unit,'' and
``major portion,'' see paragraph (b) of Sec. 1.52-2. An ``acquisition''
includes an incorporation or a liquidation.
(c) Special rule for pass-through of credit. The special rule
contained in section 41(g) for the pass-through of the credit in the
case of an individual who owns an interest in an unincorporated trade or
business, is a partner in a partnership, is a beneficiary of an estate
or trust, or is a shareholder in an S corporation shall be applied in
accordance with the principles set forth in Sec. 1.53-3.
(d) Carryback and carryover of unused credits. The taxpayer to whom
the credit is passed through under paragraph (c) of this section shall
not be prevented from applying the unused portion in a carryback or
carryover year merely because the entity that earned the credit changes
its form of conducting business.
[T.D. 8251, 54 FR 21204, May 17, 1989. Redesignated by T.D. 8930, 66 FR
295, Jan. 3, 2001]
Sec. 1.41-8 Alternative incremental credit applicable for taxable years
beginning on or before December 31, 2008.
(a) Determination of credit. At the election of the taxpayer, the
credit determined under section 41(a)(1) equals the amount determined
under section 41(c)(4).
(b) Election--(1) In general. A taxpayer may elect to apply the
provisions of the alternative incremental research credit (AIRC) in
section 41(c)(4) for any taxable year of the taxpayer beginning after
June 30, 1996. If a taxpayer makes an election under section 41(c)(4),
the election applies to the taxable year for which made and all
subsequent taxable years unless revoked in the manner prescribed in
paragraph (b)(3) of this section.
(2) Time and manner of election. An election under section 41(c)(4)
is made by completing the portion of Form 6765, ``Credit for Increasing
Research Activities,'' (or successor form) relating to the election of
the AIRC, and attaching the completed form to the taxpayer's timely
filed (including extensions) original return for the taxable year to
which the election applies. An election under section 41(c)(4) may not
be made on an amended return. An extension of time to make an election
under section 41(c)(4) will not be granted under Sec. 301.9100-3 of
this chapter.
(3) Revocation. An election under this section may not be revoked
except with the consent of the Commissioner. A taxpayer is deemed to
have requested, and to have been granted, the consent of the
Commissioner to revoke an election under section 41(c)(4) if the
taxpayer completes the portion of Form 6765, ``Credit For Increasing
Research Activities,'' (or successor form) relating to the amount
determined under section 41(a)(1) (the regular credit) or the
alternative simplified credit (ASC) and attaches the completed form to
the taxpayer's timely filed (including extensions) original return for
the year to which the revocation applies. An election under section
41(c)(4) may not be revoked on an amended return. An extension of time
to revoke an election under section 41(c)(4) will not be granted under
Sec. 301.9100-3 of this chapter.
(4) Special rules for controlled groups--(i) In general. In the case
of a controlled group of corporations, all the members of which are not
included on a single consolidated return, an election (or revocation)
must be made by the designated member by satisfying the requirements of
paragraph (b)(2) or (b)(3) of this section (whichever applies), and such
election (or revocation) by the designated member shall be
[[Page 182]]
binding on all the members of the group for the credit year to which the
election (or revocation) relates. If the designated member fails to
timely make (or revoke) an election, each member of the group must
compute the group credit using the method used to compute the group
credit for the immediately preceding credit year.
(ii) Designated member. For purposes of this paragraph (b)(4), for
any credit year, the term designated member means that member of the
group that is allocated the greatest amount of the group credit under
Sec. 1.41-6(c) based on the amount of credit reported on the taxpayer's
timely filed (including extensions) original Federal income tax return
(even if that member subsequently is determined not to be the designated
member). If the members of a group compute the group credit using
different methods (the method described in section 41(a)(1), the AIRC
method of section 41(c)(4) (available for years beginning on or before
December 31, 2008), or the ASC method of section 41(c)(5)) and at least
two members of the group qualify as the designated member, then the term
designated member means that member that computes the group credit using
the method that yields the greatest group credit. For example, A, B, C,
and D are members of a controlled group but are not members of a
consolidated group. For the 2008 taxable year (the credit year), the
group credit using the method described in section 41(a)(1) is $10x.
Under this method, A would be allocated $5x of the group credit, which
would be the largest share of the group credit under this method. For
the credit year, the group credit using the AIRC method is $15x. Under
the AIRC method, B would be allocated $5x of the group credit, which is
the largest share of the group credit computed using the AIRC method.
For the credit year, the group credit using the ASC method is $10x.
Under the ASC method, C would be allocated $5x of the group credit,
which is the largest share of the group credit computed using the ASC
method. Because the group credit is greatest using the AIRC method and B
is allocated the greatest amount of credit under that method, B is the
designated member. Therefore, if B makes a section 41(c)(4) election on
its original timely filed return for the credit year, that election is
binding on all members of the group for the credit year.
(5) Effective/applicability dates. This section is applicable for
taxable years ending after June 9, 2011. For taxable years ending on or
before June 9, 2011, see Sec. Sec. 1.41-8 and 1.41-8T, as contained in
26 CFR part 1, revised April 1, 2011.
[T.D. 9296, 71 FR 65732, Nov. 9, 2006; 71 FR 70875, Dec. 7, 2006, as
amended by T.D. 9401, 73 FR 34189, June 17, 2008; T.D. 9528, 76 FR
33996, June 10, 2011]
Sec. 1.41-9 Alternative simplified credit.
(a) Determination of credit. At the election of the taxpayer, the
credit determined under section 41(a)(1) equals the amount determined
under section 41(c)(5).
(b) Election--(1) In general. A taxpayer may elect to apply the
provisions of the alternative simplified credit (ASC) in section
41(c)(5) for any taxable year of the taxpayer ending after December 31,
2006. If a taxpayer makes an election under section 41(c)(5), the
election applies to the taxable year for which made and all subsequent
taxable years unless revoked in the manner prescribed in paragraph
(b)(3) of this section.
(2) Time and manner of election. A taxpayer makes an election under
section 41(c)(5) by completing the portion of Form 6765, ``Credit for
Increasing Research Activities,'' (or successor form) relating to the
election of the ASC, and attaching the completed form to the taxpayer's
timely filed (including extensions) original return for the taxable year
to which the election applies. A taxpayer may make an election under
section 41(c)(5) for a tax year on an amended return, but only if the
taxpayer has not previously claimed a section 41(a)(1) credit on its
original return or an amended return for that tax year, and only if that
tax year is not closed by the period of limitations on assessment under
section 6501(a). An extension of time to make an election under section
41(c)(5) will not be granted under Sec. 301.9100-3 of this chapter. A
taxpayer that is a member of a controlled group in a tax year may not
make an election under section 41(c)(5) for that tax year on an amended
return
[[Page 183]]
if any member of the controlled group for that tax year previously
claimed the research credit under section 41(a)(1) using a method other
than the ASC on an original or amended return for that tax year. See
paragraph (b)(4) of this section for additional rules concerning
controlled groups. See also Sec. 1.41-6(b)(1) requiring that all
members of the controlled group use the same method of computation.
(3) Revocation. An election under this section may not be revoked
except with the consent of the Commissioner. A taxpayer is deemed to
have requested, and to have been granted, the consent of the
Commissioner to revoke an election under section 41(c)(5) if the
taxpayer completes the portion of Form 6765 (or successor form) relating
to the credit determined under section 41(a)(1) (the regular credit) or
the alternative incremental credit (AIRC) and attaches the completed
form to the taxpayer's timely filed (including extensions) original
return for the year to which the revocation applies. An election under
section 41(c)(5) may not be revoked on an amended return. An extension
of time to revoke an election under section 41(c)(5) will not be granted
under Sec. 301.9100-3 of this chapter.
(4) Special rules for controlled groups--(i) In general. In the case
of a controlled group of corporations, all the members of which are not
included on a single consolidated return, an election (or revocation)
must be made by the designated member by satisfying the requirements of
paragraphs (b)(2) or (b)(3) of this section (whichever applies), and
such election (or revocation) by the designated member shall be binding
on all the members of the group for the credit year to which the
election (or revocation) relates. If the designated member fails to
timely make (or revoke) an election, each member of the group must
compute the group credit using the method used to compute the group
credit for the immediately preceding credit year.
(ii) Designated member. For purposes of this paragraph (b)(4), for
any credit year, the term designated member means that member of the
group that is allocated the greatest amount of the group credit under
Sec. 1.41-6(c) based on the amount of credit reported on the taxpayer's
timely filed (including extensions) original Federal income tax return
(even if that member subsequently is determined not to be the designated
member). If the members of a group compute the group credit using
different methods (the method described in section 41(a)(1), the AIRC
method of section 41(c)(4), or the ASC method of section 41(c)(5)) and
at least two members of the group qualify as the designated member, then
the term designated member means that member that computes the group
credit using the method that yields the greatest group credit. For
example, A, B, C, and D are members of a controlled group but are not
members of a consolidated group. For the 2011 taxable year (the credit
year), the group credit using the method described in section 41(a)(1)
is $10x. Under this method, A would be allocated $5x of the group
credit, which would be the largest share of the group credit under this
method. For the credit year, the group credit using the ASC method is
$15x. Under the ASC method, C would be allocated $5x of the group
credit, which is the largest share of the group credit computed using
the ASC method. Because the group credit is greatest using the ASC
method and C is allocated the greatest amount of credit under that
method, C is the designated member. Therefore, if C makes a section
41(c)(5) election on its timely filed (including extensions) original
return for the credit year, that election is binding on all members of
the group for the credit year.
(c) Special rules--(1) Qualified research expenses (QREs) required
in all years. Unless a taxpayer has QREs in each of the three taxable
years preceding the taxable year for which the credit is being
determined, the credit equals that percentage of the QREs for the
taxable year provided by section 41(c)(5)(B)(ii).
(2) Section 41(c)(6) applicability. QREs for the three taxable years
preceding the credit year must be determined on a basis consistent with
the definition of QREs for the credit year, without regard to the law in
effect for the three taxable years preceding the credit year. This
consistency requirement applies even if the period for filing a claim
for credit or refund has expired
[[Page 184]]
for any of the three taxable years preceding the credit year.
(3) Short taxable years--(i) General rule. If one or more of the
three taxable years preceding the credit year is a short taxable year,
then the QREs for such year are deemed to be equal to the QREs actually
paid or incurred in that year multiplied by 365 and divided by the
number of days in that year. If a credit year is a short taxable year,
then the average QREs for the three taxable years preceding the credit
year are modified by multiplying that amount by the number of days in
the short taxable year and dividing the result by 365.
(ii) Limited exception. Returns filed for taxable years ending after
December 31, 2006, and before June 9, 2011, and for which the period of
limitations has not expired, may be amended to apply the daily
calculation for short taxable years provided in paragraph (3)(i) of this
section in lieu of the monthly calculation for short taxable years
provided in Sec. 1.41-9T(c)(4).
(4) Controlled groups. For purposes of computing the group credit
under Sec. 1.41-6, a controlled group must apply the rules of this
paragraph (c) on an aggregate basis. For example, if the controlled
group has QREs in each of the three taxable years preceding the taxable
year for which the credit is being determined, the controlled group
applies the credit computation provided by section 41(c)(5)(A) rather
than section 41(c)(5)(B)(ii).
(d) Effective/applicability dates. This section is applicable for
taxable years ending after June 9, 2011. For taxable years ending on or
before June 9, 2011, see Sec. 1.41-9T as contained in 26 CFR part 1,
revised April 1, 2011. Paragraph (b)(2) of this section applies to
elections with respect to taxable years ending on or after February 27,
2015. For taxable years ending before February 27, 2015, see Sec. 1.41-
9T as contained in 26 CFR part 1, revised April 1, 2015.
[T.D. 9528, 76 FR 33996, June 10, 2011, as amended by T.D. 9666, 79 FR
31864, June 3, 2014; T.D. 9712, 80 FR 10589, Feb. 27, 2015]
Sec. 1.42-0 Table of contents.
This section lists the paragraphs contained in Sec. Sec. 1.42-1 and
1.42-2.
Sec. 1.42-1 [Reserved]
Sec. 1.42-2 Waiver of requirement that an existing building eligible
for the low-income housing credit was last placed in service more than
10 years prior to acquisition by the taxpayer.
(a) Low-income housing credit for existing building
(b) Waiver of 10-year holding period requirement
(c) Waiver requirements
(1) Federally-assisted building
(2) Federal mortgage funds at risk
(3) Statement by the Department of Housing and Urban Development or
the Farmers' Home Administration
(4) No prior credit allowed
(d) Application for waiver
(1) Time and manner
(2) Information required
(3) Other rules
(4) Effective date of waiver
(5) Attachment to return
(e) Effective date of regulations
[T.D. 8302, 55 FR 21189, May 23, 1990]
Sec. 1.42-1 Limitation on low-income housing credit allowed with
respect to qualified low-income buildings receiving housing credit
allocations from a State or local housing credit agency.
(a)-(g) [Reserved]. For further guidance, see Sec. 1.42-1T(a)
through (g).
(h) Filing of forms. Unless otherwise provided in forms or
instructions, a completed Form 8586, ``Low-Income Housing Credit,'' (or
any successor form) must be filed with the owner's Federal income tax
return for each taxable year the owner of a qualified low-income
building is claiming the low-income housing credit under section 42(a).
Unless otherwise provided in forms or instructions, a completed Form
8609, ``Low-Income Housing Credit Allocation and Certification,'' (or
any successor form) must be filed by the building owner with the IRS.
The requirements for completing and filing Forms 8586 and 8609 are
addressed in the instructions to the forms.
(i) [Reserved]. For further guidance, see Sec. 1.42-1T(i).
(j) Effective dates. Section 1.42-1(h) applies to forms filed on or
after November 7, 2005. The rules that apply for forms filed before
November 7, 2005 are contained in Sec. 1.42-1T(h) and Sec. 1.42-1(h)
[[Page 185]]
(see 26 CFR part 1 revised as of April 1, 2003, and April 1, 2005).
[T.D. 9112, 69 FR 3827, Jan. 27, 2004, as amended by T.D. 9228, 70 FR
67356, Nov. 7, 2005]
Sec. 1.42-1T Limitation on low-income housing credit allowed with
respect to qualified low-income buildings receiving housing credit
allocations from a State or local housing credit agency (temporary).
(a) In general--(1) Determination of amount of low-income housing
credit. Section 42 provides that, for purposes of section 38, a low-
income housing credit is determined for a building in an amount equal to
the applicable percentage of the qualified basis of the qualified low-
income building. In general, the credit may be claimed annually for a
10-year credit period, beginning with the taxable year in which the
building is placed in service or, at the election of the taxpayer, the
succeeding taxable year. If, after the first year of the credit period,
the qualified basis of a building is increased in excess of the
qualified basis upon which the credit was initially determined, the
allowable credit with respect to such additional qualified basis is
determined using a credit percentage equal to two-thirds of the
applicable percentage for the initial qualified basis. The credit for
additions to qualified basis is generally allowable for the remaining
years in the 15-year compliance period which begins with the first
taxable year of the credit period for the building. In general, the low-
income housing credit is available with respect to buildings placed in
service after December 31, 1986, in taxable years ending after that
date. See section 42 for the definitions of ``qualified low-income
building'', ``applicable percentage'', ``qualified basis'', ``credit
period'', ``compliance period'', and for other rules relating to
determination of the amount of the low-income housing credit.
(2) Limitation on low-income housing credit allowed. Generally, the
low-income housing credit determined under section 42 is allowed and may
be claimed for any taxable year if, and to the extent that, the owner of
a qualified low-income building receives a housing credit allocation
from a State or local housing credit agency. The aggregate amount of
housing credit allocations that may be made in any calendar year by all
housing credit agencies within a State is limited by a State housing
credit ceiling, or volume cap, described in paragraph (b) of this
section. The authority to make housing credit allocations within the
State housing credit ceiling may be apportioned among the State and
local housing credit agencies, under the rules prescribed in paragraph
(c) of this section. Upon apportionment of the State housing credit
volume cap, each State or local housing credit agency receives an
aggregate housing credit dollar amount that may be used to make housing
credit allocations among qualified low-income buildings located within
an agency's geographic jurisdiction. The rules governing the making of
housing credit allocations by any state or local housing credit agency
are provided in paragraph (d) of this section. Housing credit
allocations are required to be taken into account by owners of qualified
low-income buildings under the rules prescribed in paragraph (e) of this
section. Exceptions to the requirement that a qualified low-income
building receive a housing credit allocation from a State or local
housing credit agency are provided in paragraph (f) of this section.
Rules regarding termination of the authority of State and local housing
credit agencies to make housing credit allocations after December 31,
1989, are specified in paragraph (g) of this section. Rules concerning
information reporting by State and local housing credit agencies and
owners of qualified low-income buildings are provided in paragraph (h)
of this section. Special statutory transitional rules are incorporated
into this section of the regulations as described in paragraph (i) of
this section.
(b) The State housing credit ceiling. The aggregate amount of
housing credit allocations that may be made in any calendar year by all
State and local housing credit agencies within a State may not exceed
the State's housing credit ceiling for such calendar year. The State
housing credit ceiling for each State for any calendar year is equal to
$1.25 multiplied by the State's population. A State's population for
[[Page 186]]
any calendar year is determined by reference to the most recent census
estimate (whether final or provisional) of the resident population of
the State released by the Bureau of the Census before the beginning of
the calendar year for which the State's housing credit ceiling is set.
Unless otherwise prescribed by applicable revenue procedure,
determinations of population are based on the most recent estimates of
population contained in the Bureau of the Census publication, ``Current
Population Reports, Series P-25: Population Estimates and Projections,
Estimates of the Population of States''. For purposes of this section,
the District of Columbia and United States possessions are treated as
States.
(c) Apportionment of State housing credit ceiling among State and
local housing credit agencies--(1) In general. A State's housing credit
ceiling for any calendar year is apportioned among the State and local
housing credit agencies within such State under the rules prescribed in
this paragraph. A ``State housing credit agency'' is any State agency
specifically authorized by gubernatorial act or State statute to make
housing credit allocations on behalf of the State and to carry out the
provisions of section 42(h). A ``local housing credit agency'' is any
agency of a political subdivision of the State that is specifically
authorized by a State enabling act to make housing credit allocations on
behalf of the State or political subdivision and to carry out the
provisions of section 42(h). A ``State enabling act'' is any
gubernatorial act, State statute, or State housing credit agency
regulation (if authorized by gubernatorial act or State statute). A
State enabling act enacted on or before October 22, 1986, the date of
enactment of the Tax Reform Act of 1986, shall be given effect for
purposes of this paragraph if such State enabling act expressly carries
out the provisions of section 42(h).
(2) Primary apportionment. Except as otherwise provided in
paragraphs (c) (3) and (4) of this section, a State's housing credit
ceiling is apportioned in its entirety to the State housing credit
agency. Such an apportionment is the ``primary apportionment'' of a
State's housing credit ceiling. There shall be no primary apportionment
of the State housing credit ceiling and no grants of housing credit
allocations in such State until a State housing credit agency is
authorized by gubernatorial act or State statute. If a State has more
than one State housing credit agency, such agencies shall be treated as
a single agency for purposes of the primary apportionment. In such a
case, the State housing credit ceiling may be divided among the multiple
State housing credit agencies pursuant to gubernatorial act or State
statute.
(3) States with 1 or more constitutional home rule cities--(i) In
general. Notwithstanding paragraph (c)(2) of this section, in any State
with 1 or more constitutional home rule cities, a portion of the State
housing credit ceiling is apportioned to each constitutional home rule
city. In such a State, except as provided in paragraph (c)(4) of this
section, the remainder of the State housing credit ceiling is
apportioned to the State housing credit agency under paragraph (c)(2) of
this section. See paragraph (c)(3)(iii) of this section. The term
``constitutional home rule city'' means, with respect to any calendar
year, any political subdivision of a State that, under a State
constitution that was adopted in 1970 and effective on July 1, 1971, had
home rule powers on the first day of the calendar year.
(ii) Amount of apportionment to a constitutional home rule city. The
amount of the State housing credit ceiling apportioned to a
constitutional home rule city for any calendar year is an amount that
bears the same ratio to the State housing credit ceiling for that year
as the population of the constitutional home rule city bears to the
population of the entire State. The population of any constitutional
home rule city for any calendar year is determined by reference to the
most recent census estimate (whether final or provisional) of the
resident population of the constitutional home rule city released by the
Bureau of the Census before the beginning of the calendar year for which
the State housing credit ceiling is apportioned. However, determinations
of the population of a constitutional home rule city may not be based on
Bureau of the Census estimates that do not contain estimates
[[Page 187]]
for all of the constitutional home rule cities within the State. If no
Bureau of the Census estimate is available for all such constitutional
home rule cities, the most recent decennial census of population shall
be relied on. Unless otherwise prescribed by applicable revenue
procedure, determinations of population for constitutional home rule
cities are based on estimates of population contained in the Bureau of
the Census publication, ``Current Population Reports, Series P-26: Local
Population Estimates''.
(iii) Effect of apportionments to constitutional home rule cities on
apportionments to other housing credit agencies. The aggregate amounts
of the State housing credit ceiling apportioned to constitutional home
rule cities under this paragraph (c)(3) reduce the State housing credit
ceiling available for apportionment under paragraph (c) (2) or (4) of
this section. Unless otherwise provided in a State constitutional
amendment or by law changing the home rule provisions adopted in a
manner provided by the State constitution, the power of the governor or
State legislature to apportion the State housing credit ceiling among
local housing credit agencies under paragraph (c)(4) of this section
shall not be construed as allowing any reduction of the portion of the
State housing credit ceiling apportioned to a constitutional home rule
city under this paragraph (c)(3). However, any constitutional home rule
city may agree to a reduction in its apportionment of the State housing
credit ceiling under this paragraph (c)(3), in which case the amount of
the State housing credit ceiling not apportioned to the constitutional
home rule city shall be available for apportionment under paragraph (c)
(2) or (4) of this section.
(iv) Treatment of governmental authority within constitutional home
rule city. For purposes of determining which agency within a
constitutional home rule city receives the apportionment of the State
housing credit ceiling under this paragraph (c)(3), the rules of this
paragraph (c) shall be applied by treating the constitutional home rule
city as a ``State'', the chief executive officer of a constitutional
home rule city as a ``governor'', and a city council as a ``State
legislature''. A constitutional home rule city is also treated as a
``State'' for purposes of the set-aside requirement for housing credit
allocations to projects involving a qualified nonprofit organization.
See paragraph (c)(5) of this section for rules governing set-aside
requirements. In this connection, a constitutional home rule city may
agree with the State housing credit agency to exchange an apportionment
set aside for projects involving a qualified nonprofit organization for
an apportionment that is not so restricted. In such a case, the
authorizing gubernatorial act, State statute, or State housing credit
agency regulation (if authorized by gubernatorial act or State statute)
must ensure that the set-aside apportionment transferred to the State
housing credit agency be used for the purposes described in paragraph
(c)(5) of this section.
(4) Apportionment to local housing credit agencies--(i) In general.
In lieu of the primary apportionment under paragraph (c)(2) of this
section, all or a portion of the State housing credit ceiling may be
apportioned among housing credit agencies of governmental subdivisions.
Apportionments of the State housing credit ceiling to local housing
credit agencies must be made pursuant to a State enabling act as defined
in paragraph (c)(1) of this section. Apportionments of the State housing
credit ceiling may be made to housing credit agencies of constitutional
home rule cities under this paragraph (c)(4), in addition to
apportionments made under paragraph (c)(3) of this section.
Apportionments of the State housing credit ceiling under this paragraph
(c)(4) need not be based on the population of political subdivisions and
may, but are not required to, give balanced consideration to the low-
income housing needs of the entire State.
(ii) Change in apportionments during a calendar year. The
apportionment of the State housing credit ceiling among State and local
housing credit agencies under this paragraph (c)(4) may be changed after
the beginning of a calendar year, pursuant to a State enabling act. No
change in apportionments shall retroactively reduce the housing credit
allocations made by any agency during such year. Any change in the
[[Page 188]]
apportionment of the State housing credit ceiling under this paragraph
(c)(4) that occurs during a calendar year is effective only to the
extent housing credit agencies have not previously made housing credit
allocations during such year from their original apportionments of the
State housing credit ceiling for such year. To the extent apportionments
of the State housing credit ceiling to local housing credit agencies
made pursuant to this paragraph (c)(4) for any calendar year are not
used by such local agencies before a certain date (e.g., November 1) to
make housing credit allocations in such year, the amount of unused
apportionments may revert back to the State housing credit agency for
reapportionment. Such reversion must be specifically authorized by the
State enabling act.
(iii) Exchanges of apportionments. Any State or local housing credit
agency that receives an apportionment of the State housing credit
ceiling for any calendar year under this paragraph (c)(4) may exchange
part or all of such apportionment with another State or local housing
credit agency to the extent no housing credit allocations have been made
in such year from the exchanged portions. Such exchanges must be made
with another housing credit agency in the same State and must be
consistent with the State enabling act. If an apportionment set aside
for projects involving a qualified nonprofit organization is transferred
or exchanged, the transferee housing credit agency shall be required to
use the set-aside apportionment for the purposes described in paragraph
(c)(5) of this section.
(iv) Written records of apportionments. All apportionments,
exchanges of apportionments, and reapportionments of the State housing
credit ceiling which are authorized by this paragraph (c)(4) must be
evidenced in the written records maintained by each State and local
housing credit agency.
(5) Set-aside apportionments for projects involving a qualified
nonprofit organization--(i) In general. Ten percent of the State housing
credit ceiling for a calendar year must be set aside exclusively for
projects involving a qualified nonprofit organization (as defined in
paragraph (c)(5)(ii) of this section). Thus, at least 10 percent of
apportionments of the State housing credit ceiling under paragraphs (c)
(2) and (3) of this section must be used only to make housing credit
allocations to buildings that are part of projects involving a qualified
nonprofit organization. In the case of apportionments of the State
housing credit ceiling under paragraph (c)(4) of this section, the State
enabling act must ensure that the apportionment of at least 10 percent
of the State housing credit ceiling be used exclusively to make housing
credit allocations to buildings that are part of projects involving a
qualified nonprofit organization. The State enabling act shall prescribe
which housing credit agencies in the State receive apportionments that
must be set aside for making housing credit allocations to buildings
that are part of projects involving a qualified nonprofit organization.
These set-aside apportionments may be distributed disproportionately
among the State or local housing credit agencies receiving
apportionments under paragraph (c)(4) of this section. The 10-percent
set-aside requirement of this paragraph (c)(4) is a minimum requirement,
and the State enabling act may set aside more than 10 percent of the
State housing credit ceiling for apportionment to housing credit
agencies for exclusive use in making housing credit allocations to
buildings that are part of projects involving a qualified nonprofit
organization.
(ii) Projects involving a qualified nonprofit organization. The term
``projects involving a qualified nonprofit organization'' means projects
with respect to which a qualified nonprofit organization is to
materially participate (within the meaning of section 469(h)) in the
development and continuing operation of the project throughout the 15-
year compliance period. The term ``qualified nonprofit organization''
means any organization that is described in section 501(c) (3) or (4),
is exempt from tax under section 501(a), and includes as one of its
exempt purposes the fostering of low-income housing.
(6) Expiration of unused apportionments. Apportionments of the State
housing credit ceiling under this paragraph (c) for any calendar year
may be
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used by housing credit agencies to make housing credit allocations only
in such calendar year. Any part of an apportionment of the State housing
credit ceiling for any calendar year that is not used for housing credit
allocations in such year expires as of the end of such year and does not
carry over to any other year. However, any part of an apportionment for
1989 that is not used to make a housing credit allocation in 1989 may be
carried over to 1990 and used to make a housing credit allocation to a
qualified low-income building described in section 42(n)(2)(B). See
paragraph (g)(2) of this section.
(d) Housing credit allocations made by State and local housing
credit agencies--(1) In general. This paragraph governs State and local
housing credit agencies in making housing credit allocations to
qualified low-income buildings. The amount of the apportionment of the
State housing credit ceiling for any calendar year received by any State
or local housing credit agency under paragraph (c) of this section
constitutes the agency's aggregate housing credit dollar amount for such
year. The aggregate amount of housing credit allocations made in any
calendar year by a State or local housing credit agency may not exceed
such agency's aggregate housing credit dollar amount for such year. A
State or local housing credit agency may make housing credit allocations
only to qualified low-income buildings located within the agency's
geographic jurisdiction.
(2) Amount of a housing credit allocation. In making a housing
credit allocation, a State or local housing credit agency must specify a
credit percentage, not to exceed the building's applicable percentage
determined under section 42(b), and a qualified basis amount. The amount
of the housing credit allocation for any building is the product of the
specified credit percentage and the specified qualified basis amount. In
specifying the credit percentage and qualified basis amount, the State
or local housing credit agency shall not take account of the first-year
conventions described in section 42(f) (2)(A) and (3)(B). A State or
local housing credit agency may adopt rules or regulations governing
conditions for specification of less than the maximum credit percentage
and qualified basis amount allowable under section 42 (b) and (c),
respectively. For example, an agency may specify a credit percentage and
a qualified basis amount of less than the maximum credit percentage and
qualified basis amount allowable under section 42 (b) and (c),
respectively, when the financing and rental assistance from all sources
for the project of which the building is a part is sufficient to provide
the continuing operation of the building without the maximum credit
amount allowable under section 42.
(3) Counting housing credit allocations against an agency's
aggregate housing credit dollar amount. The aggregate amount of housing
credit allocations made in any calendar year by a State or local housing
credit agency may not exceed such agency's aggregate housing credit
dollar amount (i.e., the agency's apportionment of the State housing
credit ceiling for such year). This limitation on the aggregate dollar
amount of housing credit allocations shall be computed separately for
set-aside apportionments received pursuant to paragraph (c)(5) of this
section. Housing credit allocations count against an agency's aggregate
housing credit dollar amount without regard to the amount of credit
allowable to or claimed by an owner of a building in the taxable year in
which the allocation is made or in any subsequent year. Thus, housing
credit allocations (which are computed without regard to the first-year
conventions as provided in paragraph (d)(2) of this section) count in
full against an agency's aggregate housing credit dollar amount, even
though the first-year conventions described in section 42(f) (2)(A) and
(3)(B) may reduce the amount of credit claimed by a taxpayer in the
first year in which a credit is allowable. See also paragraph (e)(2) of
this section. Housing credit allocations count against an agency's
aggregate housing credit dollar amount only in the calendar year in
which made and not in subsequent taxable years in the credit period or
compliance period during which a taxpayer may claim a credit based on
the original housing credit allocation. Since the
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aggregate amount of housing credit allocations made in any calendar year
by a State or local housing credit agency may not exceed such agency's
aggregate housing credit dollar amount, an agency shall at all times
during a calendar year maintain a record of its cumulative allocations
made during such year and its remaining unused aggregate housing credit
dollar amount.
(4) Rules for when applications for housing credit allocations
exceed an agency's aggregate housing credit dollar amount. A State or
local housing credit agency may adopt rules or regulations governing the
awarding of housing credit allocations when an agency expects that
applicants during a calendar year will seek aggregate allocations in
excess of the agency's aggregate housing credit dollar amount. The State
enabling act may provide uniform standards for the awarding of housing
credit allocations when there is actual or anticipated excess demand
from applicants in any calendar year.
(5) Reduced or additional housing credit allocations--(i) In
general. A State or local housing credit agency may not reduce or
rescind a housing credit allocation made to a qualified low-income
building in the manner prescribed in paragraph (d)(8) of this section.
Thus, a housing credit agency may not reduce or rescind a housing credit
allocation made to a qualified low-income building which is acquired by
a new owner who is entitled to a carryover of the allowable credit for
such building under section 42(d)(7). A housing credit agency may make
additional housing credit allocations to a building in any year in the
building's compliance period, whether or not there are additions to
qualified basis for which an increased credit is allowable under section
42(f)(3). Each additional housing credit allocation made to a building
is treated as a separate allocation and is subject to the rules and
requirements of this section. However, in the case of an additional
housing credit allocation made with respect to additions to qualified
basis for which an increased credit is allowable under section 42(f)(3),
the amount of the allocation that counts against the agency's aggregate
housing credit dollar amount shall be computed as if the specified
credit percentage were unreduced in the manner prescribed in section
42(f)(3)(A) and the specified qualified basis amount were unreduced by
the first-year convention prescribed in section 42(f)(3)(B).
(ii) Examples. The rules of paragraph (d)(5)(i) of this section may
be illustrated by the following examples:
Example 1. For 1987, the County L Housing Credit Agency has an
aggregate housing credit dollar amount of $2 million. D, an individual,
places in service on July 1, 1987, a new qualified low-income building.
As of the close of each month in 1987 in which the building is in
service, the building consists of 100 residential rental units, of which
20 units are both rent-restricted and occupied by individuals whose
income is 50 percent or less of area median gross income. The total
floor space of the residential rental units is 120,000 square feet, and
the total floor space of the low-income units is 20,000 square feet. The
building is not Federally subsidized within the meaning of section
42(i)(2). As of the end of 1987, the building has eligible basis under
section 42(d) of $1 million. Thus, the qualified basis of the building
determined without regard to the first-year convention provided in
section 42(f) is $166,666.67 (i.e., $1 million eligible basis times \1/
6\, the floor space fraction which is required to be used instead of the
larger unit fraction). However, the amount of the low-income housing
credit determined for 1987 under section 42 reflects the first-year
convention provided in section 42(f)(2). Since the building has the same
floor space and unit fractions as of the close of each of the six months
in 1987 during which it is in service, upon applying the first-year
convention in section 42(f)(2), the qualified basis of the building in
1987 is $83,333.33 (i.e., $1 million eligible basis times \1/12\, the
fraction determined under section 42(f)(2)(A)). Under paragraph (d)(2)
of this section, the County L Housing Credit Agency may make a housing
credit allocation by specifying a credit percentage, not to exceed 9
percent, and a qualified basis amount, which may be greater or less than
the qualified basis of the building in 1987 as determined under section
42(c), without regard to the first-year convention provided in section
42(f)(2). If the County L Housing Credit Agency specifies a credit
percentage of 8 percent and a qualified basis amount of $100,000, the
amount of the housing credit allocation is $8,000. Under paragraph
(d)(3) of this section, the County L Housing Credit Agency's aggregate
housing credit dollar amount for 1987 is reduced by $8,000,
notwithstanding that D is entitled to claim less than $8,000 of the
credit in 1987 under the rules in paragraph (e) of this section. Under
paragraph (e)(2) of this section, in 1987 D is entitled to claim only
$4,000 of
[[Page 191]]
the credit, determined by applying the first-year convention of \6/12\
to the specified qualified basis amount contained in the housing credit
allocation (i.e., .08x$100,000x(\6/12\)).
Example 2. The facts are the same as in Example 1 except that on
July 1, 1988, the number of occupied low-income units increases to 50
units and the floor space of the occupied low-income units increases to
48,000 square feet. These occupancy fractions remain unchanged as of the
close of each month remaining in 1988. Under section 42(c), the
qualified basis of the building in 1988, without regard to the first-
year convention in section 42(f)(3)(B), is $400,000 (i.e., $1 million
eligible basis times .4, the floor space fraction which is required to
be used instead of the larger unit fraction). D's 1987 housing credit
allocation from the County L Housing Credit Agency remains effective in
1988 and entitles D to a credit of $8,000 (i.e., .08, the specified
credit percentage, times $100,000, the specified qualified basis
amount). With respect to the additional $300,000 of qualified basis
which the 1987 housing credit allocation does not cover, D must apply to
the County L Housing Credit Agency for an additional housing credit
allocation. Assume that the County L Housing Credit Agency has a
sufficient aggregate housing credit dollar amount for 1988 to make a
housing credit allocation to D in 1988 by specifying a credit percentage
of 9 percent and a qualified basis amount of $300,000. The amount of the
housing credit allocation that counts against the County L Housing
Credit Agency's aggregate housing credit dollar amount is $27,000 (i.e.,
the amount counted (.09 times $300,000) is unreduced in the manner
prescribed in section 42(f)(3) (A) and (B)). Since D's qualified basis
in 1987 was $166,666.67, D is entitled to claim a credit in 1988 with
respect to such basis of $14,000 (i.e., .08x$100,000, the 1987 credit
allocation, +.09x$66,666.67, the 1988 credit allocation). In addition, D
is entitled to claim a credit in 1988 and subsequent years in the 15-
year compliance period with respect to the additional $233,333.33 of
qualified basis covered by the 1988 housing credit allocation. However,
the allowable credit for 1988 with respect to this amount of additional
qualified basis is subject to reductions prescribed in section 42(f)(3)
(A) and (B). Thus, D is entitled in 1988 to a credit at a 6-percent rate
applied to $116,666.67 of additional qualified basis, which is reduced
to reflect the first-year convention. D's total allowable low-income
housing credit in 1988 is $21,000 (i.e., $14,000 with respect to
original qualified basis + $7,000 with respect to 1988 additions to
qualified basis). If the County L Housing Credit Agency had specified an
8-percent credit percentage in 1988 with respect to the qualified basis
not covered by the 1987 housing credit allocation to D, D's allowable
credit with respect to the $233,333.33 of additions to qualified basis
would not exceed, in 1988 and subsequent years, an amount determined by
applying a specified credit percentage of 5.33 percent (i.e., two-thirds
of 8 percent). In 1988, D's specified qualified basis amount would be
adjusted for the first-year convention.
(6) No carryover of unused aggregate housing credit dollar amount.
Any portion of a State or local housing credit agency's aggregate
housing credit dollar amount for any calendar year that is not used to
make a housing credit allocation in such year may not be carried over to
any other year, except as provided in paragraph (g) of this section. An
agency may not permit owners of qualified low-income buildings to
transfer housing credit allocations to other buildings. However, an
agency may provide a procedure whereby owners may return to the agency,
prior to the end of the calendar year in which housing credit
allocations are made, unusable portions of such allocations. In such a
case, an owner's housing credit allocation is deemed reduced by the
amount of the allocation returned to the agency, and the agency may
reallocate such amount to other qualified low-income buildings prior to
the end of the year.
(7) Effect of housing credit allocations in excess of an agency's
aggregate housing credit dollar amount. In the event that a State or
local housing credit agency makes housing credit allocations in excess
of its aggregate housing credit dollar amount for any calendar year, the
allocations shall be deemed reduced (to the extent of such excess) for
buildings in the reverse order in which such allocations were made
during such year.
(8) Time and manner for making housing credit allocations--(i) Time.
Housing credit allocations are effective for the calendar year in which
made in the manner prescribed in paragraph (d)(8)(ii) of this section. A
State or local housing credit agency may not make a housing credit
allocation to a qualified low-income building prior to the calendar year
in which such building is placed in service. An agency may adopt its own
procedures for receiving applications for housing credit allocations
from owners of qualified low-income buildings. An agency may provide a
procedure for making, in advance of a
[[Page 192]]
building's being placed in service, a binding commitment (e.g., by
contract, inducement, resolution, or other means) to make a housing
credit allocation in the calendar year in which a qualified low-income
building is placed in service or in a subsequent calendar year. Any
advance commitment shall not constitute a housing credit allocation for
purposes of this section.
(ii) Manner. Housing credit allocations are deemed made when part I
of IRS Form 8609, Low-Income Housing Credit Allocation Certification, is
completed and signed by an authorized official of the housing credit
agency and mailed to the owner of the qualified low-income building. A
copy of all completed (as to part I) Form 8609 allocations along with a
single completed Form 8610, Annual Low-Income Housing Credit Agencies
Report, must also be mailed to the Internal Revenue Service not later
than the 28th day of the second calendar month after the close of the
calendar year in which the housing credit was allocated to the qualified
low-income building. Housing credit allocations to a qualified low-
income building must be made on Form 8609 and must include--
(A) The address of the building;
(B) The name, address, and taxpayer identification number of the
housing credit agency making the housing credit allocation;
(C) The name, address, and taxpayer identification number of the
owner of the qualified low-income building;
(D) The date of the allocation of housing credit;
(E) The housing credit dollar amount allocated to the building on
such date;
(F) The specified maximum applicable credit percentage allocated to
the building on such date;
(G) The specified maximum qualified basis amount;
(H) The percentage of the aggregate basis financed by tax-exempt
bonds taken into account for purposes of the volume cap under section
146;
(I) A certification under penalties of perjury by an authorized
State or local housing credit agency official that the allocation is
made in compliance with the requirements of section 42(h); and
(J) Any additional information that may be required by Form 8609 or
by an applicable revenue procedure.
See paragraph (h) of this section for additional rules concerning filing
of forms.
(iii) Certification. The certifying official for the State or local
housing credit agency need not perform an independent investigation of
the qualified low-income building in order to certify on part I of Form
8609 that the housing credit allocation meets the requirements of
section 42(h). For example, the certifying official may rely on
information contained in an application for a low-income housing credit
allocation submitted by the building owner which sets forth facts
necessary to determine that the building is eligible for the low-income
housing credit under section 42.
(iv) Fee. A State or local housing credit agency may charge building
owners applying for housing credit allocations a reasonable fee to cover
the agency's administrative expenses for processing applications.
(v) No continuing agency responsibility. The State or local housing
credit agency need not monitor or investigate the continued compliance
of a qualified low-income building with the requirements of section 42
throughout the applicable compliance period.
(e) Housing credit allocation taken into account by owner of a
qualified low-income building--(1) Time and manner for taking housing
credit allocation into account. An owner of a qualified low-income
building may not claim a low-income housing credit determined under
section 42 in any year in excess of an effective housing credit
allocation received from a State or local housing credit agency. A
housing credit allocation made to a qualified low-income building is
effective with respect to any owner of the building beginning with the
owner's taxable year in which the housing credit allocation is received.
A housing credit allocation is deemed received in a taxable year, except
as modified in the succeeding sentence, if that allocation is made (in
the manner described in paragraph (d)(8) of this section) not later than
the earlier of (i) the 60th day after the close of the taxable year, or
(ii) the close of the
[[Page 193]]
calendar year in which such taxable year ends. A housing credit
allocation is deemed received in a taxable year ending in 1987, if such
allocation is made (in the manner described in paragraph (d)(8) of this
section) on or before December 31, 1987. A housing credit allocation is
not effective for any taxable year if received in a calendar year which
ends prior to when the qualified low-income building is placed in
service. A housing credit allocation made to a qualified low-income
building remains effective for all taxable years in the compliance
period.
(2) First-year convention limitation on housing credit allocation
taken into account. For purposes of the limitation that the allowable
low-income housing credit may not exceed the effective housing credit
allocation received from a State or local housing credit agency, as
provided in paragraph (e)(1) of this section, the amount of the
effective housing credit allocation shall be adjusted by applying the
first-year convention provided in section 42(f)(2)(A) and (3)(B) and the
percentage credit reduction provided in section 42(f)(3)(A). Under
paragraphs (d) (2) and (5) of this section, the State or local housing
credit agency must specify the credit percentage and qualified basis
amount, the product of which is the amount of the housing credit
allocation, without taking account of the first-year convention
described in section 42(f)(2)(A) and (3)(B) or the percentage credit
reduction prescribed in section 42(f)(3)(A). However, for purposes of
the limitation on the amount of the allowable low-income housing credit,
as provided in paragraph (e)(1) of this section, in a taxable year in
which the first-year convention applies to the amount of credit
determined under section 42(a), the specified qualified basis amount
shall be adjusted by the first-year convention fraction which is equal
to the number of full months (during the first taxable year) in which
the building was in service divided by 12. In addition, for purposes of
the limitation on the amount of the allowable low-income housing credit,
as provided in paragraph (e)(1) of this section, in a taxable year in
which the reduction in credit percentage applies to additions to
qualified basis, as prescribed in section 42(f)(3), the specified credit
percentage shall be reduced by one-third. See examples in paragraphs
(d)(5)(ii) and (e)(3)(ii) of this section.
(3) Use of excess housing credit allocation for increases in
qualified basis--(i) In general. If the housing credit allocation made
to a qualified low-income building exceeds the amount of credit
allowable with respect to such building in any taxable year (without
regard to the first-year conventions under section 42(f)), such excess
is not transferable to another qualified low-income building. However,
if in a subsequent year there are increases in the qualified basis for
which an increased credit is allowable under section 42(f)(3) at a
reduced credit percentage, the original housing credit allocation
(including the specified credit percentage and qualified basis amount)
would be effective with respect to such increased credit.
(ii) Example. The provisions of this paragraph (e)(3) may be
illustrated by the following example:
Example. In 1987, a newly-constructed qualified low-income building
receives a housing credit allocation of $90,000 based on a specified
credit percentage of 9 percent and a specified qualified basis amount of
$1,000,000. The building is placed in service in 1987, but the qualified
basis in such year is only $800,000, resulting in an allowable credit in
1987 (determined without regard to the first-year conventions) of
$72,000. In 1988, the qualified basis is increased to $1,100,000,
resulting in an additional credit allowable under section 42(f)(3)
(without regard to the first-year conventions) of $18,000 (i.e.,
$300,000 x .06, or \2/3\ of .09). The unused portion of the 1987 housing
credit allocation ($18,000) is effective in 1988 and in each subsequent
year in the compliance period only with respect to the specified
qualified basis for the 1987 housing credit allocation ($1,000,000).
Thus, the owner is allowed to claim a credit in 1988 and in each
subsequent year (without regard to the first-year conventions), based on
the effective housing credit allocation from 1987, of $84,000 (i.e.,
$72,000 + ($200,000 x .06)). The owner of the qualified low-income
building must obtain a new housing credit allocation in 1988 with
respect to the additional $100,000 of qualified basis in order to claim
a credit on such basis in 1988 and in each subsequent year. If the
applicable first-year convention under section 42(f)(3)(B) entitled the
owner in 1988 to only \1/2\ of the otherwise applicable credit for the
additions to qualified basis, under paragraph (e)(2) of this section the
owner is allowed to claim a credit in 1988,
[[Page 194]]
based on the effective housing credit allocation from 1987, of $78,000
(i.e., $72,000 + ($200,000 x .06 x .5)).
(4) Separate housing credit allocations for new buildings and
increases in qualified basis. Separate housing credit allocations must
be received for each building with respect to which a housing credit may
be claimed. Rehabilitation expenditures with respect to a qualified low-
income building are treated as a separate new building under section
42(e) and must receive a separate housing credit allocation. Increases
in qualified basis in a qualified low-income building are not generally
treated as a new building for purposes of section 42. To the extent that
a prior housing credit allocation received with respect to a qualified
low-income building does not allow an increased credit with respect to
an increase in the qualified basis of such building, an additional
housing credit allocation must be received in order to claim a credit
with respect to that portion of increase in qualified basis. See
paragraph (e)(3) of this section. The amount of credit allowable with
respect to an increase in qualified basis is subject to the credit
percentage limitation of section 42(f)(3)(A) and the first-year
convention of section 42(f)(3)(B). See paragraph (d)(5) of this section
for a rule requiring that the State or local housing credit agency count
a housing credit allocation made with respect to an increase in
qualified basis as if the specified credit percentage were unreduced in
the manner prescribed in section 42(f)(3) and the specified basis amount
were unreduced by the first-year convention prescribed in section
42(f)(3)(B).
(5) Acquisition of building for which a prior housing credit
allocation has been made. If a carryover credit would be allowable to an
acquirer of a qualified low-income building under section 42(d)(7), such
acquirer need not obtain a new housing credit allocation with respect to
such building. Under section 42(d)(7), the acquirer would be entitled to
claim only such credits as would have been allowable to the prior owner
of the building.
(6) Multiple housing credit allocations. A qualified low-income
building may receive multiple housing credit allocations from different
housing credit agencies having overlapping jurisdictions. A qualified
low-income building that receives a housing credit allocation set aside
exclusively for projects involving a qualified nonprofit organization
may also receive a housing credit allocation from a housing credit
agency's aggregate housing credit dollar amount that is not so set
aside.
(f) Exception to housing credit allocation requirement--(1) Tax-
exempt bond financing--(i) In general. No housing credit allocation is
required in order to claim a credit under section 42 with respect to
that portion of the eligible basis (as defined in section 42(d)) of a
qualified low-income building that is financed with the proceeds of an
obligation described in section 103(a) (``tax-exempt bond'') which is
taken into account for purposes of the volume cap under section 146. In
addition, no housing credit allocation is required in order to claim a
credit under section 42 with respect to the entire qualified basis (as
defined in section 42(c)) of a qualified low-income building if 70
percent or more of the aggregate basis of the building and the land on
which the building is located is financed with the proceeds of tax-
exempt bonds which are taken into account for purposes of the volume cap
under section 146. For purposes of this paragraph, ``land on which the
building is located'' includes only land that is functionally related
and subordinate to the qualified low-income building. See Sec. 1.103-
8(b)(4)(iii) for the meaning of the term ``functionally related and
subordinate''. For purposes of this paragraph, the basis of the land
shall be determined using principles that are consistent with the rules
contained in section 42(d).
(ii) Determining use of bond proceeds. For purposes of determining
the portion of proceeds of an issue of tax-exempt bonds used to finance
(A) the eligible basis of a qualified low-income building, and (B) the
aggregate basis of the building and the land on which the building is
located, the proceeds of the issue must be allocated in the bond
indenture or a related document (as defined in Sec. 1.103-13(b)(8)) in
a manner consistent with the method used to allocate the net proceeds of
the issue for purposes of determining whether 95
[[Page 195]]
percent or more of the net proceeds of the issue are to be used for the
exempt purpose of the issue. If the issuer is not consistent in making
this allocation throughout the bond indenture and related documents, or
if neither the bond indenture nor a related document provides an
allocation, the proceeds of the issue will be allocated on a pro rata
basis to all of the property financed by the issue, based on the
relative cost of the property.
(iii) Example. The provisions of this paragraph may be illustrated
by the following example:
Example. In 1987, County K assigns $500,000 of its volume cap for
private activity bonds under section 146 to a $500,000 issue of exempt
facility bonds to provide a qualified residential rental project to be
owned by A, an individual. The aggregate basis of the building and the
land on which the building is located is $700,000. Under the terms of
the bond indenture, the net proceeds of the issue are to be used to
finance $490,000 of the eligible basis of the building. More than 70
percent of the aggregate basis of the qualified low-income building and
the land on which the building is located is financed with the proceeds
of tax-exempt bonds to which a portion of the volume cap under section
146 was allocated. Accordingly, A may claim a credit under section 42
without regard to whether any housing credit dollar amount was allocated
to that building. If, instead, the aggregate basis of the building and
land were $800,000, A would be able to claim the credit under section 42
without receiving a housing credit allocation for the building only to
the extent that the credit was attributable to eligible basis of the
building financed with tax-exempt bonds.
(g) Termination of authority to make housing credit allocation--(1)
In general. No State or local housing credit agency shall receive an
apportionment of a State housing credit ceiling for calendar years after
1989. Consequently, no housing credit allocations may be made after
1989, except as provided in paragraph (g)(2) of this section. Housing
credit allocations made prior to January 1, 1990, remain effective after
such date.
(2) Carryover of unused 1989 apportionment. Any State or local
housing credit agency that has an unused portion of its apportionment of
the State housing credit ceiling for 1989 from which housing credit
allocations have not been made in 1989 may carry over such unused
portion into 1990. Such carryover portion of the 1989 apportionment
shall be treated as the agency's apportionment for 1990. From this 1990
apportionment, the State or local housing credit agency may make housing
credit allocations only to a qualified low-income building meeting the
following requirements:
(i) The building must be constructed, reconstructed, or
rehabilitated by the taxpayer seeking the allocation;
(ii) More than 10 percent of the reasonably anticipated cost of such
construction, reconstruction, or rehabilitation must have been incurred
as of January 1, 1989; and
(iii) The building must be placed in service before January 1, 1991.
(3) Expiration of exception for tax-exempt bond financed projects.
The exception to the requirement that a housing credit allocation be
received with respect to any portion of the eligible basis of a
qualified low-income building, as provided in paragraph (f) of this
section, shall not apply to any building placed in service after 1989,
unless such building is described in paragraphs (g)(2) (i), (ii), and
(iii) of this section.
(h) Filing of forms. For further guidance, see Sec. 1.42-1(h).
(i) Transitional rules. The transitional rules contained in section
252(f)(1) of the Tax Reform Act of 1986 are incorporated into this
section of the regulations for purposes of determining whether a
qualified low-income building is entitled to receive a housing credit
allocation or is excepted from the requirement that a housing credit
allocation be received. Housing credit allocations made to qualified
low-income buildings described in section 252(f)(1) shall not count
against the State or local housing credit agency's aggregate housing
credit dollar amount. The transitional rules contained in section
252(f)(2) of the Tax Reform Act of 1986 are incorporated into this
section of the regulations for purposes of determining amounts available
to certain State or local housing credit agencies for the making of
housing credit allocations to certain qualified low-income housing
projects. Amounts available to housing credit agencies under section
252(f)(2) shall be
[[Page 196]]
treated as special apportionments unavailable for housing credit
allocations to qualified low-income buildings not described in section
252(f)(2). Housing credit allocations made from the special
apportionments shall not count against the State or local credit
agency's aggregate housing credit dollar amount. The set-aside
requirements shall not apply to these special apportionments. The
transitional rules contained in section 252(f)(3) of the Tax Reform Act
1986 are incorporated in this section of the regulations for purposes of
determining the amount of housing credit allocations received by certain
qualified low-income buildings. Housing credit allocations deemed
received under section 252(f)(3) shall not count against the State or
local housing credit agency's aggregate housing credit dollar amount.
[T.D. 8144, 52 FR 23433, June 22, 1987; 52 FR 24583, July 1, 1987, as
amended by T.D. 9112, 69 FR 3827, Jan. 27, 2004]
Sec. 1.42-2 Waiver of requirement that an existing building eligible
for the low-income housing credit was last placed in service more than
10 years prior to acquisition by the taxpayer.
(a) Low-income housing credit for existing building. Section 42
provides that, for purposes of section 38, new and existing qualified
low-income buildings are eligible for a low-income housing credit. The
eligibility rules for new and existing buildings differ. Under section
42(d)(2), an existing building may be eligible for the low-income
housing credit based upon the acquisition cost and amounts chargeable to
capital account (to the extent properly included in eligible basis) if--
(1) The taxpayer acquires the building by purchase (as defined in
section 179(d)(2), as applicable under section 42(d)(2)(D)(iii)(I)),
(2) There is a period of at least 10 years between the date of the
building's acquisition by the taxpayer and the later of--(i) The date
the building was last placed in service, or
(ii) The date of the most recent nonqualified substantial
improvement of the building, and
(3) The building was not previously placed in service by the
taxpayer, or by a person who was a related person (as defined in section
42(d)(2)(D)(iii)(II)) with respect to the taxpayer as of the time the
building was last previously placed in service.
(b) Waiver of 10-year holding period requirement. Section 42(d)(6)
provides that a taxpayer may apply for a waiver of the 10-year holding
period requirement specified in paragraph (a)(2) of this section. The
Internal Revenue Service will grant a waiver only if--
(1) The existing building satisfies all of the requirements in
paragraph (c) of this section, and
(2) The taxpayer makes an application in conformity with the
requirements in paragraph (d) of this section.
(c) Waiver requirements--(1) Federally-assisted building. To satisfy
the requirement of this paragraph, a building must be a Federally-
assisted building. The term ``Federally assisted building'' means any
building which is substantially assisted, financed, or operated under
section 8 of the United States Housing Act of 1937, section 221(d)(3) or
236 of the National Housing Act, or section 515 of the Housing Act of
1949, as such acts were in effect on October 22, 1986.
(2) Federal mortgage funds at risk. To satisfy the requirement of
this paragraph, Federal mortgage funds must be at risk with respect to a
mortgage that is secured by the building or a project of which the
building is a part. For purposes of this paragraph, Federal mortgage
funds are at risk if, in the event of a default by the mortgagor on the
mortgage secured by the building or the project of which the building is
a part--
(i) The mortgage could be assigned to the Department of Housing and
Urban Development or the Farmers' Home Administration, or
(ii) There could arise a claim against a Federal mortgage insurance
fund (or such Department or Administration).
(3) Statement by the Department of Housing and Urban Development or
the Farmers' Home Administration. (i) To
[[Page 197]]
satisfy the requirement of this paragraph, a letter or other written
statement must be made or received and approved by the national office
of the Department of Housing and Urban Development or the Farmers' Home
Administration (``the Federal agency''). This letter or statement shall
include the following:
(A) A statement that, as of the earlier of the time of the
taxpayer's acquisition of the building or the taxpayer's application for
a waiver, the building is a Federally-assisted building within the
meaning of paragraph (c)(1) of this section and identifies the source of
Federal assistance;
(B) A statement that a waiver of the 10-year holding period
requirement is necessary to avert Federal mortgage funds being at risk
within the meaning of paragraph (c)(2) of this section; and
(C) A statement that the Federal agency has taken a Federal agency
action as described in paragraph (c)(3)(ii) of this section.
(ii) The following specified Federal agency actions shall be the
only means of satisfying the requirement of this paragraph:
(A) The Federal agency intends to accept an assignment of a mortgage
secured by the building or the project of which the building is a part,
and such assignment requires payments by the agency or a mortgage
insurance fund maintained by the agency to the prior mortgagee;
(B) The Federal agency or a mortgage insurance fund maintained by
the agency intends to accept, as a consequence of foreclosure
proceedings or otherwise, conveyance of the building or the project of
which the building is a part;
(C) The Federal agency or a mortgage insurance fund maintained by
the agency intends, as a consequence of default, to take possession of,
hold title to, or otherwise assume ownership of the building or the
project of which the building is a part; or
(D) The Federal agency has designated the building or the project of
which the building is a part as a troubled building or project. A
designation of a troubled building or project must satisfy the following
requirements:
(1) Designation of troubled status must be based on a review by the
Federal agency of the financial condition of the building or project and
on a determination by the Federal agency of a history of financial
distress or mortgage defaults;
(2) Designation of troubled status must be made or received and
approved by the national office of the Federal agency; and
(3) Federal agency regulations or procedures must provide that, in
the event of transfer of the ownership of a designated troubled building
or project, the building or project may be subject to continued review
by the Federal agency. Each Federal agency may prescribe its own
standards and procedures for designating a troubled building or project
so long as such standards are consistent with the requirements of this
paragraph (c)(3)(ii)(D).
(4) No prior credit allowed. The requirement of this paragraph is
satisfied only if no prior owner was allowed a low-income housing credit
under section 42 for the building.
(d) Application for waiver--(1) Time and manner. In order to receive
a waiver of the 10-year holding period requirement specified in
paragraph (a)(2) of this section, a taxpayer must file an application
(including the applicable user fee) that complies with the requirements
of this paragraph (d) and Rev. Proc. 90-1, 1990-1 I.R.B. 8 (or any
subsequent applicable revenue procedure). The application must be filed
by a taxpayer who has acquired the building by purchase or who has a
binding contract to purchase the building. Such binding contract may be
conditioned upon the granting of a waiver under this section. The
application may be filed at any time after a binding contract has been
entered into, but no later than 12 months after the taxpayer's
acquisition of the building. An application for a waiver of the 10-year
holding period requirement must not contain a request for a ruling on
any other issue arising under section 42 or other sections of the
Internal Revenue Code. An application for a waiver of the 10-year
holding period requirement must be mailed or delivered to the address
listed in section 3.01 of Rev. Proc.
[[Page 198]]
90-1 (or any subsequent applicable revenue procedure).
(2) Information required. An application for a waiver of the 10-year
holding period requirement must contain the following information:
(i) The taxpayer's name, address and taxpayer identification number;
(ii) The name (if any) and address of the acquired building and the
project (if any) of which it is a part;
(iii) The date of acquisition or the date of the binding contract
for acquisition of the building by the taxpayer and the expected date of
acquisition, the amount of consideration paid or to be paid for the
acquisition (including the value of any liabilities assumed by the
taxpayer), and the taxpayer's certification that such acquisition is by
purchase (as defined in section 179(d)(2), as applicable under section
42 (d)(2)(D)(iii)(I));
(iv) The identity of the person from whom the building is acquired,
and whether such person is a Federal agency, a mortgagee holding title
to the building, or the mortgagor or prior owner;
(v) The date the building was last placed in service and the date of
the most recent (if any) nonqualified substantial improvement of the
building (as defined in section 42 (d)(2)(D)(i));
(vi) The taxpayer's certification that the building was not
previously placed in service by the taxpayer, or by a person who was a
related person (as defined in section 42(d)(2)(D)(iii)(II)) with respect
to the taxpayer as of the time the building was last placed in service;
(vii) The amount and disposition (e.g., discharge, assignment,
assumption, or refinance) of the outstanding mortgage at the time of
acquisition and the identities of the mortgagee and mortgagor;
(viii) The taxpayer's certification that no prior owner was allowed
a low-income housing credit under section 42 for the building (made to
the best of the taxpayer's knowledge, with no documentation from other
persons needed to be submitted); and
(ix) The statement from the Federal agency required by paragraph
(c)(3)(i) of this section.
(3) Other rules. (i) In the event that an acquired building will be
owned by more than one taxpayer, a single application for waiver may be
filed by one taxpayer on behalf of the co-owners if the application
contains the names, addresses and taxpayer identification numbers of the
other owners. A general partner or a designated limited partner may file
an application for waiver on behalf of a partnership.
(ii) In the event that multiple Federally-assisted buildings in a
project are being acquired by the taxpayer, a single application for
waiver with respect to such buildings may be filed if the application
contains the required information set out for the address of each
Federally-assisted building involved.
(iii) In the event that specific Federally-assisted buildings are
being acquired by the taxpayer in a project consisting of multiple
buildings that may or may not be Federally-assisted, a single
application for waiver with respect to the Federally-assisted buildings
being acquired may be filed if the application contains the required
information set out for the address of each Federally-assisted building
being acquired.
(4) Effective date of waiver. A waiver will be effective when
granted in writing by the Internal Revenue Service after submission of a
completed application for waiver filed under this paragraph (d).
(5) Attachment to return. A waiver letter granted by the Internal
Revenue Service shall be filed with the taxpayer's Federal income tax
return for the first taxable year the low-income housing credit is
claimed by the taxpayer.
(e) Effective date of regulations. The provisions of Sec. 1.42-2
are effective for buildings placed in service by the taxpayer after
December 31, 1986.
[T.D. 8302, 55 FR 21189, May 23, 1990; 55 FR 25973, June 26, 1990]
Sec. 1.42-3 Treatment of buildings financed with proceeds from a
loan under an Affordable Housing Program established pursuant to
section 721 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA).
(a) Treatment under sections 42(i) and 42(b). A below market loan
funded in
[[Page 199]]
whole or in part with funds from an Affordable Housing Program
established under section 721 of FIRREA is not, solely by reason of the
Affordable Housing Program funds, a below market Federal loan as defined
in section 42(i)(2)(D). Thus, any building with respect to which the
proceeds of the loan are used during the tax year is not, solely by
reason of the Affordable Housing Program funds, treated as a federally
subsidized building for that tax year and subsequent tax years for
purposes of determining the applicable percentage for the building under
section 42(b).
(b) Effective date. The rules set forth in paragraph (a) of this
section are effective for loans made after August 8, 1989.
[56 FR 48734, Sept. 26, 1991]
Sec. 1.42-4 Application of not-for-profit rules of section 183 to
low-income housing credit activities.
(a) Inapplicability to section 42. In the case of a qualified low-
income building with respect to which the low-income housing credit
under section 42 is allowable, section 183 does not apply to disallow
losses, deductions, or credits attributable to the ownership and
operation of the building.
(b) Limitation. Notwithstanding paragraph (a) of this section,
losses, deductions, or credits attributable to the ownership and
operation of a qualified low-income building with respect to which the
low-income housing credit under section 42 is allowable may be limited
or disallowed under other provisions of the Code or principles of tax
law. See, e.g., sections 38(c), 163(d), 465, 469; Knetsch v. United
States, 364 U.S. 361 (1960), 1961-1 C.B. 34 (``sham'' or ``economic
substance'' analysis); and Frank Lyon Co. v. Commissioner, 435 U.S. 561
(1978), 1978-1 C.B. 46 (``ownership'' analysis).
(c) Effective date. The rules set forth in paragraphs (a) and (b) of
this section are effective with respect to buildings placed in service
after December 31, 1986.
[T.D. 8420, 57 FR 24729, June 11, 1992]
Sec. 1.42-5 Monitoring compliance with low-income housing credit
requirements.
(a) Compliance monitoring requirement--(1) In general. Under section
42(m)(1)(B)(iii), an allocation plan is not qualified unless it contains
a procedure that the State or local housing credit agency (``Agency'')
(or an agent of, or other private contractor hired by, the Agency) will
follow in monitoring for noncompliance with the provisions of section 42
and in notifying the Internal Revenue Service of any noncompliance of
which the Agency becomes aware. These regulations only address
compliance monitoring procedures required of Agencies. The regulations
do not address forms and other records that may be required by the
Service on examination or audit. For example, if a building is sold or
otherwise transferred by the owner, the transferee should obtain from
the transferor information related to the first year of the credit
period so that the transferee can substantiate credits claimed.
(2) Requirements for a monitoring procedure--(i) In general. A
procedure for monitoring for noncompliance under section
42(m)(1)(B)(iii) must include--
(A) The recordkeeping and record retention provisions of paragraph
(b) of this section;
(B) The certification and review provisions of paragraph (c) of this
section;
(C) The inspection provision of paragraph (d) of this section; and
(D) The notification-of-noncompliance provisions of paragraph (e) of
this section.
(ii) Order and form. A monitoring procedure will meet the
requirements of section 42 (m)(1)(B)(iii) if it contains the substance
of these provisions. The particular order and form of the provisions in
the allocation plan is not material. A monitoring procedure may contain
additional provisions or requirements.
(b) Recordkeeping and record retention provisions--(1) Recordkeeping
provision. Under the recordkeeping provision, the owner of a low-income
housing project must be required to keep records for each qualified low-
income building in the project that show for each year in the compliance
period--
[[Page 200]]
(i) The total number of residential rental units in the building
(including the number of bedrooms and the size in square feet of each
residential rental unit);
(ii) The percentage of residential rental units in the building that
are low-income units;
(iii) The rent charged on each residential rental unit in the
building (including any utility allowances);
(iv) The number of occupants in each low-income unit, but only if
rent is determined by the number of occupants in each unit under section
42(g)(2) (as in effect before the amendments made by the Omnibus Budget
Reconciliation Act of 1989);
(v) The low-income unit vacancies in the building and information
that shows when, and to whom, the next available units were rented;
(vi) The annual income certification of each low-income tenant per
unit. For an exception to this requirement, see section 42(g)(8)(B)
(which provides a special rule for a 100 percent low-income building);
(vii) Documentation to support each low-income tenant's income
certification (for example, a copy of the tenant's federal income tax
return, Forms W-2, or verifications of income from third parties such as
employers or state agencies paying unemployment compensation). For an
exception to this requirement, see section 42(g)(8)(B) (which provides a
special rule for a 100 percent low-income building). Tenant income is
calculated in a manner consistent with the determination of annual
income under section 8 of the United States Housing Act of 1937
(``Section 8''), not in accordance with the determination of gross
income for federal income tax liability. In the case of a tenant
receiving housing assistance payments under Section 8, the documentation
requirement of this paragraph (b)(1)(vii) is satisfied if the public
housing authority provides a statement to the building owner declaring
that the tenant's income does not exceed the applicable income limit
under section 42 (g);
(viii) The eligible basis and qualified basis of the building at the
end of the first year of the credit period; and
(ix) The character and use of the nonresidential portion of the
building included in the building's eligible basis under section 42 (d)
(e.g., tenant facilities that are available on a comparable basis to all
tenants and for which no separate fee is charged for use of the
facilities, or facilities reasonably required by the project).
(2) Record retention provision. Under the record retention
provision, the owner of a low-income housing project must be required to
retain the records described in paragraph (b)(1) of this section for at
least 6 years after the due date (with extensions) for filing the
federal income tax return for that year. The records for the first year
of the credit period, however, must be retained for at least 6 years
beyond the due date (with extensions) for filing the federal income tax
return for the last year of the compliance period of the building.
(3) Inspection record retention provision. Under the inspection
record retention provision, the owner of a low-income housing project
must be required to retain the original local health, safety, or
building code violation reports or notices that were issued by the State
or local government unit (as described in paragraph (c)(1)(vi) of this
section) for the Agency's inspection under paragraph (d) of this
section. Retention of the original violation reports or notices is not
required once the Agency reviews the violation reports or notices and
completes its inspection, unless the violation remains uncorrected.
(c) Certification and review provisions--(1) Certification. Under
the certification provision, the owner of a low-income housing project
must be required to certify at least annually to the Agency that, for
the preceding 12-month period--
(i) The project met the requirements of:
(A) The 20-50 test under section 42 (g)(1)(A), the 40-60 test under
section 42 (g)(1)(B), or the 25-60 test under sections 42 (g)(4) and 142
(d)(6) for New York City, whichever minimum set-aside test was
applicable to the project; and
(B) If applicable to the project, the 15-40 test under sections
42(g)(4) and 142
[[Page 201]]
(d)(4)(B) for ``deep rent skewed'' projects;
(ii) There was no change in the applicable fraction (as defined in
section 42(c)(1)(B)) of any building in the project, or that there was a
change, and a description of the change;
(iii) The owner has received an annual income certification from
each low-income tenant, and documentation to support that certification;
or, in the case of a tenant receiving Section 8 housing assistance
payments, the statement from a public housing authority described in
paragraph (b)(1)(vii) of this section. For an exception to this
requirement, see section 42(g)(8)(B) (which provides a special rule for
a 100 percent low-income building);
(iv) Each low-income unit in the project was rent-restricted under
section 42(g)(2);
(v) All units in the project were for use by the general public (as
defined in Sec. 1.42-9), including the requirement that no finding of
discrimination under the Fair Housing Act, 42 U.S.C. 3601-3619, occurred
for the project. A finding of discrimination includes an adverse final
decision by the Secretary of the Department of Housing and Urban
Development (HUD), 24 CFR 180.680, an adverse final decision by a
substantially equivalent state or local fair housing agency, 42 U.S.C.
3616a(a)(1), or an adverse judgment from a federal court;
(vi) The buildings and low-income units in the project were suitable
for occupancy, taking into account local health, safety, and building
codes (or other habitability standards), and the State or local
government unit responsible for making local health, safety, or building
code inspections did not issue a violation report for any building or
low-income unit in the project. If a violation report or notice was
issued by the governmental unit, the owner must attach a statement
summarizing the violation report or notice or a copy of the violation
report or notice to the annual certification submitted to the Agency
under paragraph (c)(1) of this section. In addition, the owner must
state whether the violation has been corrected;
(vii) There was no change in the eligible basis (as defined in
section 42(d)) of any building in the project, or if there was a change,
the nature of the change (e.g., a common area has become commercial
space, or a fee is now charged for a tenant facility formerly provided
without charge);
(viii) All tenant facilities included in the eligible basis under
section 42(d) of any building in the project, such as swimming pools,
other recreational facilities, and parking areas, were provided on a
comparable basis without charge to all tenants in the building;
(ix) If a low-income unit in the project became vacant during the
year, that reasonable attempts were or are being made to rent that unit
or the next available unit of comparable or smaller size to tenants
having a qualifying income before any units in the project were or will
be rented to tenants not having a qualifying income;
(x) If the income of tenants of a low-income unit in the building
increased above the limit allowed in section 42(g)(2)(D)(ii), the next
available unit of comparable or smaller size in the building was or will
be rented to tenants having a qualifying income;
(xi) An extended low-income housing commitment as described in
section 42(h)(6) was in effect (for buildings subject to section
7108(c)(1) of the Omnibus Budget Reconciliation Act of 1989, 103 Stat.
2106, 2308-2311), including the requirement under section
42(h)(6)(B)(iv) that an owner cannot refuse to lease a unit in the
project to an applicant because the applicant holds a voucher or
certificate of eligibility under section 8 of the United States Housing
Act of 1937, 42 U.S.C. 1437f (for buildings subject to section
13142(b)(4) of the Omnibus Budget Reconciliation Act of 1993, 107 Stat.
312, 438-439); and
(xii) All low-income units in the project were used on a
nontransient basis (except for transitional housing for the homeless
provided under section 42(i)(3)(B)(iii) or single-room-occupancy units
rented on a month-by-month basis under section 42(i)(3)(B)(iv)).
(2) Review. The review provision must--
(i) Require that the Agency review the certifications submitted
under
[[Page 202]]
paragraph (c)(1) of this section for compliance with the requirements of
section 42;
(ii) Require that with respect to each low-income housing project--
(A) The Agency must conduct on-site inspections of all buildings in
the project by the end of the second calendar year following the year
the last building in the project is placed in service and, for at least
20 percent of the project's low-income units, inspect the units and
review the low-income certifications, the documentation supporting the
certifications, and the rent records for the tenants in those units; and
(B) At least once every 3 years, the Agency must conduct on-site
inspections of all buildings in the project and, for at least 20 percent
of the project's low-income units, inspect the units and review the low-
income certifications, the documentation supporting the certifications,
and the rent records for the tenants in those units; and
(iii) Require that the Agency randomly select which low-income units
and tenant records are to be inspected and reviewed by the Agency. The
review of tenant records may be undertaken wherever the owner maintains
or stores the records (either on-site or off-site). The units and tenant
records to be inspected and reviewed must be chosen in a manner that
will not give owners of low-income housing projects advance notice that
a unit and tenant records for a particular year will or will not be
inspected and reviewed. However, an Agency may give an owner reasonable
notice that an inspection of the building and low-income units or tenant
record review will occur so that the owner may notify tenants of the
inspection or assemble tenant records for review (for example, 30 days
notice of inspection or review).
(3) Frequency and form of certification. A monitoring procedure must
require that the certifications and reviews of paragraph (c)(1) and (2)
of this section be made at least annually covering each year of the 15-
year compliance period under section 42(i)(1). The certifications must
be made under penalty of perjury. A monitoring procedure may require
certifications and reviews more frequently than on a 12-month basis,
provided that all months within each 12-month period are subject to
certification.
(4) Exception for certain buildings--(i) In general. The review
requirements under paragraph (c)(2)(ii) of this section may provide that
owners are not required to submit, and the Agency is not required to
review, the tenant income certifications, supporting documentation, and
rent records for buildings financed by the Rural Housing Service (RHS),
formerly known as Farmers Home Administration, under the section 515
program, or buildings of which 50 percent or more of the aggregate basis
(taking into account the building and the land) is financed with the
proceeds of obligations the interest on which is exempt from tax under
section 103 (tax-exempt bonds). In order for a monitoring procedure to
except these buildings, the Agency must meet the requirements of
paragraph (c)(4)(ii) of this section.
(ii) Agreement and review. The Agency must enter into an agreement
with the RHS or tax-exempt bond issuer. Under the agreement, the RHS or
tax-exempt bond issuer must agree to provide information concerning the
income and rent of the tenants in the building to the Agency. The Agency
may assume the accuracy of the information provided by RHS or the tax-
exempt bond issuer without verification. The Agency must review the
information and determine that the income limitation and rent
restriction of section 42 (g)(1) and (2) are met. However, if the
information provided by the RHS or tax-exempt bond issuer is not
sufficient for the Agency to make this determination, the Agency must
request the necessary additional income or rent information from the
owner of the buildings. For example, because RHS determines tenant
eligibility based on its definition of ``adjusted annual income,''
rather than ``annual income'' as defined under Section 8, the Agency may
have to calculate the tenant's income for section 42 purposes and may
need to request additional income information from the owner.
(iii) Example. The exception permitted under paragraph (c)(4)(i) and
(ii)
[[Page 203]]
of this section is illustrated by the following example.
Example. An Agency selects for review buildings financed by the RHS.
The Agency has entered into an agreement described in paragraph
(c)(4)(ii) of this section with the RHS with respect to those buildings.
In reviewing the RHS-financed buildings, the Agency obtains the tenant
income and rent information from the RHS for 20 percent of the low-
income units in each of those buildings. The Agency calculates the
tenant income and rent to determine whether the tenants meet the income
and rent limitation of section 42 (g)(1) and (2). In order to make this
determination, the Agency may need to request additional income or rent
information from the owners of the RHS buildings if the information
provided by the RHS is not sufficient.
(5) Agency reports of compliance monitoring activities. The Agency
must report its compliance monitoring activities annually on Form 8610,
``Annual Low-Income Housing Credit Agencies Report.''
(d) Inspection provision--(1) In general. Under the inspection
provision, the Agency must have the right to perform an on-site
inspection of any low-income housing project at least through the end of
the compliance period of the buildings in the project. The inspection
provision of this paragraph (d) is a separate requirement from any
tenant file review under paragraph (c)(2)(ii) of this section.
(2) Inspection standard. For the on-site inspections of buildings
and low-income units required by paragraph (c)(2)(ii) of this section,
the Agency must review any local health, safety, or building code
violations reports or notices retained by the owner under paragraph
(b)(3) of this section and must determine--
(i) Whether the buildings and units are suitable for occupancy,
taking into account local health, safety, and building codes (or other
habitability standards); or
(ii) Whether the buildings and units satisfy, as determined by the
Agency, the uniform physical condition standards for public housing
established by HUD (24 CFR 5.703). The HUD physical condition standards
do not supersede or preempt local health, safety, and building codes. A
low-income housing project under section 42 must continue to satisfy
these codes and, if the Agency becomes aware of any violation of these
codes, the Agency must report the violation to the Service. However,
provided the Agency determines by inspection that the HUD standards are
met, the Agency is not required under this paragraph (d)(2)(ii) to
determine by inspection whether the project meets local health, safety,
and building codes.
(3) Exception from inspection provision. An Agency is not required
to inspect a building under this paragraph (d) if the building is
financed by the RHS under the section 515 program, the RHS inspects the
building (under 7 CFR part 1930), and the RHS and Agency enter into a
memorandum of understanding, or other similar arrangement, under which
the RHS agrees to notify the Agency of the inspection results.
(4) Delegation. An Agency may delegate inspection under this
paragraph (d) to an Authorized Delegate retained under paragraph (f) of
this section. Such Authorized Delegate, which may include HUD or a HUD-
approved inspector, must notify the Agency of the inspection results.
(e) Notification-of-noncompliance provision--(1) In general. Under
the notification-of-noncompliance provisions, the Agency must be
required to give the notice described in paragraph (e)(2) of this
section to the owner of a low-income housing project and the notice
described in paragraph (e)(3) of this section to the Service.
(2) Notice to owner. The Agency must be required to provide prompt
written notice to the owner of a low-income housing project if the
Agency does not receive the certification described in paragraph (c)(1)
of this section, or does not receive or is not permitted to inspect the
tenant income certifications, supporting documentation, and rent records
described in paragraph (c)(2)(ii) of this section, or discovers by
inspection, review, or in some other manner, that the project is not in
compliance with the provisions of section 42.
(3) Notice to Internal Revenue Service--(i) In general. The Agency
must be required to file Form 8823, ``Low-Income Housing Credit Agencies
Report of Noncompliance,'' with the Service no later than 45 days after
the end of the
[[Page 204]]
correction period (as described in paragraph (e)(4) of this section,
including extensions permitted under that paragraph) and no earlier than
the end of the correction period, whether or not the noncompliance or
failure to certify is corrected. The Agency must explain on Form 8823
the nature of the noncompliance or failure to certify and indicate
whether the owner has corrected the noncompliance or failure to certify.
Any change in either the applicable fraction or eligible basis under
paragraph (c)(1)(ii) and (vii) of this section, respectively, that
results in a decrease in the qualified basis of the project under
section 42 (c)(1)(A) is noncompliance that must be reported to the
Service under this paragraph (e)(3). If an Agency reports on Form 8823
that a building is entirely out of compliance and will not be in
compliance at any time in the future, the Agency need not file Form 8823
in subsequent years to report that building's noncompliance. If the
noncompliance or failure to certify is corrected within 3 years after
the end of the correction period, the Agency is required to file Form
8823 with the Service reporting the correction of the noncompliance or
failure to certify.
(ii) Agency retention of records. An Agency must retain records of
noncompliance or failure to certify for 6 years beyond the Agency's
filing of the respective Form 8823. In all other cases, the Agency must
retain the certifications and records described in paragraph (c) of this
section for 3 years from the end of the calendar year the Agency
receives the certifications and records.
(4) Correction period. The correction period shall be that period
specified in the monitoring procedure during which an owner must supply
any missing certifications and bring the project into compliance with
the provisions of section 42. The correction period is not to exceed 90
days from the date of the notice to the owner described in paragraph
(e)(2) of this section. An Agency may extend the correction period for
up to 6 months, but only if the Agency determines there is good cause
for granting the extension.
(f) Delegation of Authority--(1) Agencies permitted to delegate
compliance monitoring functions--(i) In general. An Agency may retain an
agent or other private contractor (``Authorized Delegate'') to perform
compliance monitoring. The Authorized Delegate must be unrelated to the
owner of any building that the Authorized Delegate monitors. The
Authorized Delegate may be delegated all of the functions of the Agency,
except for the responsibility of notifying the Service under paragraphs
(c)(5) and (e)(3) of this section. For example, the Authorized Delegate
may be delegated the responsibility of reviewing tenant certifications
and documentation under paragraph (c) (1) and (2) of this section, the
right to inspect buildings and records as described in paragraph (d) of
this section, and the responsibility of notifying building owners of
lack of certification or noncompliance under paragraph (e)(2) of this
section. The Authorized Delegate must notify the Agency of any
noncompliance or failure to certify.
(ii) Limitations. An Agency that delegates compliance monitoring to
an Authorized Delegate under paragraph (f)(1)(i) of this section must
use reasonable diligence to ensure that the Authorized Delegate properly
performs the delegated monitoring functions. Delegation by an Agency of
compliance monitoring functions to an Authorized Delegate does not
relieve the Agency of its obligation to notify the Service of any
noncompliance of which the Agency becomes aware.
(2) Agencies permitted to delegate compliance monitoring functions
to another Agency. An Agency may delegate all or some of its compliance
monitoring responsibilities for a building to another Agency within the
State. This delegation may include the responsibility of notifying the
Service under paragraph (e)(3) of this section.
(g) Liability. Compliance with the requirements of section 42 is the
responsibility of the owner of the building for which the credit is
allowable. The Agency's obligation to monitor for compliance with the
requirements of section 42 does not make the Agency liable for an
owner's noncompliance.
(h) Effective date. Allocation plans must comply with these
regulations by June 30, 1993. The requirement of section 42
(m)(1)(B)(iii) that allocation
[[Page 205]]
plans contain a procedure for monitoring for noncompliance becomes
effective on January 1, 1992, and applies to buildings for which a low-
income housing credit is, or has been, allowable at any time. Thus,
allocation plans must comply with section 42(m)(1)(B)(iii) prior to June
30, 1993, the effective date of these regulations. An allocation plan
that complies with these regulations, with the notice of proposed
rulemaking published in the Federal Register on December 27, 1991, or
with a reasonable interpretation of section 42(m)(1)(B)(iii) will
satisfy the requirements of section 42(m)(1)(B)(iii) for periods before
June 30, 1993. Section 42(m)(1)(B)(iii) and these regulations do not
require monitoring for whether a building or project is in compliance
with the requirements of section 42 prior to January 1, 1992. However,
if an Agency becomes aware of noncompliance that occurred prior to
January 1, 1992, the Agency is required to notify the Service of that
noncompliance. In addition, the requirements in paragraphs (b)(3) and
(c)(1)(v), (vi), and (xi) of this section (involving recordkeeping and
annual owner certifications) and paragraphs (c)(2)(ii)(B), (c)(2)(iii),
and (d) of this section (involving tenant file reviews and physical
inspections of existing projects, and the physical inspection standard)
are applicable January 1, 2001. The requirement in paragraph
(c)(2)(ii)(A) of this section (involving tenant file reviews and
physical inspections of new projects) is applicable for buildings placed
in service on or after January 1, 2001. The requirements in paragraph
(c)(5) of this section (involving Agency reporting of compliance
monitoring activities to the Service) and paragraph (e)(3)(i) of this
section (involving Agency reporting of corrected noncompliance or
failure to certify within 3 years after the end of the correction
period) are applicable January 14, 2000.
[T.D. 8430, 57 FR 40121, Sept. 2, 1992; 57 FR 57280, Dec. 3, 1992; 58 FR
7748, Feb. 9, 1993; T.D. 8563, 59 FR 50163, Oct. 3, 1994; T.D. 8859, 65
FR 2326, Jan. 14, 2000; 65 FR 16317, Mar. 28, 2000]
Sec. 1.42-6 Buildings qualifying for carryover allocations.
(a) Carryover allocations--(1) In general. A carryover allocation is
an allocation that meets the requirements of section 42(h)(1)(E) or (F).
If the requirements of section Sec. 42(h)(1)(E) or (F) that are
required to be satisfied by the close of a calendar year are not
satisfied, the allocation is not valid and is treated as if it had not
been made for that calendar year. For example, if a carryover allocation
fails to satisfy a requirement in Sec. 1.42-6(d) for making an
allocation, such as failing to be signed or dated by an authorized
official of an allocating agency by the close of a calendar year, the
allocation is not valid and is treated as if it had not been made for
that calendar year.
(2) 10 percent basis requirement. A carryover allocation may only be
made with respect to a qualified building. A qualified building is any
building which is part of a project if, by the date specified under
paragraph (a)(2)(i) or (ii) of this section, a taxpayer's basis in the
project is more than 10 percent of the taxpayer's reasonably expected
basis in the project as of the close of the second calendar year
following the calendar year the allocation is made. For purposes of
meeting the 10 percent basis requirement, the determination of whether a
building is part of a single-building project or multi-building project
is based on whether the carryover allocation is made under section
42(h)(1)(E) (building-based allocation) or section 42(h)(1)(F) (project-
based allocation). In the case of a multi-building project that receives
an allocation under section 42(h)(1)(F), the 10 percent basis
requirement is satisfied by reference to the entire project.
(i) Allocation made before July 1. If a carryover allocation is made
before July 1 of a calendar year, a taxpayer must meet the 10 percent
basis requirement by the close of that calendar year. If a taxpayer does
not meet the 10 percent basis requirement by the close of the calendar
year, the carryover allocation is not valid and is treated as if it had
not been made.
(ii) Allocation made after June 30. If a carryover allocation is
made after June 30 of a calendar year, a taxpayer must meet the 10
percent basis requirement
[[Page 206]]
by the close of the date that is 6 months after the date the allocation
was made. If a taxpayer does not meet the 10 percent basis requirement
by the close of the required date, the carryover allocation must be
returned to the Agency. Unlike a carryover allocation made before July
1, if a taxpayer does not meet the 10 percent basis requirement by the
close of the required date, the carryover allocation is treated as a
valid allocation for the calendar year of allocation, but is included in
the ``returned credit component'' for purposes of determining the State
housing credit ceiling under section 42(h)(3)(C) for the calendar year
following the calendar year of the allocation. See Sec. 1.42-14(d)(1).
(b) Carryover-allocation basis--(1) In general. Subject to the
limitations of paragraph (b)(2) of this section, a taxpayer's basis in a
project for purposes of section 42(h)(1) (E)(ii) or (F) (carryover-
allocation basis) is the taxpayer's adjusted basis in land or
depreciable property that is reasonably expected to be part of the
project, whether or not these amounts are includible in eligible basis
under section 42(d). Thus, for example, if the project is to include
property that is not residential rental property, such as commercial
space, the basis attributable to the commercial space, although not
includible in eligible basis, is includible in carryover-allocation
basis. The adjusted basis of land and depreciable property is determined
under sections 1012 and 1016, and generally includes the direct and
indirect costs of acquiring, constructing, and rehabilitating the
property. Costs otherwise includible in carryover-allocation basis are
not excluded by reason of having been incurred prior to the calendar
year in which the carryover allocation is made.
(2) Limitations--For purposes of determining carryover-allocation
basis under paragraph (b)(1) of this section, the following limitations
apply.
(i) Taxpayer must have basis in land or depreciable property related
to the project. A taxpayer has carryover-allocation basis to the extent
that it has basis in land or depreciable property and the land or
depreciable property is reasonably expected to be part of the project
for which the carryover allocation is made. This basis includes all
items that are properly capitalizable with respect to the land or
depreciable property. For example, a nonrefundable downpayment for, or
an amount paid to acquire an option to purchase, land or depreciable
property may be included in carryover-allocation basis if properly
capitalizable into the basis of land or depreciable property that is
reasonably expected to be part of a project.
(ii) High cost areas. Any increase in eligible basis that may result
under section 42(d)(5)(C) from a building's location in a qualified
census tract or difficult development area is not taken into account in
determining carryover-allocation basis or reasonably expected basis.
(iii) Amounts not treated as paid or incurred. An amount is not
includible in carryover-allocation basis unless it is treated as paid or
incurred under the method of accounting used by the taxpayer. For
example, a cash method taxpayer cannot include construction costs in
carryover-allocation basis unless the costs have been paid, and an
accrual method taxpayer cannot include construction costs in carryover-
allocation basis unless they have been properly accrued. See paragraph
(b)(2)(iv) of this section for a special rule for fees.
(iv) Fees. A fee is includible in carryover-allocation basis only to
the extent the requirements of paragraph (b)(2)(iii) of this section are
met and--
(A) The fee is reasonable;
(B) The taxpayer is legally obligated to pay the fee;
(C) The fee is capitalizable as part of the taxpayer's basis in land
or depreciable property that is reasonably expected to be part of the
project;
(D) The fee is not paid (or to be paid) by the taxpayer to itself;
and
(E) If the fee is paid (or to be paid) by the taxpayer to a related
person, and the taxpayer uses the cash method of accounting, the
taxpayer could properly accrue the fee under the accrual method of
accounting (considering, for example, the rules of section 461(h)). A
person is a related person if the person bears a relationship to the
taxpayer specified in sections 267(b) or 707(b)(1), or if the person and
the taxpayer are
[[Page 207]]
engaged in trades or businesses under common control (within the meaning
of subsections (a) and (b) of section 52).
(3) Reasonably expected basis. Rules similar to the rules of
paragraphs (a) and (b) of this section apply in determining the
taxpayer's reasonably expected basis in a project (land and depreciable
basis) as of the close of the second calendar year following the
calendar year of the allocation.
(4) Examples. The following examples illustrate the rules of
paragraphs (a) and (b) of this section.
Example 1. (i) Facts. C, an accrual-method taxpayer, receives a
carryover allocation from Agency, the state housing credit agency, in
May of 2003. As of that date, C has not begun construction of the low-
income housing building C plans to build. However, C has owned the land
on which C plans to build the building since 1985. C's basis in the land
is $100,000. C reasonably expects that by the end of 2005, C's basis in
the project of which the building is to be a part will be $2,000,000. C
also expects that because the project is located in a qualified census
tract, C will be able to increase its basis in the project to
$2,600,000. Before the close of 2003, C incurs $150,000 of costs for
architects' fees and site preparation. C properly accrues these costs
under its method of accounting and capitalizes the costs.
(ii) Determination of carryover-allocation basis. C's $100,000 basis
in the land is includible in carryover-allocation basis even though C
has owned the land since 1985. The $150,000 of costs C has incurred for
architects' fees and site preparation are also includible in carryover-
allocation basis. The expected increase in basis due to the project's
location in a qualified census tract is not taken into account in
determining C's carryover-allocation basis. Accordingly, C's carryover-
allocation basis in the project of which the building is a part is
$250,000.
(iii) Determination of whether building is qualified. C's reasonably
expected basis in the project at the close of the second calendar year
following the calendar year of allocation is $2,000,000. The expected
increase in eligible basis due to the project's location in a qualified
census tract is not taken into account in determining this amount.
Because C's carryover-allocation basis is more than 10 percent of C's
reasonably expected basis in the project of which the building is a
part, the building for which C received the carryover allocation is a
qualified building for purposes of section 42(h)(1)(E)(ii) and paragraph
(a) of this section.
Example 2. (i) Facts. D, an accrual-method taxpayer, received a
carryover allocation from Agency, the state housing credit agency of
State X, on September 12, 2003. As of that date, D has not begun
construction of the low-income housing building D plans to build and D
does not have basis in the land on which D plans to build the building.
From September 12, 2003, to the close of March 12, 2004, D incurs some
costs related to the planned building, including architects' fees. As of
the close of March 12, 2004, these costs do not exceed 10 percent of D's
reasonably expected basis in the single-building project as of the close
of 2005.
(ii) Determination of whether building is qualified. Because D's
carryover-allocation basis as of the close of March 12, 2004, is not
more than 10 percent of D's reasonably expected basis in the single-
building project, the building is not a qualified building for purposes
of section 42(h)(1)(E)(ii) and paragraph (a) of this section.
Accordingly, the carryover allocation to D must be returned to the
Agency. The allocation is valid for purposes of determining the amount
of credit allocated by Agency from State X's 2003 State housing credit
ceiling, but is included in the returned credit component of State X's
2004 housing credit ceiling.
(c) Verification of basis by Agency--(1) Verification requirement.
An Agency that makes a carryover allocation to a taxpayer must verify
that the taxpayer has met the 10 percent basis requirement of paragraph
(a)(2) of this section.
(2) Manner of verification. An Agency may verify that a taxpayer has
incurred more than 10 percent of its reasonably expected basis in a
project by obtaining a certification from the taxpayer, in writing and
under penalty of perjury, that the taxpayer has incurred by the close of
the calendar year of the allocation (for allocations made before July 1)
or by the close of the date that is 6 months after the date the
allocation is made (for allocations made after June 30) more than 10
percent of the reasonably expected basis in the project. The
certification must be accompanied by supporting documentation that the
Agency must review. Supporting documentation may include, for example,
copies of checks or other records of payments. Alternatively, an Agency
may verify that the taxpayer has incurred adequate basis by requiring
that the taxpayer obtain from an attorney or certified public accountant
a written certification to the Agency, that the attorney or accountant
has examined all eligible costs incurred with respect to the project and
that, based upon this examination, it is the
[[Page 208]]
attorney's or accountant's belief that the taxpayer has incurred more
than 10 percent of its reasonably expected basis in the project by the
close of the calendar year of the allocation (for allocations made
before July 1) or by the close of the date that is 6 months after the
date the allocation is made (for allocations made after June 30).
(3) Time of verification--(i) Allocations made before July 1. For a
carryover allocation made before July 1, an Agency may require that the
basis certification be submitted to or received by the Agency prior to
the close of the calendar year of allocation or within a reasonable time
following the close of the calendar year of allocation. The Agency will
need to verify basis as provided in paragraph (c)(2) of this section to
accurately complete the Form 8610, ``Annual Low-Income Housing Credit
Agencies Report,'' and the Schedule A (Form 8610), ``Carryover
Allocation of Low-Income Housing Credit,'' for the calendar year of the
allocation. If the basis certification is not timely made, or supporting
documentation is lacking, inadequate, or does not actually support the
certification, the Agency should notify the taxpayer and try to get
adequate documentation. If the Agency cannot verify before the Form 8610
is filed that the taxpayer has satisfied the 10 percent basis
requirement for a carryover allocation made before July 1, the
allocation is not valid and is treated as if it had not been made and
the carryover allocation should not be reported on the Schedule A (Form
8610).
(ii) Allocations made after June 30. An Agency may require that the
basis certification be submitted to or received by the Agency prior to
the close of the date that is 6 months after the date the allocation was
made or within a reasonable period of time following the close of the
date that is 6 months after the date the allocation was made. The Agency
will need to verify basis as provided in paragraph (c)(2) of this
section. If the basis certification is not timely made, or supporting
documentation is lacking, inadequate, or does not actually support the
certification, the Agency should notify the taxpayer and try to get
adequate documentation. If the Agency cannot verify that the taxpayer
has satisfied the 10 percent basis requirement for a carryover
allocation made after June 30, the allocation must be returned to the
Agency. The carryover allocation is a valid allocation for the calendar
year of the allocation, but is included in the returned credit component
of the State housing credit ceiling for the calendar year following the
calendar year of the allocation.
(d) Requirements for making carryover allocations--(1) In general.
Generally, an allocation is made when an Agency issues the Form 8609,
`Low-Income Housing Credit Allocation Certification,' for a building.
See Sec. 1.42-1T(d)(8)(ii). An Agency does not issue the Form 8609 for
a building until the building is placed in service. However, in cases
where allocations of credit are made pursuant to section 42(h)(1)(E)
(relating to carryover allocations for buildings) or section 42(h)(1)(F)
(relating to carryover allocations for multiple-building projects), Form
8609 is not used as the allocating document because the buildings are
not yet in service. When an allocation is made pursuant to section
42(h)(1) (E) or (F), the allocating document is the document meeting the
requirements of paragraph (d)(2) of this section. In addition, when an
allocation is made pursuant to section 42(h)(1)(F), the requirements of
paragraph (d)(3) of this section must be met for the allocation to be
valid. An allocation pursuant to section 42(h)(1) (E) or (F) reduces the
state housing credit ceiling for the year in which the allocation is
made, whether or not the Form 8609 is also issued in that year.
(2) Requirements for allocation. An allocation pursuant to section
42(h)(1) (E) or (F) is made when an allocation document containing the
following information is completed, signed, and dated by an authorized
official of the Agency--
(i) The address of each building in the project, or if none exists,
a specific description of the location of each building;
(ii) The name, address, and taxpayer identification number of the
taxpayer receiving the allocation;
(iii) The name and address of the Agency;
[[Page 209]]
(iv) The taxpayer identification number of the Agency;
(v) The date of the allocation;
(vi) The housing credit dollar amount allocated to the building or
project, as applicable;
(vii) The taxpayer's reasonably expected basis in the project (land
and depreciable basis) as of the close of the second calendar year
following the calendar year in which the allocation is made;
(viii) For carryover allocations made before July 1, the taxpayer's
basis in the project (land and depreciable basis) as of the close of the
calendar year of the allocation and the percentage that basis bears to
the reasonably expected basis in the project (land and depreciable
basis) as of the close of the second calendar year following the
calendar year of allocation;
(ix) The date that each building in the project is expected to be
placed in service; and
(x) The Building Identification Number (B.I.N.) to be assigned to
each building in the project. The B.I.N. must reflect the year an
allocation is first made to the building, regardless of the year that
the building is placed in service. This B.I.N. must be used for all
allocations of credit for the building. For example, rehabilitation
expenditures treated as a separate new building under section 42(e)
should not have a separate B.I.N. if the building to which the
rehabilitation expenditures are made has a B.I.N. In this case, the
B.I.N. used for the rehabilitation expenditures shall be the B.I.N.
previously assigned to the building, although the rehabilitation
expenditures must have a separate Form 8609 for the allocation.
Similarly, a newly constructed building that receives an allocation of
credit in different calendar years must have a separate Form 8609 for
each allocation. The B.I.N. assigned to the building for the first
allocation must be used for the subsequent allocation.
(3) Special rules for project-based allocations--(i) In general. An
allocation pursuant to section 42(h)(1)(F) (a project-based allocation)
must meet the requirements of this section as well as the requirements
of section 42(h)(1)(F), including the minimum basis requirement of
section 42(h)(1)(E)(ii).
(ii) Requirement of section 42(h)(1)(F)(i)(III). An allocation
satisfies the requirement of section 42(h)(1)(F)(i)(III) if the Form
8609 that is issued for each building that is placed in service in the
project states the portion of the project-based allocation that is
applied to that building.
(4) Recordkeeping requirements--(i) Taxpayer. When an allocation is
made pursuant to section 42(h)(1)(E) or (F), the taxpayer must retain a
copy of the allocation document. The Form 8609 that reflects the
allocation must be filed for the first taxable year that the credit is
claimed and for each taxable year thereafter throughout the compliance
period, whether or not a credit is claimed for the taxable year.
(ii) Agency. The Agency must retain the original carryover
allocation document made under paragraph (d)(2) of this section and file
Schedule A (Form 8610) with the Agency's Form 8610 for the year the
allocation is made. The Agency must also retain a copy of the Form 8609
that is issued to the taxpayer and file the original with the Agency's
Form 8610 that reflects the year the form is issued.
(5) Separate procedure for election of appropriate percentage month.
If a taxpayer receives an allocation under section 42(h)(1) (E) or (F)
and wishes to elect under section 42(b)(2)(A)(ii) to use the appropriate
percentage for a month other than the month in which a building is
placed in service, the requirements specified in Sec. 1.42-8 must be
met for the election to be effective.
(e) Special rules. The following rules apply for purposes of this
section.
(1) Treatment of partnerships and other flow-through entities. With
respect to taxpayers that own projects through partnerships or other
flow-through entities (e.g., S corporations, estates, or trusts),
carryover-allocation basis is determined at the entity level using the
rules provided by this section. In addition, the entity is responsible
for providing to the Agency the certification and documentation required
under the basis verification requirement in paragraph (c) of this
section.
(2) Transferees. If land or depreciable property that is expected to
be part of
[[Page 210]]
a project is transferred after a carryover allocation has been made for
a building that is reasonably expected to be part of the project, but
before the close of the calendar year of the allocation (for allocations
made before July 1) or by the close of the date that is 6 months after
the date the allocation is made (for allocations made after June 30),
the transferee's carryover-allocation basis is determined under the
principles of this section and section 42(d)(7). See also Rev. Rul. 91-
38, 1991-2 C.B. 3 (see Sec. 601.601(d)(2)(ii)(b) of this chapter). In
addition, the transferee is treated as the taxpayer for purposes of the
basis verification requirement of this section, and therefore, is
responsible for providing to the Agency the required certifications and
documentation.
[T.D. 8520, 59 FR 10069, Mar. 3, 1994, as amended by T.D. 8859, 65 FR
2328, Jan. 14, 2000; 65 FR 16317, Mar. 28, 2000; T.D. 9110, 69 FR 502,
Jan. 6, 2004]
Sec. 1.42-7 Substantially bond-financed buildings. [Reserved]
Sec. 1.42-8 Election of appropriate percentage month.
(a) Election under section 42(b)(2)(A)(ii)(I) to use the appropriate
percentage for the month of a binding agreement--(1) In general. For
purposes of section 42(b)(2)(A)(ii)(I), an agreement between a taxpayer
and an Agency as to the housing credit dollar amount to be allocated to
a building is considered binding if it--
(i) Is in writing;
(ii) Is binding under state law on the Agency, the taxpayer, and all
successors in interest;
(iii) Specifies the type(s) of building(s) to which the housing
credit dollar amount applies (i.e., a newly constructed or existing
building, or substantial rehabilitation treated as a separate new
building under section 42(e));
(iv) Specifies the housing credit dollar amount to be allocated to
the building(s); and
(v) Is dated and signed by the taxpayer and the Agency during the
month in which the requirements of paragraphs (a)(1) (i) through (iv) of
this section are met.
(2) Effect on state housing credit ceiling. Generally, a binding
agreement described in paragraph (a)(1) of this section is an agreement
by the Agency to allocate credit to the taxpayer at a future date. The
binding agreement may include a reservation of credit or a binding
commitment (under section 42(h)(1)(C)) to allocate credit in a future
taxable year. A reservation or a binding commitment to allocate credit
in a future year has no effect on the state housing credit ceiling until
the year the Agency actually makes an allocation. However, if the
binding agreement is also a carryover allocation under section 42(h)(1)
(E) or (F), the state housing credit ceiling is reduced by the amount
allocated by the Agency to the taxpayer in the year the carryover
allocation is made. For a binding agreement to be a valid carryover
allocation, the requirements of paragraph (a)(1) of this section and
Sec. 1.42-6 must be met.
(3) Time and manner of making election. An election under section
42(b)(2)(A)(ii)(I) may be made either as part of the binding agreement
under paragraph (a)(1) of this section to allocate a specific housing
credit dollar amount or in a separate document that references the
binding agreement. In either case, the election must--
(i) Be in writing;
(ii) Reference section 42(b)(2)(A)(ii)(I);
(iii) Be signed by the taxpayer;
(iv) If it is in a separate document, reference the binding
agreement that meets the requirements of paragraph (a)(1) of this
section; and
(v) Be notarized by the 5th day following the end of the month in
which the binding agreement was made.
(4) Multiple agreements--(i) Rescinded agreements. A taxpayer may
not make an election under section 42(b)(2)(A)(ii)(I) for a building if
an election has previously been made for the building for a different
month. For example, assume a taxpayer entered into a binding agreement
for allocation of a specific housing credit dollar amount to a building
and made the election under section 42(b)(2)(A)(ii)(I) to apply the
appropriate percentage for the month of the binding agreement. If the
binding agreement subsequently is
[[Page 211]]
rescinded under state law, and the taxpayer enters into a new binding
agreement for allocation of a specific housing credit dollar amount to
the building, the taxpayer must apply to the building the appropriate
percentage for the elected month of the rescinded binding agreement.
However, if no prior election was made with respect to the rescinded
binding agreement, the taxpayer may elect the appropriate percentage for
the month of the new binding agreement.
(ii) Increases in credit. The election under section
42(b)(2)(A)(ii)(I), once made, applies to any increase in the credit
amount allocated for a building, whether the increase occurs in the same
or in a subsequent year. However, in the case of a binding agreement (or
carryover allocation that is treated as a binding agreement) to allocate
a credit amount under section 42(e)(1) for substantial rehabilitation
treated as a separate new building, a taxpayer may make the election
under section 42(b)(2)(A)(ii)(I) notwithstanding that a prior election
under section 42(b)(2)(A)(ii)(I) is in effect for a prior allocation of
credit for a substantial rehabilitation that was previously placed in
service under section 42(e).
(5) Amount allocated. The housing credit dollar amount eventually
allocated to a building may be more or less than the amount specified in
the binding agreement. Depending on the Agency's determination pursuant
to section 42(m)(2) as to the financial feasibility of the building (or
project), the Agency may allocate a greater housing credit dollar amount
to the building (provided that the Agency has additional housing credit
dollar amounts available to allocate for the calendar year of the
allocation) or the Agency may allocate a lesser housing credit dollar
amount. Under section 42(h)(7)(D), in allocating a housing credit dollar
amount, the Agency must specify the applicable percentage and maximum
qualified basis of the building. The applicable percentage may be less,
but not greater than, the appropriate percentage for the month the
building is placed in service, or the month elected by the taxpayer
under section 42(b)(2)(A)(ii)(I). Whether the appropriate percentage is
the appropriate percentage for the 70-percent present value credit or
the 30-percent present value credit is determined under section 42(i)(2)
when the building is placed in service.
(6) Procedures--(i) Taxpayer. The taxpayer must give the original
notarized election statement to the Agency before the close of the 5th
calendar day following the end of the month in which the binding
agreement is made. The taxpayer must retain a copy of the binding
agreement and the election statement.
(ii) Agency. The Agency must retain the original of the binding
agreement and election statement and, to the extent required by Schedule
A (Form 8610), ``Carryover Allocation of Low-Income Housing Credit,''
account for the binding agreement and election statement on that
schedule.
(7) Examples. The following examples illustrate the provisions of
this section. In each example, X is the taxpayer, Agency is the state
housing credit agency, and the carryover allocations meet the
requirements of Sec. 1.42-6 and are otherwise valid.
Example 1. (i) In August 2003, X and Agency enter into an agreement
that Agency will allocate $100,000 of housing credit dollar amount for
the low-income housing building X is constructing. The agreement is
binding and meets all the requirements of paragraph (a)(1) of this
section. The agreement is a reservation of credit, not an allocation,
and therefore, has no effect on the state housing credit ceiling. On or
before September 5, 2003, X signs and has notarized a written election
statement that meets the requirements of paragraph (a)(3) of this
section. The applicable percentage for the building is the appropriate
percentage for the month of August 2003.
(ii) Agency makes a carryover allocation of $100,000 of housing
credit dollar amount for the building on October 2, 2003. The carryover
allocation reduces Agency's state housing credit ceiling for 2003. Due
to unexpectedly high construction costs, when X places the building in
service in July 2004, the product of the building's qualified basis and
the applicable percentage for the building (the appropriate percentage
for the month of August 2003) is $150,000, rather than $100,000.
Notwithstanding that only $100,000 of credit was allocated for the
building in 2003, Agency may allocate an additional $50,000 of housing
credit dollar amount for the building from its state housing credit
ceiling for 2004. The appropriate percentage for the month of August
2003 is the applicable percentage for the building for the entire
[[Page 212]]
$150,000 of credit allocated for the building, even though separate
allocations were made in 2003 and 2004. Because allocations were made
for the building in two separate calendar years, Agency must issue two
Forms 8609, ``Low-Income Housing Credit Allocation Certification,'' to
X. One Form 8609 must reflect the $100,000 allocation made in 2003, and
the other Form 8609 must reflect the $50,000 allocation made in 2004.
(iii) X gives the original notarized statement to Agency on or
before September 5, 2003, and retains a copy of the binding agreement,
election statement, and carryover allocation document.
(iv) Agency retains the original of the binding agreement, election
statement, and 2003 carryover allocation document. Agency accounts for
the binding agreement, election statement, and 2003 carryover allocation
on the Schedule A (Form 8610) that it files for the 2003 calendar year.
After the building is placed in service in 2004, and assuming other
necessary requirements for issuing a Form 8609 are met (for example,
taxpayer has certified all sources and uses of funds and development
costs for the building under Sec. 1.42-17), Agency issues to X a copy
of the Form 8609 reflecting the 2003 carryover allocation of $100,000.
Agency files the original of this Form 8609 with the Form 8610, ``Annual
Low-Income Housing Credit Agencies Report,'' that it files for the 2004
calendar year. Agency also issues to X a copy of the Form 8609
reflecting the 2004 allocation of $50,000 and files the original of this
Form 8609 with the Form 8610 that it files for the 2004 calendar year.
Agency retains copies of the Forms 8609 that are issued to X.
Example 2. (i) In September 2003, X and Agency enter into an
agreement that Agency will allocate $70,000 of housing credit dollar
amount for rehabilitation expenditures that X is incurring and that X
will treat as a new low-income housing building under section 42(e)(1).
The agreement is binding and meets all the requirements of paragraph
(a)(1) of this section. The agreement is a reservation of credit, not an
allocation, and therefore, has no effect on Agency's state housing
credit ceiling. On or before October 5, 2003, X signs and has notarized
a written election statement that meets the requirements of paragraph
(a)(3) of this section. The applicable percentage for the building is
the appropriate percentage for the month of September 2003. Agency makes
a carryover allocation of $70,000 of housing credit dollar amount for
the building on November 15, 2003. The carryover allocation reduces by
$70,000 Agency's state housing credit ceiling for 2003.
(ii) In October 2004, X and Agency enter into another binding
agreement meeting the requirements of paragraph (a)(1) of this section.
Under the agreement, Agency will allocate $50,000 of housing credit
dollar amount for additional rehabilitation expenditures by X that
qualify as a second separate new building under section 42(e)(1). On or
before November 5, 2004, X signs and has notarized a written election
statement meeting the requirements of paragraph (a)(3) of this section.
On December 1, 2004, X receives a carryover allocation under section
42(h)(1)(E) for $50,000. The carryover allocation reduces by $50,000
Agency's state housing credit ceiling for 2004. The applicable
percentage for the rehabilitation expenditures treated as the second
separate new building is the appropriate percentage for the month of
October 2004, not September 2003. The appropriate percentage for the
month of September 2003 still applies to the allocation of $70,000 for
the rehabilitation expenditures treated as the first separate new
building. Because allocations were made for the building in two separate
calendar years, Agency must issue two Forms 8609 to X. One Form 8609
must reflect the $70,000 allocation made in 2003, and the other Form
8609 must reflect the $50,000 allocation made in 2004.
(iii) X gives the first original notarized statement to Agency on or
before October 5, 2003, and retains a copy of the first binding
agreement, election statement, and carryover allocation document issued
in 2003. X gives the second original notarized statement to Agency on or
before November 5, 2004, and retains a copy of the second binding
agreement, election statement, and carryover allocation document issued
in 2004.
(iv) Agency retains the original of the binding agreements, election
statements, and carryover allocation documents. Agency accounts for the
binding agreement, election statement, and 2003 carryover allocation on
the Schedule A (Form 8610) that it files for the 2003 calendar year.
Agency also accounts for the binding agreement, election statement, and
2004 carryover allocation on the Schedule A (Form 8610) that it files
for the 2004 calendar year. After each separate new building is placed
in service, and assuming other necessary requirements for issuing a Form
8609 are met (for example, taxpayer has certified all sources and uses
of funds and development costs for the building under Sec. 1.42-17),
the Agency will issue to X a copy of the Form 8609 reflecting the 2003
carryover allocation of $70,000 and a copy of the Form 8609 reflecting
the 2004 carryover allocation of $50,000, respectively. Agency files the
original of each Form 8609 with the Form 8610 that reflects the calendar
year each Form 8609 is issued. Agency retains copies of the Forms 8609
that are issued to X.
(b) Election under section 42(b)(2)(A)(ii)(II) to use the
appropriate percentage for the month tax-exempt bonds are issued--(1)
Time and manner of making election. In the case of any
[[Page 213]]
building to which section 42(h)(4)(B) applies, an election under section
42(b)(2)(A)(ii)(II) to use the appropriate percentage for the month tax-
exempt bonds are issued must--
(i) Be in writing;
(ii) Reference section 42(b)(2)(A)(ii)(II);
(iii) Specify the percentage of the aggregate basis of the building
and the land on which the building is located that is financed with the
proceeds of obligations described in section 42(h)(4)(A) (tax-exempt
bonds);
(iv) State the month in which the tax-exempt bonds are issued;
(v) State that the month in which the tax-exempt bonds are issued is
the month elected for the appropriate percentage to be used for the
building;
(vi) Be signed by the taxpayer; and
(vii) Be notarized by the 5th day following the end of the month in
which the bonds are issued.
(2) Bonds issued in more than one month. If a building described in
section 42(h)(4)(B) (substantially bond-financed building) is financed
with tax-exempt bonds issued in more than one month, the taxpayer may
elect the appropriate percentage for any month in which the bonds are
issued. Once the election is made, the appropriate percentage elected
applies for the building even if all bonds are not issued in that month.
The requirements of this paragraph (b), including the time limitation
contained in paragraph (b)(1)(vii) of this section, must also be met.
(3) Limitations on appropriate percentage. Under section
42(m)(2)(D), the credit allowable for a substantially bond- financed
building is limited to the amount necessary to assure the project's
feasibility. Accordingly, in making the determination under section
42(m)(2), an Agency may use an applicable percentage that is less, but
not greater than, the appropriate percentage for the month the building
is placed in service, or the month elected by the taxpayer under section
42(b)(2)(A)(ii)(II).
(4) Procedures--(i) Taxpayer. The taxpayer must provide the original
notarized election statement to the Agency before the close of the 5th
calendar day following the end of the month in which the bonds are
issued. If an authority other than the Agency issues the tax-exempt
bonds, the taxpayer must also give the Agency a signed statement from
the issuing authority that certifies the information described in
paragraphs (b)(1)(iii) and (iv) of this section. The taxpayer must also
retain a copy of the election statement.
(ii) Agency. The Agency must retain the original of the election
statement and a copy of the Form 8609 that reflects the election
statement. The Agency must file an additional copy of the Form 8609 with
the Agency's Form 8610 that reflects the calendar year the Form 8609 is
issued.
[T.D. 8520, 59 FR 10071, Mar. 3, 1994, as amended by T.D. 9110, 69 FR
504, Jan. 6, 2004]
Sec. 1.42-9 For use by the general public.
(a) General rule. If a residential rental unit in a building is not
for use by the general public, the unit is not eligible for a section 42
credit. A residential rental unit is for use by the general public if
the unit is rented in a manner consistent with housing policy governing
non-discrimination, as evidenced by rules or regulations of the
Department of Housing and Urban Development (HUD) (24 CFR subtitle A and
chapters I through XX). See HUD Handbook 4350.3 (or its successor). A
copy of HUD Handbook 4350.3 may be requested by writing to: HUD,
Directives Distribution Section, room B-100, 451 7th Street, SW.,
Washington, DC 20410.
(b) Limitations. Notwithstanding paragraph (a) of this section, if a
residential rental unit is provided only for a member of a social
organization or provided by an employer for its employees, the unit is
not for use by the general public and is not eligible for credit under
section 42. In addition, any residential rental unit that is part of a
hospital, nursing home, sanitarium, lifecare facility, trailer park, or
intermediate care facility for the mentally and physically handicapped
is not for use by the general public and is not eligible for credit
under section 42.
(c) Treatment of units not for use by the general public. The costs
attributable to a residential rental unit that is not for use by the
general public are not excludable from eligible basis by reason
[[Page 214]]
of the unit's ineligibility for the credit under this section. However,
in calculating the applicable fraction, the unit is treated as a
residential rental unit that is not a low-income unit.
[T.D. 8520, 59 FR 10073, Mar. 3, 1994]
Sec. 1.42-10 Utility allowances.
(a) Inclusion of utility allowances in gross rent. If the cost of
any utility (other than telephone, cable television, or Internet) for a
residential rental unit is paid directly by the tenant(s), and not by or
through the owner of the building, the gross rent for that unit includes
the applicable utility allowance determined under this section. This
section only applies for purposes of determining gross rent under
section 42(g)(2)(B)(ii) as to rent-restricted units.
(b) Applicable utility allowances--(1) Buildings assisted by the
Rural Housing Service. If a building receives assistance from the Rural
Housing Service (RHS-assisted building), the applicable utility
allowance for all rent-restricted units in the building is the utility
allowance determined under the method prescribed by the Rural Housing
Service (RHS) for the building (whether or not the building or its
tenants also receive other state or federal assistance).
(2) Buildings with Rural Housing Service assisted tenants. If any
tenant in a building receives RHS rental assistance payments (RHS tenant
assistance), the applicable utility allowance for all rent-restricted
units in the building (including any units occupied by tenants receiving
rental assistance payments from the Department of Housing and Urban
Development (HUD)) is the applicable RHS utility allowance.
(3) Buildings regulated by the Department of Housing and Urban
Development. If neither a building nor any tenant in the building
receives RHS housing assistance, and the rents and utility allowances of
the building are reviewed by HUD on an annual basis (HUD-regulated
building), the applicable utility allowance for all rent-restricted
units in the building is the applicable HUD utility allowance.
(4) Other buildings. If a building is neither an RHS-assisted nor a
HUD-regulated building, and no tenant in the building receives RHS
tenant assistance, the applicable utility allowance for rent-restricted
units in the building is determined under the following methods.
(i) Tenants receiving HUD rental assistance. The applicable utility
allowance for any rent-restricted units occupied by tenants receiving
HUD rental assistance payments (HUD tenant assistance) is the applicable
Public Housing Authority (PHA) utility allowance established for the
Section 8 Existing Housing Program.
(ii) Other tenants--(A) General rule. If none of the rules of
paragraphs (b)(1), (2), (3), and (4)(i) of this section apply to any
rent-restricted units in a building, the appropriate utility allowance
for the units is the applicable PHA utility allowance. However, if a
local utility company estimate is obtained for any unit in the building
in accordance with paragraph (b)(4)(ii)(B) of this section, that
estimate becomes the appropriate utility allowance for all rent-
restricted units of similar size and construction in the building. This
local utility company estimate procedure is not available for and does
not apply to units to which the rules of paragraphs (b) (1), (2), (3),
or (4)(i) of this section apply. However, if a local utility company
estimate is obtained for any unit in the building under paragraph
(b)(4)(ii)(B) of this section, a State or local housing credit agency
(Agency) provides a building owner with an estimate for any unit in a
building under paragraph (b)(4)(ii)(C) of this section, a cost estimate
is calculated using the HUD Utility Schedule Model under paragraph
(b)(4)(ii)(D) of this section, or a cost estimate is calculated by an
energy consumption model under paragraph (b)(4)(ii)(E) of this section,
then the estimate under paragraph (b)(4)(ii)(B), (C), (D), or (E)
becomes the applicable utility allowance for all rent-restricted units
of similar size and construction in the building. Paragraphs
(b)(4)(ii)(B), (C), (D), and (E) of this section do not apply to units
to which the rules of paragraphs (b)(1), (2), (3), or (4)(i) of this
section apply.
(B) Utility company estimate. Any interested party (including a low-
income tenant, a building owner, or an Agency) may obtain a local
utility company
[[Page 215]]
estimate for a unit. The estimate is obtained when the interested party
receives, in writing, information from a local utility company providing
the estimated cost of that utility for a unit of similar size and
construction for the geographic area in which the building containing
the unit is located. In the case of deregulated utility services, the
interested party is required to obtain an estimate only from one utility
company even if multiple companies can provide the same utility service
to a unit. However, the utility company must offer utility services to
the building in order for that utility company's rates to be used in
calculating utility allowances. The estimate should include all
component deregulated charges for providing the utility service. The
local utility company estimate may be obtained by an interested party at
any time during the building's extended use period (see section
42(h)(6)(D)) or, if the building does not have an extended use period,
during the building's compliance period (see section 42(i)(1)). Unless
the parties agree otherwise, costs incurred in obtaining the estimate
are borne by the initiating party. The interested party that obtains the
local utility company estimate (the initiating party) must retain the
original of the utility company estimate and must furnish a copy of the
local utility company estimate to the owner of the building (where the
initiating party is not the owner), and the Agency that allocated credit
to the building (where the initiating party is not the Agency). The
owner of the building must make available copies of the utility company
estimate to the tenants in the building.
(C) Agency estimate. A building owner may obtain a utility estimate
for each unit in the building from the Agency that has jurisdiction over
the building provided the Agency agrees to provide the estimate. The
estimate is obtained when the building owner receives, in writing,
information from the Agency providing the estimated per-unit cost of the
utilities for units of similar size and construction for the geographic
area in which the building containing the units is located. The Agency
estimate may be obtained by a building owner at any time during the
building's extended use period (see section 42(h)(6)(D)). Costs incurred
in obtaining the estimate are borne by the building owner. In
establishing an accurate utility allowance estimate for a particular
building, an Agency (or an agent or other private contractor of the
Agency that is a qualified professional within the meaning of paragraph
(b)(4)(ii)(E) of this section) must take into account, among other
things, local utility rates, property type, climate and degree-day
variables by region in the State, taxes and fees on utility charges,
building materials, and mechanical systems. If the Agency uses an agent
or other private contractor to calculate the utility estimates, the
agent or contractor and the owner must not be related within the meaning
of section 267(b) or 707(b). An Agency may also use actual utility
company usage data and rates for the building. However, use of the
Agency estimate is limited to the building's consumption data for the
twelve-month period ending no earlier than 60 days prior to the
beginning of the 90-day period under paragraph (c)(1) of this section
and utility rates used for the Agency estimate must be no older than the
rates in place 60 days prior to the beginning of the 90-day period under
paragraph (c)(1) of this section. In the case of newly constructed or
renovated buildings with less than 12 months of consumption data, the
Agency (or an agent or other private contractor of the Agency that is a
qualified professional within the meaning of paragraph (b)(4)(ii)(E) of
this section) may use consumption data for the 12-month period of units
of similar size and construction in the geographic area in which the
building containing the units is located.
(D) HUD Utility Schedule Model. A building owner may calculate a
utility estimate using the ``HUD Utility Schedule Model'' that can be
found on the Low-Income Housing Tax Credits page at http://
www.huduser.org/datasets/lihtc.html (or successor URL). Utility rates
used for the HUD Utility Schedule Model must be no older than the rates
in place 60 days prior to the beginning of the 90-day period under
paragraph (c)(1) of this section.
[[Page 216]]
(E) Energy consumption model. A building owner may calculate utility
estimates using an energy and water and sewage consumption and analysis
model (energy consumption model). The energy consumption model must, at
a minimum, take into account specific factors including, but not limited
to, unit size, building orientation, design and materials, mechanical
systems, appliances, and characteristics of the building location. The
utility consumption estimates must be calculated by either a properly
licensed engineer or a qualified professional approved by the Agency
that has jurisdiction over the building (together, qualified
professional), and the qualified professional and the building owner
must not be related within the meaning of section 267(b) or 707(b). Use
of the energy consumption model is limited to the building's consumption
data for the twelve-month period ending no earlier than 60 days prior to
the beginning of the 90-day period under paragraph (c)(1) of this
section, and utility rates used for the energy consumption model must be
no older than the rates in place 60 days prior to the beginning of the
90-day period under paragraph (c)(1) of this section. In the case of
newly constructed or renovated buildings with less than 12 months of
consumption data, the qualified professional may use consumption data
for the 12-month period of units of similar size and construction in the
geographic area in which the building containing the units is located.
(c) Changes in applicable utility allowance--(1) In general. If, at
any time during the building's extended use period (as defined in
section 42(h)(6)(D)), the applicable utility allowance for units
changes, the new utility allowance must be used to compute gross rents
of the units due 90 days after the change (the 90-day period). For
example, if rent must be lowered because a local utility company
estimate is obtained that shows a higher utility cost than the otherwise
applicable PHA utility allowance, the lower rent must be in effect for
rent due at the end of the 90-day period. A building owner using a
utility company estimate under paragraph (b)(4)(ii)(B) of this section,
the HUD Utility Schedule Model under paragraph (b)(4)(ii)(D) of this
section, or an energy consumption model under paragraph (b)(4)(ii)(E) of
this section must submit copies of the utility estimates to the Agency
that has jurisdiction over the building and make the estimates available
to all tenants in the building at the beginning of the 90-day period
before the utility allowances can be used in determining the gross rent
of rent-restricted units. An Agency may require additional information
from the owner during the 90-day period. Any utility estimates obtained
under the Agency estimate under paragraph (b)(4)(ii)(C) of this section
must also be made available to all tenants in the building at the
beginning of the 90-day period. The building owner must pay for all
costs incurred in obtaining the estimates under paragraphs
(b)(4)(ii)(B), (C), (D), and (E) of this section and providing the
estimates to the Agency and the tenants. The building owner is not
required to review the utility allowances, or implement new utility
allowances, until the building has achieved 90 percent occupancy for a
period of 90 consecutive days or the end of the first year of the credit
period, whichever is earlier.
(2) Annual review. A building owner must review at least once during
each calendar year the basis on which utility allowances have been
established and must update the applicable utility allowance in
accordance with paragraph (c)(1) of this section. The review must take
into account any changes to the building such as any energy conservation
measures that affect energy consumption and changes in utility rates.
(d) Record retention. The building owner must retain any utility
consumption estimates and supporting data as part of the taxpayer's
records for purposes of Sec. 1.6001-1(a).
[T.D. 8520, 59 FR 10073, Mar. 3, 1994, as amended by T.D. 9420, 73 FR
43867, July 29, 2008]
Sec. 1.42-11 Provision of services.
(a) General rule. The furnishing to tenants of services other than
housing (whether or not the services are significant) does not prevent
the units occupied by the tenants from qualifying as residential rental
property eligible for
[[Page 217]]
credit under section 42. However, any charges to low-income tenants for
services that are not optional generally must be included in gross rent
for purposes of section 42(g).
(b) Services that are optional--(1) General rule. A service is
optional if payment for the service is not required as a condition of
occupancy. For example, for a qualified low-income building with a
common dining facility, the cost of meals is not included in gross rent
for purposes of section 42(g)(2)(A) if payment for the meals in the
facility is not required as a condition of occupancy and a practical
alternative exists for tenants to obtain meals other than from the
dining facility.
(2) Continual or frequent services. If continual or frequent
nursing, medical, or psychiatric services are provided, it is presumed
that the services are not optional and the building is ineligible for
the credit, as is the case with a hospital, nursing home, sanitarium,
lifecare facility, or intermediate care facility for the mentally and
physically handicapped. See also Sec. 1.42-9(b).
(3) Required services--(i) General rule. The cost of services that
are required as a condition of occupancy must be included in gross rent
even if federal or state law requires that the services be offered to
tenants by building owners.
(ii) Exceptions--(A) Supportive services. Section 42(g)(2)(B)(iii)
provides an exception for certain fees paid for supportive services. For
purposes of section 42(g)(2)(B)(iii), a supportive service is any
service provided under a planned program of services designed to enable
residents of a residential rental property to remain independent and
avoid placement in a hospital, nursing home, or intermediate care
facility for the mentally or physically handicapped. For a building
described in section 42(i)(3)(B)(iii) (relating to transitional housing
for the homeless) or section 42(i)(3)(B)(iv) (relating to single-room
occupancy), a supportive service includes any service provided to assist
tenants in locating and retaining permanent housing.
(B) Specific project exception. Gross rent does not include the cost
of mandatory meals in any federally-assisted project for the elderly and
handicapped (in existence on or before January 9, 1989) that is
authorized by 24 CFR 278 to provide a mandatory meals program.
[T.D. 8520, 59 FR 10074, Mar. 3, 1994, as amended by T.D. 8859, 65 FR
2328, Jan. 14, 2000]
Sec. 1.42-12 Effective dates and transitional rules.
(a) Effective dates--(1) In general. Except as provided in
paragraphs (a)(2) and (a)(3) of this section, the rules set forth in
Sec. Sec. 1.42-6 and 1.42-8 through 1.42-12 are applicable on May 2,
1994. However, binding agreements, election statements, and carryover
allocation documents entered into before May 2, 1994, that follow the
guidance set forth in Notice 89-1, 1989-1 C.B. 620 (see Sec.
601.601(d)(2)(ii)(b) of this chapter) need not be changed to conform to
the rules set forth in Sec. Sec. 1.42-6 and 1.42-8 through 1.42-12.
(2) Community Renewal Tax Relief Act of 2000--(i) In general.
Section 1.42-6 (a), (b)(4)(iii) Example 1 and Example 2, (c),
(d)(2)(viii), and (e)(2) are applicable for housing credit dollar
amounts allocated after January 6, 2004. However, the rules in Sec.
1.42-6 (a), (b)(4)(iii) Example 1 and Example 2, (c), (d)(2)(viii), and
(e)(2) may be applied by Agencies and taxpayers for housing credit
dollar amounts allocated after December 31, 2000, and on or before
January 6, 2004. Otherwise, subject to the applicable effective dates of
the corresponding statutory provisions, the rules that apply for housing
credit dollar amounts allocated on or before January 6, 2004, are
contained in Sec. 1.42-6 in effect on and before January 6, 2004 (see
26 CFR part 1 revised as of April 1, 2003).
(3) Electronic filing simplification changes. Sections 1.42-6(d)(4)
and 1.42-8(a)(6)(i), (a)(6)(ii), (a)(7) Example 1 and Example 2,
(b)(4)(i), and (b)(4)(ii) are applicable for forms filed after January
6, 2004. The rules that apply for forms filed on or before January 6,
2004, are contained in Sec. 1.42-6 and Sec. 1.42-8 in effect on and
before January 6, 2004 (see 26 CFR part 1 revised as of April 1, 2003).
(4) Utility allowances. The first sentence in Sec. 1.42-10(a),
Sec. 1.42-10(b)(1), (2), (3), and (4), the last two sentences in Sec.
1.42-10(b)(4)(ii)(A), the third, fourth, and fifth sentences in Sec.
1.42-10(b)(4)(ii)(B), Sec. 1.42-10(b)(4)(ii)(C), (D),
[[Page 218]]
and (E), and Sec. 1.42-10(c) and (d) are applicable to a building
owner's taxable years beginning on or after July 29, 2008. Taxpayers may
rely on these provisions before the beginning of the building owner's
taxable year beginning on or after July 29, 2008 provided that any
utility allowances calculated under these provisions are effective no
earlier than the first day of the building owner's taxable year
beginning on or after July 29, 2008. The utility allowances provisions
that apply to taxable years beginning before July 29, 2008 are contained
in Sec. 1.42-10 (see 26 CFR part 1 revised as of April 1, 2008).
(b) Prior periods. Notice 89-1, 1989-1 C.B. 620 and Notice 89-6,
1989-1 C.B. 625 (see Sec. 601.601(d)(2)(ii)(b) of this chapter) may be
applied for periods prior to May 2, 1994.
(c) Carryover allocations. The rule set forth in Sec. 1.42-
6(d)(4)(ii) relating to the requirement that state and local housing
agencies file Schedule A (Form 8610), ``Carryover Allocation of the Low-
Income Housing Credit,'' is applicable for carryover allocations made
after December 31, 1999.
[T.D. 8520, 59 FR 10074, Mar. 3, 1994; 59 FR 15501, Apr. 1, 1994, as
amended by T.D. 8859, 65 FR 2328, Jan. 14, 2000; T.D. 9110, 69 FR 504,
Jan. 6, 2004; T.D. 9420, 73 FR 43868, July 29, 2008]
Sec. 1.42-13 Rules necessary and appropriate; housing credit
agencies' correction of administrative errors and omissions.
(a) Publication of guidance. Under section 42(n), the Secretary has
authority to prescribe regulations as may be necessary or appropriate to
carry out the purposes of section 42. The Secretary may also provide
guidance through various publications in the Internal Revenue Bulletin.
(See Sec. 601.601(d)(2)(ii)(b) of this chapter.)
(b) Correcting administrative errors and omissions--(1) In general.
An Agency may correct an administrative error or omission with respect
to allocations and recordkeeping, as described in paragraph (b)(2) of
this section, within a reasonable period after the Agency discovers the
administrative error or omission. Whether a correction is made within a
reasonable period depends on the facts and circumstances of each
situation. Except as provided in paragraph (b)(3)(iii) of this section,
an Agency need not obtain the prior approval of the Secretary to correct
an administrative error or omission, if the correction is made in
accordance with paragraph (b)(3)(i) of this section. The administrative
errors and omissions to which this paragraph (b) applies are strictly
limited to those described in paragraph (b)(2) of this section, and,
thus, do not include, for example, any misinterpretation of the
applicable rules and regulations under section 42. Accordingly, an
Agency's allocation of a particular calendar year's low-income housing
credit dollar amount made after the close of that calendar year, or the
use of an incorrect population amount in calculating a State's housing
credit ceiling for a calendar year are not administrative errors that
can be corrected under this paragraph (b).
(2) Administrative errors and omissions described. An administrative
error or omission is a mistake that results in a document that
inaccurately reflects the intent of the Agency at the time the document
is originally completed or, if the mistake affects a taxpayer, a
document that inaccurately reflects the intent of the Agency and the
affected taxpayer at the time the document is originally completed.
Administrative errors and omissions described in this paragraph (b)(2)
include the following--
(i) A mathematical error;
(ii) An entry on a document that is inconsistent with another entry
on the same or another document regarding the same property, or
taxpayer;
(iii) A failure in tracking the housing credit dollar amount an
Agency has allocated (or that remains to be allocated) in the current
calendar year (e.g., a failure to include in its State housing credit
ceiling a previously allocated credit dollar amount that has been
returned by a taxpayer);
(iv) An omission of information that is required on a document; and
(v) Any other type of error or omission identified by guidance
published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter) as an administrative error or
omission covered by this paragraph (b).
[[Page 219]]
(3) Procedures for correcting administrative errors or omissions--
(i) In general. An Agency's correction of an administrative error or
omission, as described in paragraph (b)(2) of this section, must amend
the document so that the corrected document reflects the original intent
of the Agency, or the Agency and the affected taxpayer, and complies
with applicable rules and regulations under section 42.
(ii) Specific procedures. If a document corrects a document
containing an administrative error or omission that has not yet been
filed with the Internal Revenue Service, the Agency, or the Agency and
the affected taxpayer, should complete and file the corrected document
as the original. When a document containing an administrative error or
omission has already been filed with the Service, the Agency, or the
Agency and the affected taxpayer, should refile a copy of the document
containing the administrative error or omission, and prominently and
clearly note the correction thereon or on an attached new document. The
Agency should indicate at the top of the document(s) that the correction
is being made under Sec. 1.42-13 of the Income Tax Regulations.
(iii) Secretary's prior approval required. Except as provided in
paragraph (b)(3)(vi) of this section, an Agency must obtain the
Secretary's prior approval to correct an administrative error or
omission, as described in paragraph (b)(2) of this section, if the
correction is not made before the close of the calendar year of the
error or omission and the correction--
(A) Is a numerical change to the housing credit dollar amount
allocated for the building or project;
(B) Affects the determination of any component of the State's
housing credit ceiling under section 42(h)(3)(C); or
(C) Affects the State's unused housing credit carryover that is
assigned to the Secretary under section 42(h)(3)(D).
(iv) Requesting the Secretary's approval. To obtain the Secretary's
approval under paragraph (b)(3)(iii) of this section, an Agency must
submit a request for the Secretary's approval within a reasonable period
after discovering the administrative error or omission, and must agree
to any conditions that may be required by the Secretary under paragraph
(b)(3)(v) of this section. When requesting the Secretary's approval, the
Agency, or the Agency and the affected taxpayer, must file an
application that complies with the requirements of this paragraph
(b)(3)(iv). For further information on the application procedure see
Rev. Proc. 93-1, 1993-1 I.R.B. 10 (or any subsequent applicable revenue
procedure). (See Sec. 601.601(d)(2)(ii)(b) of this chapter.) The
application requesting the Secretary's approval must contain the
following information--
(A) The name, address, and identification number of each affected
taxpayer;
(B) The Building Identification Number (B.I.N.) and address of each
building or project affected by the administrative error or omission;
(C) A statement explaining the administrative error or omission and
the intent of the Agency, or of the Agency and the affected taxpayer,
when the document was originally completed;
(D) Copies of any supporting documentation;
(E) A statement explaining the effect, if any, that a correction of
the administrative error or omission would have on the housing credit
dollar amount allocated for any building or project; and
(F) A statement explaining the effect, if any, that a correction of
the administrative error or omission would have on the determination of
the components of the State's housing credit ceiling under section
42(h)(3)(C) or on the State's unused housing credit carryover that is
assigned to the Secretary under section 42(h)(3)(D).
(v) Agreement to conditions. To obtain the Secretary's approval
under paragraph (b)(3)(iii) of this section, an Agency, or the Agency
and the affected taxpayer, must agree to the conditions the Secretary
considers appropriate.
(vi) Secretary's automatic approval. The Secretary grants automatic
approval to correct an administrative error or omission described in
paragraph (b)(2) of this section if--
(A) The correction is not made before the close of the calendar year
of the error or omission and the correction is a numerical change to the
housing
[[Page 220]]
credit dollar amount allocated for the building or multiple-building
project;
(B) The administrative error or omission resulted in an allocation
document (the Form 8609, ``Low-Income Housing Credit Allocation
Certification,'' or the allocation document under the requirements of
section 42(h)(1)(E) or (F), and Sec. 1.42-6(d)(2)) that either did not
accurately reflect the number of buildings in a project (for example, an
allocation document for a 10-building project only references 8
buildings instead of 10 buildings), or the correct information (other
than the amount of credit allocated on the allocation document);
(C) The administrative error or omission does not affect the
Agency's ranking of the building(s) or project and the total amount of
credit the Agency allocated to the building(s) or project; and
(D) The Agency corrects the administrative error or omission by
following the procedures described in paragraph (b)(3)(vii) of this
section.
(vii) How Agency corrects errors or omissions subject to automatic
approval. An Agency corrects an administrative error or omission
described in paragraph (b)(3)(vi) of this section by--
(A) Amending the allocation document described in paragraph
(b)(3)(vi)(B) of this section to correct the administrative error or
omission. The Agency will indicate on the amended allocation document
that it is making the ``correction under Sec. 1.42-13(b)(3)(vii).'' If
correcting the allocation document requires including any additional
B.I.N.(s) in the document, the document must include any B.I.N.(s)
already existing for buildings in the project. If possible, the
additional B.I.N.(s) should be sequentially numbered from the existing
B.I.N.(s);
(B) Amending, if applicable, the Schedule A (Form 8610), ``Carryover
Allocation of the Low-Income Housing Credit,'' and attaching a copy of
this schedule to Form 8610, ``Annual Low-Income Housing Credit Agencies
Report,'' for the year the correction is made. The Agency will indicate
on the schedule that it is making the ``correction under Sec. 1.42-
13(b)(3)(vii).'' For a carryover allocation made before January 1, 2000,
the Agency must complete Schedule A (Form 8610), and indicate on the
schedule that it is making the ``correction under Sec. 1.42-
13(b)(3)(vii)'';
(C) Amending, if applicable, the Form 8609 and attaching the
original of this amended form to Form 8610 for the year the correction
is made. The Agency will indicate on the Form 8609 that it is making the
``correction under Sec. 1.42-13(b)(3)(vii)''; and
(D) Mailing or otherwise delivering a copy of any amended allocation
document and any amended Form 8609 to the affected taxpayer.
(viii) Other approval procedures. The Secretary may grant automatic
approval to correct other administrative errors or omissions as
designated in one or more documents published either in the Federal
Register or in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of
this chapter).
(c) Examples. The following examples illustrate the scope of this
section:
Example 1. Individual B applied to Agency X for a reservation of a
low-income housing credit dollar amount for a building that is part of a
low-income housing project. When applying for the low-income housing
credit dollar amount, B informed Agency X that B intended to form
Partnership Y to finance the project. After receiving the reservation
letter and prior to receiving an allocation, B formed Partnership Y and
sold partnership interests to a number of limited partners. B
contributed the low-income housing project to Partnership Y in exchange
for a partnership interest. B and Partnership Y informed Agency X of the
ownership change. When actually allocating the housing credit dollar
amount, Agency X sent Partnership Y a document listing B, rather than
Partnership Y, as the building's owner. Partnership Y promptly notified
Agency X of the error. After reviewing related documents, Agency X
determined that it had incorrectly listed B as the building's owner on
the allocation document. Since the parties originally intended that
Partnership Y would receive the allocation as the owner of the building,
Agency X may correct the error without obtaining the Secretary's
approval, and insert Partnership Y as the building's owner on the
allocation document.
Example 2. Agency Y allocated a lower low-income housing credit
dollar amount for a low-income housing building than Agency Y originally
intended. After the close of the calendar year of the allocation, B, the
building's owner, discovered the error and promptly notified Agency Y.
Agency Y reviewed relevant documents and agreed that an error had
occurred. Agency Y and B must apply, as provided in paragraph (b)(3)(iv)
of
[[Page 221]]
this section, for the Secretary's approval before Agency Y may correct
the error.
(d) Effective date. This section is effective February 24, 1994.
However, an Agency may elect to apply these regulations to
administrative errors or omissions that occurred before the publication
of these regulations. Any reasonable method used by a State or local
housing credit agency to correct an administrative error or omission
prior to February 24, 1994, will be considered proper, provided that the
method is consistent with the rules of section 42. Paragraphs
(b)(3)(vi), (vii), and (viii) of this section are effective January 14,
2000.
[T.D. 8521, 59 FR 8861, Feb. 24, 1994, as amended by T.D. 8859, 65 FR
2328, Jan. 14, 2000]
Sec. 1.42-14 Allocation rules for post-2000 State housing credit
ceiling amount.
(a) State housing credit ceiling--(1) In general. The State housing
credit ceiling for a State for any calendar year after 2000 is comprised
of four components. The four components are--
(i) The unused State housing credit ceiling, if any, of the State
for the preceding calendar year (the unused carryforward component);
(ii) The greater of--
(A) $1.75 ($1.50 for calendar year 2001) multiplied by the State
population; or
(B) $2,000,000 (the population component);
(iii) The amount of State housing credit ceiling returned in the
calendar year (the returned credit component); plus
(iv) The amount, if any, allocated to the State by the Secretary
under section 42(h)(3)(D) from a national pool of unused credit (the
national pool component).
(2) Cost-of-living adjustment--(i) General rule. For any calendar
year after 2002, the $2,000,000 and $1.75 amounts in paragraph
(a)(1)(ii) of this section are each increased by an amount equal to--
(A) The dollar amount; multiplied by
(B) The cost-of-living adjustment determined under section 1(f)(3)
for the calendar year by substituting ``calendar year 2001'' for
``calendar year 1992'' in section 1(f)(3)(B).
(ii) Rounding. Any increase resulting from the application of
paragraph (a)(2)(i) of this section which, in the case of the $2,000,000
amount, is not a multiple of $5,000, is rounded to the next lowest
multiple of $5,000, and which, in the case of the $1.75 amount, is not a
multiple of 5 cents, is rounded to the next lowest multiple of 5 cents.
(b) The unused carryforward component. The unused carryforward
component of the State housing credit ceiling for any calendar year is
the unused State housing credit ceiling, if any, of the State for the
preceding calendar year. The unused State housing credit ceiling for any
calendar year is the excess, if any, of--
(1) The sum of the population, returned credit, and national pool
components for the calendar year; over
(2) The aggregate housing credit dollar amount allocated for the
calendar year reduced by the housing credit dollar amounts allocated
from the unused carryforward component for the calendar year.
(c) The population component. The population component of the State
housing credit ceiling of a State for any calendar year is determined
pursuant to section 146(j). Thus, a State's population for any calendar
year is determined by reference to the most recent census estimate,
whether final or provisional, of the resident population of the State
released by the Bureau of the Census before the beginning of the
calendar year for which the State's housing credit ceiling is set.
Unless otherwise prescribed by applicable revenue procedure,
determinations of population are based on the most recent estimates of
population contained in the Bureau of the Census publication, Current
Population Report, Series P-25; Population Estimates and Projections,
Estimates of the Population of States. For convenience, the Internal
Revenue Service publishes the population estimates annually in the
Internal Revenue Bulletin. (See Sec. 601.601(d)(2)(ii)(b)).
(d) The returned credit component--(1) In general. The returned
credit component of the State housing credit ceiling of a State for any
calendar year equals the housing credit dollar amount returned during
the calendar year that was validly allocated within the State in a prior
calendar year to any project that does not become a qualified low-
[[Page 222]]
income housing project within the period required by section 42, or as
required by the terms of the allocation. The returned credit component
also includes credit allocated in a prior calendar year that is returned
as a result of the cancellation of an allocation by mutual consent or by
an Agency's determination that the amount allocated is not necessary for
the financial feasibility of the project. For purposes of this section,
credit is allocated within a State if it is allocated from the State's
housing credit ceiling by an Agency of the State or of a constitutional
home rule city in the State.
(2) Limitations and special rules. The following limitations and
special rules apply for purposes of this paragraph (d).
(i) General limitations. Notwithstanding any other provision of this
paragraph (d), returned credit does not include any credit that was--
(A) Allocated prior to calendar year 1990;
(B) Allowable under section 42(h)(4) (relating to the portion of
credit attributable to eligible basis financed by certain tax-exempt
bonds under section 103); or
(C) Allocated during the same calendar year that it is received back
by the Agency.
(ii) Credit period limitation. Notwithstanding any other provision
of this paragraph (d), an allocation of credit may not be returned any
later than 180 days following the close of the first taxable year of the
credit period for the building that received the allocation. After this
date, credit that might otherwise be returned expires, and cannot be
returned to or reallocated by any Agency.
(iii) Three-month rule for returned credit. An Agency may, in its
discretion, treat any portion of credit that is returned from a project
after September 30 of a calendar year and that is not reallocated by the
close of the calendar year as returned on January 1 of the succeeding
calendar year. In this case, the returned credit becomes part of the
returned credit component of the State housing credit ceiling for the
succeeding calendar year. Any portion of credit that is returned from a
project after September 30 of a calendar year that is reallocated by the
close of the calendar year is treated as part of the returned credit
component of the State housing credit ceiling for the calendar year that
the credit was returned.
(iv) Returns of credit. Subject to the limitations of paragraphs
(d)(2) (i) and (ii) of this section, credit is returned to the Agency in
the following instances in the manner described in paragraph (d)(3) of
this section.
(A) Building not qualified within required time period. If a
building is not a qualified building within the time period required by
section 42, it loses its credit allocation and the credit is returned.
For example, a building is not qualified within the required time period
if it is not placed in service within the period required by section 42
or if the project of which the building is a part fails to meet the
minimum set-aside requirements of section 42(g)(1) by the close of the
first year of the credit period. Also, a building that has received a
post-June 30 carryover allocation is not qualified within the required
time period if the taxpayer does not meet the 10 percent basis
requirement by the date that is 6 months after the date the allocation
was made (as described in Sec. 1.42-6(a)(2)(ii)).
(B) Noncompliance with terms of the allocation. If a building does
not comply with the terms of its allocation, it loses the credit
allocation and the credit is returned. The terms of an allocation are
the written conditions agreed to by the Agency and the allocation
recipient in the allocation document.
(C) Mutual consent. If the Agency and the allocation recipient
cancel an allocation of an amount of credit by mutual consent, that
amount of credit is returned.
(D) Amount not necessary for financial feasibility. If an Agency
determines under section 42(m)(2) that an amount of credit allocated to
a project is not necessary for the financial feasibility of the project
and its viability as a qualified low-income housing project throughout
the credit period, that amount of credit is returned.
(3) Manner of returning credit--( i) Taxpayer notification. After an
Agency determines that a building or project
[[Page 223]]
no longer qualifies under paragraph (d)(2)(iv)(A), (B), or (D) of this
section for all or part of the allocation it received, the Agency must
provide written notification to the allocation recipient, or its
successor in interest, that all or part of the allocation is no longer
valid. The notification must also state the amount of the allocation
that is no longer valid. The date of the notification is the date the
credit is returned to the Agency. If an allocation is cancelled by
mutual consent under paragraph (d)(2)(iv)(C) of this section, there must
be a written agreement signed by the Agency, and the allocation
recipient, or its successor in interest, indicating the amount of the
allocation that is returned to the Agency. The effective date of the
agreement is the date the credit is returned to the Agency.
(ii) Internal Revenue Service notification. If a credit is returned
within 180 days following the close of the first taxable year of a
building's credit period as provided in paragraph (d)(2)(ii) of this
section, and a Form 8609, Low-Income Housing Credit Allocation
Certification, has been issued for the building, the Agency must notify
the Internal Revenue Service that the credit has been returned. If only
part of the credit has been returned, this notification requirement is
satisfied when the Agency attaches to an amended Form 8610, Annual Low-
Income Housing Credit Agencies Report, the original of an amended Form
8609 reflecting the correct amount of credit attributed to the building
together with an explanation for the filing of the amended Forms. The
Agency must send a copy of the amended Form 8609 to the taxpayer that
owns the building. If the building is not issued an amended Form 8609
because all of the credit allocated to the building is returned,
notification to the Internal Revenue Service is satisfied by following
the requirements prescribed in Sec. 1.42-5(e)(3) for filing a Form
8823, Low-Income Housing Credit Agencies Report of Noncompliance.
(e) The national pool component. The national pool component of the
State housing credit ceiling of a State for any calendar year is the
portion of the National Pool allocated to the State by the Secretary for
the calendar year. The national pool component for any calendar year is
zero unless a State is a qualified State. (See paragraph (i) of this
section for rules regarding the National Pool and the description of a
qualified State.) A national pool component credit that is allocated
during a calendar year and returned after the close of the calendar year
may qualify as part of the returned credit component of the State
housing credit ceiling for the calendar year that the credit is
returned.
(f) When the State housing credit ceiling is determined. For
purposes of accounting for the State housing credit ceiling on Form 8610
and for purposes of determining the set-aside apportionment for projects
involving qualified nonprofit organizations described in section
42(h)(5) and Sec. 1.42-1T(c)(5), the State housing credit ceiling for
any calendar year is determined at the close of the calendar year.
(g) Stacking order. Credit is treated as allocated from the various
components of the State housing credit ceiling in the following order.
The first credit allocated for any calendar year is treated as credit
from the unused carryforward component of the State housing credit
ceiling for the calendar year. After all of the credit in the unused
carryforward component has been allocated, any credit allocated is
treated as allocated from the sum of the population, returned credit,
and national pool components of the State housing credit ceiling.
(h) Nonprofit set-aside--(1) Determination of set-aside. Under
section 42(h)(5) and Sec. 1.42-1T(c)(5), at least 10 percent of a State
housing credit ceiling in any calendar year must be set aside
exclusively for projects involving qualified nonprofit organizations
(the nonprofit set-aside). However, credit allocated from the nonprofit
set-aside in a calendar year and returned in a subsequent calendar year
does not retain its nonprofit set-aside character. The credit becomes
part of the returned credit component of the State housing credit
ceiling for the calendar year that the credit is returned and must be
included in determining the nonprofit set-aside of the State housing
credit ceiling for that calendar year. Similarly, credit amounts that
are not allocated from
[[Page 224]]
the nonprofit set-aside in a calendar year and are returned in a
subsequent calendar year become part of the returned credit component of
the State housing credit ceiling for that year and are also included in
determining the set-aside for that year.
(2) Allocation rules. An Agency may allocate credit from any
component of the State housing credit ceiling as part of the nonprofit
set-aside and need not reserve 10 percent of each component for the
nonprofit set-aside. Thus, an Agency may satisfy the nonprofit set-aside
requirement of section 42(h)(5) and Sec. 1.42-1T(c)(5) in any calendar
year by setting aside for allocation an amount equal to at least 10
percent of the total State housing credit ceiling for the calendar year.
(i) National Pool--(1) In general. The unused housing credit
carryover of a State for any calendar year is assigned to the Secretary
for inclusion in a national pool of unused housing credit carryovers
(National Pool) that is reallocated among qualified States the
succeeding calendar year. The assignment to the Secretary is made on
Form 8610.
(2) Unused housing credit carryover. The unused housing credit
carryover of a State for any calendar year is the excess, if any, of--
(i) The unused carryforward component of the State housing credit
ceiling for the calendar year; over
(ii) The total housing credit dollar amount allocated for the
calendar year.
(3) Qualified State--(i) In general. The term qualified State means,
with respect to any calendar year, any State that has allocated its
entire State housing credit ceiling for the preceding calendar year and
for which a request is made by the State, not later than May 1 of the
calendar year, to receive an allocation of credit from the National Pool
for that calendar year. Except as provided in paragraph (i)(3)(ii) of
this section, a State is not a qualified State in a calendar year if
there remains any unallocated credit in its State housing credit ceiling
at the close of the preceding calendar year that was apportioned to any
Agency within the State for the calendar year.
(ii) Exceptions--(A) De minimis amount. If the amount remaining
unallocated at the close of a calendar year is only a de minimis amount
of credit, the State is a qualified State eligible to participate in the
National Pool. For that purpose, a credit amount is de minimis if it
does not exceed 1 percent of the aggregate State housing credit ceiling
of the State for the calendar year.
(B) Other circumstances. Pursuant to the authority under section
42(n), the Internal Revenue Service may determine that a State is a
qualified State eligible to participate in the National Pool even though
the State's unallocated credit is in excess of the 1 percent safe harbor
set forth in paragraph (A) of this section. The Internal Revenue Service
will make this determination based on all the facts and circumstances,
weighing heavily the interests of the States who would otherwise qualify
for the National Pool. The Internal Revenue Service will generally grant
relief under this paragraph only where a State's unallocated credit is
not substantial.
(iii) Time and manner for making request. For further guidance as to
the time and manner for making a request of housing credit dollar
amounts from the National Pool by a qualified State, see Rev. Proc. 92-
31, 1992-1 C.B. 775. (See 601.601(d)(2)(ii)(b)).
(4) Formula for determining the National Pool. The amount allocated
to a qualified State in any calendar year is an amount that bears the
same ratio to the aggregate unused housing credit carryovers of all
States for the preceding calendar year as that State's population for
the calendar year bears to the population of all qualified States for
the calendar year.
(j) Coordination between Agencies. The Agency responsible for filing
Form 8610 on behalf of all Agencies within a State and making any
request on behalf of the State for credit from the National Pool (the
Filing Agency) must coordinate with each Agency within the State to
ensure that the various requirements of this section are complied with.
For example, the Filing Agency of a State must ensure that all Agencies
within the State that were apportioned a credit amount for the calendar
[[Page 225]]
year have allocated all of their respective credit amounts for the
calendar year before the Filing Agency can make a request on behalf of
the State for a distribution of credit from the National Pool.
(k) Example. (1) The operation of the rules of this section is
illustrated by the following examples. Unless otherwise stated in an
example, Agency A is the sole Agency authorized to make allocations of
housing credit dollar amounts in State M, all of Agency A's allocations
are valid, and for calendar year 2003, Agency A has available for
allocation a State housing credit ceiling consisting of the following
housing credit dollar amounts:
A. Unused carryforward component.............................. $50
B. Population component....................................... 110
C. Returned credit component.................................. 10
D. National pool component.................................... 0
---------
Total..................................................... 170
=========
(2) In addition, the $10 of returned credit component was returned
before October 1, 2003.
Example 1: (i) Additional facts. By the close of 2003, Agency A had
allocated $80 of the State M housing credit ceiling. Of the $80
allocated, $17 was allocated to projects involving qualified nonprofit
organizations.
(ii) Application of stacking rules. The $80 of allocated credit is
first treated as allocated from the unused carryforward component of the
State housing credit ceiling. The $80 of allocated credit exceeds the
$50 attributable to the unused carryforward component by $30. Because
the unused carryforward component is fully utilized no credit will be
forfeited by State M to the 2004 National Pool. The remaining $30 of
allocated credit will next be treated as allocated from the $120 in
credit determined by aggregating the population, returned credit, and
national pool components ($110 + 10 + 0 = $120). The $90 of unallocated
credit remaining in State M's 2003 State housing credit ceiling ($120 -
30 = $90) represents the unused carryforward component of State M's 2004
State housing credit ceiling. Under paragraph (i)(3) of this section,
State M does not qualify for credit from the 2004 National Pool.
(iii) Nonprofit set-aside. Agency A allocated exactly the amount of
credit to projects involving qualified nonprofit organizations as
necessary to meet the nonprofit set-aside requirement ($17, 10% of the
$170 ceiling).
Example 2: (i) Additional facts. By the close of 2003, Agency A had
allocated $40 of the State M housing credit ceiling. Of the $40
allocated, $20 was allocated to projects involving qualified nonprofit
organizations.
(ii) Application of stacking rules. The $40 of allocated credit is
first treated as allocated from the unused carryforward component of the
State housing credit ceiling. Because the $40 of allocated credit does
not exceed the $50 attributable to the unused carryforward component,
the remaining components of the State housing credit ceiling are
unaffected. The $10 remaining in the unused carryforward component is
assigned to the Secretary for inclusion in the 2004 National Pool. The
$120 in credit determined by aggregating the population, returned
credit, and national pool components becomes the unused carryforward
component of State M's 2004 State housing credit ceiling. Under
paragraph (i)(3) of this section, State M does not qualify for credit
from the 2004 National Pool.
(iii) Nonprofit set-aside. Agency A allocated $3 more credit to
projects involving qualified nonprofit organizations than necessary to
meet the nonprofit set-aside requirement. This does not reduce the
application of the 10% nonprofit set-aside requirement to the State M
housing credit ceiling for calendar year 2004.
Example 3: (i) Additional fact. None of the applications for credit
that Agency A received for 2003 are for projects involving qualified
nonprofit organizations.
(ii) Nonprofit set-aside. Because at least 10% of the State housing
credit ceiling must be set aside for projects involving a qualified
nonprofit organization, Agency A can allocate only $153 of the $170
State housing credit ceiling for calendar year 2003 ($170 -17 = $153).
If Agency A allocates $153 of credit, the credit is treated as allocated
$50 from the unused carryforward component and $103 from the sum of the
population, returned credit, and national pool components. The $17 of
unallocated credit that is set aside for projects involving qualified
nonprofit organizations becomes the unused carryforward component of
State M's 2004 State housing credit ceiling. Under paragraph (i)(3) of
this section, State M does not qualify for credit from the 2004 National
Pool.
Example 4: (i) Additional facts. The $10 of returned credit
component was returned prior to October 1, 2003. However, a $40 credit
that had been allocated in calendar year 2002 to a project involving a
qualified nonprofit organization was returned to the Agency by a mutual
consent agreement dated November 15, 2003. By the close of 2003, Agency
A had allocated $170 of the State M's housing credit ceiling, including
$17 of credit to projects involving qualified nonprofit organizations.
(ii) Effect of three-month rule. Under the three-month rule of
paragraph (d)(2)(iii) of this section, Agency A may treat all or part of
the $40 of previously allocated credit as returned on January 1, 2004.
If Agency A treats all of the $40 amount as having been returned in
calendar year 2004, the State M
[[Page 226]]
housing credit ceiling for 2003 is $170. This entire amount, including
the $17 nonprofit set-aside, has been allocated in 2003. Under paragraph
(i)(3) of this section, State M qualifies for the 2004 National Pool.
(iii) If three-month rule not used. If Agency A treats all of the
$40 of previously allocated credit as returned in calendar year 2003,
the State housing credit ceiling for the 2003 calendar year will be $210
of which $50 will be attributable to the returned credit component ($10
+ $40 = $50). Because credit amounts allocated to a qualified nonprofit
organization in a prior calendar year that are returned in a subsequent
calendar year do not retain their nonprofit character, the nonprofit
set-aside for calendar year 2003 is $21 (10% of the $210 State housing
credit ceiling). The $170 that Agency A allocated during 2003 is first
treated as allocated from the unused carryforward component of the State
housing credit ceiling. The $170 of allocated credit exceeds the $50
attributable to the unused carryforward component by $120. Because the
unused carryforward component is fully utilized no credit will be
forfeited by State M to the 2004 National Pool. The remaining $120 of
allocated credit will next be treated as allocated from the $160 in
credit determined by aggregating the population, returned credit, and
national pool components ($110 + 50 + 0 = $160). The $40 of unallocated
credit (which includes $4 of unallocated credit from the $21 nonprofit
set-aside) remaining in State M's 2003 housing credit ceiling ($160-120
= $40) represents the unused carryforward component of State M's 2004
housing credit ceiling. Under paragraph (i)(3) of this section, State M
does not qualify for credit from the 2004 National Pool.
(l) Effective dates--(1) In general. Except as provided in paragraph
(l)(2) of this section, the rules set forth in Sec. 1.42-14 are
applicable on January 1, 1994.
(2) Community Renewal Tax Relief Act of 2000 changes. Paragraphs
(a), (b), (c), (e), (i)(2) and (k) of this section are applicable for
housing credit dollar amounts allocated after January 6, 2004. However,
paragraphs (a), (b), (c), (e), (i)(2) and (k) of this section may be
applied by Agencies and taxpayers for housing credit dollar amounts
allocated after December 31, 2000, and on or before January 6, 2004.
Otherwise, subject to the applicable effective dates of the
corresponding statutory provisions, the rules that apply for housing
credit dollar amounts allocated on or before January 6, 2004, are
contained in this section in effect on and before January 6, 2004 (see
26 CFR part 1 revised as of April 1, 2003).
[T.D. 8563, 59 FR 50163, Oct. 3, 1994; 60 FR 3345, Jan. 17, 1995, as
amended by T.D. 9110, 69 FR 504, Jan. 6, 2004; 69 FR 8331, Feb. 24,
2004]
Sec. 1.42-15 Available unit rule.
(a) Definitions. The following definitions apply to this section:
Applicable income limitation means the limitation applicable under
section 42(g)(1) or, for deep rent skewed projects described in section
142(d)(4)(B), 40 percent of area median gross income.
Available unit rule means the rule in section 42(g)(2)(D)(ii).
Comparable unit means a residential unit in a low-income building
that is comparably sized or smaller than an over-income unit or, for
deep rent skewed projects described in section 142(d)(4)(B), any low-
income unit. For purposes of determining whether a residential unit is
comparably sized, a comparable unit must be measured by the same method
used to determine qualified basis for the credit year in which the
comparable unit became available.
Current resident means a person who is living in the low-income
building.
Low-income unit is defined by section 42(i)(3)(A).
Nonqualified resident means a new occupant or occupants whose
aggregate income exceeds the applicable income limitation.
Over-income unit means a low-income unit in which the aggregate
income of the occupants of the unit increases above 140 percent of the
applicable income limitation under section 42(g)(1), or above 170
percent of the applicable income limitation for deep rent skewed
projects described in section 142(d)(4)(B).
Qualified resident means an occupant either whose aggregate income
(combined with the income of all other occupants of the unit) does not
exceed the applicable income limitation and who is otherwise a low-
income resident under section 42, or who is a current resident.
(b) General section 42(g)(2)(D)(i) rule. Except as provided in
paragraph (c) of this section, notwithstanding an increase in the income
of the occupants
[[Page 227]]
of a low-income unit above the applicable income limitation, if the
income of the occupants initially met the applicable income limitation,
and the unit continues to be rent-restricted--
(1) The unit continues to be treated as a low-income unit; and
(2) The unit continues to be included in the numerator and the
denominator of the ratio used to determine whether a project satisfies
the applicable minimum set-aside requirement of section 42(g)(1).
(c) Exception. A unit ceases to be treated as a low-income unit if
it becomes an over-income unit and a nonqualified resident occupies any
comparable unit that is available or that subsequently becomes available
in the same low-income building. In other words, the owner of a low-
income building must rent to qualified residents all comparable units
that are available or that subsequently become available in the same
building to continue treating the over-income unit as a low-income unit.
Once the percentage of low-income units in a building (excluding the
over-income units) equals the percentage of low-income units on which
the credit is based, failure to maintain the over-income units as low-
income units has no immediate significance. The failure to maintain the
over-income units as low-income units, however, may affect the decision
of whether or not to rent a particular available unit at market rate at
a later time. A unit is not available for purposes of the available unit
rule when the unit is no longer available for rent due to contractual
arrangements that are binding under local law (for example, a unit is
not available if it is subject to a preliminary reservation that is
binding on the owner under local law prior to the date a lease is signed
or the unit is occupied).
(d) Effect of current resident moving within building. When a
current resident moves to a different unit within the building, the
newly occupied unit adopts the status of the vacated unit. Thus, if a
current resident, whose income exceeds the applicable income limitation,
moves from an over-income unit to a vacant unit in the same building,
the newly occupied unit is treated as an over-income unit. The vacated
unit assumes the status the newly occupied unit had immediately before
it was occupied by the current resident.
(e) Available unit rule applies separately to each building in a
project. In a project containing more than one low-income building, the
available unit rule applies separately to each building.
(f) Result of noncompliance with available unit rule. If any
comparable unit that is available or that subsequently becomes available
is rented to a nonqualified resident, all over-income units for which
the available unit was a comparable unit within the same building lose
their status as low-income units; thus, comparably sized or larger over-
income units would lose their status as low-income units.
(g) Relationship to tax-exempt bond provisions. Financing
arrangements that purport to be exempt-facility bonds under section 142
must meet the requirements of sections 103 and 141 through 150 for
interest on the obligations to be excluded from gross income under
section 103(a). This section is not intended as an interpretation under
section 142.
(h) Examples. The following examples illustrate this section:
Example 1. This example illustrates noncompliance with the available
unit rule in a low-income building containing three over-income units.
On January 1, 1998, a qualified low-income housing project, consisting
of one building containing ten identically sized residential units,
received a housing credit dollar amount allocation from a state housing
credit agency for five low-income units. By the close of 1998, the first
year of the credit period, the project satisfied the minimum set-aside
requirement of section 42(g)(1)(B). Units 1, 2, 3, 4, and 5 were
occupied by individuals whose incomes did not exceed the income
limitation applicable under section 42(g)(1) and were otherwise low-
income residents under section 42. Units 6, 7, 8, and 9 were occupied by
market-rate tenants. Unit 10 was vacant. To avoid recapture of credit,
the project owner must maintain five of the units as low-income units.
On November 1, 1999, the certificates of annual income state that annual
incomes of the individuals in Units 1, 2, and 3 increased above 140
percent of the income limitation applicable under section 42(g)(1),
causing those units to become over-income units. On November 30, 1999,
Units 8 and 9 became vacant. On December 1, 1999, the project owner
rented Units 8 and 9 to qualified residents who were
[[Page 228]]
not current residents at rates meeting the rent restriction requirements
of section 42(g)(2). On December 31, 1999, the project owner rented Unit
10 to a market-rate tenant. Because Unit 10, an available comparable
unit, was leased to a market-rate tenant, Units 1, 2, and 3 ceased to be
treated as low-income units. On that date, Units 4, 5, 8, and 9 were the
only remaining low-income units. Because the project owner did not
maintain five of the residential units as low-income units, the
qualified basis in the building is reduced, and credit must be
recaptured. If the project owner had rented Unit 10 to a qualified
resident who was not a current resident, eight of the units would be
low-income units. At that time, Units 1, 2, and 3, the over-income
units, could be rented to market-rate tenants because the building would
still contain five low-income units.
Example 2. This example illustrates the provisions of paragraph (d)
of this section. A low-income project consists of one six-floor
building. The residential units in the building are identically sized.
The building contains two over-income units on the sixth floor and two
vacant units on the first floor. The project owner, desiring to maintain
the over-income units as low-income units, wants to rent the available
units to qualified residents. J, a resident of one of the over-income
units, wishes to occupy a unit on the first floor. J's income has
recently increased above the applicable income limitation. The project
owner permits J to move into one of the units on the first floor.
Despite J's income exceeding the applicable income limitation, J is a
qualified resident under the available unit rule because J is a current
resident of the building. The unit newly occupied by J becomes an over-
income unit under the available unit rule. The unit vacated by J assumes
the status the newly occupied unit had immediately before J occupied the
unit. The over-income units in the building continue to be treated as
low-income units.
(i) Effective date. This section applies to leases entered into or
renewed on and after September 26, 1997.
[T.D. 8732, 62 FR 50505, Sept. 26, 1997]
Sec. 1.42-16 Eligible basis reduced by federal grants.
(a) In general. If, during any taxable year of the compliance period
(described in section 42(i)(1)), a grant is made with respect to any
building or the operation thereof and any portion of the grant is funded
with federal funds (whether or not includible in gross income), the
eligible basis of the building for the taxable year and all succeeding
taxable years is reduced by the portion of the grant that is so funded.
(b) Grants do not include certain rental assistance payments. A
federal rental assistance payment made to a building owner on behalf or
in respect of a tenant is not a grant made with respect to a building or
its operation if the payment is made pursuant to--
(1) Section 8 of the United States Housing Act of 1937 (42 U.S.C.
1437f)
(2) A qualifying program of rental assistance administered under
section 9 of the United States Housing Act of 1937 (42 U.S.C. 1437g); or
(3) A program or method of rental assistance as the Secretary may
designate by publication in the Federal Register or in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(c) Qualifying rental assistance program. For purposes of paragraph
(b)(2) of this section, payments are made pursuant to a qualifying
rental assistance program administered under section 9 of the United
States Housing Act of 1937 to the extent that the payments--
(1) Are made to a building owner pursuant to a contract with a
public housing authority with respect to units the owner has agreed to
maintain as public housing units (PH-units) in the building;
(2) Are made with respect to units occupied by public housing
tenants, provided that, for this purpose, units may be considered
occupied during periods of short term vacancy (not to exceed 60 days);
and
(3) Do not exceed the difference between the rents received from a
building's PH-unit tenants and a pro rata portion of the building's
actual operating costs that are reasonably allocable to the PH-units
(based on square footage, number of bedrooms, or similar objective
criteria), and provided that, for this purpose, operating costs do not
include any development costs of a building (including developer's fees)
or the principal or interest of any debt incurred with respect to any
part of the building.
(d) Effective date. This section is effective September 26, 1997.
[T.D. 8731, 62 FR 50503, Sept. 26, 1997]
[[Page 229]]
Sec. 1.42-17 Qualified allocation plan.
(a) Requirements--(1) In general. [Reserved]
(2) Selection criteria. [Reserved]
(3) Agency evaluation. Section 42(m)(2)(A) requires that the housing
credit dollar amount allocated to a project is not to exceed the amount
the Agency determines is necessary for the financial feasibility of the
project and its viability as a qualified low-income housing project
throughout the credit period. In making this determination, the Agency
must consider--
(i) The sources and uses of funds and the total financing planned
for the project. The taxpayer must certify to the Agency the full extent
of all federal, state, and local subsidies that apply (or which the
taxpayer expects to apply) to the project. The taxpayer must also
certify to the Agency all other sources of funds and all development
costs for the project. The taxpayer's certification should be
sufficiently detailed to enable the Agency to ascertain the nature of
the costs that will make up the total financing package, including
subsidies and the anticipated syndication or placement proceeds to be
raised. Development cost information, whether or not includible in
eligible basis under section 42(d), that should be provided to the
Agency includes, but is not limited to, site acquisition costs,
construction contingency, general contractor's overhead and profit,
architect's and engineer's fees, permit and survey fees, insurance
premiums, real estate taxes during construction, title and recording
fees, construction period interest, financing fees, organizational
costs, rent-up and marketing costs, accounting and auditing costs,
working capital and operating deficit reserves, syndication and legal
fees, and developer fees;
(ii) Any proceeds or receipts expected to be generated by reason of
tax benefits;
(iii) The percentage of the housing credit dollar amount used for
project costs other than the costs of intermediaries. This requirement
should not be applied so as to impede the development of projects in
hard-to-develop areas under section 42(d)(5)(C); and
(iv) The reasonableness of the developmental and operational costs
of the project.
(4) Timing of Agency evaluation--(i) In general. The financial
determinations and certifications required under paragraph (a)(3) of
this section must be made as of the following times--
(A) The time of the application for the housing credit dollar
amount;
(B) The time of the allocation of the housing credit dollar amount;
and
(C) The date the building is placed in service.
(ii) Time limit for placed-in-service evaluation. For purposes of
paragraph (a)(4)(i)(C) of this section, the evaluation for when a
building is placed in service must be made not later than the date the
Agency issues the Form 8609, ``Low-Income Housing Credit Allocation
Certification.'' The Agency must evaluate all sources and uses of funds
under paragraph (a)(3)(i) of this section paid, incurred, or committed
by the taxpayer for the project up until date the Agency issues the Form
8609.
(5) Special rule for final determinations and certifications. For
the Agency's evaluation under paragraph (a)(4)(i)(C) of this section,
the taxpayer must submit a schedule of project costs. Such schedule is
to be prepared on the method of accounting used by the taxpayer for
federal income tax purposes, and must detail the project's total costs
as well as those costs that may qualify for inclusion in eligible basis
under section 42(d). For projects with more than 10 units, the schedule
of project costs must be accompanied by a Certified Public Accountant's
audit report on the schedule (an Agency may require an audited schedule
of project costs for projects with fewer than 11 units). The CPA's audit
must be conducted in accordance with generally accepted auditing
standards. The auditor's report must be unqualified.
(6) Bond-financed projects. A project qualifying under section
42(h)(4) is not entitled to any credit unless the governmental unit that
issued the bonds (or on behalf of which the bonds were issued), or the
Agency responsible for issuing the Form(s) 8609 to the project, makes
determinations under rules similar to the rules in paragraphs (a) (3),
(4), and (5) of this section.
[[Page 230]]
(b) Effective date. This section is effective on January 1, 2001.
[T.D. 8859, 65 FR 2329, Jan. 14, 2000]
Sec. 1.42-18 Qualified contracts.
(a) Extended low-income housing commitment--(1) In general. No
credit under section 42(a) is allowed by reason of section 42 with
respect to any building for the taxable year unless an extended low-
income housing commitment (commitment) (as defined in section
42(h)(6)(B)) is in effect as of the end of such taxable year. A
commitment must be in effect for the extended use period (as defined in
paragraph (a)(1)(i) of this section).
(i) Extended use period. The term extended use period means the
period beginning on the first day in the compliance period (as defined
in section 42(i)(1)) on which the building is part of a qualified low-
income housing project (as defined in section 42(g)(1)) and ending on
the later of--
(A) The date specified by the low-income housing credit agency
(Agency) in the commitment; or
(B) The date that is 15 years after the close of the compliance
period.
(ii) Termination of extended use period. The extended use period for
any building will terminate--
(A) On the date the building is acquired by foreclosure (or
instrument in lieu of foreclosure) unless the Commissioner determines
that such acquisition is part of an arrangement with the taxpayer (``the
owner'') a purpose of which is to terminate such period; or
(B) On the last day of the one-year period beginning on the date
(after the 14th year of the compliance period) on which the owner
submits a written request to the Agency to find a person to acquire the
owner's interest in the low-income portion of the building if the Agency
is unable to present during such period a qualified contract for the
acquisition of the low-income portion of the building by any person who
will continue to operate such portion as a qualified low-income building
(as defined in section 42(c)(2)).
(iii) Owner non-acceptance. If the Agency provides a qualified
contract within the one-year period and the owner rejects or fails to
act upon the contract, the building remains subject to the existing
commitment.
(iv) Eviction, gross rent increase concerning existing low-income
tenants not permitted. Prior to the close of the three year period
following the termination of a commitment, no owner shall be permitted
to evict or terminate the tenancy (other than for good cause) of an
existing tenant of any low-income unit, or increase the gross rent for
such unit in a manner or amount not otherwise permitted by section 42.
(2) Exception. Paragraph (a)(1)(ii)(B) of this section shall not
apply to the extent more stringent requirements are provided in the
commitment or under State law.
(b) Definitions. For purposes of this section, the following terms
are defined:
(1) As provided by section 42(h)(6)(G)(iii), base calendar year
means the calendar year with or within which the first taxable year of
the credit period ends.
(2) The low-income portion of a building is the portion of the
building equal to the applicable fraction (as defined in section
42(c)(1)(B)) specified in the commitment for the building.
(3) The fair market value of the non-low-income portion of the
building is determined at the time of the Agency's offer of sale of the
building to the general public. The fair market value of the non-low-
income portion also includes the fair market value of the land
underlying the entire building (both the non-low-income portion and the
low-income portion). This valuation must take into account the existing
and continuing requirements contained in the commitment for the
building. The fair market value of the non-low-income portion also
includes the fair market value of items of personal property not
included in eligible basis under section 42(d) that convey under the
contract with the building.
(4) Qualifying building costs include--
(i) Costs that are included in eligible basis of a low-income
housing building under section 42(d) and that are included in the
adjusted basis of depreciable property that is subject to section 168
and that is residential rental property for purposes of section 142(d)
and Sec. 1.103-8(b);
[[Page 231]]
(ii) Costs that are included in eligible basis of a low-income
housing building under section 42(d) and that are included in the
adjusted basis of depreciable property that is subject to section 168
and that is used in a common area or is provided as a comparable amenity
to all residential rental units in the building; and
(iii) Costs of the type described in paragraph (b)(4)(i) and (ii) of
this section incurred after the first year of the low-income housing
building's credit period under section 42(f).
(5) The qualified contract amount is the sum of the fair market
value of the non-low-income portion of the building (within the meaning
of section 42(h)(6)(F) and paragraph (b)(3) of this section) and the
price for the low-income portion of the building (within the meaning of
section 42(h)(6)(F) and paragraph (b)(2) of this section) as calculated
in paragraph (c)(2) of this section. If this sum is not a multiple of
$1,000, then when the Agency offers the building for sale to the general
public, the Agency may round up the offering price to the next highest
multiple of $1,000.
(c) Qualified contract purchase price formula--(1) In general. For
purposes of this section, qualified contract means a bona fide contract
to acquire the building (within a reasonable period after the contract
is entered into) for the qualified contract amount.
(i) Initial determination. The qualified contract amount is
determined at the time of the Agency's offer of sale of the building to
the general public.
(ii) Mandatory adjustment by the buyer and owner. The buyer and
owner under a qualified contract must adjust the amount of the low-
income portion of the qualified contract formula to reflect changes in
the components of the qualified contract formula such as mortgage
payments that reduce outstanding indebtedness between the time of the
Agency's offer of sale to the general public and the building's actual
sale closing date.
(iii) Optional adjustment by the Agency and owner. The Agency and
owner may agree to adjust the fair market value of the non low-income
portion of the building after the Agency's offer of sale of the building
to the general public and before the close of the one-year period
described in paragraph (a)(1)(ii)(B) of this section. If no agreement
between the Agency and owner is reached, the fair market value of the
non-low-income portion of the building determined at the time of the
Agency's offer of sale of the building to the general public remains
unchanged.
(2) Low-income portion amount. The low-income portion amount is an
amount not less than the applicable fraction specified in the
commitment, as defined in section 42(h)(6)(B)(i), multiplied by the
total of--
(i) The outstanding indebtedness for the building (as defined in
paragraph (c)(3) of this section); plus
(ii) The adjusted investor equity in the building for the calendar
year (as defined in paragraph (c)(4) of this section); plus
(iii) Other capital contributions (as defined in paragraph (c)(5) of
this section), not including any amounts described in paragraphs
(c)(2)(i) and (ii) of this section; minus
(iv) Cash distributions from (or available for distribution from)
the building (as defined in paragraph (c)(6) of this section).
(3) Outstanding indebtedness. For purposes of paragraph (c)(2)(i) of
this section, outstanding indebtedness means the remaining stated
principal balance (which is initially determined at the time of the
Agency's offer of sale of the building to the general public) of any
indebtedness secured by, or with respect to, the building that does not
exceed the amount of qualifying building costs described in paragraph
(b)(4) of this section. Thus, any refinancing indebtedness or additional
mortgages in excess of such qualifying building costs are not
outstanding indebtedness for purposes of section 42(h)(6)(F) and this
section. Examples of outstanding indebtedness include certain mortgages
and developer fee notes (excluding developer service costs not included
in eligible basis). Outstanding indebtedness does not include debt used
to finance nondepreciable land costs, syndication costs, legal and
accounting costs, and operating deficit payments. Outstanding
indebtedness includes only obligations that are indebtedness under
general principles of Federal income
[[Page 232]]
tax law and that are actually paid to the lender upon the sale of the
building or are assumed by the buyer as part of the sale of the
building.
(4) Adjusted investor equity--(i) Application of cost-of-living
factor. For purposes of paragraph (c)(2)(ii) of this section, the
adjusted investor equity for any calendar year equals the unadjusted
investor equity, as described in paragraph (c)(4)(ii) of this section,
multiplied by the qualified-contract cost-of-living adjustment for that
year, as defined in paragraph (c)(4)(iii) of this section.
(ii) Unadjusted investor equity. For purposes of this paragraph
(c)(4), unadjusted investor equity means the aggregate amount of cash
invested by owners for qualifying building costs described in paragraph
(b)(4)(i) and (ii) of this section. Thus, equity paid for land, credit
adjuster payments, Agency low-income housing credit application and
allocation fees, operating deficit contributions, and legal,
syndication, and accounting costs all are examples of cost payments that
do not qualify as unadjusted investor equity. Unadjusted investor equity
takes an amount into account only to the extent that, as of the
beginning of the low-income building's credit period (as defined in
section 42(f)(1)), there existed an obligation to invest the amount.
Unadjusted investor equity does not include amounts included in the
calculation of outstanding indebtedness as defined in paragraph (c)(3)
of this section.
(iii) Qualified-contract cost-of-living adjustment. For purposes of
this paragraph (c)(4), the qualified-contract cost-of-living adjustment
for a calendar year is the number that is computed under the general
rule in paragraph (c)(4)(iv) of this section or a number that may be
provided by the Commissioner as described in paragraph (c)(4)(v) of this
section.
(iv) General rule. Except as provided in paragraph (c)(4)(v) of this
section, the qualified-contract cost-of-living adjustment is the
quotient of--
(A) The sum of the 12 monthly Consumer Price Index (CPI) values
whose average is the CPI for the calendar year that precedes the
calendar year in which the Agency offers the building for sale to the
general public (The term ``CPI for a calendar year'' has the meaning
given to it by section 1(f)(4) for purposes of computing annual
inflation adjustments to the rate brackets.); divided by
(B) The sum of the 12 monthly CPI values whose average is the CPI
for the base calendar year (within the meaning of section 1(f)(4)),
unless that sum has been increased under paragraph (c)(4)(iii)(D) of
this section.
(v) Provision by the Commissioner of the qualified-contract cost-of-
living adjustment. The Commissioner may publish in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2) of this chapter) a process pursuant to
which the Internal Revenue Service will compute the qualified-contract
cost-of-living adjustment for a calendar year and make available the
results of that computation.
(vi) Methodology. The calculations in paragraph (c)(4)(iv) of this
section are to be made in the following manner:
(A) The CPI data to be used for purposes of this paragraph (c)(4)
are the not seasonally adjusted values of the CPI for all urban
consumers. (The U.S. Department of Labor's Bureau of Labor Statistics
(BLS) sometimes refers to these values as ``CPI-U.'') The BLS publishes
the CPI data on-line (including a History Table that contains monthly
CPI-U values for all years back to 1913). See www.BLS.gov/data.
(B) The quotient is to be carried out to 10 decimal places.
(C) The Agency may round adjusted investor equity to the nearest
dollar.
(D) If the CPI for any calendar year (within the meaning of section
1(f)(4)) during the extended use period after the base calendar year
exceeds by more than 5 percent the CPI for the preceding calendar year
(within the meaning of section 1(f)(4)), then the sum described in
paragraph (c)(4)(i)(B) is to be increased so that the excess is never
taken into account under this paragraph (c)(4).
(vii) Example. The following example illustrates the calculations
described in this paragraph (c)(4):
Example. (i) Facts. Owner contributed $20,000,000 in equity to a
building in 1997, which was the first year of the credit period for the
building. In 2011, Owner requested Agency to find a buyer to purchase
the building, and Agency offered the building for sale
[[Page 233]]
to the general public during 2011. The CPI for 1997 (within the meaning
of section 1(f)(4)) is the average of the Consumer Price Index as of the
close of the 12-month period ending on August 31, 1997. The sum of the
CPI values for the twelve months from September 1996 through August 1997
is 1913.9. The CPI for 2010 (within the meaning of section 1(f)(4)) is
the average of the Consumer Price Index as of the close of the 12-month
period ending August 31, 2010. The sum of the CPI values for the twelve
months from September 2009 through August 2010 is 2605.959. At no time
during this period (after the base calendar year) did the CPI for any
calendar year exceed the CPI for the preceding calendar year by more
than 5 percent.
(ii) Determination of adjusted investor equity. The qualified-
contract cost-of-living adjustment is 1.3615962171 (the quotient of
2605.959, divided by 1913.9). Owner's adjusted investor equity,
therefore, is $27,231,924, which is $20,000,000, multiplied by
1.3615962171, rounded to the nearest dollar.
(5) Other capital contributions. For purposes of paragraph
(c)(2)(iii) of this section, other capital contributions to a low-income
building are qualifying building costs described in paragraph (b)(4)(ii)
of this section paid or incurred by the owner of the low-income building
other than amounts included in the calculation of outstanding
indebtedness or adjusted investor equity as defined in this section. For
example, other capital contributions may include amounts incurred to
replace a furnace after the first year of a low-income housing credit
building's credit period under section 42(f), provided any loan used to
finance the replacement of the furnace is not secured by the furnace or
the building. Other capital contributions do not include expenditures
for land costs, operating deficit payments, credit adjuster payments,
and payments for legal, syndication, and accounting costs.
(6) Cash distributions--(i) In general. For purposes of paragraph
(c)(2)(iv) of this section, the term cash distributions from (or
available for distribution from) the building include--
(A) All distributions from the building to the owners or to persons
whose relationship to the owner is described in section 267(b) or
section 707(b)(1)), including distributions under section 301 (relating
to distributions by a corporation), section 731 (relating to
distributions by a partnership), or section 1368 (relating to
distributions by an S corporation); and
(B) All cash and cash equivalents available for distribution at, or
before, the time of sale, including, for example, reserve funds whether
operating or replacement reserves, unless the reserve funds are legally
required by mortgage restrictions, regulatory agreements, or third party
contractual agreements to remain with the building following the sale.
(ii) Excess proceeds. For purposes of paragraph (c)(6)(i) of this
section, proceeds from the refinancing of indebtedness or additional
mortgages that are in excess of qualifying building costs are not
considered cash available for distribution.
(iii) Anti-abuse rule. The Commissioner will interpret and apply the
rules in this paragraph (c)(6) as necessary and appropriate to prevent
manipulation of the qualified contract amount. For example, cash
distributions include payments to owners or persons whose relation to
owners is described in section 267(b) or section 707(b) for any
operating expenses in excess of amounts reasonable under the
circumstances.
(d) Administrative discretion and responsibilities of the Agency--
(1) In general. An Agency may exercise administrative discretion in
evaluating and acting upon an owner's request to find a buyer to acquire
the building. An Agency may establish reasonable requirements for
written requests and may determine whether failure to follow one or more
applicable requirements automatically prevents a purported written
request from beginning the one-year period described in section
42(h)(6)(I). If the one-year-period has already begun, the Agency may
determine whether failure to follow one or more requirements suspends
the running of that period. Examples of Agency administrative discretion
include, but are not limited to, the following:
(i) Concluding that the owner's request lacks essential information
and denying the request until such information is provided.
(ii) Refusing to consider an owner's representations without
substantiating
[[Page 234]]
documentation verified with the Agency's records.
(iii) Determining how many, if any, subsequent requests to find a
buyer may be submitted if the owner has previously submitted a request
for a qualified contract and then rejected or failed to act upon a
qualified contract presented by the Agency.
(iv) Assessing and charging the owner certain administrative fees
for the performance of services in obtaining a qualified contract (for
example, real estate appraiser costs).
(v) Requiring all appraisers involved in the qualified contract
process to be State certified general appraisers that are acceptable to
the Agency.
(vi) Specifying other conditions applicable to the qualified
contract consistent with section 42 and this section.
(2) Actual offer. Upon receipt of a written request from the owner
to find a person to acquire the building, the Agency must offer the
building for sale to the general public, based on reasonable efforts, at
the determined qualified contract amount in order for the qualified
contract to satisfy the requirements of this section unless the Agency
has already identified a willing buyer who submitted a qualified
contract to purchase the project.
(3) Debarment of certain appraisers. Agencies shall not utilize any
individual or organization as an appraiser if that individual or
organization is currently on any list for active suspension or
revocation for performing appraisals in any State or is listed on the
Excluded Parties Lists System (EPLS) maintained by the General Services
Administration for the United States Government found at www.epls.gov.
(e) Effective date/applicability date. These regulations are
applicable to owner requests to housing credit agencies on or after May
3, 2012 to obtain a qualified contract for the acquisition of a low-
income housing credit building.
[T.D. 9587, 77 FR 26178, May 3, 2012]
Sec. 1.42A-1 General tax credit for taxable years ending after
December 31, 1975, and before January 1, 1979.
(a)(1) Allowance of credit for taxable years ending after December
31, 1975, and beginning before January 1, 1977. Subject to the special
rules of paragraphs (b)(1), (c) and (d) and the limitation of paragraph
(e)(1) of this section, an individual is allowed as a credit against the
tax imposed by chapter 1 for the taxable year in the case of taxable
years ending after December 31, 1975, and beginning before January 1,
1977, an amount equal to the greater of--
(i) 2 percent of so much of the individual's taxable income as does
not exceed $9,000, or
(ii) $35 multiplied by the total number of deductions for personal
exemptions to which the individual is entitled for the taxable year
under section 151 (b) and (e) and the regulations thereunder (relating
to allowance of deductions for personal exemptions with respect to the
individual, the individual's spouse, and dependents).
For purposes of applying subdivision (ii) of this paragraph (a)(1), the
total number of deductions for personal exemptions shall not include any
additional exemptions to which the individual or his spouse may be
entitled based upon age of 65 or more or blindness under section 151 (c)
or (d) and the regulations thereunder.y
(2) Allowance of credit for taxable years beginning after December
31, 1976, and ending before January 1, 1979. Subject to the special
rules of paragraphs (b)(2), (c) and (d) and the limitation of paragraph
(e)(2) of this section, an individual is allowed as a credit against the
tax imposed by section 1, or against the tax imposed in lieu of the tax
imposed by section 1, for the taxable year in the case of taxable years
beginning after December 31, 1976, and ending before January 1, 1979, an
amount equal to the greater of--
(i) 2 percent of so much of the individual's taxable income for the
taxable year, reduced by the zero bracket amount determined under
section 63 (d), as does not exceed $9,000, or
(ii) $35 multiplied by the total number of deductions for personal
exemptions to which the individual is entitled for the taxable year
under section 151 and the regulations thereunder (relating to allowance
of deductions for personal exemptions).
(b) Married individuals filing separate returns--(1) For taxable
years ending
[[Page 235]]
after December 31, 1975, and beginning before January 1, 1977. In the
case of taxable years ending after December 31, 1975, and beginning
before January 1, 1977, a married individual who files a separate return
for the taxable year is allowed as a credit for the taxable year an
amount equal to either--
(i) 2 percent of so much of the individual's taxable income as does
not exceed $4,500, or
(ii) $35 multiplied by the total number of deductions for personal
exemptions to which the individual is entitled for the taxable year
under section 151 (b) and (e) and the regulations thereunder, but only
if both the individual and the individual's spouse elect to have the
credit determined in the manner described in this subdivision (ii) for
their corresponding taxable years. The elections shall be made by both
married individuals separately calculating and claiming the credit in
the manner and amount described in this subdivision (ii) on their
separate returns for their corresponding taxable years. The rules of
section 142 (a) and the regulations thereunder (relating to individuals
not eligible for the standard deduction) in effect for taxable years
beginning before January 1, 1977, apply to determine whether the taxable
years of the individual and the individual's spouse correspond to each
other. For purposes of applying this subdivision (ii), the total number
of deductions for personal exemptions shall not include any additional
exemptions to which the individual may be entitled based upon age of 65
or more or blindness under section 151 (c) or (d) and the regulations
thereunder.
(2) For taxable years beginning after December 31, 1976, and ending
before January 1, 1979. In the case of taxable years beginning after
December 31, 1976, and ending before January 1, 1979, a married
individual who files a separate return for the taxable year shall
determine the amount of the credit for the taxable year under section
42(a)(2) and Sec. 1.42A-1(a)(2)(ii).
(3) Determination of marital status. For purposes of this paragraph,
the determination of marital status shall be made as provided by section
143 and the regulations thereunder (relating to the determination of
marital status).
(c) Return for short period on change of annual accounting period.
In computing the credit provided by section 42 and this section for a
period of less than 12 months (hereinafter referred to as a ``short
period''), where income is to be annualized under section 443(b)(1) in
order to determine the tax--
(1) The credit allowed by paragraphs (a) (1)(i) and (2)(i) of this
section shall be computed based upon the amount of the taxable income
annualized under the rules of section 443(b)(1) and Sec. 1.443-1(b)(1),
or
(2)(i) The credit allowed by paragraph (a)(1)(ii) of this section
shall be computed based upon the total number of deductions for personal
exemptions to which the individual is entitled for the short period
under section 151 (b) and (e) and the regulations thereunder (relating
to allowance of deductions for personal exemptions with respect to the
individual, the individual's spouse, and dependents), and
(ii) The credit allowed by paragraph (a)(2)(ii) of this section
shall be computed based upon the total number of deductions for personal
exemptions to which the individual is entitled for the short period
under section 151 and the regulations thereunder (relating to allowance
of deductions for personal exemptions).
As so computed, the credit allowed by section 42 and this section shall
be allowed against the tax computed on the basis of the annualized
taxable income. See Sec. 1.443-1(b)(1)(vi).
(d) Certain persons not eligible--(1) Estates and trusts. The credit
provided by section 42 and this section shall not be allowed in the case
of any estate or trust. Thus, the credit shall not be allowed to an
estate of an individual in bankruptcy or to an estate of a deceased
individual. However, in the case of a deceased individual, the credit
shall be allowed on the decedent's final return filed by his executor or
other representative. Also, the credit provided by section 42 and this
section shall be allowed in the case of a return filed by an estate of
an infant, incompetent, or an individual under a disability.
(2) Nonresident alien individuals. The credit provided by section 42
and this section shall not be allowed in the case
[[Page 236]]
of any nonresident alien individual. As used in this subparagraph, the
term ``nonresident alien individual'' has the meaning provided by Sec.
1.871-2. See, however, section 6013(g) for election to treat nonresident
alien individual as resident of the United States. The credit shall be
allowed to an alien individual who is a resident of the United States
for part of the taxable year. See Sec. 1.871-2(b) for rules relating to
the determination of residence of an alien individual. For purposes of
paragraphs (a) (1)(i) and (2)(i) of this section, the credit allowed
shall be computed by taking into account only that portion of the
individual's taxable income which is attributable to the period of his
residence in the United States. For purposes of paragraph (a)(1)(ii) of
this section, the credit allowed shall be computed by taking into
account only the total number of deductions for personal exemptions to
which the individual is entitled under section 151 (b) and (e) for the
period of his residence in the United States. For purposes of paragraph
(a)(2)(ii) of this section, the credit allowed shall be computed by
taking into account only the total number of deductions for personal
exemptions to which the individual is entitled under section 151 for the
period of his residence in the United States. See Sec. 1.871-13 for
rules relating to changes of residence status during a taxable year.
(e) Limitation--(1) For taxable years ending after December 31,
1975, and beginning before January 1, 1977. For taxable years ending
after December 31, 1975, and beginning before January 1, 1977, the
credit allowed by section 42 and this section shall not exceed the
amount of tax imposed by chapter 1 for the taxable year. In the case of
an alien individual who is a resident of the United States for a part of
the taxable year, the credit allowed by section 42 and this section
shall not exceed the amount of tax imposed by chapter 1 for that portion
of the taxable year during which the alien individual was a resident of
the United States. See Sec. 1.871-13.
(2) For taxable years beginning after December 31, 1976, and ending
before January 1, 1979. For taxable years beginning after December 31,
1976, and ending before January 1, 1979, the credit allowed by section
42 and this section shall not exceed the amount of tax imposed by
section 1, or the amount of tax imposed in lieu of the tax imposed by
section 1, for the taxable year. In the case of an alien individual who
is a resident of the United States for a part of the taxable year, the
credit allowed by section 42 and this section shall not exceed the
amount of tax imposed by section 1, or the amount of tax imposed in lieu
of the tax imposed by section 1, for that portion of the taxable year
during which the alien individual was a resident of the United States.
See Sec. 1.871-13.
(f) Application with other credits. In determining the credits
allowed under--
(1) Section 33 (relating to foreign tax credit),
(2) Section 37 (relating to credit for the elderly),
(3) Section 38 (relating to investment in certain depreciable
property),
(4) Section 40 (relating to expenses of work incentive programs),
and
(5) Section 41 (relating to contributions to candidates for public
office),
the tax imposed for the taxable year shall first be reduced (before any
other reduction) by the credit allowed by section 42 and this section
for the taxable year.
(g) Income tax tables to reflect credit. The tables prescribed under
section 3 shall reflect the credit allowed by section 42 and this
section.
(h) Effective dates. The credit allowed by section 42 and this
section applies only for taxable years ending after December 31, 1975,
and before January 1, 1979.
[T.D. 7547, 43 FR 19653, May 8, 1978]
Sec. 1.43-0 Table of contents.
This section lists the captions contained in Sec. Sec. 1.43-0
through 1.43-7.
Sec. 1.43-1 The enhanced oil recovery credit--general rules.
(a) Claiming the credit.
(1) In general.
(2) Examples.
(b) Amount of the credit.
(c) Phase-out of the credit as crude oil prices increase.
(1) In general.
(2) Inflation adjustment.
(3) Examples.
[[Page 237]]
(d) Reduction of associated deductions.
(1) In general.
(2) Certain deductions by an integrated oil company.
(e) Basis adjustment.
(f) Passthrough entity basis adjustment.
(1) Partners' interests in a partnership.
(2) Shareholders' stock in an S corporation.
(g) Examples.
Sec. 1.43-2 Qualified enhanced oil recovery project.
(a) Qualified enhanced oil recovery project.
(b) More than insignificant increase.
(c) First injection of liquids, gases, or other matter.
(1) In general.
(2) Example.
(d) Significant expansion exception.
(1) In general.
(2) Substantially unaffected reservoir volume.
(3) Terminated projects.
(4) Change in tertiary recovery method.
(5) Examples.
(e) Qualified tertiary recovery methods.
(1) In general.
(2) Tertiary recovery methods that qualify.
(3) Recovery methods that do not qualify.
(4) Examples.
Sec. 1.43-3 Certification.
(a) Petroleum engineer's certification of a project.
(1) In general.
(2) Timing of certification.
(3) Content of certification.
(b) Operator's continued certification of a project.
(1) In general.
(2) Timing of certification.
(3) Content of certification.
(c) Notice of project termination.
(1) In general.
(2) Timing of notice.
(3) Content of notice.
(d) Failure to submit certification.
(e) Effective date.
Sec. 1.43-4 Qualified enhanced oil recovery costs.
(a) Qualifying costs.
(1) In general.
(2) Costs paid or incurred for an asset which is used to implement
more than one qualified enhanced oil recovery project or for other
activities.
(b) Costs defined.
(1) Qualified tertiary injectant expenses.
(2) Intangible drilling and development costs.
(3) Tangible property costs.
(4) Examples.
(c) Primary purpose.
(1) In general.
(2) Tertiary injectant costs.
(3) Intangible drilling and development costs.
(4) Tangible property costs.
(5) Offshore drilling platforms.
(6) Examples.
(d) Costs paid or incurred prior to first injection.
(1) In general.
(2) First injection after filing of return for taxable year costs
are allowable.
(3) First injection more than 36 months after close of taxable year
costs are paid or incurred.
(4) Injections in volumes less than the volumes specified in the
project plan.
(5) Examples.
(e) Other rules.
(1) Anti-abuse rule.
(2) Costs paid or incurred to acquire a project.
(3) Examples.
Sec. 1.43-5 At-risk limitation.
Sec. 1.43-6 Election out of section 43.
(a) Election to have the credit not apply.
(1) In general.
(2) Time for making the election.
(3) Manner of making the election.
(b) Election by partnerships and S corporations.
Sec. 1.43-7 Effective date of regulations.
[T.D. 8448, 57 FR 54923, Nov. 23, 1992]
Sec. 1.43-1 The enhanced oil recovery credit--general rules.
(a) Claiming the credit--(1) In general. The enhanced oil recovery
credit (the ``credit'') is a component of the section 38 general
business credit. A taxpayer that owns an operating mineral interest (as
defined in Sec. 1.614-2(b)) in a property may claim the credit for
qualified enhanced oil recovery costs (as described in Sec. 1.43-4)
paid or incurred by the taxpayer in connection with a qualified enhanced
oil recovery project (as described in Sec. 1.43-2) undertaken with
respect to the property. A taxpayer that does not own an operating
mineral interest in a property may not claim the credit. To the extent a
credit included in the current year business credit under section 38(b)
is unused under section 38, the credit is carried back or forward under
the section 39 business credit carryback and carryforward rules.
(2) Examples. The following examples illustrate the principles of
this paragraph (a).
[[Page 238]]
Example 1. Credit for operating mineral interest owner. In 1992, A,
the owner of an operating mineral interest in a property, begins a
qualified enhanced oil recovery project using cyclic steam. B, who owns
no interest in the property, purchases and places in service a steam
generator. B sells A steam, which A uses as a tertiary injectant
described in section 193. Because A owns an operating mineral interest
in the property with respect to which the project is undertaken, A may
claim a credit for the cost of the steam. Although B owns the steam
generator used to produce steam for the project, B may not claim a
credit for B's costs because B does not own an operating mineral
interest in the property.
Example 2. Credit for operating mineral interest owner. C and D are
partners in CD, a partnership that owns an operating mineral interest in
a property. In 1992, CD begins a qualified enhanced oil recovery project
using cyclic steam. D purchases a steam generator and sells steam to CD.
Because CD owns an operating mineral interest in the property with
respect to which the project is undertaken, CD may claim a credit for
the cost of the steam. Although D owns the steam generator used to
produce steam for the project, D may not claim a credit for the costs of
the steam generator because D paid these costs in a capacity other than
that of an operating mineral interest owner.
(b) Amount of the credit. A taxpayer's credit is an amount equal to
15 percent of the taxpayer's qualified enhanced oil recovery costs for
the taxable year, reduced by the phase-out amount, if any, determined
under paragraph (c) of this section.
(c) Phase-out of the credit as crude oil prices increase--(1) In
general. The amount of the credit (determined without regard to this
paragraph (c)) for any taxable year is reduced by an amount which bears
the same ratio to the amount of the credit (determined without regard to
this paragraph (c)) as--
(i) The amount by which the reference price determined under section
29(d)(2)(C) for the calendar year immediately preceding the calendar
year in which the taxable year begins exceeds $28 (as adjusted under
paragraph (c)(2) of this section); bears to
(ii) $6.
(2) Inflation adjustment--(i) In general. For any taxable year
beginning in a calendar year after 1991, an amount equal to $28
multiplied by the inflation adjustment factor is substituted for the $28
amount under paragraph (c)(1)(i) of this section.
(ii) Inflation adjustment factor. For purposes of this paragraph
(c), the inflation adjustment factor for any calendar year is a
fraction, the numerator of which is the GNP implicit price deflator for
the preceding calendar year and the denominator of which is the GNP
implicit price deflator for 1990. The ``GNP implicit price deflator'' is
the first revision of the implicit price deflator for the gross national
product as computed and published by the Secretary of Commerce. As early
as practicable, the inflation adjustment factor for each calendar year
will be published by the Internal Revenue Service in the Internal
Revenue Bulletin.
(3) Examples. The following examples illustrate the principles of
this paragraph (c).
Example 1. Reference price exceeds $28. In 1992, E, the owner of an
operating mineral interest in a property, incurs $100 of qualified
enhanced oil recovery costs. The reference price for 1991 determined
under section 29(d)(2)(C) is $30 and the inflation adjustment factor for
1992 is 1. E's credit for 1992 determined without regard to the phase-
out for crude oil price increases is $15 ($100 x 15%). In determining
E's credit, the credit is reduced by $5 ($15 x ($30 - ($28 x 1))/6).
Accordingly, E's credit for 1992 is $10 ($15 - $5).
Example 2. Inflation adjustment. In 1993, F, the owner of an
operating mineral interest in a property, incurs $100 of qualified
enhanced oil recovery costs. The 1992 reference price is $34, and the
1993 inflation adjustment factor is 1.10. F's credit for 1993 determined
without regard to the phase-out for crude oil price increases is $15
($100 x 15%). In determining F's credit, $30.80 (1.10 x $28) is
substituted for $28, and the credit is reduced by $8 ($15 x ($34 -
$30.80)/6). Accordingly, F's credit for 1993 is $7 ($15 - $8).
(d) Reduction of associated deductions--(1) In general. Any
deduction allowable under chapter 1 for an expenditure taken into
account in computing the amount of the credit determined under paragraph
(b) of this section is reduced by the amount of the credit attributable
to the expenditure.
(2) Certain deductions by an integrated oil company. For purposes of
determining the intangible drilling and development costs that an
integrated oil company must capitalize under section
[[Page 239]]
291(b), the amount allowable as a deduction under section 263(c) is the
deduction allowable after paragraph (d)(1) of this section is applied.
See Sec. 1.43-4(b)(2) (extent to which integrated oil company
intangible drilling and development costs are qualified enhanced oil
recovery costs).
(e) Basis adjustment. For purposes of subtitle A, the increase in
the basis of property which would (but for this paragraph (e)) result
from an expenditure with respect to the property is reduced by the
amount of the credit determined under paragraph (b) of this section
attributable to the expenditure.
(f) Passthrough entity basis adjustment--(1) Partners' interests in
a partnership. To the extent a partnership expenditure is not deductible
under paragraph (d)(1) of this section or does not increase the basis of
property under paragraph (e) of this section, the expenditure is treated
as an expenditure described in section 705(a)(2)(B) (concerning
decreases to basis of partnership interests). Thus, the adjusted bases
of the partners' interests in the partnership are decreased (but not
below zero).
(2) Shareholders' stock in an S corporation. To the extent an S
corporation expenditure is not deductible under paragraph (d)(1) of this
section or does not increase the basis of property under paragraph (e)
of this section, the expenditure is treated as an expenditure described
in section 1367(a)(2)(D) (concerning decreases to basis of S corporation
stock). Thus, the bases of the shareholders' S corporation stock are
decreased (but not below zero).
(g) Examples. The following examples illustrate the principles of
paragraphs (d) through (f) of this section.
Example 1. Deductions reduced for credit amount. In 1992, G, the
owner of an operating mineral interest in a property, incurs $100 of
intangible drilling and development costs in connection with a qualified
enhanced oil recovery project undertaken with respect to the property. G
elects under section 263(c) to deduct these intangible drilling and
development costs. The amount of the credit determined under paragraph
(b) of this section attributable to the $100 of intangible drilling and
development costs is $15 ($100 x 15%). Therefore, G's otherwise
allowable deduction of $100 for the intangible drilling and development
costs is reduced by $15. Accordingly, in 1992, G may deduct under
section 263(c) only $85 ($100 - $15) for these costs.
Example 2. Integrated oil company deduction reduced. The facts are
the same as in Example 1, except that G is an integrated oil company. As
in Example 1, the amount of the credit determined under paragraph (b) of
this section attributable to the $100 of intangible drilling and
development costs is $15, and G's allowable deduction under section
263(c) is $85. Because G is an integrated oil company, G must capitalize
25.50 ($85 x 30%) under section 291(b). Therefore, in 1992, G may deduct
under section 263(c) only $59.50 ($85 - $25.50) for these intangible
drilling and development costs.
Example 3. Basis of property reduced. In 1992, H, the owner of an
operating mineral interest in a property, pays $100 to purchase tangible
property that is an integral part of a qualified enhanced oil recovery
project undertaken with respect to the property. The amount of the
credit determined under paragraph (b) of this section attributable to
the $100 is $15 ($100 x 15%). Therefore, for purposes of subtitle A, H's
basis in the tangible property is $85 ($100 - $15).
Example 4. Basis of interest in passthrough entity reduced. In 1992,
I is a $50% partner in IJ, a partnership that owns an operating mineral
interest in a property. IJ pays $200 to purchase tangible property that
is an integral part of a qualified enhanced oil recovery project
undertaken with respect to the property. The amount of the credit
determined under paragraph (b) of this section attributable to the $200
is $30 ($200 x 15%). Therefore, for purposes of subtitle A, IJ's basis
in the tangible property is $170 ($200 - $30). Under paragraph (f) of
this section, the amount of the purchase price that does not increase
the basis of the property ($30) is treated as an expenditure described
in section 705(a)(2)(B). Therefore, I's basis in the partnership
interest is reduced by $15 (I's allocable share of the section
705(a)(2)(B) expenditure ($30 x 50%)).
[T.D. 8448, 57 FR 54923, Nov. 23, 1992; 58 FR 7987, Feb. 11, 1993]
Sec. 1.43-2 Qualified enhanced oil recovery project.
(a) Qualified enhanced oil recovery project. A ``qualified enhanced
oil recovery project'' is any project that meets all of the following
requirements--
(1) The project involves the application (in accordance with sound
engineering principles) of one or more qualified tertiary recovery
methods (as
[[Page 240]]
described in paragraph (e) of this section) that is reasonably expected
to result in more than an insignificant increase in the amount of crude
oil that ultimately will be recovered;
(2) The project is located within the United States (within the
meaning of section 638(1));
(3) The first injection of liquids, gases, or other matter for the
project (as described in paragraph (c) of this section) occurs after
December 31, 1990; and
(4) The project is certified under Sec. 1.43-3.
(b) More than insignificant increase. For purposes of paragraph
(a)(1) of this section, all the facts and circumstances determine
whether the application of a tertiary recovery method can reasonably be
expected to result in more than an insignificant increase in the amount
of crude oil that ultimately will be recovered. Certain information
submitted as part of a project certification is relevant to this
determination. See Sec. 1.43-3(a)(3)(i)(D). In no event is the
application of a recovery method that merely accelerates the recovery of
crude oil considered an application of one or more qualified tertiary
recovery methods that can reasonably be expected to result in more than
an insignificant increase in the amount of crude oil that ultimately
will be recovered.
(c) First injection of liquids, gases, or other matter--(1) In
general. The ``first injection of liquids, gases, or other matter''
generally occurs on the date a tertiary injectant is first injected into
the reservoir. The ``first injection of liquids, gases, or other
matter'' does not include--
(i) The injection into the reservoir of any liquids, gases, or other
matter for the purpose of pretreating or preflushing the reservoir to
enhance the efficiency of the tertiary recovery method; or
(ii) Test or experimental injections.
(2) Example. The following example illustrates the principles of
this paragraph (c).
Example. Injections to pretreat the reservoir. In 1989, A, the owner
of an operating mineral interest in a property, began injecting water
into the reservoir for the purpose of elevating reservoir pressure to
obtain miscibility pressure to prepare for the injection of miscible gas
in connection with an enhanced oil recovery project. In 1992, A obtains
miscibility pressure in the reservoir and begins injecting miscible gas
into the reservoir. The injection of miscible gas, rather than the
injection of water, is the first injection of liquids, gases, or other
matter into the reservoir for purposes of determining whether the first
injection of liquids, gases, or other matter occurs after December 31,
1990.
(d) Significant expansion exception--(1) In general. If a project
for which the first injection of liquids, gases, or other matter (within
the meaning of paragraph (c)(1) of this section) occurred before January
1, 1991, is significantly expanded after December 31, 1990, the
expansion is treated as a separate project for which the first injection
of liquids, gases, or other matter occurs after December 31, 1990.
(2) Substantially unaffected reservoir volume. A project is
considered significantly expanded if the injection of liquids, gases, or
other matter after December 31, 1990, is reasonably expected to result
in more than an insignificant increase in the amount of crude oil that
ultimately will be recovered from reservoir volume that was
substantially unaffected by the injection of liquids, gases, or other
matter before January 1, 1991.
(3) Terminated projects. Except as otherwise provided in this
paragraph (d)(3), a project is considered significantly expanded if each
qualified tertiary recovery method implemented in the project prior to
January 1, 1991, terminated more than 36 months before implementing an
enhanced oil recovery project that commences after December 31, 1990.
Notwithstanding the provisions of the preceding sentence, if a project
implemented prior to January 1, 1991, is terminated for less than 36
months before implementing an enhanced oil recovery project that
commences after December 31, 1990, a taxpayer may request permission to
treat the project that commences after December 31, 1990, as a
significant expansion. Permission will not be granted if the Internal
Revenue Service determines that a project was terminated to make an
otherwise nonqualifying project eligible for the credit. For purposes of
section 43, a qualified tertiary
[[Page 241]]
recovery method terminates at the point in time when the method no
longer results in more than an insignificant increase in the amount of
crude oil that ultimately will be recovered. All the facts and
circumstances determine whether a tertiary recovery method has
terminated. Among the factors considered is the project plan, the unit
plan of development, or other similar plan. A tertiary recovery method
is not necessarily terminated merely because the injection of the
tertiary injectant has ceased. For purposes of this paragraph (d)(1), a
project is implemented when costs that will be taken into account in
determining the credit with respect to the project are paid or incurred.
(4) Change in tertiary recovery method. If the application of a
tertiary recovery method or methods with respect to an enhanced oil
recovery project for which the first injection of liquids, gases, or
other matter occurred before January 1, 1991, has not been terminated
for more than 36 months, a taxpayer may request a private letter ruling
from the Internal Revenue Service whether the application of a different
tertiary recovery method or methods after December 31, 1990, that does
not affect reservoir volume substantially unaffected by the previous
tertiary recovery method or methods, is treated as a significant
expansion. All the facts and circumstances determine whether a change in
tertiary recovery method is treated as a significant expansion. Among
the factors considered are whether the change in tertiary recovery
method is in accordance with sound engineering principles and whether
the change in method will result in more than an insignificant increase
in the amount of crude oil that would be recovered using the previous
method. A more intensive application of a tertiary recovery method after
December 31, 1990, is not treated as a significant expansion.
(5) Examples. The following examples illustrate the principles of
this paragraph (d).
Example 1. Substantially unaffected reservoir volume. In January
1988, B, the owner of an operating mineral interest in a property, began
injecting steam into the reservoir in connection with a cyclic steam
enhanced oil recovery project. The project affected only a portion of
the reservoir volume. In 1992, B begins cyclic steam injections with
respect to reservoir volume that was substantially unaffected by the
previous cyclic steam project. Because the injection of steam into the
reservoir in 1992 affects reservoir volume that was substantially
unaffected by the previous cyclic steam injection, the cyclic steam
injection in 1992 is treated as a separate project for which the first
injection of liquids, gases, or other matter occurs after December 31,
1990.
Example 2. Tertiary recovery method terminated more than 36 months.
In 1982, C, the owner of an operating mineral interest in a property,
implemented a tertiary recovery project using cyclic steam injection as
a method for the recovery of crude oil. The project was certified as a
tertiary recovery project for purposes of the windfall profit tax. In
May 1988, the application of the cyclic steam tertiary recovery method
terminated. In July 1992, C begins drilling injection wells as part of a
project to apply the steam drive tertiary recovery method with respect
to the same project area affected by the cyclic steam method. C begins
steam injections in September 1992. Because C commences an enhanced oil
recovery project more than 36 months after the previous tertiary
recovery method was terminated, the project is treated as a separate
project for which the first injection of liquids, gases, or other matter
occurs after December 31, 1990.
Example 3. Change in tertiary recovery method affecting
substantially unaffected reservoir volume. In 1984, D, the owner of an
operating mineral interest in a property, implemented a tertiary
recovery project using cyclic steam as a method for the recovery of
crude oil. The project was certified as a tertiary recovery project for
purposes of the windfall profit tax. D continued the cyclic steam
injection until 1992, when the tertiary recovery method was changed from
cyclic steam injection to steam drive. The steam drive affects reservoir
volume that was substantially unaffected by the cyclic steam injection.
Because the steam drive affects reservoir volume that was substantially
unaffected by the cyclic steam injection, the steam drive is treated as
a separate project for which the first injection of liquids, gases, or
other matter occurs after December 31, 1990.
Example 4. Change in tertiary recovery method not affecting
substantially unaffected reservoir volume. In 1988, E, the owner of an
operating mineral interest in a property, undertook an immiscible
nitrogen enhanced oil recovery project that resulted in more than an
insignificant increase in the ultimate recovery of crude oil from the
property. E continued the immiscible nitrogen
[[Page 242]]
project until 1992, when the project was converted from immiscible
nitrogen displacement to miscible nitrogen displacement by increasing
the injection of nitrogen to increase reservoir pressure. The miscible
nitrogen displacement affects the same reservoir volume that was
affected by the immiscible nitrogen displacement. Because the miscible
nitrogen displacement does not affect reservoir volume that was
substantially unaffected by the immiscible nitrogen displacement nor was
the immiscible nitrogen displacement project terminated for more than 36
months before the miscible nitrogen displacement project was
implemented, E must obtain a ruling whether the change from immiscible
nitrogen displacement to miscible nitrogen displacement is treated as a
separate project for which the first injection of liquids, gases, or
other matter occurs after December 31, 1990. If E does not receive a
ruling, the miscible nitrogen displacement project is not a qualified
project.
Example 5. More intensive application of a tertiary recovery method.
In 1989, F, the owner of an operating mineral interest in a property,
undertook an immiscible carbon dioxide displacement enhanced oil
recovery project. F began injecting carbon dioxide into the reservoir
under immiscible conditions. The injection of carbon dioxide under
immiscible conditions resulted in more than an insignificant increase in
the ultimate recovery of crude oil from the property. F continues to
inject the same amount of carbon dioxide into the reservoir until 1992,
when new engineering studies indicate that an increase in the amount of
carbon dioxide injected is reasonably expected to result in a more than
insignificant increase in the amount of crude oil that would be
recovered from the property as a result of the previous injection of
carbon dioxide. The increase in the amount of carbon dioxide injected
affects the same reservoir volume that was affected by the previous
injection of carbon dioxide. Because the additional carbon dioxide
injected in 1992 does not affect reservoir volume that was substantially
unaffected by the previous injection of carbon dioxide and the previous
immiscible carbon dioxide displacement method was not terminated for
more than 36 months before additional carbon dioxide was injected, the
increase in the amount of carbon dioxide injected into the reservoir is
not a significant expansion. Therefore, it is not a separate project for
which the first injection of liquids, gases, or other matter occurs
after December 31, 1990.
(e) Qualified tertiary recovery methods--(1) In general. For
purposes of paragraph (a)(1) of this section, a ``qualified tertiary
recovery method'' is any one or any combination of the tertiary recovery
methods described in paragraph (e)(2) of this section. To account for
advances in enhanced oil recovery technology, the Internal Revenue
Service may by revenue ruling prescribe that a method not described in
paragraph (e)(2) of this section is a ``qualified tertiary recovery
method.'' In addition, a taxpayer may request a private letter ruling
that a method not described in paragraph (e)(2) of this section or in a
revenue ruling is a qualified tertiary recovery method. Generally, the
methods identified in revenue rulings or private letter rulings will be
limited to those methods that involve the displacement of oil from the
reservoir rock by means of modifying the properties of the fluids in the
reservoir or providing the energy and drive mechanism to force the oil
to flow to a production well. The recovery methods described in
paragraph (e)(3) of this section are not ``qualified tertiary recovery
methods.''
(2) Tertiary recovery methods that qualify--(i) Thermal recovery
methods--(A) Steam drive injection. The continuous injection of steam
into one set of wells (injection wells) or other injection source to
effect oil displacement toward and production from a second set of wells
(production wells);
(B) Cyclic steam injection--The alternating injection of steam and
production of oil with condensed steam from the same well or wells; and
(C) In situ combustion. The combustion of oil or fuel in the
reservoir sustained by injection of air, oxygen-enriched air, oxygen, or
supplemental fuel supplied from the surface to displace unburned oil
toward producing wells. This process may include the concurrent,
alternating, or subsequent injection of water.
(ii) Gas Flood recovery methods--(A) Miscible fluid displacement.
The injection of gas (e.g., natural gas, enriched natural gas, a
liquified petroleum slug driven by natural gas, carbon dioxide,
nitrogen, or flue gas) or alcohol into the reservoir at pressure levels
such that the gas or alcohol and reservoir oil are miscible;
(B) Carbon dioxide augmented waterflooding. The injection of
carbonated water, or water and carbon dioxide, to increase waterflood
efficiency;
[[Page 243]]
(C) Immiscible carbon dioxide displacement. The injection of carbon
dioxide into an oil reservoir to effect oil displacement under
conditions in which miscibility with reservoir oil is not obtained. This
process may include the concurrent, alternating, or subsequent injection
of water; and
(D) Immiscible nonhydrocarbon gas displacement. The injection of
nonhydrocarbon gas (e.g., nitrogen) into an oil reservoir, under
conditions in which miscibility with reservoir oil is not obtained, to
obtain a chemical or physical reaction (other than pressure) between the
oil and the injected gas or between the oil and other reservoir fluids.
This process may include the concurrent, alternating, or subsequent
injection of water.
(iii) Chemical flood recovery methods--(A) Microemulsion flooding.
The injection of a surfactant system (e.g., a surfactant, hydrocarbon,
cosurfactant, electrolyte, and water) to enhance the displacement of oil
toward producing wells; and
(B) Caustic flooding--The injection of water that has been made
chemically basic by the addition of alkali metal hydroxides, silicates,
or other chemicals.
(iv) Mobility control recovery method--Polymer augmented
waterflooding. The injection of polymeric additives with water to
improve the areal and vertical sweep efficiency of the reservoir by
increasing the viscosity and decreasing the mobility of the water
injected. Polymer augmented waterflooding does not include the injection
of polymers for the purpose of modifying the injection profile of the
wellbore or the relative permeability of various layers of the
reservoir, rather than modifying the water-oil mobility ratio.
(3) Recovery methods that do not qualify. The term ``qualified
tertiary recovery method'' does not include--
(i) Waterflooding--The injection of water into an oil reservoir to
displace oil from the reservoir rock and into the bore of the producing
well;
(ii) Cyclic gas injection--The increase or maintenance of pressure
by injection of hydrocarbon gas into the reservoir from which it was
originally produced;
(iii) Horizontal drilling--The drilling of horizontal, rather than
vertical, wells to penetrate hydrocarbon bearing formations;
(iv) Gravity drainage--The production of oil by gravity flow from
drainholes that are drilled from a shaft or tunnel dug within or below
the oil bearing zones; and
(v) Other methods--Any recovery method not specifically designated
as a qualified tertiary recovery method in either paragraph (e)(2) of
this section or in a revenue ruling or private letter ruling described
in paragraph (e)(1) of this section.
(4) Examples. The following examples illustrate the principles of
this paragraph (e).
Example 1. Polymer augmented waterflooding. In 1992 G, the owner of
an operating mineral interest in a property, begins a waterflood project
with respect to the property. To reduce the relative permeability in
certain areas of the reservoir and minimize water coning, G injects
polymers to plug thief zones and improve the areal and vertical sweep
efficiency of the reservoir. The injection of polymers into the
reservoir does not modify the water-oil mobility ratio. Accordingly, the
injection of polymers into the reservoir in connection with the
waterflood project does not constitute polymer augmented waterflooding
and the project is not a qualified enhanced oil recovery project.
Example 2. Polymer augmented waterflooding. In 1993 H, the owner of
an operating mineral interest in a property, begins a caustic flooding
project with respect to the property. Engineering studies indicate that
the relative permeability of various layers of the reservoir may result
in the loss of the injectant to thief zones, thereby reducing the areal
and vertical sweep efficiency of the reservoir. As part of the caustic
flooding project, H injects polymers to plug the thief zones and improve
the areal and vertical sweep efficiency of the reservoir. Because the
polymers are injected into the reservoir to improve the effectiveness of
the caustic flooding project, the project is a qualified enhanced oil
recovery project.
[T.D. 8448, 57 FR 54925, Nov. 23, 1992; 58 FR 6678, Feb. 1, 1993]
Sec. 1.43-3 Certification
(a) Petroleum engineer's certification of a project--(1) In general.
A petroleum engineer must certify, under penalties of perjury, that an
enhanced oil recovery project meets the requirements of
[[Page 244]]
section 43(c)(2)(A). A petroleum engineer's certification must be
submitted for each project. The petroleum engineer certifying a project
must be duly registered or certified in any State.
(2) Timing of certification. The operator of an enhanced oil
recovery project or any other operating mineral interest owner
designated by the operator (``designated owner'') must submit a
petroleum engineer's certification to the Internal Revenue Service
Center, Austin, Texas, or such other place as may be designated by
revenue procedure or other published guidance, not later than the last
date prescribed by law (including extensions) for filing the operator's
or designated owner's federal income tax return for the first taxable
year for which the enhanced oil recovery credit (the ``credit'') is
allowable. The operator may designate any other operating mineral
interest owner (the ``designated owner'') to file the petroleum
engineer's certification.
(3) Content of certification--(i) In general. A petroleum engineer's
certification must contain the following information--
(A) The name and taxpayer identification number of the operator or
the designated owner submitting the certification;
(B) A statement identifying the project, including its geographic
location;
(C) A statement that the project involves a tertiary recovery method
(as defined in section 43(c)(2)(A)(i)) and a description of the process
used, including--
(1) A description of the implementation and operation of the project
sufficient to establish that it is implemented and operated in
accordance with sound engineering practices;
(2) If the project involves the application of a tertiary recovery
method approved in a private letter ruling described in paragraph (e)(1)
of Sec. 1.43-2, a copy of the private letter ruling, and
(3) The date on which the first injection of liquids, gases, or
other matter occurred or is expected to occur.
(D) A statement that the application of a qualified tertiary
recovery method or methods is expected to result in more than an
insignificant increase in the amount of crude oil that ultimately will
be recovered, including--
(1) Data on crude oil reserve estimates covering the project area
with and without the enhanced oil recovery process,
(2) Production history prior to implementation of the project and
estimates of production after implementation of the project, and
(3) An adequate delineation of the reservoir, or portion of the
reservoir, from which the ultimate recovery of crude oil is expected to
be increased as a result of the implementation and operation of the
project; and
(E) A statement that the petroleum engineer believes that the
project is a qualified enhanced oil recovery project within the meaning
of section 43(c)(2)(A).
(ii) Additional information for significantly expanded projects. The
petroleum engineer's certification for a project that is significantly
expanded must in addition contain--
(A) If the expansion affects reservoir volume that was substantially
unaffected by a previously implemented project, an adequate delineation
of the reservoir volume affected by the previously implemented project;
(B) If the expansion involves the implementation of an enhanced oil
recovery project more than 36 months after the termination of a
qualified tertiary recovery method that was applied before January 1,
1991, the date on which the previous tertiary recovery method terminated
and an explanation of the data or assumptions relied upon to determine
the termination date;
(C) If the expansion involves the implementation of an enhanced oil
recovery project less than 36 months after the termination of a
qualified tertiary recovery method that was applied before January 1,
1991, a copy of a private letter ruling from the Internal Revenue
Service that the project implemented after December 31, 1990 is treated
as a significant expansion; or
(D) If the expansion involves the application after December 31,
1990, of a tertiary recovery method or methods that do not affect
reservoir volume that was substantially unaffected by the application of
a different tertiary recovery method or methods before
[[Page 245]]
January 1, 1991, a copy of a private letter ruling from the Internal
Revenue Service that the change in tertiary recovery method is treated
as a significant expansion.
(b) Operator's continued certification of a project--(1) In general.
For each taxable year following the taxable year for which the petroleum
engineer's certification is submitted, the operator or designated owner
must certify, under penalties of perjury, that an enhanced oil recovery
project continues to be implemented substantially in accordance with the
petroleum engineer's certification submitted for the project. An
operator's certification must be submitted for each project.
(2) Timing of certification. The operator or designated owner of an
enhanced oil recovery project must submit an operator's certification to
the Internal Revenue Service Center, Austin, Texas, or such other place
as may be designated by revenue procedure or other published guidance,
not later than the last date prescribed by law (including extensions)
for filing the operator's or designated owner's federal income tax
return for any taxable year after the taxable year for which the
petroleum engineer's certification is filed.
(3) Content of certification. An operator's certification must
contain the following information--
(i) The name and taxpayer identification number of the operator or
the designated owner submitting the certification;
(ii) A statement identifying the project including its geographic
location and the date on which the petroleum engineer's certification
was filed;
(iii) A statement that the project continues to be implemented
substantially in accordance with the petroleum engineer's certification
(as described in paragraph (a) of this section) submitted for the
project; and
(iv) A description of any significant change or anticipated change
in the information submitted under paragraph (a)(3) of this section,
including a change in the date on which the first injection of liquids,
gases, or other matter occurred or is expected to occur.
(c) Notice of project termination--(1) In general. If the
application of a tertiary recovery method is terminated, the operator or
designated owner must submit a notice of project termination to the
Internal Revenue Service.
(2) Timing of notice. The operator or designated owner of an
enhanced oil recovery project must submit the notice of project
termination to the Internal Revenue Service Center, Austin, Texas, or
such other place as may be designated by revenue procedure or other
published guidance, not later than the last date prescribed by law
(including extensions) for filing the operator's or designated owner's
federal income tax return for the taxable year in which the project
terminates.
(3) Content of notice. A notice of project termination must contain
the following information--
(i) The name and taxpayer identification number of the operator or
the designated owner submitting the notice;
(ii) A statement identifying the project including its geographic
location and the date on which the petroleum engineer's certification
was filed; and
(iii) The date on which the application of the tertiary recovery
method was terminated.
(d) Failure to submit certification. If a petroleum engineer's
certification (as described in paragraph (a) of this section) or an
operator's certification (as described in paragraph (b) of this section)
is not submitted in the time or manner prescribed by this section, the
credit will be allowed only after the appropriate certifications are
submitted.
[T.D. 8384, 56 FR 67177, Dec. 30, 1991; 57 FR 6074, Feb. 20, 1992; 57 FR
6353, Feb. 24, 1992. Redesignated and amended by T.D. 8448, 57 FR 54927,
Nov. 23, 1992]
Sec. 1.43-4 Qualified enhanced oil recovery costs.
(a) Qualifying costs--(1) In general. Except as provided in
paragraph (e) of this section, amounts paid or incurred in any taxable
year beginning after December 31, 1990, that are qualified tertiary
injectant expenses (as described in paragraph (b)(1) of this section),
intangible drilling and development costs (as described in paragraph
(b)(2) of this section), and tangible property costs
[[Page 246]]
(as described in paragraph (b)(3) of this section) are ``qualified
enhanced oil recovery costs'' if the amounts are paid or incurred with
respect to an asset which is used for the primary purpose (as described
in paragraph (c) of this section) of implementing an enhanced oil
recovery project. Any amount paid or incurred in any taxable year
beginning before January 1, 1991, in connection with an enhanced oil
recovery project is not a qualified enhanced oil recovery cost.
(2) Costs paid or incurred for an asset which is used to implement
more than one qualified enhanced oil recovery project or for other
activities. Any cost paid or incurred during the taxable year for an
asset which is used to implement more than one qualified enhanced oil
recovery project is allocated among the projects in determining the
qualified enhanced oil recovery costs for each qualified project for the
taxable year. Similarly, any cost paid or incurred during the taxable
year for an asset which is used to implement a qualified enhanced oil
recovery project and which is also used for other activities (for
example, an enhanced oil recovery project that is not a qualified
enhanced oil recovery project) is allocated among the qualified enhanced
oil recovery project and the other activities to determine the qualified
enhanced oil recovery costs for the taxable year. See Sec. 1.613-5(a).
Any cost paid or incurred for an asset which is used to implement a
qualified enhanced oil recovery project and which is also used for other
activities is not required to be allocated under this paragraph (a)(2)
if the use of the property for nonqualifying activities is de minimis
(e.g., not greater than 10%). Costs are allocated under this paragraph
(a)(2) only if the asset with respect to which the costs are paid or
incurred is used for the primary purpose of implementing an enhanced oil
recovery project. See paragraph (c) of this section. Any reasonable
allocation method may be used. A method that allocates costs based on
the anticipated use in a project or activity is a reasonable method.
(b) Costs defined--(1) Qualified tertiary injectant expenses. For
purposes of this section, ``qualified tertiary injectant expenses''
means any costs that are paid or incurred in connection with a qualified
enhanced oil recovery project and that are deductible under section 193
for the taxable year. See section 193 and Sec. 1.193-1. Qualified
tertiary injectant expenses are taken into account in determining the
credit with respect to the taxable year in which the tertiary injectant
expenses are deductible under section 193.
(2) Intangible drilling and development costs. For purposes of this
section, ``intangible drilling and development costs'' means any
intangible drilling and development costs that are paid or incurred in
connection with a qualified enhanced oil recovery project and for which
the taxpayer may make an election under section 263(c) for the taxable
year. Intangible drilling and development costs are taken into account
in determining the credit with respect to the taxable year in which the
taxpayer may deduct the intangible drilling and development costs under
section 263(c). For purposes of this paragraph (b)(2), the amount of the
intangible drilling and development costs for which an integrated oil
company may make an election under section 263(c) is determined without
regard to section 291(b).
(3) Tangible property costs--(i) In general. For purposes of this
section, ``tangible property costs'' means an amount paid or incurred
during a taxable year for tangible property that is an integral part of
a qualified enhanced oil recovery project and that is depreciable or
amortizable under chapter 1. An amount paid or incurred for tangible
property is taken into account in determining the credit with respect to
the taxable year in which the cost is paid or incurred.
(ii) Integral part. For purposes of this paragraph (b), tangible
property is an integral part of a qualified enhanced oil recovery
project if the property is used directly in the project and is essential
to the completeness of the project. All the facts and circumstances
determine whether tangible property is used directly in a qualified
enhanced oil recovery project and is essential to the completeness of
the project. Generally, property used to acquire or produce the tertiary
injectant or property used to transport the tertiary injectant to a
project site
[[Page 247]]
is property that is an integral part of the project.
(4) Examples. The following examples illustrate the principles of
this paragraph (b). Assume for each of these examples that the qualified
enhanced oil recovery costs are paid or incurred with respect to an
asset which is used for the primary purpose of implementing an enhanced
oil recovery project.
Example 1. Qualified costs--in general. (i) In 1992, X, a
corporation, acquires an operating mineral interest in a property and
undertakes a cyclic steam enhanced oil recovery project with respect to
the property. X pays a fee to acquire a permit to drill and hires a
contractor to drill six wells. As part of the project implementation, X
constructs a building to serve as an office on the property and
purchases equipment, including downhole equipment (e.g., casing, tubing,
packers, and sucker rods), pumping units, a steam generator, and
equipment to remove gas and water from the oil after it is produced. X
constructs roads to transport the equipment to the wellsites and incurs
costs for clearing and draining the ground in preparation for the
drilling of the wells. X purchases cars and trucks to provide
transportation for monitoring the wellsites. In addition, X contracts
with Y for the delivery of water to produce steam to be injected in
connection with the cyclic steam project, and purchases storage tanks to
store the water.
(ii) The leasehold acquisition costs are not qualified enhanced oil
recovery costs. However, the costs of the permit to drill are intangible
drilling and development costs that are qualified costs. The costs
associated with hiring the contractor to drill, constructing roads, and
clearing and draining the ground are intangible drilling and development
costs that are qualified enhanced oil recovery costs. The downhole
equipment, the pumping units, the steam generator, and the equipment to
remove the gas and water from the oil after it is produced are used
directly in the project and are essential to the completeness of the
project. Therefore, this equipment is an integral part of the project
and the costs of the equipment are qualified enhanced oil recovery
costs. Although the building that X constructs as an office and the cars
and trucks X purchases to provide transportation for monitoring the
wellsites are used directly in the project, they are not essential to
the completeness of the project. Therefore, the building and the cars
and trucks are not an integral part of the project and their costs are
not qualified enhanced oil recovery costs. The cost of the water X
purchases from Y is a tertiary injectant expense that is a qualified
enhanced oil recovery cost. The storage tanks X acquires to store the
water are required to provide a proximate source of water for the
production of steam. Therefore, the water storage tank are an integral
part of the project and the costs of the water storage tanks are
qualified enhanced oil recovery costs.
Example 2. Diluent storage tanks. In 1992, A, the owner of an
operating mineral interest, undertakes a qualified enhanced oil recovery
project with respect to the property. A acquires diluent to be used in
connection with the project. A stores the diluent in a storage tank that
A acquires for that purpose. The storage tank provides a proximate
source of diluent to be used in the tertiary recovery method. Therefore,
the storage tank is used directly in the project and is essential to the
completeness of the project. Accordingly, the storage tanks is an
integral part of the project and the cost of the storage tank is a
qualified enhanced oil recovery cost.
Example 3. Oil storage tanks. In 1992, Z, a corporation and the
owner of an operating mineral interest in a property, undertakes a
qualified enhanced oil recovery project with respect to the property. Z
acquires storage tanks that Z will use solely to store the crude oil
that is produced from the enhanced oil recovery project. The storage
tanks are not used directly in the project and are not essential to the
completeness of the project. Therefore, the storage tanks are not an
integral part of the enhanced oil recovery project and the costs of the
storage tanks are not qualified enhanced oil recovery costs.
Example 4. Oil refinery. B, the owner of an operating mineral
interest in a property, undertakes a qualified enhanced oil recovery
project with respect to the property. Located on B's property is an oil
refinery where B will refine the crude oil produced from the project.
The refinery is not used directly in the project and is not essential to
the completeness of the project. Therefore, the refinery is not an
integral part of the enhanced oil recovery project.
Example 5. Gas processing plant. C, the owner of an operating
mineral interest in a property, undertakes a qualified enhanced oil
recovery project with respect to the property. A gas processing plant
where C will process gas produced in the project is located on C's
property. The gas processing plant is not used directly in the project
and is not essential to the completeness of the project. Therefore, the
gas processing plant is not an integral part of the enhanced oil
recovery project.
Example 6. Gas processing equipment. The facts are the same as in
Example 5 except that C uses a portion of the gas processing plant to
separate and recycle the tertiary injectant. The gas processing
equipment used to separate and recycle the tertiary injectant is used
directly in the project and
[[Page 248]]
is essential to the completeness of the project. Therefore, the gas
processing equipment used to separate and recycle the tertiary injectant
is an integral part of the enhanced oil recovery project and the costs
of this equipment are qualified enhanced oil recovery costs.
Example 7. Steam generator costs allocated. In 1988, D, the owner of
an operating mineral interest in a property, undertook a steam drive
project with respect to the property. In 1992, D decides to undertake a
steam drive project with respect to reservoir volume that was
substantially unaffected by the 1988 project. The 1992 project is a
significant expansion that is a qualified enhanced oil recovery project.
D purchases a new steam generator with sufficient capacity to provide
steam for both the 1988 project and the 1992 project. The steam
generator is used directly in the 1992 project and is essential to the
completeness of the 1992 project. Accordingly, the steam generator is an
integral part of the 1992 project. Because the steam generator is also
used to provide steam for the 1988 project, D must allocate the cost of
the steam generator to the 1988 project and the 1992 project. Only the
portion of the cost of the steam generator that is allocable to the 1992
project is a qualified enhanced oil recovery cost.
Example 8. Carbon dioxide pipeline. In 1992, E, the owner of an
operating mineral interest in a property, undertakes an immiscible
carbon dioxide displacement project with respect to the property. E
constructs a pipeline to convey carbon dioxide to the project site. E
contracts with F, a producer of carbon dioxide, to purchase carbon
dioxide to be injected into injection wells in E's enhanced oil recovery
project. The cost of the carbon dioxide is a tertiary injectant expense
that is a qualified enhanced oil recovery cost. The pipeline is used by
E to transport the tertiary injectant, that is, the carbon dioxide to
the project site. Therefore, the pipeline is an integral part of the
project. Accordingly, the cost of the pipeline is a qualified enhanced
oil recovery cost.
Example 9. Water source wells. In 1992, G the owner of an operating
mineral interest in a property, undertakes a polymer augmented
waterflood project with respect to the property. G drills water wells to
provide water for injection in connection with the project. The costs of
drilling the water wells are intangible drilling and development costs
that are paid or incurred in connection with the project. Therefore, the
costs of drilling the water wells are qualified enhanced oil recovery
costs.
Example 10. Leased equipment. In 1992, H, the owner of an operating
mineral interest in a property undertakes a steam drive project with
respect to the property. H contracts with I, a driller, to drill
injection wells in connection with the project. H also leases a steam
generator to provide steam for injection in connection with the project.
The drilling costs are intangible drilling and development costs that
are paid in connection with the project and are qualified enhanced oil
recovery costs. The steam generator is used to produce the tertiary
injectant. The steam generator is used directly in the project and is
essential to the completeness of the project; therefore, it is an
integral part of the project. The costs of leasing the steam generator
are tangible property costs that are qualified enhanced oil recovery
costs.
(c) Primary purpose--(1) In general. For purposes of this section, a
cost is a qualified enhanced oil recovery cost only if the cost is paid
or incurred with respect to an asset which is used for the primary
purpose of implementing one or more enhanced oil recovery projects, at
least one of which is a qualified enhanced oil recovery project. All the
facts and circumstances determine whether an asset is used for the
primary purpose of implementing an enhanced oil recovery project. For
purposes of this paragraph (c), an enhanced oil recovery project is a
project that satisfies the requirements of paragraphs (a) (1) and (2) of
section 1.43-2.
(2) Tertiary injectant costs. Tertiary injectant costs generally
satisfy the primary purpose test of this paragraph (c).
(3) Intangible drilling and development costs. Intangible drilling
and development costs paid or incurred with respect to a well that is
used in connection with the recovery of oil by primary or secondary
methods are not qualified enhanced oil recovery costs. Except as
provided in this paragraph (c)(3), a well used for primary or secondary
recovery is not used for the primary purpose of implementing an enhanced
oil recovery project. A well drilled for the primary purpose of
implementing an enhanced oil recovery project is not considered to be
used for primary or secondary recovery, notwithstanding that some
primary or secondary production may result when the well is drilled,
provided that such primary or secondary production is consistent with
the unit plan of development or other similar plan. All the facts and
circumstances determine whether primary or secondary recovery
[[Page 249]]
is consistent with the unit plan of development or other similar plan.
(4) Tangible property costs. Tangible property costs must be paid or
incurred with respect to property which is used for the primary purpose
of implementing an enhanced oil recovery project.
If tangible property is used partly in a qualified enhanced oil
recovery project and partly in another activity, the property must be
primarily used to implement the qualified enhanced oil recovery project.
(5) Offshore drilling platforms. Amounts paid or incurred in
connection with the acquisition, construction, transportation, erection,
or installation of an offshore drilling platform (regardless of whether
the amounts are intangible drilling and development costs) that is used
in connection with the recovery of oil by primary or secondary methods
are not qualified enhanced oil recovery costs. An offshore drilling
platform used for primary or secondary recovery is not used for the
primary purpose of implementing an enhanced oil recovery project.
(6) Examples. The following examples illustrate the principles of
this paragraph (c).
Example 1. Intangible drilling and development costs. In 1992, J
incurs intangible drilling and development costs in drilling a well. J
intends to use the well as an injection well in connection with an
enhanced oil recovery project in 1994, but in the meantime will use the
well in connection with a secondary recovery project. J may not take the
intangible drilling and development costs into account in determining
the credit because the primary purpose of a well used for secondary
recovery is not to implement a qualified enhanced oil recovery project.
Example 2. Offshore drilling platform. K, the owner of an operating
mineral interest in an offshore oil field located within the United
States, constructs an offshore drilling platform that is designed to
accommodate the primary, secondary, and tertiary development of the
field. Subsequent to primary and secondary development of the field, K
commences an enhanced oil recovery project that involves the application
of a qualified tertiary recovery method. As part of the enhanced oil
recovery project, K drills injection wells from the offshore drilling
platform K used in the primary and secondary development of the field
and installs an additional separator on the platform.
Because the offshore drilling platform was used in the primary and
secondary development of the field and was not used for the primary
purpose of implementing tertiary development of the field, costs
incurred by K in connection with the acquisition, construction,
transportation, erection, or installation of the offshore drilling
platform are not qualified enhanced oil recovery costs. However, the
costs K incurs for the additional separator are qualified enhanced oil
recovery costs because the separator is used for the primary purpose of
implementing tertiary development of the field. In addition, the
intangible drilling and development costs K incurs in connection with
drilling the injection wells are qualified enhanced oil recovery costs
with respect to which K may claim the enhanced oil recovery credit.
(d) Costs paid or incurred prior to first injection--(1) In general.
Qualified enhanced oil recovery costs may be paid or incurred prior to
the date of the first injection of liquids, gases, or other matter
(within the meaning of Sec. 1.43-2(c)). If the first injection of
liquids, gases, or other matter occurs on or before the date the
taxpayer files the taxpayer's federal income tax return for the taxable
year with respect to which the costs are allowable, the costs may be
taken into account on that return. If the first injection of liquids,
gases, or other matter is expected to occur after the date the taxpayer
files that return, costs may be taken into account on that return if the
Internal Revenue Service issues a private letter ruling to the taxpayer
that so permits.
(2) First injection after filing of return for taxable year costs
are allowable. Except as provided in paragraph (d)(3) of this section,
if the first injection of liquids, gases, or other matter occurs or is
expected to occur after the date the taxpayer files the taxpayer's
federal income tax return for the taxable year with respect to which the
costs are allowable, the costs may be taken into account on an amended
return (or in the case of a Coordinated Examination Program taxpayer, on
a written statement treated as a qualified return) after the earlier
of--
(i) The date the first injection of liquids, gases, or other matter
occurs; or
(ii) The date the Internal Revenue Service issues a private letter
ruling that provides that the taxpayer may take costs into account prior
to the
[[Page 250]]
first injection of liquids, gases, or other matter.
(3) First injection more than 36 months after close of taxable year
costs are paid or incurred. If the first injection of liquids, gases, or
other matter occurs more than 36 months after the close of the taxable
year in which costs are paid or incurred, the taxpayer may take the
costs into account in determining the credit only if the Internal
Revenue Service issues a private letter ruling to the taxpayer that so
provides.
(4) Injections in volumes less than the volumes specified in the
project plan. For purposes of this paragraph (d), injections in volumes
significantly less than the volumes specified in the project plan, the
unit plan of development, or another similar plan do not constitute the
first injection of liquids, gases, or other matter.
(5) Examples. The following examples illustrate the provisions of
paragraph (d) of this section.
Example 1. First injection before return filed. In 1992, L, a
calendar year taxpayer, undertakes a qualified enhanced oil recovery
project on a property in which L owns an operating mineral interest. L
incurs $1,000 of intangible drilling and development costs, which L may
elect to deduct under section 263(c) for 1992. The first injection of
liquids, gases, or other matter (within the meaning of Sec. 1.43-2(c))
occurs in March 1993. L files a 1992 federal income tax return in April
1993. Because the first injection occurs before the filing of L's 1992
federal income tax return, L may take the $1,000 of intangible drilling
and development costs into account in determining the credit for 1992 on
that return.
Example 2. First injection after return filed. In 1993, M, a
calendar year taxpayer, undertakes a qualified enhanced oil recovery
project on a property in which M owns an operating mineral interest. M
incurs $2,000 of intangible drilling and development costs, which M
elects to deduct under section 263(c) for 1993. The first injection of
liquids, gases, or other matter is expected to occur in 1995. M files a
1993 federal income tax return in April 1994. Because the first
injection of liquids, gases, or other matter occurs after the date on
which M's 1993 federal income tax return is filed in April 1994, M may
take the $2,000 of intangible drilling and development costs into
account on an amended return for 1993 after the earlier of the date the
first injection of liquids, gases, or other matter occurs, or the date
the Internal Revenue Service issues a private letter ruling that
provides that M may take the $2,000 into account prior to first
injection.
Example 3. First injection more than 36 months after taxable year.
N, a calendar year taxpayer, owns an operating mineral interest in a
property on which N undertakes an immiscible carbon dioxide displacement
project. In 1994, N incurs $5,000 in connection with the construction of
a pipeline to transport carbon dioxide to the project site. The first
injection of liquids, gases, or other matter is expected to occur after
the pipeline is completed in 1998. Because the first injection of
liquids, gases, or other matter occurs more than 36 months after the
close of the taxable year in which the $5,000 is incurred, N may take
the $5,000 into account in determining the credit only if N receives a
private letter ruling from the Internal Revenue Service that provides
that N may take the $5,000 into account prior to first injection.
(e) Other rules--(1) Anti-abuse rule. Costs paid or incurred with
respect to an asset that is acquired, used, or transferred in a manner
designed to duplicate or otherwise unreasonably increase the amount of
the credit are not qualified enhanced oil recovery costs, regardless of
whether the costs would otherwise be creditable for a single taxpayer or
more than one taxpayer.
(2) Costs paid or incurred to acquire a project. A purchaser of an
existing qualified enhanced oil recovery project may claim the credit
for any section 43 costs in excess of the acquisition cost. However,
costs paid or incurred to acquire an existing qualified enhanced oil
recovery project (or an interest in an existing qualified enhanced oil
recovery project) are not eligible for the credit.
(3) Examples. The following examples illustrate the principles of
paragraph (e) of this section.
Example 1. Duplicating or unreasonably increasing the credit. O owns
an operating mineral interest in a property with respect to which a
qualified enhanced oil recovery project is implemented. O acquires
pumping units, rods, casing, and separators for use in connection with
the project from an unrelated equipment dealer in an arm's length
transaction. The equipment is used for the primary purpose of
implementing the project. Some of the equipment acquired by O is used
equipment. The costs paid by O for the used equipment are qualified
enhanced oil recovery costs. O does not need to determine whether the
equipment has been previously used in an enhanced oil recovery project.
Example 2. Duplicating or unreasonably increasing the credit. P and
Q are co-owners of an oil property with respect to which a
[[Page 251]]
qualified enhanced oil recovery project is implemented. In 1992, P and Q
jointly purchase a nitrogen plant to supply the tertiary injectant used
in the project. P and Q claim the credit for their respective costs for
the plant. In 1994, X, a corporation unrelated to P or Q, purchases the
nitrogen plant and enters into an agreement to sell nitrogen to P and Q.
Because this transaction duplicates or otherwise unreasonably increases
the credit, the credit is not allowable for the amounts incurred by P
and Q for the nitrogen purchased from X.
Example 3. Duplicating or unreasonably increasing the credit. The
facts are the same as in Example 2. In addition, in 1995, P and Q
reacquire the nitrogen plant from X. This constitutes the acquisition of
property in a manner designed to duplicate or otherwise unreasonably
increase the amount of the credit. Therefore, the credit is not
allowable for amounts incurred by P and Q for the nitrogen plant
purchased from X.
Example 4. Duplicating or unreasonably increasing the credit. R owns
an operating mineral interest in a property with respect to which a
qualified enhanced oil recovery project is implemented. R acquires a
pump that is installed at the site of the project. After the pump has
been placed in service for 6 months, R transfers the pump to a secondary
recovery project and acquires a replacement pump for the tertiary
project. The original pump is suited to the needs of the secondary
recovery project and could have been installed there initially. The
pumps have been acquired in a manner designed to duplicate or otherwise
unreasonably increase the amount of the credit. Depending on the facts,
the cost of one pump or the other may be a qualified enhanced oil
recovery cost; however, R may not claim the credit with respect to the
cost of both pumps.
Example 5. Acquiring a project. In 1993, S purchases all of T's
interest in a qualified enhanced oil recovery project, including all of
T's interest in tangible property that is an integral part of the
project and all of T's operating mineral interest. In 1994, S incurs
costs for additional tangible property that is an integral part of the
project and which is used for the primary purpose of implementing the
project. S also incurs costs for tertiary injectants that are injected
in connection with the project. In determining the credit for 1994, S
may take into account costs S incurred for tangible property and
tertiary injectants. However, S may not take into account any amount
that S paid for T's interest in the project in determining S's credit
for any taxable year.
[T.D. 8448, 57 FR 54927, Nov. 23, 1992; 58 FR 7987, Feb. 11, 1993]
Sec. 1.43-5 At-risk limitation. [Reserved]
Sec. 1.43-6 Election out of section 43.
(a) Election to have the credit not apply--(1) In general. A
taxpayer may elect to have section 43 not apply for any taxable year.
The taxpayer may revoke an election to have section 43 not apply for any
taxable year. An election to have section 43 not apply (or a revocation
of an election to have section 43 not apply) for any taxable year is
effective only for the taxable year to which the election relates.
(2) Time for making the election. A taxpayer may make an election
under paragraph (a) of this section to have section 43 not apply (or
revoke an election to have section 43 not apply) for any taxable year at
any time before the expiration of the 3-year period beginning on the
last date prescribed by law (determined without regard to extensions)
for filing the return for the taxable year. The time for making the
election (or revoking the election) is prescribed by section 43(e)(2)
and may not be extended under Sec. 1.9100-1.
(3) Manner of making the election. An election (or revocation) under
paragraph (a)(1) of this section is made by attaching a statement to the
taxpayer's federal income tax return or an amended return (or, in the
case of a Coordinated Examination Program taxpayer, on a written
statement treated as a qualified amended return) for the taxable year
for which the election (or revocation) applies. The taxpayer must
indicate whether the taxpayer is electing to not have section 43 apply
or is revoking such an election and designate the project or projects to
which the election (or revocation) applies. For any taxable year, the
last election (or revocation) made by a taxpayer within the period
prescribed in paragraph (a)(2) of this section determines whether
section 43 applies for that taxable year.
(b) Election by partnerships and S corporations. For partnerships
and S corporations, an election to have section 43 not apply (or a
revocation of an election to have section 43 not apply) for any taxable
year is made, in accordance with the requirements of paragraph (a) of
this section, by the partnership or S corporation with respect
[[Page 252]]
to the qualified enhanced oil recovery costs paid or incurred by the
partnership or S corporation for the taxable year to which the election
relates.
[T.D. 8448, 57 FR 54930, Nov. 23, 1992]
Sec. 1.43-7 Effective date of regulations.
The provisions of Sec. Sec. 1.43-1, 1.43-2 and 1.43-4 through 1.43-
7 are effective with respect to costs paid or incurred after December
31, 1991, in connection with a qualified enhanced oil recovery project.
The provisions of Sec. 1.43-3 are effective for taxable years beginning
after December 31, 1990. For costs paid or incurred after December 31,
1990, and before January 1, 1992, in connection with a qualified
enhanced oil recovery project, taxpayers must take reasonable return
positions taking into consideration the statute and its legislative
history.
[T.D. 8448, 57 FR 54931, Nov. 23, 1992]
Sec. 1.44-1 Allowance of credit for purchase of new principal
residence after March 12, 1975, and before January 1, 1977.
(a) General rule. Section 44 provides a credit against the tax
imposed by chapter 1 of the Internal Revenue Code of 1954 in the case of
an individual who purchases a new principal residence (as defined in
paragraph (a) of Sec. 1.44-5) which is property to which section 44
applies (as provided in Sec. 1.44-2). Subject to the limitations set
forth in paragraph (b) of this section, the credit is in an amount equal
to 5 percent of the purchase price (as defined in paragraph (b) of Sec.
1.44-5).
(b) Limitations--(1) Maximum credit. The credit allowed under
section 44 and this section may not exceed $2,000.
(2) Limitation to one residence. Such credit shall be allowed with
respect to only one residence of the taxpayer; the combined purchase
prices of more than one new principal residence cannot be aggregated to
increase the credit allowed.
(3) Married individuals. In the case of a husband and wife who file
a joint return under section 6013, the maximum credit allowed on the
joint return is $2,000. In the case of married individuals filing
separate returns the maximum credit allowable to each spouse is $1,000.
Where a husband and wife do not make equal contributions with respect to
the purchase price of the new principal residence, allocation of the
credit is to be made in proportion to their respective ownership
interests in such residence. For this purpose, tenants by the entirety
or joint tenants with right of survivorship are treated as equal owners.
(4) Certain other taxpayers. Where a new principal residence is
purchased by two or more taxpayers (other than a husband and wife), the
amount of the credit allowed will be allocated among the taxpayers in
proportion to their respective ownership interests in such residence,
with the limitation that the sum of the credits allowed to all such
taxpayers shall not exceed $2,000. For this purpose, joint tenants with
right of survivorship are treated as equal owners. For an example of the
operation of this provision see Example (2) of Sec. 1.44-5(b)(2)(ii).
(5) Application with other credits. The credit allowed by this
section shall not exceed the amount of the tax imposed by chapter 1 of
the Code for the taxable year, reduced by the sum of the credits
allowable under--
(i) Section 33 (relating to taxes of foreign countries and
possessions of the United States),
(ii) Section 37 (relating to retirement income),
(iii) Section 38 (relating to investment in certain depreciable
property),
(iv) Section 40 (relating to expenses of work incentive program),
(v) Section 41 (relating to contributions to candidates for public
office), and
(vi) Section 42 (relating to personal exemptions).
[T.D. 7391, 40 FR 55851, Dec. 2, 1975]
Sec. 1.44-2 Property to which credit for purchase of new principal
residence applies.
The provisions of section 44 and the regulations thereunder apply to
a new principal residence which satisfies the following conditions:
(a) Construction. The construction of the residence must have begun
before March 26, 1975. For this purpose construction is considered to
have commenced in the following circumstances:
[[Page 253]]
(1)(i) Except as provided in subparagraph (2) of this paragraph,
construction is considered to commence when actual physical work of a
significant amount has occurred on the building site of the residence. A
significant amount of construction requires more than drilling to
determine soil conditions, preparation of an architect's sketches,
securing of a building permit, or grading of the land. Land preparation
and improvements such as the clearing and grading (excavation or
filling), construction of roads and sidewalks, and installation of
sewers and utilities are not considered commencement of construction of
the residence even though they might involve a significant expenditure.
However, driving pilings for the foundation, digging of the footings,
excavation of the building foundation, pouring of floor slabs, or
construction of compacted earthen pads when specifically prepared and
designed for a particular residential structure and not merely as a part
of the overall land preparation, constitute a significant amount of
construction of the residence. In the case of a housing or condominium
development construction of recreational facilities no matter how
extensive does not by itself constitute commencement of construction of
any residential unit. However, where residential units are part of a
building structure, as in the case of certain condominium and
cooperative housing units, then digging of the footings or excavation of
the building foundation constitutes commencement of construction for all
units in that building.
(ii) The rules in subdivision (i) of this subparagraph are
illustrated by the following examples:
Example 1. A location chosen for a housing development has extremely
hilly terrain. In order to make the location suitable for development,
the builder moves large amounts of earth and places it elsewhere on the
location. In addition, the earth material which has been moved must be
compacted according to government specifications in order to provide a
stable base. Such activities constitute land preparation and, therefore,
do not constitute the commencement of construction.
Example 2. A location chosen for a housing development has swampy
and marshy terrain. In order to make the location suitable for
development the builder utilizes large quantities of fill. This activity
constitutes land preparation and does not constitute commencement of
construction.
Example 3. Assume the same facts as in either Example 1 or Example 2
except that the builder also constructs an earthen pad of compacted fill
specifically prepared for a particular residential structure and not
merely as a part of the overall land preparation. Construction of the
compacted earthen pad is considered in the same light as excavation of
the building foundation and accordingly constitutes commencement of
construction.
(2) Construction of a factory-made home (as defined in paragraph (e)
of Sec. 1.44-5) is considered to have commenced when construction of
important parts of the factory-made home has commenced. For this
purpose, commencement of construction of important parts means the
cutting and shaping or welding of structural components for a specific
identifiable factory-made home, whether the work was done by the
manufacturer of the home or by a subcontractor thereof.
(b) Acquisition and occupancy. The residence must be acquired and
occupied by the taxpayer after March 12, 1975, and before January 1,
1977. For this purpose a taxpayer ``acquires'' a residence when legal
title to it is conveyed to him at settlement, or he has possession of it
pursuant to a binding purchase contract under which he makes periodic
payments until he becomes entitled under the contract to demand
conveyance of title. A taxpayer ``occupies'' a residence when he or his
spouse physically occupies it. Thus, for example, moving of furniture or
other household effects into the residence or physical occupancy by a
dependent child of the taxpayer is not ``occupancy'' for purposes of
this paragraph. The credit may be claimed when both the acquisition and
occupancy tests have been satisfied. Thus, where a taxpayer meets the
acquisition and occupancy tests set forth above after March 12, 1975,
and before January 1, 1976, the credit is allowable for 1975. Where a
taxpayer occupied a residence prior to March 13, 1975, without having
acquired it (as where his occupancy was pursuant to a leasing
arrangement pending settlement under a binding contract to purchase or
pursuant to a
[[Page 254]]
leasing arrangement where a written option to purchase was contained in
the original lease agreement) he will nonetheless satisfy the
acquisition and occupancy tests set forth above if he acquires the
residence and continues to occupy it after March 12, 1975, and before
January 1, 1977.
(c) Binding contract. Except in the case of self-construction, the
new principal residence must be acquired by the taxpayer (within the
meaning of paragraph (b) of this section) under a binding contract
entered into by the taxpayer before January 1, 1976. An otherwise
binding contract for the purchase of a residence which is conditioned
upon the purchaser's obtaining a loan for the purchase of the residence
(including conditions as to the amount or interest rate of such loan) is
considered binding notwithstanding that condition.
(d) Self-constructed residence. A self-constructed residence (as
defined in paragraph (d) of Sec. 1.44-5) must be occupied by the
taxpayer before January 1, 1977. Where self-construction of a principal
residence was begun before March 13, 1975, only that portion of the
basis of the property allocable to construction after March 12, 1975,
and before January 1, 1977, shall be taken into consideration in
determining the amount of the credit allowable. For this purpose, the
portion of the basis attributable to the pre-March 13 period includes
the total cost of land acquired (as defined in paragraph (b) of this
section) prior to March 13, 1975, on which the new principal residence
is constructed and the cost of expenditures with respect to construction
work performed prior to March 13, 1975. The costs incurred in
stockpiling materials for later stages of construction, however, are not
allocated to the pre-March 13 period. Thus, for example, if prior to
March 13, 1975, a taxpayer who qualifies for the credit has constructed
a portion of a residence at a cost of $10,000 (including the cost of the
land purchased prior to March 13, 1975) and the total cost of the
residence is $40,000 and the taxpayer's basis after the application of
section 1034(e) (relating to the reduction of basis of new principal
residence where gain is not recognized upon the sale of the old
residence) is $36,000, the amount subject to the credit will be $27,000:
($30,000/$40,000) x $36,000.
[T.D. 7391, 40 FR 55852, Dec. 2, 1975; 40 FR 58138, Dec. 15, 1975]
Sec. 1.44-3 Certificate by seller.
(a) Requirement of certification by seller. Taxpayers claiming the
credit should attach Form 5405, Credit for Purchase or Construction of
New Principal Residence, to their tax returns on which the credit is
claimed. Except in the case of self-construction (as defined in Sec.
1.44-5(d)), taxpayers must attach a certification by the seller that
construction of the residence began before March 26, 1975, and that the
purchase price is the lowest price at which the residence was offered
for sale after February 28, 1975. For purposes of section 44(e)(4) and
this section, the term ``price'' generally does not include costs of
acquisition other than the amount of the consideration from the
purchaser to the seller. However, for rules relating to adjustments in
price due to changes in financing terms and closing costs see paragraph
(d)(2) of this section.
(b) Form of certification. The following form of the certification
statement is suggested:
I certify that the construction of the residence at (specify
address) was begun before March 26, 1975, and that this residence has
not been offered for sale after February 28, 1975 in a listing, a
written private offer, or an offer by means of advertisement at a lower
purchase price than (state price), the price at which I sold the
residence to (state name, present address, and social security number of
purchaser) by contract dated (give date).
(Date, seller's signature and taxpayer identification number.)
However, any written certification filed by the taxpayer will be
accepted provided that such certification is signed by the seller and
states that construction of the residence began before March 26, 1975,
and that the purchase price of the residence is the lowest price at
which the residence was offered for sale after February 28, 1975. With
regard to factory-made homes the
[[Page 255]]
seller, in the absence of his own knowledge as to the commencement of
construction, may attach to his own certification a certification from
the manufacturer that construction began before March 26, 1975, and may
certify based on the manufacturer's certification. It is suggested that
both certifications include the serial number, if any, of the residence.
(c) Offer to sell. (1) For purposes of section 44(e)(4) and this
section, an offer to sell is limited to an offer to sell a specified
residence at a specified purchase price.
(2) An ``offer'' includes any written offer, whether made to a
particular purchaser or to the public, and any offer by means of
advertising. Advertising includes an offer to sell published by
billboards, flyers, brochures, price lists (unless the lists are
exclusively for the internal use of the seller and are not made
available to the public), mailings, newspapers, periodicals, radio, or
television. The listing of a property with a real estate agency, the
filing of a prospectus and the registration of construction plans and
price lists with the appropriate authorities (in the case of
condominiums or cooperative housing developments) are to be considered
offers made to the public.
(3) An offer to sell a specified residence includes:
(i) Both an offer to sell an existing residence and an offer to
build and sell a residence of substantially the same design or model as
that purchased by the taxpayer on the same lot as that on which the
taxpayer's new principal residence was constructed. It does not include
an offer to sell the same model residence on a different lot. Where a
residence of a particular design or model is offered at a specific base
price, additions of property to the residence, no matter how extensive,
will not result in the residence being treated as a different residence
for the purpose of determining the lowest offer (as defined in paragraph
(f) of Sec. 1.44-5).
(ii) In the case of a condominium or cooperative housing development
where units are offered for sale on the basis of models (e.g., all Model
C two-bedroom apartments sell at a specified base price), an offer to
sell a specified residence includes an offer to sell a specific type of
unit (with appropriate adjustments to be made for the location of such
unit and as provided in paragraph (d) of this section).
(iii) In the case of a factory-made home, an offer to sell a
specified residence includes an offer to sell the same model home as
that purchased by the taxpayer, provided that the offer is made after
the seller has the right to sell the home purchased by the taxpayer
(i.e., has that specific home in his inventory). However, it does not
include an offer to sell such home with land which is not included in
the taxpayer's purchase nor an offer to sell such home without land
which is included in the taxpayer's purchase. Appropriate adjustments to
a prior offer shall be made as provided in paragraph (d) of this
section, including adjustments for any delivery and installation charges
as provided in paragraph (d)(3).
(iv) The rules of this subparagraph may be illustrated by the
following examples:
Example 1. In March 1975 A advertised colonial-style homes on
section I of subdivision C at a base price of $40,000. At the time none
of the homes had been completed but construction of all homes on section
I was commenced before March 26, 1975. After one-half of the homes were
sold, A offers to sell the remaining homes in May 1975 at a base price
of $45,000. Under the facts above the base price of $45,000 is not the
lowest offer since the seller had offered to sell the same model home on
the same lot at a lower purchase price after February 28, 1975.
Example 2. In June 1975 A offers houses, otherwise qualifying, on
section II for the first time for a base price of $50,000. They are
colonial homes and substantially the same as the homes he previously
offered on section I. Under the facts stated above the base price of
$50,000 is the lowest offer since the same model home on the same lot
was not previously offered for sale.
Example 3. In March 1975 B, a condominium developer, offers to sell
any two-bedroom unit in a particular high rise condominium for $45,000
with an added $5,000 for units with a lakefront view and an additional
$2,000 for units on higher floors. With regard to all two-bedroom units
in the condominium an offer to sell a specified residence at a specified
purchase price has been made. This is true even though at the time of
the offer construction had not reached the floor on which the particular
unit will be located.
(4) A specified purchase price means a stated definite price for a
particular
[[Page 256]]
residence or a specific base price for a residence of a particular model
or design. An offer to sell for an indefinite price (e.g., an
advertisement that all houses sell in the $40,000's) is not considered
an offer to sell at a specified purchase price.
(5) An offer to sell includes an offer to sell subject to special
conditions imposed by the seller. Thus, if the lowest price at which a
house was advertised was ``at $40,000 for March only'', the $40,000
price would be the lowest offer. However, certain conditions may
necessitate adjustments in determining the lowest offer. See paragraph
(d) of this section.
(6) An offer to sell two or more residences together as for example,
in a bulk sale shall be disregarded, even though each residence is
assigned a specific purchase price for the purpose of such a sale. With
regard to factory-made homes an offer to sell does not include an offer
made by the manufacturer to a dealer in such homes.
(7)(i) Where new residences are purchased at a foreclosure sale
(including a conveyance by the owner in lieu of foreclosure) and prior
to the foreclosure sale such residences had been offered for sale by the
foreclosure seller at specified prices, the foreclosure purchaser is
bound by such prices in determining the lowest offer. He is not bound by
the prices paid to the foreclosure seller since such prices do not
constitute voluntary offers.
(ii) For this purpose, if the foreclosure seller and foreclosure
purchaser are not related parties (as defined in subdivision (iii) of
this subparagraph), and if the foreclosure purchaser does not have
knowledge of the date of commencement of construction and the lowest
offer made by such seller with respect to each of the foreclosed
residences, the foreclosure purchaser must request and try to obtain
from the foreclosure seller a certificate specifying such facts. Upon a
subsequent sale of a particular residence by the foreclosure purchaser,
he must certify whether the price is the lowest offer for that
particular residence based on the certification of the foreclosure
seller, a copy of which must be attached to the certification of the
foreclosure purchaser. If the foreclosure seller refuses to so certify,
the foreclosure purchaser must make a reasonable effort to determine the
date construction commenced and the lowest offer made by the foreclosure
seller. For this purpose, reasonable effort includes the effort to
locate and examine advertising and listings published or used by the
foreclosure seller. If the foreclosure seller and foreclosure purchaser
are related parties (as defined in subdivision (iii) of this
subparagraph), the foreclosure purchaser will be considered as having
knowledge of the date of the commencement of construction and the lowest
offer made by such seller with respect to each of the foreclosed
residences, and, upon a subsequent sale of a particular residence by the
foreclosure purchaser, he must comply with the certification
requirements prescribed by paragraphs (a) and (b) of this section.
(iii) For purposes of this subparagraph related parties shall
include the relationships described in subparagraph (2) of Sec. 1.44-
5(c), and the constructive ownership rules of section 318 shall apply,
but family members for this purpose shall include spouses, ancestors,
and lineal descendants.
(d) Adjustments in determining lowest price. (1)(i) In determining
whether a residence was sold at the lowest offer appropriate adjustment
shall be made for differences in the property offered and in the terms
of the sale. Where the sale to the taxpayer includes property which was
not the subject of the prior offer or excludes property which was
included in the prior offer, the amount of the prior offer shall be
adjusted to reflect the fair market value of such property, provided
that, in the case of property included in the sale which was not a part
of the residence at the time of execution of the contract of purchase,
the taxpayer had the option to require inclusion or exclusion of such
property. The fair market value of any excluded property is to be
determined at the time of the prior offer, while all additions are to be
valued at their fair market value on the date of execution of the
contract of sale. If a seller increases his present offer to include
financing or other costs of the seller in connection with his ownership
of the
[[Page 257]]
residence, the present offer does not qualify as being the lowest offer.
(ii) The rules in subdivision (i) of this subparagraph are
illustrated by the following examples:
Example 1. A offered to sell a new home without a garage for
$35,000. Having found no buyers A added a garage and sold the home for
$40,000. At the time the contract of sale was executed the fair market
value of the garage was $5,000. The offer to sell for $40,000 qualifies
since it equals the seller's lowest offer plus the fair market value of
the garage.
Example 2. B, unable to sell colonial-style homes presently under
construction and previously offered for sale for $40,000, makes
extensive changes in decor and identifies the homes as his new
Williamsburg model. The Williamsburg models are not different residences
for purposes of this section. To the extent that the additions have not
yet been added at the time of execution of a contract of sale, in order
to qualify for the credit the taxpayer must have the option as to
whether to include these additions, and if these additions are included
B must charge no more than the fair market value of the additions on
that date of execution of the contract of sale.
(2) Appropriate adjustment to a prior offer to sell shall be made
for differences in financing terms and closing costs which increase the
seller's actual net proceeds and the purchaser's actual costs. A seller
may pass on to the purchaser without affecting the purchase price only
those additional amounts he is required to expend in connection with
such differences. The seller may not by changing the financing terms or
closing costs indirectly increase the purchase price. For these purposes
closing costs include all charges paid at settlement for obtaining the
mortgage loan and transferring real estate title. Thus, for example,
where a seller previously offered a residence for sale for $40,000 and
agreed to pay financing ``points'' required by the mortgagee, and now
offers the same residence also for $40,000 but requires the purchaser to
pay the points, the present offer does not constitute the lowest offer.
On the other hand, a prior offer to sell based upon a large down payment
by the prospective purchaser may be adjusted to reflect the additional
costs to the seller of accepting a small down payment from the taxpayer.
For purposes of determining the seller's net proceeds, proceeds received
by all related parties within the meaning of section 318 must be taken
into account. For purposes of determining the lowest offer, where an
offer provided for a rebate (e.g., of cash or of a contribution toward
mortgage payments) or included, without additional charge or at less
than fair market value, property not normally included in the sale of a
residence (e.g., an automobile), such offer must be reduced by the
amount of such rebate or by the amount by which the fair market value of
such property at the time of the offer exceeds the amount paid for it by
the purchaser. Thus, where a residence was advertised for sale at
$40,000, but the seller agreed to pay $200 a month on the purchaser's
mortgage for 10 months, such residence is considered to have been
offered for sale at $38,000.
(3) In the case of a factory-made home, where delivery and
installation costs are included in the specified base price of such home
an appropriate adjustment is to be made in such specified base price for
differences in the fair market value of the delivery and installation in
determining the lowest offer.
(e) Civil and criminal penalties. If a person certifies that the
price for which the residence was sold does not exceed the lowest offer
and if it is found that the price for which the residence was sold
exceeded the lowest offer, then such person is liable (under section
208(b) of the Tax Reduction Act of 1975) to the purchaser for damages in
an amount equal to three times the excess of the certified price over
the lowest offer plus reasonable attorney's fees. No income tax
deduction shall be allowed for two-thirds of any amount paid or incurred
pursuant to a judgment entered against any person in a suit based on
such liability. However, attorney's fees, court costs, and other such
amounts paid or incurred with respect to such suit which meet the
requirements of section 162 are deductible under that section. In
addition, an individual who falsely certifies may be subject to criminal
penalties. For example, section 1001 of title 18 of the United States
Code provides as follows:
Sec. 1001
Statements or entries generally.
[[Page 258]]
Whoever, in any matter within the jurisdiction of any department or
agency of the United States knowingly and willfully falsifies, conceals
or covers up by any trick, scheme, or device a material fact, or makes
any false, fictitious or fraudulent statements or representations, or
makes or uses any false writing or document knowing the same to contain
any false, fictitious or fraudulent statement or entry, shall be fined
not more than $10,000 or imprisoned not more than five years, or both.
The treble damages and criminal sanctions provided under this paragraph
apply only with regard to false certification as to the lowest offer,
not to false certification as to commencement of construction. However,
with regard to false certification as to commencement of construction
there may exist contractual or tort remedies under State law.
(f) Denial of credit. In the absence of the taxpayer's participation
in, or knowledge of, a false certification by the seller, the credit is
not denied to a taxpayer who otherwise qualifies for the credit solely
because the seller has falsely certified that the new principal
residence was sold at the lowest offer. However, if certification as to
the commencement of construction is false, no credit is allowed since
such residence does not qualify as a new principal residence
construction of which began before March 26, 1975.
[T.D. 7391, 40 FR 55852, Dec. 2, 1975]
Sec. 1.44-4 Recapture for certain dispositions.
(a) In general. (1) Under section 44(d) except as provided in
paragraphs (b) and (c) of this section, if the taxpayer disposes of
property, with respect to the purchase of which a credit was allowed
under section 44(a), at any time within 36 months after the date on
which he acquired it (or, in the case of construction by the taxpayer,
the date on which he first occupied it as his principal residence), then
the tax imposed under chapter 1 of the Code for the taxable year in
which the replacement period (as provided under subparagraph (2) of this
paragraph) terminates is increased by an amount equal to the amount
allowed as a credit for the purchase of such property.
(2) The replacement period is the period provided for purchase of a
new principal residence under section 1034 of the Code without
recognition of gain on the sale of the old residence. In the case of
residences sold or exchanged after December 31, 1974, it is generally 18
months in the case of acquisition by purchase and 2 years in the case of
construction by the taxpayer provided, however, that such construction
has commenced within the 18-month period. Thus, a calendar-year taxpayer
who disposes of his old principal residence in December 1975 and does
not qualify under paragraph (b) or (c) of this section will include the
amount previously allowed as additional tax on his 1977 tax return.
(3) Except as provided in paragraphs (b) and (c) of this section,
section 44(d) applies to all dispositions of property, including sales
(including foreclosure sales), exchanges (including tax-free exchanges
such as those under sections 351, 721, and 1031), and gifts.
(4) In the case of a husband and wife who were allowed a credit
under section 44(a) claimed on a joint return, for the purpose of
section 44(d) and this section the credit shall be allocated between the
spouses in accordance with the provisions of paragraph (b)(3) of Sec.
1.44-1.
(b) Acquisition of a new residence. (1) Section 44(d)(1) and
paragraph (a) of this section shall not apply to a disposition of
property with respect to the purchase of which a credit was allowed
under section 44(a) in the case of a taxpayer who purchases or
constructs a new principal residence (within the meaning of Sec. 1.44-
5(a)) within the applicable replacement period provided in section 1034.
In determining whether a new principal residence qualifies for purposes
of this section the rules relating to construction, acquisition, and
occupancy under Sec. 1.44-2 do not apply. Where a disposition has
occurred and the taxpayer's purchase (or construction) costs of a new
principal residence are less than the adjusted sales price (as defined
in section 1034(b)) of the old residence, the tax imposed by chapter 1
of the Code for the taxable year following the taxable year during which
disposition occurs is increased by an amount which bears the same ratio
to
[[Page 259]]
the amount allowed as a credit for the purchase of the old residence as
(i) the adjusted sales price of the old residence (within the meaning of
section 1034), reduced (but not below zero) by the taxpayer's cost of
purchasing (or constructing) the new residence (within the meaning of
such section) bears to (ii) the adjusted sales price of the old
residence.
(2) The rules of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example. On July 15, 1975, A purchases a new principal residence for
a total purchase price of $40,000. The property meets the tests of Sec.
1.44-2, and A is allowed a credit of $2,000 on his 1975 tax return. On
January 15, 1977 (within 36 months after acquisition) A sells his
residence for an adjusted sales price of $50,000 and on March 15, 1977,
purchases a new principal residence at a cost of $40,000. Since the new
principal residence was purchased within the 18-month replacement period
(provided in section 1034), the amount recaptured is limited to $400,
determined by multiplying the amount of the credit allowed ($2,000) by a
fraction, the numerator of which is $10,000 (determined by reducing the
adjusted sales price of the old residence ($50,000) by A's cost of
purchasing the new principal residence ($40,000)) and the denominator of
which is $50,000 (the adjusted sales price). Therefore, A's tax
liability for 1978, the year following the taxable year in which the
disposition occurred, is increased by $400.
(c) Certain involuntary dispositions. Section 44(d)(1) and paragraph
(a) of this section shall not apply to the following:
(1) A disposition of a residence made on account of the death of any
individual having a legal or equitable interest therein occurring during
the 36-month period described in paragraph (a) of this section,
(2) A disposition of the residence if it is substantially or
completely destroyed by a casualty described in section 165(c)(3),
(3) A disposition of the residence if it is compulsorily and
involuntarily converted within the meaning of section 1033(a), or
(4) A disposition of the residence pursuant to a settlement in a
divorce or legal separation proceeding where the other spouse retains
the residence as principal residence (as defined in Sec. 1.44-5(a)).
[T.D. 7391, 40 FR 55854, Dec. 2, 1975; 40 FR 58138, Dec. 15, 1975]
Sec. 1.44-5 Definitions.
For purposes of section 44 and the regulations thereunder--
(a) New principal residence. The term ``new principal residence''
means a principal residence, the original use of which commences with
the taxpayer. The term ``principal residence'' has the same meaning as
under section 1034 of the Code. For this purpose, the term ``residence''
includes, without being limited to, a single family structure, a
residential unit in a condominium or cooperative housing project, a
townhouse, and a factory-made home. In the case of a tenant-stockholder
in a cooperative housing corporation references to property used by the
taxpayer as his principal residence and references to the residence of a
taxpayer shall include stock held by the tenant-stockholder in a
cooperative housing project provided, however, that the taxpayer used as
his principal residence the house or apartment which he was entitled as
such stockholder to occupy. ``Original use'' of the new principal
residence by the taxpayer means that such residence has never been used
as a residence prior to its use as such by the taxpayer. For this
purpose, a residence will qualify if the first occupancy was by the
taxpayer pursuant to a lease arrangement pending settlement under a
binding contract to purchase or pursuant to a lease arrangement where a
written option to purchase the then existing residence was contained in
the original lease agreement.
A renovated building does not qualify as new, regardless of the extent
of the renovation nor does a condominium conversion qualify.
(b) Purchase price--(1) General rule. For purposes of section 44(a)
and Sec. 1.44-1, the term ``purchase price'' means the adjusted basis
of the new principal residence on the date of acquisition and includes
all amounts attributable to the acquisition or construction, but only to
the extent that such amounts constitute capital expenditures and are not
allowable as deductions in computing taxable income. Such capital
[[Page 260]]
expenditures include but are not limited to the cost of acquisition or
construction, title insurance, attorney's fees, transfer taxes, and
other costs of transfer. For these purposes the adjusted basis of a
factory-made home includes the cost of moving the home and setting it up
as the taxpayer's principal residence only where such cost is included
in the base price of the residence; it also includes the purchase price
of the land on which the home is located, but only if such land was
purchased by the taxpayer after March 12, 1975 and only if the taxpayer
acquired the land prior to or in conjunction with the acquisition of
such factory-made home. However, the adjusted basis does not include any
expenditures involved in connection with the leasing of land on which
the factory-made home is located. In the case of factory-made homes the
adjusted basis includes furniture only where it is included in the base
price of the unit.
(2) Sale of old principal residence. (i) The adjusted basis is
reduced by any gain from the sale or involuntary conversion of an old
principal residence, which is not recognized due to the application of
section 1033 or section 1034. However, no reduction will be made for any
gain excluded from tax by reason of the special treatment provided under
the tax laws in the case of a sale by a taxpayer who has attained age 65
(section 121 of the code).
(ii) The rules in subdivision (i) of this subparagraph are
illustrated by the following examples:
Example 1. A sells an old principal residence for $30,000 which has
an adjusted basis of $20,000. A reinvests the proceeds by purchasing a
new principal residence for $40,000 (including settlement costs which
are capital in nature), and this purchase satisfies the statutory
criteria under section 1034 for nonrecognition of gain. The credit under
section 44 applies with respect to $30,000 ($40,000 costs minus $10,000
unrecognized gain) of the cost of the new principal residence.
Example 2. B and C, two sisters, purchase a new principal residence
as joint tenants with the right of survivorship for a total purchase
price of $40,000. B has previously sold her old principal residence for
$25,000 and a $10,000 gain on the sale has qualified for nonrecognition
under section 1034. B contributes $25,000 and C contributes $15,000. The
adjusted basis of the new principal residence is $30,000 representing
the total purchase price of $40,000 less $10,000 representing
unrecognized gain under section 1034. The total credit allowable,
therefore, is $1,500. Since joint tenants are treated as equal owners
and since allocation of the credit is made in proportion to the
taxpayer's respective ownership interests in such residence B and C each
will receive a credit of $750.
Example 3. Taxpayer D is 65 years old and sells his old principal
residence for $20,000 excluding all gain under section 121. He then
purchases a new principal residence for $30,000. D's adjusted basis in
his new principal residence is $30,000, and he is allowed a credit of
$1,500.
(3) Tie-in sales. In the case of a purchase of a new principal
residence which is tied in to the transfer of other property by the
seller to the purchaser, whether purportedly by sale or gift, the
adjusted basis of the residence is reduced by the amount of the excess
of the fair market value of such other property received over the
amount, if any, purportedly paid for it by the purchaser of the
residence. For example, if a taxpayer receives a new car with a fair
market value of $2,500 upon the purchase of a condominium apartment for
a total purchase price of $40,000 (including settlement costs which are
capital in nature) his adjusted basis in the residence for computation
of the credit is $37,500.
(4) Basis of new principal residence. The taxpayer's basis in his
new principal residence is not in any way affected by the allowance of
the credit.
(c) Purchase--(1) General rule. Except as provided in subparagraph
(2) of this paragraph, the term ``purchase'' means any acquisition of
property.
(2) Exceptions. (i) An acquisition does not qualify as a purchase
for the purpose of this paragraph if the property is acquired from a
person whose relationship to the person acquiring it would result in the
disallowance of losses under section 267 or 707(b). Such persons
include--
(A) The purchaser's spouse, ancestors and lineal descendants,
(B) Related corporations as provided under section 267(b)(2),
(C) Related trusts as provided under section 267(b), (4), (5), (6),
and (7),
(D) Related charitable organizations as provided under section
267(b)(9), and
(E) Related partnerships as provided under section 707(b)(1).
[[Page 261]]
For purposes of this subdivision the constructive ownership rules of
section 267(c) shall apply except that paragraph (4) of section 267(c)
shall be treated as providing that the family of an individual shall
include only his spouse, ancestors, and lineal descendants.
(ii) An acquisition does not qualify as a purchase for the purpose
of this paragraph if the basis of the property in the hands of the
person acquiring such property is determined--
(A) In whole or in part by reference to the adjusted basis of such
property in the hands of the person from whom acquired (e.g., a gift
under section 1015), or
(B) Under section 1014(a) (relating to property acquired from a
decedent).
(d) Self-construction. The term ``self-construction'' means the
construction of a residence (other than a factory-made home) to the
taxpayer's specifications on land already owned or leased by the
taxpayer at the time of commencement of construction. Thus, where a
taxpayer purchases land and either builds a residence himself or hires
an architect and a contractor to build a residence on that land, the
taxpayer has ``self-constructed'' the residence.
(e) Factory-made home. The term ``factory-made homes'' includes
mobile homes, houseboats and prefabricated and modular homes.
(f) Lowest offer. The term ``lowest offer'' means the lowest price
at which the residence was offered for sale after February 28, 1975.
[T.D. 7391, 40 FR 55855, Dec. 2, 1975]
Sec. 1.44B-1 Credit for employment of certain new employees.
(a) In general--(1) Targeted jobs credit. Under section 44B a
taxpayer may elect to claim a credit for wages (as defined in section
51(c) paid or incurred to members of a targeted group (as defined in
section 51(d)). Generally, to qualify for the credit, the wages must be
paid or incurred to members of a targeted group first hired after
September 26, 1978. However, wages paid of incurred to a vocational
rehabilitation referral (as defined in section 51(d)(2)) hired before
September 27, 1978, may qualify for the credit if a credit under section
44B (as in effect prior to enactment of the Revenue Act of 1978) was
claimed for the individual by the taxpayer for a taxable year beginning
before January 1, 1979. The amount of the credit shall be determined
under section 51. Section 280C(b) (relating to the requirement that the
deduction for wages be reduced by the amount of the credit) and the
regulations thereunder will not apply to taxpayers who do not elect to
claim the credit.
(2) New jobs credit. Under section 44B (as in effect prior to
enactment of the Revenue Act of 1978) a taxpayer may elect to claim as a
credit the amount determined under sections 51, 52, and 53 (as in effect
prior to enactment of the Revenue Act of 1978). Section 280C(b)
(relating to the requirement that the deduction for wages be reduced by
the amount of the credit) and the regulations thereunder will not apply
to taxpayers who do not elect to claim the credit.
(b) Time and manner of making election. The election to claim the
targeted jobs credit and the new jobs credit is made by claiming the
credit on an original return, or on an amended return, at any time
before the expiration of the 3-year period beginning on the last date
prescribed by law for filing the return for the taxable year (determined
without regard to extensions). The election may be revoked within the
above-described 3-year period by filing an amended return on which the
credit is not claimed.
(c) Election by partnership, electing small business corporation,
and members of a controlled group. In the case of a partnership, the
election shall be made by the partnership. In the case of an electing
small business corporation (as defined in section 1371(a)), the election
shall be made by the corporation. In the case of a controlled group of
corporations (within the meaning of section 52(a) and the regulations
issued thereunder) not filing a consolidlated return under section 1501,
the election shall be made by each member of the group. In the case of
an affiliated group
[[Page 262]]
filing a consolidated return under section 1501, the election shall be
made by the group.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B; 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7921, 48 FR 52904, Nov. 23, 1983]
Research Credit--For Taxable Years Beginning Before January 1, 1990
Sec. 1.41-0A Table of contents.
This section lists the paragraphs contained in Sec. Sec. 1.41-0A,
1.41-3A, 1.41-4A and 1.41-5A.
Sec. 1.41-0A Table of contents.
Sec. 1.41-3A Base period research expense.
(a) Number of years in base period.
(b) New taxpayers.
(c) Definition of base period research expenses.
(d) Special rules for short taxable years.
(1) Short determination year.
(2) Short base period year.
(3) Years overlapping the effective dates of section 41 (section
44F).
(i) Determination years.
(ii) Base period years.
(4) Number of months in a short taxable year.
(e) Examples.
Sec. 1.41-4A Qualified research for taxable years beginning before
January 1, 1986.
(a) General rule.
(b) Activities outside the United States.
(1) In-house research.
(2) Contract research.
(c) Social sciences or humanities.
(d) Research funded by any grant, contract, or otherwise.
(1) In general.
(2) Research in which taxpayer retains no rights.
(3) Research in which the taxpayer retains substantial rights.
(i) In general.
(ii) Pro rata allocation.
(iii) Project-by-project determination.
(4) Independent research and development under the Federal
Acquisition Regulations System and similar provisions.
(5) Funding determinable only in subsequent taxable year.
(6) Examples.
Sec. 1.41-5A Basic research for taxable years beginning before January
1, 1987.
(a) In general.
(b) Trade or business requirement.
(c) Prepaid amounts.
(1) In general.
(2) Transfers of property.
(d) Written research agreement.
(1) In general.
(2) Agreement between a corporation and a qualified organization
after June 30, 1983.
(i) In general.
(ii) Transfers of property.
(3) Agreement between a qualified fund and a qualified educational
organization after June 30, 1983.
(e) Exclusions.
(1) Research conducted outside the United States.
(2) Research in the social sciences or humanities.
(f) Procedure for making an election to be treated as a qualified
fund.
[T.D. 8930, 66 FR 295, Jan. 3, 2001]
Sec. 1.41-3A Base period research expense.
(a) Number of years in base period. The term ``base period''
generally means the 3 taxable years immediately preceding the year for
which a credit is being determined (``determination year''). However, if
the first taxable year of the taxpayer ending after June 30, 1981, ends
in 1981 or 1982, then with respect to that taxable year the term ``base
period'' means the immediately preceding taxable year. If the second
taxable year of the taxpayer ending after June 30, 1981, ends in 1982 or
1983, then with respect to that taxable year the term ``base period''
means the 2 immediately preceding taxable years.
(b) New taxpayers. If, with respect to any determination year, the
taxpayer has not been in existence for the number of preceding taxable
years that are included under paragraph (a) of this section in the base
period for that year, then for purposes of paragraph (c)(1) of this
section (relating to the determination of average qualified research
expenses during the base period), the taxpayer shall be treated as--
(1) Having been in existence for that number of additional 12-month
taxable years that is necessary to complete the base period specified in
paragraph (a) of this section, and
(2) Having had qualified research expenses of zero in each of those
additional years.
(c) Definition of base period research expenses. For any
determination year, the term ``base period research expenses'' means the
greater of--
[[Page 263]]
(1) The average qualified research expenses for taxable years during
the base period, or
(2) Fifty percent of the qualified research expenses for the
determination year.
(d) Special rules for short taxable years--(1) Short determination
year. If the determination year for which a research credit is being
taken is a short taxable year, the amount taken into account under
paragraph (c)(1) of this section shall be modified by multiplying that
amount by the number of months in the short taxable year and dividing
the result by 12.
(2) Short base period year. For purposes of paragraph (c)(1) of this
section, if a year in the base period is a short taxable year, the
qualified research expenses paid or incurred in the short taxable year
are deemed to be equal to the qualified research expenses actually paid
or incurred in that year multiplied by 12 and divided by the number of
months in that year.
(3) Years overlapping the effective dates of section 41 (section
44F)--(i) Determination years. If a determination year includes months
before July 1981, the determination year is deemed to be a short taxable
year including only the months after June 1981. Accordingly, paragraph
(d)(1) of this section is applied for purposes of determining the base
period expenses for such year. See section 221(d)(2) of the Economic
Recovery Tax Act of 1981.
(ii) Base period years. No adjustment is required in the case of a
base period year merely because it overlaps June 30, 1981.
(4) Number of months in a short taxable year. The number of months
in a short taxable year is equal to the number of whole calendar months
contained in the year plus fractions for any partially included months.
The fraction for a partially included month is equal to the number of
days in the month that are included in the short taxable year divided by
the total number of days in that month. Thus, if a short taxable year
begins on January 1, 1982, and ends on June 9, 1982, it consists of 5
and 9/30 months.
(e) Examples. The following examples illustrate the application of
this section.
Example 1. X Corp., an accrual-method taxpayer using the calendar
year as its taxable year, is organized and begins carrying on a trade or
business during 1979 and subsequently incurs qualified research expenses
as follows:
1979........................................................... $10x
1980........................................................... 150x
1/1/81-6/30/81................................................. 90x
7/1/81-12/31/81................................................ 110x
1982........................................................... 250x
1983........................................................... 450x
(i) Determination year 1981. For determination year 1981, the base
period consists of the immediately preceding taxable year, calendar year
1980. Because the determination year includes months before July 1981,
paragraph (d)(3)(i) of this section requires that the determination year
be treated as a short taxable year. Thus, for purposes of paragraph
(c)(1) of this section, as modified by paragraph (d)(1) of this section,
the average qualified research expenses for taxable years during the
base period are $75x ($150x, the average qualified research expenses for
the base period, multiplied by 6, the number of months in the
determination year after June 30, 1981, and divided by 12). Because this
amount is greater than the amount determined under paragraph (c)(2) of
this section (50 percent of the determination year's qualified research
expense of $110x, or $55x), the amount of base period research expenses
is $75x. The credit for determination year 1981 is equal to 25 percent
of the excess of $110x (the qualified research expenditures incurred
during the determination year including only expenditures accrued on or
after July 1, 1981, through the end of the determination year) over $75x
(the base period research expenses).
(ii) Determination year 1982. For determination year 1982, the base
period consists of the 2 immediately preceding taxable years, 1980 and
1981. The amount determined under paragraph (c)(1) of this section (the
average qualified research expenses for taxable years during the base
period) is $175x (($150x+$90x+$110x)/2). This amount is greater than the
amount determined under paragraph (c)(2) of this section, (50 percent of
$250x, or $125x). Accordingly, the amount of base period research
expenses is $175x. The credit for determination year 1982 is equal to 25
percent of the excess of $250x (the qualified research expenses incurred
during the determination year) over $175x (the base period research
expenses).
(iii) Determination year 1983. For determination year 1983, the base
period consists of the 3 immediately preceding taxable years 1980, 1981
and 1982. The amount determined under paragraph (c)(1) of this section
(the average qualified research expenses for taxable years during the
base period) is $200x (($150x+$200x+$250x)/3). The amount determined
under paragraph (c)(2) of this section
[[Page 264]]
is $225x (50 percent of the $450x of qualified research expenses in
1983). Accordingly, the amount of base period research expenses is
$225x. The credit for determination year 1983 is equal to 25 percent of
the excess of $450x (the qualified research expenses incurred during the
determination year) over $225x (the base period research expenses).
Examp1e 2. Y, an accrual-basis corporation using the calendar year
as its taxable year comes into existence and begins carrying on a trade
or business on July 1, 1983. Y incurs qualified research expenses as
follows:
7/1/83--12/31/83............................................... $80x
1984........................................................... 200x
1985........................................................... 200x
(i) Determination year 1983. For determination year 1983, the base
period consists of the 3 immediately preceding taxable years: 1980, 1981
and 1982. Although Y was not in existence during 1980, 1981 and 1982, Y
is treated under paragraph (b) of this section as having been in
existence during those years with qualified research expenses of zero.
Thus, the amount determined under paragraph (c)(1) of this section (the
average qualified research expenses for taxable years during the base
period) is $0x (($0x+$0x+$0x)/3). The amount determined under paragraph
(c)(2) of this section is $40x (50 percent of $80x). Accordingly, the
amount of base period research expenses is $40x. The credit for
determination year 1983 is equal to 25 percent of the excess of $80x
(the qualified research expenses incurred during the determination year)
over $40x (the base period research expenses).
(ii) Determination year 1984. For determination year 1984, the base
period consists of the 3 immediately preceding taxable years: 1981,
1982, and 1983. Under paragraph (b) of this section, Y is treated as
having been in existence during years 1981 and 1982 with qualified
research expenses of zero. Because July 1 through December 31, 1983 is a
short taxable year, paragraph (d)(2) of this section requires that the
qualified research expenses for that year be adjusted to $160x for
purposes of determining the average qualified research expenses during
the base period. The $160x results from the actual qualified research
expenses for that year ($80x) multiplied by 12 and divided by 6 (the
number of months in the short taxable year). Accordingly, the amount
determined under paragraph (c)(1) of this section (the average qualified
research expenses for taxable years during the base period) is $53\1/3\x
(($0x+$0x+$160x)/3). The amount determined under paragraph (c)(2) of
this section is $100x (50 percent of $200x). The amount of base period
research expenses is $100x. The credit for determination year 1984 is
equal to 25 percent of the excess of $200x (the qualified research
expenses incurred during the determination year) over $100x (the base
period research expenses).
(iii) Determination year 1985. For determination year 1985, the base
period consists of the 3 immediately preceding taxable years: 1982,
1983, and 1984. Pursuant to paragraph (b) of this section, Y is treated
as having been in existence during 1982 with qualified research expenses
of zero. Because July 1 through December 31, 1982, is a short taxable
year, paragraph (d)(2) of this section requires that the qualified
research expense for that year be adjusted to $160x for purposes of
determining the average qualified research expenses for taxable years
during the base period. This $160x is the actual qualified research
expense for that year ($80x) multiplied by 12 and divided by 6 (the
number of months in the short taxable year). Accordingly, the amount
determined under paragraph (c)(1) of this section (the average qualified
research expenses for taxable years during the base period) is $120x
(($0x+$160x+$200x)/3). The amount determined under paragraph (c)(2) of
this section is $100x (50 percent of $200x). The amount of base period
research expenses is $120x. The credit for determination year 1985 is
equal to 25 percent of the excess of $200x (the qualified research
expenses incurred during the determination year) over $120x (the base
period research expenses).
[T.D. 8251, 54 FR 21204, May 17, 1989. Redesignated by T.D. 8930, 66 FR
289, Jan. 3, 2001]
rules for computing credit for investment in certain depreciable
property
Sec. 1.45D-0 Table of contents.
This section lists the paragraphs contained in Sec. 1.45D-1.
(a) Current year credit.
(b) Allowance of credit.
(1) In general.
(2) Credit allowance date.
(3) Applicable percentage.
(4) Amount paid at original issue.
(c) Qualified equity investment.
(1) In general.
(2) Equity investment.
(3) Equity investments made prior to allocation.
(i) In general.
(ii) Exceptions.
(A) Allocation applications submitted by August 29, 2002.
(B) Other allocation applications.
(iii) Failure to receive allocation.
(iv) Initial investment date.
(4) Limitations.
(i) In general.
(ii) Allocation limitation.
(5) Substantially all.
(i) In general.
(ii) Direct-tracing calculation.
(iii) Safe harbor calculation.
(iv) Time limit for making investments.
[[Page 265]]
(v) Reduced substantially-all percentage.
(vi) Examples.
(6) Aggregation of equity investments.
(7) Subsequent purchasers.
(8) Non-real estate qualified equity investment.
(d) Qualified low-income community investments.
(1) In general.
(i) Investment in a qualified active low-income community business
or a non-real estate qualified active low-income community business.
(ii) Purchase of certain loans from CDEs.
(A) In general.
(B) Certain loans made before CDE certification.
(C) Intermediary CDEs.
(D) Examples.
(iii) Financial counseling and other services.
(iv) Investments in other CDEs.
(A) In general.
(B) Examples.
(2) Payments of, or for, capital, equity or principal.
(i) In general.
(ii) Subsequent reinvestments.
(iii) Special rule for loans.
(iv) Example.
(3) Special rule for reserves.
(4) Qualified active low-income community business.
(i) In general.
(A) Gross-income requirement.
(B) Use of tangible property.
(1) In general.
(2) Example.
(C) Services performed.
(D) Collectibles.
(E) Nonqualified financial property.
(1) In general.
(2) Construction of real property.
(ii) Proprietorships.
(iii) Portions of business.
(A) In general.
(B) Examples.
(iv) Active conduct of a trade or business.
(A) Special rule.
(B) Example.
(5) Qualified business.
(i) In general.
(ii) Rental of real property.
(iii) Exclusions.
(A) Trades or businesses involving intangibles.
(B) Certain other trades or businesses.
(C) Farming.
(6) Qualifications.
(i) In general.
(ii) Control.
(A) In general.
(B) Definition of control.
(C) Disregard of control.
(7) Financial counseling and other services.
(8) Special rule for certain loans.
(i) In general.
(ii) Example.
(9) Targeted populations.
(i) Low-income persons.
(A) Definition.
(1) In general.
(2) Area median family income.
(3) Individual's family income.
(B) Qualified active low-income community business requirements for
low-income targeted populations.
(1) In general.
(2) Employee.
(3) Owner.
(4) Derived from.
(5) Fair market value of sales, rentals, services, or other
transactions.
(C) 120-percent-income restriction.
(1) In general.
(2) Population census tract location.
(D) Rental of real property for low-income targeted populations.
(1) In general.
(2) Special rule for entities whose sole business is the rental to
others of real property.
(ii) Individuals who otherwise lack adequate access to loans or
equity investments.
(A) In general.
(B) GO Zone Targeted Population.
(C) Qualified active low-income community business requirements for
the GO Zone Targeted Population.
(1) In general.
(2) Location.
(i) In general.
(ii) Determination.
(D) 200-percent-income restriction.
(1) In general.
(2) Population census tract location.
(E) Rental of real property for the GO Zone Targeted Population.
(10) Non-real estate qualified active low-income community business.
(i) Definition.
(ii) Payments of, or for, capital, equity or principal with respect
to a non-real estate qualified active low-income community business.
(A) In general.
(B) Seventh year of the 7-year credit period.
(C) Amounts received from a qualifying entity.
(D) Definition of qualifying entity.
(e) Recapture.
(1) In general.
(2) Recapture event.
(3) Redemption.
(i) Equity investment in a C corporation.
(ii) Equity investment in an S corporation.
(iii) Capital interest in a partnership.
(4) Bankruptcy.
(5) Waiver of requirement or extension of time.
(i) In general.
(ii) Manner for requesting a waiver or extension.
[[Page 266]]
(iii) Terms and conditions.
(6) Cure period.
(7) Example.
(f) Basis reduction.
(1) In general.
(2) Adjustment in basis of interest in partnership or S corporation.
(g) Other rules.
(1) Anti-abuse.
(2) Reporting requirements.
(i) Notification by CDE to taxpayer.
(A) Allowance of new markets tax credit.
(B) Recapture event.
(ii) CDE reporting requirements to Secretary.
(iii) Manner of claiming new markets tax credit.
(iv) Reporting recapture tax.
(3) Other Federal tax benefits.
(i) In general.
(ii) Low-income housing credit.
(4) Bankruptcy of CDE.
(h) Effective/applicability dates.
(1) In general.
(2) Exception for certain provisions.
(3) Targeted populations.
(4) Investments in non-real estate businesses.
[T.D. 9560, 76 FR 75777, Dec. 5, 2011, as amended by T.D. 9600, 77 FR
59546, Sept. 28, 2012]
Sec. 1.45D-1 New markets tax credit.
(a) Current year credit. The current year general business credit
under section 38(b)(13) includes the new markets tax credit under
section 45D(a).
(b) Allowance of credit--(1) In general. A taxpayer holding a
qualified equity investment on a credit allowance date which occurs
during the taxable year may claim the new markets tax credit determined
under section 45D(a) and this section for such taxable year in an amount
equal to the applicable percentage of the amount paid to a qualified
community development entity (CDE) for such investment at its original
issue. Qualified equity investment is defined in paragraph (c) of this
section. Credit allowance date is defined in paragraph (b)(2) of this
section. Applicable percentage is defined in paragraph (b)(3) of this
section. A CDE is a qualified community development entity as defined in
section 45D(c). The amount paid at original issue is determined under
paragraph (b)(4) of this section.
(2) Credit allowance date. The term credit allowance date means,
with respect to any qualified equity investment--
(i) The date on which the investment is initially made; and
(ii) Each of the 6 anniversary dates of such date thereafter.
(3) Applicable percentage. The applicable percentage is 5 percent
for the first 3 credit allowance dates and 6 percent for the other 4
credit allowance dates.
(4) Amount paid at original issue. The amount paid to the CDE for a
qualified equity investment at its original issue consists of all
amounts paid by the taxpayer to, or on behalf of, the CDE (including any
underwriter's fees) to purchase the investment at its original issue.
(c) Qualified equity investment--(1) In general. The term qualified
equity investment means any equity investment (as defined in paragraph
(c)(2) of this section) in a CDE if--
(i) The investment is acquired by the taxpayer at its original issue
(directly or through an underwriter) solely in exchange for cash;
(ii) Substantially all (as defined in paragraph (c)(5) of this
section) of such cash is used by the CDE to make qualified low-income
community investments (as defined in paragraph (d)(1) of this section);
and
(iii) The investment is designated for purposes of section 45D and
this section as a qualified equity investment or a non-real estate
qualified equity investment (as defined in paragraph (c)(8) of this
section) by the CDE on its books and records using any reasonable
method.
(2) Equity investment. The term equity investment means any stock
(other than nonqualified preferred stock as defined in section
351(g)(2)) in an entity that is a corporation for Federal tax purposes
and any capital interest in an entity that is a partnership for Federal
tax purposes. See Sec. Sec. 301.7701-1 through 301.7701-3 of this
chapter for rules governing when a business entity, such as a business
trust or limited liability company, is classified as a corporation or a
partnership for Federal tax purposes.
(3) Equity investments made prior to allocation--(i) In general.
Except as provided in paragraph (c)(3)(ii) of this section, an equity
investment in an entity is not eligible to be designated as a qualified
equity investment if it is
[[Page 267]]
made before the entity enters into an allocation agreement with the
Secretary. An allocation agreement is an agreement between the Secretary
and a CDE relating to a new markets tax credit allocation under section
45D(f)(2).
(ii) Exceptions. Notwithstanding paragraph (c)(3)(i) of this
section, an equity investment in an entity is eligible to be designated
as a qualified equity investment or a non-real estate qualified equity
investment under paragraph (c)(1)(iii) of this section if--
(A) Allocation applications submitted by August 29, 2002. (1) The
equity investment is made on or after April 20, 2001;
(2) The designation of the equity investment as a qualified equity
investment is made for a credit allocation received pursuant to an
allocation application submitted to the Secretary no later than August
29, 2002; and
(3) The equity investment otherwise satisfies the requirements of
section 45D and this section; or
(B) Other allocation applications. (1) The equity investment is made
on or after the date the Secretary publishes a Notice of Allocation
Availability (NOAA) in the Federal Register;
(2) The designation of the equity investment as a qualified equity
investment is made for a credit allocation received pursuant to an
allocation application submitted to the Secretary under that NOAA; and
(3) The equity investment otherwise satisfies the requirements of
section 45D and this section.
(iii) Failure to receive allocation. For purposes of paragraph
(c)(3)(ii)(A) of this section, if the entity in which the equity
investment is made does not receive an allocation pursuant to an
allocation application submitted no later than August 29, 2002, the
equity investment will not be eligible to be designated as a qualified
equity investment. For purposes of paragraph (c)(3)(ii)(B) of this
section, if the entity in which the equity investment is made does not
receive an allocation under the NOAA described in paragraph
(c)(3)(ii)(B)(1) of this section, the equity investment will not be
eligible to be designated as a qualified equity investment.
(iv) Initial investment date. If an equity investment is designated
as a qualified equity investment in accordance with paragraph (c)(3)(ii)
of this section, the investment is treated as initially made on the
effective date of the allocation agreement between the CDE and the
Secretary.
(4) Limitations--(i) In general. The term qualified equity
investment does not include--
(A) Any equity investment issued by a CDE more than 5 years after
the date the CDE enters into an allocation agreement (as defined in
paragraph (c)(3)(i) of this section) with the Secretary; and
(B) Any equity investment by a CDE in another CDE, if the CDE making
the investment has received an allocation under section 45D(f)(2).
(ii) Allocation limitation. The maximum amount of equity investments
issued by a CDE that may be designated under paragraph (c)(1)(iii) of
this section by the CDE may not exceed the portion of the limitation
amount allocated to the CDE by the Secretary under section 45D(f)(2).
(5) Substantially all--(i) In general. Except as provided in
paragraph (c)(5)(v) of this section, the term substantially all means at
least 85 percent. The substantially-all requirement must be satisfied
for each annual period in the 7-year credit period using either the
direct-tracing calculation under paragraph (c)(5)(ii) of this section,
or the safe harbor calculation under paragraph (c)(5)(iii) of this
section. For the first annual period, the substantially-all requirement
is treated as satisfied if either the direct-tracing calculation under
paragraph (c)(5)(ii) of this section, or the safe-harbor calculation
under paragraph (c)(5)(iii) of this section, is performed on a single
testing date and the result of the calculation is at least 85 percent.
For each annual period other than the first annual period, the
substantially-all requirement is treated as satisfied if either the
direct-tracing calculation under paragraph (c)(5)(ii) of this section,
or the safe harbor calculation under paragraph (c)(5)(iii) of this
section, is performed every six months and the average of the two
calculations for the annual period is at least 85 percent. For example,
[[Page 268]]
the CDE may choose the same two testing dates for all qualified equity
investments regardless of the date each qualified equity investment was
initially made under paragraph (b)(2)(i) of this section, provided the
testing dates are six months apart. The use of the direct-tracing
calculation under paragraph (c)(5)(ii) of this section (or the safe
harbor calculation under paragraph (c)(5)(iii) of this section) for an
annual period does not preclude the use of the safe harbor calculation
under paragraph (c)(5)(iii) of this section (or the direct-tracing
calculation under paragraph (c)(5)(ii) of this section) for another
annual period, provided that a CDE that switches to a direct-tracing
calculation must substantiate that the taxpayer's investment is directly
traceable to qualified low-income community investments from the time of
the CDE's initial investment in a qualified low-income community
investment. For purposes of this paragraph (c)(5)(i), the 7-year credit
period means the period of 7 years beginning on the date the qualified
equity investment is initially made. See paragraph (c)(6) of this
section for circumstances in which a CDE may treat more than one equity
investment as a single qualified equity investment.
(ii) Direct-tracing calculation. The substantially-all requirement
is satisfied if at least 85 percent of the taxpayer's investment is
directly traceable to qualified low-income community investments as
defined in paragraph (d)(1) of this section. The direct-tracing
calculation is a fraction the numerator of which is the CDE's aggregate
cost basis determined under section 1012 in all of the qualified low-
income community investments that are directly traceable to the
taxpayer's cash investment, and the denominator of which is the amount
of the taxpayer's cash investment under paragraph (b)(4) of this
section. For purposes of this paragraph (c)(5)(ii), cost basis includes
the cost basis of any qualified low-income community investment that
becomes worthless. See paragraph (d)(2) of this section for the
treatment of amounts received by a CDE in payment of, or for, capital,
equity or principal with respect to a qualified low-income community
investment.
(iii) Safe harbor calculation. The substantially-all requirement is
satisfied if at least 85 percent of the aggregate gross assets of the
CDE are invested in qualified low-income community investments as
defined in paragraph (d)(1) of this section. The safe harbor calculation
is a fraction the numerator of which is the CDE's aggregate cost basis
determined under section 1012 in all of its qualified low-income
community investments, and the denominator of which is the CDE's
aggregate cost basis determined under section 1012 in all of its assets.
For purposes of this paragraph (c)(5)(iii), cost basis includes the cost
basis of any qualified low-income community investment that becomes
worthless. See paragraph (d)(2) of this section for the treatment of
amounts received by a CDE in payment of, or for, capital, equity or
principal with respect to a qualified low-income community investment.
(iv) Time limit for making investments. The taxpayer's cash
investment received by a CDE is treated as invested in a qualified low-
income community investment as defined in paragraph (d)(1) of this
section only to the extent that the cash is so invested within the 12-
month period beginning on the date the cash is paid by the taxpayer
(directly or through an underwriter) to the CDE.
(v) Reduced substantially-all percentage. For purposes of the
substantially-all requirement (including the direct-tracing calculation
under paragraph (c)(5)(ii) of this section and the safe harbor
calculation under paragraph (c)(5)(iii) of this section), 85 percent is
reduced to 75 percent for the seventh year of the 7-year credit period
(as defined in paragraph (c)(5)(i) of this section).
(vi) Examples. The following examples illustrate an application of
this paragraph (c)(5):
Example 1. X is a partnership and a CDE that has received a $1
million new markets tax credit allocation from the Secretary. On
September 1, 2004, X uses a line of credit from a bank to fund a $1
million loan to Y. The loan is a qualified low-income community
investment under paragraph (d)(1) of this section. On September 5, 2004,
A pays $1 million to acquire a capital interest in X. X uses the
proceeds of A's equity investment to pay off the $1 million line of
credit that was
[[Page 269]]
used to fund the loan to Y. X's aggregate gross assets consist of the $1
million loan to Y and $100,000 in other assets. A's equity investment in
X does not satisfy the substantially-all requirement under paragraph
(c)(5)(i) of this section using the direct-tracing calculation under
paragraph (c)(5)(ii) of this section because the cash from A's equity
investment is not used to make X's loan to Y. However, A's equity
investment in X satisfies the substantially-all requirement using the
safe harbor calculation under paragraph (c)(5)(iii) of this section
because at least 85 percent of X's aggregate gross assets are invested
in qualified low-income community investments.
Example 2. X is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On August 1, 2004, A
pays $100,000 for a capital interest in X. On August 5, 2004, X uses the
proceeds of A's equity investment to make an equity investment in Y. X
controls Y within the meaning of paragraph (d)(6)(ii)(B) of this
section. For the annual period ending July 31, 2005, Y is a qualified
active low-income community business (as defined in paragraph (d)(4) of
this section). Thus, for that period, A's equity investment satisfies
the substantially-all requirement under paragraph (c)(5)(i) of this
section using the direct-tracing calculation under paragraph (c)(5)(ii)
of this section. For the annual period ending July 31, 2006, Y no longer
is a qualified active low-income community business. Thus, for that
period, A's equity investment does not satisfy the substantially-all
requirement using the direct-tracing calculation. However, during the
entire annual period ending July 31, 2006, X's remaining assets are
invested in qualified low-income community investments with an aggregate
cost basis of $900,000. Consequently, for the annual period ending July
31, 2006, at least 85 percent of X's aggregate gross assets are invested
in qualified low-income community investments. Thus, for the annual
period ending July 31, 2006, A's equity investment satisfies the
substantially-all requirement using the safe harbor calculation under
paragraph (c)(5)(iii) of this section.
Example 3. X is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On August 1, 2004, A
and B each pay $100,000 for a capital interest in X. X does not treat
A's and B's equity investments as one qualified equity investment under
paragraph (c)(6) of this section. On September 1, 2004, X uses the
proceeds of A's equity investment to make an equity investment in Y and
X uses the proceeds of B's equity investment to make an equity
investment in Z. X has no assets other than its investments in Y and Z.
X controls Y and Z within the meaning of paragraph (d)(6)(ii)(B) of this
section. For the annual period ending July 31, 2005, Y and Z are
qualified active low-income community businesses (as defined in
paragraph (d)(4) of this section). Thus, for the annual period ending
July 31, 2005, A's and B's equity investments satisfy the substantially-
all requirement under paragraph (c)(5)(i) of this section using either
the direct-tracing calculation under paragraph (c)(5)(ii) of this
section or the safe harbor calculation under paragraph (c)(5)(iii) of
this section. For the annual period ending July 31, 2006, Y, but not Z,
is a qualified active low-income community business. Thus, for the
annual period ending July 31, 2006--
(1) X does not satisfy the substantially-all requirement using the
safe harbor calculation under paragraph (c)(5)(iii) of this section;
(2) A's equity investment satisfies the substantially-all
requirement using the direct-tracing calculation because A's equity
investment is directly traceable to Y; and
(3) B's equity investment does not satisfy the substantially-all
requirement because B's equity investment is traceable to Z.
Example 4. X is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On November 1, 2004, A
pays $100,000 for a capital interest in X. On December 1, 2004, B pays
$100,000 for a capital interest in X. On December 31, 2004, X uses
$85,000 from A's equity investment and $85,000 from B's equity
investment to make a $170,000 equity investment in Y, a qualified active
low-income community business (as defined in paragraph (d)(4) of this
section). X has no assets other than its investment in Y. X determines
whether A's and B's equity investments satisfy the substantially-all
requirement under paragraph (c)(5)(i) of this section on December 31,
2004. The calculation for A's and B's equity investments is 85 percent
using either the direct-tracing calculation under paragraph (c)(5)(ii)
of this section or the safe harbor calculation under paragraph
(c)(5)(iii) of this section. Therefore, for the annual periods ending
October 31, 2005, and November 30, 2005, A's and B's equity investments,
respectively, satisfy the substantially-all requirement under paragraph
(c)(5)(i) of this section. For the subsequent annual period, X performs
its calculations on December 31, 2005, and June 30, 2006. The average of
the two calculations on December 31, 2005, and June 30, 2006, is 85
percent using either the direct-tracing calculation under paragraph
(c)(5)(ii) of this section or the safe harbor calculation under
paragraph (c)(5)(iii) of this section. Therefore, for the annual periods
ending October 31, 2006, and November 30, 2006, A's and B's equity
investments, respectively, satisfy the substantially-all requirement
under paragraph (c)(5)(i) of this section.
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(6) Aggregation of equity investments. A CDE may treat any qualified
equity investments issued on the same day as one qualified equity
investment. If a CDE aggregates equity investments under this paragraph
(c)(6), the rules in this section shall be construed in a manner
consistent with that treatment.
(7) Subsequent purchasers. A qualified equity investment includes
any equity investment that would (but for paragraph (c)(1)(i) of this
section) be a qualified equity investment in the hands of the taxpayer
if the investment was a qualified equity investment in the hands of a
prior holder.
(8) Non-real estate qualified equity investment. If a qualified
equity investment is designated as a non-real estate qualified equity
investment under paragraph (c)(1)(iii) of this section, then the
qualified equity investment may only satisfy the substantially-all
requirement under paragraph (c)(5) of this section if the CDE makes
qualified low-income community investments that are directly traceable
(including investments made through one or more CDEs) to non-real estate
qualified active low-income community businesses (as defined in
paragraph (d)(10) of this section). The proceeds of a non-real estate
qualified equity investment cannot be used for transactions involving a
qualified active low-income community business that is not a non-real
estate qualified active low-income community business.
(d) Qualified low-income community investments--(1) In general. The
term qualified low-income community investment means any of the
following:
(i) Investment in a qualified active low-income community business
or a non-real estate qualified active low-income community business. Any
capital or equity investment in, or loan to, any qualified active low-
income community business (as defined in paragraph (d)(4) of this
section) or any non-real estate qualified active low-income community
business (as defined in paragraph (d)(10) of this section).
(ii) Purchase of certain loans from CDEs--(A) In general. The
purchase by a CDE (the ultimate CDE) from another CDE (whether or not
that CDE has received an allocation from the Secretary under section
45D(f)(2)) of any loan made by such entity that is a qualified low-
income community investment. A loan purchased by the ultimate CDE from
another CDE is a qualified low-income community investment if it
qualifies as a qualified low-income community investment either--
(1) At the time the loan was made; or
(2) At the time the ultimate CDE purchases the loan.
(B) Certain loans made before CDE certification. For purposes of
paragraph (d)(1)(ii)(A) of this section, a loan by an entity is treated
as made by a CDE, notwithstanding that the entity was not a CDE at the
time it made the loan, if the entity is a CDE at the time it sells the
loan.
(C) Intermediary CDEs. For purposes of paragraph (d)(1)(ii)(A) of
this section, the purchase of a loan by the ultimate CDE from a CDE that
did not make the loan (the second CDE) is treated as a purchase of the
loan by the ultimate CDE from the CDE that made the loan (the
originating CDE) if--
(1) The second CDE purchased the loan from the originating CDE (or
from another CDE); and
(2) Each entity that sold the loan was a CDE at the time it sold the
loan.
(D) Examples. The following examples illustrate an application of
this paragraph (d)(1)(ii):
Example 1. X is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. Y, a corporation, made
a $500,000 loan to Z in 1999. In January of 2004, Y is certified as a
CDE. On September 1, 2004, X purchases the loan from Y. At the time X
purchases the loan, Z is a qualified active low-income community
business under paragraph (d)(4)(i) of this section. Accordingly, the
loan purchased by X from Y is a qualified low-income community
investment under paragraphs (d)(1)(ii)(A) and (B) of this section.
Example 2. The facts are the same as in Example 1 except that on
February 1, 2004, Y sells the loan to W and on September 1, 2004, W
sells the loan to X. W is a CDE. Under paragraph (d)(1)(ii)(C) of this
section, X's purchase of the loan from W is treated as the purchase of
the loan from Y. Accordingly, the loan purchased by X from W is a
qualified low-income community investment under paragraphs (d)(1)(ii)(A)
and (C) of this section.
Example 3. The facts are the same as in Example 2 except that W is
not a CDE. Because
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W was not a CDE at the time it sold the loan to X, the purchase of the
loan by X from W is not a qualified low-income community investment
under paragraphs (d)(1)(ii)(A) and (C) of this section.
(iii) Financial counseling and other services. Financial counseling
and other services (as defined in paragraph (d)(7) of this section)
provided to any qualified active low-income community business, or to
any residents of a low-income community (as defined in section 45D(e)).
(iv) Investments in other CDEs--(A) In general. Any equity
investment in, or loan to, any CDE (the second CDE) by a CDE (the
primary CDE), but only to the extent that the second CDE uses the
proceeds of the investment or loan--
(1) In a manner--
(i) That is described in paragraph (d)(1)(i) or (iii) of this
section; and
(ii) That would constitute a qualified low-income community
investment if it were made directly by the primary CDE;
(2) To make an equity investment in, or loan to, a third CDE that
uses such proceeds in a manner described in paragraph (d)(1)(iv)(A)(1)
of this section; or
(3) To make an equity investment in, or loan to, a third CDE that
uses such proceeds to make an equity investment in, or loan to, a fourth
CDE that uses such proceeds in a manner described in paragraph
(d)(1)(iv)(A)(1) of this section.
(B) Examples. The following examples illustrate an application of
paragraph (d)(1)(iv)(A) of this section:
Example 1. X is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On September 1, 2004,
X uses $975,000 to make an equity investment in Y. Y is a corporation
and a CDE. On October 1, 2004, Y uses $950,000 from X's equity
investment to make a loan to Z. Z is a qualified active low-income
community business under paragraph (d)(4)(i) of this section. Of X's
equity investment in Y, $950,000 is a qualified low-income community
investment under paragraph (d)(1)(iv)(A)(1) of this section.
Example 2. W is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On September 1, 2004,
W uses $975,000 to make an equity investment in X. On October 1, 2004, X
uses $950,000 from W's equity investment to make an equity investment in
Y. X and Y are corporations and CDEs. On October 5, 2004, Y uses
$925,000 from X's equity investment to make a loan to Z. Z is a
qualified active low-income community business under paragraph (d)(4)(i)
of this section. Of W's equity investment in X, $925,000 is a qualified
low-income community investment under paragraph (d)(1)(iv)(A)(2) of this
section because X uses proceeds of W's equity investment to make an
equity investment in Y, which uses $925,000 of the proceeds in a manner
described in paragraph (d)(1)(iv)(A)(1) of this section.
Example 3. U is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On September 1, 2004,
U uses $975,000 to make an equity investment in V. On October 1, 2004, V
uses $950,000 from U's equity investment to make an equity investment in
W. On October 5, 2004, W uses $925,000 from V's equity investment to
make an equity investment in X. On November 1, 2004, X uses $900,000
from W's equity investment to make an equity investment in Y. V, W, X,
and Y are corporations and CDEs. On November 5, 2004, Y uses $875,000
from X's equity investment to make a loan to Z. Z is a qualified active
low-income community business under paragraph (d)(4)(i) of this section.
U's equity investment in V is not a qualified low-income community
investment because X does not use proceeds of W's equity investment in a
manner described in paragraph (d)(1)(iv)(A)(1) of this section.
(2) Payments of, or for, capital, equity or principal--(i) In
general. Except as otherwise provided in this paragraph (d)(2), amounts
received by a CDE in payment of, or for, capital, equity or principal
with respect to a qualified low-income community investment must be
reinvested by the CDE in a qualified low-income community investment no
later than 12 months from the date of receipt to be treated as
continuously invested in a qualified low-income community investment. If
the amounts received by the CDE are equal to or greater than the cost
basis of the original qualified low-income community investment (or
applicable portion thereof), and the CDE reinvests, in accordance with
this paragraph (d)(2)(i), an amount at least equal to such original cost
basis, then an amount equal to such original cost basis will be treated
as continuously invested in a qualified low-income community investment.
In addition, if the amounts received by the CDE are equal to or greater
than the cost basis of the original qualified low-income community
investment (or
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applicable portion thereof), and the CDE reinvests, in accordance with
this paragraph (d)(2)(i), an amount less than such original cost basis,
then only the amount so reinvested will be treated as continuously
invested in a qualified low-income community investment. If the amounts
received by the CDE are less than the cost basis of the original
qualified low-income community investment (or applicable portion
thereof), and the CDE reinvests an amount in accordance with this
paragraph (d)(2)(i), then the amount treated as continuously invested in
a qualified low-income community investment will equal the excess (if
any) of such original cost basis over the amounts received by the CDE
that are not so reinvested. Amounts received by a CDE in payment of, or
for, capital, equity or principal with respect to a qualified low-income
community investment during the seventh year of the 7-year credit period
(as defined in paragraph (c)(5)(i) of this section) do not have to be
reinvested by the CDE in a qualified low-income community investment in
order to be treated as continuously invested in a qualified low-income
community investment.
(ii) Subsequent reinvestments. In applying paragraph (d)(2)(i) of
this section to subsequent reinvestments, the original cost basis is
reduced by the amount (if any) by which the original cost basis exceeds
the amount determined to be continuously invested in a qualified low-
income community investment.
(iii) Special rule for loans. Periodic amounts received during a
calendar year as repayment of principal on a loan that is a qualified
low-income community investment are treated as continuously invested in
a qualified low-income community investment if the amounts are
reinvested in another qualified low-income community investment by the
end of the following calendar year.
(iv) Example. The application of paragraphs (d)(2)(i) and (ii) of
this section is illustrated by the following example:
Example. On April 1, 2003, A, B, and C each pay $100,000 to acquire
a capital interest in X, a partnership. X is a CDE that has received a
new markets tax credit allocation from the Secretary. X treats the 3
partnership interests as one qualified equity investment under paragraph
(c)(6) of this section. In August 2003, X uses the $300,000 to make a
qualified low-income community investment under paragraph (d)(1) of this
section. In August 2005, the qualified low-income community investment
is redeemed for $250,000. In February 2006, X reinvests $230,000 of the
$250,000 in a second qualified low-income community investment and uses
the remaining $20,000 for operating expenses. Under paragraph (d)(2)(i)
of this section, $280,000 of the proceeds of the qualified equity
investment is treated as continuously invested in a qualified low-income
community investment. In December 2008, X sells the second qualified
low-income community investment and receives $400,000. In March 2009, X
reinvests $320,000 of the $400,000 in a third qualified low-income
community investment. Under paragraphs (d)(2)(i) and (ii) of this
section, $280,000 of the proceeds of the qualified equity investment is
treated as continuously invested in a qualified low-income community
investment ($40,000 is treated as invested in another qualified low-
income community investment in March 2009).
(3) Special rule for reserves. Reserves (not in excess of 5 percent
of the taxpayer's cash investment under paragraph (b)(4) of this
section) maintained by the CDE for loan losses or for additional
investments in existing qualified low-income community investments are
treated as invested in a qualified low-income community investment under
paragraph (d)(1) of this section. Reserves include fees paid to third
parties to protect against loss of all or a portion of the principal of,
or interest on, a loan that is a qualified low-income community
investment.
(4) Qualified active low-income community business--(i) In general.
The term qualified active low-income community business means, with
respect to any taxable year, a corporation (including a nonprofit
corporation) or a partnership engaged in the active conduct of a
qualified business (as defined in paragraph (d)(5) of this section), if
the requirements of paragraphs (d)(4)(i)(A), (B), (C), (D), and (E) of
this section are met (or in the case of an entity serving targeted
populations, if the requirements of paragraphs (d)(4)(i)(D), (E), and
(d)(9)(i) or (ii) of this section are met). Solely for purposes of this
section, a nonprofit corporation will be deemed to be engaged in the
active conduct of a trade or business if it is engaged in an activity
that furthers its purpose as a nonprofit corporation.
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(A) Gross-income requirement. At least 50 percent of the total gross
income of such entity is derived from the active conduct of a qualified
business (as defined in paragraph (d)(5) of this section) within any
low-income community (as defined in section 45D(e)). An entity is deemed
to satisfy this paragraph (d)(4)(i)(A) if the entity meets the
requirements of either paragraph (d)(4)(i)(B) or (C) of this section, if
``50 percent'' is applied instead of 40 percent. In addition, an entity
may satisfy this paragraph (d)(4)(i)(A) based on all the facts and
circumstances. See paragraph (d)(4)(iv) of this section for certain
circumstances in which an entity will be treated as engaged in the
active conduct of a trade or business. See paragraph (d)(9) of this
section for rules relating to targeted populations.
(B) Use of tangible property--(1) In general. At least 40 percent of
the use of the tangible property of such entity (whether owned or
leased) is within any low-income community. This percentage is
determined based on a fraction the numerator of which is the average
value of the tangible property owned or leased by the entity and used by
the entity during the taxable year in a low-income community and the
denominator of which is the average value of the tangible property owned
or leased by the entity and used by the entity during the taxable year.
Property owned by the entity is valued at its cost basis as determined
under section 1012. Property leased by the entity is valued at a
reasonable amount established by the entity. See paragraph (d)(9) of
this section for rules relating to targeted populations.
(2) Example. The application of paragraph (d)(4)(i)(B)(1) of this
section is illustrated by the following example:
Example. X is a corporation engaged in the business of moving and
hauling scrap metal. X operates its business from a building and an
adjoining parking lot that X owns. The building and the parking lot are
located in a low-income community (as defined in section 45D(e)). X's
cost basis under section 1012 for the building and parking lot is
$200,000. During the taxable year, X operates its business 10 hours a
day, 6 days a week. X owns and uses 40 trucks in its business, which, on
average, are used 6 hours a day outside a low-income community and 4
hours a day inside a low-income community (including time in the parking
lot). The cost basis under section 1012 of each truck is $25,000. During
non-business hours, the trucks are parked in the lot. Only X's 10-hour
business days are used in calculating the use of tangible property
percentage under paragraph (d)(4)(i)(B)(1) of this section. Thus, the
numerator of the tangible property calculation is $600,000 (\4/10\ of
$1,000,000 (the $25,000 cost basis of each truck times 40 trucks) plus
$200,000 (the cost basis of the building and parking lot)) and the
denominator is $1,200,000 (the total cost basis of the trucks, building,
and parking lot), resulting in 50 percent of the use of X's tangible
property being within a low-income community. Consequently, X satisfies
the 40 percent use of tangible property test under paragraph
(d)(4)(i)(B)(1) of this section.
(C) Services performed. At least 40 percent of the services
performed for such entity by its employees are performed in a low-income
community. This percentage is determined based on a fraction the
numerator of which is the total amount paid by the entity for employee
services performed in a low-income community during the taxable year and
the denominator of which is the total amount paid by the entity for
employee services during the taxable year. If the entity has no
employees, the entity is deemed to satisfy this paragraph (d)(4)(i)(C),
and paragraph (d)(4)(i)(A) of this section, if the entity meets the
requirement of paragraph (d)(4)(i)(B) of this section if ``85 percent''
is applied instead of 40 percent. See paragraph (d)(9) of this section
for rules relating to targeted populations.
(D) Collectibles. Less than 5 percent of the average of the
aggregate unadjusted bases of the property of such entity is
attributable to collectibles (as defined in section 408(m)(2)) other
than collectibles that are held primarily for sale to customers in the
ordinary course of business.
(E) Nonqualified financial property--(1) In general. Less than 5
percent of the average of the aggregate unadjusted bases of the property
of such entity is attributable to nonqualified financial property. For
purposes of the preceding sentence, the term nonqualified financial
property means debt, stock, partnership interests, options, futures
contracts, forward contracts, warrants, notional principal contracts,
annuities, and other similar property except that such term does not
include--
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(i) Reasonable amounts of working capital held in cash, cash
equivalents, or debt instruments with a term of 18 months or less
(because the definition of nonqualified financial property includes debt
instruments with a term in excess of 18 months, banks, credit unions,
and other financial institutions are generally excluded from the
definition of a qualified active low-income community business); or
(ii) Debt instruments described in section 1221(a)(4).
(2) Construction of real property. For purposes of paragraph
(d)(4)(i)(E)(1)(i) of this section, the proceeds of a capital or equity
investment or loan by a CDE that will be expended for construction of
real property within 12 months after the date the investment or loan is
made are treated as a reasonable amount of working capital.
(ii) Proprietorships. Any business carried on by an individual as a
proprietor is a qualified active low-income community business if the
business would meet the requirements of paragraph (d)(4)(i) of this
section if the business were incorporated.
(iii) Portions of business--(A) In general. A CDE may treat any
trade or business (or portion thereof) as a qualified active low-income
community business if the trade or business (or portion thereof) would
meet the requirements of paragraph (d)(4)(i) of this section if the
trade or business (or portion thereof) were separately incorporated and
a complete and separate set of books and records is maintained for that
trade or business (or portion thereof). However, the CDE's capital or
equity investment or loan is not a qualified low-income community
investment under paragraph (d)(1)(i) of this section to the extent the
proceeds of the investment or loan are not used for the trade or
business (or portion thereof) that is treated as a qualified active low-
income community business under this paragraph (d)(4)(iii)(A).
(B) Examples. The following examples illustrate an application of
paragraph (d)(4)(iii) of this section:
Example 1. X is a partnership and a CDE that receives a new markets
tax credit allocation from the Secretary. A pays $1 million for a
capital interest in X. Z is a corporation that operates a supermarket
that is not in a low-income community (as defined in section 45D(e)). X
uses the proceeds of A's equity investment to make a loan to Z that Z
will use to construct a new supermarket in a low-income community. Z
will maintain a complete and separate set of books and records for the
new supermarket. The proceeds of X's loan to Z will be used exclusively
for the new supermarket. Assume that Z's new supermarket in the low-
income community would meet the requirements to be a qualified active
low-income community business under paragraph (d)(4)(i) of this section
if it were separately incorporated. Pursuant to paragraph (d)(4)(iii)(A)
of this section, X treats Z's new supermarket as the qualified active
low-income community business. Accordingly, X's loan to Z is a qualified
low-income community investment under paragraph (d)(1)(i) of this
section.
Example 2. X is a partnership and a CDE that receives a new markets
tax credit allocation from the Secretary. A pays $1 million for a
capital interest in X. Z is a corporation that operates a liquor store
in a low-income community (as defined in section 45D(e)). A liquor store
is not a qualified business under paragraph (d)(5)(iii)(B) of this
section. X uses the proceeds of A's equity investment to make a loan to
Z that Z will use to construct a restaurant next to the liquor store. Z
will maintain a complete and separate set of books and records for the
new restaurant. The proceeds of X's loan to Z will be used exclusively
for the new restaurant. Assume that Z's restaurant would meet the
requirements to be a qualified active low-income community business
under paragraph (d)(4)(i) of this section if it were separately
incorporated. Pursuant to paragraph (d)(4)(iii) of this section, X
treats Z's restaurant as the qualified active low-income community
business. Accordingly, X's loan to Z is a qualified low-income community
investment under paragraph (d)(1)(i) of this section.
Example 3. X is a partnership and a CDE that receives a new markets
tax credit allocation from the Secretary. A pays $1 million for a
capital interest in X. Z is a corporation that operates an insurance
company in a low-income community (as defined in section 45D(e)). Five
percent or more of the average of the aggregate unadjusted bases of Z's
property is attributable to nonqualified financial property under
paragraph (d)(4)(i)(E) of this section. Z's insurance operations include
different operating units including a claims processing unit. X uses the
proceeds of A's equity investment to make a loan to Z for use in Z's
claims processing operations. Z will maintain a complete and separate
set of books and records for the claims processing unit. The proceeds of
X's loan to Z will be used exclusively for the claims processing unit.
Assume that Z's claims processing unit would meet the requirements to
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be a qualified active low-income community business under paragraph
(d)(4)(i) of this section if it were separately incorporated. Pursuant
to paragraph (d)(4)(iii) of this section, X treats Z's claims processing
unit as the qualified active low-income community business. Accordingly,
X's loan to Z is a qualified low-income community investment under
paragraph (d)(1)(i) of this section.
(iv) Active conduct of a trade or business--(A) Special rule. For
purposes of paragraph (d)(4)(i) of this section, an entity will be
treated as engaged in the active conduct of a trade or business if, at
the time the CDE makes a capital or equity investment in, or loan to,
the entity, the CDE reasonably expects that the entity will generate
revenues (or, in the case of a nonprofit corporation, engage in an
activity that furthers its purpose as a nonprofit corporation) within 3
years after the date the investment or loan is made. This paragraph
(d)(4)(iv) applies only for purposes of determining whether an entity is
engaged in the active conduct of a trade or business and does not apply
for purposes of determining whether the gross-income requirement under
paragraph (d)(4)(i)(A), (d)(9)(i)(B)(1)(i), or (d)(9)(ii)(C)(1)(i) of
this section is satisfied.
(B) Example. The application of paragraph (d)(4)(iv)(A) of this
section is illustrated by the following example:
Example. X is a partnership and a CDE that receives a new markets
tax credit allocation from the Secretary on July 1, 2004. X makes a ten-
year loan to Y. Y is a newly formed entity that will own and operate a
shopping center to be constructed in a low-income community. Y has no
revenues but X reasonably expects that Y will generate revenues
beginning in December 2005. Under paragraph (d)(4)(iv)(A) of this
section, Y is treated as engaged in the active conduct of a trade or
business for purposes of paragraph (d)(4)(i) of this section.
(5) Qualified business--(i) In general. Except as otherwise provided
in this paragraph (d)(5), the term qualified business means any trade or
business. There is no requirement that employees of a qualified business
be residents of a low-income community.
(ii) Rental of real property. The rental to others of real property
located in any low-income community (as defined in section 45D(e)) is a
qualified business if and only if the property is not residential rental
property (as defined in section 168(e)(2)(A)) and there are substantial
improvements located on the real property. However, a CDE's investment
in or loan to a business engaged in the rental of real property is not a
qualified low-income community investment under paragraph (d)(1)(i) of
this section to the extent a lessee of the real property is described in
paragraph (d)(5)(iii)(B) of this section.
(iii) Exclusions--(A) Trades or businesses involving intangibles.
The term qualified business does not include any trade or business
consisting predominantly of the development or holding of intangibles
for sale or license.
(B) Certain other trades or businesses. The term qualified business
does not include any trade or business consisting of the operation of
any private or commercial golf course, country club, massage parlor, hot
tub facility, suntan facility, racetrack or other facility used for
gambling, or any store the principal business of which is the sale of
alcoholic beverages for consumption off premises.
(C) Farming. The term qualified business does not include any trade
or business the principal activity of which is farming (within the
meaning of section 2032A(e)(5)(A) or (B)) if, as of the close of the
taxable year of the taxpayer conducting such trade or business, the sum
of the aggregate unadjusted bases (or, if greater, the fair market
value) of the assets owned by the taxpayer that are used in such a trade
or business, and the aggregate value of the assets leased by the
taxpayer that are used in such a trade or business, exceeds $500,000.
For purposes of this paragraph (d)(5)(iii)(C), two or more trades or
businesses will be treated as a single trade or business under rules
similar to the rules of section 52(a) and (b).
(6) Qualifications--(i) In general. Except as provided in paragraph
(d)(6)(ii) of this section, an entity is treated as a qualified active
low-income community business for the duration of the CDE's investment
in the entity if the CDE reasonably expects, at the time the CDE makes
the capital or equity investment in, or loan to, the entity,
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that the entity will satisfy the requirements to be a qualified active
low-income community business under paragraph (d)(4)(i) of this section
throughout the entire period of the investment or loan.
(ii) Control--(A) In general. If a CDE controls or obtains control
of an entity at any time during the 7-year credit period (as defined in
paragraph (c)(5)(i) of this section), the entity will be treated as a
qualified active low-income community business only if the entity
satisfies the requirements of paragraph (d)(4)(i) of this section
throughout the entire period the CDE controls the entity.
(B) Definition of control. Control means, with respect to an entity,
direct or indirect ownership (based on value) or control (based on
voting or management rights) of more than 50 percent of the entity. For
purposes of the preceding sentence, the term management rights means the
power to influence the management policies or investment decisions of
the entity.
(C) Disregard of control. For purposes of paragraph (d)(6)(ii)(A) of
this section, the acquisition of control of an entity by a CDE is
disregarded during the 12-month period following such acquisition of
control (the 12-month period) if--
(1) The CDE's capital or equity investment in, or loan to, the
entity met the requirements of paragraph (d)(6)(i) of this section when
initially made;
(2) The CDE's acquisition of control of the entity is due to
financial difficulties of the entity that were unforeseen at the time
the investment or loan described in paragraph (d)(6)(ii)(C)(1) of this
section was made; and
(3) If the acquisition of control occurs before the seventh year of
the 7-year credit period (as defined in paragraph (c)(5)(i) of this
section), either--
(i) The entity satisfies the requirements of paragraph (d)(4) of
this section by the end of the 12-month period; or
(ii) The CDE sells or causes to be redeemed the entire amount of the
investment or loan described in paragraph (d)(6)(ii)(C)(1) of this
section and, by the end of the 12-month period, reinvests the amount
received in respect of the sale or redemption in a qualified low-income
community investment under paragraph (d)(1) of this section. For this
purpose, the amount treated as continuously invested in a qualified low-
income community investment is determined under paragraphs (d)(2)(i) and
(ii) of this section.
(7) Financial counseling and other services. The term financial
counseling and other services means advice provided by the CDE relating
to the organization or operation of a trade or business.
(8) Special rule for certain loans--(i) In general. For purposes of
paragraphs (d)(1)(i), (ii), and (iv) of this section, a loan is treated
as made by a CDE to the extent the CDE purchases the loan from the
originator (whether or not the originator is a CDE) within 30 days after
the date the originator makes the loan if, at the time the loan is made,
there is a legally enforceable written agreement between the originator
and the CDE which--
(A) Requires the CDE to approve the making of the loan either
directly or by imposing specific written loan underwriting criteria; and
(B) Requires the CDE to purchase the loan within 30 days after the
date the loan is made.
(ii) Example. The application of paragraph (d)(8)(i) of this section
is illustrated by the following example:
Example. (i) X is a partnership and a CDE that has received a new
markets tax credit allocation from the Secretary. On October 1, 2004, Y
enters into a legally enforceable written agreement with W. Y and W are
corporations but only Y is a CDE. The agreement between Y and W provides
that Y will purchase loans (or portions thereof) from W within 30 days
after the date the loan is made by W, and that Y will approve the making
of the loans.
(ii) On November 1, 2004, W makes an $825,000 loan to Z pursuant to
the agreement between Y and W. Z is a qualified active low-income
community business under paragraph (d)(4) of this section. On November
15, 2004, Y purchases the loan from W for $840,000. On December 31,
2004, X purchases the loan from Y for $850,000.
(iii) Under paragraph (d)(8)(i) of this section, the loan to Z is
treated as made by Y. Y's loan to Z is a qualified low-income community
investment under paragraph (d)(1)(i) of this section. Accordingly, under
paragraph (d)(1)(ii)(A) of this section, X's purchase of the loan from Y
is a qualified low-income
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community investment in the amount of $850,000.
(9) Targeted populations. For purposes of section 45D(e)(2),
targeted populations that will be treated as a low-income community are
individuals, or an identifiable group of individuals, including an
Indian tribe, who are low-income persons as defined in paragraph
(d)(9)(i) of this section or who are individuals who otherwise lack
adequate access to loans or equity investments as defined in paragraph
(d)(9)(ii) of this section.
(i) Low-income persons--(A) Definition--(1) In general. For purposes
of section 45D(e)(2) and this paragraph (d)(9), an individual shall be
considered to be low-income if the individual's family income, adjusted
for family size, is not more than--
(i) For metropolitan areas, 80 percent of the area median family
income; and
(ii) For non-metropolitan areas, the greater of 80 percent of the
area median family income, or 80 percent of the statewide non-
metropolitan area median family income.
(2) Area median family income. For purposes of paragraph
(d)(9)(i)(A)(1) of this section, area median family income is determined
in a manner consistent with the determinations of median family income
under section 8 of the Housing Act of 1937, as amended. Taxpayers must
use the annual estimates of median family income released by the
Department of Housing and Urban Development (HUD) and may rely on those
figures until 45 days after HUD releases a new list of income limits, or
until HUD's effective date for the new list, whichever is later.
(3) Individual's family income. For purposes of paragraph
(d)(9)(i)(A)(1) of this section, an individual's family income is
determined using any one of the following three methods for measuring
family income:
(i) Household income as measured by the U.S. Census Bureau,
(ii) Adjusted gross income under section 62 as reported on Internal
Revenue Service Form 1040. Adjusted gross income must include the
adjusted gross income of any member of the individual's family (as
defined in section 267(c)(4)) if the family member resides with the
individual regardless of whether the family member files a separate
return,
(iii) Household income determined under section 8 of the Housing Act
of 1937, as amended.
(B) Qualified active low-income community business requirements for
low-income targeted populations--(1) In general. An entity will not be
treated as a qualified active low-income community business for low-
income targeted populations unless--
(i) Except as provided in paragraph (d)(9)(i)(D)(2) of this section,
at least 50 percent of the entity's total gross income for any taxable
year is derived from sales, rentals, services, or other transactions
with individuals who are low-income persons for purposes of section
45D(e)(2) and this paragraph (d)(9);
(ii) At least 40 percent of the entity's employees are individuals
who are low-income persons for purposes of section 45D(e)(2) and this
paragraph (d)(9); or
(iii) At least 50 percent of the entity is owned by individuals who
are low-income persons for purposes of section 45D(e)(2) and this
paragraph (d)(9).
(2) Employee. The determination of whether an employee is a low-
income person must be made at the time the employee is hired. If the
employee is a low-income person at the time of hire, that employee is
considered a low-income person for purposes of section 45D(e)(2) and
this paragraph (d)(9) throughout the time of employment, without regard
to any increase in the employee's income after the time of hire.
(3) Owner. The determination of whether an owner is a low-income
person must be made at the time the qualified low-income community
investment is made, or at the time the ownership interest is acquired by
the owner, whichever is later. If an owner is a low-income person at the
time the qualified low-income community investment is made or at the
time the ownership interest is acquired by the owner, whichever is
later, that owner is considered a low-income person for purposes of
section 45D(e)(2) and this paragraph (d)(9) throughout the time the
ownership interest is held by that owner.
(4) Derived from. For purposes of paragraph (d)(9)(i)(B)(1)(i) of
this section,
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the term derived from includes gross income derived from:
(i) Payments made directly by low-income persons to the entity; and
(ii) Money and the fair market value of property or services
provided to the entity primarily for the benefit of low-income persons,
but only if the persons providing the money, property, or services do
not receive a direct benefit from the entity (for this purpose, a
contribution that benefits the general public is not a direct benefit).
(5) Fair market value of sales, rentals, services, or other
transactions. For purposes of paragraph (d)(9)(i)(B)(1)(i) of this
section, an entity with gross income that is derived from sales,
rentals, services, or other transactions with both non low-income
persons and low-income persons may treat the gross income derived from
the sales, rentals, services, or other transactions with low-income
persons as including the full fair market value even if the low-income
persons do not pay fair market value.
(C) 120-percent-income restriction--(1) In general--(i) In no case
will an entity be treated as a qualified active low-income community
business under paragraph (d)(9)(i) of this section if the entity is
located in a population census tract for which the median family income
exceeds 120 percent of, in the case of a tract not located within a
metropolitan area, the statewide median family income, or in the case of
a tract located within a metropolitan area, the greater of statewide
median family income or metropolitan area median family income (120-
percent-income restriction).
(ii) The 120-percent-income restriction shall not apply to an entity
located within a population census tract with a population of less than
2,000 if such tract is not located in a metropolitan area.
(iii) The 120-percent-income restriction shall not apply to an
entity located within a population census tract with a population of
less than 2,000 if such tract is located in a metropolitan area and more
than 75 percent of the tract is zoned for commercial or industrial use.
For this purpose, the 75 percent calculation should be made using the
area of the population census tract. For purposes of this paragraph
(d)(9)(i)(C)(1)(iii), property for which commercial or industrial use is
a permissible zoning use will be treated as zoned for commercial or
industrial use.
(2) Population census tract location--(i) For purposes of the 120-
percent-income restriction, an entity will be considered to be located
in a population census tract for which the median family income exceeds
120 percent of the applicable median family income under paragraph
(d)(9)(i)(C)(1)(i) of this section (non-qualifying population census
tract) if at least 50 percent of the total gross income of the entity is
derived from the active conduct of a qualified business (as defined in
paragraph (d)(5) of this section) within one or more non-qualifying
population census tracts (non-qualifying gross income amount); at least
40 percent of the use of the tangible property of the entity (whether
owned or leased) is within one or more non-qualifying population census
tracts (non-qualifying tangible property usage); and at least 40 percent
of the services performed for the entity by its employees are performed
in one or more non-qualifying population census tracts (non-qualifying
services performance).
(ii) The entity is considered to have the non-qualifying gross
income amount if the entity has non-qualifying tangible property usage
or non-qualifying services performance of at least 50 percent instead of
40 percent.
(iii) If the entity has no employees, the entity is considered to
have the non-qualifying gross income amount and non-qualifying services
performance if at least 85 percent of the use of the tangible property
of the entity (whether owned or leased) is within one or more non-
qualifying population census tracts.
(D) Rental of real property for low-income targeted populations--(1)
In general. An entity that rents to others real property for low-income
targeted populations and that otherwise satisfies the requirements to be
a qualified business under paragraph (d)(5) of this section will be
treated as located in a low-income community for purposes of paragraph
(d)(5)(ii) of this section if at least
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50 percent of the entity's total gross income is derived from rentals to
individuals who are low-income persons for purposes of section 45D(e)(2)
and this paragraph (d)(9) or rentals to a qualified active low-income
community business that meets the requirements for low-income targeted
populations under paragraphs (d)(9)(i)(B)(1)(i) or (ii) and
(d)(9)(i)(B)(2) of this section.
(2) Special rule for entities whose sole business is the rental to
others of real property. If an entity's sole business is the rental to
others of real property under paragraph (d)(9)(i)(D)(1) of this section,
then the gross income requirement in paragraph (d)(9)(i)(B)(1)(i) of
this section will be considered satisfied if the entity is treated as
being located in a low-income community under paragraph (d)(9)(i)(D)(1)
of this section.
(ii) Individuals who otherwise lack adequate access to loans or
equity investments--(A) In general. Paragraph (d)(9)(ii) of this section
may be applied only with regard to qualified low-income community
investments made under the increase in the new markets tax credit
limitation pursuant to section 1400N(m)(2). Therefore, only CDEs with a
significant mission of recovery and redevelopment of the Gulf
Opportunity Zone (GO Zone) that receive an allocation from the increase
described in section 1400N(m)(2) may make qualified low-income community
investments from that allocation pursuant to the rules in paragraph
(d)(9)(ii) of this section.
(B) GO Zone Targeted Population. For purposes of the targeted
populations rules under section 45D(e)(2), an individual otherwise lacks
adequate access to loans or equity investments only if the individual
was displaced from his or her principal residence as a result of
Hurricane Katrina or the individual lost his or her principal source of
employment as a result of Hurricane Katrina (GO Zone Targeted
Population). In order to meet this definition, the individual's
principal residence or principal source of employment, as applicable,
must have been located in a population census tract within the GO Zone
that contains one or more areas designated by the Federal Emergency
Management Agency (FEMA) as flooded, having sustained extensive damage,
or having sustained catastrophic damage as a result of Hurricane
Katrina.
(C) Qualified active low-income community business requirements for
the GO Zone Targeted Population--(1) In general. An entity will not be
treated as a qualified active low-income community business for the GO
Zone Targeted Population unless--
(i) At least 50 percent of the entity's total gross income for any
taxable year is derived from sales, rentals, services, or other
transactions with the GO Zone Targeted Population, low-income persons as
defined in paragraph (d)(9)(i) of this section, or some combination
thereof;
(ii) At least 40 percent of the entity's employees consist of the GO
Zone Targeted Population, low-income persons as defined in paragraph
(d)(9)(i) of this section, or some combination thereof; or
(iii) At least 50 percent of the entity is owned by the GO Zone
Targeted Population, low-income persons as defined in paragraph
(d)(9)(i) of this section, or some combination thereof.
(2) Location--(i) In general. In order to be a qualified active low-
income community business under paragraph (d)(9)(ii)(C) of this section,
the entity must be located in a population census tract within the GO
Zone that contains one or more areas designated by FEMA as flooded,
having sustained extensive damage, or having sustained catastrophic
damage as a result of Hurricane Katrina (qualifying population census
tract).
(ii) Determination--For purposes of the preceding paragraph, an
entity will be considered to be located in a qualifying population
census tract if at least 50 percent of the total gross income of the
entity is derived from the active conduct of a qualified business (as
defined in paragraph (d)(5) of this section) within one or more
qualifying population census tracts (gross income requirement); at least
40 percent of the use of the tangible property of the entity (whether
owned or leased) is within one or more qualifying population census
tracts (use of tangible property requirement); and at least 40 percent
of the services performed for the entity by its employees are performed
in one
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or more qualifying population census tracts (services performed
requirement). The entity is deemed to satisfy the gross income
requirement if the entity satisfies the use of tangible property
requirement or the services performed requirement on the basis of at
least 50 percent instead of 40 percent. If the entity has no employees,
the entity is deemed to satisfy the services performed requirement and
the gross income requirement if at least 85 percent of the use of the
tangible property of the entity (whether owned or leased) is within one
or more qualifying population census tracts.
(D) 200-percent-income restriction--(1) In general--(i) In no case
will an entity be treated as a qualified active low-income community
business under paragraph (d)(9)(ii) of this section if the entity is
located in a population census tract for which the median family income
exceeds 200 percent of, in the case of a tract not located within a
metropolitan area, the statewide median family income, or, in the case
of a tract located within a metropolitan area, the greater of statewide
median family income or metropolitan area median family income (200-
percent-income restriction).
(ii) The 200-percent-income restriction shall not apply to an entity
located within a population census tract with a population of less than
2,000 if such tract is not located in a metropolitan area.
(iii) The 200-percent-income restriction shall not apply to an
entity located within a population census tract with a population of
less than 2,000 if such tract is located in a metropolitan area and more
than 75 percent of the tract is zoned for commercial or industrial use.
For this purpose, the 75 percent calculation should be made using the
area of the population census tract. For purposes of this paragraph
(d)(9)(ii)(D)(1)(iii), property for which commercial or industrial use
is a permissible zoning use will be treated as zoned for commercial or
industrial use.
(2) Population census tract location--(i) For purposes of the 200-
percent-income restriction, an entity will be considered to be located
in a population census tract for which the median family income exceeds
200 percent of the applicable median family income under paragraph
(d)(9)(ii)(D)(1)(i) of this section (non-qualifying population census
tract) if--at least 50 percent of the total gross income of the entity
is derived from the active conduct of a qualified business (as defined
in paragraph (d)(5) of this section) within one or more non-qualifying
population census tracts (non-qualifying gross income amount); at least
40 percent of the use of the tangible property of the entity (whether
owned or leased) is within one or more non-qualifying population census
tracts (non-qualifying tangible property usage); and at least 40 percent
of the services performed for the entity by its employees are performed
in one or more non-qualifying population census tracts (non-qualifying
services performance).
(ii) The entity is considered to have the non-qualifying gross
income amount if the entity has non-qualifying tangible property usage
or non-qualifying services performance of at least 50 percent instead of
40 percent.
(iii) If the entity has no employees, the entity is considered to
have the non-qualifying gross income amount and non-qualifying services
performance if at least 85 percent of the use of the tangible property
of the entity (whether owned or leased) is within one or more non-
qualifying population census tracts.
(E) Rental of real property for the GO Zone Targeted Population. The
rental to others of real property for the GO Zone Targeted Population
that otherwise satisfies the requirements to be a qualified business
under paragraph (d)(5) of this section will be treated as located in a
low-income community for purposes of paragraph (d)(5)(ii) of this
section if at least 50 percent of the entity's total gross income is
derived from rentals to the GO Zone Targeted Population, rentals to low-
income persons as defined in paragraph (d)(9)(i) of this section, or
rentals to a qualified active low-income community business that meets
the requirements for the GO Zone Targeted Population under paragraph
(d)(9)(ii)(C)(1)(i) or (ii) of this section.
(10) Non-real estate qualified active low-income community
business--(i) Definition. The term non-real estate qualified
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active low-income community business means any qualified active low-
income community business (as defined in paragraph (d)(4) of this
section) whose predominant business activity does not include the
development (including construction of new facilities and
rehabilitation/enhancement of existing facilities), management, or
leasing of real estate. For purposes of the preceding sentence,
predominant business activity means a business activity that generates
more than 50 percent of the business' gross income. The purpose of the
capital or equity investment in, or loan to, the non-real estate
qualified active low-income community business must not be connected to
the development (including construction of new facilities and
rehabilitation/enhancement of existing facilities), management, or
leasing of real estate.
(ii) Payments of, or for, capital, equity or principal with respect
to a non-real estate qualified active low-income community business--(A)
In general. For purposes of paragraph (d)(2)(i) of this section, a
portion of the amounts received by a CDE in payment of, or for, capital,
equity, or principal with respect to a non-real estate qualified active
low-income community business after year one of the 7-year credit period
(as defined by paragraph (c)(5)(i) of this section) may be reinvested by
the CDE in a qualifying entity (as defined in paragraph (d)(10)(ii)(D)).
Any portion that the CDE chooses to reinvest in a qualifying entity must
be reinvested by the CDE no later than 30 days from the date of receipt
to be treated as continuously invested in a qualified low-income
community investment for purposes of paragraph (d)(2)(i) of this
section. If the amount reinvested in a qualifying entity exceeds the
maximum aggregate portion of the non-real estate qualified equity
investment, then the excess will not be treated as invested in a
qualified low-income community investment. The maximum aggregate portion
of the non-real estate qualified equity investment that may be
reinvested into a qualifying entity, which will be treated as
continuously invested in a qualified low-income community investment,
may not exceed the following percentages of the non-real estate
qualified equity investment in the following years:
(1) 15 percent in Year 2 of the 7-year credit period.
(2) 30 percent in Year 3 of the 7-year credit period.
(3) 50 percent in Year 4 of the 7-year credit period.
(4) 85 percent in Year 5 and Year 6 of the 7-year credit period.
(B) Seventh year of the 7-year credit period. Amounts received by a
CDE in payment of, or for, capital, equity, or principal with respect to
a non-real estate qualified active low-income community business (as
defined in paragraph (d)(10)(i) of this section) during the seventh year
of the 7-year credit period do not have to be reinvested by the CDE in a
qualified low-income community investment to be treated as continuously
invested in a qualified low-income community investment.
(C) Amounts received from qualifying entity. Except for the seventh
year of the 7-year credit period under paragraph (d)(10)(ii)(B) of this
section, amounts received from a qualifying entity must be reinvested by
the CDE no later than 30 days from the date of receipt to be treated as
continuously invested in a qualified low-income community investment.
(D) Definition of qualifying entity. For purposes of paragraphs
(d)(10)(ii) and (d)(10)(iii) of this section, a qualifying entity is--
(1) A certified community development financial institution
(certified CDFI) that is a CDE under section 45D(c)(2)(B) (as defined by
12 CFR 1805.201), which is unrelated to the CDE making the investment in
the certified CDFI within the meaning of section 267(b) or section
707(b)(1); or
(2) An entity designated by the Secretary by publication in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter).
(e) Recapture--(1) In general. If, at any time during the 7-year
period beginning on the date of the original issue of a qualified equity
investment in a CDE, there is a recapture event under paragraph (e)(2)
of this section with respect to such investment, then the tax imposed by
Chapter 1 of the Internal Revenue Code for the taxable year in which the
recapture event occurs is increased
[[Page 282]]
by the credit recapture amount under section 45D(g)(2). A recapture
event under paragraph (e)(2) of this section requires recapture of
credits allowed to the taxpayer who purchased the equity investment from
the CDE at its original issue and to all subsequent holders of that
investment.
(2) Recapture event. There is a recapture event with respect to an
equity investment in a CDE if--
(i) The entity ceases to be a CDE;
(ii) The proceeds of the investment cease to be used in a manner
that satisfies the substantially-all requirement of paragraph (c)(1)(ii)
of this section; or
(iii) The investment is redeemed or otherwise cashed out by the CDE.
(3) Redemption--(i) Equity investment in a C corporation. For
purposes of paragraph (e)(2)(iii) of this section, an equity investment
in a CDE that is treated as a C corporation for Federal tax purposes is
redeemed when section 302(a) applies to amounts received by the equity
holder. An equity investment is treated as cashed out when section
301(c)(2) or section 301(c)(3) applies to amounts received by the equity
holder. An equity investment is not treated as cashed out when only
section 301(c)(1) applies to amounts received by the equity holder.
(ii) Equity investment in an S corporation. For purposes of
paragraph (e)(2)(iii) of this section, an equity investment in a CDE
that is an S corporation is redeemed when section 302(a) applies to
amounts received by the equity holder. An equity investment in an S
corporation is treated as cashed out when a distribution to a
shareholder described in section 1368(a) exceeds the accumulated
adjustments account determined under Sec. 1.1368-2 and any accumulated
earnings and profits of the S corporation.
(iii) Capital interest in a partnership. In the case of an equity
investment that is a capital interest in a CDE that is a partnership for
Federal tax purposes, a pro rata cash distribution by the CDE to its
partners based on each partner's capital interest in the CDE during the
taxable year will not be treated as a redemption for purposes of
paragraph (e)(2)(iii) of this section if the distribution does not
exceed the CDE's operating income for the taxable year. In addition, a
non-pro rata de minimis cash distribution by a CDE to a partner or
partners during the taxable year will not be treated as a redemption. A
non-pro rata de minimis cash distribution may not exceed the lesser of 5
percent of the CDE's operating income for that taxable year or 10
percent of the partner's capital interest in the CDE. For purposes of
this paragraph (e)(3)(iii), with respect to any taxable year, operating
income is the sum of:
(A) The CDE's taxable income as determined under section 703, except
that--
(1) The items described in section 703(a)(1) shall be aggregated
with the non-separately stated tax items of the partnership; and
(2) Any gain resulting from the sale of a capital asset under
section 1221(a) or section 1231 property shall not be included in
taxable income;
(B) Deductions under section 165, but only to the extent the losses
were realized from qualified low-income community investments under
paragraph (d)(1) of this section;
(C) Deductions under sections 167 and 168, including the additional
first-year depreciation under section 168(k);
(D) Start-up expenditures amortized under section 195; and
(E) Organizational expenses amortized under section 709.
(4) Bankruptcy. Bankruptcy of a CDE is not a recapture event.
(5) Waiver of requirement or extension of time--(i) In general. The
Commissioner may waive a requirement or extend a deadline if such waiver
or extension does not materially frustrate the purposes of section 45D
and this section.
(ii) Manner for requesting a waiver or extension. A CDE that
believes it has good cause for a waiver or an extension may request
relief from the Commissioner in a ruling request. The request should set
forth all the relevant facts and include a detailed explanation
describing the event or events relating to the request for a waiver or
an extension. For further information on the application procedure for a
ruling, see Rev. Proc. 2005-1 (2005-1 I.R.B. 1) or its successor revenue
procedure (see Sec. 601.601(d)(2) of this chapter).
[[Page 283]]
(iii) Terms and conditions. The granting of a waiver or an extension
to a CDE under this section may require adjustments of the CDE's
requirements under section 45D and this section as may be appropriate.
(6) Cure period. If a qualified equity investment fails the
substantially-all requirement under paragraph (c)(5)(i) of this section,
the failure is not a recapture event under paragraph (e)(2)(ii) of this
section if the CDE corrects the failure within 6 months after the date
the CDE becomes aware (or reasonably should have become aware) of the
failure. Only one correction is permitted for each qualified equity
investment during the 7-year credit period under this paragraph (e)(6).
(7) Example. The application of this paragraph (e) is illustrated by
the following example:
Example. In 2003, A and B acquire separate qualified equity
investments in X, a partnership. X is a CDE that has received a new
markets tax credit allocation from the Secretary. X uses the proceeds of
A's qualified equity investment to make a qualified low-income community
investment in Y, and X uses the proceeds of B's qualified equity
investment to make a qualified low-income community investment in Z. Y
and Z are not CDEs. X controls both Y and Z within the meaning of
paragraph (d)(6)(ii)(B) of this section. In 2003, Y and Z are qualified
active low-income community businesses. In 2007, Y, but not Z, is a
qualified active low-income community business and X does not satisfy
the substantially-all requirement using the safe harbor calculation
under paragraph (c)(5)(iii) of this section. A's equity investment
satisfies the substantially-all requirement of paragraph (c)(1)(ii) of
this section using the direct-tracing calculation of paragraph
(c)(5)(ii) of this section because A's equity investment is traceable to
Y. However, B's equity investment fails the substantially-all
requirement using the direct-tracing calculation because B's equity
investment is traceable to Z. Therefore, under paragraph (e)(2)(ii) of
this section, there is a recapture event for B's equity investment (but
not A's equity investment).
(f) Basis reduction--(1) In general. A taxpayer's basis in a
qualified equity investment is reduced by the amount of any new markets
tax credit determined under paragraph (b)(1) of this section with
respect to the investment. A basis reduction occurs on each credit
allowance date under paragraph (b)(2) of this section. This paragraph
(f) does not apply for purposes of sections 1202, 1400B, and 1400F.
(2) Adjustment in basis of interest in partnership or S corporation.
The adjusted basis of either a partner's interest in a partnership, or
stock in an S corporation, must be appropriately adjusted to take into
account adjustments made under paragraph (f)(1) of this section in the
basis of a qualified equity investment held by the partnership or S
corporation (as the case may be).
(g) Other rules--(1) Anti-abuse. If a principal purpose of a
transaction or a series of transactions is to achieve a result that is
inconsistent with the purposes of section 45D and this section, the
Commissioner may treat the transaction or series of transactions as
causing a recapture event under paragraph (e)(2) of this section.
(2) Reporting requirements--(i) Notification by CDE to taxpayer--(A)
Allowance of new markets tax credit. A CDE must provide notice to any
taxpayer who acquires a qualified equity investment in the CDE at its
original issue that the equity investment is a qualified equity
investment entitling the taxpayer to claim the new markets tax credit.
The notice must be provided by the CDE to the taxpayer no later than 60
days after the date the taxpayer makes the investment in the CDE. The
notice must contain the amount paid to the CDE for the qualified equity
investment at its original issue and the taxpayer identification number
of the CDE.
(B) Recapture event. If, at any time during the 7-year period
beginning on the date of the original issue of a qualified equity
investment in a CDE, there is a recapture event under paragraph (e)(2)
of this section with respect to such investment, the CDE must provide
notice to each holder, including all prior holders, of the investment
that a recapture event has occurred. The notice must be provided by the
CDE no later than 60 days after the date the CDE becomes aware of the
recapture event.
(ii) CDE reporting requirements to Secretary. Each CDE must comply
with such reporting requirements to the Secretary as the Secretary may
prescribe.
[[Page 284]]
(iii) Manner of claiming new markets tax credit. A taxpayer may
claim the new markets tax credit for each applicable taxable year by
completing Form 8874, ``New Markets Credit,'' and by filing Form 8874
with the taxpayer's Federal income tax return.
(iv) Reporting recapture tax. If there is a recapture event with
respect to a taxpayer's equity investment in a CDE, the taxpayer must
include the credit recapture amount under section 45D(g)(2) on the line
for recapture taxes on the taxpayer's Federal income tax return for the
taxable year in which the recapture event under paragraph (e)(2) of this
section occurs (or on the line for total tax, if there is no such line
for recapture taxes) and write NMCR (new markets credit recapture) next
to the entry space.
(3) Other Federal tax benefits--(i) In general. Except as provided
in paragraph (g)(3)(ii) of this section, the availability of Federal tax
benefits does not limit the availability of the new markets tax credit.
Federal tax benefits that do not limit the availability of the new
markets tax credit include, for example:
(A) The rehabilitation credit under section 47;
(B) All deductions under sections 167 and 168, including the
additional first-year depreciation under section 168(k), and the expense
deduction for certain depreciable property under section 179; and
(C) All tax benefits relating to certain designated areas such as
empowerment zones and enterprise communities under sections 1391 through
1397D, the District of Columbia Enterprise Zone under sections 1400
through 1400B, renewal communities under sections 1400E through 1400J,
and the New York Liberty Zone under section 1400L.
(ii) Low-income housing credit. If a CDE makes a capital or equity
investment or a loan with respect to a qualified low-income building
under section 42, the investment or loan is not a qualified low-income
community investment under paragraph (d)(1) of this section to the
extent the building's eligible basis under section 42(d) is financed by
the proceeds of the investment or loan.
(4) Bankruptcy of CDE. The bankruptcy of a CDE does not preclude a
taxpayer from continuing to claim the new markets tax credit on the
remaining credit allowance dates under paragraph (b)(2) of this section.
(h) Effective/applicability dates--(1) In general. Except as
provided in paragraphs (h)(2), (h)(3), and (h)(4) of this section, this
section applies on or after December 22, 2004, and may be applied by
taxpayers before December 22, 2004. The provisions that apply before
December 22, 2004, are contained in Sec. 1.45D-1T (see 26 CFR part 1
revised as of April 1, 2003, and April 1, 2004).
(2) Exception. Paragraph (d)(5)(ii) of this section as it relates to
the restriction on lessees described in paragraph (d)(5)(iii)(B) of this
section applies to qualified low-income community investments made on or
after June 22, 2005.
(3) Targeted populations. The rules in paragraph (d)(9) of this
section and the last sentence in paragraph (d)(4)(iv)(A) of this section
apply to taxable years ending on or after December 5, 2011. A taxpayer
may apply the rules in paragraph (d)(9) of this section to taxable years
ending before December 5, 2011 for designations made by the Secretary
after October 22, 2004.
(4) Investments in non-real estate businesses. Paragraphs (c)(8) and
(d)(10) of this section apply to equity investments in CDEs made on or
after September 28, 2012.
[T.D. 9171, 69 FR 77627, Dec. 28, 2004; 70 FR 4012, Jan. 28, 2005, as
amended by T.D. 9560, 76 FR 75778, Dec. 5, 2011; T.D. 9600, 77 FR 59546,
Sept. 28, 2012]
Sec. 1.45G-0 Table of contents for the railroad track maintenance
credit rules.
This section lists the table of contents for Sec. 1.45G-1.
Sec. 1.45G-1 Railroad track maintenance credit.
(a) In general.
(b) Definitions.
(1) Class II railroad and Class III railroad.
(2) Eligible railroad track.
(3) Eligible taxpayer.
(4) Qualifying railroad structure.
(5) Qualified railroad track maintenance expenditures.
(6) Rail facilities.
(7) Railroad-related property.
(8) Railroad-related services.
[[Page 285]]
(9) Railroad track.
(10) Form 8900.
(11) Examples.
(c) Determination of amount of railroad track maintenance credit for
the taxable year.
(1) General amount.
(2) Limitation on the credit.
(i) Eligible taxpayer is a Class II railroad or Class III railroad.
(ii) Eligible taxpayer is not a Class II railroad or Class III
railroad.
(iii) No carryover of amount that exceeds limitation.
(3) Determination of amount of QRTME paid or incurred.
(i) In general.
(ii) Effect of reimbursements received from persons other than a
Class II or Class III railroad.
(4) Examples.
(d) Assignment of track miles.
(1) In general.
(2) Assignment eligibility.
(3) Effective date of assignment.
(4) Assignment information statement.
(i) In general.
(ii) Assignor.
(iii) Assignee.
(iv) Special rule for returns filed prior to November 9, 2007.
(5) Special rules.
(i) Effect of subsequent dispositions of eligible railroad track
during the assignment year.
(ii) Effect of multiple assignments of eligible railroad track miles
during the same taxable year.
(6) Examples.
(e) Adjustments to basis.
(1) In general.
(2) Basis adjustment made to railroad track.
(3) Examples.
(f) Controlled groups.
(1) In general.
(2) Definitions.
(i) Trade or business.
(ii) Group and controlled group.
(iii) Group credit.
(iv) Consolidated group.
(v) Credit year.
(3) Computation of the group credit.
(4) Allocation of the group credit.
(i) In general.
(ii) Stand-alone entity credit.
(5) Special rules for consolidated groups.
(i) In general.
(ii) Special rule for allocation of group credit among consolidated
group members.
(6) Tax accounting periods used.
(i) In general.
(ii) Special rule when timing of QRTME is manipulated.
(7) Membership during taxable year in more than one group.
(8) Intra-group transactions.
(i) In general.
(ii) Payment for QRTME.
(g) Effective/applicability date.
(1) In general.
(2) Taxable years ending before September 7, 2006.
(3) Special rules for returns filed prior to November 9, 2007.
[T.D. 9365, 72 FR 63815, Nov. 13, 2007]
Sec. 1.45G-1 Railroad track maintenance credit.
(a) In general. For purposes of section 38, the railroad track
maintenance credit (RTMC) for qualified railroad track maintenance
expenditures (QRTME) paid or incurred by an eligible taxpayer during the
taxable year is determined under this section. A taxpayer claiming the
RTMC must do so by filing Form 8900, ``Qualified Railroad Track
Maintenance Credit,'' with its timely filed (including extensions)
Federal income tax return for the taxable year the RTMC is claimed.
Paragraph (b) of this section provides definitions of terms. Paragraph
(c) of this section provides rules for computing the RTMC, including
rules regarding limitations on the amount of the credit. Paragraph (d)
of this section provides rules for assigning miles of railroad track.
Paragraph (e) of this section contains rules for adjusting basis for the
amount of the RTMC claimed by an eligible taxpayer. Paragraph (f) of
this section contains rules for computing the amount of the RTMC in the
case of a controlled group, and for the allocation of the group credit
among members of the controlled group.
(b) Definitions. For purposes of section 45G and this section, the
following definitions apply:
(1) Class II railroad and Class III railroad have the respective
meanings given to these terms by the Surface Transportation Board (STB)
without regard to the controlled group rules under section 45G(e)(2).
(2) Eligible railroad track is railroad track (as defined in
paragraph (b)(9) of this section) located within the United States that
is owned or leased by a Class II railroad or Class III railroad at the
close of its taxable year. For purposes of section 45G and this section,
a Class II railroad or Class III railroad owns railroad track if the
railroad track is subject to the allowance for
[[Page 286]]
depreciation under section 167 by the Class II railroad or Class III
railroad.
(3) Eligible taxpayer is--
(i) A Class II railroad or Class III railroad during the taxable
year;
(ii) Any person that transports property using the rail facilities
(as defined in paragraph (b)(6) of this section) of a Class II railroad
or Class III railroad during the taxable year, but only is an eligible
taxpayer with respect to the miles of eligible railroad track assigned
to the person for that taxable year by that Class II railroad or Class
III railroad under paragraph (d) of this section; or
(iii) Any person that furnishes railroad-related property (as
defined in paragraph (b)(7) of this section) or railroad-related
services (as defined in paragraph (b)(8) of this section), to a Class II
railroad or Class III railroad during the taxable year, but only is an
eligible taxpayer with respect to the miles of eligible railroad track
assigned to the person for that taxable year by that Class II railroad
or Class III railroad under paragraph (d) of this section.
(4) Qualifying railroad structure is property located within the
United States that is described in the following STB property accounts
in 49 CFR Part 1201, Subpart A:
(i) Property Account 3, Grading.
(ii) Property Account 4, Other right-of-way expenditures.
(iii) Property Account 5, Tunnels and subways.
(iv) Property Account 6, Bridges, trestles, and culverts.
(v) Property Account 7, Elevated structures.
(vi) Property Account 8, Ties.
(vii) Property Account 9, Rails and other track material.
(viii) Property Account 11, Ballast.
(ix) Property Account 13, Fences, snowsheds, and signs.
(x) Property Account 27, Signals and interlockers.
(xi) Property Account 39, Public improvements; construction.
(5) Qualified railroad track maintenance expenditures (QRTME) are
expenditures for maintaining, repairing, and improving qualifying
railroad structure (as defined in paragraph (b)(4) of this section) that
is owned or leased as of January 1, 2005, by a Class II railroad or
Class III railroad. These expenditures may or may not be chargeable to a
capital account.
(6) Rail facilities of a Class II railroad or Class III railroad are
railroad yards, tracks, bridges, tunnels, wharves, docks, stations, and
other related assets that are used in the transport of freight by a
railroad and that are owned or leased by the Class II railroad or Class
III railroad.
(7) Railroad-related property is property that is provided directly
to, and is unique to, a railroad and that, in the hands of a Class II
railroad or Class III railroad, is described in--
(i) The following STB property accounts in 49 CFR Part 1201, Subpart
A:
(A) Property Account 3, Grading;
(B) Property Account 5, Tunnels and subways;
(C) Property Account 22, Storage warehouses; and
(ii) Asset classes 40.1 through 40.54 in the guidance issued by the
Internal Revenue Service under section 168(i)(1) (for further guidance,
for example, see Rev. Proc. 87-56 (1987-2 CB 674), and Sec.
601.601(d)(2)(ii)(b) of this chapter), except that any office building,
any passenger train car, and any miscellaneous structure if such
structure is not provided directly to, and is not unique to, a railroad
are excluded from the definition of railroad-related property.
(8) Railroad-related services are services that are provided
directly to, and are unique to, a railroad and that relate to railroad
shipping, loading and unloading of railroad freight, or repairs of rail
facilities (as defined in paragraph (b)(6) of this section) or railroad-
related property (as defined in paragraph (b)(7) of this section).
Examples of railroad-related services are the transport of freight by
rail; the loading and unloading of freight transported by rail; railroad
bridge services; railroad track construction; providing railroad track
material or equipment; locomotive leasing or rental; maintenance of
railroad's right-of-way (including vegetation control); piggyback
trailer ramping; rail deramping services; and freight train cars repair
services. Examples of services that are not railroad-related services
are general business services, such as, accounting and
[[Page 287]]
bookkeeping, marketing, legal services; janitorial services; office
building rental; banking services (including financing of railroad-
related property); and purchasing of, or services performed on, property
not described in paragraph (b)(7) of this section.
(9) Except as provided in paragraph (e)(2) of this section, railroad
track is property described in STB property accounts 8 (ties), 9 (rails
and other track material), and 11 (ballast) in 49 CFR part 1201, Subpart
A. Double track is treated as multiple lines of railroad track, rather
than as a single line of railroad track. Thus, one mile of single track
is one mile, but one mile of double track is two miles.
(10) Form 8900. If Form 8900 is revised or renumbered, any reference
in this section to that form shall be treated as a reference to the
revised or renumbered form.
(11) Examples. The application of this paragraph (b) is illustrated
by the following examples. In all examples, the taxpayers use a calendar
taxable year, and are not members of a controlled group.
Example 1. A is a manufacturer that in 2006, transports its products
by rail using the railroad tracks owned by B, a Class II railroad that
owns 500 miles of railroad track within the United States on December
31, 2006. B properly assigns for purposes of section 45G 100 miles of
eligible railroad track to A in 2006. A is an eligible taxpayer for 2006
with respect to the 100 miles of eligible railroad track.
Example 2. C is a bank that loans money to several Class III
railroads. In 2006, C loans money to D, a Class III railroad, who in
turn uses the loan proceeds to purchase track material. Because
providing loans is not a service that is unique to a railroad, C is not
providing railroad-related services and, thus, C is not an eligible
taxpayer, even if D assigns miles of eligible railroad track to C for
purposes of section 45G.
Example 3. E leases locomotives directly to Class I, Class II, and
Class III railroads. In 2006, E leases locomotives to F, a Class II
railroad that owns 200 miles of railroad track within the United States
on December 31, 2006. F properly assigns for purposes of section 45G 200
miles of eligible railroad track to E. Because locomotives are property
that is unique to a railroad, and E leases these locomotives directly to
F in 2006, E is an eligible taxpayer for 2006 with respect to the 200
miles of eligible railroad track assigned to E by F.
Example 4. The facts are the same as in Example 3, except that E
leases passenger trains, not locomotives, to F. Because passenger trains
are not railroad-related property for purposes of section 45G, E is not
an eligible taxpayer even if F assigns miles of eligible railroad track
to E for purposes of section 45G.
(c) Determination of amount of railroad track maintenance credit for
the taxable year--(1) General amount. Except as provided in paragraph
(c)(2) of this section, for purposes of section 38, the RTMC determined
under section 45G(a) for the taxable year is equal to 50 percent of the
QRTME paid or incurred (as determined under paragraph (c)(3) of this
section) by an eligible taxpayer during the taxable year.
(2) Limitation on the credit--(i) Eligible taxpayer is a Class II
railroad or Class III railroad. If an eligible taxpayer is a Class II
railroad or Class III railroad, the RTMC determined under paragraph
(c)(1) of this section for the Class II railroad or Class III railroad
for any taxable year must not exceed $3,500 multiplied by the sum of--
(A) The number of miles of eligible railroad track owned or leased
by the Class II railroad or Class III railroad, reduced by the number of
miles of eligible railroad track assigned under paragraph (d) of this
section by the Class II railroad or Class III railroad to another
eligible taxpayer for that taxable year; and
(B) The number of miles of eligible railroad track owned or leased
by another Class II railroad or Class III railroad that are assigned
under paragraph (d) of this section to the Class II railroad or Class
III railroad for the taxable year.
(ii) Eligible taxpayer is not a Class II railroad or Class III
railroad. If an eligible taxpayer is not a Class II railroad or Class
III railroad, the RTMC determined under paragraph (c)(1) of this section
for the eligible taxpayer for any taxable year must not exceed $3,500
multiplied by the number of miles of eligible railroad track assigned
under paragraph (d) of this section by a Class II railroad or Class III
railroad to the eligible taxpayer for the taxable year.
(iii) No carryover of amount that exceeds limitation. Amounts that
exceed the limitation under paragraph (c)(2)(i) of this section or
paragraph (c)(2)(ii) of
[[Page 288]]
this section, may never be carried over to another taxable year.
(3) Determination of amount of QRTME paid or incurred--(i) In
general. The term paid or incurred means, in the case of a taxpayer
using an accrual method of accounting, a liability incurred (within the
meaning of Sec. 1.446-1(c)(1)(ii)). A liability may not be taken into
account under section 45G and this section prior to the taxable year
during which the liability is incurred. Any amount that an eligible
taxpayer (assignee) pays a Class II railroad or Class III railroad
(assignor) in exchange for an assignment of one or more miles of
eligible railroad track under paragraph (d) of this section, is treated,
for purposes of this section, as QRTME paid or incurred by the assignee,
and not by the assignor, at the time and to the extent the assignor pays
or incurs QRTME.
(ii) Effect of reimbursements received from persons other than a
Class II or Class III railroad. The amount of QRTME treated as paid or
incurred during the taxable year by an eligible taxpayer under
paragraphs (b)(3)(ii) and (iii) of this section shall be reduced by any
amount to which the eligible taxpayer is entitled to be reimbursed,
directly or indirectly, from persons other than a Class II or Class III
railroad.
(4) Examples. The application of this paragraph (c) is illustrated
by the following examples. In all examples, the taxpayers use an accrual
method of accounting and a calendar taxable year, and are not members of
a controlled group.
Example 1. Computation of RTMC; section 45G credit limitation is not
exceeded. (i) G is a Class II railroad that owns or has leased to it
1,000 miles of railroad track within the United States on December 31,
2006. H is a manufacturer that in 2006, transports its products by rail
using the rail facilities of G. In 2006, for purposes of section 45G, G
assigns 100 miles of eligible railroad track to H and does not make any
other assignments of railroad track miles. H did not receive any other
assignments of railroad track miles in 2006. During 2006, G incurred
QRTME in the amount of $2.5 million and H incurred QRTME in the amount
of $200,000.
(ii) For 2006, G determines the tentative amount of RTMC under
paragraph (c)(1) of this section to be $1,250,000 (50% multiplied by
$2,500,000 QRTME incurred by G during 2006). G further determines G's
credit limitation under paragraph (c)(2)(i) of this section for 2006 to
be $3,150,000 ($3,500 multiplied by 900 miles of eligible railroad track
(1,000 miles owned by, or leased to, G on December 31, 2006, less 100
miles assigned by G to H in 2006)). Because G's tentative amount of RTMC
does not exceed G's credit limitation amount for 2006, G may claim a
RTMC for 2006 in the amount of $1,250,000.
(iii) For 2006, H determines the tentative amount of RTMC under
paragraph (c)(1) of this section to be $100,000 (50% multiplied by
$200,000 QRTME incurred by H during 2006). H further determines H's
credit limitation under paragraph (c)(2)(ii) of this section for 2006 to
be $350,000 ($3,500 multiplied by 100 miles of eligible railroad track
assigned by G to H in 2006). Because H's tentative amount of RTMC does
not exceed H's credit limitation amount for 2006, H may claim a RTMC in
the amount of $100,000.
Example 2. Computation of RTMC; section 45G credit limitation is
exceeded. (i) The facts are the same as in Example 1, except that G
assigned for purposes of section 45G only 50 miles of railroad track to
H in 2006 and, during 2006, H incurred QRTME in the amount of $400,000.
(ii) For 2006, G determines the tentative amount of RTMC under
paragraph (c)(1) of this section to be $1,250,000 (50% multiplied by
$2,500,000 QRTME incurred by G during 2006). G further determines G's
credit limitation under paragraph (c)(2)(i) of this section for 2006 to
be $3,325,000 ($3,500 multiplied by 950 miles of eligible railroad track
(1,000 miles owned by, or leased to, G on December 31, 2006, less 50
miles assigned by G to H in 2006)). Because G's tentative amount of RTMC
does not exceed G's credit limitation amount for 2006, G may claim a
RTMC in the amount of $1,250,000.
(iii) For 2006, H determines the tentative amount of RTMC under
paragraph (c)(1) of this section to be $200,000 (50% multiplied by
$400,000 QRTME incurred by H during 2006). H further determines H's
credit limitation under paragraph (c)(2)(ii) of this section for 2006 to
be $175,000 ($3,500 multiplied by 50 miles of eligible railroad track
assigned by G to H in 2006). Because H's tentative amount of RTMC
exceeds H's credit limitation amount for 2006, H may claim a RTMC in the
amount of $175,000 (the credit limitation amount). Under paragraph
(c)(2)(iii) of this section, there is no carryover of the $25,000 (the
tentative amount of $200,000 less the credit limitation amount of
$175,000) that exceeds the limitation.
Example 3. Railroad track miles assigned for payment. (i) J is a
Class II railroad that owns or has leased to it 1,000 miles of railroad
track within the United States on December 31, 2006. K is a corporation
that sells ties, ballast, and other track material to Class I, Class II,
and Class III railroads. During 2006,
[[Page 289]]
K sold these items to J and J incurred QRTME in the amount of $1
million. Also, on December 6, 2006, J assigned for purposes of section
45G 150 miles of eligible railroad track to K and K paid J $800,000 for
that assignment. K did not pay or incur any other QRTME during 2006.
(ii) For 2006, in accordance with paragraph (c)(3)(ii) of this
section, J is treated as having incurred QRTME in the amount of $200,000
($1 million QRTME actually incurred by J less the $800,000 paid by K to
J for the assignment of the railroad track miles in 2006). For 2006, J
determines the tentative amount of RTMC under paragraph (c)(1) of this
section to be $100,000 (50% multiplied by $200,000 QRTME treated as
incurred by J during 2006). J further determines J's credit limitation
amount under paragraph (c)(2)(i) of this section for 2006 to be
$2,975,000 ($3,500 multiplied by 850 miles of eligible railroad track
(1,000 miles owned by, or leased to, J on December 31, 2006, less 150
miles assigned by J to K in 2006)). Because J's tentative amount of RTMC
does not exceed J's credit limitation amount for 2006, J may claim a
RTMC in the amount of $100,000.
(iii) For 2006, K is an eligible taxpayer because, during 2006, K
provided railroad-related property to J and received an assignment of
eligible railroad track miles from J. Under paragraph (c)(3)(ii) of this
section, K is treated as having incurred QRTME in the amount of $800,000
(the amount paid by K to J for the assignment of the railroad track
miles in 2006). For 2006, K determines the tentative amount of RTMC
under paragraph (c)(1) of this section to be $400,000 (50% multiplied by
$800,000 QRTME treated as incurred by K during 2006). K further
determines K's credit limitation amount under paragraph (c)(2)(ii) of
this section for 2006 to be $525,000 ($3,500 multiplied by 150 miles of
eligible railroad track assigned by J in 2006). Because K's tentative
amount of RTMC does not exceed K's credit limitation amount for 2006, K
may claim a RTMC in the amount of $400,000.
(iv) The results in this Example 3 would be the same if K sold the
ties, ballast, and other track material with a fair market value of $1
million to J for $200,000 in exchange for the assignment by J of 150
miles of eligible railroad track to K.
Example 4. Reimbursement of QRTME. (i) L is a Class III railroad
that owns or has leased to it 500 miles of railroad track within the
United States on December 31, 2006. M is a manufacturer that in 2006
transports its products by rail using the rail facilities of L. During
2006, L did not incur any QRTME. Also, in 2006, L assigned for purposes
of section 45G 200 miles of eligible railroad track to M and agreed to
reduce L's freight shipping rates to M by $250,000 in exchange for M
upgrading these railroad track miles. Consequently, during 2006, M
incurred QRTME of $500,000 to upgrade these 200 miles of railroad track
and L reduced L's freight shipping rates for M by $250,000.
(ii) For 2006, M is an eligible taxpayer because, during 2006, M
transported property using the rail facilities of L and received an
assignment of eligible railroad track miles from L. The amount of QRTME
paid or incurred by M during 2006 is $500,000 and is not reduced by the
reimbursement of $250,000 by L to M because, under paragraph (c)(3)(ii)
of this section, QRTME is not reduced by reimbursements from Class II or
Class III railroads. For 2006, M determines the tentative amount of RTMC
under paragraph (c)(1) of this section to be $250,000 (50% multiplied by
$500,000 QRTME incurred by M during 2006). M further determines M's
credit limitation amount under paragraph (c)(2)(ii) of this section for
2006 to be $700,000 ($3,500 multiplied by 200 miles of eligible railroad
track assigned by L to M in 2006). Because M's tentative amount of RTMC
does not exceed M's credit limitation amount for 2006, M may claim a
RTMC in the amount of $250,000.
(d) Assignment of track miles--(1) In general. An assignment of any
mile of eligible railroad track under this paragraph (d) is a
designation by a Class II railroad or Class III railroad that is made
solely for purposes of section 45G and this section of a specific number
of miles of eligible railroad track as being assigned to another
eligible taxpayer for a taxable year. A designation must be in writing
and must include the name and taxpayer identification number of the
assignee, and the information required under the rules of paragraph
(d)(4)(iii)(B) of this section. A designation requires no transfer of
legal title or other indicia of ownership of the eligible railroad
track, and need not specify the location of any assigned mile of
eligible railroad track. Further, an assigned mile of eligible railroad
track need not correspond to any specific mile of eligible railroad
track with respect to which the eligible taxpayer actually pays or
incurs the QRTME.
(2) Assignment eligibility. Only a Class II railroad or Class III
railroad may assign a mile of eligible railroad track. If a Class II
railroad or Class III railroad assigns a mile of eligible railroad track
to an eligible taxpayer, the assignee is not permitted to reassign any
mile of eligible railroad track to another eligible taxpayer. The
maximum number of miles of eligible railroad track that may be assigned
by a Class II railroad
[[Page 290]]
or Class III railroad for any taxable year is its total miles of
eligible railroad track less the miles of eligible railroad track that
the Class II railroad or Class III railroad retains for itself in
determining its RTMC for the taxable year.
(3) Effective date of assignment. If a Class II railroad or Class
III railroad assigns a mile of eligible railroad track, the assignment
is treated as being made by the Class II railroad or Class III railroad
at the close of its taxable year in which the assignment was made. With
respect to the assignee, the assignment of a mile of eligible railroad
track is taken into account for the taxable year of the assignee that
includes the date the assignment is treated as being made by the
assignor Class II railroad or Class III railroad under this paragraph
(d)(3).
(4) Assignment information statement--(i) In general. A taxpayer
must file Form 8900, ``Qualified Railroad Track Maintenance Credit,''
with its timely filed (including extensions) Federal income tax return
for the taxable year for which the taxpayer assigns any mile of eligible
railroad track, even if the taxpayer is not itself claiming the RTMC for
that taxable year.
(ii) Assignor. Except as provided in paragraph (d)(4)(iv) of this
section, a Class II railroad or Class III railroad (assignor) that
assigns one or more miles of eligible railroad track during a taxable
year to one or more eligible taxpayers must attach to the assignor's
Form 8900 for that taxable year an information statement providing--
(A) The name and taxpayer identification number of each assignee;
(B) The total number of miles of the assignor's eligible railroad
track;
(C) The number of miles of eligible railroad track assigned by the
assignor to each assignee for the taxable year; and
(D) The total number of miles of eligible railroad track assigned by
the assignor to all assignees for the taxable year.
(iii) Assignee. Except as provided in paragraph (d)(4)(iv) of this
section, an eligible taxpayer (assignee) that has received an assignment
of miles of eligible railroad track during its taxable year from a Class
II railroad or Class III railroad, and that claims the RTMC for that
taxable year, must attach to the assignee's Form 8900 for that taxable
year a statement--
(A) Providing the total number of miles of eligible railroad track
assigned to the assignee for the assignee's taxable year; and
(B) Attesting that the assignee has in writing, and has retained as
part of the assignee's records for purposes of Sec. 1.6001-1(a), the
following information from each assignor:
(1) The name and taxpayer identification number of each assignor.
(2) The date of each assignment made by each assignor (as determined
under paragraph (d)(3) of this section) to the assignee;
(3) The number of miles of eligible railroad track assigned by each
assignor to the assignee for the assignee's taxable year.
(iv) Special rules for returns filed prior to November 9, 2007. If
an eligible taxpayer's Federal income tax return for a taxable year
beginning after December 31, 2004, and ending before November 9, 2007,
was filed before December 13, 2007, and the eligible taxpayer is not
filing an amended Federal income tax return for that taxable year
pursuant to paragraph (g)(2) of this section before the eligible
taxpayer's next filed original Federal income tax return, and the
eligible taxpayer wants to apply paragraph (g)(2) of this section but
did not include with that return the information specified in paragraph
(d)(4)(ii) or (iii) of this section, as applicable, the eligible
taxpayer must attach a statement containing the information specified in
paragraph (d)(4)(ii) or (iii) of this section, as applicable, to
either--
(A) The eligible taxpayer's next filed original Federal income tax
return; or
(B) The eligible taxpayer's amended Federal income tax return that
is filed pursuant to paragraph (g)(2) of this section, provided that
amended Federal income tax return is filed by the eligible taxpayer
before its next filed original Federal income tax return.
(5) Special rules--(i) Effect of subsequent dispositions of eligible
railroad track during the assignment year. If a Class II railroad or
Class III railroad assigns one or more miles of eligible railroad track
that it owned or leased
[[Page 291]]
as of the actual date of the assignment, but does not own or lease any
eligible railroad track at the close of the taxable year in which the
assignment is made by the Class II railroad or Class III railroad, the
assignment is not valid for that taxable year for purposes of section
45G and this section.
(ii) Effect of multiple assignments of eligible railroad track miles
during the same taxable year. If a Class II railroad or Class III
railroad assigns more miles of eligible railroad track than it owned or
leased as of the close of the taxable year in which the assignment is
made by the Class II railroad or Class III railroad, the assignment is
valid for purposes of section 45G and this section only with respect to
the name of the assignee and the number of miles listed by the assignor
Class II railroad or Class III railroad on the statement required under
paragraph (d)(4)(ii) of this section and only to the extent of the
maximum miles of eligible railroad track that may be assigned by the
assignor Class II railroad or Class III railroad as determined under
paragraph (d)(2) of this section. If the total number of miles on this
statement exceeds the maximum miles of eligible railroad track that may
be assigned by the assignor Class II railroad or Class III railroad (as
determined under paragraph (d)(2) of this section), the total number of
miles on the statement shall be reduced by the excess amount of miles.
This reduction is allocated among each assignee listed on the statement
in proportion to the total number of miles listed on the statement for
that assignee.
(6) Examples. The application of this paragraph (d) is illustrated
by the following examples. In none of the examples are the taxpayers
members of a controlled group:
Example 1. Assignor and assignee have the same taxable year. (i) N,
a calendar year taxpayer, is a Class II railroad that owns 500 miles of
railroad track within the United States on December 31, 2006. O, a
calendar year taxpayer, is not a railroad, but is a taxpayer that
provides railroad-related property to N during 2006. On November 7,
2006, N assigns for purposes of section 45G 300 miles of eligible
railroad track to O. O receives no other assignment of eligible railroad
track in 2006. O pays or incurs QRTME in the amount of $100,000 in
November 2006, and $50,000 in February 2007. N and O each file Form 8900
with their timely filed Federal income tax returns for 2006 and attach
the statement required by paragraph (d)(4)(ii) and (iii), respectively,
of this section reporting the assignment of the 300 miles of eligible
railroad track to O.
(ii) The assignment of the 300 miles of eligible railroad track made
by N to O on November 7, 2006, is treated as made on December 31, 2006
(at the close of the N's taxable year). Consequently, the assignment is
taken into account by O for O's taxable year ending on December 31,
2006. For 2006, O is an eligible taxpayer because, during 2006, O
provides railroad-related property to N and receives an assignment of
300 eligible railroad track miles from N. For 2006, O determines the
tentative amount of RTMC under paragraph (c)(1) of this section to be
$50,000 (50% multiplied by $100,000 QRTME paid or incurred by O during
2006). O further determines the credit limitation amount under paragraph
(c)(2)(i) of this section for 2006 to be $1,050,000 ($3,500 multiplied
by 300 miles of eligible railroad track assigned by N to O on December
31, 2006). Because O's tentative amount of RTMC does not exceed O's
credit limitation amount for 2006, O may claim a RMTC for 2006 in the
amount of $50,000.
Example 2. Assignor and assignee have different taxable years. (i)
The facts are the same as in Example 1, except that O's taxable year
ends on March 31.
(ii) The assignment of the 300 miles of eligible railroad track made
by N to O on November 7, 2006, is treated as made on December 31, 2006.
As a result, the assignment is taken into account by O for O's taxable
year ending on March 31, 2007. Thus, for the taxable year ending on
March 31, 2007, O determines the tentative amount of RMTC under
paragraph (c)(1) of this section to be $75,000 (50% multiplied by
$150,000 QRTME incurred by O during its taxable year ending March 31,
2007). Because O's tentative amount of RTMC does not exceed O's credit
limitation amount for the taxable year ending March 31, 2007, O may
claim a RMTC for the taxable year ending March 31, 2007, in the amount
of $75,000.
Example 3. Assignment location differs from QRTME location. (i) P, a
calendar-year taxpayer, is a Class III railroad that owns or has leased
to it 200 miles of railroad track within the United States on December
31, 2006. P owns 50 miles of this railroad track and leases 150 miles of
this railroad track from Q, a Class I railroad. On February 8, 2006, P
assigns for purposes of section 45G 50 miles of eligible railroad track
to R. R is not a railroad, but is a taxpayer that ships products using
the 50 miles of eligible railroad track owned by P, and R paid $100,000
in 2006 to P to enable P to upgrade these 50 miles of eligible railroad
track. In March 2006, P also assigns for purposes of section 45G 150
miles of
[[Page 292]]
eligible railroad track to S. S is not a railroad, but is a taxpayer
that provides railroad-related property to P, and S paid $400,000 to P
to enable P to upgrade P's 200 miles of eligible railroad track. For
2006, P pays or incurs QRTME in the amount of $500,000 to upgrade the
150 miles of eligible railroad track that it leases from Q and pays or
incurs no QRTME on the 50 miles of eligible railroad track that it owns.
For 2006, P receives no other assignment of eligible railroad track
miles and did not retain any eligible railroad track miles for itself.
Also, R and S do not pay or incur any other amounts that would qualify
as QRTME during 2006. P, R, and S each file Form 8900 with their timely
filed Federal income tax returns for 2006 and attach the statement
required by paragraph (d)(4) (ii) or (iii) of this section, whichever
applies, reporting the assignment of eligible railroad track by P to R
or S in 2006.
(ii) For 2006, in accordance with paragraph (c)(3)(ii) of this
section, P is treated as having incurred QRTME in the amount of $0
($500,000 QRTME actually incurred by P less the $100,000 paid by R to P
for the assignment of the 50 miles of eligible railroad track and the
$400,000 paid by S to P for the assignment of the 150 miles of eligible
railroad track). Further, P assigned all of its eligible railroad track
miles to R and S for 2006. Accordingly, for 2006, P may not claim any
RTMC.
(iii) For 2006, R is an eligible taxpayer because, during 2006, R
ships property using the rail facilities of P and receives an assignment
of 50 eligible railroad track miles from P. In accordance with paragraph
(c)(3)(ii) of this section, R is treated as having incurred QRTME in the
amount of $100,000 (the amount paid by R to P for the assignment of the
eligible railroad track miles in 2006) even though no work was performed
on the 50 miles of eligible railroad track that was assigned by P to R.
For 2006, R determines the tentative amount of RTMC under paragraph
(c)(1) of this section to be $50,000 (50% multiplied by $100,000 QRTME
treated as incurred by R during 2006). R further determines the credit
limitation amount under paragraph (c)(2)(ii) of this section to be
$175,000 ($3,500 multiplied by 50 miles of eligible railroad track
assigned by P to R in 2006). Because R's tentative amount of RTMC does
not exceed R's credit limitation amount for 2006, R may claim a RTMC for
2006 in the amount of $50,000.
(iv) For 2006, S is an eligible taxpayer because, during 2006, S
provides railroad-related property to P and receives an assignment of
150 eligible railroad track miles from P. In accordance with paragraph
(c)(3)(ii) of this section, S is treated as having incurred QRTME in the
amount of $400,000 (amount paid by S to P for the assignment of the
eligible railroad track miles in 2006). For 2006, S determines the
tentative amount of RTMC under paragraph (c)(1) of this section to be
$200,000 (50% multiplied by $400,000 QRTME treated as incurred by S
during 2006). S further determines the credit limitation amount under
paragraph (c)(2)(ii) of this section to be $525,000 ($3,500 multiplied
by 150 miles of eligible railroad track assigned by P to S in 2006).
Because S's tentative amount of RTMC does not exceed S's credit
limitation amount for 2006, S may claim a RTMC for 2006 in the amount of
$200,000.
Example 4. Multiple assignments of track miles. (i) T, a calendar-
year taxpayer, is a Class III railroad that owns or has leased to it 200
miles of railroad track within the United States on December 31, 2006. T
owns 75 miles of this railroad track and leases 125 miles of this
railroad track from U, a Class I railroad. V and W are not railroads,
but are both taxpayers that provide railroad-related services to T
during 2006. On January 15, 2006, T assigns for purposes of section 45G
200 miles of eligible railroad track to V. V agrees to incur, in 2006,
$1.4 million of QRTME to upgrade a portion of/segment of these 200 miles
of eligible railroad track. Due to unexpected financial difficulties, V
only incurs $250,000 of QRTME during 2006 and on May 15, 2006, T learns
that V is unable to incur the remainder of the QRTME. On June 15, 2006,
T assigns for purposes of section 45G the 200 miles of railroad track to
W. In 2006, W incurs $1,100,000 of QRTME to upgrade a portion of/segment
of the railroad track. For 2006, T receives no other assignment of
eligible railroad track miles and did not retain any eligible railroad
track miles for itself. V and W do not receive any other assignments of
miles of eligible railroad track miles from a Class II railroad or Class
III railroad during 2006. T and W each file Form 8900 with their timely
filed Federal income tax returns for 2006, and attach the statement
required by paragraph (d)(4) (ii) and (iii), respectively, of this
section, reporting the assignment of 200 miles of eligible railroad
track to W.
(ii) Because T did not retain any miles of eligible railroad track
for itself for 2006, the maximum miles of eligible railroad track that
may be assigned by T for 2006 is 200 miles pursuant to paragraph (d)(2)
of this section. On the statement required by paragraph (d)(4)(ii) of
this section, T assigned a total of 200 miles of eligible railroad track
to W. Consequently, because T did not list V as an assignee on T's
statement required by paragraph (d)(4)(ii) of this section, V did not
receive an assignment of eligible railroad track miles from T during
2006 and V is not an eligible taxpayer for 2006. Thus, for 2006, V may
not claim any RTMC even though V incurred QRTME in the amount of
$250,000.
(iii) For 2006, W is an eligible taxpayer because, during 2006, W
provides railroad-related services to T and receives an assignment of
200 eligible railroad track miles
[[Page 293]]
from T. W determines the tentative amount of RTMC under paragraph (c)(1)
of this section to be $550,000 (50% multiplied by $1,100,000 QRTME
incurred by W during 2006). W further determines the credit limitation
amount under paragraph (c)(2)(ii) of this section to be $700,000 ($3,500
multiplied by the 200 miles of eligible railroad track assigned by T to
W in 2006). Because W's tentative amount of RTMC does not exceed W's
credit limitation amount for 2006, W may claim a RTMC for 2006 in the
amount of $550,000.
Example 5. Multiple assignments of track miles. (i) Same facts as in
Example 4, except T, to its Form 8900 for 2006, attaches the statement
required by paragraph (d)(4)(ii) of this section assigning 200 miles of
eligible railroad track to W and 200 miles of eligible railroad track to
V.
(ii) Because T did not retain any miles of eligible railroad track
for itself for 2006, the maximum miles of eligible railroad track that
may be assigned by T for 2006 is 200 miles pursuant to paragraph (d)(2)
of this section. However, on the statement required by paragraph
(d)(4)(ii) of this section, T assigned a total of 400 miles of eligible
railroad track (200 miles to W and 200 miles to V). Consequently, the
400 miles of eligible railroad track on this statement must be reduced
to the 200 maximum miles of eligible railroad track available for
assignment for 2006. Because the statement reports 200 miles of eligible
railroad track assigned to each W and V, the reduction of 200 miles (400
total miles of eligible railroad track on the statement less 200 maximum
miles of eligible railroad track available for assignment) is allocated
pro-rata between W and V and, therefore, 100 miles each to W and V.
Thus, pursuant to paragraph (d)(5)(ii) of this section, the number of
miles of eligible railroad track assigned by T to W and V for 2006 is
100 miles each.
(iii) For 2006, V is an eligible taxpayer because, during 2006, V
provides railroad-related services to T and receives an assignment of
100 eligible railroad track miles from T. V determines the tentative
amount of RTMC under paragraph (c)(1) of this section to be $125,000
(50% multiplied by $250,000 QRTME incurred by V during 2006). V further
determines the credit limitation amount under paragraph (c)(2)(ii) of
this section to be $350,000 ($3,500 multiplied by the 100 miles of
eligible railroad track assigned by T to V in 2006). Because V's
tentative amount of RTMC does not exceed W's credit limitation amount
for 2006, V may claim a RTMC for 2006 in the amount of $125,000.
(iv) For 2006, W is an eligible taxpayer because, during 2006, W
provides railroad-related services to T and receives an assignment of
100 eligible railroad track miles from T. W determines the tentative
amount of RTMC under paragraph (c)(1) of this section to be $550,000
(50% multiplied by $1,100,000 QRTME incurred by W during 2006). W
further determines the credit limitation amount under paragraph
(c)(2)(ii) of this section to be $350,000 ($3,500 multiplied by the 100
miles of eligible railroad track assigned by T to W in 2006). Because
W's tentative amount of RTMC exceeds W's credit limitation amount for
2006, W may claim a RTMC for 2006 in the amount of $350,000 (the credit
limitation). There is no carryover of the amount of $200,000 (the
tentative amount of $550,000 less the credit limitation amount of
$350,000).
(e) Adjustments to basis--(1) In general. All or some of the QRTME
paid or incurred by an eligible taxpayer during the taxable year may be
required to be capitalized under section 263(a) as a tangible asset or
as an intangible asset. See, for example, Sec. 1.263(a)-4(d)(8), which
requires capitalization of amounts paid or incurred by a taxpayer to
produce or improve real property owned by another (except to the extent
the taxpayer is selling services at fair market value to produce or
improve the real property) if the real property can reasonably be
expected to produce significant economic benefits for the taxpayer. The
basis of the tangible asset or intangible asset includes the capitalized
amount of the QRTME.
(2) Basis adjustment made to railroad track. An eligible taxpayer
must reduce the adjusted basis of any railroad track with respect to
which the eligible taxpayer claims the RTMC. For purposes of section
45G(e)(3) and this paragraph (e)(2), the adjusted basis of any railroad
track with respect to which the eligible taxpayer claims the RTMC is
limited to the amount of QRTME, if any, that is required to be
capitalized into the qualifying railroad structure or an intangible
asset. The adjusted basis of the railroad track is reduced by the amount
of the RTMC allowable (as determined under paragraph (c) of this
section) by the eligible taxpayer for the taxable year, but not below
zero. This reduction is taken into account at the time the QRTME is paid
or incurred by an eligible taxpayer and before the depreciation
deduction with respect to such railroad track is determined for the
taxable year for which the RTMC is allowable. If all or some of the
QRTME paid or incurred by an eligible taxpayer during the taxable year
is capitalized under section 263(a)
[[Page 294]]
to more than one asset, whether tangible or intangible (for example,
railroad track and bridges), the reduction to the basis of these assets
under this paragraph (e)(2) is allocated among each of the assets
subject to the reduction in proportion to the unadjusted basis of each
asset at the time the QRTME is paid or incurred during that taxable
year.
(3) Examples. The application of this paragraph (e) is illustrated
by the following examples. In each example, all taxpayers use a calendar
taxable year, and no taxpayers are members of a controlled group.
Example 1. (i) X is a Class II railroad that owns 500 miles of
railroad track within the United States on December 31, 2006. During
2006, X incurs $1 million of QRTME for maintaining this railroad track.
X uses the track maintenance allowance method for track structure
expenditures (for further guidance, see Rev. Proc. 2002-65 (2002-2 CB
700) and Sec. 601.601(d)(2)(ii)(b) of this chapter). Assume all of the
$1 million QRTME is track structure expenditures and none of it was
expended for new track structure.
(ii) For 2006, X determines the tentative amount of RTMC under
paragraph (c)(1) of this section to be $500,000 (50% multiplied by $1
million QRTME incurred by X during 2006). X further determines the
credit limitation amount under paragraph (c)(2)(i) of this section for
2006 to be $1,750,000 ($3,500 multiplied by 500 miles of eligible
railroad track). Because X's tentative amount of RTMC does not exceed
X's credit limitation amount for 2006, X may claim a RTMC for 2006 in
the amount of $500,000.
(iii) Of the $1 million QRTME incurred by X during 2006, X
determines under the track maintenance allowance method that $750,000 is
the track maintenance allowance under section 162 and $250,000 is the
capitalized amount for the track structure. In accordance with paragraph
(e)(2) of this section, X reduces the capitalized amount of $250,000 by
the RTMC of $500,000 claimed by X for 2006, but not below zero. Thus,
the capitalized amount of $250,000 is reduced to zero. X also deducts
under section 162 a track maintenance allowance of $750,000 on its 2006
Federal income tax return.
Example 2. (i) Y is a Class II railroad that owns or has leased to
it 500 miles of eligible railroad track within the United States on
December 31, 2006. Z is not a railroad, but is a taxpayer that, in 2006,
transports its products using the rail facilities of Y. In 2006, Y
assigns for purposes of section 45G 300 miles of eligible railroad track
to Z. Z does not receive any other assignments of eligible railroad
track miles in 2006. During 2006, Z incurs QRTME in the amount of $1
million, and Y does not incur any QRTME. Y and Z each file Form 8900
with their timely filed Federal income tax returns for 2006 and attach
the statement required by paragraph (d)(4)(ii) and (iii), respectively,
of this section reporting the assignment of the 300 miles of eligible
railroad track to Z.
(ii) For 2006, Z determines the tentative amount of RTMC under
paragraph (c)(1) of this section to be $500,000 (50% multiplied by $1
million QRTME incurred by Z during 2006). Z further determines the
credit limitation amount under paragraph (c)(2)(ii) of this section for
2006 to be $1,050,000 ($3,500 multiplied by 300 miles of eligible
railroad track assigned by Y to Z in 2006). Because Z's tentative amount
of RTMC does not exceed Z's credit limitation amount for 2006, Z may
claim a RTMC for 2006 in the amount of $500,000.
(iii) For 2006, Z also must determine the portion of the $1 million
QRTME that Z incurs that is required to be capitalized under section
263(a), and the portion that is a section 162 expense. Because Z is not
a Class II railroad or Class III railroad, Z cannot use the track
maintenance allowance method. Assume that all of the QRTME constitutes
an intangible asset under Sec. 1.263(a)-4(d)(8) and, therefore, is
required to be capitalized by Z under section 263(a) as an intangible
asset. In accordance with paragraph (e)(2) of this section, Z reduces
the capitalized amount of $1 million by the RTMC of $500,000 claimed by
Z for 2006. Thus, the capitalized amount of $1 million for the
intangible asset is reduced to $500,000. Further, pursuant to Sec.
1.167(a)-3(b)(1)(iv), Z may treat this intangible asset with an adjusted
basis of $500,000 as having a useful life of 25 years for purposes of
the depreciation allowance under section 167(a).
(f) Controlled groups--(1) In general. Pursuant to section
45G(e)(2), if an eligible taxpayer is a member of a controlled group of
corporations, rules similar to the rules in Sec. 1.41-6T apply for
determining the amount of the RTMC under section 45G(a) and this
section. To determine the amount of RTMC (if any) allowable to a trade
or business that at the end of its taxable year is a member of a
controlled group, a taxpayer must--
(i) Compute the group credit in the manner described in paragraph
(f)(3) of this section; and
(ii) Allocate the group credit among the members of the group in the
manner described in paragraph (f)(4) of this section.
[[Page 295]]
(2) Definitions. For purposes of section 45G(e)(2) and paragraph (f)
of this section--
(i) A trade or business is a sole proprietorship, a partnership, a
trust, an estate, or a corporation that is carrying on a trade or
business (within the meaning of section 162). Any corporation that is a
member of a commonly controlled group shall be deemed to be carrying on
a trade or business if any other member of that group is carrying on any
trade or business;
(ii) Group and controlled group means a controlled group of
corporations, as defined in section 41(f)(5), or a group of trades or
businesses under common control. For rules for determining whether
trades or businesses are under common control, see Sec. 1.52-1(b)
through (g);
(iii) Group credit means the RTMC (if any) allowable to a controlled
group;
(iv) Consolidated group has the meaning set forth in Sec. 1.1502-
1(h); and
(v) Credit year means the taxable year for which the member is
computing the RTMC.
(3) Computation of the group credit. All members of a controlled
group are treated as a single taxpayer for purposes of computing the
RTMC. The group credit is computed by applying all of the section 45G
computational rules (including the rules set forth in this section) on
an aggregate basis.
(4) Allocation of the group credit--(i) In general. (A) To the
extent the group credit (if any) computed under paragraph (f)(3) of this
section does not exceed the sum of the stand-alone entity credits of all
of the members of a controlled group, computed under paragraph
(f)(4)(ii) of this section, such group credit shall be allocated among
the members of the controlled group in proportion to the stand-alone
entity credits of the members of the controlled group, computed under
paragraph (f)(4)(ii) of this section:
[GRAPHIC] [TIFF OMITTED] TR13NO07.002
(B) To the extent that the group credit (if any) computed under
paragraph (f)(3) of this section exceeds the sum of the stand-alone
entity credits of all of the members of the controlled group, computed
under paragraph (f)(4)(ii) of this section, such excess shall be
allocated among the members of a controlled group in proportion to the
QRTMEs of the members of the controlled group:
[GRAPHIC] [TIFF OMITTED] TR13NO07.003
(ii) Stand-alone entity credit. The term stand-alone entity credit
means the RTMC (if any) that would be allowable to a member of a
controlled group if the credit were computed as if section 45G(e)(2) did
not apply, except that the member must apply the rules provided in
paragraphs (f)(5) (relating to consolidated groups) and (f)(8) (relating
to intra-group transactions) of this section.
(5) Special rules for consolidated groups--(i) In general. For
purposes of applying paragraph (f)(4) of this section, a consolidated
group whose members are members of a controlled group is treated as a
single member of the controlled group and a single stand-alone entity
credit is computed for the consolidated group.
(ii) Special rule for allocation of group credit among consolidated
group members. The portion of the group credit that is allocated to a
consolidated group is allocated to the members of the consolidated group
in accordance with the principles of paragraph (f)(4) of this section.
However, for this purpose, the
[[Page 296]]
stand-alone entity credit of a member of a consolidated group is
computed without regard to section 45G(e)(2).
(6) Tax accounting periods used--(i) In general. The credit
allowable to a member of a controlled group is that member's share of
the group credit computed as of the end of that member's taxable year.
In computing the group credit for a group whose members have different
taxable years, a member generally should treat the taxable year of
another member that ends with or within the credit year of the computing
member as the credit year of that other member. For example, Q, R, and S
are members of a controlled group of corporations. Both Q and R are
calendar year taxpayers. S files a return using a fiscal year ending
June 30. For purposes of computing the group credit at the end of Q's
and R's taxable year on December 31, S's fiscal year ending June 30,
which ends within Q's and R's taxable year, is treated as S's credit
year.
(ii) Special rule when timing of QRTME is manipulated. If the timing
of QRTME by members using different tax accounting periods is
manipulated to generate a credit in excess of the amount that would be
allowable if all members of the group used the same tax accounting
period, then the appropriate Internal Revenue Service official in the
operating division that has examination jurisdiction of the return may
require each member of the group to calculate the credit in the current
taxable year and all future years as if all members of the group had the
same taxable year and base period as the computing member.
(7) Membership during taxable year in more than one group. A trade
or business may be a member of only one group for a taxable year. If,
without application of this paragraph (f)(7), a business would be a
member of more than one group at the end of its taxable year, the
business shall be treated as a member of the group in which it was
included for its preceding taxable year. If the business was not
included for its preceding taxable year in any group in which it could
be included as of the end of its taxable year, the business shall
designate in its timely filed (including extensions) federal income tax
return for the taxable year the group in which it is being included. If
the business does not so designate, then the appropriate Internal
Revenue Service official in the operating division that has examination
jurisdiction of the return will determine the group in which the
business is to be included. If the Federal income tax return for a
taxable year beginning after December 31, 2004, and ending before
November 9, 2007, was filed before December 13, 2007, and the business
wants to apply paragraph (g)(2) of this section but did not designate
its group membership in that return, the business must designate its
group membership for that year either--
(i) In its next filed original Federal income tax return; or
(ii) In its amended Federal income tax return that is filed pursuant
to paragraph (g)(2) of this section, provided that amended Federal
income tax return is filed by the business before its next filed
original Federal income tax return.
(8) Intra-group transactions--(i) In general. Because all members of
a group under common control are treated as a single taxpayer for
purposes of determining the RTMC, transfers between members of the group
are generally disregarded.
(ii) Payment for QRTME. Amounts paid or incurred by the owner (or
lessor) of eligible railroad track to another member of the group for
QRTME shall be taken into account as QRTME by the owner (or lessor) of
the eligible railroad track for purposes of section 45G only to the
extent of the lesser of--
(A) The amount paid or incurred to the other member; or
(B) The amount that would have been considered paid or incurred by
the other member for the QRTME, if the QRTME was not reimbursed by the
owner (or lessor) of the eligible railroad track.
(g) Effective/applicability date--(1) In general. Except as provided
in paragraphs (g)(2) and (g)(3) of this section, this section applies to
taxable years ending on or after September 7, 2006.
(2) Taxable years ending before September 7, 2006. A taxpayer may
apply this section to taxable years beginning
[[Page 297]]
after December 31, 2004, and ending before September 7, 2006, provided
that the taxpayer applies all provisions in this section to the taxable
year.
(3) Special rules for returns filed prior to November 9, 2007. If a
taxpayer's Federal income tax return for a taxable year beginning after
December 31, 2004, and ending before November 9, 2007, was filed before
December 13, 2007, and the taxpayer is not filing an amended Federal
income tax return for that taxable year pursuant to paragraph (g)(2) of
this section before the taxpayer's next filed original Federal income
tax return, see paragraphs (d)(4)(iv) and (f)(7) of this section for the
statements that must be attached to the taxpayer's next filed original
Federal income tax return.
[T.D. 9365, 72 FR 63816, Nov. 13, 2007]
Sec. 1.45R-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.45R-1
through 1.45R-5.
Sec. 1.45R-1 Definitions.
(a) Definitions.
(1) Average premium.
(2) Composite billing.
(3) Credit period.
(4) Eligible small employer.
(5) Employee.
(6) Employer-computed composite rate.
(7) Exchange.
(8) Family member.
(9) Full-time equivalent employee (FTE).
(10) List billing.
(11) Net premium payments.
(12) Nonelective contribution.
(13) Payroll taxes.
(14) Qualified health plan QHP.
(15) Qualifying arrangement.
(16) Seasonal worker.
(17) SHOP dependent coverage.
(18) Small Business Health Options Program (SHOP).
(19) State.
(20) Tax-exempt eligible small employer.
(21) Tier.
(22) Tobacco surcharge.
(23) United States.
(24) Wages.
(25) Wellness program.
(b) Effective/applicability date.
Sec. 1.45R-2 Eligibility for the credit.
(a) Eligible small employer.
(b) Application of section 414 employer aggregation rules.
(c) Employees taken into account.
(d) Determining the hours of service performed by employees.
(1) In general.
(2) Permissible methods.
(3) Examples.
(e) FTE calculation.
(1) In general.
(2) Example.
(f) Determining the employer's average annual wages.
(1) In general.
(2) Example.
(g) Effective/applicability date.
Sec. 1.45R-3 Calculating the credit.
(a) In general.
(b) Average premium limitation.
(1) In general.
(2) Examples.
(c) Credit phaseout.
(1) In general.
(2) $25,000 dollar amount adjusted for inflation.
(3) Examples
(d) State credits and subsidies for health insurance.
(1) Payments to employer.
(2) Payments to issuer.
(3) Credits may not exceed net premium payment.
(4) Examples.
(e) Payroll tax limitation for tax-exempt eligible small employers.
(1) In general.
(2) Example.
(f) Two-consecutive-taxable year credit period limitation.
(g) Premium payments by the employer for a taxable year.
(1) In general.
(2) Excluded amounts.
(h) Rules applicable to trusts, estates, regulated investment
companies, real estate investment trusts and cooperative organizations.
(i) Transition rule for 2014.
(1) In general.
(2) Example.
(j) Effective/applicability date.
Sec. 1.45R-4 Uniform percentage of premium paid.
(a) In general.
(b) Employers offering one QHP.
(1) Employers offering one QHP, self-only coverage, composite
billing.
(2) Employers offering one QHP, other tiers of coverage, composite
billing.
(3) Employers offering one QHP, self-only coverage, list billing.
(4) Employers offering one QHP, other tiers of coverage, list
billing.
(5) Employers offering SHOP dependent coverage.
(c) Employers offering more than one QHP.
(1) QHP-by-QHP method.
(2) Reference QHP method.
[[Page 298]]
(d) Tobacco surcharges and wellness program discounts.
(i) Tobacco surcharges.
(ii) Wellness programs.
(e) Special rules regarding employer compliance with applicable
State and local law.
(f) Examples.
(g) Effective/applicability date.
Sec. 1.45R-5 Claiming the credit.
(a) Claiming the credit.
(b) Estimated tax payments and alternative minimum tax (AMT)
liability.
(c) Reduction of section 162 deduction.
(d) Effective/applicability date.
[T.D. 9672, 79 FR 36646, June 30, 2014]
Sec. 1.45R-1 Definitions.
(a) Definitions. The definitions in this section apply to this
section and Sec. Sec. 1.45R-2, 1.45R-3, 1.45R-4, and 1.45R-5.
(1) Average premium. The term average premium means an average
premium for the small group market in the rating area in which the
employee enrolls for coverage. The average premium for the small group
market in a rating area is determined by the Secretary of Health and
Human Services.
(2) Composite billing. The term composite billing means a system of
billing under which a health insurer charges a uniform premium for each
of the employer's employees or charges a single aggregate premium for
the group of covered employees that the employer then divides by the
number of covered employees to determine the uniform premium.
(3) Credit period--(i) In general. The term credit period means,
with respect to any eligible small employer (or any predecessor
employer), the two-consecutive-taxable-year period beginning with the
first taxable year beginning after 2013, for which the eligible small
employer files an income tax return with an attached Form 8941, ``Credit
for Small Employer Health Insurance Premiums'' (or files a Form 990-T,
``Exempt Organization Business Income Tax Return,'' with an attached
Form 8941 in the case of a tax-exempt eligible employer). For a
transition rule for 2014, see Sec. 1.45R-3(i).
(ii) Examples. The following examples illustrate the provisions of
paragraph (a)(3)(i) of this section:
Example 1. (i) Facts. In 2014, an eligible small employer (Employer)
that uses a calendar year as its taxable year begins to offer insurance
through a SHOP Exchange. Employer has 4 employees and otherwise
qualifies for the credit, but none of the employees enroll in the
coverage offered by Employer through the SHOP Exchange. In mid-2015, the
4 employees enroll for coverage through the SHOP Exchange but Employer
does not file Form 8941 or claim the credit. In 2016, Employer has 20
employees and all are enrolled in coverage offered through the SHOP
Exchange. Employer files Form 8941 with Employer's 2016 tax return to
claim the credit.
(ii) Conclusion. Employer's taxable year 2016 is the first year of
the credit period. Accordingly, Employer's two-year credit period is
2016 and 2017.
Example 2. (i) Facts. Same facts as Example 1, but Employer files
Form 8941 with Employer's 2015 tax return.
(ii) Conclusion. Employer's taxable year 2015 is the first year of
the credit period. Accordingly, Employer's two-year credit period is
2015 and 2016 (and does not include 2017). Employer is entitled to a
credit based on a partial year of SHOP Exchange coverage for Employer's
taxable year 2015.
(4) Eligible small employer. (i) The term eligible small employer
means an employer that meets the requirements set forth in Sec. 1.45R-
2.
(ii) For the definition of tax-exempt eligible small employer, see
paragraph (a)(19) of this section.
(iii) A farmers' cooperative described under section 521 that is
subject to tax pursuant to section 1381, and otherwise meets the
requirements of this paragraph (a)(4) and Sec. 1.45R-2, is an eligible
small employer.
(5) Employee--(i) In general. Except as otherwise specifically
provided in this paragraph (a)(5), the term employee means an individual
who is an employee of the eligible small employer under the common law
standard. See Sec. 31.3121(d)-1(c).
(ii) Leased employees. For purposes of this paragraph (a)(5), the
term employee also includes a leased employee (as defined in section
414(n)).
(iii) Certain individuals excluded. The term employee does not
include independent contractors (including sole proprietors), partners
in a partnership, shareholders owning more than two percent of an S
corporation, and any owners of more than five percent of other
businesses. The term employee also does not include family members of
these owners and partners, including
[[Page 299]]
the employee-spouse of a shareholder owning more than two percent of the
stock of an S corporation, the employee-spouse of an owner of more than
five percent of a business, the employee-spouse of a partner owning more
than a five percent interest in a partnership, and the employee-spouse
of a sole proprietor, or any other member of the household of these
owners and partners who qualifies as a dependent under section
152(d)(2)(H).
(iv) Seasonal workers. The term employee does not include seasonal
workers unless the seasonal worker provides services to the employer on
more than 120 days during the taxable year.
(v) Ministers. Whether a minister is an employee is determined under
the common law standard for determining worker status. If, under the
common law standard, a minister is not an employee, the minister is not
an employee for purposes of this paragraph (a)(5) and is not taken into
account in determining an employer's FTEs, and premiums paid for the
minister's health insurance coverage are not taken into account in
computing the credit. If, under the common law standard, a minister is
an employee, the minister is an employee for purposes of this paragraph
(a)(5), and is taken into account in determining an employer's FTEs, and
premiums paid by the employer for the minister's health insurance
coverage can be taken into account in computing the credit. Because the
performance of services by a minister in the exercise of his or her
ministry is not treated as employment for purposes of the Federal
Insurance Contributions Act (FICA), compensation paid to the minister is
not wages as defined under section 3121(a), and is not counted as wages
for purposes of computing an employer's average annual wages.
(vi) Former employees. Premiums paid on behalf of a former employee
with no hours of service may be treated as paid on behalf of an employee
for purposes of calculating the credit (see Sec. 1.45R-3) provided
that, if so treated, the former employee is also treated as an employee
for purposes of the uniform percentage requirement (see Sec. 1.45R-4).
For the treatment of terminated employees for purposes of determining
employer eligibility for the credit, see Sec. 1.45R-2(c).
(6) Employer-computed composite rate. The term employer-computed
composite rate refers to a rate for a tier of coverage (such as
employee-only, dependent or family) of a QHP that is the average rate
determined by adding the premiums for that tier of coverage for all
employees eligible to participate in the QHP (whether or not they
actually receive coverage under the plan or under that tier of coverage)
and dividing by the total number of such eligible employees. The
employer-computed composite rate may be used in list billing to convert
individual premiums for a tier of coverage into an employer-computed
composite rate for that tier of coverage. See Sec. 1.45R-4(b)(3).
(7) Exchange. The term Exchange means an exchange as defined in 45
CFR 155.20.
(8) Family member. The term family member is defined with respect to
a taxpayer as a child (or descendant of a child); a sibling or step-
sibling; a parent (or ancestor of a parent); a step-parent; a niece or
nephew; an aunt or uncle; or a son-in-law, daughter-in-law, father-in-
law, mother-in-law, brother-in-law or sister-in-law. A spouse of any of
these family members is also considered a family member.
(9) Full-time equivalent employee (FTE). The number of full-time
equivalent employees (FTEs) is determined by dividing the total number
of hours of service for which wages were paid by the employer to
employees during the taxable year by 2,080. See Sec. 1.45R-2(d) and (e)
for permissible methods of calculating hours of service and the method
for calculating the number of an employer's FTEs.
(10) List billing. The term list billing refers to a system of
billing under which a health insurer lists a separate premium for each
employee based on the age of the employee or other factors.
(11) Net premium payments. The term net premium payments means, in
the case of an employer receiving a State tax credit or State subsidy
for providing health insurance to its employees, the excess of the
employer's actual premium payments over the State tax credit or State
subsidy received by the
[[Page 300]]
employer. In the case of a State payment directly to an insurance
company (or another entity licensed under State law to engage in the
business of insurance), the employer's net premium payments are the
employer's actual premium payments. If a State-administered program
(such as Medicaid or another program that makes payments directly to a
health care provider or insurance company on behalf of individuals and
their families who meet certain eligibility guidelines) makes payments
that are not contingent on the maintenance of an employer-provided group
health plan, those payments are not taken into account in determining
the employer's net premium payments.
(12) Nonelective contribution. The term nonelective contribution
means an employer contribution other than a contribution pursuant to a
salary reduction arrangement under section 125.
(13) Payroll taxes. For purposes of section 45R, the term payroll
taxes means amounts required to be withheld as tax from the employees of
a tax-exempt eligible small employer under section 3402, amounts
required to be withheld from such employees under section 3101(b), and
amounts of tax imposed on the tax-exempt eligible small employer under
section 3111(b).
(14) Qualified health plan or QHP. The term qualified health plan or
the term QHP means a qualified health plan as defined in Affordable Care
Act section 1301(a) (see 42 U.S.C. 18021(a)), but does not include a
catastrophic plan described in Affordable Care Act section 1302(e) (see
42 U.S.C. 18022(e)).
(15) Qualifying arrangement. The term qualifying arrangement means
an arrangement that requires an eligible small employer to make a
nonelective contribution on behalf of each employee who enrolls in a QHP
offered to employees by the employer through a SHOP Exchange in an
amount equal to a uniform percentage (not less than 50 percent) of the
premium cost of the QHP.
(16) Seasonal worker. The term seasonal worker means a worker who
performs labor or services on a seasonal basis as defined by the
Secretary of Labor, including (but not limited to) workers covered by 29
CFR 500.20(s)(1), and retail workers employed exclusively during holiday
seasons. Employers may apply a reasonable, good faith interpretation of
the term seasonal worker and a reasonable good faith interpretation of
29 CFR 500.20(s)(1) (including as applied by analogy to workers and
employment positions not otherwise covered under 29 CFR 500.20(s)(1)).
(17) SHOP dependent coverage. The term SHOP dependent coverage
refers to coverage offered through SHOP separately to any individual who
is or may become eligible for coverage under the terms of a group health
plan offered through SHOP because of a relationship to a participant-
employee, whether or not a dependent of the participant-employee under
section 152 of the Internal Revenue Code. The term SHOP dependent
coverage does not include coverage such as family coverage, which
includes coverage of the participant-employee.
(18) Small Business Health Options Program (SHOP). The term Small
Business Health Options Program (SHOP) means an Exchange established
pursuant to section 1311 of the Affordable Care Act and defined in 45
CFR 155.20.
(19) State. The term State means a State as defined in section
7701(a)(10), including the District of Columbia.
(20) Tax-exempt eligible small employer. The term tax-exempt
eligible small employer means an eligible small employer that is exempt
from federal income tax under section 501(a) as an organization
described in section 501(c).
(21) Tier. The term tier refers to a category of coverage under a
benefits package that varies only by the number of individuals covered.
For example, employee-only coverage, dependent coverage, and family
coverage would constitute three separate tiers of coverage.
(22) Tobacco surcharge. The term tobacco surcharge means any
allowable differential that is charged for insurance in the SHOP
Exchange that is attributable to tobacco use as the term tobacco use is
defined in 45 CFR 147.102(a)(1)(iv).
(23) United States. The term United States means United States as
defined in section 7701(a)(9).
[[Page 301]]
(24) Wages. The term wages for purposes of section 45R means wages
as defined under section 3121(a) for purposes of the Federal Insurance
Contributions Act (FICA), determined without regard to the social
security wage base limitation under section 3121(a)(1).
(25) Wellness program. The term wellness program for purposes of
section 45R means a program of health promotion or disease prevention
subject to the requirements of Sec. 54.9802-1(f).
(b) Effective/applicability date. This section is applicable for
periods after 2013. For rules relating to certain plan years beginning
in 2014, see Sec. 1.45R-3(i).
[T.D. 9672, 79 FR 36646, June 30, 2014]
Sec. 1.45R-2 Eligibility for the credit.
(a) Eligible small employer. To be eligible for the credit under
section 45R, an employer must be an eligible small employer. In order to
be an eligible small employer, with respect to any taxable year, an
employer must have no more than 25 full-time equivalent employees
(FTEs), must have in effect a qualifying arrangement, and the average
annual wages of the employer's FTEs must not exceed an amount equal to
twice the dollar amount in effect under Sec. 1.45R-3(c)(2). For
purposes of eligibility for the credit for taxable years beginning in or
after 2014, a qualifying arrangement is an arrangement that requires an
employer to make a nonelective contribution on behalf of each employee
who enrolls in a qualified health plan (QHP) offered to employees
through a small business health options program (SHOP) Exchange in an
amount equal to a uniform percentage (not less than 50 percent) of the
premium cost of the QHP. Notwithstanding the foregoing, an employer that
is an agency or instrumentality of the federal government, or of a
State, local or Indian tribal government, is not an eligible small
employer if it is not an organization described in section 501(c) that
is exempt from tax under section 501(a). An employer does not fail to be
an eligible small employer merely because its employees are not
performing services in a trade or business of the employer. An employer
located outside the United States (including an employer located in a
U.S. territory) must have income effectively connected with the conduct
of a trade or business in the United States, and otherwise meet the
requirements of this section, to be an eligible small employer. For
eligibility standards for SHOP related to foreign employers, see 45 CFR
155.710. Paragraphs (b) through (f) of this section provide the rules
for determining whether the requirements to be an eligible small
employer are met, including rules related to identifying and counting
the number of the employer's FTEs, counting the employees' hours of
service, and determining the employer's average annual FTE wages for the
taxable year. For rules on determining whether the uniform percentage
requirement is met, see Sec. 1.45R-4.
(b) Application of section 414 employer aggregation rules. All
employers treated as a single employer under section 414(b), (c), (m) or
(o) are treated as a single employer for purposes of this section. Thus,
all employees of a controlled group under section 414(b), (c) or (o), or
an affiliated service group under section 414(m), are taken into account
in determining whether any member of the controlled group or affiliated
service group is an eligible small employer. Similarly, all wages paid
to, and premiums paid for, employees by the members of the controlled
group or affiliated service group are taken into account when
determining the amount of the credit for a group treated as a single
employer under these rules.
(c) Employees taken into account. To be eligible for the credit, an
employer must have employees as defined in Sec. 1.45R-1(a)(5) during
the taxable year. All such employees of the eligible small employer are
taken into account for purposes of determining the employer's FTEs and
average annual FTE wages. Employees include employees who terminate
employment during the year for which the credit is being claimed,
employees covered under a collective bargaining agreement, and employees
who do not enroll in a QHP offered by the employer through a SHOP
Exchange.
(d) Determining the hours of service performed by employees--(1) In
general. An employee's hours of service for a year include each hour for
which an
[[Page 302]]
employee is paid, or entitled to payment, for the performance of duties
for the employer during the employer's taxable year. It also includes
each hour for which an employee is paid, or entitled to payment, by the
employer on account of a period of time during which no duties are
performed due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence
(except that no more than 160 hours of service are required to be
counted for an employee on account of any single continuous period
during which the employee performs no duties).
(2) Permissible methods. In calculating the total number of hours of
service that must be taken into account for an employee during the
taxable year, eligible small employers need not use the same method for
all employees, and may apply different methods for different
classifications of employees if the classifications are reasonable and
consistently applied. Eligible small employers may change the method for
calculating employees' hours of service for each taxable year. An
eligible small employer may use any of the following three methods.
(i) Actual hours worked. An employer may use the actual hours of
service provided by employees including hours worked and any other hours
for which payment is made or due (as described in paragraph (d)(1) of
this section).
(ii) Days-worked equivalency. An employer may use a days-worked
equivalency whereby the employee is credited with 8 hours of service for
each day for which the employee would be required to be credited with at
least one hour of service under paragraph (d)(1) of this section.
(iii) Weeks-worked equivalency. An employer may use a weeks-worked
equivalency whereby the employee is credited with 40 hours of service
for each week for which the employee would be required to be credited
with at least one hour of service under paragraph (d)(1) of this
section.
(3) Examples. The following examples illustrate the rules of
paragraph (d) of this section:
Example 1. Counting hours of service by hours actually worked or for
which payment is made or due. (i) Facts. An eligible small employer
(Employer) has payroll records that indicate that Employee A worked
2,000 hours and that Employer paid Employee A for an additional 80 hours
on account of vacation, holiday and illness. Employer uses the actual
hours worked method described in paragraph (d)(2)(i) of this section.
(ii) Conclusion. Under this method of counting hours, Employee A
must be credited with 2,080 hours of service (2,000 hours worked and 80
hours for which payment was made or due).
Example 2. Counting hours of service under days-worked equivalency.
(i) Facts. Employee B worked from 8:00 am to 12:00 pm every day for 200
days. Employer uses the days-worked equivalency method described in
paragraph (d)(2)(ii) of this section.
(ii) Conclusion. Under this method of counting hours, Employee B
must be credited with 1,600 hours of service (8 hours for each day
Employee B would otherwise be credited with at least 1 hour of service x
200 days).
Example 3. Counting hours of service under weeks-worked equivalency.
(i) Facts. Employee C worked 49 weeks, took 2 weeks of vacation with
pay, and took 1 week of leave without pay. Employer uses the weeks-
worked equivalency method described in paragraph (d)(2)(iii) of this
section.
(ii) Conclusion. Under this method of counting hours, Employee C
must be credited with 2,040 hours of service (40 hours for each week
during which Employee C would otherwise be credited with at least 1 hour
of service x 51 weeks).
Example 4. Excluded employees. (i) Facts. Employee D worked 3
consecutive weeks at 32 hours per week during the holiday season.
Employee D did not work during the remainder of the year. Employee E
worked limited hours after school from time to time through the year for
a total of 350 hours. Employee E does not work through the summer.
Employer uses the actual hours worked method described in paragraph
(d)(2)(i) of this section.
(ii) Conclusion. Employee D is a seasonal employee who worked for
120 days or less for Employer during the year. Employee D's hours are
not counted when determining the hours of service of Employer's
employees. Employee E works throughout most of the year and is not a
seasonal employee. Employer counts Employee E's 350 hours of service
during the year.
(e) FTE Calculation--(1) In general. The number of an employer's
FTEs is determined by dividing the total hours of service, determined in
accordance with paragraph (d) of this section, credited during the year
to employees taken into account under paragraph (c) of this section (but
not more than 2,080 hours for any employee) by 2,080. The
[[Page 303]]
result, if not a whole number, is then rounded to the next lowest whole
number. If, however, after dividing the total hours of service by 2,080,
the resulting number is less than one, the employer rounds up to one
FTE.
(2) Example. The following example illustrates the provisions of
paragraph (e) of this section:
Example. Determining the number of FTEs. (i) Facts. A sole
proprietor pays 5 employees wages for 2,080 hours each, pays 3 employees
wages for 1,040 hours each, and pays 1 employee wages for 2,300 hours.
One of the employees working 2,080 hours is the sole proprietor's
nephew. The sole proprietor's FTEs would be calculated as follows: 8,320
hours of service for the 4 employees paid for 2,080 hours each (4 x
2,080); the sole proprietor's nephew is excluded from the FTE
calculation; 3,120 hours of service for the 3 employees paid for 1,040
hours each (3 x 1,040); and 2,080 hours of service for the 1 employee
paid for 2,300 hours (lesser of 2,300 and 2,080). The sum of the
included hours of service equals 13,520 hours of service.
(ii) Conclusion. The sole proprietor's FTEs equal 6 (13,520 divided
by 2,080 = 6.5, rounded to the next lowest whole number).
(f) Determining the employer's average annual FTE wages--(1) In
general. All wages paid to employees (including overtime pay) are taken
into account in computing an eligible small employer's average annual
FTE wages. The average annual wages paid by an employer for a taxable
year is determined by dividing the total wages paid by the eligible
small employer during the employer's taxable year to employees taken
into account under paragraph (c) of this section by the number of the
employer's FTEs for the year. The result is then rounded down to the
nearest $1,000 (if not otherwise a multiple of $1,000). For purposes of
determining the employer's average annual wages for the taxable year,
only wages that are paid for hours of service determined under paragraph
(d) of this section are taken into account.
(2) Example. The following example illustrates the provision of
paragraphs (e) and (f) of this section:
Example. (i) Facts. An employer has 26 FTEs with average annual
wages of $23,000. Only 22 of the employer's employees enroll for
coverage offered by the employer through a SHOP Exchange.
(ii) Conclusion. The hours of service and wages of all employees are
taken into consideration in determining whether the employer is an
eligible small employer for purposes of the credit. Because the employer
does not have fewer than 25 FTEs for the taxable year, the employer is
not an eligible small employer for purposes of this section, even if
fewer than 25 employees (or FTEs) enroll for coverage through the SHOP
Exchange.
(g) Effective/applicability date. This section is applicable for
periods after 2013. For transition rules relating to certain plan years
beginning in 2014, see Sec. 1.45R-3(i).
[T.D. 9672, 79 FR 36646, June 30, 2014]
Sec. 1.45R-3 Calculating the credit.
(a) In general. The tax credit available to an eligible small
employer equals 50 percent of the eligible small employer's premium
payments made on behalf of its employees under a qualifying arrangement,
or in the case of a tax-exempt eligible small employer, 35 percent of
the employer's premium payments made on behalf of its employees under a
qualifying arrangement. The employer's tax credit is subject to the
following adjustments and limitations:
(1) The average premium limitation for the small group market in the
rating area in which the employee enrolls for coverage, described in
paragraph (b) of this section;
(2) The credit phaseout described in paragraph (c) of this section;
(3) The net premium payment limitation in the case of State credits
or subsidies described in paragraph (d) of this section;
(4) The payroll tax limitation for a tax-exempt eligible small
employer described in paragraph (e) of this section;
(5) The two-consecutive-taxable year-credit period limitation,
described in paragraph (f) of this section;
(6) The rules with respect to the premium payments taken into
account, described in paragraph (g) of this section;
(7) The rules with respect to credits applicable to trusts, estates,
regulated investment companies, real estate investment trusts and
cooperatives described in paragraph (h) of this section; and
(8) The transition relief for 2014 described in paragraph (i) of
this section.
[[Page 304]]
(b) Average premium limitation--(1) In general. The amount of an
eligible small employer's premium payments that is taken into account in
calculating the credit is limited to the premium payments the employer
would have made under the same arrangement if the average premium for
the small group market in the rating area in which the employee enrolls
for coverage were substituted for the actual premium.
(2) Examples. The following examples illustrate the provisions of
paragraph (b)(1) of this section:
Example 1. Comparing premium payments to average premium for small
group market. (i) Facts. An eligible small employer (Employer) offers a
health insurance plan with employee-only and SHOP dependent coverage
through a small business options program (SHOP) Exchange. Employer has 9
full-time equivalent employees (FTEs) with average annual wages of
$23,000 per FTE. All 9 employees are employees as defined under Sec.
1.45R-1(a)(5). Six employees are enrolled in employee-only coverage and
5 of these 6 employees have also enrolled either one child or one spouse
in SHOP dependent coverage. Employer pays 50% of the premiums for all
employees enrolled in employee-only coverage and 50% of the premiums for
all employees who enrolled family members in SHOP dependent coverage
(and the employee is responsible for the remainder in each case). The
premiums are $4,000 a year for employee-only coverage and $3,000 a year
for each individual enrolled in SHOP dependent coverage. The average
premium for the small group market in Employer's rating area is $5,000
for employee-only coverage and $4,000 for each individual enrolled in
SHOP dependent coverage. Employer's premium payments for each FTE
($2,000 for employee-only coverage and $1,500 for SHOP dependent
coverage) do not exceed 50 percent of the average premium for the small
group market in Employer's rating area ($2,500 for employee-only
coverage and $2,000 for each individual enrolled in SHOP dependent
coverage).
(ii) Conclusion. The amount of premiums paid by Employer for
purposes of computing the credit equals $19,500 ((6 x $2,000) plus (5 x
$1,500)).
Example 2. Premium payments exceeding average premium for small
group market. (i) Facts. Same facts as Example 1, except that the
premiums are $6,000 for employee-only coverage and $5,000 for each
dependent enrolled in coverage. Employer's premium payments for each
employee ($3,000 for employee-only coverage and $2,500 for SHOP
dependent coverage) exceed 50% of the average premium for the small
group market in Employer's rating area ($2,500 for self-only coverage
and $2,000 for family coverage).
(ii) Conclusion. The amount of premiums paid by Employer for
purposes of computing the credit equals $25,000 ((6 x $2,500) plus (5 x
$2,000)).
(c) Credit phaseout--(1) In general. The tax credit is subject to a
reduction (but not reduced below zero) if the employer's FTEs exceed 10
or average annual FTE wages exceed $25,000. If the number of FTEs
exceeds 10, the reduction is determined by multiplying the otherwise
applicable credit amount by a fraction, the numerator of which is the
number of FTEs in excess of 10 and the denominator of which is 15. If
average annual FTE wages exceed $25,000, the reduction is determined by
multiplying the otherwise applicable credit amount by a fraction, the
numerator of which is the amount by which average annual FTE wages
exceed $25,000 and the denominator of which is $25,000. In both cases,
the result of the calculation is subtracted from the otherwise
applicable credit to determine the credit to which the employer is
entitled. For an employer with both more than 10 FTEs and average annual
FTE wages exceeding $25,000, the total reduction is the sum of the two
reductions.
(2) $25,000 dollar amount adjusted for inflation. For taxable years
beginning in a calendar year after 2013, each reference to ``$25,000''
in paragraph (c)(1) of this section is replaced with a dollar amount
equal to $25,000 multiplied by the cost-of-living adjustment under
section 1(f)(3) for the calendar year, determined by substituting
``calendar year 2012'' for ``calendar year 1992'' in section 1(f)(3)(B).
(3) Examples. The following examples illustrate the provisions of
paragraph (c) this section. For purposes of these examples, no employer
is a tax-exempt organization and no other adjustments or limitations on
the credit apply other than those adjustments and limitations explicitly
set forth in the example.
Example 1. Calculating the maximum credit for an eligible small
employer without an applicable credit phaseout. (i) Facts. An eligible
small employer (Employer) has 9 FTEs with average annual wages of
$23,000. Employer pays $72,000 in health insurance premiums for those
employees (which does not exceed the total average premium for the small
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group market in the rating area), and otherwise meets the requirements
for the credit.
(ii) Conclusion. Employer's credit equals $36,000 (50% x $72,000).
Example 2. Calculating the credit phaseout if the number of FTEs
exceeds 10 or average annual wages exceed $25,000, as adjusted for
inflation. (i) Facts. An eligible small employer (Employer) has 12 FTEs
and average annual FTE wages of $30,000 in a year when the amount in
paragraph (c)(1) of this section, as adjusted for inflation, is $25,000.
Employer pays $96,000 in health insurance premiums for its employees
(which does not exceed the average premium for the small group market in
the rating area) and otherwise meets the requirements for the credit.
(ii) Conclusion. The initial amount of the credit is determined
before any reduction (50% x $96,000) = $48,000. The credit reduction for
FTEs in excess of 10 is $6,400 ($48,000 x 2/15). The credit reduction
for average annual FTE wages in excess of $25,000 is $9,600 ($48,000 x
$5,000/$25,000), resulting in a total credit reduction of $16,000
($6,400 + $9,600). Employer's total tax credit equals $32,000 ($48,000-
$16,000).
(d) State credits and subsidies for health insurance--(1) Payments
to employer. If the employer is entitled to a State tax credit or a
premium subsidy that is paid directly to the employer, the premium
payment made by the employer is not reduced by the credit or subsidy for
purposes of determining whether the employer has satisfied the
requirement to pay an amount equal to a uniform percentage (not less
than 50 percent) of the premium cost. Also, except as described in
paragraph (d)(3) of this section, the maximum amount of the credit is
not reduced by reason of a State tax credit or subsidy or by reason of
payments by a State directly to an employer.
(2) Payments to issuer. If a State makes payments directly to an
insurance company (or another entity licensed under State law to engage
in the business of insurance) to pay a portion of the premium for
coverage of an employee enrolled for coverage through a SHOP Exchange,
the State is treated as making these payments on behalf of the employer
for purposes of determining whether the employer has satisfied the
requirement to pay an amount equal to a uniform percentage (not less
than 50 percent) of the premium cost of coverage. Also, except as
described below in paragraph (d)(3) of this section, these premium
payments by the State are treated as an employer contribution under this
section for purposes of calculating the credit.
(3) Credits may not exceed net premium payment. Regardless of the
application of paragraphs (d)(1) and (2) of this section, in no event
may the amount of the credit exceed the amount of the employer's net
premium payments as defined in Sec. 1.45R-1(a)(11).
(4) Examples. The following examples illustrate the provisions of
paragraphs (d)(1) through (3) of this section. For purposes of these
examples, each employer is an eligible small employer that is not a tax-
exempt organization and the eligible small employer's taxable year and
plan year begin during or after 2014. No other adjustments or
limitations on the credit apply other than those adjustments and
limitations explicitly set forth in the example.
Example 1. State premium subsidy paid directly to employer. (i)
Facts. The State in which an eligible small employer (Employer) operates
provides a health insurance premium subsidy of up to 40% of the health
insurance premiums for each eligible employee. The State pays the
subsidy directly to Employer. Employer has one employee, Employee D.
Employee D's health insurance premiums are $100 per month and are paid
as follows: $80 by Employer and $20 by Employee D through salary
reductions to a cafeteria plan. The State pays Employer $40 per month as
a subsidy for Employer's payment of insurance premiums on behalf of
Employee D. Employer is otherwise an eligible small employer that meets
the requirements for the credit.
(ii) Conclusion. For purposes of calculating the credit, the amount
of premiums paid by the employer is $80 per month (the premium payment
by the Employer without regard to the subsidy from the State). The
maximum credit is $40 ($80 x 50%).
Example 2. State premium subsidy paid directly to insurance company.
(i) Facts. The State in which Employer operates provides a health
insurance premium subsidy of up to 30% for each eligible employee.
Employer has one employee, Employee E. Employee E is enrolled in
employee-only coverage through a qualified health plan (QHP) offered by
Employer through a SHOP Exchange. Employee E's health insurance premiums
are $100 per month and are paid as follows: $50 by Employer; $30 by the
State and $20 by the employee. The State pays the $30 per month directly
to the insurance company and the insurance company bills Employer for
the employer and employee's share, which equal
[[Page 306]]
$70 per month. Employer is otherwise an eligible small employer that
meets the requirements for the credit.
(ii) Conclusion. For purposes of calculating the amount of the
credit, the amount of premiums paid by Employer is $80 per month (the
sum of Employer's payment and the State's payment). The maximum credit
is $40 ($80 x 50%).
Example 3. Credit limited by employer's net premium payment. (i)
Facts. The State in which Employer operates provides a health insurance
premium subsidy of up to 50% for each eligible employee. Employer has
one employee, Employee F. Employee F is enrolled in employee-only
coverage under the QHP offered to Employee F by Employer through a SHOP
Exchange. Employee F's health insurance premiums are $100 per month and
are paid as follows: $20 by Employer; $50 by the State and $30 by
Employee F. The State pays the $50 per month directly to the insurance
company and the insurance company bills Employer for the employer's and
employee's shares, which total $50 per month. The amount of premiums
paid by Employer (the sum of Employer's payment and the State's payment)
is $70 per month, which is more than 50% of the $100 monthly premium
payment. The amount of the premium for calculating the credit is also
$70 per month.
(ii) Conclusion. The maximum credit without adjustments or
limitations is $35 ($70 x 50%). Employer's net premium payment is $20
(the amount actually paid by Employer excluding the State subsidy).
Because the credit may not exceed Employer's net premium payment, the
credit is $20 (the lesser of $35 or $20).
(e) Payroll tax limitation for tax-exempt eligible small employers--
(1) In general. For a tax-exempt eligible employer, the amount of the
credit claimed cannot exceed the total amount of payroll taxes (as
defined in Sec. 1.45R-1(a)(13)) of the employer during the calendar
year in which the taxable year begins.
(2) Example. The following example illustrates the provisions of
paragraph (e)(1) of this section. For purposes of this example, the
eligible small employer's taxable year and plan year begin during or
after 2014. No other adjustments or limitations on the credit apply
other than those adjustments and limitations explicitly set forth in the
example.
Example. Calculating the maximum credit for a tax-exempt eligible
small employer. (i) Facts. Employer is a tax-exempt eligible small
employer that has 10 FTEs with average annual wages of $21,000. Employer
pays $80,000 in health insurance premiums for its employees (which does
not exceed the average premium for the small group market in the rating
area) and otherwise meets the requirements for the credit. The total
amount of Employer's payroll taxes equals $30,000.
(ii) Conclusion. The initial amount of the credit is determined
before any reduction: (35% x $80,000) = $28,000, and Employer's payroll
taxes are $30,000. The total tax credit equals $28,000 (the lesser of
$28,000 and $30,000).
(f) Two-consecutive-taxable-year credit period limitation. The
credit is available to an eligible small employer, including a tax-
exempt eligible small employer, only during that employer's credit
period. For a transition rule for 2014, see paragraph (i) of this
section. To prevent the avoidance of the two-year limit on the credit
period through the use of successor entities, a successor entity and a
predecessor entity are treated as the same employer. For this purpose,
the rules for identifying successor entities under Sec. 31.3121(a)(1)-
1(b) apply. Accordingly, for example, if an eligible small employer
claims the credit for the 2014 and 2015 taxable years, that eligible
small employer's credit period will have expired so that any successor
employer to that eligible small employer will not be able to claim the
credit for any subsequent taxable years.
(g) Premium payments by the employer for a taxable year--(1) In
general. Only premiums paid by an eligible small employer or tax-exempt
eligible small employer on behalf of each employee enrolled in a QHP or
payments paid to the issuer in accordance with paragraph (d)(2) of this
section are counted in calculating the credit. If an eligible small
employer pays only a portion of the premiums for the coverage provided
to employees (with employees paying the rest), only the portion paid by
the employer is taken into account. Premiums paid on behalf of seasonal
workers may be counted in determining the amount of the credit (even
though seasonal worker wages and hours of service are not included in
the FTE calculation and average annual FTE wage calculation unless the
seasonal worker works for the employer
[[Page 307]]
on more than 120 days during the taxable year). Subject to the average
premium limitation, premiums paid on behalf of an employee with respect
to any individuals who are or may become eligible for coverage under the
terms of the plan because of a relationship to the employee (including
through family coverage or SHOP dependent coverage) may also be taken
into account in determining the amount of the credit. (However, premiums
paid for SHOP dependent coverage are not taken into account in
determining whether the uniform percentage requirement is met, see Sec.
1.45R-4(b)(5).)
(2) Excluded amounts--(i) Salary reduction amounts. Any premium paid
pursuant to a salary reduction arrangement under a section 125 cafeteria
plan is not treated as paid by the employer for purposes of section 45R
and these regulations. For this purpose, premiums paid with employer-
provided flex credits that employees may elect to receive as cash or
other taxable benefits are treated as paid pursuant to a salary
reduction arrangement under a section 125 cafeteria plan.
(ii) HSAs, HRAs, and FSAs. Employer contributions to, or amounts
made available under, health savings accounts, reimbursement
arrangements, and health flexible spending arrangements are not taken
into account in determining the premium payments by the employer for a
taxable year.
(h) Rules applicable to trusts, estates, regulated investment
companies, real estate investment trusts and cooperative organizations.
Rules similar to the rules of section 52(d) and (e) and the regulations
thereunder apply in calculating and apportioning the credit with respect
to a trust, estate, a regulated investment company or real estate
investment trusts or cooperative organization.
(i) Transition rule for 2014--(1) In general. This paragraph (i)
applies if as of August 26, 2013, an eligible small employer offers
coverage for a health plan year that begins on a date other than the
first day of its taxable year. In such a case, if the eligible small
employer has a health plan year beginning after January 1, 2014 but
before January 1, 2015 (2014 health plan year) that begins after the
start of its first taxable year beginning on or after January 1, 2014
(2014 taxable year), and the employer offers one or more QHPs to its
employees through a SHOP Exchange as of the first day of its 2014 health
plan year, then the eligible small employer is treated as offering
coverage through a SHOP Exchange for its entire 2014 taxable year for
purposes of section 45R if the health care coverage provided from the
first day of the 2014 taxable year through the day immediately preceding
the first day of the 2014 health plan year would have qualified for a
credit under section 45R using the rules applicable to taxable years
beginning before January 1, 2014. If the eligible small employer claims
the section 45R credit in the 2014 taxable year, the 2014 taxable year
begins the first year of the credit period.
(2) Example. The following example illustrates the rule of this
paragraph (i) of this section. For purposes of this example, it is
assumed that the eligible small employer is not a tax-exempt
organization and that no other adjustments or limitations on the credit
apply other than those adjustments and limitations explicitly set forth
in the example.
Example. (i) Facts. An eligible small employer (Employer) has a 2014
taxable year that begins January 1, 2014 and ends on December 31, 2014.
As of August 26, 2013, Employer had a 2014 health plan year that begins
July 1, 2014 and ends June 30, 2015. Employer offers a QHP through a
SHOP Exchange the coverage under which begins July 1, 2014. Employer
also provides other coverage from January 1, 2014 through June 30, 2014
that would have qualified for a credit under section 45R based on the
rules applicable to taxable years beginning before 2014.
(ii) Conclusion. Employer may claim the credit at the 50% rate under
section 45R for the entire 2014 taxable year using the rules under this
paragraph (i) of this section. Accordingly, in calculating the credit,
Employer may count premiums paid for the coverage from January 1, 2014
through June 30, 2014, as well as premiums paid for the coverage from
July 1, 2014 through December 31, 2014. If Employer claims the credit
for the 2014 taxable year, that taxable year is the first year of the
credit period.
(j) Effective/applicability date. This section is applicable for
periods after 2013. For transition rules relating to
[[Page 308]]
certain plan years beginning in 2014, see paragraph (i) of this section.
[T.D. 9672, 79 FR 36646, June 30, 2014]
Sec. 1.45R-4 Uniform percentage of premium paid.
(a) In general. An eligible small employer must pay a uniform
percentage (not less than 50 percent) of the premium for each employee
enrolled in a qualified health plan (QHP) offered to employees by the
employer through a small business health options program (SHOP)
Exchange.
(b) Employers offering one QHP. An employer that offers a single QHP
through a SHOP Exchange must satisfy the requirements of this paragraph
(b).
(1) Employers offering one QHP, employee-only coverage, composite
billing. For an eligible small employer offering employee-only coverage
and using composite billing, the employer satisfies the requirements of
this paragraph if it pays the same amount toward the premium for each
employee receiving employee-only coverage under the QHP, and that amount
is equal to at least 50 percent of the premium for employee-only
coverage.
(2) Employers offering one QHP, other tiers of coverage, composite
billing. For an eligible small employer offering one QHP providing at
least one tier of coverage with a higher premium than employee-only
coverage and using composite billing, the employer satisfies the
requirements of this paragraph (b)(2) if it either--
(i) Pays an amount for each employee enrolled in that more expensive
tier of coverage that is the same for all employees and that is no less
than the amount that the employer would have contributed toward
employee-only coverage for that employee, or
(ii) Meets the requirements of paragraph (b)(1) of this section for
each tier of coverage that if offers.
(3) Employers offering one QHP, employee-only coverage, list
billing. For an eligible small employer offering one QHP providing only
employee-only coverage and using list billing, the employer satisfies
the requirements of this paragraph (b)(3) if either--
(i) The employer pays toward the premium an amount equal to a
uniform percentage (not less than 50 percent) of the premium charged for
each employee, or
(ii) The employer converts the individual premiums for employee-only
coverage into an employer-computed composite rate for self-only
coverage, and, if an employee contribution is required, each employee
who receives coverage under the QHP pays a uniform amount toward the
employee-only premium that is no more than 50 percent of the employer-
computed composite rate for employee-only coverage.
(4) Employers offering one QHP, other tiers of coverage, list
billing. For an eligible small employer offering one QHP providing at
least one tier of coverage with a higher premium than employee-only
coverage and using list billing, the employer satisfies the requirements
of this paragraph (b)(4) if it either--
(i) Pays toward the premium for each employee covered under each
tier of coverage an amount equal to or exceeding the amount that the
employer would have contributed with respect to that employee for
employee-only coverage, calculated either based upon the actual premium
that would have been charged by the insurer for that employee for
employee-only coverage or based upon the employer-computed composite
rate for employee-only coverage, or
(ii) Meets the requirements of paragraph (b)(3) of this section for
each tier of coverage that it offers substituting the employer-computed
composite rate for each tier of coverage for the employer-computed
composite rate for employee-only coverage.
(5) Employers offering SHOP dependent coverage. If SHOP dependent
coverage is offered through the SHOP Exchange, the employer does not
fail to satisfy the uniform percentage requirement by contributing a
different amount toward that SHOP dependent coverage, even if that
contribution is zero. For treatment of premiums paid on behalf of an
employee's dependents, see Sec. 1.45R-3(g)(1).
(c) Employers offering more than one QHP. If an eligible small
employer offers more than one QHP, the employer must satisfy the
requirements of this
[[Page 309]]
paragraph (c). The employer may satisfy the requirements of this
paragraph (c) in either of the following two ways:
(1) QHP-by-QHP method. The employer makes payments toward the
premium with respect to each QHP for which the employer is claiming the
credit that satisfy the uniform percentage requirement under paragraph
(b) of this section on a QHP-by-QHP basis (so that the amounts or
percentages of premium paid by the employer for each QHP need not be
identical, but the payments with respect to each QHP must satisfy
paragraph (b) of this section); or
(2) Reference QHP method. The employer designates a reference QHP
and makes employer contributions in accordance with the following
requirements--
(i) The employer determines a level of employer contributions for
each employee such that, if all eligible employees enrolled in the
reference QHP, the contributions would satisfy the uniform percentage
requirement under paragraph (b) of this section, and
(ii) The employer allows each employee to apply an amount of
employer contribution determined necessary to meet the uniform
percentage requirement under paragraph (b) of this section either toward
the reference QHP or toward the cost of coverage under any of the other
available QHPs.
(d) Tobacco surcharges and wellness program discounts or rebates--
(i) Tobacco surcharges. The tobacco surcharge and amounts paid by the
employer to cover the surcharge are not included in premiums for
purposes of calculating the uniform percentage requirement, nor are
payments of the surcharge treated as premium payments for purposes of
calculating the credit. The uniform percentage requirement is also
applied without regard to employee payment of the tobacco surcharges in
cases in which all or part of the employee tobacco surcharges are not
paid by the employer.
(ii) Wellness programs. If a plan of an employer provides a wellness
program, for purposes of meeting the uniform percentage requirement any
additional amount of the employer contribution attributable to an
employee's participation in the wellness program over the employer
contribution with respect to an employee that does not participate in
the wellness program is not taken into account in calculating the
uniform percentage requirement, whether the difference is due to a
discount for participation or a surcharge for nonparticipation. The
employer contribution for employees that do not participate in the
wellness program must be at least 50 percent of the premium (including
any premium surcharge for nonparticipation). However, for purposes of
computing the credit, the employer contributions are taken into account,
including those contributions attributable to an employee's
participation in a wellness program.
(e) Special rules regarding employer compliance with applicable
State or local law. An employer will be treated as satisfying the
uniform percentage requirement if the failure to otherwise satisfy the
uniform percentage requirement is attributable solely to additional
employer contributions made to certain employees to comply with an
applicable State or local law.
(f) Examples. The following examples illustrate the provisions of
paragraphs (a) through (e) of this section:
Example 1. (i) Facts. An eligible small employer (Employer) offers a
QHP on a SHOP Exchange, Plan A, which uses composite billing. The
premiums for Plan A are $5,000 per year for employee-only coverage, and
$10,000 for family coverage. Employees can elect employee-only or family
coverage under Plan A. Employer pays $3,000 (60% of the premium) toward
employee-only coverage under Plan A and $6,000 (60% of the premium)
toward family coverage under Plan A.
(ii) Conclusion. Employer's contributions of 60% of the premium for
each tier of coverage satisfy the uniform percentage requirement.
Example 2. (i) Facts. Same facts as Example 1, except that Employer
pays $3,000 (60% of the premium) for each employee electing employee-
only coverage under Plan A and pays $3,000 (30% of the premium) for each
employee electing family coverage under Plan A.
(ii) Conclusion. Employer's contributions of 60% of the premium
toward employee-only coverage and the same dollar amount toward the
premium for family coverage satisfy the uniform percentage requirement,
even though the percentage is not the same.
Example 3. (i) Facts. Employer offers two QHPs, Plan A and Plan B,
both of which use composite billing. The premiums for Plan A
[[Page 310]]
are $5,000 per year for employee-only coverage and $10,000 for family
coverage. The premiums for Plan B are $7,000 per year for employee-only
coverage and $13,000 for family coverage. Employees can elect employee-
only or family coverage under either Plan A or Plan B. Employer pays
$3,000 (60% of the premium) for each employee electing employee-only
coverage under Plan A, $3,000 (30% of the premium) for each employee
electing family coverage under Plan A, $3,500 (50% of the premium) for
each employee electing employee-only coverage under Plan B, and $3,500
(27% of the premium) for each employee electing family coverage under
Plan B.
(ii) Conclusion. Employer's contributions of 60% (or $3,000) of the
premiums for employee-only coverage and the same dollar amounts toward
the premium for family coverage under Plan A, and of 50% (or $3,500) of
the premium for employee-only of coverage and the same dollar amount
toward the premium for family coverage under Plan B, satisfy the uniform
percentage requirement on a QHP-by-QHP basis; therefore the employer's
contributions to both plans satisfy the uniform percentage requirement.
Example 4. (i) Facts. Same facts as Example 3, except that Employer
designates Plan A as the reference QHP. Employer pays $2,500 (50% of the
premium) for each employee electing employee-only coverage under Plan A
and pays $2,500 of the premium for each employee electing family
coverage under Plan A or either employee-only or family coverage under
Plan B.
(ii) Conclusion. Employer's contribution of 50% (or $2,500) toward
the premium of each employee enrolled under Plan A or Plan B satisfies
the uniform percentage requirement.
Example 5. (i) Facts. Employer receives a list billing premium quote
with respect to Plan X, a QHP offered by Employer on a SHOP Exchange for
health insurance coverage for each of Employer's four employees. For
Employee L, age 20, the employee-only premium is $3,000 per year, and
the family premium is $8,000. For Employees M, N and O, each age 40, the
employee-only premium is $5,000 per year and the family premium is
$10,000. The total employee-only premium for the four employees is
$18,000 ($3,000 + (3 x 5,000)). Employer calculates an employer-computed
composite employee-only rate of $4,500 ($18,000/4). Employer offers to
make contributions such that each employee would need to pay $2,000 of
the premium for employee-only coverage. Under this arrangement, Employer
would contribute $1,000 toward employee-only coverage for L and $3,000
toward employee-only coverage for M, N, and O. In the event an employee
elects family coverage, Employer would make the same contribution
($1,000 for L or $3,000 for M, N, or O) toward the family premium.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because it offers and makes contributions based on an
employer-calculated composite employee-only rate such that, to receive
employee-only coverage, each employee must pay a uniform amount which is
not more than 50% of the composite rate, and it allows employees to use
the same employer contributions toward family coverage.
Example 6. (i) Facts. Same facts as Example 5, except that Employer
calculates an employer-computed composite family rate of $9,500 (($8,000
+ 3 x 10,000)/4) and requires each employee to pay $4,000 of the premium
for family coverage.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because it offers and makes contributions based on a
calculated employee-only and family rate such that, to receive either
employee-only or family coverage, each employee must pay a uniform
amount which is not more than 50% of the composite rate for coverage of
that tier.
Example 7. (i) Facts. Same facts as Example 5, except that Employer
also receives a list billing premium quote from Plan Y with respect to a
second QHP offered by Employer on a SHOP Exchange for each of Employer's
4 employees. Plan Y's quote for Employee L, age 20, is $4,000 per year
for employee-only coverage or $12,000 per year for family coverage. For
Employees M, N and O, each age 40, the premium is $7,000 per year for
employee-only coverage or $15,000 per year for family coverage. The
total employee-only premium under Plan Y is $25,000 ($4,000 + (3 x
7,000)). The employer-computed composite employee-only rate is $6,250
($25,000/4). Employer designates Plan X as the reference plan. Employer
offers to make contributions based on the employer-calculated composite
premium for the reference QHP (Plan X) such that each employee has to
contribute $2,000 to receive employee-only coverage through Plan X.
Under this arrangement, Employer would contribute $1,000 toward
employee-only coverage for L and $3,000 toward employee-only coverage
for M, N, and O. In the event an employee elects family coverage through
Plan X or either employee-only or family coverage through Plan Y,
Employer would make the same contributions ($1,000 for L or $3,000 for
M, N, or O) toward that coverage.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because it offers and makes contributions based on the
employer-calculated composite employee-only premium for the Plan X
reference QHP such that, in order to receive employee-only coverage,
each employee must pay a uniform amount which is not more than 50% of
the employee-only composite premium of the reference QHP; it allows
employees to use the same employer contributions toward
[[Page 311]]
family coverage in the reference QHP or coverage through another QHPs.
Example 8. (i) Facts. Employer offers employee-only and SHOP
dependent coverage through a QHP to its three employees using list
billing. All three employees enroll in the employee-only coverage, and
one employee elects to enroll two dependents in SHOP dependent coverage.
Employer contributes 100% of the employee-only premium costs, but only
contributes 25% of the premium costs toward SHOP dependent coverage.
(ii) Conclusion. Employer's contribution of 100% toward the premium
costs of employee-only coverage satisfies the uniform percentage
requirement, even though Employer is only contributing 25% toward SHOP
dependent coverage.
Example 9. (i) Facts. Employer has five employees. Employer is
located in a State that requires employers to pay 50% of employees'
premium costs, but also requires that an employee's contribution not
exceed a certain percentage of the employee's monthly gross earnings
from that employer. Employer offers to pay 50% of the premium costs for
all its employees, and to comply with the State law, Employer
contributes more than 50% of the premium costs for two of its employees.
(ii) Conclusion. Employer satisfies the uniform percentage
requirement because its failure to otherwise satisfy the uniform
percentage requirement is attributable solely to compliance with the
applicable State or local law.
Example 10. (i) Facts. Employer has three employees who all enroll
in employee-only coverage. Employer is located in a State that has a
tobacco surcharge on the premiums of employees who use tobacco. One of
Employer's employees smokes. Employer contributes 50% of the employee-
only premium costs, but does not cover any of the tobacco surcharge for
the employee who smokes.
(ii) Conclusion. Employer's contribution of 50% toward the premium
costs of employee-only coverage satisfies the uniform percentage
requirement. Tobacco surcharges are not factored into premiums when
calculating the uniform percentage requirement.
Example 11. (i) Facts. Employer has five employees who all enroll in
employee-only coverage. Employer offers a wellness program that reduces
the employee share of the premium for employees who participate in the
wellness program. Employer contributes 50% of the premium costs of
employee-only coverage for employees who do not participate in the
wellness program and 55% of the premium costs of employee-only coverage
for employees who participate in the wellness program. Three of the five
employees participate in the wellness program.
(ii) Conclusion. Employer's contribution of 50% toward the premium
costs of employee-only coverage for the two employees who do not
participate in the wellness program and 55% toward the premium costs of
employee-only coverage for three employees who participate in the
wellness program satisfies the uniform percentage requirement because
the additional 5% contribution due to the employees' participation in
the wellness program is not taken into account. However, the additional
5% contributions are taken into account for purposes of calculating the
credit.
(g) Effective/applicability date. This section is applicable for
periods after 2013. For transition rules relating to certain plan years
starting in 2014, see Sec. 1.45R-3(i).
[T.D. 9672, 79 FR 36646, June 30, 2014]
Sec. 1.45R-5 Claiming the credit.
(a) Claiming the credit. The credit is a general business credit. It
is claimed on an eligible small employer's annual income tax return and
offsets an employer's actual tax liability for the year. The credit is
claimed by attaching Form 8941, ``Credit for Small Employer Health
Insurance Premiums,'' to the eligible small employer's income tax return
or, in the case of a tax-exempt eligible small employer, by attaching
Form 8941 to the employer's Form 990-T, ``Exempt Organization Business
Income Tax Return.'' To claim the credit, a tax-exempt eligible small
employer must file a form 990-T with an attached Form 8941, even if a
Form 990-T would not otherwise be required to be filed.
(b) Estimated tax payments and alternative minimum tax (AMT)
liability. An eligible small employer may reflect the credit in
determining estimated tax payments for the year in which the credit
applies in accordance with the estimated tax rules as set forth in
sections 6654 and 6655 and the applicable regulations. An eligible small
employer may also use the credit to offset the employer's alternative
minimum tax (AMT) liability for the year, if any, subject to certain
limitations based on the amount of the employer's regular tax liability,
AMT liability and other allowable credits. See section 38(c)(1), as
modified by section 38(c)(4)(B)(vi). However, an eligible small
employer, including a tax-exempt eligible small employer, may not reduce
its deposits and payments of employment tax (that
[[Page 312]]
is, income tax required to be withheld under section 3402, social
security and Medicare tax under sections 3101 and 3111, and federal
unemployment tax under section 3301) during the year in anticipation of
the credit.
(c) Reduction of section 162 deduction. No deduction under section
162 is allowed for the eligible small employer for that portion of the
health insurance premiums that is equal to the amount of the credit
under Sec. 1.45R-2.
(d) Effective/applicability date. This section is applicable for
periods after 2013. For rules relating to certain plan years beginning
in 2014, see Sec. 1.45R-3(i).
[T.D. 9672, 79 FR 36646, June 30, 2014]
Sec. 1.46-1 Determination of amount.
(a) Effective dates--(1) In general. This section is effective for
taxable years beginning after December 31, 1975. However, transitional
rules under paragraph (g) of this section are effective for certain
earlier taxable years.
(2) Acts covered. This section reflects changes made by the
following Acts of Congress:
Act and Section
Tax Reduction Act of 1975, section 301.
Tax Reform Act of 1976, sections 802, 1701, 1703.
Revenue Act of 1978, sections 311, 312, 315.
Energy Tax Act of 1978, section 301.
Economic Recovery Tax Act of 1981, section 212.
Technical Corrections Act of 1982, section 102(f).
Tax Reform Act of 1986, section 251.
(3) Prior regulations. For taxable years beginning before January 1,
1976, see 26 CFR 1.46-1 (Rev. as of April 1, 1979). Those regulatons do
not reflect changes made by Pub. L. 89-384, Pub. L. 89-389, and Pub. L.
91-172.
(b) General rule. The amount of investment credit (credit) allowed
by section 38 for the taxable year is the portion of credit available
under section 46(a)(1) that does not exceed the limitation based on tax
under section 46(a)(3).
(c) Credit available. The credit available for the taxable year is
the sum of--
(1) Unused credit carried over from prior taxable years under
section 46(b) (carryovers).
(2) Amount of credit determined under section 46(a)(2) for the
taxable year (credit earned), and
(3) Unused credit carried back from succeeding taxable years under
section 46(b) (carrybacks).
(d) Credit earned. The credit earned for the taxable year is the sum
of the following percentages of qualified investment (as determined
under section 46 (c) and (d))--
(1) The regular percentage (as determined under section 46),
(2) For energy property, the energy percentage (as determined under
section 46), and
(3) For the portion of the basis of a qualified rehabilitated
building (as defined in Sec. 1.48-12(b)) that is attributable to
qualified rehabilitation expenditures (as defined in Sec. 1.48-12(c)),
the rehabilitation percentage (as determined under section 46(b)(4)).
(e) Designation of credits. The credit available for the taxable
year is designated as follows:
(1) The credit attributable to the regular percentage is the
``regular credit''.
(2) The credit attributable to the ESOP percentage is the ``ESOP
credit''.
(3) The credit attributable to the energy percentage for energy
property other than solar or wind is the ``nonrefundable energy
credit''.
(4) The credit attributable to the energy percentage for solar or
wind energy property is the ``refundable energy credit''.
(5) The credit attributable to the rehabilitation percentage for
qualified rehabilitation expenditures is the rehabilitation investment
credit.
(f) Special rules for certain energy property. Energy property is
defined in section 48(l). Under section 46(a)(2)(D), energy property
that is section 38 property solely by reason of section 48(l)(1)
qualifies only for the energy credit. Other energy property qualifies
for both the regular credit (and, if applicable, the ESOP credit) and
the energy credit. For limitation on the energy percentage for property
financed by industrial development bonds, see section 48(l)(11).
(g) Transitional rule for regular and ESOP credit--(1) In general.
Although section 46(a)(2) was amended by section 301(a)(1) of the Energy
Tax Act of 1977
[[Page 313]]
to eliminate the transitional rules under section 46(a)(2)(D), those
rules still apply in certain instances. Section 46(a)(2)(D) was added by
section 301(a) of the Tax Reduction Act of 1975 and amended by section
802(a) of the Tax Reform Act of 1976.
(2) Regular credit. Under section 46(a)(2)(D), the regular credit is
10 percent and applies for the following property:
(i) Property to which section 46 (d) does not apply, the
construction, reconstruction, or erection of which is completed by the
taxpayer after January 21, 1975, but only to the extent of basis
attributable to construction, reconstruction, or erection after that
date.
(ii) Property to which section 46(d) does not apply, acquired by the
taxpayer after January 21, 1975.
(iii) Qualified progress expenditures (as defined in section 46(d))
made after January 21, 1975.
(3) ESOP credit. See section 48(m) for transitional rules limiting
the period for which the ESOP percentage under section 46(a)(2)(E)
applies. For prior statutes, see section 46(a)(2) (B) and (D), as added
by section 301 of the Tax Reduction Act of 1975 and amended by section
802 of the Tax Reform Act of 1976.
(4) Cross reference. (i) The principles of Sec. 1.48-2 (b) and (c)
apply in determining the portion of basis attributable to construction,
reconstruction, or erection after January 21, 1975, and in determining
the time when property is acquired.
(ii) Section 311 of the Revenue Act of 1978 made the 10 percent
regular credit permanent.
(5) Seven percent credit. To the extent that, under paragraph (g)(1)
of this section, the 10 percent does not apply, the regular credit, in
general, is 7 percent. For a special limitation on qualified investment
for public utility property (other than energy property), see section
46(c)(3)(A).
(6) Qualified progress expenditures. For progress expenditure
property that is constructed, reconstructed, or erected by the taxpayer
within the meaning of Sec. 1.48-2(b), the ten-percent credit applies in
the year the property is placed in service to the portion of the
qualified investment that remains after reduction for qualified progress
expenditures under section 46(c)(4), but only to the extent that the
remaining qualified investment is attributable to construction,
reconstruction, or erection after January 21, 1975. For progress
expenditure property that is acquired by the taxpayer (within the
meaning of Sec. 1.48-2(b)) after January 21, 1975, and placed in
service after that date, the ten-percent credit applies in the year the
property is placed in service to the entire portion of qualified
investment that remains after reduction for qualified progress
expenditures.
(h) Tax liability limitation--(1) In general. Section 46(a)(3)
provides a tax liability limitation on the amount of credit allowed by
section 38 (other than the refundable energy credit) for any taxable
year. See section 46(a)(10)(C)(i). Tax liability is defined in paragraph
(j) of this section. The excess of available credit over the applicable
tax liability limitation for the year is an unused credit which may be
carried forward or carried back under section 46(b).
(2) Regular and ESOP tax liability limitation. In general, the tax
liability limitation for the regular and ESOP credits is the portion of
tax liability that does not exceed $25,000 plus a percentage of the
excess, as determined under section 46(a)(3)(B).
(3) Nonrefundable energy credit tax liability limitation. (i) For
nonrefundable energy credit carrybacks to a taxable year ending before
October 1, 1978, the tax liability limitation is the portion of tax
liability that does not exceed $25,000 plus a percentage of the excess,
as determined under section 46(a)(3)(B).
(ii) For a taxable year ending after September 30, 1978, the tax
liability limitation for available nonrefundable energy credit is 100
percent of the year's tax liability.
(4) Alternative limitations. Alternative limitations apply for
certain utilities, railroads, and airlines in determining the regular
tax liability limitation and, for nonrefundable energy credit carrybacks
to taxable years ending before October 1, 1978, the nonrefundable energy
credit tax liability limitation. These alternative limitations do not
apply in determining the energy tax liability limitation for a taxable
year
[[Page 314]]
ending after October 1, 1978. The provisions listed below set forth the
alternative limitations:
------------------------------------------------------------------------
Code section Type Years applicable
------------------------------------------------------------------------
46(a)(6) \1\ Utilities Taxable years ending in
1975-1978
46(a)(7) \2\ Utilities Taxable year ending in
1979
46(a)(8) Railroads and Airlines Taxable year ending in
1979 or 1980
46(a)(8) \3\ Railroads Taxable years ending in
1977 or 1978
46(a)(9) \3\ Airlines Taxable years ending in
1977 or 1978
------------------------------------------------------------------------
\1\ Section 46(a)(6) was added by section 301(b)(2) of the Tax Reduction
Act of 1975 and redesignated as section 46(a)(7) by section 302(a)(1)
of the Tax Reform Act of 1976.
\2\ Section 46(a)(7) was amended by section 312(b)(1) of the Revenue Act
of 1978.
\3\ These provisions were repealed by section 312(b)(2) of the Revenue
Act of 1978.
(i) [Reserved]
(j) Tax liability--(1) In general. ``Tax liability'' for purposes of
the regular and ESOP credit and carrybacks of nonrefundable energy
credit to a taxable year ending before October 1, 1978, means the
liability for tax as defined in section 46(a)(4). For ordering of
regular, ESOP, and nonrefundable energy credits, see paragraph (m) of
this section. In addition to taxes excluded under section 46(a)(4), tax
liability does not include tax resulting from recapture of credit under
section 47 and the alternative minimum tax imposed by section 55. See
sections 47(c) and 55(c)(1).
(2) Certain nonrefundable energy credit. For a taxable year ending
after September 30, 1978, ``tax liability'' for purposes of the
nonrefundable energy credit is liability for tax, as defined in section
46(a)(4) and paragraph (j)(1) of this section, reduced by the regular
and ESOP credit allowed for the taxable year. Thus, carrybacks of
regular or ESOP credit to a taxable year may displace nonrefundable
energy carryovers or credit earned taken into account in that year.
However, carrybacks of regular, ESOP, or nonrefundable energy credit do
not affect refundable energy credit which is treated as an overpayment
of tax under section 6401(b). See paragraph (k) of this section.
(k) Special rule for refundable energy credit. The amount of the
refundable energy credit is determined under the rules of section 46
(other than section 46(a)(3)). However, to permit the refund, the
refundable energy credit for purposes of the Internal Revenue Code
(other than section 38, part IVB, and chapter 63 of the Code) is treated
as allowed by section 39 and not by section 38. The refundable credit is
not applied against tax liability for purposes of determining the tax
liability limitation for other investment credits. Rather, it is treated
as an overpayment of tax under section 6401(b).
(l) FIFO rule. If the credit available for a taxable year is not
allowed in full because of the tax liability limitation, special rules
determine the order in which credits are applied. Under the first-in-
first-out rule of section 46(a)(1) (FIFO), carryovers are applied
against the tax liability limitation first. To the extent the tax
liability limitation exceeds carryovers, credit earned, and carrybacks
are then applied.
(m) Special ordering rule--(1) In general. Under section
46(a)(10)(A), the FIFO rule applies separately--
(i) First, with respect to regular and ESOP credits, and
(ii) Second, with respect to nonrefundable energy credit.
(2) Regular and ESOP credit. Under Sec. 1.46-8(c)(9)(ii), regular
and ESOP credits available are applied in the following order:
(i) Regular carryovers;
(ii) ESOP carryovers;
(iii) Regular credit earned;
(iv) ESOP credit earned;
(v) Regular carrybacks; and
(vi) ESOP carrybacks.
(3) Example. For an example of the order of application of regular
and ESOP credits, see Sec. 1.46-8(c)(9)(iii).
(n) Examples. The following examples illustrate paragraphs (a)
through (m) of this section.
Example 1. (a) Corporation M's regular credit available for its
taxable year ending December 31, 1979 is as follows:
Regular carryovers........................................... $5,000
Regular credit earned........................................ 10,000
Regular carrybacks........................................... 15,000
----------
Credit available.......................................... 30,000
(b) M's ``tax liability'' for 1979 is $30,000. M's tax liability
limitation for 1979 for the regular credit is $28,000, consisting of
$25,000 plus 60 percent of the $5,000 of ``tax liability'' in excess of
$25,000.
(c) The regular carryovers and credit earned are allowed in full.
However, only $13,000 of the regular carryback is allowed
[[Page 315]]
for 1979. The remaining $2,000 must be carried to the next year to which
it may be carried under section 46(b).
Example 2. (a) For its taxable year ending December 31, 1980,
corporation N has $30,000 regular credit earned and $9,000 nonrefundable
energy credit earned. N has no carryovers to 1980 and no ``tax
liability'' for pre-1980 years.
(b) N's ``tax liability'' for 1980 for the regular credit is
$35,000. N's tax liability limitation for 1980 for the regular credit is
$32,000, consisting of $25,000 plus 70 percent of the $10,000 of ``tax
liability'' in excess of $25,000.
(c) The entire regular credit is allowed in 1980.
(d) N's ``tax liability'' for 1980 for the nonrefundable energy
credit is $5,000, consisting of $35,000 less $30,000 regular credit
allowed for 1980. N's tax liability limitation for 1980 for the
nonrefundable energy credit is 100 percent of $5,000.
(e) $5,000 of the nonrefundable energy credit is allowed for 1980.
The remaining $4,000 energy credit is an unused nonrefundable energy
credit which must be carried to the next year to which it may be carried
under section 46(b).
Example 3. (a) Assume the same facts as in Example 2 except that in
its taxable year ending December 31, 1981, N earns a regular credit of
which it may carry back $2,000 to 1980.
(b) The $30,000 regular credit earned and $2,000 of the regular
carryback is allowed for 1980. N's ``tax liability'' for 1980 for the
nonrefundable energy credit is reduced to $3,000, consisting of $35,000
less $32,000 regular credit allowed for 1980. The nonrefundable energy
credit allowed for 1980 is reduced to $3,000. The remaining $6,000 is an
unused nonrefundable energy credit which must be carried to the next
year to which it may be carried under section 46(b).
Example 4. (a) For its taxable year ending December 31, 1980,
corporation P's regular credit earned is $20,000. P also has a $9,000
refundable energy credit for 1980. There are no carryovers or carrybacks
to 1980.
(b) P's ``tax liability'' for 1980 for the regular credit is $25,000
which is also the tax liability limitation for the regular credit.
(c) The entire $20,000 regular credit is allowed for 1980. The
entire $9,000 refundable energy credit is treated as an overpayment of
tax under section 6401(b), even though ``tax liability'' remains.
Example 5. Assume the same facts as in Example 4, except that in the
following year P earns a regular credit, $5,000 of which it may carry
back to 1980. The $5,000 carryback is allowed in full in 1980.
Example 6. (i) Corporation X, a calendar year taxpayer, constructs a
ship on which it begins construction on January 1, 1973, and which, when
placed in service on December 31, 1980, has a basis of $450,000. Of that
amount, $100,000 is attributable to construction before January 22,
1975. X makes an election under section 46(d) (qualified progress
expenditures) for taxable years after 1975.
(ii) For 1976, 1977, 1978, and 1979, qualified progress expenditures
total $200,000. The ten-percent credit applies to those expenditures.
(iii) For 1980, qualified investment for the ship is $450,000. Under
section 46(c)(4), X must reduce this amount by $200,000, the amount of
qualified progress expenditures taken into account. The ten-percent
credit applies to the portion of the remaining qualified investment
attributable to construction after January 21, 1975 ($150,000). The
seven-percent credit applies to the portion of qualified investment
attributable to construction before January 22, 1975 ($100,000).
Example 7. (i) Corporation Y agrees to build a ship for Corporation
X, which uses the calendar year. In 1973, Y begins construction of the
ship which X acquires and places in service on December 31, 1980. X
makes an election under section 46(d) for taxable years after 1974. The
contract price is $400,000.
(ii) For 1975, 1976, 1977, 1978, and 1979, qualified progress
expenditures total $250,000. The ten-percent credit applies to those
expenditures.
(iii) For 1980, qualified investment for the ship is $400,000, which
is the contract price. X must reduce qualified investment by $250,000,
the amount of qualified progress expenditures. The ten-percent credit
applies to the $150,000 of qualified investment that remains after
reduction for qualified progress expenditures.
(o) Married individuals. If a separate return is filed by a husband
or wife, the tax liability limitation is computed by substituting a
$12,500 amount for the $25,000 amount that applies under section
46(a)(3). However, this reduction of the $25,000 amount to $12,500
applies only if the taxpayer's spouse is entitled to a credit under
section 38 for the taxable year of such spouse which ends with, or
within, the taxpayer's taxable year. The taxpayer's spouse is entitled
to a credit under section 38 either because of investment made in
qualified property for such taxable year of the spouse (whether directly
made by such spouse or whether apportioned to such spouse, for example,
from an electing small business corporation, as defined in section
1371(b)), or because of an investment credit carryback or carryover to
such taxable year. The determination of whether an individual is married
shall be made under the principles of section 143 and the regulations
thereunder.
[[Page 316]]
(p) Apportionment of $25,000 amount among component members of a
controlled group--(1) In general. In determining the tax liability
limitation under section 46(a)(3) for corporations that are component
members of a controlled group on December 31, only one $25,000 amount is
available to those component members for their taxable years that
include that December 31. See subparagraph (2) of this paragraph for
apportionment of such amount among such component members. See
subparagraph (3) of this paragraph for definition of ``component
member''.
(2) Manner of apportionment. (i) In the case of corporations which
are component members of a controlled group on a particular December 31,
the $25,000 amount may be apportioned among such members for their
taxable years that include such December 31 in any manner the component
members may select, provided that each such member less than 100 percent
of whose stock is owned, in the aggregate, by the other component
members of the group on such December 31 consents to an apportionment
plan. The consent of a component member to an apportionment plan with
respect to a particular December 31 shall be made by means of a
statement, signed by a person duly authorized to act on behalf of the
consenting member, stating that such member consents to the
apportionment plan with respect to such December 31. The statement shall
set forth the name, address, employer identification number, and taxable
year of each component member of the group on such December 31, the
amount apportioned to each such member under the plan, and the location
of the Service Center where the statement is to be filed. The consent of
more than one component member may be incorporated in a single
statement. The statement shall be timely filed with the Service Center
where the component member having the taxable year first ending on or
after such December 31 files its return for such taxable year and shall
be irrevocable after such filing. If two or more component members have
the same such taxable year, a statement of consent may be filed by any
one of such members. However, if the due date (including any extensions
of time) of the return of such member is on or before December 15, 1971,
the required statement shall be considered as timely filed if filed on
or before March 15, 1972. Each component member of the group on such
December 31 shall keep as a part of its records a copy of the statement
containing all the required consents.
(ii) An apportionment plan adopted by a controlled group with
respect to a particular December 31 shall be valid only for the taxable
year of each member of the group which includes such December 31. Thus,
a controlled group must file a separate consent to an apportionment plan
with respect to each taxable year which includes a December 31 as to
which an apportionment plan is desired.
(iii) If the apportionment plan is not timely filed, the $25,000
amount specified in section 46(a)(3) shall be reduced for each component
member of the controlled group, for its taxable year which includes a
December 31, to an amount equal to $25,000 divided by the number of
component members of such group on such December 31.
(iv) If a component member of the controlled group makes its income
tax return on the basis of a 52-53-week taxable year, the principles of
section 441(f)(2)(A)(ii) and Sec. 1.441-2 apply in determining the last
day of such taxable year.
(3) Definitions of controlled group of corporations and component
member of controlled group. For the purpose of this paragraph, the terms
``controlled group of corporations'' and ``component member'' of a
controlled group of corporations shall have the same meaning assigned to
those terms in section 1563 (a) and (b). For purposes of applying Sec.
1.1563-1(b)(2)(ii)(c), an electing small business corporation shall be
treated as an excluded member whether or not it is subject to the tax
imposed by section 1378.
(4) Members of a controlled group filing a consolidated return. If
some component members of a controlled group join in filing a
consolidated return pursuant to Sec. 1.1502-3(a)(3), and other
component members do not join, then, unless a consent is timely filed
apportioning the $25,000 amount among the group filing the consolidated
return
[[Page 317]]
and the other component members of the controlled group, each component
member of the controlled group (including each component member which
joins in filing the consolidated return) shall be treated as a separate
corporation for purposes of equally apportioning the $25,000 amount
under subparagraph (2)(iii) of this paragraph. In that case, the tax
liability limitation for the group filing the consolidated return is
computed by substituting for the $25,000 amount under section 46(a)(3)
the total amount apportioned to each component member that joins in
filing the consolidated return. If the affiliated group filing the
consolidated return and the other component members of the controlled
group adopt an apportionment plan, the affiliated group shall be treated
as a single member for the purpose of applying subparagraph (2)(i) of
this paragraph. Thus, for example, only one consent executed by the
common parent to the apportionment plan is required for the group filing
the consolidated return. If any component member of the controlled group
which joins in the filing of the consolidated return is an organization
to which section 593 applies or a cooperative organization described in
section 1381(a), see paragraph (a)(3)(ii) of Sec. 1.1502-3.
(5) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example 1. At all times during 1976 Smith, an individual, owns all
the stock of corporations X, Y, and Z. Corporation X files an income tax
return on a calendar year basis. Corporation Y files an income tax
return on the basis of a fiscal year ending June 30. Corporation Z files
an income tax return on the basis of a fiscal year ending September 30.
On December 31, 1976, X, Y, and Z are component members of the same
controlled group. X, Y, and Z all consent to an apportionment plan in
which the $25,000 amount is apportioned entirely to Y for its taxable
year ending June 30, 1977 (Y's taxable year which includes December 31,
1976). Such consent is timely filed. For purposes of computing the
credit under section 38, Y's tax liability limitation for its taxable
year ending June 30, 1977, is so much of Y's tax liability as does not
exceed $25,000, plus 50 percent of Y's tax liability in excess of
$25,000. X's and Z's limitations for their taxable years ending December
31, 1976, and September 30, 1977, respectively, are equal to 50 percent
of X's tax liability for 50 percent of Z's tax liability. On the other
hand, if an apportionment plan is not timely filed, X's limitation would
be so much of X's tax liability as does not exceed $8,333.33, plus 50
percent of X's liability in excess of $8,333.33, and Y's and Z's
limitations would be computed similarly.
Example 2. At all times during 1976, Jones, an individual, owns all
the outstanding stock of corporations P, Q, and R. Corporations Q and R
both file returns for taxable years ending December 31, 1976. P files a
consolidated return as a common parent for its fiscal year ending June
30, 1977, with its two wholly-owned subsidiaries N and O. On December
31, 1976, N, O, P. Q, and R are component members of the same controlled
group. No consent to an apportionment plan is filed. Therefore, each
member is apportioned $5,000 of the $25,000 amount ($25,000 divided
equally among the five members). The tax liability limitation for the
group filing the consolidated return (P, N, and O) for the year ending
June 30, 1977 (the consolidated taxable year within which December 31,
1976, falls) is computed by using $15,000 instead of the $25,000 amount.
The $15,000 is arrived at by adding together the $5,000 amounts
apportioned to P, N, and O.
(q) Rehabilitation percentage--(1) General rule--(i) In general. Due
to amendments made by the Tax Reform Act of 1986, different rules apply
depending on when the property attributable to the qualified
rehabilitated expenditures (as defined in Sec. 1.48-12(c)) is placed in
service. Paragraph (q)(1)(ii) of this section contains the general rule
relating to property placed in service after December 31, 1986.
Paragraph (q)(1)(iii) of this section contains rules relating to
property placed in service before January 1, 1987. Paragraph (q)(1)(iv)
of this section contains rules relating to property placed in service
after December 31, 1986, that qualifies for a transition rule.
(ii) Property placed in service after December 31, 1986. Except as
otherwise provided in paragraph (q)(1)(iv) of this section, in the case
of section 38 property described in section 48(a)(1)(E) placed in
service after December 31, 1986, the term ``rehabilitation percentage''
means--
(A) 10 percent in the case of qualified rehabilitation expenditures
with respect to a qualified rehabilitated building other than a
certified historic structure, and
[[Page 318]]
(B) 20 percent in the case of qualified rehabilitation expenditures
with respect to a certified historic structure.
(iii) Property placed in service before January 1, 1987. For
qualified rehabilitation expenditures (as defined in Sec. 1.48-12(c))
with respect to property placed in service before January 1, 1987,
section 46(b)(4)(A) as in effect prior to the enactment of the Tax
Reform Act of 1986 provided for a three-tier rehabilitation percentage.
The applicable rehabilitation percentage for such expenditures depends
on whether the qualified rehabilitated building is a ``30-year
building,'' a ``40-year building,'' or a certified historic structure
(as defined in section 48(g)(3) and Sec. 1.48-12(d)(1)). The
rehabilitation percentage for such qualified rehabilitation expenditures
incurred with respect to a qualified rehabilitated building is 15
percent to the extent that the building is a 30-year building (i.e., at
least 30 years, but less than 40 years, has elapsed between the date the
physical work on the rehabilitation began and the date the building was
first placed in service), 20 percent to the extent that the building is
a 40-year building (i.e., at least 40 years has so elapsed), and 25
percent for certified historic structures, regardless of age. See
paragraph (q)(2)(ii) of this section for rules concerning buildings to
which additions have been added.
(iv) Property placed in service after December 31, 1986, that
qualifies under the transition rules. In the case of section 38 property
described in section 48(a)(1)(E) placed in service after December 31,
1986, and to which the amendments made by section 251 of the Tax Reform
Act of 1986 do not apply because the transition rules in section 251(d)
of that Act and Sec. 1.48-12(a)(2)(iv)(B) or (C) apply, the
rehabilitation percentage for a ``30-year building'' (within the meaning
of paragraph (q)(1)(iii) of this section) shall be 10 percent, the
rehabilitation percentage for a ``40-year building'' (within the meaning
of paragraph (q)(1)(iii) of this section) shall be 13 percent, and the
rehabilitation percentage for a certified historic structure shall be 25
percent.
(2) Special rules--(i) Moved buildings. With respect to paragraph
(q)(1)(ii) of this section, Sec. 1.48-12(b)(5) provides that a building
(other than a certified historic structure) is not a qualified
rehabilitated building unless it has been at the location where it is
being rehabilitated since January 1, 1936. In addition, for purposes of
paragraph (q)(1) (iii) and (iv) of this section, a building is not a
``30-year building'' unless it has been at the location where it is
being rehabilitated for the thirty-year period immediately preceding the
beginning of the rehabilitation process, and is not a ``40-year
building'' unless it has been at the location where it is being
rehabilitated for the forty-year period immediately preceding the
beginning of the rehabilitation process.
(ii) Building to which additions have been added--(A) Property
placed in service after December 31, 1986. For purposes of paragraph
(q)(1)(ii) of this section, if part of a building meets the definition
of a qualified rehabilitated building, and part of the building does not
meet the definition of a qualified rehabilitated building because such
part is an addition that was placed in service after December 31, 1935,
the qualified rehabilitation expenditures made to the building must be
allocated to the pre-1936 portion of the building and the post-1935
portion of the building using the principles in Sec. 1.48-
12(c)(10)(ii). Qualified rehabilitation expenditures attributable to the
post-1935 addition shall not qualify for the 10 percent rehabilitation
percentage.
(B) Property placed in service before January 1, 1987, and property
qualifying for a transitional rule. For purposes of paragraphs (q)(1)
(iii) and (iv) of this section, if part of a building meets the
definition of a ``40-year building'' and part of the building is an
addition that was placed in service less than forty years before
physical work on the rehabilitation began but more than thirty years
before such date, then the qualified rehabilitation expenditures made to
the building shall be allocated between the forty year old portion of
the building and the thirty year old portion of the building, and a 20
percent rehabilitation percentage shall be applied to the forty year old
portion of the building and a 15 percent rehabilitation percentage shall
be applied to
[[Page 319]]
the thirty year old portion. This allocation shall be made using the
principles in Sec. 1.48-12(c)(10)(ii). If an allocation cannot be made
between the expenditures to the forty year old portion of the building
and the thirty year old portion of the building, then the building will
be considered to be a 30-year building. Furthermore, for purposes of
this paragraph (q), a building (other than a certified historic
structure) is not a qualified rehabilitated building to the extent of
that portion of the building that is less than 30 years old. If
rehabilitation expenditures are incurred with respect to an addition to
a qualified rehabilitated building, but the addition is not considered
to be part of the qualified rehabilitated building because the addition
does not meet the age requirement in section 48(g)(1)(B) (as in effect
prior to its amendment by the Tax Reform Act of 1986) and Sec. 1.48-
12(b)(4)(i)(B), then no rehabilitation percentage will be applied to the
expenditures attributable to the rehabilitation of the addition. Thus,
for purposes of paragraphs (q)(1) (iii) and (iv) of this section, it may
be necessary to allocate rehabilitation expenditures incurred with
respect to a building between the original portion of the building and
the addition.
(iii) Mixed-use buildings. If qualified rehabilitation expenditures
are incurred for property that is excluded from section 38 property
described in section 48(a)(1)(E) (because, for example, they are made
with respect to a portion of the building used for lodging within the
meaning of section 48(a)(3) and Sec. 1.48-1(h)), an allocation of the
expenditures must be made between the expenditures that result in an
addition to basis that is section 38 property and the expenditures that
result in an addition to basis that is excluded from the definition of
section 38 property since the rehabilitation percentage is applicable
only to section 38 property. These allocations should be made using the
principles contained in Sec. 1.48-12(c)(10)(ii).
(3) Regular and energy percentages not to apply. The regular
percentage and the energy percentage shall not apply to that portion of
the basis of any building that is attributable to qualified
rehabilitation expenditures (as defined in Sec. 1.48-12(c)).
(4) Effective date. The rehabilitation percentage is applicable only
to qualified rehabilitation expenditures (as defined in Sec. 1.48-
12(c)). For rules relating to applicability of the regular percentage to
qualified rehabilitation expenditures (as defined in Sec. 1.48-11(c)),
see Sec. 1.48-11.
[T.D. 6731, 29 FR 6064, May 8, 1964]
Editorial Note: For Federal Register citations affecting Sec. 1.46-
1, see the List of CFR Sections Affected, which appears in the Finding
Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.46-2 Carryback and carryover of unused credit.
(a) Effective date. This section is effective for taxable years
beginning after December 31, 1975. For taxable years beginning before
January 1, 1976, see 26 CFR 1.46-2 (Rev. as of April 1, 1979).
(b) In general. Under section 46(b)(1), unused credit may be carried
back and carried over. Carrybacks and carryovers of unused credit are
taken into account in determining the amount of credit available and the
credit allowed for the taxable years to which they may be carried. In
general, the application of the rules of this section to regular and
ESOP credits are separate from their application to nonrefundable energy
credits. For example, the limitations on carrybacks and carryovers of
unused nonrefundable energy credit under section 46(b) (2) and (3),
respectively, differ in amount from the limitations on the regular and
ESOP credits because the tax liability limitations for those credits
differ. See Sec. 1.46-1(h). For a further example, see the special
ordering rule in Sec. 1.46-1(m). Section 46(b) does not apply to the
refundable energy credit.
(c) Unused credit. If carryovers and credit earned (as defined in
Sec. 1.46-1(c)(1)) exceed the applicable tax liability limitation, the
excess attributable to credit earned is an unused credit. The taxable
year in which an unused credit arises is referred to as the ``unused
credit year''.
(d) Taxable years to which unused credit may be carried. An unused
credit is a carryback to each of the 3 taxable
[[Page 320]]
years preceding the unused credit year and a carryover to each of the 7
taxable years succeeding the unused credit year. An unused credit must
be carried first to the earliest of those 10 taxable years. An unused
credit then must be carried to each of the other 9 taxable years (in
order of time) to the extent that the unused credit was not absorbed
during a prior taxable year because of the limitations under section
46(b) (2) and (3).
(e) Special rule for pre-1971 years--(1) In general. For unused
credit years ending before January 1, 1971, unused credit is allowed a
10-year carryover rather than the 7-year carryover. The principles of
paragraph (d) of this section apply to this 10-year carryover.
(2) Cross reference. For limitations on the taxable years to which
unused credit from pre-1971 credit years may be carried, see paragraph
(g) of this section.
(f) Limitations on carrybacks. Under the FIFO rule to section
46(a)(1), carryovers and credit earned are applied against the tax
liability limitation before carrybacks. Thus, carrybacks to a taxable
year may not exceed the amount by which the applicable tax liability
limitation for that year exceeds the sum of carryovers to and credit
earned for that year. Carrybacks from an unused credit year are applied
against tax liability before carrybacks from a later unused credit year.
To the extent an unused credit cannot be carried back to a particular
preceding taxable year, the unused credit must be carried to the next
succeeding taxable year to which it may be carried.
(g) Limitations on carryovers--(1) General rule. Carryovers to a
taxable year may not exceed the applicable tax liability limitation for
that year. Carryovers from an unused credit year are applied before
carryovers from a later unused credit year.
(2) Exception. A 10-year carryover from a pre-1971 unused credit
year may, under certain circumstances, be postponed to prevent a later-
earned 7-year carryover from expiring. This exception does not extend
the 10-year carryover period for pre-1971 unused credit. See section
46(b)(1)(D).
(h) Examples. The following examples illustrate paragraphs (a)
through (g) of this section.
Example 1. (a) Corporation M is organized on January 1, 1977 and
files its income tax return on a calendar year basis. Assume the facts
set forth in columns (1) and (2) of the following table. The
determination of the regular credit allowed for each of the taxable
years indicated is set forth in the remaining portions of the table.
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7)
--------------------------------------------------------------------------------
Tax
liability
limitation Credit Remaining Unused
Credit Tax (remaining allowed tax credit
available liability Percent from col. (lower of liability ((1)-(5))
(6) on (1) or limitation or (amount
preceding (4)) ((4)-(5)) absorbed)
line)
----------------------------------------------------------------------------------------------------------------
1977:
A. Credit earned............. $20,000 $45,000 50 $35,000 $20,000 $15,000 0
B. Carryback from 1978....... *15,000 ......... ......... [15,000] 15,000
1978:
A. Credit earned............. 80,000 55,000 50 40,000 40,000 0 $20,000
Carryback to 1977.......... ......... ......... ......... ........... ......... .......... (*15,000)
Carryover to 1979.......... ......... ......... ......... ........... ......... .......... (*5,000)
1979:
A. Carryover from 1978....... *5,000 50,000 60 40,000 6,000 35,000
B. Credit earned............. 50,000 ......... ......... [35,000] 35,000 0 15,000
Carryover to 1980.......... ......... ......... ......... ........... ......... .......... (*15,000)
1980:
A. Carryover from 1979....... *15,000 55,000 70 46,000 15,000 31,000
B. Credit earned............. 25,000 ......... ......... [31,000] 25,000 6,000 0
----------------------------------------------------------------------------------------------------------------
*For line ``A'' each year: Lesser of (1) tax liability or (2) $25,000 + (percentage in col. (3) x [col. (2) -
$25,000]). See, Sec. 1.46-1(h). For other lines: Amount in col. (6) on preceding line.
[[Page 321]]
Example 2. (a) Assume the same facts as in Example 1 except for 1979
M earns a $35,000 nonrefundable energy credit. The following table shows
the determinations for each year.
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7)
-------------------------------------------------------------------------------------------------
Tax liability Tax
---------------------------- liability
limitation* Credit Remaining Unused
Credit (remaining allowed tax credit
available (a) (b) Energy Percent from col. (lower of liability ((1)-(5))
Regular ((2)(a)-(5)(R)) (6) on (1) or limitation or (amount
preceding (4)) ((4)-(5)) absorbed)
line)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1977:
Regular:
A. Credit earned.................................. $20,000 $45,000 ............... 50 $35,000 $20,000R $15,000 0
B. Carryback from 1978............................ *15,000 ......... ............... ......... [15,000] 15,000R 0
1978:
Regular:
A. Credit earned.................................. 60,000 55,000 ............... 50 40,000 40,000R 0 $20,000
Carryback to 1977............................... ......... ......... ............... ......... ........... ......... .......... (*15,000)
Carryover to 1979............................... ......... ......... ............... ......... ........... ......... .......... (*5,000)
Energy:
A. Carryback from 1979............................ *15,000 ......... $15,000 100 15,000 15,000E 0
1979:
Regular:
A. Carryover from 1978............................ *5,000 50,000 ............... 60 40,000 5,000R 35,000
B. Credit earned.................................. 50,000 ......... ............... ......... [35,000] 35,000R 0 15,000
Carryover to 1980............................... ......... ......... ............... ......... ........... ......... .......... (*15,000)
Energy:
A. Credit earned.................................. 35,000 ......... 10,000 100 10,000 10,000E 0 25,000
Carryback to 1978............................... ......... ......... ............... ......... ........... ......... .......... (*15,000)
Carryover to 1980............................... ......... ......... ............... ......... ........... ......... .......... (*10,000)
1980:
Regular:
A. Carryover from 1979............................ *15,000 55,000 ............... 70 46,000 15,000R 31,000
B. Credit earned.................................. 25,000 ......... ............... ......... [31,000] 25,000R 6,000 0
Energy:
A. Carryover from 1979............................ *10,000 ......... 15,000 100 15,000 10,000E 5,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
*See footnote to the chart in Example 1.
(b) Although, in general, a nonrefundable energy credit may be
carried back to taxable years ending before October 1, 1978, in this
example the unused nonrefundable energy credit from 1979 may not be
absorbed in 1977. The 1977 tax liability limitation for the
nonrefundable energy credit is the same as it is for the regular credit,
reduced by regular credit previously allowed for 1977. See Sec. Sec.
1.46-1(h)(3) and 1.46-1(m).
Example 3. (a) Assume the same facts as in Example 2 except M has
regular credit of $37,000 for 1981 and M's tax liability for 1981 is
$32,500. The determinations for 1980 and 1981 are set forth in the
following table.
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7)
----------------------------------------------------------------------------------------------
Tax liability Tax
------------------------- liability
limitation* Credit Remaining Unused
Credit (remaining allowed tax credit
available (a) (b) Energy Percent from col. (lower of liability ((1)-(5))
Regular ((2)-(5)(R)) (6) on (1) or limitation or (amount
preceding (4)) ((4)-(5)) absorbed)
line)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1979 (restated):
Energy:
To be carried over................................... ......... ......... ............ ......... ........... ......... .......... $10,000
Carryover to 1980.................................. ......... ......... ............ ......... ........... ......... .......... (*9,000)
Carryover to 1981.................................. ......... ......... ............ ......... ........... ......... .......... (*1,000)
1980 (restated):
Regular:
A. Carryover from 1979............................... $15,000 $55,000 ............ 70 $46,000 $15,000R $31,000
B. Credit earned..................................... *25,000 ......... ............ ......... [31,000] 25,000R 6,000 0
[[Page 322]]
C. Carryback from 1981............................... *6,000 ......... ............ ......... [6,000] 6,000R 0
Energy:
A. Carryover from 1979............................... *9,000 ......... $9,000 100 9,000 9,000E
1981: Regular:
A. Credit earned..................................... 37,000 32,500 ............ 80 31,000 31,000R 0 6,000
Carryback to 1980.................................. ......... ......... ............ ......... ........... ......... .......... (*6,000)
Energy:
A. Carryover from 1979............................... *1,000 ......... 1,500 100 1,500 1,000E 500 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
*See footnote to chart under Example 1.
(b) Allowance of the regular carryback in 1980 from 1981 requires
that the computations for 1980 be restated. The energy tax liability
limitation for 1980 is reduced from $15,000 (as determined in Example 2)
to $9,000. Thus, $1,000 of the $10,000 energy credit allowed for 1980 is
displaced by the regular carryback. That amount may not be carried back
because there is no remaining energy tax liability limitation for the
prior 3 years (see table in Example 2). It may be carried over to 1981
and allowed in full in that year.
(i) [Reserved]
(j) Electing small business corporation. A shareholder of an
electing small business corporation (as defined in section 1371(b)) may
not take into account unused credit of the corporation attributable to
unused credit years for which the corporation was not an electing small
business corporation. However, a taxable year for which the corporation
is an electing small business corporation is counted as a taxable year
for determining the taxable years to which that unused credit may be
carried.
(k) Periods of less than 12 months. A fractional part of a year that
is considered a taxable year under sections 441(b) and 7701(a)(23) is
treated as a preceding or succeeding taxable year for determining under
section 46(b) the taxable years to which an unused credit may be
carried.
(l) Corporate acquisitions. For carryover of unused credits in the
case of certain corporate acquisitions, see section 381(c)(23).
(Secs. 7805 (68A Stat. 917, 26 U.S.C. 7805) and 38(b) (76 Stat. 962, 26
U.S.C. 38))
[T.D. 7751, 46 FR 1679, Jan. 7, 1981]
Sec. 1.46-3 Qualified investment.
(a) In general. (1) With respect to any taxable year, the qualified
investment of the taxpayer is the aggregate (expressed in dollars) of
(i) the applicable percentage of the basis of each new section 38
property placed in service by the taxpayer during such taxable year,
plus (ii) the applicable percentage of the cost of each used section 38
property placed in service by the taxpayer during such taxable year.
With respect to any section 38 property, qualified investment means the
applicable percentage of the basis (or cost) of such property. Section
38 property placed in service by the taxpayer during the taxable year
includes the taxpayer's share of the basis (or cost) of section 38
property placed in service by a partnership in the taxable year of such
partnership ending with or within the taxpayer's taxable year. In the
case of a shareholder of an electing small business corporation (as
defined in section 1371(b)), or a beneficiary of an estate or trust, see
Sec. Sec. 1.48-5 and 1.48-6, respectively, for apportionment of the
basis (or cost) of section 38 property placed in service by such
corporation, estate, or trust. For the definitions of new section 38
property and used section 38 property, see Sec. Sec. 1.48-2 and 1.48-3,
respectively. See Sec. 1.46-5 for special rules for progress
expenditure property.
(2) The basis (or cost) of section 38 property placed in service
during a taxable year shall not be taken into account in determining
qualified investment for such year if such property is
[[Page 323]]
disposed of or otherwise ceases to be section 38 property during such
year, except where Sec. 1.47-3 applies. Thus, if individual A places in
service during a taxable year section 38 property and later in the same
year sells such property, the basis (or cost) of such property shall not
be taken into account in determining A's qualified investment. On the
other hand, if A places in service section 38 property during a taxable
year and dies later in the same year, the basis (or cost) of such
property would be taken into account in computing qualified investment.
Similarly, if section 38 property is destroyed by fire in the same year
in which it is placed in service and paragraph (h) of this section
applies to reduce the basis (or cost) of replacement property, the basis
(or cost) of the destroyed property would be taken into account in
computing qualified investment. In order to determine whether section 38
property is disposed of or otherwise ceases to be section 38 property
see Sec. 1.47-2.
(3) Qualified investment is reduced in the case of property which is
``public utility property'' (see paragraph (h) of this section), and in
the case of property of organizations to which section 593 applies,
regulated investment companies or real estate investment trusts subject
to taxation under subchapter M, chapter 1 of the Code, and cooperative
organizations described in section 1381(a) (see Sec. 1.46-4).
(b) Applicable percentage. The applicable percentage to be applied
to the basis (or cost) of property is 33\1/3\ percent if the estimated
useful life of the property is 3 years or more but less than 5 years;
66\2/3\ percent if the estimated useful life is 5 years or more but less
than 7 years; or 100 percent if the estimated useful life is 7 years or
more. In the case of property which is not described in section 50, the
preceding sentence shall be applied by substituting ``4 years'' for ``3
years'', ``6 years'' for ``5 years'', and ``8 years'' for ``7 years''.
The provisions of this paragraph may be illustrated by the following
example:
Example. Corporation Y acquires and places in service during 1972
the following new and used section 38 properties:
------------------------------------------------------------------------
Estimated
useful Basis (or
Property life cost)
(years)
------------------------------------------------------------------------
A (new).......................................... 4 $60,000
B (new).......................................... 10 90,000
C (new).......................................... 6 150,000
D (used)......................................... 3 30,000
------------------------------------------------------------------------
Corporation Y's qualified investment for 1972 is $220,000 determined
in the following manner:
------------------------------------------------------------------------
Basis (or Applicable Qualified
Property cost) percentage investment
------------------------------------------------------------------------
A................................ $60,000 33\1/3\ $20,000
B................................ 90,000 100 90,000
C................................ 150,000 66\2/3\ 100,000
D................................ 30,000 33\1/3\ 10,000
--------------------------------------
Total.................................................... 220,000
------------------------------------------------------------------------
(c) Basis or cost. (1) The basis of any new section 38 property
shall be determined in accordance with the general rules for determining
the basis of property. Thus, the basis of property would generally be
its cost (see section 1012), unreduced by the adjustment to basis
provided by section 48(g)(1) with respect to property placed in service
before January 1, 1964, and any other adjustment to basis, such as that
for depreciation, and would include all items properly included by the
taxpayer in the depreciable basis of the property, such as installation
and freight costs. However, for purposes of determining qualified
investment, the basis of new section 38 property constructed,
reconstructed, or erected by the taxpayer shall not include any
depreciation sustained with respect to any other property used in the
construction, reconstruction, or erection of such new section 38
property. (See paragraph (b)(4) of Sec. 1.48-1.) If new section 38
property is acquired in exchange for cash and other property in a
transaction described in section 1031 in which no gain or loss is
recognized, the basis of the newly acquired property for purposes of
determining qualified investment would be equal to the adjusted basis of
the other property plus the cash paid. See Sec. 1.48-4 for the basis of
property to a lessee where the lessor has elected to treat such lessee
as a purchaser.
(2) The cost of any used section 38 property shall be determined in
accordance with paragraph (b) of Sec. 1.48-3. However, the aggregate
cost of used section 38 property which may be
[[Page 324]]
taken into account in any taxable year in computing qualified investment
cannot exceed $50,000 (see paragraph (c) of Sec. 1.48-3).
(3) For reduction in the basis (or cost) of certain property which
replaces other property which was destroyed or damaged by fire, storm,
shipwreck, or other casualty, or which was stolen, see paragraph (h) of
this section.
(d) Placed in service. (1) For purposes of the credit allowed by
section 38, property shall be considered placed in service in the
earlier of the following taxable years:
(i) The taxable year in which, under the taxpayer's depreciation
practice, the period for depreciation with respect to such property
begins; or
(ii) The taxable year in which the property is placed in a condition
or state of readiness and availability for a specifically assigned
function, whether in a trade or business, in the production of income,
in a tax-exempt activity, or in a personal activity.
Thus, if property meets the conditions of subdivision (ii) of this
subparagraph in a taxable year, it shall be considered placed in service
in such year notwithstanding that the period for depreciation with
respect to such property begins in a succeeding taxable year because,
for example, under the taxpayer's depreciation practice such property is
accounted for in a multiple asset account and depreciation is computed
under an ``averaging convention'' (see Sec. 1.167(a)-10), or
depreciation with respect to such property is computed under the
completed contract method, the unit of production method, or the
retirement method.
(2) In the case of property acquired by a taxpayer for use in his
trade or business (or in the production of income), the following are
examples of cases where property shall be considered in a condition or
state of readiness and availability for a specifically assigned
function:
(i) Parts are acquired and set aside during the taxable year for use
as replacements for a particular machine (or machines) in order to avoid
operational time loss.
(ii) Operational farm equipment is acquired during the taxable year
and it is not practicable to use such equipment for its specifically
assigned function in the taxpayer's business of farming until the
following year.
(iii) Equipment is acquired for a specifically assigned function and
is operational but is undergoing testing to eliminate any defects.
(iv) Reforestation expenditures (as defined in Sec. 1.194-3(c)) are
incurred during the taxable year in connection with qualified timber
property (as defined in Sec. 1.194-3(a)).
However, fruit-bearing trees and vines shall not be considered in a
condition or state of readiness and availability for a specifically
assigned function until they have reached an income-producing stage.
Moreover, materials and parts acquired to be used in the construction of
an item of equipment shall not be considered in a condition or state of
readiness and availability for a specifically assigned function.
(3) Notwithstanding subparagraph (1) of this paragraph, property
with respect to which an election is made under Sec. 1.48-4 to treat
the lessee as having purchased such property shall be considered placed
in service by the lessor in the taxable year in which possession is
transferred to such lessee.
(4)(i) The credit allowed by section 38 with respect to any property
shall be allowed only for the first taxable year in which such property
is placed in service by the taxpayer. The determination of whether
property is section 38 property in the hands of the taxpayer shall be
made with respect to such first taxable year. Thus, if a taxpayer places
property in service in a taxable year and such property does not qualify
as section 38 property (or only a portion of such property qualifies as
section 38 property) in such year, no credit (or a credit only as to the
portion which qualifies in such year) shall be allowed to the taxpayer
with respect to such property notwithstanding that such property (or a
greater portion of such property) qualifies as section 38 property in a
subsequent taxable year. For example, if a taxpayer places property in
service in 1963 and uses the property entirely for personal purposes in
such year, but in 1964 begins using the property in a trade or business,
no credit is allowable
[[Page 325]]
to the taxpayer under section 38 with respect to such property. See
Sec. 1.48-1 for the definition of section 38 property.
(ii) Notwithstanding subdivision (i) of this subparagraph, if, for
the first taxable year in which property is placed in service by the
taxpayer, the property qualifies as section 38 property but the basis of
the property does not reflect its full cost for the reason that the
total amount to be paid or incurred by the taxpayer for the property is
indeterminate, a credit shall be allowed to the taxpayer for such first
taxable year with respect to so much of the cost as is reflected in the
basis of the property as of the close of such year, and an additional
credit shall be allowed to the taxpayer for any subsequent taxable year
with respect to the additional cost paid or incurred during such year
and reflected in the basis of the property as of the close of such year.
The estimated useful life used in computing each additional credit with
respect to the property shall be the same as the estimated useful life
used in computing the credit for the first taxable year in which the
property was placed in service by the taxpayer. Assume, for example,
that in 1964 X Corporation, a utility company which makes its return on
the basis of a calendar year, enters into an agreement with Y
Corporation, a builder, to construct certain utility facilities for a
housing development built by Y. Assume further that part of the funds
for the construction of the utility facilities is advanced by Y under a
contract providing that X will repay the advances over a 10-year period
in accordance with an agreed formula, after which no further amounts
will be repayable by X even though the full amount advanced by Y has not
been repaid. Assuming that the utility facilities are placed in service
in 1964 and qualify as section 38 property, X is allowed a credit for
1964 with respect to its basis in the utility facilities at the close of
1964. For each succeeding taxable year X is allowed an additional credit
with respect to the increase in the basis of the utility facilities
resulting from the repayments to Y during such year.
(e) Estimated useful life--(1)(i) In general. With respect to assets
placed in service by the taxpayer during any taxable year, for the
purpose of computing qualified investment the estimated useful lives
assigned to all assets which fall within a particular guideline class
(within the meaning of Revenue Procedure 62-21) may be determined, at
the taxpayer's option, under either subparagraph (2) or (3) of this
paragraph. Thus, the taxpayer may assign estimated useful lives to all
the assets falling in one guideline class in accordance with
subparagraph (2) of this paragraph, and may assign estimated useful
lives to all the assets falling within another guideline class in
accordance with subparagraph (3) of this paragraph. See subparagraphs
(4) and (5) of this paragraph for determination of estimated useful
lives of assets not subject to subparagraph (2) or (3) of this
paragraph.
(ii) Except as provided in subparagraph (7), this paragraph shall
not apply to property described in section 50.
(2) Class life system. The taxpayer may assign to each asset falling
within a guideline class, which is placed in service during the taxable
year, the class life of the taxpayer for the guideline class for such
year as determined under section 4, part II of Revenue Procedure 62-21.
The preceding sentence may be applied to the assets falling within a
guideline class irrespective of whether the taxpayer uses single asset
accounts or multiple asset accounts in computing depreciation with
respect to such assets and irrespective of whether the taxpayer chooses
to have his depreciation allowance with respect to such assets examined
under the rules provided in Revenue Procedure 62-21.
(3) Individual useful life system. (i) The taxpayer may assign an
individual estimated useful life to each asset falling within a
guideline class which is placed in service during the taxable year. With
respect to the assets falling within the guideline class which are
placed in single asset accounts for purposes of computing depreciation,
the estimated useful life used for each asset for that purpose shall be
used in determining qualified investment. With respect to the assets
falling within the guideline class which are placed in multiple asset
accounts (including a guideline
[[Page 326]]
class account described in Revenue Procedure 62-21) for which a group,
classified, or composite rate is used in computing depreciation (or in
single asset accounts for which an average life rate is used), the
determination of estimated useful life for each asset in the account
shall be made individually on the best estimate obtainable on the basis
of all the facts and circumstances. The individual estimated useful
lives used for all the assets placed in a multiple asset account, when
viewed together, must be consistent with the group, classified, or
composite life used for the account for purposes of computing
depreciation.
(ii) In determining the individual estimated useful lives of assets
similar in kind contained in a multiple asset account (or in single
asset accounts for which an average life rate is used), the taxpayer may
(a) assign to each of such assets the average useful life of such assets
used for purposes of computing depreciation, or (b) assign separate
lives to such assets based on the estimated range of years taken into
consideration in establishing the average useful life. Thus, for
example, if a taxpayer places nine similar trucks with an average
estimated useful life of 7 years, based on an estimated range of 6 to 8
years (two trucks with a useful life of 6 years, five trucks with a
useful life of 7 years, and two trucks with a useful life of 8 years),
in a multiple asset account for which a group rate is used in computing
depreciation, he may either assign a useful life of 6 years to two of
the trucks, 7 years to five of the trucks, and 8 years to two of the
trucks, or he may assign the average useful life of the trucks (7 years)
to each of the nine trucks. Likewise, if a taxpayer places 100 similar
telephone poles with an average useful life of 28 years, based on an
estimated range of 3 to 40 years (two with a useful life of less than 4
years, three with a useful life of 4 to 6 years, four with a useful life
of 6 to 8 years, and 91 with a useful life of more than 8 years), in a
multiple asset account for which a group rate is used in computing
depreciation, he may either assign useful lives corresponding to the
estimated range of years of the poles (i.e., a useful life of less than
4 years to two of the poles, etc.), or he may assign the average useful
life of the poles (28 years) to each of the poles.
(iii) [Reserved]
(iv) For purposes of subdivision (ii) of this subparagraph, assets
(other than ``mass assets'') shall not be considered as ``similar in
kind'' in respect of other assets unless all such assets are
substantially of the same value, nor shall used section 38 property be
considered as ``similar in kind'' to new section 38 property.
(4) Useful life of property subject to amortization--(i) In general.
In the case of property with respect to which amortization in lieu of
depreciation is allowable, the term over which amortization deductions
are taken shall be considered as the estimated useful life of such
property.
(ii) Qualified timber property. In the case of qualified timber
property (within the meaning of section 194(c)(1)), the normal growing
period of such property shall be considered its estimated useful life.
(5) Useful life of property subject to certain methods of
depreciation. If a taxpayer is using a method of depreciation, such as
the unit of production or retirement method, which does not measure the
useful life of the property in terms of years, he must estimate such
useful life in years in order to compute his qualified investment.
(6) Record requirements. The taxpayer shall maintain sufficient
records to determine whether section 47 (relating to certain
dispositions, etc., of section 38 property) applies with respect to any
asset.
(7) Section 50 property. (i) The provisions of this subparagraph and
subparagraphs (4) and (6) of this paragraph shall apply to property
which is described in section 50.
(ii) The estimated useful life of property for purposes of computing
qualified investment shall be the useful life used or to be used by the
taxpayer in computing the allowance for depreciation with respect to
such property under section 167 for the taxable year in which the
property is placed in service. Thus, if property is placed in service by
a taxpayer in a taxable year but the period for depreciation with
respect to such property does not begin until a
[[Page 327]]
succeeding taxable year (see paragraph (d)(1) of this section), the
estimated useful life for purposes of computing qualified investment
must be the estimated useful life that the taxpayer uses in computing
the allowance for depreciation. See subdivision (iv) of this
subparagraph for rules for determining the estimated useful life of
property with respect to which the allowance for depreciation under
section 167 is computed under the unit of production method, the income-
forecast method, or any other method which does not measure the useful
life of the property in terms of years.
(iii)(a) The estimated useful life of any section 38 property to
which an election under section 167(m) applies shall be the asset
depreciation period selected for such property under Sec. 1.167(a)-
11(b)(4), whether or not such property constitutes mass assets (as
defined in Sec. 1.47-1(e)(4)).
(b) The estimated useful life of any section 38 property to which an
election under section 167(m) does not apply and which is placed in a
multiple asset account for which a group, classified, or composite rate
is used in computing depreciation (or in single asset accounts for which
an average life rate is used) shall be determined individually for each
asset on the best estimate obtainable on the basis of all the facts and
circumstances. The individual estimated useful life for each asset
placed in a multiple asset account (including a mass asset account) must
be the same as the useful life of such asset used in determining the
group, classified, or composite life for the account for purposes of
computing depreciation. The individual estimated useful lives of assets
similar in kind may be determined in accordance with subdivisions (ii)
and (iv) of subparagraph (3) of this paragraph. In the case of mass
assets, subdivision (iii) of subparagraph (3) of this paragraph shall
apply.
(f) Partnerships--(1) In general. In the case of a partnership, each
partner shall take into account separately, for his taxable year with or
within which the partnership taxable year ends, his share of the basis
of partnership new section 38 property and his share of the cost of
partnership used section 38 property placed in service by the
partnership during such partnership taxable year. Each partner shall be
treated as the taxpayer with respect to his share of the basis of
partnership new section 38 property and his share of the cost of
partnership used section 38 property. The estimated useful life to each
partner of such property shall be deemed to be the estimated useful life
of the property in the hands of the partnership. Partnership section 38
property shall not, by reason of each partner taking his share of the
basis or cost into account, lose its character as either new section 38
property or used section 38 property, as the case may be. For
computation of each partner's qualified investment for the energy credit
for a qualified intercity bus, see Sec. 1.48-9(q)(9)(iv).
(2) Determination of partner's share. (i) Each partner's share of
the basis (or cost) of any section 38 property shall be determined in
accordance with the ratio in which the partners divide the general
profits of the partnership (that is, the taxable income of the
partnership as described in section 702(a)(9)) regardless of whether the
partnership has a profit or a loss for its taxable year during which the
section 38 property is placed in service. However, if the ratio in which
the partners divide the general profits of the partnership changes
during the taxable year of the partnership, the ratio effective for the
date on which the property is placed in service shall apply.
(ii) Notwithstanding subdivision (i) of this subparagraph, if all
related items of income, gain, loss, and deduction with respect to any
item of partnership section 38 property are specially allocated in the
same manner and if such special allocation is recognized under section
704 (a) and (b) and paragraph (b) of Sec. 1.704-1, then each partner's
share of the basis of such item of new section 38 property or the cost
of such item of used section 38 property shall be determined by
reference to such special allocation effective for the date on which the
property is placed in service.
(iii) Notwithstanding subdivisions (i) and (ii) of this
subparagraph, if with respect to a partnership's taxable year the
conditions set forth in (a) through (c) of this subdivision are
satisfied with
[[Page 328]]
respect to a partner, then such partner shall not take into account the
basis (or cost) of any section 38 property placed in service by the
partnership during such taxable year. The conditions referred to in the
preceding sentence are:
(a) Such partner's interest in the general profits of the
partnership during the taxable year is 5 percent or less;
(b) Under the partnership agreement, such partner will retire from
the partnership during the taxable year or within 7 years after the end
of such year; and
(c) The partnership agreement provides that the basis (or cost) of
section 38 property placed in service by the partnership during the
taxable year shall not be taken into account by a partner described in
(a) and (b) of this subdivision.
Any basis (or cost) of section 38 property which is not taken into
account by a partner because of the provisions of this subdivision shall
be taken into account by the other partners in accordance with
subdivision (i) of this subparagraph.
(3) Examples. This paragraph may be illustrated by the following
examples:
Example 1. Partnership ABCD acquires and places in service on
January 1, 1962, an item of new section 38 property, and acquires and
places in service on September 1, 1962, another item of new section 38
property. The ABCD partnership and each of its partners reports income
on the basis of the calendar year. Partners A, B, C, and D share
partnership profits equally. Each partner's share of the basis of each
new partnership section 38 property is 25 percent.
Example 2. Assume the same facts as in Example 1 and the following
additional facts: A dies on June 30, 1962, and B purchases A's interest
as of such date. Each partner's share of the profits from January 1 to
June 30 is 25 percent. From July 1 to December 31, B's share of the
profits is 50 percent, and C and D's share of the profits is 25 percent
each. For A's last taxable year (January 1 to June 30, 1962), A shall
take into account 25 percent of the basis of the section 38 property
placed in service on January 1. B shall take into account 25 percent of
the basis of the section 38 property placed in service on January 1 and
50 percent of the basis of the section 38 property placed in service on
September 1, C and D shall each take into account 25 percent of the
basis of each new section 38 property placed in service by the
partnership in 1962.
Example 3. Partnership MR is engaged in the business of renting soda
fountain equipment and icemakers to restaurants. The partnership makes
no elections under Sec. 1.48-4 to treat its lessees as having purchased
such property. Under the terms of the partnership agreement, the income,
gain or loss on disposition, depreciation, and other deductions
attributable to the icemakers are specially allocated 70 percent to
partner M and 30 percent to partner R. In all other respects M and R
share profits and losses equally. If the special allocation with respect
to the icemakers is recognized under section 704 (a) and (b) and
paragraph (b) of Sec. 1.704-1, the basis (or cost) of the icemakers
which qualify as partnership section 38 property shall be taken into
account 70 percent by M and 30 percent by R. The basis (or cost) of
partnership section 38 property not subject to the special allocation
shall be taken into account equally by M and R.
Example 4. Assume the same facts as in Example 3 and the following
additional facts: During November 1962, the partnership, which reports
its income on the basis of a fiscal year ending May 31, acquires and
places in service two items which qualify as new section 38 property, an
icemaker and a soda fountain. The icemaker has an estimated useful life
of 8 years to the partnership and a basis of $1,000. The soda fountain
has an estimated useful life of 6 years to the partnership and a basis
of $600. Partner M also owns and operates a business as a sole
proprietorship and reports income on the calendar year basis. During
1963, M acquires and places in service in his sole proprietorship a
machine which qualifies as new section 38 property. This machine has an
estimated useful life of 4 years and a basis of $300. M owns no interest
in any other partnerships, electing small business corporations,
estates, or trusts. M's total qualified investment for 1963 is $1,000,
computed as follows:
----------------------------------------------------------------------------------------------------------------
Estimated M's share of Applicable Qualified
Property useful life Basis basis percentage investment
----------------------------------------------------------------------------------------------------------------
Partnership MR
Icemaker........................ 8 $1,000 $700 100 $700
Soda fountain................... 6 600 300 66\2/3\ 200
Sole proprietorship
Machine......................... 4 300 .............. 33\1/3\ 100
-------------------------------------------------------------------------------
Total....................................................................................... 1,000
----------------------------------------------------------------------------------------------------------------
[[Page 329]]
(g) Public utility property--(1) In general--(i) Scope of paragraph.
This paragraph only applies to property described in section 50. For
rules relating to public utility property not described in section 50,
see 26 CFR part 1, Sec. 1.46-3(g) (as revised April 1, 1977). This
paragraph does not reflect amendments to section 46(c) made after
enactment of the Revenue Act of 1971.
(ii) Amount of qualified investment. A taxpayer's qualified
investment in section 38 property that is public utility property is \4/
7\ of the amount otherwise determined under this section.
(2) Meaning and uses of certain terms. For purposes of this
paragraph--
(i) Public utility property. ``Public utility property'' is property
used by a taxpayer predominantly in a trade or business that is a public
utility activity and property that is nonregulated communication
property.
(ii) Public utility activity. A ``public utility activity'' is any
activity in which the goods or services described in section 46(c)(3)(B)
(i), (ii), or (iii) are furnished or sold at regulated rates. If
property is used by a taxpayer both in a public utility activity and in
another activity, the characterization of such property is based on the
predominant use of such property during the taxable year in which it is
placed in service.
(iii) Regulated rates. A taxpayer's rates are ``regulated'' if they
are established or approved on a rate-of-return basis. Rates regulated
on a rate-of-return basis are an authorization to collect revenues that
cover the taxpayer's cost of providing goods or services, including a
fair return on the taxpayer's investment in providing such goods or
services, where the taxpayer's costs and investment are determined by
use of a uniform system of accounts prescribed by the regulatory body. A
taxpayer's rates are not ``regulated'' if they are established or
approved on the basis of maintaining competition within an industry,
insuring adequate service to customers of an industry, or charging
``reasonable'' rates within an industry since the taxpayer is not
authorized to collect revenues based on the taxpayer's cost of providing
goods or services. Rates are considered to have been ``established or
approved'' if a schedule of rates is filed with a regulatory body that
has the power to approve such rates, even though the regulatory body
takes no action on the filed schedule or generally leaves undisturbed
rates filed by the taxpayer.
(iv) Nonregulated communication property. ``Nonregulated
communication property'' is property that is clearly the same type of
property (and is used by the taxpayer predominantly for the same type of
communication purposes) as communication property, but it is used by the
taxpayer predominantly in a trade or business that is not a public
utility activity. For purposes of this paragraph (g)(2)(iv), of this
section, communication property is property ordinarily used for
communication purposes by persons who provide regulated telephone or
microwave communication services described in section 46(c)(3)(B)(iii).
The determination of whether property is clearly of this same type and
is used predominantly for these same communication purposes as
communication property is made on the basis of the facts and
circumstances of each particular case, including the current state of
technology in the communications industry and the range and type of
services permitted or required to be provided by the regulated telephone
and microwave communication industry. As of 1978, wires or cables used
predominantly to distribute to subscribers the signals of one or more
television broadcast stations or cablecast stations (such as in a CATV
system) are not used for the same type of communication purposes as
communication property. Communication property includes microwave
transmission equipment, private communication equipment (other than land
mobile radio equipment for which the operator must obtain a license from
the Federal Communications Commission), private switchboard (PBX)
equipment, communications terminal equipment connected to telephone
networks, data transmission equipment, and communications satellites.
Communication property does not include (as of 1978) computer terminals
or facsimile reproduction equipment that is connected to telephone lines
to transmit data. It also does not include office furniture stands for
communication property,
[[Page 330]]
tools, repair vehicles, and similar property, even if such property is
exclusively used in providing regulated telephone or microwave
communication services.
(3) Leased property. Public utility property includes property which
is leased to others by a taxpayer where the leasing of such property is
part of the lessor's public utility activity. Thus, such leased property
is public utility property even though the lessee uses such property in
an activity which is not a public utility activity, and whether or not
the lessor of such property makes a valid election under Sec. 1.48-4 to
treat the lessee as having purchased such property for purposes of the
credit allowed by section 38. Property leased by a lessor, where the
leasing is not part of a public utility activity, to a lessee who uses
such property predominantly in a public utility activity is public
utility property for purposes of computing the lessor's or lessee's
qualified investment with respect to such property.
(4) Property used in both the production or transmission of gas and
the local distribution of gas. (i) With respect to properties of a
taxpayer engaged in both the production or transmission of gas and the
local distribution of gas, section 38 property shall be considered as
used predominantly in the trade or business of the furnishing or sale of
gas through a local distribution system if expenditures for such
property are chargeable to any of the following accounts under either
the uniform system of accounts prescribed for natural gas companies
(class A and class B) by the Federal Power Commission, effective January
1, 1961, or the uniform system of accounts for class A and B gas
utilities adopted in 1958 by the National Association of Railroad and
Utility Commissioners (or would be chargeable to any of the following
accounts if the taxpayer used either of such systems):
(a) Accounts 360 through 363, inclusive (Local Storage Plant), or
(b) Accounts 374 through 387, inclusive (Distribution Plant).
(ii) If expenditures for section 38 property are chargeable (or
would be chargeable) to any of the following accounts under either of
the systems named in subdivision (i) of this subparagraph, the
determination of whether or not such property is used predominantly in
the trade or business of the furnishing or sale of gas through a local
distribution system shall be made under all the facts and circumstances
relating to the actual use of such property in the year such property is
placed in service:
(a) Accounts 304 through 320, inclusive (Manufactured Gas Production
Plant), or
(b) Accounts 389 through 399, inclusive (General Plant).
For example, if an office machine is used 55 percent of the time for
billing customers of the taxpayer's local distribution system in the
year in which it is placed in service, such office machine shall be
considered as used predominantly in the trade or business of the
furnishing or sale of gas through a local distribution system.
(5) Certain submarine cable property. In the case of any interest in
a submarine cable circuit which is property described in section 50 used
to furnish telegraph service between the United States and a point
outside the United States of a taxpayer engaged in furnishing
international telegraph service (if the rates for such furnishing have
been established or approved by a governmental unit, agency,
instrumentality, commission, or similar body described in subparagraph
(2) of this paragraph), the qualified investment shall not exceed the
qualified investment attributable to so much of the interest of the
taxpayer in the circuit as does not exceed 50 percent of all interests
in the circuit.
(h) Certain replacement property. (1)(i) If section 38 property is
placed in service by the taxpayer to replace property (whether or not
section 38 property) similar or related in service or use, which was
destroyed or damaged before August 16, 1971, by fire, storm, shipwreck,
or other casualty, or was stolen before such date, then for purposes of
paragraph (a) of this section the basis (or cost) of the replacement
section 38 property otherwise determined under paragraph (c) of this
section shall be reduced by an amount equal to the lesser of--
[[Page 331]]
(a) The amount of money, or the fair market value of other property,
received as compensation, by insurance or otherwise, for the property
which was destroyed, damaged, or stolen, or
(b) The adjusted basis of such destroyed, damaged, or stolen
property (immediately before such destruction, damage, or theft).
(ii) For purposes of subdivision (i) of this subparagraph--
(a) Section 38 property placed in service after the due date
(including extensions of time thereof) for filing the taxpayer's income
tax return for the taxable year in which the other property was
destroyed, damaged, or stolen shall not be considered as replacement
section 38 property, and
(b) If the property which is destroyed, damaged, or stolen, is
leased property, no other leased property shall be considered as
replacement property with respect to the property destroyed, damaged, or
stolen, in any case in which the lessor makes or made an election under
section 48(d) (relating to election with respect to certain leased
property) with respect to either the property destroyed, damaged, or
stolen, the other leased property, or both.
(2) Subparagraph (1) of this paragraph shall not apply to
replacement property if the reduction, under such subparagraph (1), in
the basis (or cost) of such replacement property is less than the excess
of--
(i) The qualified investment with respect to the destroyed, damaged,
or stolen property, over
(ii) The recomputed qualified investment with respect to such
property (determined under the principles of paragraph (a) of Sec.
1.47-1).
(3) This paragraph may be illustrated by the following examples:
Example 1. (i) A acquired and placed in service on January 1, 1962,
machine No. 1, which qualified as section 38 property, with a basis of
$30,000 and an estimated useful life of 6 years. The amount of qualified
investment with respect to such machine was $20,000. On January 2, 1963,
machine No. 1 is completely destroyed by fire. On January 1, 1963, the
adjusted basis of such machine in A's hands is $24,500. On November 1,
1963, A receives $23,000 in insurance proceeds as compensation for the
destroyed machine, and on December 15, 1963, A acquires and places in
service machine No. 2, which qualifies as section 38 property, with a
basis of $41,000 and an estimated useful life of 6 years to replace
machine No. 1.
(ii) Under subparagraph (1) of this paragraph, the $41,000 basis of
machine No. 2 is reduced, for purposes of paragraph (a) of this section,
by $23,000 (that is, the $23,000 insurance proceeds since such amount is
less than the $24,500 adjusted basis of machine No. 1 immediately before
it was destroyed) to $18,000 since such reduction (that is, $23,000) is
greater than the $20,000 reduction in qualified investment which would
be made if paragraph (a) of Sec. 1.47-1 were to apply to machine No. 1
($20,000 qualified investment less zero recomputed qualified
investment).
Example 2. (i) The facts are the same as in Example 1 except that on
November 1, 1963, A receives only $19,000 in insurance proceeds as
compensation for the destroyed machine.
(ii) The $41,000 basis of machine No. 2 is not reduced, for purposes
of paragraph (a) of this section, under this paragraph since the $19,000
reduction which would have been made under this paragraph had it applied
(that is, the $19,000 insurance proceeds since such amount is less than
the $24,500 adjusted basis of machine No. 1 immediately before it was
destroyed) is less than the $20,000 reduction in qualified investment
which is made since paragraph (a) of Sec. 1.47-1 applies to machine No.
1 ($20,000 qualified investment less zero recomputed qualified
investment).
(Secs. 194 (94 Stat. 1989; 26 U.S.C. 194) and 7805 (68A Stat. 917, 26
U.S.C. 7805) of the Internal Revenue Code of 1954; secs. 38(b) (76 Stat.
963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat. 264, 26 U.S.C. 48(l)(16)),
and 7805 (68A Stat. 917, 26 U.S.C. 7805)
[T.D. 6731, 29 FR 6068, May 8, 1964, as amended by T.D. 6931, 32 FR
14026, Oct. 10, 1967; T.D. 7203, 37 FR 17125, Aug. 25, 1972; T.D. 7602,
44 FR 17667, Mar. 23, 1979; T.D. 7927, 48 FR 55849, Dec. 16, 1983; T.D.
7982, 49 FR 39541, Oct. 9, 1984; T.D. 8183, 53 FR 6618, Mar. 2, 1988;
T.D. 8474, 58 FR 25557, Apr. 27, 1993]
Sec. 1.46-4 Limitations with respect to certain persons.
(a) Mutual savings institutions. In the case of an organization to
which section 593 applies (that is, a mutual savings bank, a cooperative
bank, or a domestic building and loan association)--
(1) The qualified investment with respect to each section 38
property shall be 50 percent of the amount otherwise determined under
Sec. 1.46-3, and
(2) The $25,000 amount specified in section 46(a)(2), relating to
limitation based on amount of tax, shall be reduced by 50 percent of
such amount.
[[Page 332]]
For example, if a domestic building and loan association places in
service on January 1, 1963, new section 38 property with a basis of
$30,000 and an estimated useful life of 6 years, its qualified
investment for 1963 with respect to such property computed under Sec.
1.46-3 is $20,000 (66\2/3\ percent of $30,000). However, under this
paragraph such amount is reduced to $10,000 (50 percent of $20,000). If
an organization to which section 593 applies is a member of an
affiliated group (as defined in section 46(a)(5)), the $25,000 amount
specified in section 46(a)(2) shall be reduced in accordance with the
provisions of paragraph (f) of Sec. 1.46-1 before such amount is
further reduced under this paragraph.
(b) Regulated investment companies and real estate investment
trusts. (1) In the case of a regulated investment company or a real
estate investment trust subject to taxation under subchapter M, chapter
1 of the Code--
(i) The qualified investment with respect to each section 38
property otherwise determined under Sec. 1.46-3, and
(ii) The $25,000 amount specified in section 46(a)(2), relating to
limitation based on amount of tax,
shall be reduced to such person's ratable share of each such amount. If
a regulated investment company or a real estate investment trust is a
member of an affiliated group (as defined in section 46(a)(5)), the
$25,000 amount specified in section 46(a)(2) shall be reduced in
accordance with the provisions of paragraph (f) of Sec. 1.46-1 before
such amount is further reduced under this paragraph.
(2) A person's ratable share of the amount described in subparagraph
(1)(i) and the amount described in subparagraph (1)(ii) of this
paragraph shall be the ratio which--
(i) Taxable income for the taxable year, bears to
(ii) Taxable income for the taxable year plus the amount of the
deduction for dividends paid taken into account under section
852(b)(2)(D) in computing investment company taxable income, or under
section 857(b)(2)(B) (section 857(b)(2)(C), as then in effect, for
taxable years ending before October 5, 1976) in computing real estate
investment trust taxable income, as the case may be.
For purposes of the preceding sentence, taxable income means, in the
case of a regulated investment company its investment company taxable
income (within the meaning of section 852(b)(2)), and in the case of a
real estate investment trust its real estate investment trust taxable
income (within the meaning of section 857(b)(2)). In the case of a
taxable year ending after October 4, 1976, real estate investment trust
taxable income, for purposes of section 46(e) and this paragraph, is
determined by excluding any net capital gain, and by computing the
deduction for dividends paid without regard to capital gains dividends
(as defined in section 857(b)(3)(C)). The amount of the deduction for
dividends paid includes the amount of deficiency dividends (other than
capital gains deficiency dividends) taken into account in computing
investment company taxable income or real estate investment trust
taxable income for the taxable year. See section 860(f) for the
definition of deficiency dividends. For purposes of this paragraph only,
in computing taxable income for a taxable year beginning before January
1, 1964, a regulated investment company or a real estate investment
trust may compute depreciation deductions with respect to section 38
property placed in service before January 1, 1964, without regard to the
reduction in basis of such property required under Sec. 1.48-7.
(3) This paragraph may be illustrated by the following example:
Example. (i) Corporation X, a regulated investment company subject
to taxation under section 852 of the Code which makes its return on the
basis of the calendar year, places in service on January 1, 1964,
section 38 property with a basis of $30,000 and an estimated useful life
of 6 years. Corporation X's investment company taxable income under
section 852(b)(2) is $10,000 after taking into account a deduction for
dividends paid of $90,000.
(ii) Under this paragraph, corporation X's qualified investment for
the taxable year 1964 with respect to such property is $2,000, computed
as follows: (a) $20,000 (qualified investment under Sec. 1.46-3),
multiplied by (b) $10,000 (taxable income), divided by (c) $100,000
(taxable income plus the deduction for dividends paid). For 1964, the
$25,000 amount specified in section 46(a)(2) is reduced to $2,500.
[[Page 333]]
(c) Cooperatives. (1) In the case of a cooperative organization
described in section 1381(a)--
(i) The qualified investment with respect to each section 38
property otherwise determined under Sec. 1.46-3, and
(ii) The $25,000 amount specified in section 46(a)(2), relating to
limitation based on amount of tax,
shall be reduced to such cooperative's ratable share of each such
amount. If a cooperative organization described in section 1381(a) is a
member of an affiliated group (as defined in section 46(a)(5)), the
$25,000 amount specified in section 46(a)(2) shall be reduced in
accordance with the provisions of paragraph (f) of Sec. 1.46-1 before
such amount is further reduced under this paragraph.
(2) A cooperative's ratable share of the amount described in
subparagraph (1)(i) and the amount described in subparagraph (1)(ii) of
this paragraph shall be the ratio which--
(i) Taxable income for the taxable year, bears to
(ii) Taxable income for the taxable year plus the sum of (a) the
amount of the deductions allowed under section 1382(b), (b) the amount
of the deductions allowed under section 1382(c), and (c) amounts similar
to the amounts described in (a) and (b) of this subdivision the tax
treatment of which is determined without regard to subchapter T, chapter
1 of the Code and the regulations thereunder.
Amounts similar to deductions allowed under section 1382 (b) or (c) are,
for example, in the case of a taxable year of a cooperative organization
beginning before January 1, 1963, the amount of patronage dividends
which are excluded or deducted and any nonpatronage distributions which
are deducted under section 522(b)(1). In the case of a taxable year of a
cooperative organization beginning after December 31, 1962, such amounts
are the amount of patronage dividends and nonpatronage distributions
which are excluded or deducted without regard to section 1382 (b) or (c)
because they are paid with respect to patronage occurring before 1963.
For purposes of this paragraph only, in computing taxable income for a
taxable year beginning before January 1, 1964, a cooperative may compute
depreciation deductions with respect to section 38 property placed in
service before January 1, 1964, without regard to the reduction in basis
of such property required under Sec. 1.48-7.
(3) This paragraph may be illustrated by the following example:
Example. (i) Cooperative X, an organization described in section
1381(a) which makes its return on the basis of the calendar year, places
in service on January 1, 1964, section 38 property with a basis of
$30,000 and an estimated useful life of 6 years. Cooperative X's taxable
income is $10,000 after taking into account deductions of $20,000
allowed under section 1382(b), deductions of $60,000 allowed under
section 1382(c), and deductions of $10,000 allowed under section
522(b)(1)(B).
(ii) Under this paragraph, cooperative X's qualified investment for
the taxable year 1964 with respect to such property is $2,000, computed
as follows: (a) $20,000 (qualified investment under Sec. 1.46-3),
multiplied by (b) $10,000 (taxable income), divided by (c) $100,000
(taxable income plus the sum of the deductions allowed under sections
1382(b), 1382(c), and 522(b)(1)(B)). For 1964, the $25,000 amount
specified in section 46(a)(2) is reduced to $2,500.
(d) Noncorporate lessors. (1) In the case of a lease entered into
after September 22, 1971, a credit is allowed under section 38 to a
noncorporate lessor of property with respect to the leased property only
if--
(i) Such property has been manufactured or produced by the lessor in
the ordinary course of his business, or
(ii) The term of the lease (taking into account any options to
renew) is less than 50 percent of the estimated useful life of the
property (determined under Sec. 1.46-3(e)), and for the period
consisting of the first 12 months after the date on which the property
is transferred to the lessee the sum of the deductions with respect to
such property which are allowable to the lessor solely by reason of
section 162 (other than rents and reimbursed amounts with respect to
such property) exceeds 15 percent of the rental income produced by such
property.
In the case of property of which a partnership is the lessor, the credit
otherwise allowable under section 38 with respect to such property to
any partner which is a corporation shall be allowed notwithstanding the
first sentence of this subparagraph. For purposes of this
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subparagraph, an electing small business corporation (as defined in
section 1371) shall be treated as a person which is not a corporation.
This paragraph shall not apply to property used by the taxpayer in his
trade or business (other than the leasing of property) for a period of
at least 24 months preceding the day on which any lease of such property
is entered into.
(2) For purposes of subparagraph (1)(ii) of this paragraph, if at
the time the lessor files his income tax return for the taxable year in
which the property is placed in service, the lessor is unable to show
that the more-than-15-percent test has been satisfied, then no credit
may be claimed by the lessor on such return with respect to such
property unless (i) taking into account the lessor's obligations under
the lease it is reasonable to believe that the more-than-15-percent test
will be satisfied, and (ii) the lessor files a statement with his return
from which it may be determined that he expects to satisfy the more-
than-15-percent test. If the more-than-15-percent test is not satisfied
with respect to the property, the taxpayer must file an amended return
for the year in which the property is placed in service.
(3)(i) The more-than-15-percent test described in subparagraph
(1)(ii) of this paragraph is based on the relationship of the expenses
of the lessor relating to or attributable to the property to the gross
income from rents of the taxpayer produced by the property. The test is
applied with respect to such expenses and gross income as are properly
attributable to the period consisting of the first 12 months after the
date on which the property is transferred to the lessee. When more than
one property is subject to a single lease and, pursuant to subparagraph
(4) of this paragraph, the arrangement is considered to be a separate
lease of each property, the test is applied separately to each such
lease by making an apportionment of the payments received and expenses
incurred with respect to each such property, considering all relevant
factors. Such apportionment is made in accordance with any reasonable
method selected and consistently applied by the taxpayer. For example,
under subparagraph (4) of this paragraph, where a taxpayer leases an
airplane which he owns to an airline along with a baggage truck, he is
treated as having made two separate leases, one covering the airplane
and one covering the baggage truck. Thus, the test will be applied by
apportioning the related income and expenses between the two leases.
Similarly, where a taxpayer leases a factory building erected by him
containing section 38 property (machinery and equipment), the test will
be applied to the taxpayer as though he had leased (to the lessee) the
building and the section 38 property separately. Thus, the rental income
and expenses are apportioned between the building and the section 38
property.
(ii) Only those deductions allowable solely by reason of section 162
are taken into account in applying the more-than-15-percent test. Hence,
depreciation allowable by reason of section 167 (including amortization
allowable in lieu of depreciation); interest allowable by reason of
section 163; taxes allowable by reason of section 164; and depletion
allowable by reason of section 611 are examples of deductions which are
not taken into account in applying the test. Moreover, rents and
reimbursed amounts paid or payable by the lessor are not taken into
account notwithstanding that a deduction in respect of such rents or
reimbursed amounts is allowable solely by reason of section 162. For
purposes of this paragraph, a reimbursed amount is any expense for which
the lessee or some other party is obligated to reimburse the lessor.
Section 162 expenses paid or payable by any person other than the lessor
are not taken into account unless the lessor is obligated to reimburse
the person paying the expense. Further, if the lessee is obligated to
pay to the lessor a charge for services which is separately stated or
determinable, the expenses incurred by the lessor with respect to those
services are not taken into account.
(iii) For purposes of the more-than-15-percent test, the gross
income from rents of the lessor produced by the property is the total
amount which is payable to the lessor by reason of the lease agreement
other than reimbursements of section 162 expenses and
[[Page 335]]
charges for services which are separately stated or determinable. The
fact that such amount depends, in whole or in part, on the sales or
profits of the lessee or the performance of significant services by the
lessor shall not affect the characterization of such amounts as gross
income from rents for purposes of this paragraph. Gross income from
rents also includes any taxes imposed on the lessor by local law but
which are paid directly by the lessee on behalf of the lessor.
(4) For purposes of determining under this paragraph whether
property is subject to a lease, the provisions of Sec. 1.57-3(d)(1)
(relating to definition of a lease) shall apply. If a noncorporate
lessor enters into two or more successive leases with respect to the
same or substantially similar items of section 38 property, the terms of
such leases shall be aggregated and such leases shall be considered one
lease for the purpose of determining whether the term of such leases is
less than 50 percent of the estimated useful life of the property
subject to such leases. Thus, for example, if an individual owns an
airplane with an estimated useful life of 7 years and enters into three
successive 3-year leases of such airplane, such leases will be
considered to be one lease for a term of nine years for the purpose of
determining whether the term of the lease is less than 3\1/2\ years (50
percent of the 7-year estimated useful life).
(5) The requirements of this paragraph shall not apply with respect
to any property which is treated as section 38 property by reason of
section 48(a)(1)(E).
(Sec. 860(e) (92 Stat. 2849, 26 U.S.C. 860(e)); sec. 860(g) (92 Stat.
2850, 26 U.S.C. 860(g)); and sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 6731, 29 FR 6071, May 8, 1964, as amended by T.D. 6958, 33 FR
9170, June 21, 1968; T.D. 7203, 37 FR 17126, Aug. 25, 1972; T.D. 7767,
46 FR 11262, Feb. 6, 1981; T.D. 7936, 49 FR 2105, Jan. 18, 1984; T.D.
8031, 50 FR 26697, June 28, 1985]
Sec. 1.46-5 Qualified progress expenditures.
(a) Effective date. This section applies to taxable years ending
after December 31, 1974. This section reflects amendments to the
Internal Revenue Code made only by the Tax Reduction Act of 1975, the
Tax Reform Act of 1976, and the Revenue Act of 1978.
(b) General rule. Under section 46(d), a taxpayer may elect to take
the investment credit for qualified progress expenditures (as defined in
paragraph (g) of this section). In general, qualified progress
expenditures are amounts paid (paid or incurred in the case of self-
constructed property) for construction of progress expenditure property.
The taxpayer must reasonably estimate that the property will take at
least 2 years to construct and that the useful life of the property will
be 7 years or more. Qualified progress expenditures may not be taken
into account if made before the later of January 22, 1975, or the first
taxable year to which an election under section 46(d) applies. In
general, qualified progress expenditures are not allowed for the year
property is placed in service, nor for the first year or any subsequent
year recapture is required under section 47(a)(3). There is a percentage
limitation on qualified progress expenditures for taxable years
beginning before January 1, 1980. For a special rule relating to
transfers of progress expenditure property, see paragraph (r) of this
section.
(c) Reduction of qualified investment. Under section 46(c)(4), a
taxpayer must reduce qualified investment for the year property is
placed in service by qualified progress expenditures taken into account
by that person or a predecessor. A ``predecessor'' of a taxpayer is a
person whose election under section 46(d) carries over to the taxpayer
under paragraph (o)(3) of this section.
(d) Progress expenditure property. Progress expenditure property is
property constructed by or for the taxpayer, with a normal construction
period of 2 years or more. The taxpayer must reasonably believe that the
property will be new section 38 property with a useful life of 7 years
or more when placed in service. Whether property is progress expenditure
property is determined on the basis of facts know at the close of the
taxable year of the taxpayer in which construction begins (or, if later,
at the close of the first taxable year to which an election under
section 46(d) applies). For purposes of this paragraph (d), property is
[[Page 336]]
constructed by or for the taxpayer only if it is built or manufactured
from materials and component parts. Accordingly, progress expenditure
property does not include property such as orchards, vineyards,
livestock, or motion picture films or videotapes.
(e) Normal construction period--(1) In general. (i) The normal
construction period is the period the taxpayer reasonably expects will
be required to construct the property. The period begins on the date
physical work on construction of the property commences and ends on the
date the property is available to be placed in service. The normal
construction period does not include, however, construction before
January 22, 1975, nor construction before the first day of the first
taxable year for which an election under section 46(d) is in effect.
Physical work on construction of property does not include preliminary
activities such as planning, designing, preparing blueprints, exploring,
or securing financing.
(ii) The determination of the time when physical work on
construction commences is based on the facts and circumstances of each
case. Physical work on construction of property may include the physical
work done by a subcontractor on a component specifically designated as
part of the property. Also, the commencement of physical work on
construction may occur at a site different from the main site of
construction of the property. For example, if a shipyard orders a
turbine before it begins work on building a ship, the normal
construction period of the ship is measured from the time the
subcontractor commences physical work on construction of the turbine (if
it is normal for such work to precede the work of the main contractor).
(iii) Generally, physical work on construction does not include
physical activity that is not necessary to complete construction of the
property, nor does it include physical work on construction of a
building or other property that will not be new section 38 property when
placed in service. Physical work on construction also does not include
research and development activities in a laboratory or experimental
setting.
(iv) The normal construction period of property ends on the date it
is expected the property will be available to be placed in service.
Property is considered available to be placed in service when
construction is completed and the property is available for delivery to
the site of its assigned function. It is not necessary that property be
in a state of readiness for a specifically assigned function. Nor is it
necessary that it actually be delivered to the site of its assigned
function.
(2) Estimates. Taxpayers should refer to normal industry practice in
estimating the normal construction period of particular items. A
different period may be used if special circumstances exist making it
impractical to make the estimate on the basis of normal industry
practice. The estimate must be based on information available at the
close of the taxable year in which physical work on construction of the
property begins, or, if later, at the close of the first taxable year
for which an election under section 46(d) is in effect for the taxpayer.
If the estimate is reasonable when made, the actual time it takes to
complete the work is, in general, irrelevant in determining whether
property is progress expenditure property. However, if there is a
significant error in estimating the normal construction period, it may
be evidence that the estimate was unreasonable when made. For taxable
years ending after April 1, 1988, a taxpayer not relying or normal
industry practice to estimate the normal construction period of
particular property must attach to the tax return for the taxable year
in which physical work on construction of the property begins (or, if
later, the first taxable year for which an election under section 46(d)
is in effect) a statement of the basis relied upon in estimating the
normal construction period of the property.
(3) Integrated unit. (i) In determining whether property has a
normal construction period of 2 years or more, property that will be
placed in service separately is to be considered separately. For
example, if two ships are contracted for at the same time, each ship is
considered separately under this paragraph. However, for property that
[[Page 337]]
will be placed in service as an integrated unit, the taxpayer must
determine the normal construction period of the integrated unit. If the
normal construction period of the integrated unit is 2 years or more,
the normal construction period of each item of new section 38 property
that is a part of the integrated unit is considered to be 2 years or
more. Thus, the normal construction period of an integrated unit may be
2 years or more even if no part of the unit has a normal construction
period of 2 years or more.
(ii) Property is part of an integrated unit only if the operation of
that item is essential to the performance of the function to which the
unit is assigned. Property essential to the performance of the function
to which the unit is assigned includes property the use of which is
significantly connected to that function and which effects the safe,
proper, or efficient performance of the unit. Generally, property must
be placed in service at the same time to be considered part of the same
integrated unit. Properties are not an integrated unit, however, solely
because they are to be placed in service at the same time.
(iii) The normal construction period for an integrated unit begins
on the date the normal construction period of the first item of new
section 38 property that is part of the unit begins. It is not necessary
that physical work commence at the main construction site of the
integrated unit.
The period ends on the date the last item of new section 38 property
that is part of that unit is available to be placed in service. Property
that is not new section 38 property, such as a building, is not
considered part of an integrated unit for purposes of determining the
normal construction period of that unit. For example, if a manufacturing
plant has a normal construction period of two years or more but the
equipment (i.e., new section 38 property) to be installed in the plant
has a normal construction period of less than two years, the plant and
the equipment do not constitute an integrated unit with a construction
period of two years or more and the equipment is not progress
expenditure property.
(4) Examples. The following examples illustrate this paragraph (e).
Example 1. On July 1, 1974, corporation X begins physical work on
construction of a machine with an estimated useful life when placed in
service of more than 7 years. For its taxable year ending June 30, 1975,
X makes an election under section 46(d). For purposes of determining on
June 30, 1975, whether the machine is ``progress expenditure property'',
the normal construction period is treated as having begun on January 22,
1975. Thus, the machine will be considered to be progress expenditure
property on June 30, 1975, only if the estimated time required to
complete construction after June 30 is at least 18 months and 22 days
(i.e., 2 years less the period January 22, 1975, through June 30, 1975).
Example 2. (i) Corporation X constructs a pipeline in two sections
and simultaneously begins physical work on construction of each section
on January 1, 1976. One section extends from city M to city N. The other
extends from city N to city O. Oil will be transferred to storage tanks
at both city N and city O. Corporation X also begins construction on
January 1, 1976, of a pumping station necessary to the operation of the
pipeline from city M to city N. Construction of a pumping station
necessary to the operation of the pipeline from city N to city O begins
on June 30, 1977. For 1976, corporation X makes an election under
section 46(d).
(ii) The section of pipeline from city M to city N and the
associated pumping station will be available to be placed in service on
January 1, 1977. Construction of the section of the pipeline from city N
to city O will be completed on June 30, 1977. However, that section of
the pipeline will not be available to be placed in service until
completion of the associated pumping station on January 1, 1978.
(iii) The section of pipeline from city M to city N and the section
from city N to city O must be considered separately in determining the
normal construction period of the property. Each section will be placed
in service separately. However, each section of the pipeline and the
associated pumping station may be considered an integrated unit. The
pumping stations are essential to the operation of each section of
pipeline. Each section of pipeline and the associated pumping station
are placed in service at the same time.
(iv) The section of pipeline from city M to city N and the
associated pumping station are not progress expenditure property,
because the normal construction period of that unit is only 1 year
(January 1, 1976 to January 1, 1977).
(v) The section of pipeline from city N to city O and the associated
pumping station are progress expenditure property, because
[[Page 338]]
the normal construction of that integrated unit is 2 years (January 1,
1976 to January 1, 1978). It is immaterial that neither the construction
period of that section of pipeline (January 1, 1976 to June 30, 1977)
nor the construction period of the associated pumping station (June 30,
1977 to January 1, 1978) is 2 years.
(vi) Assume the pumping station associated with the pipeline from
city N to city O includes backup pumping equipment that will be used
only if the primary pumping equipment fails. The backup equipment is
part of the integrated unit because it serves to effect the safe or
efficient performance of the unit.
(f) New section 38 property with a 7-year useful life--(1) In
general. The taxpayer must determine if property will be new section 38
property with a useful life of 7 years or more when placed in service.
The determination must be made at the close of the taxable year in which
construction begins or, if later, at the close of the first taxable year
to which an election under section 46(d) applies for the taxpayer.
(2) Determination based on reasonably expected use. The
determination of whether property will be ``new section 38 property''
(within the meaning of Sec. Sec. 1.48-1 and 1.48-2 when placed in
service must be based on the reasonably expected use of the property by
the taxpayer. There is a presumption that property will be new section
38 property if it would be new section 38 property if placed in service
by the taxpayer when the determination is made. For example, in
determining if property is an integral part of manufacturing under
section 48(a)(1)(B)(i), it will be presumed that property will be new
section 38 property if the taxpayer is engaged in manufacturing when the
determination is made. Also, significant steps taken to establish a
trade or business will be evidence the taxpayer will be engaged in that
trade or business when the property is placed in service.
(3) Estimated useful life. The determination of whether property
will have an estimated useful life of 7 years or more when placed in
service must be made by applying the principles of Sec. 1.46-3(e). If
the estimated useful life is less than 7 years when the property is
actually placed in service, the credit previously allowed under section
46(d) must be recomputed under section 47(a)(3)(B).
(g) Definition of qualified progress expenditures--(1) In general. A
taxpayer's qualified progress expenditures are the sum of qualified
progress expenditures for self-constructed property (determined under
paragraph (h) of this section), plus qualified progress expenditures for
non-self-constructed property (determined under paragraph (j) of this
section). Only amounts includible under Sec. 1.46-3(c) in the basis of
new section 38 property may be considered as qualified progress
expenditures.
(2) Excluded amounts. Qualified progress expenditures do not
include:
(i) In the case of non-self-constructed property, amounts incurred
(whether or not paid)--
(A) Before the normal construction period begins, or
(B) Before the later of January 22, 1975, or the first day of the
first taxable year for which an election under section 46(d) applies for
the taxpayer;
(ii) In the case of self-constructed property, amounts chargeable to
capital account--
(A) Before the normal construction period begins, or
(B) Before the later of January 22, 1975, or the first day of the
first taxable year for which an election under section 46(d) applies for
the taxpayer,
(See, however, section 46(d)(4)(A) and paragraph (h)(3)(i) of this
section, relating to the time when amounts for component parts and
materials are properly chargeable to capital account);
(iii) Expenditures with respect to particular property in the
earlier of--
(A) The taxable year in which the property is placed in service, or
(B) The taxable year in which the taxpayer must recapture investment
credit under section 47(a)(3) for the property or any subsequent year;
(iv) Expenditures for construction, reconstruction, or erection of
property that is not section 38 property; or
(v) Amounts treated as an expense and deducted in the year paid or
accrued.
(h) Qualified progress expenditures for self-constructed property--
(1) In general. Qualified progress expenditures for self-constructed
property (as defined in
[[Page 339]]
paragraph (k) of this section) are amounts properly chargeable to
capital account in connection with that property. In general, amounts
paid or incurred are chargeable to capital account if under the
taxpayer's method of accounting they are properly includible in
computing basis under Sec. 1.46-3. Qualified progress expenditures for
self-constructed property include both direct costs (e.g., labor,
material, parts) and indirect costs (e.g., overhead, insurance)
associated with construction of property to the extent those costs are
properly chargeable to capital account.
(2) Property partially non-self constructed. If an item of property
is self-constructed because more than half of the construction
expenditures are made directly by the taxpayer, then any expenditures
(whether or not made directly by the taxpayer) for construction of that
item of property are not subject to the limitations of section
46(d)(3)(B) and paragraph (j) of this section (relating to actual
payment and progress in construction).
(3) Time when amounts paid or incurred are properly chargeable to
capital account. (i) In general, expenditures for component parts and
materials to be used in construction of self-constructed property are
not properly chargeable to capital account until consumed or physically
attached in the construction process. Component parts and materials that
have been neither consumed nor physically attached in the construction
process, but which have been irrevocably allocated to construction of
that property are properly chargeable to capital account. Component
parts and materials designed specifically for the self-constructed
property may be considered irrevocably allocated to construction of that
property at the time of manufacture of the component parts and
materials. Component parts and materials not designed specifically for
the property may be considered irrevocably allocated to construction at
the time of delivery to the construction site if they would be
economically impractical to remove. For example, pumps delivered to
sites of construction of a tundra pipeline may be treated as irrevocably
allocated to that pipeline on the date of delivery, even if they would
be usable, but for their location on the tundra, in connection with
other property. Component parts and materials are not to be considered
irrevocably allocated to use in self-constructed property until physical
work on construction of that property has begun (as determined under
paragraph (e)(1)(ii) of this section). Mere bookkeeping notations are
not sufficient evidence that the necessary allocation has been made.
(ii) A taxpayer's procedure for determining the time when an
expenditure is properly chargeable to capital account for self-
constructed property is a method of accounting. Under section 446(e),
the method of accounting, once adopted, may not be changed without
consent of the Secretary.
(4) Records requirement. The taxpayer shall maintain detailed
records which permit specific identification of the amounts properly
chargeable by the taxpayer during each taxable year to capital account
for each item of self-constructed property.
(i) [Reserved]
(j) Qualified progress expenditures for non-self-constructed
property--(1) In general. Qualified progress expenditures for non-self-
constructed property (as defined in paragraph (l) of this section) are
amounts actually paid by the taxpayer to another person for construction
of the property, but only to the extent progress is made in
construction. For example, such expenditures may include payments to the
manufacturer of an item of progress expenditure property, payments to a
contractor building progress expenditure property, or payments for
engineering designs or blueprints that are drawn up during the normal
construction period.
(2) Property partially self-constructed. If an item of property is
non-self-constructed, but a taxpayer uses its own employees to construct
a portion of the property, expenditures for construction of that portion
are made directly by the taxpayer (see Sec. 1.46-5(h)(1)). Subject to
the limitations of paragraph (g) of this section, those expenditures are
qualified progress expenditures for non-self-constructed property if
they satisfy the requirements of paragraphs (j) (4), (5), and (6) of
this section. Wages
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actually paid to the taxpayer's employees are presumed to correspond to
progress in construction. Other amounts, including expenditures for
materials, parts, and overhead, must be actually paid, not borrowed from
the payee, and attributable to progress made in construction by the
taxpayer.
(3) Property constructed by more than one person. The percentage of
completion limitation (as prescribed in paragraph (j)(6) of this
section), including the presumption of ratable progress in construction,
applies to an item of progress expenditure property as a whole. However,
if several manufacturers or contractors do work in connection with the
same property, the progress that each person makes toward completion of
construction of the property must be determined separately. Section
46(d)(3)(B) is then applied separately to amounts paid to each
manufacturer or contractor based on each person's progress in
construction. For example, assume the taxpayer contracts with three
persons to build an item of equipment. The taxpayer contracts with A to
build the frame, B to build the motor, and C to assemble the frame and
motor. Assume each contract represents 33\1/3\ percent of the
construction costs of the property. If, within the taxable year in which
construction begins, A and B each complete 50 percent of the
construction of the frame and motor, respectively, amounts paid to A
during that taxable year not in excess of 16\2/3\ percent of the overall
cost of the property, and amounts paid to B during that taxable year not
in excess of 16\2/3\ percent of the overall cost of the property, are
qualified progress expenditures. Section 46(d)(3)(B) does not apply,
however, to persons, such as lower-tier subcontractors, that do not have
a direct contractual relationship with the taxpayer. If, in the above
example, A engages a subcontractor to construct part of the frame,
section 46(d)(3)(B) is applied only to amounts paid by the taxpayer to
A, B, and C, but the portion of construction completed by A during a
taxable year includes the portion completed by A's subcontractor.
(4) Requirement of actual payment. Qualified progress expenditures
for non-self-constructed property must be actually paid and not merely
incurred. Amounts paid during the taxable year to another person for
construction of non-self-constructed property may be in the form of
money or property (e.g., materials). However, property given as payment
may be considered only to the extent it will be includible under Sec.
1.46-3(c) in the basis of the non-self-constructed property when it is
placed in service.
(5) Certain borrowing disregarded. Qualified progress expenditures
for non-self-constructed property do not include any amount paid to
another person (the ``payee'') for construction if the amount is paid
out of funds borrowed directly or indirectly from the payee. Amounts
borrowed directly or indirectly from the payee by any person that is
related to the taxpayer (within the meaning of section 267) or that is a
member of the same controlled group of corporations (as defined in
section 1563(a)) will be considered borrowed indirectly from the payee.
Similarly, amounts borrowed under any financing arrangement that has the
effect of making the payee a surety will be considered amounts borrowed
indirectly by the taxpayer from the payee.
(6) Percentage of completion limitation. (i) Under section
46(d)(3)(B)(ii), payments made in any taxable year may be considered
qualified progress expenditures for non-self-constructed property only
to the extent they are attributable to progress made in construction
(percentage of completion limitation). Progress will generally be
measured in terms of the manufacturer's incurred cost, as a fraction of
the anticipated cost (as adjusted from year to year). Architectural or
engineering estimates will be evidence of progress made in construction.
Cost accounting records also will be evidence of progress. Progress will
be presumed to occur not more rapidly than ratably over the normal
construction period. However, the taxpayer may rebut the presumption by
clear and convincing evidence of a greater percentage of completion.
(ii) If, after the first year of construction, there is a change in
either the total cost to the taxpayer or the total cost of construction
by another person,
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the taxpayer must recompute the percentage of completion limitation on
the basis of revised cost. However, the recomputation will affect only
amounts allowed as qualified progress expenditures in the taxable year
in which the change occurs and in subsequent taxable years. The
recomputation remains subject to the presumption of pro rata completion.
(iii) If, for any taxable year, the amount paid to another person
for construction of an item of property under section 46(d)(3)(B)(i)
exceeds the percentage of completion limitation in section
46(d)(3)(B)(ii), the excess is treated as an amount paid to the other
person for construction for the succeeding taxable year. If for any
taxable year the percentage of completion limitation for an item of
property exceeds the amount paid to another during the taxable year for
construction, the excess is added to the percentage of completion
limitation for that property for the succeeding taxable year.
(iv) The taxpayer must maintain detailed records which permit
specific identification of the amounts paid to each person for
construction of each item of property and the percentage of construction
completed by each person for each taxable year.
(7) Example. The following example illustrates paragraph (j)(6) of
this section.
Example. (i) Corporation X agrees to build an airplane for
corporation Y, a calendar year taxpayer. The airplane is non-self-
constructed progress expenditure property. Physical work on construction
begins on January 1, 1980. The normal construction period for the
airplane is five years and the airplane is delivered and placed in
service on December 31, 1984.
(ii) The cost of construction to corporation X is $500,000. The
contract price is $550,000. Corporation Y makes a $110,000 payment in
each of the years 1980 and 1981, an $85,000 payment in 1982, a $135,000
payment in 1983, and a $110,000 payment in 1984.
(iii) For 1980, corporation Y makes an election under section 46(d).
Progress is presumed to occur ratably over the 5-year construction
period, which is 20 percent in each year. Twenty percent of the contract
price is $110,000. The percentage of completion limitation for each
year, thus, is $110,000.
(iv) For each of the years 1980 and 1981, the $110,000 payments may
be treated as qualified progress expenditures. The payments equal the
percentage of completion limitation.
(v) For 1982, the $85,000 payment may be treated as a qualified
progress expenditure, because it is less than the percentage of
completion limitation. The excess of the percentage of completion
limitation ($110,000) over the 1982 payment ($85,000) is added to the
percentage of completion limitation for 1983. One hundred and ten
thousand dollars minus $85,000 equals $25,000. Twenty-five thousand
dollars plus $110,000 equals $135,000, which is the percentage of
completion limitation for 1983.
(vi) For 1983, the entire $135,000 payment may be treated as a
qualified progress expenditure. The payment equals the percentage of
completion limitation for 1983.
(vii) For 1984, no qualified progress expenditures may be taken into
account, because the airplane is placed in service in that year.
(viii) See example 2 of paragraph (r)(4) of this section for the
result if Y sells its contract rights to the property on December 31,
1982.
(k) Definition of self-constructed property--(1) In general.
Property is self-constructed property if it is reasonable to believe
that more than half of the construction expenditures for the property
will be made directly by the taxpayer. Construction expenditures made
directly by the taxpayer include direct costs such as wages and
materials and indirect costs such as overhead attributable to
construction of the property. Expenditures for direct and indirect costs
of construction will be treated as construction expenditures made
directly by the taxpayer only to the extent that the expenditures
directly benefit the construction of the property by employees of the
taxpayer. Thus, wages paid to taxpayers's employees and expenditures for
basic construction materials, such as sheet metal, lumber, glass, and
nails, which are used by employees of the taxpayer to construct progress
expenditure property, will be considered made directly by the taxpayer.
Construction expenditures made by the taxpayer to a contractor or
manufacturer, in general, will not be considered made directly by the
taxpayer. Thus, the cost of component parts, such as boilers and
turbines, which are purchased and merely installed or assembled by the
taxpayer, will not be considered expenditures made directly by the
taxpayer for construction. (See paragraph (h)(3) of this section to
determine when such cost is
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properly chargeable to capital account.)
(2) Time when determination made. The determination of whether
property is self-constructed is to be made at the close of the taxable
year in which physical work on construction of the property begins, or,
if later, the close of the first taxable year to which an election under
this section applies. Once it is reasonably estimated that more than
half of construction expenditures will be made directly by the taxpayer,
the fact the taxpayer actually makes half, or less than half, of the
expenditures directly will not affect classification of the property as
self-constructed property. Similarly, once a determination has been
made, classification of property as self-constructed property is not
affected by a change in circumstances in a later taxable year. However,
a significant error unrelated to a change in circumstances may be
evidence that the estimate was unreasonable when made.
(3) Determination based on certain expenditures. For purposes of
determining whether more than half of the expenditures for construction
of an item of property will be made directly by the taxpayer, the
taxpayer may take into account only expenditures properly includable by
the taxpayer in the basis of the property under the provisions of Sec.
1.46-3(c). Thus, property is self-constructed property only if more than
half of the estimated basis of the property to be used for purposes of
determining the credit allowed by section 38 is attributable to
expenditures made directly by the taxpayer.
(l) Definition of non-self-constructed property. Non-self-
constructed property is property that is not self-constructed property.
Thus, property is non-self-constructed property if it is reasonable to
believe that only half, or less than half, of the expenditures for
construction will be made directly by the taxpayer.
(m) Alternative limitations for public utility, railroad, or airline
property. The alternative limitations on qualified investment under
section 46(a) (7) and (8) for public utility, railroad, or airline
property (whichever applies) apply in determining the credit for
qualified progress expenditures. The determination of whether progress
expenditure property will be public utility, railroad, or airline
property (whichever applies) when placed in service must be made at the
close of the taxable year in which physical work on construction begins
or, if later, at the close of the first taxable year for which an
election under section 46(d) is in effect. If, at that time, the
taxpayer is in a trade or business as a public utility, railroad, or
airline (as described in section 46(c)(3)(B) and 46(a)(8) (D) and (E),
respectively), it is evidence the property will be public utility,
railroad, or airline property when placed in service.
(n) Leased property. A lessor of progress expenditure property may
not elect under section 48(d) to treat a lessee (or a person who will be
a lessee) as having made qualified progress expenditures.
(o) Election--(1) In general. The election under section 46(d)(6) to
increase qualified investment by qualified progress expenditures may be
made for any taxable year ending after December 31, 1974. Except as
provided in paragraph (o)(2) of this section, the election is effective
for the first taxable year for which it is made and for all taxable
years thereafter unless it is revoked with the consent of the
Commissioner. Except as provided in paragraphs (o) (2) and (3) of this
section, the election applies to all qualified progress expenditures
made by the taypayer during the taxable year for construction of any
progress expenditure property. Thus, the taxpayer may not make the
election for one item of progress expenditure property and not for other
items. If progress expenditure property is being constructed by or for a
partnership, S corporation (as defined in section 1361(a)), trust, or
estate, an election under section 46(d)(6) must be made separately by
each partner or shareholder, or each beneficiary if the beneficiary, in
determining his tax liability, would be allowed investment credit under
section 38 for property subject to the election. The election may not be
made by a partnership or S corporation, and may be made by a trust or
estate only if the trust or estate, in determining its tax liability,
would be allowed investment credit under section 38 for property subject
to
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the election. The election of any partner, shareholder, beneficiary,
trust, or estate will be effective for that person, even if a related
partner, shareholder, beneficiary, trust, or estate does not make the
election. An election made by a partner, shareholder, beneficiary,
trust, or estate applies to all progress expenditure property of that
person. For example, an election made by corporation X, which is a
partner in the XYZ partnership, applies to progress expenditure property
the corporation holds in its own capacity and also to its interest in
progress expenditure property of the partnership.
(2) Time and manner of making election. An election under section
46(d)(6) must be made on Form 3468 and filed with the original income
tax return for the first taxable year ending after December 31, 1974 to
which the election will apply. An election made before March 2, 1988, by
filing a written statement (whether or not attached to the income tax
return) will be considered valid. The election may not be made on an
amended return filed after the time prescribed for filing the original
return (including extensions) for that taxable year. However, an
election under this section may be made or revoked by filing a statement
with an amended return filed on or before May 31, 1988, if the due date
for filing a return for the first taxable year to which the election
applies is before May 31, 1988.
(3) Carryover of election in certain transactions. In general, and
election under section 46(d)(6) does not carry over to the transferee of
progress expenditure property (or an interest therein). However, if
under section 47(b) the property does not cease to be progress
expenditure property because of the transfer, the election will carry
over to the transferee. If so, the election will apply only to the
property transferred. For rules relating to the determination of
qualified progress expenditures of the transferee, see paragraph (r) of
this section.
(p) Partnerships, S corporations, trusts, or estates--(1) In
general. Each partner, shareholder, trust, estate, or beneficiary of a
trust or estate that makes an election under section 46(d) shall take
into account its share of qualified progress expenditures (determined
under paragraph (p)(2) of this section) made by the partnership, S
corporation, trust, or estate. In determining qualified investment for
the year in which the property is placed in service, the basis of the
property is apportioned as provided in Sec. Sec. 1.46-3(f), 1.48-6, or
1.48-5 (whichever applies). Each partner, shareholder, trust, estate, or
beneficiary that made the election must reduce qualified investment
under section 46(c)(4) for the year the property is placed in service by
qualified progress expenditures taken into account by that person.
(2) Determination of share of qualified progress expenditures. The
share of qualified progress expenditures of each partner, shareholder,
trust, estate, or beneficiary that makes an election under section 46(d)
must be determined in accordance with the same ratio used under
Sec. Sec. 1.46-3(f)(2), 1.48-5(a)(1), or 1.48-6(a)(1) (whichever
applies) to determine its share of basis (or cost). The last sentence of
Sec. 1.46-3(f)(2)(i) must be applied by referring to the date on which
qualified progress expenditures are paid or chargeable to capital amount
(whichever is applicable).
(3) Examples. The following examples illustrate this paragraph (p).
Example 1. (i) Corporation X contracts to build a ship for
partnership AB that qualifies as progress expenditure property. The
contract price is $100,000. Physical work on construction of the ship
begins on January 1, 1980. The ship is placed in service on December 31,
1983.
(ii) The AB partnership reports income on the calendar year basis.
Partners A and B share profits equally. For A's taxable year ending
December 31, 1980, A makes an election under section 46(d) B does not
make the election.
(iii) For each of the years 1980, 1981, 1982, and 1983, the AB
partnership makes $25,000 payments to corporation X. The payments made
in 1980, 1981, and 1982 are qualified progress expenditures. The 1983
payment is not a qualified progress expenditure, because the ship is
placed in service in that year.
(iv) For each of the years 1980, 1981, and 1982, A may take into
account qualified progress expenditures of $12,500 because A had a 50
percent partnership interest in each of those years.
(v) For 1983, qualified investment for the ship is $100,000. A and
B's share are $50,000 each, because each had a 50 percent partnership
interest in 1983. However, A must reduce its $50,000 share for 1983 by
$37,500, the
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amount of qualified progress expenditures taken into account by A. B's
share is not reduced, because B did not take into account qualified
progess expenditures.
Example 2. (i) The facts are the same as in example 1 except that on
June 30, 1983, the partnership agreement is amended to admit a new
partner, C. The partners agree to share profits equally. There is no
special allocation in effect under section 704 with respect to the ship.
(ii) For each of the years 1980, 1981, and 1982, A may take into
account qualified progress expenditures of $12,500 because A has a 50
percent partnership interest in those years.
(iii) For 1983, A, B, and C's share of qualified investment is
$33,333 each, because each had a 33\1/3\ percent partnership interest in
that year. A must reduce its share to zero, because it took $37,500 into
account as qualified progress expenditures. In addition, the excess of
the $37,500 over the $33,333 applied as a reduction is subject to
recapture under section 47(a)(3)(B). B and C's shares are not reduced,
because neither taxpayer took into account qualified progress
expenditures.
(q) Limitation on qualified progress expenditures for taxable years
beginning before 1980--(1) In general. (i) Under section 46(d)(7),
qualified progress expenditures for any taxable year beginning before
January 1, 1980, are limited. The taxpayer must apply the limitation
under section 46(d)(7) on an item by item basis. In general, the
taxpayer may take into account the applicable percentage (as determined
under the table in section 46(d)(7)(A)) of qualified progress
expenditures for each of those years. In addition, the taxpayer may take
into account for each of those years 20 percent of qualified investment
for each of the preceding taxable years determined without applying the
limitations of section 46(d)(7).
(ii) The applicable percentage under section 46(d)(7)(A) may be
applied only for one taxable year that ends within a calendar year in
determining qualified investment for an item of progress expenditure
property. For example, calendar year partners of a calendar year
partnership may increase qualified investment for 1976 by 20 percent of
qualified progress expenditures made in 1975 for an item of property. If
the partnership incorporates in 1976 and the taxable year of the
corporation begins on July 1, 1976, and ends on June 30, 1977, qualified
investment of the corporation for its taxable year beginning on July 1,
1976, cannot be increased by 20 percent of the 1975 expenditure.
(2) Example. The following example illustrates this paragraph (q).
Example. (i) Corporation X contracts with A on January 1, 1976, to
build an electric generator that qualifies as non-self-constructed
progress expenditure property. A will build the generator at a cost of
$125,000. Corporation X agrees to pay A $150,000. Corporation X reports
income on the calendar year basis. Corporation X makes an election under
section 46(d) for 1976. Physical work on construction begins on January
1, 1976. Corporation X makes payments of $30,000 to A for construction
of the generator in each of the years 1976, 1977, 1978, 1979, and 1980.
A incurs a cost of $25,000 in each of those years for construction of
the property. The property is placed in service in 1980.
(ii) For 1976, X may increase qualified investment by $12,000, 40
percent of the payment made in 1976.
(iii) For 1977, corporation X may increase qualified investment by
$24,000. Eighteen thousand dollars of that amount is 60 percent of the
1977 payment. The remaining $6,000 is 20 percent of the $30,000 payment
made in 1976.
(iv) For 1978, corporation X may increase qualified investment by
$36,000. Twenty-four thousand dollars of that amount is 80 percent of
the 1978 payment. The remaining $12,000 is 20 percent of the $30,000
payment made in 1976, plus 20 percent of the $30,000 payment made in
1977.
(v) For 1979, corporation X may increase qualified investment by
$48,000. Thirty thousand dollars of that amount is 100 percent of the
1979 payment. The remaining $18,000 of that amount is 20 percent of the
$30,000 payments made in each of the years 1976, 1977, and 1978.
(vi) Qualified investment for corporation X for 1980 is $30,000. The
$30,000 is the basis (or cost) of the generator ($150,000), reduced by
qualified progress expenditures allowed with respect to that property
($120,000).
(r) Special rules for transferred property--(1) In general. A
transferee of progress expenditure property (or an interest therein) may
take into account qualified progress expenditures for the property only
if--
(i) The property is progress expenditure property in the hands of
the transferee, and
(ii) The transferee makes an election under section 46(d) or the
election made by the transferor (or its predecessor) carries over to the
transferee under paragraph (o)(3) of this section.
[[Page 345]]
(2) Status as progress expenditure property. (i) If the transfer
requires recapture under section 47(a)(3) and Sec. 1.47-1(g) (or would
require recapture if the transferor had made an election under section
46(d)), then--
(A) For purposes of determining if the property is progress
expenditure property in the hands of the transferee, the normal
construction period for the property begins on the date of the transfer,
or, if later, on the first day of the first taxable year for which the
transferee makes an election under section 46(d), and
(B) For purposes of determining whether the property is self-
constructed or non-self-constructed in the hands of the transferee, the
amount paid or incurred for the transfer of the property will not be
considered a construction expenditure made directly by the transferee.
(ii) If the transfer does not require recapture under section
47(a)(3) and Sec. 1.47-1(g), and the election carries over to the
taxpayer under paragraph (o)(3) of this section, the property does not
lose its status as progress expenditure property because of the
transfer.
(3) Amount of qualified progress expenditures for transferee. (i) If
the transfer does not require recapture under section 47(a)(3) and Sec.
147-1(g), and the election carries over to the taxpayer under paragraph
(o)(3) of this section, the transferee must determine its qualified
progress expenditures--
(A) By using the same normal construction period used by the
transferor,
(B) By treating the property as having the same status as self-
constructed or non-self-constructed as the property had in the hands of
the transferor, and
(C) In the case of non-self-constructed property, by taking into
account any excess described in section 46(d)(4)(C)(i) (relating to the
excess of payments over the percentage-of-completion limitation) or
section 46(d)(4)(C)(ii) (relating to the excess of the percentage-of-
completion limitation over the amount of payments) that the transferor
would have taken into account with respect to that property.
(ii) If the transfer requires recapture under section 47(a)(3) and
Sec. 1.47-1(g) (or would require recapture if the transferor had made
an election under section 46(d)), the amount paid or incurred for the
transfer will be considered a payment for construction of that property
to the extent that--
(A) It is properly includible in the basis of the property under
Sec. 1.46-3(c),
(B) The taxpayer can show the amount is attributable to construction
costs paid or chargeable to capital account by the transferor or other
person after physical work on construction of the property began, and
(C) It does not exceed the amount by which the transferor has
increased qualified investment for qualified progress expenditures
incurred with respect to the property (or would have increased qualified
investment but for the ``lesser of'' limitation of section 46(d)(3)(B)
or the absence of an election under section 46(d)), plus any amount that
would have been treated as a qualified progress expenditure by the
transferor had the property not been transferred.
Once the status of the property as self-constructed or non-self-
constructed property in the hands of the transferee has been determined,
all rules under this section for determining the amount of qualified
progress expenditures for that type of property apply. For example, if
the property is non-self-constructed in the hands of the transferee,
amounts merely incurred (but not paid) for the transfer are not taken
into account as qualified progress expenditures. Actual payment is
necessary (see paragraph (j)(3) of this section). In applying section
46(d)(3)(B)(ii), the amount paid or incurred for the transfer (to the
extent that it qualifies as a payment for construction under the first
sentence of this paragraph (r)(3)(ii)) is considered to be part of the
overall cost to the transferee of construction by another person, and
the portion of construction which is completed during the taxable year
is determined by taking into account construction that was completed
before the constructed property was acquired by the transferee. If the
transferee makes an election under section 46(d) and this section for
the taxable year in which the transfer occurs, then
[[Page 346]]
for purposes of applying the presumption in section 46(d)(4)(D) that
construction is deemed to occur not more rapidly than ratably over the
normal construction period, the transferee's normal construction period
is considered to have begun on the date on which physical work on
construction of the acquired property began.
(4) Examples. The following examples illustrate this paragraph (r).
Example 1. Corporation X begins physical work on construction of
progress expenditure property for corporation Y on January 1, 1976. Y
accurately estimates a 3-year normal construction period and elects
under section 46(d) on its return for its taxable year ending December
31, 1976. On January 1, 1978, Y sells the contract rights for
construction of the property to corporation Z, which uses a fiscal year
ending June 30. Qualified progress expenditures allowed to Y in 1976 and
1977 are subject to recapture under section 47(a)(3). Because Z's normal
construction period for the property is less than 2 years (January 1,
1978 to January 1, 1979), the property is not progress expenditure
property in Z's hands. Z may not elect progress expenditure treatment
for the property.
Example 2. (i) Assume the same facts as in the example in paragraph
(j)(7) of this section, except, on December 31, 1982, Y sells its
contract rights to the property for $340,000 to corporation Z, which
also uses the calendar year. Z pays Y the full $340,000 on that date.
The property is still to be placed in service on December 31, 1984, and
will not be available for placing in service at an earlier date. Z makes
payments to X of $135,000 on December 31, 1983, and $110,000 on December
31, 1984.
(ii) The investment credit allowed Y in 1980 and 1981 for qualified
progress expenditures is subject to recapture under section 47(a)(3) and
Y may not treat its $85,000 payment in 1982 as a qualified progress
expenditure.
(iii) For purposes of determining if the airplane is qualified
progress expenditure property with respect to Z, the normal construction
period for the property for Z begins on December 31, 1982, the date of
transfer. Since the remaining construction period is two years, the
property is progress expenditure property if it otherwise qualifies in
Z's hands.
(iv) Only $305,000 of the $340,000 payment to Y can qualify as a
qualified progress expenditure, because only that amount is attributable
to construction costs paid by Y and does not exceed the sum of the
amount by which Y increased qualified investment in 1980 and 1981 for
qualified progress expenditures ($220,000) and the amount that Y would
have treated as a qualified progress expenditure in 1982 ($85,000).
(v) Assume that Z cannot establish that progress in construction has
been completed more rapidly than ratably. If Z makes an election under
section 46(d) for 1982, then for purposes of applying the percentage of
completion limitation, Z's normal construction period is considered to
begin on January 1, 1980. Progress is presumed to occur ratably over the
5-year construction period, which is 20 percent in each year.
(vi) For 1982, Z may treat the full $305,000 as a qualified progress
expenditure because it is less than the percentage of completion
limitation, $330,000 ($110,000 a year for 1980, 1981, and 1982).
(vii) For 1983, Z may treat the entire $135,000 payment as a
qualified progress expenditure, since it does not exceed the percentage
of completion limitation for that year, $135,000 ($110,000 plus the
$25,000 excess from 1982).
(viii) For Z's taxable year ending December 31, 1984, no qualified
progress expenditures may be taken into account because the property is
placed in service during that year.
[T.D. 8183, 53 FR 6618, Mar. 2, 1988; 53 FR 11162, Apr. 5, 1988]
Sec. 1.46-6 Limitation in case of certain regulated companies.
(a) In general--(1) Scope of section. This section does not reflect
amendments made to section 46 after enactment of the Revenue Act of
1971, other than the redesignation of section 46(e) as section 46(f) by
the Tax Reduction Act of 1975.
(2) Disallowance of credit. Under section 46(f), a credit otherwise
allowable under section 38 (``credit'') will be disallowed in certain
cases with respect to ``section 46(f) property'' as defined in paragraph
(b)(1) of this section. Paragraph (f) of this section describes
circumstances under which a determination put into effect by a
regulatory body will result in the disallowance of the credit. Such a
determination will result in a disallowance only if section 46(f) (1) or
(2) applies to such property and such determination affects the
taxpayer's cost of service or rate base in a manner inconsistent with
section 46(f) (1) or (2) (whichever is applicable).
(3) General rules. The provisions of section 46(f) (1) and (2) are
limitations on the treatment of the credit for ratemaking purposes and
for purposes of the taxpayer's regulated books of account only. Under
the provisions of section 46(f)(1), the credit may not be
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flowed through to income (i.e., used to reduce taxpayer's cost of
service) but in certain circumstances may be used to reduce rate base
(provided that such reduction is restored not less rapidly than
ratably). If an election is made under section 46(f)(2), the credit may
be flowed through to income (but not more rapidly than ratably) and
there may not be any reduction in rate base. If an election is made
under section 46(f)(3), none of the limitations of section 46(f) (1) or
(2) apply to certain section 46(f) property of the taxpayer. Thus, under
the provisions of section 46(f)(3), no credit is disallowed if the
credit is treated in any manner for ratemaking purposes, including any
manner of treatment permitted under the limitations of section 46(f) (1)
or (2).
(4) Elections. For rules relating to the manner of making, on or
before March 9, 1972, the three elections listed in section 46(f) (1),
(2), and (3), see 26 CFR 12.3. For rules relating to the application of
such elections, see paragraph (h) of this section.
(5) Cross references. For rules with respect to the treatment of
corporate reorganizations, asset acquisitions, and taxpayers subject to
the jurisdiction of more than one regulatory body, etc., see paragraph
(j) of this section.
(6) Nonapplication of prior law. Under section 105 (e) of the
Revenue Act of 1971, section 203 (e) of the Revenue Act of 1964, 78
Stat. 35, does not apply to section 46(f) property.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Section 46(f) property. ``Section 46(f) property'' is property
described in section 50 that is--
(i) Public utility property within the meaning of section
46(c)(3)(B) (other than nonregulated communication property described in
Sec. 1.46-3(g)(2)(iv)) or
(ii) Property used predominantly in the trade or business of the
furnishing or sale of steam through a local distribution system or of
the transportation of gas or steam by pipeline, if the rates for the
trade or business are regulated within the meaning of Sec. 1.46-
3(g)(2)(iii).
For purposes of determining whether property is used predominantly in
the trade or business of transportation of gas by pipeline (or of
transportation of gas by pipeline and of furnishing or sale of gas
through a local distribution system), the rules prescribed in Sec.
1.46-3(g)(4) apply except that accounts 365 through 371 inclusive
(Transmission Plant) are added to the accounts listed in Sec. 1.46-
3(g)(4)(i).
(2) Cost of service. (i)(A) For purposes of this section, ``cost of
service'' is the amount required by a taxpayer to provide regulated
goods or services. Cost of service includes operating expenses
(including salaries, cost of materials, etc.) maintenance expenses,
depreciation expenses, tax expenses, and interest expenses. For purposes
of this section, any effect on a taxpayer's permitted return on
investment that results from a reduction in the taxpayer's rate base
does not constitute a reduction in cost of service, even though, as a
technical ratemaking term, ``cost of service'' ordinarily includes a
permitted return on investment. In addition, taking into account a
deduction for the additional interest that the taxpayer would pay or
accrue if the credit were unavailable in determining Federal income tax
expense (``synchronization of interest'') does not constitute a
reduction in cost of service for purposes of section 46(f)(2). This
adjustment to Federal income tax expense may be taken into account in
determining cost of service for the regulated accounting period or
periods that include the taxable year to which the adjustment relates or
for any subsequent regulated accounting period.
(B) See paragraph (b)(3)(ii)(B) of this section for rules relating
to the amount of additional interest that the taxpayer would pay or
accrue if the credit were unavailable.
(ii) In determining whether, or to what extent, a credit has been
used to reduce cost of service, reference shall be made to any
accounting treatment that affects cost of service. Examples of such
treatment include reducing by all or a portion of the credit the amount
of Federal income tax expense taken into account for ratemaking purposes
and reducing the depreciable
[[Page 348]]
bases of property by all or a portion of the credit for ratemaking
purposes.
(3) Rate base. (i) For purposes of this section, ``rate base'' is
the monetary amount that is multiplied by a rate of return to determine
the permitted return on investment.
(ii)(A) In determining whether, or to what extent, a credit has been
used to reduce rate base, reference shall be made to any accounting
treatment that affects rate base. In addition, in those cases in which
the rate of return is based on the taxpayer's cost of capital, reference
shall be made to any accounting treatment that reduces the permitted
return on investment by treating the credit less favorably than the
capital that would have been provided if the credit were unavailable.
Thus, the credit may not be assigned a ``cost of capital'' rate that is
less than the overall cost of capital rate, determined on the basis of a
weighted average, for the capital that would have been provided if the
credit were unavailable.
(B) For purposes of determining the cost of capital rate assigned to
the credit and the amount of additional interest that the taxpayer would
pay or accrue, the composition of the capital that would have been
provided if the credit were unavailable may be determined--
(1) On the basis of all the relevant facts and circumstances; or
(2) By assuming for both such purposes that such capital would be
provided solely by common shareholders, preferred shareholders, and
long-term creditors in the same proportions and at the same rates of
return as the capital actually provided to the taxpayer by such
shareholders and creditors.
For purposes of this section, capital provided by long-term creditors
does not include deferred taxes as described in section 167(e)(3)(G) or
168(e)(3)(B)(ii).
(C) If a taxpayer's overall rate of return is based on a deemed or
hypothetical capital structure, paragraph (b)(3)(ii)(B) of this section
shall be applied by treating the deemed or hypothetical capital as if it
were the capital actually provided to the taxpayer and determining the
composition of the capital that would have been provided if the credit
were unavailable in a manner consistent with such treatment.
(iii) Whether, or to what extent, a credit has been used to reduce
rate base for any period to which pre-June 23, 1986 rates apply will be
determined under 26 CFR 1.46-6(b) (3) and (4) (revised as of April 1,
1985) if such a determination avoids disallowance of a credit that would
be disallowed under paragraph (b)(3)(ii) or (4)(ii) of this section. For
this purpose, a period of which pre-June 23, 1986 rates apply is any
period for which the effect of the credit on rate base for ratemaking
purposes is established under a determination put into effect (within
the meaning of paragraph (f) of this section) before June 23, 1986.
(4) Indirect reductions to cost of service or rate base. (i) Cost of
service or rate base is also considered to have been reduced by reason
of all or a portion of a credit if such reduction is made in an indirect
manner.
(ii) One type of such indirect reduction is any ratemaking decision
in which the credit is treated as operating income (subject to
ratemaking regulation) or is treated less favorably than the capital
that would have been provided if the credit were unavailable. For
example, if the credit is accounted for as nonoperating income on a
company's regulated books of account but a ratemaking decision has the
effect of treating the credit as operating income in determining rate of
return to common shareholders, then cost of service has been indirectly
reduced by reason of the credit.
(iii) A second type of indirect reduction is any ratemaking decision
intended to achieve an effect similar to a direct reduction to cost of
service or rate base. In determining whether a ratemaking decision is
intended to achieve this effect, consideration is given to all the
relevant facts and circumstances of each case, including, but not
limited to--
(A) The record of the proceeding,
(B) The regulatory body's orders or opinions (including any
dissenting views), and
(C) The anticipated effect of the ratemaking decision on the
company's revenues in comparison to a direct reduction to cost of
service or rate base by
[[Page 349]]
reason of the investment tax credits available to the regulated company.
(iv) This paragraph (b)(4)(iv) describes a situation that is not an
indirect reduction to cost of service or rate base by reason of all or a
portion of a credit. The ratemaking treatment of credits may affect the
financial condition of a company, including the company's ability to
attract new capital, the cost of that capital, the company's future
financial requirements, the market price of the company's securities,
and the degree of risk attributable to investment in those securities.
The financial condition may be reflected in certain customary financial
indicators such as the comparative capital structure of the company,
coverage ratios, price/earnings ratios, and price/book ratios. Under the
facts and circumstances test of paragraph (b)(4)(iii) of this section,
the consideration of a company's financial condition by a regulatory
body is not an indirect reduction to cost of service or rate base, even
though such condition, as affected by the ratemaking treatment of the
company's investment tax credits, is considered in the development of a
reasonable rate of return on common shareholders' investment.
(c) General rule--(1) In general. Section 46(f)(1) applies to all of
the taxpayer's section 46(f) property except property to which an
election under section 46(f) (2) or (3) applies. Under section 46(f)(1),
the credit for the taxpayer's section 46(f) property will be disallowed
if--
(i) The taxpayer's cost of service for ratemaking purposes is
reduced by reason of any portion of such credit, or
(ii) The taxpayer's rate base is reduced by reason of any portion of
the credit and such reduction in rate base is not restored or is
restored less rapidly than ratably within the meaning of paragraph (g)
of this section.
(2) Insufficient natural domestic supply. The provisions of
paragraph (c)(1)(ii) of this section shall not apply to permit any
reduction in taxpayer's rate base with respect to its ``short supply
property'' if it made an election under the last sentence of section
46(f)(1) on or before March 9, 1972.
(3) Short supply property. For purposes of this section, section
46(f) property is ``short supply property'' if--
(i) The property is described in paragraph (b)(1)(ii) of this
section,
(ii) The regulatory body described in section 46(c)(3)(B) that has
jurisdiction for ratemaking purposes with respect to such trade or
business is an agency or instrumentality of the United States, and
(iii) This regulatory body makes a short supply determination and
the determination is in effect on the date such property is placed in
service.
(4) Short supply determination. A short supply determination is made
or revoked on the date of its publication in the Federal Register. It is
a determination that the natural domestic supply of gas or steam is
insufficient to meet the present and future requirements of the domestic
economy.
(5) Dates short supply determination in effect. (i) A short supply
determination is considered to be in effect with respect to section
46(f) property placed in service at any time before the determination is
revoked. However, a short supply determination made after June 20, 1979
is not considered to be in effect with respect to section 46(f) property
placed in service before such determination was made.
(d) Special rule for ratable flow-through. If an election was made
under section 46(f)(2) on or before March 9, 1972, section 46(f)(2)
applies to all of the taxpayer's section 46(f) property except property
to which an election under section 46(f)(3) applies. Under section
46(f)(2), the credit for the taxpayer's section 46(f) property will be
disallowed if--
(1) The taxpayer's cost of service, for ratemaking purposes or in
its regulated books of account, is reduced by more than a ratable
portion of such credit within the meaning of paragraph (g) of this
section or
(2) The taxpayer's rate base is reduced by reason of any portion of
such credit.
(e) Flow-through property. If a taxpayer made an election under
section 46(f)(3) on or before March 9, 1972, section 46(f) (1) and (2)
do not apply to the taxpayer's section 46(f) property to which section
167(l)(2)(C) applies. In the
[[Page 350]]
case of an election under section 46(f)(3), a credit will not be
disallowed, notwithstanding a determination by a regulatory body having
jurisdiction over such taxpayer that reduces the taxpayer's cost of
service or rate base by reason of such credit. In general, section
167(l)(2)(C) applies to property with respect to which a taxpayer may
use a flow-through method of accounting (within the meaning of section
167(l)(3)(H)) to take into account the allowance for depreciation under
section 167(a). Section 167(l)(2)(C) applies to property even though the
taxpayer does not use a flow-through method of accounting with respect
to the property. Section 167(l)(2)(C) does not apply to property if the
taxpayer can not use a flow-through method of accounting with respect to
the property. For example, section 167(l)(2)(C) does not apply to
property with respect to which an election under section 167(l)(4)(A)
applies. Thus, such property does not qualify for an election under
section 46(f)(3).
(f) Limitations--(1) In general. This paragraph provides rules
relating to limitations on the disallowance of credits under section
46(f)(4). Key terms are defined in paragraphs (f) (7), (8), and (9) of
this section.
(2) Disallowance postponed. There is no disallowance of a credit
before the first final inconsistent determination is put into effect for
the taxpayer's section 46(f) property.
(3) Time of disallowance. A credit is disallowed--
(i) When the first final inconsistent determination is put into
effect and
(ii) When any inconsistent determination (whether or not final) is
put into effect after the first final inconsistent determination is put
into effect.
(4) Credits disallowed. A credit is disallowed for section 46(f)
property placed in service (within the meaning of Sec. 1.46-3(d)) by
the taxpayer--
(i) Before the date any inconsistent determination described in
paragraph (f)(2) of this section is put into effect and
(ii) On or after such date and before the date a subsequent
consistent determination (whether or not final) is put into effect.
(5) Barred years. No amount of credit for a taxable year is
disallowed under paragraph (f)(3) of this section if, for such year,
assessment of a deficiency is barred by any law or rule of law.
(6) Notification and other requirements. The taxpayer shall notify
the district director of a disallowance of a credit under paragraph
(f)(3) of this section within 30 days of the date that the applicable
determination is put into effect. In the case of such a disallowance,
the taxpayer shall recompute its tax liability for any affected taxable
year, and such recomputation shall be made in the form of an amended
return where necessary.
(7) Determinations. For purposes of this paragraph, the term
``determination'' refers to a determination made with respect to section
46(f) property (other than property to which an election under section
46(f)(3) applies) by a regulatory body described in section 46(c)(3)(B)
that determines the effect of the credit--
(i) For purposes of section 46(f)(1), on the taxpayer's cost of
service or rate base for ratemaking purposes or
(ii) In the case of a taxpayer that made an election under section
46(f)(2), on the taxpayer's cost of service, for ratemaking purposes or
in its regulated books of account, or on the taxpayer's rate base for
ratemaking purposes.
A regulatory body does not have to take affirmative action to make a
determination. Thus, a regulatory body's failure to take action on a
rate schedule filed by a taxpayer is a determination if the rates can be
put into effect without further action by the regulatory body.
(8) Types of determinations. For purposes of this paragraph--
(i) The term ``inconsistent'' refers to a determination that is
inconsistent with section 46(f) (1) or (2) (as the case may be). Thus,
for example, a determination to reduce the taxpayer's cost of service by
more than a ratable portion of the credit would be a determination that
is inconsistent with section 46(f)(2). As a further example, such a
determination would also be inconsistent if section 46(f)(1) applied
because no reduction in cost of service is permitted under section
46(f)(1).
[[Page 351]]
(ii) The term ``consistent'' refers to a determination that is
consistent with section 46(f) (1) or (2) (as the case may be).
(iii) The term ``final determination'' means a determination with
respect to which all rights to appeal or to request a review, a
rehearing, or a redetermination have been exhausted or have lapsed.
(iv) The term ``first final inconsistent determination'' means the
first final determination put into effect after December 10, 1971, that
is inconsistent with section 46(f) (1) or (2) (as the case may be).
(9) Put into effect. A determination is put into effect on the
latter of--
(i) The date it is issued (or, if a first final inconsistent
determination, the date it becomes final) or
(ii) The date it becomes operative.
(10) Examples. The provisions of this paragraph may be illustrated
by the following examples:
Example 1. Corporation X, a calendar-year taxpayer engaged in a
public utility activity is subject to the jurisdiction of regulatory
body A. On September 15, 1971, X purchases section 46(f) property and
places it in service on that date. For 1971, X takes the credit
allowable by section 38 with respect to such property. X does not make
any election permitted by section 46(f). On October 9, 1972, A makes a
determination that X must account for the credit allowable under section
38 in a manner inconsistent with section 46(f)(1). The determination,
which was the first determination by A after December 10, 1971, becomes
final on January 1, 1973, and holds that X must retroactively adjust the
manner in which it accounted for the credit allowable under section 38
starting with the taxable year that began on January 1, 1972. Since,
under the provisions of paragraph (f)(8) of this section, the
determination by A is put into effect on January 1, 1973 (the date it
becomes final), the credit is retroactively disallowed with respect to
any of X's section 46(f) property placed in service before January 1,
1973, on any date which occurs during a taxable year with respect to
which an assessment of a deficiency has not been barred by any law or
rule of law. In addition, the credit is disallowed with respect to X's
section 46(f) property placed in service on or after January 1, 1973,
and before the date that a subsequent determination by A, which as to X
is consistent with section 46(f)(1), is put into effect. Thus, X must
amend its income tax return for 1971 to reflect the retroactive
disallowance of the credit otherwise allowable under section 38 with
respect to the section 46(f) property placed in service on September 15,
1971.
Example 2. The facts are the same as in example 1, except that the
first inconsistent determination by A becomes final on April 5, 1972,
and requires X to account for the credit for all taxable years beginning
on or after January 1, 1973, in a manner inconsistent with section
46(f)(1). Under the provisions of paragraph (f)(8) of this section, the
determination was put into effect on January 1, 1973 (the date it became
operative). The result is the same as in example 1.
Example 3. The facts are the same as in example 1, except that on
June 1, 1975, A issues a determination that X shall retroactively
account for the credit allowable by section 38 in a manner consistent
with the provisions of section 46(f)(1) for taxable years beginning on
or after January 1, 1971. The determination becomes final on January 5,
1976, in the same form as originally issued. The result is the same as
in example 1 with respect to property X places in service before June 1,
1975. The credit is allowed with respect to property X places in service
on or after June 1, 1975 (the date that the consistent determination is
put into effect).
(g) Ratable methods--(1) In general. Under this paragraph (g), rules
are prescribed for purposes of determining whether or not, under section
46(f)(1), a reduction in the taxpayer's rate base with respect to the
credit is restored less rapidly than ratably and whether or not under
section 46(f)(2) the taxpayer's cost of service for ratemaking purposes
is reduced by more than a ratable portion of such credit.
(2) Regulated depreciation expense. What is ``ratable'' is
determined by considering the period of time actually used in computing
the taxpayer's regulated depreciation expense for the property for which
a credit is allowed. ``Regulated depreciation expense'' is the
depreciation expense for the property used by a regulatory body for
purposes of establishing the taxpayer's cost of service for ratemaking
purposes. Such period of time shall be expressed in units of years (or
shorter periods), units of production, or machine hours and shall be
determined in accordance with the individual useful life system or
composite (or other group asset) account system actually used in
computing the taxpayer's regulated depreciation expense. A method of
restoring, or reducing, is ratable if the amount to be restored to rate
base, or to reduce cost of service (as the case
[[Page 352]]
may be), is allocated ratably in proportion to the number of such units.
Thus, for example, assume that the regulated depreciation expense is
computed under the straight line method by applying a composite annual
percentage rate to ``original cost'' (as defined for purposes of
computing regulated depreciation expense). If, with respect to an item
of section 46(f) property, the amount to be restored annually to rate
base is computed by applying a composite annual percentage rate to the
amount by which the rate base was reduced, then the restoration is
ratable. Similarly, if cost of service is reduced annually by an amount
computed by applying a composite annual percentage rate to the amount of
the credit, cost of service is reduced by a ratable portion. If such
composite annual percenage rate were revised for purposes of computing
regulated depreciation expense beginning with a particular accounting
period, the computation of ratable restoration or ratable portion (as
the case may be) must also be revised beginning with such period. A
composite annual percentage rate is determined solely by reference to
the period of time actually used by the taxpayer in computing its
regulated depreciation expense without reduction for salvage or other
items such as over and under accruals. A composite annual percentage
rate determined by taking into account salvage value or other items
shall be considered to be ratable in the case of a determination
(whether or not final) issued before March 22, 1979, and any rate order
(whether or not final) that is entered into before June 20, 1979, in
response to a rate case filed before April 23, 1979. For this purpose,
the term ``rate order'' does not include an order by a regulatory body
that perfunctorily adopts rates as filed if such rates are suspended or
subject to rebate.
(h) Elections--(1) Applicability of elections. (i) Any election
under section 46(f) applies to all of the taxpayer's property eligible
for the election, whether or not the taxpayer is regulated by more than
one regulatory body.
(ii) Section 46(f)(1) applies to all of the taxpayer's section 46(f)
property in the absence of an election under either section 46(f) (2) or
(3). If an election is made under section 46(f)(2), section 46(f)(1)
does not apply to any of the taxpayer's section 46(f) property.
(iii) An election made under the last sentence of section 46(f)(1)
applies to that portion of the taxpayer's section 46(f) property to
which section 46(f)(1) applies and which is short supply property within
the meaning of paragraph (c)(2) of this section.
(iv) If a taxpayer makes an election under section 46(f)(2) and
makes no election under section 46(f)(3), the election under section
46(f)(2) applies to all of the taxpayer's section 46(f) property.
(v) If a taxpayer makes an election under section 46(f)(3), such
election applies to all of the taxpayer's section 46(f) property to
which section 167(l)(2)(C) applies. Section 46(f) (1) or (2) (as the
case may be) applies to that portion of the taxpayer's section 46(f)
property that is not property to which section 167(f)(2)(C) applies.
Thus, for example, if a taxpayer makes an election under section
46(f)(2) and also makes an election under section 46(f)(3), section
46(f)(3) applies to all of the taxpayer's section 46(f) property to
which section 167(l)(2)(C) applies, and section 46(f)(2) applies to the
remainder of the taxpayer's section 46(f) property.
(2) Method of making elections. See 26 CFR 12.3 for rules relating
to the method of making the elections described in section 46(f) (1),
(2), or (3).
(i) [Reserved]
(j) Reorganizations, asset acquisitions, multiple regulation, etc.--
(1) Taxpayers not entirely subject to jurisdiction of one regulatory
body. (i) If a taxpayer is required by a regulatory body having
jurisdiction over less than all of its property to account for the
credit under a determination that is inconsistent with section 46(f) (1)
or (2) (as the case may be), such credit shall be disallowed only with
respect to property subject to the jurisdiction of such regulatory body.
(ii) For purposes of this paragraph (j), a regulatory body is
considered to have jurisdiction over property of a taxpayer if the
property is included in the rate base for which the regulatory body
determines an allowable rate of return for ratemaking purposes or if
expenses
[[Page 353]]
with respect to the property are included in cost of service as
determined by the regulatory body for ratemaking purposes. For example,
if regulatory body A, having jurisdiction over 60 percent of an item of
corporation X's section 46(f) property, makes a determination which is
inconsistent with section 46(f), and if regulatory body B, having
jurisdiction over the remaining 40 percent of such item of property,
makes a consistent determination (or if the remaining 40 percent is not
subject to the jurisdiction of any regulatory body), then 60 percent of
the credit for such item will be disallowed. For a further example, if
regulatory body A, having jurisdiction over 60 percent of X's section
46(f) property, has jurisdiction over 100 percent of a particular
generator, 100 percent of the credit for such generator will be
disallowed.
(iii) For rules which provide that the 3 elections under section
46(f) may not be made with respect to less than all of the taxpayer's
property eligible for the election, see paragraph (h)(1)(i) of this
section.
(2) [Reserved]
(k) Treatment of accumulated deferred investment tax credits upon
the deregulation of public utility property--(1) Scope--(i) In general.
This paragraph (k) provides rules for the application of former sections
46(f)(1) and 46(f)(2) of the Internal Revenue Code to a taxpayer with
respect to public utility property that ceases, whether by disposition,
deregulation, or otherwise, to be public utility property with respect
to the taxpayer and that is not described in paragraph (k)(1)(ii) of
this section (deregulated public utility property).
(ii) Exception. This paragraph (k) does not apply to property that
ceases to be public utility property with respect to the taxpayer on
account of an ordinary retirement within the meaning of Sec. 1.167(a)-
11(d)(3)(ii).
(2) Ratable amount--(i) Restoration of rate base reduction. A
reduction in the taxpayer's rate base on account of the credit with
respect to public utility property that becomes deregulated public
utility property is restored ratably during the period after the
property becomes deregulated public utility property if the amount of
the reduction remaining to be restored does not, at any time during the
period, exceed the restoration percentage of the recoverable stranded
cost of the property at such time. For this purpose--
(A) The stranded cost of the property is the cost of the property
reduced by the amount of such cost that the taxpayer has recovered
through regulated depreciation expense during the period before the
property becomes deregulated public utility property;
(B) The recoverable stranded cost of the property at any time is the
stranded cost of the property that the taxpayer will be permitted to
recover through rates after such time; and
(C) The restoration percentage for the property is determined by
dividing the reduction in rate base remaining to be restored with
respect to the property immediately before the property becomes
deregulated public utility property by the stranded cost of the
property.
(ii) Cost of service reduction. Reductions in the taxpayer's cost of
service on account of the credit with respect to public utility property
that becomes deregulated public utility property are ratable during the
period after the property becomes deregulated public utility property if
the cumulative amount of the reduction during such period does not, at
any time during the period, exceed the flowthrough percentage of the
cumulative stranded cost recovery for the property at such time. For
this purpose--
(A) The stranded cost of the property is the cost of the property
reduced by the amount of such cost that the taxpayer has recovered
through regulated depreciation expense during the period before the
property becomes deregulated public utility property;
(B) The cumulative stranded cost recovery for the property at any
time is the stranded cost of the property that the taxpayer has been
permitted to recover through rates on or before such time; and
(C) The flowthrough percentage for the property is determined by
dividing the amount of credit with respect to the property remaining to
be used to reduce cost of service immediately before the property
becomes deregulated
[[Page 354]]
public utility property by the stranded cost of the property.
(3) Cross reference. See Sec. 1.168(i)-(3) for rules relating to
the treatment of balances of excess deferred income taxes when public
utility property becomes deregulated public utility property.
(4) Effective/applicability dates--(i) In general. Except as
provided in paragraph (k)(4)(ii) of this section, this paragraph (k)
applies to public utility property that becomes deregulated public
utility property with respect to a taxpayer after December 21, 2005.
(ii) Property that becomes public utility property of the
transferee. This paragraph (k) does not apply to property that becomes
deregulated public utility property with respect to a taxpayer an
account of a transfer on or before March 20, 2008 if after the transfer
the property is public utility property of the transferee.
(iii) Application of regulation project (REG-104385-01). A reduction
in the taxpayer's cost of service will be treated as ratable if it is
consistent with the proposed rules in regulation project (REG-104385-01)
(68 FR 10190) March 4, 2003, and occurs during the period beginning on
March 5, 2003, and ending on the earlier of--
(A) The last date on which the utility's rates are determined under
the rate order in effect on December 21, 2005; or
(B) December 21, 2007.
[T.D. 7602, 44 FR 17668, Mar. 23, 1979, as amended by T.D. 8089, 51 FR
18777, May 22, 1986; T.D. 9387, 73 FR 14936, Mar. 20, 2008; 73 FR 18708,
Apr. 7, 2008]
Sec. 1.46-7 Statutory provisions; plan requirements for taxpayers
electing additional investment credit, etc.
As amended by sections 802(b)(7), and 803 (c), (d), and (e) of the
Tax Reform Act of 1976 (90 Stat. 1520), section 301 (d), (e), and (f) of
the Tax Reduction Act of 1975 (89 Stat. 38) provides as follows:
Sec. 301. Increase in investment credit * * *
(d) Plan requirements for taxpayers electing additional credit. In
order to meet the requirements of this subsection--
(1) Except as expressly provided in subsections (e) and (f), a
corporation (hereinafter in this subsection referred to as the
``employer'') must establish an employee stock ownership plan (described
in paragraph (2)) which is funded by transfers of employer securities in
accordance with the provisions of paragraph (6) and which meets all
other requirements of this subsection.
(2) The plan referred to in paragraph (1) must be a defined
contribution plan established in writing which--
(A) Is a stock bonus plan, a stock bonus and a money purchase
pension plan, or a profit-sharing plan,
(B) Is designed to invest primarily in employer securities, and
(C) Meets such other requirements (similar to requirements
applicable to employee stock ownership plans as defined in section
4975(e)(7) of the Internal Revenue Code of 1954) as the Secretary of the
Treasury or his delegate may prescribe.
(3) The plan must provide for the allocation of all employer
securities transferred to it or purchased by it (because of the
requirements of section 46(a)(2)(B) of the Internal Revenue Code of
1954) to the account of each participant (who was a participant at any
time during the plan year, whether or not he is a participant at the
close of the plan year) as of the close of each year in an amount which
bears substantially the same proportion to the amount of all such
securities allocated to all participants in the plan for that plan year
as the amount of compensation paid to such participant (disregarding any
compensation in excess of the first $100,000 per year) bears to the
compensation paid to all such participants during that year
(disregarding any compensation in excess of the first $100,000 with
respect to any participant). Notwithstanding the first sentence of this
paragraph, the allocation to participants' accounts may be extended over
whatever period may be necessary to comply with the requirements of
section 415 of the Internal Revenue Code of 1954. For purposes of this
paragraph, the amount of compensation paid to a participant for a year
is the amount of such participant's compensation within the meaning of
section 415(c)(3) of such Code for such year.
(4) The plan must provide that each participant has a nonforfeitable
right to any stock allocated to his account under paragraph (3), and
that no stock allocated to a participant's account may be distributed
from that account before the end of the eighty-fourth month beginning
after the month in which the stock is allocated to the account except in
the case of separation from the service, death, or disability.
(5) The plan must provide that each participant is entitled to
direct the plan as to the manner in which any employer securities
allocated to the account of the participant are to be voted.
(6) On making a claim for credit, adjustment, or refund under
section 38 of the Internal Revenue Code of 1954, the employer
[[Page 355]]
states in such claim that it agrees, as a condition of receiving any
such credit, adjustment, or refund--
(A) In the case of a taxable year beginning before January 1, 1977,
to transfer employer securities forthwith to the plan having an
aggregate value at the time of the claim of 1 percent of the amount of
the qualified investment (as determined under section 46 (c) and (d) of
such Code) of the taxpayer for the taxable year, and
(B) In the case of a taxable year beginning after December 31,
1976--
(i) To transfer employer securities to the plan having an aggregate
value at the time of the claim of 1 percent of the amount of the
qualified investment (as determined under section 46 (c) and (d) of such
Code) of the employer for the taxable year,
(ii) Except as provided in clause (iii), to effect the transfer not
later than 30 days after the time (including extensions) for filing its
income tax return for a taxable year, and
(iii) In the case of an employer whose credit (as determined under
section 46(a)(2)(B) of such Code) for a taxable year beginning after
December 31, 1976, exceeds the limitations of paragraph (3) of section
46(a) of such Code--
(I) To effect that portion of the transfer allocable to investment
credit carrybacks of such excess credit at the time required under
clause (ii) for the unused credit year (within the meaning of section
46(b) of such Code), and
(II) To effect that portion of the transfer allocable to investment
credit carryovers of such excess credit at the time required under
clause (ii) for the taxable year to which such portion is carried over.
For purposes of meeting the requirements of this paragraph, a transfer
of cash shall be treated as a transfer of employer securities if the
cash is, under the plan, used to purchase employer securities.
(7) Notwithstanding any other provision of law to the contrary, if
the plan does not meet the requirements of section 401 of the Internal
Revenue Code of 1954--
(A) Stock transferred under paragraph (6) or subsection (e)(3) and
allocated to the account of any participant under paragraph (3) and
dividends thereon shall not be considered income of the participant or
his beneficiary under the Internal Revenue Code of 1954 until actually
distributed or made available to the participant or his beneficiary and,
at such time, shall be taxable under section 72 of such Code (treating
the participant or his beneficiary as having a basis of zero in the
contract),
(B) No amount shall be allocated to any participant in excess of the
amount which might be allocated if the plan met the requirements of
section 401 of such Code, and
(C) The plan must meet the requirements of sections 410 and 415 of
such Code.
(8)(A) Except as provided in subparagraph (B)(iii), if the amount of
the credit determined under section 46(a)(2)(B) of the Internal Revenue
Code of 1954 is recaptured or redetermined in accordance with the
provisions of such Code, the amounts transferred to the plan under this
subsection and subsection (e) and allocated under the plan shall remain
in the plan or in participant accounts, as the case may be, and continue
to be allocated in accordance with the plan.
(B) If the amount of the credit determined under section 46(a)(2)(B)
of the Internal Revenue Code of 1954 is recaptured in accordance with
the provisions of such Code--
(i) The employer may reduce the amount required to be transferred to
the plan under paragraph (6) of this subsection, or under paragraph (3)
of subsection (e), for the current taxable year or any succeeding
taxable years by the portion of the amount so recaptured which is
attributable to the contribution to such plan,
(ii) Notwithstanding the provisions of paragraph (12), the employer
may deduct such portion, subject to the limitations of section 404 of
such Code (relating to deductions for contributions to an employees'
trust or plan), or
(iii) If the requirements of subsection (f)(1) are met, the employer
may withdraw from the plan an amount not in excess of such portion.
(C) If the amount of the credit claimed by an employer for a prior
taxable year under section 38 of the Internal Revenue Code of 1954 is
reduced because of a redetermination which becomes final during the
taxable year, and the employer transferred amounts to a plan which were
taken into account for purposes of this subsection for that prior
taxable year, then--
(i) The employer may reduce the amount it is required to transfer to
the plan under paragraph (6) of this subsection, or under paragraph (3)
of subsection, (e), for the taxable year or any succeeding taxable year
by the portion of the amount of such reduction in the credit or increase
in tax which is attributable to the contribution to such plan, or
(ii) Notwithstanding the provisions of paragraph (12), the employer
may deduct such portion subject to the limitations of section 404 of
such Code.
(9) For purposes of this subsection, the term--
(A) ``Employer securities'' means common stock issued by the
employer or a corporation which is a member of a controlled group of
corporations which includes the employer (within the meaning of section
1563 (a) of the Internal Revenue Code of 1954, determined without regard
to section 1563 (a)(4) and (e)(3)(C) of such Code) with voting power and
dividend rights no less favorable than the voting power and dividend
rights of other
[[Page 356]]
common stock issued by the employer or such controlling corporation, or
securities issued by the employer or such controlling corporation,
convertible into such stock, and
(B) ``Value'' means the average of closing prices of the employer's
securities, as reported by a national exchange on which securities are
listed, for the 20 consecutive trading days immediately preceding the
date of transfer or allocation of such securities or, in the case of
securities not listed on a national exchange, the fair market value as
determined in good faith and in accordance with regulations issued by
the Secretary of the Treasury or his delegate.
(10) The Secretary of the Treasury or his delegate shall prescribe
such regulations and require such reports as may be necessary to carry
out the provisions of this subsection and subsections (e) and (f).
(11) If the employer fails to meet any requirement imposed under
this subsection or subsection (e) or (f) or under any obligation
undertaken to comply with the requirement of this subsection or
subsection (e) or (f), he is liable to the United States for a civil
penalty of an amount equal to the amount involved in such failure. The
preceding sentence shall not apply if the taxpayer corrects such failure
(as determined by the Secretary of the Treasury or his delegate) within
90 days after notice thereof. For purposes of this paragraph, the term
``amount involved'' means an amount determined by the Secretary or his
delegate, but not in excess of 1 percent of the qualified investment of
the taxpayer for the taxable year under section 46(a)(2)(B) and not less
than the product of one-half of one percent of such amount multiplied by
the number of months (or parts thereof) during which such failure
continues. The amount of such penalty may be collected by the Secretary
of the Treasury in the same manner in which a deficiency in the payment
of Federal income tax may be collected.
(12) Notwithstanding any provision of the Internal Revenue Code of
1954 to the contrary, no deductions shall be allowed under section 162,
212, or 404 of such Code for amounts transferred to an employee stock
ownership plan and taken into account under this subsection.
(13)(A) As reimbursement for the expense of establishing the plan,
the employer may withhold from amounts due the plan for the taxable year
for which the plan is established, or the plan may pay, so much of the
amounts paid or incurred in connection with the establishment of the
plan as does not exceed the sum of 10 percent of the first $100,000 that
the employer is required to transfer to the plan for that taxable year
under paragraph (6) (including any amounts transferred under subsection
(e)(3)) and 5 percent of any amount in excess of the first $100,000 of
such amount.
(B) As reimbursement for the expense of administering the plan, the
employer may withhold from amounts due the plan, or the plan may pay, so
much of the amounts paid or incurred during the taxable year as expenses
of administering the plan as does not exceed the smaller of--
(i) The sum of 10 percent of the first $100,000 and 5 percent of any
amount in excess of $100,000 of the income from dividends paid to the
plan with respect to stock of the employer during the plan year ending
with or within the employer's taxable year, or
(ii) $100,000.
(14) The return of a contribution made by an employer to an employee
stock ownership plan designed to satisfy the requirements of this
subsection or subsection (e) (or a provision for such a return) does not
fail to satisfy the requirements of this subsection, subsection (e),
section 401(a) of the Internal Revenue Code of 1954, or section
403(c)(1) of the Employee Retirement Income Security Act of 1974 if--
(A) The contribution is conditioned under the plan upon
determination by the Secretary of the Treasury that such plan meets the
applicable requirements of this subsection, subsection (e), or section
401(a) of such Code.
(B) The application for such a determination is filed with the
Secretary not later than 90 days after the date on which the credit
under section 38 is allowed, and
(C) The contribution is returned within one year after the date on
which the Secretary issues notice to the employer that such plan does
not satisfy the requirements of this subsection, subsection (e), or
section 401(a) of such Code.
(e) Plan requirements for taxpayers electing additional one-half
percent credit--(1) General rule. For purposes of clause (ii) of section
46(a)(2)(B) of the Internal Revenue Code of 1954, the amount determined
under this subsection for a taxable year is an amount equal to the sum
of the matching employee contributions for the taxable year which meet
the requirements of this subsection.
(2) Election; basic plan requirements. No amount shall be determined
under this subsection for the taxable year unless the corporation elects
to have this subsection apply for that year. A corporation may not elect
to have the provisions of this subsection apply for a taxable year
unless the corporation meets the requirements of subsection (d) and the
requirements of this subsection.
(3) Employer contribution. On making a claim for credit, adjustment,
or refund under section 38 of the Internal Revenue Code of 1954, the
employer shall state in such claim that the employer agrees, as a
condition of receiving any such credit, adjustment, or refund
attributable to the provisions of section 46(a)(2)(B)(ii) of such Code,
to transfer at the
[[Page 357]]
time described in subsection (d)(6)(B) employer securities (as defined
in subsection (d)(9)(A)) to the plan having an aggregate value at the
time of the transfer of not more than one-half of one percent of the
amount of the qualified investment (as determined under subsections (c)
and (d) of section 46 of such Code) of the taxpayer for the taxable
year. For purposes of meeting the requirements of this paragraph, a
transfer of cash shall be treated as a transfer of employer securities
if the cash is, under the plan, used to purchase employer securities.
(4) Requirements relating to matching employee contributions. (A) An
amount contributed by an employee under a plan described in subsection
(d) for the taxable year may not be treated as a matching employee
contribution for that taxable year under this subsection unless--
(i) Each employee who participates in the plan described in
subsection (d) is entitled to make such a contribution,
(ii) The contribution is designated by the employee as a
contribution intended to be used for matching employer amounts
transferred under paragraph (3) to a plan which meets the requirements
of this subsection, and
(iii) The contribution is in the form of an amount paid in cash to
the employer or plan administrator not later than 24 months after the
close of the taxable year in which the portion of the credit allowed by
section 38 of such Code (and determined under clause (ii) of section 46
(a)(2)(B) of such Code which the contribution is to match) is allowed,
and is invested forthwith in employer securities (as defined in
subsection (d)(9)(A)).
(B) The sum of the amounts of matching employee contributions taken
into account for purposes of this subsection for any taxable year may
not exceed the value (at the time of transfer) of the employer
securities transferred to the plan in accordance with the requirements
of paragraph (3) for the year for which the employee contributions are
designated as matching contributions.
(C) The employer may not make participation in the plan a condition
of employment and the plan may not require matching employee
contributions as a condition of participation in the plan.
(D) Employee contributions under the plan must meet the requirements
of section 401(a)(4) of such Code (relating to contributions).
(5) A plan must provide for allocation of all employer securities
transferred to it or purchased by it under this subsection to the
account of each participant (who was a participant at any time during
the plan year, whether or not he is a participant at the close of the
plan year) as of the close of the plan year in an amount equal to his
matching employee contributions for the year. Matching employee
contributions and amounts so allocated shall be deemed to be allocated
under subsection (d)(3).
(f) Recapture--(1) General rule. Amounts transferred to a plan under
subsection (d)(6) or (e)(3) may be withdrawn from the plan by the
employer if the plan provides that while subject to recapture--
(A) Amounts so transferred with respect to a taxable year are
segregated from other plan assets, and
(B) Separate accounts are maintained for participants on whose
behalf amounts so transferred have been allocated for a taxable year.
(2) Coordination with other law. Notwithstanding any other law or
rule of law, an amount withdrawn by the employer will neither fail to be
considered to be nonforfeitable nor fail to be for the exclusive benefit
of participants or their beneficiaries merely because of the withdrawal
from the plan of--
(A) Amounts described in paragraph (1), or
(B) Employer amounts transferred under subsection (e)(3) to the plan
which are not matched by matching employee contributions or which are in
excess of the limitations of section 415 of such Code,
nor will the withdrawal of any such amount be considered to violate the
provisions of section 403(c)(1) of the Employee Retirement Income
Security Act of 1974.
[Sec. 301(d) of the Tax Reduction Act of 1975 (89 Stat. 38) as
amended by sec. 802(b)(7) and sec. 803 (c) and (e) of the Tax Reform Act
of 1976 (90 Stat. 1520); sec. 301 (e) and (f) of the Tax Reduction Act
of 1975 as added by sec. 803(d) of the Tax Reform Act of 1976]
(Sec. 301(d)(2)(C) of the Tax Reduction Act of 1975; sec. 7805 of the
Internal Revenue Code of 1954 (89 Stat. 38, 68A Stat. 917; 26 U.S.C.
7805)
[T.D. 7857 47 FR 54793, Dec. 6, 1982]
Sec. 1.46-8 Requirements for taxpayers electing additional
one-percent investment credit (TRASOP's).
(a) Introduction--(1) In general. A corporation may elect under
section 46(a)(2)(B) of the Code to obtain an additional investment
credit for property described in section 46(a)(2)(D). This section
provides rules for electing to have the provisions of section
46(a)(2)(B) apply and for implementing an employee stock ownership plan
under section 301(d) of the Tax Reduction Act of 1975 (``1975 TRA'').
The plan must meet the formal requirements of paragraph (d), and the
operational requirements of paragraph (e), of this section. An
additional credit may be obtained for the periods described in
[[Page 358]]
section 46(a)(2)(D). Unless otherwise indicated, statutory references in
this section are to the Internal Revenue Code of 1954 as in effect prior
to the amendments made by the Revenue Act of 1978.
(2) Reports. The returns required by section 6058(a) must be filed
on behalf of a plan established under paragraph (c)(7) of this section,
whether or not the plan is qualified under section 401(a).
(3) Cross-references. The following table indicates where in this
section provisions appear relating to each provision of section 301 (d)
and (f) of the 1975 TRA.
------------------------------------------------------------------------
Section 301 Section 1.46-8 Subject
------------------------------------------------------------------------
(d)(1).......................... (c)(7)(i), Establishing a
(c)(8)(i). TRASOP, in
general; funding
a TRASOP, in
general.
(2)(A)........................ (c)(7)(ii)........ Type of plan.
(B)......................... (d)(3), (e)(10)... Investment design.
(C)......................... (d)(1)............ Plan requirements,
in general.
(3)........................... (d)(6)............ Allocation.
(b)(8)............ Compensation,
definition.
(4)........................... (d)(7)............ Nonforfeitability.
(d)(9)............ Distributions.
(5)........................... (d)(8)............ Voting rights.
(6)........................... (c)............... Procedures for
additional
credit.
(7)(A)........................ (c)(7)(ii)........ Taxability, non-
401(a) TRASOP.
(B)......................... (e)(3)............ Allocations under
401(a).
(C)......................... (e)(3)............ Section 410 and
section 415
requirements.
(8)........................... (e)(9)............ Reductions of
investment
credit.
(9)(A)........................ (b)(4)............ Employer
securities,
definition.
(e)(10), (f)...... Employer
securities,
requirements.
(B)......................... (b)(7)............ Value, definition.
(10).......................... (a)(2)............ Reporting
requirements.
(11).......................... (h)............... Failure to comply.
(12).......................... (c)(10)........... Deductibility.
(13).......................... (e) (6) and (7)... Reimbursement for
expenses.
(14).......................... (c)(8)(v) and Contingent
(d)(7)(i). contributions.
(f)............................. (d)(7), Withdrawals of
(e)(8)(vii), (f). TRASOP
securities.
------------------------------------------------------------------------
(b) Definitions. When used in this section, the terms listed below
have the indicated meanings:
(1) TRASOP. A ``TRASOP'' is an employee stock ownership plan that
meets the requirements of section 301(d) of the 1975 TRA. See Sec.
1.46-7. It is a type of plan described in paragraph (d)(1) of this
section and may, but need not, be an ESOP under Sec. 54.4975-11 of this
chapter (Pension Excise Tax Regulations). See Sec. 1.46-8(d)(5)
concerning use of TRASOP assets as collateral for debts and expenses of
the plan.
(2) Additional credit. An ``additional credit'' is the additional
one-percent investment credit under section 46(a)(2)(B)(i).
(3) Employer. An ``employer'' is a corporation that establishes a
TRASOP.
(4) Employer securities--(i) In general. ``Employer securities'' are
common stock, and securities convertible into common stock, of the
employer or of a corporation that is a member of a controlled group of
corporations including the employer. Employer securities must meet the
requirements of paragraph (g) of this section. Membership in a
controlled group for purposes of this section is determined under
section 414(b) of the Code.
(ii) Pre-1977 employer securities. In addition, employer securities
acquired by a TRASOP before January 1, 1977, include common stock, and
securities convertible into common stock, of a corporation in control of
the employer within the meaning of section 368(c).
(iii) Caution. An employer security under this section is not
necessarily a qualifying employer security as defined in section
407(d)(5) of the Employee Retirement Income Security Act of 1974 (ERISA)
or section 4975(e)(8). Moreover, sections 406, 407, and 408 of ERISA in
certain cases limit the acquisition and disposition of qualifying
employer securities as defined in section 407(d)(5) of ERISA.
(5) TRASOP securities. ``TRASOP securities'' are employer securities
that--
(i) Are transferred to a TRASOP, or acquired with cash transferred
to a TRASOP, to obtain an additional credit, and
(ii) Except as provided under paragraphs (g) (4) and (5) of this
section, or as required by applicable law, are subject to no other put,
call, or other option, or buy-sell or similar arrangement while held by
the plan.
(6) Publicly traded. The term ``publicly traded'' has the meaning
specified in Sec. 54.4975-7(b)(1)(iv) of this chapter.
(7) Value--(i) In general. With respect to the transfer of TRASOP
securities by a corporation to a TRASOP or the
[[Page 359]]
acquisition of TRASOP securities with cash transferred by a corporation
to a TRASOP, ``value'' means fair market value determined in good faith
and based on all relevant factors as of the date of transfer or
acquisition of the TRASOP securities. If the plan acquires TRASOP
securities from other than a disqualified person within the meaning of
section 4975(e)(2), a good faith determination of value includes a
determination of fair market value based on an appraisal independently
arrived at by a person who customarily makes such appraisals and who is
independent of any person from whom the TRASOP securities are acquired.
(ii) Twenty-day average rule. A special 20-day average valuation
rule applies to certain publicly traded securities transferred by a
corporation to a TRASOP. It does not apply to securities acquired with
cash transferreed by a corporation to a TRASOP. Under the special rule,
the term ``value'' refers to an average of daily closing prices for a
security, as reported on any national securities exchange or as quoted
on any system sponsored by a national securities association, over the
20 consecutive trading days immediately preceding the applicable last
day described in paragraph (c)(8)(i) of this section. The average is
based on the closing prices for each day when the security is in fact
traded during the 20-day period. However, the special rule does not
apply unless the security is in fact traded for at least 10 of the 20
days.
(iii) 20-day average transitional exception. If a TRASOP security is
transferred before March 20, 1979, the plan may value the security on
the basis of the 20 consecutive trading days preceding the date on which
the security is transferred or the date as of which the security is
allocated to a participant's account.
(8) Compensation. ``Compensation'' means ``participant's
compensation'' under section 415(c)(3) and Sec. 1.415-2(d). However,
except for purposes of applying section 415, compensation must be
determined for a plan year, not a limitation year.
(c) Procedures for additional credit--(1) Applicable year--(i)
General rule. With respect to a qualified investment, the ``applicable
year'' of a corporation is generally the taxable year in which the
investment is made. For purposes of this section, an investment is made
either in a year when section 38 property is placed in service or in a
year when qualified progress expenditures are incurred.
(ii) Carryover option. A corporation may determine the applicable
years for qualified investments made in any taxable year beginning after
December 31, 1976, under the following method: The first applicable year
with respect to the additional credit for a given year's qualified
investment is the year the qualified investment is made or, if later,
the first taxable year for which any additional credit is allowable if
claimed for that qualified investment. If there is an investment credit
carryover from the first applicable year, each taxable year to which any
part of the additional credit for that qualified investment is carried
over is also an applicable year. If the carryover treatment is elected
for the additional credit attributable to a year's qualified investment,
all applicable years for the additional credit attributable to that
investment must be determined under the carryover option.
(iii) Increased credit. A taxable year in which a corporation's
additional credit is increased because of a redetermination is also an
applicable year. See paragraph (c)(9)(iv) of this section.
(iv) Illustration. To illustrate the application of paragraphs
(c)(1) (i) and (ii) of this section, assume that a calendar-year
corporation makes a qualified investment in 1977 and that 1977 is an
unused credit year described in section 46(b)(1). If the general rule is
applied, 1977 is an applicable year. However, because 1977 is an unused
credit year (at least with respect to the additional credit), if the
corporation does not elect to treat 1977 as an applicable year but
carries over its entire additional credit for 1977 to 1978 and uses it
in 1978, then 1978 is an applicable year. If part of the additional
credit is carried over further to 1979, the year 1979 is also an
applicable year.
(v) Change in method. The choice between the general rule and
carryover
[[Page 360]]
option methods of determining the additional credit attributable to
applicable years is made with respect to each year's qualified
investment, and does not bind the corporation with respect to selection
of methods for the additional credit attributable to other years'
qualified investment. A failure to comply does not occur merely because
a corporation elects to apply either method for the additional credit
attributable to separate years' qualified investment.
(2) Time and manner of electing. A corporation with a qualified
investment must elect to be eligible for an additional credit by
attaching a statement of election--
(i) To its income tax return, filed on or before the due date
including extensions of time, for a taxable year not later than its
first applicable year with respect to a qualified investment, or
(ii) In the case of a return filed before December 31, 1975, to an
amended return filed on or before December 31, 1975.
(3) Statement of election. The statement of election must contain
the name and taxpayer identification number of the corporation. Also, it
must declare in the following words, or in words having substantially
the same meaning, that:
(i) The corporation elects to have section 46(a)(2)(B)(i) of the
Internal Revenue Code of 1954 apply; and
(ii) The corporation agrees to implement (or continue to implement,
as appropriate) a TRASOP and to claim the additional credit as required
by Sec. 1.46-8 of the Income Tax Regulations.
(4) Separate election. A separate election must be made for each
taxable year's qualified investment to obtain an additional credit for
that qualified investment. If a corporation does not make a timely
election to obtain an additional credit for a taxable year, it may not
subsequently make the election on an amended return or otherwise.
(5) No partial election. An election to obtain an additional credit
applies to a corporation's entire qualified investment for a taxable
year. Thus, a corporation may not elect to obtain a partial additional
credit for any year's qualified investment. However, the partial
disallowance of an additional credit will not result in an election
being treated as a partial election. Also, an election by a member of a
controlled group of corporations that applies only to the electing
member's qualified investment is not a partial election. See Sec. 1.46-
8(h)(9) with respect to transitional rules for elections made before
January 19, 1979.
(6) No revocation of election. After the time for electing the
additional credit has expired for a taxable year, a corporation may not
revoke its election for that year.
(7) Establishing a TRASOP--(i) In general. A corporation electing to
obtain an additional credit must establish a TRASOP with accompanying
trust on or before the last day for making the election regardless of
when in fact the election is made. A TRASOP is considered to be in
existence on a particular date if it meets the requirements of Sec.
1.410(a)-2(c)(1). A new plan need not be established if an existing plan
qualifies as a TRASOP, or is amended to meet the requirements of this
section, on or before the last day for making the election. The
requirements of this section are not satisfied merely by establishing
and crediting a separate ``TRASOP'' account on the corporation's books.
(ii) Type of plan. A TRASOP need not meet the requirements of
section 401(a). However, it must be a stock bonus plan, a combination
stock bonus plan and money purchase pension plan, or a profit-sharing
plan under Sec. 1.401-1(b)(1) of this chapter. See section 301(d)(7)(A)
of the 1975 TRA for the tax consequences relating to a TRASOP that does
not meet the requirements of section 401(a). See also title I of ERISA
for additional provisions applicable to a TRASOP as an employee pension
benefit plan under section 3(2) of ERISA.
(8) Funding a TRASOP--(i) In general. A corporation electing to
obtain an additional credit must fund its TRASOP by transferring TRASOP
securities or cash to it no later than 30 days after the applicable last
day. That day is the last day for electing the additional credit,
irrespective of when the election is actually made. However, in the case
of an investment credit that was carried over and claimed in a
subsequent applicable year by reason of
[[Page 361]]
paragraph (c)(1)(ii) of this section, that day is the last day
(including extensions) for filing its income tax return for the
subsequent applicable year. TRASOP securities may be transferred to a
plan at any time during the applicable year, but not before the first
day of an applicable year. If TRASOP securities are transferred to the
plan within the permissible time period after the close of the
applicable year, they are treated as transferred during that applicable
year first until all TRASOP securities required by this paragraph (c)
for that applicable year are transferred to, and taken into account
under, the TRASOP. Thus, for example, assume that on a return filed on
September 17, 1979 (with extensions, the last day for filing a return
for 1978), a calendar-year corporation claims an additional credit of
$5,000 for 1978, an applicable year under the TRASOP. No contributions
were made in 1978 on account of the 1978 credit, but TRASOP securities
with a value of $6,000 were contributed in 1979. The corporation also
expects to be able to claim an additional credit of $10,000 for 1979.
TRASOP securities transferred between January 1, 1979, and October 17,
1979, must be taken into account under the plan for 1978 before they are
taken into account for 1979. Accordingly, securities having a value of
$5,000 are applied against the obligation for 1978, and $1,000 of the
contribution is retained to be applied to the eventual obligation for
1979.
(ii) Cash transfers. A corporation may transfer cash to the TRASOP
instead of TRASOP securities only if the TRASOP uses the cash to acquire
TRASOP securities no later than 30 days after the time for funding the
TRASOP.
(iii) Valuation. The value of the TRASOP securities for an
applicable year must equal one percent of the corporation's qualified
investment for that year. However, if paragraph (c)(1)(ii) of this
section is followed by a corporation, the value of TRASOP securities for
an applicable year must equal the amount of additional credit claimed
for that year.
(iv) Cash reserve. The value of TRASOP securities acquired with cash
transferred by a corporation may be reduced by two items. The first item
is an amount not more than the value of fractional shares allocable to
participants entitled to receive an immediate distribution at the time
of the transfer. The second item is start-up expenses and administrative
expenses to the extent permitted under section 301(d)(13) of the 1975
TRA and paragraphs (e) (6) and (7) of this section.
(v) Conditional funding. The funding of a TRASOP may be conditional
if the TRASOP satisfies the provisions of section 301(d)(14) of the 1975
TRA. For purposes of section 301(d)(14), an investment credit is
considered to be allowed on the date the election for the applicable
year is made under paragraph (c)(2) of this section.
(vi) Certain benefit offset mechanisms. A TRASOP will be deemed to
be not funded to the extent that TRASOP securities are used to offset
benefits under a defined benefit plan.
(9) Claiming additional credit--(i) In general. Section 46(a)(3)
subjects the amount of investment credit earned with respect to a
taxpayer's qualified investment for a taxable year to a limitation based
on the corporation's tax liability.
(ii) Unused credit year. Section 46(a)(1) provides a first-in-first-
out rule for the investment credit in a taxable year. Section 46(b)(1)
provides for the carryback and carryover of unused credits. If less than
all of a taxpayer's credit earned for a taxable year is allowable, the
10-percent credit determined under section 46(a)(2)(A) earned for a
particular year is allowed first. Any portion of the additional credit
for a taxable year that is not allowable may be carried back or carried
over to the extent permitted by section 46(b)(1). However, an additional
credit which is allowed for a taxable year is not reduced by a carryback
to that year of an unused credit from a succeeding taxable year.
(iii) Example. Paragraph (c)(9)(ii) of this section is illustrated
by the following example:
Example. A calendar-year corporation begins operation and
establishes a TRASOP in 1975. The facts and treatment relating to the
corporation's qualified investments and investment tax credits for 1975
and 1976 are as follows:
[[Page 362]]
------------------------------------------------------------------------
1975 1976
------------------------------------------------------------------------
Facts:
1. Qualified investment....................... $500,000 $500,000
2. Credits earned:
a. 10% credit............................... 50,000 50,000
b. Additional credit........................ 5,000 5,000
c. Carryover of additional credit from prior .......... 3,000
year, line 5...............................
3. Sec. 46(a)(3) limitation 52,000 47,000
Treatment of credits:
4. Credits allowed:
a. Carryover of additional credit........... .......... 3,000
b. Current 10% credit....................... 50,000 44,000
c. Current additional credit................ 2,000 0
5. Unused credits:
a. 10% credit............................... 0 6,000
b. Additional credit........................ 3,000 5,000
------------------------------------------------------------------------
Thus, in 1975 the section 46(a)(3) limitation ($52,000) is applied first
to allow all of the 10-percent investment credit ($50,000). Accordingly
only $2,000 of the additional credit earned is allowed in 1975 and
$3,000 of the additional credit is carried forward to 1976. In 1976,
section 46(a)(1) requires that this $3,000 of additional credit is
allowed first, and then only $44,000 of the 10-percent credit earned in
1976 is allowed since the section 46(a)(3) limitation for that year is
$47,000. The unused credits from 1976 cannot be carried back since 1975,
the only prior year, is an unused credit year.
(iv) Redeterminations increasing credit. If a corporation's
allowable additional credit is increased because of a redetermination,
the increase is treated as if it were an unused credit carryover for
purposes of paragraphs (c)(1)(ii) and (c)(8)(i) of this section. For
purposes of this subdivision (iv), the date of the increase is
determined under paragraph (e)(9)(iii) of this section as if it were the
date of a reduction. Thus, for example, assume that a calendar-year
corporation claims an additional credit of $100,000 in 1978 because of a
qualified investment in that year. In 1980, the additional credit
attributable to 1978 qualified investment is redetermined to be
$110,000. With respect to the 1978 qualified investment, 1980 is also an
applicable year to the extent of $10,000. The increased credit is
reflected on the employer's return for 1980. The corporation must fund
the TRASOP with this $10,000 under paragraph (c)(8) of this section.
(v) Redeterminations increasing tax liability. If a corporation's
tax liability for a year is increased such that an additional credit
carried forward and claimed in a later year is allowable in the earlier
year, the claim of the additional credit will be considered timely if it
was otherwise timely under this section. Thus, for example, assume that
a calendar-year corporation makes qualified investment of $5,000,000 in
1978 but, based on its income tax liability, is unable to use any of the
credit until 1979, when the entire $50,000 additional credit can be
used. The corporation adopts the TRASOP, elects the full $50,000 credit
and funds in a timely manner for tax year 1979. However, as a result of
a 1981 redetermination of the 1978 tax liability, the corporation is
able to use $30,000 of the additional credit in 1978 and the remaining
$20,000 in 1979. The allowable credit for 1978 is increased by $30,000
and the increase is treated as an unused credit carryover, for which the
year of redetermination, 1981, is the applicable year. Assuming that no
other credits are available, the 1979 credit is reduced from $50,000 to
$20,000, and this reduction is taken into account in the redetermination
year by offsetting the reduction against amounts due the plan or by
deducting the amount of the reduction. The adoption of the TRASOP for
1979, rather than 1978, is considered timely.
(10) Deductions at expiration of carryover period. Under paragraph
(c)(1)(i) of this section, a corporation that uses no additional credit
in the year of a qualifed investment may nonetheless treat the year in
which the qualified investment is made as the first applicable year. If
the carryover period under section 46(b)(1)(B) expires before the
corporation uses the entire additional credit with respect to the
qualified investment, contributions attributable to the unused credit
are deductible, subject to the limitations of section 404(a), as if made
in the taxable year when the carryover period expires. The amount
deductible is the dollar amount of the unused credit irrespective of the
current value of the securities contributed with respect to the credit.
(d) Formal plan requirements--(1) In general. To be a TRASOP, a plan
must meet the formal requirements of this paragraph (d).
[[Page 363]]
(2) Plan year. To be a TRASOP, a plan must specify a plan year that
begins with or within the corporation's taxable year.
(3) Designed to invest primarily in employer securities. To be a
TRASOP, a plan must state that it is designed to invest primarily in
employer securities. A TRASOP intended to qualify as an ESOP under Sec.
54.4975-11 must state that it is designed to invest primarily in
employer securities. See paragraph (e)(10) of this section concerning
the requirement that a plan invest in employer securities on an ongoing
basis.
(4) Separate accounting. To be a TRASOP, a plan must state that
TRASOP securities are to be accounted for separately from any other
contributions to the plan.
(5) Debts and expenses of the TRASOP. To be a TRASOP, a plan must
state that TRASOP securities cannot be used to satisfy a loan made to
the TRASOP or be used as collateral for a loan made to a TRASOP.
However, if the plan so provides, to the extent permitted under section
301(d)(13) of the 1975 TRA and paragraphs (e) (6) and (7) of this
section, certain amounts may be used for the TRASOP's start-up expenses
and administrative expenses.
(6) Allocation of TRASOP securities--(i) General rules. To be a
TRASOP, a plan must provide for the allocation of TRASOP securities
under section 301(d)(3) of the 1975 TRA and this subparagraph (6).
(ii) Timing. TRASOP securities are allocated as of the last day of
the plan year beginning with or within the appropriate applicable year.
(iii) Participants. Each employee who is a participant at any time
during the plan year for which allocation is made must receive an
allocation as of the end of that year even though not then employed by
the employer. However, to receive allocations, employees must satisfy
the minimum participation requirements of the plan (for example, 1,000
hours of service).
(iv) Compensation considered. Under section 301(d)(3) of the 1975
TRA, allocations must be based on the proportion that each participant's
compensation bears to all participants' compensation. Compensation in
excess of $100,000 must be disregarded in making these allocations. A
plan may have a lower stated ceiling on compensation (from $0 to
$100,000) and if the plan has such a lower ceiling, compensation in
excess of this ceiling must likewise be disregarded. Also, allocations
must be based on a participant's compensation while actually employed,
not just while actually participating, in the plan year.
(v) Section 415 priority rule; transitional rule. For purposes of
section 415, this subdivision (v) applies only to limitation years
beginning after November 30, 1982. If a TRASOP security is not allocated
to a participant's account for a plan year because of section 415 and
section 301(d)(3) of the 1975 TRA, no other amount may be allocated for
that participant under any defined contribution plan of the same
employer after the actual allocation date for that TRASOP plan year,
until all unallocated TRASOP securities have been allocated as provided
in paragraphs (d)(6) (vi) and (vii) of this section. This subdivision
(v) applies to a TRASOP when, under section 415(f)(1)(B), the TRASOP is
treated along with an employer's other defined contribution plans as one
plan for purposes of section 415.
(vi) Unallocated amounts. Under section 301(d)(3) of the 1975 TRA,
TRASOP securities unallocated for a plan year to participants' accounts
because of section 415 must be allocated proportionately to the accounts
of other participants until the addition to the account of each
participant reaches the limits of section 415.
(vii) Suspense account. If, after these allocations, TRASOP
securities remain unallocated, they must be held in an unallocated
suspense account under the TRASOP. Any income produced by these
securities must also be held in the account. A plan with such an account
will not fail to qualify under section 401(a) merely because of the
account. In each successive TRASOP plan year (whether or not an
applicable year), the unallocated assets are released from this account
for allocation on a first-in-first-out basis. They are then allocated to
the participants' accounts proportionately under paragraph (d)(6) (i)
through (vi) of this section for each later year until no
[[Page 364]]
TRASOP securities remain unallocated. Value for this allocation is
determined under paragraph (b)(7) of this section as of the date of
transfer from the suspense account or, if the special 20-day average
rule applies, the value is determined on the basis of the 20 consecutive
trading days immediately preceding the date of transfer from the
suspense account.
(viii) Escrow account. A TRASOP may provide for the establishment of
an escrow account instead of a suspense account. The escrow account must
satisfy paragraph (d)(6)(vii) of this section. The beneficiary of the
escrow account is to be the TRASOP. The corporation may establish the
escrow account and contribute stock or cash to it. In such a case, the
escrow agent must transfer assets to the plan each year equal to the
amount to be allocated proportionately under paragraph (d)(6)(i)-(vi) of
this section. Assets held in an escrow account are plan assets.
(ix) Treatment of certain plan terminations. To be a TRASOP, a plan
must provide that, if a plan terminates because the corporation ceases
to exist, unallocated amounts described in paragraph (d)(6)(vi) of this
section must be allocated to the extent possible under section 415 for
the year of termination. The remaining unallocated amounts must then be
withdrawn. These unallocated amounts are treated as recaptured under all
the rules of paragraph (e)(9)(vii) of this section except its last
sentence. See paragraph (d)(9)(i) of this section concerning
distributions of allocated TRASOP securities.
(x) No integration. No TRASOP may be integrated, directly or
indirectly, with contributions or benefits under title II of the Social
Security Act or any other state or federal law.
(xi) Fractional securities. Participants' accounts are to be
allocated fractional securities or fractional rights to securities.
(xii) Accounting for amounts withheld by employer or paid by plan as
start-up or administrative expenses. An employer may withhold certain
start-up and administrative expenses from TRASOP securities due the
plan. Also, a plan may reduce amounts to be allocated to the extent that
certain plan assets are used to reimburse the employer, for example for
salaries of employees providing services to the plan, or to pay fees
directly to independent contractors for expenses. These expenses do not
reduce the amount of additional credit claimed and are not allowable as
expenses in computing taxable income. Additional rules concerning these
expenses are in paragraphs (e) (6) and (7) of this section.
(7) Nonforfeitability. To be a TRASOP, a plan must state that each
participant has a nonforfeitable right to allocated TRASOP securities.
For purposes of this section, forfeitures described in section 411(a)(3)
are not permitted. However, amounts shall not fail to be considered to
be nonforfeitable if the plan provides for their return to the
corporation--
(i) In the case of conditional contributions, under section
301(d)(14) of the 1975 TRA and paragraph (c)(8)(v) of this section, and
(ii) In the case of investment credit recapture or an event deemed
to be a recapture, under section 301(f) of the 1975 TRA and paragraph
(f) of this section.
(8) Voting rights--(i) Provision for passthrough. To be a TRASOP, a
plan must state that each participant is entitled to direct a designated
fiduciary how to exercise any voting rights on TRASOP securities
allocated to the account of the participant. The plan need not permit
participants to direct the voting of unallocated TRASOP or other
securities held by the trust. It may authorize the designated fiduciary
to exercise voting rights for unallocated securities.
(ii) Notification by the employer. To be a TRASOP, the plan must
obligate the corporation to furnish the designated fiduciary and
participants with notices and information statements when voting rights
are to be exercised. The time and manner for furnishing participants
with a notice or information statement must comply with both applicable
law and the corporation's charter and bylaws as generally applicable to
security holders. In general, the content of the statement must be the
same for plan participants as for other security holders.
[[Page 365]]
(iii) Fractional securities. To be a TRASOP, the plan must allow the
participants to vote any allocated fractional securities or fractional
rights to securities. This requirement is met if the designated
fiduciary votes the combined fractional securities or rights to the
extent possible to reflect the direction of the voting participants.
(iv) Unexercised voting rights. To be a TRASOP, the plan may not
permit the designated fiduciary to exercise voting rights which a
participant fails to exercise. However, the plan may permit the
solicitation and exercise of participants' voting rights by management
and others under a proxy provision applicable to all security holders.
(9) Distributions--(i) In general. To be a TRASOP, a plan must
permit the distribution of allocated TRASOP securities only as provided
under section 301(d)(4) of the 1975 TRA. Also, under Sec. 1.401-
1(b)(1)(i) of this chapter, to the extent that a TRASOP is a money
purchase pension plan, it can only provide for a distribution in the
case of separation from service, death, or disability. No TRASOP may
provide for the distribution of TRASOP securities upon plan termination
within the 84-month holding period. For purposes of section 301(d)(4) of
the 1975 TRA, the 84-month holding period begins on the date as of which
TRASOP securities are allocated.
(ii) Certain fractional securities. A stock bonus TRASOP may
distribute cash instead of fractional securities.
(e) Operational plan requirements--(1) General rule. To be a TRASOP,
a plan in operation must meet the requirements of this paragraph (e).
However, the provisions under paragraph (e)(8) of this section apply
only to TRASOPs qualified under section 401(a).
(2) Compliance with plan provisions. To be a TRASOP, a plan must
operate in compliance with its provisions. Failure to operate in
compliance with plan provisions constitutes an operational failure to
comply. See paragraph (h)(5)(iii) of this section.
(3) Compliance with certain Code provisions. To be a TRASOP, a plan
must meet the requirements of section 301(d)(7) of the 1975 TRA. Thus,
whether or not it is qualified under section 401(a), a TRASOP must meet
the requirements of section 401(a) with respect to allocations, section
410 with respect to participation, and section 415 with respect to
limitations on contributions and benefits. However, these requirements
are modified by paragraph (d)(6) of this section, relating to
allocations and section 415.
(4) Employee contributions. Under a TRASOP, the participants'
receipt of benefits attributable to TRASOP securities contributed for
the additional credit (but not the extra additional credit) must not
depend on contributions by participants. If a corporation has a plan in
existence which requires employee contributions, a portion of the plan
may be a TRASOP if employee contributions are not required with respect
to that portion of the plan.
(5) Controlled group of corporations, etc. Whether or not a TRASOP
is qualified under section 401(a), all employees who by reason of
section 414 (b) and (c) are treated as employees of an electing
corporation are treated as employed by the corporation in determining
whether the plan satisfies the requirements of sections 301(d)(7) (B)
and (C) of the 1975 TRA. A member of a controlled group under paragraph
(b)(4)(i) of this section with a qualified investment but with no actual
employees may obtain an additional credit even though the only
participants in the corporation's TRASOP are actually employed by
another member of the controlled group.
(6) Start-up expenses--(i) In general. For purposes of this section,
the term ``start-up expense'' means any ordinary and necessary amount of
a nonrecurring nature paid or incurred by the corporation or by the plan
in connection with the establishment of a TRASOP under paragraph (c)(7)
of this section. Thus, for example, start-up expenses may include
expenses relating to: the drafting or amending of plan documents to
establish a TRASOP under section 301(d) or (e) of the 1975 TRA, the
seeking of agency approval for these documents and related transactions,
the obtaining of shareholder approval for establishing a TRASOP, and the
registering of securities for initial funding of a TRASOP.
(ii) Treatment of start-up expenses. Start-up expenses may be
withheld by the employer from amounts that would
[[Page 366]]
otherwise be due the plan under paragraph (c)(8) of this section, to the
extent that these amounts are known by the employer when funding first
occurs for an applicable year. To the extent that these amounts are not
withheld by the employer, the plan may pay remaining amounts from plan
assets within a reasonable time after the amounts are known by the plan.
(iii) Ceiling on start-up expenses. Reimbursement for start-up
expenses is limited to a ceiling. This ceiling is the sum of 10 percent
of the first $100,000 that an employer is first required to transfer
under paragraph (c)(8) of this section for an applicable year and 5
percent of that amount in excess of $100,000. If this first year is an
unused credit year from which there is a carryover, amounts required to
be transferred in subsequent years for claiming carryovers from this
first year are considered in determining this ceiling. Thus, for
example, assume that a calendar-year corporation first earns an
additional credit in 1977 of $9,000 and that $3,000 of this amount is
claimed on the income tax return for 1977, for 1978 and for 1979. The
corporation's ceiling on start-up expenses is $300 when its 1977 return
is filed. The total ceiling increases to $600 when its 1978 return is
filed and to $900 when its 1979 return is filed, with the claiming of an
additional $3,000 credit for each of the three years.
(iv) Special rule for taxable years ending before January 1, 1977.
Special treatment is available for expenses paid or incurred before
January 1, 1977, that were not taken into account in the manner provided
by section 301(d)(13) of the 1975 TRA. These expenses may be withdrawn
under paragraph (e)(9)(vii) of this section in the same manner as
reductions in the corporation's additional credit caused by a recapture.
This withdrawal may only be made during the first taxable year ending
after March 20, 1979. It is subject to the ceiling of section 301(d)(13)
of the 1975 TRA. Expenses previously deducted by a corporation must be
reduced on a timely-filed amended return by the amount of this
withdrawal.
(7) Administrative expenses--(i) In general. For purposes of this
section, the term ``administrative expense'' means any amount, other
than a start-up expense, paid or incurred by the corporation or by the
plan that is ordinary and necessary in maintaining the TRASOP. Thus, for
example, administrative expenses may include expenses relating to:
compensating plan fiduciaries and administrators, leasing office space
and equipment, reproducing and mailing information to participants and
beneficiaries, and filing reports, returns, and amendments relating to a
TRASOP. Paragraph (e)(6) (ii) and (iv), relating to treatment of start-
up expenses and to a special rule for taxable years ending before
January 1, 1977, also applies to administrative expenses.
(ii) Ceiling on administrative expenses. Reimbursement for
administrative expenses under paragraph (e)(6)(ii) of this section is
limited to the smaller of two amounts for each plan year. The first
amount is $100,000. The second amount is the sum of 10 percent of the
first $100,000 of dividend income paid with respect to TRASOP securities
held by the plan during the plan year ending with or within the
corporation's taxable year and 5 percent of any such dividend income in
excess of $100,000.
(8) TRASOP qualification under section 401(a)--(i) Permanence. A
TRASOP is not required to be a qualified plan under section 401(a).
However, to meet the requirements of section 401(a), a TRASOP must be a
permanent plan, as described in Sec. 1.401-1(b)(2) of this chapter.
Under section 401(a)(21), a plan will not fail to be considered
permanent merely because the amount of employer contributions under the
plan is determined solely by reference to the amount of additional
credit allowable under this section. Thus, for example, it will not fail
to be considered permanent merely because employer contributions are not
made for a year for which an additional credit is not available by
reason of no qualified investment for which an additional credit can be
obtained. Section 401(a)(21) applies only to the extent the TRASOP is
funded with TRASOP securities and cash in lieu of TRASOP securities.
(ii) Partial discontinuance of contributions. A plan that meets the
requirements of section 401(a) may receive contributions of TRASOP
securities as
[[Page 367]]
well as other contributions. If the other contributions continue on a
permanent basis, the plan's qualification under section 401(a) will not
be adversely affected merely because TRASOP securities cease to be
contributed to it. The discontinuance of TRASOP contributions does not
alter the requirement that past TRASOP contributions remain invested in
employer securities. See paragraph (e)(10) of this section.
(iii) Income distribution. Income paid with respect to employer
securities acquired by a TRASOP may be distributed at any time after
receipt by the plan to participants on whose behalf such securities have
been allocated without adversely affecting the qualified status of the
plan under section 401(a). (See the last sentence of section 803(h), Tax
Reform Act of 1976.) However, under a TRASOP that is a stock bonus or
profit-sharing plan, income held by the plan for a 2-year period or
longer must be distributed under rules generally applicable to stock
bonus and profit-sharing plans qualified under section 401(a). Income
distributed by a TRASOP is not subject to the partial exclusion of
dividends provided in section 116, whether or not the income is held by
the plan for two or more years.
(9) Reductions in investment credit--(i) General rule. Certain
reductions in a corporation's investment credit result from either a
recapture under section 47 of the corporation's investment credit or a
redetermination of the allowable credit. If these reductions are taken
into account under a TRASOP, the plan may only use one or more of the
methods described in paragraphs (e)(9), (v), (vi), and (vii) of this
section for taking into account these reductions. Thus, for example,
more than one method is permitted upon a recapture with respect to a
qualified investment made in a particular year. However, the method
described in paragraphs (e)(9)(vii) of this section applies only to a
recapture and not to a redetermination.
(ii) Ratable reduction. A reduction is allocated ratably between the
10-percent credit and the additional credit. Thus, for example, if a
calendar-year corporation claims a $33,000 investment credit for 1976,
including $3,000 additional credit, and $11,000 of the total credit is
recaptured in 1978, the $3,000 additional credit is reduced by $1,000.
This subdivision (ii) does not apply to a reduction solely of the
additional credit as could occur, for example, in the case of a
redetermination caused by a mathematical error in computing the
additional credit or in the case of a recapture caused by a bad faith
failure to comply under paragraph (h) of this section.
(iii) Date of reduction. A reduction in investment credit occurs
under this paragraph (e)(9) on the earliest of these dates: (A) The date
an income tax return (or an amended return) is filed reflecting the
reduction; (B) the date a judicial determination affecting the amount of
the reduction becomes final; and (C) the date specified in a closing
agreement made under section 7121 that is approved by the Commissioner.
For purposes of this subdivision (iii), a judicial determination becomes
final at the time prescribed in Sec. 1.547-2(b)(1) (ii) or (iii),
relating to personal holding company tax.
(iv) Year for taking reduction into account. A reduction in
investment credit must be taken into account in the earliest year or
years possible under the applicable method beginning no later than the
year in which the date of the reduction falls.
(v) Decrease future contributions. The reduction may be taken into
account as a decrease in the value of TRASOP securities to be
transferred to the plan. The amount of the decrease is equal to the
dollar amount of the reduction.
(vi) Deduct under section 404. On the date of the reduction, the
amount of the reduction may be treated as an amount paid to the TRASOP
for purposes of, and as a deduction to the extent allowed under, section
404.
(vii) Withdraw TRASOP securities. If an additional credit allowed
for a taxable year is recaptured, the corporation may withdraw from the
plan TRASOP securities transferred to, or acquired by, the plan for
claiming that year's credit. The withdrawal must only be from assets
segregated under paragraph (f)(2) of this section and must be first from
assets accounted for in an unallocated suspense account for
[[Page 368]]
the particular year. The amount of assets actually withdrawn bears the
same proportion to the amount of assets subject to withdrawal as the
amount of additional credit recaptured bears to the amount of additional
credit claimed. Thus, for example, if the assets subject to withdrawal
consist of 300 shares of one class of employer stock and one-third of
the additional credit is recaptured, 100 shares of the stock are
withdrawn. However, if the current value of the assets subject to
withdrawal exceeds the dollar amount of the additional credit claimed,
assets may be withdrawn only to the extent that their current value does
not exceed the dollar amount of the recaptured portion of the additional
credit. Thus, for example, if the 300 segregated shares in the prior
example have a current value of $9,000 and the dollar value of the
additional credit claimed is $4,500, when one-third of the additional
credit is recaptured, only 50 shares, not 100 shares, are withdrawn.
Current value is determined under paragraph (b)(7) of this section as of
the withdrawal date or, if the special 20-day average rule is applied,
it is based on the 20 consecutive trading days immediately preceding the
withdrawal date. Withdrawals from an individual's account for the year
with respect to which recapture occurs must bear the same ratio to the
total amount withdrawn for that year as the individual's TRASOP account
balance for that year bears to the total TRASOP account balances for
that year. In the case of a TRASOP security acquired after March 20,
1979, the corporation may not withdraw it unless the plan meets the
requirements of paragraph (d)(7)(ii) of this section when the plan
acquires the TRASOP security.
(viii) Prior distribution rule. If a TRASOP distributes an amount
allocated with respect to an investment credit for a taxable year and
the credit for that year is later recaptured, withdrawals may not reduce
participants' accounts below the level to which they would have been
reduced had the prior distribution not occurred. Recaptured amounts
above this level may only be deducted under paragraph (e)(9)(vi) of this
section. They may not be used to decrease future contributions under
paragraph (e)(9)(v).
(ix) Illustration. The operation of paragraph (e)(9)(viii) of this
section is illustrated as follows:
Example. For 1977, a calendar-year corporation claims an additional
credit of $10,000. The corporation's TRASOP meets the requirements of
section 301(f) of the 1975 TRA. Each of 10 participants under the plan
for that year receives an equal allocation of 10 shares valued at
$1,000. In 1978, one participant terminates employment and receives a
distribution of 10 shares. In 1979, a recapture reduces the 1977
additional credit by $2,000. The value of employer securities has not
changed from the allocation date. If the 10 shares had not been
distributed, 20 shares would be available for withdrawal, 2 shares from
each participant's account. Since 9 participants remain from 1977, only
18 shares are available for withdrawal (2 sharesx9 remaining
participants). If these 18 shares are withdrawn, the corporation may
take into account 2 shares by deducting their value to the extent
permitted under paragraph (e)(9)(vi) of this section.
(10) Continued investment in employer securities. The requirement
that a plan be designed to invest primarily in employer securities is a
continuing obligation. Therefore, a transaction changing the status of a
corporation as an employer may require the conversion of certain plan
assets into other securities. See paragraphs (d)(9) and (g)(6) of this
section. In general, cash or other assets derived from the disposition
of employer securities must be reinvested in employer securities not
later than the 90th day following the date of disposition. However, the
Commissioner may grant an extension of the period for reinvestment in
employer securities depending on the facts and circumstances of each
case.
(f) Section 301(f) withdrawals--(1) In general. No assets may be
withdrawn by a corporation under section 301(f) of the 1975 TRA unless
the assets are either TRASOP securities or plan assets into which TRASOP
securities have been converted (``withdrawal assets''). See paragraph
(e)(10) concerning restrictions on investment of TRASOP assets in assets
other than employer securities. Withdrawal assets must meet the
segregated accounting requirements of this paragraph. The physical
segregation of assets is not required.
[[Page 369]]
(2) Segregated accounting. The segregated accounting requirements
are that--
(i) Withdrawal assets must be segregated from other plan assets on a
taxable-year-by-taxable-year basis; and
(ii) Separate accounts must be maintained on a taxable-year-by-
taxable-year basis for each participant on whose behalf withdrawal
assets are allocated.
(3) Aggregate plan year accounting. Withdrawal assets for taxable
years beginning before October 4, 1976, also meet the segregated
accounting requirements if they are aggregated and accounted for in one
separate account apart from withdrawal assets in separate accounts for
later taxable years.
(g) Requirements for employer securities--(1) General rules. The
term ``employer security'' does not include stock rights, warrants and
options. An employer security that is not common stock must at all times
be immediately convertible into common stock that is an employer
security at a conversion price which is no greater than the fair market
value of that common stock at the time the plan acquires the security.
(2) Common stock--(i) In general. To be an employer security, common
stock must meet certain voting power and dividend right requirements.
For purposes of this paragraph (g), stock held by the TRASOP is not
treated as outstanding.
(ii) Dividend right limitations. If dividend rights are subject to a
limitation, then stock representing at least 50 percent of the fair
market value of the employer's outstanding common stock at the time the
common stock is transferred to or purchased by the TRASOP must be
subject to the same limitation. However, common stock that satisfies
paragraph (g)(3)(ii) of this section is not subject to this subdivision
(ii).
(3) Voting power and dividend rights. To be an employer security,
common stock must have voting power and dividend rights which, when
taken together, are ``no less favorable'' than the voting power and
dividend rights of any other common stock issued by the employer. Common
stock which meets one of the following tests is ``no less favorable''.
(i) Ten-percent shareholder test. The stock is part of, or identical
to, a class of outstanding stock of which at least 50 percent is not
owned by 10-percent shareholders. For this purpose, a 10-percent
shareholder is one who owns at least 10 percent of the outstanding
shares in a class, including shares constructively owned under section
318.
(ii) Substantial proportionality test. More than one class of common
stock is outstanding and an identical percentage of shares from each
class is transferred to the TRASOP.
(iii) Voting power test. The stock is part of, or identical to, the
existing class of stock having the greatest number of votes per unit of
fair market value. For example, assume there are only two classes of
common stock, Class A and Class B. Their fair market values per share
are $1 and $.50, respectively, and the owner of each share of each class
is entitled to one vote per share. Thus, Class B has two votes per $1
and Class A has one vote per $1. Accordingly, the Class B stock has the
greatest number of votes per unit of fair market value.
(4) Right of first refusal. TRASOP securities may, but need not, be
subject to a right of first refusal. However, whether or not the plan is
an ESOP, any such right must meet the requirements of Sec. 54.4975-
7(b)(9) of this chapter.
(5) Put option. A TRASOP security that is transferred to a TRASOP
after September 30, 1976, must be subject to a put option if it is not
publicly traded when distributed or if it is subject to a trading
limitation when distributed. The provisions of Sec. 54.4975-7(b)(10)-
(12) and Sec. 54.4975-11(a)(3) of this chapter apply to such securities
whether or not the plan is an ESOP.
(6) Change of employer security status. In general, a transaction
changing the status of a corporation as an employer, or as a member of a
controlled group of corporations including the employer, adversely
affects the status as employer securities of common stock and securities
held by a plan (``old employer securities''). However, to the extent
that the transaction causing the change in status of the old employer
securities does not result in a recapture under section 47 of any
investment
[[Page 370]]
credit underlying the transfer to, or acquisition by, the plan of the
old employer securities, common stock and securities (``new employer
securities'') substituted for old employer securities are treated as if
they were the old employer securities if--
(i) The plan is not terminated,
(ii) The old employer securities and the new employer securities are
of equal value at the time of the transaction changing the status of the
old employer securities, and
(iii) The new employer securities otherwise meet the requirements of
this section.
(h) Failure to comply--(1) General rule--(i) Effect of failure. If a
corporation elects under paragraphs (c)(2) through (5) of this section
to obtain an additional credit and fails to comply with respect to that
credit at any time, it is liable to the United States for a civil
penalty equal to the amount involved in the failure to comply. If the
corporation fails to comply with respect to an additional credit during
the 84-month period described in section 301(d)(4) of the 1975 TRA, the
credit is also recaptured. A separate failure to comply occurs for each
taxable year in which a failure continues to exist.
(ii) Illustration of continuing failure's effect. Assume that in
1975 an additional credit is allowed and a failure to comply occurs in
1975 with respect to that credit. Assume also that in 1976 the 1975
failure continues uncorrected, another additional credit is allowed, and
a failure to comply occurs with respect to the 1976 credit. Under these
circumstances, on the last day of 1976 three separate failures to comply
exist: (A) The 1975 failure with respect to the 1975 credit, (B) the
1976 failure with respect to the 1975 credit, and (C) the 1976 failure
with respect to the 1976 credit.
(2) Assessment and collection. The civil penalty must be assessed
and collected in the same manner in which a deficiency in the payment of
federal income tax is assessed and collected.
(3) Exception. If a failure to comply is corrected within the
correction period described in paragraph (h)(5) of this section--
(i) The corporation is not liable for a civil penalty; and
(ii) If the corporation establishes that at the time of the failure
a good faith effort to comply was made, its additional credit is not
disallowed.
(4) Failure to comply (penalty classifications)--(i) In general. An
electing corporation fails to comply if a defect described in paragraphs
(h)(4) (ii) through (iv) of this section occurs with respect to an
additional credit allowed for a particular taxable year. The
characterization of the defect in this subparagraph (4) determines the
amount involved under paragraph (h)(8) of this section for the purpose
of assessing the civil penalty.
(ii) Funding defect. A funding defect occurs if a corporation or its
TRASOP fails to satisfy the requirements of paragraph (c) (8) or (9) of
this section, relating to funding a TRASOP and claiming an additional
credit.
(iii) Special operational defect. A special operational defect
occurs if a TRASOP fails in operation to satisfy the requirements
described in paragraphs (d) (5) through (9) of this section, relating to
debts and expenses of a TRASOP, allocation of TRASOP securities,
nonforfeitability, voting rights, and distributions, or paragraph (e)(3)
of this section, relating to compliance with certain Code provisions.
(iv) De minimis defect. A de minimis defect occurs if a corporation
or its TRASOP fails to satisfy any requirement of this section other
than those enumerated either in paragraph (h)(4) (ii) and (iii) of this
section or in paragraphs (a)(2) and (c) (2) through (5) of this section.
A failure to comply under this subdivision (iv) may be formal or
operational in nature.
(5) Failure to comply (correction rules classifications)--(i) In
general. If for an electing corporation a defect described in paragraph
(h)(4) of this section occurs, the procedure for correcting the failure
to comply depends upon whether the failure is classified as a ``formal''
failure or an ``operational'' failure under this subparagraph (5).
(ii) Formal failure to comply. Formal failures are corrected by
retroactive amendment. If a formal plan requirement is not met, the plan
must be retroactively amended by no later than the expiration of the
correction period under paragraph (h)(6) of this section.
[[Page 371]]
A plan fails to meet a formal plan requirement of paragraph (d) of this
section if, for example, it does not state, as required by paragraph
(d)(3) of this section, that it is designed to invest primarily in
employer securities.
(iii) Operational failure to comply. Operational failures are
corrected by undoing the defective transaction and by making the plan
and the participants whole. If the value of TRASOP securities
transferred to the TRASOP is less than the amount of the additional
credit, the corporation must make up any resulting funding deficiency
within the correction period. This is done, for example, by contributing
additional TRASOP securities plus an amount equal to the dividends or
interest that would have been paid between the time that the TRASOP
securities should have been transferred and the actual time for the
transfer. The contribution of additional TRASOP securities is based on
their value under paragraph (b)(7) of this section as of the date by
which they were required to be transferred to the plan. An electing
corporation fails to meet an obligation undertaken under this section
if, for example, it fails to comply with paragraph (c)(8) of this
section.
(6) Correction period--(i) In general. For purposes of this
paragraph (h), the ``correction period'' begins when the failure to
comply occurs and ends 90 days after receipt by the corporation of a
notice of deficiency under section 6212 with respect to the civil
penalty and the investment credit.
(ii) Extensions of correction period. Extensions of the correction
period are determined under Sec. 53.4941(e)-1(d)(2) (i), (ii), and (iv)
of this chapter (Foundation Excise Tax Regulations). For this purpose, a
failure to comply is treated as an act of self-dealing, the corporation
is treated as a foundation, and a civil penalty is treated as a tax
under section 4941(a)(1).
(7) Good faith. The corporation has the burden of establishing under
paragraph (h)(3)(ii) of this section that it made a good faith effort to
comply. For example, if a corporation shows that it has made a good
faith effort to establish the fair market value of the employer
securities transferred to the TRASOP, it may be entitled to the
additional credit even if, on later examination of the return, it is
determined that more securities should have been transferred. For
purposes of this paragraph (h)(7), reasonable reliance on Technical
Information Release 1413 (1975-50 I.R.B. 16), questions and answers
relating to ESOP's, is a good faith effort to comply.
(8) Amount involved--(i) In general. The amount involved in a
failure to comply is an amount described in this subparagraph (8). A
maximum amount and a minimum amount are determined with respect to an
additional credit allowed for a particular taxable year.
(ii) Maximum amount involved. Notwithstanding any other rule in this
paragraph (h), all amounts involved with respect to an additional credit
allowed for a particular taxable year may not exceed the amount of that
credit.
(iii) Minimum amount involved. The minimum amount is \1/2\ of one
percent of the additional credit times the number of full months, or
parts of full months, during which the failure to comply exists. ``Full
month'' has the meaning assigned in Sec. 1.1250-1(d)(4) (realty
depreciation recapture).
(iv) Funding amount involved. The amount involved for a funding
defect is the greater of the minimum amount involved or the amount
required to place the plan in the position it would have been in if no
funding defect had occurred.
(v) Special operational amount involved. The amount involved for a
special operational defect is the maximum amount involved.
(vi) De minimis amount involved. The amount involved for a de
minimis defect is the minimum amount involved.
(9) Certain permissible actions--(i) Elections prior to January 19,
1979. A corporation does not fail to comply (within the meaning of this
paragraph (h)) merely because it revokes an election made prior to
January 19, 1979, under the general rule described in paragraph
(c)(1)(i) of this section and with respect to which no additional credit
was claimed in the taxable year for which
[[Page 372]]
the election was made. Such a revocation is permitted irrespective of
whether the carryover option described in paragraph (c)(1)(ii) is
elected with respect to qualified investment made in a year for which a
general rule election is revoked.
(ii) Pro rata use of credit. A corporation does not fail to comply
merely because, for an applicable year ending prior to January 19, 1979,
it provides for pro rata use of the regular 10-percent credit and the 1-
percent additional credit to the extent that less than all of a
taxpayer's credit earned for a taxable year is allowable.
(iii) Transitional rule. The Commissioner, based on the particular
facts and circumstances of individual cases, may determine that a good
faith failure to comply before January 19, 1979, with a final or
temporary rule adopted under this section on or after that date does not
require retroactive correction under paragraph (h)(5)(ii) of this
section.
(Sec. 301(d)(2)(C) of the Tax Reduction Act of 1975; sec. 7805 of the
Internal Revenue Code of 1954 (89 Stat. 38, 68A Stat. 917; 26 U.S.C.
7805))
[T.D. 7857, 47 FR 54795, Dec. 6, 1982]
Sec. 1.46-9 Requirements for taxpayers electing an extra one-half
percent additional investment credit.
(a) Introduction--(1) In general. A corporation that qualifies for
an additional credit under Sec. 1.46-8 may elect under section
46(a)(2)(B)(ii) of the Code to obtain an extra one-half percent
additional investment credit for property described in section
46(a)(2)(D). Paragraph (c) of this section provides additional
procedures for electing this extra credit. This section also provides
rules for implementing an employee stock ownership plan that meets the
requirements of sections 301 (d) and (e) of the Tax Reduction Act of
1975 (``1975 TRA''). The plan must meet the additional formal
requirements of paragraph (d), and the additional operational
requirements of paragraph (e) of this section. Unless otherwise
indicated, statutory references in this section are to the Internal
Revenue Code of 1954, as applicable for the year in which a qualified
investment is made.
(2) Applicability of one-percent TRASOP provisions. Subject to the
exceptions and additional rules of this section, the provisions of Sec.
1.46-8 apply to an election made, and to a plan implemented, under this
section. However, this section does not change the requirements of Sec.
1.46-8 for purposes of obtaining an additional one-percent credit.
(3) Effective date. This section applies only to taxable years
beginning after December 31, 1976. See section 803(j)(2)(A) of the Tax
Reform Act of 1976.
(b) Definitions--(1) One-percent terms. When used in this section,
the terms listed below have the same meanings as in Sec. 1.46-8(b):
(i) TRASOP. See Sec. 1.46-8(b)(1).
(ii) Employer. See Sec. 1.46-8(b)(3).
(iii) Employer securities. See Sec. 1.46-8(b)(4).
(iv) TRASOP securities. See Sec. 1.46-8(b)(5).
(v) Publicly traded. See Sec. 1.46-8(b)(6).
(vi) Value. See Sec. 1.46-8(b)(7).
(vii) Compensation. See Sec. 1.46-8(b)(8).
(2) Additional credit. An ``additional credit'' or ``extra
additional credit'' is the extra one-half percent additional investment
credit under section 46(a)(2)(B)(ii)--
(i) For purposes of applying this section, and
(ii) When the context requires, for purposes of applying Sec. 1.46-
8 to this extra credit.
(3) Matching employee contribution. A ``matching employee
contribution'' is a contribution that meets the requirements of
paragraph (f) of this section.
(4) Basic amount. A ``basic amount'' is a matching employee
contribution which is equal to the maximum credit multiplied by a
fraction. The numerator of this fraction is a participant's compensation
for the plan year. (See Sec. 1.46-9(f)(3)(ii), concerning disregarded
compensation.) The denominator is the aggregate of all participants'
compensation for the plan year. The ``maximum credit'' is the estimated
value of all employer contributions under paragraph (c)(4)(i) of this
section for the applicable year, determined as if the maximum possible
matching employee contributions were made.
[[Page 373]]
(5) Supplemental contribution. A ``supplemental contribution'' is a
matching employee contribution made in addition to a basic amount.
(c) Special procedures for extra additional credit--(1) Statement of
election. A corporation's statement of election described in Sec. 1.46-
8(c)(3) must contain the name and taxpayer identification number of the
corporation. Also, it must declare in the following words, or in words
having substantially the same meaning, that:
(i) The corporation elects to have section 46(a)(2)(B) (i) and (ii)
of the Internal Revenue Code of 1954 apply; and
(ii) The corporation agrees to implement (or continue to implement,
as appropriate) a TRASOP and to claim the additional credit as required
by Sec. 1.46-8 and Sec. 1.46-9 of the Income Tax Regulations.
(2) Separate election. A separate election must be made for each
year's qualified investment to obtain the extra additional credit for
the qualified investment. If a corporation does not make a timely
election to obtain an extra additional credit for a taxable year, it may
not subsequently make the election on an amended return or otherwise.
(3) No partial election. To reduce administrative costs, a plan may
establish a ceiling on matching employee contributions. Thus, for
example, it may provide for the contribution of only a basic amount
without supplemental contributions under paragraph (f)(2)(iv) of this
section. Such a ceiling that in effect limits the additional credit to
less than one-half percent of the qualified investment is not a partial
election prohibited by Sec. 1.46-8(c)(5).
(4) Funding a TRASOP--(i) Employer contributions. The carryover
option under Sec. 1.46-8(c)(1)(ii) is available for both the one-
percent and one-half percent additional credits or for the one-half
percent additional credit alone. In applying Sec. 1.46-8(c)(8)(iii),
the value of TRASOP securities, other than those acquired with matching
employee contributions, for an applicable year must equal one-half
percent of the corporation's qualified investment for that year or, if
less, the amount of matching employee contributions received (including
pledges, where permitted by the plan) by the time the election for that
year is made. However, if a corporation exercises the carryover option
in Sec. 1.46-8(c)(1)(ii), the value of these TRASOP securities for an
applicable year must equal the amount of additional credit claimed for
that year determined after being reduced, if necessary, to equal
contributions received (including pledges, if permitted) by the time the
credit is claimed for that year. The value of these TRASOP securities,
but not the amount of credit claimed, is further reduced to the extent
that the employer withholds TRASOP securities to take into account
start-up and administrative expenses under paragraph (e)(1) of this
section or an investment tax credit reduction under paragraph (e)(2) of
this section.
(ii) Employee contributions. Paragraph (f)(4) of this section, but
not Sec. 1.46-8(c)(8) (i) through (iii), applies to TRASOP securities
acquired with matching employee contributions.
(5) Claiming additional credit. In applying Sec. 1.46-8(c)(9)(ii),
if less than all of a corporation's credit earned for a taxable year is
allowed, the extra additional credit under this section for that year is
allowed last.
(d) Additional formal plan requirements--(1) Contributions by
employees--(i) In general. The plan must contain statements relating to
matching employee contributions as required under paragraph (f) of this
section.
(ii) Aggregate floor. A plan may provide for the return of all
matching employee contributions for a year if the aggregate amount of
such contributions is not at least equal to an amount stated in the
plan. See also Sec. 1.46-9(f)(3)(iv).
(2) Separate accounting. The plan must state that employer
contributions and matching employee contributions respectively described
in paragraph (c)(4)(i) and (ii) of this section are accounted for
separately from each other as well as from other contributions,
including those described in Sec. 1.46-8(c)(8).
(3) Allocation of TRASOP securities contributed by employer. The
plan must provide for the allocation under section 301(e)(5) of the 1975
TRA and this subparagraph (3) of TRASOP securities
[[Page 374]]
contributed by the employer. These allocations reflect a ratable
reduction for TRASOP securities withheld by the employer under paragraph
(c)(4)(i) of this section. TRASOP securities so allocated are deemed to
be allocated under section 301(d) of the 1975 TRA. In applying Sec.
1.46-8(d)(6) to this section, only subdivisions (ii), (iv), (ix), (x),
(xi) and (xii) thereof apply to allocations under this section.
(4) Effect of section 415. In applying the limitations of section
415 to limitation years beginning after January 19, 1979, allocations of
TRASOP securities are considered in the following order: first,
allocations under Sec. 1.46-8; second, allocations under this section.
See Sec. 1.46-8(d)(6)(v) concerning the allocation of amounts under any
other defined contribution plan. No suspense or escrow account may be
maintained to hold contributions under this section that are unallocated
because of section 415. Thus, section 415 in effect limits the
availability of an extra additional credit in a particular year.
However, if the plan so provides, a potential extra additional credit is
treated as an investment credit carryover under the carryover option
described in Sec. 1.46-8(c)(1)(ii) to the extent that it is not used in
a particular year because of section 415.
(5) Nonforfeitability. Employer contributions are also not
considered to be forfeitable under Sec. 1.46-8(d)(7) merely because the
plan provides for their return to the corporation in an amount equal to
the excess of employer contributions under this section over matching
employee contributions or in the case of discriminatory operation under
paragraph (f)(3) of this section. See paragraph (f)(3)(iv).
(6) Distributions. Notwithstanding Sec. 1.46-8(d)(9)(i), a plan may
not distribute from a participant's employer contribution account cash
or employer securities attributable to unpaid pledges of the
participant.
(e) Additional operational plan requirements--(1) Start-up and
administrative expenses--(i) In general. The expense of establishing
plan features relating to the extra additional credit is a start-up
expense. The expense of collecting matching employee contributions is an
administrative expense.
(ii) Payment. Under Sec. 1.46-8(e) (6) and (7), an employee may
withhold or a plan may use, to the extent not withheld, TRASOP
securities for start-up and administrative expense payments. However,
withdrawals must be either limited to employer contributions under Sec.
1.46-8(c)(8) or reasonably apportioned between these employer
contributions and contributions under paragraph (c)(4)(i) of this
section. An example of reasonable apportionment is earmarking expenses
attributable to each of the additional credits and allocating any
remaining non-earmarked expenses on either a 2:1 or 1:1 ratio between
the additional credits. Another example is simply apportioning expenses
between the additional credits on a 2:1 or 1:1 ratio basis without
earmarking. However, if one-percent and one-half percent start-up
expenses are attributable to different qualified investments,
withdrawals for one-half percent expenses are limited to employer
contributions under paragraph (c)(4)(i) of this section.
(iii) Ceiling. In determining the ceiling on start-up expenses under
Sec. 1.46-8(e)(6)(iii), only employer contributions under Sec. 1.46-
8(c)(8) and paragraph (c)(4)(i) of this section are considered. In
determining the ceiling on administrative expenses under Sec. 1.46-
8(e)(7)(ii), dividends on all TRASOP securities, including those
acquired with matching employee contributions, are considered.
(2) Redeterminations and recaptures. A reduction in investment
credit because of a redetermination or recapture is allocated ratably
under the principles of Sec. 1.46-8(e)(9)(ii) among the 10-percent
credit, the one-percent credit, and the one-half percent credit for a
particular year. However, as illustrated in Sec. 1.46-8(e)(9)(ii), this
subparagraph (3) does not apply to a redetermination solely of one or
both of the additional credits.
(3)Withdrawal asset segregation. The segregated accounting
provisions of Sec. 1.46-8(f) apply independently to withdrawal assets
attributable to TRASOP securities under Sec. 1.46-8 and to TRASOP
securities under this section.
(f) Matching employee contributions--(1) Designation by employee.
The plan must state that each employee on whose behalf an allocation is
made
[[Page 375]]
under Sec. 1.46-8(d)(6) for an applicable year is eligible to designate
and contribute an amount to the TRASOP for that year as a matching
employee contribution.
(2) Form and timing of contribution--(i) Cash. A participant may
contribute in a manner provide under the plan a designated amount in
cash directly to the plan or indirectly by the employer's withholding
from amounts otherwise due the participant. The full amount, or pledge
in lieu of an amount, for an applicable year must be contributed by the
applicable last day described in Sec. 1.46-8(c)(8)(i).
(ii) Optional pledges in lieu of cash. The plan need not permit a
pledge. However, when permitted by the plan, an irrevocable written
pledge made in good faith by a participant is treated as a matching
employee contribution of cash, whether or not the pledge is in fact
contractually binding. The pledge must be to contribute, by no later
than a time specified in the TRASOP, a designated amount in cash
directly to the plan or indirectly by authorizing the employer to
withhold from compensation otherwise due a participant. The specified
time may not be later than 24 months after the close of the applicable
year for which the amount is treated as a matching employee
contribution.
(iii) Transitional rule. A plan may provide for the receipt of
employee pledges at any time before the later of the applicable last day
or January 15, 1980. If the last day for receipt of pledges for an
applicable year is January 15, 1980, the one-half percent TRASOP credit
for the applicable year may be elected on an amended return filed not
later than that date, and employer contributions for the applicable year
must be made by that date. A plan may provide that pledges which
otherwise would have been payable on or before December 31, 1979 may be
paid on or before January 15, 1980.
(iv) Basic and supplemental contributions. A plan formula may limit
a matching employee contribution to a basic amount. It may also permit
matching employee contributions of supplemental amounts to the extent
that total basic amount contributions do not equal the amount of the
additional credit claimed under this section. Employees may make
supplemental contributions covering unpaid pledges only after the
employer has disclosed the value of securities and income attributable
to the unpaid pledge.
(3) Prohibited discrimination--(i) General rule. Matching employee
contributions must be based on a formula stated in the plan that does
not result in prohibited discrimination under section 401(a)(4) either
in form or in operation. Thus, for example, a flat dollar amount
required as a matching employee contribution to qualify for employer-
provided benefits under this section may not be too high for lower paid
employees to contribute under the plan. Further, lower paid employees
must participate to such an extent that allocations under this section
do not result in prohibited discrimination
(ii) Compensation disregarded. Compensation disregarded in
allocations under Sec. 1.46-8(d)(6)(iv) is disregarded under this
paragraph and for purposes of determining basic amounts as defined in
paragraph (b)(4) of this section.
(iii) Former employees. A TRASOP must give all participants a
reasonable opportunity to make matching employee contributions. However,
neither a former employee who is a participant at the end of the plan
year by reason of Sec. 1.46-8(d)(6)(iii), nor the estate of a deceased
employee, need have the same options as are available to other
participants. Thus, for example, a former employee may be limited to
cash contributions even though other participants are permitted to make
pledges. Also, if former employees of estates of deceased employees fail
to make matching employee contributions, they are not considered in
determining whether or not a TRASOP is discriminatory.
(iv) Return of contributions. A plan may provide for the return of
employee and employer contributions for a year to the extent that plan
operation would otherwise result in prohibited discrimination.
(4) Investment in employer securities--(i) General rule. Matching
employee contributions must be invested in TRASOP securities no later
than 30 days after the time for funding a TRASOP under Sec. 1.46-
8(c)(8)(ii) or, if
[[Page 376]]
later, the time specified under the special rule for pledges.
(ii) Special rule for pledges. Cash contributed to pay a pledge
permitted by paragraph (f)(2)(ii) of this section must be invested in
employer securities so that the cash is not held more than 3 months. The
3-month period includes the period, if any, that the cash is held by the
employer.
(5) Reduction of matching employee contribution--(i) In general.
Matching employee contributions must be reduced in three cases. First,
they are reduced to the extent that there are no corresponding employer
contributions described in paragraph (c)(4)(i) of this section. This
occurs, for example, when the aggregate of the basic amounts of matching
employee contributions exceeds the allowable credit. Second, they are
reduced to the extent that corresponding employer contributions matching
them under paragraph (c)(4)(i) of this section are withdrawn under
section 301(f) of the 1975 TRA. Third, they are reduced by the amount of
any pledge unpaid at the time specified in paragraph (f)(2)(ii) of this
section.
(ii) Apportioning reductions. Generally, the account of each
contributor under this section for an applicable year is reduced by a
percentage of the account. This percentage equals the total reduction of
all matching employee contributions for that year divided by the total,
before the reduction, of all matching employee contributions. However,
if a reduction is directly attributable to a particular contributor,
only that contributor's account is reduced. A reduction is directly
attributable to a particular contributor when, for example, the limits
of section 415 prohibit a full allocation of employer contributions
equal to the contributor's matching employee contribution for an
applicable year or when a contributor fails to pay a pledge. A reduction
may not yield a negative balance in a participant's account.
(iii) Disposing of reductions. If a participant's matching employee
contribution is reduced, the amount of the reduction must either be
treated as a voluntary contribution or returned to the participant by
the later of two dates. The first date is 30 days after the time for
investing in TRASOP securities under paragraph (f)(4) of this section.
The second date is the 30th day after the date on which the withdrawal
of employer contributions occurs that causes the reduction. It may be
treated as a voluntary contribution only if, as stated in the plan, the
participant so indicates in writing when making the matching employee
contribution.
(iv) Supplemental contributions covering unpaid pledges.
Notwithstanding the timing requirements of paragraph (f)(2) of this
section, supplemental contributions covering unpaid pledges must be made
no later than 60 days after accounting for the corresponding reduction
under paragraph (f)(5)(ii) of this section.
(v) Effect of reduction on credit. For the purpose of applying
section 415 to an additional allocation to the account of a participant
attributable to a supplemental contribution covering an unpaid pledge,
the contribution is treated as an annual addition to the supplemental
contributor's account in the applicable year for which the reduction
occurred. An amount in excess of the contribution may be allocated in
equal amounts for each year from the applicable year to the year of the
reduction. The employer's credit is reduced only to the extent that a
proportionate transfer of assets is not made from the account of the
participant to whom the reduction is attributable to the accounts of
supplemental contributors.
(vi) Example. The rules contained in paragraphs (f) (2) and (5) of
this section are illustrated by the following example:
Example. Assume that A is an employee of corporation M, a calendar
year taxpayer that maintains a TRASOP. A has pledged $100 as a matching
employee contribution for 1977, the first applicable year of M's TRASOP.
M has transferred employer securities valued at $100 that have been
allocated to A's account under the Plan. The TRASOP provides that
pledges must be paid no later then 24 months after the end of the
applicable year. Thus, A's $100 pledge must be paid by December 31,
1979. As of December 31, 1979, the employer securities attributable to
A's pledge have a value of $90 and have produced undistributed dividend
income of $13. Thus, the value of the portion of A's account
attributable to the unpaid pledge is $103. After December 31, 1979, the
value of this portion of A's account
[[Page 377]]
is disclosed to participants, and employee B chooses to pay off A's
unpaid pledge, as provided in the plan, by making a $100 supplemental
contribution. The full amount of the securities and dividend income
attributable to the unpaid pledge are transferred from A's account to
that of B as of December 31, 1979. M's credit for 1977 is not reduced.
The $100 supplemental contribution is an annual addition to B's account
for purposes of applying section 415 in 1979. Income attributable to the
pledge in excess of the supplemental contribution, $3 ($103-$100), may
be allocated and treated as an annual addition by spreading this excess
amount over the years from the applicable year to the year of the
reduction (1977, 1978, 1979).
(g) Failure to comply--(1) General rule. If a corporation elects
under Sec. 1.46-8(c) (2) through (5) and paragraph (c)(1) of this
section to obtain an additional credit, Sec. 1.46-8(h) (1), (2), (3),
(5), (6), and (7) as modified by this paragraph (g) apply.
(2) Failure to comply (penalty classifications)--(i) In general. A
corporation fails to comply with an extra additional credit election if
a defect described in paragraph (g)(2) (ii)-(iv) of this section occurs
in a taxable year.
(ii) Funding defect. A funding defect occurs under this section if a
corporation or its TRASOP fails to satisfy the requirements of Sec.
1.46-8(c) (8) or (9) or paragraph (c)(4) of this section, as they apply
directly to the extra additional credit.
(iii) Special operational defect. A special operational defect
occurs if a TRASOP fails in operation to satisfy the requirements
decribed in Sec. 1.46-8(d) (5) through (9) (except (6) (i), (iii), and
(v) through (viii)) or (e)(3), or paragraphs (d) (5), (6), and (e)(3) of
this section, as they apply directly to the extra additional credit.
(iv) De minimis defect. A de minimis defect occurs if a corporation
or its TRASOP fails to satisfy the requirements, other than those
enumerated in paragraphs (c) (1) and (2) and (g)(2) (ii) and (iii), of
this section or of Sec. 1.46-8 other than those excluded under Sec.
1.46-8(h)(4)(iv).
(3) Amount involved. The amount involved in a failure to comply
under this section is based upon the extra additional credit within the
meaning of section 46(a)(2)(B)(ii).
(4) Coordination of civil penalties. The civil penalties under Sec.
1.46-8 and this section are determined separately. In no case may the
amount involved with respect to a particular failure to comply in one
year exceed under both sections the full additional credit within the
meaning of section 46(a)(2)(B) (i) and (ii).
[T.D. 7856, 47 FR 54805, Dec. 6, 1982]
Sec. 1.46-10 [Reserved]
Sec. 1.46-11 Commuter highway vehicles.
(a) In general. Section 46(c)(6) provides that the applicable
percentage to determine qualified investment under section 46(c)(1) for
a qualifying commuter highway vehicle is 100 percent. A qualifying
commuter highway vehicle is a vehicle (defined in paragraph (b) of this
section)--
(1) Which is acquired by the taxpayer on or after November 9, 1978,
(2) Which is placed in service by the taxpayer before January 1,
1986, and
(3) With respect to which the taxpayer makes an election under
paragraph (g) of this section.
(b) Definition of commuter highway vehicle. A commuter highway
vehicle is a highway vehicle that meets the following requirements:
(1) The vehicle is section 38 property in the hands of the taxpayer.
The rule of section 48(d), allowing a lessor to elect to treat the
lessee of new section 38 property as having acquired the property,
applies to commuter highway vehicles. If the vehicle is leased and that
election is made, the lessee is treated as the taxpayer under this
section. However, if that election is not made. the lessor, and not the
lessee, is treated as the taxpayer under this section.
(2) The vehicle must meet the seating capacity requirement of
paragraph (c) of this section; and
(3) The taxpayer reasonably expects to meet the commuter use
requirement of paragraph (d) of this section for at least the first 36
months after the vehicle is placed in service.
(c) Seating capacity. A commuter highway vehicle must have a seating
capacity of a least 8 adults in addition to the driver's seat.
(d) Commuter use requirement. A vehicle meets the commuter use
requirement only if at least 80 percent of the
[[Page 378]]
miles the vehicle is driven are for trips to transport the taxpayer's
employees between their residences and their places of employment. A
trip for this purpose includes driving the vehicle before or after
employees are in the vehicle, so long as the mileage driven is necessary
either to pick up or drop off passengers or to park the vehicle in its
regular parking space. A trip does not include miles driven solely for
maintenance or to refuel the vehicle. A trip is not considered to
transport the taxpayer's employees between their residences and their
places of employment unless at least one-half the seating capacity
(defined in paragraph (c) of this section) is used to seat employees of
the taxpayer. In no event is the driver counted as an employee of the
taxpayer.
(e) Definition of employee. An employee in this section is the same
as in section 3121 (d) (definition of employee for withholding
purposes).
(f) Transportation between employee's residence and place of
employment. An employee is transported between that employee's residence
and place of employment even if that place of employment is not the same
as any of the other employees transported, and even if picked up or
dropped off at some central point between that residence and place of
employment. An employee is not transported between that employee's
residence and place of employment if the transportation is of the type
for which a deduction would be allowed under Sec. 1.162-2 were the
employee providing it, such as the transportation from one work site to
another after beginning work for the day.
(g) Election. A taxpayer must elect to have the vehicle treated as a
qualifying commuter highway vehicle on the return for the taxable year
in which the vehicle is placed in service. The election may be made only
if the vehicle actually meets the commuter use requirement under
paragraph (d) of this section for that taxable year. It must be made on
or before the due date (including extensions) of that return. The
election is effective as of that due date.
[T.D. 8035, 50 FR 29370, July 19, 1985]
Sec. 1.47-1 Recomputation of credit allowed by section 38.
(a) General rule--(1) In general. (i) If during the taxable year any
section 38 property the basis (or cost) of which was taken into account,
under paragraph (a) of Sec. 1.46-3, in computing the taxpayer's
qualified investment is disposed of, or otherwise ceases to be section
38 property or becomes public utility property (as defined in paragraph
(g) of Sec. 1.46-3) or is a qualifying commuter highway vehicle (as
defined in paragraph (a) of Sec. 1.46-11) which undergoes a change in
use (as defined in paragraph (m)(2) of this section) with respect to the
taxpayer, before the close of the estimated useful life (as determined
under subparagraph (2)(i) of this paragraph) which was taken into
account in computing such qualified investment, then the credit earned
for the credit year (as defined in subdivision (ii)(a) of this
subparagraph) shall be recomputed under the principles of paragraph (a)
of Sec. 1.46-1 and paragraph (a) of Sec. 1.46-3 substituting, in lieu
of the estimated useful life of the property that was taken into account
originally in computing qualified investment, the actual useful life of
the property as determined under subparagraph (2)(ii) of this paragraph.
There shall also be recomputed under the principles of Sec. Sec. 1.46-1
and 1.46-2 the credit allowed for the credit year and for any other
taxable year affected by reason of the reduction in credit earned for
the credit year, giving effect to such reduction in the computation of
carryovers or carrybacks of unused credit. If the recomputation
described in the preceding sentence results in the aggregate in a
decrease (taking into account any recomputations under this paragraph in
respect of prior recapture years, as defined in subdivision (ii)(b) of
this subparagraph) in the credits allowed for the credit year and for
any other taxable year affected by the reduction in credit earned for
the credit year, then the income tax for the recapture year shall be
increased by the amount of such decrease in credits allowed. For
treatment of such increase in tax, see paragraph (b) of this section.
For rules relating to ``disposition'' and ``cessation'', see Sec. 1.47-
2. For rules relating to certain exceptions to the application
[[Page 379]]
of this section, see Sec. 1.47-3. For special rules in the case of an
electing small business corporation (as defined in section 1371(b)), an
estate or trust, or a partnership, see respectively, Sec. Sec. 1.47-4,
1.47-5, or 1.47-6. For rules applicable to energy property, see
paragraph (h) of this section. For special rules relating to
recomputation of credit allowed by section 38 if progress expenditure
property (as defined in Sec. 1.46-5(d)) ceases to be progress
expenditure property with respect to the taxpayer, see paragraph (g) of
this section.
(ii) For purposes of this section and Sec. Sec. 1.47-2 through
1.47-6--
(a) The term ``credit year'' means the taxable year in which section
38 property was taken into account in computing a taxpayer's qualified
investment.
(b) The term ``recapture year'' means the taxable year in which
section 38 property the basis (or cost) of which was taken into account
in computing a taxpayer's qualified investment is disposed of, or
otherwise ceases to be section 38 property or becomes public utility
property with respect to the taxpayer, before the close of the estimated
useful life which was taken into account in computing such qualified
investment.
(c) The term ``recapture determination'' means a recomputation made
under this paragraph.
(2) Rules for applying subparagraph (1). For purposes of
subparagraph (1) of this paragraph--
(i) In determining whether section 38 property is disposed of, or
otherwise ceases to be section 38 property with respect to the taxpayer,
before the close of the estimated useful life which was taken into
account in computing the taxpayer's qualified investment, the term
``estimated useful life'' means the shortest life of the useful life
category within which falls the estimated useful life which was assigned
to such property under paragraph (e) of Sec. 1.46-3. Thus, section 38
property which is assigned, under paragraph (e) of Sec. 1.46-3, an
estimated useful life of 6 years shall not be treated, for purposes of
subparagraph (1) of this paragraph, as having been disposed of before
the close of its estimated useful life if such property is sold 5 years
(that is, the shortest life of the 5 years or more but less than 7 years
useful life category) after the date on which it was placed in service.
Likewise, section 38 property with an estimated useful life of 15 years
which is placed in service on January 1, 1972, shall not be treated as
having been disposed of before the close of its estimated useful life if
such property is sold at any time after January 1, 1979 (that is, 7
years or more after the date on which it was placed in service).
(ii) In determining the recomputed qualified investment with respect
to property which is disposed of or otherwise ceases to be section 38
property the term ``actual useful life'' means, except as otherwise
provided in this section and Sec. Sec. 1.47-2 through 1.47-6, the
period beginning with the date on which the property was placed in
service by the taxpayer and ending with the date of such disposition or
cessation. See paragraph (c) of this section.
(iii) In determining the recomputed qualified investment with
respect to property which ceases to be section 38 property with respect
to the taxpayer after August 15, 1971, or which becomes public utility
property after such date, such property shall be treated as if it were
property described in section 50 at the time it was placed in service
(whether or not it was property described in section 50 at such time).
Thus, if property was placed in service on October 15, 1968, and was
assigned an estimated useful life of 4 years, there would be no increase
in tax under section 47 if the property were disposed of at any time
after October 14, 1971, that is, 3 years or more after the property was
placed in service.
(b) Increase in income tax and reduction of investment credit
carryover--(1) Increase in tax. Except as provided in subparagraph (2)
of this paragraph, any increase in income tax under this section shall
be treated as income tax imposed on the taxpayer by chapter 1 of the
Code for the recapture year notwithstanding that without regard to such
increase the taxpayer has no income tax liability, has a net operating
loss for such taxable year, or no income tax return was otherwise
required for such taxable year.
[[Page 380]]
(2) Special rule. Any increase in income tax under this section
shall not be treated as income tax imposed on the taxpayer by chapter 1
of the Code for purposes of determining the amount of the credits
allowable to such taxpayer under--
(i) Section 33 (relating to taxes of foreign countries and
possessions of United States),
(ii) Section 34 (relating to dividends received by individuals
before January 1, 1965),
(iii) Section 35 (relating to partially tax-exempt interest received
by individuals),
(iv) Section 37 (relating to retirement income), and
(v) Section 38 (relating to investment in certain depreciable
property).
(3) Reduction in credit allowed as a result of a net operating loss
carryback. (i) If a net operating loss carryback from the recapture year
or from any taxable year subsequent to the recapture year reduces the
amount allowed as a credit under section 38 for any taxable year up to
and including the recapture year, then there shall be a new recapture
determination under paragraph (a) of this section for each recapture
year affected, taking into account the reduced amount of credit allowed
after application of the net operating loss carryback.
(ii) Subdivision (i) of this subparagraph may be illustrated by the
following examples:
Example 1. (a) X Corporation, which makes its return on the basis of
a calendar year, acquired and placed in service on January 1, 1962, an
item of section 38 property with a basis of $10,000 and an estimated
useful life of 8 years. The amount of qualified investment with respect
to such asset was $10,000. For the taxable year 1962, X Corporation's
credit earned of $700 (7 percent of $10,000) was allowed under section
38 as a credit against its liability for tax of $700. In 1963 and 1964 X
Corporation had no liability for tax and placed in service no section 38
property. On January 3, 1963, such item of section 38 property was sold
to Y Corporation. Since the actual useful life of such item was only 1
year, there was a recapture determination under paragraph (a) of this
section. The income tax imposed by chapter 1 of the Code on X
Corporation for the taxable year 1963 was increased by the $700 decrease
in its credit earned for the taxable year 1962 (that is, the $700
original credit earned minus zero recomputed credit earned).
(b) For the taxable year 1965, X Corporation has a net operating
loss which is carried back to the taxable year 1962 and reduces its
liability for tax, as defined in paragraph (c) of Sec. 1.46-1, for such
taxable year to $200. As a result of such net operating loss carryback,
X Corporation's credit allowed under section 38 for the taxable year
1962 is limited to $200 and the excess of $500 ($700 credit earned minus
$200 limitation based on amount of tax) is an investment credit
carryover to the taxable year 1963.
(c) For 1965, there is a recapture determination under subdivision
(i) of this subparagraph for the 1963 recapture year. The $700 increase
in the income tax imposed on X Corporation for the taxable year 1963 is
redetermined to be $200 (that is, the $200 credit allowed after taking
into account the 1965 net operating loss minus zero credit which would
have been allowed taking into account the 1963 recapture determination).
In addition, X Corporation's $500 investment credit carryover to the
taxable year 1963 is reduced by $500 ($700 minus $200) to zero and X
Corporation is entitled to a $500 refund of the tax paid as a result of
the 1963 determination.
Example 2. (a) X Corporation, which makes its returns on the basis
of a calendar year, acquired and placed in service on January 1, 1962,
an item of section 38 property with a basis of $10,000 and an estimated
useful life of 8 years. The amount of qualified investment with respect
to such asset was $10,000. For the taxable year 1962, X Corporation's
credit earned of $700 (7 percent of $10,000) was allowed under section
38 as a credit against its liability for tax of $700. In 1963 and in
1964 X Corporation had no liability for tax and placed in service no
section 38 property. On January 3, 1965, such item of section 38
property is sold to Y Corporation. For the taxable year 1965, X
Corporation has a net operating loss which is carried back to the
taxable year 1962 and reduces its liability for tax, as defined in
paragraph (c) of Sec. 1.46-1, for such taxable year to $100.
(b) As a result of such net operating loss carryback, X
Corporation's credit allowed under section 38 for the taxable year 1962
is limited to $100 and the excess of $600 ($700 credit earned minus $100
limitation based on amount of tax) is an investment credit carryover to
the taxable year 1963.
(c) Since the actual useful life of the item of section 38 property
sold to Y Corporation was only 3 years, there is a recapture
determination under paragraph (a) of this section. X Corporation's $600
investment credit carryover to 1963 is reduced by $600 to zero. The
income tax imposed by chapter 1 of the Code on X Corporation for the
taxable year 1965 is increased by the $100 reduction in credit allowed
by section 38 for 1962.
[[Page 381]]
(4) Statement of recomputation. The taxpayer shall attach to his
income tax return for the recapture year a separate statement showing in
detail the computation of the increase in income tax imposed on such
taxpayer by chapter 1 of the Code and the reduction in any investment
credit carryovers.
(c) Date placed in service and date of disposition or cessation--(1)
General rule. For purposes of this section and Sec. Sec. 1.47-2 through
1.47-6, in determining the actual useful life of section 38 property--
(i) Such property shall be treated as placed in service on the first
day of the month in which such property is placed in service. The month
in which property is placed in service shall be determined under the
principles of paragraph (d) of Sec. 1.46-3.
(ii) If during the taxable year such property ceases to be section
38 property with respect to the taxpayer--
(a) As a result of the occurrence of an event on a specific date
(for example, a sale, transfer, retirement or other disposition), such
cessation shall be treated as having occurred on the actual date of such
event.
(b) For any reason other than the occurrence of an event on a
specific date (for example, because such property is used predominantly
in connection with the furnishing of lodging during such taxable year),
such cessation shall be treated as having occurred on the first day of
such taxable year.
(2) Special rule. Notwithstanding subparagraph (1) of this
paragraph, if a taxpayer uses an averaging convention (see Sec.
1.167(a)(10)) in computing depreciation with respect to section 38
property, then, for purposes of this section and Sec. Sec. 1.47-2
through 1.47-6, he may use the assumed dates of additions and
retirements in determining the actual useful life of such property
provided such assumed dates are used consistently for purposes of
subpart B of part IV of subchapter A of chapter 1 of the Code with
respect to all section 38 property for which such convention is used for
purposes of depreciation. This subparagraph shall not apply in any case
where from all the facts and circumstances it appears that the use of
such assumed dates results in a substantial distortion of the investment
credit allowed by section 38. Thus, for example, if the taxpayer
computes depreciation under a convention under which the average of the
beginning and ending balances of the asset account for the taxable year
are taken into account, he may use July 1 as the assumed date of all
additions and retirements to such account. Similarly, if the taxpayer
computes depreciation under a convention under which the average of the
beginning and ending balances of the asset account for each month is
taken into account, he may use the date determined by reference to the
weighted average of the monthly averages as the assumed date of all
additions and retirements to such account.
(3) Example. This paragraph may be illustrated by the following
example:
Example. Assume that section 38 property is placed in service
(within the meaning of paragraph (d) of Sec. 1.46-3) on December 1,
1965 (thus, the credit is treated as being earned in 1965) but under the
taxpayer's depreciation practice the period for depreciation with
respect to such property begins on January 1, 1966, and that the
property is actually retired on December 2, 1970. Under the general rule
of subparagraph (1) of this paragraph, the property is treated as placed
in service on December 1, 1965, and as ceasing to be section 38 property
with respect to the taxpayer on December 2, 1970, even though under the
taxpayer's depreciation practice the period for depreciation with
respect to such property begins on January 1, 1966, and terminates on
January 1, 1971. However, under the special rule of subparagraph (2) of
this paragraph the taxpayer may determine the actual useful life of the
property by reference to the assumed dates of January 1, 1966, and
January 1, 1971.
(d) Examples. Paragraphs (a) through (c) of this section may be
illustrated by the following examples:
Example 1. (i) X Corporation, which makes its returns on the basis
of the calendar year, acquired and placed in service on January 1, 1962,
three items of section 38 property each with a basis of $12,000 and an
estimated useful life of 15 years. The amount of qualified investment
with respect to each such asset was $12,000. For the taxable year 1962,
X Corporation's credit earned of $2,520 was allowed under section 38 as
a credit against its liability for tax of $4,000. On December 2, 1965,
one of the items of section 38 property is sold to Y Corporation.
(ii) The actual useful life of the item of property which is sold on
December 2, 1965, is
[[Page 382]]
three years and eleven months. The recomputed qualified investment with
respect to such item of property is zero ($12,000 basis multiplied by
zero applicable percentage) and X Corporation's recomputed credit earned
for the taxable year 1962 is $1,680 (7 percent of $24,000). The income
tax imposed by chapter 1 of the Code on X Corporation for the taxable
year 1965 is increased by the $840 decrease in its credit earned for the
taxable year 1962 (that is, $2,520 original credit earned minus $1,680
recomputed credit earned).
Example 2. (i) The facts are the same as in example 1 and in
addition on December 2, 1966, a second item of section 38 property
placed in service in the taxable year 1962 is sold to Y Corporation.
(ii) The actual useful life of the item of property which is sold on
December 2, 1966, is four years and eleven months. The recomputed
qualified investment with respect to such item of property is $4,000
($12,000 basis multiplied by 33\1/3\ percent applicable percentage) and
X Corporation's recomputed credit earned for the taxable year 1962 is
$1,120 (7 percent of $16,000). The income tax imposed by chapter 1 of
the Code on X Corporation for the taxable year 1966 is increased by $560
(that is, $1,400 ($2,520 original credit earned minus $1,120 recomputed
credit earned) reduced by the $840 increase in tax for 1965).
Example 3. (i) The facts are the same as in example 1 except that
for the taxable year 1962 X Corporation's liability for tax under
section 46(a)(3) is only $1,520. Therefore, for such taxable year X
Corporation's credit allowed under section 38 is limited to $1,520 and
the excess of $1,000 ($2,520 credit earned minus $1,520 limitation based
on amount of tax) is an unused credit. Of such $1,000 unused credit,
$100 is allowed as a credit under section 38 for the taxable year 1963,
$100 is allowed for 1964, and $800 is carried to the taxable year 1965.
(ii) The actual useful life of the item of property which is sold on
December 2, 1965, is three years and eleven months. The recomputed
qualified investment with respect to such item of property is zero
($12,000 basis multiplied by zero applicable percentage) and X
Corporation's recomputed credit earned for the taxable year 1962 is
$1,680 (7 percent of $24,000). If such $1,680 recomputed credit earned
had been taken into account in place of the $2,520 original credit
earned, X's credit allowed for 1962 would have been $1,520, and of the
$160 unused credit from 1962 $100 would have been allowed as a credit
under section 38 for 1963, and $60 would have been allowed for 1964. X
Corporation's $800 investment credit carryover to the taxable year 1965
is reduced by $800 to zero. The income tax imposed by chapter 1 of the
Code on X Corporation for the taxable year 1965 is increased by $40
(that is, the aggregate reduction in the credits allowed by section 38
for 1962, 1963, and 1964).
Example 4. (i) X Corporation, which makes its returns on the basis
of the calendar year, acquired and placed in service on November 1,
1962, an item of section 38 property with a basis of $12,000 and an
estimated useful life of 10 years. The amount of qualified investment
with respect to such property was $12,000. For the taxable year 1962, X
Corporation's credit earned of $840 was allowed under section 38 as a
credit against its liability for tax of $840. For each of the taxable
years 1963 and 1964 X Corporation's liability for tax was zero and its
credit earned was $400; therefore, for each of such years its unused
credit was $400. For the taxable year 1965 its liability for tax was
$200 and its credit earned was zero; therefore, $200 of the $400 unused
credit from 1963 was allowed as credit for 1965 and $600 ($200 from 1963
and $400 from 1964) is an investment credit carryover to 1966. On
February 2, 1966, such item of section 38 property is sold to Y
Corporation.
(ii) The actual useful life of such item of property is three years
and three months. The recomputed qualified investment with respect to
such property is zero ($12,000 basis multipled by zero) and X
Corporation's recomputed credit earned for the taxable year 1962 is
zero. If such zero recomputed credit earned had been taken into account
in place of the $840 original credit earned, the entire $400 unused
credit from 1963 (including the $200 portion which was originally
allowed as a credit for 1965) and the $400 unused credit from 1964 would
have been allowed as investment credit carrybacks against X
Corporation's liability for tax of $840 for 1962. (See Sec. 1.46-2 for
rules relating to the carryback of unused credits.)
(iii) Therefore, the $600 carryover from 1963 and 1964 to 1966 is
eliminated and the income tax imposed by chapter 1 of the Code on X
Corporation for the taxable year 1966 is increased by the $240 aggregate
reduction in the credits allowed by section 38 for the taxable years
1962 and 1965 (that is, $1,040 credit allowed minus $800 which would
have been allowed).
Example 5. (i) X Corporation, which makes its returns on the basis
of the calendar year, acquired and placed in service on November 1,
1962, an item of section 38 property with a basis of $10,000 and an
estimated useful life of 8 years. The amount of qualified investment
with respect to such asset was $10,000. For the taxable year 1962, X
Corporation's credit earned of $700 was allowed as a credit against its
liability for tax. For each of the taxable years 1963, 1964, and 1965 X
had no taxable income. On July 3, 1966, the item of section 38 property
is sold to Y Corporation. For the taxable year 1966 X Corporation has a
net operating loss of $3,000.
(ii) The actual useful life of the item of property is three years
and eight months.
[[Page 383]]
The recomputed qualified investment with respect to such item of
property is zero and X Corporation's recomputed credit earned for the
taxable year 1962 is zero. Notwithstanding the $3,000 net operating loss
for the taxable year 1966, the income tax imposed by chapter 1 of the
Code on X Corporation for such year is $700 (that is, the decrease in
its credit earned for the taxable year 1962).
(e) Identification of property--(1) General rule--(i) Record
requirements. In general, the taxpayer must maintain records from which
he can establish, with respect to each item of section 38 property, the
following facts:
(a) The date the property is disposed of or otherwise ceases to be
section 38 property,
(b) The estimated useful life which was assigned to the property
under paragraph (e) of Sec. 1.46-3,
(c) The month and the taxable year in which the property was placed
in service, and
(d) The basis (or cost), actually or reasonably determined, of the
property.
(ii) Recapture determination. For purposes of determining whether
section 38 property is disposed of, or otherwise ceases to be section 38
property with respect to the taxpayer, before the close of its estimated
useful life, and for purposes of determining recomputed qualified
investment, the taxpayer must establish from his records the facts
required by subdivision (i) of this subparagraph.
(iii) Examples. If the taxpayer fails to maintain records from which
he can establish the facts required by subdivision (i) of this
subparagraph, then this section shall be applied to the taxpayer in the
manner indicated in the following examples:
Example 1. Corporation X, organized on January 1, 1964, files its
income tax return on the basis of a calendar year. During the years 1964
and 1965, X places in service several items of machinery to which it
assigns estimated useful lives of 8 years. X places the items of
machinery in a composite account for purposes of computing depreciation.
When X's 1966 return is being audited, X is unable to establish whether
the items placed in service in 1964 and 1965 were still on hand at the
end of 1966. Therefore, for purposes of paragraph (a) of this section, X
is treated as having disposed of, in 1966, all of the items of machinery
placed in service in 1964 and 1965.
Example 2. Corporation Y, organized on January 1, 1960, files its
income tax return on the basis of a calendar year. During each of the
years 1960 through 1965, Y places in service four items of machinery to
each of which it assigns an estimated useful life of 8 years for
depreciation purposes (and for purposes of computing qualified
investment for relevant years). Y places the items of machinery in a
composite account for purposes of computing depreciation (and for
purposes of computing qualified investment for relevant years). When Y's
1965 return is being audited, Y can establish that it retired during
1965 only six items of this machinery. However, Y cannot establish the
date on which these six items were placed in service, nor can Y
establish that the items placed in service in 1963 or 1964 are still on
hand as of the end of 1965. No previous recapture has taken place with
respect to any of the items placed in service in 1963 or 1964. Assuming
that paragraph (e) (2) and (3) of this section is not applicable, Y is
treated, for purposes of paragraph (a) of this section, as having
disposed of, in 1965, the four items placed in service in 1964, the most
recent year before 1965 in which such property was placed in service,
and two items from 1963, the next most recent year.
Example 3. The facts are the same as in example 2 except that when
Y's 1966 return is being audited, Y can establish from its records that
all four items placed in service in 1965 are still on hand and that only
three items were retired in 1966. For purposes of paragraph (a) of this
section, Y is treated as having disposed of, in 1966, the two remaining
items of machinery placed in service in 1963, and one of the items
placed in service in 1962.
(2) Treatment of ``mass assets''. (i) If, in the case of mass assets
(as defined in subparagraph (4) of this paragraph), it is impracticable
for the taxpayer to maintain records from which he can establish with
respect to each item of section 38 property the facts required by
subparagraph (1) of this paragraph, and if he adopts other reasonable
recordkeeping practices, consonant with good accounting and engineering
practices, and consistent with his prior recordkeeping practices, then
he may substitute data from an appropriate mortality dispersion table.
An appropriate mortality dispersion table must be based on an acceptable
sampling of the taxpayer's actual experience or other acceptable
statistical or engineering techniques. In lieu of such mortality
dispersion table, the taxpayer may use a standard mortality dispersion
table
[[Page 384]]
prescribed by the Commissioner. If the taxpayer uses such standard
mortality dispersion table for any taxable year, it must be used for all
subsequent taxable years unless the taxpayer obtains the consent of the
Commissioner to change. If mass assets are placed in a multiple asset
account and if the depreciation rate for such account is based on the
maximum expected life of the longest lived asset in such account, in
applying a mortality dispersion table (including a standard mortality
dispersion table) the average expected useful life of the mass assets in
such account must be used.
(ii) Subdivision (i) of this subparagraph shall not apply with
respect to assets placed in service in a taxable year ending on or after
June 30, 1967, and beginning before January 1, 1971, or with respect to
assets placed in service for a taxable year beginning after December 31,
1970, for which the taxpayer has not made the election provided by
section 167(m), unless the estimated useful lives which were assigned to
such assets for purposes of determining qualified investment--
(a) Were separate lives based on the estimated range of years taken
into account in establishing the average useful life of assets similar
in kind under paragraph (e)(3)(ii)(b) of Sec. 1.46-3, and
(b) Were determined by use of a mortality dispersion table
(including a standard mortality dispersion table).
(iii) Any standard mortality dispersion table prescribed by the
Commissioner shall be based on average useful life categories and with
respect to each category shall contain five columns, the first four of
which shall state the percentage of property assumed to have a useful
life of--
Column (1): Less than 4 years,
Column (2): 4 years or more but less than 6 years,
Column (3): 6 years or more but less than 8 years, and
Column (4): 8 years or more.
The fifth column shall show the total qualified investment as a
percentage and shall be used in connection with the determination to be
made under Sec. 1.46-3(e)(3)(iii). In the case of a table which is to
apply to property which is described in section 50 or to property which
is treated as property described in section 50 under paragraph
(a)(2)(iii) of this section, this subdivision shall be applied by
substituting ``3 years'' for ``4 years'', ``5 years'' for ``6 years'',
and ``7 years'' for ``8 years''.
(iv) Whenever the standard mortality dispersion table is used for a
taxable year under subdivision (i) of this subparagraph (whether or not
such table was used in determining qualified investment), the percentage
of property shown in column (1) of the table shall (for purposes of
section 47, this section, and Sec. Sec. 1.47-2 through 1.47-6) be
deemed to have been disposed of on the day before the expiration of the
4-year period beginning on the date on which it was considered as placed
in service under Sec. 1.47-1(c); the percentage of property shown in
column (2) of the table shall be deemed to have been disposed of on the
day before the expiration of the 6-year period beginning on the date on
which it was so considered as placed in service; and the percentage of
property shown in column (3) shall be deemed to have been disposed of on
the day before the expiration of the 8-year period beginning on the date
on which it was so considered as placed in service. In applying this
subdivision for purposes of recomputing qualified investment, the proper
average useful life category shall be used whether or not such category
was used in determining qualified investment. In the case of property
which is described in section 50 or property which is treated as
property described in section 50 under paragraph (a)(2)(iii) of this
section (other than property the qualified investment with respect to
which was determined by use of the standard or an appropriate mortality
dispersion table), this subdivision shall be applied by substituting
``3-year period'' for ``4-year period'', ``5-year period'' for ``6-year
period'', and ``7-year period'' for ``8-year period''.
(v) In lieu of using subdivision (iv) of this subparagraph for
purposes of recomputing qualified investment, a taxpayer may, for the
first recapture year (as defined in paragraph (a)(1)(ii)(b) of this
section) to which such subdivision (iv) would otherwise apply with
respect to any mass asset account, recompute qualified investment on the
basis of the difference between (a) the proper total
[[Page 385]]
qualified investment based on the percentage shown in column (5) of the
table, and (b) the total qualified investment actually claimed by the
taxpayer for the year in which the property was placed in service.
Example. Assume that the taxpayer places in service during 1963 mass
assets costing him $100,000, that he places these assets in a multiple
asset account for which he properly claims a useful life of 6 years and
a qualified investment of $66,667 (\2/3\x $100,000), and that he is
allowed an investment credit of $4,667.67. When the taxpayer's 1967
return is being audited he is unable to establish that any of the mass
assets placed in service in 1963 were still on hand at the end of 1967.
The taxpayer elects to use the standard mortality dispersion table
prescribed by the Commissioner to determine the amount of recapture with
respect to these mass assets. Assume that the table prescribed by the
Commissioner shows with respect to mass assets with an average useful
life of 6 years the following:
------------------------------------------------------------------------
Percent of property assumed to have a useful life of--
-------------------------------------------------------
4 years or 6 years or Total qualified
Less than 4 more, but more, but 8 years or investment
years (1) less than 6 less than 8 more (4) (percent) (5)
years (2) years (3)
------------------------------------------------------------------------
15.87 34.13 34.13 15.87 50.00
------------------------------------------------------------------------
(a) Under these circumstances 15.87 percent of the mass assets
placed in service in 1963 are deemed to have been disposed of during
1967. With respect to these assets, the amount of qualified investment
for 1963 was $10,580 ($15,870x\2/3\) and the amount of credit earned was
$740.60 (7 percent of $10,580), whereas the recomputed qualified
investment is zero and the recomputed credit earned is zero. Thus, the
tax imposed by chapter 1 of the Code for 1967 is increased by $740.60.
(b) No recapture determination is required for 1968 since no assets
are deemed to have been disposed of in that year. During 1969, 34.13
percent of the mass assets placed in service in 1963 are deemed to have
been disposed of. With respect to these assets, the amount of qualified
investment for 1963 was $22,753.34 ($34,130x\2/3\) and the amount of
credit earned was $1,592.73 (7 percent of $22,753.34), whereas the
recomputed qualified investment is $11,376.67 ($34,130x\1/3\) and the
recomputed credit earned is $796.37 (7 percent of $11,376.67). Thus, the
tax imposed by chapter 1 of the Code for 1969 is increased by $796.36
($1,592.73 minus $796.37).
(c) If the taxpayer chooses to recompute qualified investment by
using the method provided in subdivision (v) of this subparagraph, the
increase in tax for 1967 (the first recapture year) would be $1,167.67,
i.e., the original credit earned, $4,667.67, minus the recomputed credit
earned, $3,500 (50 percent, the percentage shown in column (5), of
$100,000 multiplied by 7 percent). As long as the same average useful
life category reflects the taxpayer's experience for subsequent years,
no recapture determination will be required for any future year, except
as provided by subparagraph (3)(iv) of this paragraph.
(vi) Subdivision (i) of this subparagraph shall not apply with
respect to section 38 property to which an election under section 167(m)
applies unless the taxpayer assigns actual retirements of such section
38 property for all taxable years to the same vintage account for
purposes of section 47 and for purposes of computing the allowance for
depreciation under section 167. The assignment of actual retirements of
section 38 property for a taxable year to particular vintage accounts
may be made on the basis of an appropriate mortality dispersion table
(based on an acceptable sampling of the taxpayer's actual experience or
other statistical or engineering techniques) or on the basis of a
standard mortality dispersion table prescribed by the Commissioner. If
the taxpayer assigns actual retirements for any taxable year to
particular vintage accounts on the basis of such standard mortality
dispersion table, actual retirements for all subsequent taxable years
must be assigned to particular vintage accounts on the basis of such
table. Actual retirements of section 38 property for a taxable year
shall be assigned to particular vintage accounts by--
(a) Determining the expected retirements for such taxable year from
each vintage account containing such section 38 property, and
(b) Ratably allocating such actual retirements to each vintage
account containing such section 38 property.
However, the unadjusted basis of retired assets assigned to any
particular vintage account shall not exceed the unadjusted basis of the
property contained in such account.
(3) Special rules. (i) Taxpayers who properly determine estimated
useful lives under Sec. 1.46-3(e)(3) (ii)(b) or (iii) may treat such
assets as having been
[[Page 386]]
disposed of or having ceased to be section 38 assets in the order of the
estimated useful lives that were assigned to such assets. Thus, the
asset that is first disposed of or first ceases to be section 38
property may be treated as the asset to which there was assigned the
shortest estimated useful life; the next asset disposed of or ceasing to
be section 38 property may be treated as the asset to which there was
assigned the second shortest life, etc.
(ii) In the case of taxpayers who use the rule of subdivision (i) of
this subparagraph with respect to mass assets for which the estimated
useful life was determined under Sec. 1.46-3(e)(3)(iii), if the
dispersion shown by the mortality dispersion table effective for a
taxable year subsequent to the credit year is the same as the dispersion
shown by the mortality table that was effective for the credit year (for
example, if the same average useful life on the standard mortality
dispersion table reflects the taxpayer's experience for both such
years), no recapture determination is required for such subsequent
taxable year.
(iii) Notwithstanding subdivision (i) of this subparagraph,
taxpayers who, for purposes of determining qualified investment, do not
use a mortality dispersion table with respect to certain section 38
assets similar in kind but who consistently assign under paragraph
(e)(3)(ii)(b) of Sec. 1.46-3 to such assets separate lives based on the
estimated range of years taken into consideration in establishing the
average useful life of such assets, may select the order in which such
assets shall be considered as having been disposed of, regardless of the
taxable years in which such assets were placed in service. If a taxpayer
uses the method provided in this subdivision to determine that any asset
is considered as having been disposed of, then, in addition to complying
with the record requirements of subparagraph (1)(i) of this paragraph,
such taxpayer must maintain records from which he can establish to the
satisfaction of the district director that such asset has not previously
been considered as having been disposed of. In addition, if, for any
taxable year, a taxpayer uses the method provided in this subdivision
for any asset, he must use for such year and for each subsequent taxable
year (unless he obtains the district director's consent to change) with
respect to all assets similar in kind to such asset--
(a) The method of determining estimated useful lives described in
paragraph (e)(3)(ii)(b) of Sec. 1.46-3, and
(b) The method he has selected under this subdivision for
determining the order in which such assets are considered as having been
disposed of.
A request by a taxpayer to obtain the district director's consent to
change a system or method described in this subdivision with respect to
assets similar in kind must be submitted to the district director on or
before the last day of the taxable year with respect to which the change
is sought.
(iv) Notwithstanding subdivisions (i), (ii), and (iii) of this
subparagraph, there shall be taken into account separately any abnormal
retirement of section 38 property of substantial value for which the
estimated useful life was determined under Sec. 1.46-3(e)(3) (ii)(b) or
(iii). For definition of abnormal retirement, see paragraph (b) of Sec.
1.167(a)-8.
(4) [Reserved]
(5) Example. This paragraph may be illustrated by the following
example:
Example. (i) Taxpayer A uses numerous small returnable containers in
his business. It is impracticable for A to keep individual detailed
records with respect to such containers which are mass assets. In 1965,
A places in service 10 million containers purchased for $1 million, and
reasonably determines that each of such containers has a basis of 10
cents. A places such containers in a multiple asset account to which is
assigned a 5-year average useful life for purposes of computing
depreciation. A has conducted an appropriate mortality study which shows
that the containers have the following estimated useful lives:
------------------------------------------------------------------------
Useful
Percent of assets life
(years)
------------------------------------------------------------------------
10.......................................................... 3
20.......................................................... 6
40.......................................................... 5
20.......................................................... 6
10.......................................................... 7
------------------------------------------------------------------------
A assigns separate lives to such assets based on the estimated range of
years taken into account in establishing the average useful life of such
containers. The qualified investment with respect to such containers is
$400,000 computed as follows:
[[Page 387]]
------------------------------------------------------------------------
Applicable Qualified
Useful life Basis percentage investment
------------------------------------------------------------------------
4................................... $200,000 33\1/3\ $66,666
5................................... 400,000 33\1/3\ 133,334
6................................... 200,000 66\2/3\ 133,334
7................................... 100,000 66\2/3\ 66,666
-----------------------------------
.......... .......... 400,000
------------------------------------------------------------------------
A's credit earned for 1965 of $28,000 (7 percent times $400,000) is
allowed as a credit under section 38 against A's liability for tax of $2
million. (For purposes of this example the computations of investment
credit and recapture with respect to containers placed in service in
years other than 1965 are omitted.) The mortality studies effective for
1966 and 1967 show that none of the containers placed in service in 1965
was retired.
(ii) A's mortality study effective with respect to 1968 shows that
the containers are being retired as follows:
------------------------------------------------------------------------
Useful
Percent of assets life
(years)
------------------------------------------------------------------------
30.......................................................... 3
20.......................................................... 4
30.......................................................... 5
10.......................................................... 6
10.......................................................... 7
------------------------------------------------------------------------
Thus, the 1968 study shows that 30 percent of the 10 million containers
placed in service in 1965 were retired in 1968. Under the rule of
subparagraph (3)(i) of this paragraph, the 3 million containers are
treated as consisting of the 1 million containers to which was assigned
a 3-year useful life and the 2 million containers to which was assigned
a 4-year useful life. Taking into account only the fact that 30 percent
of the containers placed in service in 1965 had an actual life of less
than 4 years, A's recomputed qualified investment for 1965 is $333,333
and his recomputed credit earned is $23,333. A's income tax for 1968 is
increased by $4,667 ($28,000 original credit earned minus $23,333
recomputed credit earned).
(iii) The mortality study effective for 1969 shows the same results
as the mortality study effective for 1968. Thus, it shows that 2 million
containers were retired in 1969 (an actual life of 4 years). Under the
rule of subparagraph (3)(i) of this paragraph such 2 million containers
are treated as having been among 4 million containers to which were
assigned a 5-year useful life. Therefore, no recapture determination is
required for 1969.
(iv) The mortality study effective for 1970 shows the same results
as the mortality study effective for 1968. Thus, it shows that 3 million
containers were retired in 1970 (an actual life of 5 years). Under the
rule of subparagraph (3)(i) of this paragraph, the 3 million are treated
as having been assigned useful lives as follows: 2 million as having
been assigned a useful life of 5 years, and 1 million as having been
assigned a useful life of 6 years. Taking into account only the fact
that 10 percent of the containers placed in service in 1965 had an
actual life of 5 years rather than the 6 years estimated useful life
assigned to them, A's recomputed qualified investment is $300,000 and
A's credit earned for 1965 is $21,000. Thus, taking into account the
1968 recapture determination A's income tax for 1970 is increased by
$2,333.
(f) Public utility property--(1) Recomputed qualified investment. In
recomputing qualified investment with respect to section 38 property
which becomes public utility property (as defined in paragraph (g) of
Sec. 1.46-3)--
(i) If such property becomes public utility property less than 3
years from the date on which it was placed in service, then such
property shall be treated as public utility property for its entire
useful life.
(ii) If such property becomes public utility property 3 years or
more but less than 5 years from the date on which it was placed in
service, then such property shall be treated as section 38 property
which is not public utility property for the first 3 years of its
estimated useful life and as public utility property for the remaining
period of its estimated useful life.
(iii) If such property becomes public utility property 5 years or
more but less than 7 years from the date on which it was placed in
service, then such property shall be treated as section 38 property
which is not public utility property for the first 5 years of its
estimated useful life and as public utility property for the remaining
period of its estimated useful life.
If property becomes public utility property before August 16, 1971, this
subparagraph shall be applied by substituting ``4 years'' for ``3
years'', ``6 years'' for ``5 years'', and ``8 years'' for ``7 years''.
(2) Examples. Subparagraph (1) of this paragraph may be illustrated
by the following examples:
Example 1. (i) X Corporation, which makes its returns on the basis
of the calendar year, acquired and placed in service on January 1, 1969,
an item of section 38 property with a basis of $12,000 and an estimated
useful life of 8 years. The amount of qualified investment with respect
to such property was $12,000. For the taxable year 1969, X Corporation's
credit earned was $840 (7 percent of $12,000)
[[Page 388]]
and for such taxable year X Corporation was allowed under section 38 a
credit of $840 against its liability for tax. During the taxable year
1972 such property becomes public utility property (as defined in
paragraph (g) of Sec. 1.46-3) with respect to X Corporation.
(ii) Such item of section 38 property is treated as section 38
property which is not public utility property for the first 3 years of
its 8-year estimated useful life and is treated as public utility
property for the remaining 5 years. The recomputed qualified investment
with respect to such item of section 38 property is $7,428, computed as
follows:
$12,000 basisx33\1/3\ percent applicable percentage........... $4,000
$12,000 basisx \3/7\x66\2/3\ percent applicable percentage.... 3,428
---------
Total recomputed qualified investment..................... 7,428
X Corporation's recomputed credit earned for the taxable year 1969 is
$520 (7 percent of $7,428). The income tax imposed by chapter 1 of the
Code on X Corporation for the taxable year 1972 is increased by the $320
decrease in its credit earned for the taxable year 1969 (that is, $840
original credit earned minus $520 recomputed credit earned).
Example 2. (i) The facts are the same as in example 1 and in
addition the item of section 38 property which became public utility
property in 1972 is sold to Y Corporation on January 2, 1975.
(ii) The actual useful life of such item of property is 6 years. For
the first 3 years of its 8-year estimated useful life such item is
treated as section 38 property which is not public utility property and
for the remaining 3 years is treated as public utility property. The
recomputed qualified investment with respect to such item of property is
$5,714, computed as follows:
$12,000 basisx33\1/3\ percent applicable percentage........... $4,000
$12,000 basisx \3/7\ x33\1/3\ percent applicable percentage... 1,714
---------
Total recomputed qualified investment..................... 5,714
X Corporation's recomputed credit earned for the taxable year 1969 is
$400 (7 percent of $5,714). The income tax imposed by chapter 1 of the
Code on X Corporation for the taxable year 1975 is increased by $120
(that is, $440 ($840 original credit earned minus $400 recomputed credit
earned) minus $320 increase in tax for 1969).
(g) Special rules for progress expenditure property. Under section
47(a)(3), a recapture determination is required if property ceases to be
progress expenditure property (as defined in Sec. 1.46-5(d)). Property
ceases to be progress expenditure property if it is sold or otherwise
disposed of before it is placed in service. For example, cancellation of
the contract for progress expenditure property or abandonment of the
project by the taxpayer will be considered a ``disposition'' within the
meaning of Sec. 1.47-2. A cessation occurs if progress expenditure
property ceases to be property that will be section 38 property with a
useful life of 7 years or more when placed in service. In general, a
sale and leaseback is treated as a cessation. However, see paragraph
(g)(2) of Sec. 1.47-3 for special rules for certain sale and leaseback
transactions. Recapture determinations for progress expenditure property
are to be made in a way similar to that provided under Sec. Sec. 1.47-1
through 1.47-6. Reduction of qualified investment must begin with the
most recent credit year (i.e., the most recent taxable year the property
is taken into account in computing qualified investment under Sec.
1.46-3 or 1.46-5).
(h) Special rules for energy property--(1) In general. A recapture
determination is required for the investment credit attributable to the
energy percentage (energy credit) if property is (i) disposed of or (ii)
otherwise ceases to be energy property (as defined in section 48(l))
with regard to the taxpayer before the close of the estimated useful
life (as determined under paragraph (a)(2)(i) of this section) which was
taken into account in computing qualified investment.
(2) Dispositions. The term ``disposition'' is described in Sec.
1.47-2(a)(1). A transfer of energy property that is a ``disposition''
requiring a recapture determination for the investment credit
attributable to the regular percentage (regular credit) and the ESOP
percentage (ESOP credit) will also be a ``disposition'' requiring a
recapture determination for the energy credit.
(3) Cessation. (i) The term ``cessation'' is described in Sec.
1.47-2(a)(2). For energy property, a cessation occurs during a taxable
year if, by reason of a change in use or otherwise, the property would
not have qualified for an energy credit if placed in service during that
year. A change in use will not require a recapture determination for the
regular or ESOP credit unless, by reason of the change, the property
would not have qualified for the regular or ESOP credit if placed in
service during that year.
[[Page 389]]
(ii) A qualified intercity bus described in Sec. 1.48-9(q) must
meet the predominant use test (of Sec. 1.48-9(q)(7)) for the remainder
of the taxable year from the date it is placed in service and for each
taxable year thereafter. A cessation occurs in any taxable year in which
the bus is no longer a qualifying bus under Sec. 1.48-9(q)(6). A
qualified intercity bus does not cease to be energy property for a
taxable year subsequent to the one in which it was placed in service by
reason of a decrease in operating capacity (see Sec. 1.48-9(q)(9)) for
that year compared to any prior taxable year.
(4) Recordkeeping requirement. For recordkeeping requirements with
respect to dispositions or cessations, the rules of paragraph (e)(1) of
this section apply. For example, the taxpayer must maintain records for
each recycling facility indicating the percentage of virgin materials
used each year. See, Sec. 1.48-9(g)(5)(ii).
(5) Examples. The following examples illustrate this paragraph (h).
Example 1. (a) In 1980, corporation X, a calendar year taxpayer,
acquires and places in service a computer that will perform solely
energy conserving functions in connection with an existing industrial
process. Assume the computer has a 10 year useful life and qualifies for
both the regular and energy credits. In 1981, a change is made in the
industrial process (within the meaning of Sec. 1.48-9(l)(2)). However,
for 1981 the computer continues to perform solely energy conserving
functions. In 1982, the computer ceases to perform energy conserving
functions and begins to perform a production related function.
(b) For 1981, a recapture determination is not required. For 1982,
the entire energy credit must be recaptured, although none of the
regular credit is recaptured. If in 1989 the computer first ceased to
perform an energy conserving function, no part of the energy credit
would be recaptured.
Example 2. Assume the same facts and conclusion as in example 1.
Assume further that X sells the computer in 1985. A recapture
determination is required for the regular credit.
Example 3. In 1981, corporation Y, a calendar year taxpayer,
acquires and places in service recycling equipment. Assume the equipment
has a 7-year useful life and qualifies for both the regular credit and
energy credit. During the course of 1982, more than 10 percent of the
material recycled is virgin material. The energy credit is recaptured in
its entirety, although none of the regular credit is recaptured. See
Sec. 1.48-9(g)(5)(B)(ii).
Example 4. In 1980, corporation Z, a calendar year taxpayer,
acquires and places in service a boiler the primary fuel for which is an
alternate substance. The boiler has a 7-year useful life. Assume the
boiler is a structural component of a building within the meaning of
Sec. 1.48-1(e)(2). Assume further that the boiler is not a part of a
qualified rehabilitated building (as defined in section 48(g)(1)) or a
single purpose agricultural or horticultural structure (as defined in
section 48(p)). Z is allowed only an energy credit since the boiler is a
structural component of a building. In 1984, Z modifies the boiler to
use oil as the primary fuel. A recapture determination is required for
the energy credit. See Sec. 1.48-9(c)(3).
(i)-(l) [Reserved]
(m) Commuter highway vehicles--(1) Recomputed qualified investment.
(i) If a qualifying commuter highway vehicle (as defined in Sec. 1.46-
11(a) undergoes a change in use but does not cease to be section 38
property, qualified investment for that vehicle is recomputed as if the
vehicle was section 38 property which is not a qualifying commuter
highway vehicle for its entire useful life.
(ii) The following example illustrates this paragraph (m)(1).
Example. X Corporation, a calendar year taxpayer, acquired and
placed in service on January 1, 1982, a qualifying commuter highway
vehicle with a basis of $10,000 and which qualified as three year
recovery property under section 168(c)(2)(A)(i). The amount of qualified
investment for the vehicle under section 46(c) (1) and (6) is $10,000.
For the taxable year 1982, X Corporation's credit earned was $1,000 (10
percent of $10,000) and X Corporation was allowed under section 38 a
$1,000 credit against its 1982 tax liability. During the taxable year
1984, the vehicle undergoes a change in use but does not cease to be
section 38 property. The vehicle is treated as section 38 property which
is not a qualifying commuter highway vehicle for its entire useful life.
The recomputed qualified investment for the vehicle is $6,000 (60
percent of $10,000) and X Corporation's recomputed credit earned is $600
(10 percent of $6,000). The income tax imposed by chapter 1 of the Code
on X Corporation for 1984 is increased by the $400 decrease in its
credit earned for 1982 ($1,000-$600).
(2) Change in use--(i) A qualifying commuter highway vehicle
undergoes a change in use if the vehicle does not meet the commuter use
requirement
[[Page 390]]
(as defined in Sec. 1.46-11(d)) for each computation period.
(ii) Each of the following is a computation period:
(A) The period beginning on the date the vehicle was placed in
service and ending on the last day of the taxpayer's taxable year in
which the vehicle was placed in service;
(B) Each of the taxpayer's taxable years beginning after the date
the vehicle was placed in service and ending before the end of the first
36 months after the vehicle was placed in service; and
(C) The period ending at the end of the first 36 months after the
vehicle was placed in service and beginning on the first day of the
taxpayer's taxable year in which the end of those first 36 months falls.
(iii) The following example illustrates this paragraph (m)(2).
Example. (a) Z Corporation, a calendar year taxpayer, acquired and
placed in service a qualifying commuter highway vehicle on January 15,
1979. Z Corporation used the vehicle as set forth in the following
table:
------------------------------------------------------------------------
Total Commuter
Taxable year ending miles miles Ratio
------------------------------------------------------------------------
1979................................... 10,000 9,000 .90
1980................................... 10,000 8,000 .80
1981................................... 10,000 8,000 .80
1982 (1-14)............................ 1,000 100 .10
------------------------------------------------------------------------
(b) The first computation period begins on the date the vehicle is
placed in service, in this example 1-15-79, and ends 12-31-79. In that
computation period, the ratio of commuter miles to total miles is .90
(9,000 miles/10,000 miles). Therefore, the vehicle meets the commuter
use requirement for that period and has not undergone a change in use.
Similar calculations for the computation periods 1-1-80 to 12-31-80 and
1-1-81 to 12-31-81 produce the same result.
(c) As of the computation period beginning 1-1-82 and ending 1-14-
82, the ratio of commuter use to total mileage is .10 (100 miles /1,000
miles). Since that ratio is less than .80, the vehicle does not meet the
commuter use requirement for the period and the vehicle has undergone a
change in use.
(Secs. 38(b) (76 Stat. 963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat. 264,
26 U.S.C. 48(l)(16)), and 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 6931, 32 FR 14027, Oct. 10, 1967, as amended by T.D. 7203, 37 FR
17127, Aug. 25, 1972; T.D. 7765, 46 FR 7291, Jan. 23, 1981; T.D. 7982,
49 FR 39541, Oct. 9, 1984; T.D. 8035, 50 FR 29370, July 19, 1985; T.D.
8183, 53 FR 6625, Mar. 2, 1988; T.D. 8474, 58 FR 25557, Apr. 27, 1993]
Sec. 1.47-2 ``Disposition'' and ``cessation''.
(a) General rule--(1) ``Disposition''. For purposes of this section
and Sec. 1.47-1 and Sec. Sec. 1.47-3 through 1.47-6, the term
``disposition'' includes a sale in a sale-and-leaseback transaction, a
transfer upon the foreclosure of a security interest and a gift, but
such term does not include a mere transfer of title to a creditor upon
creation of a security interest. See paragraph (g) of Sec. 1.47-3 for
treatment of certain sale-and-leaseback transactions.
(2) ``Cessation''. (i) A determination of whether section 38
property ceases to be section 38 property with respect to the taxpayer
must be made for each taxable year subsequent to the credit year. Thus,
in each such taxable year the taxpayer must determine, as if such
property were placed in service in such taxable year, whether such
property would qualify as section 38 property (within the meaning of
Sec. 1.48-1) in the hands of the taxpayer for such taxable year.
(ii) Section 38 property does not cease to be section 38 property
with respect to the taxpayer in any taxable year subsequent to the
credit year merely because under the taxpayer's depreciation practice no
deduction for depreciation with respect to such property is allowable to
the taxpayer for the taxable year, provided that the property continues
to be used in the taxpayer's trade or business (or in the production of
income) and otherwise qualifies as section 38 property with respect to
the taxpayer.
(iii) This subparagraph may be illustrated by the following
examples:
Example 1. A, an individual who makes his returns on the basis of
the calendar year, on January 1, 1962, acquired and placed in service in
his trade or business an item of section 38 property with an estimated
useful life of eight years. On January 1, 1965, A removes the item of
section 38 property from use in his trade or business by converting such
item to personal use. Therefore no deduction for depreciation with
respect to such item of property is allowable to A for the taxable year
1965. On January 1, 1965, such item of property ceases to be section 38
property with respect to A.
Example 2. On January 1, 1965, A placed in service an item of
section 38 property with a basis of $10,000 and an estimated useful life
of 4 years. A depreciates such item, which has
[[Page 391]]
a salvage value of $2,000 (after taking into account section 167(f)), on
the declining balance method at a rate of 50 percent (that is, twice the
straight line rate of 25 percent). With respect to such item, A is
allowed deductions for depreciation of $5,000 for 1965, $2,500 for 1966,
and $500 for 1967. A is not allowed a deduction for depreciation for
1968 although he continues to use such item in his trade or business.
Such item does not cease to be section 38 property with respect to A in
1968.
(b) Leased property--(1) In general. For purposes of paragraph (a)
of Sec. 1.47-1, generally the mere leasing of section 38 property by a
lessor who took the basis of such property into account in computing his
qualified investment for the credit year shall not be considered to be a
disposition. However, in a case where a lease is treated as a sale for
income tax purposes such transaction is considered to be a disposition.
Leased section 38 property ceases to be section 38 property with respect
to the lessor if, in any taxable year subsequent to the credit year,
such property would not qualify as section 38 property (as defined in
Sec. 1.48-1) in the hands of the lessor, the lessee, or any sublessee.
Thus, if, in a taxable year subsequent to the credit year, a lessee uses
the property predominantly outside the United States, such property
shall be considered to have ceased to be section 38 property with
respect to the lessor.
(2) Where lessor elects to treat lessee as purchaser. For purposes
of paragraph (a) of Sec. 1.47-1, if, under Sec. 1.48-4, the lessor of
new section 38 property made a valid election to treat the lessee as
having purchased such property for purposes of the credit allowed by
section 38, the following rules apply in determining whether such
property is disposed of, or otherwise ceases to be section 38 property
with respect to the lessee:
(i) Generally, a mere disposition by the lessor of property subject
to a lease shall not be considered to be a disposition by the lessee.
(ii) If the lessor makes a disposition of property subject to a
lease to a person who may not, under Sec. 1.48-4, make a valid election
to treat the lessee as having purchased such property for purposes of
the credit allowed by section 38 (such as a person described in
paragraph (a)(5) of Sec. 1.48-4), such property shall be considered to
have ceased to be section 38 property with respect to the lessee on the
date of such disposition.
(iii) If a lease is terminated and the property is transferred by
the lessee to the lessor or to any other person, such transfer shall be
considered to be a disposition by the lessee.
(iv) If the lessee actually purchases such property in the credit
year or in a taxable year subsequent to the credit year, such purchase
shall not be considered to be a disposition.
(v) The property ceases to be section 38 property with respect to
the lessee if in any taxable year subsequent to the credit year such
property would not qualify as section 38 property (as defined in Sec.
1.48-1) in the hands of the lessor, the lessee, or any sublessee. Thus,
for example, if, in a taxable year subsequent to the credit year, a
sublessee uses the property predominantly outside the United States, the
property ceases to be section 38 property with respect to the lessee.
(c) Reduction in basis of section 38 property--(1) General rule. If,
in the credit year or in any taxable year subsequent to the credit year,
the basis (or cost) of section 38 property is reduced, for example, as a
result of a refund of part of the cost of the property, then such
section 38 property shall be treated as having ceased to be section 38
property with respect to the taxpayer to the extent of the amount of
such reduction in basis (or cost) on the date the refund which results
in such reduction in basis (or cost) is received or accrued, except that
for purposes of Sec. 1.47-1(a) the actual useful life of the property
treated as having ceased to be section 38 property shall be considered
to be less than 3 years.
(2) Example. Subparagraph (1) of this paragraph may be illustrated
by the following example:
Example. (i) On January 1, 1962, A, a cash basis taxpayer, acquired
from X Cooperative an item of section 38 property with a basis of $100
and an estimated useful life of 10 years which he placed in service on
such date. The amount of qualified investment with respect to such asset
was $100. For the taxable year 1962 A was allowed under section 38 a
credit of $7 against his liability for tax. On June 1, 1963, A receives
a $10 patronage dividend from X Cooperative with respect to such
[[Page 392]]
asset. Under paragraph (c)(2)(i) of Sec. 1.1385-1, the basis of the
asset in A's hands is reduced by $10.
(ii) Under subparagraph (1) of this paragraph, on June 1, 1963, the
item of section 38 property ceases to be section 38 property with
respect to A to the extent of $10 of the original $100 basis.
(d) Retirements. A retirement of section 38 property, including a
normal retirement (as defined in paragraph (b) of Sec. 1.167(a)-8,
relating to definition of normal and abnormal retirements), whether from
a single asset account or a multiple asset account, and an abandonment,
are dispositions for purposes of paragraph (a) of Sec. 1.47-1.
(e) Conversion of section 38 property to personal use. (1) If, for
any taxable year subsequent to the credit year--
(i) A deduction for depreciation is allowable to the taxpayer with
respect to only a part of section 38 property because such property is
partially devoted to personal use, and
(ii) The part of the property (expressed as a percentage of its
total basis (or cost)) with respect to which a deduction for
depreciation is allowable for such taxable year is less than the part of
the property with respect to which a deduction for depreciation was
allowable in the credit year,
then such property shall be considered as having ceased to be section 38
property with respect to the taxpayer to such extent. Further, property
ceases to be section 38 property with respect to the taxpayer to the
extent that a deduction for depreciation thereon is disallowed under
section 274 (relating to disallowance of certain entertainment, etc.,
expenses).
(2) Examples. Subparagraph (1) of this paragraph may be illustrated
by the following examples:
Example 1. (i) A, a calendar-year taxpayer, acquired and placed in
service on January 1, 1962, an automobile with a basis of $2,400 and an
estimated useful life of four years. In the taxable year 1962 the
automobile was used by A 80 percent of the time in his trade or business
and was used 20 percent of the time for personal purposes. Thus, for the
taxable year 1962 only 80 percent of the basis of the automobile
qualified as section 38 property since a deduction for depreciation was
allowable to A only with respect to 80 percent of the basis of the
automobile. In the taxable year 1963 the automobile is used by A only 60
percent of the time in his trade or business. Thus, for the taxable year
1963 a deduction for depreciation is allowable to A only with respect to
60 percent of the basis of the automobile.
(ii) Under subparagraph (1) of this paragraph, on January 1, 1963,
the automobile ceases to be section 38 property with respect to A to the
extent of 20 percent (80 percent minus 60 percent) of the $2,400 basis
of the automobile.
Example 2. (i) The facts are the same as in example 1 and in
addition for the taxable year 1964 a deduction for depreciation is
allowable to A only with respect to 40 percent of the basis of the
property.
(ii) Under subparagraph (1) of this paragraph, on January 1, 1964,
the automobile ceases to be section 38 property with respect to A to the
extent of 20 percent (60 percent minus 40 percent) of the $2,400 basis
of the automobile.
[T.D. 6931, 32 FR 14032, Oct. 10, 1967, as amended by T.D. 7203, 37 FR
17128, Aug. 25, 1972]
Sec. 1.47-3 Exceptions to the application of Sec. 1.47-1.
(a) In general. Notwithstanding the provisions of Sec. 1.47-2,
relating to ``disposition'' and ``cessation,'' paragraph (a) of Sec.
1.47-1 shall not apply if paragraph (b) of this section (relating to
transfers by reason of death), paragraph (c) of this section (relating
to property destroyed by casualty), paragraph (d) of this section
(relating to reselection of used section 38 property), paragraph (e) of
this section (relating to transactions to which section 381(a) applies),
paragraph (f) of this section (relating to mere change in form of
conducting a trade or business), paragraph (g) of this section (relating
to sale-and-leaseback transactions), or paragraph (h) of this section
(relating to certain property replaced after Apr. 18, 1969) applies with
respect to such disposition or cessation.
(b) Transfers by reason of death--(1) General rule. Notwithstanding
the provisions of Sec. 1.47-2, relating to ``disposition'' and
``cessation'', paragraph (a) of Sec. 1.47-1 shall not apply to a
transfer of section 38 property by reason of the death of the taxpayer.
Thus, for example, with respect to section 38 property held in joint
tenancy, paragraph (a) of Sec. 1.47-1 shall not apply to the transfer
of the deceased taxpayer's interest to the surviving joint tenant. If,
under Sec. 1.48-4, the lessor of new section 38
[[Page 393]]
property made a valid election to treat the lessee as having purchased
such property for purposes of the credit allowed by section 38,
paragraph (a) of Sec. 1.47-1 does not apply if, by reason of the death
of the lessee, there is a termination of the lease and transfer of the
leased property to the lessor, or there is an assignment of the lease
and transfer of the leased property to another person. Moreover,
paragraph (a) of Sec. 1.47-1 does not apply to the transfer of a
partner's interest in a partnership, a beneficiary's interest in an
estate or trust, or shares of stock of a shareholder of an electing
small business corporation (as defined in section 1371(b)) by reason of
the death of such partner, beneficiary, or shareholder. Paragraph (a) of
Sec. 1.47-1 shall not apply to property prior to his death even if the
value of such gift is included in his gross estate for estate tax
purposes (such as, a gift in contemplation of death under section 2035).
The effect of this subparagraph is that any section 38 property held by
a taxpayer at the time of his death is deemed to have been held by him
for its entire estimated useful life.
(2) Examples. Subparagraph (1) of this paragraph may be illustrated
by the following examples:
Example 1. (i) A, an individual, acquired and placed in service on
January 1, 1962, an item of section 38 property with a basis of $10,000
and an estimated useful life of eight years. On April 28, 1963, A dies
and, as a result of A's death, his interest in such item of section 38
property is transferred to a testamentary trust pursuant to A's will,
and on February 1, 1967, the trust is terminated and the item of section
38 property is transferred to the beneficiaries of the trust.
(ii) Under subparagraph (1) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the transfer, as a result of A's death,
of his interest in such item of section 38 property to the testamentary
trust. Moreover, paragraph (a) of Sec. 1.47-1 does not apply to the
February 1, 1967, transfer of such item of section 38 property by the
trust to its beneficiaries.
Example 2. (i) X Corporation, an electing small business corporation
(as defined in section 1371(b)) which makes its returns on the basis of
a calendar year, acquired and placed in service during 1962 an item of
section 38 property. On December 31, 1962, X Corporation had 10 shares
of stock outstanding which were owned as follows: A owned eight shares
and B owned two shares. On December 31, 1962, 80 percent of the basis of
the item of section 38 property was apportioned to A and 20 percent to
B. On June 1, 1964, A dies and, as a result of A's death, his eight
shares of stock in X Corporation are transferred to his wife. On July
10, 1965, X Corporation sells the item of section 38 property to Y
Corporation.
(ii) Under subparagraph (1) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the transfer, as a result of A's death,
of his eight shares of stock in X Corporation to his wife. Moreover,
with respect to the July 10, 1965, sale paragraph (a) of Sec. 1.47-1
applies only to the 20 percent of the basis of the item of section 38
property which was apportioned to B.
(c) Property destroyed by casualty--(1) Dispositions after April 18,
1969. Notwithstanding the provisions of Sec. 1.47-2, relating to
``disposition'' and ``cessation'', paragraph (a) of Sec. 1.47-1 shall
not apply to property which, after April 18, 1969, and before August 16,
1971, is disposed of or otherwise ceases to be section 38 property with
respect to the taxpayer on account of its destruction or damage by fire,
storm, shipwreck, or other casualty, or by reason of its theft.
(2) Dispositions before April 19, 1969. (i) In the case of property
which, before April 19, 1969, is disposed of or otherwise ceases to be
section 38 property with respect to the taxpayer on account of its
destruction or damage by fire, storm, shipwreck or other casualty, or by
reason of its theft, paragraph (a) of Sec. 1.47-1 shall apply except to
the extent provided in subdivisions (ii) and (iii) of this subparagraph.
(ii) Paragraph (a) of Sec. 1.47-1 shall not apply if--
(a) Section 38 property is placed in service by the taxpayer to
replace (within the meaning of paragraph (h) of Sec. 1.46-3) the
destroyed, damaged, or stolen property, and
(b) The basis (or cost) of the section 38 property which is placed
in service by the taxpayer to replace the destroyed, damaged, or stolen
property is reduced under paragraph (h) of Sec. 1.46-3.
(iii) If property which would be section 38 property but for section
49 is placed in service by the taxpayer to replace the destroyed,
damaged, or stolen property, then the provisions of paragraph (h) of
this section (other than the requirement that the replacement take place
within 6 months after the disposition) shall apply.
[[Page 394]]
(3) Examples. The provisions of subparagraph (2)(ii) of this
paragraph may be illustrated by the following examples:
Example 1. (i) A acquired and placed in service on January 1, 1962,
machine No. 1 which qualified as section 38 property with a basis of
$30,000 and an estimated useful life of 6 years. The amount of qualified
investment with respect to such machine was $20,000. For the taxable
year 1962 A's credit earned of $1,400 was allowed under section 38 as a
credit against its liability for tax. On January 1, 1963, machine No. 1
is completely destroyed by fire. On January 1, 1963, the adjusted basis
of machine No. 1 in A's hands is $24,500. A receives $23,000 in
insurance proceeds as compensation for the destroyed machine, and on
February 15, 1964, A acquires and places in service machine No. 2, which
qualifies as section 38 property, with a basis of $41,000 and an
estimated useful life of 6 years to replace machine No. 1.
(ii) Under subparagraph (1) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply with respect to machine No. 1 since machine
No. 2 is placed in service to replace machine No. 1 and the $41,000
basis of machine No. 2 is reduced, under paragraph (h) of Sec. 1.46-3,
by $23,000. (See example 1 of paragraph (h)(3) of Sec. 1.46-3.)
Example 2. (i) The facts are the same as in example 1 except that A
receives only $19,000 in insurance proceeds as compensation for the
destroyed machine.
(ii) Although machine No. 2 is placed in service to replace machine
No. 1, subparagraph (1) of this paragraph does not apply with respect to
machine No. 1 since the basis of machine No. 2 is not reduced under
paragraph (h) of Sec. 1.46-3. Paragraph (a) of Sec. 1.47-1 applies
with respect to the January 1, 1963, destruction of machine No. 1. The
actual useful life of machine No. 1 is 1 year. The recomputed qualified
investment with respect to such machine is zero ($30,000 basis
multiplied by zero applicable percentage) and A's recomputed credit
earned for the taxable year 1962 is zero. The income tax imposed by
chapter 1 of the Code on A for the taxable year 1963 is increased by
$1,400.
(d) Reselection of used section 38 property--(1) Reselection. If--
(i) Used section 38 property (as defined in Sec. 1.48-3) the cost
of which was taken into account in computing the taxpayer's qualified
investment is disposed of, or otherwise ceases to be section 38 property
with respect to the taxpayer, before the close of the estimated useful
life which was taken into account in computing such qualified
investment, and
(ii) For the taxable year in which the property described in
subdivision (i) of this subparagraph was placed in service, the sum of
(a) the cost of used section 38 property placed in service by the
taxpayer, and (b) the cost of used section 38 property apportioned to
such taxpayer exceeded $50,000,
then such taxpayer may treat the cost of any used section 38 property
(regardless of its estimated useful life) which was not originally
selected, under paragraph (c)(4) of Sec. 1.48-3, to be taken into
account in computing qualified investment for such taxable year (or
previously reselected under this subparagraph) as having been selected
(in accordance with the principles of paragraph (c)(4)(ii) of Sec.
1.48-3) in place of the cost of the used section 38 property described
in subdivision (i) of this subparagraph. Hereinafter such reselected
property is referred to as ``newly selected used section 38 property''.
For purposes of this subparagraph, the cost of used section 38 property
apportioned to a taxpayer means the sum of the cost of used section 38
property apportioned to him by a trust, estate, or electing small
business corporation (as defined in section 1371(b)), and his share of
the cost of partnership used section 38 property, with respect to the
taxable year of such trust, estate, corporation or partnership ending
with or within such taxpayer's taxable year. In the case of a taxpayer
to whom paragraph (c)(2) of Sec. 1.48-3 applied for the taxable year in
which the property described in subdivision (i) of this subparagraph was
placed in service, a $25,000 amount shall be substituted for the $50,000
amount referred to in subdivision (ii)(b) of this subparagraph, and in
the case of a member of an affiliated group (as defined in subparagraph
(6) of Sec. 1.48-3(e)) the amount apportioned to such member under
paragraph (e) of Sec. 1.48-3 shall be substituted for such $50,000
amount.
(2) Application of paragraph (a) of Sec. 1.47-1. (i) If a taxpayer
treats, under subparagraph (1) of this paragraph, the cost of any used
section 38 property which was not originally selected as having been
selected in place of the cost of used section 38 property described in
subparagraph (1)(i) of this paragraph, then, not withstanding the
[[Page 395]]
provisions of Sec. 1.47-2 (relating to ``disposition'' and
``cessation''), paragraph (a) of Sec. 1.47-1 shall not apply to the
property described in subparagraph (1)(i) of this paragraph to the
extent of the cost of the newly selected used section 38 property.
(ii) If the cost of the used section 38 property described in
subparagraph (1)(i) of this paragraph exceeds the cost of the newly
selected used section 38 property, then the property described in
subparagraph (1)(i) of this paragraph shall cease to be section 38
property with respect to the taxpayer to the extent of such excess.
(iii) If the newly selected used section 38 property is disposed of,
or otherwise ceases to be section 38 property with respect to the
taxpayer, before the close of the estimated useful life of the property
described in subparagraph (1)(i) of this paragraph, then, unless he
reselects other used section 38 property, paragraph (a) of Sec. 1.47-1
shall apply with respect to such newly selected used section 38
property. For purposes of recomputing qualified investment with respect
to such newly selected used section 38 property the actual useful life
shall be deemed to be the period beginning with the date on which the
property described in subparagraph (1)(i) of this paragraph was placed
in service by the taxpayer and ending with the date of the disposition
or cessation with respect to such newly selected used section 38
property. See paragraph (c) of Sec. 1.47-1, relating to date placed in
service and date of disposition or cessation.
(3) Information requirement. (i) If in any taxable year this
paragraph applies to a taxpayer, such taxpayer shall attach to his
income tax return for such taxable year a statement containing the
information required by subdivision (ii) of this subparagraph.
(ii) The statement referred to in subdivision (i) of this
subparagraph shall contain the following information:
(a) The taxpayer's name, address and taxpayer account number; and
(b) With respect to the originally selected used section 38 property
and the newly selected used section 38 property, the month and year
placed in service, cost, and estimated useful life.
(4) Examples. This paragraph may be illustrated by the following
examples:
Example 1. (i) X Corporation purchased and placed in service on
January 1, 1962, machines No. 1 and No. 2, which qualified as used
section 38 property, each with a cost of $50,000 and an estimated useful
life of eight years. The aggregate cost of used section 38 property
taken into account by X Corporation in computing its qualified
investment for the taxable year 1962 could not exceed $50,000;
therefore, under paragraph (c)(4) of Sec. 1.48-3, X selected the
$50,000 cost of machine No. 1 to be taken into account in computing its
qualified investment for the taxable year 1962. The qualified investment
with respect to machine No. 1 was $50,000. For the taxable year 1962 X's
credit earned of $3,500 was allowed under section 38 as a credit against
its liability for tax. On January 2, 1965, X Corporation sells machine
No. 1 to Y Corporation.
(ii) Under subparagraph (1) of this paragraph, X Corporation treats
the $50,000 cost of machine No. 2 as having been selected to be taken
into account in computing its qualified investment for the taxable year
1962 in place of the $50,000 cost of machine No. 1. Therefore, under
subparagraph (2)(i) of this paragraph, paragraph (a) of Sec. 1.47-1
does not apply to the January 2, 1965, disposition of machine No. 1.
Example 2. (i) The facts are the same as in example 1 and in
addition X Corporation, on December 2, 1966, sells machine No. 2 to Z
Corporation.
(ii) Under subparagraph (2)(iii) of this paragraph, paragraph (a) of
Sec. 1.47-1 applies with respect to the December 2, 1966, disposition
of machine No. 2. The actual useful life of machine No. 2 is four years
and eleven months (that is, the period beginning on January 1, 1962, and
ending on December 2, 1966). The recomputed qualified investment with
respect to machine No. 2 is $16,667 ($50,000 cost multiplied by 33\1/3\
percent applicable percentage) and X Corporation's recomputed credit
earned for the taxable year 1962 is $1,167. The income tax imposed by
chapter 1 of the Code on X Corporation for the taxable year 1966 is
increased by the $2,333 decrease in its credit earned for the taxable
year 1962 (that is, $3,500 original credit earned minus $1,167
recomputed credit earned).
Example 3. (i) The facts are the same as in example 1 except that
machine No. 2 had a cost of $30,000.
(ii) Under subparagraph (1) of this paragraph, X Corporation treats
the $30,000 cost of machine No. 2 as having been selected to be taken
into account in computing its qualified investment for the taxable year
1962 in place of the $50,000 cost of machine No. 1. Therefore, under
subparagraph (2)(i) of this paragraph, paragraph (a) of Sec. 1.47-1
does
[[Page 396]]
not apply to the January 2, 1965, disposition of machine No. 1 to the
extent of $30,000 of the $50,000 cost of machine No. 1. However, under
subparagraph (2)(ii) of this paragraph, paragraph (a) of Sec. 1.47-1
applies to the January 2, 1965, disposition of machine No. 1 to the
extent of $20,000 (that is, $50,000 cost of machine No. 1 minus $30,000
cost of machine No. 2). The actual useful life of such $20,000 portion
of machine No. 1 is three years (that is, the period beginning on
January 1, 1962, and ending on January 2, 1965). The recomputed
qualified investment with respect to the $20,000 portion of the cost of
machine No. 1 is zero ($20,000 portion of the cost multiplied by zero
applicable percentage) and X Corporation's recomputed credit earned for
the taxable year 1962 is $2,100 (7 percent of $30,000). The income tax
imposed by chapter 1 of the Code on X Corporation for the taxable year
1965 is increased by the $1,400 decrease in its credit earned for the
taxable year 1962 (that is, $3,500 original credit earned minus $2,100
recomputed credit earned).
(e) Transactions to which section 381(a) applies--(1) General rule.
Notwithstanding the provisions of Sec. 1.47-2, relating to
``disposition'' and ``cessation'', paragraph (a) of Sec. 1.47-1 shall
not apply to a disposition of section 38 property in a transaction to
which section 381(a) (relating to carryovers in certain corporate
acquisitions) applies. If the section 38 property described in the
preceding sentence is disposed of, or otherwise ceases to be section 38
property with respect to the acquiring corporation, before the close of
the estimated useful life which was taken into account in computing the
transferor corporation's qualified investment, then paragraph (a) of
Sec. 1.47-1 shall apply to the acquiring corporation with respect to
such section 38 property. For purposes of recomputing qualified
investment with respect to such property its actual useful life shall be
the period beginning with the date on which it was placed in service by
the transferor corporation and ending with the date of the disposition
by, or cessation with respect to, the acquiring corporation.
(2) Examples. This paragraph may be illustrated by the following
examples:
Example 1. (i) X Corporation, a wholly owned subsidiary of Y
Corporation, acquired and placed in service on January 1, 1962, an item
of section 38 property with a basis of $12,000 and an estimated useful
life of eight years. Both X and Y make their returns on the basis of a
calendar year. The qualified investment with respect to such item was
$12,000. For the taxable year 1962 X Corporation's credit earned of $840
was allowed under section 38 as a credit against its liability for tax.
On January 15, 1967, X Corporation is liquidated under section 332 and
all of its properties, including the item of section 38 property, are
transferred to Y Corporation. The bases of the properties in the hands
of Y Corporation are determined under section 334(b)(1).
(ii) Under subparagraph (1) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the January 15, 1967, transfer to Y
Corporation.
Example 2. (i) The facts are the same as in example 1 and in
addition on February 2, 1968, Y Corporation sells the item of section 38
property to Z Corporation.
(ii) Under subparagraph (1) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the January 15, 1967, transfer to Y
Corporation. However, paragraph (a) of Sec. 1.47 applies to the
February 2, 1968, sale of the property by Y Corporation. The actual
useful life of the property is six years and one month (that is, the
period beginning on January 1, 1962, and ending on February 2, 1968).
(f) Mere change in form of conducting a trade or business--(1)
General rule. (i) Notwithstanding the provisions of Sec. 1.47-2,
relating to ``disposition'' and ``cessation'', paragraph (a) of Sec.
1.47-1 shall not apply to section 38 property which is disposed of, or
otherwise ceases to be section 38 property with respect to the taxpayer,
before the close of the estimated useful life which was taken into
account in computing the taxpayer's qualified investment by reason of a
mere change in the form of conducting the trade or business in which
such section 38 property is used provided that the conditions set forth
in subdivision (ii) of this subparagraph are satisfied.
(ii) The conditions referred to in subdivision (i) of this
subparagraph are as follows:
(a) The section 38 property described in subdivision (i) of this
subparagraph is retained as section 38 property in the same trade or
business,
(b) The transferor (or in a case where the transferor is a
partnership, estate, trust, or electing small business corporation, the
partner, beneficiary, or shareholder) of such section 38 property
retains a substantial interest in such trade or business,
[[Page 397]]
(c) Substantially all the assets (whether or not section 38
property) necessary to operate such trade or business are transferred to
the transferee to whom such section 38 property is transferred, and
(d) The basis of such section 38 property in the hands of the
transferee is determined in whole or in part by reference to the basis
of such section 38 property in the hands of the transferor. This
subparagraph shall not apply to the transfer of section 38 property if
paragraph (e) of this section, relating to transactions to which section
381 applies, applies with respect to such transfer.
(2) Substantial interest. For purposes of this paragraph, a
transferor (or in a case where the transferor is a partnership, estate,
trust, or electing small business corporation, the partner, beneficiary,
or shareholder) shall be considered as having retained a substantial
interest in the trade or business only if, after the change in form, his
interest in such trade or business--
(i) Is substantial in relation to the total interest of all persons,
or
(ii) Is equal to or greater than his interest prior to the change in
form.
Thus, where a taxpayer owns a 5-percent interest in a partnership, and,
after the incorporation of that partnership, the taxpayer retains at
least a 5-percent interest in the corporation, the taxpayer will be
considered as having retained a substantial interest in the trade or
business as of the date of the change in form.
(3) Property held for the production of income. Subparagraph (1)(i)
of this paragraph applies to section 38 property held for the production
of income (within the meaning of section 167(a)(2)) as well as to
section 38 property used in a trade or business.
(4) Leased property. In a case where a lessor of new section 38
property made a valid election, under Sec. 1.48-4, to treat the lessee
as having purchased such property for purposes of the credit allowed by
section 38, in determining whether subparagraph (1)(i) of this paragraph
applies to an assignment of the lease and transfer of possession of such
property, the condition contained in subparagraph (1)(ii)(d) of this
paragraph is not applicable.
(5) Disposition or cessation. (i) If section 38 property described
in subparagraph (1)(i) of this paragraph is disposed of by the
transferee, or otherwise ceases to be section 38 property with respect
to the transferee, before the close of the estimated useful life which
was taken into account in computing the qualified investment of the
transferor (or in a case where the transferor is a partnership, estate,
trust, or electing small business corporation, the qualified investment
of the partners, beneficiaries, or shareholders) then under paragraph
(a) of Sec. 1.47-1 such property ceases to be section 38 property with
respect to the transferor (or such partners, beneficiaries, or
shareholders), and a recapture determination shall be made with respect
to such property. For purposes of recomputing qualified investment with
respect to such property, the actual useful life shall be the period
beginning with the date on which it was placed in service by the
transferor and ending with the date of the disposition by, or cessation
with respect to, the transferee.
(ii) If in any taxable year the transferor (or in a case where the
transferor is a partnership, estate, trust, or electing small business
corporation, the partner, beneficiary, or shareholder) of the section 38
property described in subparagraph (1)(i) of this paragraph does not
retain a substantial interest in the trade or business directly or
indirectly (through ownership in other entities provided that such other
entities' bases in such interest are determined in whole or in part by
reference to the basis of such interest in the hands of the transferor)
then, under paragraph (a) of Sec. 1.47-1, such property ceases to be
section 38 property with respect to the transferor and he (or the
partner, beneficiary, or shareholder) shall make a recapture
determination. For purposes of recomputing qualified investment with
respect to property described in this subdivision, its actual useful
life shall be the period beginning with the date on which it was placed
in service by the transferor and ending with the first date on which the
transferor (or the partner, beneficiary, or shareholder) does not retain
a substantial interest in the trade or business. Any taxpayer who seeks
to establish
[[Page 398]]
his interest in a trade or business under the rule of this subdivision
shall maintain adequate records to demonstrate his indirect interest in
such trade or business after any such transfer or transfers.
(iii) In making a recapture determination under this subparagraph
there shall be taken into account any prior recapture determinations
with respect to the transferor in connection with the same property.
(iv) Notwithstanding subparagraph (1) of this paragraph and
subdivision (ii) of this subparagraph in the case of a mere change in
the form of a trade or business, if the interest of a taxpayer in the
trade or business is reduced but such taxpayer has retained a
substantial interest in such trade or business, paragraph (a)(2) of
Sec. 1.47-4 (relating to electing small business corporations),
paragraph (a)(2) of Sec. 1.47-5 (relating to estates or trusts) or
paragraph (a)(2) of Sec. 1.47-6 (relating to partnerships) shall apply,
as the case may be.
(6) Examples. This paragraph may be illustrated by the following
examples in each of which it is assumed that the transfer satisfies the
conditions of subparagraphs (1)(ii) (a), (c), and (d) of this paragraph.
Example 1. (i) On January 1, 1962, A, an individual, acquired and
placed in service in his sole proprietorship an item of section 38
property with a basis of $12,000 and an estimated useful life of eight
years. The qualified investment with respect to such item was $12,000.
For the taxable year 1962 A's credit earned of $840 was allowed under
section 38 as a credit against his liability for tax. On March 15, 1963,
A transfers all of the assets used in his sole proprietorship to X
Corporation, a newly formed corporation, in exchange for 45 percent of
the stock of X Corporation.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the March 15, 1963, transfer to X
Corporation.
Example 2. (i) The facts are the same as in example 1 and in
addition on February 2, 1964, X Corporation sells the item of section 38
property to Y Corporation.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the March 15, 1963, transfer to X
Corporation. However, under subparagraph (5)(i) of this paragraph,
paragraph (a) of Sec. 1.47-1 applies to the February 2, 1964, sale of
the item of section 38 property by X Corporation to Y Corporation. The
actual useful life of the property is two years and one month (that is,
the period beginning on January 1, 1962, and ending on February 2,
1964). The recomputed qualified investment with respect to such property
is zero ($12,000 basis multiplied by zero applicable percentage) and A's
recomputed credit earned for the taxable year 1962 is zero. The income
tax imposed by chapter 1 of the Code on A for 1964 is increased by the
$840 decrease in his credit earned for the taxable year 1962 (that is,
$840 credit earned minus zero recomputed credit earned).
Example 3. (i) On January 1, 1962, partnership ABC, which makes its
returns on the basis of a calendar year, acquired and placed in service
on item of section 38 property with a basis of $20,000 and an estimated
useful life of eight years. Partnership ABC has 10 partners who make
their returns on the basis of a calendar year and share partnership
profits equally. Each partner's share of the basis of such item of
section 38 property is 10 percent, that is, $2,000. On March 15, 1963,
partnership ABC transfers all of the assets used in its trade or
business to the X Corporation, a newly formed corporation, in exchange
for all of the stock of X Corporation and immediately thereafter
transfers 10 percent of such stock to each of the 10 partners.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the March 15, 1963 transfer by the ABC
Partnership to X Corporation.
Example 4. (i) The facts are the same as in example 3 except that
partnership ABC transfers 10 percent of the stock in X Corporation to
each of 8 partners, 20 percent to partner A, and cash to partner B.
(ii) Under subparagraph (1)(i) of this paragraph, with respect to
all of the partners (including partner A) except partner B, paragraph
(a) of Sec. 1.47-1 does not apply to the March 15, 1963, transfer by
the ABC Partnership to X Corporation. Paragraph (a) of Sec. 1.47-1
applies with respect to partner B's $2,000 share of the item of section
38 property. See paragraph (a)(1) of Sec. 1.47-6.
Example 5. (i) X Corporation operates a manufacturing business and a
separate personal service business. On January 1, 1962, X acquired and
placed in service a truck, which qualified as section 38 property, in
its manufacturing business. The truck had a basis of $10,000 and an
estimated useful life of 8 years. On February 10, 1965, X transfers all
the assets used in its manufacturing business to Partnership XY in
exchange for a 50-percent interest in such partnership.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of
Sec. 1.47-1 does not apply to the February 10, 1965, transfer to
Partnership XY.
(g) Sale-and-leaseback transactions--(1) In general. Notwithstanding
the provisions of Sec. 1.47-2, relating to ``disposition'' and
``cessation'', paragraph (a) of
[[Page 399]]
Sec. 1.47-1 shall not apply where section 38 property is disposed of
and as part of the same transaction is leased back to the vendor even
though gain or loss is recognized to the vendor-lessee and the property
ceases to be subject to depreciation in his hands. If paragraph (a) of
Sec. 1.47-1 applies with respect to such property subsequent to the
transaction, the actual useful life shall begin with the date on which
such property was first placed in service by the vendor-lessee as owner.
(2) Special rule for progress expenditure property. The sale and
leaseback (or agreement or contract to leaseback) of progress
expenditure property (including any contract rights to the property), in
general, will be treated as a cessation described in section 47(a)(3)(A)
with respect to the seller-lessee. However, a sale and leaseback (or
agreement or contract to leaseback) will not be treated as a cessation
to the extent qualified investment passed through to the lessee under
section 48(d) in the year the property is placed in service equals or
exceeds qualified progress expenditures for the property taken into
account by the lessee. If a sale-leaseback transaction is treated as a
cessation, qualified investment must be reduced and the credit
recomputed, beginning with the most recent credit year (i.e., the most
recent year property is taken into account in computing qualified
investment under Sec. 1.46-3 or 1.46-5). The amount of the reduction is
the amount, if any, by which qualified progress expenditures taken into
account by the lessee in all prior years exceeds qualified investment
passed through to the lessee under section 48(d). This paragraph (g)(2)
does not apply to any progress expenditure property that has been placed
in service by a vendor-lessee (as described in paragraph (g)(1) of this
section) prior to a sale-leaseback of that property in a transaction
described in paragraph (g)(1) of this section.
(h) Certain property replaced after April 18, 1969--(1) In general.
(i) If section 38 property is disposed of and property which is, for
purposes of section 1033 and the regulations thereunder, similar or
related in service or use to the property disposed of and which would be
section 38 property but for the application of section 49 is placed in
service to replace the property disposed of, the increase in income tax
and adjustment of investment credit carryovers and carrybacks resulting
from the recomputation under paragraph (a) of Sec. 1.47-1 shall be
reduced (but not below zero) by the credit that would be allowed for the
qualified investment of the replacement property (determined as if such
property were section 38 property). The preceding sentence shall not
apply unless the replacement takes place within 6 months after the
disposition. If property otherwise qualifies as replacement property, it
is immaterial that it is placed in service (for example, to undergo
testing) before the replaced property is disposed of. The assignment by
the taxpayer in his return of an estimated useful life to the
replacement property in computing its qualified investment will be
considered a representation by the taxpayer that he expects to retain
the replacement property for its entire estimated useful life. If such
property is disposed of before the end of such life, then the
circumstances surrounding the replacement will be examined to determine
whether the taxpayer's representation was in good faith and, if
appropriate, the qualified investment of the replacement property will
be recomputed for the year of replacement using the actual useful life
of such property.
(ii) The provisions of subdivision (i) of this subparagraph may be
illustrated by the following example:
Example. On January 1, 1967, A, a calendar year taxpayer, acquired
and placed in service a new machine with a basis of $100 and an
estimated useful life of 8 years. A's qualified investment was $100 and
his credit earned was $7, which was allowed as a credit against tax for
1967. On January 15, 1971. A disposed of the machine and replaced it
with a similar new machine costing $75 and having an estimated useful
life of 8 years. The new machine would be section 38 property but for
section 49. Since the actual useful life of the original machine was at
least 4 but less than 6 years, the recomputed qualified investment of
the machine is $33.33 (33\1/3\ percent of $100) and under paragraph (a)
of Sec. 1.47-1 the amount of recapture tax would be $4.67 ($7, the
original credit earned, minus $2.33, the recomputed credit earned).
However, under the provisions of this paragraph, the recapture tax is
reduced (but not below zero) by
[[Page 400]]
the credit that would be allowed for the replacement property
(determined as if such property were section 38 property). Under these
facts the recapture tax is zero ($4.67, the recapture tax with respect
to the original machine, minus $5.25, the credit that would be allowed
on the new machine).
(2) Leased property. Property disposed of may be replaced with
property leased from another, provided (i) an election with respect to
the newly leased property could be made under section 48(d) but for
section 49, and (ii) the lessee obtains the lessor's written statement
that he will not claim such property as replacement property under this
paragraph. The statement of the lessor shall contain the information
specified in subdivisions (i) through (vii) of Sec. 1.48-4(f)(1) and
the statement (or a copy thereof) shall be retained in the records of
the lessor and the lessee for a period of at least 3 years after the
property is transferred to the lessee.
[T.D. 6931, 32 FR 14033, Oct. 10, 1967, as amended by T.D. 7126, 36 FR
11192, June 10, 1971; T.D. 7203; 37 FR 17128, Aug. 25, 1972; T.D. 8183,
53 FR 6625, Mar. 2, 1988]
Sec. 1.47-4 Electing small business corporation.
(a) In general--(1) Disposition or cessation in hands of
corporation. If an electing small business corporation (as defined in
section 1371(b)) or a former electing small business corporation
disposes of any section 38 property (or if any section 38 property
otherwise ceases to be section 38 property in the hands of the
corporation) before the close of the estimated useful life which was
taken into account in computing qualified investment with respect to
such property, a recapture determination shall be made with respect to
each shareholder who is treated, under Sec. 1.48-5, as a taxpayer with
respect to such property. Each such recapture determination shall be
made with respect to the pro rata share of the basis (or cost) of such
property taken into account by such shareholder in computing his
qualified investment. For purposes of each such recapture determination
the actual useful life of such property shall be the period beginning
with the date on which it was placed in service by the electing small
business corporation and ending with the date of the disposition or
cessation. In making a recapture determination under this subparagraph
there shall be taken into account any prior recapture determinations
made with respect to the shareholder in connection with the same
property. For definition of ``recapture determination'' see paragraph
(a)(1) of Sec. 1.47-1.
(2) Disposition of shareholder's interest. (i) If--
(a) The basis (or cost) of section 38 property is apportioned, under
Sec. 1.48-5, to a shareholder of an electing small business corporation
who takes such basis (or cost) into account in computing his qualified
investment, and
(b) After the end of the shareholder's taxable year in which such
apportionment was taken into account and before the close of the
estimated useful life of the property, such shareholder's proportionate
stock interest in such corporation is reduced (for example, by a sale or
redemption, or by the issuance of additional shares) below the
percentage specified in subdivision (ii) of this subparagraph,
then, on the date of such reduction such section 38 property ceases to
be section 38 property with respect to such shareholder to the extent of
the actual reduction in such shareholder's proportionate stock interest.
(For example, if $100 of the basis of section 38 property was
apportioned to a shareholder and if his proportionate stock interest is
reduced from 60 percent to 30 percent (that is, 50 percent of his
original interest), then such property shall be treated as having ceased
to be section 38 property to the extent of $50.) Accordingly, a
recapture determination shall be made with respect to such shareholder.
For purposes of such recapture determination the actual useful life of
such property shall be the period beginning with the date on which it
was placed in service by the electing small business corporation and
ending with the date on which it is treated as having ceased to be
section 38 property with respect to the shareholder. In making a
recapture determination under this subparagraph there shall be taken
into account any prior recapture determination made
[[Page 401]]
with respect to the shareholder in connection with the same property.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the shareholder's proportionate stock
interest in the corporation on the date of the apportionment under Sec.
1.48-5. However, once property has been treated under this subparagraph
as having ceased to be section 38 property to any extent the percentage
referred to shall be 33\1/3\ percent of the shareholder's proportionate
stock interest in the corporation on the date of the apportionment under
Sec. 1.48-5.
(iii) In determining a shareholder's proportionate stock interest in
a former electing small business corporation for purposes of this
subparagraph, the shareholder shall be considered to own stock in such
corporation which he owns directly or indirectly (through ownership in
other entities provided such other entities' bases in such stock are
determined in whole or in part by reference to the basis of such stock
in the hands of the transferor). For example, if A, who owns all of the
100 shares of the outstanding stock of corporation X, a corporation
which was formerly an electing small business corporation, transfers on
November 1, 1966, 70 shares of X stock to corporation Y in exchange for
90 percent of the stock of Y in a transaction to which section 351
applies, then, for purposes of subdivision (i) of this subparagraph, A
shall be considered to own 93 percent of the stock of X, 30 percent
directly and 63 percent indirectly (i.e., 90 percent of 70). Any
taxpayer who seeks to establish his interest in the stock of a former
electing small business corporation under the rule of this subdivision
shall maintain adequate records to demonstrate his indirect interest in
the corporation after any such transfer or transfers.
(b) Election of a small business corporation under section 1372--(1)
General rule. If a corporation makes a valid election under section 1372
to be an electing small business corporation (as defined in section
1371(b)), then on the last day of the taxable year immediately preceding
the first taxable year for which such election is effective, any section
38 property the basis (or cost) of which was taken into account in
computing the corporation's qualified investment in taxable years prior
to the first taxable year for which the election is effective (and which
has not been disposed of or otherwise ceased to be section 38 property
with respect to the corporation prior to such last day) shall be
considered as having ceased to be section 38 property with respect to
such corporation and Sec. 1.47-1 shall apply. However, if the
corporation and each of the persons who are shareholders of the
corporation on the first day of the first taxable year for which the
election under section 1372 is to be effective, or on the date of such
election, whichever is later, execute the agreement specified in
subparagraph (2) of this paragraph, Sec. 1.47-1 shall not apply to any
such section 38 property by reason of the election by the corporation
under section 1372.
(2) Agreement of shareholders and corporation. (i) The agreement
referred to in subparagraph (1) of this paragraph shall be signed by the
shareholders and the corporation, and shall recite that, in the event
the section 38 property described in subparagraph (1) of this paragraph
is later disposed of by, or ceases to be section 38 property with
respect to, the corporation during a taxable year of the corporation for
which the election under section 1372 is effective, each such signer
agrees (a) to notify the district director of such disposition or
cessation, and (b) to be jointly and severally liable to pay to the
district director an amount equal to the increase in tax provided by
section 47. The amount of such increase shall be determined as if such
property had ceased to be section 38 property as of the last day of the
taxable year immediately preceding the first taxable year for which the
election under section 1372 is effective, except that the actual useful
life (within the meaning of paragraph (a) of Sec. 1.47-1) of the
property shall be considered to have ended on the date of the actual
disposition by, or cessation in the hands of, the electing small
business corporation.
(ii) The agreement shall set forth the name, address, and taxpayer
account number of each party and the internal revenue district in which
each such party files his or its income tax return
[[Page 402]]
for the taxable year which includes the last day of the corporation's
taxable year immediately preceding the first taxable year for which the
election under section 1372 is effective. The agreement may be signed on
behalf of the corporation by any person who is duly authorized. The
agreement shall be filed with the district director with whom the
corporation files its income tax return for its taxable year immediately
preceding the first taxable year for which the election under section
1372 is effective and shall be filed on or before the due date
(including extensions of time) of such return. However, if the due date
(including extensions of time) of such income tax return is on or before
September 1, 1967, the agreement may be filed on or before December 31,
1967. For purposes of the two preceding sentences, the district director
may, if good cause is shown, permit the agreement to be filed on a later
date.
(c) Examples. This section may be illustrated by the following
examples in each of which it is assumed that X Corporation, an electing
small business corporation which makes its returns on the basis of the
calendar year, acquired and placed in service on June 1, 1962, three
items of section 38 property. The basis and estimated useful life of
each item of section 38 property are as follows:
------------------------------------------------------------------------
Estimated
useful
Asset No. Basis life
(Years)
------------------------------------------------------------------------
1............................................... $30,000 4
2............................................... 30,000 6
3............................................... 30,000 8
------------------------------------------------------------------------
On December 31, 1962, X Corporation had 20 shares of stock outstanding
which were owned equally by A and B who make their returns on the basis
of a calendar year. Under Sec. 1.48-5, the total bases of section 38
properties was apportioned to the shareholders of X Corporation as
follows:
------------------------------------------------------------------------
Useful life category
-----------------------------------
4 to 6 6 to 8 8 years or
years years more
------------------------------------------------------------------------
Total bases..................... $30,000 $30,000 $30,000
-----------------------------------
Shareholder A (10/20)............... 15,000 15,000 15,000
Shareholder B (10/20)............... 15,000 15,000 15,000
------------------------------------------------------------------------
Assuming that during 1962 shareholders A and B did not place in service
any section 38 property and that they did not own any interests in other
electing small business corporations, partnerships, estates, or trusts,
the qualified investment of each shareholder is $30,000, computed as
follows:
------------------------------------------------------------------------
Applicable Qualified
Basis percentage investment
------------------------------------------------------------------------
$15,000......................................... 33\1/3\ $5,000
$15,000......................................... 66\2/3\ 10,000
$15,000......................................... 100 15,000
-----------
.......... 30,000
------------------------------------------------------------------------
For the taxable year 1962, each shareholder's credit earned of $2,100 (7
percent of $30,000) was allowed under section 38 as a credit against his
liability for tax.
Example 1. (i) On December 2, 1965, X Corporation sells asset No. 3
to Y Corporation.
(ii) The actual useful life of asset No. 3 is three years and six
months. The recomputed qualified investment with respect to each
shareholder's share of the basis of asset No. 3 is zero ($15,000 share
of basis multiplied by zero applicable percentage) and for the taxable
year 1962 each shareholder's recomputed credit earned is $1,050 (7
percent of $15,000). The income tax imposed by chapter 1 of the Code on
each of the shareholders for the taxable year 1965 is increased by the
$1,050 decrease in his credit earned for the taxable year 1962 (that is,
$2,100 original credit earned minus $1,050 recomputed credit earned).
Example 2. (i) On December 3, 1964, shareholder A sells 5 of his 10
shares of stock in X Corporation to C, and on December 3, 1965, A sells
his remaining 5 shares of stock to D. In addition, on January 2, 1966, X
Corporation sells asset No. 3 to Y Corporation.
(ii) Under paragraph (a)(2) of this section, on December 3, 1964, 50
percent of the share of the basis of each of the three items of section
38 property ceases to be section 38 property with respect to shareholder
A since immediately after the December 3, 1964, sale A's proportionate
stock interest in X Corporation is reduced to 50 percent of the
proportionate stock interest in X Corporation which he held on December
31, 1962. The actual useful life of the share of the bases of the
section 38 properties which cease to be section 38 property with respect
to A is two years and six months (that is, the period beginning with
June 1, 1962, and ending with December 3, 1964). A's recomputed
qualified investment with respect to such properties is $15,000,
computed as follows:
------------------------------------------------------------------------
Recomputed
Basis Applicable qualified
percentage investment
------------------------------------------------------------------------
$7,500........................................ 33\1/3\ $2,500
[[Page 403]]
$7,500........................................ 66\2/3\ 5,000
$7,500........................................ 100 7,500
------------
........... 15,000
------------------------------------------------------------------------
For the taxable year 1962 shareholder A's recomputed credit earned is
$1,050 (7 percent of $15,000). The income tax imposed by chapter 1 of
the Code on shareholder A for the taxable year 1964 is increased by the
$1,050 decrease in his credit earned for the taxable year 1962 (that is,
$2,100 original credit earned minus $1,050 recomputed credit earned).
(iii) Under paragraph (a)(2) of this section, on December 3, 1965,
the remaining 50 percent of the share of the basis of each of the three
items of section 38 property ceases to be section 38 property with
respect to shareholder A since immediately after the December 3, 1965,
sale A's proportionate stock interest in X Corporation is reduced to
zero. The actual useful life of the share of the bases of the section 38
properties which cease to be section 38 property with respect to A is
three years and six months (that is, the period beginning with June 1,
1962, and ending with December 3, 1965). A's recomputed qualified
investment with respect to such properties is zero. For the taxable year
1962 shareholder A's recomputed credit earned is zero. The income tax
imposed by chapter 1 of the Code on shareholder A for the taxable year
1965 is increased by $1,050 (that is, $2,100 ($2,100 original credit
earned minus zero recomputed credit earned) reduced by the $1,050
increase in tax for 1964).
(iv) The actual useful life of asset No. 3 which was sold on January
2, 1966, is three years and seven months. The recomputed qualified
investment with respect to B's share of the basis of asset No. 3 is zero
($15,000 share of basis multiplied by zero applicable percentage) and
for the taxable year 1962, B's recomputed credit earned is $1,050 (7
percent of $15,000). The income tax imposed by chapter 1 of the Code on
shareholder B for the taxable year 1966 is increased by the $1,050
decrease in his credit earned for the taxable year 1962 ($2,100 original
credit earned minus $1,050 recomputed credit earned). The sale of asset
No. 3 on January 2, 1966, by X Corporation has no effect on A.
(d) Termination or revocation of an election under section 1372.
Section 38 property shall not be considered to be disposed of or to have
ceased to be section 38 property solely by reason of a termination or
revocation of a corporation's election under section 1372.
[T.D. 6931, 32 FR 14035, Oct. 10, 1967]
Sec. 1.47-5 Estates and trusts.
(a) In general--(1) Disposition or cessation in hands of estate or
trust. If an estate or trust disposes of any section 38 property (or if
any section 38 property otherwise ceases to be section 38 property in
the hands of the estate or trust) before the close of the estimated
useful life which was taken into account in computing qualified
investment with respect to such property, a recapture determination
shall be made with respect to the estate or trust, and each beneficiary
who is treated, under Sec. 1.48-6, as a taxpayer with respect to such
property. Each such recapture determination shall be made with respect
to the share of the basis (or cost) of such property taken into account
by such estate or trust and such beneficiary in computing its or his
each such recapture determination the actual useful life of such
property shall be the period beginning with the date on which it was
placed in service by the estate or trust and ending with the date of the
disposition or cessation. In making a recapture determination under this
subparagraph with respect to a taxpayer there shall be taken into
account any prior recapture determinations made with respect to such
taxpayer in connection with the same property. For definition of
``recapture determination'' see paragraph (a)(1) of Sec. 1.47-1.
(2) Disposition of interest. (i) If--
(a) The basis (or cost) of section 38 property is apportioned, under
Sec. 1.48-6, to an estate or trust which, or to a beneficiary of an
estate or trust who, takes such basis (or cost) into account in
computing his qualified investment, and
(b) After the date on which such section 38 property was placed in
service by the estate or trust and before the close of the estimated
useful life of the property, such estate's, trust's, or such
beneficiary's proportionate interest in the income of the estate or
trust is reduced (for example, by a sale, or by the terms of the estate
or trust instrument) below the percentage specified in subdivision (ii)
of this subparagraph, then, on the date of such reduction, such section
38 property ceases to be section 38 property with respect to such
estate, trust, or beneficiary to the
[[Page 404]]
extent of the actual reduction in such estate's, trust's, or
beneficiary's proportionate interest in the income of the estate or
trust. (For example, if $100 of the basis of section 38 property was
apportioned to a beneficiary and if his proportionate interest in the
income of the estate or trust is reduced from 60 percent to 30 percent
(that is, 50 percent of his original interest), then such property shall
be treated as having ceased to be section 38 property to the extent of
$50). Accordingly, a recapture determination shall be made with respect
to such estate, trust, or beneficiary. For purposes of such recapture
determination the actual useful life of such property shall be the
period beginning with the date on which it was placed in service by the
estate or trust and ending with the date on which it is treated as
having ceased to be section 38 property with respect to the estate,
trust, or beneficiary. In making a recapture determination under this
subparagraph there shall be taken into account any prior recapture
determination made with respect to the estate, trust, or beneficiary in
connection with the same property.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the estate's, trust's, or
beneficiary's proportionate interest in the income of the estate or
trust for the taxable year of the apportionment under Sec. 1.48-6.
However, once property has been treated under this subparagraph as
having ceased to be section 38 property to any extent the percentage
referred to shall be 33\1/3\ percent of the estate's, trust's, or
beneficiary's proportionate interest in the income of the estate or
trust for the taxable year of the apportionment under Sec. 1.48-6.
(iii) In determining a beneficiary's proportionate interest in the
income of an estate or trust for purposes of this subparagraph, the
beneficiary shall be considered to own any interest in such an estate or
trust which he owns directly or indirectly (through ownership in other
entities provided such other entities' bases in such interest are
determined in whole or in part by reference to the basis of such
interest in the hands of the beneficiary). For example, if A, whose
proportionate interest in the income of trust X is 30 percent, transfers
all of such interest to corporation Y in exchange for all of the stock
of Y in a transaction to which section 351 applies, then, for purposes
of subdivision (i) of this subparagraph, A shall be considered to own a
30-percent interest in trust X. Any taxpayer who seeks to establish his
interest in an estate or trust under the rule of this subdivision shall
maintain adequate records to demonstrate his indirect interest in the
estate or trust after any such transfer or transfers.
(b) Examples. Paragraph (a) of this section may be illustrated by
the following examples in each of which it is assumed that XYZ Trust,
which makes its returns on the basis of the calendar year, acquired and
placed in service on June 1, 1962, three items of section 38 property.
The basis and estimated useful life of each item of section 38 property
are as follows:
------------------------------------------------------------------------
Estimated
useful
Asset No. Basis life
(Years)
------------------------------------------------------------------------
1............................................... $30,000 4
2............................................... 30,000 6
3............................................... 30,000 8
------------------------------------------------------------------------
For the taxable year 1962 the income of XYZ Trust is $20,000, which is
allocable equally to XYZ Trust and beneficiary A. Beneficiary A makes
his returns on the basis of a calendar year. Under Sec. 1.48-6, the
total bases of the section 38 properties was apportioned to XYZ Trust
and beneficiary A as follows:
----------------------------------------------------------------------------------------------------------------
Useful life category
-----------------------------------
4 to 6 6 to 8 8 years or
years years more
----------------------------------------------------------------------------------------------------------------
Total bases................................................. .......... $30,000 $30,000 $30,000
-----------------------------------
($10,000) 15,000 15,000 15,000
------------
XYZ Trust....................................................... ($20,000)
Beneficiary A................................................... ($10,000) 15,000 15,000 15,000
------------
($20,000)
----------------------------------------------------------------------------------------------------------------
[[Page 405]]
Assuming that during 1962 beneficiary A did not place in service any
section 38 property and that he did not own any interests in other
estates, trusts, electing small business corporations, or partnerships,
the qualified investment of XYZ Trust and of beneficiary A is $30,000
each, computed as follows:
------------------------------------------------------------------------
Applicable Qualified
Basis percentage investment
------------------------------------------------------------------------
$15,000......................................... 33\1/3\ $5,000
$15,000......................................... 66\2/3\ 10,000
$15,000......................................... 100 15,000
-----------------------
.......... 30,000
------------------------------------------------------------------------
For the taxable year 1962, XYZ Trust and beneficiary A each had a credit
earned of $2,100 (7 percent of $30,000). Each such credit earned was
allowed under section 38 as a credit against the liability for tax.
Example 1. (i) On December 2, 1965, XYZ Trust sells asset No. 3 to X
Corporation.
(ii) The actual useful life of asset No. 3 is three years and six
months. The recomputed qualified investment with respect to XYZ Trust's
and beneficiary A's share of the basis of asset No. 3 is zero ($15,000
share of basis multiplied by zero applicable percentage) and for the
taxable year 1962, XYZ Trust's and beneficiary A's recomputed credit
earned is $1,050 (7 percent of $15,000). The income tax imposed by
chapter 1 of the Code on XYZ Trust and on beneficiary A for the taxable
year 1965 is increased by the $1,050 decrease in his credit earned for
the taxable year 1962 (that is, $2,100 original credit earned minus
$1,050 recomputed credit earned).
Example 2. (i) On December 3, 1964, beneficiary A sells 50 percent
of his interest in the income of XYZ Trust to B, and on December 3,
1965, A sells his remaining 50 percent interest to C. In addition, on
January 2, 1966, XYZ Trust sells asset No. 3 to Y Corporation.
(ii) Under paragraph (a)(2) of this section, on December 3, 1964, 50
percent of the basis of each of the three items of section 38 property
ceases to be section 38 property with respect to beneficiary A since
immediately after the December 3, 1964, sale A's proportionate interest
in the income of XYZ Trust is reduced to 50 percent of his proportionate
interest in the income of XYZ Trust for the taxable year 1962. The
actual useful life of the share of the bases of the section 38
properties which cease to be section 38 property with respect to A is
two years and six months (that is, the period beginning with June 1,
1962, and ending with December 3, 1964). Beneficiary A's recomputed
qualified investment with respect to such properties is $15,000,
computed as follows:
------------------------------------------------------------------------
Applicable Qualified
Basis percentage investment
------------------------------------------------------------------------
$7,500.......................................... 33\1/3\ $2,500
$7,500.......................................... 66\2/3\ 5,000
$7,500.......................................... 100 7,500
-----------------------
.......... 15,000
------------------------------------------------------------------------
For the taxable year 1962 beneficiary A's recomputed credit earned is
$1,050 (7 percent of $15,000). The income tax imposed by chapter 1 of
the Code on beneficiary A for the taxable year 1964 is increased by the
$1,050 decrease in his credit earned for the taxable year 1962 (that is,
$2,100 original credit earned minus $1,050 recomputed credit earned).
(iii) Under paragraph (a)(2) of this section, on December 3, 1965,
the remaining 50 percent of the share of the basis of each of the three
items of section 38 property ceases to be section 38 property with
respect to beneficiary A since immediately after the December 3, 1965,
sale A's proportionate interest in the income of XYZ Trust is reduced to
zero. The actual useful life of the share of the basis of the section 38
properties which cease to be section 38 property with respect to A is
three years and six months (that is, the period beginning with June 1,
1962, and ending with December 3, 1965). A's recomputed qualified
investment with respect to such properties is zero. For the taxable year
1962 beneficiary A's recomputed credit earned is zero. The income tax
imposed by chapter 1 of the Code on beneficiary A for the taxable year
1965 is increased by $1,050 (that is, $2,100 ($2,100 original credit
earned minus zero recomputed credit earned) reduced by the $1,050
increase in tax for 1964).
(iv) The actual useful life of asset No. 3 which was sold on January
2, 1966, is three years and seven months. The recomputed qualified
investment with respect to XYZ Trust's share of the basis of asset No. 3
is zero ($15,000 share of basis multiplied by zero applicable
percentage) and for the taxable year 1962, XYZ Trust's recomputed credit
earned is $1,050 (7 percent of $15,000). The income tax imposed by
chapter 1 of the Code on XYZ Trust for the taxable year 1966 is
increased by the $1,050 decrease in its credit earned for the taxable
year 1962 ($2,100 original credit earned minus $1,050 recomputed credit
earned). The sale of asset No. 3 on January 2, 1966, has no effect on A.
[T.D. 6931, 32 FR 14037, Oct. 10, 1967]
Sec. 1.47-6 Partnerships.
(a) In general--(1) Disposition or cessation in hands of
partnership. If a partnership disposes of any partnership section 38
property (or if any partnership section 38 property otherwise ceases to
be section 38 property in the hands of the partnership) before the close
of the
[[Page 406]]
estimated useful life which was taken into account in computing
qualified investment with respect to such property, a recapture
determination shall be made with respect to each partner who is treated,
under paragraph (f) of Sec. 1.46-3, as a taxpayer with respect to such
property. Each such recapture determination shall be made with respect
to the share of the basis (or cost) of such property taken into account
by such partner in computing his qualified investment. For purposes of
each such recapture determination the actual useful life of such
property shall be the period beginning with the date on which it was
placed in service by the partnership and ending with the date of the
disposition or cessation. In making a recapture determination under this
subparagraph there shall be taken into account any prior recapture
determinations made with respect to the partner in connection with the
same property. For definition of ``recapture determination'' see
paragraph (a)(1) of Sec. 1.47-1.
(2) Disposition of partner's interest. (i) If--
(a) The basis (or cost) of partnership section 38 property is taken
into account by a partner in computing his qualified investment, and
(b) After the date on which such partnership section 38 property was
placed in service by the partnership and before the close of the
estimated useful life of the property, such partner's proportionate
interest in the general profits of the partnership (or in the particular
item of property) is reduced (for example, by a sale, by a change in the
partnership agreement, or by the admission of a new partner) below the
percentage specified in subdivision (ii) of this subparagraph, then, on
the date of such reduction such partnership section 38 property ceases
to be section 38 property with respect to such partner to the extent of
the actual reduction in such partner's proportionate interest in the
general profits of the partnership (or in the particular item of
property). (For example, if $100 of the basis of section 38 property was
taken into account by a partner and if his proportionate interest in the
general profits of the partnership is reduced from 60 percent to 30
percent (that is, 50 percent of his original interest), then such
property shall be treated as having ceased to be section 38 property to
the extent of $50.) Accordingly, a recapture determination shall be made
with respect to such partner. For purposes of such recapture
determination the actual useful life of such property shall be the
period beginning with the date on which it was placed in service by the
partnership and ending with the date on which it is treated as having
ceased to be section 38 property with respect to the partner. In making
a recapture determination under this subparagraph there shall be taken
into account any prior recapture determination made with respect to the
partner in connection with the same property.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the partner's proportionate interest
in the general profits of the partnership (or in the particular item of
property) for the year in which such property was placed in service.
However, once property has been treated under this subparagraph as
having ceased to be section 38 property to any extent the percentage
referred to shall be 33\1/3\ percent of the partner's proportionate
interest in the general profits of the partnership (or in the particular
item of property) for the year in which such property was placed in
service.
(iii) In determining a partner's proportionate interest in the
general profits of a partnership for purposes of this subparagraph, the
partner shall be considered to own any interest in such a partnership
which he owns directly or indirectly (through ownership in other
entities provided the other entities' bases in such interest are
determined in whole or in part by reference to the basis of such
interest in the hands of the partner). For example, if A, whose
proportionate interest in the general profits of partnership X is 20
percent, transfers all of such interest to corporation Y in exchange for
all of the stock of Y in a transaction to which section 351 applies,
then, for purposes of subdivision (i) of this subparagraph, A shall be
considered to own a 20-percent interest in partnership X. Any taxpayer
who seeks to establish his interest in a partnership under the rule
[[Page 407]]
of this subdivision shall maintain adequate records to demonstrate his
indirect interest in the partnership after any such transfer or
transfers.
(b) Examples. Paragraph (a) of this section may be illustrated by
the following examples in each of which it is assumed that ABC
Partnership, which makes its returns on the basis of the calendar year,
acquired and placed in service on June 1, 1962, three items of section
38 property. The basis and estimated useful life of each item of section
38 property are as follows:
------------------------------------------------------------------------
Estimated
Asset No. Basis useful
life Years
------------------------------------------------------------------------
1............................................... $30,000 4
2............................................... 30,000 6
3............................................... 30,000 8
------------------------------------------------------------------------
Partners A and B, who make their returns on the basis of a calendar
year, share the profits and losses of ABC Partnership equally. Under
paragraph (f)(2) of Sec. 1.46-3, each partner's share of the basis of
the partnership section 38 property is as follows:
------------------------------------------------------------------------
Partners share of
Estimated basis
Asset No. useful Basis -------------------
life A 50 B 50
(years) percent percent
------------------------------------------------------------------------
1.............................. 4 $30,000 $15,000 $15,000
2.............................. 6 30,000 15,000 15,000
3.............................. 8 30,000 15,000 15,000
------------------------------------------------------------------------
Assuming that during 1962 partners A and B did not place in service any
section 38 property and that they did not own any interests in other
partnerships, electing small business corporations, estates, or trusts,
the qualified investment of each partner is $30,000, computed as
follows:
------------------------------------------------------------------------
Share of Applicable Qualified
Partnership asset No. basis percentage investment
------------------------------------------------------------------------
1................................... $15,000 33\1/3\ $5,000
2................................... 15,000 66\2/3\ 10,000
3................................... 15,000 100 15,000
-----------------------------------
.......... .......... 30,000
------------------------------------------------------------------------
For the taxable year 1962, each partner's credit earned of $2,100 (7
percent of $30,000) was allowed under section 38 as a credit against his
liability for tax.
Example 1. (i) On December 2, 1965, ABC Partnership sells asset No.
3 to X Corporation.
(ii) The actual useful life of asset No. 3 is three years and six
months. The recomputed qualified investment with respect to each
partner's share of the basis of asset No. 3 is zero ($15,000 shares of
basis multiplied by zero applicable percentage) and for the taxable year
1962, each partner's recomputed credit earned is $1,050 (7 percent of
$15,000). The income tax imposed by chapter 1 of the Code on each of the
partners for the taxable year 1965 is increased by the $1,050 decrease
in his credit earned for the taxable year 1962 (that is, $2,100 original
credit earned minus $1,050 recomputed credit earned).
Example 2. (i) On December 3, 1964, partner A sells one-half of his
50 percent interest in ABC Partnership to C, and on December 3, 1965, A
sells the remaining one- half of his interest to D. In addition, on
January 2, 1966, ABC Partnership sells asset No. 3 to X Corporation.
(ii) Under paragraph (a)(2) of this section, on December 3, 1964, 50
percent of the basis of each of the three items of section 38 property
ceases to be section 38 property with respect to partner A since
immediately after the December 3, 1964, sale A's proportionate interest
in the general profits of ABC Partnership is reduced to 50 percent of
his proportionate interest in the general profits of ABC Partnership for
1962. The actual useful life of the share of the basis of each of the
section 38 properties which cease to be section 38 property with respect
to A is two years and six months (that is, the period beginning with
June 1, 1962, and ending with December 3, 1964). Partner A's recomputed
qualified investment with respect to such properties is $15,000,
computed as follows:
------------------------------------------------------------------------
Share of Applicable Qualified
Partnership asset No. basis percentage investment
------------------------------------------------------------------------
1................................... $7,500 33\1/3\ $2,500
2................................... 7,500 66\2/3\ 5,000
3................................... 7,500 100 7,500
-----------------------------------
.......... .......... 15,000
------------------------------------------------------------------------
For the taxable year 1962 partner A's recomputed credit earned is $1,050
(7 percent of $15,000). The income tax imposed by chapter 1 of the Code
on partner A for the taxable year 1964 is increased by the $1,050
decrease in his credit earned for the taxable year 1962 (that is, $2,100
original credit earned minus $1,050 recomputed credit earned).
(iii) Under paragraph (a)(2) of this section, on December 3, 1965,
the remaining 50 percent of the share of the basis of each of the three
items of section 38 property ceases to be section 38 property with
respect to partner A since immediately after the December 3, 1965, sale
A's proportionate interest in the general profits of ABC Partnership is
reduced to zero. The actual useful life of the share of the bases of the
section 38 properties which cease to be section 38 property with respect
to A is three years and six months (that is, the period beginning with
June 1, 1962, and ending with December 3, 1965). A's
[[Page 408]]
recomputed qualified investment with respect to such properties is zero.
For the taxable year 1962 partner A's recomputed credit earned is zero.
The income tax imposed by chapter 1 of the Code on partner A for the
taxable year 1965 is increased by $1,050 (that is, $2,100 ($2,100
original credit earned minus zero recomputed credit earned) reduced by
the $1,050 increase in tax for 1964).
(iv) The actual useful life of asset No. 3 which was sold on January
2, 1966, is three years and seven months. The recomputed qualified
investment with respect to partner B's share of the basis of asset No. 3
is zero ($15,000 share of basis multiplied by zero applicable
percentage) and for the taxable year 1962, partner B's recomputed credit
earned is $1,050 (7 percent of $15,000). The income tax imposed by
chapter 1 of the Code on partner B for the taxable year 1966 is
increased by the $1,050 decrease in his credit earned for the taxable
year 1962 ($2,100 original credit earned minus $1,050 recomputed credit
earned). The sale of asset No. 3 on January 2, 1966, has no effect on A.
[T.D. 6931, 32 FR 14039, Oct. 10, 1967]
Sec. 1.48-1 Definition of section 38 property.
(a) In general. Property which qualifies for the credit allowed by
section 38 is known as ``section 38 property''. Except as otherwise
provided in this section, the term ``section 38 property'' means
property (1) with respect to which depreciation (or amortization in lieu
of depreciation) is allowable to the taxpayer, (2) which has an
estimated useful life of 3 years or more (determined as of the time such
property is placed in service), and (3) which is (i) tangible personal
property, (ii) other tangible property (not including a building and its
structural components) but only if such other property is used as an
integral part of manufacturing, production, or extraction, or an
integral part of furnishing transportation, communications, electrical
energy, gas, water, or sewage disposal services by a person engaged in a
trade or business of furnishing any such service, or is a research or
storage facility used in connection with any of the foregoing
activities, (iii) an elevator or escalator which satisfies the
conditions of section 48(a)(1)(C), or (iv) in the case of a qualified
rehabilitated building, that portion of the basis which is attributable
to qualified rehabilitation expenditures. The determination of whether
property qualifies as section 38 property in the hands of the taxpayer
for purposes of the credit allowed by section 38 must be made with
respect to the first taxable year in which such property is placed in
service by the taxpayer. See paragraph (d) of Sec. 1.46-3. For the
meaning of ``estimated useful life'', see paragraph (e) of Sec. 1.46-3.
In the case of property which is not described in section 50, this
paragraph shall be applied by substituting ``4 years'' for ``3 years''.
(b) Depreciation allowable. (1) Property (with the exception of
property described in section 48(a)(1)(F) and paragraph (p) of this
section) is not section 38 property unless a deduction for depreciation
(or amortization in lieu of depreciation) with respect to such property
is allowable to the taxpayer for the taxable year. A deduction for
depreciation is allowable if the property is of a character subject to
the allowance for depreciation under section 167 and the basis (or cost)
of the property is recovered through a method of depreciation,
including, for example, the unit of production method and the retirement
method as well as methods of depreciation which measure the life of the
property in terms of years. If property is placed in service (within the
meaning of paragraph (d) of Sec. 1.46-3) in a trade or business (or in
the production of income), but under the taxpayer's depreciation
practice the period for depreciation with respect to such property
begins in a taxable year subsequent to the taxable year in which such
property is placed in service, then a deduction for depreciation shall
be treated as allowable with respect to such property in the earlier
taxable year (or years). Thus, for example, if a machine is placed in
service in a trade or business in 1963, but the period for depreciation
with respect to such machine begins in 1964, because the taxpayer uses
an averaging convention (see Sec. 1.167(a)-10) in computing
depreciation, then, for purposes of determining whether the machine
qualifies as section 38 property, a deduction for depreciation shall be
treated as allowable in 1963.
(2) If, for the taxable year in which property is placed in service,
a deduction for depreciation is allowable to the taxpayer only with
respect to a
[[Page 409]]
part of such property, then only the proportionate part of the property
with respect to which such deduction is allowable qualifies as section
38 property for the purpose of determining the amount of credit
allowable under section 38. Thus, for example, if property is used 80
percent of the time in a trade or business and is used 20 percent of the
time for personal purposes, only 80 percent of the basis (or cost) of
such property qualifies as section 38 property. Further, property does
not qualify to the extent that a deduction for depreciation thereon is
disallowed under section 274 (relating to disallowance of certain
entertainment, etc., expenses).
(3) If the cost of property is not recovered through a method of
depreciation but through a deduction of the full cost in one taxable
year, for purposes of subparagraph (1) of this paragraph a deduction for
depreciation with respect to such property is not allowable to the
taxpayer. However, if an adjustment with respect to the income tax
return for such taxable year requires the cost of such property to be
recovered through a method of depreciation, a deduction for depreciation
will be considered as allowable to the taxpayer.
(4) If depreciation sustained on property is not an allowable
deduction for the taxable year but is added to the basis of property
being constructed, reconstructed, or erected by the taxpayer, for
purposes of subparagraph (1) of this paragraph a deduction for
depreciation shall be treated as allowable for the taxable year with
respect to the property on which depreciation is sustained. Thus, if
$1,000 of depreciation sustained with respect to property No. 1, which
is placed in service in 1964 by taxpayer A, is not allowable to A as a
deduction for 1964 but is added to the basis of property being
constructed by A (property no. 2), for purposes of subparagraph (1) of
this paragraph a deduction for depreciation shall be treated as
allowable to A for 1964 with respect to property no. 1. However, the
$1,000 amount is not included in the basis of property no. 2 for
purposes of determining A's qualified investment with respect to
property no. 2. See paragraph (c)(1) of Sec. 1.46-3.
(c) Definition of tangible personal property. If property is
tangible personal property it may qualify as section 38 property
irrespective of whether it is used as an integral part of an activity
(or constitutes a research or storage facility used in connection with
such activity) specified in paragraph (a) of this section. Local law
shall not be controlling for purposes of determining whether property is
or is not ``tangible'' or ``personal''. Thus, the fact that under local
law property is held to be personal property or tangible property shall
not be controlling. Conversely, property may be personal property for
purposes of the investment credit even though under local law the
property is considered to be a fixture and therefore real property. For
purposes of this section, the term ``tangible personal property'' means
any tangible property except land and improvements thereto, such as
buildings or other inherently permanent structures (including items
which are structural components of such buildings or structures). Thus,
buildings, swimming pools, paved parking areas, wharves and docks,
bridges, and fences are not tangible personal property. Tangible
personal property includes all property (other than structural
components) which is contained in or attached to a building. Thus, such
property as production machinery, printing presses, transportation and
office equipment, refrigerators, grocery counters, testing equipment,
display racks and shelves, and neon and other signs, which is contained
in or attached to a building constitutes tangible personal property for
purposes of the credit allowed by section 38. Further, all property
which is in the nature of machinery (other than structural components of
a building or other inherently permanent structure) shall be considered
tangible personal property even though located outside a building. Thus,
for example, a gasoline pump, hydraulic car lift, or automatic vending
machine, although annexed to the ground, shall be considered tangible
personal property.
(d) Other tangible property--(1) In general. In addition to tangible
personal property, any other tangible property (but not including a
building and its
[[Page 410]]
structural components) used as an integral part of manufacturing,
production, or extraction, or as an integral part of furnishing
transportation, communications, electrical energy, gas, water, or sewage
disposal services by a person engaged in a trade or business of
furnishing any such service, or which constitutes a research or storage
facility used in connection with any of the foregoing activities, may
qualify as section 38 property.
(2) Manufacturing, production, and extraction. For purposes of the
credit allowed by section 38, the terms ``manufacturing'',
``production'', and ``extraction'' include the construction,
reconstruction, or making of property out of scrap, salvage, or junk
material, as well as from new or raw material, by processing,
manipulating, refining, or changing the form of an article, or by
combining or assembling two or more articles, and include the
cultivation of the soil, the raising of livestock, and the mining of
minerals. Thus, section 38 property would include, for example, property
used as an integral part of the extracting, processing, or refining of
metallic and nonmetallic minerals, including oil, gas, rock, marble, or
slate; the construction of roads, bridges, or housing; the processing of
meat, fish or other foodstuffs; the cultivation of orchards, gardens, or
nurseries; the operation of sawmills, the production of lumber, lumber
products or other building materials; the fabrication or treatment of
textiles, paper, leather goods, or glass; and the rebuilding, as
distinguished from the mere repairing, of machinery.
(3) Transportation and communications businesses. Examples of
transportation businesses include railroads, airlines, bus companies,
shipping or trucking companies, and oil pipeline companies. Examples of
communications businesses include telephone or telegraph companies and
radio or television broadcasting companies.
(4) Integral part. In order to qualify for the credit, property
(other than tangible personal property and research or storage
facilities used in connection with any of the activities specified in
subparagraph (1) of this paragraph) must be used as an integral part of
one or more of the activities specified in subparagraph (1) of this
paragraph. Property such as pavements, parking areas, inherently
permanent advertising displays or inherently permanent outdoor lighting
facilities, or swimming pools, although used in the operation of a
business, ordinarily is not used as an integral part of any of such
specified activities. Property is used as an integral part of one of the
specified activities if it is used directly in the activity and is
essential to the completeness of the activity. Thus, for example, in
determining whether property is used as an integral part of
manufacturing, all properties used by the taxpayer in acquiring or
transporting raw materials or supplies to the point where the actual
processing commences (such as docks, railroad tracks and bridges), or in
processing raw materials into the taxpayer's final product, would be
considered as property used as an integral part of manufacturing.
Specific examples of property which normally would be used as an
integral part of one of the specified activities are blast furnaces, oil
and gas pipelines, railroad tracks and signals, telephone poles,
broadcasting towers, oil derricks, and fences used to confine livestock.
Property shall be considered used as an integral part of one of the
specified activities if so used either by the owner of the property or
by the lessee of the property.
(5) Research or storage facilities. (i) If property (other than a
building and its structural components) constitutes a research or
storage facility and if it is used in connection with an activity
specified in subparagraph (1) of this paragraph, such property may
qualify as section 38 property even though it is not used as an integral
part of such activity. Examples of research facilities include wind
tunnels and test stands. Examples of storage facilities include oil and
gas storage tanks and grain storage bins. Although a research or storage
facility must be used in connection with, for example, a manufacturing
process, the taxpayer-owner of such facility need not be engaged in the
manufacturing process.
(ii) In the case of property described in section 50, property will
constitute a storage facility only if the facility is used principally
for the bulk storage of
[[Page 411]]
fungible commodities. Bulk storage means the storage of a commodity in a
large mass prior to its consumption or utilization. Thus, if a facility
is used to store oranges that have been sorted and boxed, it is not used
for bulk storage.
(e) Definition of building and structural components. (1) Generally,
buildings and structural components thereof do not qualify as section 38
property. See, however, section 48(a)(1)(E) and (g), and Sec. 1.48-11
(relating to investment credit for qualified rehabilitated building).
The term ``building'' generally means any structure or edifice enclosing
a space within its walls, and usually covered by a roof, the purpose of
which is, for example, to provide shelter or housing, or to provide
working, office, parking, display, or sales space. The term includes,
for example, structures such as apartment houses, factory and office
buildings, warehouses, barns, garages, railway or bus stations, and
stores. Such term includes any such structure constructed by, or for, a
lessee even if such structure must be removed, or ownership of such
structure reverts to the lessor, at the termination of the lease. Such
term does not include (i) a structure which is essentially an item of
machinery or equipment, or (ii) a structure which houses property used
as an integral part of an activity specified in section 48(a)(1)(B)(i)
if the use of the structure is so closely related to the use of such
property that the structure clearly can be expected to be replaced when
the property it initially houses is replaced. Factors which indicate
that a structure is closely related to the use of the property it houses
include the fact that the structure is specifically designed to provide
for the stress and other demands of such property and the fact that the
structure could not be economically used for other purposes. Thus, the
term ``building'' does not include such structures as oil and gas
storage tanks, grain storage bins, silos, fractionating towers, blast
furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal
tipples.
(2) The term ``structural components'' includes such parts of a
building as walls, partitions, floors, and ceilings, as well as any
permanent coverings therefor such as paneling or tiling; windows and
doors; all components (whether in, on, or adjacent to the building) of a
central air conditioning or heating system, including motors,
compressors, pipes and ducts; plumbing and plumbing fixtures, such as
sinks and bathtubs; electric wiring and lighting fixtures; chimneys;
stairs, escalators, and elevators, including all components thereof;
sprinkler systems; fire escapes; and other components relating to the
operation or maintenance of a building. However, the term ``structural
components'' does not include machinery the sole justification for the
installation of which is the fact that such machinery is required to
meet temperature or humidity requirements which are essential for the
operation of other machinery or the processing of materials or
foodstuffs. Machinery may meet the ``sole justification'' test provided
by the preceding sentence even though it incidentally provides for the
comfort of employees, or serves, to an insubstantial degree, areas where
such temperature or humidity requirements are not essential. For
example, an air conditioning and humidification system installed in a
textile plant in order to maintain the temperature or humidity within a
narrow optimum range which is critical in processing particular types of
yarn or cloth is not included within the term ``structural components''.
For special rules with respect to an elevator or escalator, the
construction, reconstruction, or erection of which is completed by the
taxpayer after June 30, 1963, or which is acquired after June 30, 1963,
and the original use of which commences with the taxpayer and commences
after such date, see section 48(a)(1)(C) and paragraph (m) of this
section.
(f) Intangible property. Intangible property, such as patents,
copyrights, and subscription lists, does not qualify as section 38
property. The cost of intangible property, in the case of a patent or
copyright, includes all costs of purchasing or producing the item
patented or copyrighted. Thus, in the case of a motion picture or
television film or tape, the cost of the intangible property includes
manuscript and screenplay costs, the cost of wardrobe and set
[[Page 412]]
design, the salaries of cameramen, actors, directors, etc., and all
other costs properly includible in the basis of such film or tape. In
the case of a book, the cost of the intangible property includes all
costs of producing the original copyrighted manuscript, including the
cost of illustration, research, and clerical and stenographic help.
However, if tangible depreciable property is used in the production of
such intangible property, see paragraph (b)(4) of this section.
(g) Property used outside the United States--(1) General rule. (i)
Except as provided in subparagraph (2) of this paragraph, the term
``section 38 property'' does not include property which is used
predominantly outside the United States (as defined in section
7701(a)(9)) during the taxable year. The determination of whether
property is used predominantly outside the United States during the
taxable year shall be made by comparing the period of time in such year
during which the property is physically located outside the United
States with the period of time in such year during which the property is
physically located within the United States. If the property is
physically located outside the United States during more than 50 percent
of the taxable year, such property shall be considered used
predominantly outside the United States during that year. If property is
placed in service after the first day of the taxable year, the
determination of whether such property is physically located outside the
United States during more than 50 percent of the taxable year shall be
made with respect to the period beginning on the date on which the
property is placed in service and ending on the last day of such taxable
year.
(ii) Since the determination of whether a credit is allowable to the
taxpayer with respect to any property may be made only with respect to
the taxable year in which the property is placed in service by the
taxpayer, property used predominantly outside the United States during
the taxable year in which it is placed in service cannot qualify as
section 38 property with respect to such taxpayer, regardless of the
fact that the property is permanently returned to the United States in a
later year. Furthermore, if property is used predominantly in the United
States in the year in which it is placed in service by the taxpayer, and
a credit under section 38 is allowed with respect to such property, but
such property is thereafter in any one year used predominantly outside
the United States, such property ceases to be section 38 property with
respect to the taxpayer and is subject to the application of section 47.
(iii) This subparagraph applies whether property is used
predominantly outside the United States by the owner of the property, or
by the lessee of the property. If property is leased and if the lessor
makes a valid election under Sec. 1.48-4 to treat the lessee as having
purchased such property for purposes of the credit allowed by section
38, the determination of whether such property is physically located
outside the United States during more than 50 percent of the taxable
year shall be made with respect to the taxable year of the lessee;
however, if the lessor does not make such an election, such
determination shall be made with respect to the taxable year of the
lessor.
(2) Exceptions. The provisions of subparagraph (1) of this paragraph
do not apply to--
(i) Any aircraft which is registered by the Administrator of the
Federal Aviation Agency, and which (a) is operated, whether on a
scheduled or nonscheduled basis, to and from the United States, or (b)
is placed in service by the taxpayer during a taxable year ending after
March 9, 1967, and is operated under contract with the United States:
Provided, That use of the aircraft under the contract constitutes its
principal use outside the United States during the taxable year. The
term ``to and from the United States'' is not intended to exclude an
aircraft which makes flights from one point in a foreign country to
another such point, as long as such aircraft returns to the United
States with some degree of frequency;
(ii) Rolling stock, of a domestic railroad corporation subject to
part I of the Interstate Commerce Act, which is used within and without
the United
[[Page 413]]
States. For purposes of this subparagraph, the term ``rolling stock''
means locomotives, freight and passenger train cars, floating equipment,
and miscellaneous transportation equipment on wheels, the expenditures
for which are chargeable (or, in the case of leased property, would be
chargeable) to the equipment investment accounts in the uniform system
of accounts for railroad companies prescribed by the Interstate Commerce
Commission;
(iii) Any vessel documented under the laws of the United States
which is operated in the foreign or domestic commerce of the United
States. A vessel is documented under the laws of the United States if it
is registered, enrolled, or licensed under the laws of the United States
by the Commandant, U.S. Coast Guard. Vessels operated in the foreign or
domestic commerce of the United States include those documented for use
in foreign trade, coastwise trade, or fisheries;
(iv) Any motor vehicle of a United States person (as defined in
section 7701(a)(30)) which is operated to and from the United States
with some degree of frequency;
(v) Any container of a United States person which is used in the
transportation of property to and from the United States;
(vi) Any property (other than a vessel or an aircraft) of a U.S.
person which is used for the purpose of exploring for, developing,
removing, or transporting resources from the outer Continental Shelf
(within the meaning of section 2 of the Outer Continental Shelf Lands
Act, as amended and supplemented; 43 U.S.C. 1331). Thus for example,
offshore drilling equipment may be section 38 property;
(vii) Any property placed in service after December 31, 1965 which
(a) is owned by a domestic corporation (other than a corporation
entitled to the benefits of section 931 or 934(b)) or by a United States
citizen (other than a citizen entitled to the benefits of section 931,
932, 933, or 934(c)), and (b) is used predominantly in a possession of
the United States during the taxable year by such a corporation or such
a citizen, or by a corporation created or organized in, or under the law
of, a possession of the United States. Thus, property placed in service
after December 31, 1965, which is owned by a domestic corporation not
entitled to the benefits of section 931 or 934(b), which is leased to a
corporation organized under the laws of a U.S. possession, and which is
used by such lessee predominantly in a possession of the United States
may qualify as section 38 property. However, property which is owned by
a corporation not entitled to the benefits of section 931 or 934(b) but
which is leased to a domestic corporation entitled to such benefits
would not qualify as section 38 property. The determination of whether
property is used predominantly in a possession of the United States
during the taxable year shall be made under principles similar to those
described in subparagraph (1) of this paragraph. For example, if a
machine is placed in service in a possession of the United States on
July 1, 1966, by a calendar year taxpayer and if it is physically
located in such a possession during more than 50 percent of the period
beginning on July 1, 1966 and ending on December 31, 1966, then such
machine shall be considered used predominantly in a possession of the
United States during the taxable year 1966;
(viii) Any communications satellite (as defined in section 103(3) of
the Communications Satellite Act of 1962, 47 U.S.C., sec. 702(3)), or
any interest therein, of a U.S. person;
(ix) Any cable which is property described in section 50, or any
interest therein, of a domestic corporation engaged in furnishing
telephone service to which section 46(c)(3)(B)(iii) applies (or of a
wholly owned domestic subsidiary of such corporation), if such cable is
part of a submarine cable system which constitutes part of a
communications link exclusively between the United States and one or
more foreign countries; and
(x) Any property described in section 50 (other than a vessel or an
aircraft) of a U.S. person which is used in international or territorial
waters for the purpose of exploring for, developing, removing, or
transporting resources from ocean waters or deposits under such waters.
[[Page 414]]
(h) Property used for lodging--(1) In general. (i) Except as
provided in subparagraph (2) of this paragraph, the term ``section 38
property'' does not include property which is used predominantly to
furnish lodging or is used predominantly in connection with the
furnishing of lodging during the taxable year. Property used in the
living quarters of a lodging facility, including beds and other
furniture, refrigerators, ranges, and other equipment, shall be
considered as used predominantly to furnish lodging. The term ``lodging
facility'' includes an apartment house, hotel, motel, dormitory, or any
other facility (or part of a facility) where sleeping accommodations are
provided and let, except that such term does not include a facility used
primarily as a means of transportation (such as an aircraft, vessel, or
a railroad car) or used primarily to provide medical or convalescent
services, even though sleeping accommodations are provided.
(ii) Property which is used predominantly in the operation of a
lodging facility or in serving tenants shall be considered used in
connection with the furnishing of lodging, whether furnished by the
owner of the lodging facility or another person. Thus, for example,
lobby furniture, office equipment, and laundry and swimming pool
facilities used in the operation of an apartment house or in serving
tenants would be considered used predominantly in connection with the
furnishing of lodging. However, property which is used in furnishing, to
the management of a lodging facility or its tenants, electrical energy,
water, sewage disposal services, gas, telephone service, or other
similar services shall not be treated as property used in connection
with the furnishing of lodging. Thus, such items as gas and electric
meters, telephone poles and lines, telephone station and switchboard
equipment, and water and gas mains, furnished by a public utility would
not be considered as property used in connection with the furnishing of
lodging.
(iii) Notwithstanding any other provision of this paragraph (h), in
the case of a qualified rehabilitated building (within the meaning of
section 48(g)(1) and Sec. 1.48-12(b)), expenditures for property
resulting in basis described in section 48(a)(1)(E) shall not be treated
as section 38 property to the extent that such property is attributable
to a portion of the building that is used for lodging or in connection
with lodging. For example, if expenditures are incurred to rehabilitate
a five story qualified rehabilitated building, three floors of which are
used for apartments and two floors of which are used as commercial
office space, the portion of the basis of the building attributable to
qualified rehabilitated expenditures attributable to the commercial part
of the building shall not be considered to be expenditures for property,
or in connection with property, used predominantly for lodging.
Allocation of expenditures between the two portions of the building are
to be made using the principles contained in Sec. 1.48-12(C)(10)(ii).
(2) Exceptions--(i) Nonlodging commercial facility. A nonlodging
commercial facility which is available to persons not using the lodging
facility on the same basis as it is available to the tenants of the
lodging facility shall not be treated as property which is used
predominantly to furnish lodging or predominantly in connection with the
furnishing of lodging. Examples of non-lodging commercial facilities
include restaurants, drug stores, grocery stores, and vending machines
located in a lodging facility.
(ii) Property used by a hotel or motel. Property used by a hotel,
motel, inn, or other similar establishment, in connection with the trade
or business of furnishing lodging shall not be considered as property
which is used predominantly to furnish lodging or predominantly in
connection with the furnishing of lodging, provided that the predominant
portion of the living accommodations in the hotel, motel, etc., is used
by transients during the taxable year. For purposes of the preceding
sentence, the term ``predominant portion'' means ``more than one-half''.
Thus, if more than one-half of the living quarters of a hotel, motel,
inn, or other similar establishment is used during the taxable year to
accommodate tenants on a transient basis, none of the property used by
such
[[Page 415]]
hotel, motel, etc., in the trade or business of furnishing lodging shall
be considered as property which is used predominantly to furnish lodging
or predominantly in connection with the furnishing of lodging.
Accommodations shall be considered used on a transient basis if the
rental period is normally less than 30 days.
(iii) Coin-operated machines. In the case of property which is
described in section 50, coin-operated vending machines and coin-
operated washing machines and dryers shall not be considered as property
which is used predominantly to furnish lodging or predominantly in
connection with the furnishing of lodging.
(iv) Certified historic structures. For purposes of this paragraph
(h), regardless of the actual use of a certified historic structure,
that portion of the basis of such certified historic structure which is
attributable to qualified rehabilitation expenditures (as defined in
Sec. 1.48-12(c)) shall not be considered as property which is either
used predominantly to furnish lodging or predominantly in connection
with the furnishing of lodging. Accordingly, such portion of the basis
may qualify as section 38 property. (For the definition of ``certified
historic structure,'' see section 48(g)(3) and Sec. 1.48-12(d).)
(i) [Reserved]
(j) Property used by certain tax-exempt organizations. The term
``section 38 property'' does not include property used by an
organization (other than a cooperative described in section 521) which
is exempt from the tax imposed by chapter 1 of the Code unless such
property is used predominantly in an unrelated trade or business the
income of which is subject to tax under section 511. If such property is
debt-financed property as defined in section 514(b), the basis or cost
of such property for purposes of computing qualified investment under
section 46(c) shall include only that percentage of the basis or cost
which is the same percentage as is used under section 514(a), for the
year the property is placed in service, in computing the amount of gross
income to be taken into account during such taxable year with respect to
such property. The term ``property used by an organization'' means (1)
property owned by the organization (whether or not leased to another
person), and (2) property leased to the organization. Thus, for example,
a data processing or copying machine which is leased to an organization
exempt from tax would be considered as property used by such
organization. Property (unless used predominantly in an unrelated trade
or business) leased by another person to an organization exempt from tax
or leased by such an organization to another person is not section 38
property to either the lessor or the lessee, and in either case the
lessor may not elect under Sec. 1.48-4 to treat the lessee of such
property as having purchased such property for purposes of the credit
allowed by section 38. This paragraph shall not apply to property leased
on a casual or short-term basis to an organization exempt from tax.
(k) Property used by governmental units. The term ``section 38
property'' does not include property used by the United States, any
State (including the District of Columbia) or political subdivision
thereof, any international organization (as defined in section
7701(a)(18)) other than the International Telecommunications Satellite
Consortium or any successor organization, or any agency or
instrumentality of the United States, of any State or political
subdivision thereof, or of any such international organization. The term
``property used by the United States, etc.'' means (1) property owned by
any such governmental unit (whether or not leased to another person),
and (2) property leased to any such governmental unit. Thus, for
example, a data processing or copying machine which is leased to any
such governmental unit would be considered as property used by such
governmental unit. Property leased by another person to any such
governmental unit or leased by such governmental unit to another person
is not section 38 property to either the lessor or the lessee, and in
either case the lessor may not elect under Sec. 1.48-4 to treat the
lessee of such property as having purchased such property for purposes
of the credit allowed by section 38. This paragraph shall not apply to
property leased on a casual or short-term basis to any such governmental
unit.
[[Page 416]]
(l) [Reserved]
(m) Elevators and escalators--(1) In general. Under section
48(a)(1)(C), an elevator or escalator qualifies as section 38 property
if--
(i) The construction, reconstruction, or erection of the elevator or
escalator is completed by the taxpayer after June 30, 1963, or
(ii) The elevator or escalator is acquired after June 30, 1963, and
the original use of such elevator or escalator commences with the
taxpayer and commences after such date.
In the case of construction, reconstruction, or erection of an elevator
or escalator commenced before January 1, 1962, and completed after June
30, 1963, there shall be taken into account in determining the qualified
investment under section 46(c) only that portion of the basis which is
properly attributable to construction, reconstruction, or erection after
December 31, 1961. Further, if the construction, reconstruction, or
erection of such property is commenced after December 31, 1961, and is
completed after June 30, 1963, the entire basis of the elevator or
escalator shall be taken into account in determining qualified
investment under section 46(c). Also, if an elevator or escalator is
reconstructed by the taxpayer after June 30, 1963, the basis
attributable to such reconstruction may be taken into account in
determining the qualified investment under section 46(c), irrespective
of the fact that the original construction or erection of such elevator
or escalator may have occurred before January 1, 1962. Paragraph (b) of
Sec. 1.48-2 shall be applied in determining the date of acquisition,
original use, and basis attributable to construction, reconstruction, or
erection.
(2) Definition of elevators and escalators. For purposes of this
section the term ``elevator'' means a cage or platform and its hoisting
machinery for conveying persons or freight to or from different levels
and functionally related equipment which is essential to its operation.
The term includes, for example, guide rails and cables, motors and
controllers, control panels and landing buttons, and elevator gates and
doors, which are essential to the operation of the elevator. The term
``elevator'' does not, however, include a structure which is considered
a building for purposes of the investment credit. The term ``escalator''
means a moving staircase and functionally related equipment which is
essential to its operation. For purposes of determining qualified
investment under section 46(c) and Sec. 1.46-3, the basis of an
elevator or escalator does not include the cost of any structural
alterations to the building, such as the cost of constructing a shaft or
of making alterations to the floor, walls, or ceiling, even though such
alterations may be necessary in order to install or modernize the
elevator or escalator.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example 1. If an elevator with a total basis of $100,000 is
completed after June 30, 1963, and the portion attributable to
construction by the taxpayer after December 31, 1961, is determined by
engineering estimates or by cost accounting records to be $30,000, only
the $30,000 portion may be taken into account as an investment in new
section 38 property in computing qualified investment.
Example 2. If construction of an elevator with a total basis of
$90,000 is commenced by the taxpayer after December 31, 1961, and is
completed after June 30, 1963, the entire basis of $90,000 may be taken
into account as an investment in new section 38 property.
Example 3. The facts are the same as in example 2 except that
construction of the elevator was completed before June 30, 1963. The
elevator is not considered to be section 38 property.
Example 4. In 1964, a taxpayer reconditions an elevator, which had
been constructed and placed in service in 1962 and which had an adjusted
basis in 1964 of $75,000. The cost of reconditioning amounts to an
additional $50,000. The basis of the elevator which may be taken into
account in computing qualified investment in section 38 property is
$50,000, irrespective of whether the taxpayer contracts to have it
reconditioned or reconditions it himself, and irrespective of whether
the materials used in the process are new in use.
(n) Amortized property. Any property with respect to which an
election under 167(k), 169, 184, 187, or 188 applies shall not be
treated as section 38 property. In the case of any property to which
section 169 applies, the preceding sentence shall apply only to so much
of the adjusted basis of the property as (after the application of
section 169(f))
[[Page 417]]
constitutes the amortizable basis for purposes of section 169. This
paragraph shall not apply to property with respect to which an election
under section 167(k), 184, 187, or 188 applies unless such property is
described in section 50.
(o) [Reserved]
(p) Qualified timber property. (1) Qualified timber property (within
the meaning of section 194(c)(1)) shall be treated as section 38
property to the extent of the portion of the basis of such property
which is the amortizable basis (as defined in Sec. 1.194-3(b)) acquired
during the taxable year and taken into account under section 194 (after
applying the limitation of section 194(b)(1)). Such amortizable basis
shall qualify as section 38 property whether or not an election is made
under section 194. However, any portion of such amortizable basis which
is attributable to property which otherwise qualifies as section 38
property shall not be treated as section 38 property under section
48(a)(1)(F) and this paragraph. For example, amortizable basis
attributable to depreciation on equipment would not qualify as section
38 property under this paragraph if such equipment qualifies as section
38 property under sections 48(a)(1) (A) or (B). In determining the
portion of amortizable basis which qualifies as section 38 property
under this paragraph, the reduction in amortizable basis to account for
depreciation sustained with respect to property used in the
reforestation process (which otherwise qualifies as section 38 property)
shall be applied before the $10,000 limitation on eligible costs under
section 194(b)(1). For example, if in a taxable year a taxpayer incurs
qualifying reforestation costs resulting in $12,000 of amortizable basis
with respect to property for which an election is in effect, and $2,000
of these costs are attributable to depreciation of the taxpayer's
equipment, such $12,000 would first be reduced by the $2,000 of
depreciation, and the $10,000 limitation under section 194(b)(1) would
be applied following such reduction.
(2) If a taxpayer makes an election to amortize reforestation
expenditures under section 194, and allocates the $10,000 limitation
among more than one property under Sec. 1.194-2(b)(2), then such
allocation shall apply for purposes of determining the amortizable basis
that qualifies as section 38 property under paragraph (p)(1) of this
section. If no election is made under section 194, the taxpayer may
select the manner in which the $10,000 limitation is to be allocated
among the qualified timber properties.
(Sec. 38(b), 76 Stat. 963; 26 U.S.C. 38; secs. 194 (94 Stat. 1989; 26
U.S.C. 194) and 7805 (68A Stat. 917, 26 U.S.C. 7805) of the Internal
Revenue Code of 1954)
[T.D. 6731, 29 FR 6073, May 8, 1964]
Editorial Note: For Federal Register citations affecting Sec. 1.48-
1, see the List of CFR Sections Affected, which appears in the Finding
Aids section of the printed volume and at www.fdsys.gov.
Sec. 1.48-2 New section 38 property.
(a) In general. Section 48(b) defines ``new section 38 property'' as
section 38 property--
(1) The construction, reconstruction, or erection of which is
completed by the taxpayer after December 31, 1961, or
(2) Which is acquired by the taxpayer after December 31, 1961,
provided that the original use of such property commences with the
taxpayer and commences after such date.
In the case of construction, reconstruction, or erection of such
property commenced before January 1, 1962, and completed after December
31, 1961, there shall be taken into account as the basis of new section
38 property in determining qualified investment only that portion of the
basis which is properly attributable to contruction, reconstruction, or
erection after December 31, 1961. See Sec. 1.48-1 for the definition of
section 38 property.
(b) Special rules for determining date of acquisition, original use,
and basis attributable to construction, reconstruction, or erection. For
purposes of paragraph (a) of this section, the principles set forth in
paragraphs (a) (1) and (2) of Sec. 1.167(c)-1 shall be applied. Thus,
for example, the following rules are applicable:
(1) Property is considered as constructed, reconstructed, or erected
by the taxpayer if the work is done for him in accordance with his
specifications.
[[Page 418]]
(2) The portion of the basis of property attributable to
construction, reconstruction, or erection after December 31, 1961,
consists of all costs of construction, reconstruction, or erection
allocable to the period after December 31, 1961, including the cost or
other basis of materials entering into such work (but not including, in
the case of reconstruction of property, the adjusted basis of the
reconstructed property as of the time such reconstruction is commenced).
(3) It is not necessary that materials entering into construction,
reconstruction, or erection be acquired after December 31, 1961, or that
they be new in use.
(4) If construction or erection by the taxpayer began after December
31, 1961, the entire cost or other basis of such construction or
erection may be taken into account as the basis of new section 38
property.
(5) Construction, reconstruction, or erection by the taxpayer begins
when physical work is started on such construction, reconstruction, or
erection.
(6) Property shall be deemed to be acquired when reduced to physical
possession, or control.
(7) The term ``original use'' means the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer. For example, a reconditioned or rebuilt
machine acquired by the taxpayer will not be treated as being put to
original use by the taxpayer. The question of whether property is
reconditioned or rebuilt property is a question of fact. Property will
not be treated as reconditioned or rebuilt merely because it contains
some used parts.
If the cost of reconstruction may properly either be capitalized and
recovered through depreciation or charged against the depreciation
reserve, such cost may be taken into account as the basis of new section
38 property even though it is charged against the depreciation reserve.
(c) Examples. This section may be illustrated by the following
examples:
Example 1. If a machine with a total cost of $100,000 is completed
after December 31, 1961, and the portion attributable to construction by
the taxpayer after December 31, 1961, is determined by engineering
estimates or by cost accounting records to be $30,000, the $30,000
amount shall be taken into account by the taxpayer in computing
qualified investment in new section 38 property.
Example 2. In 1965, a taxpayer reconditions a machine, which he
constructed and placed in service in 1962 and which has an adjusted
basis in 1965 of $10,000. The cost of reconditioning amounts to an
additional $20,000. The basis of the machine which shall be taken into
account in computing qualified investment in new section 38 property for
1965 is $20,000, whether he contracts to have it reconditioned or
reconditions it himself, and irrespective of whether the materials used
for reconditioning are new in use.
Example 3. In 1961, a taxpayer pays the entire purchase price of
$10,000 for section 38 property to be delivered in 1962. In 1962 he
takes possession of the property and commences the original use of the
asset in that year. The $10,000 amount shall be taken into account in
computing qualified investment in new section 38 property for 1962.
Example 4. A taxpayer, instead of reconditioning his old machine,
buys a ``factory reconditioned'' or ``rebuilt'' machine in 1962 to
replace it. The reconditioned or rebuilt machine is not new section 38
property since such taxpayer is not the first user of the machine. See,
however, Sec. 1.48-3 (relating to used section 38 property).
Example 5. In 1962, a taxpayer buys from X for $20,000 an item of
section 38 property which has been previously used by X. The taxpayer in
1962 makes an expenditure on the property of $5,000 of the type that
must be capitalized. Regardless of whether the $5,000 is added to the
basis of such property or is capitalized in a separate account, such
amount shall be taken into account by the taxpayer in computing
qualified investment in new section 38 property for 1962. No part of the
$20,000 purchase price may be taken into account for such purpose. See,
however, Sec. 1.48-3 (relating to used section 38 property).
(d) Special rule for qualified rehabilitated buildings.
Notwithstanding the rules in paragraphs (a) through (c) of this section,
that portion of the basis of a qualified rehabilitated building
attributable to qualified rehabilitation expenditures is treated as new
section 38 property. See section 48(a)(1)(E) and (g), and Sec. 1.48-11.
[T.D. 6731, 29 FR 6076, May 8, 1964, as amended by T.D. 8031, 50 FR
26698, June 28, 1985]
Sec. 1.48-3 Used section 38 property.
(a) In general. (1) Section 48(c) provides that ``used section 38
property'' means section 38 property acquired by purchase after December
31, 1961, which
[[Page 419]]
is not ``new section 38 property.'' See Sec. Sec. 1.48-1 and 1.48-2,
respectively, for definitions of section 38 property and new section 38
property. In determining whether property is acquired by purchase, the
provisions of paragraph (c)(1) of Sec. 1.179-3 shall apply, except that
(i) ``1961'' shall be substituted for ``1957'', and (ii) the definition
of ``component member'' of a controlled group of corporations in
paragraph (d)(4) of this section shall be substituted for the definition
of such term in paragraph (e) of Sec. 1.179-3.
(2)(i) Property shall not qualify as used section 38 property if,
after its acquisition by the taxpayer, it is used by (a) a person who
used such property before such acquisition, or (b) a person who bears a
relationship described in section 179(d)(2) (A) or (B) to a person who
used such property before such acquisition. Thus, for example, if
property is used by a person and is later sold by him under a sale and
lease-back arrangement, such property in the hands of the purchaser-
lessor is not used section 38 property because the property, after its
acquisition, is being used by the same person who used it before its
acquisition. Similarly, where a lessee has been leasing property and
subsequently purchases it (whether or not the lease contains an option
to purchase), such property is not used section 38 property with respect
to the purchaser because the property is being used by the same person
who used it before its acquisition. In addition, if property owned by a
lessor is sold subject to the lease, or is sold upon the termination of
the lease, the property will not qualify as used section 38 property
with respect to the purchaser if, after the purchase, the property is
used by a person who used the property as a lessee before the purchase.
(ii) For purposes of applying subdivision (i) of this subparagraph,
property shall not be considered as used by a person before its
acquisition if such property was used only on a casual basis by such
person.
(iii) In determining whether a person bears a relationship described
in section 179(d)(2) (A) or (B) to a person who used property before its
acquisition by the taxpayer, the provisions of paragraphs (c)(1) (i) and
(ii) of Sec. 1.179-3 shall apply, except that the definition of
``component member'' of a controlled group of corporations in paragraph
(d)(4) of this section shall be substituted for the definition of such
term in paragraph (e) of Sec. 1.179-3.
(3) The provisions of this paragraph may be illustrated by the
following examples:
Example 1. Corporation P acquires properties 1 and 2 in 1960 and
uses them in its trade or business until 1962. In 1962, corporation P
sells such properties to corporation Y, which leases back property 1 to
corporation P and leases property 2 to corporation S, a wholly owned
subsidiary of corporation P. Property 1 is not used section 38 property
in the hands of corporation Y because, after its acquisition by
corporation Y, it is used by a person (corporation P) who used it prior
to such acquisition. Property 2 is not used section 38 property because,
after its acquisition by corporation Y, it is used by a person
(corporation S) who is related, within the meaning of section
179(d)(2)(B), to a person (corporation P) who used it before such
acquisition.
Example 2. In 1962, corporation L leases property from corporation
M. In 1964, corporation L acquires the property that it previously had
been leasing. The property acquired by corporation L is not used section
38 property because such property is used after such acquisition by the
same person (corporation L) who used the property before its acquisition
(corporation L).
Example 3. Corporation X buys property in 1962 and leases such
property to corporation Y. Corporation X in 1965 sells the property to A
subject to the lease. The property acquired by A is not used section 38
property if such property continues to be used by corporation Y, because
corporation Y used the property before its acquisition by A.
Example 4. A owns a bulldozer which he rents out to a number of
different users, including B. In 1962, B used the bulldozer from
February 16 to March 12 and again on October 15 and 16. B purchases the
bulldozer from A on December 1, 1962. The prior use of the property by B
does not disqualify such property as used section 38 property to B,
because he used such property only on a casual basis prior to its
purchase.
(b) Cost. (1) The cost of used section 38 property is equal to the
basis of such property, but does not include so much of such basis as is
determined by reference to the adjusted basis of other property (whether
or not section 38 property) held at any time by the taxpayer acquiring
such used section 38 property.
[[Page 420]]
(2) If property (whether or not section 38 property) is disposed of
by the taxpayer (other than by reason of its destruction or damage by
fire, storm, shipwreck, or other casualty, or its theft) and used
section 38 property similar or related in service or use is acquired as
a replacement therefor in a transaction in which the basis of the
replacement property is not determined by reference to the adjusted
basis of the property replaced, then the cost of the used section 38
property so acquired shall be its basis reduced by the adjusted basis of
the property replaced. The preceding sentence shall apply only if the
taxpayer acquires (or enters into a contract to acquire) the replacement
property within a period of 60 days before or after the date of the
disposition.
(3) Notwithstanding subparagraphs (1) and (2) of this paragraph, the
cost of used section 38 property shall not be reduced with respect to
the adjusted basis of any property disposed of if, by reason of section
47, such disposition resulted in an increase of tax or a reduction of
investment credit carrybacks or carryovers described in section 46(b).
(4) The provisions of this paragraph may be illustrated by the
following examples:
Example 1. In 1972, A acquires machine 2 (an item of used section 38
property which has a sales price of $5,600) by trading in machine 1 (an
item of section 38 property acquired in 1962), and by paying an
additional $4,000 cash. The adjusted basis of machine 1 is $1,600. Under
the provisions of sections 1012 and 1031(d), the basis of machine 2 is
$5,600 ($1,600 adjusted basis of machine 1 plus cash expended of
$4,000). The cost of machine 2 which may be taken into account in
computing qualified investment for 1972 is $4,000 (basis of $5,600 less
$1,600 adjusted basis of machine 1).
Example 2. The facts are the same as in example 1 except that
machine 2 has a sales price of $6,000. The trade-in allowance on machine
1 is $2,000. The result is the same as in example 1, that is, the basis
of machine 2 is $5,600 ($1,600 plus $4,000); therefore, the cost of
machine 2 which may be taken into account in computing qualified
investment for 1972 is $4,000 (basis of $5,600 less $1,600 adjusted
basis of machine 1).
Example 3. On September 18, 1962, B sells truck 1, which he acquired
in 1961 and which has an adjusted basis in his hands of $1,200. On
October 15, 1962, he purchases for $2,000 truck 2 (an item of used
section 38 property) as a replacement therefor. The cost of truck 2
which may be taken into account in computing qualified investment is
$800 ($2,000 less $1,200).
Example 4. In 1962, C acquires property 1, an item of new section 38
property with a basis of $12,000 and a useful life of eight years or
more. He is allowed a credit under section 38 of $840 (7 percent of
$12,000) with respect to such property. In 1968, C acquires property 2
(an item of used section 38 property) by trading in property 1 and by
paying an additional amount in cash. Section 47(a) applies to the
disposition of property 1 and C's tax liability for 1968 is increased by
$280. Since the application of section 47(a) results in an increase in
tax, for purposes of computing qualified investment the cost of property
2 is not reduced by any part of the adjusted basis of the property
traded in.
(c) Dollar limitation--(1) In general. Section 48(c)(2) provides
that the aggregate cost of used section 38 property which may be taken
into account for any taxable year in computing qualified investment
under section 46(c)(1)(B) shall not exceed $50,000. If the total cost of
used section 38 property exceeds $50,000, there must be selected, in the
manner provided in subparagraph (4) of this paragraph, the particular
items of used section 38 property the cost of which is to be taken into
account in computing qualified investment. The cost of used section 38
property that may be taken into account by a person in applying the
$50,000 limitation for any taxable year includes not only the cost of
used section 38 property placed in service by such person during such
taxable year, but also the cost of used section 38 property apportioned
to such person. For purposes of this section, the cost of used section
38 property apportioned to any person means the cost of such property
apportioned to him by a trust, estate, or electing small business
corporation (as defined in section 1371(b)), and his share of the cost
of partnership used section 38 property, with respect to the taxable
year of such trust, estate, corporation or partnership ending with or
within such person's taxable year. Thus, if an individual places in
service during his taxable year used section 38 property with a cost of
$25,000, if the cost of used section 38 property apportioned to him by
an electing small business corporation for
[[Page 421]]
such year is $30,000, and if his share for such year of the cost of used
section 38 property placed in service by a partnership is $20,000, he
may select from the used section 38 property with a total cost of
$75,000 the particular used section 38 property the cost of which he
wishes to take into account. No part of the excess of $25,000 ($75,000
cost minus $50,000 annual limitation) may be taken into account in any
other taxable year. For determining the amount of the cost to be
apportioned by an electing small business corporation, see paragraph
(a)(2) of Sec. 1.48-5; in the case of estates and trusts, see paragraph
(a)(2) of Sec. 1.48-6. See paragraph (e) of this section for
application of $50,000 limitation in the case of affiliated groups.
(2) Married individuals filing separate returns. In the case of a
husband or wife who files a separate return, the aggregate cost of used
section 38 property which may be taken into account for the taxable year
to which such return relates cannot exceed $25,000. The preceding
sentence shall not apply, however, unless the taxpayer's spouse places
in service (or is apportioned the cost of) used section 38 property for
the taxable year of such spouse which ends with or within the taxpayer's
taxable year. Thus, if a husband and wife who file separate returns on a
calendar year basis both place in service used section 38 property
during the taxable year, the maximum cost of used section 38 property
which may be taken into account by each is $25,000. However, in such
case, if only one spouse places in service (or is apportioned the cost
of) used section 38 property during the taxable year, such spouse may
take into account a maximum of $50,000 for such year. The determination
of whether an individual is married shall be made under the principles
of section 143 and the regulations thereunder.
(3) Partnerships. In the case of a partnership, the aggregate cost
of used section 38 property placed in service by the partnership (or
apportioned to the partnership) which may be taken into account by the
partners with respect to any taxable year of the partnership may not
exceed $50,000. If such aggregate cost exceeds $50,000, the partnership
must make a selection in the manner provided in subparagraph (4) of this
paragraph. The $50,000 limitation applies to each partner, as well as to
the partnership.
(4) Selection of $50,000 cost. (i) If the sum of (a) the cost of
used section 38 property placed in service during the taxable year by
any person, (b) such person's share of the cost of partnership used
section 38 property placed in service during the taxable year of a
partnership ending with or within such person's taxable year, and (c)
the cost of used section 38 property apportioned to such person for such
taxable year by an electing small business corporation, estate, or
trust, exceeds $50,000, such person must make a selection for such
taxable year in the manner provided in subdivision (ii) of this
subparagraph.
(ii) For purposes of computing qualified investment (or, in the case
of a partnership, electing small business corporation, estate, or trust,
for purposes of selecting used section 38 property the cost of which may
be taken into account by the partners, shareholders, or estate or trust
and its beneficiaries) any person to whom subdivision (i) of this
subparagraph applies must select a total cost of $50,000 from (a) the
cost of specific used section 38 property placed in service by such
person, (b) such person's share of the cost of specific used section 38
property placed in service by a partnership and (c) the cost of used
section 38 property apportioned to such person by an electing small
business corporation, estate, or trust. When a particular property is
selected, the entire cost (or entire share of cost of a particular
property in the case of partnership property) of such property must be
taken into account unless, as a result of the selection of such
particular property, the $50,000 limitation is exceeded. Likewise, in
the case of an apportionment from an electing small business
corporation, estate, or trust, when the cost in a particular useful life
category is selected, the entire cost in such category must be taken
into account unless, as a result of the selection of such cost, the
$50,000 limitation is exceeded. Thus, if a person places in service
during the taxable year three items of used section 38 property, each
with a
[[Page 422]]
cost of $20,000, he must select the entire cost of two of the items and
only $10,000 of the cost of the third item; he may not select a portion
of the cost of each of the three items. The selection by any person
shall be made by taking the cost of used section 38 property into
account in computing qualified investment (or in selecting the used
section 38 property the cost of which may be taken into account by the
partners, etc.), and if such property was placed in service by such
person, he must maintain records which permit specific identification of
any item of used section 38 property selected.
(5) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example 1. H, who operates a sole proprietorship, purchases and
places in service in 1963 used section 38 property with a cost of
$60,000. His spouse, W, is a shareholder in an electing small business
corporation which purchases and places in service during its fiscal year
ending June 30, 1963, used section 38 property with a cost of $50,000.
Both spouses file separate returns on a calendar year basis. W, as a 60
percent shareholder on the last day of the taxable year of the
corporation, is apportioned $30,000 (60 percent of $50,000) of the cost
of the used section 38 property placed in service by the corporation.
The cost of used section 38 property that may be taken into account by H
on his separate return is $25,000. The cost of used section 38 property
that may be taken into account by W on her separate return is $25,000.
On the other hand, if the corporation had made no investment in used
section 38 property, H could take $50,000 of the $60,000 cost into
account.
Example 2. Partners X, Y, and Z share the profits and losses of
partnership XYZ in the ratio of 50 percent, 30 percent, and 20 percent,
respectively. The partnership and each partner make returns on the basis
of the calendar year. Each partner also operates a sole proprietorship.
In 1963, the partnership and the partners purchase and place in service
the following used section 38 property:
------------------------------------------------------------------------
Estimated
useful
Property life Cost
(years)
------------------------------------------------------------------------
Partnership XYZ
Property No. 1.................................. 9 $10,000
Property No. 2.................................. 7 50,000
Property No. 3.................................. 7 50,000
Property No. 4.................................. 5 30,000
Partner X
Property No. 5.................................. 6 30,000
Partner Y
Property No. 6.................................. 10 60,000
Partner Z
Property No. 7.................................. 4 36,000
------------------------------------------------------------------------
(i) Selection by partnership. In accordance with subparagraph
(4)(ii) of this paragraph, the partnership selects property No. 1 and
$40,000 of the cost of property No. 2 to be taken into account.
Therefore, each partner's share of cost of the property selected by the
partnership is as follows:
----------------------------------------------------------------------------------------------------------------
Estimated Partner's share of cost
Property No. useful life Selected --------------------------------------
(years) cost X (50%) Y (30%) Z (20%)
----------------------------------------------------------------------------------------------------------------
1.............................................. 9 $10,000 $5,000 $3,000 $2,000
2.............................................. 7 40,000 20,000 12,000 8,000
----------------------------------------------------------------
Total...................................... ........... 50,000 25,000 15,000 10,000
----------------------------------------------------------------------------------------------------------------
(ii) Selection by partners. In accordance with subparagraph (4)(ii)
of this paragraph, the partners make the following selections: Partner X
selects property No. 5 ($30,000), his share of the cost of property No.
1 ($5,000), and $15,000 of his share of the cost of property No. 2.
Partner Y selects $50,000 of the cost of property No. 6, and no part of
his share of the cost of partnership property. Partner Z, having an
aggregate cost of used section 38 property of only $46,000 (partnership
property of $10,000 and individually owned property of $36,000), takes
into account the entire $46,000.
(iii) Qualified investment of partner X. X's total qualified
investment in used section 38 property for 1963 is $35,000, computed as
follows:
----------------------------------------------------------------------------------------------------------------
Estimated
Property No. useful life Selected Applicable Qualified
(years) cost percentage investment
----------------------------------------------------------------------------------------------------------------
1........................................................... 9 $5,000 100 $5,000
2........................................................... 7 15,000 66\2/3\ 10,000
5........................................................... 6 30,000 66\2/3\ 20,000
---------------------------------------------------
[[Page 423]]
Total..................................................... ........... 50,000 ........... 35,000
----------------------------------------------------------------------------------------------------------------
(iv) Qualified investment of partner Y. Y's total qualified
investment in used section 38 property for 1963 is $50,000 (100 percent
of $50,000) since he selected $50,000 of the cost of property No. 6
which has a useful life of 8 years or more.
(v) Qualified investment of partner Z. Z's total qualified
investment in used section 38 property for 1963 is $19,333, computed as
follows:
----------------------------------------------------------------------------------------------------------------
Estimated
Property No. useful life Selected Applicable Qualified
(years) cost percentage investment
----------------------------------------------------------------------------------------------------------------
1........................................................... 9 $2,000 100 $2,000
2........................................................... 7 8,000 66\2/3\ 5,333
7........................................................... 4 36,000 33\1/3\ 12,000
---------------------------------------------------
Total..................................................... ........... 46,000 ........... 19,333
----------------------------------------------------------------------------------------------------------------
(d) Dollar limitation for component members of a controlled group--
(1) In general. (i) Section 48(c)(2)(C) provides that the $50,000
limitation on the cost of used section 38 property which may be taken
into account for any taxable year shall, in the case of component
members of a controlled group (as defined in subparagraph (4) of this
paragraph) on a particular December 31, be reduced for each such member
by apportioning the $50,000 amount among such component members for
their taxable years that include such December 31 in accordance with
their respective amounts of used section 38 property which may be taken
into account, that is, in accordance with the total cost of used section
38 property placed in service by each such member during its taxable
year (without regard to the $50,000 limitation or the applicable
percentages to be applied in computing qualified investment).
(ii) Except as otherwise provided in this paragraph, the $50,000
amount shall be apportioned among those corporations which are component
members of the controlled group on a December 31. For the taxable year
of each such member which includes such December 31, the cost of used
section 38 property taken into account in computing qualified investment
under section 46(c)(1)(B) shall not exceed the amount which bears the
same ratio to $50,000 as the cost of used section 38 property placed in
service by such member for such taxable year bears to the total cost of
used section 38 property placed in service by all component members of
the controlled group for their taxable years which include such December
31.
(iii) If a component member of the group makes its income tax return
on the basis of a 52-53-week taxable year, the principles of section
441(f)(2)(A)(ii) and Sec. 1.441-2 apply in determining the last day of
such a taxable year.
(2) Statement by the ``filing member''. For purposes of this
paragraph, the term ``filing member'' with respect to a particular
December 31 means the member (or members) of a controlled group which
has, among those members of the group which are apportioned part of the
$50,000 amount for their taxable years which include such December 31,
the taxable year including such December 31 which ends on the earliest
date. The filing member of the group shall attach to its income tax
return a statement containing the name, address, and employer
identification number of each component member of the controlled group
on such December 31 and a schedule showing the computation of the
apportionment of the $50,000 amount among the component members of the
group. Each such other member shall retain as part of its records a copy
of the statement containing the apportionment schedule. Except as
otherwise provided in subparagraph (3)(ii) of this paragraph,
[[Page 424]]
each member which is apportioned part of the $50,000 amount shall take
such apportioned amount into account in filing its return for its
taxable year which includes such December 31.
(3) Estimate of used section 38 property to be placed in service.
(i) For purposes of subparagraphs (1) and (2) of this paragraph, if on
the date (including extensions of time) for filing the income tax return
of the filing member of the group with respect to a particular December
31, the total cost of used section 38 property actually placed in
service by any component member of the group during such member's
taxable year that includes such December 31 is not known, then such
member shall estimate such cost. The estimate shall be made on the basis
of the facts and circumstances known as of the time of the estimate. Any
such estimate shall also be used in determining the total cost of used
section 38 property placed in service by all component members for their
taxable years including such December 31.
(ii) If an estimate is used by any component member of a controlled
group pursuant to subdivision (i) of this subparagraph, each member may
later file an original or amended return in which the apportionment of
the $50,000 amount is based upon the cost of used section 38 property
actually placed in service by all component members of the group during
their taxable year which include such December 31. Such amended
apportionment shall be made only if each component member of the group
whose limitation would be changed files an original or amended return
which reflects the amended apportionment based upon the cost of the used
section 38 property actually placed in service by component members of
the group. In such case, the new statement reflecting the amended
apportionment shall be attached to the amended return of the filing
member of the group, and a copy of such statement shall be retained by
each such member pursuant to the requirements of subparagraph (2) of
this paragraph.
(4) Definitions of controlled group of corporations and component
member of controlled group. For purposes of this section, the terms
``controlled group of corporations'' and ``component member'' of a
controlled group of corporations shall have the same meaning assigned to
those terms in section 1563 (a) and (b), except that the phrase ``more
than 50 percent'' shall be substituted for the phrase ``at least 80
percent'' each place it appears in section 1563(a)(1). For purposes of
applying Sec. 1.1563-1(b)(2)(ii)(c), an electing small business
corporation shall be treated as an excluded member whether or not it is
subject to the tax imposed by section 1378.
(5) Members of controlled group filing a consolidated return. For
the purpose of apportioning the $50,000 amount in the case of component
members of a controlled group which join in filing a consolidated
return, all such members shall be treated as though they were a single
component member of the controlled group. Thus, in determining the
limitation on the cost of used section 38 property which may be taken
into account by the group filing the consolidated return, the
apportionment provided in subparagraph (1)(ii) of this paragraph shall
be made by using the aggregate cost of such property placed in service
by all members of the group filing the consolidated return. If all
component members of the controlled group join in filing a consolidated
return, the group may select the items to be taken into account to the
extent of an aggregate cost of $50,000; if some component members of the
controlled group do not join in filing the consolidated return, then the
members of the group which join in filing the consolidated return may
select the items to be taken into account to the extent of the amount
apportioned to such members under subparagraph (1)(ii) of this
paragraph.
(6) Examples. This paragraph may be illustrated by the following
examples:
Example 1. (i) On December 31, 1970, corporations M, N, and O are
component members of the same controlled group. The taxable years of M,
N, and O end, respectively, on January 31, March 31, and April 30.
During the respective taxable years of each corporation which include
December 31, 1970, M places in service no used section 38 property, and
N and O place in service used section 38 property with respective costs
of $100,000 and $150,000. N is the ``filing member'' of the group since
N, among the members (N and O)
[[Page 425]]
which are apportioned part of the $50,000 amount for their taxable years
which include such December 31, has the taxable year ending on the
earliest date.
(ii) The cost of used section 38 property taken into account by N
for its taxable year ending March 31, 1971, may not exceed $20,000, that
is, an amount which bears the same ratio to $50,000 as the cost of used
section 38 property placed in service by N for its taxable year
($100,000) bears to the total cost of used section 38 property placed in
service by all component members of the controlled group (M, N, and O)
for their taxable years which include December 31, 1970 ($250,000).
Similarly, the cost of used section 38 property taken into account by O
for its taxable year ending April 30, 1971, may not exceed $30,000.
Example 2. (i) On December 31, 1971, corporations S and T are
component members of the same controlled group. The taxable years of
corporations S and T end, respectively, on January 31 and June 30. On
April 15, 1972, S files an income tax return for its taxable year ending
January 31, 1972, during which year it places in service used section 38
property costing $100,000. T estimates that it will place in service
used section 38 property costing $150,000 during its taxable year ending
June 30, 1972.
(ii) S, the ``filing member'' of the group, must file an
apportionment schedule under which it may take into account as the cost
of used section 38 property an amount not in excess of $20,000
($100,000/$250,000x $50,000). If T actually places in service during its
taxable year used section 38 property costing more or less than
$150,000, its income tax return for its taxable year ending June 30,
1972, may reflect the amended apportionment of the $50,000 limitation
based upon the cost of used section 38 property actually placed in
service by the group, provided that S attaches a new apportionment
schedule to an amended return to reflect the amended apportionment. For
example, if T places in service used section 38 property costing
$200,000, the cost of used section 38 property taken into account by S
and T for their respective taxable years could not exceed $16,667
($100,000/$300,000x$50,000) and $33,333 ($200,000/$300,000x$50,000),
respectively, under an amended apportionment.
(Secs. 38(b) and 7805 of the Internal Revenue Code of 1954 (76 Stat.
962, U.S.C. 38(b); 68A Stat. 917; 26 U.S.C. 7805)
[T.D. 6731, 29 FR 6076, May 8, 1964, as amended by T.D. 7181, 37 FR
8064, Apr. 25, 1972; T.D. 7820, 47 FR 25139, June 10, 1982; T.D. 8996,
67 FR 35012, May 17, 2002]
Sec. 1.48-4 Election of lessor of new section 38 property to treat
lessee as purchaser.
(a) In general--(1) Lessee treated as purchaser. Under section
48(d), a lessor of property may elect to treat the lessee of such
property as having purchased such property (or, in the case of short-
term lease property described in subparagraph (2) of this paragraph, a
portion of such property) for purposes of the credit allowed by section
38 if the following conditions are satisfied:
(i) The property must be ``section 38 property'' in the hands of the
lessor; that is, it must be property with respect to which depreciation
(or amortization in lieu of depreciation) is allowable to the lessor, it
must have a useful life of 3 years (4 years in the case of property
which is not described in section 50) or more in his hands, and in every
other respect it must meet the requirements of Sec. 1.48-1. Thus, for
example, property leased by a municipality to a taxpayer for use in what
is commonly known as an ``industrial park'' is not eligible for the
election since, under paragraph (k) of Sec. 1.48-1, property used by a
governmental unit is not section 38 property. In addition, property used
by the lessee predominantly outside the United States is not eligible
for the election since, under paragraph (g) of Sec. 1.48-1, such
property is not section 38 property. For purposes of this subdivision,
if the lessor is an estate or trust, depreciation (or amortization in
lieu of depreciation) will be considered allowable to the estate or
trust even if it is apportioned to the beneficiaries or other persons.
(ii) The property must be ``new section 38 property'' (within the
meaning of Sec. 1.48-2) in the hands of the lessor, and the original
use of such property must commence with the lessor. See paragraph (b) of
this section for the application of the rules relating to ``original
use'' in the case of leased property.
(iii) The property would constitute ``new section 38 property'' to
the lessee if such lessee had actually purchased the property. Thus, the
election is not available if the lessee is not the original user of the
property. See paragraph (b) of this section for the application of the
rules relating to ``original use'' in
[[Page 426]]
the case of leased property. See paragraph (d) of this section for the
determination of the estimated useful life of leased property in the
hands of the lessee.
(iv) A statement of election to treat the lessee as a purchaser has
been filed in the manner and within the time provided in paragraph (f)
or (g) of this section.
(v) The lessor is not a person referred to in section 46(d)(1), that
is, a mutual savings bank, cooperative bank, or domestic building and
loan association to which section 593 applies; a regulated investment
company or real estate investment trust subject to taxation under
subchapter M, chapter 1 of the Code; or a cooperative organization
described in section 1381(a).
The election may be made on a property-by-property basis or a general
election may be made with respect to each taxable year of a particular
lessee. If the conditions of this subparagraph have been met, the lessee
shall be treated as though he were the actual owner of all or a portion
of the property for purposes of the credit allowed by section 38. Thus,
the lessee shall be entitled to a credit allowed by section 38 with
respect to such property for the taxable year in which he places such
property in service, and the lessor shall not be entitled to a credit
allowed by section 38 with respect to such property unless the property
is short-term lease property (as defined in subparagraph (2) of this
paragraph). Moreover, if the leased property is disposed of, or if it
otherwise ceases to be section 38 property, the property will be subject
to the provisions of section 47 (relating to early dispositions, etc.).
(2) Short-term lease property. For purposes of this section, the
term ``short-term lease property'' means property which--
(i) Is new section 38 property;
(ii) Has a class life (determined under section 167(m)) in excess of
14 years;
(iii) Is leased under a lease entered into after November 8, 1971,
for a period which is less than 80 percent of the class life of such
property; and
(iv) Is not leased subject to a net lease within the meaning of
section 57(c)(1)(B) and the regulations thereunder.
The class life of property shall be determined under section 167(m) and
the regulations prescribed in connection with that section, except that
such class life shall be determined without regard to any variance from
the class life permitted under such section. If a class life has not
been prescribed for property under section 167(m) on the date such
property is leased, the class life of the property shall be the
estimated useful life used to compute the allowance for depreciation
with respect to such property under section 167. For purposes of
subdivision (iii) of this subparagraph, the period for which a lease is
entered into shall be determined without regard to any option on the
part of the lessee to extend or renew such lease, and without regard to
any option on the part of the lessee to cancel the lease after a
specified period if under the terms of such lease, such a cancellation
would result in the imposition of a substantial penalty upon the lessee.
Generally, a penalty equal to 25 percent of the total remaining rental
payments due under the lease will be regarded as substantial.
(b) Original use. For purposes of this section only, the lessor and
the lessee may both be considered as the original users of an item of
leased property. The determination of whether the lessor qualifies as
the original user of leased property shall be made under paragraph
(b)(7) of Sec. 1.48-2. The determination of whether the lessee
qualifies as the original user of leased property shall be made, under
paragraph (b)(7) of Sec. 1.48-2, as if the lessee actually purchased
the property. Thus, the lessee would not be considered the original user
of the property if it has been previously used by the lessor or another
person, or if it is reconstructed, rebuilt, or reconditioned property.
However, the lessee would be considered the original user if he is the
first person to use the property for its intended function. Thus, the
fact that the lessor may have, for example, tested, stored, or attempted
to lease the property to other persons will not preclude the lessee from
being considered the original user.
(c) Qualified investment--(1) In general. If a valid election is
made under this
[[Page 427]]
section, the amount of qualified investment under section 46(c) with
respect to the leased property shall be determined under this paragraph
and paragraphs (d) and (e) of this section.
(2) Nonshort-term lease property. In the case of property which is
not short-term lease property, the lessee is treated as having acquired
the entire property for an amount equal to--
(i) The fair market value of such property on the date possession is
transferred to the lessee, or
(ii) If the property is leased by a component member of a controlled
group to another component member of the same controlled group (within
the meaning of paragraph (f)(4) of Sec. 1.46-1) on the date possession
of the property is transferred to the lessee, the basis of the property
in the hands of the lessor.
(3) Short-term lease property. (i) In the case of short-term lease
property, the lessee is treated as having acquired a portion of such
property. The amount for which the lessee is treated as having acquired
such portion is an amount equal to a fraction, the numerator of which is
the term of the lease and the denominator of which is the class life of
the property leased, of the amount for which the lessee would be treated
as having acquired the property under subparagraph (2) of this paragraph
if the property were not short-term lease property.
(ii) In the case of short-term lease property, the qualified
investment of the lessor is an amount equal to his qualified investment
in such property determined under section 46(c) multiplied by a
fraction, the numerator of which is the class life of the property
leased minus the term of the lease and the denominator of which is the
class life of such property.
(4) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. (a) On December 1, 1971, X corporation completed
construction of an item of new section 38 property with a basis of
$10,000. Under section 167(m), the property has a class life of 16
years. On December 1, 1971, X leases the property to individual A for 4
years and A immediately places the property in service. The lease is not
a net lease within the meaning of section 57(c)(1)(B). On the date of
the lease, the fair market value of the property is $12,000. The
property would qualify as new section 38 property in A's hands if it had
been purchased by A. Under this section, the property is short-term
lease property. X makes the election under this section to treat A as
having acquired a portion of the property.
(b) A is treated as having acquired from X a portion of the property
for $3,000 (the fair market value of the property, $12,000, multiplied
by a fraction, \4/16\ , the numerator of which is the term of the lease
and the denominator of which is the class life of the leased property).
Since under paragraph (d) of this section the useful life of such
property in the hands of A is the same as the useful life of such
property in the hands of X, and such useful life is at least 7 years,
A's qualified investment with respect to the property is $3,000.
(c) The qualified investment of X is $7,500 (the qualified
investment of X under section 46(c), $10,000, multiplied by a fraction,
\12/16\, the numerator of which is the class life of the leased
property, 16, minus the term of the lease, 4, and the denominator of
which is the class life of the property).
(d) Estimated useful life of leased property. The estimated useful
life to the lessee of property subject to the election shall be deemed
to be the estimated useful life in the hands of the lessor for purposes
of computing depreciation, regardless of the term of the lease. The
lessor shall determine the estimated useful life of each leased property
on an individual basis even though multiple asset accounts are used.
However, in the case of assets similar in kind contained in a multiple
asset account, the lessor shall assign to each of such assets the
average useful life of such assets used in computing depreciation. Thus,
for example, if during a taxable year a lessor leases 10 similar trucks
with an average estimated useful life for depreciation purposes of 6
years, based on an estimated range of 5 to 7 years, he must assign a
useful life of 6 years to each of the 10 trucks.
(e) Lessor itself a lessee--(1) In general. If the lessee of
property is treated, under this section, as having purchased all or a
portion of such property and if such lessee leases such property to a
sublessee, the qualified investment with respect to such property in the
hands of the sublessee shall be determined under paragraphs (c) and (d)
of this section as if the original lessor had leased the property
directly to the sublessee for the term of the sublessee's
[[Page 428]]
lease on the date possession of the property is transferred to the
sublessee. For this purpose, property which is short-term lease property
in the hands of the lessee shall be treated as short-term lease property
in the hands of the sublessee regardless of whether such property is
leased to the sublessee subject to a net lease (within the meaning of
section 57(c)(1)(B)). In the case of property which is short-term lease
property in the hands of the sublessee, the amount for which the lessee
is treated as having acquired such property under paragraph (c) of this
section shall be reduced by an amount equal to such amount multiplied by
a fraction, the numerator of which is the term of the lease of the
sublessee and the denominator of which is the term of the lease of the
lessee.
(2) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. (a) On December 1, 1971, corporation X completes
construction of a machine at a cost of $10,000. The machine has a class
life under section 167(m) of 20 years. On December 1, 1971, X leases the
machine to corporation Y for 12 years, and Y immediately subleases the
machine to individual A for 8 years. X and Y are component members of
the same controlled group. The lease between X and Y is not a net lease
within the meaning of section 57(c)(1)(B). The fair market value of the
property on December 1, 1971, is $16,000. Both X and Y make valid
elections under this section.
(b) The property is short-term lease property and this paragraph
applies.
(c) The qualified investment of A is $6,400. Such amount is
determined by multiplying $16,000, the amount for which A would be
treated under paragraph (c)(2) of this section as having acquired the
property if it were not short-term lease property, by \8/20\.
(d) The qualified investment of Y is $2,000. Such amount is
determined by multiplying $10,000, the amount for which Y would be
treated under paragraph (c)(2) of this section as having acquired the
property if it were not short-term lease property, by \12/20\, and by
reducing the amount so determined ($6,000) by \8/12\ of such amount
($4,000) to $2,000.
(e) The qualified investment of X is $4,000. Such amount is
determined by multiplying the amount of X's qualified investment
determined under section 46(c) without regard to this section ($10,000)
by \8/20\.
(f) Property-by-property election--(1) Manner of making election.
The election of a lessor with respect to a particular property (or
properties) shall be made by filing a statement with the lessee, signed
by the lessor and including the written consent of the lessee,
containing the following information:
(i) The name, address, and taxpayer account number of the lessor and
the lessee;
(ii) The district director's office with which the income tax
returns of the lessor and the lessee are filed;
(iii) A description of each property with respect to which the
election is being made;
(iv) The date on which possession of the property (or properties) is
transferred to the lessee;
(v) The estimated useful life category of the property (or
properties) in the hands of the lessor, that is, 3 years or more but
less than 5 years, 5 years or more but less than 7 years, or 7 years or
more;
(vi) The amount for which the lessee (or sublessee) is treated as
having acquired the leased property under paragraph (c)(2) or (3) of
this section; and
(vii) If the lessor is itself a lessee, the name, address, and
taxpayer account number of the original lessor, and the district
director's office with which the income tax return of such original
lessor is filed.
(2) Time for making election. The statement referred to in
subparagraph (1) of this paragraph shall be filed with the lessee on or
before the due date (including any extensions of time) of the lessee's
return for the lessee's taxable year during which possession of the
property is transferred to the lessee, except that if such taxable year
ends after March 31, 1971, and before December 11, 1971, the statement
shall be filed with the lessee on or before the due date (including any
extensions of time) of the lessee's return for such taxable year, or on
or before October 24, 1972, whichever is later.
(3) Election is irrevocable. An election under this paragraph shall
be irrevocable as of the time the statement referred to in subparagraph
(1) of this paragraph is filed with the lessee.
(g) General election--(1) In general. In lieu of making elections on
a property-by-property basis in the manner and time prescribed in
paragraph (f) of this section, a lessor may, with respect to a
[[Page 429]]
particular taxable year of a particular lessee, make a general election
to treat such lessee as having purchased all properties possession of
which is transferred under lease by the lessor to the lessee during such
taxable year of the lessee.
(2) Manner and time for making general election. The general
election of a lessor with respect to a taxable year of a lessee shall be
made by filing a statement with the lessee, signed by the lessor and
including the written consent of the lessee, on or before the due date
(including any extensions of time) of the lessee's return for such
taxable year, except that if such taxable year ends after March 31,
1971, and before December 11, 1971, the statement shall be filed with
the lessee on or before the due date (including any extensions of time)
of the lessee's return for such taxable year, or on or before October
24, 1972, whichever is later. Such statement of general election shall
contain:
(i) The name, address, and taxpayer account number of the lessor and
the lessee;
(ii) The taxable year of the lessee with respect to which such
general election is made;
(iii) The district director's office with which the income tax
returns of the lessor and the lessee are filed;
(iv) If the lessor is itself a lessee, the name, address, and
taxpayer account number of the original lessor, and the district
director's office with which the income tax return of such original
lessor is filed.
(3) Election is irrevocable. A general election under this paragraph
shall be irrevocable as of the time the statement referred to in
subparagraph (2) of this paragraph is filed with the lessee and shall be
binding on the lessor and the lessee for the entire taxable year of the
lessee with respect to which such general election is made.
(4) Information requirement. If a lessor, with respect to a taxable
year of the lessee, makes a general election under this paragraph, such
lessor shall provide such lessee, on or before the date required for
filing the statement under subparagraph (2) of this paragraph, with a
statement (or statements) containing the information required by
paragraphs (f)(1) (iii), (iv), (v), and (vi) of this section with
respect to all properties possession of which is transferred under lease
by the lessor to the lessee during such taxable year.
(h) Signature. The statement referred to in paragraph (f)(1) or
(g)(2) of this section shall not be valid unless signed by both the
lessor and the lessee. The signature of the lessee shall constitute the
consent of the lessee to the election. The statement shall be signed by
the taxpayer or a duly authorized agent of the taxpayer. For purposes of
this section, a facsimile signature may be used in lieu of a signature
manually executed and, if used, shall be as binding as a signature
manually executed.
(i) [Reserved]
(j) Record requirements. The lessor and the lessee shall keep as a
part of their records the statement referred to in paragraph (f)(1), or
the statements referred to in paragraphs (g)(2) and (g)(4), of this
section. The lessor shall attach to his income tax return a summary
statement of all property leased during his taxable year with respect to
which an election is made. In the case of a taxable year ending after
March 31, 1971, and before December 11, 1971, a summary statement may be
filed on or before the due date (including any extensions of time) of
the return or on or before October 24, 1972, whichever is later, with
the Internal Revenue Service Center with which the return has been
filed. Such summary statement shall contain the following information:
(1) The name, address, and taxpayer account number of the lessor; and
(2) in numerical account number order, each lessee's account number,
name, and address, the estimated useful life category of the property
(or, if applicable, the estimated useful life expressed in years), and
the basis or fair market value of the property, whichever is applicable.
(k) Adjustment of rental deductions--(1) In general. The rules of
this paragraph apply only to section 38 property placed in service
before January 1, 1964, and with respect to any such property only for
taxable years of a lessee beginning before January 1, 1964. If a lessor
makes a valid election under this section with respect to property
placed in service by the lessee before January 1, 1964, section 48(g)
and Sec. 1.48-7 (relating
[[Page 430]]
to adjustments to basis of property) shall not apply to the lessor with
respect to such property. Thus, the lessor is not required to reduce
under section 48(g)(1) the basis of such property. However, if such an
election is made, the deductions otherwise allowable under section 162
to the lessee for amounts paid or accrued to the lessor under the lease
shall be adjusted in the manner provided in this paragraph. For special
adjustment for taxable years beginning after December 31, 1963, see
paragraph (m) of this section.
(2) Decrease in rental deduction. (i) The deductions otherwise
allowable under section 162 to the lessee for amounts paid or accrued to
the lessor under the lease with respect to leased property placed in
service before January 1, 1964, shall be decreased under subdivision
(ii) or (iii) of this subparagraph, whichever is applicable, by an
amount determined by reference to the credit earned on the leased
property. The ``credit earned'' on the leased property is determined by
multiplying the qualified investment (as defined in section 46(c)) with
respect to such property by 7 percent. Thus, the credit earned (and the
decrease in deductions) is determined without regard to the limitation
based on tax which, under section 46(a)(2), may limit the amount of the
credit the lessee may take into account in any one year.
(ii) If, in the case of property placed in service before January 1,
1964, the lessor, under paragraph (f)(1)(v) of this section, supplies
the lessee with the useful life of such property expressed in years,
then for each taxable year beginning before January 1, 1964, any part of
which falls within a period beginning with the month in which the leased
property is placed in service by the lessee and ending with the close of
the estimated useful life of such property (as determined under
paragraph (d) of this section), the lessee shall decrease the deduction
otherwise allowable under section 162 for each such taxable year with
respect to such property. The decrease for each such taxable year shall
be equal to (a) the credit earned, divided by (b) the estimated useful
life of the property (expressed in months), multiplied by (c) the number
of calendar months in which the leased property was held by the lessee
during such taxable year. Thus, if leased property with a basis of
$27,000 in the hands of a calendar-year lessee, and with an estimated
useful life of 10 years, is placed in service by the lessee on July 15,
1963, the lessee must decrease his section 162 deduction with respect to
the leased property for the taxable year 1963 by $94.50 ($1,890 credit
earned, divided by 120, multiplied by 6).
(iii) If, in the case of property placed in service before January
1, 1964, the lessor, under paragraph (f)(1)(v) of this section, supplies
the lessee with the useful life category of such property, then for each
taxable year beginning before January 1, 1964, during a period equal to
the shortest life of the useful life category used by the lessee in
computing qualified investment under section 46(c) with respect to the
leased property, the lessee shall decrease the deduction otherwise
allowable under section 162 for such taxable year with respect to such
property. The decrease for each such taxable year shall be equal to the
credit earned divided by such shortest life, that is, 4, 6, or 8. Such
decreases shall begin with the taxable year during which the lessee
places the property in service. Thus, if leased property with a basis of
$30,000 to the lessee, and an estimated useful life falling within the 4
years or more but less than 6 years useful life category, is placed in
service by the lessee within the lessee's taxable year ending December
31, 1962, the lessee must decrease his section 162 deduction with
respect to the leased property for each of the taxable years 1962 and
1963 by $175 ($700 credit earned divided by 4).
(iv) To the extent that a required decrease, under subdivision (ii)
or (iii) of this subparagraph, is not taken into account for any taxable
year beginning before January 1, 1964, because the deduction otherwise
allowable under section 162 for such taxable year with respect to the
leased property is less than the required decrease for such taxable
year, then the balance of the required decrease not taken into account
for such taxable year shall decrease the amount otherwise allowable as a
deduction under section 162 with respect to such property for the next
[[Page 431]]
succeeding taxable year (or years) beginning before January 1, 1964, if
any, for which a deduction is allowable with respect to such property.
Thus, if the required decrease with respect to leased property is $200
for 1962 but the lessee's deduction otherwise allowable under section
162 for such taxable year with respect to such property is only $50, the
balance of $150 must be applied in 1963 to decrease the deduction
otherwise allowable to the lessee with respect to the leased property
for such taxable year.
(v) See paragraph (b) of Sec. 1.48-7 for reduction of basis in the
case of an actual purchase of leased property by a lessee (in a taxable
year of such lessee beginning before January 1, 1964) who has been
treated as a purchaser of such property under this section.
(3) Increase in rental deductions on account of early disposition,
etc. (i) If, as a result of an early disposition, etc., in a taxable
year beginning before January 1, 1964, with respect to leased property
placed in service before such date, the lessee's tax is increased under
section 47(a) (1) or (2), or an adjustment in a carryback or carryover
is made under section 47(a)(3) by reduction of an unused credit, the
rental deductions (if any) otherwise allowable under section 162 to such
lessee for amounts paid or accrued to the lessor under the lease with
respect to such property shall be increased in an amount equal to the
total decreases previously made in the lessee's rental deductions under
subparagraph (2) of this paragraph.
(ii) Except as provided in subdivision (iii) of this subparagraph,
the increase in rental deductions described in subdivision (i) of this
subparagraph shall be taken into account as an increase in rental
deductions otherwise allowable under section 162 for the taxable year in
which the early disposition, etc., occurred.
(iii) If, after the event which caused section 47(a) (1), (2), or
(3) to apply the lessee continues the use of the property in a trade or
business or in the production of income, the increase in rental
deductions described in subdivision (i) of this subparagraph shall be
taken into account ratably over the remaining portion of the useful life
of the property which was used in making the decreases in rental
deductions with respect to the property under subparagraph (2) of this
paragraph.
(iv) If subdivision (iii) of this subparagraph applies, and if,
prior to the expiration of the useful life of the property used in
making the decreases in rental deductions, the lease is terminated other
than by actual purchase of the property by the lessee, any increase in
rental deductions not previously taken into account shall be taken into
account as an increase in rental deductions for the taxable year in
which the lease is terminated. In the case of an actual purchase of the
property by the lessee, see paragraph (e) of Sec. 1.48-7.
(l) Examples. The provisions of this section may be illustrated by
the following examples:
Example 1. X Corporation is engaged in the business of manufacturing
and leasing new and reconstructed equipment which in its hands has an
estimated useful life of 12 years. After December 31, 1961, X
Corporation constructs machine no. 1 at a cost of $20,000 and
reconstructs machine no. 2 at a cost of $5,000. On February 15, 1962, Y
Corporation, a calendar-year taxpayer, leases both machines from X
Corporation and places them in service. The fair market value of machine
no. 1 on the date on which possession is transferred to Y is $25,200.
Machine no. 1 would qualify as new section 38 property in Y's hands if
it had been purchased by Y. If X elects to treat Y as the purchaser of
machine no. 1, under paragraph (c)(2)(ii) of this section such machine
will have a basis of $25,200 in Y's hands. Under paragraph (f)(1)(v) of
this section, X supplies Y with an estimated useful life of 12 years
(expressed in years rather than useful life category) with respect to
machine no. 1 for purposes of determining Y's qualified investment. Y's
credit earned with respect to the property is $1,764 (7 percent of
$25,200). Under paragraph (k)(2)(ii) of this section, Y's deduction
attributable to the leased property for 1962 will be decreased by
$134.75 (credit earned of $1,764, divided by 144, multiplied by 11), and
for 1963 such deduction will be decreased by $147 ($1,764, divided by
144, multiplied by 12). The election is not available with respect to
machine no. 2 since a reconstructed machine would not constitute new
section 38 property if Y had purchased it. In such case, while X cannot
make the election to treat Y as a purchaser, X would be entitled to a
credit under section 38 based on its expenditure of $5,000 as an
investment in new
[[Page 432]]
section 38 property, since such amount represents cost of reconstruction
after December 31, 1961.
Example 2. Assume the same facts as in example 1 except that under
paragraph (f)(1)(v) of this section, X supplies Y with an estimated
useful life category of 8 years or more (rather than an estimated useful
life expressed in years) with respect to machine no. 1 for purposes of
determining Y's qualified investment. Under paragraph (k)(2)(iii) of
this section, Y's deduction attributable to the leased property will be
decreased by $220.50 (credit earned of $1,764, divided by 8) for each of
its taxable years 1962 and 1963.
Example 3. Assume the same facts as in example 1 except that the
lessee disposes of his interest in the lease on January 1, 1963, and
that there is an increase in Y's tax for 1963 under section 47(a)(1) in
the amount of $1,764. Under paragraph (k)(2) of this section, Y's
deductions attributable to the leased property are decreased only in
1962, and the amount of such decrease is $134.75. In 1963 there shall be
an increase of $134.75 in the deductions otherwise allowable under
section 162 for such taxable year with respect to the leased property.
Example 4. Assume the same facts as in example 1 except that during
the year 1963 the property was used by Y predominantly outside the
United States within the meaning of paragraph (g) of Sec. 1.48-1, and
thereafter was used in Y's trade or business. Under paragraph (k)(3) of
this section, the increase of $134.75 described in example 3 is taken
into account ratably as an increase in rental deductions otherwise
allowable under section 162 in the amount of $12.25 ($134.75 divided by
11 years) for 1963 and each of the 10 succeeding years.
(m) Increase in rental deductions on account of section 203(a)(2)(B)
of the Revenue Act of 1964--(1) In general. (i) Under section
203(a)(2)(B) of the Revenue Act of 1964, if, for any taxable year of a
lessee beginning before January 1, 1964, the rental deductions otherwise
allowable under section 162 to such lessee for amounts paid or accrued
to the lessor under the lease with respect to leased property placed in
service before January 1, 1964, were decreased under paragraph (k)(2) of
this section, such rental deductions shall be increased.
(ii) The increase in rental deductions described in subdivision (i)
of this subparagraph shall be in an amount equal to the total decreases
in the lessee's rental deductions previously made under paragraph (k)(2)
of this section less any increases in rental deductions made under
paragraph (k)(3) of this section.
(iii) Except as provided in subdivision (iv) of this subparagraph,
the increase in rental deductions described in subdivision (i) of this
subparagraph shall be taken into account ratably over the remaining
portion of the useful life of the property commencing with the first day
of the first taxable year beginning after December 31, 1963. For this
purpose, the useful life of the property shall be the useful life used
in making the decreases in rental deductions with respect to the
property under paragraph (k)(2) of this section.
(iv) If the lease is terminated other than by the lessee's actual
purchase of the property during a taxable year beginning after December
31, 1963, and before the end of the remaining useful life of the
property used in making the decreases in rental deductions, the amount
of the increase in rental deductions described in subdivision (i) of
this subparagraph and not previously taken into account shall be allowed
as a deduction for the taxable year in which such termination occurs.
(v) The rental deductions with respect to any section 38 property
are not to be increased under this paragraph if the lessee dies in a
taxable year beginning before January 1, 1964.
(vi) The increase in rental deductions described in subdivision (i)
of this subparagraph shall ordinarily be taken into account by the
lessee treated as the purchaser, that is, the lessee entitled to the
credit. However, if the property under the lease is transferred by the
lessee to a successor lessee in a transaction described in section 47(b)
(other than a transfer by reason of death) under which the successor
lessee assumes the lessee's obligations under the lease, such increase
in rental deductions shall be taken into account by the successor lessee
in the manner prescribed in this paragraph.
(2) Examples. The operation of this paragraph may be illustrated by
the following examples:
Example 1. (a) X Corporation acquired on January 1, 1962, an item of
new section 38 property with a basis of $24,000 and with a useful life
to the lessor of 10 years. Y Corporation, which makes its returns on the
basis of a calendar year, leased such property
[[Page 433]]
from X Corporation and placed it in service on January 2, 1962. Under
this section, X Corporation made a valid election to treat Y Corporation
as having purchased such property for purposes of the credit allowed by
section 38 and supplied the lessee with information that the property
had a useful life of 10 years. The amount of the credit earned with
respect to such property was $1,680 (7 percent of $24,000). For each of
the taxable years 1962 and 1963, Y Corporation decreased, under
paragraph (k)(2) of this section, its deductions otherwise allowable
under section 162 with respect to such property by $168 ($1,680
multiplied by \12/120\).
(b) For each of the taxable years 1964 through 1971, Y Corporation
increases its deductions otherwise allowable under section 162 for
amounts paid to X Corporation under the lease by $42 ($336 (that is,
$168 multiplied by 2) divided by the remaining useful life of 8 years).
Example 2. (a) The facts are the same as in example 1 except that
the lease is terminated on January 3, 1965.
(b) For the taxable year 1964, Y Corporation increases its
deductions otherwise allowable under section 162 by $42.
(c) For the taxable year 1965, Y Corporation increases its
deductions otherwise allowable under section 162 for the portion of the
increase which had not been taken into account as of the time of the
termination of the lease. Thus, the amount of such increase for the
taxable year 1965 is $294 ($336 minus $42).
(Sec. 38, 76 Stat. 963; 26 U.S.C. 38)
[T.D. 6731, 29 FR 6080, May 8, 1964; 29 FR 7671, June 16, 1964, as
amended by T.D. 6838, 30 FR 9060, July 20, 1965; T.D. 7203, 37 FR 17131,
17132, Aug. 25, 1972]
Sec. 1.48-5 Electing small business corporations.
(a) In general. (1) In the case of an electing small business
corporation (as defined in section 1371(b)), the basis of ``new section
38 property'' and the cost of ``used section 38 property'' placed in
service during the taxable year shall be apportioned pro rata among the
persons who are shareholders of such corporation on the last day of such
corporation's taxable year. Section 38 property shall not (by reason of
such apportionment) lose its character as new section 38 property or
used section 38 property, as the case may be. The estimated useful life
of such property in the hands of a shareholder shall be deemed to be the
estimated useful life of such property in the hands of the electing
small business corporation. The bases of all new section 38 properties
which have a useful life falling within a particular useful life
category shall be aggregated; likewise, the cost of all used section 38
properties which have a useful life falling within a particular useful
life category shall be aggregated. The total bases of new section 38
properties within each useful life category and the total cost of used
section 38 properties within each useful life category shall be
apportioned separately. The useful life categories are:
(i) 3 years or more but less than 5 years; (ii) 5 years or more but
less than 7 years; and (iii) 7 years or more. There shall be apportioned
to each person who is a shareholder of the electing small business
corporation on the last day of the taxable year of such corporation, for
his taxable year in which or with which the taxable year of such
corporation ends, his pro rata share of the total bases of new section
38 properties within each useful life category, and his pro rata share
of the total cost of used section 38 properties within each useful life
category. In determining who are shareholders of an electing small
business corporation on the last day of its taxable year, the rules of
paragraph (d)(1) of Sec. 1.1371-1 and of paragraph (a)(2) of Sec.
1.1373-1 shall apply.
(2) The total cost of used section 38 property that may be
apportioned by an electing small business corporation to its
shareholders for any taxable year of such corporation shall not exceed
$50,000. If the total cost of used section 38 property placed in service
during the taxable year by the electing small business corporation
exceeds $50,000 such corporation must select, under paragraph (c)(4) of
Sec. 1.48-3, the used section 38 property the cost of which is to be
apportioned to its shareholders.
(3) A shareholder to whom the basis (or cost) of section 38 property
is apportioned shall, for purposes of the credit allowed by section 38,
be treated as the taxpayer with respect to such property. Thus, the
total cost of used section 38 property apportioned to him by the
electing small business corporation must be taken into account as
[[Page 434]]
cost of used section 38 property in determining whether the $50,000
limitation on the cost of used section 38 property which may be taken
into account by the shareholder in computing qualified investment for
any taxable year is exceeded. If a shareholder takes into account in
determining his qualified investment any portion of the basis (or cost)
of section 38 property placed in service by an electing small business
corporation and if such property subsequently is disposed of or
otherwise ceases to be section 38 property in the hands of the
corporation, such shareholder shall be subject to the provisions of
section 47. See Sec. 1.47-4.
(b) Summary statement. An electing small business corporation shall
attach to its return a statement showing the apportionment to each
shareholder of the total bases of new, and the total cost of used,
section 38 properties within each useful life category.
(c) Example. This section may be illustrated by the following
example:
Example. 1 X Corporation, an electing small business corporation
which makes its return on the basis of the calendar year, acquires and
places in service on June 1, 1962, three new assets which qualify as new
section 38 property and three used assets which qualify as used section
38 property. The basis of each new, and the cost of each used, section
38 property and the estimated useful life of each property are as
follows:
------------------------------------------------------------------------
Basis (or Estimated useful
Asset No. cost) life
------------------------------------------------------------------------
1 (new)............................... $30,000 4 years.
2 (new)............................... 30,000 4 years.
3 (new)............................... 30,000 8 years.
4 (used).............................. 12,000 6 years.
5 (used).............................. 12,000 6 years.
6 (used).............................. 12,000 8 years.
------------------------------------------------------------------------
On December 31, 1962, X Corporation has 10 shares of stock outstanding
which are owned as follows: A owns 3 shares, B owns 2 shares, and C owns
5 shares.
(2) Under this section, the total bases of the new, and the total
cost of the used, section 38 properties are apportioned to the
shareholders of X Corporation as follows:
----------------------------------------------------------------------------------------------------------------
New--4 to 6 New--8 years Used--6 to 8 Used--8 years
Useful life category years or more years or more
----------------------------------------------------------------------------------------------------------------
Total bases or total cost..................... $60,000 $30,000 $24,000 $12,000
===============================================================
Shareholder A (\3/10\).......................... 18,000 9,000 7,200 3,600
Shareholder B (\2/10\).......................... 12,000 6,000 4,800 2,400
Shareholder C (\5/10\).......................... 30,000 15,000 12,000 6,000
----------------------------------------------------------------------------------------------------------------
Assume that shareholders A, B and C did not place in service during
their taxable years in which falls December 31, 1962 (the last day of X
Corporation's taxable year) any section 38 property and that such
shareholders did not own any interests in other electing small business
corporations, partnerships, estates, or trusts. Under section 46(c), the
qualified investment of shareholder A is $23,400, of shareholder B is
$15,600, and of shareholder C is $39,000, computed as follows:
------------------------------------------------------------------------
Applicable Qualified
Basis (or cost) percentage investment
------------------------------------------------------------------------
Shareholder A
------------------------------------------------------------------------
$18,000 (new)................................... 33\1/3\ $6,000
$9,000 (new).................................... 100 9,000
$7,200 (used)................................... 66\2/3\ 4,800
$3,600 (used)................................... 100 3,600
-----------------------
Total....................................... .......... 23,400
------------------------------------------------------------------------
Shareholder B
------------------------------------------------------------------------
$12,000 (new)................................... 33\1/3\ $4,000
$6,000 (new).................................... 100 6,000
$4,800 (used)................................... 66\2/3\ 3,200
$2,400 (used)................................... 100 2,400
-----------------------
Total....................................... .......... 15,600
------------------------------------------------------------------------
Shareholder C
------------------------------------------------------------------------
$30,000 (new)................................... 33\1/3\ $10,000
$15,000 (new)................................... 100 15,000
$12,000 (used).................................. 66\2/3\ 8,000
$6,000 (used)................................... 100 6,000
-----------------------
Total................................................... 39,000
------------------------------------------------------------------------
[T.D. 6731, 29 FR 6082, May 8, 1964, as amended by T.D. 6931, 32 FR
14040, Oct. 10, 1967; T.D. 7203, 37 FR 17133, Aug. 25, 1972]
Sec. 1.48-6 Estates and trusts.
(a) In general. (1) In the case of an estate or trust, the basis of
``new section 38 property'' and the cost of ``used section 38 property''
placed in service during the taxable year shall be apportioned among the
estate or trust and
[[Page 435]]
its beneficiaries on the basis of the income of such estate or trust
allocable to each. Section 38 property shall not (by reason of such
apportionment) lose its character as new section 38 property or used
section 38 property, as the case may be. The estimated useful life of
such property in the hands of a beneficiary shall be deemed to be the
estimated useful life of such property in the hands of the estate or
trust. The bases of all new section 38 properties which have a useful
life falling within a particular useful life category shall be
aggregated; likewise, the cost of all used section 38 properties which
have a useful life falling within a particular useful life category
shall be aggregated. The total bases of new section 38 properties within
each useful life category and the total cost of used section 38
properties within each useful life category shall be apportioned
separately. The useful life categories are:
(i) 3 years or more but less than 5 years; (ii) 5 years or more but
less than 7 years; and (iii) 7 years or more. There shall be apportioned
to the estate or trust for its taxable year, and to each beneficiary of
such estate or trust for his taxable year in which or with which the
taxable year of such estate or trust ends, his share (as determined
under paragraph (b) of this section) of the total bases of new section
38 properties within each useful life category, and his share of the
total cost of used section 38 properties within each useful life
category.
(2) The total cost of used section 38 property that may be
apportioned among an estate or trust and its beneficiaries for any
taxable year of such estate or trust shall not exceed $50,000. If the
total cost of used section 38 property placed in service during the
taxable year by the estate or trust exceeds $50,000, such estate or
trust must select, under paragraph (c)(4) of Sec. 1.48-3, the used
section 38 property the cost of which is to be apportioned among such
estate or trust and its beneficiaries.
(3) A beneficiary to whom the basis (or cost) of section 38 property
is apportioned shall, for purposes of the credit allowed by section 38,
be treated as the taxpayer with respect to such property. Thus, the
total cost of used section 38 property apportioned to him by the estate
or trust must be taken into account as cost of used section 38 property
in determining whether the $50,000 limitation on the cost of used
property which may be taken into account by the beneficiary in computing
qualified investment for any taxable year is exceeded. If a beneficiary
takes into account in determining his qualified investment any portion
of the basis (or cost) of section 38 property placed in service by an
estate or trust and if such property subsequently is disposed of or
otherwise ceases to be section 38 property in the hands of estate or
trust, such beneficiary shall be subject to the provisions of section
47. See Sec. 1.47-5.
(4) For purposes of this section, the term ``beneficiary'' includes
heir, legatee, and devisee.
(5) If during the taxable year of an estate or trust a beneficiary's
interest in the income of such estate or trust terminates, the basis (or
cost) of section 38 property placed in service by such estate or trust
after such termination shall not be apportioned to such beneficiary.
(b) Share. A trust's, estate's, or beneficiary's share of the total
bases of new section 38 properties, and the total cost of used section
38 properties, within a useful life category shall be--
(1) The total bases of new (or the total cost of used) section 38
properties which have a useful life falling within such useful life
category placed in service in the taxable year of the estate or trust,
multiplied by
(2) The amount of income allocable to such estate or trust or to
such beneficiary for such taxable year, divided by
(3) The sum of the amounts of income allocable to such estate or
trust and all its beneficiaries taken into account under subparagraph
(2) of this paragraph.
(c) Limitation based on amount of tax. In the case of an estate or
trust, the $25,000 amount specified in section 46(a)(2), relating to
limitation based on amount of tax, shall be reduced for the taxable year
to--
(1) $25,000, multiplied by
(2) The qualified investment with respect to the total bases of new
section
[[Page 436]]
38 properties plus the qualified investment with respect to the total
cost of used section 38 properties, apportioned to such estate or trust
under paragraph (a) of this section, divided by
(3) The qualified investment with respect to the total bases of all
new section 38 properties plus the qualified investment with respect to
the total cost of all used section 38 properties, apportioned among such
estate or trust and its beneficiaries.
For purposes of subparagraph (3) of this paragraph, cost of used section
38 property shall not be considered as apportioned to any beneficiary to
the extent that such cost is not taken into account by such beneficiary
in computing qualified investment in used section 38 property.
(d) Summary statement. An estate or trust shall attach to its return
a statement showing the apportionment to such estate or trust and to
each beneficiary of the total bases of new, and the total cost of used,
section 38 properties within each useful life category.
(e) Example. This section may be illustrated by the following
example:
Example. 1 XYZ Trust, which makes its return on the basis of the
calendar year, acquires and places in service on June 1, 1962, three new
assets which qualify as new section 38 property and three used assets
which qualify as used section 38 property. The basis of the new, and the
cost of the used, section 38 property and the estimated useful life of
each property are as follows:
------------------------------------------------------------------------
Basis (or Estimated useful
Asset No. cost) life
------------------------------------------------------------------------
1 (new)............................... $30,000 4 years.
2 (new)............................... 30,000 4 years.
3 (new)............................... 30,000 8 years.
4 (used).............................. 12,000 6 years.
5 (used).............................. 12,000 6 years.
6 (used).............................. 12,000 8 years.
------------------------------------------------------------------------
For the taxable year 1962 the income of XYZ Trust is $20,000 which is
allocable as follows: $10,000 to XYZ Trust, $6,000 to beneficiary A, and
$4,000 to beneficiary B. Beneficiaries A and B make their returns on the
basis of a calendar year.
(2) Under this section, the total bases of the new, and the total
cost of the used, section 38 properties are apportioned to XYZ Trust and
its beneficiaries as follows:
----------------------------------------------------------------------------------------------------------------
New--4 to 6 New--8 years Used--6 to 8 Used--8 years
Useful life category years or more years or more
----------------------------------------------------------------------------------------------------------------
Total bases or total cost................... $60,000 $30,000 $24,000 $12,000
===============================================================
XYZ Trust ($10,000/20,000)...................... 30,000 15,000 12,000 6,000
Beneficiary A ($6,000/20,000)................... 18,000 9,000 7,200 3,600
Beneficiary B ($4,000/20,000)................... 12,000 6,000 4,800 2,400
----------------------------------------------------------------------------------------------------------------
Assume that beneficiary A placed in service during his taxable year 1962
new section 38 property with a basis of $10,000 and an estimated useful
life of 8 years. Also, assume that beneficiary B did not place in
service during his taxable year 1962 any section 38 property and that
beneficiaries A and B did not own any interests in other trusts,
estates, partnerships, or electing small business corporations. Under
section 46(c), the qualified investment of XYZ Trust is $39,000, of
beneficiary A is $33,400, and of beneficiary B is $15,600, computed as
follows:
------------------------------------------------------------------------
Applicable Qualified
Basis (or cost) percentage investment
------------------------------------------------------------------------
XYZ Trust
------------------------------------------------------------------------
$30,000 (new)................................... 33\1/3\ $10,000
$15,000 (new)................................... 100 15,000
$12,000 (used).................................. 66\2/3\ 8,000
$6,000 (used)................................... 100 6,000
-----------------------
Total....................................... .......... 39,000
------------------------------------------------------------------------
Beneficiary A
------------------------------------------------------------------------
$18,000 (new)................................... 33\1/3\ $6,000
$9,000 (new).................................... 100 9,000
$7,200 (used)................................... 66\2/3\ 4,800
$3,600 (used)................................... 100 3,600
-----------
.......... 23,400
===========
$10,000 (new)................................... 100 10,000
-----------------------
Total....................................... .......... 33,400
------------------------------------------------------------------------
Beneficiary B
------------------------------------------------------------------------
$12,000 (new)................................... 33\1/3\ $4,000
$6,000 (new).................................... 100 6,000
$4,800 (used)................................... 66\2/3\ 3,200
$2,400 (used)................................... 100 2,400
-----------------------
Total....................................... .......... 15,600
------------------------------------------------------------------------
[[Page 437]]
(3) In the case of XYZ Trust, the $25,000 amount specified in
section 46(a)(2) is reduced to $12,500, computed as follows: (i)
$25,000, multiplied by (ii) $39,000 (qualified investment apportioned to
the trust), divided by (iii) $78,000 (total qualified investment
apportioned among such trust ($39,000), beneficiary A ($23,400), and
beneficiary B ($15,600)).
[T.D. 6731, 29 FR 6083, May 8, 1964, as amended by T.D. 6931, 32 FR
14040, Oct. 10, 1967; T.D. 6958, 33 FR 9171, June 21, 1968; T.D. 7203,
37 FR 17133, Aug. 25, 1972]
Sec. 1.48-9 Definition of energy property.
(a) General rule--(1) In general. Under section 48(l)(2), energy
property means property that is described in at least one of 6
categories of energy property and that meets the other requirements of
this section. If property is described in more than one of these
categories, or is described more than once in a single category, only a
single energy investment credit is allowed. In that case, the energy
investment credit will be allowed under the category the taxpayer
chooses by indicating the chosen category on Form 3468, Schedule B. The
6 categories of energy property are:
(i) Alternative energy property,
(ii) Solar or wind energy property,
(iii) Specially defined energy property,
(iv) Recycling equipment,
(v) Shale oil equipment, and
(vi) Equipment for producing natural gas from geopressured brine.
(2) Depreciable property with 3-year useful life. Property is not
energy property unless depreciation (or amortization in lieu of
depreciation) is allowable and the property has an estimated useful life
(determined at the time when the property is placed in service) of 3
years or more.
(3) Effective date rules. To be energy property--
(i) If property is constructed, reconstructed or erected by the
taxpayer, the construction, reconstruction, or erection must be
completed after September 30, 1978, or
(ii) If the property is acquired, the original use of the property
must (A) commence with the taxpayer and (B) commence after September 30,
1978, and before January 1, 1983.
For transitional rules, see section 48(m).
(4) Cross references. (i) To determine if depreciation (or
amortization in lieu of depreciation) is allowable for property, see
Sec. 1.48-1(b).
(ii) For the meaning of ``estimated useful life'', see Sec. 1.46-
3(e)(7).
(iii) The meaning of ``acquired'', ``original use'',
``construction'', ``reconstruction'', and ``erection'' is determined
under the principles of Sec. 1.48-2(b).
(iv) For the definition of energy investment credit (energy credit),
see section 48(o)(2).
(v) For special rules relating to public utility property, see
paragraph (n) of this section.
(b) Relationship to section 38 property--(1) In general. (i) Energy
property is treated under section 48(l)(1) as meeting the general
requirements for section 38 property set forth in section 48(a)(1). For
example, structural components of a building may qualify for the energy
credit. In addition, the exclusion from section 38 property under
section 48(a)(3) (lodging limitation) does not apply to energy property.
For purposes of the energy credit, energy property is treated as section
38 property solely by reason of section 48(l)(1). For example, if
property ceases to be energy property, it ceases to be section 38
property for all purposes relating to the energy credit and, thus, if
subject to recapture under section 47. See Sec. 1.47-1(h).
(ii) See the effective date rules under paragraph (a)(3) of this
section for limitations on the eligibility of property as energy
property.
(iii) Section 48(l)(1) does not affect the character of property
under sections of the Code outside the investment credit provisions. For
example, structural components of a building that are treated as section
38 property under section 48(l)(1) remain section 1250 property and are
not section 1245 property.
(2) Other section 48 rules apply. (i) In general, section 48(a)
otherwise applies in determining if energy property is section 38
property. Thus, energy property excluded from the definition of section
38 property under section 48(a) (except by reason of section 48(a)(1) or
[[Page 438]]
(a)(3)) is not eligible for the energy credit. For example, energy
property used predominantly outside the United States (section 48(a)(2))
or used by tax exempt organizations (section 48(a)(4)), in general, is
not treated as section 38 property for any purpose and thus, is not
eligible for the energy credit.
(ii) Other rules of section 48, such as those for leased property
under section 48(d), also apply to energy property.
(3) Regular credit denied for certain energy property. In computing
the amount of credit under section 46(a)(2), the regular percentage does
not apply to any energy property which, but for section 48(l)(1), would
not be section 38 property. See section 46(a)(2)(D). For example, energy
property used for lodging (section 48(a)(3)) and, in general, structural
components of a building (section 48(a)(1)(B)) re not eligible for the
regular credit even though they may be eligible for the energy credit.
However, a structural component of a qualified rehabilitated building
(as defined in section 48(g)(1)) or a single purpose agricultural or
horticultural structure (as defined in section 48(p)) may qualify for
the regular credit without regard to section 48(l)(1).
(c) Alternative energy property--(1) In general. Alternative energy
property means property described in paragraphs (c)(3) through (10) of
this section. In general alternative energy property includes certain
property that uses an alternate substance as a fuel or feedstock or
converts an alternate substance to a synthetic fuel and certain
associated equipment.
(2) Alternate substance. (i) An alternate substance is any substance
or combination of substances other than an oil or gas substance.
Alternate substances include coal, wood, and agricultural, industrial,
and municipal wastes or by-products. Alternate substances do not include
synthetic fuels or other products that are produced from an alternate
substance and that have undergone a chemical change as described in
paragraph (c)(5)(ii) of this section. For example, methane produced from
landfills is not an alternate substance; rather it is a synthetic fuel
produced from an alternate substance. However, preparing an alternate
substance for use as a fuel or feedstock or for conversion into a fuel
does not create a new product if no chemical change occurs. For example,
pelletizing, drying, compacting, and liquefying do not result in a new
product if no chemical change occurs.
(ii) The term ``oil or gas substance'' means--
(A) Oil or gas and
(B) Any primary product of oil or gas.
(iii) For the definition of primary product of oil or gas, see Sec.
1.993-3(g)(3)(i), (ii), and (vi). Thus, petrochemicals are not primary
products of oil or gas.
(3) Boiler. (i) A boiler that uses an alternate substance as its
primary fuel is alternative energy property.
(ii) A boiler is a device for producing vapor from a liquid.
Boilers, in general, have a burner in which fuel is burned. A boiler
includes a fire box, boiler tubes, the containment shell, pumps,
pressure and operating controls, and safety equipment, but not pollution
control equipment (as defined in paragraph (c)(8) of this section).
(iii) A ``primary fuel'' is a fuel comprising more than 50 percent
of the fuel requirement of an item of equipment, measured in terms of
Btu's for the remainder of the taxable year from the date the equipment
is placed in service and for each taxable year thereafter. Electricity
and waste heat are not fuels. For example, electric boilers do not
qualify as alternative energy property even if the electricity is
derived from an alternate substance.
(4) Burners. (i) A burner for a combustor other than a burner
described in paragraph (c)(3)(ii) of this section is alternative energy
property if the burner uses an alternate substance as its primary fuel
(as defined in paragraph (c)(3)(iii) of this section).
(ii) A burner is the part of a combustor that produces a flame. A
combustor is a process heater which includes ovens, kilns, and furnaces.
(iii) A burner includes equipment (such as conveyors, flame control
devices, and safety monitoring devices) located at the site of the
burner and necessary to bring the alternate substance to the burner.
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(5) Synthetic fuel production equipment. (i) Equipment (synthetic
fuel equipment) that converts an alternate substance into a synthetic
solid, liquid, or gaseous fuel (other than coke or coke gas) is
alternative energy property. Synthetic fuel production equipment does
not include equipment, such as an oxygen plant, that is not directly
involved in the treatment of an alternate substance, but produces a
substance that is, like the alternate substance, a basic feedstock or
catalyst used in the conversion process. Equipment is not eligible if it
is used beyond the point at which a substance usable as a fuel has been
produced. Equipment is eligible only to the extent of the equipment's
cost or basis allocable to the annual production of substances used as a
fuel or used in the production of a fuel. For example, assume for the
taxable year that 50 percent of the output of equipment is used to
produce alcohol for production of whiskey and 50 percent is used to
produce alcohol for use in a fuel mixture, such as gasohol. The alcohol
production equipment qualifies as synthetic fuel equipment but only to
the extent of one-half of its cost or basis. If, in a later taxable
year, the equipment is used exclusively to produce whiskey, all of the
equipment ceases to be synthetic fuel equipment.
(ii) A fuel is a material that produces usable heat upon combustion.
To be ``synthetic'', the fuel either must differ significantly in
chemical composition, as opposed to physical composition, from the
alternate substance used to produce it or, in the case of solid fuel
produced from biomass, the chemical change must consist of
defiberization. Examples of synthetic fuels include alcohol derived from
coal, peat, and vegetative matter, such as wood and corn, and methane
from landfills.
(iii) Synthetic fuel equipment includes coal gasification equipment,
coal liquefaction equipment, equipment for recovering methane from
landfill, and equipment that converts biomass to a synthetic fuel.
(iv) Synthetic fuel equipment does not include equipment that merely
mixes an alternate substance with another substance. For example,
synthetic fuel equipment includes neither equipment that mixes coal and
water to produce a slurry nor equipment that mixes alcohol and gasoline
to produce gasohol. Equipment used to produce coke or coke gas, such as
coke ovens, is also ineligible.
(6) Modification equipment. (i) Alternative energy property includes
equipment (modification equipment) designed to modify existing
equipment. For the definition of ``existing,'' see paragraph (l)(1)(i)
of this section. To be eligible, the modification must result in a
substitution for the remainder of the taxable year from the date the
equipment is placed in service and for each taxable year thereafter of
the items in paragraph (c)(6)(ii)(A) or (B) of this section for all or a
portion of the oil or gas substance used as a fuel or feedstock. As a
result of the modification, the substituted alternate substance must
comprise at least 25 percent of the fuel or feedstock (determined on the
basis of Btu equivalency). If the modification also increases the
capacity of the equipment, only the incremental cost (as defined in
paragraph (k) of this section) of the equipment qualifies.
(ii) The substitutes for an oil or gas substance are--
(A) An alternate substance or
(B) A mixture of oil and an alternate substance.
(iii) Modification equipment does not include replacements or a
boiler of burner. If the boiler or burner is replaced, the items must be
described in paragraph (c) (3) or (4) of this section to qualify as
alternative energy property. Modification may include, however,
replacements of components of a boiler or burner, such as a heat
exchanger.
(iv) The following examples illustrate this paragraph (c)(6).
Example 1. On January 1, 1980, corporation X is using oil to fuel
its boiler. On June 1, 1980, X modifies the boiler to permit
substitution of a coal and oil mixture for 40 percent of X's oil fuel
needs. The mixture consists 75 percent of oil and 25 percent of coal.
The equipment modifying the boiler does not qualify as modification
equipment because the alternate substance comprises only 10 percent of
the fuel.
Example 2. Assume the same facts as in example 1 except 75 percent
of the mixture is coal. The equipment modifying the boiler qualifies.
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Example 3. Assume the same facts as in example 2 except, instead of
substituting an oil and coal mixture for 40 percent of X's oil fuel
needs, X uses the modification to expand the boiler's fuel capacity by
40 percent using the mixture as additional fuel. The additional fuel
mixture comprises only 28 percent of X's total fuel needs. Thus, even
though 75 percent of the additional fuel mixture is an alternate
substance, the boiler does not qualify as modification equipment because
the alternate substance comprises only 21 percent of the total fuel.
(7) Equipment using coal as feedstock. Equipment that uses coal
(including lignite) to produce a feedstock for the manufacture of
chemicals, such as petrochemicals, or other products is alternative
energy property. Equipment is not eligible if it is not directly
involved in the treatment of coal or a coal product, but produces a
substance that is, like coal, a basic feedstock or catalyst used in the
coal conversion process. Equipment is not eligible if it is used beyond
the point at which the first product marketable as a feedstock has been
produced. Equipment used to produce coke or coke gas, such as coke
ovens, is ineligible.
(8) Pollution control equipment. (i) Pollution control equipment is
alternative energy property. Eligible equipment is limited to property
or equipment to the extent it qualifies as a pollution control facility
under section 103(b)(4)(F) and the regulations thereunder except that,
if control of pollution is not the only significant purpose (within the
meaning of those regulations), only the incremental cost (as defined in
paragraph (k) of this section) of the equipment qualifies. However, if a
Treasury decision changes the regulations under section 103(b)(4)(F)
and, thus, the rules reflected in this subdivision (i), the rules as
changed will apply as of the effective date of the Treasury decision.
(ii) To be eligible, the equipment must be required by a Federal,
State, or local government regulation to be installed on, or used in
connection with, eligible alternative energy property (as defined in
paragraph (c)(8)(v) of this section).
(iii) Under section 48(l)(3)(D) equipment is not eligible if
required by a Federal, State, or local government regulation in effect
on October 1, 1978, to be installed on, or in connection with, property
using coal (including lignite) as of October 1, 1978.
(iv) Under this subparagraph (8), pollution control equipment is
required by regulation if it would be necessary to install the equipment
to satisfy the requirements of any applicable law, including nuisance
law. The pollution control equipment need not be specifically identified
in the applicable law. If several different types of equipment may be
used to comply with the applicable law, each type of equipment is
considered necessary to satisfy the requirements of the law. An order
permitting a taxpayer to delay compliance with any applicable law is
disregarded.
(v) Under this subparagraph (8) ``eligible alternative energy
property'' is energy property (as defined in section 48 (l)(2))
described in paragraphs (c) (3) through (7) of this section. If
equipment otherwise qualifying as pollution control equipment is
installed on, or used in connection with, both eligible alternative
energy property and property other than eligible alternative energy
property, only the incremental cost (as defined in paragraph (k) of this
section) of the equipment qualifies.
(vi) Examples. The following examples illustrate this subparagraph
(8). Assume that the property or equipment in the examples are described
in Sec. 1.103-8(g)(2)(ii) and that their only purpose is control of
pollution.
Example 1. On October 1, 1978, corporation X acquires and places in
service in State A a paper mill. The facility includes a boiler the
primary fuel for which is wood chips. The facility includes equipment
necessary to comply with pollution control standards in effect on
October 1, 1978 in State A. This equipment qualifies as pollution
control equipment.
Example 2. On October 1, 1978, corporation Y was burning coal at its
facility in State B. The emissions from the facility exceeded State air
pollution control requirements in effect on October 1, 1978. On January
1, 1979, X installed cyclone separators to comply with the State
pollution control requirements. The cyclone separators do not qualify as
pollution control equipment.
Example 3. Assume the same facts as in example 2 except that Y
installs a baghouse instead of cyclone separators to meet more stringent
standards that take effect on December 31, 1978. The baghouse qualifies
as pollution control equipment because the
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baghouse was not necessary to meet the standards in effect on October 1,
1978.
Example 4. On October 1, 1978, corporation Z is burning coal at its
facility in State C. The emissions from that facility exceed State air
pollution control standards in effect on October 1, 1978. C orders Z to
install cyclone separators before January 1, 1979. However, C allows Z
to operate its facility until January 1, 1979, under less stringent
interim standards applicable only to Z. The separators do not qualify as
pollution control equipment. The delayed compliance order is
disregarded.
(9) Handling and preparation equipment. (i) Alternative energy
property includes equipment (handling and preparation equipment) used
for unloading, transfer, storage, reclaiming from storage, or
preparation of an alternate substance for use in eligible alternative
energy property (as defined in paragraph (c)(9)(ii) of this section).
Handling and preparation equipment must be located at the site the
alternate substance is used as a fuel or feedstock. For example,
equipment used to screen and prepare coal for use at a power plant
qualifies if located at the plant. However, similar equipment located at
the coal mine would not qualify.
(ii) Under this subparagraph (9), ``eligible alternative energy
property'' is energy property (as defined in section 48(l)(2)) described
in paragraphs (c) (3) through (8) of this section. If equipment
otherwise qualifying as handling and preparation equipment is installed
on, or used in connection with, property other than eligible alternative
energy property, only the incremental cost (as defined in paragraph (k)
of this section) of the equipment qualifies.
(iii) The term ``preparation'' includes washing, crushing, drying,
compacting, and weighing of an alternate substance. Handling and
preparation equipment also includes equipment for shredding, chopping,
pulverizing, or screening agricultural or forestry byproducts at the
site of use.
(iv) Handling and preparation equipment does not include equipment,
such as coal slurry pipelines and railroad cars, that transports a fuel
or a feedstock to the site of its use.
(10) Geothermal equipment--(i) Alternative energy property includes
equipment (geothermal equipment) that produces, distributes, or uses
energy derived from a geothermal deposit (as defined in Sec. 1.44C-
2(h)).
(ii) In general, production equipment includes equipment necessary
to bring geothermal energy from the subterranean deposit to the surface,
including well-head and downhole equipment (such as screening or
slotting liners, tubing, downhole pumps, and associated equipment).
Reinjection wells required for production also may qualify. Production
does not include exploration and development.
(iii) Distribution equipment includes equipment that transports
geothermal steam or hot water from a geothermal deposit to the site of
ultimate use. If geothermal energy is used to generate electricity,
distribution equipment includes equipment that transports hot water from
the geothermal deposit to a power plant. Distribution equipment also
includes components of a heating system, such as pipes and ductwork that
distribute within a building the energy derived from the geothermal
deposit.
(iv) Geothermal equipment includes equipment that uses energy
derived both from a geothermal deposit and from sources other than a
geothermal deposit (dual use equipment). Such equipment, however, is
geothermal equipment (A) only if its use of energy from sources other
than a geothermal deposit does not exceed 25 percent of its total energy
input in an annual measuring period and (B) only to the extent of its
basis or cost allocable to its use of energy from a geothermal deposit
during an annual measuring period. An ``annual measuring period'' for an
item of dual use equipment is the 365 day period beginning with the day
it is placed in service or a 365 day period beginning the day after the
last day of the immediately preceding annual measuring period. The
allocation of energy use required for purposes of paragraph (c)(10)(iv)
(A) and (B) of this section may be made by comparing, on a Btu basis,
energy input to dual use equipment from the geothermal deposit with
energy input from other sources. However, the Commissioner may accept
any other method that, in his opinion, accurately establishes the
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relative annual use by dual use equipment of energy derived from a
geothermal deposit and energy derived from other sources.
(v) The existence of a backup system designed for use only in the
event of a failure in the system providing energy derived from a
geothermal deposit will not disqualify any other equipment. If
geothermal energy is used to generate electricity, equipment using
geothermal energy includes the electrical generating equipment, such as
turbines and generators. However, geothermal equipment does not include
any electrical transmission equipment, such as transmission lines and
towers, or any equipment beyond the electrical transmission stage, such
as transformers and distribution lines.
(vi) Examples. The following examples illustrate this subparagraph
(10):
Example 1. On October 1, 1979, corporation X, a calendar year
taxpayer, places in service a system which heats its office building by
circulating hot water heated by energy derived from a geothermal deposit
through the building. Geothermal equipment includes the circulation
system, including the pumps and pipes which circulate the hot water
through the building.
Example 2. The facts are the same as in Example 1, except that
corporation X also places in service a boiler to produce hot water for
heating the building exclusively in the event of a failure of the
geothermal equipment. Such a boiler is not geothermal equipment, but the
existence of such a backup system does not serve to disqualify property
eligible in Example 1.
Example 3. The facts are the same as in Example 1, except that the
water heated by energy derived from a geothermal deposit is not hot
enough to provide sufficient heat for the building. Therefore, the
system includes an electric boiler in which the water is heated before
being circulated in the heating system. Assume that, on a Btu basis,
eighty percent of the total energy input to the circulating system
during the 365 day period beginning on October 1, 1979, is energy
derived from a geothermal deposit. The boiler is not geothermal
equipment. For the 1979 taxable year, eighty percent of the circulating
system is geothermal equipment because eighty percent of its basis or
cost is allocable to use of energy from a geothermal deposit. If, in a
subsequent taxable year, the basis or cost allocable to use of energy
from a geothermal deposit falls below eighty percent, recapture may be
required under section 47 and Sec. 1.47-1(h). Thus, if, on a Btu basis,
only 70 percent of the total energy input to the circulating system for
the 365 day period beginning October 1, 1980, is energy derived from a
geothermal deposit, then there will be complete recapture of the credit
during the 1980 taxable year. If, however, for that 365 day period, the
portion of the total energy input that is derived from a geothermal
deposit is less than 80 percent but greater than or equal to 75 percent,
then only a proportional amount of credit will be recaptured during the
1980 taxable year. No additional credit is allowable in a subsequent
taxable year, however, if the portion of the basis or cost allocable to
use of energy from a geothermal deposit increases above what it was for
a previous taxable year (see Sec. 1.46-3(d)(4)(i)).
Example 4. Corporation Y acquires a commercial vegetable dehydration
system in 1981. The system operates by placing fresh vegetables on a
conveyor belt and moving them through a dryer. The conveyor belt is
powered by electricity. The dryer uses solely energy derived from a
geothermal deposit. The dryer is geothermal equipment while the
equipment powered by electricity does not qualify.
(d) Solar energy property--(1) In general. Energy property includes
solar energy property. The term ``solar energy property'' includes
equipment and materials (and parts related to the functioning of such
equipment) that use solar energy directly to (i) generate electricity,
(ii) heat or cool a building or structure, or (iii) provide hot water
for use within a building or structure. Generally, those functions are
accomplished through the use of equipment such as collectors (to absorb
sunlight and create hot liquids or air), storage tanks (to store hot
liquids), rockbeds (to store hot air), thermostats (to activate pumps or
fans which circulate the hot liquids or air), and heat exchangers (to
utilize hot liquids or air to create hot air or water). Property that
uses, as an energy source, fuel or energy derived indirectly from solar
energy, such as ocean thermal energy, fossil fuel, or wood, is not
considered solar energy property.
(2) Passive solar excluded--(i) Solar energy property excludes the
materials and components of ``passive solar systems,'' even if combined
with ``active solar systems.''
(ii) An active solar system is based on the use of mechanically
forced energy transfer, such as the use of fans or pumps to circulate
solar generated energy.
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(iii) A passive system is based on the use of conductive,
convective, or radiant energy transfer. Passive solar property includes
greenhouses, solariums, roof ponds, glazing, and mass or water trombe
walls.
(3) Electric generation equipment. Solar energy property includes
equipment that uses solar energy to generate electricity, and includes
storage devices, power conditioning equipment, transfer equipment, and
parts related to the functioning of those items. In general, this
process involves the transformation of sunlight into electricity through
the use of such devices as solar cells or other collectors. However,
solar energy property used to generate electricity includes only
equipment up to (but not including) the stage that transmits or uses
electricity.
(4) Pipes and ducts. Pipes and ducts that are used exclusively to
carry energy derived from solar energy are solar energy property. Pipes
and ducts that are used to carry both energy derived from solar energy
and energy derived from other sources are solar energy property (i) only
if their use of energy other than solar energy does not exceed 25
percent of their total energy input in an annual measuring period and
(ii) only to the extent of their basis or cost allocable to their use of
solar energy during an annual measuring period. (See paragraph (d)(6) of
this section for the definition of ``annual measuring period'' and for
rules relating to the method of allocation.)
(5) Specially adapted equipment. Equipment that uses solar energy
beyond the distribution stage is eligible only if specially adapted to
use solar energy.
(6) Auxiliary equipment. Solar energy property does not include
equipment (auxiliary equipment), such as furnaces and hot water heaters,
that use a source of power other than solar or wind energy to provide
usable energy. Solar energy property does include equipment, such as
ducts and hot water tanks, which is utilized by both auxiliary equipment
and solar energy equipment (dual use equipment). Such equipment is solar
energy property (i) only if its use of energy from sources other than
solar energy does not exceed 25 percent of its total energy input in an
annual measuring period and (ii) only to the extent of its basis of cost
allocable to its use of solar or wind energy during an annual measuring
period. An ``annual measuring period'' for an item of dual use equipment
is the 365 day period beginning with the day it is placed in service or
a 365 day period beginning the day after the last day of the immediately
preceding annual measuring period. The allocation of energy use required
for purposes of paragraphs (d)(6) (i) and (ii) of this section may be
made by comparing, on a Btu basis, energy input to dual use equipment
from solar energy with energy input from other sources. However, the
Commissioner may accept any other method that, in his opinon, accurately
establishes the relative annual use by dual use equipment of solar
energy and energy derived from other sources.
(7) Solar process heat equipment. Solar energy property does not
include equipment that uses solar energy to generate steam at high
temperatures for use in industrial or commercial processes (solar
process heat).
(8) Example. The following example illustrates this paragraph (d).
Example. (a) In 1979, corporation X, a calendar year taxpayer,
constructs an apartment building and purchases equipment to convert
solar energy into heat for the building. Corporation X also installs an
oil-fired water heater and other equipment to provide a backup source of
heat when the solar energy equipment cannot meet the energy needs of the
building. For purposes of this example, all equipment is placed in
service on October 1, 1979. On a Btu basis, eighty percent of the total
energy input to the dual use equipment during the 365 day period
beginning October 1, 1979, is from solar energy.
(b) The items purchased, in addition to the water heater, include a
roof solar collector, a heat exchanger, a hot water tank, a control
component, pumps, pipes, fan-coil units, and valves. Assume the fan-coil
units could be used with energy derived from an oil or gas substance
without significant modification. All items are depreciable and have a
useful life of three years or more. The use of the equipment to heat the
building is the first use to which the equipment has been put.
(c) Water is pumped from the basement through pipes to the roof
solar collector. Heated water returns through pipes to a heat exchanger
which transfers heat to the water in the hot water tank.
(d) The hot water tank and the oil-fired water heater utilize the
same distribution
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pipe. Pumps and valves at the points of connection between the hot water
tank, the oil-fired water heater, and the distribution pipe regulate the
auxiliary energy supply use. They also prevent the oil-fired water
heater from heating water in the hot water tank.
(e) An integrated control component determines whether hot water
from the hot water tank or from the oil-fired water heater is
distributed to fan-coil units located throughout the building.
(f) The roof solar collector is solar energy property. The pump that
moves the water to the roof collector and the pipes between the roof
collector and the hot water tank qualify because they are solely related
to transporting solar heated water. The hot water tank qualifies because
it stores water heated solely by solar radiation. The heat exchanger
also qualifies.
(g) The oil-fired water heater does not qualify as solar energy
property because it is auxiliary equipment.
(h)(1) Because the distribution pipe, the control component, and the
pumps and valves serve the oil-fired water heater as well as the solar
energy equipment; they qualify only to the extent of eighty percent of
their cost or basis, the portion allocable to use of solar energy. If,
in a subsequent taxable year, the basis or cost allocable to their use
of solar energy falls below eighty percent, recapture may be required
under section 47 and Sec. 1.47-1(h). Thus, if, on a Btu basis, only 70
percent of the total energy input to that equipment for the 365 day
period beginning October 1, 1980, is from solar energy, then there will
be complete recapture of the credit during the 1980 taxable year. If,
however, for that 365 day period, the portion of that equipment's total
energy input that is from solar energy is less than 80 percent but
greater than or equal to 75 percent, then only a proportional amount of
credit will be recaptured during the 1980 taxable year. No additional
credit is allowable for the equipment in a subsequent taxable year,
however, if the portion of its basis or cost allocable to use of solar
energy increases above what it was for a previous taxable year (see
Sec. 1.46-3 (d)(4)(i)).
(2) The fan-coil units do not qualify as solar energy property
because they are not specially adapted to use energy derived from solar
energy.
(e) Wind energy property--(1) In general. Energy property includes
wind energy property. Wind energy property is equipment (and parts
related to the functioning of that equipment) that performs a function
described in paragraph (e)(2) of this section. In general, wind energy
property consists of a windmill, wind-driven generator, storage devices,
power conditioning equipment, transfer equipment, and parts related to
the functioning of those items. Wind energy property does not include
equipment that transmits or uses electricity derived from wind energy.
In addition, limitations apply similar to those set forth in paragraphs
(d) (5), (6), and (8) of this section. For example, if equipment is used
by both auxiliary equipment and wind energy equipment, such equipment is
wind energy property only if its use of energy other than wind energy
does not exceed 25 percent of its total energy input in an annual
measuring period and only to the extent of its basis or cost allocable
to its use of wind energy during an annual measuring period.
(2) Eligible functions. Wind energy property is limited to equipment
(and parts related to the functioning of that equipment) that--
(i) Uses wind energy to heat or cool, or provide hot water for use
in, a building or structure, or
(ii) Uses wind energy to generate electricity (but not mechanical
forms of energy).
(f) Specially defined energy property--(1) In general. Specially
defined energy property means only those items described in paragraphs
(f) (4) through (14) of this section that meet the requirements of
paragraph (f)(2) of this section. The items described in paragraphs (f)
(4) through (14) of this section also consist of related equipment, such
as fans, pumps, ductwork, piping, and controls, the installation of
which is necessary for the specified item to reduce the energy consumed
or heat wasted by the process.
(2) General requirements. To be eligible, each item described in
paragraphs (f) (4) through (14) of this section must be installed in
connection with an existing industrial or commercial facility. In
addition, the principal purpose of each of those items must be reduction
of energy consumed or heat wasted in any existing industrial or
commercial process. See section 48(l)(10) and paragraph (l) of this
section. If an item performs more than one function, only the
incremental cost (as defined in paragraph (k) of this section) of the
equipment qualifies.
[[Page 445]]
(3) Industrial or commercial process. (i) A process is a means or
method of producing a desired result by chemical, physical, or
mechanical action. For example, equipment installed in connection with
retail sales, general office use, and residential use are not used in a
process within the meaning of this paragraph (f)(3).
(ii) An industrial process includes agricultural processes and
thermal processes relating to production or manufacture, such as those
involving boilers and furnaces.
(iii) A commercial process includes laundering and food preparation.
(iv) More than one process may be conducted in a single facility.
The fact that several processes involved in the production of a product
are integrated does not cause such integrated processes to be treated as
one process. For example, in a food canning facility, producing prepared
food from fresh vegetables is not one process but rather an integration
of several processes including washing, cooking and canning.
(v) The following example illustrates this paragraph (f)(3).
Example. Corporation X, an advertising agency, acquires an automatic
energy control system designed to reduce energy consumed by heating and
cooling its office building. Although the use of an office for X's
business is a commercial activity, heating or cooling an office is not
an industrial or commercial process. The automatic energy control system
does not qualify because it does not reduce energy consumed in an
industrial or commercial process.
(4) Recuperators. Recuperators recover energy, usually in the form
of waste heat from combustion exhaust gases, hot exiting product, or
product cooling air, that is used to heat incoming combustion air, raw
materials, or fuel. Recuperators are configurations of equipment
consisting in part of fixed heat transfer surfaces between two gas
flows, and include related baffles, dividers, entrance flanges,
transition sections, and shells or cases enclosing the other components
of the recuperator. In general, a fixed heat transfer surface absorbs
heat from a gas or liquid flow or dissipates heat to the gas or liquid
flow.
(5) Heat wheels. Heat wheels recover energy, usually in the form of
waste heat, from exhaust gases to preheat incoming gases. Heat wheels
are items of equipment consisting in part of regenerators (which rotate
between two gas flows) and related drive components, wiper seals,
entrance flanges, and transition sections.
(6) Regenerators. Regenerators are devices, such as clinker columns
or chains, that recover energy by efficiently storing heat while exposed
to high temperature gases and releasing heat while exposed to low
temperature gases, fluids, or solids.
(7) Heat exchangers. Heat exchangers recover energy, usually in the
form of waste heat, from high temperature gases, liquids, or solids for
transfer to low temperature gases, liquids, or solids. Heat exchangers
consist in part of fixed heat transfer surfaces (described in paragraph
(f)(4) of this section) separating two media. Heat exchange equipment
does not include fluidized bed combustion equipment.
(8) Waste heat boilers. Waste heat boilers use waste heat, usually
in the form of combustion exhaust gases, as a substantial source of
energy. A substantial source of energy is one that comprises more than
20 percent of the energy requirement on the basis of Btu's during the
course of each taxable year (including the start-up year).
(9) Heat pipes. Heat pipes recover energy, usually in the form of
waste heat, from high temperature fluids to heat low temperature fluids.
A heat pipe consists in part of sealed heat transfer chambers and a
capillary structure. In general, the heat transfer chambers
alternatively vaporize and condense a working fluid as it passes from
one end of the chamber to the other.
(10) Automatic energy control systems. Automatic energy control
systems automatically reduce energy consumed in an industrial or
commercial process for such purposes as environmental space conditioning
(i.e., lighting, heating, cooling or ventilating, etc.). Automatic
energy control systems include, for example, automatic equipment
settings controls, load shedding devices, and relay devices used as part
of such system. Property such as computer
[[Page 446]]
hardware installed as a part of the energy control system also
qualifies, but only to the extent of its incremental cost (as defined in
paragraph (k) of this section).
(11) Turbulators. Turbulators increase the rate of transfer of heat
from combustion gases to heat exchange surfaces by increasing the
turbulence in the gases. A turbulator is a baffle placed in a boiler
firetube or in a heat exchange tube in industrial process equipment to
deflect gases to the heat transfer surface.
(12) Preheaters. Preheaters recover energy, usually in the form of
waste heat, from either combustion exhaust gases or steam, to preheat
incoming combustion air or boiler feedwater. A preheater consists in
part of fixed heat transfer surfaces (described in paragraph (f)(4) of
this section) separating two fluids.
(13) Combustible gas recovery systems. Combustible gas recovery
systems are items of equipment used to recover unburned fuel from
combustion exhaust gases.
(14) Economizers. Economizers are configurations of equipment used
to reduce energy demand or recover energy from combustion exhaust gases
and other high temperature sources to preheat boiler feedwater.
(15) Other property added by the Secretary. [Reserved]
(g) Recycling equipment--(1) In general. Recycling equipment is
equipment used exclusively to sort and prepare, or recycle, solid waste
(other than animal waste) to recover usable raw materials (``recovery
equipment''), or to convert solid waste (including animal waste) into
fuel or other useful forms of energy (``conversion equipment'').
Recycling equipment may include certain other onsite related equipment.
(2) Recovery equipment. Recovery equipment includes equipment that--
(i) Separates solid waste from a mixture of waste,
(ii) Applies a thermal, mechanical, or chemical treatment to solid
waste to ensure the waste will properly respond to recycling, or
(iii) Recycles solid waste to recover usable raw materials, but not
beyond occurrence of the first of the following:
(A) The point at which a material has been created that can be used
in beginning the fabrication of an end-product in the same way as
materials from a virgin substance. Examples are the fiber stage in
textile recycling, the newsprint or paperboard stage in paper recycling,
and the ingot stage for other metals (other than iron and steel). In the
case of recycling iron or steel, recycling equipment does not include
any equipment used to reduce solid waste to a molten state or any
process thereafter.
(B) The point at which the material is a marketable product (i.e.,
has a value other than for recycling) even if the material is not
marketed by the taxpayer at that point.
(3) Conversion equipment. Conversion equipment includes equipment
that converts solid waste into a fuel or other usable energy, but not
beyond the point at which a fuel, steam, electricity, hot water, or
other useful form of energy has been created. Thus, combustors, boilers,
and similar equipment may be eligible if used for a conversion process,
but steam and heat distribution systems between the combustor or boiler
and the point of use are not eligible.
(4) On-site related equipment. Recycling equipment also includes
onsite loading and transportation equipment, such as conveyors,
integrally related to other recycling equipment. This equipment may
include equipment to load solid waste into a sorting or preparation
machine and also a conveyor belt system that transports solid waste from
preparation equipment to other equipment in the recycling process.
(5) Solid waste. (i) The term ``solid waste'' has the same meaning
as in Sec. 1.103-8(f)(2)(ii)(b), subject to the following exceptions
and the other rules of this subparagraph (5):
(A) The date the equipment is placed in service is substituted in
the first sentence of Sec. 1.103-8(f)(2)(ii)(b) for the date of issue
of the obligations, and
(B) Material that has a market value at the place it is located only
by reason of its value for recycling is not considered to have a market
value.
(ii) Solid waste may include a nominal amount of virgin materials,
liquids, or gases, not to exceed 10 percent. If
[[Page 447]]
more than 10 percent of the material recycled during the course of any
taxable year (including the ``start up'' year) consists of virgin
material, liquids, or gases, the equipment ceases to be energy property
and is subject to recapture under section 47. The determination of the
portion of virgin material, liquids, or gases used is based on volume,
weight, or Btu's whichever is appropriate.
(6) Ineligible equipment. Transportation equipment, such as trucks,
that transfer solid waste between geographically separated sites (e.g.,
the collection point and the recycling point) is not eligible. Steam and
heat distribution systems are also ineligible.
(7) Increased recycling capacity. If the equipment both replaces
recycling capacity and increases that capacity at a particualr site,
only the incremental cost (as defined in paragraph (k) of this section)
of increasing the capacity qualifies. Recycling capacity is determined
by the ability to produce a product not previously produced by the
taxpayer, or more of an existing product, in a way that does not lower
overall production.
(8) Examples. The following examples illustrate this paragraph (g).
Example 1. Corporation W recycles aluminum scrap metal. W owns a
junk yard where it collects and crushes the metal into compact units.
W's trucks bring the scrap metal from the junk yard to its main plant
located 3 miles away. W's furnace equipment at the main plant reduces
the scrap to the molten state and W's rolling equipment rolls the
aluminum into sheets. The furnace qualifies, but for two separate
reasons the rolling equipment does not qualify. First, the molten
aluminum would be a marketable product if reduced to ingots prior to
rolling. It is not necessary that W actually reduce the molten aluminum
to ingots. Second, the molten aluminum could be used in the same way as
virgin material.
Example 2. Corporation X manufactures newsprint using wood chips
discarded during X's lumber operations. Assume X could sell the wood
chips to other companies located a short distance from X's mill for use
as a fuel. None of the equipment used to manufacture the newsprint
qualifies.
Example 3. Assume the same facts as in example 2 except X uses old
newspapers which have no value except for recycling in the area where
X's mill is located. The equipment qualifies.
Example 4. Corporation Y recycles municipal waste. Assume the
municipal waste is ``solid waste'' under paragraph (g)(5) of this
section. During the first taxable year Y operates the equipment, Y uses
8,500 pounds of municipal waste and 1,500 pounds of virgin material and
liquids. No energy credit is allowed for the equipment.
Example 5. Corporation Z owns a waste recovery facility. The
corrugated paper portion of the waste stream is picked off a conveyor as
it enters the facility. The corrugated paper is baled and sold as a
secondary paper product. Z acquires shredding and air-classification
equipment. Corrugated paper that is not removed from the conveyor belt
enters the new equipment for production as a fuel. Z increases the input
of corrugated paper so that the same amount of corrugated paper is
removed from the conveyor to be baled. The excess paper that is not
removed for baling enters the shredding and air-classification
equipment. The new equipment qualifies.
(h) Shale oil equipment--(1) In general. Shale oil equipment used in
mining or either surface or in situ processing qualifies as energy
property. Shale oil equipment means equipment used exclusively to mine,
or produce or extract oil from, shale rock.
(2) Eligible processes. In general, processing equipment qualifies
if used in or after the mining stage and up through the retorting
process. Thus, eligible processes include crushing, loading into the
retort, and retorting, but not hydrogenation, refining, or any process
subsequent to retorting. However, with respect to in situ processing,
eligible processes include creating the underground cavity.
(3) Eligible equipment. Shale oil equipment includes--
(i) Heading jumbos, bulldozers, and scaling and bolting rigs used to
create an underground cavity for in situ processing,
(ii) On-site water supply and treatment equipment and handling
equipment for spent shale.
(iii) Crushing and screening plant equipment, such as hoppers,
feeders, vibrating screens, and conveyors,
(iv) Briquetting plant equipment, such as hammer mills and vibratory
pan feeders, and
(v) Retort equipment, including direct cooling and condensing
equipment.
(i) [Reserved]
(j) Natural gas from geopressured brine. Equipment used exclusively
to extract
[[Page 448]]
natural gas from geopressured brine described in section
613A(b)(3)(C)(i) is energy property. Eligible equipment includes
equipment used to separate the gas from saline water and remove other
impurities from the gas. Equipment is eligible only up to the point the
gas may be introduced into a pipeline.
(k) Incremental cost. The term ``incremental cost'' means the excess
of the total cost of equipment over the amount that would have been
expended for the equipment if the equipment were not used for a
qualifying purpose. For example, assume equipment costing $100 performs
a pollution control function and another function. Assuming it would
cost $60 solely to perform the nonqualifying function, the incremental
cost would be $40.
(l) Existing--(1) In general. For purposes of section 48(l), the
term ``existing'' means--
(i) When used in connection with a facility or equipment, 50 percent
or more of the basis of that facility or equipment is attributable to
construction, reconstruction, or erection before October 1, 1978, or
(ii) When used in connection with an industrial or commercial
process, that process was carried on in the facility as of October 1,
1978.
(2) Industrial or commercial process. (i) A process will be
considered the same as the process carried on in the facility as of
October 1, 1978, unless and until capitalizable expenditures are paid or
incurred for modification of the process. The expenditures need not be
capitalized in fact; it is sufficient if the taxpayer has an option or
may elect to capitalize. In general, the date of change will be the date
the expenditures are properly chargeable to capital account. If the
taxpayer properly elects to expense a capitalizable expenditure, the
date of change will be the date the expenditure could have been properly
chargeable to capital account if the expenditure had been capitalized.
Recapture will not occur by reason of a change in a process unless the
process change also changes the use of the equipment. See example (1) of
Sec. 1.47-1(h)(5).
(m) Quality and performance standards--(1) In general. Energy
property must meet quality and performance standards, if any, that have
been prescribed by the Secretary (after consultation with the Secretary
of Energy) and are in effect at the time of acquisition.
(2) Time of acquisition. Under this paragraph (m) the time of
acquisition is--
(i) The date the taxpayer enters into a binding contract to acquire
the property or
(ii) For property constructed, reconstructed, or erected by the
taxpayer, (A) the earlier of the date it begins construction,
reconstruction, or erection of the property, or (B) the date the
taxpayer and another person enter into a binding contract requiring each
to construct, reconstruct, or erect property and place the property in
service for an agreed upon use. See example under paragraph (m)(4) of
this section.
(3) Binding contract. Under this paragraph (m), a binding contract
to construct, reconstruct, or erect property, or to acquire property, is
a contract that is binding at all times on the taxpayer under applicable
State or local law. A binding contract to construct, reconstruct, or
erect property or to acquire property, does not include a contract for
preparation of architect's sketches, blueprints, or performance of any
other activity not involving the beginning of physical work.
(4) Example. The following example illustrates this paragraph (m).
Example. Corporation X owns a junk yard. Corporation Y manufactures
recycling equipment and operates several recycling facilities. On
January 1, 1979, X and Y enter into a written contract that is binding
on both parties on that date and at all times thereafter. Under the
contract's terms X will supply scrap metals to Y and Y agrees in return
to build a recycling facility on land adjacent to the junk yard. Y will
own and operate the facility using the scrap metal supplied by X. Y may
treat the agreement as a binding contract under paragraph (m) (2) and
(3) of this section.
(n) Public utility property--(1) Inclusions. Public utility property
is included in both of the following categories of energy property:
(i) Shale oil equipment and
(ii) Equipment for producing natural gas from geopressured brine.
[[Page 449]]
(2) Exclusions. Public utility property is excluded from each of the
following categories of energy property:
(i) Alternative energy property,
(ii) Specially defined energy property,
(iii) Solar or wind energy property, and
(iv) Recycling equipment.
(3) Public utility property. The term ``public utility property''
has the meaning given in section 46(f)(5).
(o)-(p) [Reserved]
(q) Qualified intercity buses--(1) In general. This paragraph (q)
prescribes rules and definitions for purposes of section 48(l)(2)(A)(ix)
and (16). Energy property includes qualified intercity buses of an
eligible taxpayer, but only to the extent of the increase in the
taxpayer's total operating seating capacity (operating capacity) under
paragraphs (q) (9), (10), and (11) of this section. For application of
recapture rules see Sec. 1.47-1(h)(3)(ii).
(2) Eligible taxpayer. A taxpayer is an eligible taxpayer only if it
is determined to be both--
(i) A common carrier regulated by the Interstate Commerce Commission
or an appropriate State agency and
(ii) Engaged in the trade or business of furnishing intercity
transportation by bus.
(3) Common carrier. The taxpayer is a common carrier only if the
taxpayer holds itself out to the general public as providing passenger
bus transportation for compensation over regular or irregular routes, or
both.
(4) Appropriate State agency. A State agency is appropriate only if
it has both--
(i) Power to regulate intrastate transportation provided by a motor
carrier, within the meaning of section 10521(b)(1) of the Revised
Interstate Commerce Act (49 U.S.C. 10521(b)(1)), and
(ii) Power to initiate an exemption proceeding under section 1025(b)
of that Act (49 U.S.C. 10525(b)).
(5) Intercity transportation. Intercity transportation means
intercity passenger transportation or intercity passenger charter
service. Intercity transportation does not include transportation
provided entirely within a municipality, contiguous municipalities, or
within a zone that is adjacent to, and commercially a part of, the
municipality or municipalities (within the meaning of section
10526(b)(1) of the Revised Interstate Commerce Act (49 U.S.C.
10526(b)(1)). See 49 CFR part 1048 (regulations defining commercial
zones under that statute).
(6) Definition of qualified intercity bus. A qualified intercity bus
(qualifying bus) is an automobile bus--
(i) The chassis and body of which are exempt (under section
4063(a)(6)) from the 10-percent excise tax generally imposed under
section 4061(a) on trucks and buses.
(ii) With a seating capacity of at least 36 passengers (in addition
to the driver).
(iii) With one or more baggage compartments, in an area separated
from the passenger area, with an aggregate capacity of at least 200
cubic feet, and
(iv) Which meets the predominant use test.
(7) Predominant use test. (i) A bus meets the predominant use test
for a taxable year only if it meets the following conditions:
(A) It is used on a full-time basis during the taxable year, and
(B) At least 70 percent of the total miles driven are driven while
furnishing intercity transportation.
(ii) A bus driven from the end point of one trip to the beginning
point of another trip (``deadheading''), both of which furnish intercity
transportation of passengers, will be considered to have been driven
while furnishing intercity transportation of passengers, even if no
passengers are carried.
(iii) A bus is considered used on a full-time basis in a taxable
year if it was driven 10,000 miles in that year. If available, the best
evidence of annual mileage is the difference between odometer readings
at the beginning and end of each taxable year. If the bus was placed in
service during the taxable year, or for a short taxable year described
in section 441(b)(3), that 10,000 mile figure is prorated on a daily
basis.
(iv) If a qualifying bus fails to meet the predominant use test in a
taxable year, a cessation occurs in that taxable year. See Sec. 1.47-
1(h)(3)(ii).
[[Page 450]]
(v) The following examples illustrate this paragraph (q)(7):
Example 1. X, a bus company, used a bus for trips between city M and
city N, a distance of 100 miles. These trips qualify as furnishing
intercity transportation. During the taxable year, 300 round trips were
run carrying passengers both ways and 75 trips were run carrying
passengers from city M to city N immediately after each of which the bus
was returned to city M for the next trip. The bus was also driven 20,000
miles to furnish passenger service which was local transportation.
During the taxable year, the bus was driven a total of 100,000 miles. X
makes the following calculations to determine if it met the predominant
use test for the taxable year.
1. Total miles driven...................................... 100,000
2. Intercity miles driven:
a. Passenger round trips (100x2x300)................... 60,000
b. Passenger one-way (75x100).......................... 7,500
c. Non-passenger return trips (75x100)................. 7,500
3. Total intercity passenger miles (sum of lines 2 a, b, 75,000
and c)....................................................
4. 79% of line 1........................................... 70,000
Since line 1 is not less than 10,000 miles, the full-time use
requirement is met. Since line 3 is greater than line 4, the 70 percent
intercity mileage test is met. Thus, for the taxable year, the bus meets
the predominant use test in paragraph (q)(7)(i) of this section.
Example 2. The facts are the same as in example 1, except that the
bus was placed in service on the last day of the taxable year. The bus
was used only to run one round trip, carrying passengers, between cities
M and N. 10,000 miles X one day /365 days=27.4 miles. Because, for the
one day of the taxable year that the bus was in service, the bus was
driven more than 27.4 miles, and all these miles were driven to furnish
intercity transportation, it met the predominant use test for the
taxable year.
(8) Leased buses. (i) A bus which is leased is energy property only
if it meets the requirements of paragraphs (q)(6) (i), (ii), and (iii)
of this section, the lessee is an eligible taxpayer, and the bus meets
the predominant use test in the hands of the lessee. If a leased bus is
energy property, the energy credit is available only to the lessee
unless paragraph (q)(8)(ii) of this section applies. The lessor must
elect under section 48(d) for the lessee to claim the energy credit.
(ii) If a leased bus is energy property and, on or before October 9,
1984, either (A) the lessor and lessee enter into a lease and the lessee
places the bus in service, or (B) the bus is not placed in service but
the lessor and lessee enter into a binding contract under which the
amount of the lease payments cannot be modified, then the energy credit
is available to the lessor even if the lessor is not an eligible
taxpayer.
(iii) Notwithstanding Sec. 1.47-2(b)(1) (relating to the effect of
a disposition by the lessee on the credit claimed by the lessor), if, by
reason of a lease or the termination of a lease, a bus is used in a
taxable year subsequent to the credit year by a person other than the
one whose increase in operating capacity determined the amount of
qualified investment for the energy credit, a disposition of the bus
under Sec. 1.47-1(h)(2) results. However, if the energy credit for a
bus was earned in a taxable year and a lease of the bus which qualifies
under section 168(f)(8) (safe-harbor lease) is entered into in a
subsequent taxable year, the safe-harbor lease is not a disposition of
the bus and the lessee under that lease is treated as the lessee for
purposes of this paragraph (q)(8). For the requirement to file an
amended return if the energy credit was allowed in a prior taxable year,
see Sec. 5c.168(f)(8)-6(b)(2)(ii) (Temporary Income Tax Regulations
under the Economic Recovery Tax Act of 1981). For the rule for
determining whose operating capacity determines qualified investment for
the energy credit, see paragraph (q)(9)(ii) of this section. For the
rule for leases to related taxpayers, see paragraph (q)(10)(ii) of this
section.
(9) Operating capacity. (i) Qualified investment for a qualifying
bus is taken into account for the energy credit only to the extent the
bus increases the taxpayer's operating capacity. To increase operating
capacity, a bus must be counted in operating capacity. The increase in a
taxpayer's operating capacity is the excess of the taxpayer's operating
capacity for the current taxable year over its operating capacity for
the immediately preceding taxable year. Related taxpayers determine
operating capacity on a group basis under paragraph (q)(10) of this
section.
(ii) Operating capacity for a particular taxable year is determined
by adding together the seating capacities of all intercity buses used by
the taxpayer in that year and still owned by the taxpayer at the end of
that year.
[[Page 451]]
An intercity bus is a bus which meets the chassis and body test and the
predominant use test in paragraph (q)(6) of this section whether or not
the bus is still in use at the end of the taxable year. In the case of a
leased bus to which paragraph (q)(8) of this section applies, the
lessee's operating capacity determines qualified investment for the
energy credit.
(iii) The qualified investment for the energy credit for a
qualifying bus is the bus's qualified investment for the regular credit
multiplied by a fraction. The numerator of the fraction is the increase
in the taxpayer's operating capacity for the taxable year. The
denominator is the added operating capacity for the taxable year. Added
operating capacity for the taxable year is determined for a taxpayer by
adding together the seating capacities of the taxpayer's intercity buses
included in operating capacity for the taxable year which were not
included in operating capacity for the immediately preceding taxable
year.
(iv) In the case of a partnership, each partner's qualified
investment for the energy credit for a qualifying bus is the partner's
qualified investment for the regular credit (determined under Sec.
1.46-3(f) multiplied by the fraction referred to in paragraph
(q)(9)(iii) of this section for the partnership, as determined for the
partnership taxable year in which the bus is placed in service.
(v) The following example illustrates this paragraph (q)(9):
Example. Corporation Y is a calendar year bus company that is an
eligible taxpayer under paragraph (q)(2) of this section. Based upon the
facts as set forth in the following table, Y makes the following
calculations to determine the energy credit earned in 1981:
1. 1980 operating capacity determined as of 12/31/80:
a. 5 intercity busesx50 seats each..................... 250
------------
b. Total 1980 operating capacity....................... 250
2. 1981 operating capacity determined as of 12/31/8:
a. 2 1980 buses used on a full-time basis in 1981...... 100
b. 1981 added capacity:................................
i. Qualifying buses:
Bus 1.......................................... 45
Bus 2.......................................... 55
Bus 3.......................................... 50
ii. Intercity bus not a qualifying bus............. 50
iii. Total 1981 added capacity..................... 200
------------
c. Total 1981 operating capacity......................... 300
3. 1981 increase in operating capacity (line 2c-line 1b)... 50
4. Fraction for determining qualified investment \1/4\
attributable to increase in capacity (line 3+line 2
(b)(iii)).................................................
Accordingly, the energy credit earned in 1981 for each of the
qualifying buses is determined as follows:
------------------------------------------------------------------------
Qualified
investment for Energy Energy
the regular x Line 4 x percentage = credit
credit earned
------------------------------------------------------------------------
Bus 1: $15,000 ....... \1/4\ ....... 10 ...... $375
Bus 2: $20,000 ....... \1/4\ ....... 10 ...... 500
Bus 3: $25,000 ....... \1/4\ ....... 10 ...... 625
-------------------------------------------------------
Total energy ....... ....... ....... .......... ...... 1,500
credit earned
in 1981
------------------------------------------------------------------------
(10) Related taxpayers. (i) Related taxpayers are treated as one
taxpayer in determining the increase in operating capacity under
paragraph (q)(9)(ii) of this section and in determining the qualified
investment in qualified intercity buses for the energy credit under
paragraph (q)(9)(iii) of this section. Related taxpayers are members of
a group of trades or businesses that are under common control (as
defined in Sec. 1.52-1(b)).
(ii) Related taxpayers make all computations relating to operating
capacity on a group basis. Also, the determination of whether a bus
meets the predominant use test is made on a group basis by aggregating
bus usage by each member of the group. For example, if a bus is acquired
by one member and used by that member for part of a taxable year and
used by other members for the remainder, the combined usage is
aggregated in determining whether the predominant use test is met. In
addition, all related taxpayers are treated as one person in applying
paragraph (q)(8) of this section (relating to leasing).
(iii) The energy credit earned for a qualifying bus is allocated to
the member which acquired (or is a lessee treated under section 48(d) as
having acquired) the bus whether or not that member had a separate
increase in operating capacity for the taxable year.
(iv) Each member must make its own computation of the group's
increase in operating capacity for the period comprising its taxable
year. A member will make this computation as of the end of
[[Page 452]]
its taxable year ignoring different taxable years of other members. For
the period comprising its taxable year, the member makes all
calculations relating to group operating capacity, including the
determination of full-time use by other members.
(v) Each member determines the composition of the group as of the
end of that member's taxable year. For example, if X uses the calendar
year and makes its computation as of December 31, 1981, and Y is a
member of X's group at that time, Y's operating capacity determined as
of the end of X's immediately preceding taxable year (December 31, 1980)
is taken into account by X for 1980 even if Y was not a member of the
group for any day prior to December 31, 1981.
(vi) The following example illustrates this paragraph (q)(10):
Example (a). Corporations X and Y are related taxpayers. In this
example, each bus is a qualifying bus with a seating capacity of 50.
Each bus owned at the close of either X's or Y's taxable year was used
on a full-time basis for the relevant period corresponding to X's or Y's
taxable year. Other facts are set forth in the following table:
------------------------------------------------------------------------
X Y
------------------------------------------------------------------------
Taxable year ends.............. Dec. 31........... June 30.
Operating capacity for 1979.... 5 buses........... 10 buses.
Buses added.................... 3 buses Mar. 1, 3 buses May 15,
1980. 1981.
Buses sold..................... 2 buses Mar. 31, 2 buses Sept. 30,
1981. 1980.
Cost of each added bus......... $40,000........... $60,000.
------------------------------------------------------------------------
(b) X makes the following calculations to determine the energy
credit earned for calendar year 1980.
1. 1979 operating capacity determined as of 12/31/79:
a. Attributable to X (5 busesx50 seats).................... 250
b. Attributable to Y (10 busesx50 seats)................... 500
--------
c. Total 1979 operating capacity........................... 750
2. 1980 operating capacity determined as of 12/31/80:
a. X's 5 and Y's 8 1979 buses used on a full-time basis in 650
1980 and still owned on 12/31/80..........................
b. 1980 added capacity (X's 3 busesx50 seats).............. 150
--------
c. Total 1980 operating capacity........................... 800
3. 1980 increase in operating capacity (line 2c-line 1c)....... 50
4. Fraction in paragraph (q)(9)(iii) of this section (line 3/ \1/3\
line 2b)......................................................
Accordingly, X earned an energy credit of $4,000 in 1980
($40,000x\1/3\x10%x3 buses).
(c) Since in calendar year 1981 X placed no qualifying buses in
service, X earned no energy credit in 1981.
(d) Since in the taxable year 7/1/79-6/30/80 Y placed no qualifying
buses in service, Y earned no energy credit in that taxable year.
(e) Y makes the following calculations to determine the energy
credit earned in the taxable year 7/1/80-6/30/81.
1. Operating capacity for the taxable year ending 6/30/80
determined as of the close of that year:
a. Attributable to X (8 busesx50 seats).................... 400
b. Attributable to Y (10 busesx50 seats)................... 500
--------
c. Total operating capacity for that year.................. 900
2. Operating capacity for the taxable year ending 6/30/81
determined as of the close of that year:
a. X's 6 and Y's 8 buses from prior taxable year used on a 700
full-time basis during current taxable year and still
owned on 6/30/81..........................................
b. Capacity added during current taxable year (Y's 3 150
busesx50 seats)...........................................
--------
c. Total operating capacity for that year.................. 850
3. Increase in operating capacity for taxable year ending 6/30/ (50)
81 (line 2c-line 1c)..........................................
As determined for Y's taxable year ending 6/30/81 the group
experienced a decrease in operating capacity. Thus, no energy credit is
available for the buses Y placed in service in its taxable year ending
6/30/81.
(11) Section 381(a) transactions. (i) In the case of a transaction
described in section 381(a), the operating capacity of each transferor
or distributor corporation, determined as of the date of distribution or
transfer (within the meaning of Sec. 1.381(b)-1(b)), shall reduce the
operating capacity of the acquiring corporation (determined without this
paragraph (q)(11)) for its first taxable year ending on or after that
date for purposes of determining the acquiring corporation's energy
credit for that year. This paragraph (q)(11) shall not apply to any case
to which paragraph (q)(10) of this section (dealing with related
taxpayers) applies.
(ii) The following example illustrates this paragraph (q)(11):
Example. X and Y are unrelated corporations which use the calendar
year. For 1981, each has an operating capacity of 250 seats (5 busesx50
seats). X merges into Y on January 1, 1982. On May 1, 1982, Y retires
and sells two buses and acquires four 50-seat qualifying buses at a cost
of $40,000 each. All buses owned by Y on December 31, 1982, are included
in operating capacity. Y makes the following calculations to determine
the energy credit earned in taxable year 1982.
1. Y's 1981 operating capacity determined as of 12/31/81....... 250
[[Page 453]]
2.1982 operating capacity determined as of 12/31/82 without
this paragraph (q)(11):
a. X's 5 buses plus Y's 5 1981 buses less 2 retired buses 400
(8 busesx50 seats)........................................
b. 1982 added capacity (4 busesx50 seats).................. 200
--------
c. Total................................................... 600
3. Operating capacity of transferor (X) on 1/1/82.............. 250
--------
4. Y's 1982 operating capacity (line 2c-line 3)................ 350
5. 1982 increase in operating capacity (line 4-line 1)......... 100
6. Fraction in paragraph (q)(9)(iii) of this section (line 5/ \1/2\
line 2b)......................................................
7. Energy credit earned in 1982 ($40,000x\1/2\x10%x4 buses).... $8,000
(Secs. 7805 (68A Stat. 917, 26 U.S.C. 7805) and 38 (b) (76 Stat. 962, 26
U.S.C. 38) of the Internal Revenue Code of 1954; secs. 38(b) (76 Stat.
963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat. 264, 26 U.S.C. 48(l)(16)),
and 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7291, 46 FR 7291, Jan. 23, 1981, as amended by T.D. 7982, 49 FR
39542, Oct. 9, 1984; 49 FR 41246, Oct. 22, 1984; T.D. 8014, 50 FR 11853,
Mar. 26, 1985; T.D. 8147, 52 FR 27337, July 21, 1987]
Sec. 1.48-10 Single purpose agricultural or horticultural structures.
(a) In general--(1) Scope. Under section 48(a)(1)(D), ``section 38
property'' includes single purpose agricultural and horticultural
structures, as defined in section 48 (p) and paragraphs (b) and (c) of
this section. These structures are subject to a special rule for
recapture of the credit. See paragraph (g) of this section. For the
relation of this section to section 48(a)(1)(B) (other tangible
property) and to sections 1245 and 1250 (depreciation recapture), see
paragraph (h) of this section.
(2) Effective date. The provisions of section 48(a)(1)(D) and this
section apply to open taxable years ending after August 15, 1971.
(b) Definition of single purpose agricultural structure--(1) In
general. Under section 48(p)(2), a single purpose agricultural structure
is any structure or enclosure that meets all of the following
requirements:
(i) It is specifically designed and constructed for permissible
purposes (as defined in paragraph (b)(2) of this section). See paragraph
(d) of this section for the rule regarding ``specifically designed and
constructed''.
(ii) It is specifically used exclusively for those permissible
purposes. See paragraph (e) of this section for the rules regarding
``specifically used''.
(iii) It houses equipment necessary to house, raise, and feed
livestock and their produce. See paragraphs (b)(3) and (4) of this
section.
(2) Permissible purposes. The following are the only permissible
purposes for a single purpose agricultural structure:
(i) Housing, raising, and feeding a particular type of livestock
and, at the taxpayer's option, its produce. The term ``housing, raising,
and feeding'' includes the full range of livestock breeding and raising
activities, including ancillary post-production activities (as defined
in paragraph (f) of this section). Thus, for example, use of a structure
for breeding livestock, or for producing eggs or livestock, is
permitted. The structure may also be used for storing feed or machinery,
but more than strictly incidental use for these purposes will disqualify
the structure. See paragraph (e)(1) of this section. For the special
rule concerning the permissible purposes for a milking parlor, see
paragraph (b)(2)(iii) of this section.
(ii) Housing required equipment (including any replacements) as
defined in paragraph (b)(4) of this section.
(iii) If the structure is a dairy facility, it will qualify if it is
used for: (A) activities consisting of the production of milk or of the
production of milk and the housing, raising, or feeding dairy cattle,
and (B) housing equipment (including any replacements) necessary for
these activities. The term ``housing, raising, or feeding'' includes the
full range of dairy cattle breeding and raising activities including
ancillary post-production activities (as defined in paragraph (f) of
this section). The structure may also be used for storing feed or
machinery, but, more than incidental use for these purposes will
disqualify the structure. See paragraph (e)(1) of this section.
(3) Livestock; particular type of livestock--(i) Livestock.
Livestock qualifying as ``section 38 property'' under Sec. 1.48-1(l)
constitutes livestock for purposes of this section. Thus, for example,
horses are not livestock for purposes of this section since they do not
qualify as ``section 38 property'' under Sec. 1.48-1(l). Under section
48(p)(6) poultry constitutes livestock for purposes of
[[Page 454]]
section 48(a)(1)(D). The term ``livestock'' includes the offspring of
livestock. ``Livestock'' is distinguished from the produce of livestock,
such as milk and eggs held for sale. For purposes of this section, eggs
held for hatching and newborn livestock are considered livestock. A
structure used solely to house produce of livestock or equipment
necessary to house produce of livestock will not qualify as a single
purpose agricultural structure. Thus, for example, a dairy facility used
solely for storing milk will not qualify.
(ii) Particular type of livestock. A structure qualifies as a single
purpose agricultural structure only if it is specifically designed,
constructed, and used exclusively for permissible purposes with respect
to one particular type of livestock. For purposes of this section, each
species is a different type except that all species of poultry are
considered to be of a single type. Thus, for example, a structure
specifically designed and constructed as a single purpose hog-raising
facility will not qualify if it is used to raise dairy cows, but a
structure specifically designed, constructed, and used to raise poultry
may house, raise, and feed both chickens and turkeys.
(4) Required equipment rule. (i) A single purpose agricultural
structure must also house equipment necessary to house, raise, and feed
the livestock (``required equipment''). Required equipment must be an
integral part of the structure, and includes, but is not limited to,
equipment necessary to contain the livestock, to provide them with water
or feed, and to control the temperature, lighting, and humidity of the
interior of the structure. For purposes of this section, equipment is an
integral part of the structure if it is physically attached to or a part
of the structure. The useful life of the structure, however, need not be
contemporaneous with the life of the equipment it houses. A structure
without required equipment is not a single purpose agricultural
structure.
(ii) A single purpose agricultural structure may, but is not
required to, house equipment (for example, loading chutes) necessary to
the conduct of ancillary post-production activities as defined in
paragraph (f) of this section.
(5) Livestock structure. In section 48(p)(2), the terms ``single
purpose livestock structure'' and ``single purpose agricultural
structure'' are interchangeable.
(c) Definition of single purpose horticultural structure--(1) In
general. Under section 48(p)(3), a single purpose horticultural
structure is any structure that meets both of the following
requirements:
(i) It is a greenhouse or other structure specifically designed and
constructed for permissible purposes (as defined in paragraph (c)(2) of
this section). See paragraph (d) of this section for the rule regarding
``specifically designed and constructed.''
(ii) It is specifically used exclusively for those permissible
purposes. See paragraph (e) of this section for the rules regarding
``specifically used.''
(2) Permissible purposes. The following are the only permissible
purposes for a single purpose horticultural structure:
(i) The commercial production of plants (including plant products
such as flowers, vegetables, or fruit) in a greenhouse.
(ii) The commercial production of mushrooms.
(iii) A single purpose horticultural structure also may, but is not
required to, house equipment necessary to carry out these permissible
purposes listed in paragraphs (c)(2) (i) and (ii) of this section.
(3) Ancillary post-production activities. The terms ``commercial
production of plants'' and ``commercial production of mushrooms''
include ancillary post-production activities (as defined in paragraph
(f) of this section).
(d) Specifically designed and constructed. A structure is
specifically designed and constructed if it is not economic to design
and construct the structure for the intended qualifying purpose and then
use the structure for a different purpose. For example, if a hog raising
structure is designed and constructed in accordance with a standard set
of plans for such a structure provided by the Department of Agriculture,
it would not be economic to use the structure for purposes other than
hog raising.
[[Page 455]]
(e) Specifically used. There are two aspects of the specific use
requirement--exclusive use and actual use.
(1) Exclusive use. (i) A structure qualifies as a single purpose
agricultural or horticultural structure only if it is used exclusively
for the permitted purposes by reason of which it qualified for the
credit. Thus--
(A) The structure may not be used for any nonpermissible purposes
(for example, processing, marketing, or more than incidental use for
storing feed or equipment) and
(B) It may not be put to any use other than the specific use by
reason of which it qualifies for the credit.
(ii) For purposes of this section, the term ``incidental use'' means
a use which is both related and subordinate to the qualifying purpose.
Thus, for example, if feed is stored in an agricultural structure which
will be used for raising hogs, the feed must be used only for the hogs
in order to be related to the qualifying purpose. In determining whether
use of the structure for feed storage is subordinate to the qualifying
purpose, all of the facts and circumstances must be considered,
including, with respect to feed storage, the following:
(A) Type of animal involved;
(B) Number of, and consumption rate for, each animal;
(C) Climate of area;
(D) Total volume of storage area; and
(E) Percentage of structure's total volume devoted to storage.
(iii) It will be presumed that the storage function is not
subordinate to the qualifying purpose of the structure if more than one-
third of the structure's total usable volume is devoted to storage. This
presumption may be rebutted with clear and convincing evidence.
(iv) A structure may fail the exclusive use test if either of the
requirements of paragraph (e)(1)(i) of this section is not met. Thus,
for example, a horticultural structure that contains an area for
processing plants or plant products will fail the exclusive use test
because there is a nonpermissible use. An agricultural structure that is
used to house more than one particular type of livestock fails the
exclusive use test for the same reason. A change in the use of an
agricultural structure from one species of livestock to another will
cause the structure to fail the exclusive use test when the change
occurs. Thus, for example, a hog-raising facility which qualified for
the credit when it was placed in service cannot later be modified and
used for producing broiler chickens even if the structure would have
qualified for the credit if it had been originally designed,
constructed, and used exclusively for producing broiler chickens.
(2) Actual use. (i) A single purpose agricultural or horticultural
structure also must actually be used for the permissible purpose by
reason of which it qualifies for the credit. ``Actual use'' means
``placed in service'' (as defined in Sec. 1.46-3(d)). Mere vacancy, on
a temporary basis, will not disqualify the structure. Thus, for example,
a structure that is designed and constructed as a hog-raising structure
will not qualify if it is never placed in service for raising hogs.
However, a turkey-raising facility will not be disqualified if the
turkeys are all sent to a packing plant in November and the structure
remains vacant until the next spring when newly hatched turkeys are
placed in the structure to be raised.
(ii) For purposes of this section, ``vacancy on a temporary basis''
includes temporary vacancy caused by market fluctuations or other
economic considerations and vacancy on a seasonal basis.
(f) Work space; ancillary post-production activities--(1)
Permissible work space. Under section 48(p)(4), a single purpose
agricultural or horticultural structure may contain work space only if
it is used for--
(i) Stocking, caring for, or collecting livestock, plants, or
mushrooms,
(ii) Maintenance of the structure, or
(iii) Maintenance or replacement of the equipment or stock enclosed
by or contained in the structure. Thus, for example, an eligible
structure may not contain space devoted to processing or marketing or
other nonpermissible purposes.
(2) Ancillary post-production activities. The term ``stocking,
caring for, or collecting'' the livestock, plants, or mushrooms includes
ancillary post-production activities. These activities, therefore,
constitute permissible purposes
[[Page 456]]
when carried on in conjunction with other permissible purposes, and a
qualifying structure may contain work space devoted to such activities.
Ancillary post-production activities include gathering, sorting, and
loading livestock, plants, and mushrooms and packing unprocessed plants,
mushrooms, and the live offspring and unprocessed produce of the
livestock. Ancillary post-production activities do not include
processing activities, such as slaughtering or packing meat, nor do they
include marketing activities.
(g) Special rule for recapture under section 47. Under section
48(p)(5), if a structure which qualifies for the credit under this
section becomes ineligible because it ceases to be held for the specific
use by reason of which it qualified (or it is used for other than that
qualifying use) before the end of the applicable estimated useful life
or period specified in section 47(a), then the investment credit
previously allowed with respect to the structure may be partially or
entirely recaptured under section 47. Unlike other property to which
section 47 applies, single purpose structures may not be converted from
one permissible use to another without recapture. See subparagraph
(e)(2) of this section.
(h) Relationship to other sections--(1) Relation to section
48(a)(1)(B). All structures satisfying the requirements of section
48(a)(1)(B) and (a)(1)(D) will be considered to qualify under either
provision.
(2) Relationship to sections 1245 and 1250. For purposes of
depreciation recapture, property to which section 48(a)(1)(D) applies is
section 1245 property, except that property placed in service prior to
January 1, 1981, may, at the option of the taxpayer, be treated as
section 1250 property if depreciation deductions allowed were not under
one of the methods authorized only for section 1245 property.
(i) [Reserved]
(j) Examples. The provisions of this section may be illustrated by
the following examples:
Example 1. A constructs a rectangular structure for use as an egg-
producing facility. The structure has no windows. The walls and roof are
made of corrugated steel and there is a door which is 4 feet wide and 8
feet tall at each end of the structure. At the end of each wall are
louvered openings approximately 4 feet high and 8 feet long. These
openings house thermostatically controlled fans. In the center of the
walls are manually operated fresh-air openings. Corrugated steel
``curtains'' hang from the top of the openings so that the openings can
be completely closed in cold weather, but the curtains can be propped
open to admit fresh air. The building is well insulated. A has
reinforced the roof with extra trusses and rafters and reinforced the
building with extra wall studs. Two rows of cages are suspended from the
rafters by thin steel girders and wires. The floor of the structure is a
sloping concrete slab pierced with long troughs which run the length of
the structure beneath the cages. The troughs are used for collection and
disposal of chicken wastes. When this structure is placed in service it
will qualify for an investment credit under this section.
Example 2. B constructs a greenhouse for the commercial production
of plants. The greenhouse is a rectangular structure with translucent
fiberglass walls and roof. The structure is equipped with an automatic
temperature and humidity control system. Pipes were installed to carry
water and liquid fertilizer to the plants and to release minute amounts
of carbon dioxide into the air. When the structure was originally placed
in service B used the entire structure for growing flowers commercially.
In September 1978, B began to use the structure for growing tomatoes.
Because of the success of the venture, in January 1979, B began to use
the entire structure for growing tomatoes. In February 1980, B set up a
small counter with a cash register at one end of the structure so that
workers could sell tomatoes to customers at the greenhouse. Until
February 1980, the structure would qualify for the credit under this
section. The change in use from growing flowers to growing tomatoes will
not affect the eligibility of the structure. Once the cash register is
installed, however, the structure fails to meet both the exclusive use
test of paragraph (e)(1) of this section and the work space rule of
paragraph (f) of this section since a single purpose structure may not
be used for marketing activities.
Example 3. C purchases a prefabricated structure and makes
modifications so that the structure will meet C's requirements. C adds
gates and constructs a partition which divides the structure into two
parts. One part of the structure constitutes less than one-third of the
total usable volume of the structure and is used to house feeder cattle
while they are fed with hay. This part of the structure has a sloping
concrete floor. The other part of the structure constitutes more than
two-thirds of the total usable volume of the structure and is used to
store the hay used to feed the cattle. This structure will
[[Page 457]]
not qualify for the credit since it fails the required equipment test.
The structure does not contain equipment which is an integral part of
the structure. This structure also fails the ``specifically designed and
constructed'' test of paragraph (d) of this section since it would be
economic to use the structure for purposes other than housing, raising,
and feeding cattle (such as a general purpose barn, for example).
Finally, the structure fails the incidental use test of paragraph (e) of
this section because the storage function is presumptively not
subordinate to the qualifying purpose since more than two-thirds of the
structure's total usable volume is devoted to storage and none of the
facts will serve to rebut the presumption.
(Secs. 7805 (68A Stat. 917, 26 U.S.C. 7805) and 38 (b) (76 Stat. 926, 26
U.S.C. 38))
[T.D. 7900, 48 FR 32768, July 19, 1983; 48 FR 36448, Aug. 11, 1983]
Sec. 1.48-11 Qualified rehabilitated building; expenditures incurred
before January 1, 1982.
(a) In general. Under section 48(a)(1)(E), that portion of the basis
of a qualified rehabilitated building which is attributable to qualified
rehabilitation expenditures qualifies as section 38 property. In
general, property which is treated as section 38 property by reason of
section 48(a)(1)(E) is treated as new section 38 property and therefore
is not subject to the used property limitation. See Sec. 1.48-2(d).
Section 48(g)(1) and paragraph (b) of this section define the term
``qualified rehabilitated building''. Section 48(g)(2) and paragraph (c)
of this section define the term ``qualified rehabilitation
expenditure''. Paragraph (d) of this section provides guidance for
coordination of these provisions with other sections of the Code.
(b) Definition of qualified rehabilitated building--(1) In general.
The term ``qualified rehabilitated building'' means any building and its
structural components--
(i) Which has been rehabilitated (within the meaning of paragraph
(b)(3) of this section),
(ii) Which was placed in service (within the meaning of Sec. 1.46-
3(d)) by any person at any time before the beginning of the
rehabilitation,
(iii) 75 percent or more of the existing external walls of which are
retained in place as external walls (within the meaning of paragraph
(b)(4) of this section) in the rehabilitation process, and
(iv) Which meets the twenty-year requirement in paragraph (b)(2) of
this section.
In addition, a major portion of a building may be treated as a separate
building for purposes of this paragraph if the requirements of paragraph
(b)(5) of this section are met.
(2) Twenty-year requirement--(i) In general. A building is
considered a qualified rehabilitated building only if a period of at
least 20 years has elapsed between the date physical work on the
rehabilitation of the building began, and the later of--
(A) The date the building was first placed in service (see Sec.
1.46-3(d)) by any person as a building, or
(B) The date the building was placed in service by any taxpayer in
connection with a prior rehabilitation with respect to which a credit
was allowed by reason of section 48(a)(1)(E).
(ii) Vacant periods. The 20-year period includes periods during
which a building was vacant or devoted to a personal use and is computed
without regard to the number of owners or the identity of owners during
the period.
(iii) Physical work on a rehabilitation. For purposes of this
section, ``physical work on a rehabilitation'' begins when actual
construction begins. The term ``physical work on a rehabilitation'' does
not include preliminary activities such as planning, designing, securing
financing, exploring, researching, developing plans and specifications,
or stabilizing a building to prevent deterioration (e.g., placing boards
over broken windows).
(iv) Special rule. If a part of a building meets the twenty-years
requirement in subdivision (i) of this subparagraph and a part (for
example, an addition) does not, a rehabilitation of that part that meets
the requirement may qualify for a credit only if that part constitutes a
major portion (as defined in paragraph (b)(5) of this section) of the
building.
(3) Rehabilitation--(i) In general. For purposes of this paragraph,
rehabilitation includes renovation, restoration, or reconstruction.
However, the term
[[Page 458]]
``rehabilitation'' does not include enlargement (within the meaning of
paragraph (c)(7)(ii) of this section), new construction, or the
completion of new construction after a building has been placed in
service. For purposes of this paragraph (b)(3), whether expenditures are
attributable to the rehabilitation of an existing building, or to new
construction, is determined upon all the facts and circumstances.
(ii) Substantial rehabilitation. For a building to be considered
rehabilitated, the rehabilitation must be substantial. Whether a
rehabilitation is substantial is determined upon the basis of all the
facts and circumstances. In general, to be substantial, the
rehabilitation must do one of the following:
(A) Materially extend the useful life of the building;
(B) Significantly upgrade its usefulness (for either the same or a
new use); or
(C) Preserve it in a way that significantly improves its condition
or enhances its historic value.
A substantial rehabilitation may vary in degree from gutting and
extensive reconstruction of a building's major structural components to
the cure of a substantial accumulation of major disrepairs. It may also
include renovation, alteration, or remodelling for the conversion of a
structurally sound building to a design and condition required for a new
use. Cosmetic improvements alone, however, do not qualify as a
substantial rehabilitation.
(iii) Aggregation of rehabilitation. In the case where qualified
rehabilitation expenditures are incurred with respect to a
rehabilitation of a building by more than one person (e.g., a lessor and
a lessee, several lessees, or several condominium owners), the
substantial rehabilitation requirement in this paragraph (b)(3) shall be
applied by aggregating all the rehabilitation work done by such persons.
(iv) Special rule by qualified rehabilitation expenditures treated
as incurred by the taxpayer. In the case where qualified rehabilitation
expenditures are treated as having been incurred by a taxpayer because
of the application of paragraph (c)(3)(ii) of this section, the
substantial rehabilitation test in paragraph (b)(3)(ii) of this section
will be applied by aggregating the rehabilitation work done by the
transferor and the transferee.
(v) Examples. The provisions of this subparagraph (3) may be
illustrated by the following examples:
Example 1. Taxpayer A is the owner of a 30-year old building. The
building is air conditioned by means of window air conditioning units. A
replaces the window units with a central air conditioning system and no
other rehabilitation is performed by A. The expenditures incurred by A
did not materially extend the building's useful life, significantly
upgrade its usefulness, or preserve it in a manner that significantly
improves its condition or enhances its historic value. Although
expenditures for replacement of window units with a central air
conditioning system may constitute qualified expenditures as part of an
overall rehabilitation, alone they do not qualify as a substantial
rehabilitation and the building is not considered rehabilitated within
the meaning of this subparagraph.
Example 2. Taxpayer B is the owner of a 10 story office building
that is 35 years old. The building is in substantial disrepair and in
order to modernize it as an office building B installs new plumbing,
electrical wiring, and heating and air conditioning systems. In
addition, the layout of each floor is changed by means of tearing down
many existing interior walls and partitions and building new walls,
partitions, and doors. Old plaster is removed from many walls and
replaced by new wall covering. New windows and new flooring are
installed throughout the building. The improvements made by B materially
extend the useful life of the building and significantly upgrade its
usefulness. The building is considered rehabilitated within the meaning
of the facts and circumstances test in this subparagraph.
Example 3. Taxpayer C is the owner of a 100-year old building that
has substantial historic character, although the building is not a
certified historic structure (as defined in section 191(d)(1) and the
regulations thereunder). C uncovers and restores the original woodwork,
wall coverings and moldings throughout the building. The windows and
doors are replaced with replicas of the original. The improvements made
by C significantly preserve the building and significantly enhance its
historic value. Thus, the building is considered rehabilitated within
the meaning of this subparagraph.
(4) Retention of 75 percent of external walls--(i) In general. A
building meets the requirements set forth in paragraph (b)(1)(iii) only
if 75 percent or more of the existing external walls (as
[[Page 459]]
measured by the total area of the existing external walls) are retained
in place as external walls in the rehabilitation process. For this
purpose, the area of existing external walls includes the area of
windows and doors.
(ii) External wall. For purposes of this paragraph (b)(4), a wall
includes both the supporting elements of the wall and the nonsupporting
elements (e.g., a curtain) of the wall. Except as otherwise provided in
this paragraph (b)(4), the term ``external wall'' includes any wall that
has one face exposed to the weather, earth, or an abutting wall erected
on an adjacent property. An external wall also includes a shared wall
(i.e., a single wall shared with an adjacent building), generally
referred to as a ``party wall''.
(iii) Alternative rule. Notwithstanding the definition of external
wall contained in paragraph (b)(4)(ii) of this section, in any case in
which the building being rehabilitated would fail to meet the
requirements of a qualified rehabilitation building if the definition of
external wall in paragraph (b)(4)(ii) of this section were used, then
the term ``external wall'' shall be defined as a wall, including its
supporting elements, with one face exposed to the weather or earth, and
a common wall shall not be treated as an external wall.
(iv) Retained in place. An existing external wall is retained in
place if the supporting elements of the wall are retained in place. An
existing external wall is not retained in place if the supporting
elements of the wall are replaced by new supporting elements. An
external wall is retained in place, however, if the supporting elements
are reinforced in the rehabilitation, provided that such supporting
elements of the external wall are retained in place. An external wall is
retained in place even though it is covered (e.g., with new siding).
Moreover, the existing curtain may be replaced with a new curtain
provided that the structural framework that provides for the support of
the existing curtain is retained in place. An external wall is retained
in place notwithstanding that the existing doors and windows in the wall
are modified, eliminated, or replaced. A wall may be disassembled and
reassembled so long as the same supporting elements are used when the
wall is reassembled. Thus, for example, in the case of the brick wall,
the wall is considered retained in place even though the original bricks
are removed (for cleaning, etc.) and put back to form the wall.
(v) Retention as an external wall. For purposes of meeting the 75
percent requirement of this subparagraph (4), an existing external wall
must be retained in place as an external wall. If an addition is made
that results in an existing external wall being converted into an
internal wall, the wall is not retained in place as an external wall.
(vi) Special rule. Solely for the purpose of meeting the 75 percent
requirement of this subparagraph (4), the walls of an uncovered internal
shaft designed solely to bring light or air into the center of a
building which are completely surrounded by external walls of the
building and which enclose space not designated for occupancy or other
use by people (other than for maintenance or emergency) are not
considered external walls. Thus, a wall of a light well in the center of
an office building is not an external wall. However, walls surrounding
an uncovered courtyard which is usable by the building's occupants,
(e.g., at lunch time) are external walls.
(vii) Examples. The provisions of this subparagraph (4) may be
illustrated by the following examples:
Example 1. Taxpayer A rehabilitated a building all of the walls of
which consisted of wood siding attached to gypsum board sheets (which
covered the studs). A covered the existing wood siding with aluminum
siding in a part of a rehabilitation that otherwise qualified under this
subparagraph. A satisfied the requirement that 75 percent of the
existing external walls must be retained in place as external walls.
Example 2. Taxpayer B rehabilitated a building the external walls of
which had a masonry curtain. The masonry on the wall face was replaced
with a glass curtain. The steel beam and girders supporting the existing
curtain were retained in place. B satisfied the requirement that 75
percent of the existing external walls must be retained in place as
external walls.
Example 3. Taxpayer C rehabilitated a building which has two
external walls measuring 75[foot] x 20[foot] and two other external
walls measuring 100[foot] x 20[foot]. C tore down one of the
[[Page 460]]
larger walls, including its supporting elements, which accounted for
more than 25% of the building's external walls and constructed a new
wall. C has not satisfied the requirement that 75 percent of the
existing external walls must be retained in place as external walls.
Example 4. The facts are the same as in example 3, except C does not
tear down any walls, but makes an addition that results in one of the
smaller walls becoming an internal wall. In addition, C enlarged 8 of
the existing windows on the larger walls, increasing them from a size of
3[foot] x 4[foot] to 6[foot] x 8[foot]. Since the smaller wall accounts
for less than 25 percent of the total wall area, C has satisfied the
requirement that 75 percent of the existing external walls must be
retained in place as external walls in the rehabilitation process. The
enlargement of the existing windows on the larger wall does not change
the result.
(5) Major portion treated as separate building--(i) In general.
Where there is a separate rehabilitation of a major portion of a
building, such major portion shall be treated as a separate building.
Thus, such major portion may qualify as a qualified rehabilitated
building if the requirements of this paragraph are met with respect to
such major portion. Expenditures for property that services both a major
portion of a building and another portion must be specifically allocated
to each portion to the extent possible. If it is not possible to make
such an allocation, the expenditures must be allocated to each portion
on some reasonable basis. What constitutes a reasonable basis for an
allocation depends on factors such as the type of improvement and how
the improvement relates functionally to the building. For example, in
the case of expenditures for an air conditioning system or a roof, a
reasonable basis for allocating the expenditures would be the volume of
the major portion served by the improvement relative to the volume of
the other portion of the building served by the improvement.
(ii) Major portion defined. Whether a part of a building constitutes
a major portion of the building is determined upon the basis of all the
facts and circumstances. A major portion must generally consist of
clearly identifiable parts of a building (e.g., a wing of a building or
the first 5 stories of a 7 story building). The following factors shall
be taken into account:
(A) Whether the portion comprises an entire leasehold interest or an
entire ownership (e.g., condominium) interest;
(B) Whether the portion (as measured by volume) is sufficiently
large that it would be reasonable to treat it as a separate building;
and
(C) Whether the portion is functionally different from other parts
of the building.
(6) Special rule for rehabilitation done in phases. If
rehabilitation which is not continuous is determined under this
subparagraph to be a single rehabilitation done in phases, the
requirements of this paragraph (b) are to be applied with respect to the
overall rehabilitation and not merely to a phase of the rehabilitation.
In such case, a phase of a single overall rehabilitation will not be
considered as ``prior rehabilitation'' for purposes of subparagraph
(2)(i)(B) of this paragraph (b). Whether rehabilitation which is not
continuous is a single rehabilitation that is done in phases is
determined on the basis of all the facts and circumstances. Generally,
however, to constitute a single rehabilitation that is done in phases,
there must exist, prior to the time any rehabilitation work is
commenced, a set of written plans describing generally all phases of the
rehabilitation of the building and a reasonable expectation that all
phases of the rehabilitation will be completed. Such written plans are
not required to contain detailed working drawings or detailed
specifications of the material to be used. In addition, the period
between the time that physical work on the first phase of the overall
rehabilitation begins and physical work on the last phase of the overall
rehabilitation begins must be reasonable. In determining whether the
rehabilitation is completed within a reasonable time, the fact that a
building is occupied during the rehabilitation, the necessity of
acquiring a lease (of additional portions of the building), and
unforeseen delays shall be taken into account. Other factors that are
relevant in determining whether rehabilitation is a single
rehabilitation include the length of time between each phase of
rehabilitation activities and the extent of rehabilitation activity in
each phase.
[[Page 461]]
(7) Special rule for adjoining buildings that are combined. For
purposes of this paragraph (b), if as part of a rehabilitation process
two or more adjoining buildings are combined and placed in service as a
single building after the rehabilitation process, then all of the
requirements of a qualified rehabilitated building in section 48(g)(1)
and this section may be applied to the constituent adjoining buildings
in the aggregate. Any party walls or abutting walls between the
constitutent buildings that would otherwise be treated as external walls
(within the meaning of paragraph (b)(4)(ii) of this section) would not
be treated as external walls of the building; the substantial
rehabilitation test in paragraph (b)(3)(ii) of this section would be
applied to the aggregate rehabilitation work with respect to all of the
constitutent buildings.
(c) Definition of qualified rehabilitation expenditures--(1) In
general. Except as provided in subparagraph (2) of this paragraph, the
term ``qualified rehabilitation expenditure'' means any amount--
(i) Properly chargeable to capital account (as described in
subparagraph (2) of this paragraph),
(ii) Incurred after October 31, 1978, for depreciable or amortizable
property (or additions or improvements to property) with a useful life
of five years or more, and
(iii) Made in connection with the rehabilitation of a qualified
rehabilitated building.
(2) Chargeable to capital account. For purposes of paragraph
(c)(1)(i) of this section, amounts paid or incurred are chargeable to
capital account if under the taxpayer's method of accounting they are
property includible in computing basis under Sec. 1.46-3. Amounts
treated as an expense and deducted in the year they are paid or incurred
are not chargeable to capital account.
(3) Incurred by the taxpayer--(i) In general. Generally, to qualify
for a credit under section 48 (a)(1)(E), qualified rehabilitation
expenditures must be incurred by the taxpayer after October 31, 1978. An
expenditure is incurred for purposes of this paragraph on the date such
expenditure would be considered incurred under the accrual method of
accounting, regardless of the method of accounting used by the taxpayer
with respect to other items of income and expense. If qualified
rehabilitation expenditures are treated as having been incurred by a
taxpayer under paragraph (c)(3)(ii)) of this section, the taxpayer shall
be treated as having incurred the expenditures on the date such
expenditures were incurred by the transferor.
(ii) Qualified rehabilitation expenditures treated as incurred by
the taxpayer. (A) Where rehabilitation expenditures are incurred with
respect to a building by a person (or persons) other than the taxpayer
and the taxpayer acquires the building, or a portion of the building to
which the expenditures are allocable, the taxpayer acquiring such
property will be treated as having incurred the rehabilitation
expenditures actually incurred by the transferor (or treated as incurred
by the transferor under this paragraph (c)(3)(ii)) with respect to the
acquired property, provided that--
(1) The building, or the portion of the building, acquired by the
taxpayer was not used after the rehabilitation expenditures were
incurred and prior to the date of acquisition by the taxpayer, and
(2) No credit with respect to such qualified rehabilitation
expenditures is claimed by anyone other than the taxpayer acquiring the
property.
For purposes of this paragraph (c)(3)(ii), use shall mean actual use,
whether personal or business.
(B) The amount of qualified rehabilitation expenditures treated as
incurred by the taxpayer under this paragraph is the lesser of--
(1) The qualified rehabilitation expenditures incurred before the
date on which the taxpayer acquired the building (or portion thereof),
to which the expenditures are attributable, or
(2) That portion of the taxpayer's cost or other basis for the
property which is attributable to the qualified rehabilitation
expenditures described in paragraph (c)(3)(B)(1) of this section
incurred before such date.
For purposes of paragraph (c)(6)(ii) of this section, the amount of
rehabilitation expenditures treated as incurred by the taxpayer under
this paragraph (c)(3)(ii) shall not be considered to be
[[Page 462]]
part of the cost of acquiring a building or any interest in the
building. The portion of the cost of acquiring a building (or an
interest therein) which is not treated under this paragraph as qualified
rehabilitation expenditures incurred by the taxpayer is not eligible for
a rehabilitation investment credit. See paragraph (c)(6)(ii) of this
section.
(C) See paragraph (b)(2)(iv) of this section for rules concerning
the application of the substantial rehabilitation test to expenditures
treated as incurred by the taxpayer.
(iii) Examples. The provisions of this subparagraph may be
illustrated by the following examples:
Example 1. In 1978, taxpayer A, a cash basis taxpayer, commenced the
rehabilitation of a 30-year old building. In June 1978, A signed
contract with a plumbing contractor for replacement of the plumbing in
the building. A agreed to pay the contractor as soon as the work was
completed. The work was completed in September 1978, but A did not pay
the amount due until November 1, 1978. The expenditures for the plumbing
are not qualified rehabilitation expenditures because they were not
incurred after October 31, 1978.
Example 2. B incurred qualified rehabilitation expenditures of
$300,000 with respect to an existing building between January 1, 1980,
and May 15, 1980, and then sold the building to C on June 1, 1980. If
the property attributable to the expenditures was not placed in service
by A during the period from January 1, 1980, to June 1, 1980, C will be
treated as having incurred the expenditures.
(4) Incurred for 5-year property. An expenditure is incurred for
depreciable or amortizable property if the amount of the expenditure is
added to the basis of property which is depreciable or amortizable under
section 167. The determination of whether property has a useful life of
five years or more is made by applying the principles of Sec. 1.46-
3(e). In the case of expenditures for property made by a lessee, see
sections 167 and 178 and the regulations thereunder for rules relating
to whether improvements made to leased property are depreciable or
amortizable.
(5) Made in connection with the rehabilitation of a qualified
rehabilitated building. Expenditures attributable to work done to
facilities related to a building (e.g., sidewalk, parking lot,
landscaping) are not considered made in connection with a rehabilitation
of a qualified rehabilitated building.
(6) Certain expenditures excluded from qualified rehabilitation
expenditures. The term ``qualified rehabilitation expenditures'' does
not include the following expenditures:
(i) An expenditure for property which is ``section 38 property''
(determined without regard to section 48(a)(1) (E) and (l)).
(ii) The cost of acquiring a building or any interest in a building
(including a leasehold interest) except as provided in paragraph
(c)(3)(ii) of this section.
(iii) An expenditure attributable to enlargement of a building (as
defined in paragraph (c)(7) of this section).
(iv) An expenditure attributable to rehabilitation of a certified
historic structure (as defined in section 191(d)(1) and the regulations
thereunder), unless the rehabilitation is a certified rehabilitation (as
defined in paragraph (c)(8) of this section).
(7) Expenditures for enlargement distinguished--(i) In general.
Expenditures attributable to an enlargement of an existing building do
not qualify as qualified rehabilitated expenditures. A building is
enlarged to the extent that the total volume of the building is
increased. An increase in floor space resulting from interior remodeling
is not considred an enlargement. Generally, the total volume of a
building is equal to the product of the floor area of the base of the
building and the height from the underside of the lowest floor
(including the basement) to the average height of the finished roof (as
it exists or existed). For this purpose, floor area is measured from the
exterior faces of external walls (other than shared walls that are
external walls) and from the centerline of shared walls that are
external walls. In addition, a building is enlarged to the extent of any
construction outside the exterior faces of the existing external wall of
the building.
(ii) Rehabilitation which includes enlargement. If expenditures for
property only partially qualify as qualified rehabilitation expenditures
because some of the expenditures are also attributable to the
enlargement of the building, the
[[Page 463]]
expenditures must be apportioned between the original portion of the
building and the enlargement. This allocation should be made using the
principles contained in paragraph (b)(5)(i) of this section.
(8) Certified rehabilitation--(i) In general. For the purpose of
this paragraph (c) of this section, the term ``certified
rehabilitation'' means any rehabilitation of a certified historic
building in a registered historic district which the Secretary of the
Interior has certified to the Secretary as being consistent with the
historic character of such building or the district in which such
building is located.
(ii) Revoked or invalidated certifications. If the Department of
Interior revokes or otherwise invalidates a certification after it has
been provided to a taxpayer, the decertified property will cease to be
section 38 property described in section 48(a)(1)(e). Such cessation
shall be effective as of the date the activity giving rise to the
revocation or invalidation occurred. See section 47 for the rules
applicable to property that ceases to be section 38 property.
(d) Coordination with other provisions of the Code--(1) Credit by
lessees--(i) Rehabilitation performed by lessor. A lessee may take the
credit for rehabilitation performed by the lessor if the requirements of
this section and section 48(d) are satisfied. For purposes of applying
section 48(d), the fair market value of section 38 property described in
section 48(a)(1)(E) shall be equal to that portion of the lessor's basis
in a qualified rehabilitated building that is attributable to qualified
rehabilitation expenditures.
(ii) Rehabilitation performed by lessee. A lessee may take the
credit for rehabilitation performed by the lessee, provided that the
property (or improvements or additions to property) for which the
rehabilitation expenditures are made is depreciable (or amortizable) by
the lessee (see sections 167 and 178, and the regulations thereunder)
and the requirements of this section are satisfied.
(2) When credit may be claimed. The investment credit for qualified
rehabilitation expenditures is allowed generally in the taxable year in
which the property to which the rehabilitation expenditures is
attributable is placed in service, provided the building is a qualified
rehabilitated building for the taxable year. See Sec. 1.46-3(d). Under
certain circumstances, however, the credit may be available prior to the
date the property is placed in service. See section 46(d) and Sec.
1.46-5 (relating to qualified progress expenditures).
(3) Recapture. If property described in section 48(a)(1)(E) is
disposed of by the taxpayer, or otherwise ceases to be ``section 38
property,'' recapture may result under section 47. Property will cease
to be section 38 property, and therefore recapture may occur under
section 47, in any case where the Department of Interior revokes or
otherwise invalidates a certification of rehabilitation (see section
48(g)(2)(C)) after the property is placed in service because, for
example, the taxpayer made modifications to the building inconsistent
with Department of Interior standards.
(e) Effective date--(1) General rule. Except as provided in
paragraph (e)(2) of this section, this Sec. 1.48-11 shall not apply to
expenditures incurred after December 31, 1981.
(2) Transitional rule. This Sec. 1.48-11 shall continue to apply to
expenditures incurred after December 31, 1981, for the rehabilitation of
a building if--
(i) The physical work on the rehabilitation began before January 1,
1982, and
(ii) The building does not meet the requirements of section 48(g)(1)
of the Code as amended by the Economic Recovery Tax Act of 1981.
[T.D. 8031, 50 FR 26698, June 28, 1985]
Sec. 1.48-12 Qualified rehabilitated building; expenditures incurred
after December 31, 1981.
(a) General rule--(1) In general. Under section 48(a)(1)(E), the
portion of the basis of a qualified rehabilitated building that is
attributable to qualified rehabilitation expenditures (within the
meaning of section 48(g) and this section) is section 38 property.
Property that is section 38 property by reason of section 48(a)(1)(E) is
treated as new section 38 property and, therefore, is not subject to the
used property limitation in section 48(c). Section 48(g)(1) and
[[Page 464]]
paragraph (b) of this section define the term ``qualified rehabilitated
building.'' Section 48(g)(2) and paragraph (c) of this section define
the term ``qualified rehabilitation expenditure.'' Section 48(g)
(2)(B)(iv) and (3) and paragraph (d) of this section describe the rules
applicable to ``certified historic structures.'' Section 48(q) and
paragraph (e) of this section provide rules concerning an adjustment to
the basis of the rehabilitated building. Paragraph (f) of this section
provides guidance for coordination of these provisions with other
sections of the Code, including rules for determining when the
rehabilitation credit may be claimed.
(2) Effective dates and transition rules--(i) In general. Except as
otherwise provided in this paragraph (a)(2)(i), this section applies to
expenditures incurred after December 31, 1981, in connection with the
rehabilitation of a qualified rehabilitated building. (See paragraph
(c)(3)(i) of this section for rules concerning the determination of when
an expenditure is incurred.) If, however, physical work on the
rehabilitation began before January 1, 1982, and the building does not
meet the requirements of paragraph (b) of this section, the rules in
Sec. 1.48-11 shall apply to the expenditures incurred after December
31, 1981, in connection with such rehabilitation. (See paragraph
(b)(6)(i) of this section for rules determining when physical work on a
rehabilitation begins.) The last sentence of paragraph (c)(8)(i) of this
section applies to qualified rehabilitation expenditures that are
qualified property under section 168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b) acquired by a taxpayer after
September 10, 2001, and to qualified rehabilitation expenditures that
are 50 percent bonus depreciation property under section 168(k)(4)
acquired by a taxpayer after May 5, 2003.
(ii) Transition rules concerning ACRS lives. (A) For property placed
in service before March 16, 1984, and any property subject to the
exception set forth in section 111(g)(2) of Pub. L. 98-369 (Deficit
Reduction Act of 1984), the references to ``19 years'' in paragraph
(c)(4)(ii) and (7)(v) shall be replaced with ``15 years'' and the
reference to ``19-year real property'' in paragraph (c)(4)(ii) shall be
replaced with ``15-year real property.''
(B) Except as otherwise provided in paragraph (a)(2)(ii)(A) of this
section, for property placed in service before May 9, 1985, and any
property subject to the exception set forth in section 105(b) (2) and
(5) of Pub. L. 99-121 (99 Stat. 501, 511), the reference to ``19 years''
in paragraph (c)(4)(ii) and (7)(v) shall be replaced with ``18 years''
and the references to ``19-years real property'' in paragraph (c)(4)(ii)
shall be replaced with ``18-year real property.''
(iii) Transition rule concerning external wall definition.
Notwithstanding the definition of external wall contained in paragraph
(b)(3)(ii) of this section, in any case in which the written plans and
specifications for a rehabilitation were substantially completed on or
before June 28, 1985, and the building being rehabilitated would fail to
meet the requirement of paragraph (b)(1)(iii) of this section if the
definition of external wall in paragraph (b)(3)(ii) of this section were
used, the term ``external wall'' shall be defined as a wall, including
its supporting elements, with one face exposed to the weather or earth,
and a common wall shall not be treated as an external wall. See
paragraph (b)(2)(v) of this section for the definition of written plans
and specifications.
(iv) Transition rules concerning amendments made by the Tax Reform
Act of 1986--(A) In general. Except as otherwise provided in section
251(d) of the Tax Reform Act of 1986 and this paragraph (a)(2)(iv), the
amendments made by section 251 of the Tax Reform Act of 1986 shall apply
to property placed in service after December 31, 1986, in taxable years
ending after that date, regardless of when the rehabilitation
expenditures attributable to such property were incurred. If property
attributable to qualified rehabilitation expenditures is incurred with
respect to a rehabilitation to a building placed in service in segments
or phases and some segments are placed in service before January 1,
1987, and the remaining segments are placed in service after December
31, 1986, the amendments under the Tax Reform Act would not apply to the
property placed in service before
[[Page 465]]
January 1, 1987, but would apply to the segments placed in service after
December 31, 1986, unless one of the transition rules in paragraph
(a)(2)(iv) (B) or (C) of this section applies.
(B) General transition rule. The amendments made by sections 251 and
201 of the Tax Reform Act of 1986 shall not apply to property that
qualifies under section 251(d) (2), (3), or (4) of the Tax Reform Act of
1986. Property qualifies for the general transition rule in section
251(d)(2) of the Act if such property is placed in service before
January 1, 1994, and if such property is placed in service as part of--
(1) A rehabilitation that was completed pursuant to a written
contract that was binding on March 1, 1986, or
(2) A rehabilitation incurred in connection with property (including
any leasehold interest) acquired before March 2, 1986, or acquired on or
after such date pursuant to a written contract that was binding on March
1, 1986, if--
(i) Parts 1 and 2 of the Historic Preservation Certificate
Application were filed with the Department of the Interior (or its
designee) before March 2, 1986, or
(ii) The lesser of $1,000,000 or 5 percent of the cost of the
rehabilitation is incurred before March 2, 1986, or is required to be
incurred pursuant to a written contract which was binding on March 1,
1986.
(C) Specific rehabilitations. See section 251(d) (3) and (4) of the
Tax Reform Act of 1986 for additional rehabilitations that are exempted
from the amendments made by sections 251 and 201 of the Tax Reform Act
of 1986.
(b) Definition of qualified rehabilitated building--(1) In general.
The term ``qualified rehabilitated building'' means any building and its
structural components--
(i) That has been substantially rehabilitated (within the meaning of
paragraph (b)(2) of this section) for the taxable year,
(ii) That was placed in service (within the meaning of Sec. 1.46-
3(d)) as a building by any person before the beginning of the
rehabilitation, and
(iii) That meets the applicable existing external wall retention
test or the existing external wall and internal structural framework
retention test in accordance with paragraph (b)(3) of this section.
The requirement in paragraph (b)(1)(iii) of this section does not apply
to a certified historic structure. See paragraphs (b) (4) and (5) of
this section for additional requirements related to the definition of a
qualified rehabilitated building.
(2) Substantially rehabilitated building--(i) Substantial
rehabilitation test. A building shall be treated as having been
substantially rehabilitated for a taxable year only if the qualified
rehabilitation expenditures (as defined in paragraph (c) of this
section) incurred during any 24-month period selected by the taxpayer
ending with or within the taxable year exceed the greater of--
(A) The adjusted basis of the building (and its structural
components), or (B) $5,000.
(ii) Date to determine adjusted basis of the building--(A) In
general. The adjusted basis of the building (and its structural
components) shall be determined as of the beginning of the first day of
the 24-month period selected by the taxpayer or the first day of the
taxpayer's holding period of the building (within the meaning of section
1250(e)), whichever is later. For purposes of determining the holding
period under section 1250(e), any reconstruction that is part of the
rehabilitation shall be disregarded.
(B) Special rules. In the event that a building is not owned by the
taxpayer, the adjusted basis of the building shall be determined as of
the date that would have been used if the owner had been the taxpayer.
The adjusted basis of a building that is being rehabilitated by a
taxpayer other than the owner shall thus be determined as of the
beginning of the first day of the 24-month period selected by the
taxpayer or the first day of the owner's holding period, whichever is
later. Therefore, if a building that is being rehabilitated by a lessee
is sold subject to the lease prior to the date that the lessee has
substantially rehabilitated the building, the lessee's adjusted basis is
determined as of the beginning of the first day of the new lessor's
holding period or the beginning of the first day of the 24-month period
selected by the lessee
[[Page 466]]
(the taxpayer), whichever is later. If, therefore, the first day of the
new lessor's holding period were later than the first day of the 24-
month period selected by the lessee (the taxpayer), the lessee's
adjusted basis for purposes of the substantial rehabilitation test would
be the same as the adjusted basis of the new lessor as determined under
paragraph (b)(2)(vii) of this section. If a building is sold after the
date that a lessee has substantially rehabilitated the building with
respect to the original lessor's adjusted basis, however, the lessee's
basis may be determined as of the first day of the 24-month period
selected by the lessee or the first day of the original lessor's holding
period, whichever is later, and the transfer of the building will not
affect the adjusted basis for purposes of the substantial rehabilitation
test. The preceding sentence shall not apply, however, if the building
is sold to the lessee or a related party within the meaning of section
267(b) or section 707(b)(1).
(iii) Adjusted basis of the building--(A) In general. The term
``adjusted basis of the building'' means the aggregate adjusted basis
(within the meaning of section 1011(a)) in the building (and its
structural components) of all the parties who have an interest in the
building.
(B) Special rules. In the case of a building that is leased to one
or more tenants in whole or inpart, the adjusted basis of the building
is determined by adding the adjusted basis of the owner (lessor) in the
building to the adjusted basis of the lessee (or lessees) in the
leasehold and any leasehold improvements that are structural components
of the building. Similarly, in the case of a building that is divided
into condominium units, the adjusted basis of the building means the
aggregate adjusted basis of all of the respective condominium owners
(including the basis of any lessee in the leasehold and leasehold
improvements) in the building (and its structural components). If the
adjusted basis of a building would be determined in whole or in part by
reference to the adjusted basis of a person or persons other than the
taxpayer (e.g., a rehabilitation by a lessee) and the taxpayer is unable
to obtain the required information, the taxpayer must establish by clear
and convincing evidence that the adjusted basis of such person or
persons in the building on the date specified in paragraph (b)(2)(ii) of
this section is an amount that is less than the amount of qualified
rehabilitation expenditures incurred by the taxpayer. If no such amount
can be so established, the adjusted basis of the building will be deemed
to be the fair market value of the building on the relevant date. For
purposes of determining the adjusted basis of a building, the portion of
the adjusted basis of a building that is allocable to an addition
(within the meaning of paragraph (b)(4)(ii) of this section) to the
building that does not meet the age requirement in paragraph (b)(4)(i)
of this section shall be disregarded. (See paragraph (b)(2)(vii) of this
section for the rule applicable to the determination of the adjusted
basis of a building when qualified rehabilitation expenditures are
treated as incurred by the taxpayer.)
(iv) Rehabilitation. Rehabilitation includes renovation,
restoration, or reconstruction of a building, but does not include an
enlargement (within the meaning of paragraph (c)(10) of this section) of
new construction. The determination of whether expenditures are
attributable to the rehabilitation of an existing building or to new
construction shall be based upon all the facts and circumstances.
(v) Special rule for phased rehabilitation. In the case of any
rehabilitation that may reasonably be expected to be completed in phases
set forth in written architectural plans and specifications completed
before the physical work on the rehabilitation begins, paragraphs (b)(2)
(i), (ii), and (vii) of this section shall be applied by substituting
``60-month period'' for ``24-month period.'' A rehabilitation may
reasonably be expected to be completed in phases if it consists of two
or more distinct stages of development. The determination of whether a
rehabilitation consists of distinct stages and therefore may reasonably
be expected to be completed in phases shall be made on the basis of all
the relevant facts and circumstances in existence
[[Page 467]]
before physical work on the rehabilitation begins. For purposes of this
paragraph and paragraph (a)(2)(iii) of this section, written plans that
describe generally all phases of the rehabilitation process shall be
treated as written architectural plans and specifications. Such written
plans are not required to contain detailed working drawings or detailed
specifications of the materials to be used. In addition, the taxpayer
may include a description of work to be done by lessees in the written
plans. For example, where the owner of a vacant four story building
plans to rehabilitate two floors of the building and plans to require,
as a condition of any lease, that tenants of the other two floors must
rehabilitate those floors, the requirements of this paragrpah (b)(2)(v)
shall be met if the owner provides written plans for the rehabilitation
work to be done by the owner and a description of the rehabilitation
work that the tenants will be required to complete. The work required of
the tenants may be described in the written plans in terms of minimum
specifications (e.g., as to lighting, wiring, materials, appearance)
that must be met by such tenants. See paragraph (b)(6)(i) of this
section for the definition of physical work on a rehabilitation.
(vi) Treatment of expenses incurred by persons who have an interest
in the building. For purposes of the substantial rehabilitation test in
paragraph (b)(2)(i) of this section, the taxpayer may take into account
qualified rehabilitation expenditures incurred during the same
rehabilitation process by any other person who has an interest in the
building. Thus, for example, to determine whether a building has been
substantially rehabilitated, a lessee may include the expenditures of
the lessor and of other lessees; a condominium owner may include the
expenditures incurred by other condominium owners; and an owner may
include the expenditures of the lessees.
(vii) Special rules when qualified rehabilitation expenditures are
treated as incurred by the taxpayer. In the case where qualified
rehabilitation expenditures are treated as having been incurred by a
taxpayer under paragraph (c)(3)(ii) of this section, the transferee
shall be treated as having incurred the expenditures incurred by the
transferor on the date that the transferor incurred the expenditures
within the meaning of paragraph (c)(3)(i) of this section. For purposes
of the substantial rehabilitation test in paragrpah (b)(2)(i) of this
section, the transferee's adjusted basis in the building shall be
determined as of the beginning of the first day of a 24-month period, or
the first day of the transferee's holding period, whichever is later, as
provided in paragraph (b)(2)(ii) of this section. The transferee's basis
as of the first day of the transferee's holding period for purposes of
the substantial rehabilitation test in paragraph (b)(2)(i) of this
section, however, shall be considered to be equal to the transferee's
basis in the building on such date less--
(A) The amount of any qualified rehabilitation expenditures incurred
(or treated as having been incurred) by the transferor during the 24-
month period that are treated as having been incurred by the transferee
under paragraph (c)(3)(ii) of this section, and
(B) The amount of qualified rehabilitation expenditures incurred
before the transfer and during the 24-month period by any other person
who has an interest in the building (e.g., a lessee of the transferor).
The preceding sentence shall not apply, however, unless the transferee's
basis in the building is determined with reference to (1) the
transferee's cost of the building (including the rehabilitation
expenditures), (2) the transferor's basis in the building (where such
basis includes the amount of the expenditures), or (3) any other amount
that includes the cost of the rehabilitation expenditures. In the event
that the transferee's basis is determined with reference to an amount
not described above (e.g., transferee's basis in one building is
determined with reference to the transferee's basis in another building
under section 1031(d)), the amount of the expenditures incurred by the
transferor and treated as having been incurred by the transferee are not
deducted from the transferee's basis for purposes of the substantial
rehabilitation test. If a transferee's basis is determined under section
1014, any expenditures incurred by the decedent within the measuring
[[Page 468]]
period that are treated as having been incurred by the transferee under
paragraph (c)(3)(ii) of this section shall decrease the transferee's
basis for purposes of the substantial rehabilitation test.
(viii) Statement of adjusted basis, measuring period, and qualified
rehabilitation expenditures. In the case of any tax return filed after
August 27, 1985, on which an investment tax credit for property,
described in section 48(a)(1)(E) is claimed, the taxpayer shall indicate
by way of a marginal notation on, or a supplemental statement attached
to, Form 3468--
(A) The beginning and ending dates for the measuring period selected
by the taxpayer under section 48(g)(1)(C)(i) and paragraph (b)(2) of
this section,
(B) The adjusted basis of the building (within the meaning of
paragraph (b)(2) (iii) or (vii) of this section) as of the beginning of
such measuring period, and
(C) The amount of qualified rehabilitation expenditures incurred,
and treated as incurred, respectively, during such measuring period.
Furthermore, for returns filed after August 27, 1985, if the adjusted
basis of the building for purposes of the substantial rehabilitation
test is determined in whole or in part by reference to the adjusted
basis of a person, or persons, other than the taxpayer (e.g., a
rehabilitation by a lessee), the taxpayer must attach to the Form 3468
filed with the tax return on which the credit is claimed a statement
addressed to the District Director, signed by such third party, that
states the first day of the third party's holding period and the amount
of the adjusted basis of such third party in the building at the
beginning of the measuring period or the first day of the holding
period, whichever is later. If the taxpayer is unable to obtain the
required information, that fact should be indicated and the taxpayer
should state the manner in which the adjusted basis was determined and,
if different, the fair market value of the building on the relevant
date.
(ix) Partnerships and S corporations. If a building is owned by a
partnership (i.e., the building is partnership property) or an S
corporation, the substantial rehabilitation test shall be determined at
the entity level. Thus, the entity shall compare the amount of qualified
rehabilitation expenditures incurred during the measuring period against
its basis in the building at the beginning of its holding period or the
beginning of its measuring period, whichever is later. (See section
1223(2) for rules concerning the determination of a partnership's
holding period in the case of a contribution of property to the
partnership meeting the requirements of section 721.) The adjusted basis
of the building to a partnership shall be determined by taking into
account any adjustments to the basis of the building made under section
743 and section 734. Any adjustments to the building's basis that are
made under section 743 or section 734 after the beginning of the
partnership's holding period, but before the end of the measuring
period, shall be deemed for purposes of the substantial rehabilitation
test to have been made on the first day of the partnership's holding
period. However, in such case, the partnership's basis in the building
shall be reduced by the amount of qualified rehabilitation expenditures
incurred by the partnership. In the case of any tax return filed after
January 9, 1989 on which a credit is claimed by a partner or a
shareholder of an S corporation for rehabilitation expenditures incurred
by a partnership or an S corporation, the partner or shareholder shall
indicate on the Form 3468 on which the credit is claimed the name,
address, and identification number of the partnership or S corporation
that incurred the rehabilitation expenditures, and the partnership or S
corporation shall, by way of a marginal notation on or a supplemental
statement attached to the entity's return, provide the information
required by paragraph (b)(2)(viii) of this section.
(x) Examples. The following examples illustrate the application of
the substantial rehabilitation test in this paragraph (b)(2):
Example 1. Assume that A, a calendar year taxpayer, purchases a
building for $140,000 on January 1, 1982, incurs qualified
rehabilitation expenditures in the amount of $48,000 (at the rate of
$4,000 per month) in 1982, $100,000 in 1983, and $20,000 (at the rate of
$2,000 per month) in the first ten months of 1984, and places the
rehabilitated building in service
[[Page 469]]
on October 31, 1984. Assume that A did not have written architectural
plans and specifications describing a phased rehabilitation within the
meaning of paragraph (b)(2)(v) of this section in existence prior to the
beginning of physical work on the rehabilitation. For purposes of the
substantial rehabilitation test in paragraph (b)(2) of this section, A
may select any 24-consecutive-month measuring period that ends in 1984,
the taxable year in which the rehabilitated building was placed in
service. Assume that on A's 1984 return, A selects a measuring period
beginning on February 1, 1982, and ending on January 31, 1984, and
specifies that A's basis in the building (within the meaning of section
1011(a)) was $144,000 on February 1, 1982 ($140,000+$4,000). (The $4,000
of rehabilitation expenditures incurred during January 1982 are included
in A's basis under section 1011 even though such property has not been
placed in service.) The amount of qualified rehabilitation expenditures
incurred during the measuring period was $146,000 ($44,000 from February
1 to December 31, 1982, plus $100,000 in 1983, plus $2,000 in January
1984). The building shall be treated as ``substantially rehabilitated''
within the meaning of this paragraph (b)(2) for A's 1984 taxable year
because the $146,000 of expenditures incurred by A during the measuring
period exceeded A's adjusted basis of $144,000 at the beginning of the
period. If the other requirements of section 48(g)(1) and this paragraph
are met, the building is treated as a qualified rehabilitated building,
and A can treat as qualified rehabilitation expenditures the amount of
$168,000 (i.e., $146,000 of expenditures incurred during the measuring
period, $4,000 of expenditures incurred prior to the beginning of the
measuring period as part of the rehabilitation process, and $18,000 of
expenditures incurred after the measuring period during the taxable year
within which the measuring period ends (See paragraph (c)(6) of this
section.)). The result would generally be the same if the property
attributable to the rehabilitation expenditures was placed in service as
the expenditures were incurred, but A would have $148,000 of qualified
rehabilitation expenditures for 1983 and $20,000 of qualified
rehabilitation expenditures for 1984. (See paragraph (f)(2) of this
section).
Example 2. Assume the same facts as in example 1, except that
additional rehabilitation expenditures are incurred after the portion of
the basis of the building attributable to qualified rehabilitation
expenditures was placed in service on October 31, 1984. Such
expenditures are incurred through the end of 1984 and in 1985 when the
portion of the basis attributable to the additional expenditures is
placed in service. The fact that the building qualified as a
substantially rehabilitated building for A's 1984 taxable year has no
effect on whether the building is a qualified rehabilitated building for
property placed in service in A's 1985 taxable year. In order to
determine whether the building is a qualified rehabilitated building for
A's 1985 taxable year, A must select a measuring period that ends in
1985 and compare the expenditures incurred within that period with the
adjusted basis as of the beginning of the period. Solely for the purpose
of determining whether the building was substantially rehabilitated for
A's 1985 taxable year, expenditures incurred during 1983 and 1984, even
though considered in determining whether the building was substantially
rehabilitated in 1984, may also be used to determine whether the
building was substantially rehabilitated for A's 1985 taxable year,
provided the expenditures were incurred during any 24-month measuring
period selected by A that ends in 1985.
Example 3. (i) Assume the B purchases a building for $100,000 on
January 1, 1982, and leases the building to C who rehabilitates the
building. Assume that C, a calendar year taxpayer, places the property
with respect to which rehabilitation expenditures were made in service
in 1982 and selects December 31, 1982, as the end of the measuring
period for purposes of the substantial rehabilitation test. The
beginning of the measuring period is January 2, 1982, the beginning of
B's holding period under section 1250(e), and the adjusted basis of the
building is $100,000. Accordingly, if C incurred more than $100,000 of
qualified rehabilitation expenditures during 1982, the building would be
substantially rehabilitated within the meaning of paragraph (b)(2)(i) of
this section.
(ii) Assume the facts of example 3(i), except that after C begins
physical work on the rehabilitation, but before C incurs $100,000 of
expenditures, D acquires the building, subject to C's lease, from B for
$200,000. D's holding period under section 1250(e) begins on the day
after D acquired the building, and C's adjusted basis for purposes of
the substantial rehabilitation test is $200,000, less the amount of
expenditures incurred by C before the transfer. (See paragraphs (b)(2)
(ii) and (vii) of this section.) Accordingly, if C incurred more than
$200,000 (less the amount of expenditures incurred prior to the
transfer) of qualified rehabilitation expenditures during 1982, the
building would be substantially rehabilitated within the meaning of
paragraph (b)(2) of this section. Under paragraph (b)(2)(ii)(B) of this
section, however, C's adjusted basis for purposes of the substantial
rehabilitation test would be $100,000 if C had substantially
rehabilitated the building (i.e., incurred more than $100,000 in
rehabilitation expenditures) prior to B's sale to D.
Example 4. E owns a building with a basis of $10,000 and E incurs
$5,000 of rehabilitation expenditures. Before completing the
rehabilitation project, E sells the building to F for $30,000. Assume
that F is treated under paragraph (c)(3)(ii) of this section as having
[[Page 470]]
incurred the $5,000 of rehabilitation expenditures actually incurred by
E. Because F's basis in the building is determined under section 1011
with reference to F's $30,000 cost of the building (which includes the
property attributable to E's rehabilitation expenditures), F's basis for
purposes of the substantial rehabilitation test is $25,000 ($30,000 cost
basis less $5,000 rehabilitation expenditures treated as if incurred by
F). (See paragraph (b)(2)(vii) of this section.) F would thus be
required to incur more than $20,000 of rehabilitation expenditures (in
addition to the $5,000 incurred by E and treated as having been incurred
by F) during a measuring period selected by F to satisfy the substantial
rehabilitation test.
Example 5. G owns Building I with a basis of $10,000 and a fair
market value of $20,000. H owns Building II with a basis of $5,000 and a
fair market value of $20,000, with respect to which H has incurred
$1,000 of rehabilitation expenditures. G and H exchange their buildings
in a transaction that qualifies for nonrecognition treatment under
section 1031. Assume that G is treated under paragraph (c)(3)(ii) of
this section as having incurred $1,000 of rehabilitation expenditures.
G's basis in Building II, computed under section 1031(d), is $10,000.
G's basis in Building II is not determined with reference to (A) the
cost of Building II, (B) H's basis in Building II (including the cost of
the rehabilitation expenditures) or (C) any other amount that includes
the cost of expenditures, but is instead determined with reference to
G's basis in other property (Building I). Therefore, G's basis in
Building II for purposes of the substantial rehabilitation test is not
reduced by the $1,000 of rehabilitation expenditures treated as if
incurred by G. (See paragraph (b)(2)(vii) of this section.) Accordingly,
G's basis in Building II for purposes of the substantial rehabilitation
test is $10,000, and G must incur additional rehabilitation expenditures
in excess of $9,000 within a measuring period selected by G to satisfy
the test.
(3) Retention of existing external walls and internal structural
framework--(i) In general--(A) Property placed in service after December
31, 1986. Except in the case of property that qualifies for the
transition rules in paragraphs (a)(2)(iv) (B) and (C) of this section,
in the case of property that is placed in service after December 31,
1986, a building (other than a certified historic structure) meets the
requirement in paragraph (b)(1)(iii) of this section only if in the
rehabilitation process--
(1) 50 percent or more of the existing external walls of such
building are retained in place as external walls;
(2) 75 percent or more of the existing external walls of such
building are retained in place as internal or external walls; and
(3) 75 percent or more of the internal structural framework of such
building (as defined in paragraph (b)(3)(iii) of this section) is
retained in place.
(B) Expenditures incurred before January 1, 1984, for property
placed in service before January 1, 1987. With respect to rehabilitation
expenditures incurred before January 1, 1984, for property that is
either placed in service before January 1, 1987, or that qualifies for
the transition rules in paragraph (a)(2)(iv) (B) or (C) of this section,
a building meets the requirement in paragraph (b)(1)(iii) of this
section only if 75 percent or more of the existing external walls of the
building are retained in place as external walls in the rehabilitation
process. If an addition to a building is not treated as part of a
qualified rehabilitated building because it does not meet the 30-year
requirement in paragraph (b)(4)(i)(B) of this section, then the external
walls of such addition shall not be considered to be existing external
walls of the building for purposes of section 48(g)(1)(A)(iii) (as in
effect prior to enactment of the Tax Reform Act of 1986), and this
section.
(C) Expenditures incurred after December 31, 1983, for property
placed in service before January 1, 1987. With respect to expenditures
incurred after December 31, 1983, for property that is either placed in
service before January 1, 1987, or that qualifies for the transition
rules in paragraph (a)(2)(iv) (B) or (C) of this section, the
requirement of paragraph (b)(1)(iii) of this section is satisfied only
if in the rehabilitation process either the existing external wall
retention requirement in paragraph (b)(3)(i) (B) of this section is
satisfied, or:
(1) 50 percent or more of the existing external walls of the
building are retained in place as external walls,
(2) 75 percent or more of the existing external walls are retained
in place as internal or external walls, and
(3) 75 percent or more of the existing internal structural framework
of such building is retained in place.
[[Page 471]]
(D) Area of external walls and internal structural framework. The
determinations required by paragraphs (b)(3)(i) (A), (B), and (C) of
this section shall be based upon the area of the external walls or
internal structural framework that is retained in place compared to the
total area of each prior to the rehabilitation. The area of the existing
external walls and internal structural framework of a building shall be
determined prior to any destruction, modification, or construction of
external walls or internal structural framework that is undertaken by
any party in anticipation of the rehabilitation.
(ii) Definition of external wall. For purposes of this paragraph
(b), a wall includes both the supporting elements of the wall and the
nonsupporting elements, (e.g., a curtain, windows or doors) of the wall.
Except as otherwise provided in this paragraph (b)(3), the term
``external wall'' includes any wall that has one face exposed to the
weather, earth, or an abutting wall of an adjacent building. The term
``external wall'' also includes a shared wall (i.e., a single wall
shared with an adjacent building), generally referred to as a ``party
wall,'' provided that the shared wall has no windows or doors in any
portion of the wall that does not have one face exposed to the weather,
earth, or an abutting wall. In general, the term ``external wall''
includes only those external walls that form part of the outline or
perimeter of the building or that surround an uncovered courtyard.
Therefore, the walls of an uncovered internal shaft, designed solely to
bring light or air into the center of a building, which are completely
surrounded by external walls of the building and which enclose space not
designated for occupancy or other use by people (other than for
maintenance or emergency), are not considered external walls. Thus, for
example, a wall of a light well in the center of a building is not an
external wall. However, walls surrounding an outdoor space which is
usable by people, such as a courtyard, are external walls.
(iii) Definition of internal structural framework. For purposes of
this section, the term ``internal structural framework'' includes all
load-bearing internal walls and any other internal structural supports,
including the columns, girders, beams, trusses, spandrels, and all other
members that are essential to the stability of the building.
(iv) Retained in place. An existing external wall is retained in
place if the supporting elements of the wall are retained in place. An
existing external wall is not retained in place if the supporting
elements of the wall are replaced by new supporting elements. An
external wall is retained in place, however, if the supporting elements
are reinforced in the rehabilitation, provided that such supporting
elements of the external wall are retained in place. An external wall
also is retained in place if it is covered (e.g., with new siding).
Moreover, an external wall is retained in place if the existing curtain
is replaced with a new curtain, provided that the structural framework
that provides for the support of the existing curtain is retained in
place. An external wall is retained in place notwithstanding that the
existing doors and windows in the wall are modified, eliminated, or
replaced. An external wall is retained in place if the wall is
disassembled and reassembled, provided the same supporting elements are
used when the wall is reassembled and the configuration of the external
walls of the building after the rehabilitation is the same as it was
before the rehabilitation process commenced. Thus, for example, a brick
wall is considered retained in place even though the original bricks are
removed (for cleaning, etc.) and replaced to form the wall. The
principles of this paragraph (b)(3)(iv) shall also apply to determine
whether internal structural framework of the building is retained in
place.
(v) Effect of additions. If an existing external wall is converted
into an internal wall (i.e., a wall that is not an external wall), the
wall is not retained in place as an external wall for purposes of this
section.
(vi) Examples. The provisions of this paragraph (b)(3) may be
illustrated by the following examples:
Example 1. Taxpayer A rehabilitated a building all of the walls of
which consisted of wood siding attached to gypsum board sheets (which
covered the supporting elements of the wall, i.e., studs). A covered the
existing wood siding with aluminum siding as part of
[[Page 472]]
a rehabilitation that otherwise qualified under this subparagraph. The
addition of the aluminum siding does not affect the status of the
existing external walls as external walls and they would be considered
to have been retained in place.
Example 2. Taxpayer B rehabilitated a building, the external walls
of which had a masonry curtain. The masonry on the wall face was
replaced with a glass curtain. The steel beam and girders supporting the
existing masonry curtain were retained in place. The walls of the
building are considered to be retained in place as external walls,
notwithstanding the replacement of the curtain.
Example 3. Taxpayer C rehabilitated a building that has two external
walls measuring 75[foot] x 20[foot] and two other external walls
measuring 100[foot] x 20[foot]. C demolished one of the larger walls,
including its supporting elements and constructed a new wall. Because
one of the larger walls represents more than 25 percent of the area of
the building's external walls, C has not satisfied the requirements that
75 percent of the existing external walls must be retained in place as
either internal or external walls. If however, C had not demolished the
wall, but had converted it into an internal wall (e.g., by building a
new external wall), the building would satisfy the external wall
requirements.
Example 4. The facts are the same as in example 3, except that C
does not tear down any walls, but builds an addition that results in one
of the smaller walls becoming an internal wall. In addition, C enlarged
8 of the existing windows on one of the larger walls, increasing them
from a size of 3[foot] x 4[foot] to 6[foot] x 8[foot]. Since the smaller
wall accounts for less than 25 percent of the total wall area, C has
satisfied the requirement that 75 percent of the existing external walls
must be retained in place as external walls in the rehabilitation
process. The enlargement of the existing windows on the larger wall does
not affect its status as an external wall.
Example 5. Taxpayer D rehabilitated a building that was in the
center of a row of three buildings. The building being rehabilitated by
D shares its side walls with the buildings on either side. The shared
walls measure 100[foot] x 20[foot] and the rear and front walls measure
75[foot] x 20[foot]. As part of a rehabilitation, D tears down and
replaces the front wall. Because the shared walls as well as the front
and back walls are considered external walls and the front wall accounts
for less than 25 percent of the total external wall area (including the
shared walls), D has satisfied the requirement that 75 percent of the
existing external walls must be retained in place as external walls in
the rehabilitation process.
(4) Age requirement--(i) In general--(A) Property placed in service
after December 31, 1986. Except in the case of property that qualifies
for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this
section, a building other than a certified historic structure shall not
be considered a qualified rehabilitated building unless the building was
first placed in service (within the meaning of Sec. 1.46-3(d)) before
January 1, 1936.
(B) Property placed in service before January 1, 1987, and property
qualifying under a transition rule. In the case of property placed in
service before January 1, 1987, and property that qualifies under the
transition rules in paragraph (a)(2)(iv) (B) or (C) of this section, a
building other than a certified historic structure is considered a
qualified rehabilitated building only if a period of at least 30 years
has elasped between the date physical work on the rehabilitation of the
building began and the date the building was first placed in service
(within the meaning of Sec. 1.46-3(d)) as a building by any person.
(ii) Additions. A building that was first placed in service before
1936 in the case described in paragraph (b)(4)(i)(A) of this section, or
at least 30 years before physical work on the rehabilitation began in
the case described in paragraph (b)(4)(i)(B) of this section, will not
be disqualified because additions to such building have been added since
1936 in the case described in paragraph (b)(4)(i)(A) of this section, or
are less than 30 years old in the case described in paragraph
(b)(4)(i)(B) of this section. Such additions, however, shall not be
treated as part of the qualified rehabilitated building. The term
``addition'' means any construction that resulted in any portion of an
external wall becoming an internal wall, that resulted in an increase in
the height of the building, or that increased the volume of the
building.
(iii) Vacant periods. The determinations required by paragraph
(b)(4)(i) of this section include periods during which a building was
vacant or devoted to a personal use and is computed without regard to
the number of owners or the identify of owners during the period.
(5) Location at which the rehabilitation occurs. A building, other
than a certified historic structure is not a qualified rehabilitated
building unless it has been located where it is rehabilitated
[[Page 473]]
since before 1936 in the case described in paragraph (b)(4)(i)(A) of
this section. Similarly, in the case described in paragraph (b)(4)(i)(B)
of this section, a building, other than a certified historic structure,
is not a qualified rehabilitation building unless it has been located
where it is rehabilitated for the thirty-year period immediately
preceding the date physical work on the rehabilitation began in the case
of a ``30-year building'' or the forty-year period immediately preceding
the date physical work on the rehabilitation began in the case of a
``40-year building.'' (See Sec. 1.46-1(q)(1)(iii) for the definitions
of ``30-year building'' and ``40-year building.'')
(6) Definition and special rule--(i) Physical work on a
rehabilitation. For purposes of this section, ``physical work on a
rehabilitation'' begins when actual construction, or destruction in
preparation for construction, begins. The term ``physical work on a
rehabilitation,'' however, does not include preliminary activities such
as planning, designing, securing financing, exploring, researching,
developing plans and specifications, or stabilizing a building to
prevent deterioration (e.g., placing boards over broken windows).
(ii) Special rule for adjoining buildings that are combined. For
purposes of this paragraph (b), if as part of a rehabilitation process
two or more adjoining buildings are combined and placed in service as a
single building after the rehabilitation process, then, at the election
of the taxpayer, all of the requirements for a qualified rehabilitated
building in section 48(g)(1) and this section may be applied to the
constituent adjoining buildings in the aggregate. For example, if such
requirements are applied in the aggregate, any shared walls or abutting
walls between the constituent buildings that would otherwise be treated
as external walls (within the meaning of paragraph (b)(3) of this
section) would not be treated as external walls of the building, and the
substantial rehabilitation test in paragraph (b)(2) of this section
would be applied to the aggregate expenditures with respect to all of
the constituent buildings and to the aggregate adjusted basis of all of
the constituent buildings. A taxpayer shall elect the special rule of
this paragraph (b)(6)(ii) for adjoining buildings by indicating by way
of a marginal notation on, or a supplemental statement attached to, the
Form 3468 on which a credit is first claimed for qualified
rehabilitation expenditures with respect to such buildings that such
buildings are a single qualified rehabilitated building because of the
application of the special rule in this paragraph (b)(6)(ii).
(c) Definition of qualified rehabilitation expenditures--(1) In
general. Except as otherwise provided in paragraph (c)(7) of this
section, the term ``qualified rehabilitation expenditure'' means any
amount that is--
(i) Properly chargeable to capital account (as described in
paragraph (c)(2) of this section),
(ii) Incurred by the taxpayer after December 31, 1981 (as described
in paragraph (c)(3) of this section),
(iii) For property for which depreciation is allowable under section
168 and which is real property described in paragraph (c)(4) of this
section, and
(iv) Made in connection with the rehabilitation of a qualified
rehabilitated building (as described in paragraph (c)(5) of this
section).
(2) Chargeable to capital account. For purposes of paragraph (c)(1)
of this section, amounts are chargeable to capital account if they are
properly includible in computing basis of real property under Sec.
1.46-3(c). Amounts treated as an expense and deducted in the year they
are paid or incurred or amounts that are otherwise not added to the
basis of real property described in paragraph (c)(4) of this section do
not qualify. For purposes of this paragraph (c), amounts incurred for
architectural and engineering fees, site survey fees, legal expenses,
insurance premiums, development fees, and other construction related
costs, satisfy the requirement of this paragraph (c)(2) if they are
added to the basis of real property that is described in paragraph
(c)(4) of this section. Construction period interest and taxes that are
amortized under section 189 (as in effect prior to its repeal by the Tax
Reform Act of 1986) do not satisfy the requirement of this paragraph
(c)(2). If, however, such interest and taxes are treated by the taxpayer
as
[[Page 474]]
chargeable to capital account with respect to property described in
paragraph (c)(4) of this section, they shall be treated in the same
manner as other costs described in this paragraph (c)(2). Any
construction period interest or taxes or other fees or costs incurred in
connection with the acquisition of a building, any interest in a
building, or land, are subject to paragraph (c)(7)(ii) of this section.
See paragraph (c)(9) of this section for additional rules concerning
interest.
(3) Incurred by the taxpayer--(i) In general. Qualified
rehabilitation expenditures are incurred by the taxpayer for purposes of
this section on the date such expenditures would be considered incurred
under an accrual method of accounting, regardless of the method of
accounting used by the taxpayer with respect to other items of income
and expense. If qualified rehabilitation expenditures are treated as
having been incurred by a taxpayer under paragraph (c)(3)(ii) of this
section, the taxpayer shall be treated as having incurred the
expenditures on the date such expenditures were incurred by the
transferor.
(ii) Qualified rehabilitation expenditures treated as incurred by
the taxpayer--(A) Where rehabilitation expenditures are incurred with
respect to a building by a person (or persons) other than the taxpayer
and the taxpayer subsequently acquires the building, or a portion of the
building to which some or all of the expenditures are allocable (e.g., a
condominium unit to which rehabilitation expenditures have been
allocated), the taxpayer acquiring such property shall be treated as
having incurred the rehabilitation expenditures actually incurred by the
transferor (or treated as incurred by the transferor under this
paragraph (c)(3)(ii)) allocable to the acquired property, provided
that--
(1) The building, or the portion of the building, acquired by the
taxpayer was not used (or, if later, was not placed in service (as
defined in paragraph (f)(2) of this section)) after the rehabilitation
expenditures were incurred and prior to the date of acquisition, and
(2) No credit with respect to such qualified rehabilitation
expenditures is claimed by anyone other than the taxpayer acquiring the
property. For purposes of this paragraph (c)(3)(ii), use shall mean
actual use, whether personal or business. In the case of a building that
is divided into condominium units, expenditures attributable to the
common elements shall be allocable to the individual condominium units
in accordance with the principles of paragraph (c)(10)(ii) of this
section. Furthermore, for purpose of this paragraph (c)(3)(ii), a
condominium unit's share of the common elements shall not be considered
to have been used (or placed in service) prior to the time that the
particular condominium unit is used.
(B) The amount of rehabilitation expenditures described in paragraph
(c)(3)(ii)(A) of this section treated as incurred by the taxpayer under
this paragraph shall be the lesser of--
(1) The amount of rehabilitation expenditures incurred before the
date on which the taxpayer acquired the building (or portion thereof) to
which the rehabilitation expenditures are attributable, or
(2) The portion of the taxpayer's cost or other basis for the
property that is properly allocable to the property resulting from the
rehabilitation expenditures described in paragraph (c)(3)(ii)(B)(1) of
this section.
(C) For purposes of this paragraph (c)(3)(ii), the amount of
rehabilitation expenditures treated as incurred by the taxpayer under
this paragraph (c) shall not be treated as costs for the acquisition of
a building. The portion of the cost of acquiring a building (or an
interest therein) that is not treated under this paragraph as qualified
rehabilitation expenditures incurred by the taxpayer is not treated as
section 38 property in the hands of the acquiring taxpayer. (See
paragraph (c)(7)(ii) of this section.) (See paragraph (b)(2)(vii) for
rules concerning the application of the substantial rehabilitation test
when expenditures are treated as incurred by the taxpayer.)
(iii) Examples. The provisions of this paragraph (c) may be
illustrated by the following examples:
Example 1. In 1981, A, a taxpayer using the cash receipts and
disbursements method of accounting, commenced the rehabilitation of a
30-year old building. In June 1981, A signed
[[Page 475]]
a contract with a plumbing contractor for replacement of the plumbing in
the building. A agreed to pay the contractor as soon as the work was
completed. The work was completed in December 1981, but A did not pay
the amount due until January 15, 1982. The expenditures for the plumbing
are not qualified rehabilitation expenditures (within the meaning of
this paragraph (c)) because they were not incurred under an accrual
method of accounting after December 31, 1981.
Example 2. B incurred qualified rehabilitation expenditures of
$300,000 with respect to an existing building between January 1, 1982,
and May 15, 1982, and then sold the building to C on June 1, 1982. The
portion of the building to which the expenditures were allocable was not
used by B or any other person during the period from January 1, 1982, to
June 1, 1982, and neither B nor any other person claimed the credit.
Consequently, C will be treated as having incurred the expenditures on
the dates that B incurred the expenditures.
Example 3. D, a taxpayer using the cash receipts and disbursements
method of accounting, begins the rehabilitation of a building on January
11, 1982. Prior to May 1, 1982, D makes rehabilitation expenditures of
$16,000. On May 3, 1982, D sells the building, the land, and the
property attributable to the rehabilitation expenditures to E for
$35,000. The purchase price is properly allocable as follows:
Land........................................................... $5,000
Existing building.............................................. 11,000
Property attributable to rehabilitation expenditures........... 19,000
--------
Total purchase price..................................... 35,000
The property attributable to the rehabilitation expenditures is
placed in service by E on September 5, 1982. E may treat a portion of
the $35,000 purchase price as rehabilitation expenditures paid or
incurred by him. Since the rehabilitation expenditures paid by D
($16,000) are less than the portion of the purchase price properly
allocable to property attributable to these expenditures ($19,000), E
may treat only $16,000 as rehabilitation expenditures paid or incurred
by him. The excess of the purchase price allocable to rehabilitation
expenditures ($19,000) over the rehabilitation expenditures paid by D
($16,000), or $3,000, is treated as the cost of acquiring an interest in
the building and is not a qualified rehabilitation expenditure treated
as incurred by E.
Example 4. The facts are the same as in example 3, except that the
purchase price properly allocable to the property attributable to
rehabilitation expenditures is $15,000. Under these circumstances, E may
treat only $15,000 of D's $16,000 expenditures as rehabilitation
expenditures paid by D. The excess of the rehabilitation expenditures
paid by D ($16,000) over the purchase price allocable to rehabilitation
expenditures ($15,000), or $1,000, is treated as the cost of acquiring
an interest in the building and is not a qualified rehabilitation
expenditure treated as incurred by E.
(4) Incurred for depreciable real property--(i) Property placed in
service after December 31, 1986. Except as otherwise provided in
paragraph (c)(4)(ii) of this section (relating to certain property that
qualifies under a transition rule), in the case of property placed in
service after December 31, 1986, an expenditure is incurred for
depreciable real property for purposes of paragraph (c)(1)(iii) of this
section, only if it is added to the depreciable basis of depreciable
property which is--
(A) Nonresidential real property,
(B) Residential rental property,
(C) Real property which has a class life of more than 12.5 years, or
(D) An addition or improvement to property described in paragraph
(c)(4)(i) (A), (B), or (C) of this section.
For purposes of this paragraph (c)(4)(i), the terms ``nonresidential
real property'', ``residential rental property'', and ``class life''
have the respective meanings given to such terms by section 168 and the
regulations thereunder.
(ii) Property placed in service before January 1, 1987, and property
that qualifies under a transition rule. In the case of property placed
in service before January 1, 1987, and property placed in service after
December 31, 1986, that qualifies for the transition rules in paragraph
(a)(2)(iv) (B) or (C) of this section, an expenditure attributable to
such property shall be a qualified rehabilitation expenditure only if
such expenditure is incurred for property that is real property (or
additions or improvements to real property) with a recovery period
(within the meaning of section 168 as in effect prior to its amendment
by the Tax Reform Act of 1986) of 19 years (15 years for low-income
housing) and if the other requirements of this paragraph (c) are met.
For purposes of this section, an expenditure is incurred for recovery
property having a recovery period of 19 years only if the amount of the
expenditure is added to the basis of property which is 19-year real
property or 15-year real property in the case of low-income housing. For
purposes of this section,
[[Page 476]]
the term ``low-income housing'' has the meaning given such term by
section 168(c)(2)(F) (as in effect prior to the amendments made by the
Tax Reform Act of 1986).
(5) Made in connection with the rehabilitation of a qualified
rehabilitated building. In order for an expenditure to be a qualified
rehabilitation expenditure, such expenditure must be incurred in
connection with a rehabilitation (as defined in paragraph (b)(2)(iv) of
this section) of a qualified rehabilitated building. Expenditures
attributable to work done to facilities related to a building (e.g.,
sidewalk, parking lot, landscaping) are not considered made in
connection with the rehabilitation of a qualified rehabilitated
building.
(6) When expenditures may be incurred. An expenditure is a qualified
rehabilitation expenditure only if the building with respect to which
the expenditures are incurred is substantially rehabilitated (within the
meaning of paragraph (b)(2) of this section) for the taxable year in
which the property attributable to the expenditures is placed in service
(i.e., the building is substantially rehabilitated during a measuring
period ending with or within the taxable year in which a credit is
claimed). (See paragraph (f)(2) of this section for rules relating to
when property is placed in service.) Once the substantial rehabilitation
test is met for a taxable year, the amount of qualified rehabilitation
expenditures upon which a credit can be claimed for the taxable year is
limited to expenditures incurred:
(i) Before the beginning of a measuring period during which the
building was substantially rehabilitated that ends with or within the
taxable year, provided that the expenditures were incurred in connection
with the rehabilitation process that resulted in the substantial
rehabilitation of the building;
(ii) Within a measuring period during which the building was
substantially rehabilitated that ends with or within the taxable year,
and
(iii) After the end of a measuring period during which the building
was substantially rehabilitated but prior to the end of the taxable year
with or within which the measuring period ends.
(7) Certain expenditures excluded from qualified rehabilitation
expenditures. The term ``qualified rehabilitation expenditures'' does
not include the following expenditures:
(i) Except as otherwise provided in paragraph (c)(8) of this
section, any expenditure with respect to which the taxpayer does not use
the straight line method over a recovery period determined under section
168 (c) and (g).
(ii) The cost of acquiring a building, any interest in a building
(including a leasehold interest), or land, except as provided in
paragraph (c)(3)(ii) of this section.
(iii) Any expenditure attributable to an enlargement of a building
(within the meaning of paragraph (c)(10) of this section).
(iv) Any expenditure attributable to the rehabilitation of a
certified historic structure or a building located in a registered
historic district, unless the rehabilitation is a certified
rehabilitation. (See paragraph (d) of this section which contains
definitions and special rules applicable to rehabilitations of certified
historic structures and buildings located in registered historic
districts.)
(v) Any expenditure of a lessee of a building or a portion of a
building, if, on the date the rehabilitation is completed with respect
to property placed in service by such lessee, the remaining term of the
lease (determined without regard to any renewal period) is less than the
recovery period determined under section 168(c) (or 19 years in the case
of property placed in service before January 1, 1987, and property
placed in service that qualifies under the transition rules in paragraph
(a)(2)(iv)(B) or (C) of this section).
(vi) Any expenditure allocable to that portion of a building which
is (or may reasonably be expected to be) tax-exempt use property (within
the meaning of section 168 and the regulations thereunder), except that
the exclusion in this paragraph (c)(7)(vi) shall not apply for purposes
of determining whether the building is a substantially rehabilitated
building under paragraph (b)(2) of this section.
(8) Requirement to use straight line depreciation--(i) Property
placed in service after December 31, 1986. The requirement
[[Page 477]]
in section 48(g)(2)(B)(i) and paragraph (c)(7)(i) of this section to use
straight line cost recovery does not apply to any expenditure to the
extent that the alternative depreciation system of section 168(g)
applies to such expenditure by reason of section 168(g)(1) (B) or (C).
In addition, the requirement in section 48(g)(2)(B)(i) and paragraph
(c)(7)(i) of this section applies only to the depreciation of the
portion of the basis of a qualified rehabilitated building that is
attributable to qualified rehabilitation expenditures. However, see
Sec. 1.168(k)-1(f)(10) if the qualified rehabilitation expenditures are
qualified property or 50-percent bonus depreciation property under
section 168(k) and see Sec. 1.1400L(b)-1(f)(9) if the qualified
rehabilitation expenditures are qualified New York Liberty Zone property
under section 1400L(b).
(ii) Property placed in service before January 1, 1987, and property
placed in service after December 31, 1986, that qualifies for a
transition rule. In the case of expenditures attributable to property
placed in service before January 1, 1987, and property that qualifies
for the transition rules in paragraph (a)(2)(iv) (B) or (C) of this
section, the term ``qualified rehabilitation expenditure'' does not
include an expenditure with respect to which an election was not made
under section 168(b)(3) as in effect prior to its amendment by the Tax
Reform Act of 1986, to use the straight line method of depreciation. In
such case, the requirement that an election be made to use straight line
cost recovery applies only to the cost recovery of the portion of the
basis of a qualified rehabilitated building that is attributable to
qualified rehabilitation expenditures. See section 168(f)(1), as in
effect prior to its amendment by the Tax Reform Act of 1986, for rules
relating to the use of different methods of cost recovery for different
components of a building. In addition, such requirement shall not apply
to any expenditure to the extent that section 168(f)(12) or (j), as in
effect prior to the amendments made by the Tax Reform Act of 1986,
applied to such expenditure.
(9) Cost of acquisition. For purposes of paragraph (c)(7)(ii) of
this section, cost of acquisition includes any interest incurred on
indebtedness the proceeds of which are attributable to the acquisition
of a building, an interest in a building, or land open which a building
exists. Interest incurred on a construction loan the proceeds of which
are used for qualified rehabilitation expenditures, however, is not
treated as a cost of acquisition.
(10) Enlargement defined--(i) In general. A building is enlarged to
the extent that the total volume of the building is increased. An
increase in floor space resulting from interior remodeling is not
considered an enlargement. The total volume of a building is generally
equal to the product of the floor area of the base of the building and
the height from the underside of the lowest floor (including the
basement) to the average height of the finished roof (as it exists or
existed). For this purpose, floor area is measured from the exterior
faces of external walls (other than shared walls that are external
walls) and from the centerline of shared walls that are external walls.
(ii) Rehabilitation that includes enlargement. If expenditures for
property only partially qualify as qualified rehabilitation expenditures
because some of the expenditures are attributable to the enlargement of
the building, the expenditures must be apportioned between the original
portion of the building and the enlargement. The expenditures must be
specifically allocated between the original portion of the building and
the enlargement to the extent possible. If it is not possible to make a
specific allocation of the expenditures, the expenditures must be
allocated to each portion on some reasonable basis. The determination of
a reasonable basis for an allocation depends on factors such as the type
of improvement and how the improvement relates functionally to the
building. For example, in the case of expenditures for an air-
conditioning system or a roof, a reasonable basis for allocating the
expenditures among the two portions generally would be the volume of the
building, excluding the enlargement, served by the air-conditioning
system or the roof relative to the volume of the enlargement served by
the improvement.
[[Page 478]]
(d) Rules applicable to rehabilitations of certified historic
structures--(1) Definition of certified historic structure. The term
``certified historic structure'' means any building (and its structural
components) that is--
(i) Listed in the National Register of Historic Places (``National
Register''); or
(ii) Located in a registered historic district and certified by the
Secretary of the Interior to the Internal Revenue Service as being of
historic significance to the district.
For purposes of this section, a building shall be considered to be a
certified historic structure at the time it is placed in service if the
taxpayer reasonably believes on that date the building will be
determined to be a certified historic structure and has requested on or
before that date a determination from the Department of Interior that
such building is a certified historic structure within the meaning of
this paragraph (d)(1)(i) or (ii) and the Department of Interior later
determines that the building is a certified historic structure.
(2) Definition of registered historic district. The term
``registered historic district'' means any district that is--
(i) Listed in the National Register, or
(ii) (A) Designated under a statute of the appropriate State or
local government that has been certified by the Secretary of the
Interior to the Internal Revenue Service as containing criteria that
will substantially achieve the purpose of preserving and rehabilitating
buildings of historic significance to the district, and (B) certified by
the Secretary of the Interior as meeting substantially all of the
requirements for the listing of districts in the National Register.
(3) Definition of certified rehabilitation. The term ``certified
rehabilitation'' means any rehabilitation of a certified historic
structure that the Secretary of the Interior has certified to the
Internal Revenue Service as being consistent with the historic character
of the building and, where applicable, the district in which such
building is located. The determination of the scope of a rehabilitation
shall be made on the basis of all the facts and circumstances
surrounding the rehabilitation and shall not be made solely on the basis
of ownership. The Secretary of the Interior shall take all of the
rehabilitation work performed as part of a single rehabilitation,
including any post-certification work, into account in determining
whether the rehabilitation complies with the Department of Interior
standards for rehabilitation and whether the certification should be
granted, revoked, or otherwise invalidated.
(4) Revoked or invalidated certification. If the Department of
Interior revokes or otherwise invalidates a certification after it has
been issued to a taxpayer, the basis attributable to rehabilitation of
the decertified property shall cease to be section 38 property described
in section 48(a)(1)(E). Such cessation shall be effective as of the date
the activity giving rise to the revocation or invalidation commenced.
See section 47 for the rules applicable to property that ceases to be
section 38 property.
(5) Special rule for certain buildings located in registered
historic districts. The exclusion in paragraph (c)(7)(iv) of this
section does not apply to a building in a registered historic district
if--
(i) Such building was not a certified historic structure during the
rehabilitation process; and
(ii) The Secretary of the Interior certified to the Internal Revenue
Service that such building was not of historic significance to the
district.
In general, the certification referred to in paragraph (d)(5)(ii) of
this section must be requested by the taxpayer prior to the time that
physical work on the rehabilitation began. If, however, the
certification referred to in paragraph (d)(5)(ii) of this section is
requested by the taxpayer after physical work on the rehabilitation of
the building has begun, the taxpayer must certify to the Internal
Revenue Service that, prior to the date that physical work on the
rehabilitation began, the taxpayer in good faith was not aware of the
requirement of paragraph (d)(5)(ii) of this section. The certification
referred to in the previous sentence must be attached to the Form 3468
filed with the tax return for the year in which the credit is claimed.
(6) Special rule for certain rehabilitations begun before an area is
designated
[[Page 479]]
as a registered historic district. In general, the exclusion from the
definition of qualified rehabilitation expenditure in paragraph
(c)(7)(iv) of this section applies to any rehabilitation expenditures
that are incurred after a building becomes a certified historic
structure within the meaning of section 48 (g)(3)A) and paragraph (d)(1)
of this section or the area in which a building is located becomes a
registered historic district within the meaning of section 48 (g)(3)(B)
and paragraph (d)(2) of this section. Rehabilitation expenditures
incurred prior to such date, however, are not disqualified. In addition,
rehabilitation expenditures made after the date the area in which a
building is located becomes a registered historic district shall not be
disqualified under paragraph (c)(7)(iv) of this section in any case in
which physical work on the rehabilitation of a building begins prior to
the date the taxpayer knows or has reason to know of an intention to
nominate the area in which such building is located as a registered
historic district. For purposes of this paragraph (d)(6), the taxpayer
knows or has reason to know of such an intention if there is (A) a
communication (written or oral) to the owner of any building within the
district from the Department of the Interior, or any agency or
instrumentality of the appropriate state or local government (or a
designee of such agency or instrumentality) that the district in which
the building is located is being considered for designation as a
registered historic district, (B) a legal notice of such consideration
published in a newspaper, or (C) a public meeting held to discuss such
consideration. In order to take advantage of the special rule of this
paragraph (d)(6), the taxpayer must attach to the Form 3468 filed for
the taxable year in which the credit is claimed a statement that the
taxpayer in good faith did not know, or have reason to know, of an
intention to nominate the area in which the building is located as a
registered historic district.
(7) Notice of certification--(i) In general. Except as otherwise
provided in paragraph (d)(7)(ii) of this section, a taxpayer claiming
the credit for rehabilitation of a certified historic structure (within
the meaning of section 48(g)(3) and paragraph (d)(1) of this section)
must attach to the Form 3468 filed with the tax return for the taxable
year in which the credit is claimed a copy of the final certification of
completed work by the Secretary of the Interior, and for returns filed
after January 9, 1989, evidence that the building is a certified
historic structure.
(ii) Late certification. If the final certification of completed
work has not been issued by the Secretary of the Interior at the time
the tax return is filed for a year in which the credit is claimed, a
copy of the first page of the Historic Preservation Certification
Application--Part 2--Description of Rehabilitation (NPS Form 10-168a),
with an indication that it has been received by the Department of the
Interior or its designate, together with proof that the building is a
certified historic structure (or that such status has been requested),
must be attached to the Form 3468 filed with the return. A notice from
the Department of the Interior or the State Historic Preservation
Officer, stating that the nomination or application has been received,
or a date-stamped nomination or application shall be sufficient
indication that the nomination or application has been received. The
building need not be either listed in the National Register or be
determined to be of historic significance to a registered historic
district at the time the return is filed for the year in which the
credit is claimed. (See paragraph (d)(1) of this section.) The taxpayer
must submit a copy of the final certification as an attachment to Form
3468 with the first income tax return filed after the receipt by the
taxpayer of the certification. If the final certification is denied by
the Department of Interior, the credit will be disallowed for any
taxable year in which it was claimed. If the taxpayer fails to receive
final certification of completed work prior to the date that is 30
months after the date that the taxpayer filed the tax return on which
the credit was claimed, the taxpayer must submit a written statement to
the District Director stating such fact prior to the last day of the
30th month, and the taxpayer shall be requested to consent to an
agreement under section
[[Page 480]]
6501(c)(4) extending the period of assessment for any tax relating to
the time for which the credit was claimed. The procedure permitted by
the preceding sentence shall be used whenever the entire rehabilitation
project is not fully completed by the date that is 30 months after the
taxpayer filed the tax return upon which the credit was claimed (e.g., a
phased rehabilitation) and the Secretary of the Interior has thus not
yet certified the rehabilitation.
(iii) Effective dates. Paragraph (d)(7)(i) of this section applies
to returns for taxable years beginning before January 1, 2002. The
requirement in the fourth sentence of paragraph (d)(7)(ii) of this
section applies only if the first income tax return filed after receipt
by the taxpayer of the certification is for a taxable year beginning
before January 1, 2002. For rules applicable to returns for taxable
years beginning after December 31, 2001, see paragraph (d)(7)(iv) of
this section.
(iv) Returns for taxable years beginning after December 31, 2001--
(A) In general. Except as otherwise provided in paragraph (d)(7)(ii) of
this section and this paragraph (d)(7)(iv), a taxpayer claiming the
credit for rehabilitation of a certified historic structure (within the
meaning of section 47(c)(3) and paragraph (d)(1) of this section) for a
taxable year beginning after December 31, 2001, must provide with the
return for the taxable year in which the credit is claimed, the NPS
project number assigned by, and the date of the final certification of
completed work received from, the Secretary of the Interior. If a credit
(including a credit for a taxable year beginning before January 1, 2002)
is claimed under the late certification procedures of paragraph
(d)(7)(ii) of this section and the first income tax return filed by the
taxpayer after receipt of the certification is for a taxable year
beginning after December 31, 2001, the taxpayer must provide the NPS
project number assigned by, and the date of the final certification of
completed work received from, the Secretary of the Interior with that
return.
(B) Reporting and recordkeeping requirements. The information
required under paragraph (d)(7)(iv)(A) of this section must be provided
on Form 3468 (or its successor) filed with the taxpayer's return. In
addition, the taxpayer must retain a copy of the final certification of
completed work for as long as its contents may become material in the
administration of any internal revenue law.
(C) Passthrough entities. In the case of a credit for qualified
rehabilitation expenditures of a partnership, S corporation, estate, or
trust, the requirements of this paragraph (d)(7)(iv) apply only to the
entity. Each partner, shareholder or beneficiary claiming a credit for
such qualified rehabilitation expenditures from a passthrough entity
must, however, provide the employer identification number of the entity
on Form 3468 (or its successor).
(e) Adjustment to basis--(1) General rule. Except as otherwise
provided by this paragraph (e), if a credit is allowed with respect to
property attributable to qualified rehabilitation expenditures incurred
in connection with the rehabilitation of a qualified rehabilitated
building, the increase in the basis of the rehabilitated property that
would otherwise result from the qualified rehabilitation expenditures
must be reduced by the amount of the credit allowed. See section 48(q)
and the regulations there under for other rules concerning adjustments
to basis in the case of section 38 property.
(2) Special rule for certain property relating to certified historic
structures. If a rehabilitation investment credit is allowed with
respect to property that is placed in service before January 1, 1987, or
property that qualifies for the transition rules in paragraph (a)(2)(iv)
(B) or (C) of this section, and such property is attributable to
qualified rehabilitation expenditures incurred in connection with the
rehabilitation of a certified historic structure, the increase in the
basis of the rehabilitated property that would otherwise result from the
qualified rehabilitation expenditures must be reduced by one-half of the
amount of the credit allowed.
(3) Recapture of rehabilitation investment credit. If during any
taxable year there is a recapture amount determined with respect to any
credit that resulted in a basis adjustment under paragraph (e) (1) or
(2) of this section, the basis of such building (immediately
[[Page 481]]
before the event resulting in such recapture) shall be increased by an
amount equal to such recapture amount. For purposes of the preceding
sentence, the term ``recapture amount'' means any increase in tax (or
adjustment in carrybacks or carryovers) determined under section
47(a)(5).
(f) Coordination with other provisions of the Code--(1) Credit
claimed by lessee for rehabilitation performed by lessor. A lessee may
take the credit for rehabilitation performed by the lessor if the
requirements of this section and section 48(d) are satisfied. For
purposes of applying section 48(d), the fair market value of section 38
property described in section 48(a)(1)(E) shall be limited to that
portion of the lessor's basis in the qualified rehabilitated building
that is attributable to qualified rehabilitation expenditures. In the
case of a portion of a building that is divided into more than one
leasehold interest, the qualified rehabilitation expenditures
attributable to the common elements shall be allocated to the individual
leasehold interests in accordance with the principles of paragraph
(c)(10)(ii) of this section. Furthermore, a leasehold interest's share
of the common elements shall not be considered to have been placed in
service prior to the time that the particular leasehold interest is
placed in service.
(2) When the credit may be claimed--(i) In general. The investment
credit for qualified rehabilitation expenditures is generally allowed in
the taxable year in which the property attributable to the expenditure
is placed in service, provided the building is a qualified rehabilitated
building for the taxable year. See paragraph (b) of this section and
section 46(c) and Sec. 1.46-3(d). Under certain circumstances, however,
the credit may be available prior to the date the property is placed in
service. See section 46(d) and Sec. 1.46-5 (relating to qualified
progress expenditures). Solely for purposes of section 46(c), property
attributable to qualified rehabilitation expenditures will not be
treated as placed in service until the building with respect to which
the expenditures are made meets the definition of a qualified
rehabilitated building (as defined in section 48(g)(1) and paragraph (b)
of this section) for the taxable year. Accordingly, in the first taxable
year for which the building becomes a qualified rehabilitated building,
the property described in section 48(a)(1)(E) attributable to
expenditures described in paragraph (c) of this section, shall be
considered to be placed in service, if such property was considered
placed in service under section 46(c) and the regulations thereunder
without regard to this paragraph (f)(2)(i) in that taxable year or a
prior taxable year. For purposes of the preceding sentence, the
requirement of section 48(g)(1)(A)(iii) and paragraph (b)(3) of this
section, relating to the definition of a qualified rehabilitated
building shall be deemed to be met if the taxpayer reasonably expects
that no rehabilitation work undertaken during the remainder of the
rehabilitation process will result in a failure to satisfy the
requirements of paragraph (b)(3) of this section. If the requirements of
paragraph (b)(3) of this section, are not satisfied, however, the credit
shall be disallowed for the taxable year in which it was claimed. If a
taxpayer fails to complete physical work on the rehabilitation prior to
the date that is 30 months after the date that the taxpayer filed a tax
return on which the credit is claimed, the taxpayer must submit a
written statement to the District Director stating such fact prior to
the last day of the 30th month, and shall be requested to consent to an
agreement under section 6501(c)(4) extending the period of assessment
for any tax relating to the item for which the credit was claimed.
(ii) Section 38 property described in section 48(a)(1)(E). In the
case of section 38 property described in section 48(a)(1)(E), the
section 38 property is not the building. Instead, the section 38
property is the portion of the basis of the building that is
attributable to qualified rehabilitation expenditures. Therefore, for
example, for purposes of the determination of when such section 38
property is placed in service, a determination must be made regarding
when property attributable to the portion of the basis of the building
attributable to qualified rehabilitation expenditures is placed in
service. The issue of when the building is placed in service is thus
[[Page 482]]
not relevant. In fact, under this test, the building itself may never
have been taken out of service during the rehabilitation process. If the
building is rehabilitated over several years in stages (e.g., by
floors), section 38 property attributable to qualified rehabilitation
expenditures to a qualified rehabilitated building placed in service in
each taxable year shall, generally, be treated as a separate item of
section 38 property.
(iii) Example. The application of this paragraph (f)(2) may be
illustrated by the following example:
Example. Assume that A, a calendar year taxpayer, purchases a four-
story building on January 1, 1983, for $100,000, and incurs $10,000 of
qualified rehabilitation expenditures in 1983 to rehabilitate floor one,
$50,000 of qualified rehabilitation expenditures in 1984 to rehabilitate
floor two, $70,000 of qualified rehabilitation expenditures in 1985 to
rehabilitate floor three, and $60,000 of qualified rehabilitation
expenditures in 1986 to rehabilitate floor four. Assume further that A
places the property attributable to these expenditures in service on the
last day of the year in which the respective expenditures were incurred
and that the building is never taken out of service since as each floor
is rehabilitated, the other three floors are occupied by tenants. Under
the rule in this paragraph (f)(2), the portion of the basis of the
building that is attributable to qualified rehabilitation expenditures
incurred with respect to floor one and two are deemed to be placed in
service in 1985, because that is the first year that the substantial
rehabilitation test described in paragraph (b) of this section is met
($120,000 of expenditures incurred by A during a measuring period ending
on December 31, 1985 is greater than the $110,000 basis at the beginning
of the period). Assume that as of December 31, 1985, at least 75 percent
of the external walls of the building have been retained during the
rehabilitation process and that A has a reasonable expectation that no
work during the remainder of the rehabilitation process will result in
less than 75 percent of the external walls being retained. A may claim a
credit for A's 1985 taxable year on $130,000 of qualified rehabilitation
expenditures ($10,000 in 1983, $50,000 in 1984, and $70,000 in 1985).
(See paragraph (c)(6) of this section for rules applicable to when
qualified expenditures may be incurred. In addition, see section 46 (d)
and Sec. 1.46-5 for rules relating to qualified progress expenditures.)
The fact that the building was a qualified rehabilitated building for
A's 1985 taxable year, however, has no effect on whether the building is
a qualified rehabilitated building for A's 1986 taxable year. In order
to determine whether A is entitled to claim a credit on A's 1986 return
for the $60,000 of qualified rehabilitation expenditures incurred in
1986, A must select a measuring period ending in 1986 and must determine
whether the building is a qualified rehabilitated building for that
year. Solely for purposes of determining whether the building was
substantially rehabilitated, expenditures incurred in 1984 and 1985,
even though considered in determining whether the building was
substantially rehabilitated for A's 1985 taxable year, may be used in
addition to the expenditures incurred in 1986 to determine whether the
building was substantially rehabilitated for A's 1986 taxable year,
provided the expenditures were incurred during any measuring period
selected by A that ends in 1986.
(3) Coordination with section 47. If property described in section
48(a)(1)(E) is disposed of by the taxpayer, or otherwise ceases to be
``section 38 property,'' section 47 may apply. Property will cease to be
section 38 property, and therefore section 47 may apply, in any case in
which the Department of Interior revokes or otherwise invalidates a
certification of rehabilitation after the property is placed in service
or a building (other than a certified historic structure) is moved from
the place where it is rehabilitated after the property is placed in
service. If, for example, the taxpayer made modifications to the
building inconsistent with Department of Interior standards, the
Secretary of the Interior might revoke the certification. In addition,
if all or a portion of a substantially rehabilitated building becomes
tax-exempt use property (see paragraph (c)(7)(vi) of this section) for
the first time within five years after the credit is claimed, the credit
will be recaptured under section 47 at that time as if the building or
portion of the building which becomes tax-exempt use property had then
been sold.
[T.D. 8233, 53 FR 39592, Oct. 11, 1988; 53 FR 43866, Oct. 31, 1988, as
amended by T.D. 8989, 67 FR 20030, Apr. 24, 2002; T.D. 9040, 68 FR 4920,
Jan. 31, 2003; T.D. 9283, 71 FR 51737, Aug. 31, 2006]
Sec. 1.50-1 Restoration of credit.
(a) In general. Section 49(a) (relating to termination of credit)
does not apply to property--
(1) The construction, reconstruction, or erection of which by the
taxpayer--
[[Page 483]]
(i) Is completed after August 15, 1971, or
(ii) Is begun after March 31, 1971, or
(2) Which is acquired by the taxpayer--
(i) After August 15, 1971, or
(ii) After March 31, 1971, and before August 16, 1971, pursuant to
an order which the taxpayer establishes was placed after March 31, 1971.
(b) Transitional rule. In the case of property (other than
pretermination property) the construction, reconstruction, or erection
of which by the taxpayer is begun before April 1, 1971, and completed
after August 15, 1971, there shall be taken into account as the basis of
new section 38 property in determining qualified investment only that
portion of the basis which is properly attributable to construction,
reconstruction, or erection after August 15, 1971.
(c) Principles to be applied. The principles of Sec. 1.48-2 (b) and
(c) shall be applied in determining when property is acquired and in
determining that portion of the basis of property properly attributable
to construction, reconstruction, or erection after August 15, 1971.
[T.D. 7203, 37 FR 17133, Aug. 25, 1972]
rules for computing credit for expenses of work incentive programs
Sec. 1.50A-1 Determination of amount.
(a) In general. Except as otherwise provided in this section and in
Sec. 1.50A-2, the amount of the work incentive program (WIN) credit
allowed by section 40 for the taxable year is equal to 20 percent of the
taxpayer's WIN expenses (as determined under paragraph (a) of Sec.
1.50B-1). The amount equal to 20 percent of the WIN expenses shall be
referred to in this section and Sec. Sec. 1.50A-2 through 1.50B-5 as
the ``credit earned.''
(b) Limitation based on amount of tax. Notwithstanding the amount of
the credit earned for the taxable year, under section 50A(a)(2) the
credit allowed by section 40 for the taxable year is limited to--
(1) If the liability for tax (as defined in paragraph (c) of this
section) is $25,000 or less, the liability for tax; or
(2) If the liability for tax is more than $25,000, then, the first
$25,000 of the liability for tax plus 50 percent of the liability for
tax in excess of $25,000. However, such $25,000 amount may be reduced in
the case of certain married individuals filing separate returns (see
paragraph (e) of this section); corporations which are members of a
controlled group (see paragraph (f) of this section); estates and trusts
(see paragraph (c) of Sec. 1.50B-3); and organizations to which section
593 applies, regulated investment companies or real estate investment
trusts subject to taxation under subchapter M, chapter 1 of the Code,
and cooperative organizations described in section 1381(a) (see Sec.
1.50B-5). The excess of the credit earned for the taxable year over the
limitations described in this paragraph for such taxable year is an
unused credit which may be carried back or forward to other taxable
years in accordance with Sec. 1.50A-2.
(c) Liability for tax. For the purpose of computing the limitation
based on amount of tax, section 50A(a)(3) defines the liability for tax
as the income tax imposed for the taxable year by chapter 1 of the Code,
reduced by the sum of the credits allowable under--
(1) Section 33 (relating to taxes of foreign countries and
possessions of the United States,
(2) Section 37 (relating to credit for the elderly),
(3) Section 38 (relating to investment in certain depreciable
property), and
(4) Section 41 (relating to contributions to candidates for public
office).
For purposes of this paragraph, the tax imposed for the taxable year by
section 56 (relating to imposition of minimum tax for tax preferences),
section 72(m)(5)(B) (relating to 10 percent tax on premature
distributions to owner-employees), section 402(e) (relating to tax on
lump sum distributions), section 408(f) (relating to additional tax on
income from certain retirement accounts), section 531 (relating to
imposition of accumulated earnings tax), section 541 (relating to
imposition of personal holding company tax), or section 1378 (relating
to tax on certain capital gains of subchapter S corporations), and any
additional tax imposed for the
[[Page 484]]
taxable year by section 1351(d)(1) (relating to recoveries of foreign
expropriation losses), shall not be considered tax imposed by chapter 1
of the Code for such year. Thus, the liability for tax for purposes of
computing the limitation based on amount of tax for the taxable year is
determined without regard to any tax imposed by sections 56,
72(m)(5)(B), 402(e), 408(f), 531, 541, 1351(d)(1) or 1378 of the Code.
In addition, any increase in tax resulting from the application of
section 50A (c) and (d) and Sec. 1.50A-3 (relating to recomputation of
credit allowed due to early termination of employment by employer, or
failure to pay comparable wages) shall not be treated as tax imposed by
chapter 1 of the Code for purposes of computing the liability for tax.
See section 50A (c)(3) and (d)(2).
(d) Example. The application of paragraphs (a), (b), and (c) of this
section may be illustrated by the following example:
Example. X Corporation's WIN expenses for its taxable year ending
December 31, 1973, are $500,000. X's credit earned for its taxable year
is $100,000 (20 percent of $500,000). X's income tax for such year,
computed without regard to credits against tax and without regard to any
tax imposed by section 56, 531, 541, 1351(d)(1) or 1378, is $190,000.
That amount includes $5,000 resulting from the application of section
50A(c)(3) and Sec. 1.50 A-3. X is allowed under section 33 a foreign
tax credit of $50,000. X's liability for tax is computed as follows:
Income tax (including increase in tax under section $190,000
50A(c)(3), but before any credits and without regard to any
tax imposed by section 56, 531, 541, 1351(d)(1) or 1378)...
===========
Less:
Increase in tax resulting from application of $5,000
section 50A(c)(3)............................
Foreign tax credit............................ 50,000
------------
.......... 55,000
-----------
Liability for tax....................................... 135,000
===========
Under section 50A(a)(2) and paragraph (b) of this section, X's
limitation based on amount of tax for the taxable year is $80,000
($25,000 plus 50 percent of $110,000). X Corporation's credit allowed by
section 40 for the taxable year therefore is $80,000. X has an unused
credit for the year of $20,000 ($100,000 less $80,000) which it may
carry back or forward to other taxable years in accordance with Sec.
1.50A-2.
(e) Married individuals. If a separate return is filed by a husband
or wife, the limitation based on amount of tax under paragraph (b) of
this section shall be computed by substituting a $12,500 amount for the
$25,000 amount in applying such paragraph (b). However, this reduction
of the $25,000 amount to $12,500 applies only if the taxpayer's spouse
is entitled to a credit under section 40 for the taxable year of such
spouse which ends with, or within, the taxpayer's taxable year. The
taxpayer's spouse is entitled to a credit under section 40 either
because of incurring WIN expenses for such taxable year of the spouse
(whether directly incurred by such spouse or whether apportioned to such
spouse, for example, from an electing small business corporation, as
defined in section 1371(b)), or because of a credit carryback or
carryover to such taxable year under Sec. 1.50A-2. The determination of
whether an individual is married shall be made under the principles of
section 143 and the regulations thereunder.
(f) Apportionment of $25,000 amount among component members of a
controlled group--(1) In general. In determining the limitation based on
amount of tax under section 50A(a)(2) in the case of corporations which
are component members of a controlled group of corporations on a
December 31, only one $25,000 amount is available to such component
members for their taxable years that include such December 31. See
subparagraph (2) of this paragraph for apportionment of such amount
among such component members. See subparagraph (3) of this paragraph for
the definition of ``component member.''
(2) Manner of apportionment. (i) In the case of corporations which
are component members of a controlled group on a particular December 31,
the $25,000 amount may be apportioned among such members for their
taxable years that include such December 31 in any manner the component
members may select, provided that each such member less than 100 percent
of whose stock is owned, in the aggregate, by the other component
members of the group on such December 31 consents to an apportionment
plan. The consent of a component member to an apportionment
[[Page 485]]
plan with respect to a particular December 31 shall be made by means of
a statement signed by a person duly authorized to act on behalf of the
consenting member, stating that such member consents to the
apportionment plan with respect to such December 31. The statement shall
set forth the name, address, employer identification number, and taxable
year of each component member of the group on such December 31, the
amount apportioned to each such member under the plan, and the location
of the Internal Revenue Service center where the statement is to be
filed. The consent of more than one component member may be incorporated
in a single statement. The statement shall be timely filed with the
Internal Revenue Service center where the component member having the
taxable year first ending on or after such December 31 files its return
for such taxable year and shall be irrevocable after such filing. If two
or more component members have the same such taxable year, a statement
of consent may be filed by any one of such members. Such statement shall
be considered as timely filed if filed on or before the due date
(including any extensions of time) of such member's income tax return
which includes such December 31. However, if the due date (including any
extensions of time) of the return of such member is on or before
December 15, 1972, the required statement shall be considered as timely
filed if filed on or before March 15, 1973. Each component member of the
group on such December 31 shall keep as a part of its records a copy of
the statement containing all the required consents.
(ii) An apportionment plan adopted by a controlled group with
respect to a particular December 31 shall be valid only for the taxable
year of each member of the group which includes such December 31. Thus,
a controlled group must file a separate consent to an apportionment plan
with respect to each taxable year which includes a December 31 as to
which an apportionment plan is desired.
(iii) If an apportionment plan is not timely filed, the $25,000
amount specified in section 50A(a)(2) shall be reduced for each
component member of the controlled group, for its taxable year which
includes a December 31, to an amount equal to $25,000 divided by the
number of component members of each group on such December 31.
(iv) If a component member of the controlled group makes its income
tax return on the basis of a 52-53 week taxable year, the principles of
section 441(f)(2)(A)(ii) and paragraph (b)(1) of Sec. 1.441-2 apply in
determining the last day of such taxable year.
(3) Definitions of controlled group of corporations and component
member of controlled group. For the purpose of this paragraph, the terms
``controlled group of corporations'' and ``component member'' of a
controlled group of corporations shall have the same meaning assigned to
those terms in section 1563 (a) and (b) and the regulations thereunder.
For purposes of applying Sec. 1.1563-1(b)(2)(ii)(c), an electing small
business corporation shall be treated as an excluded member whether or
not it is subject to the tax imposed by section 1378.
(4) Members of a controlled group filing a consolidated return. If
some component members of a controlled group join in filing a
consolidated return pursuant to Sec. 1.1502-3(a)(3), and other
component members do not join, then, unless a consent is timely filed
apportioning the $25,000 amount among the group filing the consolidated
return and the other component members of the controlled group, each
component member of the controlled group (including each component
member which joins in filing the consolidated return) shall be treated
as a separate corporation for purposes of equally apportioning the
$25,000 amount under subparagraph (2)(iii) of this paragraph. In such
case, the limitation based on the amount of tax for the group filing the
consolidated return shall be computed by substituting for the $25,000
amount the total of the amount apportioned to each component member
which joins in filing the consolidated return. If the affiliated group,
filing the consolidated return and the other component members of the
controlled group adopt an apportionment plan, the affiliated group shall
be treated as a single member for the purpose of applying subparagraph
(2)(i) of this paragraph.
[[Page 486]]
Thus, for example, only one consent executed by the common parent to the
apportionment plan is required for the group filing the consolidated
return. If any component member of the controlled group which joins in
the filing of the consolidated return is an organization to which
section 593 applies or a cooperative organization described in section
1381(a), rules similar to the rules contained in paragraph (a)(3)(ii) of
Sec. 1.1502-3 are applicable.
(5) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example 1. At all times during 1972 Smith, an individual, owns all
the stock of corporations X, Y, and Z. Corporation X files an income tax
return on a calendar year basis. Corporation Y files an income tax
return on the basis of a fiscal year ending June 30. Corporation Z files
an income tax return on the basis of a fiscal year ending September 30.
On December 31, 1972, X, Y, and Z are component members of the same
controlled group. X, Y, and Z all consent to an apportionment plan in
which the $25,000 amount is apportioned entirely to Y for its taxable
year ending June 30, 1973 (Y's taxable year which includes December 31,
1972). Such consent is timely filed. For purposes of computing the
credit under section 40, Y's limitation based on amount of tax for its
taxable year ending June 30, 1973, is so much of Y's liability for tax
as does not exceed $25,000, plus 50 percent of Y's liability for tax in
excess of $25,000. X's and Z's limitations for their taxable years
ending December 31, 1972, and September 30, 1973, respectively, are
equal to 50 percent of X's liability for tax and 50 percent of Z's
liability for tax. On the other hand, if an apportionment plan is not
timely filed, X's limitation would be so much of X's liability for tax
as does not exceed $8,333.33, plus 50 percent of X's liability in excess
of $8,333.33, and Y's and Z's limitations would be computed similarly.
Example 2. At all times during 1972, Jones, an individual, owns all
the outstanding stock of corporations P, Q, and R. Corporations Q and R
both file returns for taxable year ending December 31, 1972. P files a
consolidated return as a common parent for its fiscal year ending June
30, 1973, with its wholly owned subsidiaries N and O. On December 31,
1972, N, O, P, Q, and R are component members of the same controlled
group. No consent to an apportionment plan is filed. Therefore, each
member is apportioned $5,000 of the $25,000 amount ($25,000 divided
equally among the five members). The limitation based on the amount of
tax for the group filing the consolidated return (P, N, and O) for the
year ending June 30, 1973 (the consolidated taxable year within which
December 31, 1972, falls), is computed by using $15,000 instead of the
$25,000 amount. The $15,000 is arrived at by adding together the $5,000
amounts apportioned to P, N, and O.
[38 FR 6152, Mar. 7, 1973, as amended by T.D. 7636, 44 FR 47049, Aug.
10, 1979]
Sec. 1.50A-2 Carryback and carryover of unused credit.
(a) Allowance of unused credit as carryback or carryover--(1) In
general. Section 50A(b)(1) provides for carrybacks and carryovers of any
unused credit. An unused credit is the excess of the credit earned for
the taxable year (as determined under paragraph (a) of Sec. 1.50A-1)
over the limitation based on amount of tax for such taxable year (as
determined under paragraph (b) of Sec. 1.50A-1). Subject to the
limitation contained in paragraph (b) of this section, an unused credit
shall be added to the amount allowable as a credit under section 40 for
the years to which the unused credit can be carried. The year with
respect to which an unused credit arises shall be referred to in this
section as the ``unused credit year.''
(2) Taxable years to which unused credit may be carried. An unused
credit shall be a work incentive program (WIN) credit carryback to each
of the 3 taxable years preceding the unused credit year and a WIN credit
carryover to each of the 7 taxable years succeeding the unused credit
year, except that an unused credit shall be a carryback only to taxable
years beginning after December 31, 1971. An unused credit must be
carried first to the earliest of the taxable years to which it may be
carried, and then to each of the other taxable years (in order of time)
to the extent that the unused credit may not be added (because of the
limitation contained in paragraph (b) of this section) to the amount
allowable as a credit under section 40 for a prior taxable year.
(b) Limitation on allowance of unused credit. The amount of the
unused credit from any particular unused credit year which may be added
to the amount allowable as a credit under section 40 for any of the
preceding or succeeding taxable years to which such credit may be
carried shall not exceed the amount by which the limitation based on
amount
[[Page 487]]
of tax for such preceding or succeeding taxable year exceeds the sum of
(1) the credit earned for such preceding or succeeding year, and (2)
other unused credits carried to such preceding or succeeding year which
are attributable to unused credit years prior to the particular unused
credit year.
(c) Corporate acquisitions. For the carryover of unused credits in
the case of certain corporate acquisitions, see section 381(c)(24) and
the regulations thereunder. [Sec. 1.381(c)(24)-1]
(d) Periods of less than 12 months. A fractional part of a year
which is considered as a taxable year under sections 441(b) and
7701(a)(23) shall be treated as a preceding or a succeeding taxable year
for the purpose of determining under section 50A(b) and this section the
taxable years to which an unused credit may be carried.
(e) Example. The provisions of paragraphs (a) through (d) of this
section may be illustrated by the following example:
Example. Corporation X files its income tax return on the basis of
the calendar year. X's credit earned and its limitation based on amount
of tax for each of its taxable years 1972 through 1978 are as follows:
------------------------------------------------------------------------
Credit Limitation based
earned on amount of tax
------------------------------------------------------------------------
1972...................................... $175,000 $200,000
1973...................................... 250,000 160,000
1974...................................... 200,000 210,000
1975...................................... 210,000 230,000
1976...................................... 220,000 260,000
1977...................................... 260,000 220,000
1978...................................... 270,000 280,000
------------------------------------------------------------------------
(i) Corporation X's credit earned for 1972, $175,000, is allowable
in full as a credit under section 40 for 1972 since such amount is less
than the limitation based on amount of tax for such year, $200,000.
Since the limitation based on amount of tax for 1973 is $160,000, only
$160,000 of the $250,000 credit earned for such year is allowable under
section 40 as a credit for 1973. The unused credit for 1973 of $90,000
($250,000 less $160,000) is a WIN credit carryback to 1972 and a WIN
credit carryover to 1974 and subsequent years up to and including 1980.
The portion of the $90,000 unused credit which shall be added to the
amount allowable as a credit under section 40 for 1972 and 1974 and
subsequent years is computed as follows:
(a) 1972. The portion of the unused credit for 1973 ($90,000) which
is allowable as a credit for 1972 is $25,000. This amount shall be added
to the amount allowable as a credit for 1972. The balance of the unused
credit for 1973 to be carried to 1974 is $65,000. These amounts are
computed as follows:
Carryback to 1972........................................... $90,000
1972 limitation based on tax.................... $200,000
Less: Credit earned for 1972........ $175,000
Unused credits attributable to years 0
preceding 1973.....................
------------
.......... 175,000
------------
Limit on amount of 1973 unused credit which may be added as 25,000
a credit for 1972..........................................
-----------
Balance of 1973 unused credit to be carried to 1974..... 65,000
(b) 1974. The portion of the balance of the unused credit for 1973
($65,000) allowable as a credit for 1974 is $10,000. This amount shall
be added to the amount allowable as a credit for 1974. The balance of
the unused credit for 1973 to be carried to 1975 is $55,000. These
amounts are computed as follows:
Carryover to 1974.......................................... $65,000
1974 limitation based on tax.................. $210,000
Less: Credit earned for 1974..... $200,000
Unused credits attributable to 0
years preceding 1973............
-------- 200,000
-------------
Limit on amount of 1973 unused credit which may be added as 10,000
a credit for 1974.........................................
------------
Balance of 1973 unused credit to be carried to 1975.... 55,000
(c) 1975. The portion of the balance of the unused credit for 1973
($55,000) allowable as a credit for 1975 is $20,000. This amount shall
be added to the amount allowable as a credit for 1975. The balance of
the unused credit for 1973 to be carried to 1976 is $35,000. These
amounts are computed as follows:
Carryover to 1975.......................................... $55,000
1975 limitation based on tax.................. $230,000
Less: Credit earned for 1975..... $210,000
Unused credits attributable to 0
years preceding 1973............
-------------
........... 210,000
-------------
Limit on amount of 1973 unused credit which may be added as $20,000
a credit for 1975.........................................
------------
Balance of 1973 unused credit to be carried to 1976.... 35,000
(d) 1976. The entire balance of the unused credit for 1973 ($35,000)
is allowable as a credit for 1976, since the limitation based on amount
of tax for 1976 exceeds the sum of the credit earned for 1976 and unused
credits attributable to years prior to 1973 by an
[[Page 488]]
amount in excess of $35,000. Since the balance of the unused credit for
1973 has been fully allowed, no portion thereof remains to be carried to
subsequent taxable years. This is illustrated as follows:
Carryover to 1976.......................................... $35,000
1976 limitation based on tax.................. $260,000
Less: Credit earned for 1976..... $220,000
Unused credits attributable to 0
years preceding 1973............
-------------
........... 220,000
-------------
Limit on amount of 1973 unused credit which may be added as 40,000
a credit for 1976.........................................
------------
Balance of 1973 unused credit to be carried to 1977.... 0
(ii) Since the limitation based on amount of tax for 1977 is
$220,000, only $220,000 of the $260,000 credit earned for such year is
allowable as a credit for 1977. The unused credit for 1977 of $40,000
($260,000 less $220,000) is a WIN credit carryback to 1974, 1975, and
1976 and a WIN credit carryover to 1978 and subsequent years. The
portions of the $40,000 unused credit which shall be added to the amount
allowable as a credit for such years are computed as follows:
(a) 1974. The portion of the unused credit for 1977 ($40,000)
allowable as a credit for 1974 is zero. The balance of the unused credit
for 1977 to be carried to 1975 is $40,000. These amounts are computed as
follows:
Carryback to 1974.......................................... $40,000
1974 limitation based on tax.................. $210,000
Less: Credit earned for 1974..... $200,000
Unused credits attributable to 10,000
years preceding 1977 (unused
credit from 1973)...............
-------------
........... $210,000
--------------
Limit on amount of 1977 unused credit which may be added as 0
a credit for 1974.........................................
------------
Balance of 1977 unused credit to be carried to 1975.... 40,000
(b) 1975. The portion of the unused credit for 1977 ($40,000)
allowable as a credit for 1975 is zero. The balance of the unused credit
for 1977 to be carried to 1976 is $40,000. These amounts are computed as
follows:
Carryback to 1975.......................................... $40,000
1975 limitation based on tax.................. $230,000
Less: Credit earned for 1975..... $210,000
Unused credits attributable to 20,000
years preceding 1977 (unused
credit from 1973)...............
-------- 230,000
-------------
Limit on amount of 1977 unused credit which may be added as 0
a credit for 1975.........................................
------------
Balance of 1977 unused credit to be carried to 1976...... 40,000
(c) 1976. The portion of the unused credit for 1977 ($40,000)
allowable as a credit for 1976 is $5,000. This amount shall be added to
the amount allowable as a credit for 1976. The balance of the unused
credit for 1977 to be carried to 1978 is $35,000. These amounts are
computed as follows:
Carryback to 1976.......................................... $40,000
1976 limitation based on tax.................. $260,000
Less: Credit earned for 1976..... $220,000
Unused credits attributable to 35,000
years preceding 1977 (unused
credit from 1973)...............
-------- 255,000
-------------
Limit on amount of 1977 unused credit which may be added as 5,000
a credit for 1976.........................................
------------
Balance of 1977 unused credit to be carried to 1978.... 35,000
(d) 1978. The portion of the balance of the unused credit for 1977
($35,000) allowable as a credit for 1978 is $10,000. This amount shall
be added to the amount allowable as a credit for 1978. The balance of
the unused credit for 1977 to be carried to 1979 and subsequent years is
$25,000. These amounts are computed as follows:
Carryover to 1978.......................................... $35,000
1978 limitation based on tax.................. $280,000
Less: Credit earned for 1978..... $270,000
Unused credits attributable to 0
years preceding 1977............
-------- $270,000
-------------
Limit on amount of 1977 unused credit which may be added as $10,000
a credit for 1978.........................................
------------
Balance of 1977 unused credit to be carried to 1979.... 25,000
(f) Electing small business corporation. An unused credit of a
corporation which arises in an unused credit year for which the
corporation is not an electing small business corporation (as defined in
section 1371(b)) and which is a carryback or carryover to a taxable year
for which the corporation is an
[[Page 489]]
electing small business corporation shall not be added to the amount
allowable as a credit under section 40 to the shareholders of such
corporation for any taxable year. However, a taxable year for which the
corporation is an electing small business corporation shall be counted
as a taxable year for purposes of determining the taxable years to which
such unused credit may be carried.
[38 FR 6153, Mar. 7, 1973]
Sec. 1.50A-3 Recomputation of credit allowed by section 40.
(a) General rule--(1) Early termination of employment by employer--
(i) In general. If the employment of any employee, with respect to whom
work incentive program (WIN) expenses (as defined in paragraph (a) of
Sec. 1.50B-1) are taken into account under paragraph (a) of Sec.
1.50A-1, is terminated by the taxpayer at any time during the first 12
months of such employment (whether or not consecutive) or before the
close of the 12th calendar month after the calendar month in which such
employee completes the first 12 months of employment (whether or not
consecutive) with the taxpayer, then subparagraph (3) of this paragraph
shall apply. See paragraph (c) of this section for rules relating to the
determination of the first 12 months of employment (whether or not
consecutive). See Sec. 1.50A-4 for rules relating to other
circumstances under which a termination of employment will not be
treated as a termination of employment to which the provisions of
subparagraph (3) of this paragraph are applicable.
(ii) Rules for determining whether a termination of employment has
occurred. For purposes of this section, the taxpayer is deemed to have
terminated the employment of any WIN employee (as defined in paragraph
(h) of Sec. 1.50B-1) if the employment relationship (as determined
under common law principles) has terminated. A layoff for any reason is
considered a termination of employment for purposes of the preceding
sentence. However, a temporary suspension of employment of any WIN
employee necessitated by the installation of new equipment or by the
retooling of existing equipment (such as for a model changeover in the
automobile industry) shall not be deemed to be a termination of
employment if such suspension is for a period of time no longer than 60
days. For purposes of this section, the death of the taxpayer is
considered a termination of the employment relationship between the
taxpayer and any WIN employee.
(2) Failure to pay comparable wages--(i) In general. If, at any time
during the period described in subparagraph (1)(i) of this paragraph,
the taxpayer pays wages (as defined in section 50B(b) and paragraph (b)
of Sec. 1.50B-1) to an employee, with respect to whom WIN expenses are
taken into account under paragraph (a) of Sec. 1.50A-1, which are less
than the wages paid to other employees of the taxpayer who perform
comparable services, then subparagraph (3) of this paragraph shall
apply.
(ii) Comparable services. (a) For purposes of subdivision (i) of
this subparagraph, the term ``comparable services'' refers to services
performed in work positions which require similar education, training,
and skills. Comparable services are those associated with other work
positions which require similar levels of judgment and responsibility,
which make similar physical and mental demands of an employee, and which
could easily be performed by the employee without substantial additional
training or experience.
(b) If substantial training, skill, or experience are material to
the performance of a particular job, a taxpayer may pay wages to a WIN
employee which are less than those paid to other employees of the
taxpayer who possess such training, skill, or experience. However, there
must be a reasonable relationship between the lower wages or salary of
such WIN employee and his relative lack of training, skill, or
experience.
(3) Recomputation of credit earned. (i) If, by reason of
subparagraph (1) or (2) of this paragraph, this subparagraph (3) is
applicable, then the credit earned for all credit years (as defined in
subdivision (ii)(a) of this subparagraph) shall be recomputed under the
principles of paragraph (a) of Sec. 1.50A-1 by not taking into account
WIN expenses with respect to the employee (or employees) described in
subparagraph (1) or (2) of
[[Page 490]]
this paragraph. There shall be recomputed under the principles of
Sec. Sec. 1.50A-1 and 1.50A-2 the credit allowed for all credit years
and for any other taxable year affected by reason of the reduction in
credit earned for such credit year or years, giving effect to such
reduction in the computation of carrybacks or carryovers of unused
credit from any taxable year. If the recomputation described in the
preceding sentence results, in the aggregate, in a decrease (taking into
account any recomputation under this paragraph in respect of prior
recapture years, as defined in subdivision (ii)(b) of this subparagraph)
in the credits allowed for any credit year and for any other taxable
year affected by the reduction in credit earned for any credit year,
then the income tax for the recapture year shall be increased by the
amount of such decrease in credits allowed. For treatment of such
increase in tax, see paragraph (b) of this section. For special rules in
the case of an electing small business corporation (as defined in
section 1371(b)), an estate or trust, or a partnership, see
respectively, Sec. 1.50A-5, Sec. 1.50A-6 or Sec. 1.50A-7.
(ii) For purposes of this section and Sec. Sec. 1.50A-4 through
1.50B-6--
(a) The term ``credit year'' means a taxable year in which WIN
expenses with respect to the employee described in subparagraph (1) or
(2) of this paragraph are taken into account under paragraph (a) of
Sec. 1.50A-1.
(b) The term ``recapture year'' means a taxable year in which a
termination of employment (within the meaning of subparagraph (1) of
this paragraph) or a failure to pay comparable wages (within the meaning
of subparagraph (2) of this paragraph) occurs by reason of which the
rule of subparagraph (3) of this paragraph becomes applicable.
(c) The term ``recapture determination'' means a recomputation made
under this paragraph.
(b) Increase in income tax and reduction of WIN credit carryback and
carryover--(1) Increase in tax. Except as provided in subparagraph (2)
of this paragraph, any increase in income tax under this section shall
be treated as income tax imposed on the taxpayer by chapter 1 of the
Code for the recapture year notwithstanding that without regard to such
increase the taxpayer has no income tax liability, has a net operating
loss for such taxable year, or no income tax return was otherwise
required for such taxable year.
(2) Special rule. Any increase in income tax under this section
shall not be treated as income tax imposed on the taxpayer by chapter 1
of the Code for purposes of determining the amount of the credits
allowable to such taxpayer under--
(i) Section 33 (relating to taxes of foreign countries and
possessions of the United States),
(ii) Section 35 (relating to partially tax-exempt interest received
by individuals),
(iii) Section 37 (relating to retirement income),
(iv) Section 38 (relating to investment in certain depreciable
property),
(v) Section 39 (relating to certain uses of gasoline, special fuels,
and lubricating oil),
(vi) Section 40 (relating to expenses of work incentive programs),
and
(vii) Section 41 (relating to contributions to candidates for public
office).
(3) Reduction in credit allowed as a result of a net operating loss
carryback. (i) If a net operating loss carryback from the recapture year
or from any taxable year subsequent to the recapture year reduces the
amount allowed as a credit under section 40 for any taxable year up to
and including the recapture year, then there shall be a new recapture
determination under paragraph (a) of this section for each recapture
year affected, taking into account the reduced amount of credit allowed
after application of the net operating loss carryback.
(ii) Subdivision (i) of this subparagraph may be illustrated by the
following example:
Example. (a) X Corporation, which makes its returns on the basis of
a calendar year, hired WIN employees on March 1, 1972, and incurred
$10,000 in WIN expenses with respect to these employees for the year.
For the taxable year 1972, X Corporation's credit earned of $2,000 (20
percent of $10,000) was allowed under section 40 as a credit against its
liability for tax of $2,000. In 1973 and 1974 X Corporation had no
liability for tax and had no WIN expenses. In January 1974, X
Corporation terminated the employees for whom the WIN expenses had been
incurred. Since these
[[Page 491]]
terminations were not subject to the exceptions provided by Sec. 1.50A-
4, there was a recapture determination under paragraph (a) of this
section. The income tax imposed by chapter 1 of the Code on X
Corporation for the taxable year 1974 was increased by the $2,000
decrease in its credit earned for the taxable year 1972 (that is, the
$2,000 original credit earned minus zero recomputed credit earned).
(b) For the taxable year 1975, X Corporation has a net operating
loss which is carried back to the taxable year 1972 and reduces its
liability for tax, as defined in paragraph (c) of Sec. 1.50A-1, for
such taxable year to $800. As a result of such net operating loss
carryback, X Corporation's credit allowed under section 40 for the
taxable year 1972 is limited to $800 and the excess of $1,200 ($2,000
credit earned minus the $800 limitation based on amount of tax) is a WIN
credit carryover to the taxable year 1973.
(c) For 1975 there is a recapture determination under subdivision
(i) of this subparagraph for the 1974 recapture year. The $2,000
increase in the income tax imposed on X Corporation for the taxable year
1974 is redetermined to be $800 (that is, the $800 credit allowed after
taking into account the 1975 net operating loss minus zero credit which
would have been allowed taking into account the 1974 recapture
determination). In addition, X Corporation's $1,200 WIN credit carryover
to the taxable year 1973 is reduced by $1,200 ($2,000 minus $800) to
zero and X Corporation is entitled to a $1,200 refund of the $2,000 tax
paid as a result of the 1974 recapture determination.
(4) Statement of recomputation. The taxpayer shall attach to his
income tax return for the recapture year a separate statement showing in
detail the computation of the increase in income tax imposed on such
taxpayer by chapter 1 of the Code and the reduction in any WIN credit
carryovers.
(c) Period of employment--(1) Initial date of employment. For
purposes of this section and Sec. Sec. 1.50A-4 through 1.50B-6, the
initial date of employment (for purposes of applying paragraph (a) (1)
and (2) of this section and paragraphs (a)(1) and (f) of Sec. 1.50B-1)
is the date the WIN employee reports to the taxpayer (or in the case
where the taxpayer is a partner of a partnership, a beneficiary of an
estate or trust, or a shareholder of an electing small business
corporation, to such partnership, estate, trust, or electing small
business corporation) for work.
(2) Computation of the first 12 months of employment (whether or not
consecutive). For purposes of computing the first 12 months of
employment (whether or not consecutive), the first month of employment
shall begin with the initial date of employment (as defined in
subparagraph (1) of this paragraph) of the WIN employee, the second
month of employment shall begin with the corresponding date in the
following month, the third month of employment shall begin with the
corresponding date in the next following month, and so forth. If the WIN
employee performs any services during any such month (as determined
under the preceding sentence), that month shall be counted in computing
the WIN employee's ``first 12 months of employment (whether or not
consecutive)''. If the WIN employee performs no services during any such
month, that month shall not be counted in computing the WIN employee's
``first 12 months of employment (whether or not consecutive)''. Thus, if
the initial date of employment of a WIN employee is June 15, the first
month of employment of such employee shall be the period beginning June
15, and ending July 14. The second month of employment is the period
beginning July 15 and ending August 14. If during such second month of
employment the employee performs no services for the taxpayer, that
month is not counted in determining the employee's first 12 months of
employment (whether or not consecutive).
[38 FR 6154, Mar. 7, 1973]
Sec. 1.50A-4 Exceptions to the application of Sec. 1.50A-3.
(a) In general. Notwithstanding the provisions of paragraph (a) of
Sec. 1.50A-3, a termination of employment shall not be deemed to occur
if paragraph (b) (relating to voluntary termination of employment),
paragraph (c) (relating to termination of employment due to disability),
paragraph (d) (relating to termination of employment due to misconduct),
paragraph (f) (relating to transactions to which section 381(a)
applies), or paragraph (g) (relating to mere change in form of
conducting a trade or business) applies.
(b) Voluntary termination of employment. A termination of employment
shall not be deemed to occur for purposes of paragraph (a) of Sec.
1.50A-3 if the
[[Page 492]]
employee voluntarily leaves the employment of the taxpayer. If the
taxpayer makes the working conditions of the employee so untenable that
the employee is, in effect, compelled by the taxpayer to quit, or if the
employee is coerced into quitting, the employee will not be deemed to
have voluntarily left the employment of the taxpayer. For purposes of
the preceding sentence, a substantial reduction in the benefits of
employment of an employee (such as a substantial decrease in the hours
of the employee's working week) shall constitute untenable working
conditions. An employee has voluntarily left the employment of the
taxpayer if he leaves for any reason external to his employment, such as
sickness or death in the employee's family which the employee feels
necessitates his quitting work with the taxpayer to remain at home. Any
employee who participates in an authorized strike (as finally determined
by a court, labor relations administrative body, or arbiter) will not be
deemed to have voluntarily left the employment of the taxpayer.
(c) Termination of employment due to death or disability. A
termination of employment shall not be deemed to occur for purposes of
paragraph (a) of Sec. 1.50A-3 if, after the initial date of employment
(as defined in paragraph (c)(1) of Sec. 1.50A-3) and before the close
of the period referred to in paragraph (a)(1) of Sec. 1.50A-3, the
employee becomes disabled, by reason of illness or injury (including a
disability relating to the employment), to perform the services required
by such employment, unless, before the close of such period:
(1) Such disability is removed,
(2) The employer knows of the removal of the disability, and
(3) The employer fails to offer reemployment to such employee.
The death of an employee shall not be deemed a termination of employment
for purposes of paragraph (a) of Sec. 1.50A-3.
(d) Termination of employment due to misconduct. A termination of
employment shall not be deemed to occur for purposes of paragraph (a) of
Sec. 1.50A-3 if it is determined by the appropriate State
administrative agency or State court that under the applicable State
unemployment compensation law such termination was due to the misconduct
of the WIN employee. If the WIN employee is not covered by the
applicable State unemployment compensation law (or if the employee did
not work for the minimum period required to qualify for unemployment
compensation or if the employee did not apply for unemployment
compensation), a termination of employment shall not be deemed to occur
for purposes of paragraph (a) of Sec. 1.50A-3 if the taxpayer
demonstrates by convincing evidence that, were such employee covered by
the applicable State unemployment compensation law (or if the employee
had worked for such minimum period or if the employee had applied for
unemployment compensation), he could reasonably have been found by such
administrative agency or court to have been terminated for misconduct.
(e) Recordkeeping requirement. A taxpayer who is claiming that a
termination of employment falls within the provisions of paragraph (b),
(c), or (d) of this section shall maintain sufficient records to support
his claim until the expiration of the pertinent period of limitations.
(f) Transactions to which section 381(a) applies--(1) General rule.
The employment relationship between the taxpayer and a WIN employee (as
defined in paragraph (h) of Sec. 1.50B-1) shall not be deemed
terminated for purposes of paragraph (a) of Sec. 1.50A-3 in the case of
a transaction to which section 381(a) (relating to carryovers in certain
corporate acquisitions) applies. If there is a termination of employment
(within the meaning of paragraph (a) of Sec. 1.50A-3 and this section)
by the acquiring corporation with respect to the WIN employee described
in the preceding sentence, or if the acquiring corporation fails to pay
comparable wages to such employee (within the meaning of paragraph
(a)(2) of Sec. 1.50A-3), then paragraph (a)(3) of Sec. 1.50A-3 shall
apply to the acquiring corporation with respect to the credit allowed
the acquired corporation as well as the credit allowed the acquiring
corporation with respect to such employee. For purposes of the preceding
sentence, the initial date of employment (as defined in paragraph (c)(1)
of Sec. 1.50A-3) of such employee
[[Page 493]]
with respect to the acquired corporation shall be deemed to be the
initial date of employment of such employee with respect to the
acquiring corporation and employment by the acquired corporation shall
be deemed employment by the acquiring corporation.
(2) Examples. This paragraph may be illustrated by the following
examples:
Example 1. (i) X Corporation, a wholly owned subsidiary of Y
Corporation, incurred WIN expenses of $12,000 for its taxable year
ending December 31, 1972, with respect to WIN employees hired on March
1, 1972. Both X and Y made their returns on the basis of a calendar
year. For the taxable year 1972 X Corporation's credit earned of $2,400
(20 percent of $12,000) was allowed under section 40 as a credit against
its liability for tax. On December 15, 1973, X Corporation is liquidated
under section 332 and all of its assets and liabilities are transferred
to Y Corporation in a transaction to which section 334(b)(2) is not
applicable. In addition, Y Corporation continues the employment of the
WIN employees which were employed by X Corporation and with respect to
which X Corporation was allowed the credit for its taxable year 1972.
(ii) Under subparagraph (1) of this paragraph, a termination of
employment of the WIN employees shall not be deemed to occur for
purposes of paragraph (a)(1) of Sec. 1.50A-3 due to the liquidation of
X Corporation on December 15, 1973. Thus, no recapture determination
under paragraph (a)(3) of Sec. 1.50A-3 shall be made with respect to X
Corporation.
Example 2. (i) The facts are the same as in Example 1 and, in
addition, on February 2, 1974, Y Corporation terminates the employment
of the employees with respect to whom X Corporation had incurred WIN
expenses. The termination is a termination for purposes of paragraph
(a)(1) of Sec. 1.50A-3. For purposes of applying the period described
in paragraph (a)(1) of Sec. 1.50A-3, the date the employees reported
for work at X Corporation is deemed to be the initial date of employment
of the employees with respect to Y Corporation.
(ii) Under subparagraph (1) of this paragraph, a termination of
employment of the WIN employees shall not be deemed to occur for
purposes of paragraph (a)(1) of Sec. 1.50A-3 due to the liquidation of
X Corporation on December 15, 1973. However, a termination of employment
of the WIN employees is deemed to occur for purposes of paragraph (a)(1)
of Sec. 1.50A-3 on February 2, 1974. Thus, Y Corporation shall make a
recapture determination under paragraph (a) of Sec. 1.50A-3 with
respect to the credit allowed X Corporation with respect to the WIN
employees.
(g) Mere change in form of conducting a trade or business--(1)
General rule. (i) The employment relationship between the taxpayer and a
WIN employee (as defined in paragraph (h) of Sec. 1.50B-1) shall not be
deemed terminated for purposes of paragraph (a) of Sec. 1.50A-3 in the
case of a mere change in the form of conducting the trade or business in
which such employment occurs, provided that the conditions set forth in
subdivision (ii) of this subparagraph are satisfied.
(ii) The conditions referred to in subdivision (i) of this
subparagraph are as follows:
(a) The WIN employee described in subdivision (i) of this
subparagraph is retained in the same trade or business,
(b) The taxpayer retains a substantial ownership interest in such
trade or business,
(c) Substantially all the assets necessary to operate such trade or
business are transferred to the transferee who continues the employment
of the WIN employee described in subdivision (i) of this subparagraph,
and
(d) The basis of the assets described in (c) of this subdivision in
the hands of the transferee is determined in whole or in part by
reference to the basis of such assets in the hands of the transferor.
This subparagraph shall not apply if paragraph (e) of this section
(relating to transactions to which section 381(a) applies) is applicable
with respect to such transfer.
(2) Substantial interest. For purposes of this paragraph, the
taxpayer shall be considered as having retained a substantial ownership
interest in the trade or business only if, after the change in form, the
ownership interest in such trade or business by such taxpayer--
(i) Is substantial in relation to the total ownership interests of
all persons, or
(ii) Is equal to or greater than the ownership interest prior to the
change in form.
Thus, where a taxpayer owns a 5-percent interest in a partnership, and,
after the incorporation of that partnership, the taxpayer retains at
least a 5-percent interest in the corporation, the taxpayer will be
considered as having retained a substantial interest in the
[[Page 494]]
trade or business as of the date of the change in form because of the
application of the rule contained in subdivision (ii) of this
subparagraph.
(3) Termination of employment. (i) If employment of a WIN employee
described in subparagraph (1)(i) of this paragraph is terminated by the
transferee, the employment of such employee shall be deemed terminated
by the taxpayer for purposes of paragraph (a) of Sec. 1.50A-3. For
purposes of determining the period described in paragraph (a)(1) of
Sec. 1.50A-3 with respect to such taxpayer employment by the transferee
shall be deemed employment by the transferor.
(ii) If in any taxable year the taxpayer does not retain a
substantial ownership interest in the trade or business directly or
indirectly (through ownership in other entities provided that such other
entities' bases in such interest are determined in whole or in part by
reference to the basis of such interest in the hands of the taxpayer)
then, for purposes of paragraph (a)(1) of Sec. 1.50A-3, there shall be
deemed to be a termination of employment of the WIN employees described
in subparagraph (1)(i) of this paragraph on the first date on which such
taxpayer does not retain a substantial interest in the trade or
business. For purposes of determining the period described in paragraph
(a)(1) of Sec. 1.50A-3, employment by the transferee shall be deemed
employment by the transferor. Any taxpayer who seeks to establish his
interest in a trade or business under the rule of this subdivision shall
maintain adequate records to demonstrate his indirect interest in such
trade or business after any such transfer or transfers.
(iii) Notwithstanding subparagraph (1) of this paragraph and
subdivision (ii) of this subparagraph in the case of a mere change in
the form of a trade or business, if the interest of a taxpayer in the
trade or business is reduced but such taxpayer has retained a
substantial interest in such trade or business, paragraph (a)(2) of
Sec. 1.50A-5 (relating to electing small business corporations),
paragraph (a)(2) of Sec. 1.50A-6 (relating to estates or trusts), or
paragraph (a)(2)(ii) of Sec. 1.50A-7 (relating to partnerships) shall
apply, as the case may be.
(4) Failure to pay comparable wages. If the transferee fails to pay
comparable wages (within the meaning of paragraph (a)(2) of Sec. 1.50A-
3) to the WIN employee within the period described in paragraph (a)(1)
of Sec. 1.50A-3, then such failure shall be deemed to be a failure of
the transferor (or in a case where the transferor is a partnership,
estate, trust, or electing small business corporation, the partners,
beneficiaries, or shareholders), and a recapture determination shall be
made with respect to such WIN employee as provided in Sec. 1.50A-3. For
purposes of determining the period described in paragraph (a)(1) of
Sec. 1.50A-3 with respect to such transferor (or such partners,
beneficiaries, or shareholders), employment by the transferee shall be
deemed employment by such transferor. For special rules in the case of
an electing small business corporation (as defined in section 1371(b)),
an estate or trust, or a partnership, see respectively, Sec. 1.50A-5,
Sec. 1.50A-6, or Sec. 1.50A-7.
(5) Examples. This paragraph may be illustrated by the following
examples in each of which it is assumed that the transfer satisfies the
conditions of subparagraphs (1)(ii) (a), (c) and (d) of this paragraph.
Example 1. (i) On January 1, 1972, A, an individual, employed WIN
employees in his sole proprietorship. A incurred WIN expenses with
respect to these employees of $12,000 for the taxable year ending
December 31, 1972. For the taxable year 1972 A's credit earned of $2,400
(20 percent of $12,000) was allowed under section 40 as a credit against
his liability for tax. On March 15, 1973, A transferred all of the
assets used in his sole proprietorship to X Corporation, a newly formed
corporation, in exchange for 45 percent of the stock of X Corporation.
(i) Under subparagraph (1)(i) of this paragraph, paragraph (a) of
Sec. 1.50A-3 does not apply to the March 15, 1973, transfer to X
Corporation.
Example 2. (i) The facts are the same as in Example 1 and in
addition on June 1, 1973, X Corporation terminates the employment of WIN
employees with respect to whom 50 percent of the WIN expenses were
incurred during A's 1972 taxable year.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of
Sec. 1.50A-3 does not apply to the March 15, 1973, transfer to X
Corporation. However, under subparagraph (3)(i) of this paragraph,
paragraph (a) of Sec. 1.50A-3 applies to the June 1, 1973, termination
of WIN employees by X Corporation.
[[Page 495]]
The actual period of employment of such WIN employees is 1 year and 5
months (that is, the period beginning on January 1, 1972, and ending on
June 1, 1973). For taxable year 1972, A's recomputed credit earned is
$1,200 (20 percent of $6,000). The income tax imposed by chapter 1 of
the Code on A for the taxable year 1973 is increased by the $1,200
decrease in his credit earned for the taxable year 1972 (that is, $2,400
original credit earned minus $1,200 recomputed credit earned).
Example 3. (i) The facts are the same as in Example 1 and in
addition on April 1, 1973, X Corporation begins paying wages to the
employees referred to in Example 1 which are less than the wages paid to
its other employees who perform comparable services.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1)
of Sec. 1.50A-3 does not apply to the March 15, 1973, transfer to X
Corporation. However, under subparagraph (4) of this paragraph,
paragraph (a) of Sec. 1.50A-3 applies to the failure of X Corporation
to pay wages to the WIN employees which are equal to the wages paid to
its other employees who perform comparable services. For taxable year
1972, A's recomputed credit earned is zero. The income tax imposed by
chapter 1 of the Code on A for the taxable year 1973 is increased by the
$2,400 decrease in his credit earned for the taxable year 1972.
Example 4. (i) On January 1, 1972, partnership ABC, which makes its
returns on the basis of a calendar year, employed WIN employees.
Partnership ABC incurred WIN expenses with respect to these employees of
$20,000 for the taxable year. Partnership ABC has 10 partners who make
their returns on the basis of a calendar year and share partnership
profits equally. Each partner's share of the WIN expenses is 10 percent,
that is, $2,000. On March 15, 1973, partnership ABC transfers all of the
assets used in its trade or business to the X Corporation, a newly
formed corporation, in exchange for its stock and immediately thereafter
transfers 10 percent of the stock to each of the 10 partners.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1)
of Sec. 1.50A-1 does not apply to the March 15, 1973, transfer by the
ABC Partnership to X Corporation.
Example 5. (i) The facts are the same as in Example 4 except that
partnership ABC transfers 10 percent of the stock in X Corporation to
each of eight partners, 20 percent to partner A, and cash to partner B.
(ii) Under subparagraph (1)(i) of this paragraph, with respect to
all of the partners (including partner A) except partner B, paragraph
(a)(1) of Sec. 1.50A-3 does not apply to the March 15, 1973, transfer
by the ABC Partnership. Paragraph (a)(1) of Sec. 1.50A-3 applies with
respect to partner B's $2,000 share of the WIN expenses. See paragraph
(a)(2) of Sec. 1.50A-7.
Example 6. (i) X Corporation operates a manufacturing business and a
separate retail sales business. During the month of January 1972, X
incurred WIN expenses in its manufacturing business. On February 10,
1973, X transfers all the assets used in its manufacturing business to
Partnership XY in exchange for a 50 percent interest in such
partnership.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1)
of Sec. 1.50A-3 does not apply to the February 10, 1973, transfer to
Partnership XY.
[T.D. 7263, 38 FR 6156, Mar. 7, 1973; 38 FR 8656, Apr. 5, 1973]
Sec. 1.50A-5 Electing small business corporations.
(a) In general--(1) Termination of employment by a corporation. If
an electing small business corporation (as defined in section 1371(b))
or a former electing small business corporation terminates (in a
termination subject to the provisions of paragraph (a) of Sec. 1.50A-3)
the employment of any WIN employee with respect to whom WIN expenses
have been paid or incurred, a recapture determination shall be made
under Sec. 1.50A-3 with respect to each shareholder who is treated,
under paragraph (a) of Sec. 1.50B-2 as a taxpayer who paid or incurred
such expenses. Each such recapture determination shall be made with
respect to the pro rata share of the WIN expenses of such employee which
were taken into account by such shareholder under paragraph (a) of Sec.
1.50B-2. For purposes of each such recapture determination the period of
employment of such employee or employees shall be the period beginning
with the initial date of employment (as defined in paragraph (c)(1) of
Sec. 1.50A-3) with respect to the electing small business corporation
and ending with the date of such employee's termination (as defined in
paragraph (a)(1)(ii) of Sec. 1.50A-3). For the definition of the term
``recapture determination'' see paragraph (a)(3) of Sec. 1.50A-3.
(2) Disposition of shareholder's interest. (i) If--
(a) WIN expenses are apportioned to a shareholder of an electing
small business corporation who takes such expenses into account in
computing his WIN expenses, and
[[Page 496]]
(b) After the end of the shareholder's taxable year in which such
apportionment was taken into account and before the close of the period
to which paragraph (a)(1) of Sec. 1.50A-3 applies with respect to the
employee to which such WIN expenses relate, such shareholder's
proportionate stock interest in such corporation is reduced (for
example, by a sale or redemption, or by the issuance of additional
shares) below the percentage specified in subdivision (ii) of this
subparagraph,
then, on the date of such reduction the employment of such employee
shall be deemed terminated with respect to such shareholder to the
extent of the actual reduction in such shareholder's proportionate stock
interest. (For example, if $100 of WIN expenses were apportioned to a
shareholder and if his proportionate stock interest is reduced from 60
percent to 30 percent (that is, 50 percent of his original interest),
then the employment of the employee to which such WIN expenses relate
shall be deemed terminated as to that shareholder to the extent of $50.)
Accordingly, a recapture determination shall be made with respect to
such shareholder. For purposes of such recapture determination the
period of employment of any employee or employees with respect to whom
WIN expenses were paid or incurred shall be the period beginning with
the initial date of employment (as defined in paragraph (c)(1) of Sec.
1.50A-3) with respect to the electing small business corporation and
ending with the date on which such reduction occurs.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the shareholder's proportionate stock
interest in the corporation on the date of the apportionment under
paragraph (a) of Sec. 1.50B-2. However, once employment of an employee
has been treated under this subparagraph as having terminated with
respect to the shareholder to any extent, the percentage referred to
shall be 33\1/3\ percent of the shareholder's proportionate stock
interest in the corporation on the date of apportionment under paragraph
(a) of Sec. 1.50B-2.
(iii) In determining a shareholder's proportionate stock interest in
a former electing small business corporation for purposes of this
subparagraph, the shareholder shall be considered to own stock in such
corporation which he owns directly or indirectly (through ownership in
other entities provided such other entities' bases in such stock are
determined in whole or in part by reference to the basis of such stock
in the hands of the shareholder). For example, if A, who owns all of the
100 shares of the outstanding stock of corporation X, a corporation
which was formerly an electing small business corporation, transfers on
November 1, 1973, 70 shares of X stock to corporation Y in exchange for
90 percent of the stock of Y in a transaction to which section 351
applies, then, for purposes of subdivision (i) of this subparagraph, A
shall be considered to own 93 percent of the stock of X, 30 percent
directly and 63 percent indirectly (i.e., 90 percent of 70). Any
taxpayer who seeks to establish his interest in the stock of a former
electing small business corporation under the rule of this subdivision
shall maintain adequate records to demonstrate his indirect interest in
the corporation after any such transfer or transfers.
(3) Computation of the first 12 months of employment. The period
described in paragraph (a)(1) of Sec. 1.50A-3 shall not be affected by
a change in the shareholders in such corporation and shall not be
affected by a reduction in any shareholder's proportionate stock
interest in such corporation (for example, by a sale or redemption or by
the issuance of additional shares). Thus, the first 12 months of
employment (whether or not consecutive) of any WIN employee shall be the
same with respect to any shareholder who is allowed a credit under
section 40 for salaries and wages paid or incurred for services rendered
by such employee. Also, such first 12 months of employment and the
period described in section 50B(c)(4) with respect to any WIN employee
shall not be deemed to begin again in the case of a corporation making a
valid election under section 1372.
(b) Election of a small business corporation under section 1372--(1)
General rule. If a corporation makes a valid election under section 1372
to be an electing small business corporation (as defined in section
1371(b)), then on the last day
[[Page 497]]
of the first taxable year immediately preceding the taxable year for
which such election is effective, the employment of any WIN employees
whose initial date of employment (as defined in paragraph (c)(1) of
Sec. 1.50A-3) occurred in taxable years prior to the first taxable year
for which the election is effective (and whose employment has not been
terminated prior to such last day) shall be considered as having been
terminated on such last day with respect to the WIN expenses paid or
incurred by such corporation and Sec. 1.50A-3 shall apply to such
corporation. However, if the corporation and each of the persons who are
shareholders of the corporation on the first day of the first taxable
year for which the election under section 1372 is to be effective, or on
the date of such election, whichever is later, execute the agreement
specified in subparagraph (2) of this paragraph, Sec. 1.50A-3 shall not
apply with respect to any such WIN expenses by reason of the election by
the corporation under section 1372.
(2) Agreement of shareholders and corporation. (i) The agreement
referred to in subparagraph (1) of this paragraph shall be signed by the
shareholders and by the corporation. The agreement shall recite that:
(a) In the event the employment of any WIN employee described in
subparagraph (1) of this paragraph is later terminated (in a termination
subject to the rules contained in paragraph (a) of Sec. 1.50A-3) during
a taxable year of the corporation for which the election under section
1372 is effective, each signer agrees to notify the district director or
the director of the Internal Revenue service center of such termination,
and agrees to be jointly and severally liable to pay to the district
director or the director of the Internal Revenue service center an
amount equal to the increase in tax which would have been imposed by
Sec. 1.50A-3 on the corporation but for the agreement under this
paragraph.
(b) In the event any WIN employee described in subparagraph (1) of
this paragraph is paid wages (as defined in section 50B(b) and paragraph
(b) of Sec. 1.50B-1) by such electing corporation, which are less than
the wages paid to other employees of such electing corporation who
perform comparable services (as defined in paragraph (a)(2)(ii) of Sec.
1.50A-3), during a taxable year of the corporation for which the
election under section 1372 is effective, each signer agrees to notify
the district director or the director of the Internal Revenue service
center of such failure to pay equal wages for comparable services, and
agrees to be jointly and severally liable to pay to the district
director or the director of the Internal Revenue service center an
amount equal to the increase in tax which would have been imposed by
Sec. 1.50A-3 on the corporation as a result of such failure but for the
election under section 1372.
For purposes of computing the period described in paragraph (a)(1) of
Sec. 1.50A-3, the period of employment by the corporation before the
election under section 1372 shall be added to the period of employment
by the electing small business corporation after such election.
(ii) The agreement shall set forth the name, address, and taxpayer
account number of each party and the internal revenue district or
service center in which each such party files his or its income tax
return for the taxable year which includes the last day of the
corporation's taxable year immediately preceding the first taxable year
for which the election under section 1372 is effective. The agreement
may be signed on behalf of the corporation by any person who is duly
authorized. The agreement shall be filed with the district director or
the director of the Internal Revenue service center with whom the
corporation files its income tax return for its taxable year immediately
preceding the first taxable year for which the election under section
1372 is effective and shall be filed on or before the due date
(including extensions of time) of such return. For purposes of the
preceding sentence, the district director or the director of the
Internal Revenue service center may, if good cause is shown, permit the
agreement to be filed on a later date.
(c) Examples. This section may be illustrated by the following
examples:
Example 1. (i) X Corporation, an electing small business corporation
which makes its returns on the basis of the calendar year,
[[Page 498]]
hired employees under a WIN program on July 1, 1972, and incurred
expenses for such employees during the following 12 months at an initial
rate of $10,000 per month. For taxable year 1972, X Corporation had 20
shares of stock outstanding which were owned equally by A and B who make
their returns on the basis of a calendar year. Under paragraph (a) of
this section, the WIN expenses were apportioned to the shareholders of X
Corporation as follows:
Period ending
Dec. 31, 1973
Total WIN expenses for the taxable year............... $60,000
Shareholder A (10/20)................................... 30,000
Shareholder B (10/20)................................... 30,000
Assuming that during 1972 shareholders A and B did not directly incur
any WIN expenses and that they did not own any interest in other
electing small business corporations, partnerships, estates, or trusts
incurring WIN expenses, the WIN expenses attributable to each
shareholder is $30,000. For the taxable year 1972, each shareholder's
credit earned of $6,000 (20 percent of $30,000) was allowed under
section 40 as a credit against his liability for tax.
(ii) On January 1, 1973, X Corporation terminates the employment of
the employees accounting for 50 percent of its WIN expenses incurred to
that date, or $30,000 in salaries and wages. The actual period of
employment for these WIN employees was 6 months. For taxable year 1972,
each shareholder's recomputed credit is $3,000 (20 percent of $15,000).
The income tax imposed by chapter 1 of the Code on each of the
shareholders for the taxable year 1973 is increased by the $3,000
decrease in his credit earned for the taxable year 1972 (that is, $6,000
original credit earned minus $3,000 recomputed credit earned).
Example 2. (i) The facts are the same as in subdivision (i) of
example 1, except that on January 1, 1973, shareholder A sells five of
his 10 shares of stock in X Corporation to C. No other changes in stock
ownership occurred during 1973. Under paragraph (a)(2) of this section,
the WIN expenses of X Corporation were apportioned on December 31, 1973,
to the shareholders of X Corporation as follows:
Period ending
Dec. 31, 1972
Total WIN expenses for the taxable year............... $60,000
Shareholder A (5/20).................................... 15,000
Shareholder B (10/20)................................... 30,000
Shareholder C (5/20).................................... 15,000
(ii) Under paragraph (a)(2) of this section, on January 1, 1973, the
employment of these WIN employees shall be deemed terminated by
shareholder A with respect to 50 percent of the WIN expenses allocated
to him since immediately after the January 1, 1973, sale A's
proportionate stock interest in X Corporation is reduced to 50 percent
of the proportionate stock interest in X Corporation which he held for
taxable year 1972. The actual period of employment of the WIN employees
accounting for the 50 percent of the WIN expenses originally allocated
to A is 6 months (that is, the period beginning with July 1, 1972, and
ending with January 1, 1973). The income tax imposed by chapter 1 of the
Code on shareholder A for the taxable year 1973 is increased by the
$3,000 decrease in his credit earned for the taxable year 1972 (that is,
$6,000 original credit earned minus $3,000 recomputed credit earned).
(d) Termination or revocation of an election under section 1372. The
employment of employees with respect to whom WIN expenses were paid or
incurred shall not be considered to have been terminated solely by
reason of a termination or revocation of a corporation's election under
section 1372.
[38 FR 6158, Mar. 7, 1973]
Sec. 1.50A-6 Estates and trusts.
(a) In general--(1) Termination of employment by an estate or trust.
If an estate or trust terminates (in a termination subject to the
provisions of paragraph (a) of Sec. 1.50A-3) the employment of any
employee with respect to whom WIN expenses have been paid or incurred, a
recapture determination shall be made under Sec. 1.50A-3 with respect
to the estate or trust, and each beneficiary who is treated, under
paragraph (a) of Sec. 1.50B-3 as a taxpayer who paid or incurred such
expenses. For purposes of each such recapture determination the period
of employment of such employees shall be the period beginning with the
initial date of employment (as defined in paragraph (c)(1) of Sec.
1.50A-3) with respect to the estate or trust and ending with the date of
such employee or employees' termination (as defined in paragraph
(a)(1)(ii) of Sec. 1.50A-3). For definition of ``recapture
determination'' see paragraph (a)(3) of Sec. 1.50A-3.
(2) Disposition of interest. (i) If--
(a) WIN expenses are apportioned to an estate or trust, or to a
beneficiary of an estate or trust who takes such expenses into account
in computing his WIN expenses, and
(b) After the end of the estate's, trust's, or beneficiary's taxable
year in which such apportionment was taken
[[Page 499]]
into account and before the close of the period to which paragraph
(a)(1) of Sec. 1.50A-3 applies with respect to the employees to which
such WIN expenses relate, such estate's, trust's, or such beneficiary's
proportionate interest in the income of the estate or trust is reduced
(for example, by a sale, or by the terms of the estate or trust
instrument) below the percentage specified in subdivision (ii) of this
subparagraph,
then, on the date of such reduction, the employment of such employee
shall be deemed terminated with respect to such estate, trust, or
beneficiary to the extent of the actual reduction in such estate's,
trust's, or beneficiary's proportionate interest in the income of the
estate or trust. (For example, if $100 of WIN expenses were apportioned
to a beneficiary and if his proportionate interest in the income of the
estate or trust is reduced from 60 percent to 30 percent (that is, 50
percent of his original interest), then the employment of the employee
to which such WIN expenses relates shall be deemed terminated as to that
beneficiary to the extent of $50.) Accordingly, a recapture
determination shall be made with respect to such estate, trust, or
beneficiary. For purposes of such recapture determination the period of
employment of any employee or employees with respect to whom WIN
expenses were paid or incurred shall be the period beginning with the
initial date of employment (as defined in paragraph (c)(1) of Sec.
1.50A-3) with respect to the estate or trust and ending with the date on
which such reduction occurs.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the estate's, trust's, or
beneficiary's proportionate interest in the income of the estate or
trust for the taxable year of the apportionment under paragraph (a) of
Sec. 1.50B-3. However, once employment of an employee has been treated
under this subparagraph as having terminated with respect to the estate,
trust, or beneficiary to any extent, the percentage referred to shall be
33\1/3\ percent of the estate's, trust's, or beneficiary's proportionate
interest in the income of the estate or trust for the taxable year of
the apportionment under paragraph (a) of Sec. 1.50B-3.
(iii) In determining a beneficiary's proportionate interest in the
income of an estate or trust for purposes of this subparagraph, the
beneficiary shall be considered to own any interest in such an estate or
trust which he owns directly or indirectly (through ownership in other
entities provided such other entities' bases in such interests are
determined in whole or in part by reference to the basis of such
interest in the hands of the beneficiary). For example, if A, whose
proportionate interest in the income of trust X is 30 percent, transfers
all of such interest to corporation Y in exchange for all of the stock
of Y in a transaction to which section 351 applies, then, for purposes
of subdivision (i) of this subparagraph, A shall be considered to own a
30-percent interest in trust X. Any taxpayer who seeks to establish his
interest in an estate or trust under the rule of this subdivision shall
maintain adequate records to demonstrate his indirect interest in the
estate or trust after any such transfer or transfers.
(b) Computation of the first 12 months of employment. The period
described in paragraph (a)(1) of Sec. 1.50A-3 shall not be affected by
a change in the beneficiaries of an estate or trust and shall not be
affected by a reduction or a termination of a beneficiary's interest in
the income of such estate or trust. Thus, the period described in
paragraph (a)(1) of Sec. 1.50A-3 for any WIN employee shall be the same
with respect to a trust or estate and any beneficiary of such trust or
estate which is allowed a credit under section 40 for salaries and wages
paid or incurred for services rendered by such employee. Also, such
period with respect to any WIN employee shall not be deemed to begin
again as the result of the acquisition of the interest by another.
(c) Examples. Paragraph (a) of this section may be illustrated by
the following examples:
Example 1. (i) XYZ Trust, which makes its returns on the basis of
the calendar year, hired employees under the WIN program on July 1,
1972, and incurred expenses for such employees during the following 12
months at an initial rate of $10,000 per month. For the taxable year
1972 the income of XYZ Trust is $60,000, which is allocated equally to
XYZ Trust and beneficiary A. Beneficiary A makes his returns on the
basis of a calendar
[[Page 500]]
year. Under paragraph (a) of this section, the WIN expenses were
apportioned to XYZ Trust and to beneficiary A as follows:
Period ending
Dec. 31, 1972
Total WIN expenses for the taxable year............... $60,000
XYZ Trust ($30,000/$60,000)............................. 30,000
Beneficiary A ($30,000/$60,000)......................... 30,000
Assuming that during 1972 beneficiary A did not directly incur any WIN
expenses and that he did not own any interest in other estates, trusts,
electing small business corporations, or partnerships incurring WIN
expenses, the WIN expenses incurred by XYZ Trust and by beneficiary A
are $30,000 each. For the taxable year 1972, XYZ Trust and beneficiary A
each had a credit earned of $6,000. Each credit earned was allowed under
section 40 as a credit against the liability for tax.
(ii) On January 1, 1973, XYZ Trust terminates the employment of its
employees accounting for 50 percent of its WIN expenses incurred to that
date, or $30,000 in salaries and wages. The actual period of employment
for these WIN employees was 6 months. For the taxable year 1972, XYZ
Trust's and beneficiary A's recomputed credit is $3,000 (20 percent of
$15,000). The income tax imposed by chapter 1 of the Code on XYZ Trust
and on beneficiary A for the taxable year 1973 is increased by the
$3,000 decrease in his credit earned for the taxable year 1972 (that is,
$6,000 original credit earned minus $3,000 recomputed credit earned).
Example 2. (i) The facts are the same as in subdivision (i) of
example 1, except that on January 1, 1973, beneficiary A sells 50
percent of his interest in the income of XYZ Trust to B. No other
changes in income interest occurred during 1973. Under paragraph (a)(2)
of Sec. 1.50B-4, each beneficiary's share and the trust's share of the
WIN expenses are apportioned as follows:
Period ending
Dec. 31, 1972
Total WIN expenses for the taxable year............... $60,000
XYZ Trust ($30,000/$60,000)............................. 30,000
Beneficiary A ($15,000/$60,000)......................... 15,000
Beneficiary B ($15,000/$60,000)......................... 15,000
(ii) Under paragraph (a)(2) of this section, on January 1, 1973, the
employment of these WIN employees shall be deemed terminated by
beneficiary A with respect to 50 percent of the WIN expenses allocated
to him since immediately after the January 1, 1973, sale A's
proportionate interest in the income of XYZ Trust is reduced to 50
percent of his proportionate interest in the income of XYZ Trust for the
taxable year 1972. The period of employment of the WIN employees
accounting for the 50 percent of the WIN expense originally allocated to
A is 6 months (that is, the period beginning with July 1, 1972, and
ending with December 31, 1972). For the taxable year 1972 beneficiary
A's recomputed credit earned is $3,000 (20 percent of $15,000). The
income tax imposed by chapter 1 of the Code on beneficiary A for the
taxable year 1973 is increased by the $3,000 decrease in his credit
earned for the taxable year 1972 (that is, $6,000 original credit earned
minus $3,000 recomputed credit earned).
[38 FR 6159, Mar. 7, 1973]
Sec. 1.50A-7 Partnerships.
(a) In general--(1) Termination of employment by a partnership. If a
partnership terminates (in a termination subject to the provisions of
paragraph (a) of Sec. 1.50A-3) the employment of any WIN employee with
respect to whom WIN expenses have been paid or incurred, a recapture
determination shall be made under Sec. 1.50A-3 with respect to each
partner who is treated, under paragraph (a) of Sec. 1.50B-4, as a
taxpayer with respect to such expenses. Each such recapture
determination shall be made with respect to the share of the WIN
expenses with respect to such employee which were taken into account by
such partner under paragraph (a) of Sec. 1.50B-4. For purposes of each
such recapture determination the period of employment of any such
employee shall be the period beginning with the initial date of
employment (as defined in paragraph (c)(1) of Sec. 1.50A-3) with
respect to the partnership and ending with the date of such employee's
termination (as defined in paragraph (a)(1)(ii) of Sec. 1.50A-3). For
the definition of ``recapture determination'' see paragraph (a)(3) of
Sec. 1.50A-3.
(2) Disposition of partner's interest. (i) If--
(a) WIN expenses are allocated to a partner of a partnership who
takes such expenses into account in computing his WIN expenses, and
(b) After the end of the partner's taxable year in which such
allocation was taken into account and before the close of the period to
which paragraph (a)(1) of Sec. 1.50A-3 applies with respect to the
employee to which such WIN expenses relate, such partner's proportionate
interest in the general profits of the partnership (or in the particular
expenses) is reduced (for example, by a sale, by a change in the
partnership agreement, or by the admission of a new partner) below the
percentage
[[Page 501]]
specified in subdivision (ii) of this subparagraph,
then, on the date of such reduction the employment of such employee
shall be deemed terminated with respect to such partner to the extent of
the actual reduction in such partner's proportionate interest in the
general profits (or in the particular expenses) of the partnership. (For
example, if $100 of WIN expenses were taken into account by a partner
and if his proportionate interest in the general profits of the
partnership is reduced from 60 percent to 30 percent (that is, 50
percent of his original interest), then the employment of the employee
to which such WIN expenses relate shall be deemed terminated as to that
partner to the extent of $50.) Accordingly, a recapture determination
shall be made with respect to such partner. For purposes of such
recapture determination the period of employment of any employee or
employees with respect to whom WIN expenses were paid or incurred shall
be the period beginning with the initial date of employment (as defined
in paragraph (c)(1) of Sec. 1.50A-3) with respect to the partnership
and ending with the date on which such reduction occurs.
(ii) The percentage referred to in subdivision (i)(b) of this
subparagraph is 66\2/3\ percent of the partner's proportionate interest
in the general profits (or in the WIN expenses) of the partnership for
the year of the apportionment under Sec. 1.50B-4(a). However, once
employment of an employee has been treated under this subparagraph as
having terminated with respect to the partner to any extent, the
percentage referred to shall be 33\1/3\ percent of the partner's
proportionate interest in the general profits (or in the WIN expenses)
of the partnership for the taxable year of the apportionment under
paragraph (a) of Sec. 1.50B-4.
(iii) In determining a partner's proportionate interest in the
general profits (or in the WIN expenses) of a partnership for purposes
of this subparagraph, the partner shall be considered to own any
interest in such a partnership which he owns directly or indirectly
(through ownership in other entities provided the other entities' bases
in such interests are determined in whole or in part by reference to the
basis of such interest in the hands of the partner). For example, if A,
whose proportionate interest in the general profits of partnership X is
20 percent, transfers all of such interest to Corporation Y in exchange
for all of the stock of Y in a transaction to which section 351 applies
then, for purposes of subdivision (i) of this subparagraph, A shall be
considered to own a 20 percent interest in partnership X. Any taxpayer
who seeks to establish his interest in a partnership under the rule of
this subdivision shall maintain adequate records to demonstrate his
indirect interest in the partnership after any such transfer or
transfers.
(3) Computation of the first 12 months of employment. The period
described in paragraph (a)(1) of Sec. 1.50A-3 shall not be affected by
a change in the partners of such partnership and shall not be affected
by a change in the ratio in which the partners divide the general
profits (or the WIN expenses) of the partnership. Thus, such period for
any WIN employee shall be the same with respect to any partner claiming
a credit under section 40 for salaries and wages paid or incurred for
services rendered by such employee.
(b) Examples. Paragraph (a) of this section may be illustrated by
the following examples:
Example 1. (i) AB partnership, which makes its returns on the basis
of the calendar year, hired employees under the WIN program on July 1,
1972, and incurred expenses for such employees during the following 12
months at an initial rate of $10,000 per month. Partners A and B, who
make their returns on the basis of a calendar year, share the profits
and losses of AB partnership equally. Under paragraph (a)(2) of this
section, each partner's share of the WIN expenses was approportioned as
follows:
Period ending
Dec. 31, 1972
Total WIN expenses for the taxable year............... $60,000
Partner A's share (50 percent).......................... 30,000
Partner B's share (50 percent).......................... 30,000
Assuming that during 1972 A and B did not directly incur any WIN
expenses and that they did not own any interest in other partnerships,
electing small business corporations, estates, or trusts incurring WIN
expenses, each partner's share of the WIN expenses is $30,000. For the
taxable year 1972,
[[Page 502]]
each partner's credit earned of $6,000 (20 percent of $30,000) was
allowed under section 40 as a credit against his liability for tax.
(ii) On January 1, 1973, AB partnership terminates the employment of
its employees accounting for 50 percent of its WIN expenses incurred to
that date, or $30,000 in salaries and wages. The actual period of
employment for these WIN employees was 6 months. For the taxable year
1972, each partner's recomputed credit earned is $3,000 (20 percent of
$15,000). The income tax imposed by chapter 1 of the Code on each of the
partners for the taxable year 1973 is increased by the $3,000 decrease
in his credit earned for the taxable year 1972 (that is, $6,000 original
credit earned minus $3,000 recomputed credit earned).
Example 2. (i) The facts are the same as in subdivision (i) of
example 1, except that on January 1, 1973, partner A sells one-half of
his 50 percent interest in AB partnership to C, to form the ABC
partnership. No other changes in the partners' proportionate interest in
the general profits of the partnership occurred during 1973. Under
paragraph (a)(2) of this section, each partner's share of the WIN
expenses was apportioned on December 31, 1973, as follows:
Period ending
Dec. 31, 1973
Total WIN expenses for the taxable year............... $60,000
Partner A's share (25 percent).......................... 15,000
Partner B's share (50 percent).......................... 30,000
Partner C's share (25 percent).......................... 15,000
(ii) Under paragraph (a)(2) of this section, on January 1, 1973, the
employment of these WIN employees shall be deemed terminated by partner
A with respect to 50 percent of the WIN expenses allocated to him since
immediately after the January 1, 1973, sale, A's proportionate interest
in the general profits of ABC partnership is reduced to 50 percent of
his proportionate interest in the general profits of AB partnership for
1972. The period of employment of the WIN employees accounting for the
50 percent of the WIN expenses originally allocated to A is 6 months
(that is, the period beginning with July 1, 1972, and ending with
December 31, 1972). For the taxable year 1972 partner A's recomputed
credit earned is $3,000 (20 percent of $15,000). The income tax imposed
by chapter 1 of the Code on partner A for the taxable year 1973 is
increased by the $3,000 decrease in his credit earned for the taxable
year 1972 (that is, $6,000 original credit earned minus $3,000
recomputed credit earned).
[38 FR 6160, Mar. 7, 1973]
Sec. 1.50B-1 Definitions of WIN expenses and WIN employees.
(a) WIN expenses--(1) In general. Except as otherwise provided in
paragraphs (b) through (g) of this section, for purposes of Sec. Sec.
1.50A-1 through 1.50B-5, the term ``work incentive program expenses''
(referred to in Sec. Sec. 1.50A-1 through 1.50B-5 as ``WIN expenses'')
means the salaries and wages paid or incurred by the taxpayer for
services rendered during the first 12 months of employment (whether or
not consecutive) by an employee who is certified by the Secretary of
Labor as--
(i) Having been placed in employment by the taxpayer (or if the
taxpayer is a partner of a partnership, beneficiary of an estate or
trust, or a shareholder of an electing small business corporation, by
such partnership, estate, trust, or electing small business corporation)
under a work incentive (WIN) program established under section 432(b)(1)
of the Social Security Act (42 U.S.C. 632(b)(1)), and
(ii) Not having displaced any individual from employment.
The term ``WIN expenses'' includes only salaries and wages paid or
incurred in taxable years beginning after December 31, 1971. See
paragraph (c) of Sec. 1.50A-3 for rules relating to the determination
of the first 12 months of employment (whether or not consecutive).
(2) Examples. The provisions of subparagraph (1) of this paragraph
may be illustrated by the following examples:
Example 1. X Corporation, an accrual basis taxpayer which files its
return on the basis of the calendar year, hired an employee on July 1,
1971, who was certified by the Secretary of Labor under this paragraph.
The first 12 months of employment were continuous. X is entitled to the
credit provided by section 40 with respect to the salaries or wages
incurred during its taxable year beginning January 1, 1972, for services
rendered by that employee during the period beginning July 1, 1971, and
ending June 30, 1972.
Example 2. Y, a cash basis taxpayer who files his return on the
basis of the calendar year, employed A, an employee certified by the
Secretary of Labor under this paragraph, on July 1, 1971. A's first 12
months of employment were continuous. Y paid A on the basis of a
semimonthly payroll period, but paid his payroll 2 days after the close
of the payroll period during which the wages were earned. Thus, Y paid A
on January 2, 1972, for services rendered between December 16, 1971, and
December 31, 1971. Y is entitled to the credit provided by section 40
with respect to the wages paid for services rendered by A during the
period beginning December 16, 1971, and ending June 30, 1972, because
those wages
[[Page 503]]
were paid by Y in a taxable year beginning after December 31, 1971.
(b) Salaries and wages. For purposes of this section, the term
``salaries and wages'' means only cash remuneration including a check.
Amounts deducted and withheld from the employee's pay (for example,
taxes and contributions to health and retirement plans) shall be deemed
to be cash remuneration even though not actually paid directly to the
employee.
(c) Trade or business expenses. The term ``WIN expenses'' includes
only salaries and wages which are paid or incurred in a trade or
business of the taxpayer and which are deductible in computing taxable
income. Thus, salaries and wages paid to domestic employees in a private
home are not ``WIN expenses''.
(d) Reimbursed expenses--(1) In general. The term ``WIN expenses''
does not include salaries and wages to the extent that the taxpayer is
reimbursed for such salaries or wages from any source.
(2) Example. Subparagraph (1) of this paragraph may be illustrated
by the following example:
Example. X Company, which makes its return on the basis of the
calendar year, hired WIN employees on January 1, 1972. X Company has a
cost-plus construction contract with the Federal Government. The fact
that X has a construction contract with the Federal Government or anyone
else does not change its character from a normal business transaction in
which there has been a sale of materials and services. Thus, the
salaries or wages paid or incurred for services rendered by these WIN
employees would not be reimbursed expenses, and X would be entitled to
the credit provided by section 40.
(e) Geographical limitation--(1) In general. The term ``WIN
expenses'' does not include salaries and wages paid or incurred for
services rendered outside the United States (as defined in sections 638
(relating to Continental Shelf areas) and 7701(a)(9). However, services
rendered by any WIN employee outside the United States (as defined in
sections 638 (relating to Continental Shelf areas) and 7701(a)(9)) shall
contribute to such employee's first 12 months of employment (whether or
not consecutive) for purposes of paragraph (a) of Sec. 1.50A-3 and
paragraph (a) of this section.
(2) Example. Subparagraph (1) of this paragraph may be illustrated
by the following example:
Example. X Corporation, which files its return on the basis of the
calendar year, hired A, a WIN employee, on January 1, 1972, and
continuously employed him for the following 24-month period. During
January and February of 1972, X paid A's wages while he received
training conducted in Puerto Rico. For the remainder of the calendar
year A performed services for X within the United States. For purposes
of paragraph (a) of Sec. 1.50A-3 and paragraph (a) of this section, A's
first 12 months of employment are January 1, 1972, to December 31, 1972.
Under subparagraph (1) of this paragraph no wages paid to A for services
rendered during the months of January and February of 1972 may be taken
into account by X under paragraph (a) of this section as WIN expenses
because the services were rendered outside the United States. However, X
may take into account wages he has incurred with respect to A for the
period March 1, 1972, to December 31, 1972.
(f) Maximum period of training or instruction. The term ``WIN
expenses'' does not include salaries and wages paid or incurred for
services rendered by a WIN employee after the end of the 24-month period
beginning with the date of initial employment (as defined in paragraph
(c)(1) of Sec. 1.50A-3) of the WIN employee.
(g) Ineligible individuals. The term ``WIN expenses'' does not
include salaries and wages paid or incurred for services rendered by a
WIN employee who--
(1) Bears any of the relationships described in paragraphs (1)
through (8) of section 152(a) of the Code to the taxpayer, or, if the
taxpayer is a corporation, to an individual who owns, directly or
indirectly, more than 50 percent in value of the outstanding stock of
the corporation (determined with the application of section 267(c) of
the Code),
(2) If the taxpayer is an estate or trust, is a grantor,
beneficiary, or fiduciary of the estate or trust, or is an individual
who bears any of the relationships described in paragraphs (1) through
(8) of section 152(a) of the Code to a grantor, beneficiary, or
fiduciary of the estate or trust, or
[[Page 504]]
(3) Is a dependent (described in section 152(a)(9) of the Code) of
the taxpayer, or, if the taxpayer is a corporation, of an individual
described in subparagraph (1), or, if the taxpayer is an estate or
trust, of a grantor, beneficiary, or fiduciary of the estate or trust.
(h) WIN employee. For purposes of Sec. Sec. 1.50A-1 through 1.50B-5
the term ``WIN employee'' means an employee who is certified by the
Secretary of Labor as meeting the requirements of paragraphs (a)(1) (i)
and (ii) of this section.
(i) [Reserved]
(j) Special rule applicable to transactions to which section 381(a)
applies and transactions involving a mere change in form of conducting a
trade or business. The first 12 months of employment (whether or not
consecutive) and the period described in section 50B (c)(4) of any WIN
employee, for purposes of determining the amount of WIN expenses (as
defined in paragraph (a) of Sec. 1.50B-1), shall not be affected by
transactions to which the rule contained in paragraph (f) (relating to
transaction to which section 381(a) (relating to certain corporate
acquisitions) applies), or paragraph (g) (relating to a mere change in
form of conducting a trade or business) of Sec. 1.50A-4 applies.
[38 FR 6161, Mar. 7, 1973]
Sec. 1.50B-2 Electing small business corporations.
(a) General rule--(1) In general. In the case of an electing small
business corporation (as defined in section 1371 (b)), WIN expenses (as
defined in paragraph (a) of Sec. 1.50B-1) shall be apportioned pro rata
among the persons who are shareholders of such corporation on the last
day of such corporation's taxable year, and shall be taken into account
for the taxable years of such shareholders within which or with which
the taxable year of such corporation ends. The WIN expenses for each
employee shall be apportioned separately. In determining who are
shareholders of an electing small business corporation on the last day
of its taxable year, the rules of paragraph (d)(1) of Sec. 1.1371-1 and
of paragraph (a)(2) of Sec. 1.1373-1 shall apply.
(2) Shareholder as taxpayer. A shareholder to whom WIN expenses are
apportioned shall, for purposes of the credit allowed by section 40, be
treated as the taxpayer who paid or incurred the expenses allocated to
him. If a shareholder takes into account in determining his WIN expenses
any WIN expenses with respect to an employee of an electing small
business corporation, and if the employment of such employee is
terminated in a termination subject to the rules contained in paragraph
(a) of Sec. 1.50A-3, or if the electing small business corporation
fails to pay comparable wages and such failure is subject to the rules
contained in paragraphs (a) (2) and (3) of Sec. 1.50A-3, then such
shareholder shall make a recapture determination under the provisions of
section 50A (c) and (d) of the Code and Sec. 1.50A-3. See Sec. 1.50A-
5.
(3) Computation of the first 12 months of employment. The first 12
months of employment (whether or not consecutive) and the period
described in section 50B(c)(4) of any WIN employee for purposes of
determining the amount of WIN expenses (as defined in paragraph (a) of
Sec. 1.50B-1) shall not be affected by a change in the shareholders in
such corporation and shall not be affected by a reduction in any
shareholder's proportionate stock interest in such corporation (for
example, by a sale or redemption or by the issuance of additional
shares). Thus, the first 12 months of employment (whether or not
consecutive) of any WIN employee shall be the same with respect to any
shareholder claiming a credit under section 40 for salaries and wages
paid or incurred for services rendered by such employee. Also, such
first 12 months of employment and the period described in section
50B(c)(4), with respect to any WIN employee, shall not be deemed to
begin again because of the making of a valid election under section
1372.
(b) Summary statement. An electing small business corporation shall
attach to its return a statement showing the apportionment to each
shareholder of its WIN expenses with respect to each WIN employee.
(c) Examples. Paragraph (a) of this section may be illustrated by
the following examples:
[[Page 505]]
Example 1. (i) X Corporation, an electing small business corporation
which files its returns on the basis of the calendar year, hired WIN
employees on July 1, 1972, whose employment was continuous for the next
24 months. A, a shareholder, has a 10 percent interest in X Corporation.
X Corporation incurred $24,000 in wages with respect to these WIN
employees in calendar year 1972, and $48,000 in calendar year 1973.
Assuming that during 1972 shareholder A did not directly incur any other
WIN expenses and did not own any other interest in other electing small
business corporations, partnerships, estates, or trusts that incurred
WIN expenses, for taxable year 1972 shareholder A's credit earned of
$480 (10 percent (A's ownership interest) multiplied by $24,000 of WIN
expenses multiplied by 20 percent) was allowed under section 40 as a
credit against his liability for tax.
(ii) On March 1, 1973, shareholder A sold all of his interest to B,
a new shareholder. Therefore, the employment of the WIN employees is
deemed terminated for purposes of paragraph (a) of Sec. 1.50A-3 with
respect to shareholder A. For taxable year 1972, A's recomputed credit
is zero because the termination occurred before the end of the period
described in paragraph (a)(1) of Sec. 1.50A-3. The income tax imposed
by chapter 1 of the Code on A for the taxable year 1973 is increased by
the $480 decrease in his credit earned for the taxable year 1972 (that
is, $480 original credit earned minus zero recomputed credit earned).
Under paragraph (a) of this section A has no credit earned for 1973.
(iii) Under paragraph (a)(1) of this section, assuming that during
1973 shareholder B did not directly incur any other WIN expenses and
that he did not own any interest in other electing small business
corporations, partnerships, estates, or trusts that incurred WIN
expenses, shareholder B's credit earned is $480 (10 percent (B's
ownership interest) multiplied by $24,000 of WIN expenses multiplied by
20 percent) and is allowable under section 40 as a credit against his
liability for tax. Under paragraph (a)(3) for purposes of determining
the period of employment that may be taken into account by B the initial
date of employment of these WIN employees relates back to the date they
were first employed, i.e., July 1, 1972. Thus, the first 12 months of
employment ends on June 30, 1973.
Example 2. (i) Y Corporation, an electing small business corporation
which files its return on the basis of the calendar year, hires five WIN
employees in 1972. The WIN expenses incurred with respect to each
employee are as follows:
------------------------------------------------------------------------
WIN employee No. WIN expenses
------------------------------------------------------------------------
1....................................................... $6,000
2....................................................... 5,000
3....................................................... 4,000
4....................................................... 4,000
5....................................................... 3,000
---------------
Total............................................... 22,000
------------------------------------------------------------------------
On December 31, 1972, Y Corporation has 10 shares of stock outstanding
which are owned as follows: A owns 3 shares, B owns 2 shares, and C owns
5 shares.
(ii) Under this section, the WIN expenses are apportioned to the
shareholders of Y Corporation as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
WIN employees 1 2 3 4 5 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total WIN expenses.................................... $6,000 $5,000 $4,000 $4,000 $3,000
===============================================================================================
Shareholder A (3/10).................................... 1,800 1,500 1,200 1,200 900 6,600
Shareholder B (2/10).................................... 1,200 1,000 800 800 600 4,400
Shareholder C (5/10).................................... 3,000 2,500 2,000 2,000 1,500 11,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Assume that shareholders A, B, and C did not directly incur any other
WIN expenses during their taxable year in which falls December 31, 1972
(the last day of Y Corporation's taxable year), and that such
shareholders did not own any interest in other electing small business
corporations, partnerships, estates or trust that incurred WIN expenses.
The total WIN expenses of shareholder A are $6,600, of shareholder B are
$4,400, and of shareholder C are $11,000.
[38 FR 6162, Mar. 7, 1973]
Sec. 1.50B-3 Estates and trusts.
(a) General rule--(1) In general. In the case of an estate or trust,
WIN expenses (as defined in paragraph (a) of Sec. 1.50B-1) shall be
apportioned among the estate or trust and its beneficiaries on the basis
of the income of such estate or trust allocable to each. There shall be
apportioned to the estate or trust for its taxable year, and to each
beneficiary of such estate or trust for his taxable year in which or
with which the taxable year of such estate or trust ends, his share (as
determined under paragraph (b) of this section) of the total WIN
expenses. The WIN expenses for each employee shall be apportioned
separately.
[[Page 506]]
(2) Beneficiary as taxpayer. A beneficiary to whom WIN expenses are
apportioned shall, for purposes of the credit allowed by section 40, be
treated as the taxpayer who paid or incurred such WIN expenses allocated
to him. If a beneficiary takes into account in determining his WIN
expenses any portion of the WIN expenses paid or incurred by an estate
or trust and if the employee with respect to which the WIN expenses were
paid or incurred is terminated in a termination subject to the rules in
paragraph (a) of Sec. 1.50A-3, or if there is a failure (which is
subject to the rules is paragraphs (a) (2) and (3) of Sec. 1.50A-3) to
pay such employee comparable wages then such beneficiary shall make a
recapture determination under the provisions of section 50A (c) and (d)
of the Code and Sec. 1.50A-3. See Sec. 1.50A-6.
(3) Beneficiary. For purposes of this section, the term
``beneficiary'' includes heir, legatee, and devisee.
(4) Special rule for termination of interest. If during the taxable
year of an estate or trust a beneficiary's interest in the income of
such estate or trust terminates, WIN expenses paid or incurred by such
estate or trust after such termination shall not be apportioned to such
beneficiary.
(b) Share. A trust's, estate's, or beneficiary's share of the WIN
expenses with respect to each employee shall be:
(1) The total WIN expenses incurred in the taxable year of the
estate or trust with respect to such employee, multiplied by
(2) The amount of income allocable to such estate or trust or to
such beneficiary for such taxable year, divided by
(3) The sum of the amounts of income allocable to such estate or
trust and all its beneficiaries taken into account under subparagraph
(2) of this paragraph.
(c) Limitation based on amount of tax. In the case of an estate or
trust, the $25,000 amount specified in section 50A(a)(2), relating to
limitation based on amount of tax, shall be reduced for the taxable year
to--
(1) $25,000, multiplied by
(2) The WIN expenses apportioned to such estate or trust under
paragraph (a) of this section, divided by
(3) The WIN expenses apportioned among such estate or trust and its
beneficiaries.
(d) Computation of the first 12 months of employment. The first 12
months of employment (whether or not consecutive) and the period
described in section 50B(c)(4) of any WIN employee for purposes of
determining the amount of WIN expenses (as defined in paragraph (a) of
Sec. 1.50B-1) shall not be affected by a change in the beneficiaries of
an estate or trust and shall not be affected by a reduction or a
termination of a beneficiary's interest in the income of such estate or
trust. Thus, the first 12 months of employment (whether or not
consecutive) of any WIN employee shall be the same with respect to trust
or estate, and any beneficiary of such trust or estate claiming a credit
under section 40 for salaries and wages paid or incurred for services
rendered by such employee.
(e) Summary statement. An estate or trust shall attach to its return
a statement showing the apportionment of WIN expenses with respect to
each employee to such estate or trust and to each beneficiary.
(f) Examples. This section may be illustrated by the following
examples:
Example 1. (1) XYZ trust, which makes its return on the basis of the
calendar year, hires five WIN employees in 1972. The WIN expenses
incurred with respect to each employee are as follows:
------------------------------------------------------------------------
WIN employee No. WIN expenses
------------------------------------------------------------------------
1....................................................... $6,000
2....................................................... 5,000
3....................................................... 4,000
4....................................................... 4,000
5....................................................... 3,000
---------------
Total............................................... 22,000
===============
------------------------------------------------------------------------
For the taxable year 1972 the income of XYZ trust is $10,000 which is
allocable as follows: $5,000 to XYZ trust, $2,000 to beneficiary A, and
$3,000 to beneficiary B. Beneficiaries A and B make their returns on the
basis of a calendar year.
(2) Under this section, the WIN expenses are apportioned to XYZ
trust and to its beneficiaries as follows:
[[Page 507]]
----------------------------------------------------------------------------------------------------------------
WIN employees 1 2 3 4 5 Total
----------------------------------------------------------------------------------------------------------------
Total WIN expenses.............. $6,000 $5,000 $4,000 $4,000 $3,000
=============================================================================
XYZ Trust: $5,000/10,000.......... 3,000 2,500 2,000 2,000 1,500 $11,000
Beneficiary A: $2,000/10,000...... 1,200 1,000 800 800 600 4,400
Beneficiary B: $3,000/10,000...... 1,800 1,500 1,200 1,200 900 6,600
----------------------------------------------------------------------------------------------------------------
Assume that beneficiary A hired a WIN employee during his taxable year
1972 and incurred $6,000 in wages. Also, assume that beneficiary B did
not hire WIN employees during his taxable year 1972 and that
beneficiaries A and B did not own any interests in other trusts,
estates, partnerships, or electing small business corporations that
hired WIN employees. The WIN expenses of XYZ trust are $11,000, of
beneficiary A are $10,400, and of beneficiary B are $6,600.
(3) In the case of XYZ trust, the $25,000 amount specified in
section 50A(a)(2) is reduced to $12,500, computed as follows: (i)
$25,000 multiplied by (ii) $11,000 (WIN expense apportioned to the
trust), divided by (iii) $22,000 (total WIN expenses apportioned among
such trust ($11,000), beneficiary A ($4,400), and beneficiary B
($6,600)).
Example 2. The facts are the same as in example 1 except that
beneficiary A's interest is reduced to zero. Under paragraph (a)(2) for
purposes of determining the period of employment that may be taken into
account by XYZ trust and by beneficiary B, the initial date of
employment of the WIN employees relates back to the date they were first
employed.
[38 FR 6163, Mar. 7, 1973]
Sec. 1.50B-4 Partnerships.
(a) General rule--(1) In general. In the case of a partnership, each
partner shall take into account separately, for his taxable year with or
within which the partnership taxable year ends, his share (as determined
under subparagraph (3) of this paragraph) of the WIN expenses (as
defined in paragraph (a) of Sec. 1.50B-1) of employees employed by the
partnership during such partnership's taxable year. The WIN expenses for
each employee shall be allocated separately.
(2) Partner as taxpayer. Each partner shall be treated as the
taxpayer who paid or incurred the share of the WIN expenses allocated to
him. If a partner takes into account in determining his WIN expenses the
WIN expenses of an employee of a partnership, and if the employment of
such employee is terminated in a termination subject to the rules
contained in paragraph (a) of Sec. 1.50A-3, or if the partnership fails
to pay comparable wages and such failure is subject to the rules
contained in paragraphs (a) (2) and (3) of Sec. 1.50A-3, then such
partner shall make a recapture determination under the provisions of
section 50A (c) and (d) of the Code and Sec. 1.50A-3. See Sec. 1.50A-
7.
(3) Determination of partner's share. (i) Each partner's share of
the WIN expenses shall be determined in accordance with the ratio in
which the partners divide the general profits of the partnership (that
is, the taxable income of the partnership as described in section 702
(a)(9)) regardless of whether the partnership has a profit or a loss for
the taxable year during which the WIN expenses are paid or incurred.
However, if the ratio in which the partners divide the general profits
of the partnership changes during the taxable year of the partnership,
the ratio effective for the date on which the WIN expenses are paid or
incurred shall apply.
(ii) Notwithstanding subdivision (i) of this subparagraph, if the
deduction with respect to any WIN expenses is specially allocated and if
such special allocation is recognized under section 704 (a) and (b) and
paragraph (b) of Sec. 1.704-1, then each partner's share of the WIN
expenses shall be determined by reference to such special allocation
effective for the date on which the WIN expenses are paid or incurred.
(4) Computation of the first 12 months of employment. The first 12
months of employment (whether or not consecutive) and the period
described in section 50B(c)(4) with respect to any WIN employee for
purposes of determining the amount of WIN expenses (as defined in
paragraph (a) of Sec. 1.50B-1) shall not be affected by a change in the
partners of such partnership and shall not be affected by a change in
the ratio in which the partners divide the general profits of the
partnership. Thus, the first 12 months of employment (whether or not
consecutive) and the 24-
[[Page 508]]
month period described in section 50B(c)(4) of any WIN employee shall be
the same with respect to any partner claiming a credit under section 40
for salaries and wages paid or incurred for services rendered by such
employee.
(b) Summary statement. A partnership shall attach to its return a
statement showing the allocation to each partner of its WIN expenses
with respect to each WIN employee.
(c) Examples. Paragraph (a) of this section may be illustrated by
the following examples:
Example 1. Partnership ABCD hires a WIN employee on January 1, 1972,
and hires a second WIN employee on September 1, 1972. The ABCD
partnership and each of its partners reports income on the basis of the
calendar year. Partners A, B, C, and D share partnership profits
equally. Each partner's share of the WIN expenses incurred with respect
to these employees is 25 percent.
Example 2. Assume the same facts as in example 1 and the following
additional facts: A dies on June 30, 1972, and B purchases A's interest
as of such date. Each partner's share of the profits from January 1 to
June 30 is 25 percent. From July 1 to December 31, B's share of the
profits is 50 percent, and C and D's share of the profits is 25 percent
each. B shall take into account 25 percent of the WIN expenses incurred
during the period beginning January 1 and ending June 30 and 50 percent
of the WIN expenses incurred during the remainder of the year with
respect to the employee hired on January 1, 1972. Also, B shall take
into account 50 percent of the WIN expenses incurred with respect to the
employee hired on September 1, C and D shall each take into account 25
percent of the WIN expenses incurred with respect to the employees
employed by the partnership in 1972. Under paragraph (a)(3), for
purposes of determining the period of employment that may be taken into
account by B, the initial date of employment of the WIN employee hired
on January 1 relates back to the date he was first employed, i.e.,
January 1, 1972.
Example 3. Partnership SH is engaged in manufacturing. Under the
terms of the partnership agreements deductions attributable to the
employment of WIN employees are specially allocated 70 percent to
partner S and 30 percent to partner H. In all other respects S and H
share profits and losses equally. If the special allocation with respect
to the WIN expenses is recognized under section 704 (a) and (b) and
paragraph (b) of Sec. 1.704-1, the WIN expenses shall be taken into
account, 70 percent by S and 30 percent by H.
Example 4. (i) LMN partnership, which files its return on the basis
of the calendar year, hires five WIN employees in 1973. The WIN expenses
incurred with respect to each employee are as follows:
------------------------------------------------------------------------
WIN employee No. WIN expenses
------------------------------------------------------------------------
1....................................................... $6,000
2....................................................... 5,000
3....................................................... 4,000
4....................................................... 4,000
5....................................................... 3,000
---------------
Total............................................... 22,000
------------------------------------------------------------------------
On December 31, 1973, the ratio in which the partners divide the general
profits of the LMN partnership is as follows: L receives three-tenths of
the general profits, M receives two-tenths of the general profits, and N
receives five-tenths of the general profits.
(ii) Under this section the WIN expenses are apportioned to the
partners of LMN partnership as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
WIN employees 1 2 3 4 5 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total WIN expenses.................................... $6,000 $5,000 $4,000 $4,000 $3,000 $22,000
===============================================================================================
Partner L (3/10)........................................ 1,800 1,500 1,200 1,200 900 6,600
Partner M (2/10)........................................ 1,200 1,000 800 800 600 4,400
Partner N (5/10)........................................ 3,000 2,500 2,000 2,000 1,500 11,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Assume that partners L, M, and N did not directly incur any other WIN
expenses during their taxable year in which falls December 31, 1973 (the
last day of LMN partnership's taxable year) and that such partners did
not own any interest in other partnerships, electing small business
corporations, estates, or trusts that incurred WIN expenses. The total
WIN expenses of partner L are $6,600, of partner M are $4,400, and of
partner N are $11,000.
[38 FR 6164, Mar. 7, 1973]
Sec. 1.50B-5 Limitations with respect to certain persons.
(a) Mutual savings institutions. In the case of an organization to
which section 593 applies (that is, a mutual savings bank, a cooperative
bank, or a domestic building and loan association)--
(1) WIN expenses shall be 50 percent of the amount otherwise
determined under paragraph (a) of Sec. 1.50B-1, and
[[Page 509]]
(2) The $25,000 amount specified in section 50A(a)(2), relating to
limitation based on amount of tax, shall be reduced by 50 percent of
such amount.
For example, a domestic building and loan association incurs $30,000 in
WIN expenses (as determined under paragraph (a) of Sec. 1.50B-1) during
its taxable year. However, under this paragraph such amount is reduced
to $15,000 (50 percent of $30,000). If an organization to which section
593 applies is a member of a controlled group (as defined in section
50A(a)(5)), the $25,000 amount specified in section 50A(a)(2) shall be
reduced in accordance with the provisions of paragraph (f) of Sec.
1.50A-1 before such amount is further reduced under this paragraph.
(b) Regulated investment companies and real estate investment
trusts. (1) In the case of a regulated investment company or a real
estate investment trust subject to taxation under subchapter M, chapter
1 of the Code--
(i) The WIN expenses determined under paragraph (a) of Sec. 1.50B-
1, and
(ii) The $25,000 amount specified in section 50A(a)(2), relating to
limitation based on amount of tax,
shall be reduced to such person's ratable share of each such amount. If
a regulated investment company or a real estate investment trust is a
member of a controlled group (as defined in section 50A (a)(5)), the
$25,000 amount specified in section 50A(a)(2) shall be reduced in
accordance with the provisions of paragraph (f) of Sec. 1.50A-1 before
such amount is further reduced under this paragraph.
(2) A person's ratable share of the amount described in subparagraph
(1)(i) and the amount described in subparagraph (1)(ii) of this
paragraph shall be the ratio which--
(i) Taxable income for the taxable year, bears to,
(ii) Taxable income for the taxable year plus the amount of the
deduction for dividends paid taken into account under section
852(b)(2)(D) in computing investment company taxable income, or under
section 857(b)(2)(B) (section 857(b)(2)(C), as then in effect, for
taxable years ending before October 5, 1976) in computing real estate
investment trust taxable income, as the case may be.
For purposes of the preceding sentence, the term ``taxable income''
means, in the case of a regulated investment company, its investment
company taxable income (within the meaning of section 852(b)(2)) and, in
the case of a real estate investment trust its real estate investment
trust, taxable income (within the meaning of section 857(b)(2)). In the
case of a taxable year ending after October 4, 1976, real estate
investment trust taxable income, for purposes of this paragraph, is
determined by excluding any net capital gain, and by computing the
deduction for dividends paid without regard to capital gains dividends
(as defined in section 857(b)(3)(C)). The amount of the deduction for
dividends paid includes the amount of deficiency dividends (other than
capital gains deficiency dividends) taken into account in computing
investment company taxable income or real estate investment trust
taxable income for the taxable year. See section 860(f) for the
definition of deficiency dividends.
(3) This paragraph may be illustrated by the following example:
Example. (i) Corporation X, a regulated investment company subject
to taxation under section 852 of the Code, which makes its return on the
basis of the calendar year, incurs WIN expenses of $30,000 during the
year 1974. Corporation X's investment company taxable income under
section 852 (b)(2) is $10,000 after taking into account a deduction for
dividends paid of $90,000.
(ii) Under this paragraph, Corporation X's WIN expenses for the
taxable year 1974 is $3,000, computed as follows: (a) $30,000 (WIN
expenses), multiplied by (b) $10,000 (taxable income), divided by (c)
$100,000 (taxable income plus the deduction for dividends paid). For
1974, the $25,000 amount specified in section 50A(a)(2) is reduced to
$2,500.
(c) Cooperatives. (1) In the case of a cooperative organization
described in section 1381(a)--
(i) The WIN expenses determined under paragraph (a) of Sec. 1.50B-
1, and
(ii) The $25,000 amount specified in section 50A(a)(2), relating to
limitation based on amount of tax,
shall be reduced to such cooperative's ratable share of each such amount
(as determined under subparagraph (2) of this paragraph). If a
cooperative organization described in section 1381(a) is
[[Page 510]]
a member of a controlled group (as defined in section 50A(a)(5)), the
$25,000 amount specified in section 50A(a)(2) shall be reduced in
accordance with the provisions of paragraph (f) of Sec. 1.50A-1 before
such amount is further reduced under this paragraph.
(2) A cooperative's ratable share of the amount described in
subparagraph (1)(i) and the amount described in subparagraph (1)(ii) of
this paragraph shall be the ratio which--
(i) Taxable income for the taxable year, bears to
(ii) Taxable income for the taxable year plus the sum of (a) the
amount of the deductions allowed under section 1382(b), and (b) the
amount of the deductions allowed under section 1382(c), and (c) amounts
similar to the amounts described in (a) and (b) of this subdivision the
tax treatment of which is determined without regard to subchapter T,
chapter 1 of the Code and the regulations thereunder.
(3) This paragraph may be illustrated by the following example:
Example. (i) Cooperative X, an organization described in section
1381(a) which makes its return on the basis of the calendar year, incurs
WIN expenses of $30,000 for the taxable year 1972. Cooperative X's
taxable income is $10,000 after taking into account deductions of
$30,000 allowed under section 1382(b), and deductions of $60,000 allowed
under section 1382(c).
(ii) Under this paragraph, Cooperative X's WIN expenses for the
taxable year 1972 are $3,000, computed as follows: (a) $30,000 (WIN
expenses), multiplied by (b) $10,000 (taxable income), divided by (c)
$100,000 (taxable income plus the sum of deductions allowed under
sections 1382(b) and 1382(c)). For 1972, the $25,000 amount specified in
section 50A(a)(2) is reduced to $2,500.
(Sec. 860(e) (92 Stat. 2849, 26 U.S.C. 860(e)); sec. 860(g) (92 Stat.
2850, 26 U.S.C. 860(g)); sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[38 FR 6164, Mar. 7, 1973, as amended by T.D. 7767, 46 FR 11262, Feb. 6,
1981; T.D. 7936, 49 FR 2105, Jan. 18, 1984]
Sec. 1.51-1 Amount of credit.
(a) Determination of amount--(1) General rule. Except as provided in
paragraph (a)(2) of this section, the amount of the targeted jobs credit
for purposes of section 38 (formerly designated section 44B) for the
taxable year equals 50 percent of the qualified first-year wages (minus
any qualified first-year wages paid to individuals while such
individuals are qualified summer youth employees) plus 25 percent of the
qualified second-year wages.
(2) Special rule for employment of qualified summer youth employees.
In the case of an employer who pays or incurs qualified wages after
April 30, 1983, to a qualified summer youth employee beginning work for
the employer after such date, the amount of the targeted jobs credit for
the taxable year is equal to the amount determined under paragraph
(a)(1) of this section plus an amount equal to 85 percent of the first
$3,000 of qualified wages paid to each qualified summer youth employee
during the taxable year. Such wages must be attributable to services
tendered by the qualified summer youth employee during any 90-day period
beginning on or after May 1 and ending on or before September 15.
(3) Limitation. See section 38(c) for rules limiting the amount of
the credit to a percentage of the amount of the taxpayer's net tax
liability.
(b) Definitions--(1) Qualified wages. The term ``qualified wages''
means wages (as defined in paragraph (b)(4)) paid or incurred by the
employer during the taxable year to individuals who are members of a
targeted group (within the meaning of section 51(d)).
(2) Qualified first-year wages--(i) General rule. Except in the case
of qualified summer youth employees, the term ``qualified first-year
wages'' means the first $6,000 of wages (as defined in paragraph (b)(4)
of this section) attributable to service rendered by a member of a
targeted group during the 1-year period beginning with the day the
individual first begins work for the employer. In the case of a
vocational rehabilitation referral (as defined in section 51(d)(2)) who
begins work for the employer before July 19, 1984, the one-year period
begins with the day the individual begins work for the employer on or
after the beginning of such individual's rehabilitation plan. However,
with the exception of vocational rehabilitation referrals for whom the
employer claimed a credit under section 44B (as in effect prior to
enactment of the Revenue Act of 1978) for a taxable year beginning
before January 1, 1979,
[[Page 511]]
members of a targeted group who are first hired after September 26,
1978, and before January 1, 1979, will be treated as if they first began
work for the employer on January 1, 1979. The date on which the wages
are paid is not determinative of whether the wages are first-year wages;
rather, the wages must be attributed to the period during which the work
was performed. See paragraph (f)(1) of this section for an additional
limitation on the term ``qualified first-year wages''. (See examples 1,
2, 3, 4, 5, and 6 in paragraph (j) of this section for examples
illustrating the application of the rules in this paragraph (b)(2)).
(ii) Special rule for qualified summer youth employees. In the case
of a qualified summer youth employee, qualified first-year wages for
purposes of the 85 percent credit referred to in paragraph (a)(2) of
this section include only wages attributable to services rendered by a
qualified summer youth employee during any 90-day period beginning on or
after May 1 and ending on or before September 15. If the individual is
retained by the employer after the 90-day period and recertified as a
member of another targeted group, the term ``qualified first-year
wages'' for purposes of the 50 percent credit described by section
51(a)(1) has the meaning assigned that term in paragraph (b)(2)(i) of
this section except that the $6,000 limitation for qualified first-year
wages shall be reduced by wages up to, but not more than, $3,000
attributable to services rendered during the 90-day period.
(3) Qualified second-year wages. The term ``qualified second-year
wages'' means the first $6,000 of wages attributable to services
rendered by a member of a targeted group, other than a qualified summer
youth employee, during the 1-year period beginning on the day after the
last day of the period for qualified first-year wages. The date on which
the wages are paid is not determinative of whether the wages are second-
year wages; rather, the wages must be attributed to the period during
which the work was performed.
(4) Wages--(i) General rule. Except as otherwise provided in
paragraphs (b)(4) (ii) and (iii) of this section, the term ``wages''
shall only include amounts paid or incurred after December 31, 1978, for
taxable years ending after December 31, 1978. For purposes of this
section, the term ``wages'' has the meaning assigned such term by
section 3306(b) (determined without regard to any dollar limitation
contained in such subsection).
(ii) Special rules. In the case of agricultural labor or railway
labor, the term ``wages'' means unemployment insurance wages within the
meaning of subparagraph (A) or (B) of section 51(h)(1). The term
``wages'' shall not include any amounts paid or incurred by an employer
for any pay period to any individual for whom the employer receives
federally funded payments for on-the-job training for such individual
for such pay period. (See example 7 in paragraph (j) of this section.)
The amount of wages which would otherwise be qualified wages under this
section with respect to an individual for a taxable year shall be
reduced by an amount equal to the amount of payments made to the
employer (however utilized by such employer) with respect to such
individual for such taxable year under a program established under
section 414 of the Social Security Act. In addition, the term ``wages''
shall not include any amount paid or incurred by the employer in a
taxable year beginning before January 1, 1982, to an individual with
respect to whom the employer claims a credit under section 40 (relating
to expenses of work incentive programs). For youths participating in a
qualified cooperative education program:
(A) Section 3306(c)(10)(C) (relating to the definition of employment
for certain students) does not apply in determining wages under this
section; and
(B) The term ``wages'' shall include only those amounts paid or
incurred by the employer that are attributable to services rendered by
the individual while he or she meets the conditions specified in section
51(d)(8)(A). For purposes of the preceding sentence, an employee who met
the requirement in section 51(d)(8)(A)(iv), dealing with economically
disadvantaged status, when hired, shall be deemed to continuously meet
the requirement in section 51(d)(8)(A)(iv) during the time the employee
is in the cooperative education
[[Page 512]]
program. See also paragraph (e) of this section for rules relating to
the exclusion of wages paid to certain individuals.
(iii) Termination. The term ``wages'' shall not include any amount
paid or incurred to an individual who begins work for the employer after
December 31, 1985.
(5) Special rule for eligible work incentive employees. In the case
of an eligible work incentive employee (as defined in Sec. 1.51-
1(c)(4)), this paragraph (b) shall be applied for taxable years
beginning after December 31, 1981, as if such employee had been a member
of a targeted group for taxable years beginning before January 1, 1982.
(See example 8 in paragraph (j) of this section.)
(c) Members of targeted groups--(1) In general. An individual is a
member of a targeted group if the individual is certified as (i) a
vocational rehabilitation referral, (ii) an economically disadvantaged
youth, (iii) an economically disadvantaged Vietnam-era veteran, (iv) an
SSI recipient, (v) a general assistance recipient, (vi) a youth
participating in a cooperative education program, (vii) an economically
disadvantaged ex-convict, (viii) an eligible work incentive employee,
(ix) a qualified summer youth employee, or (x) an involuntarily
terminated CETA employee. Except as provided below, see section 51(d) of
this section for a definition of these groups. See paragraph (d) of this
section for rules concerning the certification of individuals as members
of one of these targeted groups.
(2) Youths participating in a qualified cooperative education
Program--(i) Student requirements. For an individual to qualify as a
youth participating in a qualified cooperative education program, the
individual must meet each of the following conditions (A) through (D)--
(A) The youth must have attained the age of 16 but not 20. (An
individual reaching 19 will be treated as a youth participating in a
qualified cooperative education program only for wages paid or incurred
after November 26, 1979.)
(B) The youth must not have graduated from a high school or
vocational school.
(C) The youth must be enrolled in and actively pursuing a qualified
cooperative education program (as defined in paragraph (c)(2)(iii) of
this section).
(D) With respect to wages paid or incurred after December 31, 1981,
the youth must be a member of an economically disadvantaged family when
initially hired.
(ii) Economically disadvantaged family. See section 51(d)(11) for
the rules relating to the determination of whether an individual is a
member of an economically disadvantaged family.
(iii) Qualified cooperative education program. The term ``qualified
cooperative education program'' means a program of vocational education
for individuals who (through written cooperative arrangements between a
qualified school and one or more employers) receive instruction
(including required academic instruction) by alternation of study in
school with a job in any occupational field (but only if these two
experiences are planned by the school and employer so that each
contributes to the student's education and employability). See section
51(d)(8)(C) for the definition of a ``qualified school.'' For purposes
of this paragraph, the term ``program of vocational education'' means an
organized educational program which is directly related to the
preparation of individuals for employment, or for additional preparation
for a career requiring other than a baccalaureate or advanced degree. An
``organized educational program'' means only instruction related to the
occupation or occupations for which the students are in training or
instruction necessary for students to benefit from such training. The
student's employment contributes to his or her education and
employability only if it is related to the occupation, or a cluster of
closely related occupations, for which the student is in training in
school. However, the student's employment need not be directly related
to or in the same technical field as the training the student receives
in school. For example, a student studying carpentry does not have to
work as a carpenter for the program to constitute a ``qualified
cooperative education program.'' The program will qualify if, for
example, the student works at a hardware store because the student's
work would familiarize the student with the
[[Page 513]]
materials and tools used by carpenters. The program would not qualify,
however, if the student works at a restaurant and generally performs
tasks in such employment not related to carpentry.
(iv) Actively pursuing. For purposes of this paragraph (c)(2), a
youth will not be considered to be ``actively pursuing'' a school's
qualified cooperative education program (within the meaning of paragraph
(c)(2)(iii) of this section) during summer vacation unless that school
program continues during the summer vacation. Whether the school program
continues during the summer vacation will be determined by examining the
written agreement between the school and the employer. Thus, if a
written agreement specifically covers the summer vacation period and
provides for a significant degree of involvement by school personnel to
provide supervision for the students in the program during that period,
the school program will be considered to continue during the summer,
regardless of whether classes are held during the vacation period.
(3) General assistance recipients. In order for an individual to
qualify as a general assistance recipient, the individual, or another
member of the assistance unit (within the meaning of 45 CFR
205.40(a)(1)) that the individual is a member of, must receive
assistance for a period of not less than 30 days ending within the
preemployment period (as defined in section 51(d)(13)) from a qualified
general assistance program. A qualified general assistance program is a
program of a State or a political sudivision of a State that the
Secretary (after consultation with the Secretary of Health and Human
Services) has designated as providing general assistance (or similar
assistance) which is based on need and consists of money payments or
voucher or scrip. For purposes of the preceding sentences, a program
qualifying as a general assistance program by reason of non-cash
assistance (i.e., voucher or scrip) shall be so treated only with
respect to amounts paid or incurred after July 1, 1982, to individuals
beginning work for the employer after such date. For purposes of this
subparagraph, the term ``money'' means cash or an instrument convertible
into cash (e.g., a check).
(4) Eligible work incentive employees. An eligible work incentive
employee means an individual who has been certified by the designated
local agency (as defined in paragraph (d)(10) of this section) as--
(i) Being eligible for financial assistance under part A of title IV
of the Social Security Act and as having continuously received such
financial assistance during the 90-day period which immediately precedes
the date on which such individual is hired by the employer, or
(ii) Having been placed in employment under a work incentive program
established under section 432(b)(1) or 445 of the Social Security Act.
The provisions of this paragraph (c)(4) are effective with respect to
taxable years of the employer beginning after December 31, 1981. (See
paragraph (b)(5) of this section for a special rule relating to eligible
work incentive employees.)
(5) Involuntarily terminated CETA employees--(i) In general. An
involuntarily terminated CETA employee is an individual who first began
work for an employer after August 13, 1981, in taxable years of the
employer ending after August 13, 1981, and is certified by the
designated local agency (as defined in paragraph (d)(10) of this
section) as having been involuntarily terminated after December 31,
1980, from employment financed in whole, or in part, under a program
under part D of title II or title VI of the Comprehensive Employment and
Training Act.
(ii) Termination. Section 51(d)(10) and this paragraph (c)(5) shall
not apply to any individual who begins work for the employer after
December 31, 1982.
(d) Certification--(1) General rule. Except as otherwise provided in
this paragraph, an individual shall not be treated as a member of a
targeted group unless, on or before the day on which such individual
begins work for the employer, the employer has received, or has
requested in writing, a certification that the individual is a member of
a targeted group from the designated local agency (as defined in
paragraph (d)(10) of this section). In addition, the employer must
receive a certification
[[Page 514]]
before the targeted jobs credit can be claimed. However, with respect to
individuals who began work for the employer on or before May 11, 1982,
the certification will be timely only if requested or received before
the day the individual began work for the employer. In the case of a
request in writing mailed via the United States Postal Service, the
request shall be deemed to be made on the date of the postmark stamped
on the cover in which such request was mailed to the designated local
agency provided the request is mailed in accordance with the mailing
requirements in Sec. 301.7502-1(c) and delivered in accordance with the
delivery requirements in Sec. 301.7502-1(d). In the case of a deadline
that but for this sentence would fall on a Saturday, Sunday, or a legal
holiday, the deadline for making a timely request in writing for a
certification or receiving a timely certification shall be the next
succeeding day which is not a Saturday, Sunday, or legal holiday. (See
section 7503 for the definition of ``legal holiday.'') See paragraph
(d)(2) of this section for transitional rules applicable to certain
employees who began work for the employer before September 26, 1981. See
paragraph (d)(3) of this section for special rules applicable to
cooperative education students and paragraph (d)(4) of this section for
special rules applicable to eligible work incentive employees.
(2) Timeliness of certification in the case of an individual to whom
a written preliminary eligibility determination has been issued. If on
or before the day on which an individual begins work for the employer,
such individual has received from a designated local agency (or other
agency or organization designated pursuant to a written agreement with
such designated local agency) a written preliminary determination that
such individual is a member of a targeted group, then such individual
may be treated as a member of a targeted group if on or before the fifth
day after the day such individual begins work for the employer such
employer receives, or requests in writing, from the designated local
agency a certification that such individual is a member of a targeted
group. This paragraph (d)(2) only applies to individuals who begin work
for the employer after July 18, 1984.
(3) Transitional rules for certain employees who began work for the
employer on or before September 26, 1981. In the case of an individual,
other than a cooperative education student, who began work for the
employer before June 29, 1981, the employer must either receive, or
request in writing, a certification before July 23, 1981. In the case of
an individual, other than a cooperative education student, who began
work for the employer after June 28, 1981, and on or before September
26, 1981, the employer must either receive, or request in writing, a
certification before September 26, 1981.
(4) Cooperative education students. In the case of cooperative
education students, the school administering the cooperative education
program must issue the certification. Form 6199 is provided for this
purpose. If the student begins work for the employer after September 26,
1981, see the general rule in Sec. 1.51-1(d)(1) for the date when this
certification must be received or requested. If the student begins work
for the employer on or before September 26, 1981, the employer must
receive the certification or request it in writing before September 26,
1981. In order for an employer to claim a credit on wages paid or
incurred to a cooperative education student after December 31, 1981, the
employer must receive or request in writing a determination that the
student is a member of an economically disadvantaged family. A request
for economic eligibility determination for a cooperative education
student must be made in writing by the employer to the participating
school. If the student begins work for the employer on or before
September 26, 1981, the employer must receive or request in writing such
determination before September 26, 1981. However, a request in writing
on or after August 13, 1981, to a participating school for certification
will be deemed to include a request for an economic eligibility
determination. In addition, any certification issued by a school after
August 13, 1981, will be deemed to be issued in response to a request
for certification which includes a request for an economic eligibility
determination. The rule in the
[[Page 515]]
preceding sentence does not eliminate the requirement that the employer
receive a certification that includes an economic eligibility
determination in order to claim a credit for wages paid or incurred
after December 31, 1981. If a certification issued by a school after
August 13, 1984, does not contain an economic eligibility determination
and the employer wishes to claim a credit for wages paid or incurred
after December 31, 1981, the employer must receive a completed
certification before the date on which the credit is claimed.
(5) Eligible work incentive employees. In the case of eligible work
incentive employees, the employer must either receive, or request in
writing, a certification within the time requirements of paragraph (d)
(1), (2), or (3) of this section, whichever is applicable. Before
October 12, 1981 (the date the Economic Recovery Tax Act of 1981
codified the State employment security agency as the designated local
agency for certifying targeted groups), a certificate may be received or
requested in writing from either the designated local agency (as defined
in paragraph (d)(10) of this section) or the office or agency that
properly issued certifications under former section 50B(h)(1) (relating
to the work incentive credit).
(6) Certifications that are not timely. Any certification that is
not timely received or requested by the employer in accordance with the
rules of this paragraph will be treated as invalid. Thus, the employer
will not be allowed to claim a credit under section 51 with respect to
any wages paid or incurred to an employee whose certification or request
for certification is not timely. A timely request for certification does
not eliminate the need for the employer to receive a certification
before claiming the credit. In the case of a request for certification
that was denied, resubmitted, and then approved, the timeliness of the
request shall be determined by the timeliness of the first request.
(7) Incorrect certification--(i) In general. Except as otherwise
provided in paragraph (d)(7)(ii) of this section, if an individual has
been certified as a member of a targeted group, and such certification
is based on false information provided by such individual, the
certification shall be revoked and wages paid by the employer after the
date on which notice of revocation is received by the employer shall not
be treated as qualified wages. For purposes of this paragraph, a
certification will be revoked only if the individual would not have been
certified had correct information been provided to the issuer of the
certification. Thus, false information that is not material to an
individual's eligibility as a member of a targeted group will not
invalidate an otherwise valid certification.
(ii) Employer's knowledge that the certification was incorrect. In
the case of an employer who knew, or had reason to know, at the time of
certification that the information provided to the designated local
agency was false, none of the wages paid by such employer to an
individual to whom an incorrect certification has been issued will be
qualified wages.
(8) Certifications issued to certain rehires. This paragraph (d)(8)
applies in the case of an employee who first began work for the employer
before August 13, 1981, and was dismissed and rehired by the employer. A
certification received or requested by an employer with respect to such
an employee will be considered timely only if there was a valid business
reason, unrelated to the availability of the credit, for the dismissal
and rehire and if the employer did not dismiss and then rehire the
employee in order to meet the timing requirement with respect to
certification. An individual who is dismissed and then rehired for the
purpose described in the preceding sentence will be considered for
purposes of section 51(d)(16) and this paragraph to have been
continuously employed by the employer during the time between the
dismissal and the rehire. Whether the employer was motivated by reason
of the certification rules in section 51(d)(16) and this paragraph to
dismiss and then rehire an employee is a question of fact to be
determined from all the circumstances surrounding the dismissal and
rehire. (See paragraph (e)(2) of this section for a separate rule
disallowing the credit in the case of nonqualifying rehires.)
(9) Individuals who continue to be employed by the same employer but
as a
[[Page 516]]
member of another targeted group. This paragraph (d)(9) applies in the
case of an employee who continues to be employed by the same employer
but no longer qualifies as a member of the targeted group for which such
employee was first certified (e.g., the employee was orginally certified
as a qualified summer youth employee with respect to a ninety-day period
between May 1 and September 15, but such ninety-day period has ended).
In such case, the employer may request a certification that the employee
is a member of another targeted group, and if any wages paid to such
individual are qualified first-year wages or qualified second-year
wages, the employer may be entitled to a targeted jobs credit with
respect to such wages. The second certification will not be invalid
merely because it was requested or received after the individual began
work for the employer; only the first certification (for example, the
certification with respect to an individual hired first as a qualified
summer youth employee) must meet the requirement of section 51(d)(16)
that a certification must be requested or received by an employer on or
before the day on which the individual begins work for the employer. In
the case of a former qualified summer youth employee or a youth
participating in a qualified cooperative education program who is
recertified as an economically disadvantaged youth, the term ``hiring
date'' in section 51(d)(3)(B) does not mean the day the individual is
hired by the employer but means the day the individual is certified as a
member of the new targeted group. Accordingly, the age requirement of
section 51(d)(3)(B) shall be applied as of the day the individual is
certified as a member of the second targeted group. In addition, see
section 51(d)(11) for rules concerning the viability of the original
economic eligibility determination.
(10) Certification where a trade or business has been transferred to
a new employer. In the case of a transfer of a trade or business in
which an individual who is a member of a targeted group is retained as
an employee in the trade or business, the certification obtained for
such employee by the transferor-employer will apply with respect to the
transferee-employer.
(11) Designated local agency--(i) In general. For the period before
October 12, 1981, the term ``designated local agency'' means the agency
for any locality designated jointly by the Secretary and the Secretary
of Labor to perform certifications of employees for employers in that
locality. On or after October 12, 1981, the term ``designated local
agency'' means a State employment security agency established in
accordance with the Act of June 6, 1933, as amended (29 U.S.C. 49
through 49n).
(ii) Jurisdiction. The designated local agency is the agency that
has, pursuant to its charter, jurisdiction over the individual that is
sought to be certified. Thus, any certification that is issued with
respect to an individual who is not within the jurisdiction of the
designated local agency that issued the certification will be invalid.
Notwithstanding any other provision of this section, a request in
writing for certification to the appropriate designated local agency
that is made before January 23, 1984, will be considered to be timely if
it is made after an otherwise timely request in writing for
certification was made to a designated local agency that does not have
jurisdiction over the individual sought to be certified.
(e) Certain ineligible individuals--(1) Related individuals. For
purposes of section 51(a), ``qualified wages'' does not include any
amounts paid or incurred by a taxpayer to any of the following
individuals:
(i) An individual who is related (within the meaning of any of
paragraphs (1) through (8) of section 152 (a)) to the taxpayer;
(ii) An individual who is a dependent (within the meaning of section
152(a)(9)) of the taxpayer;
(iii) An individual who is related (within the meaning of any of
paragraphs (1) through (8) of section 152(a)) to a shareholder who owns
(within the meaning of section 267(c)) more than 50 percent in value of
the outstanding stock of the taypayer, if the taxpayer is a corporation;
(iv) An individual who is a dependent (within the meaning of section
[[Page 517]]
152(a)(9)) of a shareholder described in paragraph (e)(1)(iii) of this
section;
(v) An individual who is a grantor, beneficiary or fiduciary of the
taxpayer, if the taxpayer is an estate or trust;
(vi) An individual who is a dependent (within the meaning of section
152(a)(9)) of an individual described in paragraph (e)(1)(v) of this
section; or
(vii) An individual who is related (within the meaning of any of
paragraphs (1) through (8) of section 152(a)) to an individual described
in paragraph (e)(1)(v) of this section.
(2) Nonqualifying rehires. For purposes of section 51(a),
``qualified wages'' does not include wages paid to an employee who had
been employed by the employer prior to the current hiring date of the
employee if at any time during such prior employment the employee was
not a member of a targeted group. The preceding sentence shall not apply
to an employee who was previously timely certified as a member of a
targeted group with respect to the same employer. An employee shall be
treated as not having been a member of a targeted group if the
certification requirements of section 51(d)(16) were not met. (See
example 8 in paragraph (j) of this section.)
(3) Effective date. The provisions of this paragraph (e) are
effective with respect to employees first beginning work for an employer
after August 13, 1981.
(f) Limitations--(1) Limitation on qualified first-year wages. With
respect to taxable years beginning before January 1, 1982, the amount of
the qualified first-year wages which may be taken into account for
purposes of the targeted jobs credit for any taxable year shall not
exceed 30 percent of the aggregate unemployment insurance wages paid by
the employer during the calendar year ending in such taxable year. In
the case of a group of trades or businesses under common control (as
defined in Sec. 1.52-1(b)), the qualified first-year wages cannot
exceed 30 percent of the aggregate unemployment insurance wages paid to
all employees of that group of trades or businesses under common control
during the calendar year ending in such taxable year. For this purpose,
the term ``unemployment insurance wages'' has the same meaning given to
the term ``wages'' as defined in Sec. 1.51-1(b)(4). In this case of
agricultural or railway labor, see section 51(h)(1) for the applicable
definition of unemployment insurance wages. (See examples 13 and 14 in
paragraph (j) of this section.)
(2) Remuneration must be for trade or business employment.
Remuneration paid by an employer to an employee during any taxable year
shall be taken into account only if more than one-half of the
remuneration paid by the employer to an employee is for services in a
trade or business of the employer. This determination shall be made by
each employer without regard to section 52 (a) or (b). Accordingly,
employees of corporations that are members of a controlled group or
employees of partnerships, proprietorships, and other trades or
businesses (whether or not incorporated) which are under common control
will be treated as being employed by each separate employer for this
purpose. For this purpose, the term ``year'' means the taxable year of
the employer. (See example 15 in paragraph (j) of this section.)
(g) Election not to claim the targeted jobs credit. The election
under section 51(j) (as amended by section 474(p) of the Tax Reform Act
of 1984) not to claim the targeted jobs credit is available for taxable
years beginning after December 31, 1983, and shall be made for the
taxable year in which such credit is available by not claiming such
credit on an original return or amended return at any time before the
expiration of the 3-year period beginning on the last date prescribed by
law for filing the return for the taxable year (determined without
regard to extensions). The election may be revoked within the 3-year
period by filing an amended return on which the credit is claimed.
(h) Treatment of successor-employers. In the case of a successor-
employer referred to in section 3306(b)(1), the determination of the
amount of credit under this section with respect to wages paid by such
successor-employer shall be made in the same manner as if such wages
were paid by the predecessor-employer referred to in such section. Thus,
the 1-year period referred to in
[[Page 518]]
Sec. 1.51-1(b)(2)(i) will be considered to begin with the day the
employee first began work for the transferor-employer, and the amount of
qualified first-year wages and qualified second-year wages paid or
incurred with respect to the employee must be reduced by the amount of
any such wages paid or incurred by the transferor-employer. (See
examples 10 and 11 in paragraph (j) of this section.) Also, see
paragraph (d)(10) of this section for rules concerning the viability of
the employee's certification.
(i) Treatment of employees performing services for other persons. No
credit shall be determined under this section with respect to
remuneration paid by an employer to an employee for services performed
by such employee for another person unless the amount reasonably
expected to be received by the employer for such services from such
other person exceeds the remuneration paid by the employer to such
employee for such services.
(j) Examples. The application of this section may be illustrated by
the following examples which, except as otherwise stated, assume that
the limitations imposed by Sec. Sec. 1.51-1(f)(2) and 1.53-3 are
inapplicable:
Example 1. Corporation M is a calendar year, cash receipts and
disbursements method taxpayer. A, an economically disadvantaged youth,
first began work for Corporation M on October 1, 1978. Qualified first-
year wages with respect to A are wages attributable to the period
beginning on January 1, 1979 (since A was first hired after September
26, 1978, he is treated as having begun work on January 1, 1979) and
ending on December 31, 1979. In the 1979 taxable year, Corporation M
pays A $5,000 of qualified first-year wages attributable to services
performed in 1979. Corporation M's allowable credit is equal to $2,500
(50 percent of $5,000).
Example 2. Assume the same facts as in example 1, except that in
1980 Corporation M pays to A $100 of wages attributable to services
rendered in 1979. These wages will still be considered as qualified
first-year wages, but the credit may not be claimed until the 1980
taxable year.
Example 3. Corporation O is a calendar year, cash receipts and
disbursements method taxpayer. C, a vocational rehabilitation referral,
first began work for Corporation O on July 1, 1978. Corporation O
claimed a credit under section 44B (as in effect prior to enactment of
the Revenue Act of 1978) for $3,000 of wages paid to C in the 1978
taxable year. Corporation O paid C $6,000 for services performed from
January 1, 1979 to June 30, 1979. The period during which qualified
first-year wages are determined begins on July 1, 1978, and ends on June
30, 1979. Amounts paid before January 1, 1979, however, are not taken
into consideration in determining the amount of qualified first-year
wages. Accordingly, only the wages attributable to services performed
from January 1, 1979, through June 30, 1979, are considered as qualified
first-year wages. Corporation O's allowable credit is equal to $3,000
(50 percent of $6,000).
Example 4. I first began work for Corporation Q, a cash receipts and
disbursements method taxpayer, on January 1, 1981, and was not a member
of a targeted group. On March 1, 1981, I was convicted of a felony and
sentenced to prison. I quit working for Corporation Q, and served the
prison sentence. On November 1, 1981, I again was hired by Corporation Q
and began work on that date. On the November 1, 1981 hiring date, I was
an economically disadvantaged ex-convict for whom Corporation Q received
a certificate. Corporation Q paid I $500 of wages for services performed
from November 1, 1981, to December 31, 1981, and $6,000 of wages for
services performed during 1982. The $500 of wages paid for services
performed from November 1, 1981, to December 31, 1981, would be
qualified first-year wages because these qualified wages were paid for
services performed during the 1-year period beginning on the date I
first began work for Corporation Q (January 1, 1981). The $6,000 of
wages paid for services performed during 1982 would be qualified second-
year wages because these qualified wages were paid for services
performed during the 1-year period beginning on the day after the first
1-year period. Accordingly, Corporation Q has an allowable credit of
$250 attributable to qualified first-year wages and $1,500 attributable
to qualified second-year wages.
Example 5. Assume the same facts as in example 4, except that all
dates are 1 year later. Thus, I first began work for Corporation Q on
January 1, 1982, was convicted on March 1, 1982, and was rehired on
November 1, 1982. Under these facts, Q is not entitled to take a
targeted jobs credit with respect to I's wages because I is a
nonqualifying rehire.
Example 6. J, an economically disadvantaged youth, first began work
for Corporation R, a calendar year cash receipts and disbursements
method taxpayer, on December 1, 1979. On July 1, 1980, J was laid off by
Corporation R and began work for Corporation S, which is unrelated to
Corporation R, on July 2, 1980. On November 1, 1980, J again began work
for Corporation R and continued working for Corporation R until January
1, 1982. At the time J first began work for Corporation S, J no longer
met the qualifications of an economically disadvantaged youth.
Corporation S may not claim a credit
[[Page 519]]
for wages paid to J because J was not a member of a targeted group at
the time he began work for Corporation S. Corporation R, however, may
claim a credit for wages paid to J because J was a member of a targeted
group when he was hired by Corporation R. Corporation R's qualified
first-year wages paid to J are the wages paid for services performed by
J from December 1, 1979, to July 1, 1980, and from November 1, 1980, to
November 30, 1980. Corporation R's qualified second-year wages paid to J
are wages paid for services performed by J from December 1, 1980, to
November 30, 1981. Corporation R may not claim a credit for wages paid
for services performed by J after November 30, 1981.
Example 7. K, a member of a targeted group, first began work for
Corporation T on January 1, 1979. For the pay periods from January 1,
1979, to March 31, 1979, Corporation T received federally funded
payments for on-the-job training for K and paid wages of $2,000 to K.
During the remainder of 1979 Corporation T paid wages of $7,000 to K.
Corporation T may claim a credit on $6,000 of qualified first-year
wages. Amounts paid to K by Corporation T during the pay periods for
which Corporation T received federally funded payments for on-the-job
training for K are not considered wages for purposes of the credit.
However, Corporation T may consider $6,000 of the total $7,000 of wages
paid after March 31, 1979, as qualified first-year wages.
Example 8. P first began work for Corporation X on January 1, 1981,
as an individual who was certified to be an eligible employee for
purposes of the WIN credit provided in section 40. Corporation X paid P
$6,000 of wages during its taxable year beginning on January 1, 1981,
and $6,000 of wages during its taxable year beginning on January 1,
1982. X can claim a targeted jobs credit for the wages paid in 1982 if
the requirements of section 51 are met. For purposes of section 51 (a),
P's qualified first-year wages are the wages paid from January 1, 1981,
to December 31, 1981, and P's qualified second-year wages are the wages
paid from January 1, 1982, to December 31, 1982. Thus, Corporation X is
only entitled to claim a targeted job credit based on P's qualified
second-year wages.
Example 9. (i) L, 15 years of age, first began work for Corporation
U on August 1, 1979. On September 3, 1979, L began her junior year in
high school and enrolled in a qualified cooperative education program
that was to run for her junior and senior years. On October 1, 1979,
when L turned 16, she met all the requirements of Sec. 1.51-1(c)(2)(i)
and qualified as a youth participating in a qualified cooperative
education program. Corporation U is entitled to claim a credit on wages
paid or incurred for services performed by L after September 30, 1979,
so long as L meets the requisite requirements. L's summer vacation began
on June 1, 1980. Assume that the cooperative education program L was
enrolled in did not continue during the summer vacation (i.e., the
written agreement between the employer and the school did not cover the
summer vacation). Thus, during her summer vacation, L did not meet the
requirement of actively pursuing a qualified cooperative education
program. Accordingly, Corporation U may not claim a credit on wages paid
for services performed by L during L's summer vacation. On September 2,
1980, L began her senior year, and again met all the requirements of
Sec. 1.51-1(c)(2)(i). She continued to meet these requirements until
June 5, 1981, when she graduated from high school. Accordingly,
Corporation U may claim a credit on wages paid for services performed
after September 1, 1980, and before June 5, 1981.
(ii) Assume the same facts as in (i), above, except that all dates
are 3 years later. Under these facts, U is not entitled to claim a
targeted jobs credit with respect to any of L's wages because L has not
been timely certified under section 51(d)(16) and Sec. 1.51-1(d)(3).
Example 10. D began work for a drugstore owned by E as a sole
proprietor on January 1, 1979, and was certified as a member of a
targeted group with respect to E. On June 1, 1979, E sold the drugstore
where D worked to F, who continued to operate the drugstore with D as an
employee. D's qualification as a member of a targeted group is not
required to be redetermined in order for F to qualify for the targeted
jobs credit. F will take into account the certification of D's
eligibility that was provided to E. F will have qualified first-year
wages consisting of the first $6,000 of wages paid or incurred to D by E
and F from January 1, 1979 to December 31, 1979 (reduced by any
qualified wages paid or incurred by E to D from January 1, 1979, to May
31, 1979). F's qualified second-year wages will consist of the first
$6,000 of wages paid or incurred to D by F from January 1, 1980, to
December 31, 1980.
Example 11. G began work in a machine shop owned by H as a sole
proprietor on January 1, 1979, and was certified as a member of a
targeted group with respect to H. On June 1, 1980, H transferred all the
assets of the machine shop to newly formed Corporation P. Corporation P
retained G as an employee in the machine shop. G's qualification as a
member of a targeted group is not required to be redetermined in order
for P to qualify for the targeted jobs credit. H has qualified first-
year wages in the amount of the first $6,000 of wages paid or incurred
to G by H from January 1, 1979, to December 31, 1979. Corporation P has
qualified second-year wages in the amount of the first $6,000 of
[[Page 520]]
wages paid or incurred to G by H and Corporation P from January 1, 1980,
to December 31, 1980 (reduced by any qualified second-year wages paid by
H to G).
Example 12. W operates a retail store as a sole proprietor. On June
1, 1982, W hires S after receiving a written determination from a local
community organization that S meets the requirements of an economically
disadvantaged youth. W does not request a certification from the State
employment security agency as to S's eligibility. W is not entitled to
claim a credit with respect to wages paid to S because W did not
receive, or request in writing, a certification from the State
employment security agency as to S's eligibility on or before the day on
which S began work for W.
Example 13. Corporation V is a cash receipts and disbursements
method taxpayer with a July 1 through June 30 taxable year. In the
taxable year ending June 30, 1980, the aggregate unemployment insurance
wages paid by V were $150,000. In calendar year 1979 the aggregate
unemployment insurance wages paid by Corporation V were $110,000.
Corporation V's qualified first-year wages are limited to 30 percent of
the aggregate unemployment insurance wages paid by it in calendar year
1979 or $33,000 (30 percent of $110,000), even though the aggregate
unemployment insurance wages paid by it in the taxable year ending June
30, 1980, were $150,000.
Example 14. Assume the same facts as in example 13, except that all
dates are 3 years later. Since the limitation on qualified first-year
wages does not apply to taxable years beginning after December 31, 1981,
Corporation V's qualified first-year wages are $150,000.
Example 15. M operates a retail store as a sole proprietor. N and O,
both members of a targeted group, first began work for M on January 1,
1979. M paid N total qualified first-year wages of $6,000 in 1979. Three
thousand one hundred dollars of those wages were for services in M's
retail store, and $2,900 of those wages were for services as M's maid. M
paid O total qualified first-year wages of $6,000 in 1979. Three
thousand dollars of those wages were for services in M's store and
$3,000 of those wages were for services as M's chauffeur. M has an
allowable credit of $3,000 in 1979 on all $6,000 of qualified first-year
wages paid to N because more than one-half of the remuneration paid by M
to N was for services in M's trade or business. M may not take into
account the wages paid to O because not more than one-half of the
remuneration paid by M to O was for services in M's trade or business.
Acordingly, M may not claim a credit on wages paid to O.
[T.D. 8062, 50 FR 45998, Nov. 6, 1985]
Tax Surcharge
Sec. 1.52-1 Trades or businesses that are under common control.
(a) Apportionment of jobs credit among members of a group of trades
or businesses that are under common control--(1) Targeted jobs credit.
(i) In the case of a group of trades or businesses that are under common
control (within the meaning of paragraph (b) of this section) at any
time during the calendar year, the amount of the targeted jobs credit
(computed under section 51 as if all the organizations that are under
common control are one trade or business) under section 4-1B must be
apportioned among the members of the group on the basis of each member's
proportionate share of the wages giving rise to such credit. If the
group of trades or businesses that are under common control have
different taxable years, the credit shall be computed as if all the
organizations have the same taxable year as the organization for which a
determination of the proportionate share of the credit is being made.
For taxable years beginning before January 1, 1982, the amount of the
qualified first-year wages cannot exceed 30 percent of the aggregate
unemployment insurance wages paid by the group of trades or businesses
under common control during the calendar year ending in the taxable year
of the organization for which a determination of the proportionate share
of the credit is being made. The limitations in section 53 and the
regulations thereunder apply to each organization individually
(although, in applying these limitations, an affiliated group of
corporations electing to make a consolidated return shall be treated as
one organization).
(ii) The application of the subparagraph may be illustrated by the
following examples:
Example 1. (a) Corporation M and its three subsidiaries,
Corporations N, O, and P, are a group of businesses that are under
common control and each uses the cash receipts and disbursements method
of accounting and has a calendar year taxable year. Corporations M, N,
O, and P paid out the following amounts in unemployment insurance wages,
qualified first-year wages and qualified second-year wages during 1980.
[[Page 521]]
------------------------------------------------------------------------
Unemployment Qualified Qualified
insurance 1st-Year 2d-year
wages wages wages
------------------------------------------------------------------------
Corporation:
M................................. $600,000 $184,000 $75,000
N................................. 300,000 85,000 90,000
O................................. 360,000 120,000 115,000
P................................. 24,000 24,000 0
-----------------------------------
Total........................... 1,284,000 413,000 280,000
------------------------------------------------------------------------
(b) Since Corporations M, N, O, and P are under common control, the
amount of qualified first-year wages paid by the group is limited to 30
percent of the aggregate unemployment insurance wages paid by the group
in the calendar year ending in the group's taxable year. Since the
qualified first-year wages of $413,000 exceeds 30% of the aggregate
unemployment insurance wages, the group is limited to qualified first-
year wages of $385,200 (30% of $1,284,000). The amount of the targeted
jobs credit attributable to qualified first-year wages is equal to
$192,600 (50% of $385,200). The amount of the credit attributable to
qualified second-year wages is equal to $70,000 (25% of $280,000).
(c) The credit is apportioned among Corporations M, N, O, and P on
the basis of their proportionate share of the qualified first-year wages
or qualified second-year wages giving rise to the credit. Each
corporation's share of the credit attributable to qualified first-year
wages would be computed as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.145
Each corporation's share of the credit attributable to qualified
second-year wages is computed as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.146
Example 2. Assume the facts in example 1 with these additional
facts. A, a member of a targeted group, worked for more than one of the
members of the controlled group in the taxable year. A first began work
for Corporation M on January 1, 1980, and later worked for Corporations
N and O during 1980. For services rendered by A during 1980, the
following wages were paid to A: Corporation M paid A $2,500 of qualified
first-year wages: Corporation N paid A $1,500 of qualified first-year
wages; Corporation O paid A $3,000 of qualified first-year wages.
Corporations M, N, and O paid A a total of $7,000 of wages during 1980.
Only $6,000 of qualified first-year wages per year per employee may be
taken into account for purposes of the credit. See Sec. 1.51-1(d)(1).
Since Corporations M, N, and O are treated as a single employer under
section 52(a), the maximum $6,000 of qualified first-year wages paid A
by the group must be apportioned among Corporations M, N, and O as
follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.147
Example 3. (a) Corporation Q and its two subsidiaries, Corporations
R and S, are a group of businesses that are under common control and
each uses the cash receipts and disbursements method of accounting.
Corporation Q has a calendar year taxable year. Corporation R has a July
1 through June 30 taxable year. Corporation S has an October 1
[[Page 522]]
through September 30 taxable year. For purposes of determining
Corporation R's proportionate share of the credit, the credit is
computed as if Corporations Q and S have the same taxable year as
Corporation R. Accordingly, Corporation R would compute its share of the
credit for its 1979-1980 taxable year as set forth below.
------------------------------------------------------------------------
Qualified wages paid
from July 1, 1979, to
Unemployment June 30, 1980
insurance -------------------------
wages, 1979 1st year 2d year
wages wages
------------------------------------------------------------------------
Corporation:
Q............................. $500,000 $150,000 $80,000
R............................. 300,000 110,000 50,000
S............................. 100,000 25,000 10,000
---------------------------------------
Total....................... 900,000 285,000 140,000
------------------------------------------------------------------------
(b) Since Corporations Q, R, and S are under common control, the
amount of qualified first-year wages is limited to 30 percent of the
aggregate unemployment insurance wages paid by the group during the
calendar year ending in Corporation R's taxable year. Since the
qualified first-year wages of $285,000 exceeds 30 percent of the
aggregate unemployment insurance wages, the group is limited to
qualified first-year wages of $270,000 (30% of $900,000). The amount of
the targeted jobs credit attributable to qualified first-year wages paid
by members of the group during the period of the taxpayer's taxable year
is $135,000 (50% of $270,000). The amount of the credit attributable to
qualified second-year wages paid or incurred by members of the group
during the period of the taxpayer's taxable year is $35,000 (25% of
$140,000).
(c) The credit is apportioned to Corporation R on the basis of its
proportionate share of the qualified first-year wages and qualified
second-year wages giving rise to the credit. Corporation R's share of
the credit attributable to qualified first-year wages is $52,105.26
[GRAPHIC] [TIFF OMITTED] TC14NO91.148
Corporation R's share of the credit attributable to qualified second-
year wages is $12,500
[GRAPHIC] [TIFF OMITTED] TC14NO91.149
Corporation R's share of the credit for its 1979-1980 taxable year is
$64,605.26 ($52,105.26+$12,500).
(2) New jobs credit. In the case of a group of trades or businesses
that are under common control at any time during the calendar year, the
amount of the new jobs credit (computed under section 51 as if all the
organizations that are under common control are one trade or business)
under section 44B (as in effect prior to enactment of the Revenue Act of
1978) must be apportioned among the members of the group on the basis of
each member's proportionate contribution to the increase in unemployment
insurance wages for the entire group. The limitations in section 53 (as
in effect prior to enactment of the Revenue Act of 1978) and the
regulations thereunder apply to each organization individually
(although, in applying these limitations, an affiliated group of
corporations electing to make a consolidated return shall be treated as
one organization). The application of this subparagraph may be
illustrated by the following example:
Example. (a) Corporation T and its three subsidiaries, U, V, and W,
are a group of businesses that are under common control and each has a
calendar year taxable year. Corporations T, U, V, and W have paid out
the following amounts in unemployment insurance wages during 1976 and
1977:
------------------------------------------------------------------------
Increase in
FUTA wages
1976 1977 in 1977
over 1976
------------------------------------------------------------------------
Corporation.
T.............................. $1,000,000 $1,015,000 +$15,000
U.............................. 500,000 650,000 +150,000
V.............................. 600,000 580,000 -20,000
W.............................. 40,000 100,000 +60,000
--------------------------------------
Total........................ 2,140,000 2,345,000 205,000
------------------------------------------------------------------------
(b) Since all employees of trades or, businesses that are under
common control are treated as employed by a single employer, the
computations in section 51 are performed as if all the organizations
which are under common control are one trade or business. Consequently,
the amounts of the total unemployment insurance wages of the group in
1976 (i.e., $2,140,000) and 1977 (i.e., $2,345,000) are used to
determine the increase in unemployment insurance wages in 1977 over the
1976 wage base. Since the amount equal to 102 percent of the 1976
unemployment insurance wages ($2,182,800) is greater than the amount
equal to 50 percent of the 1977 unemployment insurance wages
($1,172,500), the increase in unemployment insurance wages in 1977 over
the 1976 wage base is $162,200 ($2,345,000-$2,182,800). The limitations
in section 51(c), (d), and (g) (as in effect prior to enactment of the
Revenue Act of 1978) must
[[Page 523]]
also be computed as though all the organizations under common control
are one trade or business. For purposes of this example, it is assumed
that none of those limitations reduce the amount of increase in
unemployment insurance wages. As a result, the amount of the new jobs
credit allowed to the group of business is $81,100 (50% of $162,200).
(c) The credit is apportioned among Corporations T, U, and W on the
basis of their proportionate contributions to the increase in
unemployment insurance wages. No credit would be allowed to Corporation
V because it did not contribute to the increase in the group's
unemployment insurance wages. Corporation T's share of the credit would
be $5,406.66 ($81,100x($15,000/$225,000 (i.e.,
$15,000+$150,000+$60,000))), Corporation U's share would be $54,066.67
($81,100x($150,000/225,000)), and Corporation W's share would be
$21,626.67 ($81,100x($60,000/$225,000)).
(b) Trades or businesses that are under common control. For purposes
of this section, the term ``trades or businesses that are under common
control'' means any group of trades or businesses that is either a
``parent-subsidiary group under common control'' as defined in paragraph
(c) of this section, a ``brother-sister group under common control'' as
defined in paragraph (d) of this section, or a ``combined group under
common control'' as defined in paragraph (e) of this section. For
purposes of this section and Sec. Sec. 1.52-2 and 1.52-3, the term
``organization'' means a sole proprietorship, a partnership, a trust, an
estate, or a corporation. An organization may be a member of only one
group of trades or businesses under common control. If, without the
application of this paragraph, an organization would be a member of more
than one such group, that organization shall indicate in its timely
filed return the group in which it is being included. If the
organization does not so indicate, then the district director with audit
jurisdiction of the organization's return will determine the group in
which the organization is to be included.
(c) Parent-subsidiary group under common control--(1) In general.
The term ``parent-subsidiary group under common control'' means one or
more chains of organizations conducting trades or businesses that are
connected through ownership of a controlling interest with a common
parent organization if--
(i) A controlling interest in each of the organizations, except the
common parent organization, is owned (directly and with the application
of Sec. 1.414(c)-4(b)(1), relating to options) by one or more of the
other organizations; and
(ii) The common parent organization owns (directly and with the
application of Sec. 1.414(c)-4(b)(1), relating to options) a
controlling interest in at least one of the other organizations,
excluding, in computing the controlling interest, any direct ownership
interest by the other organizations.
(2) Controlling interest defined. For purposes of this paragraph,
the term ``controlling interest'' means:
(i) In the case of a corporation, ownership of stock possessing more
than 50 percent of the total combined voting power of all classes of
stock entitled to vote or more than 50 percent of the total value of the
shares of all classes of stock of the corporation;
(ii) In the case of a trust or estate, ownership of an actuarial
interest (determined under paragraph (f) of this section) of more than
50 percent of the trust or estate;
(iii) In the case of a partnership, ownership of more than 50
percent of the profit interest or capital interest of the partnership;
and
(iv) In the case of a sole proprietorship, ownership of the sole
proprietorship.
(d) Brother-sister group under common control--(1) In general. The
term ``brother-sister group under common control'' means two or more
organizations conducting trades or businesses if--
(i) The same five or fewer persons who are individuals, estates, or
trusts own (directly and with the application of Sec. 1.414(c)-
4(b)(1)), a controlling interest of each organization; and
(ii) Taking into account the ownership of each person only to the
extent that person's ownership is identical with respect to each
organization, such persons are in effective control of each
organization.
The five or fewer persons whose ownership is considered for purposes of
the controlling interest requirement for each organization must be the
same persons whose ownership is considered
[[Page 524]]
for purposes of the effective control requirement.
(2) Controlling interest defined. For purposes of this paragraph,
the term ``controlling interest'' means:
(i) In the case of a corporation, ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of
stock entitled to vote or at least 80 percent of the total value of the
shares of all classes of stock of the corporation;
(ii) In case of a trust or estate, ownership of an actuarial
interest (determined under paragraph (f) of this section) of a least 80
percent of the trust or estate;
(iii) In the case of a partnership, ownership of at least 80 percent
of the profit interest or capital interest of the partnership; and
(iv) In the case of a sole proprietorship, ownership of the sole
proprietorship.
(3) Effective control defined. For purposes of this paragraph
``effective control'' means:
(i) In the case of a corporation, ownership of stock possessing more
than 50 percent of the total combined voting power of all classes of
stock entitled to vote or more than 50 percent of the total value of the
shares of all classes of stock of the corporation;
(ii) In the case of a trust or estate, ownership of an actuarial
interest (determined under paragraph (f) of this section) of more than
50 percent of the trust or estate;
(iii) In the case of a partnership, ownership of more than 50
percent of the profit interest or capital interest of the partnership;
and
(iv) In the case of a sole proprietorship, ownership of the sole
proprietorship.
(e) Combined group under common control. The term ``combined group
under common control'' means a group of three or more organizations, in
which (1) each organization is a member of either a parent-subsidiary
group under common control or brother-sister group under common control,
and (2) at least one organization is the common parent organization of a
parent-subsidiary group under common control and also a member of a
brother-sister group under common control.
(f) Actuarial interest. For purposes of this section, the actuarial
interest of each beneficiary of a trust or estate shall be determined by
assuming the maximum exercise of discretion by the fiduciary in favor of
the beneficiary. The factors and method prescribed in Sec. 20.2031-7
or, for certain prior periods, 20.2031-7A of this chapter (Estate Tax
Regulations) for use in ascertaining the value of an interest in
property for estate tax purposes will be used to determine a
beneficiary's actuarial interest.
(g) Exclusion of certain interests and stock in determining control.
In determining control under this paragraph, the term ``interest'' and
the term ``stock'' do not include an interest that is treated as not
outstanding under Sec. 1.414(c)-3. In addition, the term ``stock'' does
not include treasury stock or nonvoting stock that is limited and
preferred regarding dividends.
(h) Transitional rule--(1) In general. Paragraph (d) of this
section, as amended by T.D. 8179, applies to all taxable years to which
section 52(b) applies.
(2) Election. In the case of taxable years ending before March 2,
1988.
(i) If, pursuant to paragraph (b) of this section, an organization
indicated in a timely filed return that it chose to be a member of a
brother-sister group under common control, and it is not a member of
such group because of the amendments to paragraph (d) of this section
made by T.D. 8179 such organization may make the choice described in
paragraph (b) of this section by filing an amended return on or before
September 2, 1988 if such organization would otherwise still be a member
of more than one group of trades or businesses under common control, and
(ii) If an organization--
(A) Is a member of a brother-sister group of trades or businesses
under common control under Sec. 1.52-1(d)(1) as in effect before
amendment by T.D. 8179 (``old group''), for such taxable year, and
(B) Is not such a member for such taxable year because of the
amendments made by such Treasury decision,
such organization (whether or not a corporation) nevertheless will be
treated as a member of such old group if all
[[Page 525]]
the organizations (whether or not corporations) that are members of the
old group meet all the requirements of Sec. 1.1563-1(d)(3) with respect
to such taxable year.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7553, 43 FR 31322, July 21, 1978, as amended by T.D. 7921, 48 FR
52904, Nov. 23, 1983; T.D. 7955, 49 FR 19975, May 11, 1984; T.D. 8179,
53 FR 6605, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988; 53 FR 16408, May 9,
1988; T.D. 8540, 59 FR 30102, June 10, 1994]
Sec. 1.52-2 Adjustments for acquisitions and dispositions.
(a) General rule. The provisions in this section only apply to the
computation of the new jobs credit. If, after December 31, 1975, an
employer acquires the major portion of a trade or business or the major
portion of a separate unit of a trade or business, then, for purposes of
computing the new jobs credit for any calendar year ending after the
acquisition, both the amount of unemployment insurance wages and the
amount of total wages considered to have been paid by the acquiring
employer, for both the year in which the acquisition occurred and the
preceding year, must be increased, respectively, by the amount of
unemployment insurance wages and the amount of total wages paid by the
predecessor employer that are attributable to the acquired portion of
the trade or business or separate unit. If the predecessor employer
informs the acquiring employer in writing of the amount of unemployment
insurance wages and the amount of total wages attributable to the
acquired portion of the trade or business that have been paid during the
periods preceding the acquisition, then, for purposes of computing the
credit for any calendar year ending after the acquisition the amount of
unemployment insurance wages and the amount of total wages considered
paid by the predecessor employer shall be decreased by those amounts.
Regardless of whether the predecessor employer so informs the acquiring
employer, the predecessor employer shall not be allowed a credit for the
amount of any increase in the employment insurance wages or the total
wages in the calendar year of the acquisition attributable to the
acquired portion of the trade or business over the amount of such wages
in the calendar year preceding the acquisition.
(b) Meaning of terms--(1) Acquisition. (i) For the purposes of this
section, the term ``acquisition'' includes a lease agreement if the
effect of the lease is to transfer the major portion of the trade or
business or of a separate unit of the trade or business for the period
of the lease. For instance, if one company leases a factory (including
equipment) to another company for a 2-year period, the employees are
retained by the second company, and the factory is used for the same
general purposes as before, then for purposes of this section the lessee
has acquired the lessor's trade or business for the period of the lease.
(ii) Neither the major portion of a trade or business nor the major
portion of a separate unit of a trade or business is acquired merely by
acquiring physical assets. The acquisition must transfer a viable trade
or business.
(iii) Subdivision (ii) of this subparagraph may be illustrated by
the following examples:
Example 1. R Co., a restaurant, sells its building and all its
restaurant equipment to S Co. and moves into a larger, more modern
building across the street. R Co. purchases new equipment, retains its
name and continues to operate as a restaurant. S Co. opens a new
restaurant in the old R Co. building. S Co. has merely acquired the old
R Co. assets; it has not acquired any portion of R Co.'s business.
Example 2. The facts are the same as in Example 1, except that R Co.
also sells its name and goodwill to S Co. and ceases to operate a
restaurant business. S Co. operates its restaurant using the old R Co.
name. In this situation, S Co. has acquired R Co.'s business.
(2) Separate unit. (i) A separate unit is a segment of a trade or
business capable of operating as a self-sustaining enterprise with minor
adjustments. The allocation of a portion of the goodwill of a trade or
business to one of its segments is a strong indication that that segment
is a separate unit.
(ii) The following examples are illustrations of the acquisition of
a separate unit of a trade or business:
[[Page 526]]
Example 1. The M Corp., which has been engaged in the sale and
repair of boats, leases the repair shop building and all the property
used in its boat repair operations to the N Co. for four years and gives
the N Co. a covenant not to compete in the boat repair business for the
period of the lease. The N Co. is considered to have acquired a separate
unit of M Corp.'s business for the period of the lease.
Example 2. (a) The P Co. is engaged in the operation of a chain of
department stores. There are eight divisions, each division is located
in a different metropolitan area of the country, and each division
operates under a different name. Although certain buying and
merchandising functions are centralized, each division's day-to-day
operations are independent of the others. The Q Corp. acquires all of
the physical and intangible assets of one of the divisions, including
the division's name. Other than making those minor adjustments necessary
to give the division buying and merchandising departments, the Q Corp.
allows the division to continue doing business in the same manner as it
had been operating prior to the acquisition. The Q Corp. has acquired a
separate unit of the P Co.'s business.
(b) The facts are the same as in paragraph (a) of example 2, except
that Q Corporation buys the division merely to obtain its store
locations. Before the Q Corporation takes over, the division liquidates
its inventory in a going-out-of-business sale. The Q Corporation has
merely acquired assets in this transaction, not a separate unit of P
Company's business.
Example 3. The R Company processes and distributes meat products.
Both the processing division and the distributorship are self-
sustaining, profitable operations. The acquisition of either the meat
processing division or the distributorship would be an acquisition of a
separate unit of the R Company's business.
Example 4. The S Corporation is engaged in the manufacture and sale
of steel and steel products. S Corporation also owns a coal mine, which
it operates for the sole purpose of supplying its coal requirements for
its steel manufacturing operations. The acquisition of the coal mine
would be an acquisition of a separate unit of the S company's business.
Example 5. The T Company, which is engaged in the business of
operating a chain of drug stores, sells its only downtown drug store to
the V Company and agrees not to open another T Company store in the
downtown area for five years. Included in the purchase price is an
amount that is charged for the goodwill of the store location. The V
Company has acquired a separate unit of the T Company's business.
Example 6. The W Company, which is engaged in the business of
operating a chain of drug stores sells one of its stores to the X
Company, but continues to operate another drug store three blocks away.
The X Company opens the store doing business under its own name. The X
Company has not acquired a separate unit of the W Company's business.
Example 7. (a) The Y Corporation, which is engaged in the
manufacture of mattresses, sells one of its three factories to the Z
Company. At the time of the sale, the factory is capable of profitably
manufacturing mattresses on its own. Z Company has acquired a separate
unit of the Y Corporation.
(b) The facts are the same as in (a) above, except that a profitable
manufacturing operation cannot be conducted in the factory standing on
its own. Z Company has not acquired a separate unit of the Y
Corporation.
Example 8. The O Construction Company is owned by A, B, and C, who
are unrelated individuals. It owns equipment valued at 1.5 million
dollars and construction contracts valued at 6 million dollars. A,
wishing to start his own company, exchanges his interest in O Company
for 2 million dollars of contracts and a sufficient amount of equipment
to enable him to begin business immediately. A has acquired a separate
unit of the O Company's business.
(3) Major portion. All the facts and circumstances surrounding the
transaction shall be taken into account in determining what constitutes
a major portion of a trade or business (or separate unit). Factors to be
considered include:
(i) The fair market value of the assets in the portion relative to
the fair market value of the other assets of the trade or business (or
separate unit);
(ii) The proportion of goodwill attributable to the portion of the
trade or business (or separate unit);
(iii) The proportion of the number of employees of the trade or
business (or separate unit) attributable to the portion in the periods
immediately preceding the transaction; and
(iv) The proportion of the sales or gross receipts, net income, and
budget of the trade or business (or separate unit) attributable to the
portion.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7553, 43 FR 31323, July 21, 1978, as amended by T.D. 7921, 48 FR
52906, Nov. 23, 1983]
[[Page 527]]
Sec. 1.52-3 Limitations with respect to certain persons.
(a) Mutual savings institutions. In the case of an organization to
which section 593 applies (that is, a mutual savings bank, a cooperative
bank or a domestic building and loan association), the amount of the
targeted jobs credit (new jobs credit in the case of wages paid before
1979) allowable under section 44B shall be 50 percent of the amount
otherwise determined under section 51, or, in the case of an
organization under common control, under Sec. 1.52-1 (a) and (b).
(b) Regulated investment companies and real estate investment
trusts. In the case of a regulated investment company or a real estate
investment trust subject to taxation under subchapter M, chapter 1 of
the Code, the amount of the targeted jobs credit (new jobs credit in the
case of wages paid before 1979) allowable under section 44B shall be
reduced to the company's or trust's ratable share of the credit. The
ratable share shall be determined in accordance with rules similar to
the rules provided in section 46(e)(2)(B) and the regulations
thereunder. For purposes of computing the ratable share, the reduction
of the deduction for wage or salary expenses under Sec. 1.280C-1 shall
not be taken into account.
(c) Cooperatives--(1) Taxable years ending after October 31, 1978.
For taxable years ending after October 31, 1978, in the case of a
cooperative organization described in section 1381(a), rules similar to
rules provided in section 46(h) and the regulations thereunder shall
apply in determining the distribution of the amount of the targeted jobs
credit (new jobs credit in the case of wages paid before 1979) allowable
to the cooperative organization and its patrons under section 44B.
(2) Taxable years ending before November 1, 1978. For taxable years
ending before November 1, 1978, in the case of a cooperative
organization described in section 1381(a), the amount of new jobs credit
allowable under section 44B shall be reduced to the cooperative's
ratable share of the credit. The ratable share shall be the ratio which
the taxable income of the cooperative for the taxable year bears to its
taxable income increased by the amount of the deductions allowed under
section 1382 (b) and (c). For purposes of computing the ratable share,
the reduction of the deduction for wage or salary expenses under Sec.
1.280C-1 shall not be taken into account.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7921, 48 FR 52906, Nov. 23, 1983]
Sec. 1.53-1 Limitation based on amount of tax.
(a) General rule--(1) Targeted jobs credit. For taxable years
beginning after December 31, 1978, the amount of the targeted jobs
credit allowed by section 44B (as amended by the Revenue Act of 1978)
shall not exceed 90 percent of the tax imposed by chapter 1, reduced by
the credits enumerated in section 53(a).
(2) New jobs credit. For taxable years beginning before January 1,
1979, the amount of the new jobs credit allowed by section 44B (as in
effect prior to enactment of the Revenue Act of 1978) shall not exceed
the tax imposed by chapter 1, reduced by the credits enumerated in
section 53(a).
(b) Special rule for 1978-79 fiscal year. In the case of a taxable
year beginning before January 1, 1979, and ending after that date, the
sum of the targeted jobs credit (determined without regard to the tax
liability limitation in paragraph (a)(1) of this section) and the new
jobs credit (determined without regard to the tax liability limitation
in (a)(2) of this section) shall not exceed the tax imposed by chapter
1, reduced by the credits enumerated in section 53(a).
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7921, 48 FR 52906, Nov. 23, 1983]
Sec. 1.53-2 Carryback and carryover of unused credit.
(a) Allowance of unused credit as a carryback or carryover--(1) In
general. Section 53(b) (formerly designated as section 53(c) for taxable
years beginning before 1979) provides for carrybacks and carryovers of
unused targeted jobs credit (new jobs credit in the case of wages paid
before 1979). An
[[Page 528]]
unused credit is the excess of the credit determined under section 51
for the taxable year over the limitation provided by Sec. 1.53-1 for
such taxable year. Subject to the limitations contained in paragraph (b)
of this section and paragraph (f) of Sec. 1.53-3, an unused credit
shall be added to the amount allowable as a credit under section 44B for
the years to which an unused credit can be carried. The year with
respect to which an unused credit arises shall be referred to in this
section as the ``unused credit year.''
(2) Taxable years to which unused credit may be carried. An unused
targeted jobs credit (new jobs credit in the case of wages paid before
1979) shall be a new employee credit carryback to each of the 3 taxable
years preceding the unused credit year and a new employee credit
carryover to each of the 15 taxable years succeeding the unused credit
year. An unused credit must be carried first to the earliest of the
taxable years to which it may be carried, and then to each of the other
taxable years (in order of time) to the extent that the unused credit
may not be added (because of the limitation contained in paragraph (b)
of this section) to the amount allowable as a credit under section 44B
for a prior taxable year.
(b) Limitations on allowance of unused credit--(1) In general. The
amount of the unused targeted jobs credit (new jobs credit in the case
of wages paid before 1979) from any particular unused credit year which
may be added under section 53(b)(1) (section 53(c)(1) in the case of a
new jobs credit) to the amount allowable as a credit under section 44B
for any of the preceding or succeeding taxable years to which such
credit may be carried shall not exceed the amount by which the
limitation in Sec. 1.53-1 for such preceding or succeeding taxable year
exceeds the sum of (i) the credit allowable under section 44B for such
preceding or succeeding taxable year, and (ii) other unused credits
carried to such preceding or succeeding taxable year which are
attributable to unused credit years prior to the particular unused
credit year. Thus, in determining the amount, if any, of an unused
credit from a particular unused credit year which shall be added to the
amount allowable as a credit for any preceding or succeeding taxable
year, the credit earned for such preceding or succeeding taxable year,
plus any unused credits originating in taxable years prior to the
particular unused credit year, shall first be applied against the
limitation based on amount of tax for such preceding or succeeding
taxable year. To the extent the limitation based on amount of tax for
the preceding or succeeding year exceeds the sum of the credit earned
for such year and other unused credits attributable to years prior to
the particular unused credit year, the unused credit from the particular
unused credit year shall be added to the amount allowable as a credit
under section 44B for such preceding or succeeding year. If any portion
of the unused credit is a carryback to a taxable year beginning before
January 1, 1977, section 44B shall be deemed to have been in effect for
such taxable year for purposes of allowing such carryback as a credit
under section 44B. To the extent that an unused credit cannot be added
for a particular preceding or succeeding taxable year because of the
limitation contained in this paragraph, such unused credit shall be
available as a carryback or carryover to the next succeeding taxable
year to which it may be carried.
(2) Special rules for an electing small business corporation. An
unused targeted jobs credit (new jobs credit in the case of wages paid
before 1979) under section 44B of a corporation which arises in an
unused credit year for which the corporation is not an electing small
business corporation (as defined in section 1371(b)) and which is a
carryback or carryover to a taxable year for which the corporation is an
electing small business corporation shall not be added to the amount
allowable as a credit under section 44B to the shareholders of such
corporation for any taxable year. However, a taxable year for which the
corporation is an electing small business corporation shall be counted
as a taxable year for purposes of determining the taxable years to which
such unused credit may be carried.
(3) Corporate acquisitions. For the carryover of unused credits
under section
[[Page 529]]
44B in the case of certain corporate acquisitions, see section
381(c)(26) and Sec. 1.381(c)(26)-1.
(4) Examples. This paragraph may be illustrated by the following
examples.
Example 1. In 1978, A, a calendar year taxpayer, had an unused new
jobs credit of $2,000. In 1979, A has a targeted jobs credit of $2,000
and a tax liability imposed by chapter 1 of the Code of $4,000 after all
credits listed in section 53(a) have been taken into account. The amount
of A's targeted jobs credit allowable under section 44B for 1979 is 90
percent of A's tax liability. The amount of the new jobs credit that may
be carried to 1979 is limited to $1,600 ($3,600 [90% of $4,000]-$2,000).
Example 2. In 1979, B, a calendar year taxpayer, has a tax liability
imposed by chapter 1 of the Code of $10,000 after all credits listed in
section 53(a) have been taken. B's targeted jobs credit for that taxable
year is limited to 90 percent of his income tax liability or $9,000. B
had a $15,000 targeted jobs credit in 1979 resulting in an unused
targeted jobs credit of $5,000 for that year. In 1976 and 1977 B had tax
liabilities imposed by chapter 1 of the Code of $3,000 and $4,000
respectively after all credits listed in section 53(a) had been taken.
For purposes of carrying back an unused targeted jobs credit to a
taxable year beginning before January 1, 1977, section 44B as amended by
the Revenue Act of 1978 is deemed to have been in effect for such
taxable year. Accordingly, the applicable tax liability limitation for
1976 would be governed by section 53(a) (as amended by the Revenue Act
of 1978) which limits the amount of targeted jobs credit allowed to 90
percent of the tax imposed by chapter 1 of the Code after all credits
listed in section 53(a) have been taken. B may carry back $2,700 (90% of
$3,000) of the 1979 unused targeted jobs credit to 1976. B may carry
back $4,000 of the unused targeted jobs credit to 1977 because section
53(a) as it applied to the 1977 taxable year limited the amount of the
credit to 100 percent of the taxpayer's tax liability imposed by chapter
1 of the Code after all credits listed in section 53(a) had been taken.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7921, 48 FR 52906, Nov. 23, 1983]
Sec. 1.53-3 Separate rule for pass-through of jobs credit.
(a) In general. Under section 53(b), in the case of a new jobs
credit or targeted jobs credit earned under section 44B by a
partnership, estate or trust, or subchapter S corporation, the amount of
the credit that may be taken into account by a partner, beneficiary, or
shareholder may not exceed a limitation under section 53(b) separately
computed with respect to the partner's, beneficiary's, or shareholder's
interest in the entity. A credit is subject to the limitation of section
53(b) with respect to a partner, beneficiary, or shareholder if it is
earned by a partnership, estate or trust, or subchapter S corporation in
a taxable year ending within, or ending before, a taxable year beginning
before January 1, 1979 of the partner, beneficiary, or shareholder. See
paragraph (f) of this section for rules on carryback or carryover of a
credit subject to separate limitation. This section prescribes rules,
under the authority of section 44B(b), relating to the computation of
the separate limitation. For purposes of this section, references to
section 53(a) and (b) are to that section as it existed before it was
amended by the Revenue Act of 1978. This paragraph may be illustrated by
the following examples:
Example 1. A, a calendar year taxpayer, is a partner in P, a
calendar year partnership. A's pro rata portion of the credit earned by
P in 1978 is $200. The $200 credit to be claimed on A's 1978 return is
subject to the separate limitation in section 53(b) because the
limitation applies to taxable years of the taxpayer beginning before
January 1, 1979.
Example 2. B, a calendar year taxpayer, is a shareholder in
Corporation M, a subchapter S corporation with a July to June fiscal
year. B's pro rata portion of the credit earned by Corporation M in its
taxable year beginning in 1978 is $100. The $100 credit to be claimed on
B's 1979 return is not subject to the separate limitation requirement of
section 53(b) because the limitation only applies to taxable years of
the taxpayer beginning before 1979, notwithstanding the credit was
earned by Corporation M before 1979.
(b) Application of credit earned. A credit earned under section 44B
by a partnership, estate or trust, or subchapter S corporation shall be
applied by a partner, beneficiary, or shareholder, to the extent allowed
under section 53(b), before applying any other credit earned under
section 44B. For example, if an individual has a new jobs credit from a
proprietorship of $2,000 and from a partnership (after applying section
53(b)) of $1,800, but the credit must be limited under section
[[Page 530]]
53(a) to $3,000, the entire $1,800 credit from the partnership would be
applied before any part of the $2,000 amount is applied.
(c) Amount of separate limitation. The amount of the separate
limitation is equal to the partner's, beneficiary's, or shareholder's
limitation under section 53(a) for the taxable year multiplied by a
fraction. The numerator of the fraction is the portion of the taxpayer's
taxable income for the year attributable to the taxpayer's interest in
the entity. The denominator of the fraction is the taxpayer's total
taxable income for the year reduced by the zero bracket amount, if any.
(d) Portion of taxable income attributable to an interest in a
partnership, estate or trust, or subchapter S corporation--(1) General
rule. The portion of a taxpayer's taxable income attributable to an
interest in a partnership, estate or trust, or subchapter S corporation
is the amount of income from that entity the taxpayer is required to
include in gross income, reduced by--
(i) The amount of the deductions allowed to the taxpayer that are
attributable to the taxpayer's interest in the entity; and
(ii) A proportionate share of the deductions allowed to the taxpayer
not attributable to a specific activity (as defined in paragraph (e)).
If a deduction comprises both an item that is attributable to the
taxpayer's interest in the entity and an item or items that are not
attributable to the interest in the entity, and if the deduction is
limited by a provision of the Code (such as section 170(b), relating to
limitations on charitable contributions), the deduction must be prorated
among the items taken into account in computing the deduction. For
example, if an individual makes a charitable contribution of $5,000 and
his distributive share of a partnership includes $2,000 in charitable
contributions made by the partnership, and if the charitable
contribution deduction is limited to $3,500 under section 170(b), then
the portion of the deduction allowed to the taxpayer that is not
attributable to a specific activity is $2,500 ($3,500x($5,000/$7,000))
and the portion of the deduction allowed to the taxpayer that is
attributable to the interest in the partnership is $1,000
($3,500x($2,000/$7,000)).
(2) Deductions attributable to an interest in an entity. Examples of
deductions that are attributable to the taxpayer's interest in an entity
include (but are not limited to) a deduction under section 1202
attributable to a net capital gain passed through the entity, and a
deduction attributable to a deductible item (such as a charitable
contribution) that has been passed through the entity.
(3) Computation of the proportionate share of deductions not
attributable to a specific activity. The proportionate share of a
deduction of the taxpayer not attributable to a specific activity is
obtained by multiplying the amount of the deduction by a fraction. The
numerator of the fraction is the income from the entity that the
taxpayer is required to include in gross income, reduced by the amount
of the deductions of the taxpayer that are attributable to the
taxpayer's interest in the entity. The denominator is the taxpayer's
gross income reduced by the amount of all the deductions attributable to
specific activities.
(4) Examples. The method of determining the amount of taxable income
attributable to an interest in a partnership, estate or trust, or
subchapter S corporation is illustrated by the following examples:
Example 1. (a) A, a single individual, is a shareholder in S
Corporation, a subchapter S corporation. A is required to include the
following amounts from S corporation is his gross income:
Salary...................................................... $3,000
===========
Undistributed taxable income:
Ordinary income........................................... 8,000
Net capital gain.......................................... 2,000
-----------
Total................................................... 10,000
===========
Total................................................... 13,000
===========
A has income from other activities:
Ordinary income........................................... 6,000
Net capital gain.......................................... 4,000
-----------
Total................................................... 10,000
(b) In order to determine the taxable income attributable to A's
interest in S Corporation, it is necessary to reduce the amount of
income from S Corporation that A is required to include in gross income
by the amount of A's deductions attributable to the
[[Page 531]]
interest in S Corporation and by a proportionate share of A's deductions
not attributable to a specific activity. These computations are made in
paragraph (c) of this example. However, before the computation reducing
A's income by a proportionate share of the deductions not attributable
to a specific activity can be made, the ratio described in subparagraph
(3) of this paragraph (d) must be determined. The numerator of the ratio
(the amount of income from S Corporation that A is required to include
in gross income, reduced by the amount of the deductions attributable to
A's interest in S Corporation) is obtained in paragraph (c) of this
example in the process of computing A's taxable income attributable to
the interest in S Corporation. The determination of the denominator (A's
gross income reduced by the amount of all deductions attributable to
specific activities), however, require a separate computation, which
follows:
Gross income:
Income from S Corporation................................. $13,000
Income from other sources................................. 10,000
-----------
Total................................................... 23,000
Less: Deductions attributable to specific activities:
Section 1202 deduction (50 percent. of $6,000)............ 3,000
-----------
A's gross income reduced by the amount of the deductions 20,000
attributable to specific activities (denominator of the
ratio for determining the proportionate share of
deductions not attributable to a specific activity)......
(c) Computation of the amount of A's taxable income attributable to
the interest in S Corporation:
Income from S Corporation that A is required to include in
gross income:
Ordinary income........................................... $11,000
Net capital gain.......................................... 2,000
-----------
Total................................................... 13,000
Less: Deductions of the taxpayer attributable to the
interest in S Corporation:
Section 1202 deduction (50 pct. of $2,000)................ 1,000
-----------
(Numerator of the ratio for determining the proportionate 12,000
share of deductions not attributable to a specific
activity)................................................
===========
Less: Proportionate share of the deductions of the taxpayer
not attributable to a specific activity:
Personal exemption deduction ($750x$12,000/$20,000)....... 450
Zero bracket amount ($2,200x$12,000/$20,000).............. 1,320
-----------
Total................................................... 1,770
===========
Portion of A's taxable income attributable to interest in 10,230
S Corporation............................................
Example 2. (a) C, a married individual with two children, is a
partner in the CD Company. C's distributive share of the CD Company
consists of the following:
Ordinary income (other than guaranteed payment)........... $38,420
Guaranteed payment........................................ 20,000
Net long-term capital gain................................ 6,000
Net short-term capital loss............................... 2,000
Dividends qualifying for exclusion........................ 100
Charitable contributions.................................. 500
C also has items of income from other sources and deductions, as
follows:
Ordinary income........................................... $21,680
Short-term capital gain................................... 2,000
Dividends qualifying for exclusion........................ 400
Deductions:
Deductible medical expenses............................... 16,000
Charitable contributions.................................. 4,000
Alimony................................................... 18,000
Interest and taxes on home................................ 8,000
Loss relating to another specific activity................ 4,000
(b) In order to determine C's taxable income attributable to the
interest in the partnership, it is necessary to reduce the amount of
income from the partnership that C is required to include in gross
income by the amount of C's deductions attributable to the interest in
the partnership and by a proportionate share of C's deductions not
attributable to a specific activity. These computations are made in
paragraph (c) of this example. However, before the computation reducing
C's income by a proportionate share of the deductions not attributable
to a specific activity can be made, the ratio described in paragraph
(d)(3) of this section must be determined. The numerator of the ratio is
determined in paragraph (c) of this example in the process of computing
C's taxable income attributable to the interest in the partnership. The
denominator, however, requires a separate computation, reducing C's
gross income by the amount of all deductions attributable to specific
activities. This computation is as follows:
Gross income: Income from the partnership:
Ordinary income........................................... $58,420
Net long-term capital gain................................ 6,000
===========
Dividends................................................. 100
Less: Proportionate share of dividend exclusion ($100x$100/ 20
$500)....................................................
-----------
80
===========
64,500
Income from other sources:
Ordinary income........................................... 21,680
Net short/term capital gain............................... 2,000
===========
Dividends................................................. 400
Less: Proportionate share of dividend exclusion ($100x$400/ $80
$500)....................................................
-----------
320
===========
24,000
===========
88,500
===========
Less: Deductions attributable to specific activities:
Net short-term capital loss passed through the partnership 2,000
[[Page 532]]
Loss related to another specific activity................. 4,000
Section 1202 deduction attributable to the interest in the 2,000
partnership..............................................
Charitable contribution deduction passed through the 500
partnership..............................................
-----------
8,500
===========
C's gross income, reduced by the amount of the deductions 80,000
attributable to specific activities (denominator of the
ratio for determining the proportionate share of
deductions not attributable to a specific activity)......
(c) Computation of the amount of C's taxable income attributable to
the interest in the partnership:
Distributive share of ordinary income (other than $38,420
guaranteed payments).....................................
Guaranteed payment........................................ 20,000
Distributive share of dividends less share of exclusion... 80
Distributive share of net long-term capital gain.......... 6,000
-----------
64,500
===========
Section 1202 deduction (50 pct. of $4,000)................ 2,000
Charitable contribution passed through the partnership.... 500
Net short-term capital loss passed through the partnership 2,000
-----------
4,500
===========
(Numerator of the ratio for determining the proportionate 60,000
share of deductions not attributable to a specific
activity)................................................
===========
Section 1202 deduction ($1,000x$60,000/$80,000)........... 750
Deductible medical expenses ($16,000x$60,000/$80,000)..... 12,000
Charitable contributions ($4,000x$60,000/$80,000)......... 3,000
Alimony ($18,000x$60,000/$80,000)......................... 13,500
Interest and taxes on home ($8,000x$60,000/$80,000)....... 6,000
Personal exemption deduction ($3,000x$60,000/$80,000)..... 2,250
-----------
Total................................................... 37,500
===========
Portion of C's taxable income attributable to the interest 22,500
in the partnership.......................................
C has a deduction under section 1202 of $3,000. Of that deduction,
$2,000 is attributable directly to C's interest in the partnership (50
percent of the net capital gain that would result from offsetting the
$6,000 net long-term capital gain and the $2,000 net short-term capital
loss that are attributable to C's interest in the partnership). Since
the remaining $1,000 deduction under section 1202 cannot be attributed
directly to either C's income from the partnership or any other specific
activity, it must be treated as a deduction not attributable to a
specific activity.
(e) Deductions not attributable to a specific activity--(1) Specific
activity defined. A specific activity means a course of continuous
conduct involving a particular line of endeavor, whether or not the
activity is carried on for profit. Examples of a specific activity are:
(i) A trade or business carried on by the taxpayer;
(ii) A trade or business carried on by an entity in which the
taxpayer has an interest;
(iii) An activity with respect to which the taxpayer is entitled to
a deduction under section 212;
(iv) The operation of a farm as a hobby.
(2) Types of deductions not attributable to a specific activity.
Examples of deductions not attributable to a specific activity include
charitable contributions made by the partner, beneficiary, or
shareholder; medical expenses; alimony; interest on personal debts of
the partner, beneficiary, or shareholder; and real estate taxes on the
personal residence of the partner, beneficiary, or shareholder. For
purposes of this section, in cases in which deductions are not itemized,
the zero bracket amount is considered to be a deduction not attributable
to a specific activity.
(f) Carryback or carryover of credit subject to separate limitation.
A credit subject to the separate limitation under section 53(b) that is
carried back or carried over to a taxable year beginning before January
1, 1979, is also subject to the separate limitation in the carryback or
carryover year. For purposes of the preceding sentence, a credit that is
earned by a partnership, a trust, or estate, or a subchapter S
corporation in a taxable year of such entity ending within, or after,
the taxable year of a partner beneficiary or shareholder beginning after
December 31, 1978, will not be subject to the separate limitation in
section 53(b) with respect to such partner, beneficiary, or shareholder.
The taxpayer to whom the credit has been passed through shall not be
prevented from applying the unused portion in a carryback or carryover
year merely because the entity that earned the credit changes its form
of conducting business if the nature of its trade or business
essentially remains the same. The computation of the separate limitation
in such a case shall reflect the income attributable to the taxpayer's
interest in the entity in its
[[Page 533]]
revised form. Thus, a shareholder carrying over a credit from a
subchapter S corporation may include dividends declared by that
corporation after the subchapter S election had been terminated as
income attributable to that person's interest in the entity. Similarly,
if a partnership incorporates in a carryover year, any income
attributable to an interest in the corporation will be regarded, for
purposes of computing the separate limitation under section 53(b), as
income attributable to an interest in the entity. This paragraph may be
illustrated by the following examples:
Example 1. A, a calendar year taxpayer, is a shareholder in
Corporation M, a subchapter S corporation. In 1977, A's pro rata share
of the new jobs credit earned by Corporation M was $10,000. A could only
use $2,000 of the credit in 1977 because of the separate limitation
under section 53(b). In 1978, A carries the unused credit over from
1977. The carryover credit is subject to the separate limitation under
section 53(b).
Example 2. Assume the same facts as in example 1 except that the
unused credit is carried over to 1979. The carryover credit is not
subject to the separate limitation under section 53(b) because that
limitation does not apply to taxable years of a taxpayer beginning after
December 31, 1978.
Example 3. B, a calendar year taxpayer, is a shareholder in
Corporation W, a subchapter S corporation. In 1979, B's pro rata share
of the targeted jobs credit covered by Corporation W was $5,000 but B
could only use $3,000 of the credit in 1979. B carries back the unused
credit to 1978. The carryback credit is not subject to the separate
limitation under section 53(b).
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat.
2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917,
26 U.S.C. 7805)
[T.D. 7560, 43 FR 60445, Dec. 28, 1978. Redesignated and amended by T.D.
7921, 48 FR 52906, 52907, Nov. 23, 1983]
Sec. 1.55-1 Alternative minimum taxable income.
(a) General rule for computing alternative minimum taxable income.
Except as otherwise provided by statute, regulations, or other published
guidance issued by the Commissioner, all Internal Revenue Code
provisions that apply in determining the regular taxable income of a
taxpayer also apply in determining the alternative minimum taxable
income of the taxpayer.
(b) Items based on adjusted gross income or modified adjusted gross
income. In determining the alternative minimum taxable income of a
taxpayer other than a corporation, all references to the taxpayer's
adjusted gross income or modified adjusted gross income in determining
the amount of items of income, exclusion, or deduction must be treated
as references to the taxpayer's adjusted gross income or modified
adjusted gross income as determined for regular tax purposes.
(c) Effective date. These regulations are effective for taxable
years beginning after December 31, 1993.
[T.D. 8569, 59 FR 60557, Nov. 25, 1994]
Sec. 1.56-0 Table of contents to Sec. 1.56-1, adjustment for book
income of corporations.
(a) Computation of the book income adjustment.
(1) In general.
(2) Taxpayers subject to the book income adjustment.
(3) Consolidated returns.
(4) Examples.
(b) Adjusted net book income.
(1) In general.
(2) Net book income.
(i) In general.
(ii) Measures of net book income.
(iii) Tax-free transactions and tax-free income.
(iv) Treatment of dividends and other amounts.
(3) Additional rules for consolidated groups.
(i) consolidated adjusted net book income.
(ii) Consolidated net book income.
(iii) Consolidated pre-adjustment alternative minimum taxable
income.
(iv) Cross references.
(4) Computation of adjusted net book income when taxable year and
financial accounting year differ.
(i) In general.
(ii) Estimating adjusted net book income.
(iii) Election to compute adjusted net book income based on the
financial statement for the year ending within the taxable year.
(A) In general.
(B) Time of making election.
(C) Eligibility to make and manner of making election.
(D) Election or revocation of election made on an amended return.
(iv) Quarterly statement filed with the Securities and Exchange
Commission (SEC).
(5) Computation of net book income using current earnings and
profits.
[[Page 534]]
(i) In general.
(ii) Current earnings and profits of a consolidated group.
(6) Additional rules for computation of net book income of a foreign
corporate taxpayer.
(i) Adjusted net book income of a foreign taxpayer.
(ii) Effectively connected net book income of a foreign taxpayer.
(A) In general.
(B) Certain exempt amounts.
(iii) Computation of net book income of a foreign taxpayer using
current earnings and profits.
(7) Examples.
(c) Applicable financial statement.
(1) In general.
(i) Statement required to be filed with the Securities and Exchange
Commission (SEC).
(ii) Certified audited financial statement.
(iii) Financial statement provided to a government regulator.
(iv) Other financial statements.
(v) Required use of current earnings and profits.
(2) Election to treat net book income as equal to current earnings
and profits for the taxable year.
(i) In general.
(ii) Time of making election.
(iii) Eligibility to make and manner of making election.
(iv) Election by common parent of consolidated group.
(v) Election or revocation of election made on an amended return.
(3) Priority among statements.
(i) In general.
(ii) Special priority rules for use of certified audited financial
statements and other financial statements.
(iii) Priority among financial statements provided to a government
regulator.
(iv) Statements of equal priority.
(A) In general.
(B) Exceptions to the general rule in paragraph (c)(3)(iv)(A).
(4) Use of financial statement for a substantial non-tax purpose.
(5) Special rules.
(i) Applicable financial statement of related corporations.
(A) Applicable financial statement of a consolidated group.
(B) Special rule for statements of equal priority.
(C) Special rule for related corporations.
(D) Anti-abuse rule.
(ii) Applicable financial statement of foreign corporation with a
United States trade or business.
(A) In general.
(B) Special rules for applicable financial statement of a trade or
business of a foreign taxpayer.
(C) Special rule for statements of equal priority.
(D) Anti-abuse rule.
(iii) Supplement or amendment to an applicable financial statement.
(A) Excluding a restatement of net book income.
(B) Restatement of net book income.
(6) Examples.
(d) Adjustments to net book income.
(1) In general.
(2) Definitions.
(i) Historic practice.
(ii) Accounting literature.
(3) Adjustments for certain taxes.
(i) In general.
(ii) Exception for certain foreign taxes.
(iii) Certain valuation adjustments.
(iv) Examples.
(4) Adjustments to prevent omission or duplication.
(i) In general.
(ii) Special rule for depreciating an asset below is cost.
(iii) Consolidated group using current earnings and profits.
(iv) Restatement of a prior year's applicable financial statement.
(A) In general.
(B) Reconciliation of owner's equity in applicable financial
statements.
(B) Use of different priority applicable financial statements in
consecutive taxable years.
(D) First successor year defined.
(E) Exceptions.
(v) Adjustment for items previously taxed as subpart F income.
(vi) Adjustment for pooling of interests.
(vii) Adjustment for certain deferred foreign taxes.
(viii) Examples.
(5) Adjustments resulting from disclosure.
(i) Adjustment for footnote disclosure or other supplementary
information.
(A) In general.
(B) Disclosures not specifically authorized in the accounting
literature.
(ii) Equity adjustments.
(A) In general.
(B) Definition of equity adjustment.
(iii) Amount disclosed in an accountant's opinion.
(iv) Accounting method changes that result in cumulative adjustments
to the current year's applicable financial statement.
(A) In general.
(B) Exception.
(v) Examples.
(6) Adjustments applicable to related corporations.
(i) Consolidated returns.
(A) In general.
(B) Corporations included in the consolidated Federal income tax
return but excluded from the applicable financial statement.
[[Page 535]]
(C) Corporations included in the applicable financial statement but
excluded from the consolidated tax return.
(ii) Adjustment under the principles of section 482.
(iii) Adjustment for dividends received from section 936
corporations.
(A) In general.
(B) Treatment as foreign taxes.
(C) Treatment of taxes imposed on section 936 corporations.
(iv) Adjustment to net book income on sale of certain investments.
(v) Examples.
(7) Adjustments for foreign taxpayers with a United States trade or
business.
(i) In general.
(ii) Example.
(8) Adjustment for corporations subject to subchapter F.
(e) Special rules.
(1) Cooperatives.
(2) Alaska Native Corporations.
(3) Insurance companies.
(4) Estimating the net book income adjustment for purposes of
estimated tax liability.
(5) Effective/applicability date.
[T.D. 8307, 55 FR 33675, Aug. 17, 1990, as amended by T.D. 9347, 72 FR
44347, Aug. 7, 2007]
Sec. 1.56-1 Adjustment for the book income of corporations.
(a) Computation of the book income adjustment--(1) In general. For
taxable years beginning in 1987, 1988, and 1989, the alternative minimum
taxable income of any taxpayer is increased by the book income
adjustment described in this paragraph (a)(1). The book income
adjustment is 50 percent of the excess, if any, of--
(i) The adjusted net book income (as defined in paragraph (b) of
this section) of the taxpayer, over
(ii) The pre-adjustment alternative minimum taxable income for the
taxable year.
For purposes of this section, pre-adjustment alternative minimum taxable
income is alternative minimum taxable income, determined without regard
to the book income adjustment or the alternative tax net operating loss
determined under section 56(a)(4). See paragraph (a)(4) of this section
for examples relating to the computation of the income adjustment.
(2) Taxpayers subject to the book income adjustment. The book income
adjustment is applicable to any corporate taxpayer that is not an S
corporation, regulated investment company (RIC), real estate investment
trust (REIT), or real estate mortgage investment company (REMIC).
(3) Consolidated returns. In the case of a taxpayer that is a
consolidated group, the book income adjustment equals 50 percent of the
amount, if any, by which its consolidated adjusted net book income (as
defined in paragraph (b)(3)(i) of this section) exceeds its consolidated
pre-adjustment alternative minimum taxable income (as defined in
paragraph (b)(3)(iii) of this section). See paragraph (a)(4), Example 4
of this section. For purposes of this section, with respect to any
taxable year the term ``consolidated group'' has the same meaning as in
Sec. 1.1502-1T. See paragraph (d)(6) of this section for rules relating
to adjustments attributable to related corporations.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples.
Example 1. Corporation A has adjusted net book income of $200 and
pre-adjustment alternative minimum taxable income of $100. A must
increase its pre-adjustment alternative minimum taxable income by $50
(($200-$100) x .50).
Example 2. Corporation B has adjusted net book income of $200 and
pre-adjustment alternative minimum taxable income of $300. B does not
have a book income adjustment for the taxable year because its adjusted
net book income does not exceed its pre-adjustment alternative minimum
taxable income.
Example 3. Corporation C has adjusted net book income of negative
$200 and pre-adjustment alternative minimum taxable income of negative
$300. C must increase its pre-adjustment alternative minimum taxable
income by $50 ((-$200 - (-$300)) x .50). Thus, C's alternative minimum
taxable income determined after the book income adjustment, but without
regard to the alternative tax net operating loss, is negative $250 (-
$300 + $50).
Example 4. Corporations D and E are a consolidated group for tax
purposes. D and E do not have a consolidated financial statement. On
their separate financial statements D and E have adjusted net book
income of $100 and $50 respectively, and pre-adjustment alternative
minimum taxable income of $50 and $80 respectively. Assuming there are
no intercompany transactions, DE's consolidated adjusted net book income
(as defined in paragraph (b)(3)(i) of this section) is $150 and its
consolidated pre-adjustment alternative minimum taxable income (as
defined in paragraph (b)(3)(iii) of this section) is $130.
[[Page 536]]
DE must increase its consolidated pre-adjustment alternative minimum
taxable income by $10 (($150-$130)x.50).
(b) Adjusted net book income--(1) In general. ``Adjusted net book
income'' means the net book income (as defined in paragraph (b)(2) of
this section) adjusted as provided in paragraph (d) of this section.
Except as provided in paragraph (d) of this section, a taxpayer may not
make any adjustments to net book income.
(2) Net book income--(i) In general. ``Net book income'' means the
income or loss for a taxpayer reported in the taxpayer's applicable
financial statement (as defined in paragraph (c) of this section). Net
book income must take into account all items of income, expense, gain
and loss of the taxable year, including extraordinary items, income or
loss from discontinued operations, and cumulative adjustments resulting
from accounting method changes. Net book income is not reduced by any
distributions to shareholders. See paragraph (b)(5)(i) of this section
for a similar rule for corporations using current earnings and profits
to compute net book income.
(ii) Measures of net book income. Except as described in paragraph
(b)(5) of this section, net book income is disclosed on the income
statement included in a taxpayer's applicable financial statement. Such
income statement must reconcile with the balance sheet, if any, that is
included in the applicable financial statement and must be used in
computing changes in owner's equity reflected in the applicable
financial statement. See paragraph (c) of this section for the
definition of an applicable financial statement.
(iii) Tax-free transactions and tax-free income. Net book income
includes income or loss that is reported on a taxpayer's applicable
financial statement regardless of whether such income or loss is
recognized, realized or otherwise taken into account for other Federal
income tax purposes. See paragraph (b)(7), Examples 1, 2 and 3 of this
section.
(iv) Treatment of dividends and other amounts. The adjusted net book
income of a taxpayer shall include the earnings of other corporations
not filing a consolidated Federal income tax return with the taxpayer
only to the extent that amounts are required to be included in the
taxpayer's gross income under chapter 1 of the Code with respect to the
earnings of such other corporation (e.g., dividends received from such
corporation and amounts included under subpart A). See paragraph (b)(7),
Examples 4 and 5 of this section.
(3) Additional rules for consolidated groups--(i) Consolidated
adjusted net book income. ``Consolidated adjusted net book income''
means the consolidated net book income (as defined in paragraph
(b)(3)(ii) of this section), after taking into account the adjustments
under the rules of paragraph (d) of this section.
(ii) Consolidated net book income. Consolidated net book income is
the income or loss of a consolidated group as reported on its applicable
financial statement as defined in paragraph (c)(5) of this section.
(iii) Consolidated pre-adjustment alternative minimum taxable
income. Consolidated pre-adjustment alternative minimum taxable income
is the taxable income of the consolidated group for the taxable year,
determined with the adjustments provided in sections 56 and 58 (except
for the book income adjustment and the alternative tax net operating
loss determined under section 56(a)(4)) and increased by the preference
items described in section 57.
(iv) Cross references. See paragraph (c)(5) of this section for
rules relating to the applicable financial statement of related
corporations and paragraph (d)(6) of this section for rules relating to
adjustments attributable to related corporations.
(4) Computation of adjusted net book income when taxable year and
financial accounting year differ--(i) In general. If a taxpayer's
applicable financial statement is prepared on the basis of a financial
accounting year that differs from the year that the taxpayer uses for
filing its Federal income tax return, adjusted net book income must be
computed either--
(A) By including a pro rata portion of the adjusted net book income
for each financial accounting year that includes any part of the
taxpayer's taxable year (see paragraph (b)(7), Example 6 of this
section), or
[[Page 537]]
(B) In accordance with the election described in paragraph
(b)(4)(iii) of this section.
(ii) Estimating adjusted net book income. If a taxpayer is using the
pro rata approach described in paragraph (b)(4)(i)(A) of this section
and an applicable financial statement for part of the taxpayer's taxable
year is not available when the taxpayer files its Federal income tax
return, the taxpayer must make a reasonable estimate of adjusted net
book income for the pro rata portion of the taxable year. If the actual
pro rata portion of adjusted net book income that results from the
taxpayer's applicable financial statement for the financial accounting
year exceeds the estimate of adjusted net book income used on the
original tax return and results in additional tax liability, the
taxpayer must file an amended Federal income tax return reflecting such
additional liability. The amended return must be filed within 90 days of
the date the previously unavailable applicable financial statement is
available.
(iii) Election to compute adjusted net book income based on the
financial statement for the year ending within the taxable year--(A) In
general. If a taxpayer's accounting year ends five or more months after
the end of its taxable year, the taxpayer may elect to compute adjusted
net book income based on the net book income reported on the applicable
financial statement prepared for the financial accounting year ending
within the taxpayer's taxable year. See paragraph (b)(7), Examples 7 and
8 of this section. For purposes of this paragraph (b)(4)(iii)(A), if a
taxpayer uses a 52-53 week year for financial accounting or Federal
income tax purposes, the last day of such year shall be deemed to occur
on the last day of the calendar month ending closest to the end of such
year.
(B) Time of making election. An election under this paragraph
(b)(4)(iii) is made by attaching the statement described in paragraph
(b)(4)(iii)(C) of this section to the taxpayer's Federal income tax
return for the first taxable year in which the taxpayer is eligible to
make the election. An election under this paragraph (b)(4)(iii) that is
made prior to the first taxable year in which the taxpayer is eligible
to make the election (as determined under paragraph (b)(4)(iii)(C) of
this section) is valid unless revoked pursuant to paragraph
(b)(4)(iii)(D) of this section.
(C) Eligibility to make and manner of making election. A taxpayer is
eligible to make the election specified in paragraph (b)(4)(iii)(A) of
this section in the first taxable year beginning after 1986 in which--
(1) The taxpayer has an accounting year ending five or more months
after the end of its taxable year,
(2) The use of the pro rata approach described in paragraph
(b)(4)(i)(A) of this section produces an excess of adjusted net book
income over pre-adjustment alternative minimum taxable income, as
defined in paragraph (a)(1) of this section, and
(3) The taxpayer has an excess of tentative minimum tax over regular
tax for the taxable year, as defined in section 55(a), or is liable for
the environmental tax imposed by section 59A.
Thus, a taxpayer is not required to evaluate the merits of an election
to compute its adjusted net book income based on the applicable
financial statement prepared for the financial accounting year ending
within the taxpayer's taxable year unless the taxpayer, when using the
pro rata approach described in paragraph (b)(4)(i)(A) of this section,
either has an excess of tentative minimum tax over its regular tax or is
liable for the environmental tax imposed by section 59A. The election
statement must set forth the electing taxpayer's name, address, taxpayer
identification number, taxable year and financial accounting year. An
election under this paragraph (b)(4)(iii) will apply for the taxable
year when initially made and for all subsequent years until revoked with
the consent of the District Director.
(D) Election or revocation of election made on an amended return. An
election under paragraph (b)(4)(iii) of this section may be made by
attaching the statement described in paragraph (b)(4)(iii)(C) to an
amended return for the first taxable year in which the taxpayer is
eligible to make the election. An election under paragraph (b)(4)(iii)
of this section that was made prior to
[[Page 538]]
the first taxable year in which the taxpayer was eligible to make the
election, as determined under paragraph (b)(4)(iii)(C) of this section,
may be revoked by filing an amended return for the taxable year in which
the election was initially made. However, an election made or revoked on
an amended return under paragraph (b)(4)(iii) of this section will be
allowed only if the amended return is filed no later than December 14,
1990.
(iv) Quarterly statement filed with the Securities and Exchange
Commission (SEC). A taxpayer with different financial accounting and
taxable years that is required to file both annual and quarterly
financial statements with the SEC may not aggregate quarterly statements
filed with the SEC in order to obtain a statement covering the
taxpayer's taxable year. See paragraph (b)(7), Example 9 of this
section. See paragraph (c)(3)(iv)(B)(1) of this section for priority
rules relating to statements required to be filed with the SEC.
(5) Computation of net book income using current earnings and
profits--(i) In general. If a taxpayer does not have an applicable
financial statement, or only has a statement described in paragraph
(c)(1)(iv) of this section and makes the election described in paragraph
(c)(2) of this section, net book income for purposes of this section is
equal to the taxpayer's current earnings and profits for its taxable
year. Generally, a taxpayer's current earnings and profits is computed
under the rules of section 312 and the regulations thereunder. Current
earnings and profits therefore is reduced by Federal income tax expense
and any foreign tax expense for foreign taxes eligible for the foreign
tax credit under section 27 of the Code. Current earnings and profits is
then adjusted as described in paragraph (d) of this section to arrive at
adjusted net book income. No adjustment is made under paragraph (d) of
this section, however, for any adjustment that is already reflected in
current earnings and profits. See paragraph (d)(3) of this section for
adjustments to net book income with respect to certain taxes. For
purposes of this section, current earnings and profits is not reduced by
any distribution to shareholders. See paragraph (d)(3)(iv), Example 5 of
this section.
(ii) Current earnings and profits of a consolidated group. For
purposes of this paragraph (b)(5), the current earnings and profits of a
consolidated group is the aggregate of the current earnings and profits
of each member of the group, as determined pursuant to paragraph
(d)(4)(iii) of this section.
(6) Additional rules for computation of net book income of a foreign
corporate taxpayer--(i) Adjusted net book income of a foreign taxpayer.
Adjusted net book income of a foreign corporate taxpayer (``foreign
taxpayer'') means the effectively connected net book income (as defined
in paragraph (b)(6)(ii) of this section) of the foreign taxpayer, after
taking into account the adjustments under the rules of paragraph (d) of
this section.
(ii) Effectively connected net book income of a foreign taxpayer--
(A) In general. Effectively connected net book income of a foreign
taxpayer is the income or loss reported in its applicable financial
statement (as defined in paragraph (c)(5)(ii) of this section), but only
to the extent that such amount is attributable to items of income or
loss that would be treated as effectively connected with the conduct of
a trade or business in the United States by the foreign taxpayer as
determined under either the principles of section 864(c) and the
regulations thereunder, or any other applicable provision of the
Internal Revenue Code of 1986. Thus, if for tax purposes an item of
income or loss is treated as effectively connected with the conduct of a
trade or business in the United States, then the income or loss reported
on the foreign taxpayer's applicable financial statement attributable to
such item is effectively connected net book income. See paragraph
(b)(7), Examples 11, 12 and 13 of this section.
(B) Certain exempt amounts. Effectively connected net book income
does not include any amount attributable to an item that is exempt from
United States taxation under sections 883, 892, 894 or 895 of the
Internal Revenue Code of 1986. See paragraph (b)(7), Examples 14 and 15
of this section.
(iii) Computation of net book income of a foreign taxpayer using
current earnings
[[Page 539]]
and profits. If a foreign taxpayer does not have an applicable financial
statement or only has a statement described in paragraph (c)(1)(iv) of
this section and makes the election described in paragraph (c)(2) of
this section, net book income for purposes of this section is equal to
the foreign taxpayer's current earnings and profits that are
attributable to income or loss that is effectively connected (or treated
as effectively connected) with the conduct of a trade or business in the
United States. Effectively connected current earnings and profits are
computed under the rules of section 884(d) and the regulations
thereunder, relating to effectively connected earnings and profits for
purposes of computing the branch profits tax, but without regard to the
exceptions set forth under section 884(d)(2)(B) through (E). For
purposes of this section, effectively connected current earnings and
profits are not reduced by any remittances or distributions. Effectively
connected current earnings and profits takes into account Federal income
tax expense and any foreign tax expense; however, see paragraph (d)(3)
of this section for adjustments to net book income with respect to
certain taxes.
(7) Examples. The provisions of this paragraph may be illustrated by
the following examples.
Example 1. Corporation A owns 100 percent of corporation B and the
AB affiliated group files a consolidated Federal income tax return. AB
uses a calendar year for both financial accounting and tax purposes.
During 1987, A transfers all of its stock in B for stock on an acquiring
corporation in a transaction described in section 368(a)(1)(B). Although
AB recognizes no taxable gain on the transfer pursuant to section 354,
gain from the transfer is reported on AB's 1987 applicable financial
statement. Pursuant to paragraph (b)(2)(iii) of this section, AB's net
book income includes the book gain attributable to the transfer.
Example 2. Corporation C uses a calendar year for both financial
accounting and tax purposes. C adopted a plan of liquidation prior to
August 1, 1986. On June 1, 1987, C makes a bulk sale of all of its
assets subject to liabilities and completely liquidates. Pursuant to
section 633(c) of the Tax Reform Act of 1986 (the Act), section 337, as
in effect prior to its amendment by the Act, applies. Thus, C will
generally not recognize taxable gain upon the bulk sale. However, C's
applicable financial statement for the period January 1, 1987 through
June 1, 1987, reports net book income of $500, $400 of which is
attributable to the bulk sale of assets on June 1, 1987. Pursuant to
paragraph (b)(2)(iii) of this section, C's net book income includes the
amount attributable to the bulk sale. Thus, assuming C has no other
adjustments to net book income, its adjusted net book income for the
period January 1, 1987 through June 1, 1987, is $500.
Example 3. Corporation Z has a large inventory of marketable
securities. On its applicable financial statement, Z marks these
securities to market, i.e., as they appreciate in value, Z restates
their value on its balance sheet to their fair market value, and
increases the income on its income statement by that amount. Pursuant to
paragraph (b)(2)(iii) of this section, the adjusted net book income of Z
includes the income from the valuation adjustment.
Example 4. Corporation D owns 100 percent of E, a controlled foreign
corporation as defined in section 957. Both D and E use a calendar year
for financial accounting and tax purposes. D's applicable financial
statement includes E. Pursuant to section 951, D includes $100 of E's
subpart F income in its gross income for 1987. Although D's applicable
financial statement is adjusted to eliminate E's income, pursuant to
paragraph (b)(2)(iv) of this section, D's adjusted net book income for
1987 includes the $100 of gross income included under section 951.
Example 5. Corporation F owns 20 percent of G, a foreign
corporation. Both F and G use a calendar year for financial accounting
and tax purposes. During 1987, G pays F a $100 dividend. F's applicable
financial statement accounts for F's investment in G by the equity
method. F is eligible for a deemed paid foreign tax credit of $30 with
respect to the dividend from G and must include the $130 in gross income
pursuant to section 78 of the Code. Although F's applicable financial
statement is adjusted to eliminate F's income from G under the equity
method, pursuant to paragraph (b)(2)(iv) of this section, F's adjusted
net book income for 1987 includes the $130 of gross income recognized
with respect to the dividend from G.
Example 6. Corporation H files its Federal income tax return on a
calendar year basis. However, its applicable financial statement is
based on a fiscal year ending June 30. H does not make the election
described in paragraph (b)(4)(iii) of this section. Pursuant to
paragraph (b)(4)(i) of this section, H's adjusted net book income for
calendar year 1987 is computed by adding 50 percent of adjusted net book
income from the applicable financial statement for the year ending June
30, 1987 and 50 percent of adjusted net book income from the applicable
financial statement for the year ending June 30, 1988.
Example 7. Corporation J files its Federal income tax returns for
1987, 1988, and 1989 on
[[Page 540]]
a calendar year basis. However, its applicable financial statement is
based on a year ending May 31. Pursuant to paragraph (b)(4)(iii) of this
section, J elects in 1987 to compute its adjusted net book income by
using the applicable financial statement for the fiscal year ending May
31, 1987. Unless the District Director consents to revocation of the
election, for calendar year 1988 or 1989, J's adjusted net book income
for 1988 and 1989 is determined from its applicable financial statements
for the years ending May 31, 1988 and May 31, 1989, respectively.
Example 8. The facts are the same as in Example 7, except that J's
applicable financial statement is based on a year ending April 30. Since
April 30, is less than 5 months after December 31, the end of J's
taxable year, J is not permitted to make the election described in
paragraph (b)(4)(iii) of this section.
Example 9. The facts are the same as in Example 8, except H files
quarterly and annual financial statements with the Securities and
Exchange Commission (SEC). The fourth quarter statement is included as a
footnote to the annual statement that it files with the SEC. Pursuant to
paragraph (b)(4)(iv) of this section, H may not determine its net book
income by aggregating its four quarterly statements for 1987. Thus, H's
net book income is computed as described in Example 8.
Example 10. Corporation I is a United States corporation with a 100
percent owned subsidiary, J, a foreign sales corporation (FSC). I uses a
calendar year for both financial accounting and tax purposes. Income
from J is consolidated in I's applicable financial statement. I and J do
not file a consolidated tax return. In 1987, J pays a dividend to I of
$100 out of J's earnings and profits. For purposes of this example, it
is assumed that the distribution is made out of the profits attributable
solely to foreign trade income determined through use of the
administrative pricing rules of section 925(a) (1) and (2). Accordingly,
the distribution is eligible for the 100 percent dividends received
deduction under section 245(c). Although I's applicable financial
statement is adjusted to eliminate income or loss attributable to J, the
entire amount of the dividend distribution must be included in I's
adjusted net book income pursuant to paragraph (b)(2)(iv) of this
section.
Example 11. Corporation K is a foreign corporation incorporated
under the laws of country X. K uses a calendar year for both financial
accounting and tax purposes. In 1987, K actively conducts a real estate
business, L, in the United States. The financial statement that is used
as K's applicable financial statement (as determined under paragraph
(c)(5)(ii) of this section) discloses total net income of $150. Of this
amount, $100 is attributable to L's real estate business and $50 is
attributable to dividends paid to L from its investment in certain
securities. The securities investment is not connected with L's real
estate business. Under the rules of section 864, only $100 is
effectively connected to the conduct of a trade or business in the
United States. Thus, K's effectively connected net book income for 1987
equals $100.
Example 12. Assume the same facts as in Example 11 except that K's
applicable financial statement also discloses $75 attributable to
investment real property located in the United States, so that the net
income amount reported on the financial statement equals $225. The $75
of income is not effectively connected with the conduct of a trade or
business in the United States. K, for regular tax purposes, makes an
election under section 882(d) to treat this income as effectively
connected with the conduct of a trade or business in the United States.
As a result, K's effectively connected net book income for 1987 equals
$175 ($100+$75).
Example 13. Corporation M is a foreign corporation that actively
conducts a manufacturing business, N, in the United States. M is a
calendar year taxpayer for both financial accounting and tax purposes.
In 1987, the financial statement that is used as M's applicable
financial statement (as determined under paragraph (c)(5)(ii) of this
section) reflects an anticipated loss from the sale of a division of N.
For Federal income tax purposes the loss is not recognized in 1987, but
rather is recognized in 1988 when M sells the division. In determining
M's effectively connected net book income for 1987, the anticipated loss
reported on M's 1987 applicable financial statement is taken into
account because the reported loss is effectively connected to the
conduct of a trade or business in the United States under the principles
of section 864.
Example 14. Corporation O is a foreign corporation that is engaged
in the international shipping business. O is incorporated under the laws
of X. O is a calendar year taxpayer for both financial accounting and
tax purposes. In 1987, O actively conducts a shipping business, P,
within the United States. The statement that is used in 1987 as O's
applicable financial statement (as determined under paragraph (c)(5)(ii)
of this section) discloses income of $100 that is attributable to P's
operation of ships in international traffic. Under section 864, $50 is
effectively connected with the conduct of a trade or business in the
United States. However, the United States income tax treaty with X
exempts from United States income tax any income derived by a resident
of X from the operation of ships in international traffic. Thus,
pursuant to paragraph (b)(6)(ii)(B) of this section, no amount of P's
income is includible in O's effectively connected net book income.
Example 15. Assume the same facts as in Example 14 except that there
is no United
[[Page 541]]
States income tax treaty with X. However, X by statute exempts United
States citizens and United States corporations from tax imposed by X on
gross income derived from the operation of a ship or ships in
international traffic. Under section 883(a), P's income of $50 that is
effectively connected with the conduct of a trade or business in the
United States is exempt from United States taxation. Thus, pursuant to
paragraph (b)(6)(ii)(B) of this section, no amount of P's income is
includible in O's effectively connected net book income.
(c) Applicable Financial Statement--(1) In general. A taxpayer's
applicable financial statement is the statement described in this
paragraph (c)(1) that has the highest priority, as determined under
paragraph (c)(3) of this section. Generally, an applicable financial
statement includes an income statement, a balance sheet (listing assets,
liabilities, and owner's equity including changes thereto), and other
appropriate information. An income statement alone may constitute an
applicable financial statement for purposes of this section if the other
materials described in this paragraph are not prepared or used by the
taxpayer. However, an income statement that does not reconcile with
financial materials otherwise issued will not qualify as an applicable
financial statement. For purposes of determining the book income
adjustment, the following may be considered applicable financial
statements (subject to the rules relating to priority among statements
under paragraph (c)(3) of this section)--
(i) Statement required to be filed with the Securities and Exchange
Commission (SEC). A financial statement that is required to be filed
with the Securities and Exchange Commission.
(ii) Certified audited financial statement. A certified audited
financial statement that is used for credit purposes, for reporting to
shareholders or for any other substantial non-tax purpose. Such a
statement must be accompanied by the report of an independent (as
defined in the American Institute of Certified Public Accountants
Professional Standards, Code of Professional Conduct, Rule 101 and its
interpretations and rulings) Certified Public Accountant or, in the case
of a foreign corporation, a similarly qualified and independent
professional who is licensed in any foreign country. A financial
statement is ``certified audited'' for purposes of this section if it
is--
(A) Certified to be fairly presented (an unqualified or ``clean''
opinion),
(B) Subject to a qualified opinion that such financial statement is
fairly presented subject to a concern about a contingency (a qualified
``subject to'' opinion),
(C) Subject to a qualified opinion that such financial statement is
fairly presented, except for a method of accounting with which the
accountant disagrees (a qualified ``except for'' opinion), or
(D) Subject to an adverse opinion, but only if the accountant
discloses the amount of the disagreement with the statement.
Any other statement or report, such as a review statement or a
compilation report that is not subject to a full audit is not a
certified audited statement. See paragraph (c)(3)(iv)(B)(2) of this
section for a special rule for a statement accompanied by a review
report when there are statements of equal priority. See also paragraph
(d)(5)(iii) of this section for rules relating to adjustments for
information disclosed in an accountant's opinion to a certified audited
statement.
(iii) Financial statement provided to a government regulator. A
financial statement that is required to be provided to the Federal
government or any agency thereof (other than the Securities and Exchange
Commission), a state government or any agency thereof, or a political
subdivision of a state or any agency thereof. An income tax return,
franchise tax return or other tax return prepared for the purpose of
determining any tax liability that is filed with a Federal, state or
local government or agency cannot be an applicable financial statement.
(iv) Other financial statements. A financial statement that is used
for credit purposes, for reporting to shareholders, or for any other
substantial non-tax purpose, even though such financial statement is not
described in paragraphs (c)(1)(i) through (c)(1)(iii) of this section.
(v) Required use of current earnings and profits. If a taxpayer does
not have a financial statement described in
[[Page 542]]
paragraphs (c)(1)(i) through (c)(1)(iv) of this section, the taxpayer
does not have an applicable financial statement. In that case, net book
income for the taxable year will be treated as being equal to the
taxpayer's current earnings and profits for the taxable year. See
paragraph (b)(5) of this section for rules relating to the computation
of current earnings and profits for the taxable year. See paragraph
(c)(4) of this section for rules relating to use of a financial
statement for a substantial non-tax purpose.
(2) Election to treat net book income as equal to current earnings
and profits for the taxable year--(i) In general. If a taxpayer's only
financial statement is a statement described in paragraph (c)(1)(iv) of
this section, the taxpayer may elect to treat net book income as equal
to the taxpayer's current earnings and profits for all taxable years in
which the taxpayer is eligible to make the election.
(ii) Time of making election. An election under this paragraph
(c)(2) is made by attaching the statement described in paragraph
(c)(2)(iii) of this section to the taxpayer's Federal income tax return
for the first taxable year the taxpayer is eligible to make the
election. An election under this paragraph (c)(2), which is made prior
to the first taxable year in which the taxpayer is eligible to make the
election, as determined under paragraph (c)(2)(iii) of this section, is
valid unless revoked pursuant to paragraph (c)(2)(iv) of this section.
(iii) Eligibility to make and manner of making election. A taxpayer
is eligible to make the election in the first taxable year in which--
(A) The taxpayer has an applicable financial statement described in
paragraph (c)(1)(iv) of this section;
(B) The use of this applicable financial statement produces an
excess of adjusted net book income over preadjustment alternative
minimum taxable income, as defined in paragraph (a)(1) of this section,
and
(C) The taxpayer has, as determined under section 55(a), an excess
of tentative minimum tax over regular tax for the taxable year, or is
liable for the environmental tax imposed by section 59A.
Thus, a taxpayer is not required to evaluate the merits of an election
to use its current earnings and profits as its net book income unless
the taxpayer, when using an applicable financial statement described in
paragraph (c)(1)(iv) of this section, has an excess of tentative minimum
tax over its regular tax or is liable for the environmental tax imposed
by section 59A. The election statement must set forth the electing
taxpayer's name, address and taxpayer identification number, state that
the election is being made under the provisions of section 56(f)(3)(B),
and state that the only financial statement of the taxpayer is a
financial statement described in paragraph (c)(1)(iv) of this section.
An election under this paragraph (c)(2) is effective for every taxable
year in which the taxpayer does not have a financial statement described
in paragraphs (c)(1)(i) through (c)(1)(iii) of this section and may be
revoked only with the consent of the District Director. See paragraph
(c)(6), Example 1 of this section.
(iv) Election or revocation of election made on an amended return.
An election under paragraph (c)(2) of this section may be made by
attaching the statement described in paragraph (c)(2)(iii) to an amended
return for the first taxable year in which the taxpayer is eligible to
make the election. An election under paragraph (c)(2) of this section
that was made prior to the first taxable year in which the taxpayer was
eligible to make the election, as determined under paragraph (c)(2)(iii)
of this section, may be revoked by filing an amended return for the
taxable year in which the election was initially made. However, an
election made or revoked on an amended return will be allowed only if
the amended return is filed no later than December 14, 1990.
(v) Election by common parent of consolidated group. The election by
the common parent of a consolidated group to treat net book income as
equal to current earnings and profits shall bind all members of the
group. This rule shall not apply in the case of any taxpayer that first,
has made the election on a return filed before August 16, 1990, second,
applied the election only to those members of the group that are
[[Page 543]]
themselves eligible to make the election, and third, properly
consolidated the adjusted net book income of the group. In order to
change its election to apply to all members of the group, a taxpayer
must attach a statement to an amended return for the first taxable year
the taxpayer is eligible to make the election. However, an election made
on an amended return under this paragraph (c)(2)(iv) will be allowed
only if the amended return is filed no later than December 14, 1990. See
paragraph (b)(5)(ii) of this section regarding the current earnings and
profits of a consolidated group. See paragraph (d)(4)(iii) of this
section for adjustments that apply when a consolidated group uses
current earnings and profits to compute its net book income.
(3) Priority among statements--(i) In general. If a taxpayer has
more than one financial statement described in paragraphs (c)(1)(i)
through (c)(1)(iv) of this section, the taxpayer's applicable financial
statement is the statement with the highest priority. Priority is
determined in the following order--
(A) A financial statement described in paragraph (c)(1)(i) of this
section.
(B) A certified audited statement described in paragraph (c)(1)(ii)
of this section.
(C) A financial statement required to be provided to a Federal or
other government regulator described in paragraph (c)(1)(iii) of this
section.
(D) Any other financial statement described in paragraph (c)(1)(iv)
of this section.
For example, corporation A, which uses a calendar year for both
financial accounting and tax purposes, prepares a financial statement
for calendar year 1987 that is provided to a state regulator and an
unaudited financial statement that is provided to A's creditors. The
statement provided to the state regulator is A's financial statement
with the highest priority and thus is A's applicable financial
statement.
(ii) Special priority rules for use of certified audited financial
statements and other financial statements. In the case of financial
statements described in paragraphs (c)(1)(ii) and (c)(1)(iv) of this
section, within each of these categories the taxpayer's applicable
financial statement is determined according to the following priority--
(A) A statement used for credit purposes,
(B) A statement used for disclosure to shareholders, and
(C) Any other statement used for other substantial non-tax purposes.
For example, corporation B uses a calendar year for both financial
accounting and tax purposes. B prepares a financial statement for
calendar year 1987 that it uses for credit purposes and prepares another
financial statement for calendar year 1987 that it uses for disclosure
to shareholders. Both financial statements are unaudited. The statement
used for credit purposes is B's financial statement with the highest
priority and thus is B's applicable financial statement.
(iii) Priority among financial statements provided to a government
regulator. In the case of two or more financial statements described in
paragraph (c)(1)(iii) of this section (relating to financial statements
required to be provided to a Federal or other governmental regulator)
that are of equal priority, the taxpayer's applicable financial
statement is determined according to the following priority--
(A) A statement required to be provided to the Federal government or
any of its agencies,
(B) A statement required to be provided to a State government or any
of its agencies, and
(C) A statement required to be provided to any subdivision of a
state or any agency of a subdivision.
(iv) Statements of equal priority--(A) In general. Except as
provided in paragraph (c)(3)(iv)(B) and paragraph (c)(5)(i)(B) of this
section, if a taxpayer has two or more financial statements of equal
priority (determined under paragraphs (c)(3)(i), (c)(3)(ii) and
(c)(3)(iii) of this section), the taxpayer's applicable financial
statement is the statement that results in the greatest amount of
adjusted net book income.
(B) Exceptions to the general rule in paragraph (c)(3)(iv)(A). (1)
In the case of two or more financial statements described in paragraph
(c)(1)(i) of this section (relating to financial statements required to
be filed with the
[[Page 544]]
SEC) that are of equal priority, a certified audited financial statement
has a higher priority than an unaudited financial statement.
(2) In the case of two or more financial statements described in
paragraph (c)(1)(iv) of this section (relating to other financial
statements) that are of equal priority, a financial statement
accompanied by an auditor's ``review report'' has a higher priority than
another financial statement of otherwise equal priority. For purposes of
this section, an auditor's review report is defined in the American
Institute of Certified Public Accountant Professional Standards, AR
section 100.32. See paragraph (c)(6), Examples and 3 of this section.
(4) Use of financial statement for a substantal non-tax purpose. In
order to be an applicable financial statement for purposes of computing
the book income adjustment, a financial statement described in paragraph
(c)(1)(ii) or (c)(1)(iv) must be used by the taxpayer for credit
purposes, for disclosure to shareholders, or for any other substantial
non-tax purpose. A financial statement is used by a taxpayer if the
taxpayer reasonably anticipates that users of the statement will rely on
it for non-tax purposes. Thus, a financial statement used for the
purpose of computing the book income adjustment is not an applicable
financial statement even if it is provided to shareholders or creditors,
unless the taxpayer reasonably anticipates that users of the statement
will rely on it for non-tax purposes. See paragraph (c)(6), Examples 4,
5, 19 and 20 of this section.
(5) Special rules--(i) Applicable financial statement of related
corporations--(A) Applicable financial statement of a consolidated
group. The applicable financial statement of a consolidated group (as
defined in paragraph (a)(3) of this section) is the financial statement
of the common parent (within the meaning of section 1504(a)(1)) of the
consolidated group that has the highest priority under the rules of
paragraphs (c)(3)(i), (c)(3)(ii) and (c)(5)(i)(B) of this section. See
paragraph (d)(6)(i) of this section for rules relating to adjustments to
net book income of a consolidated group. See paragraph (c)(6), Example 7
of this section. See paragraph (c)(2)(iv) of this section for rules
relating to the election by the common parent of a consolidated group to
use current earnings and profits to compute net book income.
(B) Special rule for statements of equal priority. If a consolidated
group has two or more financial statements of equal priority (determined
under paragraphs (c)(3)(i) and (c)(3)(ii) of this section and this
paragraph (c)(5)), the consolidated group's applicable financial
statement is determined under either paragraph (c)(5)(i)(B) (1) or (2),
whichever is applicable.
(1) Two or more financial statements reporting on the same
corporations. If two or more financial statements of equal priority
report on the same corporations, the consolidated group's applicable
financial statement is determined under the rules of paragraph
(c)(3)(iv) of this section. Thus, the financial statement that results
in the greatest consolidated adjusted net book income is the
consolidated group's applicable financial statement.
(2) Two or more financial statements reporting on different
corporations. If two or more financial statements of equal priority
report on different corporations, the consolidated group's applicable
financial statement is--
(i) The statement that reflects the greatest amount of gross
receipts attributable to members of the consolidated group, or
(ii) The statement that reflects the greatest amount of gross
receipts (including gross receipts attributable to corporations that are
not members of the consolidated group), but only if the consolidated
group has financial statements of equal priority after applying the
rules of paragraph (c)(5)(i)(B)(2)(i).
If after applying the rules of paragraphs (c)(5)(i)(B)(2) (i) and (ii)
of this section, the consolidated group still has financial statements
of equal priority, the rules of paragraph (c)(3)(iv) of this section
apply. See paragraph (c)(6), Examples 7 and 8 of this section.
(C) Special rule for related corporations. If any portion of the net
book income
[[Page 545]]
of a corporation (the ``first corporation'') is included on the
applicable financial statement of a second corporation, but the first
and second corporations are not members of the same consolidated group,
the applicable financial statement of the second corporation is
disregarded when determining the applicable financial statement of the
first corporation. Thus, the applicable financial statement of the first
corporation is the financial statement of highest priority determined
under the rules of paragraph (c)(3) of this section without regard to
the financial statement of the second corporation. Pursuant to paragraph
(c)(1)(iv) of this section, if a separate financial statement is not
prepared by the first corporation, the rules of paragraph (b)(5)
(relating to current earnings and profits) apply. See paragraph (c)(6),
Examples 9 and 10 of this section.
(D) Anti-abuse rule. The special rules of this paragraph (c)(5)(i)
will not apply if the taxpayer rearranges its corporate structure or
modifies its financial reporting and the principal purpose of such
action is to use the special rules of this paragraph (c)(5)(i) to reduce
the amount of the book income adjustment. In such cases, the District
Director may, based upon all the facts and circumstances, determine the
taxpayer's applicable financial statement. See paragraph (c)(6),
Examples 13 and 14 of this section.
(ii) Applicable financial statement of a foreign corporation with a
United States trade or business--(A) In general. The applicable
financial statement of a foreign taxpayer conducting one or more trades
or businesses in the United States is the financial statement prepared
by any such trade or business (or attributable to more than one such
trades or businesses) that has the highest priority as determined under
paragraph (c)(3) of this section. See paragraph (c)(6), Example 15 of
this section.
(B) Special rules for applicable financial statement of a trade or
business of a foreign taxpayer--(1) Financial statement prepared under
foreign generally accepted accounting principles. Subject to the rules
of this section, a financial statement prepared by a United States trade
or business using generally accepted accounting principles of a foreign
country may be an applicable financial statement under this paragraph
(c). See paragraph (c)(6), Example 16 of this section.
(2) Financial statement denominated in United States dollars. Except
as provided in paragraph (c)(5)(ii)(D) of this section, the financial
statement of a United States trade or business must be denominated in
United States dollars in order to be considered the applicable financial
statement of the foreign taxpayer under this paragraph (c). See
paragraph (c)(6), Example 17 of this section.
(C) Special rule for statements of equal priority. If a foreign
taxpayer has two or more financial statements of equal priority
(determined under paragraphs (c)(3)(i) and (c)(3)(ii) of this section
and this paragraph (c)(5)(ii)), the foreign taxpayer's applicable
financial statement is determined under either paragraph (c)(5)(ii)(C)
(1) or (2) of this section, whichever is applicable.
(1) Two or more financial statements reporting on the same trades or
businesses. If two or more financial statements of equal priority report
on the same United States trades or businesses, the applicable financial
statement of the foreign taxpayer is determined under the rule of
paragraph (c)(3)(iv) of this section. In applying this rule, adjusted
net book income (as defined under paragraph (b)(6) of this section)
shall be used. Thus, the financial statement that results in the
greatest amount of adjusted net book income is the foreign taxpayer's
applicable financial statement.
(2) Two or more financial statements reporting on different trades
or businesses. If two or more financial statements of equal priority
report on different United States trades or businesses, the foreign
taxpayer's applicable financial statement is--
(i) The financial statement that reflects the greatest amount of
gross receipts attributable to United States trades or businesses, or
(ii) If after applying the rules of paragraph (c)(5)(ii)(C)(2)(i) of
this section, the foreign taxpayer still has financial statements of
equal priority, the financial statement determined under the
[[Page 546]]
rules of paragraph (c)(3)(iv) of this section (using effectively
connected adjusted net book income).
See paragraph (c)(6), Example 18 of this section.
(D) Anti-abuse rules. The special rules of this paragraph (c)(5)(ii)
will not apply if a trade or business conducted in the United States by
a foreign taxpayer modifies its financial reporting and the principal
purpose of such action is to reduce the amount of the book income
adjustment. In such cases, the District Director may, based upon all the
facts and circumstances, determine the taxpayer's applicable financial
statement. See paragraph (c)(6), Example 21, of this section.
(iii) Supplement or amendment to an applicable financial statement--
(A) Excluding a restatement of net book income. An applicable financial
statement includes any supplement or amendment thereto (excluding a
restatement of net book income) for the taxable year that is prepared
and used for a substantial non-tax purpose (within the meaning of
paragraph (c)(4) of this section) prior to the date the taxpayer's
Federal income tax return for the taxable year would be due if the time
for filing were extended under section 6081. For example, a calendar
year taxpayer's applicable financial statement includes any supplement
or amendment prepared and used prior to September 15 of the year
immediately following its taxable year. If a taxpayer files its Federal
income tax return before the issuance of a supplement or amendment to
the applicable financial statement and before the extended due date for
filing under section 6081, the taxpayer must file an amended Federal
income tax return reporting any additional tax that results from
treating the supplement or amendment as part of the applicable financial
statement. A supplement or amendment (excluding restatements of net book
income) to an applicable financial statement after the date specified in
section 6081 is disregarded for purposes of the book income adjustment.
(B) Restatement of net book income. If a taxpayer restates net book
income in what otherwise would have been its applicable financial
statement (its ``original financial statement''), referred to in this
section as a ``restatement of net book income,'' prior to the date that
the taxpayer's Federal income tax return for such taxable year would be
due if the time for filing were extended under section 6081, then--
(1) If the financial statement that includes the restated net book
income is of a higher priority than the original financial statement,
the restated financial statement is the taxpayer's applicable financial
statement.
(2) If the financial statement that includes the restated net book
income is of equal priority to the original financial statement and--
(i) The restatement is attributable to an error (as described in
Accounting Principles Board Opinion No. 20, paragraph 13), the restated
financial statement is the taxpayer's applicable financial statement, or
(ii) The restatement is not attributable to an error, the original
and restated financial statements will be considered of equal priority,
and paragraph (c)(3)(iv) will apply. Thus, the taxpayer's applicable
financial statement is the financial statement that results in the
greatest amount of adjusted net book income.
See paragraph (d)(4)(iv) of this section for rules that apply to
restatements occurring after the due date (including the extension under
section 6081) of the return for the taxable year to which the applicable
financial statement relates. See paragraph (c)(6), Examples 11 and 12 of
this section.
(6) Examples. The provisions of this paragraph may be illustrated by
the following examples.
Example 1. In 1987, Corporation A only has a financial statement
described in paragraph (c)(1)(iv) of this section and elects to treat
net book income as equal to its current earnings and profits. In 1988, A
has a certified audited financial statement (as described in paragraph
(c)(1)(ii) of this section). In 1989, A only has a statement described
in paragraph (c)(1)(iv) of this section. In 1988, A's certified audited
financial statement is its applicable financial statement. However, in
1989, A is bound by the election it made in 1987 (unless revoked with
the consent of the District Director) and must treat net book income as
equal to its current earnings and profits.
Example 2. Corporation B prepares two unaudited financial
statements. Both statements are distributed to creditors and are used
for substantial non-tax purposes. The
[[Page 547]]
first financial statement is accompanied by an auditor's review report
while the second statement has no auditor's review report. B has no
other financial statement. Pursuant to paragraph (c)(3)(iv)(B)(2) of
this section, the financial statement accompanied by the auditor's
review report is B's applicable financial statement.
Example 3. Assume the same facts as in Example (2), except the
financial statement accompanied by an auditor's review report is
distributed to shareholders while the other statement is distributed to
creditors, and both statements are used for substantial non-tax
purposes. Pursuant to paragraph (c)(3)(ii) of this section, B's
applicable financial statement is the statement distributed to its
creditors. Paragraph (c)(3)(iv)(B)(2) of this section does not apply
because the two statements are not of equal priority after applying
paragraphs (c)(3) (i) and (ii) of this section.
Example 4. Corporation C is a closely held corporation with two
shareholders. Both shareholders participate in the business on a day-to-
day basis and are aware of the financial status of the business. C
prepares a financial statement that is used by C's two shareholders to
calculate bonuses. The financial statement prepared by C is used for a
substantial non-tax purpose.
Example 5. Corporation D prepares a financial statement that it only
sends to banks with which D is neither currently doing business nor
negotiating. D does not reasonably anticipate that the financial
statement will be relied on by the banks for any non-tax purpose, and
therefore, for purposes of computing net book income, the financial
statement is not used for a substantial non-tax purpose. The result
would be the same if D sent the statement to a bank whose only
relationship to D is that it holds a mortgage on D's property and D's
rights and obligations under the mortgage are not affected by changes in
its financial condition. The result would also be the same if D sent the
statement to a bank with which D is doing business, and the statement is
not reasonably expected to come to the attention of the bank's employees
who are responsible for D's account.
Example 6. Corporation E and its subsidiaries, F and G are a
consolidated group. Certified audited financial statements are prepared
by EF and by FG. Both statements are used for substantial non-tax
purposes. Pursuant to paragraph (c)(5)(i)(A) of this section, the
financial statement that is prepared by EF is the applicable financial
statement of the consolidated group. However, pursuant to paragraph
(d)(6)(i)(B) of this section, an adjustment will be required to include
the adjusted net book income attributable to G. The result would be the
same even if the financial statement prepared by FG is of higher
priority (under the rules of paragraph (c)(3) of this section) than the
statement prepared by E and F.
Example 7. Corporation H and its subsidiaries I, J, and K are a
consolidated group. Certified audited financial statements are prepared
by H and I and by H, J, and K. Both statements are used for substantial
non-tax purposes. The financial statement prepared by H, J, and K
includes the greater amount of gross receipts attributable to members of
the consolidated group and thus, pursuant to paragraph
(c)(5)(i)(B)(2)(i) of this section, it is the consolidated group's
applicable financial statement.
Example 8. Corporation L and its subsidiary M are a consolidated
group. Corporation L also owns 100 percent of N, a foreign corporation
that is not part of the consolidated group. A certified audited
financial statement prepared by L, M and N discloses gross receipts of
$200, of which $150 is attributable to L and M, and a separate certified
audited financial statement prepared by L and M discloses gross receipts
of $150. Both statements are used for substantial non-tax purposes.
Pursuant to paragraph (c)(5)(i)(B) of this section, the consolidated
group's applicable financial statement is the statement prepared by L, M
and N.
Example 9. Corporation O is 60 percent owned by corporation P and 40
percent owned by corporation Q. Both P and Q prepare financial
statements that are required to be filed with the SEC reflecting their
respective interests in O. O also separately prepares a certified
audited financial statement, or uses a summary of its books and records
for credit purposes. Under paragraph (c)(5)(i)(C), O's separate
statement is its applicable financial statement.
Example 10. Assume the same facts as in Example 9 except that O does
not prepare a separate financial statement or a summary of its books and
records for credit purposes. Pursuant to paragraph (c)(5)(i)(C) of this
section, O must treat its net book income as equal to its current
earnings and profits.
Example 11. Corporation R uses a calendar year for both financial
accounting and tax purposes. Initially, R issues its calendar year 1987
financial statement on March 1, 1988. R's adjusted net book income
resulting from this statement is $80. This would be R's applicable
financial statement for 1987, but for the restatement described in the
next sentence. On September 1, 1988, R restates its 1987 financial
statement to correct an error (as described in Accounting Principles
Board Opinion No. 20, paragraph 13). The restated financial statement is
of the same priority as the initial financial statement. The restatement
results in adjusted net book income for calendar year 1987 of $50.
Pursuant to paragraph (c)(5)(iii)(B)(2)(i) of this section, the restated
financial statement is treated as R's 1987 applicable financial
statement.
[[Page 548]]
Example 12. Assume the same facts as in Example (11), except that R
restates its financial statement in order to reflect a change in
accounting method. Since the restatement does not result from an error,
paragraph (c)(5)(iii)(B)(2)(i) of this section does not apply. Pursuant
to paragraph (c)(5)(iii)(B)(2)(ii) of this section, R's 1987 applicable
financial statement is the financial statement for 1987 that results in
the greater amount of adjusted net book income. Thus, R's March 1, 1988
financial statement is treated as its 1987 applicable financial
statement.
Example 13. Corporation S, which is not a member of an affiliated
group, uses a calendar year for both financial accounting and tax
purposes. S's 1987 applicable financial statement is a certified audited
financial statement. On January 1, 1988, S transfers all of its assets
subject to liabilities to T, a newly created subsidiary that is 100
percent owned by S. The principal purpose of the transfer is to use the
special rules of paragraph (c)(5)(i) of this section to reduce the
adjusted net book income of S. For calendar year 1988, T prepares and
uses a certified audited financial statement. Since S's only asset is
its investment in T, S does not prepare a financial statement for
calendar year 1988. In addition, since S is only a holding company, T's
1988 certified audited financial statement reports the same net book
income that would have been reported on a consolidated ST financial
statement. If paragraph (c)(5)(i)(D) of this section does not apply,
ST's 1988 applicable financial statement is the financial statement of S
(the parent of the consolidated group) with the highest priority. Under
paragraph (c)(1) of this section, since S does not have a financial
statement in 1988, the net book income of the ST consolidated group is
ordinarily deemed to equal the aggregate earnings and profits of the
members of the consolidated group. However, given these facts, the
District Director may determine that the 1988 certified audited
financial statement of T is the 1988 applicable financial statement of
the ST consolidated group.
Example 14. The facts are the same as in Example 13, except that S
has owned 100 percent of T for several years prior to calendar year
1987. In addition, prior to 1987, ST prepared a consolidated certified
audited financial statement. For calendar year 1987, ST does not prepare
a consolidated certified audited financial statement. Instead, T
prepares and uses a certified audited financial statement while S does
not prepare a financial statement. The principal purpose of the change
in financial reporting is to use the special rules of paragraph
(c)(5)(i) of this section to reduce the adjusted net book income of the
ST consolidated group. Given these facts, the District Director may
determine that the 1987 certified audited financial statement of T is
the 1987 applicable financial statement of the ST consolidated group.
Example 15. Corporation U is a foreign corporation incorporated in
A. U is a calendar year taxpayer for both financial accounting and tax
purposes. U actively conducts three real estate businesses, X, Y and Z,
in the United States. In 1987, X prepares a certified audited financial
statement that it provides to its United States creditor. In addition,
in 1987, X, Y and Z each prepare unaudited financial statements that
they provide to U for incorporation in U's worldwide financial
statement. Under paragraph (c)(5)(ii)(A) of this section, U's applicable
financial statement is the certified audited financial statement
prepared by X. However, pursuant to paragraph (d)(7) of this section, an
adjustment is required to include any of U's effectively connected net
book income that is not included in X's certified audited financial
statement (i.e., the effectively connected net book income attributable
to Y and Z).
Example 16. Corporation A is a foreign corporation incorporated in
Z. A is a calendar year taxpayer for both financial accounting and tax
purposes. A actively conducts a real estate business, B, in the United
States. B prepares a certified audited financial statement for 1987
using the accounting principles of Z that it provides to A for
incorporation into A's worldwide financial statement. In addition, B
prepares a review statement for 1987 using United States generally
accepted accounting principles that it provides to its United States
creditors. Both the certified statement and the review statement are
denominated in United States dollars. Under paragraphs (c)(5)(ii)(A) and
(c)(5)(ii)(B)(1) of this section, the financial statement prepared under
the accounting principles of Z is the applicable financial statement.
Example 17. Assume the same facts as in Example (16) except that
amounts are reported on B's certified audited financial statement in the
currency of Z and amounts are reported on B's review statement in United
States dollars. Since the review statement is denominated in United
States dollars, under paragraph (c)(5)(ii)(B)(2) of this section, it is
the applicable financial statement.
Example 18. Corporation C is a foreign corporation incorporated in
Z. C is a calendar year taxpayer for both financial accounting and tax
purposes. C actively conducts two real estate businesses, D and E, in
the United States. D and E each separately prepare a certified audited
financial statement for 1987 that they provide to their United States
creditors. D's financial statement reports gross receipts of $100. E's
financial statement reports gross receipts of $200. Under paragraph
(c)(5)(ii)(C)(2) of this section, E's certified audited financial
statement is the applicable financial statement and must be adjusted
under the rules of paragraph (d)(7) of
[[Page 549]]
this section to include effectively connected book income attributable
to D.
Example 19. F is a foreign corporation incorporated in X. F is a
calendar year taxpayer for both financial accounting and tax purposes. F
actively conducts a banking business, G, in the United States. G has
been engaged in business in the United States since 1977. For the years
1977 through 1986, G did not prepare a separate financial statement.
However, each year G provided F with its books, records and other raw
financial data. F used this data in preparing its worldwide financial
statement. G provides F with its 1987 books and records on January 5,
1988, in accordance with its historic practice. On February 15, 1988, G
prepares an unaudited financial statement for calendar year 1987 that it
provides to F. The principal purpose of creating this financial
statement is to reduce net book income. Under these facts, the financial
statement provided by G is not intended to be reasonably relied upon by
F in preparing its worldwide financial statement. Therefore, for
purposes of computing net book income, G's financial statement has not
been used for a substantial non-tax purpose.
Example 20. Assume the same facts as in Example 19 except that for
purposes of preparing F's 1987 worldwide financial statement, G does not
provide F with any raw financial data, and G only provides F with an
audited financial statement that is prepared for a substantial non-tax
purpose. Under these facts, the financial statement provided by G is
intended to be relied upon by F in preparing its worldwide financial
statement. Therefore, for purposes of computing net book income, G's
financial statement has been used for a substantial non-tax purpose.
Example 21. Corporation H is a foreign corporation incorporated in
I. H is a calendar year taxpayer for both financial accounting and tax
purposes. H actively conducts a real estate business, J, in the United
States. For the years 1976 through 1986, J prepared a certified audited
financial statement using United States dollars that it provided to H.
In 1987, J prepares a certified audited financial statement using the
currency of I. The principal purpose of the modification of J's
financial reporting is to reduce the amount of the book income
adjustment. Given these facts, the District Director may determine that
J's 1987 certified audited financial statement prepared in the currency
of I is J's applicable financial statement for 1987, and such statement
must be converted into United States dollars based upon the translation
used to prepare the certified audited financial statement in the
currency of I. Accordingly, the effectively connected net book income of
J for 1987 is the effectively connected net book income reported on the
financial statement that has been converted into United States dollars.
(d) Adjustments to net book income--(1) In general. Adjusted net
book income is computed by making the adjustments described in this
paragraph (d) to net book income (as defined in paragraph (b)(2) of this
section). No adjustment may be made to net book income except as
provided in this paragraph (d).
(2) Definitions--(i) Historic practice. For purposes of this
paragraph (d), historic practice is defined as an accounting practice
that--
(A) Was used consistently by the taxpayer for each of the 2 years
immediately preceding its first taxable year beginning after 1986, and
(B) Was used on the financial statement that would have been the
taxpayer's applicable financial statement (as determined under paragraph
(c) of this section) for each of the 2 years immediately preceding its
first taxable year beginning after 1986 if section 56(f), as amended by
the Tax Reform Act of 1986, had been in effect.
Thus, in order for a calendar year corporation to have an historic
practice in 1987, the corporation must have used the accounting practice
in its 1985 and 1986 financial statements. However, to be treated as
used for purposes of this paragraph, an accounting practice must have
been used prior to April 23, 1987. For example, an accounting practice
that is first used after April 23, 1987, in a restatement of a
taxpayer's 1985 and 1986 financial statements is not the taxpayer's
historic practice.
(ii) Accounting literature. For purposes of this paragraph (d), the
term ``accounting literature'' means--
(A) Generally accepted accounting principles (GAAP) as defined in
the American Institute of Certified Public Accountants Professional
Standards, AU Sec. 411.05, paragraphs (a) through (c), and
(B) Pronouncements by the SEC including, but not limited to,
Regulations S-X, SEC Financial Reporting Releases, and SEC Staff
Accounting Bulletins,
that are effective for the accounting period covered by the applicable
financial statement.
(3) Adjustments for certain taxes--(i) In general. Net book income
for purposes of this paragraph (d) must be adjusted to disregard (for
example, by adding
[[Page 550]]
back) any Federal income taxes or income, war profits, or excess profits
taxes imposed by any foreign country or possession of the United States
that are directly or indirectly taken into account on the taxpayer's
applicable financial statement. No adjustment is made for taxes not
described in the preceding sentence. Taxes directly or indirectly taken
into account consist of the taxpayer's total income tax expense that
includes both current and deferred income tax expense. In addition,
items of income and expense, including extraordinary items that are
stated net of tax, must be adjusted to disregard the taxes described in
this paragraph (d)(3)(i). See paragraph (d)(4)(vii) of this section for
an adjustment for certain deferred foreign taxes.
(ii) Exception for certain foreign taxes. Net book income is not
adjusted to disregard taxes imposed by a foreign country or possession
of the United States if the taxpayer does not choose to take the
benefits of section 901 (relating to the foreign tax credit) with
respect to these taxes for the taxable year. The rule in the preceding
sentence only applies to the amount of taxes the taxpayer deducts in the
current taxable year under section 164(a). See paragraph (d)(3)(iv),
Example 4 of this section. Net book income also is not adjusted to
disregard foreign taxes that cannot be claimed as a credit (other than
by virtue of a foreign tax credit limitation). Thus, a taxpayer does not
add back to net book income any taxes it is not allowed to claim as a
credit against its United States income tax liability because of section
245(a)(8), 901(j), 907(b) or 908 of the Code.
(iii) Certain valuation adjustments. Income tax expense under
paragraph (d)(3)(i) of this section does not include valuation
adjustments such as the valuation adjustments related to purchase
accounting described in Accounting Principles Board (APB) Opinion No.
16, paragraph 89. However, income tax expense does include the tax
associated with any gain or loss on the sale or other disposition of any
asset the basis of which was adjusted under paragraph 89 of Opinion 16.
See paragraph (d)(3)(iv), Example 6 of this section.
(iv) Examples. The provisions of this paragraph may be illustrated
by the following examples:
Example 1. Corporation A has $120 of net book income. In calculating
net book income, A has deducted $20 of state income tax expense and $60
of Federal income tax expense. Assuming there are no other adjustments
to net book income, A's adjusted net book income is $180 ($120 of net
book income + $60 of Federal income tax expense). Pursuant to paragraph
(d)(3)(i) of this section, no adjustment is made for the state income
tax expense.
Example 2. Assume the same facts as in Example 1, except that A also
has a net extraordinary item of $40. Thus, A has net book income of $160
($120 + $40). The $40 net extraordinary item is composed of a $70 gross
extraordinary item less $30 of Federal income tax expense. Assuming
there are no other adjustments to net book income, A's adjusted net book
income is $250 ($160 of net book income + $60 of Federal income tax
expense on book income other than the extraordinary item + $30 of
Federal income tax expense on the extraordinary item).
Example 3. Assume the same facts as in Example 1, except that in
calculating A's $120 of net book income, A has $50 of Federal income tax
expense and $10 of foreign income tax expense. The $10 of foreign income
tax expense results from a foreign branch and is composed of $7 of
current foreign income tax expense and $3 of deferred foreign income tax
expense. A chooses to take the benefits of the foreign tax credit under
section 901 for the current taxable year. Assuming there are no other
adjustments to net book income, A's adjusted net book income is $180
($120 of net book income + $50 of Federal income tax expense + $10 of
foreign income tax expense).
Example 4. Assume the same facts as in Example 3, except that A does
not choose to take the benefits of the foreign tax credit in the current
taxable year and instead deducts the $7 of current foreign income tax
paid. Pursuant to paragraph (d)(3)(ii) of this section, net book income
is not adjusted for the $7 of current foreign income tax expense.
However, net book income is adjusted for the $3 of deferred foreign
income tax expense. Thus, assuming there are no other adjustments to net
book income, D's adjusted net book income is $173 ($120 of net book
income + $50 of Federal income tax expense + $3 of deferred foreign
income tax expenses).
Example 5. In 1987, corporation B only has a financial statement
described in paragraph (c)(1)(iv) of this section. B elects pursuant to
paragraph (c)(2) of this section to treat net book income as equal to
its current earnings and profits. B's current earnings and profits in
1987 is $60, after reduction for $40 of Federal income tax (see
paragraph (b)(5)(i) of this section). Pursuant to paragraph (d)(3) of
[[Page 551]]
this section, B must make a $40 adjustment to net book income. Thus,
assuming no other adjustments to net book income, B's 1987 adjusted net
book income is $100 ($60 of net book income + $40 adjustment for Federal
income taxes).
Example 6. Corporation A acquires assets from corporation B in a
transaction where the tax basis of B's assets will carry over to A. For
financial accounting purposes, A will account for the acquisition in
accordance with Accounting Principles Board (APB) Opinion No. 16. One of
the assets acquired from B has an appraised value of $10,000. However,
because the tax basis of B's assets will carry over to A, A's tax basis
in the asset is only $7,000. Given these facts, APB Opinion No. 16,
paragraph 89 requires that the asset be recorded at $10,000 less the tax
effect of the difference between the appraised value and the tax basis.
Assuming a 30 percent tax rate for A, the asset would be recorded at
$9,100 ($10,000 appraised value--($3,000 difference between the
appraised value and the tax basis x 30 percent)). If A sells the asset
for $10,000, A will recognize a book gain of $900 with respect to the
sale (assuming the asset is not amortized for book purposes). However, A
will also have income tax expense of $900 (($10,000 sales proceeds--
$7,000 tax basis) x 30 percent) with respect to the sale. Thus, A will
have no net book income from the sale. Pursuant to paragraph (d)(3)(iii)
of this section, A's income tax expense includes the $900 of income tax
expense attributable to the effects of the valuation adjustment made in
accordance with APB Opinion No. 16, paragraph 89. As a result, A's
adjusted net book income with respect to its asset sale is $900 ($0 of
net book income + $900 adjustment for income tax expense).
(4) Adjustments to prevent omission or duplication--(i) In general.
In order to prevent omissions or duplications, net book income must be
adjusted for the items described in paragraph (d)(4)(ii) through
(d)(4)(vii) of this section and for such other items as approved or
required by the Commissioner in published guidance. Except as provided
in this paragraph (d), a taxpayer may not adjust net book income to
prevent omission or duplication of items. See paragraph (d)(4)(viii),
Example 1 of this section.
(ii) Special rule for depreciating an asset below its cost. Net book
income must be adjusted to exclude depreciation or amortization expense
to the extent such expense exceeds the asset's financial accounting
historical cost (``excess depreciation''). However, no adjustment is
required if excess depreciation has been the taxpayer's historic
practice (as defined in paragraph (d)(2)(i) of this section) or if the
excess depreciation is properly attributable to negative salvage value
(i.e., where the cost of removal or clean-up exceeds the salvage value).
(iii) Consolidated group using current earnings and profits. In the
case of a consolidated group that uses its aggregate current earnings
and profits as net book income (as determined under the rules of
paragraph (b)(5)(ii) of this section), the current earnings and profits
of the group is the aggregate of the current earnings and profits of
each member of the group. In determining aggregate current earnings and
profits, the adjustments described in Sec. 1.1502-33 apply except for
the adjustment for intercompany distributions with respect to stock and
obligations or members of the group described in Sec. 1.1502-33(c)(1)
and the investment adjustment described in Sec. 1.1502-33(c)(4)(ii)(a).
(iv) Restatement of a prior year's applicable financial statement--
(A) In general. If a taxpayer restates an applicable financial statement
and as a result, the net book income for a taxable year is restated
after the last date that the taxpayer could have filed its Federal
income tax return for such taxable year (if it had obtained an extension
of time under section 6081 of the Code), net book income for the first
successor year (as defined in paragraph (d)(4)(iv)(D) of this section)
must be adjusted by that part of the cumulative effect of the
restatement on net book income attributable to taxable years beginning
after 1986. To the extent that the cumulative effect of the restatement
on net book income includes a tax component, paragraph (d)(3) of this
section may apply. See paragraph (c)(5)(iii) of this section for rules
relating to the restatement of an applicable financial statement prior
to the date the taxpayer's return for the taxable year would be due if
the time for filing the return is extended.
(B) Reconciliation of owner's equity in applicable financial
statements. If--
(1) The beginning balance of owner's equity on the taxpayer's
applicable financial statement for the current taxable year is different
than the ending
[[Page 552]]
balance of owner's equity on the taxpayer's applicable financial
statement for the preceding taxable year, and
(2) The taxpayer is not otherwise subject to the restatement rules
in paragraph (d)(4)(iv)(A) of this section,
the taxpayer will be deemed to have restated its applicable financial
statement for the preceding year and paragraph (d)(4)(iv)(A) of this
section will apply.
(C) Use of different priority applicable financial statements in
consecutive taxable years. If the priority of a taxpayer's applicable
financial statement (as determined under the rules of paragraph (c)(3)
of this section) for the current taxable year is different than the
priority of the taxpayer's applicable financial statement for the
preceding taxable year, the taxpayer shall be required to adjust net
book income to the extent required under the rules of either paragraph
(d)(4)(iv) (A) or (B) of this section.
(D) First successor year defined. The ``first successor year'' is
the first taxable year for which the taxpayer could have timely filed a
return if it had obtained an extension of time under section 6081 of the
Code after the restatement occurs. For example, if a calendar year
corporation restates and uses its 1987 applicable financial statement
between September 16, 1988 and September 15, 1989, any adjustment
resulting from the restatement will be made in the taxpayer's 1988
Federal income tax return. If the restatement occurs prior to September
15, 1988, the rules of paragraph (c)(5)(iii) of this section will apply.
(E) Exceptions. (1) No adjustment is made under paragraph
(d)(4)(iv)(A) of this section for a restatement prepared in accordance
with APB Opinion No. 16, paragraph 53, requiring restatements of
financial statements to reflect the combined operation of corporations
combined in a pooling transaction.
(2) In order to prevent duplication of an adjustment, an adjustment
otherwise required under paragraph (d)(4)(iv)(A) of this section may be
decreased to take into account an adjustment previously made under the
disclosure rules described in paragraph (d)(5) of the section. See
paragraph (d)(4)(viii), Example 3 of this section.
(v) Adjustment for items previously taxed as subpart F income. Net
book income does not include any item excluded from regular taxable
income under section 959 if the item was included in adjusted net book
income in a prior taxable year under the provisions of paragraph
(b)(2)(iv) of this section and due to section 951. A taxpayer may not
adjust net book income under this paragraph (d)(4)(v) to the extent any
portion of the subpart F income was recognized during taxable years
beginning before 1987. See Example 5 of paragraph (d)(4)(viii) of this
section.
(vi) Adjustment for poolings of interests. In a business combination
accounted for as a pooling of interests under paragraph 50 of APB
Opinion 16, net book income does not include the income of a separate
corporation for that part of the taxable year preceding the combination
of that corporation with the taxpayer, to the extent the separate
corporation included this income in its net book income for the taxable
year preceding the business combination. A taxpayer may not adjust net
book income under this paragraph (d)(4)(vi) to the extent the separate
corporation's income is attributable to taxable years beginning before
1987.
(vii) Adjustment for certain deferred foreign taxes. In the case of
deferred foreign taxes that were previously added back to net book
income in accordance with paragraph (d)(3) of this section, a deduction
is allowed in computing adjusted net book income for the taxable year in
which the deferred foreign taxes are deducted under section 164(a). A
taxpayer may not adjust net book income under this paragraph (d)(4)(vii)
to the extent the foreign taxes were deferred during taxable years
beginning before 1987.
(viii) Examples. The provisions of this paragraph may be illustrated
by the following examples.
Example 1. Corporation A uses a calendar year for both financial
accounting and tax purposes. In 1986, A's financial statement included a
$100 financial accounting loss for a plant shutdown. A could not deduct
the loss on its 1986 Federal income tax return. In 1987, A deducts the
loss from the 1986 plant shutdown in its 1987 Federal income tax return.
As a result, A's 1987 adjusted net book
[[Page 553]]
income exceeds its 1987 pre-adjustment alternative minimum taxable
income by $100 (an amount equal to the deduction for the 1986 plant
shutdown). Pursuant to paragraph (d)(4)(i) of this section, A cannot
make an adjustment to net book income.
Example 2. Corporation B uses a calendar year for both financial
accounting and tax purposes. B issues its calendar year 1987 applicable
financial statement on March 1, 1988. The applicable financial statement
reports net book income for the calendar years 1985 through 1987 of $50,
$70, and $80, respectively. On March 1, 1989 when it issues its calendar
year 1988 applicable financial statement, B restates its 1985, 1986, and
1987 applicable financial statements. The restatement results from a
change in accounting method that is made during calendar year 1988.
After restatement, B's net book income for 1985, 1986, and 1987 is $60,
$80, and $90, respectively. Based upon these facts, the cumulative
effect of the restatement on B's net book income for years prior to 1988
is $30. However, since $20 of the cumulative effective is attributable
to years beginning before 1987, B's 1988 net book income is increased by
only $10 ($30-$20). If the cumulative effect includes a tax adjustment,
see paragraph (d)(3) of this section
Example 3. Assume the same facts for Corporation B as in Example 2,
except that B's 1987 net book income of $80 is increased by $10 for
purposes of B's 1987 Federal income tax return. The $10 adjustment is
made pursuant to paragraph (d)(5)(iii) of this section relating to
disclosure in the accountant's opinion. Specifically, the accountant's
opinion on B's 1987 applicable financial statement disclosed that if D
had used a certain accounting method, B's 1987 net book income would
have been $90 rather than $80. The restatement of B's 1987 applicable
financial statement on March 1, 1988 results entirely from B changing to
the accounting method referred to in the 1987 accountant's opinion.
Pursuant to paragraph (d)(4)(iv)(E)(2) of this section, no adjustment is
made to B's 1988 net book income as a result of the restatement of B's
1987 applicable financial statement.
Example 4. Assume the same facts as in Example 1, except that when A
issues its 1987 applicable financial statement it also restates the net
book income reported on its 1986 financial statement to exclude the $100
loss attributable to the plant shutdown. Furthermore, the $100 loss from
the plant shutdown is included in A's 1987 net book income as reported
on its 1987 applicable financial statement. Pursuant to paragraph (d)(4)
of this section, no adjustment is made to A's 1987 net book income as a
result of the restatement of A's 1986 net book income.
Example 5. Corporation D is a domestic corporation. D owns ten
percent of the issued and outstanding stock of corporation F, a foreign
corporation. D and F file separate financial statements and federal
income tax returns, both on a calendar-year basis. F is a controlled
foreign corporation as defined in section 957. In 1987, D includes ten
percent of F's subpart F income in its income under section 951. F makes
no actual distributions to D in that year, and D's applicable financial
statement includes the earnings of F only when actual distributions are
made. See paragraph (d)(6)(i)(A) of this section. In 1987, D must adjust
its net book income under paragraph (b)(2)(iv) of this section to
include ten percent of F's subpart F income. In 1988, F makes an actual
distribution to D which qualifies for the exclusion of section 959. D
includes this actual distribution as income on its applicable financial
statement for 1987. Pursuant to paragraph (d)(4)(v) of this section, D
must adjust its net book income for 1988 to exclude the actual
distribution from F.
(5) Adjustments resulting from disclosure--(i) Adjustment for
footnote disclosure or other supplementary information--(A) In general.
Except as described in this paragraph (d)(5)(i), net book income must be
increased by any amount disclosed in a footnote or other supplementary
information to the applicable financial statement if the disclosure
supports a calculation of a net book income amount that would be greater
than the net book income reported on the taxpayer's applicable financial
statement. However, net book income will not be increased if the
disclosure--
(1) Is specifically authorized by the accounting literature
described in paragraph (d)(2)(ii) of this section, or
(2) Is in accordance with the taxpayer's historic practice as
defined in paragraph (d)(2)(i) of this section.
See paragraph (d)(5)(v), Examples 1 and 2 of this section.
(B) Disclosures not specifically authorized in the accounting
literature. The following footnote or other supplementary disclosure
will not be considered specifically authorized in the accounting
literature--
(1) Disclosure of what the taxpayer's net book income would have if
GAAP had been used in preparing the applicable financial statement
instead of tax accounting rules (or disclosure of the adjustment
necessary to determine net book income on a GAAP basis), and
(2) Disclosure of what the taxpayer's net book income would have
been if the
[[Page 554]]
accrual method had been used in preparing the applicable financial
statement instead of the cash method (or disclosure of the adjustment
necessary to determine net book income on the accrual method).
(ii) Equity adjustments--(A) In general. Except as described in this
paragraph (d)(5)(ii), net book income must be increased by the amount of
any equity adjustment (as defined in paragraph (d)(5)(ii)(B) of this
section) included in the applicable financial statement if the equity
adjustment increases owner's equity as reported on the taxpayer's
applicable financial statement and the increase is attributable to the
taxpayer or a member of the taxpayer's consolidated group. However, net
book income will not be increased if the equity adjustment--
(1) Is specifically authorized by the accounting literature
described in paragraph (d)(2)(ii) of this section, or
(2) Is in accordance with the taxpayer's historic practice as
defined in paragraph (d)(2)(i) of this section.
See paragraph (d)(5)(v), Examples 3 and 4 of this section.
(B) Definition of equity adjustment. An equity adjustment is any
reconciling item between beginning and ending owner's equity as reported
on the taxpayer's applicable financial statement for the current taxable
year. However, if properly accounted for, the following reconciling
items are not considered equity adjustments and do not require
adjustment under paragraph (d)(5)(ii)(A) of this section--
(1) Net book income,
(2) Non-liquidating dividend distributions, and
(3) Contributions to capital.
(iii) Amounts disclosed in an accountant's opinion. Net book income
must be increased by the amount of any item disclosed in the
accountant's opinion (as described in paragraphs (c)(1)(ii)(C) and
(c)(1)(ii)(D) of this section) if the disclosure supports a calculation
of a net book income amount that would be greater than the net book
income reported on the taxpayer's applicable financial statement.
However, net book income will not be increased if the disclosure is in
accordance with the taxpayer's historic practice, as defined in
paragraph (d)(2)(i) of this section.
(iv) Accounting method changes that result in cumulative adjustments
to the current year's applicable financial statement--(A) In general. If
net book income for the current taxable year includes a cumulative
adjustment attributable to an accounting method change and the amount of
the cumulative adjustment may be determined upon review of the
applicable financial statement (including footnotes) or other
supplementary disclosure, net book income for the current taxable year
shall be adjusted to exclude that portion of the cumulative adjustment
attributable to taxable years beginning before 1987. To the extent the
cumulative adjustment is reported net of a tax, paragraph (d)(3) of this
section may apply. See paragraph (d)(5)(V), Example 5 of this section.
If an accounting method change results in a restatement of an applicable
financial statement, paragraphs (c)(5)(iii) or (d)(4)(iv)(A) of this
section may apply.
(B) Exception. In order to prevent duplication of an adjustment, the
adjustment required under paragraph (d)(5)(iv)(A) of this section may be
decreased to take into account any adjustment for the accounting method
change previously made under the rules described in paragraph (d)(5) of
this section (relating to adjustments resulting from disclosure).
(v) Examples. The provisions of this paragraph may be illustrated by
the following examples.
Example 1. Corporation A uses a calendar year for both financial
accounting and tax purposes. For calendar years 1984 through 1986, A
used the cash method of accounting on its financial statement and
disclosed in a footnote the net income or loss that would have resulted
if the accrual method of accounting had been used. A's 1987 net book
income, as reported on its 1987 applicable financial statement, is $100
and is calculated on the cash method of accounting. In addition, a
footnote in A's 1987 applicable financial statement states that A's 1987
net book income would have been $30 greater had the accrual method of
accounting been used. Pursuant to paragraph (d)(5)(i)(B)(2) of this
section, A's 1987 footnote disclosure is not considered specifically
authorized by the accounting literature. However, since A made such
disclosure for calendar years 1985 and 1986, the 1987 disclosure is in
accordance with A's historic practice, as defined in paragraph (d)(2)(i)
of this section. Since A satisfies the
[[Page 555]]
exception described in paragraph (d)(5)(i)(A)(2) of this section, no
adjustment is made to A's 1987 net book income for the footnote
disclosure.
Example 2. Assume the same facts for corporation B as in Example
(1), except that B's 1985 and 1986 financial statements did not disclose
the amount of income or loss that would result if the accrual method of
accounting (rather than the cash method of accounting) were used. Since
B does not satisfy either of the exceptions described in paragraph
(d)(5)(i)(A) of this section, B's 1987 adjusted net book income is $130
($100 of net book income plus $30 adjustment for footnote disclosure).
Example 3. Corporation C uses a calendar year for both financial
accounting and tax purposes. C's 1987 net book income, as reported on
its 1987 applicable financial statement, is $200. However, as
specifically authorized in FASB Statement of Standards No. 52, C's 1987
applicable financial statement also includes a $50 equity adjustment (as
defined in paragraph (d)(5)(ii)(B) of this section) for foreign currency
translation gains. Since the equity adjustment is specifically
authorized in the accounting literature, C satisfies the exception
described in paragraph (d)(5)(ii)(A)(1) of this section, and no
adjustment is made to C's 1987 net book income for the $50 equity
adjustment.
Example 4. Assume the same facts for coporation D as in Example (3),
except that D's equity adjustment is for foreign currency transaction
gains instead of foreign currency translation gains. Pursuant to FASB
Statement of Financial Accounting Standards No. 52, foreign currency
transaction gains (as compared with foreign currency translation gains)
are included in the income statement rather than in equity. In addition,
in 1985 and 1986, D included foreign currency transaction gains in its
income statement. Since D does not satisfy either of the exceptions
described in paragraph (d)(5)(ii)(A) of this section, D's 1987 adjusted
net book income is $250 ($200 of net book income plus $50 equity
adjustment).
Example 5. Corporation E uses a calendar year for both financial
accounting and tax purposes. E's net book income for 1988 is $100. The
$100 of net book income includes $30 of financial accounting loss
attributable to a cumulative adjustment as of January 1, 1988, resulting
from a change in E's accounting method. The $30 cumulative loss is
disclosed in E's 1988 applicable financial statement. If E had made the
accounting method change in calendar year 1987, the cumulative loss as
of January 1, 1987 would have been $20. Based upon the above facts, E
must increase net book income by $20 to disregard that portion of the
cumulative adjustment attributable to years beginning before 1987. Thus,
assuming no other adjustments to net book income, E's adjusted net book
income for 1988 is $120 ($100 plus $20).
(6) Adjustments applicable to related corporations--(i) Consolidated
returns--(A) In general. Pursuant to paragraphs (a)(3) and (b)(3) of
this section, the book income adjustment with respect to a consolidated
group (as described under paragraph (a)(3) of this section) is computed
based on the consolidated adjusted net book income (as defined in
paragraph (b)(3)(i) of this section). In the case of any corporation
that is not included in the consolidated group, consolidated adjusted
net book income of the consolidated group shall include only the sum of
the dividends received from such other corporation and other amounts
includible in gross income under this chapter with respect to the
earnings of such other corporation. See paragraph (d)(6)(v), Example 4
of this section.
(B) Corporations included in the consolidated Federal income tax
return but excluded from the applicable financial statement--(1) In
general. Consolidated net book income reported on the applicable
financial statement (as determined under paragraph (c)(5) of this
section) shall be adjusted to include net book income attributable to a
corporation that is included in the consolidated group but is not
included in the applicable financial statement. Net book income for the
corporation not included in the applicable financial statement of the
consolidated group is the net book income reported on such corporation's
applicable financial statement (determined under the rules of paragraph
(c) of this section and adjusted under the rules of this paragraph (d)).
The adjusted net book income of such corporation must be consolidated
with the adjusted net book income of other members of the consolidated
group and appropriate adjustments, including consolidating elimination
entries, must be made.
(2) Adjustments to net book income for minority interests.
Consolidated net book income must be adjusted to include income or loss
allocated to minority interests in members of the consolidated group.
Failure to include income or loss allocated to minority interests shall
be treated as an omission
[[Page 556]]
of net book income. See paragraph (d)(6)(v), Example 1 of this section.
(3) Corporations included in the consolidated group that are
accounted for under the equity method of accounting. No adjustment is
required to consolidated net book income for income or loss of a member
of the consolidated group that is reported in the applicable financial
statement under the equity method of accounting (as described in APB
Opinion No. 18, paragraph (6)). However, consolidated adjusted net book
income (as defined in paragraph (b)(3)(i) of this section) must include
100 percent of the net book income attributable to such member. See
paragraph (d)(6)(i)(B)(2) of this section. For example, if consolidated
net book income (as defined in paragraph (b)(3)(ii) of this section)
only includes 85 percent of the equity income attributable to a member
of the consolidated group, an adjustment will be required to include the
15 percent of equity income excluded from consolidated net book income.
In addition, to the extent the equity income reflects an adjustment for
tax expense or benefit, paragraph (d)(3) may apply. See paragraph
(d)(6)(v), Examples 2 and 3 of this section.
(C) Corporations included in the applicable financial statement but
excluded from the consolidated tax return. Net book income or
consolidated net book income must be adjusted to eliminate the income or
loss of a corporation that is included in the applicable financial
statement, but is not included in the consolidated group. When net book
income attributable to a corporation that is not a member of the
consolidated group is removed from the computation of net book income in
the applicable financial statement, consolidating elimination entries
attributable to the excluded member must also be removed.
(ii) Adjustment under the principles of section 482. In order to
fairly allocate items relating to intercompany transactions between
corporations that are owned or controlled directly or indirectly by the
same interests but are not members of a consolidated group, adjustments
must be made to the net book income reported on the applicable financial
statement of each corporation under the principles of section 482 and
the regulations thereunder (relating to allocation of income and
deductions among related taxpayers). For example, assume corporation A
owns 100 percent of F, a foreign subsidiary, but A and F are not members
of a consolidated group. However, A and F prepare a consolidated
financial statement. In adjusting A's applicable financial statement to
eliminate the net book income attributable to F, A must apply the
principles of section 482. If a corporation fails to make appropriate
adjustments to its applicable financial statement under the rules of
this paragraph (d)(6)(ii), the District Director may make such
adjustments under the principles of section 482 and the regulations
thereunder.
(iii) Adjustment for dividends received from section 936
corporations--(A) In general. Any dividend received from a corporation
eligible for the credit provided by section 936 (relating to the
possession tax credit) shall be included in adjusted net book income.
For example, assume corporation A owns 100 percent of B, a section 936
corporation, and B pays a $100 dividend to A. Furthermore, assume that
of the $100 dividend, $15 of withholding tax is paid to a possession of
the United States, so that A only receives $85 from the dividend. Given
these facts, A's adjusted net book income includes $100 with respect to
the dividend from B.
(B) Treatment as foreign taxes. Fifty percent of any withholding tax
paid to a possession of the United States with respect to dividends
referred to in paragraph (d)(6)(iii)(A) of this section may be treated
for purposes of the alternative minimum foreign tax credit as a tax paid
to a foreign country by the corporation receiving the dividend. However,
if the aggregate of these dividends exceeds the excess referred to in
paragraph (a)(1) of this section, the amount treated as a tax paid to
the foreign country shall not exceed 50 percent of the aggregate amount
of the tax withheld multiplied by a fraction.
(1) The numerator of which is the excess referred to in paragraph
(a)(1) of this section; and
(2) The denominator numerator of which is the aggregate amount of
these dividends.
[[Page 557]]
(C) Treatment of taxes imposed on section 936 corporations. Taxes
paid by any corporation eligible for the credit provided under section
936 shall be treated as a withholding tax paid with respect to any
dividend paid by such corporation, and thus subject to the rules of this
paragraph (d)(6)(iii), but only to the extent such taxes would be
treated as paid by the corporation receiving the dividend under rules
similar to the rules of section 902.
(iv) Adjustment to net book income on sale of certain investments.
If a taxpayer accounts for an investment under any method equivalent to
the equity method of accounting (as described in APB Opinion No. 18,
paragraph 6) and pursuant to paragraphs (b)(2)(iv) or (d)(6)(i) of this
section the taxpayer excludes net book income attributable to that
investment, the taxpayer must adjust its net book income in the year the
investment is sold (or partially sold). The adjustment equals the amount
of net book income previously excluded under paragraphs (b)(2)(iv) or
(d)(6)(i)(A) of this section). See paragraph (d)(6)(v), Example 4 of
this section.
(v) Examples. The provisions of this paragraph may be illustrated by
the following examples.
Example 1. Corporation A and its 100 percent owned subsidiary B and
its 90 percent owned subsidiary C are a consolidated group. A also owns
100 percent of D, a foreign corporation. ABC's applicable financial
statement is a certified audited financial statement that includes A, B,
C and D. The net book income reported on the statement excludes $10 of
C's net book income that is attributable to the 10 percent minority
interest in C held outside of the consolidated group. Pursuant to
paragraph (d)(6)(i)(B)(2) of this section, net book income of the
consolidated group must be adjusted to include the $10 of net book
income attributable to the minority interest in C. In addition, pursuant
to paragraph (d)(6)(i)(C) of this section, net book income shown on the
applicable financial statement must be adjusted to eliminate the net
book income attributable to D.
Example 2. Corporation E owns 100 percent of F, a finance
subsidiary, and EF are a consolidated group. Since F is a finance
subsidiary E's applicable financial statement accounts for F under the
equity method of accounting. F also prepares a separate financial
statement that is of equal or higher priority than E's applicable
financial statement. In 1987, E's applicable financial statement
includes $60 of equity income from F. The $60 of equity income reflects
a reduction for $40 of Federal income tax expense. Thus, E's equity
income from F prior to the reduction for Federal income tax expense, is
$100 ($60 + $40). Since E's applicable financial statement includes E's
equity income in F, F's separate financial statement is not relevant for
determining the adjusted net book income of the EF consolidated group.
However, pursuant to paragraphs (d)(3) and (d)(6)(i)(B)(3) of this
section, E is required to adjust its equity income in F by the $40 of
Federal income tax expense attributable to F. Thus, assuming there are
no other adjustments, E's adjusted net book income with respect to F is
$100.
Example 3. The facts are the same as Example (2), except that E
reports its equity income in F without reduction for F's Federal income
tax expense. The $40 of Federal income tax expense attributable to F is
combined with E's Federal income tax expense. Assuming no other
adjustments, E's adjusted net book income with respect to F is $100.
Thus, E's adjusted net book income with respect to F will be the same
regardless of whether E's equity income in F is reported before or after
taxes.
Example 4. A, a domestic corporation, uses a calendar year for both
financial accounting and tax purposes. On January 1, 1987, A purchases
100 percent of F, a foreign corporation, for $100. F does not file a
Federal income tax return and A does not recognize any taxable income
with respect to F under section 951 (relating to controlled foreign
corporations). In its applicable financial statement, A accounts for its
investment in F under the equity method of accounting. Thus, A's initial
investment in F is $100. During calendar year 1987, F has $50 of net
book income but makes no dividend payments to A. Under the equity method
of accounting, A's net book income includes the $50 of net book income
attributable to A's net book investment in F. Thus, A's investment in F
is increased to $150. Pursuant to paragraph (d)(6)(i)(C) of this
section, A's net book income is adjusted to eliminate the $50 of net
book income attributable to F. On January 1, 1988, A sells F for $150.
Since A's investment in F under the equity method of accounting is $150,
A's net book income for 1988 will not include any gain on the sale of F.
However, pursuant to paragraph (d)(6)(iv), A's 1988 net book income must
be increased by $50, the amount of net book income previously eliminated
with respect to A's investment in F. The result would be the same if
instead of accounting for its investment in F under the equity method of
accounting, A and F prepare a consolidated financial statement.
(7) Adjustments for foreign taxpayers with a United States trade or
business--(i) In general. Pursuant to paragraph (b)(6)
[[Page 558]]
of this section, the book income adjustment with respect to a foreign
taxpayer with a United States trade or business is computed based on the
effectively connected net book income of the foreign taxpayer (as
defined in paragraph (b)(6)(ii) of this section). The net book income
amount reported on the applicable financial statement of the foreign
taxpayer (as determined under paragraph (c)(5)(ii) of this section) must
be adjusted to--
(A) Include effectively connected net book income attributable to a
trade or business conducted in the United States by the foreign taxpayer
that is not reported on the applicable financial statement. Such amounts
shall be determined from a financial statement (determined under
paragraph (c) of this section and adjusted under the rules of this
paragraph (d)) that would have qualified as an applicable financial
statement of such excluded trade or business or upon effectively
connected earnings and profits (if the rules of section (b)(6)(iii) of
this section apply), and
(B) Exclude any amount reported on such applicable financial
statement that does not qualify as effectively connected net book
income.
See the example in paragraph (d)(7)(ii) of this section.
(ii) Example. The provisions of this paragraph may be illustrated by
the following example.
Example. Foreign corporation A, a calendar year taxpayer for
financial accounting and tax purposes, is incorporated in X. A actively
conducts two real estate businesses, B and C, in the United States. B
prepares a certified audited financial statement that it provides to its
United States creditor. C does not prepare a financial statement. The
certified audited financial statement prepared by B is treated as A's
applicable financial statement under paragraph (c)(5)(ii) of this
section. B's certified audited financial statement, in addition to
amounts related to the conduct of its real estate business, also reports
income received from its investment in United States securities,
unrelated to its conduct of business in the United States that does not
qualify as effectively connected net book income. In order to determine
A's effectively connected net book income from the net book income
reported on the applicable financial statement, such statement must be
adjusted to exclude amounts attributable to the securities. In addition,
book income or loss attributable to C, to the extent effectively
connected to its business in the United States, must be included in the
effectively connected net book income reported on B's financial
statement. Since C does not have a financial statement, C's effectively
connected net book income is determined by computing its effectively
connected earnings and profits under paragraph (b)(6)(iii) of this
section.
(8) Adjustment for corporations subject to subchapter F. A
corporation subject to tax under subchapter F of chapter 1 of the Code
shall adjust its book income to exclude all items of income, loss or
expense other than those relating to the calculation of unrelated
business taxable income for purposes of section 512(a).
(e) Special rules--(1) Cooperatives. For purposes of computing the
book income adjustment, net book income of a cooperative to which
section 1381 applies is reduced by patronage dividends and per-unit
retain allocations under section 1382(b) that are paid by the
cooperative to the extent such amounts are deductible for regular income
tax and general alternative minimum tax purposes under section 1382, and
not otherwise taken into account in determining adjusted net book
income.
(2) Alaska Native Corporations. In computing the net book income of
an Alaska Native Corporation, cost recovery and depletion are computed
using the asset basis determined under section 21(c) of the Alaska
Native Claims Settlement Act (43 U.S.C. 1620(c)). In addition, net book
income is reduced by expenses payable under either section 7(i) or
section 7(j) of the Alaska Native Claims Settlement Act (43 U.S.C. 1606
(i) and (j)) only when deductions for such expenses are allowed for tax
purposes.
(3) Insurance companies. In the case of an insurance company whose
applicable financial statement is a statement describing in paragraph
(c)(1)(iii) of this section (relating to statements provided to a
government regulator), net book income for purposes of the book income
adjustment is the net income or loss from operations, after reduction
for dividends paid to policyholders, but without reduction for Federal
income taxes.
[[Page 559]]
(4) Estimating the book income adjustment for purposes of the
estimated tax liability. See Sec. 1.6655-7, as contained in 26 CFR part
1 revised as of April 1, 2007, for special rules for estimating the
corporate alternative minimum tax book income adjustment under the
annualization exception.
(5) Effective/applicability date. Paragraph (e)(4) of this section
is applicable for taxable years beginning after September 6, 2007.
[T.D. 8307, 55 FR 33676, Aug. 17, 1990, as amended by T.D. 9347, 72 FR
44347, Aug. 7, 2007]
Regulations Applicable to Taxable Years Beginning in 1969 and Ending in
1970
Sec. 1.56A-1 Imposition of tax.
(a) In general. Section 56(a) imposes an income tax on the items of
tax preference (as defined in Sec. 1.57-1) of all persons other than
persons specifically exempt from the taxes imposed by chapter 1. The
items of tax preference represent income of a person which either is not
subject to current taxation by reason of temporary exclusion (such as
stock options) or by reason of an acceleration of deductions (such as
accelerated depreciation) or is sheltered from full taxation by reason
of certain deductions (such as percentage depletion) or by reason of a
special rate of tax (such as the rate of tax on corporate capital
gains). The tax imposed by section 56 is in addition to the other taxes
imposed by chapter 1.
(b) Computation of tax. The amount of such tax is 10 percent of the
excess (referred to herein as ``the minimum tax base'') of--
(1) The sum of the taxpayer's items of tax preference for such year
in excess of the taxpayer's minimum tax exemption (determined under
Sec. 1.58-1) for such year, over
(2) The sum of:
(i) The taxes imposed for such year under chapter 1 other than the
taxes imposed by section 56 (relating to minimum tax for tax
preferences), by section 531 (relating to accumulated earnings tax), or
by section 541 (relating to personal holding company tax), reduced by
the sum of the credits allowable under--
(a) Section 33 (relating to taxes of foreign countries and
possessions of the United States),
(b) Section 37 (relating to retirement income),
(c) Section 38 (relating to investment credit),
(d) Section 40 (relating to expenses of work incentive programs),
and
(e) Section 41 (relating to contributions to candidates for public
office, and
(ii) The tax carryovers to such taxable year (as described in Sec.
1.56A-5).
(c) Special rule. For purposes of paragraph (b) of this section
where for any taxable year in which a tax is imposed under section 667
(relating to treatment of amounts deemed distributed by a trust in
preceding years), that portion of the section 667 tax representing an
increase in an earlier year's chapter 1 taxes (as recomputed), which
taxes are allowed as a reduction in any such earlier year's minimum tax
base, is not allowable as a reduction in the minimum tax base for the
current taxable year. The remaining portion of the section 667 tax,
representing the taxes imposed by section 56, section 531, and section
541, is not allowable as a reduction in the minimum tax base for any
taxable year. Similarly, taxes imposed under section 614(c)(4) (relating
to increase in tax with respect to aggregation of certain mineral
interests) or under section 1351(d) (relating to recoveries of foreign
expropriation losses) for any taxable year are not allowed as a
reduction in the minimum tax base for such taxable year to the extent
they represent chapter 1 taxes which are allowed as a reduction in a
minimum tax base for an earlier taxable year for purposes of the
computations under section 614(c)(4) or section 1351(d) or to the extent
they represent an increase in the tax imposed by section 56, section
531, or section 541 in an earlier taxable year.
[T.D. 7564, 43 FR 40466, Sept. 12, 1978. Redesignated and amended by
T.D. 8138, 52 FR 15309, Apr. 28, 1987]
[[Page 560]]
Sec. 1.56A-2 Deferral of tax liability in case of certain net
operating losses.
(a) In general. Section 56(b) provides for the deferral of liability
for the minimum tax where, for the taxable year, the taxpayer has--
(1) A net operating loss for such taxable year any portion of which
(under sec. 172) remains as a net operating loss carryover to a
succeeding taxable year, and
(2) Items of tax preference in excess of the minimum tax exemptions
(hereinafter referred to as ``excess tax preferences'').
In such a case, an amount of tax equal to the lesser of the tax imposed
under section 56(a) (after allowance of the retirement income credit to
the extent that such credit cannot be used against the other taxes
imposed by chapter 1) or 10 percent of the amount of the net operating
loss carryover described in subparagraph (1) of this paragraph is
deferred. Such amount is not treated as tax imposed in such taxable
year, but is treated as tax imposed in the succeeding taxable year or
years in which the net operating loss is used as provided in paragraphs
(b) and (c) of this section. Deferral will result in the above case
regardless of the character of the tax preference items. Thus, for
example, if the taxpayer has $1,030,000 of items of tax preference,
including the stock option item of tax preference, and a $750,000 net
operating loss available for carryover to subsequent taxable years, the
amount of tax imposed for the taxable year under section 56(a) is
$100,000 and $75,000 is deferred by application of section 56(b).
Therefore, only $25,000 is treated as tax imposed for the taxable year.
The provisions of this section are applicable in the case of a net
operating loss or comparable item such as an operations loss under
section 812 and an unused loss as defined in section 825(b).
(b) Year of liability. In any taxable year in which any portion of a
net operating loss carryover attributable to the amount of excess tax
preferences reduces taxable imcome (in the form of a net operating loss
deduction), section 56(b)(2) treats as tax liability imposed in such
taxable year an amount equal to 10 percent of such reduction. For this
purpose, the portion of such net operating loss which is considered
attributable to the amount of excess tax preferences is an amount equal
to the lesser of such excess or the amount of the net operating loss
carryover described in paragraph (a)(1) of this section. In no case,
however, shall the total amount of tax imposed by reason of section
56(b) in subsequent years exceed the amount of the tax that was deferred
in the loss year.
(c) Priority of reduction. (1) If a portion of a net operating loss
is attributable to an amount of excess tax preferences, such portion is
considered to reduce taxable income in succeeding taxable years only
after the other portion (if any) of such net operating loss is used to
reduce taxable income. Accordingly, if the amount of a net operating
loss which may be carried to succeeding taxable years is reduced because
of a modification required to be made pursuant to section 172(b)(2),
such reduction is to be considered to be first from that portion of the
net operating loss that is attributable to excess tax preferences. If a
portion of a net operating loss carryover which is attributable to an
amount of excess tax preferences is not used to reduce taxable income in
any succeeding taxable year, no minimum tax will be imposed with respect
to such portion.
(2) In the case of taxpayers with deductions attributable to foreign
sources which are suspense preferences (as defined in paragraphs (c)
(1)(ii) and (2)(ii) of Sec. 1.58-7), the amount of such deductions is
not included in the portion of the net operating loss not attributable
to excess tax preferences. The portion of the net operating loss
attributable to excess tax preferences is increased by the amount of
suspense preferences which are, in accordance with the provisions of
Sec. 1.58-7(c), converted to actual items of tax preference (and not
used against the minimum tax exemption of the loss year) in subsequent
taxable years. The other portion of the net operating loss is increased
by the amount of suspense preferences which reduce taxable income in
subsequent taxable years but are not converted to actual items of tax
preference (or are so converted but
[[Page 561]]
used against the minimum tax exemption of the loss year). See Sec.
1.58-7(c)(1)(iii) example 4.
(d) Multiple net operating loss carryovers. In determining whether a
net operating loss is used to reduce taxable income in a taxable year to
which two or more net operating losses are carried, the ordering rules
of section 172(b) and the regulations thereunder are to be applied.
Thus, for example, the portion of a net operating loss carried over from
an earlier taxable year which is attributable to an amount of excess tax
preference is used to reduce taxable income in the carryover year before
any portion of any other net operating loss carried over or back from a
taxable year subsequent to the earlier taxable year.
(e) Examples. The application of this section may be illustrated by
the following examples:
Example 1. In 1970, A, a calendar year taxpayer, who is a single
individual, has $180,000 of items of tax preference, a $150,000 net
operating loss of which $100,000 may be carried forward, and no tax
liability under chapter 1 without regard to the minimum tax. His minimum
tax computed under section 56(a) is $15,000 (10 percent times ($180,000
minus $30,000)). Under section 56(b)(1) an amount equal to the lesser of
the amount determined under section 56(a) ($15,000) or 10 percent of the
net operating loss which may be carried forward ($10,000) is treated as
a deferred liability. Thus, his minimum tax liability for 1970 is $5,000
($15,000 minimum tax under section 56(a) minus $10,000 deferred tax
liability under section 56(b)). If, in 1971, he has $80,000 of taxable
income before the deduction for the 1970 net operating loss, his minimum
tax liability is $8,000 (10 percent of the amount by which the net
operating loss carryforward from 1970 reduces taxable income) plus any
minimum tax liability resulting from items of tax preference arising in
1971. If, by reason of the modifications provided by section 172(b)(2),
no portion of the 1970 net operating loss remains as a carryover from
1971, no further minimum tax liability will result from the items of tax
preference arising in 1970.
Example 2. In 1970, A, a calendar year taxpayer who is a single
individual, has $90,000 of items of tax preference, a $100,000 net
operating loss available for carryover to future taxable years, no net
operating loss carryovers from prior taxable years, and no tax liability
under chapter 1 without regard to the minimum tax. His minimum tax
computed under section 56(a) is $6,000 (10 percent times ($90,000 minus
$30,000)). Under section 56(b)(1) an amount equal to the lesser of the
amount determined under section 56(a) ($6,000) or 10 percent of the net
operating loss subject to carryforward ($10,000) is treated as a
deferred liability. Thus, A owes no minimum tax in 1970 and the entire
$6,000 of minimum tax liability is deferred. Under section 56(b)(2), the
portion of the net operating loss attributable to the excess tax
preferences described in section 56(b)(1)(B) is $60,000.
(a) In 1971, A has $25,000 of taxable income before the deduction
for the 1970 net operating loss. Thus, in 1971, A has no minimum tax
liability attributable to the items of tax preference arising in 1970
since, by application of section 56(b)(3), the portion of the 1970 net
operating loss carryforward not attributable to the excess described in
section 56(b)(1)(B), or $40,000, is considered applied against taxable
income before the remaining portion.
(b) In 1972, A has $50,000 of taxable income before the deduction
for the remaining 1970 net operating loss. Thus, the first $15,000 of
reduction in taxable income is considered as from the portion of the
1970 net operating loss carryforward not attributable to the excess tax
preferences described in section 56(b)(1)(B) and the remaining $35,000
of reduction in taxable income is considered attributable to such
excess. A's 1972 minimum tax attributable to items of tax preference
arising in 1970 is, therefore, $3,500 (10 percent times $35,000).
(c) In 1973, A has $80,000 of taxable income before the deduction
for the 1970 net operating loss. The remaining $25,000 of the 1970 net
operating loss carryforward is used to reduce taxable income in 1973.
Thus, A's 1973 minimum tax liability attributable to items of tax
preference arising in 1970 is $2,500 (10 percent times $25,000).
Example 3. In 1971, M Corporation, a Western Hemisphere trade
corporation (as defined in sec. 921), reporting on a calendar year basis
has $20,000 of taxable income after all deductions including the Western
Hemisphere trade deduction allowable under section 922 in the amount of
$30,000. In 1970, M Corporation had a net operating loss of $100,000 all
of which was available for carryover to 1971 and $60,000 of which was
attributable to excess tax preferences. In computing the amount of the
1970 net operating loss carried over to 1972 pursuant to section 172(b),
the 1971 Western Hemisphere trade corporation deduction is not taken
into account. Thus, M Corporation's recomputed income under section
172(b) is $50,000 ($20,000 taxable income plus $30,000 Western
Hemisphere trade corporation deduction). Pursuant to paragraph (c)(1) of
this section, $20,000 of the $40,000 portion of the 1970 net operating
loss not attributable to excess tax preferences is considered to reduce
taxable income in 1971 and $30,000 of the $60,000 portion of the 1970
net operating loss attributable to excess tax preferences is considered
reduced
[[Page 562]]
pursuant to section 172(b)(2). Thus, M Corporation has no 1971 minimum
tax attributable to items of tax preference arising in 1970. Of the
$50,000 remaining of the 1970 net operating loss, $30,000 is
attributable to excess tax preference.
Example 4. In 1972, A, a calendar year taxpayer who is a single
individual, has $25,000 of taxable income resulting from $50,000 of net
long-term capital gains. In 1971, A had a net operating loss of $100,000
all of which is available to carryover to 1972 and $60,000 of which is
attributable to excess tax preferences. By application of section 172(b)
only $50,000 of the 1971 net operating loss is carried over to 1973.
Pursuant to paragraph (c) of this section, $25,000 of the $40,000
portion of the 1971 net operating loss not attributable to excess tax
preferences is considered to reduce taxable income in 1972. Of the
$50,000 remaining of the 1971 net operating loss, $15,000 is not
attributable to excess tax preferences and $35,000 is attributable to
excess tax preferences. Thus, the $25,000 section 1202 deduction, in
effect, reduces the portion of the 1971 net operating loss attributable
to excess tax preferences. Because a net operating loss carryover is
reduced to the extent of any section 1202 deduction, section 1202
deductions do not normally produce a tax benefit in such circumstances
and, pursuant to Sec. 1.57-4, would not be treated as items of tax
preference. However, in this case, to the extent the portion of the 1971
net operating loss carryover attributable to excess tax preferences is
reduced by reason of the section 1202 deduction, such deduction does
result in a tax benefit to the taxpayer and is, therefore, treated as an
item of tax preference in 1971. See Sec. 1.57-4(b)(2).
[T.D. 7564, 43 FR 40467, Sept. 12, 1978. Redesignated by T.D. 8138, 52
FR 15309, Apr. 28, 1987]
Sec. 1.56A-3 Effective date.
(a) In general. The minimum tax is effective for taxable years
ending after December 31, 1969.
(b) Taxable year beginning in 1969 and ending in 1970. In the case
of a taxable year beginning in 1969 and ending in 1970, the amount of
the minimum tax shall be an amount equal to the amount determined under
section 56 multiplied by the following fraction:
Number of days in the taxable year ending after December 31, 1969/Number
of days in the entire taxable year.
Where, by reason of section 56(b) and Sec. 1.56A-2, tax initially
imposed in a 1969-70 fiscal year is deferred until a subsequent taxable
year or years, the amount of such tax liability in any subsequent
taxable year is determined by application of the above fraction. Section
21, relating to computation of tax in years where there is a change in
rates, is not applicable to the initial imposition of the minimum tax
for tax preferences. The applications of this paragraph may be
illustrated by the following example:
Example. The taxpayer uses a June 30 fiscal year. For fiscal 1969-
1970 the taxpayer has $180,000 of items of tax preference and a $50,000
net operating loss. In fiscal year 1970-1971, the taxpayer uses the full
net operating loss carryover from 1969-1970 to reduce his taxable income
by $50,000. Thus, without regard to the proration rules applicable under
this section, the taxpayer's minimum tax liability for items of tax
preference arising in 1969-1970 is $15,000, i.e., 10 percentx($180,000-
$30,000), of which $5,000, i.e., 10 percentx$50,000, is deferred until
1970-1971 under the principles of section 56(b) and section 1.56A-2. By
application of the above formula the taxpayer's actual minimum tax
liability is $4,958.90 in 1969-1970 and $2,479.45 in 1970-1971
determined as follows:
1969-1970: 181/365x$10,000
1970-1971: 181/365x$5,000
[T.D. 7564, 43 FR 40468, Sept. 12, 1978. Redesignated and amended by
T.D. 8138, 52 FR 15309, Apr. 28, 1987]
Sec. 1.56A-4 Certain taxpayers.
For application of the minimum tax in the case of estates and
trusts, electing small business corporations, common trust funds,
regulated investment companies, real estate investment trusts, and
partnerships, see Sec. Sec. 1.58-2 through 1.58-6.
[T.D. 7564, 43 FR 40468, Sept. 12, 1978. Redesignated by T.D. 8138, 52
FR 15309, Apr. 28, 1987]
Sec. 1.56A-5 Tax carryovers.
(a) In general. Section 56(c) provides a 7-year carryover of the
excess of the taxes described in paragraph (1) of such section imposed
during the taxable year over the items of tax preference described in
paragraph (2) of such section for such taxable year for the purpose of
reducing the amount subject to tax under section 56(a) in subsequent
taxable years.
(b) Computation of amount of carryover. The amount of tax carryover
described in section 56(c) is the excess (if any) of--
(1) The taxes imposed for the taxable year under chapter 1 other
than taxes
[[Page 563]]
imposed by section 56 (relating to minimum tax for tax preferences), by
section 531 (relating to accumulated earnings tax), or by section 541
(relating to personal holding company tax), reduced by the sum of the
credits allowable under--
(i) Section 33 (relating to taxes of foreign countries and
possessions of the United States),
(ii) Section 37 (relating to retirement income,
(iii) Section 38 (relating to investment credit),
(iv) Section 40 (relating to expenses of work incentive programs),
and
(v) Section 41 (relating to contributions to candidates for public
office), over
(2) The sum of the taxpayer's items of tax preference for such year
in excess of the taxpayer's minimum tax exemption (determined under
Sec. 1.58-1) for such year.
For purposes of section 56(c) and this section, taxes imposed in a
taxable year ending on or before December 31, 1969, are not included in
the taxes described in subparagraph (1) of this paragraph. In addition,
the rules of paragraph (c) of Sec. 1.56A-1 are applicable in
determining the taxable year for which taxes are imposed under chapter 1
for purposes of paragraph (a)(1) of this section.
(c) Operation of carryover. Tax carryovers attributable to the
taxable year shall be carried over to each of the 7 succeeding taxable
years as follows:
(1) To the first such succeeding taxable year to reduce in the
manner described in paragraph (d) of this section the amount subject to
tax under section 56(a) for such first succeeding taxable year and
(2) To the extent such amount is not used as a reduction in the
amount subject to tax under section 56(a) for such taxable year, such
amount (if any) is carried over to each of the succeeding 6 taxable
years but only to the extent such amount is not used to reduce the
amount subject to tax under section 56(a) in taxable years intervening
between the taxable year to which such amount is attributable and the
taxable year to which such amount may otherwise be carried over.
(d) Priority of reduction. Where tax carryovers attributable to two
or more taxable years are carried over to a subsequent taxable year such
amounts attributable to the earliest taxable year shall be used to
reduce the amount subject to tax under section 56(a) for such subsequent
taxable year before any such amounts attributable to a later taxable
year.
(e) Special rules--(1) Periods of less than 12 months. A fractional
part of a year which is a taxable year under section 441(b) or
7701(a)(23) is a taxable year for purposes of section 56(c) and this
section.
(2) Electing small business corporations. A taxable year for which a
corporation is an electing small business corporation (as defined in
section 1371(b)) shall be counted as a taxable year for purposes of
determining the taxable years to which amounts which are available as a
carryover under paragraph (a) of this section may be carried whether or
not such carryovers arose in a year in which an election was in effect.
(3) Husband and wife--(i) From joint to separate return. If a joint
return is filed by a husband and wife in a taxable year or years to
which a tax carryover is attributable but separate returns are filed in
any subsequent taxable year to which such carryover may be carried over
to reduce the amount subject to tax under section 56(a), such carryover
described in paragraph (b) of this section shall be allocated between
husband and wife for purposes of reducing the amount subject to tax
under section 56(a) for such subsequent taxable year in accordance with
the principles of Sec. 1.172-7(d).
(ii) From separate to joint return. If separate returns are filed by
a husband and wife in a taxable year or years in which a tax carryover
is attributable but a joint return is filed in any subsequent taxable
year to which such carryover may be carried over to reduce the amount
subject to tax under section 56(a), such carryover shall be aggregated
for purposes of reducing the amount subject to tax under section 56(a),
for such subsequent taxable year.
(4) Estates and trusts. In the case of the termination of an estate
or trust, tax carryovers attributable to the estate or trust shall not
be allowed to
[[Page 564]]
the beneficiaries succeeding to the property of the estate or trust.
(5) Corporate acquisitions. In the case of a transaction to which
section 381(a) applies, the acquiring corporation shall succeed to and
take into account, as of the close of the date transfer the tax
carryovers attributable to the distributor or distribution or transferor
corporation. The portion of such carryovers which may be taken into
account under paragraph (b)(2)(ii) of Sec. 1.56A-1 for any taxable year
shall not exceed the excess of (i) the sum of the items of tax
preference for such year resulting from the continuation of the business
in which the distributor or transferor corporation was engaged at the
time of such transaction and the items of tax preference not related to
the continuation of such business which are directly attributable to the
assets acquired from the distributor or transferor corporation over (ii)
an amount which bears the same ratio to the acquiring corporation's
minimum tax exemption for such year as the items of tax preference
described in subdivision (i) of this subparagraph bears to all of the
acquiring corporation's items of tax preference for such year. This item
shall be taken into account by the acquiring corporation subject to the
rules in section 381(b) and the regulations thereunder.
(f) Suspense preferences. Where an item of tax preference which is a
suspense preference (as defined in Sec. 1.58-7) arises in a taxable
year in which tax carryovers may be used to reduce the minimum tax base
(or in which such carryovers arise the minimum tax liability for that
year and the tax carryovers to subsequent taxable years shall be
recomputed upon the conversion of the suspense preference in a
subsequent year. In lieu of the above, in all cases, since there is no
difference in tax consequence, the recomputation may be accomplished by
recomputing the minimum tax liability of the taxable year in which the
suspense preference arose without reduction of the minimum tax base for
the tax carryovers which have been used as a reduction in the minimum
tax base in intervening taxable years. If such method is used, the
minimum tax liability of the intervening year is not recomputed and any
tax carryovers carried from the taxable year in which the suspense
preference arose which remain as a carryover in the year of conversion
are reduced, in the priority provided in paragraph (d) of this section,
to the extent used to reduce an increase in the minimum tax base for the
earlier year resulting from the conversion of the suspense preference.
(g) Taxes imposed in a taxable year beginning in 1969 and ending in
1970. In the case of a taxable year beginning in 1969 and ending in 1970
the amount of the carryover determined under paragraph (b) of this
section is reduced to an amount equal to the amount of such carryover
(without regard to this paragraph) multiplied by the following fraction:
Number of days in taxable year ending after December 31, 1969 / Number
of days in the entire taxable year.
(h) Examples. The provisions of this section may be illustrated by
the following examples:
Example 1. A is a single individual who uses a June 30 fiscal year.
For fiscal 1968-1969, A had income tax liability under chapter 1 in the
amount of $100,000. For fiscal 1969-1970, A had items of tax preference
in the amount of $212,500 and income tax liability under chapter 1
(other than taxes imposed under sections 56, 531, and 541) of $365,000.
(a) The chapter 1 tax attributable to fiscal 1968-1969 is not
available as a carryover under section 56(c) to reduce the amount
subject to tax under section 56(a) since this tax arose in a taxable
year ending on or before December 31, 1969.
(b) A portion of the excess of chapter 1 tax over the amount subject
to tax under section 56(a) attributable to fiscal year 1969-1970 is
available as a carryover as provided in section 56(c) to reduce the
amount subject to tax under section 56(a). The amount of this carryover
is $91,000 computed as follows:
1. Carryover under paragraph (b) of this section:
Chapter 1 taxes........................................... $365,000
Items of tax preference in excess of exemption............ 182,500
-----------
Total................................................... 182,500
2. Reduction pursuant to paragraph (g) of this section:
182/365x$182,500=$91,000
Example 2. A is a calendar year taxpayer who is a single individual.
In 1972, A had chapter 1 income tax liability (other than taxes imposed
under sections 56, 531, and 541) of $200,000 and $50,000 of items of tax
preference. In 1973, A had chapter 1 income tax
[[Page 565]]
liability (other than taxes imposed under sections 56, 531, and 541) of
$120,000 and $40,000 of items of tax preference. In 1974, A had $400,000
of items of tax preference and no liability for tax under chapter 1
other than under section 56(a). Under section 56(c), the excess of the
taxes described in paragraph (1) of that section arising in an earlier
taxable year not used to reduce the amount subject to tax under section
56(a) for such taxable year can be carried over as provided in section
56(c) to reduce the amount subject to tax under section 56(a).
(a) The amount of the carryover from 1972 is $180,000 computed as
follows:
Carryover under paragraph (b) of this section:
Chapter 1 taxes........................................... $200,000
Items of tax preference in excess of exemption............ 20,000
-----------
Total................................................... 180,000
(b) The amount of the carryover from 1973 is $110,000 computed as
follows:
Carryover under paragraph (b) of this section:
Chapter 1 taxes........................................... $120,000
Items of tax preference in excess of exemption............ 10,000
-----------
Total................................................... 110,000
(c) For 1974, the excess of taxes in the preceding taxable years is
used to reduce the amount subject to tax under section 56(a). The amount
of carryover attributable to excess taxes arising in 1972 is used before
such excess arising in 1973. The amount of tax under section 56(a) is
$8,000 computed as follows:
1974 tax preferences........................................ $400,000
Less exemption.............................................. 30,000
-----------
370,000
Less 1972 carryover......................................... 180,000
-----------
190,000
Less 1973 carryover......................................... 110,000
-----------
1974 minimum tax base....................................... 80,000
===========
1974 minimum tax ($80,000x10%).............................. 8,000
Example 3. The facts are the same as in example 2 except that in
1974 A had $300,000 of items of tax preference. The amount of the
carryover for taxable years after 1974 is computed as follows:
1974 tax preferences........................................ $300,000
===========
Less exemption.............................................. 30,000
-----------
270,000
Less 1972 carryover......................................... 180,000
-----------
90,000
Less 1973 carryover......................................... 90,000
-----------
Minimum tax base............................................ 0
1973 carryover.............................................. 110,000
Amount used in 1974......................................... 90,000
-----------
Amount available for taxable years after 1974............... 20,000
The $20,000 remaining of the 1973 carryover is available to reduce the
amount subject to tax under section 56(a) in 1975 or other future
taxable years as provided in section 56(c).
Example 4. M Corporation is a calendar year taxpayer. N Corporation
uses a June 30 fiscal year. For the fiscal year 1970-1971, N Corporation
had excess chapter 1 tax liability as described in paragraph (a) of this
section in the amount of $75,000. On January 1, 1972, M Corporation
acquired N Corporation in a reorganization described in section
368(a)(1)(A). N Corporation does not use any of such excess chapter 1
tax liability to reduce the amount subject to tax under section 56(a)
for the short taxable year beginning on July 1, 1971, and ending on
December 31, 1971. Thus, the excess chapter 1 tax liability is available
to M Corporation as a carryover under paragraph (a) of this section to
reduce the amount subject to tax for the next 6 succeeding taxable years
beginning with taxable year 1972 as provided in this section. In
applying the carryover to 1972 and succeeding taxable years, the
carryover of N Corporation subject to the limitation of Sec. 1.56A-
5(e)(4) is combined with any carryovers originating with M Corporation
in 1970.
[T.D. 7564, 43 FR 40468, Sept. 12, 1978. Redesignated and amended by
T.D. 8138, 52 FR 15309, Apr. 28, 1987]
Sec. 1.56(g)-0 Table of Contents.
This section lists the paragraphs contained in Sec. 1.56(g)-1.
Sec. 1.56(g)-1 Adjusted current earnings.
(a) Adjustment for adjusted current earnings.
(1) Positive adjustment.
(2) Negative adjustment.
(i) In general.
(ii) Limitation on negative adjustments.
(iii) Example.
(3) Negative amounts.
(4) Taxpayers subject to adjustment for adjusted current earnings.
(5) General rule for applying Internal Revenue Code provisions in
determining adjusted current earnings.
(i) In general.
(ii) Example.
(6) Definitions.
(i) Pre-adjustment alternative minimum taxable income.
(ii) Adjusted current earnings.
(iii) Earnings and profits.
(7) Application to foreign corporations.
(b) Depreciation allowed.
(1) Property placed in service after 1989.
(2) Property subject to new ACRS.
(i) In general.
(ii) Rules for computing the depreciation deduction.
(iii) Example.
[[Page 566]]
(3) Property subject to original ACRS.
(i) In general.
(ii) Rules for computing the depreciation deduction.
(iii) Example.
(4) Special rule for certain section 168(f) property.
(5) Certain property not subject to ACRS.
(c) Inclusion in adjusted current earnings of items included in
earnings and profits.
(1) In general.
(2) Certain amounts not taken into account in determining whether an
item is permanently excluded.
(3) Allowance of offsetting deductions.
(4) Special rules.
(i) Income from the discharge of indebtedness.
(ii) Federal income tax refunds.
(iii) Income earned on behalf of states and municipalities.
(5) Treatment of life insurance contracts.
(i) In general.
(ii) Inclusion of inside buildup.
(iii) Calculation of income on the contract.
(iv) Treatment of distributions under the life insurance contract.
(v) Treatment of death benefits.
(vi) Other rules.
(A) Term life insurance contracts without net surrender values.
(B) Life insurance contracts involving divided ownership.
(vii) Examples.
(6) Partial list of income items excluded from gross income but
included in earnings and profits.
(7) Partial list of items excluded from both pre-adjustment
alternative minimum taxable income and adjusted current earnings.
(d) Disallowance of items not deductible in computing earnings and
profits.
(1) In general.
(2) Deductions for certain dividends received.
(i) Certain amounts deducted under sections 243 and 245.
(ii) Special rules.
(A) Dividends received from a foreign sales corporation.
(B) Dividends received from a section 936 corporation.
(iii) Special rule for certain dividends received by certain
cooperatives.
(3) Partial list of items not deductible in computing earnings and
profits.
(4) Partial list of items deductible for purposes of computing both
pre-adjustment alternative minimum taxable income and adjusted current
earnings.
(e) Treatment of income items included, and deduction items not
allowed, in computing pre-adjustment alternative minimum taxable income.
(f) Certain other earnings and profits adjustments.
(1) Intangible drilling costs.
(2) Certain amortization provisions do not apply.
(3) LIFO recapture adjustment.
(i) In general.
(ii) Beginning LIFO and FIFO inventory.
(iii) Definitions.
(A) LIFO recapture amount.
(1) Definition.
(2) Assets included.
(B) FIFO method.
(C) LIFO method.
(D) Inventory amounts.
(iv) Exchanges under sections 351 and 721.
(v) Examples.
(vi) Effective date.
(4) Installment sales.
(i) In general.
(ii) Exception for prior dispositions.
(iii) Special rules for obligations to which section 453A applies.
(A) In general.
(B) Limitation on application of installment method.
(C) Treatment of the ineligible portion.
(D) Treatment of the eligible portion.
(E) Coordination with the pledge rule.
(F) Example.
(g) Disallowance of loss on exchange of debt pools. [Reserved]
(h) Policy acquisition expenses of life insurance companies.
(1) In general.
(2) Reasonably estimated life.
(3) Reasonable allowance for amortization.
(4) Safe harbor for public financial statements.
(i) [Reserved]
(j) Depletion.
(k) Treatment of certain ownership changes.
(1) In general.
(2) Definition of ownership change.
(3) Determination of net unrealized built-in loss immediately before
an ownership change.
(4) Example.
(l) [Reserved]
(m) Adjusted current earnings of a foreign corporation.
(1) In general.
(2) Definitions.
(i) Effectively connected pre-adjustment alternative minimum taxable
income.
(ii) Effectively connected adjusted current earnings.
(3) Rules to determine effectively connected pre-adjustment
alternative minimum taxable income and effectively connected adjusted
current earnings.
(4) Certain exempt amounts.
(n) Adjustment for adjusted current earnings of consolidated groups.
(1) Positive adjustments.
(2) Negative adjustments.
(i) In general.
(ii) Limitation on negative adjustments.
(3) Definitions.
[[Page 567]]
(i) Consolidated pre-adjustment alternative minimum taxable income.
(ii) Consolidated adjusted current earnings.
(4) Example.
(o) [Reserved]
(p) Effective dates for corporate partners in partnerships.
(1) In general.
(2) Application of effective dates.
(3) Example.
(q) Treatment of distributions of property to shareholders.
(1) In general.
(2) Examples.
(r) Elections to use simplified inventory methods to compute
alternative minimum tax.
(1) In general.
(2) Effect of election.
(i) Inventories.
(ii) Modifications required.
(A) In general.
(B) Negative modifications allowed.
(iii) LIFO recapture adjustment.
(3) Time and manner of making election.
(i) Prospective election.
(ii) Retroactive election.
(iii) Taxpayers under examination.
(A) In general.
(1) Year of change under examination.
(2) Other open years under examination.
(B) Statement required.
(C) Year of change.
(D) Treatment of additional tax liability.
(iv) Election as method of accounting.
(v) Untimely election to use simplified inventory method.
(4) Example.
(5) Election to use alternative minimum tax inventories to compute
adjusted current earnings.
(s) Adjustment for alternative tax energy preference deduction.
(1) In general.
(2) Example.
[T.D. 8340, 56 FR 11083, Mar. 15, 1991, as amended by T.D. 8454, 57 FR
60476, Dec. 21, 1992]
Sec. 1.56(g)-1 Adjusted current earnings.
(a) Adjustment for adjusted current earnings--(1) Positive
adjustment. For taxable years beginning after December 31, 1989, the
alternative minimum taxable income of any taxpayer described in
paragraph (a)(4) of this section is increased by the adjustment for
adjusted current earnings. The adjustment for adjusted current earnings
is 75 percent of the excess, if any, of--
(i) The adjusted current earnings (as defined in paragraph
(a)(6)(ii) of this section) of the taxpayer for the taxable year over.
(ii) The pre-adjustment alternative minimum taxable income (as
defined in paragraph (a)(6)(i) of this section) of the taxpayer for the
taxable year.
(2) Negative adjustment--(i) In general. For taxable years beginning
after December 31, 1989, the alternative minimum taxable income of any
taxpayer is decreased, subject to the limitation of paragraph (a)(2)(ii)
of this section, by 75 percent of the excess, if any, of pre-adjustment
alternative minimum taxable income (as defined in paragraph (a)(6)(i) of
this section), over adjusted current earnings (as defined in paragraph
(a)(6)(ii) of this section).
(ii) Limitation on negative adjustments. The amount of the negative
adjustment for any taxable year is limited to the excess, if any, of--
(A) The aggregate increases in alternative minimum taxable income in
prior years under paragraph (a)(1) of this section over
(B) The aggregate decreases in alternative minimum taxable income in
prior years under this paragraph (a)(2).
Any excess of pre-adjustment alternative minimum taxable income over
adjusted current earnings that is not allowed as a negative adjustment
for the taxable year because of the limitation in this paragraph
(a)(2)(ii) is not applied to reduce any positive adjustment in any other
taxable year.
(iii) Example. The following example illustrates the provisions of
this paragraph (a)(2):
(A) Corporation P is a calendar-year taxpayer and has pre-adjustment
alternative minimum taxable income and adjusted current earnings in the
following amounts for 1990 through 1993:
------------------------------------------------------------------------
Pre-
adjustment
alternative Adjusted
Year minimum current
taxable earnings
income
------------------------------------------------------------------------
1990.......................................... $800,000 $700,000
1991.......................................... 600,000 900,000
1992.......................................... 500,000 400,000
1993.......................................... 500,000 100,000
------------------------------------------------------------------------
(B) Under these facts, corporation P has the following positive and
negative adjustments for adjusted current earnings:
------------------------------------------------------------------------
Negative Positive
Year adjustment adjustment
------------------------------------------------------------------------
1990.......................................... 0 0
1991.......................................... 0 $225,000
[[Page 568]]
1992.......................................... $75,000 0
1993.......................................... 150,000 0
------------------------------------------------------------------------
(C) In 1990, P has a potential negative adjustment (before the
cumulative limitation) of $75,000 (75 percent of the $100,000 excess of
pre-adjustment alternative minimum taxable income over adjusted current
earnings). Nonetheless, P is not permitted a negative adjustment because
P had no prior increases in its alternative minimum taxable income due
to an adjustment for adjusted current earnings.
(D) In 1991, P has a positive adjustment of $225,000 (75 percent of
the $300,000 excess of adjusted current earnings over pre-adjustment
alternative minimum taxable income). P is not allowed to use the prior
year's excess of pre-adjustment alternative minimum taxable income over
adjusted current earnings to reduce its 1991 positive adjustment.
(E) In 1992, P is permitted a negative adjustment of $75,000, the
full amount of 75 percent of the $100,000 excess of pre-adjustment
alternative minimum taxable income over adjusted current earnings for
the taxable year. This is because P's prior cumulative increases in
alternative minimum taxable income due to the positive adjustments for
adjusted current earnings exceed the negative adjustment for the year.
(F) In 1993, P has a potential negative adjustment (before the
cumulative limitation) of $300,000 (75 percent of the $400,000 excess of
pre-adjustment alternative minimum taxable income over adjusted current
earnings). P's net cumulative increases in alternative minimum taxable
income due to the adjustment for adjusted current earnings are $150,000
($225,000 increase in 1991, less $75,000 decrease in 1992). Thus, P's
negative adjustment in 1993 is limited to $150,000. P may not use the
remaining portion ($150,000) of the negative adjustment for 1993 to
reduce positive adjustments in other taxable years.
(3) Negative amounts. In determining whether an excess exists under
paragraph (a)(1) or (a)(2) of this section, a positive amount exceeds a
negative amount by the sum of the absolute numbers, and a smaller
negative amount exceeds a larger negative amount by the difference
between the absolute numbers. Thus, for example, a positive amount of
adjusted current earnings of $30 exceeds a negative amount (or loss) of
pre-adjustment AMTI of $10 by the sum of the absolute numbers, or $40
(30+10). Accordingly, the adjustment for adjusted current earnings would
be 75 percent of $40, or $30. In contrast, a negative amount of adjusted
current earnings of $10 exceeds a negative amount (or loss) of pre-
adjustment alternative minimum taxable income of $30 by the difference
between the absolute numbers, or $20 (30-10). Accordingly, the
adjustment for adjusted current earnings would be 75 percent of $20, or
$15.
(4) Taxpayers subject to adjustment for adjusted current earnings.
The adjustment for adjusted current earnings applies to any corporation
other than--
(i) An S corporation as defined in section 1361,
(ii) A regulated investment company as defined in section 851,
(iii) A real estate investment trust as defined in section 856, or
(iv) A real estate mortgage investment conduit as defined in section
860A.
(5) General rule for applying Internal Revenue Code provisions in
determining adjusted current earnings--(i) In general. Except as
otherwise provided by regulations or other guidance issued by the
Internal Revenue Service, all Internal Revenue Code provisions that
apply in determining the regular taxable income of a taxpayer also apply
in determining adjusted current earnings. For example, the rules of part
V of subchapter P (relating to original issue discount and similar
matters) of the Code apply in determining the amount (and the timing) of
any interest income included in adjusted current earnings under this
section. In applying Code provisions, however, the adjustments of
section 56(g) and this section are also taken into account. For example,
in applying the capitalization provisions of section 263A, the amount of
depreciation to be capitalized is based on the amount of depreciation
allowed in computing adjusted current earnings.
(ii) Example. The following example illustrates the provisions of
this paragraph (a)(5):
(A) Corporation N is a calendar year manufacturer of golf clubs. N
places new manufacturing equipment in service in 1990. The regular tax
depreciation allowable for this equipment is $80,000; the pre-adjustment
alternative minimum taxable income depreciation is $60,000; and the
adjusted current earnings depreciation is $40,000. All of the golf clubs
N produces in 1990 are unsold and are in ending inventory.
[[Page 569]]
(B) Pursuant to section 263A and Sec. 1.263A-1(e)(3)(ii)(I), N must
capitalize the depreciation allowed for the year for the new
manufacturing equipment in the ending inventory of golf clubs. Thus,
when N sells the golf clubs (or is deemed to have sold them under its
normal method of accounting), the cost of goods sold attributable to the
capitalized depreciation will be $80,000 in computing regular taxable
income; $60,000 in computing pre-adjustment alternative minimum taxable
income; and $40,000 in computing adjusted current earnings.
(6) Definitions. The following terms have the following meanings for
purpose of this section.
(i) Pre-adjustment alternative minimum taxable income. Pre-
adjustment alternative minimum taxable income is the alternative minimum
taxable income of the taxpayer for the taxable year, determined under
section 55(b)(2), but without the adjustment for adjusted current
earnings under section 56(g) and this section, without the alternative
tax net operating loss deduction under section 56(a)(4), and without the
alternative tax energy preference deduction under section 56(h).
(ii) Adjusted current earnings. Adjusted current earnings is the
pre-adjustment alternative minimum taxable income of the taxpayer for
the taxable year, adjusted as provided in section 56(g) and this
section. To the extent an amount is included (or deducted) in computing
pre-adjustment alternative minimum taxable income for the taxable year
(whether because an adjustment is made under section 56 or 58, because
of a tax preference item under section 57, or because the item is
reflected in taxable income), that amount is not again included (or
deducted) in computing adjusted current earnings for the taxable year.
(iii) Earnings and profits. Earnings and profits means current
earnings and profits within the meaning of section 316(a)(2), that is,
earnings and profits for the taxable year computed as of the close of
the taxable year of the corporation without diminution by reason of any
distributions made during the taxable year.
(7) Application to foreign corporations. See paragraph (m) of this
section for rules relating to the application of this section to foreign
corporations.
(b) Depreciation allowed. The depreciation deduction allowed in
computing adjusted current earnings is determined under the rules of
this paragraph (b). Generally, the rules for computing the adjusted
current earnings depreciation deduction differ depending on the taxable
year in which the property is placed in service and the method used in
computing the depreciation deduction for taxable income purposes. See
Sec. 1.168(i)-1(k) for an election to use general asset accounts.
(1) Property placed in service after 1989. The depreciation
deduction for property placed in service in a taxable year beginning
after December 31, 1989, is the amount determined by using the
alternative depreciation system of section 168(g). This paragraph (b)(1)
does not apply to property to which paragraph (b)(4) of this section
applies (relating to certain property described in sections 168 (f)(1)
through (f)(4)).
(2) Property subject to new ACRS--(i) In general. This paragraph
(b)(2) provides the rules for computing the depreciation deduction for
property to which the amendments made by section 201 of the Tax Reform
Act of 1986 (new ACRS) apply (generally property placed in service after
December 31, 1986), and that is placed in service in a taxable year
beginning before January 1, 1990. This paragraph (b)(2) does not apply
to property described in paragraph (b)(4) of this section (relating to
certain property described in sections 168 (f)(1) through (f)(4)) or to
property described in paragraph (b)(5)(i) of this section (relating to
certain churning transactions described in section 168(f)(5)).
(ii) Rules for computing the depreciation deduction. The
depreciation deduction for property described in this paragraph (b)(2)
is the amount determined by using--
(A) The adjusted basis of the property as determined in computing
alternative minimum taxable income as of the close of the last taxable
year beginning before January 1, 1990,
(B) The straight-line method, and
(C) The recovery period that consists of the remainder of the
recovery period applicable to the property under the alternative
depreciation system of section 168(g).
[[Page 570]]
Thus, the recovery period begins on the first day of the first taxable
year beginning after December 31, 1989, and ends on the last day of the
recovery period that would have applied had the recovery period for the
property originally been determined under section 168(g). In determining
the recovery period that would have applied, the property is deemed
placed in service on the date it was considered placed in service under
the depreciation convention that would have applied to the property
under section 168(d).
(iii) Example. The following example illustrates the provisions of
this paragraph (b)(2).
Example. Corporation X, a calendar-year taxpayer, purchases and
places in service on August 1, 1987, computer-based telephone central
office switching equipment. This is the only item of depreciable
property X places in service during 1987. Thus, the applicable
convention under section 168(d) is the half-year convention. As of
December 31, 1989, the adjusted basis of the property used in computing
alternative minimum taxable income is $42,000. The recovery period that
would have applied to the property under section 168(g)(2) is 9.5 years
(from July 1, 1987 to December 31, 1996). Thus, the recovery period for
computing adjusted current earnings under section 56(g)(4)(A)(ii) and
this paragraph (b)(2) begins on January 1, 1990, and ends on December
31, 1996. X's 1990 depreciation deduction for computing adjusted current
earnings is $6,000, determined under the straight-line method by
dividing $42,000 (adjusted basis) by 7 (recovery period).
(3) Property subject to original ACRS--(i) In general. This
paragraph (b)(3) provides the rules for computing the depreciation
deduction for property to which section 168 as in effect on the day
before the date of enactment of the Tax Reform Act of 1986 (original
ACRS) applies and that is placed in service in a taxable year beginning
before January 1, 1990 (generally property that was placed in service
after December 31, 1980 and before January 1, 1987). In determining
whether original ACRS applies to property, the fact that the unadjusted
basis of the property is reduced or eliminated under section
168(d)(4)(A)(i) of original ACRS is not taken into account. This
paragraph (b)(3) does not apply to property described in paragraph
(b)(4) or (b)(5)(i) of this section (relating to certain section 168(f)
property).
(ii) Rules for computing the depreciation deduction. The
depreciation deduction for property described in this paragraph (b)(3)
is the amount determined by using--
(A) The adjusted basis of the property as determined in computing
taxable income as of the close of the last taxable year beginning before
January 1, 1990,
(B) The straight-line method, and
(C) The recovery period that consists of the remainder of the
recovery period applicable to the property under the alternative
depreciation system of section 168(g). Thus, the recovery period begins
on the first day of the first taxable year beginning after December 31,
1989, and ends on the last day of the recovery period that would have
applied had the recovery period for the property originally been
determined under section 168(g)(2). In determining the recovery period
that would have applied, the property is deemed placed in service on the
date it was considered placed in service under the depreciation
convention that would have applied to the property under section 168(d)
(without regard to section 168(d)(3)).
(iii) Example. The following example illustrates the provisions of
this paragraph (b)(3).
Example. Corporation Y, a calendar-year taxpayer, purchases and
places in service on December 1, 1986, computer-based telephone central
office switching equipment. The depreciation convention that would have
applied to this property under section 168(d) (without regard to section
168(d)(3)) is the half-year convention. As of December 31, 1989, the
adjusted basis of the property used in computing taxable income is
$21,000. The recovery period for the property under section 168(g)(2) is
9.5 years (from July 1, 1986 to December 31, 1995). Thus, the recovery
period for computing adjusted current earnings under section
56(g)(4)(A)(iii) and this paragraph (b)(3) begins on January 1, 1990,
and ends on December 31, 1995. Y's 1990 depreciation deduction for
computing adjusted current earnings is $3,500, determined under the
straight-line method by dividing $21,000 (adjusted basis) by 6 (recovery
period).
(4) Special rule for certain section 168(f) property. The
depreciation or amortization deduction for property described in section
168(f) (1) through (4) is determined in the same manner as used in
[[Page 571]]
computing taxable income, without regard to when the property is placed
in service.
(5) Certain property not subject to ACRS. The depreciation or
amortization deduction for property not described in paragraphs (b) (1)
through (4) of this section is determined in the same manner as used in
computing taxable income. Thus, this paragraph (b)(5) applies to--
(i) Property placed in service after December 31, 1980, in a taxable
year beginning before January 1, 1990, and that is excluded from the
application of original ACRS or new ACRS by section 168(e)(4) of
original ACRS or section 168(f)(5)(A)(i) of new ACRS, and
(ii) Property placed in service before January 1, 1981.
(c) Inclusion in adjusted current earnings of items included in
earnings and profits--(1) In general. Except as otherwise provided in
paragraph (c)(4) of this section, adjusted current earnings includes all
income items that are permanently excluded from (i.e., not taken into
account in determining) pre-adjustment alternative minimum taxable
income but that are taken into account in determining earnings and
profits. An income item is considered taken into account in determining
pre-adjustment alternative minimum taxable income without regard to the
timing of its inclusion. Thus, this paragraph (c)(1) does not apply to
any income item that is, has been, or will be included in pre-adjustment
alternative minimum taxable income. For example, a taxpayer eligible to
use the completed contract method of accounting for long-term
construction contracts does not take income (or expenses) into account
in determining pre-adjustment alternative minimum taxable income for
taxable years before the taxable year the contract is completed. The
taxpayer is required under section 312(n)(6) to include income (and
expenses) in earnings and profits throughout the term of the contract
under the percentage of completion method. This paragraph (c)(1) does
not require the income on the contract to be included in adjusted
current earnings, however, because the income will be taken into account
in the taxable year the contract is completed and therefore is
considered to be taken into account in determining pre-adjustment
alternative minimum taxable income.
(2) Certain amounts not taken into account in determining whether an
item is permanently excluded. The fact that proceeds from an income item
may eventually be reflected in pre-adjustment alternative minimum
taxable income of another taxpayer on the liquidation or disposal of a
business, or similar circumstances, is not taken into account in
determining whether the item is permanently excluded from pre-adjustment
alternative minimum taxable income. Thus, for example, a corporation's
adjusted current earnings include interest excluded from pre-adjustment
alternative minimum taxable income under section 103 even though the
interest might eventually be reflected in the pre-adjustment alternative
minimum taxable income of a corporate shareholder as gain on the
liquidation of the corporation.
(3) Allowance of offsetting deductions. In determining adjusted
current earnings under this paragraph (c), a deduction is allowed for
all items that relate to income required to be included in adjusted
current earnings under this paragraph (c) and that would be deductible
in computing pre-adjustment alternative minimum taxable income if the
income items to which the items of deduction relate were included in
pre-adjustment alternative minimum taxable income for any taxable year.
For example, deductions disallowed under section 265(a)(2) for the costs
of carrying tax-exempt obligations, the interest on which is excluded
from pre-adjustment alternative minimum taxable income under section 103
but is included in adjusted current earnings under this paragraph (c),
are generally allowed as deductions in computing adjusted current
earnings. Amounts deductible under this paragraph (c)(3) are taken into
account using the taxpayer's method of accounting and are subject to any
provisions or limitations of the Code that would have applied if the
amounts had been deductible in determining pre-adjustment alternative
minimum taxable income. For example, section 267(a)(2) may affect the
timing of a deduction otherwise disallowed under section 265(a)(2).
[[Page 572]]
(4) Special rules. Adjusted current earnings does not include the
following amounts.
(i) Income from the discharge of indebtedness. Amounts that are
excluded from gross income under section 108 of the Internal Revenue
Code of 1986 or any corresponding provision of prior law (including the
Bankruptcy Tax Act of 1980, case law, income tax regulations and
administrative pronouncements).
(ii) Federal income tax refunds. Refunds of federal income taxes.
(iii) Income earned on behalf of states and municipalities. Amounts
that are excluded from gross income under section 115.
(5) Treatment of life insurance contracts--(i) In general. This
paragraph (c)(5) addresses the treatment of life insurance contracts in
determining adjusted current earnings. These rules apply to life
insurance contracts as defined in section 7702. Generally, death
benefits under a life insurance contract are included in adjusted
current earnings, and all other distributions (including surrenders) are
taxed in accordance with the principles of section 72(e), taking into
account the taxpayer's basis in the contract for purposes of adjusted
current earnings. If the adjusted basis in the contract for purposes of
adjusted current earnings exceeds the amount of death benefits received
or the amount received when the contract is surrendered (increased by
the amount of any outstanding policy loan), the resulting loss is
allowed as a deduction under paragraph (c)(3) of this section in
computing adjusted current earnings for the taxable year. In addition,
undistributed income on the contract is included in adjusted current
earnings as provided in paragraph (c)(5)(ii) of this section. Paragraph
(c)(5)(vi)(A) of this section provides special rules for term insurance
that has no net surrender value.
(ii) Inclusion of inside buildup. Income on a life insurance
contract with respect to a taxable year (or any shorter period either
ending or beginning with the date of a distribution from the contract)
is included in adjusted current earnings for the taxable year. Thus,
income on the contract is calculated from the beginning of a taxable
year to the date of any distribution, from immediately after any
distribution to the date of the next distribution, and from the last
distribution during the taxable year through the end of the taxable
year. Income on a life insurance contract is not included in adjusted
current earnings for any taxable year in which the insured dies or the
contract is completely surrendered for its entire net surrender value.
Solely for purposes of computing adjusted current earnings, the
taxpayer's adjusted basis in the contract (as determined under section
72(e)(6)) is increased to reflect any positive income on the contract
included in adjusted current earnings under this paragraph (c)(5)(ii).
The manner in which the income on the contract is determined for
adjusted current earnings purposes is prescribed in paragraph
(c)(5)(iii) of this section. If the income on the contract determined
under paragraph (c)(5)(iii) of this section is a negative amount, income
on the contract is not included in adjusted current earnings and no
deduction from adjusted current earnings is allowed for the negative
amount.
(iii) Calculation of income on the contract. For purposes of
determining adjusted current earnings, the income on a life insurance
contract for any period, including a taxable year, is the excess, if
any, of--
(A) The sum of the contract's net surrender value (as defined in
section 7702(f)(2)(B)) at the end of the period, and any distributions
under the contract during the period that, in accordance with the
principles of section 72(e), are not taxed because they represent
recoveries of the taxpayer's basis in the contract for adjusted current
earnings, over
(B) The sum of the contract's net surrender value at the end of the
preceding period, and any premiums paid under the contract during the
period.
(iv) Treatment of distributions under the life insurance contract.
Any distribution under a life insurance contract (whether a partial
withdrawal or an amount received on complete surrender of the contract)
is included in adjusted current earnings in accordance with the
principles of section 72(e), taking into account the taxpayer's basis in
the contract for purposes of computing
[[Page 573]]
adjusted current earnings. The taxpayer's basis in the contract is equal
to the basis at the end of the immediately preceding period plus any
premiums paid before the distribution. The taxpayer's basis in the
contract for purposes of adjusted current earnings is reduced, in
accordance with the principles of section 72(e), to the extent that the
distribution is not included in adjusted current earnings because it
represents a recovery of that basis.
(v) Treatment of death benefits. The excess of the contractual death
benefit of a life insurance contract over the taxpayer's adjusted basis
in the contract for purposes of computing adjusted current earnings at
the time of the insured's death is included in adjusted current earnings
as provided by paragraph (c)(6)(i) of this section. The amount of the
death benefit that is taken into account for adjusted current earnings
includes the amount of any outstanding policy loan treated as forgiven
or discharged by the insurance company upon the death of the insured.
(vi) Other rules--(A) Term life insurance contract without net
surrender values. Except as provided in this paragraph (c)(5)(vi), the
requirements of paragraph (c)(5) of this section do not apply to term
life insurance contracts that provide no net surrender value. Adjusted
current earnings are reduced by any premiums paid under such a contract
that are allocable to the taxable year. Any premiums paid that are not
allocable to the taxable year must be included in the basis of the
contract. The death benefit under such a term insurance contract is
included in adjusted current earnings as provided by paragraph (c)(5)(v)
of this section.
(B) Life insurance contracts involving divided ownership. If the
ownership of a life insurance contract is divided between different
persons (for example, a split-dollar arrangement), the requirements of
paragraph (c)(5) of this section apply to the separate ownership
interests as though each interest were a separate contract.
(vii) Examples. The following examples illustrate the provisions of
this paragraph (c)(5).
Example 1. (i) On January 1, 1987, corporation X, a calendar year
taxpayer, purchased a flexible premium life insurance contract with a
death benefit of $100,000 and planned annual gross premiums of $2,200
payable on January 1 of each year. The net surrender value of the
contract at the end of 1987 and subsequent years, together with the
cumulative premiums for the contract at the end of each year, are set
forth in the following table:
------------------------------------------------------------------------
Year-end
Cumulative net
Year premiums surrender
paid value
------------------------------------------------------------------------
1987.......................................... $2,200 $2,420
1988.......................................... 4,400 5,082
1989.......................................... 6,600 8,010
1990.......................................... 8,800 11,231
1991.......................................... 11,000 14,774
------------------------------------------------------------------------
(ii) Under paragraph (c)(5)(ii) of this section, X must include
$1,021 in adjusted current earnings for 1990. The inclusion is computed
by subtracting from the net surrender value of the contract at the end
of the taxable year ($11,231) the sum of the net surrender value of the
contract at the end of the preceding taxable year ($8,010) plus the
premiums paid during the taxable year ($2,200). See paragraph
(c)(5)(iii) of this section. For purposes of determining adjusted
current earnings, X's adjusted basis in the contract would be increased
at the end of 1990 from $8,800 to $9,821 to reflect the $1,021
inclusion. See paragraph (c)(5)(ii) of this section. The income under
the contract attributable to taxable years prior to 1990 does not
increase X's adjusted basis in the contract.
(iii) For 1991, the income on the contract included in adjusted
current earnings is determined in the same manner as the preceding year,
and there is a corresponding increase in X's adjusted basis in the
contract. Thus, for 1991, the income on the contract is $1,343, which is
determined by subtracting from the net surrender value of the contract
at the end of the taxable year ($14,774) the sum of the net surrender
value at the end of the preceding taxable year ($11,231) plus the
premiums paid during the taxable year ($2,200). At the end of 1991, X's
adjusted basis in the contract for adjusted current earnings is $13,364,
which reflects the basis of the contract at the beginning of 1991,
increased by the premium paid during the year ($2,200) and the income on
the contract that has been included in adjusted current earnings for the
taxable year ($1,343).
Example 2. The facts are the same as in example 1, except that,
after the payment of the premium for 1991, the insured dies and X
receives the $100,000 death benefit under the contract. Under paragraph
(c)(5)(ii) of this section, no amount is included in adjusted current
earnings for income on the contract for the taxable year in which the
insured dies. Instead, under paragraph (c)(5)(v) of this section, X must
include the adjusted current earnings for 1991 the excess of the
[[Page 574]]
death benefit ($100,000) over the adjusted basis in the contract for
purposes of computing adjusted current earnings at the time of the
insured's death ($12,021), which equals X's adjusted basis in the
contract at the end of 1990 ($9,821), increased by X's premium payment
for 1991 ($2,200).
Example 3. (i) The facts are the same as in example 1, except that
in addition to making the $2,200 planned premium payment for 1992, X
receives a $16,200 distribution under the contract on February 1, 1992,
leaving a net surrender value of $915 immediately following the
distribution. On March 1, 1992, X pays an additional premium of $5,000
under the contract. The net surrender value of the contract at the end
of 1992 is $6,417.
(ii) Treatment of the distribution. Under paragraph (c)(5)(iv) of
this section, the $16,200 distribution in 1992 is included in adjusted
current earnings as an amount taxable in accordance with the principles
of section 72(e) to the extent that the distribution ($16,200) exceeds
X's adjusted basis for adjusted current earnings, as determined at the
end of the immediately preceding period, and including premiums paid
through the period ending on the date of the distribution ($15,564).
Thus, X must include $636 in adjusted current earnings for 1992 as an
amount taxable in accordance with the principles of section 72(e).
(iii) Determination of the income on the contract. Under paragraph
(c)(5)(iii) of this section, for 1992, the income on the contract must
be separately determined for the period beginning with the first day of
the taxable year to the date of the distribution and for the period
beginning immediately after the distribution to the end of the taxable
year, using the contract's net surrender values at the beginning and end
of each of these periods. The income on the contract for the period
beginning on January 1, 1992 and ending on February 1, 1992 (the date of
the distribution) is equal to the excess, if any, of (A) the sum of the
net surrender value at the end of the period ($915) and the amount of
the distribution that is allocable to X's basis in the contract for
adjusted current earnings ($15,564), over (B) the sum of the net
surrender value at the end of the preceding taxable year ($14,774) plus
any premiums paid on the contract during the period ($2,200). Because
the net result of this computation is a negative amount (($915+$15,564)-
($14,774+$2,200)=-495), no income on the contract for the period ending
with the date of the distribution is included in adjusted current
earnings for 1992.
(iv) Under paragraph (c)(5)(ii), X must also determine the income on
the contract for the period beginning immediately after the distribution
through the end of the taxable year. The income on the contract for this
period is $502, which is equal to the excess of the net surrender value
at the end of the taxable year ($6,417) over the sum of the net
surrender value at the end of the preceding period ($915), plus any
premiums paid during the period ($5,000). At the end of 1992, X's
adjusted basis in the contract for adjusted current earnings is $5,502,
determined by adding the income on the contract ($502) and the premiums
paid during the period ($5,000) to the basis at the end of the preceding
period ($0).
(v) Thus, X must include a total of $1,138 ($636+502) in adjusted
current earnings for 1992. This inclusion reflects both the
undistributed income on the contract for the taxable year plus the
amount of income from distributions under the contract that is taxed in
accordance with the principles of section 72(e) using X's adjusted basis
in the contract for adjusted current earnings.
(6) Partial list of income items excluded from gross income but
included in earnings and profits. The following is a partial list of
items that are permanently excluded from pre-adjustment alternative
minimum taxable income but that are included in earnings and profits,
and are therefore included in adjusted current earnings under this
paragraph (c).
(i) Proceeds of life insurance contracts that are excluded under
section 101, to the extent provided in paragraph (c)(5)(v) or (c)(5)(vi)
of this section.
(ii) Interest that is excluded under section 103.
(iii) Amounts received as compensation for injuries or sickness that
are excluded under section 104.
(iv) Income taxes of a lessor of property that are paid by a lessee
and are excluded under section 110.
(v) Income attributable to the recovery of an item deducted in
computing earnings and profits in a prior year that is excluded under
section 111.
(vi) Amounts received as proceeds from sports programs that are
excluded under section 114.
(vii) Cost-sharing payments that are excluded under section 126, to
the extent section 126(e) does not apply.
(viii) Interest on loans used to acquire employer securities that is
excluded under section 133.
(ix) Financial assistance that is excluded under section 597.
(x) Amounts that are excluded from pre-adjustment alternative
minimum
[[Page 575]]
taxable income as a result of an election under section 831(b) (allowing
certain insurance companies to compute their pre-adjustment alternative
minimum taxable income using only their investment income).
Items described in paragraph (c)(1) of this section must be included in
earnings and profits (and therefore in adjusted current earnings) even
if they are not identified in this paragraph (c)(6). The Commissioner
may identify additional items described in paragraph (c)(1) in other
published guidance.
(7) Partial list of items excluded from both pre-adjustment
alternative minimum taxable income and adjusted current earnings. The
following is a partial list of items that are excluded from both pre-
adjustment alternative minimum taxable income and adjusted current
earnings, and for which no adjustment is allowed under this section.
(i) The value of improvements made by a lessee to a lessor's
property that is excluded from the lessor's income under section 109.
(ii) contributions to the capital of a corporation by a non-
shareholder that are excluded from the corporation's income under
section 118.
The Commissioner may identify additional items described in this
paragraph (c)(7) in other published guidance.
(d) Disallowance of items not deductible in computing earnings and
profits--(1) In general. Except as otherwise provided in this paragraph
(d), no deduction is allowed in computing adjusted current earnings for
any items that are not taken into account in determining earnings and
profits for any taxable year, even if the items are taken into account
in determining pre-adjustment alternative minimum taxable income. These
items therefore increase adjusted current earnings to the extent they
are deducted in computing pre-adjustment alternative minimum taxable
income. An item of deduction is considered taken into account without
regard to the timing of its deductibility in computing earnings and
profits. Thus, to the extent an item is, has been, or will be deducted
for purposes of determining earnings and profits, it does not increase
adjusted current earnings in the taxable year in which it is deducted
for purposes of determining pre-adjustment alternative minimum taxable
income. For example, a deduction allowed (in determining pre-adjustment
alternative minimum taxable income) under section 196 for unused
research credits allowable under section 41 is taken into account in
computing earnings and profits because the costs that gave rise to the
credit were deductible in computing earnings and profits when incurred.
Therefore, the deduction does not increase adjusted current earnings. As
a further example, payments by a United States parent corporation with
respect to employees of certain foreign subsidiaries, which are
deductible under section 176, are considered contributions to the
capital of the foreign subsidiary for purposes of computing earnings and
profits. Although the payments are not deductible in computing the
earnings and profits of the United States parent corporation in the year
incurred, the payments do increase the parent's basis in its stock in
the foreign subsidiary. This basis increase will reduce any gain the
parent may later realize for purposes of computing earnings and profits
on the disposition of the stock of the foreign subsidiary. Therefore,
the amount of the payment by the parent is considered taken into account
in computing the earnings and profits of the parent and does not
increase adjusted current earnings. Thus, only deduction items that are
never taken into account in computing earnings and profits are
disallowed in computing adjusted current earnings under this paragraph
(d).
(2) Deductions for certain dividends received--(i) Certain amounts
deducted under sections 243 and 245. Paragraph (d)(1) of this section
does not apply to, and adjusted current earnings therefore are not
increased by, amounts deducted under sections 243 and 245 that qualify
as 100-percent deductible dividends under sections 243(a), 245(b) or
245(c), or to any dividend received from a 20-percent owned corporation
(as defined in section 243(c)(2)), to the extent that the dividend
giving rise to the deductions is attributable to earnings of the paying
corporation that are subject to federal income tax. Earnings are
considered subject to federal income
[[Page 576]]
tax return (that is filed or, if not, that should be filed) of an entity
subject to United States taxation, even if there is no resulting United
States tax liability (e.g., because of net operating losses or tax
credits, other than the credit provided for in section 936).
(ii) Special rules--(A) Dividends received from a foreign sales
corporation. The portion of a dividend received from a foreign sales
corporation (FSC) that is classified as a 100-percent deductible
dividend attributable to earnings of the FSC subject to federal income
tax is that portion of the dividend distributed out of earnings and
profits of the FSC attributable to non-exempt foreign trade income
determined under either of the administrative pricing methods of section
925(a) (1) or (2), and to non-exempt foreign trade income determined
under section 925(a)(3) that is effectively connected with the conduct
of a trade or business in the United States (determined without regard
to section 921). If the FSC is a 20-percent owned corporation (as
defined in section 243(c)(2)), an additional portion of that dividend is
classified as being attributable to earnings of the FSC subject to
federal income tax to the extent that the dividend is distributed out of
earnings and profits of the FSC attributable to effectively connected
income (as defined in section 245(c)(4)(B)). A FSC is defined in section
922 and, for purposes of this paragraph, includes a small FSC and a
former FSC. The ordering rules for distributions from a FSC set forth in
Sec. 1.926(a)-1T(b)(1) apply to determine the classification of
earnings and profits out of which a distribution has been made.
(B) Dividends received from a section 936 corporation. For example,
assume that a section 936 corporation earns $100 of income in its
current taxable year, $10 of which is not eligible for the credit under
section 936. If the section 936 corporation makes a distribution of $50
during that year, $5 of that distribution ($10 of income not eligible
for the section 936 credit divided by $100 of income, times $50
distributed) is deemed to be attributable to earnings of the paying
corporation that are subject to federal income tax.
(iii) Special rule for certain dividends received by certain
cooperatives. Paragraph (d)(1) of this section does not apply to, and
adjusted current earnings do not include, any dividend received by any
organization to which part I of subchapter T of the Code applies and
that is engaged in the marketing of agricultural or horticultural
products, if the dividend is paid by a FSC and is allowable as a
deduction under section 245(c).
(3) Partial list of items not deductible in computing earnings and
profits. The following is a partial list of items that are not taken
into account in computing earnings and profits and thus are not
deductible in computing adjusted current earnings.
(i) Unrecovered losses attributable to certain damages that are
deductible under section 186, to the extent those damages were
previously deducted in computing earnings and profits.
(ii) The deduction for small life insurance companies allowed under
section 806.
(iii) Dividends deductible under the following sections of the Code:
(A) Dividends received by corporations that are deductible under
section 243, to the extent paragraph (d)(2)(i) of this section does not
apply.
(B) Dividends received on certain preferred stock that are
deductible under section 244.
(C) Dividends received from certain foreign corporations that are
deductible under section 245, to the extent neither paragraph (d)(2)(i)
nor (d)(2)(iii) of this section applies.
(D) Dividends paid on certain preferred stock of public utilities
that are deductible under section 247.
(E) Dividends paid to an employee stock ownership plan that are
deductible under section 404(k).
(F) Non-patronage dividends that are paid and deductible under
section 1382(c)(1).
Items described in paragraph (d)(1) of this section are not taken into
account in computing earnings and profits (and thus are not deductible
in computing adjusted current earnings) even if they are not identified
in this paragraph (d)(3). The Commissioner may identify additional items
described in paragraph (d)(1) of this section in other published
guidance.
[[Page 577]]
(4) Partial list of items deductible for purposes of computing both
pre-adjustment alternative minimum taxable income and adjusted current
earnings. The following is a partial list of items that are deductible
for purposes of computing both pre-adjustment alternative minimum
taxable income and adjusted current earnings, and for which no
adjustment is allowed under this section.
(i) Payments by a United States corporation with respect to
employees of certain foreign corporations that are deductible under
section 176.
(ii) Dividends paid on deposits by thrift institutions that are
deductible under section 591.
(iii) Life insurance policyholder dividends that are deductible
under section 808.
(iv) Dividends paid by cooperatives that are deductible under
sections 1382(b) or 1382(c)(2) and that are not paid with respect to
stock.
The Commissioner may identify additional items described in this
paragraph (d)(4) in other published guidance.
(e) Treatment of income items included, and deduction items not
allowed, in computing pre-adjustment alternative minimum taxable income.
Adjusted current earnings includes any income item that is included in
pre-adjustment alternative minimum taxable income, even if that income
item is not included in earnings and profits for the taxable year.
Except as specifically provided in paragraph (c)(3) or (c)(5) of this
section, no deduction is allowed for an item in computing adjusted
current earnings if the item is not deductible in computing pre-
adjustment alternative minimum taxable income for the taxable year, even
if the item is deductible in computing earnings and profits for the
year. Thus, for example, capital losses in excess of capital gains for
the taxable year are not deductible in computing adjusted current
earnings for the taxable year.
(f) Certain other earnings and profits adjustments--(1) Intangible
drilling costs. For purposes of computing adjusted current earnings, the
amount allowable as a deduction for intangible drilling costs (as
defined in section 263(c)) for amounts paid or incurred in taxable years
beginning after December 31, 1989, is determined as provided in section
312(n)(2)(A). See section 56(h) for an additional adjustment to
alternative minimum taxable income based on energy preferences for
taxable years beginning after 1990.
(2) Certain amortization provisions do not apply. For purposes of
computing adjusted current earnings, sections 173 (relating to
circulation expenditures) and 248 (relating to organizational
expenditures) do not apply to amounts paid or incurred in taxable years
beginning after December 31, 1989. If an election is made under section
59(e) to amortize circulation expenditures described in section 173 over
a three-year period, the expenditures to which the election applies are
deducted ratably over the three-year period for purposes of computing
taxable income, pre-adjustment alternative minimum taxable income, and
adjusted current earnings.
(3) LIFO recapture adjustment--(i) In general. Adjusted current
earnings are generally increased or decreased by the increase or
decrease in the taxpayer's LIFO recapture amount (as defined in
paragraph (f)(3)(iii)(A) of this section) as of the close of each
taxable year.
(ii) Beginning LIFO and FIFO inventory. For purposes of computing
the increase or decrease in the LIFO recapture amount, the beginning
LIFO and FIFO inventory amounts for the first taxable year beginning
after December 31, 1989, are--
(A) The ending LIFO inventory amount used in computing pre-
adjustment alternative minimum taxable income for the last year
beginning before January 1, 1990; and
(B) The ending FIFO inventory amount for the last year beginning
before January 1, 1990, computed with the adjustments described in
section 56 (other than the adjustment described in section 56(g)) and
section 58, the items of tax preference described in section 57 and
using the methods used in computing pre-adjustment alternative minimum
taxable income.
(iii) Definitions--(A) LIFO recapture amount--(1) Definition. The
taxpayer's LIFO recapture amount is the excess, if any, of--
(i) the inventory amount of its assets under the FIFO method,
computed using the rules of this section; over
[[Page 578]]
(ii) the inventory amount of its assets under the LIFO method,
computed using the rules of this section.
(2) Assets included. Only the assets for which the taxpayer uses the
LIFO method to compute pre-adjustment alternative minimum taxable income
are taken into account in determining the LIFO recapture amount.
(B) FIFO Method. For purposes of this paragraph, the LIFO method is
the first in, first out method described in section 471, determined by
using--
(1) The retail method if that is the method the taxpayer uses in
computing pre-adjustment alternative minimum taxable income; or
(2) The lower of cost or market method for all other taxpayers.
(C) LIFO method. The LIFO method is the last in, first out method
authorized by section 472.
(D) Inventory amounts. Except as otherwise provided, inventory
amounts are computed using the methods used in computing pre-adjustment
alternative minimum taxable income. To the extent inventory is treated
as produced or acquired during taxable years beginning after December
31, 1989, the inventory amount is determined with the adjustments
described in sections 56 and 58 and the items of tax preference
described in section 57. Thus, for example, the amount of depreciation
to be capitalized under section 263A with respect to inventory produced
in taxable years beginning after December 31, 1989, is based on the
depreciation allowed under the rules of paragraph (b) of this section.
See paragraph (a)(5) of this section.
(iv) Exchanges under sections 351 and 721. For purposes of this
section, any decrease in a transferor's LIFO recapture amount that
occurs as a result of a transfer of inventories in an exchange to which
section 351 or section 721 applies cannot be used to decrease the
adjusted current earnings of the transferor. A decrease that is
disallowed under the preceding sentence is instead carried over to
reduce any LIFO recapture adjustment that the transferee (or its
corporate partners, if section 721 applies) would otherwise make (in the
absence of this paragraph (f)(3)(iv)) solely by reason of its carryover
basis in inventories received in the section 351 or section 721
exchange. Nothing in this paragraph (f)(3)(iv), however, alters the
computation of the LIFO recapture amount of the transferor or transferee
as of the close of any taxable year.
(v) Examples. The following examples illustrate the provisions of
this paragraph (f)(3).
Example 1. M Corporation, a calendar-year taxpayer, uses the LIFO
method of accounting for its inventory for purposes of computing pre-
adjustment alternative minimum taxable income. M's ending LIFO inventory
for all of its pools for purposes of computing pre-adjustment
alternative minimum taxable income on December 31, 1989, is $300. M
computes a $500 FIFO inventory amount on that date, after applying the
provisions of section 263A along with the adjustments and preferences
required in computing pre-adjustment alternative minimum taxable income.
M's FIFO and LIFO ending inventory amounts at the close of its taxable
years, its LIFO reserves, and its adjustment under this paragraph
(f)(3), are as follows:
----------------------------------------------------------------------------------------------------------------
1989 1990 1991 1992
----------------------------------------------------------------------------------------------------------------
Ending inventory:
A. FIFO................................................. \1\ $500 $360 $560 $600
B. LIFO................................................. \2\ 300 180 320 440
---------------------------------------------------
LIFO recapture amount:
A-B..................................................... 200 180 240 160
===================================================
Change in LIFO recapture amount and adjustment under ........... (20) 60 (80)
paragraph (f)(3)...........................................
----------------------------------------------------------------------------------------------------------------
\1\ Beginning FIFO inventory amount under paragraph (f)(3)(ii).
\2\ Beginning LIFO inventory amount under paragraph (f)(3)(ii).
Example 2. (A) X Corporation, a calendar-year taxpayer, uses the
LIFO method for purposes of computing pre-adjustment alternative minimum
taxable income. X's LIFO recapture amount is $300 as of December 31,
1992, and is $200 as of December 31, 1993. Immediately prior to
calculating its LIFO recapture amount as of December 31, 1993, X
[[Page 579]]
transfers inventory with an adjusted current earnings (ACE) basis of
$500 to Y Corporation in an exchange to which section 351 applies. X
determines that the $100 decrease in its LIFO recapture amount occurred
as a result of its transfer of inventories to Y in the section 351
exchange. Thus, under paragraph (f)(3)(iv) of this section, X cannot
decrease its adjusted current earnings by that amount. In computing its
1994 LIFO recapture adjustment, X will use $200 as its LIFO recapture
amount as of December 31, 1993, even though it was not entitled to
reduce adjusted current earnings by the $100 decrease in its LIFO
recapture amount in 1993.
(B) For purposes of computing its ACE, Y takes a $500 carryover
basis in the inventories received from X. If Y, a newly formed calendar-
year taxpayer, engages in no other inventory transactions in 1993 and
adopts the LIFO inventory method on its 1993 tax return, it will have a
LIFO recapture amount of $0 as of December 31, 1993 (because its FIFO
inventory amount and its LIFO inventory amount are both $500). Assume
that at December 31, 1994, Y has a LIFO recapture amount of $200 ($1,000
FIFO inventory amount-$800 LIFO inventory amount). Under paragraph
(f)(3)(i) of this section, Y computes a LIFO recapture adjustment for
1994 of $200 ($200-$0). If any portion of Y's $200 LIFO recapture
adjustment occurs solely by reason of its carryover basis in the
inventories it received from X, Y reduces its $200 LIFO recapture
adjustment by that portion under paragraph (f)(3)(iv). In any event,
however, Y will use its $200 LIFO recapture amount as of December 31,
1994, in computing its 1995 LIFO recapture adjustment.
(vi) Effective date. Paragraph (f)(3) is effective for taxable years
beginning after December 18, 1992. A taxpayer may choose to apply this
paragraph, however, to all taxable years beginning after December 31,
1989.
(4) Installment sales--(i) In general. Adjusted current earnings are
computed without regard to the installment method, except as provided in
this paragraph (f)(4).
(ii) Exception for prior dispositions. Paragraph (f)(4)(i) of this
section does not apply to any disposition in a taxable year beginning
before January 1, 1990, that is taken into account under the installment
method for purposes of computing pre-adjustment alternative minimum
taxable income. Thus, for any disposition in a taxable year beginning
before January 1, 1990, the installment method applies in computing
adjusted current earnings for taxable years beginning after December 31,
1989, to the same extent it applies in determining pre-adjustment
alternative minimum taxable income for the taxable year.
(iii) Special rules for obligations to which section 453A applies--
(A) In general. The following special rules apply to any installment
sale occurring in a taxable year beginning after December 31, 1989, that
results in an installment obligation to which section 453A(a)(1) applies
and with respect to which preadjustment alternative minimum taxable
income is determined under the installment method. As explained in
paragraph (f)(4)(iii)(B) of this section, for purposes of computing
adjusted current earnings, a portion of the contract price is eligible
for the installment method, and the remainder of the contract price is
not eligible for the installment method. Payments under the obligation
are allocated pro-rata between the two accounting methods.
(B) Limitation on application of installment method. Only a portion
of the contract price of an installment sale described in paragraph
(f)(4)(iii)(A) of this section is eligible to be accounted for under the
installment method for purposes of computing adjusted current earnings.
The portion eligible for the installment method is equal to the total
contract price of the sale multiplied by the applicable percentage (as
determined under section 453A(c)(4)) for the taxable year of the sale.
The remainder of the contract price is not eligible to be accounted for
under the installment method for purposes of computing adjusted current
earnings. The gross profit ratio is determined without regard to this
bifurcated treatment of the sale.
(C) Treatment of the ineligible portion. The gain on the sale that
is taken into account in the taxable year of the sale for purposes of
computing adjusted current earnings is equal to the gross profit ratio
multiplied by the entire portion of the contract price that is
ineligible for the installment method.
(D) Treatment of the eligible portion. For purposes of calculating
adjusted current earnings, the amount of gain
[[Page 580]]
recognized in a taxable year on the portion of the contract price that
is eligible for the installment method is equal to--
(1) The amount of payments received during the taxable year,
multiplied by
(2) The applicable percentage for the taxable year of the sale,
multiplied by
(3) The gross profit ratio.
(E) Coordination with the pledge rule. For purposes of determining
the amount of payments received during the taxable year under paragraph
(f)(4)(iii)(D), the rules of section 453A(d) (relating to the treatment
of certain pledge proceeds as payments) apply. This includes the rules
under section 453A(d)(3) that relate to treating later payments as
receipts of amounts on which tax has already been paid.
(F) Example. The following example illustrates the provisions of
this paragraph (f)(4)(iii):
(1) On January 1, 1990, corporation A, a calendar-year taxpayer,
sells a building with an adjusted basis for purposes of computing
adjusted current earnings of $10 million, for $5 million and an
installment obligation bearing adequate stated interest with a principal
amount of $20 million. The installment obligation calls for 4 annual
payments of $5 million on January 1 of 1991, 1992, 1993, and 1994. A
does not elect out of the installment method, and disposes of no other
property under the installment method during 1990. No gain with respect
to the sale is recaptured pursuant to section 1250.
(2) The gross profit percentage for purposes of computing adjusted
current earnings on the sale is 60 percent, computed as follows: gross
profit of $15 million ($25 million contract price less $10 million
adjusted basis) divided by $25 million contract price. The applicable
percentage on the sale is 75 percent, computed as follows: $15 million
($20 million of installment obligations arising during and outstanding
at the end of 1990 less $5 million) divided by $20 million of
installment obligations arising during and outstanding at the end of
1990. See section 453A(c)(4). The portion of the contract price eligible
for accounting under the installment method for purposes of computing
adjusted current earnings is $18.75 million, or $25 million total
contract price times applicable percentage of 75 percent. The portion of
the contract price ineligible for the installment method is $6.25
million, or $25 million less $18.75 million.
(3) In computing adjusted current earnings for 1990, A must include
$3.75 million of the gain on the sale. This amount is equal to the
portion of the contract price that is ineligible for the installment
method times the gross profit ratio, or $6.25 million times 60 percent.
A must also include $2.25 million of gain from the $5 million payment
received in 1990. This amount is computed as follows: the eligible
portion of the payment, $3.75 million ($5 million payment times the
applicable percentage of 75 percent), times the gross profit ratio of 60
percent. Thus, the total amount of gain from the sale that A must
include in adjusted current earnings for 1990 is $6 million ($3.75
million of gain from the portion of the contract price that is not
eligible for the installment method, plus $2.25 million of gain from the
1990 payment).
(4) A does not pledge or otherwise accelerate payments on the note
in any other taxable year. In computing adjusted current earnings for
1991, 1992, 1993, and 1994, A therefore includes $2.25 million of gain
on the installment sale, computed as follows: $5 million payment times
the applicable percentage of 75 percent, times the gross profit ratio of
60 percent.
(g) Disallowance of loss on exchange of debt pools. [Reserved]
(h) Policy acquisition expenses of life insurance companies--(1) In
general. This paragraph (h) addresses the treatment of policy
acquisition expenses of life insurance companies in determining adjusted
current earnings. Policy acquisition expenses are those expenses that,
under generally accepted accounting principles in effect at the time the
expenses are incurred, are considered to vary with and to be primarily
related to the acquisition of new and renewal insurance policies.
Generally, these acquisition expenses must be capitalized and amortized
for purposes of adjusted current earnings over the reasonably estimated
life of the acquired policy, using a method that provides a reasonable
allowance for amortization. This method of amortization is treated as if
it applied to all taxable years in determining the amount of policy
acquisition expenses deducted for adjusted current earnings. The rules
in this paragraph (h) apply to any life insurance company, as defined in
section 816(a).
(2) Reasonably estimated life. The reasonably estimated life of an
acquired policy is determined based on the facts with respect to each
policy (such as the age, sex, and health of the insured), and the
company's experience (such as mortality, lapse rate and renewals) with
similar policies. A company may treat as the reasonably estimated life
[[Page 581]]
of an acquired policy the period for amortizing expenses of the acquired
policy that would be required by the Financial Accounting Standards
Board (FASB) at the time the acquisition expenses are incurred. If the
FASB has not established such a period, the period for amortizing
acquisition expense of an acquired policy under guidelines issued by the
American Institute of Certified Public Accountants in effect at the time
the acquisition expenses are incurred may be treated as the reasonably
estimated life of the acquired policy.
(3) Reasonable allowance for amortization. For purposes of
determining a reasonable allowance for amortization, a company may use a
method that amortizes acquisition expenses in the same proportion that
gross premiums and gross investment income for the taxable year bear to
total anticipated receipts of gross premiums (including anticipated
renewal premiums) and gross investment income to be realized over the
reasonably estimated life of the policy.
(4) Safe harbor for public financial statements. Any company that is
required to file with the Securities and Exchange Commission (SEC) a
financial statement with respect to the taxable year will be treated as
having complied with paragraph (h)(1) of this section if it accounts for
acquisition expenses for adjusted current earnings purposes in the same
manner as it accounts for those expenses on its financial statements
filed with the SEC.
(i) [Reserved]
(j) Depletion. For purposes of computing adjusted current earnings,
the allowance for depletion with respect to any property placed in
service in a taxable year beginning after December 31, 1989 is
determined under the cost depletion method of section 611.
(k) Treatment of certain ownership changes--(1) In general. In the
case of any corporation that has an ownership change as defined in
paragraph (k)(2) of this section in a taxable year beginning after
December 31, 1989, and that also has a net unrealized built-in loss (as
defined in paragraph (k)(3) of this section) immediately before the
ownership change, the adjusted basis of each asset of the corporation
for purposes of computing adjusted current earnings following the
ownership change shall be its proportionate share (determined on the
basis of the respective fair market values of each asset) of the fair
market value of the assets of the corporation immediately before the
ownership change. The rules of Sec. 1.338-6(b), if otherwise applicable
to the transaction, are applied in making this allocation of basis. If
such rules apply, the limitations of Sec. Sec. 1.338-6(c) (1) and (2)
also apply in allocating basis under this paragraph (k)(1).
(2) Definition of ownership change. A corporation has an ownership
change for purposes of section 56(g)(4)(G)(i) and this paragraph (k) if
there is an ownership change under section 382(g) for purposes of
computing the corporation's amount of taxable income that may be offset
by pre-change losses or the regular tax liability that may be offset by
pre-change credits. See Sec. 1.382-2T for rules to determine whether a
corporation has an ownership change. Accordingly, in order for an
ownership change to occur for purposes of this paragraph (k), a
corporation must be a loss corporation as defined in Sec. 1.382-
2(a)(1). In determining whether the corporation is a loss corporation,
the determination of whether there is a net unrealized built-in loss is
made by using the aggregate adjusted basis of the assets of the
corporation used in computing taxable income. The aggregate adjusted
basis of the corporation's assets for purposes of computing adjusted
current earnings is not relevant in determining whether the corporation
is a loss corporation. See part (iv) of the example in paragraph (k)(4)
of this section.
(3) Determination of net unrealized built-in loss immediately before
an ownership change. In order to determine whether it has a net
unrealized built-in loss for purposes of section 56(g)(4)(G)(ii) and
paragraph (k)(1) of this section, a corporation that has an ownership
change as defined in paragraph (k)(2) of this section must use the
aggregate adjusted basis of its assets that it uses in computing its
adjusted current earnings. The rules of section 382 (including sections
382(h)(3)(B)(i) and 382(h)(8)) otherwise
[[Page 582]]
apply in determining whether the corporation has a net unrealized built-
in loss.
(4) Example. The following example illustrates the provisions of
this paragraph (k):
(i) Individual A has owned all the issued and outstanding stock of
corporation L for the past 5 years. A sells all of his stock in L to
unrelated individual B. On the date of the sale, L owns the following
assets (all numbers are in millions):
------------------------------------------------------------------------
Adjusted
Adjusted basis for
basis for computing Fair market
Asset computing adjusted value
taxable current
income earnings
------------------------------------------------------------------------
x................................ $45 $50 $50
y................................ 55 60 30
z................................ 10 10 20
--------------------------------------
$110 $120 $100
------------------------------------------------------------------------
For purposes of computing taxable income, L has a $500 million net
operating loss carryforward to the taxable year in which the sale
occurs. Therefore, L is a loss corporation. As a result of the transfer
of shares of L from A to B, L has had an ownership change.
(ii) L has no net unrealized built-in loss for purposes of computing
taxable income because the amount by which the aggregate adjusted basis
of its assets for that purpose exceeds their fair market value is $10
million, which is less than 15 percent of their fair market value and is
not greater than $10 million. See section 381(h)(3)(B)(i). L, however,
does have a net unrealized built-in loss for purposes of computing
adjusted current earnings because the aggregate adjusted basis of its
assets for the purpose exceeds their fair market value by $20 million,
and that amount is greater than $10 million.
(iii) Under paragraph (k)(1) of this section, L must restate the
adjusted basis of its assets for purposes of computing adjusted current
earnings to their fair market values, as follows (all numbers are in
millions):
------------------------------------------------------------------------
New
Asset adjusted
basis
------------------------------------------------------------------------
x.......................................................... $50
y.......................................................... 30
z.......................................................... 20
------------------------------------------------------------------------
L must use these new adjusted bases for all purposes in determining
adjusted current earnings, including computing depreciation and any gain
or loss on disposition.
(iv) If L did not have the net operating loss carryforward, and had
no other loss or credit carryovers or other attributes described in
Sec. 1.382-2(a)(1) for purposes of computing the amount of its taxable
income that may be offset by pre-change losses or its regular tax
liability that may be offset by pre-change credits, it would not have
been a loss corporation on the date of the sale and therefore would not
be treated as having had an ownership change for purposes of computing
adjusted current earnings. This would be true even though L had a net
unrealized built-in loss for purposes of computing adjusted current
earnings. Therefore, this paragraph (k) would not have applied.
(l) [Reserved]
(m) Adjusted current earnings of a foreign corporation--(1) In
general. The alternative minimum taxable income of a foreign corporation
is increased by 75 percent of the excess of--
(i) Its effectively connected adjusted current earnings for the
taxable year; over
(ii) Its effectively connected pre-adjustment alternative minimum
taxable income for the taxable year.
(2) Definitions--(i) Effectively connected pre-adjustment
alternative minimum taxable income. Effectively connected pre-adjustment
alternative minimum taxable income is the effectively connected taxable
income of the foreign corporation for the taxable year, determined with
the adjustments under sections 56 and 58 (except for the adjustment for
adjusted current earnings, the alternative tax net operating loss and
the alternative tax energy preference deduction) and increased by the
tax preference items of section 57, but taking into account only items
of income of the foreign corporation that are effectively connected (or
treated as effectively connected) with the conduct of a trade or
business in the United States, and any expense, loss or deduction that
is properly allocated and apportioned to that income.
(ii) Effectively connected adjusted current earnings. Effectively
connected adjusted current earnings is the effectively connected pre-
adjustment alternative minimum taxable income of the foreign corporation
for the taxable year, adjusted under section 56(g) and this section, but
taking into account only items of income of the foreign corporation that
are effectively connected (or treated as effectively connected) with the
conduct of a trade or business in the United States, and any
[[Page 583]]
expense, loss or deduction that is properly allocated and apportioned to
that income.
(3) Rules to determine effectively connected pre-adjustment
alternative minimum taxable income and effectively connected adjusted
current earnings. The principles of section 864 (c) (and the regulations
thereunder) and any other applicable provision of the Internal Revenue
Code apply to determine whether items of income of the foreign
corporation are effectively connected (or treated as effectively
connected) with the conduct of a trade or business in the United States,
and whether any expense, loss or deduction is properly allocated and
apportioned to that income.
(4) Certain exempt amounts. Effectively connected adjusted current
earnings and effectively connected pre-adjustment alternative minimum
taxable income do not include any item of income, or any expense, loss
or deduction that is properly allocated and apportioned to income that
is exempt from United States taxation under section 883 or an applicable
income tax treaty. See section 894.
(n) Adjustment for adjusted current earnings of consolidated
groups--(1) Positive adjustments. For taxable years beginning after
December 31, 1989, the alternative minimum taxable income of a
consolidated group (as defined in Sec. 1.1502-1T) is increased by 75
percent of the excess, if any, of--
(i) The consolidated adjusted current earnings for the taxable year,
over
(ii) The consolidated pre-adjustment alternative minimum taxable
income for the taxable year.
(2) Negative adjustments--(i) In general. The alternative minimum
taxable income of a consolidated group is decreased, subject to the
limitation of paragraph (n)(2)(ii) of this section, by 75 percent of the
excess, if any, of the consolidated pre-adjustment alternative minimum
taxable income over consolidated adjusted current earnings.
(ii) Limitation on negative adjustments. The amount of the negative
adjustment for any taxable year shall be limited to the excess, if any,
of--
(A) The aggregate increases in the alternative minimum taxable
income of the group in prior years under this section, over
(B) The aggregate decreases in the alternative minimum taxable
income of the group in prior years under this section.
(3) Definitions--(i) Consolidated pre-adjustment alternative minimum
taxable income. Consolidated pre-adjustment alternative minimum taxable
income is the consolidated taxable income (as defined in Sec. 1.1502-
11) of a consolidated group for the taxable year, determined with the
adjustments provided in sections 56 and 58 (except for the adjustment
for adjusted current earnings and the alternative tax net operating loss
determined under section 56(a)(4)) and increased by the preference items
described in section 57.
(ii) Consolidated adjusted current earnings. The consolidated
adjusted current earnings of a consolidated group is the consolidated
pre-adjustment alternative minimum taxable income of the consolidated
group for the taxable year, adjusted as provided in section 56(g) and
this section.
(4) Example. The following example illustrates the provisions of
this paragraph (n):
(i) P is the common parent of a consolidated group. In 1990, the
group has consolidated pre-adjustment alternative minimum taxable income
of $1,400,000 and consolidated adjusted current earnings of $1,600,000.
Thus, the group has a consolidated adjustment for adjusted current
earnings for 1990 of $150,000 (75 percent of the $200,000 excess of
consolidated adjusted current earnings over consolidated pre-adjustment
alternative minimum taxable income), and alternative minimum taxable
income of $1,550,000 ($1,400,000 plus $150,000).
(ii) In 1991, the group has consolidated pre-adjustment alternative
minimum taxable income of $1,500,000 and consolidated adjusted current
earnings of $1,100,000. Thus, the group can reduce its alternative
minimum taxable income by $150,000. The potential negative adjustment of
$300,000 (75 percent of the $400,000 excess of consolidated pre-
adjustment alternative minimum taxable income over consolidated adjusted
current earnings) is limited to the $150,000 consolidated adjustment for
adjusted current earnings taken into account in 1990.
(o) [Reserved]
(p) Effective dates for corporate partners in partnerships--(1) In
general. The provisions of this section apply to a
[[Page 584]]
corporate partner's distributive share of items of income and expense
from a partnership for any taxable year of the partnership ending within
or with any taxable year of the corporate partner beginning after
December 31, 1989.
(2) Application of effective dates. Solely for purposes of the
effective date provisions of this section, a partnership event (such as
placing property in service, paying or incurring a cost, or closing an
installment sale) is deemed to occur on the last day of the
partnership's taxable year.
(3) Example. The following example illustrates the provisions of
this paragraph (p):
(i) X is a calendar-year corporation that is a partner in P, an
accrual-basis partnership with a taxable year ending March 31. During
P's taxable year ending March 31, 1990, P earned ratably throughout the
year interest income on tax-exempt obligations. In addition, P incurred
intangible drilling costs in November 1989 and in February 1990.
(ii) X's adjusted current earnings for 1990 includes X's
distributive share of the interest on the tax-exempt obligations earned
by P for its taxable year ending March 31, 1990. This is true even
though P earned a portion of the interest prior to January 1, 1990.
(iii) For purposes of computing X's adjusted current earnings for
1990, the adjustment provided in paragraph (f)(1) of this section
applies to X's distributive share of P's November 1989 and February 1990
intangible drilling costs.
(q) Treatment of distributions of property to shareholders--(1) In
general. If a distribution of an item of property by a corporation with
respect to its stock gives rise to more than one adjustment to earnings
and profits under section 312, all of the adjustments with respect to
that item of property (including the adjustment described in section
312(c) with respect to liabilities to which the item is subject or which
are assumed in connection with the distribution) are combined for
purposes of determining the corporation's adjusted current earnings for
the taxable year. If the amount included in pre-adjustment alternative
minimum taxable income with respect to a distribution of an item of
property exceeds the net increase in earnings and profits caused by the
distribution, pre-adjustment alternative minimum taxable income is not
reduced in computing adjusted current earnings. If the net increase in
earnings and profits caused by a distribution of an item of property
exceeds the amount included in pre-adjustment alternative minimum
taxable income with respect to the distribution, that excess is added to
pre-adjustment alternative minimum taxable income in computing adjusted
current earnings.
(2) Examples. The following examples illustrate the provisions of
this paragraph (q).
(i) Example 1. K corporation distributes property with a fair market
value of $150 and an adjusted basis of $100. The adjusted basis is the
same for purposes of computing taxable income, pre-adjustment
alternative minimum taxable income, adjusted current earnings, and
earnings and profits. Under section 312(a)(3), as modified by section
312(b)(2), K decreases its earnings and profits by the fair market value
of the property, or $150. Under section 312(b)(1), K increases its
earnings and profits by the excess of the fair market value of the
property over its adjusted basis, or $50. As a result of the
distribution, there is a net decrease in K's earnings and profits of
$100. K recognizes $50 of gain under section 311(b) as a result of the
distribution as if K sold the property for $150. K thus has no amount
permanently excluded from pre-adjustment alternative minimum taxable
income that is taken into account in determining current earnings and
profits, and thus has no adjustment under paragraph (c)(1) of this
section.
(ii) Example 2. The facts are the same as in example 1, except that
the distribution shareholder assumes a $190 liability in connection with
the disribution. Under section 312(c)(1), K must adjust the adjustments
to its earnings and profits under section 312 (a) and (b) to account for
the liability the shareholder assumes. K adjusts the $100 net decrease
in its earnings and profits to reflect the $190 liability, resulting in
an increase in its earnings and profits of $90. Because section
311(b)(2) makes the rules of section 336(b) apply, the fair market value
of the property is not less than the amount of the liability, or $190. K
therefore is treated as if it sold the
[[Page 585]]
property for $190, recognizing $90 of gain. K thus has no amount
permanently excluded from pre-adjustment alternative minimum taxable
income that is taken into account in determining current earnings and
profits, and thus has no adjustment under paragraph (c)(1) of this
section.
(r) Elections to use simplified inventory methods to compute
alternative minimum tax--(1) In general. If a taxpayer makes an election
under this paragraph (r) (and does not make the election in paragraph
(r)(5) of this section), the rules of paragraph (r)(2) of this section
apply in computing the taxpayer's pre-adjustment alternative minimum
taxable income and adjusted current earnings.
(2) Effect of election--(i) Inventories. The taxpayer's inventory
amounts as determined for purposes of computing taxable income are used
for purposes of computing pre-adjustment alternative minimum taxable
income and adjusted current earnings. Subject to the further
modification described in paragraph (r)(2)(ii) of this section, the
taxpayer's cost of sales as determined for purposes of computing taxable
income is also used for purposes of computing pre-adjustment alternative
minimum taxable income and adjusted current earnings.
(ii) Modifications required--(A) In general. If a taxpayer makes an
election under this paragraph (r), pre-adjustment alternative minimum
taxable income and adjusted current earnings are computed with the
modifications described in this paragraph. The items of adjustment under
sections 56 and 58 and the items of tax preference under section 57 are
computed without regard to the portion of those adjustments and
preferences which, but for the election described in this paragraph,
would have been capitalized in ending inventory. For example, pre-
adjustment alternative minimum taxable income is increased by the excess
of the depreciation allowable for the taxable year under section 168 for
purposes of computing taxable income (determined without regard to
section 263A) over the depreciation allowable for the taxable year under
section 56(a)(1) and section 57 for purposes of computing pre-adjustment
alternative minimum taxable income (determined without regard to section
263A). Similarly, adjusted current earnings is further increased by the
excess of the depreciation allowable for the taxable year under section
56(a)(1) and section 57 for purposes of computing pre-adjustment
alternative minimum taxable income (determined without regard to section
263A) over the depreciation allowable for the taxable year under section
56(g)(4)(A) for purposes of computing adjusted current earnings
(determined without regard to section 263A). Thus, the modifications
described in the preceding sentence do not duplicate amounts that are
taken into account in computing pre-adjustment alternative minimum
taxable income. See paragraph (a)(6)(ii) of this section.
(B) Negative modifications allowed. An election under this paragraph
(r) does not affect the taxpayer's ability to make negative adjustments.
Thus, if an election is made under this paragraph (r) and the amount of
any adjustment under section 56 or 58, determined after modification
under paragraph (r)(2)(ii)(A) of this section, is a negative amount,
then this amount reduces pre-adjustment alternative minimum taxable
income or adjusted current earnings. However, no negative adjustment
under this paragraph (r)(2)(ii)(B) is allowed for the items of tax
preference under section 57.
(iii) LIFO recapture adjustment. If a taxpayer makes an election
under this paragraph (r) and uses the LIFO method for some assets, for
purposes of computing the LIFO recapture adjustment under paragraph
(f)(3) of this section for taxable years beginning after December 31,
1989--
(A) The LIFO inventory amount as determined for purposes of
computing taxable income is used in lieu of the LIFO inventory amount as
determined under paragraph (f)(3)(iii) of this section;
(B) The FIFO inventory amount is computed without regard to the
adjustments under sections 56 (including the adjustments of section
56(g)(4)) and 58 and the items of tax preference of section 57; and
(C) The beginning LIFO and FIFO inventory amounts under paragraph
(f)(3)(ii) of this section are the ending
[[Page 586]]
LIFO inventory amount as determined for purposes of computing taxable
income and the ending FIFO inventory amount computed without regard to
the adjustments under sections 56 (including the adjustments of sections
56(g)(4)) and 58 and the items of tax preference of section 57 for the
last taxable year beginning before January 1, 1990.
(3) Time and manner of making election--(i) Prospective election.
(A) A prospective election under this paragraph (r) may be made by any
taxpayer--
(1) That has computed pre-adjustment alternative minimum taxable
income and adjusted current earnings for all prior taxable years in
accordance with the method described in this paragraph (r); or
(2) That has not computed pre-adjustment alternative minimum taxable
income and adjusted current earnings for all prior tax years in
accordance with the method described in this paragraph (r), but for
which the use of the method described in this paragraph (r) for all
prior taxable years would not have changed the taxpayer's tax liability
(as shown on returns filed as of the date the election is made) for any
prior taxable year for which the period of limitations under section
6501(a) has not expired (as of the date the election is made).
(B) A prospective election under this paragraph (r) may only be made
by attaching a statement to the taxpayer's timely filed (including
extensions) original Federal income tax return for any taxable year that
is no later than its first taxable year to which this paragraph (r)
applies and in which the taxpayer's tentative minimum tax (computed
under the provisions of this paragraph (r)) exceeds its regular tax.
However, in the case of a taxpayer described in paragraph
(r)(3)(i)(A)(1) of this section that had tentative minimum tax in excess
of its regular tax for any prior taxable year, the election may only be
made by attaching a statement to its timely filed (including extensions)
original Federal income tax return for the first taxable year ending
after December 18, 1992. The statement must--
(1) Give the name, address and employer identification number of the
taxpayer; and
(2) Identify the election as made under this paragraph (r).
(C) The determination of whether a taxpayer is described in
paragraph (r)(3)(i)(A)(2) of this section is to be made as of the time
the taxpayer makes a prospective election in accordance with the
procedures in paragraph (r)(3)(i)(B) of this section.
(D) Any taxpayer described in paragraph (r)(3)(i)(A)(2) of this
section that makes a prospective election will be deemed to have used
the method described in this paragraph (r) in computing pre-adjustment
alternative minimum taxable income and adjusted current earnings for all
prior taxable years.
(ii) Retroactive election--(A) A retroactive election under this
paragraph (r) may be made by any taxpayer not described in paragraph
(r)(3)(i)(A) (1) or (2) of this section. Except as provided in paragraph
(r)(3)(iii) of this section, a retroactive election may only be made by
attaching a statement to the taxpayer's amended Federal income tax
return for the earliest taxable year for which the period of limitations
under section 6501(a) has not expired and which begins after December
31, 1986. The amended return to which the election under this paragraph
(r)(3)(ii) is attached must be filed no later than June 21, 1993.
(B) The amended return must contain the statement described in
paragraph (r)(3)(i)(B) of this section. In addition, the statement must
contain a representation that the taxpayer will modify its pre-
adjustment alternative minimum taxable income and adjusted current
earnings for all open taxable years in accordance with paragraph (r)(2)
of this section. Upon this change in method of accounting, the taxpayer
must include the entire adjustment required under section 481(a), if
any, in preadjustment alternative minimum taxable income and adjusted
current earnings on the amended return for the year of the election. The
taxpayer must also reflect the method of accounting described in
paragraph (r)(2) of this section on amended returns filed for all
taxable years after the year
[[Page 587]]
of the election for which returns were originally filed before making
the election (and for which the period of limitations under section
6501(a) has not expired).
(C) Provided a taxpayer meets the requirements of this paragraph
(r), any change in method of accounting arising as a result of making a
retroactive election will be treated as made with the advance consent of
the Commissioner.
(D) Any retroactive election under this paragraph (r) that is made
without filing amended returns required under this paragraph (r)(3)(ii)
shall constitute a change in method of accounting made without the
consent of the Commissioner.
(iii) Taxpayers under examination--(A) In general. A taxpayer that
wishes to make a retroactive election under section (r)(3)(ii) of this
section may use the procedures in paragraph (r)(3)(iii)(A) (1) or (2) in
lieu of filing an amended return for any taxable year that is under
examination by the Internal Revenue Service.
(1) Year of change under examination. If the year of the change is
under examination at the time the taxpayer timely makes the election,
the taxpayer may (in lieu of filing an amended return for the year of
the change) furnish the written statement described in paragraph
(r)(3)(iii)(B) of this section to the revenue agent responsible for
examining the taxpayer's return no later than June 21, 1993. It is the
taxpayer's responsibility to make a timely election either by furnishing
the statement to the revenue agent or by filing amended returns by June
21, 1993.
(2) Other open years under examination. If any other year for which
the taxpayer must modify its pre-adjustment alternative minimum taxable
income and adjusted current earnings (see paragraph (r)(3)(ii)(B) of
this section) is examined, the taxpayer may (in lieu of filing an
amended return) furnish the amount of the conforming adjustment to the
revenue agent responsible for examining the taxpayer's return. It is the
taxpayer's responsibility to timely modify its pre-adjustment
alternative minimum taxable income and adjusted current earnings for
each year other than the year of change, either by furnishing the amount
of the adjustment to the revenue agent or by filing amended returns.
(B) Statement required. The statement required under paragraph
(r)(3)(iii)(A)(1) of this section must include all of the items required
under paragraph (r)(3)(ii)(B) of this section, as well as--
(1) The caption ``Election to use regular tax inventories for AMT
purposes;''
(2) A description of the nature and amount of all items that would
result in adjustments and that the taxpayer would have reported if the
taxpayer had used the method described in this paragraph (r) for all
prior taxable years for which the period of limitations under section
6501(a) has not expired and which begin after December 31, 1986; and
(3) The following declaration signed by the person authorized to
sign the return for the taxpayer: ``Under penalties of perjury, I
declare that I have examined this written statement, and to the best of
my knowledge and belief this written statement is true, correct, and
complete.''
(C) Year of change. The year of change is the earliest taxable year
for which the period of limitations under section 6501(a) has not
expired at the time the statement is submitted to the appropriate
revenue agent and that begins after December 31, 1986. Thus, the
adjustments required to be included on the statement must include any
adjustment under section 481(a) determined as if the method described in
this paragraph (r) had been used in all taxable years prior to the year
of change that begin after December 31, 1986.
(D) Treatment of additional tax liability. Any additional tax
liability that results from the adjustments identified in the written
statement described in paragraph (r)(3)(iii)(B) of this section is
treated as an additional amount of tax shown on an amended return.
(iv) Election as method of accounting. The elections provided in
paragraphs (r)(3) (i) and (ii) of this section constitute either
adoptions of, or changes in, methods of accounting. These elections,
once made, may be revoked only with the consent of the Commissioner
[[Page 588]]
in accordance with the rules of section 446(e) and Sec. 1.446-1(e).
(v) Untimely election to use simplified inventory method. If a
taxpayer makes an election described in this paragraph (r) after the
times set forth in paragraph (r)(3) (i) or (ii) of this section, the
taxpayer must comply with the requirements of Sec. 1.446-1(e)(3) in
order to secure the consent of the Commissioner to change to the method
of accounting prescribed in this paragraph (r). The taxpayer generally
will be subject to terms and conditions designed to place the taxpayer
in a position no more favorable than a taxpayer that timely complied
with paragraph (r)(3) (i) and (ii) of this section, whichever is
applicable.
(4) Example. The following example illustrates the provisions of
this paragraph (r).
Example. (i) Corporation L is a calendar year manufacturer of
baseball bats and uses the LIFO method of accounting for inventories.
During 1987, 1988, and 1989, L's cost of goods sold in computing taxable
income was as follows:
------------------------------------------------------------------------
1987 1988 1989
------------------------------------------------------------------------
Beginning LIFO inventory......... $3,000 $4,000 $5,000
Purchases and other costs........ 9,000 9,000 9,000
Ending LIFO inventory............ (4,000) (5,000) (6,000)
--------------------------------------
Cost of goods sold............... 8,000 8,000 8,000
------------------------------------------------------------------------
(ii) L has no preferences under section 57 during 1987, 1988, and
1989. L's sole adjustment in computing alternative minimum tax during
1987, 1988, and 1989 was the depreciation adjustment under section
56(a)(1). Depreciation determined for both production and non-production
assets under section 168 and under section 56(a)(1) during 1987, 1988,
and 1989 was as follows:
------------------------------------------------------------------------
1987 1988 1989
------------------------------------------------------------------------
Section 168 depreciation......... $1,800 $1,800 $1,800
Section 56(a)(1) depreciation.... (900) (900) (900)
--------------------------------------
Depreciation difference.......... 900 900 900
Portion of difference capitalized (100) (100) (100)
in the increase in inventory....
--------------------------------------
Adjustment required under section 800 800 800
56(a)(1)........................
------------------------------------------------------------------------
(iii) In computing taxable income, a portion of each year's section
168 depreciation attributable to production assets is deducted currently
and a portion is capitalized into the increase in ending inventory. For
1987, 1988, and 1989, L computed alternative minimum tax by deducting
the cost of goods sold which was reflected in taxable income ($8,000) in
accordance with paragraph (r)(2)(i) of this section. For 1987, 1988, and
1989, L also modified its adjustments under sections 56 and 58 and its
preferences under section 57 to disregard the portion of any adjustment
or preference that was capitalized in inventory. Thus, under section
56(a)(1), L increased alternative minimum taxable income during each
year by $900.
(iv) L is eligible to make the election under paragraph (r)(1) of
this section in accordance with paragraph (r)(3)(i) of this section (a
prospective election).
(v) L must compute its LIFO recapture adjustment for each year by
reference to--
(A) The FIFO inventory amount after applying the provisions of
section 263A but before applying the adjustments of sections 56 and 58
and the items of preference in section 57; and
(B) The LIFO inventory amount used in computing taxable income.
(5) Election to use alternative minimum tax inventories to compute
adjusted current earnings. A taxpayer may elect under this paragraph
(r)(5) to use the inventory amounts used to compute pre-adjustment
alternative minimum taxable income in computing its adjusted current
earnings. Rules similar to those of paragraphs (r)(2) and (r)(3) of this
section apply for purposes of this election.
(s) Adjustment for alternative tax energy preference deduction--(1)
In general. For purposes of computing adjusted current earnings, any
taxpayer claiming a deduction under section 56(h) must properly decrease
basis by the
[[Page 589]]
portion of the deduction allowed under section 56(h) which is
attributable to adjustments under section 56(g)(4). In taxable years
following the taxable year in which the section 56(h) deduction is
claimed, basis recovery (including amortization, depletion, and gain on
sale) must properly take into account this basis reduction.
(2) Example. The following example illustrates the provisions of
this paragraph (s):
Example. Corporation A, a calendar year taxpayer, incurs $100 of
intangible drilling costs on January 1, 1994 and as a result of these
intangible drilling costs A claims a deduction under section 56(h) of
$40. Assume that $20 of A's deduction under section 56(h) is
attributable to the adjustment under paragraph (f)(1) of this section. A
must reduce by $20 the amount of intangible drilling costs to be
amortized under paragraph (f)(1) of this section in 1995 through 1998
(the balance of the 60-month amortization period).
[T.D. 8340, 56 FR 11084, Mar. 15, 1991, as amended by T.D. 8352, 56 FR
29433, June 27, 1991; T.D. 8454, 57 FR 60477, Dec. 21, 1992; T.D. 8482,
58 FR 42207, Aug. 9, 1993; T.D. 8566, 59 FR 51371, Oct. 11, 1994; T.D.
8858, 65 FR 1237, Jan. 7, 2000; T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Tax Preference Regulations
Sec. 1.57-0 Scope.
For purposes of the minimum tax for tax preferences (subtitle A,
chapter I, part VI), the items of tax preference are:
(a) Excess investment interest,
(b) The excess of accelerated depreciation on section 1250 property
over straight line depreciation,
(c) The excess of accelerated depreciation on section 1245 property
subject to a net lease over straight line depreciation,
(d) The excess of the amortization deduction for certified pollution
control facilities over the depreciation otherwise allowable,
(e) The excess of the amortization deduction for railroad rolling
stock over the depreciation otherwise allowable,
(f) The excess of the fair market value of a share of stock received
pursuant to a qualified or restricted stock option over the exercise
price,
(g) The excess of the addition to the reserve for losses on bad
debts of financial institutions over the amount which have been
allowable based on actual experience,
(h) The excess of the percentage depletion deduction over the
adjusted basis of the property, and
(i) The capital gains deduction allowable under section 1202 or an
equivalent amount in the case of corporations.
Accelerated depreciation on section 1245 property subject to a net lease
and excess investment interest are not items of tax preference in the
case of a corporation, other than a personal holding company (as defined
in section 542) and an electing small business corporation (as defined
in section 1371(b)). In addition, excess investment interest is an item
of tax preference only for taxable years beginning before January 1,
1972. Rules for the determination of the items of tax preference are
contained in Sec. Sec. 1.57-1 through 1.57-5. Generally, in the case of
a nonresident alien or foreign corporation, the application of
Sec. Sec. 1.57-1 through 1.57-5 will be limited to cases in which the
taxpayer has income effectively connected with the conduct of a trade or
business within the United States. Special rules for the treatment of
items of tax preference in the case of certain entities and the
treatment of items of tax preference relating to income from sources
outside the United States are provided in section 58 and in Sec. Sec.
1.58-1 through 1.58-8.
[T.D. 7564, 43 FR 40470, Sept. 12, 1978]
Sec. 1.57-1 Items of tax preference defined.
(a) [Reserved]
(b) Accelerated depreciation on section 1250 property--(1) In
general. Section 57(a)(2) provides that, with respect to each item of
section 1250 property (as defined in section 1250(c)), there is to be
included as an item of tax preference the amount by which the deduction
allowable for the taxable year for depreciation or amortization exceeds
the deduction which would have been allowable for the taxable year if
the taxpayer had depreciated the property under the straight line method
for each year of its useful life for which the taxpayer has held the
property. The determination of the excess under section 57(a)(2) is made
with respect to each separate item of section 1250 property.
[[Page 590]]
Accordingly, where the amount of depreciation which would have been
allowable with respect to one item of section 1250 property if the
taxpayer had originally used the straight line method exceeds the
allowable depreciation or amortization with respect to such property,
such excess may not be used to reduce the amount of the item of tax
preference resulting from another item of section 1250 property.
(2) Separate items of section 1250 property. The determination of
what constitutes a separate item of section 1250 property is to be made
on the facts and circumstances of each individual case. In general, each
building (or component thereof, if the taxpayer uses the component
method of computing depreciation) is a separate item of section 1250
property. However, for purposes of this section, assets placed in a
group, classified, or composite account are to be treated as a single
item by a taxpayer, provided that such account contains only property
placed in service during a single taxable year. In addition, two or more
items may be treated as one item of section 1250 property for purposes
of this paragraph where, with respect to each such item:
(i) The period for which depreciation is taken begins on the same
date, (ii) the same estimated useful life has continually been used for
purposes of taking depreciation or amortization, and (iii) the same
method (and rate) of depreciation or amortization has continually been
used. For example, assume a taxpayer constructed a 40-unit rental
townhouse development and began taking declining balance depreciation on
all 40 units as of January 1, 1970, at a uniform rate and has
consistently taken depreciation on all 40 units on this same basis.
Although each townhouse is a separate item of section 1250 property, all
40 townhouses may be treated as one item of section 1250 property for
purposes of the minimum tax since the conditions of subdivisions (i),
(ii), and (iii) of this subparagraph are met. This would be true even if
the 40 townhouses comprised two 20-unit developments located apart from
each other. However, if the taxpayer constructed an additional
development or new section on the existing development for which he
began taking depreciation on July 1, 1970, at a uniform rate for all the
additional units, the additional units and the original units may not be
treated as one item of section 1250 property since the condition of
subdivision (i) of this subparagraph is not met. Where a portion of an
item of section 1250 property has been depreciated or amortized under a
method (or rate) which is different from the method (or rate) under
which the other portion or portions of such item have been depreciated
or amortized, such portion is considered a separate item of section 1250
property for purposes of this paragraph.
(3) Allowable depreciation or amortization. The phrase ``deduction
allowable for the taxable year for exhaustion, wear and tear,
obsolescence, or amortization'' and references in this paragraph to
``allowable depreciation or amortization'' include deductions allowable
for the taxable year under sections 162, 167, 212, or 611 for the
depreciation or amortization of section 1250 property. Such phrase does
not include depreciation allowable in the year in which the section 1250
property is disposed of. For the determination of ``allowable
depreciation or amortization'' for taxable years in which the taxpayer
has taken no deduction, see Sec. 1.1016-3(a)(2).
(4) Straight line depreciation. (i) For purposes of computing the
depreciation which would have been allowable for the taxable year if the
taxpayer had depreciated the property under the straight line method for
each taxable year of its useful life, the taxpayer must use the same
useful life and salvage value as was used for the first taxable year in
which the taxpayer depreciated or amortized the property (subject to
redeterminations made pursuant to Sec. 1.167(a)-1 (b) and (c)). If,
however, for any taxable year, no useful life was used under the method
of depreciation or amortization used or an artificial period was used,
such as, for example, by application of section 167(k), or salvage value
was not taken into account in determining the annual allowances, such
as, for example, under the declining balance method, then, for purposes
of computing the depreciation which would have been allowable under
[[Page 591]]
the straight line method for the taxable year--
(a) There is to be used the useful life and salvage value which
would have been proper if depreciation had actually been determined
under the straight line method (without reference to an artificial life)
throughout the period the property was held, and
(b) Such useful life and such salvage value is to be determined by
taking into account for each taxable year the same facts and
circumstances as would have been taken into account if the taxpayer had
used such method throughout the period the property was held.
If an election under Sec. 1.167(a)-11(f), Sec. 1.167(a)-12(e), or
Sec. 1.167(a)-12(f) is applicable to the property, the salvage value of
the property shall be determined in accordance with such election, and
the asset depreciation period (or asset guideline period) applicable to
the property pursuant to such election shall be considered to be the
useful life of the property for the purposes of this section.
(ii) Where the taxpayer acquires property in a transaction to which
section 381(a) applies or from another member of an affiliated group
during a consolidated return year and an ``accelerated'' method of
depreciation as described in section 167(b) (2), (3), or (4) or section
167(j)(1) (B) or (C) is permitted (see Sec. 1.381(c)(6)-1 and Sec.
1.1502-12(g)), the depreciation which would have been allowable under
the straight line method is determined as if the property had been
depreciated under the straight line method since depreciation was first
taken on the property by the transferor of such property. In such cases,
references in this paragraph to the period for which the property is
held or useful life of the property are treated as including the period
beginning with the commencement of the original use of the property.
(iii) For purposes of section 57(a)(2), the straight line method
includes the method of depreciation described in Sec. 1.167(b)-1 or any
other method which provides for a uniform proration of the cost or other
basis (less salvage value) of the property over the estimated useful
life of the property to the taxpayer (in terms of years, hours of use,
or other similar time units) or estimated number of units to be produced
over the life of the property to the taxpayer. If a method other than
the method described in Sec. 1.167(b)-1 is used, the estimated useful
life or estimated units of production shall be determined in a manner
consistent with subdivision (i) of this subparagraph.
(iv) In the case of property constructed by or improvements made by
a lessee, the useful life is to be determined in accordance with Sec.
1.167(a)-4.
(5) Application for partial period. If an item is section 1250
property for less than the entire taxable year, the allowable
depreciation or amortization includes only the depreciation or
amortization for that portion of the taxable year during which the item
is section 1250 property and the amount of the depreciation which would
have been allowable under the straight line method is determined only
with regard to such portion of the taxable year.
(6) No section 1250 and basis adjustment. No adjustment is to be
made as a result of the minimum tax either to the basis of section 1250
property or with respect to computations under section 1250.
(7) Example. The principles of this paragraph may be illustrated by
the following example:
Example. The taxpayer's only item of section 1250 property is an
office building with respect to which operations were commenced on
January 1, 1971. The taxpayer depreciates the component parts of the
building on the declining balance method. The useful life and costs of
the component parts for depreciation purposes are as follows:
------------------------------------------------------------------------
Salvage
Asset Useful life Cost value
------------------------------------------------------------------------
Building shell................... 50 $400,000 $50,000
Partitions and walls............. 10 40,000
Ceilings......................... 10 20,000
Electrical system................ 25 40,000 2,500
Heating and air-conditioning 25 60,000 2,500
system..........................
------------------------------------------------------------------------
For purposes of computing the item of tax preference under this
paragraph for the taxpayer, the partitions, walls, and ceilings may be
grouped together and the electrical, heating, and air-conditioning
systems may be grouped together since the period for which depreciation
is taken began with respect to the assets within these two groups on the
[[Page 592]]
same date and the assets within each group have continually had the same
useful life and have continually been depreciated under the same method
(and rate).
(a) The taxpayer's 1971 item of tax preference under this paragraph
would be determined as follows:
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Declining
Item of 1250 property balance Straight line Excess of (2)
depreciation depreciation over (3)
----------------------------------------------------------------------------------------------------------------
1. Shell........................................................ $12,000 $7,000 $5,000
2. Partitions, walls, ceilings.................................. 9,000 6,000 3,000
3. Electrical, heating and air-conditioning systems............. 6,000 3,800 2,200
-----------------------------------------------
1971 preference............................................... .............. .............. 10,200
----------------------------------------------------------------------------------------------------------------
(b) Assuming the above facts are the same for 1974, the taxpayer's
1974 item of tax preference under this paragraph would be determined as
follows:
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Declining
Item of 1250 property balance Straight line Excess of (2)
depreciation depreciation over (3)
----------------------------------------------------------------------------------------------------------------
1. Shell........................................................ $10,952 $7,000 $3,952
2. Partitions, walls, ceilings.................................. 5,529 6,000 None
3. Electrical, heating and air-conditioning systems............. 4,983 3,800 1,183
-----------------------------------------------
1974 preference............................................... .............. .............. 5,135
----------------------------------------------------------------------------------------------------------------
(c) Accelerated depreciation on section 1245 property subject to a
net lease--(1) In general. Section 57(a)(3) provides that, with respect
to each item of section 1245 property (as defined in section 1245(a)(3))
which is the subject of a net lease for the taxable year, there is to be
included as an item of tax preference the amount by which the deduction
allowable for the taxable year for depreciation or amortization exceeds
the deduction which would have been allowable for the taxable year if
the taxpayer had depreciated the property under the straight line method
for each year of its useful life for which the taxpayer has held the
property. Except as provided in paragraph (b)(1)(ii) of this section,
the determination of the excess under section 57(a)(3) is made with
respect to each separate item of section 1245 property. Accordingly,
where the amount of depreciation which would have been allowable with
respect to one item of section 1245 property if the taxpayer had
originally used the straight line method exceeds the allowable
depreciation or amortization with respect to such property, such excess
may not be used to reduce the amount of the item of tax preference
resulting from another item of section 1245 property.
(2) Separate items of property. The determination of what
constitutes a separate item of section 1245 property must be made on the
facts and circumstances of each individual case. Such determination
shall be made in a manner consistent with the principles expressed in
paragraph (b)(2) of this section.
(3) Allowable depreciation or amortization. The phrase ``deduction
allowable for the taxable year for exhaustion, wear and tear,
obsolescence, or amortization'' and references in this paragraph to
``allowable depreciation or amortization'' include deductions allowable
for the taxable year under sections 162, 167 (including depreciation
allowable under section 167 by reason of section 179), 169, 184, 185,
212, or 611 for the depreciation or amortization of section 1245
property. Such phrase does not include depreciation allowable in the
year in which the section 1245 property is disposed of. Amortization of
certified pollution control facilities under section 169, and
amortization of railroad rolling stock under section 184 are not to be
treated as amortization
[[Page 593]]
for purposes of section 57(a)(3) to the extent such amounts are treated
as an item of tax preference under section 57(a) (4) or (5) (see
paragraphs (d) and (e) of this section). For the determination of
``allowable depreciation or amortization'' for taxable years in which
the taxpayer has taken no deduction, see Sec. 1.1016-3(a)(2).
(4) Straight line method of depreciation. The determination of the
depreciation which would have been allowable under the straight line
method shall be made in a manner consistent with paragraph (b)(4) of
this section. Such amount shall include any amount allowable under
section 167 by reason of section 179 (relating to additional first-year
depreciation for small business).
(5) Application for partial period. If an item is section 1245
property for less than the entire taxable year or subject to a net lease
for less than the entire taxable year the allowable depreciation or
amortization includes only the depreciation or amortization for that
portion of the taxable year during which the item was both section 1245
property and subject to a net lease and the amount of the depreciation
which would have been allowable under the straight line method is to be
determined only with regard to such portion of the taxable year.
(6) Net lease. Section 57(a)(3) applies only if the section 1245
property is the subject of a net lease for all or part of the taxable
year. See Sec. 1.57-3 for the determination of when an item is
considered the subject of a net lease. p
(7) No section 1245 and basis adjustment. No adjustment is to be
made as a result of the minimum tax either to the basis of section 1245
property or with respect to computations under section 1245.
(8) Nonapplicability to corporations. Section 57(a)(3) does not
apply to a corporation other than an electing small business corporation
(as defined in section 1371(b)) and a personal holding company (as
defined in section 542).
(d) Amortization of certified pollution control facilities--(1) In
general. Section 57(a)(4) provides that, with respect to each certified
pollution control facility for which an election is in effect under
section 169, there is to be included as an item of tax preference the
amount by which the deduction allowable for the taxable year under such
section exceeds the depreciation deduction which would otherwise be
allowable under section 167. The determination under section 57(a)(4) is
made with respect to each separate certified pollution control facility.
Accordingly, where the amount of the depreciation deduction which would
otherwise be allowable under section 167 with respect to one facility
exceeds the allowable amortization deduction under section 169 with
respect to such facility, such excess may not be used to offset an item
of tax preference resulting from another facility.
(2) Separate facilities. The determination of what constitutes a
separate facility must be made on the facts and circumstances of each
individual case. Generally, each facility with respect to which a
separate election is in effect under section 169 shall be treated as a
separate facility for purposes of this paragraph. However, if the
depreciation or amortization which would have been allowable without
regard to section 169 with respect to any part of a facility is based on
a different useful life, date placed in service, or method of
depreciation or amortization from the other part or parts of such
facility, such part is considered a separate facility for purposes of
this paragraph. For example, if a building constitutes a certified
pollution control facility and various component parts of the building
have different useful lives, each group of component parts with the same
useful life would be treated as a separate facility for purposes of this
paragraph. Two or more facilities may be treated as one facility for
purposes of this paragraph where, with respect to each such facility:
(i) The initial amortization under section 169 commences on the same
date, (ii) the facility is placed in service on the same date, (iii) the
estimated useful life which would be the basis for depreciation or
amortization other than under section 169 has continually been the same,
and (iv) the method of depreciation or amortization which could have
been used without regard to section 169 could have continually been the
same.
(3) Amount allowable under section 169. For purposes of the
determination of
[[Page 594]]
the amount of the deduction allowable under section 169, see section 169
and the regulations thereunder. Such amount, however, does not include
amortization allowable in the year in which the pollution control
facility is disposed of.
(4) Otherwise allowable deduction. (i) The determination of the
amount of the depreciation deduction otherwise allowable under section
167 is made as if the taxpayer had depreciated the property under
section 167 for each year of its useful life for which the property has
been held. This amount may be determined under Sec. 1.167(a)-(11)(c) if
the property is eligible property (as defined in Sec. 1.167(a)-
11(b)(2)) and, during the taxable year in which the property was first
placed in service, the taxpayer--
(a) Has made an election under Sec. 1.167(a)-11(f) with respect to
eligible property first placed in service in such taxable year, or
(b) Has placed no eligible property in service other than property
described in Sec. 1.167(a)-11(b)(5) (iii), (iv), or (v).
The amount determined pursuant to the preceding sentence shall be
determined as if the taxpayer had depreciated the property in accordance
with Sec. 1.167(a)-11 for all years to which such section applies and
during which the taxpayer held the property. This amount may be
determined under Sec. 1.167(a)-12(a)(5) if the property is qualified
property (as defined in Sec. 1.167(a)-12(a)(3)) and the taxpayer has
made an election with respect to such property under Sec. 1.167(a)-
12(e). If the taxpayer has made an election under Sec. 1.167(a)-
12(f)(1) for a taxable year ending before January 1, 1971, this amount
shall be determined for such year in accordance with such election. For
purposes of this determination, any method selected by the taxpayer
which would have been permissible under section 167 for such taxable
year, including accelerated methods, may be used. Any additional amount
which would have been allowable by reason of section 179 (relating to
additional first-year depreciation for small business) may be included
provided such amount is reflected in the determination made under this
paragraph in subsequent years.
(ii) If a deduction for depreciation has not been taken by the
taxpayer in any taxable year under section 167 with respect to the
facility--
(a) There is to be used the useful life and salvage value which
would have been proper under section 167.
(b) Such useful life and salvage value is determined by taking into
account for each taxable year the same facts and circumstances as would
have been taken into account if the taxpayer had used such method
throughout the period the property has been held, and
(c) The date the property is placed in service is, for purposes of
this section, deemed to be the first day of the first month for which
the amortization deduction is taken with respect to the facility under
section 169.
If, prior to the date amortization begins under section 169, a deduction
for depreciation has been taken by the taxpayer in any taxable year
under section 167 with respect to the facility, the useful life, salvage
value, etc., used for that purpose is deemed to be the appropriate
useful life, salvage value, etc., for purposes of this paragraph, with
such adjustments as are appropriate in light of the facts and
circumstances which would have been taken into account since the time
the last such depreciation deduction was taken, unless it is established
by clear and convincing evidence that some other useful life, salvage
value, or date the property is placed in service is more appropriate.
(iii) For purposes of section 57(a)(4) and this paragraph, if the
deduction for amortization or depreciation which would have been
allowable had no election been made under section 169 would have been--
(a) An amortization deduction based on the term of a leasehold or
(b) A depreciation deduction determined by reference to section 611,
such deduction is to be deemed to be a deduction allowable under section
167.
(iv) If a facility is subject to amortization under section 169 for
less than the entire taxable year, the otherwise allowable depreciation
deduction under section 167 shall be determined only with regard to that
portion of the taxable year during which the election under section 169
is in effect.
[[Page 595]]
(v) If less than the entire adjusted basis of a facility is subject
to amortization under section 169, the otherwise allowable depreciation
deduction under section 167 shall be determined only with regard to that
portion of the adjusted basis subject to amortization under section 169.
(5) No section 1245 and basis adjustment. No adjustment is to be
made as a result of the minimum tax either to the basis of a certified
pollution control facility or with respect to computations under
sections 1245.
(6) Relationship to section 57(a)(3). See paragraph (c)(3) with
respect to an adjustment in the amount treated as amortization under
that provision where both paragraphs (3) and (4) of section 57(a) are
applicable to the same item of property.
(7) Example. The principles of this paragraph may be illustrated by
the following example:
Example. A calendar year taxpayer has a certified pollution control
facility on which an election is in effect under section 169 commencing
with January 1, 1971. No part of the facility is section 1250 property.
The original basis of the facility is $100,000 of which $75,000
constitutes amortizable basis. The useful life of the facility is 20
years. The taxpayer depreciates the $25,000 portion of the facility
which is not amortizable basis under the double declining method and
began taking depreciation on January 1, 1971.
(a) The taxpayer's 1971 item of tax preference under this paragraph
would be determined as follows:
1. Amortization deduction................................... $15,000
2. Depreciation deduction on amortizable basis (double 7,500
declining method)..........................................
-----------
1971 preference (excess of 1 over 2).................... 7,500
(b) If the taxpayer terminated his election under section 169 in
1972 effective as of July 1, 1972, the taxpayer's 1972 item of tax
preference would be determined as follows:
1. Amortization deduction................................... $7,500
2. Depreciation deduction on amortizable basis:
Full year ($75,000 (original basis) less $7,500 6,750
(``depreciation'' to 1-1-72) equals adjusted basis of
$67,500; multiplied by 0.10 (double declining rate)).....
===========
Portion of full year's depreciation attributable to 3,375
amortization period (one-half)...........................
-----------
1972 preference (excess of 1 over 2).................... 4,125
(e) Amortization of railroad rolling stock--(1) In general. Section
57(a)(5) provides that, with respect to each unit of railroad rolling
stock for which an election is in effect under section 184, there is to
be included as an item of tax preference the amount by which the
deduction allowable for the taxable year under such section exceeds the
depreciation deduction which would otherwise be allowable under section
167. The determination under section 57(a)(5) is made with respect to
each separate unit of rolling stock. Accordingly, where the amount of
the depreciation deduction which would otherwise be allowable under
section 167 with respect to one unit exceeds the allowable amortization
deduction under section 184 with respect to such unit, such excess may
not be used to offset an item of tax preference resulting from another
unit.
(2) Separate units of rolling stock. The determination of what
constitutes a separate unit of rolling stock must be made on the facts
and circumstances of each individual case. Such determination shall be
made in a manner consistent with the manner in which the comparable
determination is made with respect to separate certified pollution
control facilities under paragraph (d) (2) of this section.
(3) Amount allowable under section 184. For purposes of the
determination of the amount of the deduction allowable under section
184, see section 184. Such amount, however, does not include
amortization allowable in the year in which the rolling stock is
disposed of.
(4) Otherwise allowable deduction. The determination of the amount
of the depreciation deduction otherwise allowable under section 167 is
to be made in a manner consistent with the manner in which the
comparable deduction with respect to certified pollution control
facilities is determined under paragraph (d)(4) of this section.
(5) No section 1245 or basis adjustment. No adjustment is to be made
as a result of the minimum tax either to the basis of a unit of railroad
rolling stock or with respect to computations under section 1245.
(6) Relationship to section 57(a)(3). See paragraph (c)(3) of this
section with respect to an adjustment in the amount treated as
amortization under that provision where both paragraphs (3) and
[[Page 596]]
(5) of section 57(a) are applicable to the same item.
(f) Stock options--(1) In general. Section 57(a)(6) provides that
with respect to each transfer of a share of stock pursuant to the
exercise of a qualified stock option or a restricted stock option, there
shall be included by the transferee as an item of tax preference the
amount by which the fair market value of the share at the time of
exercise exceeds the option price. The stock option item of tax
preference is subject to tax under section 56(a) in the taxable year of
the transferee in which the transfer is made.
(2) Definitions. See generally Sec. 1.421-7 (e), (f), and (g) for
the definitions of ``option price,'' ``exercise,'' and ``transfer,''
respectively; however, in the case of a transfer of a share of stock
pursuant to the exercise of a qualified stock option or a restricted
stock option after the death of an employee by the estate of the
decedent (or by a person who acquired the right to exercise such option
by bequest or inheritance or by reason of the death of the decedent),
the term ``option price'' shall, for purposes of this paragraph, include
both the consideration paid by the estate (or such person) for such
share of stock and so much of the basis of the option as is attributable
to such share of stock. For the definition of a qualified stock option
see section 422(b) and Sec. 1.422-2. For the definition of a restricted
stock option see section 424(b) and Sec. 1.424-2. The definitions and
special rules contained in section 425 and the regulations thereunder
are applicable to this paragraph.
(3) Fair market value. In accordance with the principles of section
83(a)(1), the fair market value of a share of stock received pursuant to
the exercise of a qualified or restricted stock option is to be
determined without regard to restrictions (other than nonlapse
restrictions within the meaning of Sec. 1.83-3(h)). Notwithstanding any
valuation date given in section 83(a)(1), for purposes of this section,
fair market value is determined as of the date the option is exercised.
(4) Foreign source options. In the case of an option attributable to
sources within any foreign country or possession, see section 58(g) and
Sec. 1.58-8.
(5) Inapplicability in certain cases. (i) Section 57(a)(6) is
inapplicable if during the same taxable year in which stock is
transferred pursuant to the exercise of an option, the transferee makes
a disposition (within the meaning of section 425(c)) of such stock. In
the case of a nonresident alien, section 57(a)(6) is inapplicable to the
extent the stock option is attributable (in accordance with the
principles of sections 861 through 863 and the regulations thereunder)
to sources without the United States.
(ii) Section 57(a)(6) is inapplicable if section 421(a) does not
apply to the transfer because of employment requirements of section
422(a)(2) or 424(a)(2).
(6) Proportionate applicability. Where, by reason of section 422
(b)(7) and (c)(3) (relating to percentage ownership limitations), only a
portion of a transfer qualifies for application of section 421, the fair
market value and option price shall be determined only with regard to
that portion of the transfer which so qualifies.
(7) No basis adjustment. No adjustment shall be made to the basis of
the stock received pursuant to the exercise of a qualified or restricted
stock option as a result of the minimum tax.
(g) Reserves for losses on bad debts of financial institutions--(1)
In general. Section 57(a)(7) provides that, in the case of a financial
institution to which section 585 or 593 (both relating to reserves for
losses on loans) applies, there shall be included as an item of tax
preference the amount by which the deduction allowable for the taxable
year for a reasonable addition to a reserve for bad debts exceeds the
amount that would have been allowable had the institution maintained its
bad debt reserve for all taxable years on the basis of the institution's
actual experience.
(2) Taxpayers covered. Section 57(a)(7) applies only to an
institution (or organization) to which section 585 or 593 applies. See
sections 585(a) and 593(a) and the regulations thereunder for a
description of those institutions.
(3) Allowable deduction. For purposes of this paragraph, the amount
of the deduction allowable for the taxable year for a reasonable
addition to a reserve for bad debts is the amount of the
[[Page 597]]
deduction allowed under section 166(c) by reference to section 585 or
593.
(4) Actual experience. (i) For purposes of this paragraph, the
determination of the amount which would have been allowable had the
institution maintained its reserve for bad debts on the basis of actual
experience is the amount determined under section 585(b)(3)(A) and the
regulations thereunder. For this purpose, the beginning balance for the
first taxable year ending in 1970 is the amount which bears the same
ratio to loans outstanding at the beginning of the taxable year as (a)
the total bad debts sustained during the 5 preceding taxable years,
adjusted for recoveries of bad debts during such period, bears to (b)
the sum of the loans outstanding at the close of such 5 taxable years.
The taxpayer may, however, select a more appropriate balance based on
its actual experience during a shorter period subject to the approval of
the district director upon examination of the return provided there are
unusual circumstances which indicate that such period is more indicative
of the taxpayer's actual loss experience. Any such selection and
approval shall be made in a manner consistent with the selection and
approval of a bad debt reserve method under Sec. 1.166-1(b). In the
case of an institution which has been in existence for less than 5
taxable years as of the beginning of the first taxable year ending in
1970, the above formula for determining the beginning balance is applied
by substituting the number of taxable years for which the institution
has been in existence as of the beginning of the taxable year for ``5''
each time it appears. If any taxable year utilized in the above formula
for determining the beginning balance is a short taxable year the amount
of the bad debts, adjusted for recoveries, for such taxable year is
modified by dividing such amount by the number of days in the taxable
year and multiplying the resulting amount by 365. The beginning balance
for any subsequent taxable year is the amount of the beginning balance
of the preceding taxable year, decreased by bad debt losses during such
year, increased by recoveries of bad debts during such year and
increased by the lower of the maximum amount determined under section
585(b)(3)(A) for such year or the amount of the deduction allowed for
such year. The application of this subdivision (i) may be illustrated by
the following example:
Example. The Y Bank, a calendar year taxpayer, uses the reserve
method of acounting for bad debts. On December 31, 1969, Y determines
the balance of its reserve for bad debts to be $70,000 under the
percentage method. On the same date Y's 5-year moving average is
$52,000. Y incurs net bad debt losses (bad debt losses less recoveries
of bad debts) of $3,000 for each of the years 1970, 1971, and 1972,
which it charges to its reserve for bad debts. Y's 6-year moving
averages computed under section 585(b)(3)(A) at the close of 1970, 1971,
and 1972 are $50,000, $49,000, and $51,000, respectively. Y's preference
items are computed as follows based upon additional facts assumed:
------------------------------------------------------------------------
1970 1971 1972
------------------------------------------------------------------------
1. Bad debt reserve--percentage method:
(a) Balance beginning of year $70,000 $70,000 $68,000
(closing balance prior year)........
(b) Net bad debts charged to reserve. 3,000 3,000 3,000
--------------------------------
(c) Subtotal......................... 67,000 67,000 65,000
(d) Deduction allowed................ 3,000 1,000 4,000
--------------------------------
(e) Balance end of year.............. 70,000 68,000 69,000
2. Bad debt reserve--``actual
experience'':
(a) Beginning balance (for 1970, 5- 52,000 50,000 48,000
year moving average; for other
years, closing balance prior year)..
(b) Net bad debts charged to reserve. 3,000 3,000 3,000
--------------------------------
(c) Subtotal......................... 49,000 47,000 45,000
(d) Maximum amount under section 585 1,000 2,000 6,000
(b)(3)(A) (6-year moving average
minus (c))..........................
(e) Deduction allowed (line 1(d)).... 3,000 1,000 4,000
(f) Lower of (d) or (e).............. 1,000 1,000 4,000
--------------------------------
(g) Closing balance (line (c) + (f)). 50,000 48,000 49,000
3. Preference item under section
57(a)(7):
(a) Deduction allowed................ 3,000 1,000 4,000
[[Page 598]]
(b) Maximum amount under section 1,000 2,000 6,000
585(b)(3)(A)........................
--------------------------------
(c) Preference item (excess of (a) 2,000 0 0
over (b))...........................
------------------------------------------------------------------------
(ii) In the case of a new institution whose first taxable year ends
after 1969, its beginning balance for its reserve for bad debts, for
purposes of this paragraph, is zero and its reasonable addition to the
reserve for such taxable year is determined on the basis of the actual
experience of similar institutions located in the area served by the
taxpayer.
(h) Depletion--(1) In general. Section 57(a)(8) provides that with
respect to each property (as defined in section 614), there is to be
included as an item of tax preference the amount by which the deduction
allowable for the taxable year under section 611 for depletion for the
property exceeds the adjusted basis of the property at the end of the
taxable year (determined without regard to the depletion deduction for
that taxable year). The determination under section 57(a)(8) is made
with respect to each separate property. Thus, for example, if one
mineral property has an adjusted basis remaining at the end of the
taxable year, such basis may not be used to reduce the amount of an item
of tax preference resulting from another mineral property.
(2) Allowable depletion. For the determination of the amount of the
deduction for depletion allowable for the taxable year see section 611
and the regulations thereunder.
(3) Adjusted basis. For the determination of the adjusted basis of
the property at the end of the taxable year see section 1016 and the
regulations thereunder.
(4) No basis adjustment. No adjustment is to be made to the basis of
property subject to depletion as a result ot the minimum tax.
(i) Capital gains--(1) Taxpayers other than corporations. Section
57(a)(9)(A) provides that, in the case of a taxpayer other than a
corporation, there is to be included as an item of tax preference one-
half of the amount by which the taxpayer's net long-term capital gain
for the taxable year exceeds the taxpayer's net short-term capital loss
for the taxable year. For this purpose, for taxable years beginning
after December 31, 1971, the taxpayer's net long-term capital gain does
not include an amount equal to the deduction allowable under section 163
(relating to interest expense) by reason of subsection (d)(1)(C) of that
section, and the excess described in the preceding sentence is reduced
by an amount equal to the reduction of disallowed interest expense by
reason of section 163(d)(2)(B). Furthermore, the net long-term capital
gain of an estate or trust does not include capital gains described in
section 642(c)(4). Included in the computation of the taxpayer's capital
gains item of tax preference are amounts reportable by the taxpayer as
distributive shares of gain or loss from partnerships, estates or
trusts, electing small business corporations, common trust funds, etc.
See section 58 and the regulations thereunder with respect to the above
entities.
Example. For 1971, A, a calendar year individual taxpayer,
recognized $50,000 from the sale of securities held for more than 6
months. In addition, A received a $15,000 dividend from X Fund, a
regulated investment company, $12,000 of which was designated as a
capital gain dividend by the company pursuant to section 852(b)(3)(C).
The AB partnership recognized a gain of $20,000 from the sale of section
1231 property held by the partnership. The AB partnership agreement
provides that A is entitled to 50 percent of the income and gains of the
partnership. A had net short-term capital loss for the year of $10,000.
A's 1971 capital gains item of tax preference is computed as follows:
Capital gain recognized from securities..................... $50,000
Capital gain dividend from regulated investment company..... 12,000
Distributive share of partnership capital gain.............. 10,000
-----------
Total net long-term capital gain........................ 72,000
Less: net short-term capital loss........................... (10,000)
-----------
Excess of net long-term capital gain over net short-term 62,000
capital loss...............................................
===========
One-half of above excess.................................... 31,000
(2) Corporations. (i) Section 57(a)(9)(B) provides that in the case
of corporations there is to be included as an item
[[Page 599]]
of tax preference with respect to a corporation's net section 1201 gain
an amount equal to the product obtained by multiplying the excess of the
net long-term capital gain over the net short-term capital loss by a
fraction. The numerator of this fraction is the sum of the normal tax
rate and the surtax rate under section 11 minus the alternative tax rate
under section 1201(a) for the taxable year, and the denominator of the
fraction is the sum of the normal tax rate and the surtax rate under
section 11 for the taxable year. Included in the above computation are
amounts reportable by the taxpayer as distributive shares of gain or
loss from partnerships, estates or trusts, common trust funds, etc. In
certain cases the amount of the net section 1201 gain which results in
preferential treatment will be less than the amount determined by
application of the statutory formula. Therefore, in lieu of the
statutory formula, the capital gains item of tax preference for
corporations may in all cases be determined by dividing--
(a) The amount of tax which would have been imposed under section 11
if section 1201(a) did not apply minus--
(b) The amount of the taxes actually imposed
by the sum of the normal tax rate plus the surtax rate under section 11.
In case of foreign source capital gains and losses which are not taken
into account pursuant to sections 58(g)(2)(B) and 1.58-8, the amount
determined in the preceding sentence shall be multiplied by a fraction
the numerator of which is the corporation's net section 1201 gain
without regard to such gains and losses which are not taken into account
and the denominator of which is the corporation's net section 1201 gain.
The computation of the corporate capital gains item of tax preference
may be illustrated by the following examples:
Example 1. For 1971, A, a calendar year corporate taxpayer, has
ordinary income of $10,000 and net section 1201 gain of $50,000, none of
which is subsection (d) gain (as defined in sec. 1201(d)) and none of
which is attributable to foreign sources. A's 1971 capital gain item of
tax preference may be computed as follows:
1. Tax under section 11:
Normal tax (0.22x$60,000)................................. $13,200
Surtax (0.26x$35,000)..................................... 9,100
-----------
.......... 22,300
2. Tax under section 1201:
(a) Normal tax on ordinary income (0.22x$10,000).......... $2,200
Tax on net section 1201 gain (0.30x$50,000)... $15,000 $17,200
-----------------------
3. Excess................................................... 5,100
-------------
4. Normal tax rate plus surtax rate......................... .48
5. Capital gains preference (line 3 divided by line 4)...... 10,625
Example 2. For 1971, A, a calendar year corporate taxpayer, has a
loss from operations of $30,000 and net section 1201 gain of $150,000,
none of which is subsection (d) gain (as defined in section 1201(d)) and
none of which is attributable to foreign sources. A's 1971 capital gain
item of tax preference may be computed as follows:
1. Tax under section 11:
Normal tax (0.22x$120,000)................................ $26,400
Surtax (0.26x$95,000)..................................... 24,700
-----------
.......... 51,100
2. Tax under section 1201(a):
Normal tax on ordinary income................. None
Tax on net section 1201 gain (0.30x$150,000).. 45,000 45,000
-----------
3. Excess................................................... 6,100
-------------
4. Normal tax rate plus surtax rate......................... .48
5. Capital gain preference (line 3 divided by line 4)....... 12,708
(ii) In the case of organizations subject to the tax imposed by
section 511(a), mutual savings banks conducting a life insurance
business (see section 594), life insurance companies (as defined in
section 801), mutual insurance companies to which part II of subchapter
L applies, insurance companies to which part III of subchapter L
applies, regulated investment companies subject to tax under part I of
subchapter M, real estate investment trusts subject to tax under part II
of subchapter M, or any other corporation not subject to the taxes
imposed by sections 11 and 1201(a), the capital gains item of tax
preference may be computed in accordance with subdivision (i) of this
subparagraph except that, in lieu of references to section 11, there is
to be substituted the section which imposes the tax comparable to the
tax imposed by section 11 and, in lieu of references to section 1201(a),
there is to be substituted the section which imposes the alternative or
special tax applicable to the capital gains of such corporation.
[[Page 600]]
(iii) For purposes of this paragraph, where the net section 1201
gain is not in any event subject to the tax comparable to the normal tax
and the surtax under section 11, such as in the case of regulated
investment companies subject to tax under subchapter M, such comparable
tax shall be computed as if it were applicable to net section 1201 gain
to the extent such gain is subject to the tax comparable to the
alternative tax under section 1201(a). Thus, in the case of a regulated
investment company subject to tax under subchapter M, the tax comparable
to the normal tax and the surtax would be the tax computed under section
852(b)(1) determined as if the amount subject to tax under section
852(b)(3) were included in investment company taxable income. The
principles of this subdivision (iii) may be illustrated by the following
example:
Example. M, a calendar year regulated investment company, in 1971,
has investment company taxable income (subject to tax under sec.
852(b)(1)) of $125,000 and net long-term capital gain of $800,000. M
company has no net short-term capital loss but has a deduction for
dividends paid (determined with reference to capital gains only) of
$700,000, M's 1971 capital gains item of tax preference is computed as
follows:
1. Section 852(b)(1) tax computed as if
it were applicable to all income
including capital gains:
Amount subject to section 852(b)(1)........... $125,000
Net section 1201 gain.............. $800,000
Less: Dividends paid deduction..... 700,000
-----------
Net section 1201 gain subject to tax at the 100,000
company level................................
-----------
......... 225,000
Normal tax (0.22x$225,000)............................... $49,500
Surtax (0.26x200,000).................................... 52,000
--------------------------------
......... ......... 101,500
================================
2. Tax comparable to section 1201(a) tax section 852(b)(1) tax:
Normal tax (0.22x125,000).......... $27,500
Surtax (0.26x100,000).............. 26,000 $53,500
-----------
Section 852(b)(3) tax (0.30x100,000).......... 30,000
-----------
......... ......... $83,500
==========
3. Excess.................................................... 18,000
============
4. Normal tax rate plus surtax rate.......................... .48
5. Capital gains preference (line 3 divided by line 4)....... 37,500
------------------------------------------------------------------------
(iv) For the computation of the capital gains item of tax preference
in the case of an electing small business corporation (as defined in
section 1371(b)), see Sec. 1.58-4(c).
(3) Nonresident aliens, foreign corporations. In the case of a
nonresident alien individual or foreign corporation, there shall be
included in computing the capital gains item of tax preference under
section 57(a)(9) only those capital gains and losses included in the
computation of income effectively connected with the conduct of a trade
or business within the United States as provided in section 871(b) or
882.
[T.D. 7564, 43 FR 40470, Sept. 12, 1978]
Sec. Sec. 1.57-2--1.57-3 [Reserved]
Sec. 1.57-4 Limitation on amounts treated as items of tax preference
for taxable years beginning before January 1, 1976.
(a) In general. If in any taxable year beginning before January 1,
1976, a taxpayer has deductions in excess of gross income and all or a
part of any item of tax preference described in Sec. 1.57-1 results in
no tax benefit due to modifications required under section 172(c) or
section 172(b)(2) in computing the amount of the net operating loss or
the net operating loss to be carried to a succeeding taxable year, then,
for purposes of section 56(a)(1), the sum of the items of tax preference
determined
[[Page 601]]
under section 57(a) (and Sec. 1.57-1) is to be limited as provided in
paragraph (b) of this section.
(b) Limitation. The sum of the items of tax preference, for purposes
of section 56(a)(1) and Sec. 1.56A-1(a), is limited to an amount
determined under subparagraphs (1) and (2) of this paragraph.
(1) Loss year. If the taxpayer has no taxable income for the taxable
year without regard to the net operating loss deduction, the amount of
the limitation is equal to--
(i) In cases where the taxpayer does not have a net operating loss
for the taxable year, the amount of the recomputed income (as defined in
paragraph (c) of this section) or
(ii) In cases where the taxpayer has a net operating loss for the
taxable year, the amount of the net operating loss (expressed as a
positive amount) increased by the recomputed income or decreased by the
recomputed loss for the taxable year (as defined in paragraph (c) of
this section,
plus the amount of the taxpayer's stock option item of tax preference
(as described in Sec. 1.57-1(f)).
(2) Loss carryover and carryback years. Except in cases to which
subparagraph (1)(ii) of this paragraph applies, if, in any taxable year
to which a net operating loss is carried, a capital gains deduction is
disallowed under section 172(b)(2) in computing the amount of such net
operating loss which may be carried to succeeding taxable years, the
amount of the limitation is equal to the amount, if any, by which the
sum of the items of tax preference (computed with regard to subparagraph
(1)(i) of this paragraph) exceeds the lesser of--
(i) The amount by which such loss is reduced because of a
disallowance of the capital gains deduction in such taxable year, or
(ii) The capital gains deduction.
The amount determined pursuant to the preceding sentence shall be
increased by the amount, if any, that such reduction is attributable to
that portion of such a net operating loss described in section
56(b)(1)(B) and Sec. 1.56A-2(a)(2) (relating to excess tax
preferences).
(c) Recomputed income or loss. For purposes of this section, the
phrase ``recomputed income or loss'' means the taxable income or net
operating loss for the taxable year computed without regard to the
amounts described in Sec. 1.57-1 except paragraph (i)(2) of that
section (relating to corporate capital gains) and without regard to the
net operating loss deduction. For this purpose, the reference to the
amounts described in Sec. 1.57-1 is a reference to that portion of the
deduction allowable in computing taxable income under the appropriate
section equal to the amount which is determined in each paragraph of
Sec. 1.57-1. For example, the amount described in Sec. 1.57-1(h)
(relating to excess of percentage depletion over basis) is that portion
of the deduction allowable for depletion under section 611 which is
equal to the amount determined under Sec. 1.57-1(h). For purposes of
this paragraph, the amount described in Sec. 1.57-1(i)(1) (relating to
capital gains) is to be considered as the amount of the deduction
allowable for the taxable year under section 1202.
(d) Determination of preferences reduced. When, pursuant to
paragraph (b)(1) of this section, the sum of the items of tax preference
(determined without regard to this section) are reduced, such reduction
is first considered to be from the capital gains item of tax preference
(described in Sec. 1.57-1(i)(1)) and each item of tax preference
relating to a deduction disallowed in computing the net operating loss
pursuant to section 172(d), pro rata. The balance of the reduction, if
any, is considered to be from the remaining items of tax preference, pro
rata. For purposes of this subparagraph, deductions not attributable to
the taxpayer's trade or business which do not relate to items of tax
preference are considered as being applied in reducing gross income not
derived from such trade or business before such deductions which do
relate to items of tax preferences.
(e) Examples. The principles of this section may be illustrated by
the following examples in each of which the deduction for the personal
exemption is disregarded and the taxpayer is an individual who is a
calendar year taxpayer.
[[Page 602]]
Example 1. The taxpayer has the following items of income and
deduction for 1970:
Gross income (all business income).......................... $120,000
Deductions:
Nonbusiness deductions.................................... 30,000
Items of tax preference (excess accelerated depreciation 80,000
on real property held in taxpayer's business)............
Other business deductions................................. 50,000
Based on the above figures, the taxpayer has a net operating loss of
$10,000 (business deductions of $130,000 less business income of
$120,000, the nonbusiness deductions having been disallowed by reason of
section 172(d)(4)). The limitation on the amount treated as items of tax
preference is computed as follows:
Tax preferences.............................................. $80,000
============
Net operating loss................................ $10,000
Recomputed income or loss:
Gross income......................... $120,000
Deductions other than tax preference 80,000
items...............................
------------
Recomputed income................................. 40,000
------------
Sum of net operating loss and recomputed income... 50,000
Stock options preference.......................... 0
------------
Limitation........................................ 50,000
Thus, the minimum tax computed under section 56(a) would be 10 percent
of $20,000 (items of tax preference of $50,000 less the minimum tax
exemption of $30,000), $1,000 of which would be deferred tax liability
pursuant to section 56(b).
Example 2. Assume the same facts as in example 1 except that the
other business deductions are $130,000, resulting in a net operating
loss of $90,000. The limitation on the amount treated as items of tax
preference is computed as follows:
Tax preferences.............................................. $80,000
============
Net operating loss................................ $90,000
Recomputed income or loss:
Gross income......................... $120,000
Deductions other than tax preference 160,000
items...............................
------------
(40,000)
Disallowance of nonbusiness deductions 30,000
under sec. 172(d).....................
-----------
Recomputed loss................................... 10,000
-----------
Net operating loss less recomputed loss........... 80,000
Stock options preference.......................... 0
-----------
Limitation................................................... 80,000
Thus, the minimum tax computed under section 56(a) would be 10 percent
of $50,000 (items of tax preference of $80,000 less the minimum tax
exemption of $30,000), all of which will be deferred tax liability
pursuant to section 56(b).
Example 3. The taxpayer has the following items of income and
deduction for 1970:
Gross income (all from business):
Ordinary..................................................... $50,000
Net section 1201 gains..................................... 120,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution $45,000
control facilities...........................
Capital gains deduction....................... 60,000 105,000
-----------
Other business deductions............ ......... ......... 75,000
In addition, the taxpayer has a $55,000 item of tax preference resulting
from qualified stock options. Based on the above figures, the taxpayer
has no taxable income and no net operating loss as the capital gains
deduction is disallowed in determining the net operating loss pursuant
to section 172(d). The limitation on the amount treated as items of tax
preference is computed as follows:
[[Page 603]]
Tax preferences.............................................. $160,000
============
Net operating loss................................ 0
Recomputed income or loss:
Gross income......................... $170,000
Deductions other than tax preference 75,000
items...............................
------------
Recomputed income................................. $95,000
Plus: Stock options preference.................. 55,000
-----------
Limitation................................................... 150,000
Thus, the minimum tax computed under section 56 would be 10 percent of
$120,000 (items of tax preference of $150,000 less the minimum tax
exemption of $30,000).
Example 4. Assume the same facts as in example (3) except that the
taxpayer has a net operating loss carryover from 1969 of $80,000. The
taxpayer has $160,000 of tax preferences which are limited to $150,000
pursuant to Sec. 1.57-4(b)(1). In order to determine the amount of the
1969 net operating loss which remains as a carryover to 1971, the 1970
taxable income is redetermined in accordance with section 172(b)(2) and
the regulations thereunder, as follows:
Gross income--1970.............................. $170,000
Deductions:
Capital gains deduction disallowed business $120,000 120,000
deductions...................................
-----------------------
Taxable income for section 172(b)(2).................... 50,000
Thus, the 1969 net operating loss which remains as a carryover to 1971
is $30,000. Pursuant to paragraph (b)(2) of this section, the limitation
on the amount treated as items of tax preference is computed as follows:
Items of tax preference computed with regard to Sec. 1.57- $150,000
4(b)(1) (per example (3))..................................
Less: Lesser of capital gains deduction ($60,000) or amount 50,000
of reduction in carryover due to its disallowance ($50,000)
-------------
Limitation.............................................. 100,000
Thus, the minimum tax computed under section 56 would be 10 percent of
$70,000 (items of tax preference of $100,000 less the minimum tax
exemption of $30,000).
Example 5. The taxpayer has the following items of income and
deduction for the taxable year 1970 without regard to any net operating
loss deduction:
Gross income (all from business):
Ordinary........................................ $50,000
Net section 1201 gain........................... 40,000
------------
......... $90,000
Deductions:
Capital gains deduction......................... 20,000
Medical expenses ($4,100 actually paid but 2,000
allowable only to the extent in excess of 3
percent of adjusted gross income of $70,000)...
Other itemized deductions....................... 40,000
------------
......... 62,000
----------
Taxable income (before net operating loss deduction)..... 28,000
In addition, the taxpayer has an item of tax preference of $35,000
resulting from qualified stock options. In 1973, the taxpayer has a net
operating loss of $60,000 (no portion of which is attributable to excess
tax preferences pursuant to Sec. 1.56A-2) which is carried back to 1970
resulting in no taxable income in 1970. In order to determine the amount
of the 1973 net operating loss which remains as a carryover to 1971, the
1970 taxable income is redetermined, in accordance with section
172(b)(2) and the regulations thereunder, as follows:
Gross income................................................. $90,000
Deductions:
Capital gains deduction disallowed..............
Medical expenses ($4,100 actually paid but $1,400
allowable only to the extent in excess of 3
percent of adjusted gross income of $90,000)...
Other itemized deductions....................... 40,000
------------
......... $41,400
Taxable income for section 172(b)(2).......... ......... 48,600
The limitation on the amount treated as items of tax preference is
computed as follows:
Items of tax preference:
Capital gains................................. .......... $20,000
Stock options................................. .......... 35,000
-----------
.......... 55,000
Less:
Lesser of capital gains deduction ($20,000) or amount of (20,000)
reduction in carryover due to its disallowance ($20,600).
-------------
Limitation.............................................. 35,000
Thus, the minimum tax for 1970 under section 56 would be 10 percent of
$5,000 (items of tax preference of $35,000 less the minimum tax
exemption of $30,000).
Example 6. Assume the same facts as in example (5) except that the
1973 net operating loss was $45,000. In this case, the $20,600 increase
in the 1970 taxable income as redetermined, results in a decrease of
$17,000 (i.e., the remaining 1973 net operating loss after an initial
decrease of $28,000 resulting from
[[Page 604]]
the 1970 taxable income before redetermination). The limitation on the
amount treated as items of tax preference is computed as follows:
Items of tax preference computed without regard to this $55,000
section....................................................
Less: Lesser of capital gains deduction ($20,000) or amount (17,000)
of reduction in carryover due to its disallowance ($17,000)
-------------
Limitation.............................................. 38,000
Thus, the minimum tax for 1970 under section 56 would be 10 percent of
$8,000 (items of tax preference of $38,000 less the minimum tax
exemption of $30,000).
Example 7. The taxpayer has the following items of income and
deduction for 1973 without regard to any net operating loss deduction:
Gross income (all from business):
Ordinary.................................... $100,000
Net section 1201 gains...................... 120,000
--------------
........... $220,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution 45,000
control facilities.........................
Capital gains deduction..................... 60,000
-------------
105,000
Other business deductions................... 75,000
--------------
........... $180,000
Taxable income (before net operating loss deduction)... 40,000
In 1972, the taxpayer had a net operating loss of $70,000 which is
carried forward to 1973; $20,000 of this net operating loss is
attributable to excess tax preferences. In order to determine the amount
of the 1972 net operating loss which remains as a carryover to 1974, the
1973 taxable income is redetermined, in accordance with section
172(b)(2) and the regulations thereunder, as follows:
Gross income................................................ $220,000
Deductions:
Capital gains deduction................................... Disallowed
Business deductions....................................... 120,000
-------------
Taxable income per section 172(b)(2).................... 100,000
In this case, the $60,000 increase in the 1972 taxable income as
redetermined and the $30,000 decrease in the amount of the 1973 net
operating loss remaining as a carryover to 1974 (i.e., the remaining
1972 net operating loss after an initial decrease of $40,000 resulting
from the 1973 taxable income before redetermination) is entirely
attributable to the disallowance of the capital gains deduction. The
limitation on the amount treated as items of tax preference is computed
as follows:
Items of tax preference computed without regard to this
section:
Capital gains............................................. $60,000
Excess amortization of certified pollution control 45,000
facilities...............................................
-------------
105,000
Less: Lesser of capital gains deduction (60,000) or amount (30,000)
of reduction in carryover due to its disallowance ($30,000)
-------------
75,000
Plus: Amount of reduction of carryover (due to disallowance 20,000
of capital gains deduction) attributable to excess tax
preferences................................................
-------------
Limitation.............................................. 95,000
[T.D. 7564, 43 FR 40476, Sept. 12, 1978, as amended by T.D. 8138, 52 FR
15309, Apr. 28, 1987]
Sec. 1.57-5 Records to be kept.
(a) In general. The taxpayer shall have available permanent records
of all the facts necessary to determine with reasonable accuracy the
amounts described in Sec. 1.57-1. Such records shall include:
(1) In the case of amounts described in paragraph (a) of Sec. 1.57-
1: the amount and nature of indebtedness outstanding for the taxable
year and the date or dates on which each such indebtedness was incurred
or renewed in any form; the amount expended for property held for
investment during any taxable year during which such indebtedness was
incurred or renewed; and the manner in which it was determined that
property was or was not held for investment.
(2) In the case of amounts described in paragraphs (b), (c), (d),
(e), and (h) of Sec. 1.57-1:
(i) The dates, and manner in which, the property was acquired and
placed in service,
(ii) The taxpayer's basis on the date the property was acquired and
the manner in which the basis was determined,
(iii) An estimate of the useful life (in terms of months, hours of
use, etc., whichever is appropriate) of the property on the date placed
in service or an estimate of the number of units to be produced by the
property on the date the property is placed in service, whichever is
appropriate, and the manner in which such estimate was determined,
(iv) The amount and date of all adjustments by the taxpayer to the
basis of the property and an explanation of the nature of such
adjustments, and
[[Page 605]]
(v) In the case of property which has an adjusted basis reflecting
adjustments taken by another taxpayer with respect to the property or
taken by the taxpayer with respect to other property, the information
described in paragraph (a)(2)(i) through (iv) of this section, with
respect to such other property or other taxpayer.
(3) In the case of amounts described in paragraph (f) of Sec. 1.57-
1, the fair market value of the shares of stock at the date of exercise
of the option and the option price and the manner in which each was
determined.
(4) In the case of amounts described in paragraph (g) of Sec. 1.57-
1, the amount of debts written off and the amount of the loans
outstanding for the taxable year and the 5 preceding taxable years or
such shorter or longer period as is appropriate.
(b) Net operating losses. The taxpayer shall have available
permanent records for the first taxable year in which a portion of a net
operating loss was attributable to items of tax preference (within the
meaning of Sec. 1.56A-2 (b)) and each succeeding taxable year in which
there is a net operating loss or a net operating loss carryover a
portion of which is so attributable. Such records shall include all the
facts necessary to determine with reasonable accuracy the amount of
deferred tax liability under section 56, including the amount of the net
operating loss in each taxable year in which there are items of tax
preference in excess of the minimum tax exemption (as determined under
Sec. 1.58-1), the amount of the items of tax preference for each such
taxable year, the amount by which each such net operating loss reduces
taxable income in any taxable year, and the amount by which each such
net operating loss is reduced in any taxable year.
[T.D. 7564, 43 FR 40479, Sept. 12, 1978, as amended by T.D. 8138, 52 FR
15309, Apr. 28, 1987]
Sec. 1.58-1 Minimum tax exemption.
(a) In general. For purposes of the minimum tax for tax preferences
(subtitle A, chapter 1A, part VI), the minimum tax exemption is $30,000
except as otherwise provided in this section.
(b) Husband and wife. In the case of a married individual filing a
separate return, section 58(a) provides that the minimum tax exemption
is $15,000. This rule applies without regard to whether the married
individual is living together with or apart from his spouse and without
regard to whether or not his spouse has any items of tax preference.
(c) Members of controlled groups--(1) Amount of exemption--(i)
General rule. Under section 58(b), if a corporation is a component
member of a controlled group of corporations on December 31 (as defined
in section 1563 (a) and (b) and the regulations thereunder), the minimum
tax exemption for such taxable year which includes such December 31 is
an amount equal to--
(a) $30,000 divided by the number of corporations which are
component members of such group on December 31, or
(b) If an apportionment plan is adopted under subparagraph (3) of
this paragraph, such portion of the $30,000 as is apportioned to such
member in accordance with such plan.
(ii) Consolidated returns. The minimum tax exemption of a controlled
group all of whose component members join in the filing of a
consolidated return is $30,000. If there are component members of the
controlled group which do not join in the filing of a consolidated
return, and there is no apportionment plan effective under subparagraph
(3) of this paragraph apportioning the $30,000 among the component
members filing the consolidated return and the other component members
of the controlled group, each component member of the controlled group
(including each component member which joins in filing the consolidated
return) is treated as a separate corporation for purposes of equally
apportioning the $30,000 amount under subdivision (i)(a) of this
subparagraph. In such case, the minimum tax exemption of the
corporations filing the consolidated return is the sum of the amounts
apportioned to each component member which joins in the filing of the
consolidated return.
(2) Certain short taxable years. If the return of a corporation is
for a short
[[Page 606]]
period which does not include a December 31, and such corporation is a
component member of a controlled group of corporations with respect to
such short period, the minimum tax exemption of such corporation for
such short period is an amount equal to $30,000 divided by the number of
corporations which are component members of such group on the last day
of such short period. The minimum tax exemption so determined is also
subject to the rules of section 443(d) (relating to reduction in the
amount of the exemption for short periods) and the regulations
thereunder. For purposes of this subparagraph, the term ``short period''
does not include any period if the income for such period is required to
be included in a consolidated return under Sec. 1.1502-76(b). The
determination of whether a corporation is a component member of a
controlled group of corporations on the last day of a short period is
made by applying the definition of ``component member'' contained in
section 1563(b) and Sec. 1.1563-1 as if the last day of such short
period were a December 31.
(3) Apportionment of minimum tax exemption--(i) Apportionment plan--
(a) In general. In the case of corporations which are component members
of a controlled group of corporations on a December 31, a single minimum
tax exemption may be apportioned among such members if all such members
consent, in the manner provided in subdivision (ii) of this
subparagraph, to an apportionment plan with respect to such December 31.
Such plan must provide for the apportionment of a fixed dollar amount to
one or more of such members, but in no event may the sum of the amount
so apportioned exceed $30,000. An apportionment plan is not considered
as adopted with respect to a particular December 31 until each component
member which is required to consent to the plan under subdivision
(ii)(a) of this subparagraph files the original of a statement described
in such subdivision (or, the original of a statement incorporating its
consent is filed on its behalf). In the case of a return filed before a
plan is adopted, the minimum tax exemption for purposes of such return
is to be equally apportioned in accordance with subparagraph (1) of this
paragraph. If a valid apportionment plan is adopted after the return is
filed and within the time prescribed in (b) of this subdivision (i),
such return must be amended (or a claim for refund should be made) to
reflect the change from equal apportionment.
(b) Time for adopting plan. A controlled group may adopt an
apportionment plan with respect to a particular December 31 only if, at
the time such plan is sought to be adopted, there is at least 1 year
remaining in the statutory period (including any extensions thereof) for
the assessment of the deficiency against any corporation the tax
liability of which would be increased by the adoption of such plan. If
there is less than 1 year remaining with respect to any such
corporation, the district director or the director of the service center
with whom such corporation files its income tax return will ordinarily,
upon request, enter into an agreement to extend such statutory period
for the limited purpose of assessing any deficiency against such
corporation attributable to the adoption of such apportionment plan.
(c) Years for which effective. (1) The amount apportioned to a
component member of a controlled group of corporations in an
apportionment plan adopted with respect to a particular December 31
constitutes such member's minimum tax exemption for its taxable year
including the particular December 31, and for all taxable years
including succeeding December 31's, unless the apportionment plan is
amended in accordance with subdivision (iii) of this subparagraph or is
terminated under paragraph (c)(2) of this subdivision (i). Thus, the
apportionment plan (including any amendments thereof) has a continuing
effect and need not be renewed annually.
(2) If an apportionment plan is adopted with respect to a particular
December 31, such plan terminates with respect to a succeeding December
31, if: the controlled group goes out of existence with respect to such
succeeding December 31 within the meaning of paragraph (b) of Sec.
1.1562-5, any corporation which was a component member of such group on
the particular December 31 is not a component member of such group on
such succeeding December 31,
[[Page 607]]
or any corporation which was not a component member of such group on the
particular December 31 is a component member of such group on such
succeeding December 31. An apportionment plan, once terminated with
respect to a December 31, is no longer effective. Accordingly, unless a
new apportionment plan is adopted, the minimum tax exemption of the
component members of the controlled group for their taxable years which
include such December 31 and all December 31's thereafter will be
determined under subparagraph (1) of this paragraph.
(3) If an apportionment plan is terminated with respect to a
particular December 31 by reason of the addition or withdrawal of a
component member, each corporation which is a component member of the
controlled group on such particular December 31 must, on or before the
date it files its income tax return for the taxable year which includes
such particular December 31, notify the district director or the
director of the service center with whom it files such return to such
termination. If an apportionment plan is terminated with respect to a
particular December 31 by reason of the controlled group going out of
existence, each corporation which was a component member of the
controlled group on the preceding December 31 must, on or before the
date it files its income tax return for the taxable year which includes
such particular December 31, notify the district director or the
director of the service center with whom it files such return to such
termination.
(ii) Consents to plan--(a) General rule. (1) The consent of a
component member (other than a wholly-owned subsidiary) to an
apportionment plan with respect to a particular December 31 is to be
made by means of a statement, signed by any person who is duly
authorized to act on behalf of the consenting member, stating that such
member consents to the apportionment plan with respect to such December
31. The statement must set forth the name, address, taxpayer
identification number, and taxable year of the consenting component
member, the amount apportioned to such member under the plan, and the
internal revenue district or service center where the original of the
statement is to be filed. The consent of more than one component member
may be incorporated in a single statement. The original of a statement
of consent is to be filed with the district director or the director of
the service center with whom the component member of the group on such
December 31 which has the taxable year ending first on or after such
date filed its return for such taxable year. If two or more component
members have the same such taxable year, a statement of consent may be
filed with the district director or the director of the service center
with whom the return for any such taxable year is filed. The original of
a statement of consent is to have attached thereto information (referred
to in this subdivision as ``group identification'') setting forth the
name, address, taxpayer identification number, and taxable year of each
component member of the controlled group on such December 31 (including
wholly-owned subsidiaries) and the amount apportioned to each such
member under the plan. If more than one original statement is filed, a
statement may incorporate the group identification by reference to the
name, address, taxpayer identification number, and taxable year of the
component member of the group which has attached such group
identification to the original of its statement.
(2) Each component member of the group on such December 31 (other
than wholly-owned subsidiaries) must attach a copy of its consent (or a
copy of the statement incorporating its consent) to the income tax
return, amended return, or claim for refund filed with its district
director or director of the service center for the taxable year
including such date. Such copy must either have attached thereto
information on group identification or must incorporate such information
by reference to the name, address, taxpayer identification number, and
taxable year of the component member of the group which has attached
such information to its income tax return, amended return, or claim for
refund filed with the same district director or director of the service
center for the taxable year including such date.
[[Page 608]]
(b) Wholly-owned subsidiaries. (1) Each component member of a
controlled group which is a wholly-owned subsidiary of such group with
respect to a December 31 is deemed to consent to an apportionment plan
with respect to such December 31, provided each component member of the
group which is not a wholly-owned subsidiary consents to the plan. For
purposes of this paragraph, a component member of a controlled group is
considered to be a wholly-owned subsidiary of the group with respect to
a December 31, if, on each day preceding such date and during its
taxable year which includes such date, all of its stock is owned
directly by one or more corporations which are component members of the
group on such December 31.
(2) Each wholly-owned subsidiary of a controlled group with respect
to a December 31 must attach a statement containing the information
which is required to be set forth in a statement of consent to an
apportionment plan with respect to such December 31 to the income tax
return, amended return, or claim for refund filed with its district
director or director of the service center for the taxable year which
includes such date. Such statement must either have attached thereto
information on group identification or incorporate such information by
reference to the name, address, taxpayer identification number, and
taxable year of a component member of the group which has attached such
information to its income tax return, amended return, or claim for
refund filed with the same district director or director of the service
center for the taxable year including such date.
(iii) Amendment of plan. An apportionment plan adopted with respect
to a December 31 by a controlled group of corporations may be amended
with respect to such December 31 or with respect to any succeeding
December 31 for which the plan is effective under subdivision (i)(c) of
this subparagraph. An apportionment plan must be amended with respect to
a particular December 31 and the amendments to the plan are effective
only if adopted in accordance with the rules prescribed in this
paragraph for the adoption of an original plan with respect to such
December 31.
(iv) Component members filing consolidated return. If the component
members of a controlled group of corporations on a December 31 include
corporations which join the filing of a consolidated return, the
corporations filing the consolidated return are treated as a single
component member for purposes of this subparagraph. Thus, for example,
only one consent executed by the common parent to an apportionment plan
filed pursuant to this section is required on behalf of the component
members filing the consolidated return.
(d) Estates and trusts. Section 58(c)(2) provides that, in the case
of an estate or trust, the minimum tax exemption applicable to such
estate or trust is an amount which bears the same ratio to $30,000 as
the portion of the sum of the items of tax preference apportioned to the
estate or trust bears to the full sum before apportionment. For example,
if one-third of the sum of the items of tax preference of a trust are
subject to tax at the trust level after apportionment under section
58(c)(1) and Sec. 1.58-3, the trust's minimum tax exemption is $10,000.
See Sec. 1.58-3 for rules with respect to the apportionment of items of
tax preference of an estate or trust.
(e) Short taxable year. See section 443(d) and Sec. 1.443-1(d) with
respect to reduction in the amount of the minimum tax exemption in the
case of a short taxable year.
[T.D. 7564, 43 FR 40479, Sept. 12, 1978]
Sec. 1.58-2 General rules for conduit entities; partnerships and
partners.
(a) General rules for conduit entities. Sections 1.58-3 through
1.58-6 provide rules under which items of tax preference of an estate,
trust, electing small business corporation, common trust fund, regulated
investment company, or real estate investment trust (referred to in this
paragraph as the ``conduit entity'') are treated as items of tax
preference of the beneficiaries, shareholders, participants, etc.
(referred to in this paragraph as the ``distributees''). Where an item
of tax preference of a conduit entity is so apportioned to a
distributee, the item of tax preference retains its character in
[[Page 609]]
the hands of the distributee and is adjusted to reflect:
(1) The separate items of income and deduction of the distributee
and (2) the tax status of the distributee as an individual, corporation,
etc. For example, if a trust has $100,000 of capital gains for the
taxable year, all of which are distributed to A, an individual, the item
of tax preference apportioned to A under section 57(a)(9) (and Sec.
1.57-1(i)(1)) is $50,000. If, however, A had a net capital loss for the
taxable year of $60,000 without regard to the distribution from the
trust, the trust tax preference would be adjusted in the hands of A to
reflect the separate items of income and deduction passed through to the
distributee, or, in this case, to reflect the net section 1201 gain to A
of $40,000. Thus, A's capital gains items of tax preference would be
$20,000. By application of this rule, A, in effect, treats capital gains
distributed to him from the trust the same as his other capital gains in
computing his capital gains item of tax preference. If A had been a
corporation, the trust tax preference would be adjusted both to reflect
the capital loss and to reflect A's tax status by recomputing the
capital gains item of tax preference (after adjustment for the capital
loss) under section 57(a)(9)(B) and Sec. 1.57-1(i)(2). Similarly, if
depreciation on section 1245 property subject to a net lease (as defined
in section 57(a)(3) and Sec. 1.57-1(c)) is apportioned from a conduit
entity to a corporation (other than a personal holding company or
electing small business corporation), the amount so apportioned to the
corporation is not treated as an item of tax preference to such
corporation since such item is not an item of tax preference in the case
of a corporation (other than a personal holding company or an electing
small business corporation).
(b) Partnerships and partners. (1) Section 701 provides that a
partnership as such is not subject to the income tax imposed by chapter
1. Thus, a partnership as such is not subject to the minimum tax for tax
preferences. Section 702 provides that, in determining his income tax,
each partner is to take into account separately his distributive share
of certain items of income, deductions, etc. of the partnership and
other items of income, gain, loss, deduction, or credit of the
partnership to the extent provided by regulations prescribed by the
Secretary or his delegate. Accordingly, each partner, in computing his
items of tax preference, must take into account separately those items
of income and deduction of the partnership which enter into the
computation of the items of tax preference in accordance with
subparagraph (2) of this paragraph.
(2) Pursuant to section 702, each partner must, solely for purposes
of the minimum tax for tax preferences (to the extent not otherwise
required to be taken into account separately under section 702 and the
regulations thereunder), take into account separately in the manner
provided in subchapter K and the regulations thereunder those items of
income and deduction of the partnership which enter into the computation
of the items of tax preference specified in section 57 and the
regulations thereunder. A partner must, for this purpose, take into
account separately his distributive share of:
(i) Investment interest expense (as defined in section 57(b)(2)(D)
determined at the partnership level;
(ii) Investment income (as defined in section 57(b)(2)(B) determined
at the partnership level;
(iii) Investment expenses (as defined in section 57(b)(2)(C))
determined at the partnership level;
(iv) With respect to each section 1250 property (as defined in
section 1250(c)), the amount of the deduction allowable for the taxable
year for exhaustion, wear and tear, obsolescence, or amortization and
the deduction which would have been allowable for the taxable year had
the property been depreciated under the straight line method each
taxable year of its useful life (determined without regard to section
167(k)) for which the partnership has held the property;
(v) With respect to each item of section 1245 property (as defined
in section 1245(a)(3)) which is subject to a net lease, the amount of
the deduction allowable for exhaustion, wear and tear, obsolescence, or
amortization and the deduction which would have been allowable for the
taxable year had the property been depreciated under the
[[Page 610]]
straight line method for each taxable year of its useful life for which
the partnership has held the property;
(vi) With respect to each certified pollution control facility for
which an election is in effect under section 169, the amount of the
deduction allowable for the taxable year under such section and the
deduction which would have been allowable under section 167 had no
election been in effect under section 169;
(vii) With respect to each unit of railroad rolling stock for which
an election is in effect under section 184, the amount of the deduction
allowable for the taxable year under such section and the deduction
which would have been allowable under section 167 had no election been
in effect under section 184;
(viii) In the case of a partnership which is a financial institution
to which section 585 or 593 applies, the amount of the deduction
allowable for the taxable year for a reasonable addition to a reserve
for bad debts and the amount of the deduction that would have been
allowable for the taxable year had the institution maintained its bad
debt reserve for all taxable years on the basis of actual experience;
and
(ix) With respect to each mineral property, the deduction for
depletion allowable under section 611 for the taxable year and the
adjusted basis of the property at the end of the taxable year
(determined without regard to the depreciation deduction for the taxable
year).
If, pursuant to section 743 (relating to optional adjustment to basis),
the basis of partnership property is adjusted with respect to a
transferee partner due to an election being in effect under section 754
(relating to manner of electing optional adjustment), items representing
amortization, depreciation, depletion, gain or loss, and the adjusted
basis of property subject to depletion, described above, shall be
adjusted to reflect the basis adjustment under section 743.
(3) The minimum tax is effective for taxable years ending after
December 31, 1969. Thus, subparagraph (2) of this paragraph is
inapplicable in the case of items of income or deduction paid or accrued
in a partnership's taxable year ending on or before December 31, 1969.
[T.D. 7564, 43 FR 40481, Sept. 12, 1978]
Sec. 1.58-3 Estates and trusts.
(a) In general. (1) Section 58(c)(1) provides that the sum of the
items of tax preference of an estate or trust shall be apportioned
between the estate or trust and the beneficiary on the basis of the
income of the estate or trust allocable to each. Income for this purpose
is the income received or accrued by the trust or estate which is not
subject to current taxation either in the hands of the trust or estate
or the beneficiary by reason of an item of tax preference. The character
of the amounts distributed is determined under section 652(b) or 662(b)
and the regulations thereunder.
(2) Additional computations required by reason of excess
distributions are to be made in accordance with the principles of
sections 665 through 669 and the regulations thereunder.
(3) In the case of a charitable remainder annuity trust (as defined
in section 664(d)(1) and Sec. 1.664-2) or a charitable remainder
unitrust (as defined in section 664(d)(2) and Sec. 1.664-3), the
determination of the income not subject to current taxation by reason of
an item of tax preference is to be made as if such trust were generally
subject to taxation. Where income of such a trust is not subject to
current taxation in accordance with this section and is distributed to a
beneficiary in a taxable year subsequent to the taxable year in which
the trust received or accrued such income, the items of tax preference
relating to such income are apportioned to the beneficiary in such
subsequent year (without credit for minimum tax paid by the trust with
respect to items of tax preference which are subject to the minimum tax
by reason of section 664(c)).
(4) Items of tax preference apportioned to a beneficiary pursuant to
this section are to be taken into account by the beneficiary in his
taxable year within or with which ends the taxable year of the estate or
trust during which it has such items of tax preference.
(5) Where a trust or estate has items of income or deduction which
enter
[[Page 611]]
into the computation of the excess investment interest item of tax
preference, but such items do not result in an item of tax preference at
the trust or estate level, each beneficiary must take into account, in
computing his excess investment interest, the portion of such items
distributed to him. The determination of the portion of such items
distributed to each beneficiary is made in accordance with the character
rules of section 652(b) or 662(b) and the regulations thereunder.
(6) Where, pursuant to subpart E of part 1 of subchapter J (sections
671 through 678), the grantor of a trust or another person is treated as
the owner of any portion of the trust, there shall be included in
computing the items of tax preference of such person those items of
income, deductions, and credits against tax of the trust which are
attributable to that portion of the trust to the extent such items are
taken into account under section 671 and the regulations thereunder. Any
remaining portion of the trust is subject to the provisions of this
section.
(b) Examples. The principles of this section may be illustrated by
the following examples in each of which it is assumed that none of the
distributions are accumulation distributions (see sections 665 through
669 and the regulations thereunder):
Example 1. Trust A, with one income beneficiary, has the following
items of income and deduction without regard to the deduction for
distributions:
Income:
Business income........................................... $200,000
Investment income......................................... 20,000
-----------
220,000
===========
Deductions:
Business deductions (nonpreference)....................... 100,000
Investment interest expense............................... 80,000
-----------
180,000
Based on the above figures, the trust has $100,000 of taxable income
without regard to items which enter into the computation of excess
investment interest and the deduction for distributions. The trust also
has $60,000 of excess investment interests, resulting in $40,000 of
distributable net income. Thus, $60,000 of the $100,000 of noninvestment
income is not subject to current taxation by reason of the excess
investment interest.
(a) If $40,000 is distributed to the beneficiary, the beneficiary
will normally be subject to tax on the full amount received and the
``sheltered'' portion of the income will remain at the trust level.
Thus, none of the excess investment interest item of tax preference is
apportioned to the beneficiary.
(b) If the beneficiary receives $65,000 from the trust, the
beneficiary is still subject to tax on only $40,000 (the amount of the
distributable net income) and thus, is considered to have received
$25,000 of business income ``sheltered'' by excess investment interest.
Thus, $25,000 of the $60,000 of excess investment interest of the trust
is apportioned to the beneficiary.
Example 2. Trust B has $150,000 of net section 1201 gain.
(a) If none of the gain is distributed to the beneficiaries, none of
the capital gains item of tax preference is apportioned to the
beneficiaries.
(b) If all or a part of the gain is distributed to the
beneficiaries, a proportionate part of the capital gains item of tax
preference is apportioned to the beneficiaries. If any of the
beneficiaries are corporations the capital gains item of tax preference
is adjusted in the hands of the corporations as provided in Sec. 1.58-
2(a).
Example 3. Trust C has taxable income of $200,000 computed without
regard to depreciation on section 1250 property and the deduction for
distributions. The depreciation on section 1250 property held by the
trust is $160,000. The trust instrument provides for income to be
retained by the trust in an amount equal to the depreciation on the
property determined under the straight line method (which method has
been used for this purpose for the entire period the trust has held the
property) which, in this case is equal to $100,000. The $60,000 excess
of the accelerated depreciation of $160,000 over the straight line
amount which would have resulted had the property been depreciated under
that method for the entire period for which the trust has held the
property is an item of tax preference pursuant to section 57(a)(2). Of
the remaining $100,000 of net income of the trust (after the reserve for
depreciation), 80 percent is distributed to the beneficiaries. Pursuant
to sections 167(h) and 642(e), 80 percent of the remaining $60,000 of
depreciation deduction (or $48,000) is taken as a deduction directly by
the beneficiaries and ``shelters'' the income received by the
beneficiaries. Thus, the full $48,000 deduction taken by the
beneficiaries is ``excess accelerated depreciation'' on section 1250
property and is an item of tax preference in the hands of the
beneficiaries. None of the remaining $12,000 of ``excess accelerated
depreciation'' is apportioned to the beneficiaries since this amount
``shelters'' income retained at the trust level.
Example 4. G creates a trust the ordinary income of which is payable
to his adult son.
[[Page 612]]
Ten years from the date of the transfer, corpus is to revert to G. G
retains no other right or power which would cause him to be treated as
an owner under subpart E of part 1 of subchapter J (section 671 and
following). Under the terms of the trust instrument and applicable local
law capital gains must be applied to corpus. During the taxable year
1970 the trust has $200,000 income from dividends and interest and a net
long-term capital gain of $100,000. Since the capital gain is held or
accumulated for future distribution to G, he is treated under section
677(a)(2) as an owner of a portion of the trust to which the gain is
attributable. Therefore, he must include the capital gain in the
computation of his taxable income in 1970 and the capital gain item of
tax preference is treated as being directly received by G. Accordingly,
no adjustment is made to the trust's minimum tax exemption by reason of
the capital gain.
Example 5. For its taxable year 1971 the trust referred to in
example (4) has taxable income of $200,000 computed without regard to
depreciation on section 1250 property and the deduction for
distributions. The depreciation on section 1250 property held by the
trust is $160,000. The trust instrument provides for income to be
retained by the trust in an amount equal to the depreciation on the
property determined for purposes of the Federal income tax. If the
property had been depreciated under the straight line method for the
entire period for which the trust held the property the resulting
depreciation deduction would have been $100,000. The $60,000 excess is,
therefore, an item of tax preference pursuant to section 57(a)(2) and
Sec. 1.57-1(d). Since this amount of ``income'' is held or accumulated
for future distributions to G, he is treated under section 677(a)(2) as
an owner of a portion of the trust to which such income is attributable.
Therefore, section 671 requires that in computing the tax liability of
the grantor the income, deductions, and credits against tax of the trust
which are attributable to such portion shall be taken into account.
Thus, the grantor has received $160,000 of income and is entitled to a
depreciation deduction in the same amount. The $60,000 item of tax
preference resulting from the excess depreciation is treated as being
directly received by G as he has directly received the income sheltered
by that preference. Accordingly, no adjustment is made to the trust's
minimum tax exemption by reason of such depreciation.
[T.D. 7564, 43 FR 40482, Sept. 12, 1978]
Sec. 1.58-3T Treatment of non-alternative tax itemized deductions
by trusts and estates and their beneficiaries in taxable years beginning
after December 31, 1982 (temporary).
For purposes of section 58(c), in taxable years beginning after
December 31, 1982, itemized deductions of a trust or estate which are
not alternative tax itemized deductions (as defined in section
55(e)(1)), shall be treated as items of tax preference and apportioned
between trusts and their beneficiaries, and estates and their
beneficiaries.
[T.D. 8083, 51 FR 15320, Apr. 23, 1986]
Sec. 1.58-4 Electing small business corporations.
(a) In general. Section 58(d)(1) provides rules for the
apportionment of the items of tax preference of an electing small
business corporation among the shareholders of such corporation. Section
58(d)(2) provides rules for the imposition of the minimum tax on an
electing small business corporation with respect to certain capital
gains. For purposes of section 58(d) and this section, the items of tax
preference are computed at the corporate level as if section 57
generally applied to the corporation. However, the items of tax
preference so computed are treated as items of tax preference of the
shareholders of such corporation and not as items of tax preference of
such corporation (except as provided in paragraph (c) of this section).
The items of tax preference specified in section 57(a)(1) and Sec.
1.57-1(a) (excess investment interest) and section 57(a)(3) and Sec.
1.57-1(c) (accelerated depreciation on section 1245 property subject to
a net lease), while generally inapplicable to corporations, are included
as items of tax preference in the case of an electing small business
corporation.
(b) Apportionment to shareholders. (1) The items of tax preference
of an electing small business corporation, other than the capital gains
item of tax preference described in paragraph (c) of this section, are
apportioned pro rata among the shareholders of such corporation in a
manner consistent with section 1374(c)(1). Thus, with respect to the
items of tax preference of the electing small business corporation,
there is to be treated as items of tax preference of each shareholder a
pro rata share of such items computed as follows:
[[Page 613]]
(i) Divide the total amount of such items of tax preference of the
corporation by the number of days in the taxable year of the
corporation, thus determining the daily amount of such items of tax
preference.
(ii) Determine for each day the shareholder's portion of the daily
amount of each such item of tax preference by applying to such amount
the ratio which the stock owned by the shareholder on that day bears to
the total stock outstanding on that day.
(iii) Total the shareholder's daily portions of each such item of
tax preference of the corporation for it taxable year.
Amounts taken into account by shareholders in accordance with this
paragraph are considered to consist of a pro rata share of each item of
tax preference of the corporation. Thus, for example, if the corporation
has $50,000 of excess investment interest and $150,000 of excess
accelerated depreciation on section 1250 property and a shareholder, in
accordance with this paragraph, takes into account $60,000 of the total
$200,000 of tax preference items of the corporation, one-fourth
($50,000/$200,000) of the $60,000, or $15,000, taken into account by the
shareholder is considered excess investment interest and three-fourths
of the $60,000, or $45,000, is considered excess accelerated
depreciation on section 1250 property.
(2) Items of tax preference apportioned to a shareholder pursuant to
subparagraph (1) of this paragraph are taken into account by the
shareholder for the shareholder's taxable year in which or with which
the taxable year of the corporation ends, except that, in the case of
the death of a shareholder during any taxable year of the corporation
(during which the corporation is an electing small business
corporation), the items of tax preference of the corporation for such
taxable year are taken into account for the final taxable year of the
shareholder.
(c) Capital gains. (1) Capital gains of an electing small business
corporation, other than those capital gains subject to tax under section
1378, do not result in an item of tax preference at the corporate level
since, in applying the formula specified in sections 57(a)(9)(B) and
Sec. 1.57-1(i)(2), the rate of tax on capital gains (and the resulting
tax) at the corporate level is zero. Under section 1375 (a) shareholders
of an electing small business corporation take into account the capital
gains of the corporation (including capital gains subject to tax under
section 1378). Therefore, the computation of the capital gains item of
tax preference at the shareholder level, with respect to such capital
gains, is taken into account automatically by operation of section
57(a)(9) and Sec. 1.57-1(i). To avoid double inclusion of the capital
gains item of tax preference by a shareholder with respect to capital
gains subject to tax under section 1378, the capital gains item of tax
preference which results at the corporate level by reason of section 58
(d)(2) is not treated under section 58 (d)(1) as an item of tax
preference of the shareholders of the corporation.
(2) The capital gains item of tax preference of an electing small
business corporation subject to the tax imposed by section 1378 is the
excess of the amount of tax computed under section 1378(b)(2) over the
sum of--
(i) The amount of tax that would be computed under section
1378(b)(2) if the following amount were excluded:
(a) That portion of the net section 1201 gain of the corporation
described in section 1378(b)(1), or
(b) If section 1378(c)(3) applies, that portion of the net section
1201 gain attributable to the property described in section 1378(c)(3),
and
(ii) The amount of tax imposed under section 1378 divided by the sum
of the normal tax rate and the surtax rate under section 11 for the
taxable year.
(3) The principles of this paragraph may be illustrated by the
following example.
Example. Corporation X is a calendar year taxpayer and an electing
small business corporation. For its taxable year 1971 the corporation
has net section 1201 gain of $650,000 and taxable income of $800,000
(including the net section 1201 gain). Although X's election under
section 1372(a) has been in effect for its three immediately preceding
taxable years, X is subject to the tax imposed by section 1378 for 1971
since it has net section 1201 gain (in the amount of $200,000)
attributable to property with a substituted basis. The tax computed
under section 1378(b)(1) is $187,500 (30 percent of ($650,000 minus
$25,000)) and
[[Page 614]]
under section 1378(b)(2) is $377,500 (22 percent of $800,000 plus 26
percent of $775,000). By reason of the limitation imposed by section
1378(c) the tax actually imposed by section 1378 is $60,000 (30 percent
of $200,000, the net section 1201 gain). The tax computed under section
1378(b)(2) with the modification required under subparagraph (2)(i) of
this paragraph is $281,500 (22 percent of $600,000 plus 26 percent of
$575,000). Thus, the 1971 capital gains item of tax preference X is
$75,000 computed as follows:
1. Tax computed under 1378(b) (2)........................... $377,500
2. Tax computed under 1378(b) (2) with modification......... 281,500
-----------
3. Excess................................................... 96,000
4. Tax actually imposed under 1378.......................... 60,000
-----------
5. Difference............................................... 36,000
===========
6. Normal tax rate plus surtax rate......................... .48
7. Tax preference (line 5 divided by line 6)................ $75,000
In addition each shareholder of X will take into account his
distributive share of the $650,000 of net section 1201 gain of X less
the taxes paid by X under sections 56 and 1378 on the gain
[T.D. 7564, 43 FR 40483, Sept. 12, 1978]
Sec. 1.58-5 Common trust funds.
Section 58(e) provides that each participant in a common trust fund
(as defined in section 584 and the regulations thereunder) is to treat
as items of tax preference his proportionate share of the items of tax
preference of the fund computed as if the fund were an individual
subject to the minimum tax. The participant's proportionate share of the
items of tax preference of the fund is determined as if the participant
had realized, or incurred, his pro rata share of items of income, gain,
loss, or deduction of the fund directly from the source from which
realized or incurred by the fund. The participant's pro rata share of
such items is determined in a manner consistent with section 1.584-2(c).
Items of tax preference apportioned to a participant pursuant to this
paragraph are taken into account by the participant for the
participant's taxable year in which or with which the taxable year of
the trust ends.
[T.D. 7564, 43 FR 40484, Sept. 12, 1978]
Sec. 1.58-6 Regulated investment companies; real estate investment trusts.
(a) In general. Section 58(f) provides rules with respect to the
determination of the items of tax preference of regulated investment
companies (as defined in section 851) and their shareholders and real
estate investment trusts (as defined in section 856) and their
shareholders, or holders of beneficial interest. In general, the items
of tax preference of such companies and such trusts are determined at
the company or trust level and the items of tax preference so determined
(other than the capital gains item of tax preference (sections 57(a)(9)
and Sec. 1.57-1(i)) and, in the case of a real estate investment trust,
accelerated depreciation on section 1250 property (sections 57(a)(2) and
Sec. 1.57-1(b)) are treated as items of tax preference of the
shareholders, or holders of beneficial interest, in the same proportion
that the dividends (other than capital gains dividends) paid to each
such shareholder, or holder of beneficial interest, bear to the taxable
income of such company or such trust determined without regard to the
deduction for dividends paid. In no case, however, is such proportion to
be considered in excess of 100 percent. For example, if a regulated
investment company has items of tax preference of $500,000 for the
taxable year, none of which resulted from capital gains, and distributes
dividends in an amount equal to 90 percent of its taxable income, each
shareholder treats his share of 90 percent of the company's items of tax
preference, or (a proportionate share of) $450,000, as items of tax
preference of the shareholder. The remaining $50,000 constitutes items
of tax preference of the company. Amounts treated under this paragraph
as items of tax preference of the shareholders, or holders of beneficial
interest, are deemed to be derived proportionately from each item of tax
preference of the company or trust, other than the capital gains item of
tax preference and, in the case of a real estate investment trust,
accelerated depreciation on section 1250 property. Such amounts are
taken into account by the shareholders, or holders of beneficial
interest, in the same taxable year in which the dividends on which the
apportionment is based are includible in income. The minimum tax
exemption of the trust or company shall not be reduced
[[Page 615]]
because a portion of the trust's or company's items of tax preference
are allocated to the shareholders or holders of beneficial interests.
(b) Capital gains. Section 58(g)(1) provides that a regulated
investment company or real estate investment trust does not treat as an
item of tax preference the capital gains item of tax preference under
section 57(a)(9) (and Sec. 1.57-1(i)) to the extent that such item is
attributable to amounts taken into income by the shareholders of such
company under section 852(b)(3) or by the shareholders or holders of
beneficial interest of such trust under section 857(b)(3). Thus, such a
company or trust computes its capital gains item of tax preference on
the basis of its net section 1201 gain less the sum of (1) the capital
gains dividend (as defined in section 852(b)(3)(C) or 857(b)(3)(C)) for
the taxable year of the company or trust plus (2), in the case of a
regulated investment company, that portion of the undistributed capital
gains designated, pursuant to section 852(b)(3)(D) and the regulations
thereunder, by the company to be includible in the shareholder's return
as long-term capital gains for the shareholders's taxable year in which
the last day of the company's taxable years falls. Amounts treated under
section 852(b)(3) or 857(b)(3) as long-term capital gains of
shareholders, or holders of beneficial interest, are automatically
included, pursuant to sections 57(a)(9) and 1.57-1(i), in the
computation of the capital gains item of tax preference of the
shareholders, or holders of beneficial interest.
(c) Accelerated depreciation on section 1250 property. In the case
of a real estate investment trust, all of the items of tax preference
resulting from accelerated depreciation on section 1250 property held by
the trust (section 57(a)(2) and Sec. 1.57-1(b)) are treated as items of
tax preference of the trust, and, thus, none are treated as items of tax
preference of the shareholder, or holder of beneficial interest.
[T.D. 7564, 43 FR 40484, Sept. 12, 1978]
Sec. 1.58-7 Tax preferences attributable to foreign sources; preferences other than capital gains and stock options.
(a) In general. Section 58(g)(1) provides that except in the case of
the stock options item of tax preference (section 57(a)(6) and Sec.
1.57-1(f)) and the capital gains item of tax preference (section
57(a)(9) and Sec. 1.57-1(i)), items of tax preference which are
attributable to sources within any foreign country or possession of the
United States shall, for purposes of section 56, be taken into account
only to the extent that such items reduce the tax imposed by chapter 1
(other than the minimum tax under section 56) on income derived from
sources within the United States. Items of tax preference from sources
within any foreign country or possession of the United States reduce the
chapter 1 tax on income from sources within the United States to the
extent the deduction relating to such preferences, in combination with
other foreign deductions, exceed the income from such sources and, in
effect, offset income from sources within the United States. Items of
tax preference, for this purpose, are determined after application of
Sec. 1.57-4 (relating to limitation on amounts treated as items of tax
preference). In the case of a taxpayer who deducted foreign taxes under
section 164 for a taxable year, the provisions of this section shall be
applied (without regard to section 275(a)(4)) as if he had elected the
overall foreign tax credit limitation under section 904(a) (2) for such
year.
(b) Preferences attributable to foreign sources--(1) Preferences
other than excess investment interest. Except in the case of excess
investment interest (see subparagraph (2) of this paragraph), an item of
tax preference to which this section applies is attributable to sources
within a foreign country or possession of the United States to the
extent such item is attributable to a deduction properly allocable or
apportionable to an item or class of gross income from sources within a
foreign country or possession of the United States under the principles
of section 862(b), or section 863, and the regulations thereunder.
Where, in the case of income partly from sources
[[Page 616]]
within the United States and partly from sources within a foreign
country or possession of the United States, taxable income is computed
before apportionment to domestic and foreign sources, and is then
apportioned by processes or formulas of general apportionment (pursuant
to section 863(b) and the regulations thereunder), deductions
attributable to such taxable income are considered to be proportionately
from sources within the United States and within the foreign country or
possession of the United States on the same basis as taxable income.
(2) Excess investment interest--(i) Per-country limitation--(a) In
the case of a taxpayer on the per-country foreign tax credit limitation
under section 904(a) for the taxable year, excess investment interest
(as defined in section 57(b)(1)), and the resulting item of tax
preference, is attributable to sources within a foreign country or a
possession of the United States to the extent that investment interest
expense attributable to income from sources within such foreign country
or possession of the United States exceeds the net investment income
from sources within such foreign country or such possession. For this
purpose, net investment income from within a foreign country or
possession of the United States is the excess (if any) of the investment
income from sources within such country or possession over the
investment expenses attributable to income from sources within such
country or such possession. For the definition of investment interest
expense see section 57(b)(2)(D); for the definition of investment income
see section 57(b)(2)(B); for the definition of investment expense see
section 57(b)(2)(C).
(b) If the taxpayer's excess investment interest computed on a
worldwide basis is less than the taxpayer's total separately determined
excess investment interest (as defined in this subdivision (b)), the
amount of the taxpayer's excess investment interest from each foreign
country or possession is the amount which bears the same relationship to
the taxpayer's excess investment interest from each such country or
possession, determined without regard to this subdivision (b), as the
taxpayer's worldwide excess investment interest bears to the taxpayer's
total separately determined excess investment interest. For purposes of
this subdivision (b), the taxpayer's total separately determined excess
investment interest is the sum of the total excess investment interest
determined without regard to this subdivision (b) plus the taxpayer's
excess investment interest from sources within the United States
determined in a manner consistent with (a) of this subdivision (i).
(ii) Overall limitation. In the case of a taxpayer who has elected
the overall foreign tax credit limitation under section 904(a)(2) for
the taxable year, excess investment interest (as defined in section
57(b)(1)), and the resulting item of tax preference, is attributable to
sources within any foreign country or possession of the United States to
the extent that investment interest expense attributable to income from
such sources exceeds the sum of (a) the net investment income from such
sources plus (b) the excess, if any, of net investment income from
sources within the United States over investment interest expense
attributable to sources within the United States. For this purpose, net
investment income from sources within any foreign country or possession
of the United States is the excess (if any) of the investment income
from all such sources over the investment expenses attributable to
income from such sources. For the definition of investment interest
expense see section 57(b)(2)(D) for the definition of investment income
see section 57(b)(2)(B); for the definition of investment expense see
section 57(b)(2)(C).
(iii) Allocation of expenses. The determination of the investment
interest expense and investment expenses attributable to a foreign
country or possession of the United States is made in a manner
consistent with subparagraph (1) of this paragraph.
(iv) Attribution of certain interest deductions to foreign sources.
Where net investment income from sources within any foreign country or
possession has the effect of offsetting investment interest expense
attributable to income from sources within the United States,
[[Page 617]]
the deductions for the investment interest expense so offset are, for
purposes of Sec. 1.58-7(c) (relating to reduction in taxes on United
States source income), treated as deductions attributable to income from
sources within the foreign country or possession from which such net
investment income is derived. Such an offset will occur where there is
an excess of investment interest expense attributable to income from
sources within the United States over net investment income from such
sources and (a) in the case of a taxpayer on the per-country foreign tax
credit limitation, an excess of net investment income from sources
within a foreign country or possession of the United States over
investment interest expense from within such foreign country or
possession, or (b) in the case of a taxpayer who has elected the overall
foreign tax credit limitation, there is an excess of net investment
income from sources within foreign countries or possessions of the
United States over investment interest expense attributable to income
from within such sources.
(v) Separate limitation on interest income. Where a taxpayer has
income described in section 904(f)(2) (relating to interest income
subject to the separate foreign tax credit limitation) or expenses
attributable to such income, the determination of the excess investment
interest resulting therefrom must be determined separately with respect
to such income and the expenses properly allocable or apportionable
thereto in the same manner as such determination is made in the case of
a taxpayer on the per-country foreign tax credit limitation for the
taxable year (see subdivision (i) of this subparagraph).
(vi) Examples. The principles of this subparagraph may be
illustrated by the following examples in each of which the taxpayer is
an individual and a citizen of the United States:
Example 1. The taxpayer's only items of income and deduction
relating to excess investment interest are as follows:
----------------------------------------------------------------------------------------------------------------
United
States France Germany Total
----------------------------------------------------------------------------------------------------------------
Investment income from sources within........................... $150,000 $120,000 $180,000 $450,000
Investment expenses relating to income from sources within...... (100,000) (90,000) (120,000) (310,000)
-----------------------------------------------
Net investment income........................................... 50,000 30,000 60,000 140,000
Investment interest expense relating to income from sources (110,000) (70,000) (50,000) (230,000)
within.........................................................
-----------------------------------------------
(Excess) of investment interest expense over net investment (60,000) (40,000) *10,000 (90,000)
income.........................................................
----------------------------------------------------------------------------------------------------------------
*Excess of net investment income over investment interest expense.
(a) If the taxpayer has elected the overall foreign tax credit
limitation, his excess investment interest from sources within any
foreign countries or possessions of the United States determined under
subdivision (ii) of this subparagraph is computed as follows:
Investment interest:
French........................... ($70,000)
German........................... (50,000) ........... ($120,000)
------------
Net investment income:
Investment income:
French......................... 120,000
German......................... 180,000 $300,000
------------
Less:
Investment expenses:
French......................... (90,000)
German......................... (120,000) (210,000) 90,000
------------------------------------
Excess of U.S. net income over
investment interest expenses:
Total foreign excess .......... ........... (30,000)
investment interest.........
------------------------------------------------------------------------
[[Page 618]]
(b) If the taxpayer is on the per-country foreign tax credit
limitation, his excess investment interest from France and Germany
determined under subdivision (i)(a) of this subparagraph is $40,000 and
zero, respectively. Since the taxpayer's worldwide excess investment
interest ($90,000) is less than his total separately determined excess
investment interest ($60,000 (United States) plus $40,000 (French) plus
zero (German), or $100,000), the limitation in subdivision (i) (b) of
this subparagraph applies and the excess investment interest
attributable to France is limited as follows:
Total worldwide excess ($90,000) / Total separately determined excess
($100,000) x French excess ($40,000) = $36,000
The taxpayer's total excess investment interest attributable to sources
within any foreign country or possession of the United States is, thus,
$36,000 ($36,000 (French) plus zero (German)). The taxpayer's excess
investment interest attributable to sources within the United States is
$54,000
($90,000 / $100,000 x $60,000).
Since, in making the latter determination, $6,000 of the $60,000 of U.S.
investment interest expense in excess of U.S. net investment income is,
in effect, offset by German net investment income, for purposes of Sec.
1.58-7(c), $6,000 of interest deductions attributable to income from
sources within the United States are, pursuant to subdivision (iv) of
this subparagraph, treated as deductions attributable to income from
sources within Germany.
Example 2. Assume the same facts as in example (1) except that the
items of income and deduction in Germany and the United States are
reversed. The worldwide excess investment interest, thus, remains
$90,000 and the items of income and deduction relating to excess
investment interest are as follows:
----------------------------------------------------------------------------------------------------------------
United
States France Germany Total
----------------------------------------------------------------------------------------------------------------
Investment income from sources within........................... $180,000 $120,000 $150,000 $450,000
Investment expenses relating to income from sources within...... (120,000) (90,000) (100,000) (310,000)
-----------------------------------------------
Net investment income........................................... 60,000 30,000 50,000 140,000
Investment interest expense relating to income from sources (50,000) (70,000) (110,000) (230,000)
within.........................................................
-----------------------------------------------
(Excess) of investment interest expense over net investment 10,000 (40,000) (60,000) (90,000)
income.........................................................
----------------------------------------------------------------------------------------------------------------
(a) If the taxpayer has elected the overall limitation, his excess
investment interest from sources within any foreign countries or
possessions of the United States determined under subdivision (ii) of
this subparagraph is determined as follows:
Foreign investment interest:
French.......................... ($70,000)
German.......................... (110,000) .......... ($180,000)
------------
Foreign net investment income:
French.......................... 120,000
German.......................... 150,000 $270,000
------------
Less:
Investment expenses:
French.......................... (90,000)
German.......................... (100,000) (190,000) 80,000
-----------------------------------
Excess of U.S. net investment income .......... .......... 10,000
over U.S. investment interest
expense............................
-----------
Excess investment interest .......... .......... (90,000)
attributable to foreign sources....
(b) If the taxpayer has not elected the overall foreign tax credit
limitation, his excess investment interest from France and Germany
determined under subdivision (i) of this subparagraph (without regard to
the limitation to worldwide excess investment interest) is $40,000 and
$60,000 respectively, and his total separately determined excess
investment interest is, thus, $10,000. Since the total separately
determined excess would exceed the worldwide excess, the limitation to
the worldwide excess in subdivision (i) applies and the excess
investment interest is determined as follows:
France:
$90,000 / $100,000 x $40,000 = $36,000
Germany:
$90,000 / $100,000 x $60,000 = $54,000
Total excess investment interest attributable to sources within any
foreign countries and possessions--$90,000.
[[Page 619]]
Example 3. Assume the same facts as in example (1) except that the
taxpayer, in addition has investment income, investment expenses, and
investment interest subject to the separate limitation under section
904(f).
(a) If the taxpayer has elected the overall foreign tax credit
limitation, his excess investment interest from sources within any
foreign countries or possessions of the United States determined under
subdivision (ii) of this subparagraph is the same as in (a) of example
(1) of this subdivision (vi). He then treats such amount as separately
determined excess investment interest attributable to a single foreign
country as determined under subdivision (i) of this subparagraph and
proceeds as in (b) of example (1) of this subdivision (vi) treating
items of income and deduction subject to section 904(f) and from each
separate foreign country or possession separately in making the
additional determinations under subdivisions (i) and (iv) of this
subparagraph.
(b) If the taxpayer has not elected the overall foreign tax credit
limitation, his excess investment interest from sources within any
foreign country or possession of the United States would be determined
in the same manner as in (b) of example (1) treating items of income and
deduction which are subject to section 904(f) and from each separate
foreign country or possession separately in making the determinations
under subdivisions (i) and (iv) of this subparagraph.
(c) Reduction in taxes on United States source income--(1) Overall
limitation--(i) In general. If a taxpayer is on the overall foreign tax
credit limitation under section 904(a)(2), the items of tax preference
determined to be attributable to foreign sources under paragraph (b) of
this section reduce the tax imposed by chapter 1 (other than the minimum
tax imposed under section 56) on income from sources within the United
States for the taxable year to the extent of the smallest of the
following three amounts:
(a) Items of tax preference (other than stock options and capital
gains) attributable to sources within a foreign country or possession of
the United States,
(b) The excess (if any) of the total deductions properly allocable
or apportionable to items or classes of gross income from sources within
foreign countries and possessions of the United States over the gross
income from such sources, or
(c) Taxable income from sources within the United States.
See Sec. 1.58-7(b)(2)(iv) with respect to the attribution of certain
interest deductions to foreign sources in cases involving the excess
investment interest item of tax preference.
(ii) Net operating loss. Where there is an overall net operating
loss for the taxable year, to the extent that the lesser of the amounts
determined under (a) or (b) of subdivision (i) of this subparagraph
exceeds the taxpayer's taxable income from sources within the United
States (and, therefore do not offset taxable income from sources within
the United States for the taxable year) the amount of such excess is
treated as ``suspense preferences.'' Suspense preferences are converted
to actual items of tax preference, arising in the loss year and subject
to the provisions of section 56, as the net operating loss is used in
other taxable years, in the form of a net operating loss deduction under
section 172, to offset taxable income from sources within the United
States. Suspense preferences which, in other taxable years, reduce
taxable income from sources within any foreign country or possession of
the United States lose their character as suspense preferences and,
thus, are never converted into actual items of tax preference. The
amount of the suspense preferences which are converted into actual items
of tax preference is equal to that portion of the net operating loss
attributable to the suspense preferences which offset taxable income
from sources within the United States in taxable years other than the
loss year. The determination of the component parts of the net operating
loss and the determination of the amount by which the portion of the net
operating loss attributable to suspense preferences offsets taxable
income from sources within the United States is made on a year-by-year
basis in the same order as the net operating loss is used in accordance
with section 172(b). Such determination is made by applying deductions
attributable to U.S. source income first against such income and
deductions attributable to foreign source income first against such
foreign source income and in accordance with the following principles:
(a) Deductions attributable to items or classes of gross income from
sources
[[Page 620]]
within the United States offset taxable income from sources within the
United States before any remaining portion of the net operating loss;
(b) Deductions attributable to items or classes of gross income from
sources within foreign countries or possessions of the United States
offset taxable income from such sources before any remaining portion of
the net operating loss;
(c) Deductions described in (b) of the subdivision (ii) which are
not suspense preferences (referred to in this subparagraph as ``other
foreign deductions'') offset taxable income from sources within foreign
countries and possessions of the United States before suspense
preferences; and
(d) Suspense preferences offset taxable income from sources within
the United States before other foreign deductions.
For purposes of the above computations, taxable income is computed with
the modifications specified in section 172(b)(2) or section 172(c),
whichever is applicable. However, the amount of suspense preferences
which are converted into actual items of tax preference in accordance
with the above principles is reduced to the extent suspense preferences
offset increases in taxable income from sources within the United States
due to the modifications specified in section 172(b)(2) or section
172(c). For this purpose, suspense preferences are considered to offset
an increase in taxable income due to the section 172(b)(2) modifications
only after reducing taxable income computed before the section 172(b)(2)
or section 172(c) modifications.
(iii) Examples. The principles of this subparagraph may be
illustrated by the following examples. In each example the taxpayer is
an individual citizen of the United States and has elected the overall
foreign tax credit limitation. Personal deductions and exemptions are
disregarded for purposes of these examples.
Example 1. In 1974, the taxpayer has the following items of income
and deduction:
United States taxable income:
Gross income...................... .......... $750,000
Deductions........................ .......... (250,000) $500,000
------------
Foreign source loss:
Gross income...................... .......... 200,000
Deductions:
Preference items (excess of $550,000
percentage depletion over
basis).........................
Other........................... 50,000 (600,000) (400,000)
------------------------
Overall taxable income.............. .......... .......... 100,000
Pursuant to subdivision (i) of this subparagraph the smallest of (a) the
items of tax preference attributable to the foreign sources ($550,000),
(b) the foreign source loss ($400,000), or (c) the taxable income from
sources within the United States ($500,000) reduces the tax imposed by
chapter 1 (other than the minimum tax) on income from sources within the
United States. Thus, $400,000 of the $550,000 of excess depletion is
treated as an item of tax preference in 1974 subject to the minimum tax.
Example 2. Assume the same facts as in example (1) except that the
gross income from sources within the United States is $350,000 resulting
in U.S. taxable income of $100,000 and an overall net operating loss of
$300,000. Pursuant to subdivision (i) of this subparagraph, $100,000 of
the $550,000 excess depletion would be treated as an item of tax
preference in 1974 subject to the minimum tax. In addition, pursuant to
subdivision (ii) of this subparagraph, the excess of the items of tax
preference from foreign sources ($550,000) or the foreign source loss
($400,000), whichever is less, over the U.S. taxable income ($100,000),
or, in this example, $300,000, is treated as suspense preferences.
(a) If, in 1971, the taxpayer's total items of income and deduction
result in $350,000 of taxable income all of which is from sources within
the United States, the entire $300,000 net operating loss, all of which
is attributable to suspense preferences, is used to offset U.S. taxable
income. Accordingly, the full $300,000 of suspense preferences are
converted into actual items of tax preference arising in 1974 and are
subject to tax under section 56.
(b) If the $350,000 in 1971 is modified taxable income resulting
from the denial of a section 1202 capital gains deduction of $175,000 by
reason of section 172(b)(2), the $300,000, otherwise treated as actual
items of tax preference, is reduced by $125,000, i.e., the extent to
which the suspense preferences offset U.S.
[[Page 621]]
taxable income attributable to the increase in taxable income resulting
from the denial of the section 1202 deduction.
Example 3. In 1974, the taxpayer has the following items of income
and deduction:
United States loss:
Gross income.................... .......... $75,000
Deductions...................... .......... (225,000)
-------------
.......... .......... ($150,000)
Foreign loss:
Gross income.................... .......... 400,000
Deductions:
Preference items (excess of $200,000
accelerated depreciation on
sec. 1250 property over
straight-line amount)........
Other......................... 550,000 (750,000) (350,000)
-----------------------------------
Overall net operating loss.......... .......... .......... (500,000)
Since the nonpreference deductions reduce the foreign source income
before the preference portion, the $350,000 foreign source loss consists
of $200,000 of suspense preferences and $150,000 of other deductions. In
1971, 1972, and 1973 the taxpayer had taxable income from sources within
the United States of $100,000, $200,000, and $300,000, respectively and
taxable income from sources within foreign countries of $80,000 each
year. Of the $200,000 of suspense preferences, $150,000 are converted
into actual items of tax preference, subject to the minimum tax in 1974,
determined as follows:
[In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
Taxable income Foreign deductions
------------------------------ -------------------------
Year--Explanation U.S. deductions Suspense
U.S. source Foreign source preferences Other
----------------------------------------------------------------------------------------------------------------
1971 End of year balance before section 100 80 150 200 150
58(g) computations....................
1. U.S. deductions against U.S. (100)
income............................
........... ............... (100)
2. Other foreign deductions against ........... (80) ............... ........... (80)
foreign income....................
1972 End of year balance before section 200 80 50 200 70
58(g) computations....................
1. U.S. deductions against U.S. (50) ............... (50)
income............................
2. Other foreign deductions against ........... (70) ............... ........... (70)
foreign income....................
3. Suspense preferences against ........... (10) ............... (10)
foreign income....................
4. Suspense preferences against *(150) ............... ............... *(150)
U.S. income.......................
1973 End of year balance before section 300 80 ............... 40
58(g) computations....................
1. U.S. deductions against U.S. ........... ............... Not applicable
income............................
2. Other foreign deductions against ........... ............... Not applicable
foreign income....................
3. Suspense preference against ........... (40) ............... (40)
foreign income....................
4. Suspense preferences against ........... ............... Not applicable
U.S. income.......................
Balances........................... 300 40
----------------------------------------------------------------------------------------------------------------
*Suspense preferences converted to actual items of tax preference.
Example 4. In 1970, the taxpayer's total items of income and
deduction, all of which are attributable to foreign sources, are as
follows:
Foreign loss:
Gross income.............................................. $400,000
Deductions:
Preferences (excess of accelerated $200,000
depreciation on section 1250 property over
straight-line).............................
-----------------------
Net operating loss.......................................... 350,000
[[Page 622]]
Pursuant to subdivision (i) of this subparagraph, none of the
preferences attributable to foreign sources reduce the tax imposed by
chapter 1 (other than the minimum tax) on taxable income from sources
within the United States. Pursuant to subdivision (ii) of this
subparagraph, the $200,000 portion of the net operating loss resulting
from the excess accelerated depreciation constitutes suspense
preferences. No part of the net operating loss that is carried back to
previous years is reduced in such previous years. In 1971 and 1972, the
taxpayer's income (before the net operating loss deduction) consists of
the following:
1971 taxable income:
United States............................................. $160,000
Foreign................................................... 70,000
-------------
Total................................................... 230,000
=============
1972 taxable income:
United States............................................. 25,000
Foreign................................................... 105,000
-------------
Total................................................... 130,000
(a) In 1971, the conversion of suspense preferences into actual
items of tax preference under section 58(g) (and this paragraph) and the
imposition of the minimum tax on 1970 items of tax preference under
section 56(b) and (Sec. 1.56A-2) are determined as follows:
Conversion of suspense preferences:
1970 Net Operating Loss
[In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
U.S. Other
taxable Foreign U.S. deductions Suspense foreign
income taxable income preferences deductions
----------------------------------------------------------------------------------------------------------------
$160 $70 ..................... $200 $150
-----------------------------------------------------------------------------
1. U.S. deductions against U.S. ........... .............. Not applicable.......
income.
2. Other foreign deductions ........... 70 ..................... ........... (70)
against foreign income.
3. Suspense preference against ........... .............. Not applicable.......
foreign income.
4. Suspense preference against *(160) .............. ..................... (160)
U.S. income.
-----------------------------------------------------------------------------
Balance to 1972................................................................... 40 80
----------------------------------------------------------------------------------------------------------------
*Suspense preferences converted into actual items of tax preference.
Imposition of minimum tax on 1970 items of tax preference:
1970 Net Operating Loss
[In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
1971 taxable Nonpreference Preference Suspense
income portion portion portion
----------------------------------------------------------------------------------------------------------------
$230 $150 ............... $200
-------------------------------------------------------------------
1. 1971 conversion of suspense preferences ............... \1\ 30 $130 (160)
pursuant to sec. 58(g).....................
Adjusted NOL............................ ............... 180 130 40
2. Nonpreference portion against taxable (180) (180)
income.....................................
3. Preference portion against taxable income \2\ (50) ............... (50)
-------------------------------------------------------------------
Balance to 1972........................................................... 80 40
----------------------------------------------------------------------------------------------------------------
\1\ Represents the 1970 minimum tax exemption.
\2\ Imposition of 1970 minimum tax (10 pctx$50,000=$5,000).
(b) In 1972, the conversion of suspense preferences into actual
items of tax preferences under section 58(g) (and this paragraph) and
the imposition of the minimum tax on 1970 items of tax preference under
section 56(b) (and Sec. 1.56A-2) are determined as follows:
Conversion of suspense preferences:
[[Page 623]]
1970 Net Operating Loss
[In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
U.S. Other
taxable Foreign taxable U.S. deductions Suspense foreign
income income preferences deductions
----------------------------------------------------------------------------------------------------------------
$25 $105 ............... $40 $80
------------------------------------------------------------------------
1. U.S. deduction against U.S. income.. ........... ............... Not applicable
2. Other foreign deductions against ........... (80) ............... ........... (80)
foreign income........................
3. Suspense preferences against foreign ........... (25) ............... (25)
income................................
4. Suspense preference against U.S. \1\ (15) ............... ............... (15)
income................................
------------------------------------------------------------------------
Balance............................ 10
----------------------------------------------------------------------------------------------------------------
\1\ Suspense preferences converted into actual items of tax preference.
Imposition of minimum tax on 1970 items of tax preference:
1970 Net Operating Loss
[In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
1972 taxable Nonpreference Preference Suspense
income portion portion portion
----------------------------------------------------------------------------------------------------------------
$130 ............... $80 $40
-------------------------------------------------------------------
1. 1972 conversion of suspense preferences ............... $25 15 (40)
pursuant to sec. 58(g).....................
Adjusted NOL............................ ............... 25 95
2. Nonpreference portion against taxable (25) (25)
income.....................................
3. Preference portion against taxable income \1\ (95) ............... (95)
-------------------------------------------------------------------
Balance................................. 10
----------------------------------------------------------------------------------------------------------------
\1\ Imposition of 1970 minimum tax (10 pctx$95,000=$9,500).
(2) Per-country limitation--(i) In general. If a taxpayer is on the
per-country foreign tax credit limitation for the taxable year, the
amount by which the items of tax preference to which this section
applies reduce the tax imposed by chapter 1 (other than the minimum tax
under section 56) on income from sources within the United States is
determined separately with respect to each foreign country or possession
of the United States. Such determination is made in a manner consistent
with subparagraph (1) of this paragraph as modified in subdivision (ii)
of this subparagraph. In applying subparagraph (1)(i) of this paragraph
to a taxpayer on the per-country limitation, if the total potential
preference amounts (as defined in this subdivision (i)) exceed the
taxpayer's taxable income from sources within the United States, then,
for purposes of subparagraph (1)(i)(c) of this paragraph (relating to
the U.S. taxable income limitation on the amount treated as a reduction
of U.S. taxable income), the taxable income from sources within the
United States which is reduced by potential preference amounts with
respect to each foreign country or possession is an amount which bears
the same relationship to such income as the potential preference amount
with respect to such foreign country or possession bears to the total of
the potential preference amounts with respect to all foreign countries
and possessions. For purposes of this subparagraph, the potential
preference amount with respect to a foreign country or possession is the
lesser of the amount of foreign source preference (described in
subparagraph (1)(i)(a) of this paragraph) attributable to such country
or possession or the amount of foreign source loss (described in
subparagraph (1)(i)(b) of this paragraph) attributable to such country
or possession.
[[Page 624]]
(ii) Net operating loss. Where there is an overall net operating
loss for the taxable year and the total of the potential preference
amounts with respect to all foreign countries and possessions exceeds
the taxpayer's taxable income from sources within the United States, the
amount of such excess is treated as ``suspense preferences''. The
suspense preferences are converted into actual items of tax preference,
arising in the loss year and subject to the provisions of section 56, as
the net operating loss is used in other taxable years, in the form of a
net operating loss deduction under section 172, to offset taxable income
from sources within the United States. Suspense preferences attributable
to a foreign country or possession which, in other taxable years, reduce
taxable income from sources within such country or possession or offset
taxable income from sources within any other foreign country or
possession lose their character as suspense preferences and, thus, are
never converted into actual items of tax preference. The amount of the
suspense preferences which are converted into actual items of tax
preference is equal to that portion of the net operating loss
attributable to the suspense preferences which offsets taxable income
from sources within the United States in taxable years other than the
loss year. The determination of the component parts of the net operating
loss and the determination of the amount by which the portion of the net
operating loss attributable to the suspense preferences offsets taxable
income from sources within the United States is made on a year-by-year
basis in the same order as the net operating loss is used in accordance
with section 172(b). Such determination is made by applying deductions
attributable to United States source income first against such income
and applying deductions attributable to income from sources within a
foreign country or possession of the United States first against income
from sources within such country or possession and in accordance with
the following principles:
(a) Deductions attributable to items or classes of gross income from
sources within the United States offset taxable income from sources
within the United States before any remaining deductions;
(b) Deductions attributable to items or classes of gross income from
sources within any foreign country or possession of the United States
which are not suspense preferences (referred to in this paragraph as
``other foreign deductions'') offset taxable income from sources within
such country or possession before any remaining deductions;
(c) Suspense preferences attributable to items or classes of gross
income from sources within a foreign country or possession offset any
remaining taxable income from sources within such foreign country or
possession after application of (b) of this subdivision (ii) before any
remaining deductions;
(d) Suspense preferences from each foreign country and possession
(remaining after application of (c) of this subdivision (ii)) offset
taxable income from sources within the Unted States (remaining after
application of (a) of this subdivision (ii)) before other foreign
deductions pro rata on the basis of the total of such suspense
preferences;
(e) Other foreign deductions from each foreign country and
possession (remaining after application of (b) of this subdivision (ii))
offset taxable income from sources within the United States (remaining
after application (a) and (b) of this subdivision (ii)) pro rata on the
basis of the total of such other foreign deductions;
(f) Deductions attributable to income from sources within the United
States (remaining after application of (a) of this subdivision (ii))
offset taxable income from sources within any foreign country or
possession before any foreign deductions;
(g) Other foreign deductions from each foreign country and
possession (remaining after application of (b) and (e) of this
subdivision (ii)) offset taxable income from sources within any other
foreign countries or possessions (remaining after application of (f) of
this subdivision (ii)) pro rata on the basis of the total of such other
foreign deductions; and
(h) Suspense preferences (remaining after the application of (c) and
(d) of this subdivision (ii)) offset taxable income from sources within
any foreign country or possession (remaining after
[[Page 625]]
the application of paragraphs (f) and (g) of this subdivision (ii)) pro
rata on the basis of the total of such suspense preferences.
For purposes of the above computations, taxable income is computed with
the modifications specifed in section 172(b)(2) or section 172(c),
whichever is applicable. However, the amount of suspense preferences
which are converted into actual items of tax preference in accordance
with the above principles is reduced to the extent the suspense
preferences offset increases in taxable income from sources within the
United States due to the modifications specified in section 172(b)(2) or
section 172(c). For this purpose, suspense preferences are considered to
offset an increase in taxable income due to section 172(b)(2) or section
172(c) modifications only after reducing taxable income computed before
such modifications.
(iii) Examples. The principles of this subparagraph may be
illustrated by the following examples in each of which the per-country
foreign tax credit limitation is applicable. For purposes of these
examples, personal deductions and exemptions are disregarded.
Example (1). The taxpayer has the following items of income and
deduction for the taxable year 1971:
----------------------------------------------------------------------------------------------------------------
United United
States France Germany Kingdom
----------------------------------------------------------------------------------------------------------------
Gross income.................................................. $180,000 $165,000 $50,000 $75,000
Deductions:
Preference.................................................. ........... ........... .......... (45,000)
Other....................................................... (120,000) (125,000) (80,000) (100,000)
-------------------------------------------------
Taxable income (or loss).................................. 60,000 40,000 (30,000) (70,000)
----------------------------------------------------------------------------------------------------------------
(a) Pursuant to subdivision (i) of this subparagraph, the potential
preference amount in the case of the United Kingdom is the lesser of the
preferences attributable to the United Kingdom ($45,000) or the excess
of deductions over gross income from sources within the United Kingdom
($70,000) and the potential preference amounts in the case of France and
Germany are zero in both cases since the preferences attributable to
both countries are zero. Since the total potential preference amounts
($45,000) is less than the taxable income from sources within the United
States ($60,000), no modification of U.S. taxable income is required.
Thus, the amount by which the U.K. preferences reduce the tax on taxable
income from sources within the United States, determined in a manner
consistent with subparagraph (1)(i) of this paragraph, is the smallest
of (1) the items of tax preference attributable to the United Kingdom
($45,000), (2) the excess of deductions over gross income attributable
to the United Kingdom ($70,000), or (3) taxable income from sources
within the United States ($60,000). The full $45,000 of U.K. preference
items are, therefore, taken into account as items of tax preference in
1971 and subject to the minimum tax. Since there is no net operating
loss, subdivision (ii) of this subparagraph does not apply.
(b) If the French taxable income is $15,000 instead of $40,000, a
$25,000 net operating loss (on a worldwide basis) results. The
determination of the foreign preference items taken into account
pursuant to subdivision (i) of this subparagraph is the same as in (a)
of this example. Subdivision (ii) of this subparagraph again does not
apply since the total potential preference amounts ($45,000) is less
than the U.S. taxable income ($60,000).
Example 2. For the taxable year 1972, the taxpayer has a net
operating loss of $35,000 consisting of the following items of income
and deduction:
----------------------------------------------------------------------------------------------------------------
United United
States France Germany Kingdom Belgium
----------------------------------------------------------------------------------------------------------------
Gross income....................................... $250,000 $50,000 $60,000 $5,000 $45,000
Deductions:
Preferences...................................... ........... (35,000) (70,000) (95,000)
Other............................................ (100,000) (75,000) (30,000) .......... (40,000)
------------------------------------------------------------
Taxable income (or loss)....................... 150,000 (60,000) (40,000) (90,000) 5,000
----------------------------------------------------------------------------------------------------------------
[[Page 626]]
(a) Pursuant to subdivision (i) of this subparagraph the potential
preference amount with respect to each country is the lesser of the
amount shown as preferences with respect to such country or the amount
of the loss from such country. Thus, the potential preference amounts in
this case are:
France...................................................... $35,000
Germany..................................................... 40,000
United Kingdom.............................................. 90,000
Belgium..................................................... 0
-----------
Total..................................................... 165,000
Since the total of the potential preference amounts exceeds the U.S.
taxable income, in applying the principles of subparagraph (1)(i) of
this paragraph, U.S. taxable income which is reduced by potential
preference amounts with respect to each country is a pro-rata amount
based on the total potential preference amounts as follows:
France..................................... (35,000 / 165,000 x
$150,000)--$31,818
Germany.................................... (40,000 / 165,000 x
$150,000)--$36,364
United Kingdom............................. (90,000 / 165,000 x
$150,000)--$81,818
Belgium.................................... (0 / 165,000 x $150,000)--
$0
----------------------------
Total.................................... $150,000
The amount by which the foreign preference items offset U.S. taxable
income pursuant to subdivision (i) of this subparagraph is then
determined as follows:
----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
---------------------------------------------------------------
Smallest of
Preferences Loss U.S. taxable (a), (b), or
income (c)
----------------------------------------------------------------------------------------------------------------
France.......................................... $35,000 $60,000 $81,818 $31,818
Germany......................................... 70,000 40,000 36,364 36,364
United Kingdom.................................. 95,000 90,000 81,818 81,818
Belgium.........................................
---------------------------------------------------------------
Total....................................... .............. .............. .............. 150,000
----------------------------------------------------------------------------------------------------------------
Thus, $150,000 of the total foreign preference items will be taken into
account pursuant to subdivision (i) of this subparagraph as items of tax
preference in 1972 and subject to the provisions of section 56.
(b) Pursuant to subdivision (ii) of this subparagraph, the 1972 net
operating loss of $35,000 will consist of suspense preferences of
$15,000 and other foreign deductions of $20,000 attributable to each
foreign country as shown below and determined as follows:
----------------------------------------------------------------------------------------------------------------
Deductions
-----------------------------------------------------------------------------------
Explanation France Germany United
United ------------------------------------------------ Kingdom Belgium
States Preferences Other Preferences Other preferences other
----------------------------------------------------------------------------------------------------------------
$100,000 $35,000 $75,000 $70,000 $30,000 $95,000 $40,000
1. U.S. deductions against (100,000)
U.S. income ($250,000).....
2. Other foreign deductions .......... ........... (50,000) ........... (30,000) ........... (40,000)
against foreign income (per-
country) \1\...............
3. Suspense preferences .......... ........... ......... (30,000) ......... (5,000)
against remaining foreign
income (per-country).......
4. Suspense preferences
against remaining U.S.
income:
France (35,000 / 165,000 .......... (31,818)
x $150,000)............
Germany (40,000 / .......... ........... ......... (36,364)
165,000 x $150,000)....
U.K. (90,000 / 165,000 x .......... ........... ......... ........... ......... (81,818)
$150,000)..............
5. Other foreign deductions (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
against remaining U.S.
income (0).................
6. U.S. deductions against (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
other foreign income.......
7. Other foreign deductions .......... ........... (5,000)
against remaining foreign
income ($5,000)............
8. Suspense preferences (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
against remaining foreign
income (0):
Balance (components of .......... 3,182 20,000 3,636 ......... 8,182
NOL).................
----------------------------------------------------------------------------------------------------------------
\1\ Foreign income amounts before step 2 are: France--$50,000; Germany--$60,000; United Kingdom--$5,000;
Belgium--$45,000.
\2\ Not applicable.
[[Page 627]]
Example 3. In 1973, the taxpayer has taxable income (computed
without regard to the net operating loss deduction) from the following
sources and in the following amounts:
------------------------------------------------------------------------
United
United States France Germany Kingdom
------------------------------------------------------------------------
$100,000............................ $60,000 $20,000 $30,000
------------------------------------------------------------------------
In addition, the taxpayer has a net operating loss deduction of
$235,000 resulting from a 1972 net operating loss consisting of the
following amounts:
Deductions attributable to income from sources within $25,000
the United States......................................
Suspense preferences attributable to income from sources $75,000
within France..........................................
Deductions other than suspense preferences attributable $85,000
to income from sources within France...................
Deductions other than suspense preferences attributable $50,000
to sources within the Netherlands......................
(a) Pursuant to subdivision (ii) of this subparagraph, the converted
suspense preferences and the remaining portions of the 1972 net
operating loss carried over to 1974 are computed as follows:
[In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
1973 income 1972 net operating loss
---------------------------------------------------------------------------------
French French Dutch
United France Germany United United suspense other other
States Kingdom States preferences deductions deductions
----------------------------------------------------------------------------------------------------------------
100 60 20 30 25 75 85 50
U.S. deductions against U.S. (25) ....... ....... ....... (25)
income.......................
Other foreign deductions ....... (60) ....... ....... ....... ........... (60)
against foreign income (per-
country).....................
Suspense preferences against (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
remaining foreign income (per-
country).....................
Suspense preferences against (\1\ ....... ....... ....... ....... (75)
remaining U.S. income........ 75)
Other foreign deductions (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
against remaining U.S. income
U.S. deductions against (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
remaining foreign income.....
Other foreign deductions
against remaining foreign
income:
French (25,000/75,000 x ....... ....... (16.7) ....... ....... ........... (16.7)
$50,000).................
Dutch (50,000/75,000 x ....... ....... (33.3) ....... ....... ........... .......... (33.3)
$50,000).................
Suspense preferences against (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\)
remaining foreign income.....
Balance (1972 carryover to ....... ....... ....... ....... ....... ........... 8.3 16.7
1974)........................
----------------------------------------------------------------------------------------------------------------
\1\ Suspense preferences converted to actual items of tax preference.
\2\ Not applicable.
(b) If, in 1972, there had been no items of tax preference without
regard to the suspense preferences, the conversion of the suspense
preferences in 1973 would result in a 1972 minimum tax liability under
section 56(a) of $4,500 (10 percent x ($75,000-$30,000)), all of which
would have been deferred by reason of section 56(b). Further, by
application of section 56(b) and Sec. 1.56A-2, $20,000 of the $45,000
preference portion of the 1972 net operating loss would be treated as
having reduced taxable income in 1973 resulting in the imposition in
1973 of $2,000 of the deferred 1972 minimum tax liability.
(3) Separate limitation under section 904(f). In the case of a
taxpayer subject to the separate limitation on interest income under
section 904(f), the provisions of this paragraph shall be applied in the
same manner as in subparagraph (2) of this paragraph. If the taxpayer
has elected the overall foreign tax credit limitation, subparagraph (2)
of this paragraph shall be applied as if all income from sources within
any foreign countries or possessions of the United States and deductions
relating to income from such sources other than income or deductions
subject to the separate limitation under section 904(f) were from a
single foreign country.
(4) Carryover of excess taxes. For rules relating to carryover of
excess taxes described in paragraph (1) of section 56(c) when suspense
preferences are converted to actual items of tax preference, see Sec.
1.56A-5(f).
[[Page 628]]
(5) Character of amounts. Where the amounts from sources within a
foreign country or possession of the United States (or all such
countries or possessions in the case of a taxpayer who has elected the
overall foreign tax credit limitation) which are treated as reducing
chapter 1 tax on income from sources within the United States or as
suspense preferences are less than the total items of tax preference
described in subparagraph (1)(i)(a) of this paragraph attributable to
such sources, the amounts so treated are considered derived
proportionately from each such item of tax preference.
[T.D. 7564, 43 FR 40484, Sept. 12, 1978, as amended by T.D. 8138, 52 FR
15309, Apr. 28, 1987]
Sec. 1.58-8 Capital gains and stock options.
(a) In general. Section 58(g)(2) provides that the items of tax
preference specified in section 57(a)(6), and Sec. 1.57-1(b) (stock
options), and section 57(a)(9), and Sec. 1.57-1(i) (capital gains),
which are attributable to sources within any foreign country or
possession of the United States shall not be taken into account as items
of tax preference if, under the tax laws of such country or possession,
preferential treatment is not accorded:
(1) In the case of stock options, to the gain, profit, or other
income realized from the transfer of shares of stock pursuant to the
exercise of an option which is under United States tax law a qualified
or restricted stock option (under section 422 or section 424); and
(2) In the case of capital gains, to gain from the sale or exchange
of capital assets (or property treated as capital assets under United
States tax law).
Where capital gains are not accorded preferential treatment within a
foreign country, capital losses as well as capital gains from such
country are not taken into account for purposes of the minimum tax.
(b) Source of capital gains and stock options. Generally, in
determining whether the capital gain or stock option item of tax
preference is attributable to sources within any foreign country or
possession of the United States, the principles of sections 861-863 and
the regulations thereunder are applied. Thus, the stock option item of
tax preference, representing compensation for personal services, is
attributable, in accordance with Sec. 1.861-4, to sources within the
country in which the personal services were performed. Where the capital
gain item of tax preference represents gain from the purchase and sale
of personal property, such gain is attributable, in accordance with
Sec. 1.861-7, entirely to sources within the country in which the
property is sold. In accordance with paragraph (c) of Sec. 1.861-7, in
any case in which the sales transaction is arranged in a particular
manner for the primary purpose of tax avoidance, all factors of the
transaction, such as negotiations, the execution of the agreement, the
location of the property, and the place of payment, will be considered,
and the sale will be treated as having been consummated at the place
where the substance of the sale occurred.
(c) Preferential treatment. For purposes of this section, gain,
profit, or other income is accorded preferential treatment by a foreign
country or possession of the United States if (1) recognition of the
income, for foreign tax purposes, is deferred beyond the taxpayer's
taxable year or comparable period for foreign tax purposes which
coincides with the taxpayer's U.S. taxable year in cases where other
items of profit, gain, or other income may not be deferred; (2) it is
subject to tax at a lower effective rate (including no rate of tax) than
other items of profit, gain, or other income, by means of a special rate
of tax, artifical deductions, exemptions, exclusions, or similar
reductions in the amount subject to tax; (3) it is subject to no
significant amount of tax; or (4) the laws of the foreign country or
possession by any other method provide tax treatment for such profit,
gain, or other income more beneficial than the tax treatment otherwise
accorded income by such country or possession. For the purpose of the
preceding sentence, gain, profit, or other income is subject to no
significant amount of tax if the amount of taxes imposed by the foreign
country or possession of the United States is
[[Page 629]]
equal to less than 2.5 percent of the gross amount of such income.
(d) Examples. The principles of this section may be illustrated by
the following examples:
Example 1. The Bahamas imposes no income tax on individuals or
corporations, whether resident or nonresident. Since capital gains are
subject to no tax in the Bahamas, capital gains are considered to be
accorded preferential treatment and will be taken into account for
purposes of the minimum tax.
Example 2. In France, except in certain cases involving the sale of
large blocks of stock, a nonresident individual is not subject to tax on
isolated capital gains transactions. Since such capital gains are not
subject to tax in France, they are considered to be accorded
preferential treatment irrespective of the treatment accorded other
capital gains in France and such gains will be taken into account for
purposes of the minimum tax.
Example 3. In Germany, in the case of the sale within 1 taxable year
of 1 percent or more of the shares of a corporation in which an
individual taxpayer is regarded as holding a substantial interest, the
gains on the sale of the large block of stock will be taxed as
extraordinary income at one-half the ordinary income tax rate. Since
these gains are taxed as a reduced rate of tax in comparison to other
income, they are considered to be accorded preferential treatment and
will be taken into account for purposes of the minimum tax.
Example 4. In Belgium, gains derived by an individual in the course
of regular speculative transactions are taxed as ordinary income, but
with an upper limit of 30 percent. Rates of tax on individuals in
Belgium range from approximately 30 percent to approximately 60 percent.
Since the gains on speculative transactions are taxed at a maximum rate
which is more beneficial then the rates accorded to other income, such
gains are considered to be accorded preferential treatment and will be
taken into account for purposes of the minimum tax.
Example 5. In France, gains derived by a company on the sale of
fixed assets held for less than 2 years are treated as short-term gains.
The excess of short-term gains in any fiscal year is taxed at the full
company tax rate of 50 percent. However, this tax may be paid in equal
portions over the 5 years immediately following the realization of such
short-term gains. Since recognition of the short-term gains for tax
purposes is subject to deferral over a 5-year period, such gains are
considered to be accorded preferential treatment and will be taken into
account for purposes of the minimum tax.
Example 6. Also in France, in the case of the sale or exchange by a
company of depreciable assets and nondepreciable asset owned for at
least 2 years, the excess of long-term capital gains over long-term
capital losses in a fiscal year is subject to an immediate tax at the
reduced rate of 10 percent. Such excess, reduced by the 10-percent tax,
is carried in a special reserve account on the taxpayer's books. If the
excess is reinvested in other fixed asset within a stated period, no
further tax is due. If the amounts in the special reserve are
distributed, they will be treated as ordinary income for the fiscal year
in which the distribution is made. Since such gains (other than those
distributed in the same fiscal year they are realized) are subject to
deferral or a reduced rate of tax, they are (except to the extent
distributed in the year of realization) considered to be accorded
preferential treatment and are taken into account for purposes of the
minimum tax.
Example 7. In Sweden, in the case of gains derived by an individual
on the sale of shares or bonds held for 5 years or less, 25 percent of
the gains are taxed if the holding period is 4 to 5 years, 50 percent of
the gain is taxed if the holding period is 3 to 4 years, and 75 percent
of the gain is taxed if the holding period is 2 to 3 years. The gain is
fully taxable at ordinary income rates if held for less than 2 years.
Thus, gains on shares or bonds held for 2 years or more are considered
accorded preferential treatment in Sweden since they are either subject
to exemption or treatment comparable to the U.S. capital gains deduction
and are taxed at a reduced rate. Thus, such gains are taken into account
for purposes of the minimum tax.
Example 8. Pursuant to Article XIV of the United States-United
Kingdom Income Tax Convention, a resident of the United States is exempt
from United Kingdom tax on most capital gains. Since such capital gains
are exempt from United Kingdom taxation, they are considered to be
accorded preferential treatment and are taken into account for purposes
of the minimum tax.
Example 9. An individual resident of the United States, is desirous
of selling his stock in a corporation listed on the New York Stock
Exchange. He requests the stock certificates from his broker in the
United States, travels to a foreign country, delivers the certificates
to a broker in that country, and has the foreign broker execute the sale
which takes place on the New York Stock Exchange. Since the sale was
consummated in the United States, pursuant to paragraph (b) of this
section and Sec. 1.861-7, the resulting capital gain item of tax
preference is attributable to sources within the United States.
Example 10. Two individuals, both residing in the United States,
negotiate and reach agreement in New York City for the sale of stock of
a closed corporation. Prior to the transfer of the stock, in order to
avoid imposition of the minimum tax, both individuals travel to a
foreign country which does not
[[Page 630]]
accord preferential treatment to capital gains, but imposes a 5-percent
rate of income tax which would be fully creditable against U.S. tax
under sections 901 and 904 if the capital gains were sourced in that
country. The stock is actually transferred and consideration paid in the
foreign country. Since the primary purpose of consummating the sale in
the foreign country was the avoidance of tax, pursuant to paragraph (b)
of this section, and Sec. 1.861-7(c), the resulting capital gain item
of tax preference will be considered attributable to sources within the
country in which the substance of sale took place or, in this case, the
United States.
[T.D. 7564, 43 FR 40492, Sept. 12, 1978]
Sec. 1.58-9 Application of the tax benefit rule to the minimum tax for taxable years beginning prior to 1987.
(a) In general. For purposes of computing the minimum tax liability
imposed under section 56 of the Internal Revenue Code of 1954 (Code),
taxpayers are not liable for minimum tax on tax preference items that do
not reduce the taxpayer's tax liability under subtitle A of the Code for
the taxable year. In general, tax preference items that do not reduce
tax liability under subtitle A for the taxable year are those from which
no current tax benefit is derived because available credits would have
reduced or eliminated the taxpayer's regular tax liability if the
preference items had not been allowed in computing taxable income.
However, any credits that, because of such preference items, are not
needed for use against regular tax (``freed-up credits''), are required
to be reduced under the rules of paragraph (c) of this section. For
purposes of this section, a taxpayer's regular tax is the Federal income
tax liability under subchapter A of chapter 1 of the Code, not including
the minimum tax imposed by section 56. Unless otherwise noted, all
references to Internal Revenue Code sections refer to the Internal
Revenue Code of 1954.
(b) Effective date. The rules of this section are effective May 5,
1992, but only as they affect tax preference items that arise in taxable
years beginning after December 31, 1976, and before January 1, 1987.
(c) Adjustment of carryover credits--(1) In general. A taxpayer's
freed-up credits must be reduced by the additional minimum tax that
would have been imposed if a current tax benefit had been derived from
preference items that did not actually produce a current tax benefit.
The amount of this reduction shall be calculated in the following
manner--
(i) Determine the amount of freed-up credits;
(ii) Determine the amount of tax preference items (if any) from
which a current tax benefit was derived for the taxable year
(``beneficial preferences''), and the amount of preferences from which
no current tax benefit was derived for the taxable year (``non-
beneficial preferences''); and
(iii) Determine the portion of the total minimum tax on all tax
preference items for the taxable year that is attributable to the non-
beneficial preferences.
The freed-up credits are then reduced by an amount equal to such
portion of the minimum tax.
(2) Determine freed-up credits. (i) To determine the freed-up
credits for the taxable year, first determine the regular tax that would
have been imposed for the taxable year if preference items had not been
allowed in computing taxable income (``non-preference regular tax''). In
the case of a taxpayer with the capital gain preference described in
section 57(a)(9)(B), non-preference regular tax is computed without
regard to section 1201 and without adding the section 57(a)(9)(B)
preference amount to taxable income. Second, compute the amount of
credits that would have been allowed to reduce the non-preference
regular tax. The credits available to reduce non-preference regular tax
shall include any freed-up credits from other taxable years, as reduced
under paragraph (c)(5) of this section, that are carried to the current
taxable year. Third, subtract the amount of credits that were actually
allowed to reduce the regular tax for such taxable year from the amount
of credits that would have been allowed to reduce non-preference regular
tax. The result is the amount of the freed-up credits.
(ii) The following examples illustrate the determination of freed-up
credits. The first two examples assume that the foreign tax credits
being used do not exceed the limitation under section 904.
[[Page 631]]
Example 1. In 1982 Corporation B has $17.6 million dollars in
foreign tax credits available for the taxable year. If preference items
were not allowed in determining regular tax, the regular tax would have
been $10.2 million and foreign tax credits used to reduce regular tax
would have been $10.2 million. Because of tax preference items, however,
B's regular tax is $6.3 million and the amount of foreign tax credits
actually used to reduce the regular tax is $6.3 million. The amount of
freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3
million).
Example 2. Assume the same facts as in Example 1 of paragraph
(c)(2)(ii) of this section except that Corporation B has $7.2 million
dollars in foreign tax credits. If preference items were not allowed,
the non-preference regular tax would have been $10.2 million and the
foreign tax credits used to reduce the regular tax would have been $7.2
million. Because of tax preference items, however, B's regular tax is
$6.3 million, and the amount of foreign tax credits actually used to
reduce the regular tax is $6.3 million. The amount of freed-up foreign
tax credits is $.9 million ($7.2 million minus $6.3 million).
Example 3. In 1983 Corporation C has $500,000 of investment tax
credits available. If preference items were not allowed, non-preference
regular tax would have been $690,000 and all $500,000 of investment tax
credits would have been allowed to reduce non-preference regular tax
liability. Because of tax preferences, however, C's actual regular tax
is $439,750. As a result of the limitation under section 38(c), only
$377,537 of the investment tax credits are allowed to reduce the actual
regular tax. Freed-up credits are $122,463 ($500,000 minus $377,537).
Example 4. In 1984 Corporation B has ordinary income of $20,000 and
net section 1201 gain of $300,000, none of which is attributable to
foreign sources. B has no other items of tax preference in 1984. B's
non-preference regular tax for 1984 is $126,950, the amount of tax that
would be imposed without regard to section 1201.
(3) Determination of beneficial and non-beneficial preferences--(i)
In general. The amount of tax preferences from which a current tax
benefit is derived (``beneficial preferences'') and the amount from
which no current tax benefit is derived (``non-beneficial preferences'')
for the taxable year are determined as set forth below.
(ii) Regular tax liability is the same regardless of preference
items. (A) If the taxpayer's tax liability (after credits) would be the
same regardless of whether preference items were allowed to reduce
taxable income, then all of the taxpayer's preference items are non-
beneficial preference items.
(B) The following example illustrates the rule set forth in
paragraph (c)(3)(ii)(A) of this section. This example assumes that
foreign tax credits being used do not exceed the limitation under
section 904.
Example. (i) In 1982 Corporation B has $17.6 million dollars in
foreign tax credits available for the taxable year. If preference items
were not allowed in determining regular tax, the regular tax would have
been $10.2 million and foreign tax credits used to reduce regular tax
would have been $10.2 million. Because of tax preference items, however,
B's regular tax is $6.3 million and the amount of foreign tax credits
actually used to reduce the regular tax is $6.3 million. The amount of
freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3
million).
(ii) The total amount of B's tax preference items is $8.4 million.
B's non-preference regular tax is $10.2 million and, reduced by foreign
tax credits, is zero. B's actual regular tax is $6.3 million and,
reduced by foreign tax credits, is zero. Since the amount of credits
that would have been allowed to offset the non-preference regular tax
would have reduced such tax to an amount ($0) equal to the actual
regular tax liability ($0), B received a tax benefit from none of the
$8.4 million of tax preferences and therefore all of these preferences
are non-beneficial preferences.
(iii) Regular tax liability differs because of preference items. If
tax liability (after credits) is less because preference items are
allowed to reduce taxable income, then some of these preference items
have provided a current tax benefit. In such cases, the amount of
beneficial and non-beneficial preferences are determined as follows:
(A) Non-beneficial preferences. (1) The non-beneficial preferences
are determined by converting the freed-up credits for such taxable year
into an amount of taxable income. To make this conversion, freed-up
credits are ``grossed up'' (i.e., divided by the regular tax marginal
rate at which such credits would have offset non-preference regular tax)
to determine the amount of tax preferences that freed up such credits.
For purposes of this calculation, the 5-percent addition to tax provided
by section 11(b) shall be included in determining the marginal rate. The
aggregate of these grossed-up amounts is the total amount of non-
[[Page 632]]
beneficial preferences for the taxable year.
(2) The freed-up credits shall be grossed up beginning at the lowest
marginal tax rate that would have applied to the additional taxable
income arising if tax preferences were not allowed. Thus, the marginal
tax rates at which the actual regular tax was imposed shall not be taken
into account in grossing up freed-up credits, even if all or a portion
of such tax is not offset by credits because of limitations on the
allowance of such credits (such as the section 904 limit on foreign tax
credits or the section 38(c) limit on investment tax credits). For
example, if the first dollar of additional non-preference taxable income
would have been taxed at a rate of 46 percent, then freed-up credits
shall be grossed up at 46 percent, even if regular tax imposed on
taxable income at a 40-percent rate was not offset by credits because of
the limitations on investment tax credits under section 38(c). See
Examples 1 and 2 in paragraph (d) of this section for illustrations of
the gross up of freed-up credits in cases where limitations apply to the
amount of credit allowed to offset actual regular tax.
(3) The following example illustrates the gross up of freed-up
credits to determine non-beneficial preferences. This example assumes
that foreign tax credits being used do not exceed the limitation under
section 904.
Example. (i) Corporation L has the following items for the 1985
taxable year:
Actual taxable income............................... ........ $90,000
Regular tax......................................... ........ 21,750
Available credits:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... 25,000
Investment tax credits carried forward from 1984.. 20,000
----------
........ 60,000
Credit allowed to offset actual regular tax:
Foreign tax credits for 1985...................... 15,000
Foreign tax credits carried forward from 1984..... 6,750
----------
........ 21,750
Actual regular tax liability........................ ........ 0
Preferences......................................... ........ 110,000
Taxable income for 1985 determined as though ........ 200,000
preferences were not allowed.......................
Non-preference regular tax.......................... ........ 71,750
Credits allowed to offset non-preference regular
tax:
Foreign tax credits for 1985...................... 15,000
Foreign tax credits carried forward from 1984..... 25,000
Investment tax credits carried forward from 1984.. 20,000
----------
........ 60,000
Non-preference regular tax liability................ ........ 11,750
(ii) The freed-up credits for 1985 are $38,250 ($60,000 minus
$21,750). The non-preference regular tax of $71,750 is determined by
applying the regular tax rates set forth in section 11(b) to the
$200,000 of taxable income as follows:
------------------------------------------------------------------------
Taxable income Rate Tax
------------------------------------------------------------------------
$25,000 X .15 = $3,750
25,000 X .18 = 4,500
25,000 X .30 = 7,500
25,000 X .40 = 10,000
100,000 X .46 = 46,000
------------------ -----------------
$200,000 ......... ............. ......... $71,750
------------------------------------------------------------------------
(iii) Thus, for purposes of determining the non-beneficial
preferences, freed-up credits are grossed up as follows: The credits
allowed against the regular tax and the freed-up credits are treated as
offsetting non-preference regular tax in the same order as such credits
would have been allowed to offset such tax, beginning at the lowest
marginal tax rate. The freed-up credits are grossed up beginning at the
lowest marginal tax rate at which additional taxable income would have
been taxed if preferences were not allowed. Thus, in this example freed-
up credits are grossed up beginning at 40 percent, and the amount of L's
non-beneficial preferences for the 1985 taxable year is $84,456.
----------------------------------------------------------------------------------------------------------------
Credit
allowed Freed-up Divided by Non-
Type against credit tax rate beneficial
regular tax preferences
----------------------------------------------------------------------------------------------------------------
FTC (85)................................................ $3,750 ........... .15
Do..................................................... 4,500 ........... .18
Do..................................................... 6,750 ........... .30
FTC (84)................................................ 750 ........... .30
Do..................................................... 6,000 ........... .40
Do..................................................... ........... $4,000 .40 = $10,000
Do..................................................... ........... 14,250 .46 = 30,978
ITC (84)................................................ ........... 20,000 .46 = 43,478
-------------------------------------------------------
$21,750 $38,250 ........... .. $84,456
----------------------------------------------------------------------------------------------------------------
[[Page 633]]
Foreign tax credit = FTC (year)
Investment tax credit = ITC (year)
(B) Beneficial preferences. The amount of beneficial preferences for
the taxable year is computed by subtracting the non-beneficial
preferences for the taxable year from the total amount of tax
preferences for such year. This rule may be illustrated by the following
example:
Example. Assume the same facts as in the Example in paragraph
(c)(3)(iii)(A)(3) of this section. The amount of L's beneficial
preferences for 1985 is $25,544 (total preferences of $110,000, minus
non-beneficial preferences of $84,456).
(4) Determine the minimum tax attributable to non-beneficial
preferences. (i) The portion of the minimum tax that is attributable to
the non-beneficial preferences is computed as follows--
(A) Compute the minimum tax that would be imposed on all tax
preference items for the taxable year if all of the preferences had
produced a tax benefit.
(B) Compute the minimum tax that would be imposed on the beneficial
preferences if these were the taxpayer's only preferences. (This is the
amount of minimum tax actually imposed for the taxable year.)
(C) Subtract the amount computed in paragraph (c)(4)(i)(B) of this
section from the amount computed in paragraph (c)(4)(i)(A) of this
section. The result is the minimum tax attributable to the non-
beneficial preferences for the taxable year. This amount is sometimes
referred to hereinafter as the ``credit reduction amount''.
(ii) The following examples illustrate determination of the credit
reduction amount. These examples assume that foreign tax credits being
used do not exceed the limitation under section 904.
Example 1. (i) In 1982 Corporation B has $17.6 million dollars in
foreign tax credits available for the taxable year. If preference items
were not allowed in determining regular tax, the regular tax would have
been $10.2 million and foreign tax credits used to reduce regular tax
would have been $10.2 million. Because of tax preference items, however,
B's regular tax is $6.3 million and the amount of foreign tax credits
actually used to reduce the regular tax is $6.3 million. The amount of
freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3
million).
(ii) The total amount of B's tax preference items is $8.4 million.
B's non-preference regular tax is $10.2 million and, reduced by foreign
tax credits, is zero. B's actual regular tax is $6.3 million and,
reduced by foreign tax credits, is zero. Since the amount of credits
that would have been allowed to offset the non-preference regular tax
would have reduced such tax to an amount ($0) equal to the actual
regular tax liability ($0), B received a tax benefit from none of the
$8.4 million of tax preferences and therefore all of these preferences
are non-beneficial preferences.
(iii) Since B has $8.4 million in total preference items and no
regular tax liability, the minimum tax on that amount would be
$1,258,500 (($8.4 million minus $10,000) multiplied by .15). None of the
preference items is a beneficial preference. Thus, the minimum tax
attributable to non-beneficial preferences (and therefore, the credit
reduction amount) is $1,258,500.
Example 2. (i) Corporation L has the following items for the 1985
taxable year:
Actual taxable income............................... ........ $90,000
Regular tax......................................... ........ 21,750
Available credits:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... 25,000
Investment tax credits carried forward from 1984.. 20,000
----------
........ $60,000
Credit allowed to offset actual regular tax:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... 6,750
----------
........ $21,750
Actual regular tax liability........................ ........ 0
Preferences......................................... ........ 110,000
Taxable income for 1985 determined as though ........ 200,000
preferences were not allowed.......................
Non-preference regular tax.......................... ........ 71,750
Credits allowed to offset non-preference regular
tax:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... 25,000
Investment tax credits carried forward from 1984.. 20,000
----------
........ $60,000
Non-preference regular tax liability................ ........ 11,750
(ii) The freed-up credits for 1985 are $38,250 ($60,000 minus
$21,750). The non-preference regular tax is $71,750. The amount of L's
non-beneficial preferences for the 1985 taxable year is $84,456.
(iii) The minimum tax on L's total preference items of $110,000
would be $15,000 (($110,000 minus $10,000) multiplied by .15). Since the
amount of non-beneficial preferences is $84,456, the amount of L's
beneficial preferences for 1985 is $25,544 ($110,000 minus $84,456). The
minimum tax on L's beneficial preferences of $25,544 is $2,332 (($25,544
minus $10,000) multiplied by .15). (This is the amount of minimum tax
imposed for 1985.)
[[Page 634]]
The minimum tax attributable to non-beneficial preference items (and
therefore, the credit reduction amount) is $12,668 ($15,000 minus
$2,332).
(5) Reduction of freed-up credits--(i) In general. The freed-up
credits are reduced by an amount equal to the minimum tax attributable
to the non-beneficial preferences (``credit reduction amount''). If the
taxpayer has only one type of freed-up credit (i.e., only investment tax
credit or only foreign tax credit) and that credit was earned in only
one year (the current year or a carryover year), then the credit is
reduced by the credit reduction amount. This rule may be illustrated by
the following example. This example assumes that foreign tax credits
being used do not exceed the limitation under section 904.
Example. (i) In 1982 Corporation B has $17.6 million dollars in
foreign tax credits available for the taxable year. If preference items
were not allowed in determining regular tax, the regular tax would have
been $10.2 million and foreign tax credits used to reduce regular tax
would have been $10.2 million. Because of tax preference items, however,
B's regular tax is $6.3 million and the amount of foreign tax credits
actually used to reduce the regular tax is $6.3 million. The amount of
freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3
million).
(ii) The total amount of B's tax preference items is $8.4 million.
B's non-preference regular tax is $10.2 million and, reduced by foreign
tax credits, is zero. B's actual regular tax is $6.3 million and,
reduced by foreign tax credits, is zero. Since the amount of credits
that would have been allowed to offset the non-preference regular tax
would have reduced such tax to an amount ($0) equal to the actual
regular tax liability ($0), B received a tax benefit from none of the
$8.4 million of tax preferences and therefore all of these preferences
are non-beneficial preferences.
(iii) Since B has $8.4 million in total preference items and no
regular tax liability, the minimum tax on that amount would be
$1,258,500 (($8.4 million minus $10,000) multiplied by .15). None of the
preference items is a beneficial preference. Thus, the minimum tax
attributable to nonbeneficial preferences (and therefore, the credit
reduction amount is $1,258,500.
(iv) All of the $3.9 million of freed-up credits are foreign tax
credits that arise in the same year and that otherwise would be carried
forward. Since the entire amount of B's tax preferences are non-
beneficial preferences, the minimum tax of $1,258,500 that would be
imposed on the total tax preferences is the credit reduction amount.
Thus, B's $3.9 million of freed-up foreign tax credits is reduced by
$1,258,500. The foreign tax credit carryforward from 1982 is
$10,041,500. This amount is the sum of $2,641,500 (the freed-up foreign
tax credit of $3,900,000, reduced by the credit reduction amount of
$1,258,500), plus $7.4 million (the foreign tax credit that would have
been carried over even if tax preference items had not been allowed).
However, if the taxpayer has more than one type of freed-up credit, or
the taxpayer's freed-up credits are from more than one taxable year,
then the credit reduction amount must be allocated under the exact
method described in paragraph (c)(5)(ii) of this section, unless an
election is made under paragraph (c)(5)(iii) of this section to use the
simplified method.
(ii) Exact method. For each type of freed-up credits and for each
taxable year within such type from which any such credits are earned,
the amount of credit reduction shall be equal to the amount of minimum
tax attributable to the non-beneficial preferences that freed up the
credits for that type and taxable year. The amount of the credit
reduction is computed by multiplying the amount of non-beneficial
preferences which freed up credits for each type and taxable year by the
minimum tax rate. For purposes of this computation, if the amount of the
taxpayer's minimum tax exemption for the taxable year (as determined
under section 56(a)) exceeds the amount of the taxpayer's beneficial
preferences, such excess exemption shall reduce the amount of non-
beneficial preferences to be multiplied by the minimum tax rate. The
non-beneficial preferences shall be reduced by any such excess exemption
in the same order in which the credits that were freed up by such
preferences would have been allowed to offset tax. Thus, for example,
any excess exemption shall first reduce non-beneficial preferences that
freed up foreign tax credits. Any such excess exemption remaining after
reducing non-beneficial preferences that freed up foreign tax credits to
zero would then be used to reduce the non-beneficial preferences that
freed up investment tax credits.
[[Page 635]]
(iii) Simplified method--(A) Description of method. In lieu of the
exact credit reduction method described in paragraph (c)(5)(ii) of this
section, taxpayers may elect to use the simplified credit reduction
method. Under the simplified credit reduction method, the amount of
freed-up credits for each type of credit and for each taxable year in
which such credit is earned is multiplied by a fraction. The numerator
of the fraction is the total credit reduction amount as determined in
paragraph (c)(4)(i)(C) of this section. The denominator is the total
amount of freed-up credits as determined in paragraph (c)(2)(i) of this
section. The product of this multiplication is the amount of credit
reduction for each type and taxable year of freed-up credit.
(B) Election to use simplified method. A taxpayer may elect to use
the simplified credit reduction method for all taxable years to which
this section applies by attaching a statement indicating such an
election on the amended Federal income tax return or returns applying
the adjustments of this section. If an election is made for any taxable
year, it must be made for all taxable years. Once an election has been
made, it can be revoked only with the permission of the Commissioner.
Similarly, once returns have been filed applying the exact credit
reduction method, an election to apply the simplified method can be made
only with the consent of the Commissioner.
(iv) Effect of credit reduction on credit carryovers. Under both the
exact method and the simplified method, the determination of credit
carryovers to other taxable years is made on the basis of freed-up
credits remaining after such reduction, plus any other unused credits.
Thus, an amount of freed-up credits that is equal to the credit
reduction amount shall not be allowed to reduce tax liability in any
taxable year. Such disallowance is without regard to whether such
credits would otherwise be allowed as a carryover. The freed-up credits,
as reduced under this paragraph (c)(5), shall be carried over or carried
back in applying this section in a carryover or carryback year. No
minimum tax liability shall be due with respect to the non-beneficial
preferences for any taxable year.
(v) Examples. The following examples illustrate reduction of freed-
up credits.
Example 1. (i) Corporation L has the following items for the 1985
taxable year:
Actual taxable income............................... ........ $90,000
Regular tax......................................... ........ 21,750
Available credits:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... 25,000
Investment tax credits carried forward from 1984.. 20,000
----------
........ 60,000
Credit allowed to offset actual regular tax:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... 6,750
----------
........ 21,750
Actual regular tax liability........................ ........ 21,750
Preferences......................................... ........ 110,000
Taxable income for 1985 determined as though ........ 200,000
preferences were not allowed.......................
Non-preference regular tax.......................... ........ 71,750
Credits allowed to offset non-preference regular ........
tax:
Foreign tax credits for 1985...................... $15,000
Foreign tax credits carried forward from 1984..... $25,000
Investment tax credits carried forward from 1984.. 20,000
----------
........ 60,000
Non-preference regular tax liability................ ........ 11,750
(ii) The freed-up credits for 1985 are $38,250 ($60,000 minus
$21,750). The non-preference regular tax is $71,750. The amount of L's
non-beneficial preferences for the 1985 taxable year is $84.456.
(iii) The credit reduction amount for 1985 is $12,668, the amount of
minimum tax attributable to L's non-beneficial preferences. This amount
is allocated to reduce each category of freed-up credit and to each year
from which such credit is carried over. L's $38,250 of freed-up credits
consists of $18,250 of foreign tax credits carried forward from 1984,
which were freed up by $40,978 of non-beneficial preferences, and
$20,000 of investment tax credits carried forward from 1984, which were
freed up by $43,478 of non-beneficial preferences.
(iv) The apportionment of this credit reduction amount to each
category of freed-up credit and each taxable year from which such
credits are carried over is determined as follows under the exact credit
reduction method:
(A) Foreign tax credits carried forward from 1984:
Non-beneficial preferences that freed up 1984 FTCx.15=Credit reduction
of 1984 FTC
$40,978x.15=$6,146
(B) Investment tax credits carried forward from 1984:
[[Page 636]]
Non-beneficial preferences that freed up 1984 ITCx.15=Credit reduction
of 1984 ITC
$43,478x.15=$6,522
Thus, the foreign tax credits from 1984 that are carried forward to 1986
are $12,104 ($18,250 minus $6,146). The investment tax credits from 1984
that are carried forward to 1986 are $13,478 ($20,000 minus $6,522).
(v) The reduction of the freed-up credit under the simplified credit
reduction method is as follows:
(A) Foreign tax credit carried forward from 1984:
[GRAPHIC] [TIFF OMITTED] TC14NO91.150
[GRAPHIC] [TIFF OMITTED] TC14NO91.151
(B) Investment tax credits carried forward from 1984:
[GRAPHIC] [TIFF OMITTED] TC14NO91.152
[GRAPHIC] [TIFF OMITTED] TC14NO91.153
Thus, under the simplified credit reduction method, L has $12,206 of
foreign tax credits for 1984 ($18,250 minus $6,044) that are carried
forward to 1986, and $13,376 of investment tax credits for 1984 ($20,000
minus $6,624) that are carried forward to 1986.
Example 2. Assume the same facts as in Example 1 of this paragraph
(c)(5)(v), except that the foreign tax credits available for use in 1985
include $10,750 in credits carried forward from 1980 and $14,250 in
credits carried forward from 1984, rather than $25,000 carried forward
from 1984. Thus, $4,000 of the freed-up foreign tax credit is carried
over from 1980. The other $14,250 of freed-up foreign tax credit is
carried over from 1984. The non-beneficial preferences that freed up the
1980 foreign tax credit are $10,000. The non-beneficial preferences that
freed up the 1984 foreign tax credit are $30,978. Under the exact credit
reduction method, the credit reduction amounts for each of these credits
are determined as follows:
(i) Foreign tax credit carried forward from 1980:
$10,000x.15=$1,500
(ii) Foreign tax credit carried forward from 1984:
$30,978x.15=$4,646
Thus, the foreign tax credit from 1984 that is carried forward to 1986
is $9,604 ($14,250 minus $4,646). Since the foreign tax credit from 1980
expires after 1985, none of that credit is carried forward to 1986.
(d) Examples. The following examples are comprehensive illustrations
of the adjustments described in paragraph (c) of this section:
Example 1. (i) This example illustrates the operation of the credit
reduction adjustment when the amount of foreign tax credit allowed is
subject to the overall limitation under section 904. For purposes of
this example, assume that Corporation x has the following items for the
1984 taxable year:
Taxable income (determined as though preferences were not allowed)
$140,000
From foreign sources..............................................70,000
Foreign tax credits from 1984......................................5,000
Foreign tax credits from 1983......................................7,000
Actual taxable income.............................................50,000
From foreign sources..............................................25,000
(ii) The credit reduction adjustment and minimum tax liability for
the taxable year are determined as follows:
1. Taxable income (determined as though .......... ........ $140,000
preferences were not allowed).........
2. Tax preferences for 1984............ .......... ........ 90,000
3. Taxable income (line 1 minus line 2) .......... ........ 50,000
[[Page 637]]
4. Regular tax on line 3 amount (actual
regular tax) before credits:
$25,000x.15=$3,750
25,000x.18=4,500.................. .......... ........ 8,250
5. Foreign tax credits allowed against .......... ........ 4,125
regular tax (limited to 50% of actual
regular tax under sec. 904)--1984
foreign tax credits...................
6. Regular tax after credits (line 4 .......... ........ 4,125
minus line 5).........................
7. Regular tax on line 1 amount (non-
preference regular tax) before credits
25,000x.15=$3,750..................
25,000x.18=4,500...................
25,000x.3=7,500....................
25,000x.4=10,000...................
40,000x.46=18,400.................. .......... ........ 44,150
8. Foreign tax credits allowed against
non-preference regular tax:
$5,000 (1984 foreign tax credits)
7,000 (1983 foreign tax credits)... .......... ........ 12,000
(the allowed credits do not exceed
the section 904 limitation of
$22,075)
9. Non-preference regular tax after .......... ........ 32,150
credits (line 7 minus line 8).........
10. Freed-up credits (line 8 minus line
5):
1984 foreign tax credits........... $5,000
(4,125)
------------
.......... $875
1983 foreign tax credits........... $7,000
0
------------
.......... 7,000
Total............................ .......... $7,875
11. Non-beneficial preferences are computed as set forth in the
table below. Under this computation, non-beneficial preferences are
considered to free up credits that would have offset non-preference
regular tax beginning at the lowest tax rates at which income that was
offset by tax preferences otherwise would have been subjet to regular
tax. In this case, income that was offset by tax preferences would have
been taxed beginning at the 30 per cent marginal tax rate.
------------------------------------------------------------------------
Non-
Type Freed-up Divided by beneficial
credit tax rate preferences
------------------------------------------------------------------------
FTC (84)........................... $875 .30 $2,917
FTC (83)........................... 6,625 .30 22,083
Do................................ 375 .40 938
------------ ------------
7,875 .......... 25,938
============ ============
Total non-beneficial preferences..................... 25,938
------------------------------------------------------------------------
12. Beneficial preferences (line 2 minus line 11)......... 64,062
13. Minimum tax on total tax preferences ((line 2 minus 12,000
the greater of line 6 or $10,000)x.15)...................
14. Minimum tax on beneficial preferences ((line 12 minus 8,109
the greater of line 6 or $10,000)x.15)...................
15. Credit reduction amount (line 13 minus line 14)....... 3,891
16. Reduction of freed-up credits under the exact method
(subtotals of line 11 multiplied by .15):
(a) 1984 foreign tax credits:
$2,917x.15=$438
(b) 1983 foreign tax credits:
($22,083+$938) x.15=$3,453
(c) Total credit reduction.............................. 3,891
Note: If X had elected to use the simplified credit reduction
method, the amount of credit reduction would be determined by
multiplying the amount of freed-up credit in each category and taxable
year by the following ratio:
[GRAPHIC] [TIFF OMITTED] TC14NO91.154
(d) Under this method, the 1984 freed-up foreign tax
credits would be reduced by $433 ($875x.494)and the
1983 freed-up foreign tax credits would be reduced by
$3,458 ($7,000x.494).
17. Freed-up credits after reduction under the exact
method (line 10 subtotal minus line 16 subtotals):
(a) 1984 foreign tax credits ($874 minus $438)........ 437
(b) 1983 foreign tax credits ($7,000 minus $3,453).... 3,547
Thus, assuming that Corporation X did not elect to use the simplified
method, Corporation X will carryover $437 of 1984 foreign tax credits to
1985 and $3,547 of 1983 foreign tax credits to 1985. Had Corporation X
elected to use the simplified method, freed-up credits after reduction
would be as follows:
(a) 1984 foreign tax credits ($875 minus $433)........ 442
(b) 1983 foreign tax credits ($7,000 minus $3,458).... 3,542
Example 2. (i) Corporation X has the following items for its 1985
taxable year:
Taxable income (determined as though preferences were $1,500,000
not allowed)...........................................
1984 investment tax credits............................. 400,000
1985 investment tax credits............................. 100,000
Actual taxable income................................... 1,000,000
(ii) The credit reduction and minimum tax of X for 1985
are determined as follows:
1. Taxable income determined as though.................. $1,500,000
2. Tax preferences for 1985............................. 500,000
3. Taxable income (line 1 minus line 2)................. 1,000,000
4. Regular tax on line 3 amount (actual regular tax)
before credits:........................................
[[Page 638]]
$25,000x.15=$3,750
25,000x.18=4,500
25,000x.30=7,500
25,000x.40=10,000
900,000x.46=414,000................................... 439,750
5. Investment tax credits allowed (limited under section 377,537
38 (c) to $25,000 of net tax liability, plus 85 percent
of net tax liability in excess of $25,000..............
6. Regular tax after credits (line 4 minus line 5)...... 62,212
7. Regular tax on line 1 amount (non-preference regular
tax) before credits:
25,000x.15=$3,750
25,000x.18=4,500
25,000x.30=7,500
25,000x.40=10,000
900,000x.46=414,000
405,000x.51=206,550
95,000x.46=43,700 690,000
8. Investment tax credits allowed against non-preference 500,000
regular tax............................................
9. Non-preference regular tax after credits (line 7 190,000
minus line 8)..........................................
10. Freed-up credits (line 8 minus line 5):
1984 investment tax credit............................ $400,000
(377,537)
---------------
22,463
1985 investment tax credit............................ $100,000
--0--
---------------
100,000
---------------
Total............................................. $122,463
===============
11. Non-beneficial preferences are computed as set forth in the
table below. Under this computation, non-beneficial preferences are
considered to free up credits that would have offset non-preference
regular tax beginning at the lowest tax rates at which income that was
offset by tax preferences otherwise would have been subject to regular
tax. In this case, income that was offset by tax preferences would have
been taxed beginning at the 51 percent marginal tax rate. Although some
of the income offset by preferences would be taxed at the 46 percent
marginal rate (because taxable income in excess of $1,405,000 is not
subject to the 5 percent addition to tax on taxable income in excess of
$1 million), the 51 percent marginal rate is taken into account first.
------------------------------------------------------------------------
Non-
Type Freed-up Divided by beneficial
credit tax rate preferences
------------------------------------------------------------------------
ITC (84)......................... $22,463 .51 $44,045
ITC (85)......................... 100,000 .51 196,078
------------- ------------
122,463 ........... 240,123
============= ============
Total non-beneficial ........... ........... 240,123
preferences.................
------------------------------------------------------------------------
12. Beneficial preferences (line 2 minus line 11).......... 259,877
13. Minimum tax on total tax preferences ((line 2 minus the 65,668
greater of line 6 or $10,000) X .15)......................
14. Minimum tax on beneficial preferences ((line 12 minus 29,650
the greater of line 6 or $10,000) X .15...................
15. Credit reduction amount (line 13 minus line 14)........ 36,018
16. Reduction of freed-up credits under the exact method
(subtotals of line 11 multiplied by .15):
(a) 1984 investment tax credits:
$44,045 x .15=$6,607
(b) 1985 investment tax credits:
$196,078 x .15=$29,411
(c) Total credit reduction............................... 36,018
17. Fixed-up credits after reduction (assuming that
Corporation X does not elect the simplified method):
(a) 1984 investment credit ($22,463 minus $6,607)........ 15,856
(b) 1985 investment credit ($100,000 minus $29,411)...... 70,589
(e) Miscellaneous rules--(1) Investment Credit Recapture. If during
any taxable year property to which section 47 applies is disposed of,
then for purposes of determining any increase in tax under section 47
for such year, the amount of any reduction under this section of freed-
up section 38 credit which was earned in the year the property was
placed in service shall be treated as a credit that was allowed in a
prior taxable year.
Example. Corporation D places property in service in 1983 that
generates investment tax credits of $10,000. D earns no other investment
tax credits in 1983. None of the investment tax credits are used to
reduce tax liability in 1983 or any prior years. In 1984, D uses $1,000
of this credit to reduce regular tax liability. In addition, D has items
of tax preferences in 1984. However, under section 58(h), D is not
liable for minimum tax on any of these preference items because none of
these preference items produces a tax benefit in 1984. As a result, an
adjustment is made under the provisions of Sec. 1.58-9 and the
investment tax credit carryforward from 1983 is reduced by $4,000. Thus,
D has an investment tax credit carryforward of $5,000 that is
attributable to the property placed in service in 1983. In 1986, the
property is disposed of and the investment tax credits earned in 1983
are recomputed as required under section 47. This recomputation results
in a reduction of $6,000 of the investment tax credits earned in 1983. D
must now adjust its 1983 investment tax credit carryforward under
section 47(a)(6) by reducing this carryforward to zero. In addition, D
has an additional tax liability of $1,000 for 1986.
(2) Period of limitations; adjustments to tax liability. The
adjustments described in this section shall, in general, apply for
purposes of assessing deficiencies or claiming refunds of tax for any
taxable
[[Page 639]]
year for which the tax liability is affected by the adjustments of this
section, provided that the period of limitations under section 6501 has
not expired for such taxable year. Therefore, these adjustments
generally apply for purposes of assessing deficiencies and refunding any
overpayment of tax for all years for which the period of limitations has
not expired regardless of whether the period of limitations has expired
for the taxable year in which the non-beneficial preferences arose.
However, the adjustments of this section do not apply to reduce
otherwise allowable credits that were freed up by such non-beneficial
preferences where:
(i) The taxpayer paid minimum tax on all tax preference items
arising in the taxable year in which the non-beneficial preferences
arose;
(ii) The taxpayer has not made a claim for a credit or refund for
such minimum tax; and
(iii) The period of limitations for claiming a credit or refund
under section 6511 has expired for such taxable year.
(A) Further, if--
(1) the taxpayer never paid minimum tax attributable to non-
beneficial preferences;
(2) credits that were freed up by such preferences were used to
reduce tax liability for a taxable year for which the period of
limitations has expired; and
(3) credits so used exceed the amount of credits that would have
been available if the credit reduction required under this section with
respect to such preferences had been made,
(B) Then, the taxpayer shall be liable for the minimum tax equal to
the amount of credits so used, provided the period of limitations has
not expired for the taxable year in which preferences arose.
(3) Claims for credit or refund. A taxpayer may claim a credit or
refund of minimum tax that was made on non-beneficial preferences.
However, such a claim for a credit or refund shall be disallowed to the
extent that the taxpayer has reduced tax liability in a taxable year for
which the period of limitations has expired by using freed-up credits in
excess of the amount that would have been available if the credit
reduction required under this section had been made. Such claim must be
made by filing an amended return for the taxable year for which such
minimum tax was paid. Further, if a claim for credit or refund is filed,
amended returns must also be filed for any taxable year for which tax
liability would be affected as a result of the reduction, under this
section, of credits freed up by such non-beneficial preferences. See
section 6511 and the regulations thereunder regarding the period of
limitations for claiming a credit or refund.
(4) Carryovers of foreign tax credit to taxable years after 1986. In
the case of foreign tax credit carryforwards to taxable years beginning
after December 31, 1986, reductions in such credits required under this
section shall apply for purposes of computing the alternative minimum
tax foreign tax credit under section 59(a) of the Internal Revenue Code
of 1986 as well as for purposes of computing the foreign tax credit for
regular tax purposes.
(5) Credit Carrybacks. If credit carrybacks increase the amount of
credits for a taxable year, the adjustments described in this section
shall be recomputed taking into account the additional credits. This
rule may be illustrated by the following examples:
Example 1. (i) In 1981 corporation D has actual taxable income of
$72,500 and regular tax before credits of $15,000. In computing actual
regular taxable income, D made use of $36,739 of tax preference items,
so that D's taxable income determined as though preference were not
allowed would be $109,239. D's non-preference regular tax before credits
is $30,000. D earns $25,000 of foreign tax credits in 1981, none of
which exceed the limitation under section 904 determined using either
actual regular taxable income or the non-preference taxable income.
These credits reduce actual regular tax to zero ($0) and would have
reduced non-preference regular tax to $5,000 ($30,000 minus $25,000).
Thus, D has freed-up foreign tax credits from 1981 of $10,000 ($25,000
minus $15,000). Pursuant to the adjustments required under this section,
D determines that its credit reduction amount is $3,843 and reduces its
freed-up credit (and its credit carryover) from 1981 to $6,157 ($10,000
minus $3,843). D also pays minimum tax of $167 on $11,114 of beneficial
preferences (($11,114 minus $10,000) multiplied by .15).
(ii) In 1982 D earns additional foreign tax credits. After
application of the foreign tax credit carryback rules, D would have
$5,000 of 1982 foreign tax credits available for use in
[[Page 640]]
1981. D must recalculate the adjustments required under this section by
treating $5,000 of foreign tax credit from 1982 as carried back and
(assuming that these credits do not exceed the limitation under section
904) used to reduce non-preference regular tax liability in 1981 to zero
($0). That is, $5,000 of the foreign tax credits earned in 1982 are
treated as credits freed up because of D's tax preference items in 1981.
Pursuant to the rules set forth herein, D must take into account the
foreign tax credits from both 1981 and 1982 in determining to what
extent a tax benefit was derived from the preference items used to
determine actual regular tax liability in 1981 and in computing the
credit reduction amount. When the $5,000 of foreign tax credits from
1982 are considered, all preferences become non-beneficial preferences,
and the credit reduction amount is $4,010. Assuming that D elects the
simplified method, the 1981 freed-up credits and the 1982 freed-up
credits will each be reduced by the following percentage:
[GRAPHIC] [TIFF OMITTED] TC14NO91.155
The 1981 freed-up foreign tax credits of $10,000 are thus reduced by
$2,673 ($10,000 multiplied by .2673), to $7,327 and the 1982 freed-up
foreign tax credits of $5,000 are reduced by $1,334 ($5,000 multiplied
by .2673) to $3,666. D also files a claim for credit or refund of the
$167 of minimum tax paid in 1981.
Example 2. In 1985 corporation E's non-preference regular taxable
income was $25,000. E had no available credits. It paid zero in regular
tax, however, because of $25,000 in preference items. E paid $2,250 of
minimum tax on these preferences (($25,000 minus $10,000) multiplied by
.15). In 1986, E has additional investment tax credits. After
application of the investment tax credit carryback rules, E would have
$1,000 investment tax credit from 1986 available for use in 1985. E must
recompute the adjustments required under this section by treating $1,000
of these 1986 investment tax credits as carried back and used to reduce
non-preference regular tax liability for 1985. Pursuant to the rules of
this section, all of these $1,000 of credits are freed-up credits. Non-
beneficial preferences are $6,667 ($1,000 grossed up at a 15 percent
regular tax rate). Beneficial preferences are $18,333 ($25,000 minus
$6,667). Minimum tax on all preferences would be $2,250 (($25,000 minus
$10,000) multiplied by .15); minimum tax on beneficial preferences would
be $1,250 (($18,333 minus $10,000) multiplied by .15). Minimum tax
attributable to the non-beneficial preferences is thus $1,000 ($2,250
minus $1,250), which is the credit reduction amount. E thus reduces the
$1,000 of credits carried back to 1985 to zero. Under the rules of this
section, the amount of minimum tax due for 1985 is redetermined. It is
equal to the minimum tax on beneficial preferences, which, as described
above, is $1,250. Because E paid minimum tax of $2,250 in 1985, E files
a claim for credit or refund for $1,000 of the minimum tax paid in 1985.
(f) Treatment of net operating losses. [Reserved]
[T.D. 8416, 57 FR 19255, May 5, 1992; 57 FR 24848, June 11, 1992]
Sec. 1.59-1 Optional 10-year writeoff of certain tax preferences.
(a) In general. Section 59(e) allows any qualified expenditure to
which an election under section 59(e) applies to be deducted ratably
over the 10-year period (3-year period in the case of circulation
expenditures described in section 173) beginning with the taxable year
in which the expenditure was made (or, in the case of intangible
drilling and development costs deductible under section 263(c), over the
60-month period beginning with the month in which the expenditure was
paid or incurred).
(b) Election--(1) Time and manner of election. An election under
section 59(e) shall only be made by attaching a statement to the
taxpayer's income tax return (or amended return) for the taxable year in
which the amortization of the qualified expenditures subject to the
section 59(e) election begins. The statement must be filed no later than
the date prescribed by law for filing the taxpayer's original income tax
return (including any extensions of time) for the taxable year in which
the amortization of the qualified expenditures subject to the section
59(e) election begins. Additionally, the statement must include the
following information--
(i) The taxpayer's name, address, and taxpayer identification
number; and
(ii) The type and amount of qualified expenditures identified in
section 59(e)(2) that the taxpayer elects to deduct ratably over the
applicable period described in section 59(e)(1).
(2) Elected amount. A taxpayer may make an election under section
59(e) with respect to any portion of any qualified expenditure paid or
incurred by the taxpayer in the taxable year to which the election
applies. An election under section 59(e) must be for a specific dollar
amount and the amount
[[Page 641]]
subject to an election under section 59(e) may not be made by reference
to a formula. The amount elected under section 59(e) is properly
chargeable to a capital account under section 1016(a)(20), relating to
adjustments to basis of property.
(c) Revocation--(1) In general. An election under section 59(e) may
be revoked only with the consent of the Commissioner. Such consent will
only be granted in rare and unusual circumstances. The revocation, if
granted, will be effective in the first taxable year in which the
section 59(e) election was applicable. However, if the period of
limitations for the first taxable year the section 59(e) election was
applicable has expired, the revocation, if granted, will be effective in
the earliest taxable year for which the period of limitations has not
expired.
(2) Time and manner for requesting consent. A taxpayer requesting
the Commissioner's consent to revoke a section 59(e) election must
submit the request prior to the end of the taxable year the applicable
amortization period described in section 59(e)(1) ends. The application
for consent to revoke the election must be submitted to the Internal
Revenue Service in the form of a letter ruling request.
(3) Information to be provided. A request to revoke a section 59(e)
election must contain all of the information necessary to demonstrate
the rare and unusual circumstances that would justify granting
revocation.
(4) Treatment of unamortized costs. The unamortized balance of the
qualified expenditures subject to the revoked section 59(e) election as
of the first day of the taxable year the revocation is effective is
deductible in the year the revocation is effective (subject to the
requirements of any other provision under the Code, regulations, or any
other published guidance) and the taxpayer will be required to amend any
federal income tax returns affected by the revocation.
(d) Effective date. These regulations apply to a section 59(e)
election made for a taxable year ending, or a request to revoke a
section 59(e) election submitted, on or after December 22, 2004.
[T.D. 9168, 69 FR 76616, Dec. 22, 2004]
Sec. 1.60 [Reserved]
[[Page 643]]
FINDING AIDS
--------------------------------------------------------------------
A list of CFR titles, subtitles, chapters, subchapters and parts and
an alphabetical list of agencies publishing in the CFR are included in
the CFR Index and Finding Aids volume to the Code of Federal Regulations
which is published separately and revised annually.
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
Table of OMB Control Numbers
List of CFR Sections Affected
[[Page 645]]
Table of CFR Titles and Chapters
(Revised as of April 1, 2015)
Title 1--General Provisions
I Administrative Committee of the Federal Register
(Parts 1--49)
II Office of the Federal Register (Parts 50--299)
III Administrative Conference of the United States (Parts
300--399)
IV Miscellaneous Agencies (Parts 400--500)
Title 2--Grants and Agreements
Subtitle A--Office of Management and Budget Guidance
for Grants and Agreements
I Office of Management and Budget Governmentwide
Guidance for Grants and Agreements (Parts 2--199)
II Office of Management and Budget Guidance (Parts 200--
299)
Subtitle B--Federal Agency Regulations for Grants and
Agreements
III Department of Health and Human Services (Parts 300--
399)
IV Department of Agriculture (Parts 400--499)
VI Department of State (Parts 600--699)
VII Agency for International Development (Parts 700--799)
VIII Department of Veterans Affairs (Parts 800--899)
IX Department of Energy (Parts 900--999)
X Department of the Treasury (Parts 1000--1099)
XI Department of Defense (Parts 1100--1199)
XII Department of Transportation (Parts 1200--1299)
XIII Department of Commerce (Parts 1300--1399)
XIV Department of the Interior (Parts 1400--1499)
XV Environmental Protection Agency (Parts 1500--1599)
XVIII National Aeronautics and Space Administration (Parts
1800--1899)
XX United States Nuclear Regulatory Commission (Parts
2000--2099)
XXII Corporation for National and Community Service (Parts
2200--2299)
XXIII Social Security Administration (Parts 2300--2399)
XXIV Housing and Urban Development (Parts 2400--2499)
XXV National Science Foundation (Parts 2500--2599)
XXVI National Archives and Records Administration (Parts
2600--2699)
XXVII Small Business Administration (Parts 2700--2799)
[[Page 646]]
XXVIII Department of Justice (Parts 2800--2899)
XXIX Department of Labor (Parts 2900--2999)
XXX Department of Homeland Security (Parts 3000--3099)
XXXI Institute of Museum and Library Services (Parts 3100--
3199)
XXXII National Endowment for the Arts (Parts 3200--3299)
XXXIII National Endowment for the Humanities (Parts 3300--
3399)
XXXIV Department of Education (Parts 3400--3499)
XXXV Export-Import Bank of the United States (Parts 3500--
3599)
XXXVI Office of National Drug Control Policy, Executive
Office of the President (Parts 3600--3699)
XXXVII Peace Corps (Parts 3700--3799)
LVIII Election Assistance Commission (Parts 5800--5899)
LIX Gulf COast Ecosystem Restoration Council (Parts 5900--
5999)
Title 3--The President
I Executive Office of the President (Parts 100--199)
Title 4--Accounts
I Government Accountability Office (Parts 1--199)
II Recovery Accountability and Transparency Board (Parts
200--299)
Title 5--Administrative Personnel
I Office of Personnel Management (Parts 1--1199)
II Merit Systems Protection Board (Parts 1200--1299)
III Office of Management and Budget (Parts 1300--1399)
V The International Organizations Employees Loyalty
Board (Parts 1500--1599)
VI Federal Retirement Thrift Investment Board (Parts
1600--1699)
VIII Office of Special Counsel (Parts 1800--1899)
IX Appalachian Regional Commission (Parts 1900--1999)
XI Armed Forces Retirement Home (Parts 2100--2199)
XIV Federal Labor Relations Authority, General Counsel of
the Federal Labor Relations Authority and Federal
Service Impasses Panel (Parts 2400--2499)
XVI Office of Government Ethics (Parts 2600--2699)
XXI Department of the Treasury (Parts 3100--3199)
XXII Federal Deposit Insurance Corporation (Parts 3200--
3299)
XXIII Department of Energy (Parts 3300--3399)
XXIV Federal Energy Regulatory Commission (Parts 3400--
3499)
XXV Department of the Interior (Parts 3500--3599)
XXVI Department of Defense (Parts 3600--3699)
XXVIII Department of Justice (Parts 3800--3899)
[[Page 647]]
XXIX Federal Communications Commission (Parts 3900--3999)
XXX Farm Credit System Insurance Corporation (Parts 4000--
4099)
XXXI Farm Credit Administration (Parts 4100--4199)
XXXIII Overseas Private Investment Corporation (Parts 4300--
4399)
XXXIV Securities and Exchange Commission (Parts 4400--4499)
XXXV Office of Personnel Management (Parts 4500--4599)
XXXVII Federal Election Commission (Parts 4700--4799)
XL Interstate Commerce Commission (Parts 5000--5099)
XLI Commodity Futures Trading Commission (Parts 5100--
5199)
XLII Department of Labor (Parts 5200--5299)
XLIII National Science Foundation (Parts 5300--5399)
XLV Department of Health and Human Services (Parts 5500--
5599)
XLVI Postal Rate Commission (Parts 5600--5699)
XLVII Federal Trade Commission (Parts 5700--5799)
XLVIII Nuclear Regulatory Commission (Parts 5800--5899)
XLIX Federal Labor Relations Authority (Parts 5900--5999)
L Department of Transportation (Parts 6000--6099)
LII Export-Import Bank of the United States (Parts 6200--
6299)
LIII Department of Education (Parts 6300--6399)
LIV Environmental Protection Agency (Parts 6400--6499)
LV National Endowment for the Arts (Parts 6500--6599)
LVI National Endowment for the Humanities (Parts 6600--
6699)
LVII General Services Administration (Parts 6700--6799)
LVIII Board of Governors of the Federal Reserve System
(Parts 6800--6899)
LIX National Aeronautics and Space Administration (Parts
6900--6999)
LX United States Postal Service (Parts 7000--7099)
LXI National Labor Relations Board (Parts 7100--7199)
LXII Equal Employment Opportunity Commission (Parts 7200--
7299)
LXIII Inter-American Foundation (Parts 7300--7399)
LXIV Merit Systems Protection Board (Parts 7400--7499)
LXV Department of Housing and Urban Development (Parts
7500--7599)
LXVI National Archives and Records Administration (Parts
7600--7699)
LXVII Institute of Museum and Library Services (Parts 7700--
7799)
LXVIII Commission on Civil Rights (Parts 7800--7899)
LXIX Tennessee Valley Authority (Parts 7900--7999)
LXX Court Services and Offender Supervision Agency for the
District of Columbia (Parts 8000--8099)
LXXI Consumer Product Safety Commission (Parts 8100--8199)
LXXIII Department of Agriculture (Parts 8300--8399)
LXXIV Federal Mine Safety and Health Review Commission
(Parts 8400--8499)
LXXVI Federal Retirement Thrift Investment Board (Parts
8600--8699)
[[Page 648]]
LXXVII Office of Management and Budget (Parts 8700--8799)
LXXX Federal Housing Finance Agency (Parts 9000--9099)
LXXXIII Special Inspector General for Afghanistan
Reconstruction (Parts 9300--9399)
LXXXIV Bureau of Consumer Financial Protection (Parts 9400--
9499)
LXXXVI National Credit Union Administration (Parts 9600--
9699)
XCVII Department of Homeland Security Human Resources
Management System (Department of Homeland
Security--Office of Personnel Management) (Parts
9700--9799)
XCVII Council of the Inspectors General on Integrity and
Efficiency (Parts 9800--9899)
XCIV Military Compensation and Retirement Modernization
Commission (Parts 9900--9999)
Title 6--Domestic Security
I Department of Homeland Security, Office of the
Secretary (Parts 1--199)
X Privacy and Civil Liberties Oversight Board (Parts
1000--1099)
Title 7--Agriculture
Subtitle A--Office of the Secretary of Agriculture
(Parts 0--26)
Subtitle B--Regulations of the Department of
Agriculture
I Agricultural Marketing Service (Standards,
Inspections, Marketing Practices), Department of
Agriculture (Parts 27--209)
II Food and Nutrition Service, Department of Agriculture
(Parts 210--299)
III Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 300--399)
IV Federal Crop Insurance Corporation, Department of
Agriculture (Parts 400--499)
V Agricultural Research Service, Department of
Agriculture (Parts 500--599)
VI Natural Resources Conservation Service, Department of
Agriculture (Parts 600--699)
VII Farm Service Agency, Department of Agriculture (Parts
700--799)
VIII Grain Inspection, Packers and Stockyards
Administration (Federal Grain Inspection Service),
Department of Agriculture (Parts 800--899)
IX Agricultural Marketing Service (Marketing Agreements
and Orders; Fruits, Vegetables, Nuts), Department
of Agriculture (Parts 900--999)
X Agricultural Marketing Service (Marketing Agreements
and Orders; Milk), Department of Agriculture
(Parts 1000--1199)
XI Agricultural Marketing Service (Marketing Agreements
and Orders; Miscellaneous Commodities), Department
of Agriculture (Parts 1200--1299)
[[Page 649]]
XIV Commodity Credit Corporation, Department of
Agriculture (Parts 1400--1499)
XV Foreign Agricultural Service, Department of
Agriculture (Parts 1500--1599)
XVI Rural Telephone Bank, Department of Agriculture (Parts
1600--1699)
XVII Rural Utilities Service, Department of Agriculture
(Parts 1700--1799)
XVIII Rural Housing Service, Rural Business-Cooperative
Service, Rural Utilities Service, and Farm Service
Agency, Department of Agriculture (Parts 1800--
2099)
XX Local Television Loan Guarantee Board (Parts 2200--
2299)
XXV Office of Advocacy and Outreach, Department of
Agriculture (Parts 2500--2599)
XXVI Office of Inspector General, Department of Agriculture
(Parts 2600--2699)
XXVII Office of Information Resources Management, Department
of Agriculture (Parts 2700--2799)
XXVIII Office of Operations, Department of Agriculture (Parts
2800--2899)
XXIX Office of Energy Policy and New Uses, Department of
Agriculture (Parts 2900--2999)
XXX Office of the Chief Financial Officer, Department of
Agriculture (Parts 3000--3099)
XXXI Office of Environmental Quality, Department of
Agriculture (Parts 3100--3199)
XXXII Office of Procurement and Property Management,
Department of Agriculture (Parts 3200--3299)
XXXIII Office of Transportation, Department of Agriculture
(Parts 3300--3399)
XXXIV National Institute of Food and Agriculture (Parts
3400--3499)
XXXV Rural Housing Service, Department of Agriculture
(Parts 3500--3599)
XXXVI National Agricultural Statistics Service, Department
of Agriculture (Parts 3600--3699)
XXXVII Economic Research Service, Department of Agriculture
(Parts 3700--3799)
XXXVIII World Agricultural Outlook Board, Department of
Agriculture (Parts 3800--3899)
XLI [Reserved]
XLII Rural Business-Cooperative Service and Rural Utilities
Service, Department of Agriculture (Parts 4200--
4299)
Title 8--Aliens and Nationality
I Department of Homeland Security (Immigration and
Naturalization) (Parts 1--499)
V Executive Office for Immigration Review, Department of
Justice (Parts 1000--1399)
[[Page 650]]
Title 9--Animals and Animal Products
I Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 1--199)
II Grain Inspection, Packers and Stockyards
Administration (Packers and Stockyards Programs),
Department of Agriculture (Parts 200--299)
III Food Safety and Inspection Service, Department of
Agriculture (Parts 300--599)
Title 10--Energy
I Nuclear Regulatory Commission (Parts 0--199)
II Department of Energy (Parts 200--699)
III Department of Energy (Parts 700--999)
X Department of Energy (General Provisions) (Parts
1000--1099)
XIII Nuclear Waste Technical Review Board (Parts 1300--
1399)
XVII Defense Nuclear Facilities Safety Board (Parts 1700--
1799)
XVIII Northeast Interstate Low-Level Radioactive Waste
Commission (Parts 1800--1899)
Title 11--Federal Elections
I Federal Election Commission (Parts 1--9099)
II Election Assistance Commission (Parts 9400--9499)
Title 12--Banks and Banking
I Comptroller of the Currency, Department of the
Treasury (Parts 1--199)
II Federal Reserve System (Parts 200--299)
III Federal Deposit Insurance Corporation (Parts 300--399)
IV Export-Import Bank of the United States (Parts 400--
499)
V Office of Thrift Supervision, Department of the
Treasury (Parts 500--599)
VI Farm Credit Administration (Parts 600--699)
VII National Credit Union Administration (Parts 700--799)
VIII Federal Financing Bank (Parts 800--899)
IX Federal Housing Finance Board (Parts 900--999)
X Bureau of Consumer Financial Protection (Parts 1000--
1099)
XI Federal Financial Institutions Examination Council
(Parts 1100--1199)
XII Federal Housing Finance Agency (Parts 1200--1299)
XIII Financial Stability Oversight Council (Parts 1300--
1399)
XIV Farm Credit System Insurance Corporation (Parts 1400--
1499)
XV Department of the Treasury (Parts 1500--1599)
XVI Office of Financial Research (Parts 1600--1699)
XVII Office of Federal Housing Enterprise Oversight,
Department of Housing and Urban Development (Parts
1700--1799)
[[Page 651]]
XVIII Community Development Financial Institutions Fund,
Department of the Treasury (Parts 1800--1899)
Title 13--Business Credit and Assistance
I Small Business Administration (Parts 1--199)
III Economic Development Administration, Department of
Commerce (Parts 300--399)
IV Emergency Steel Guarantee Loan Board (Parts 400--499)
V Emergency Oil and Gas Guaranteed Loan Board (Parts
500--599)
Title 14--Aeronautics and Space
I Federal Aviation Administration, Department of
Transportation (Parts 1--199)
II Office of the Secretary, Department of Transportation
(Aviation Proceedings) (Parts 200--399)
III Commercial Space Transportation, Federal Aviation
Administration, Department of Transportation
(Parts 400--1199)
V National Aeronautics and Space Administration (Parts
1200--1299)
VI Air Transportation System Stabilization (Parts 1300--
1399)
Title 15--Commerce and Foreign Trade
Subtitle A--Office of the Secretary of Commerce (Parts
0--29)
Subtitle B--Regulations Relating to Commerce and
Foreign Trade
I Bureau of the Census, Department of Commerce (Parts
30--199)
II National Institute of Standards and Technology,
Department of Commerce (Parts 200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV Foreign-Trade Zones Board, Department of Commerce
(Parts 400--499)
VII Bureau of Industry and Security, Department of
Commerce (Parts 700--799)
VIII Bureau of Economic Analysis, Department of Commerce
(Parts 800--899)
IX National Oceanic and Atmospheric Administration,
Department of Commerce (Parts 900--999)
XI Technology Administration, Department of Commerce
(Parts 1100--1199)
XIII East-West Foreign Trade Board (Parts 1300--1399)
XIV Minority Business Development Agency (Parts 1400--
1499)
Subtitle C--Regulations Relating to Foreign Trade
Agreements
[[Page 652]]
XX Office of the United States Trade Representative
(Parts 2000--2099)
Subtitle D--Regulations Relating to Telecommunications
and Information
XXIII National Telecommunications and Information
Administration, Department of Commerce (Parts
2300--2399)
Title 16--Commercial Practices
I Federal Trade Commission (Parts 0--999)
II Consumer Product Safety Commission (Parts 1000--1799)
Title 17--Commodity and Securities Exchanges
I Commodity Futures Trading Commission (Parts 1--199)
II Securities and Exchange Commission (Parts 200--399)
IV Department of the Treasury (Parts 400--499)
Title 18--Conservation of Power and Water Resources
I Federal Energy Regulatory Commission, Department of
Energy (Parts 1--399)
III Delaware River Basin Commission (Parts 400--499)
VI Water Resources Council (Parts 700--799)
VIII Susquehanna River Basin Commission (Parts 800--899)
XIII Tennessee Valley Authority (Parts 1300--1399)
Title 19--Customs Duties
I U.S. Customs and Border Protection, Department of
Homeland Security; Department of the Treasury
(Parts 0--199)
II United States International Trade Commission (Parts
200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV U.S. Immigration and Customs Enforcement, Department
of Homeland Security (Parts 400--599)
Title 20--Employees' Benefits
I Office of Workers' Compensation Programs, Department
of Labor (Parts 1--199)
II Railroad Retirement Board (Parts 200--399)
III Social Security Administration (Parts 400--499)
IV Employees' Compensation Appeals Board, Department of
Labor (Parts 500--599)
V Employment and Training Administration, Department of
Labor (Parts 600--699)
[[Page 653]]
VI Office of Workers' Compensation Programs, Department
of Labor (Parts 700--799)
VII Benefits Review Board, Department of Labor (Parts
800--899)
VIII Joint Board for the Enrollment of Actuaries (Parts
900--999)
IX Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 1000--1099)
Title 21--Food and Drugs
I Food and Drug Administration, Department of Health and
Human Services (Parts 1--1299)
II Drug Enforcement Administration, Department of Justice
(Parts 1300--1399)
III Office of National Drug Control Policy (Parts 1400--
1499)
Title 22--Foreign Relations
I Department of State (Parts 1--199)
II Agency for International Development (Parts 200--299)
III Peace Corps (Parts 300--399)
IV International Joint Commission, United States and
Canada (Parts 400--499)
V Broadcasting Board of Governors (Parts 500--599)
VII Overseas Private Investment Corporation (Parts 700--
799)
IX Foreign Service Grievance Board (Parts 900--999)
X Inter-American Foundation (Parts 1000--1099)
XI International Boundary and Water Commission, United
States and Mexico, United States Section (Parts
1100--1199)
XII United States International Development Cooperation
Agency (Parts 1200--1299)
XIII Millennium Challenge Corporation (Parts 1300--1399)
XIV Foreign Service Labor Relations Board; Federal Labor
Relations Authority; General Counsel of the
Federal Labor Relations Authority; and the Foreign
Service Impasse Disputes Panel (Parts 1400--1499)
XV African Development Foundation (Parts 1500--1599)
XVI Japan-United States Friendship Commission (Parts
1600--1699)
XVII United States Institute of Peace (Parts 1700--1799)
Title 23--Highways
I Federal Highway Administration, Department of
Transportation (Parts 1--999)
II National Highway Traffic Safety Administration and
Federal Highway Administration, Department of
Transportation (Parts 1200--1299)
III National Highway Traffic Safety Administration,
Department of Transportation (Parts 1300--1399)
[[Page 654]]
Title 24--Housing and Urban Development
Subtitle A--Office of the Secretary, Department of
Housing and Urban Development (Parts 0--99)
Subtitle B--Regulations Relating to Housing and Urban
Development
I Office of Assistant Secretary for Equal Opportunity,
Department of Housing and Urban Development (Parts
100--199)
II Office of Assistant Secretary for Housing-Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 200--299)
III Government National Mortgage Association, Department
of Housing and Urban Development (Parts 300--399)
IV Office of Housing and Office of Multifamily Housing
Assistance Restructuring, Department of Housing
and Urban Development (Parts 400--499)
V Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 500--599)
VI Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 600--699) [Reserved]
VII Office of the Secretary, Department of Housing and
Urban Development (Housing Assistance Programs and
Public and Indian Housing Programs) (Parts 700--
799)
VIII Office of the Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Section 8 Housing Assistance
Programs, Section 202 Direct Loan Program, Section
202 Supportive Housing for the Elderly Program and
Section 811 Supportive Housing for Persons With
Disabilities Program) (Parts 800--899)
IX Office of Assistant Secretary for Public and Indian
Housing, Department of Housing and Urban
Development (Parts 900--1699)
X Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Interstate Land Sales
Registration Program) (Parts 1700--1799)
XII Office of Inspector General, Department of Housing and
Urban Development (Parts 2000--2099)
XV Emergency Mortgage Insurance and Loan Programs,
Department of Housing and Urban Development (Parts
2700--2799) [Reserved]
XX Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 3200--3899)
XXIV Board of Directors of the HOPE for Homeowners Program
(Parts 4000--4099) [Reserved]
XXV Neighborhood Reinvestment Corporation (Parts 4100--
4199)
Title 25--Indians
I Bureau of Indian Affairs, Department of the Interior
(Parts 1--299)
[[Page 655]]
II Indian Arts and Crafts Board, Department of the
Interior (Parts 300--399)
III National Indian Gaming Commission, Department of the
Interior (Parts 500--599)
IV Office of Navajo and Hopi Indian Relocation (Parts
700--799)
V Bureau of Indian Affairs, Department of the Interior,
and Indian Health Service, Department of Health
and Human Services (Part 900)
VI Office of the Assistant Secretary-Indian Affairs,
Department of the Interior (Parts 1000--1199)
VII Office of the Special Trustee for American Indians,
Department of the Interior (Parts 1200--1299)
Title 26--Internal Revenue
I Internal Revenue Service, Department of the Treasury
(Parts 1--End)
Title 27--Alcohol, Tobacco Products and Firearms
I Alcohol and Tobacco Tax and Trade Bureau, Department
of the Treasury (Parts 1--399)
II Bureau of Alcohol, Tobacco, Firearms, and Explosives,
Department of Justice (Parts 400--699)
Title 28--Judicial Administration
I Department of Justice (Parts 0--299)
III Federal Prison Industries, Inc., Department of Justice
(Parts 300--399)
V Bureau of Prisons, Department of Justice (Parts 500--
599)
VI Offices of Independent Counsel, Department of Justice
(Parts 600--699)
VII Office of Independent Counsel (Parts 700--799)
VIII Court Services and Offender Supervision Agency for the
District of Columbia (Parts 800--899)
IX National Crime Prevention and Privacy Compact Council
(Parts 900--999)
XI Department of Justice and Department of State (Parts
1100--1199)
Title 29--Labor
Subtitle A--Office of the Secretary of Labor (Parts
0--99)
Subtitle B--Regulations Relating to Labor
I National Labor Relations Board (Parts 100--199)
II Office of Labor-Management Standards, Department of
Labor (Parts 200--299)
III National Railroad Adjustment Board (Parts 300--399)
[[Page 656]]
IV Office of Labor-Management Standards, Department of
Labor (Parts 400--499)
V Wage and Hour Division, Department of Labor (Parts
500--899)
IX Construction Industry Collective Bargaining Commission
(Parts 900--999)
X National Mediation Board (Parts 1200--1299)
XII Federal Mediation and Conciliation Service (Parts
1400--1499)
XIV Equal Employment Opportunity Commission (Parts 1600--
1699)
XVII Occupational Safety and Health Administration,
Department of Labor (Parts 1900--1999)
XX Occupational Safety and Health Review Commission
(Parts 2200--2499)
XXV Employee Benefits Security Administration, Department
of Labor (Parts 2500--2599)
XXVII Federal Mine Safety and Health Review Commission
(Parts 2700--2799)
XL Pension Benefit Guaranty Corporation (Parts 4000--
4999)
Title 30--Mineral Resources
I Mine Safety and Health Administration, Department of
Labor (Parts 1--199)
II Bureau of Safety and Environmental Enforcement,
Department of the Interior (Parts 200--299)
IV Geological Survey, Department of the Interior (Parts
400--499)
V Bureau of Ocean Energy Management, Department of the
Interior (Parts 500--599)
VII Office of Surface Mining Reclamation and Enforcement,
Department of the Interior (Parts 700--999)
XII Office of Natural Resources Revenue, Department of the
Interior (Parts 1200--1299)
Title 31--Money and Finance: Treasury
Subtitle A--Office of the Secretary of the Treasury
(Parts 0--50)
Subtitle B--Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts
51--199)
II Fiscal Service, Department of the Treasury (Parts
200--399)
IV Secret Service, Department of the Treasury (Parts
400--499)
V Office of Foreign Assets Control, Department of the
Treasury (Parts 500--599)
VI Bureau of Engraving and Printing, Department of the
Treasury (Parts 600--699)
VII Federal Law Enforcement Training Center, Department of
the Treasury (Parts 700--799)
VIII Office of International Investment, Department of the
Treasury (Parts 800--899)
[[Page 657]]
IX Federal Claims Collection Standards (Department of the
Treasury--Department of Justice) (Parts 900--999)
X Financial Crimes Enforcement Network, Department of
the Treasury (Parts 1000--1099)
Title 32--National Defense
Subtitle A--Department of Defense
I Office of the Secretary of Defense (Parts 1--399)
V Department of the Army (Parts 400--699)
VI Department of the Navy (Parts 700--799)
VII Department of the Air Force (Parts 800--1099)
Subtitle B--Other Regulations Relating to National
Defense
XII Defense Logistics Agency (Parts 1200--1299)
XVI Selective Service System (Parts 1600--1699)
XVII Office of the Director of National Intelligence (Parts
1700--1799)
XVIII National Counterintelligence Center (Parts 1800--1899)
XIX Central Intelligence Agency (Parts 1900--1999)
XX Information Security Oversight Office, National
Archives and Records Administration (Parts 2000--
2099)
XXI National Security Council (Parts 2100--2199)
XXIV Office of Science and Technology Policy (Parts 2400--
2499)
XXVII Office for Micronesian Status Negotiations (Parts
2700--2799)
XXVIII Office of the Vice President of the United States
(Parts 2800--2899)
Title 33--Navigation and Navigable Waters
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Corps of Engineers, Department of the Army (Parts
200--399)
IV Saint Lawrence Seaway Development Corporation,
Department of Transportation (Parts 400--499)
Title 34--Education
Subtitle A--Office of the Secretary, Department of
Education (Parts 1--99)
Subtitle B--Regulations of the Offices of the
Department of Education
I Office for Civil Rights, Department of Education
(Parts 100--199)
II Office of Elementary and Secondary Education,
Department of Education (Parts 200--299)
III Office of Special Education and Rehabilitative
Services, Department of Education (Parts 300--399)
IV Office of Career, Technical and Adult Education,
Department of Education (Parts 400--499)
[[Page 658]]
V Office of Bilingual Education and Minority Languages
Affairs, Department of Education (Parts 500--599)
[Reserved]
VI Office of Postsecondary Education, Department of
Education (Parts 600--699)
VII Office of Educational Research and Improvement,
Department of Education (Parts 700--799)
[Reserved]
Subtitle C--Regulations Relating to Education
XI [Reserved]
XII National Council on Disability (Parts 1200--1299)
Title 35 [Reserved]
Title 36--Parks, Forests, and Public Property
I National Park Service, Department of the Interior
(Parts 1--199)
II Forest Service, Department of Agriculture (Parts 200--
299)
III Corps of Engineers, Department of the Army (Parts
300--399)
IV American Battle Monuments Commission (Parts 400--499)
V Smithsonian Institution (Parts 500--599)
VI [Reserved]
VII Library of Congress (Parts 700--799)
VIII Advisory Council on Historic Preservation (Parts 800--
899)
IX Pennsylvania Avenue Development Corporation (Parts
900--999)
X Presidio Trust (Parts 1000--1099)
XI Architectural and Transportation Barriers Compliance
Board (Parts 1100--1199)
XII National Archives and Records Administration (Parts
1200--1299)
XV Oklahoma City National Memorial Trust (Parts 1500--
1599)
XVI Morris K. Udall Scholarship and Excellence in National
Environmental Policy Foundation (Parts 1600--1699)
Title 37--Patents, Trademarks, and Copyrights
I United States Patent and Trademark Office, Department
of Commerce (Parts 1--199)
II U.S. Copyright Office, Library of Congress (Parts
200--299)
III Copyright Royalty Board, Library of Congress (Parts
300--399)
IV Assistant Secretary for Technology Policy, Department
of Commerce (Parts 400--599)
Title 38--Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0--199)
II Armed Forces Retirement Home (Parts 200--299)
[[Page 659]]
Title 39--Postal Service
I United States Postal Service (Parts 1--999)
III Postal Regulatory Commission (Parts 3000--3099)
Title 40--Protection of Environment
I Environmental Protection Agency (Parts 1--1099)
IV Environmental Protection Agency and Department of
Justice (Parts 1400--1499)
V Council on Environmental Quality (Parts 1500--1599)
VI Chemical Safety and Hazard Investigation Board (Parts
1600--1699)
VII Environmental Protection Agency and Department of
Defense; Uniform National Discharge Standards for
Vessels of the Armed Forces (Parts 1700--1799)
VIII Gulf Coast Ecosystem Restoration Council (Parts 1800--
1899)
Title 41--Public Contracts and Property Management
Subtitle A--Federal Procurement Regulations System
[Note]
Subtitle B--Other Provisions Relating to Public
Contracts
50 Public Contracts, Department of Labor (Parts 50-1--50-
999)
51 Committee for Purchase From People Who Are Blind or
Severely Disabled (Parts 51-1--51-99)
60 Office of Federal Contract Compliance Programs, Equal
Employment Opportunity, Department of Labor (Parts
60-1--60-999)
61 Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 61-1--61-999)
62--100 [Reserved]
Subtitle C--Federal Property Management Regulations
System
101 Federal Property Management Regulations (Parts 101-1--
101-99)
102 Federal Management Regulation (Parts 102-1--102-299)
103--104 [Reserved]
105 General Services Administration (Parts 105-1--105-999)
109 Department of Energy Property Management Regulations
(Parts 109-1--109-99)
114 Department of the Interior (Parts 114-1--114-99)
115 Environmental Protection Agency (Parts 115-1--115-99)
128 Department of Justice (Parts 128-1--128-99)
129--200 [Reserved]
Subtitle D--Other Provisions Relating to Property
Management [Reserved]
Subtitle E--Federal Information Resources Management
Regulations System [Reserved]
Subtitle F--Federal Travel Regulation System
300 General (Parts 300-1--300-99)
301 Temporary Duty (TDY) Travel Allowances (Parts 301-1--
301-99)
[[Page 660]]
302 Relocation Allowances (Parts 302-1--302-99)
303 Payment of Expenses Connected with the Death of
Certain Employees (Part 303-1--303-99)
304 Payment of Travel Expenses from a Non-Federal Source
(Parts 304-1--304-99)
Title 42--Public Health
I Public Health Service, Department of Health and Human
Services (Parts 1--199)
IV Centers for Medicare & Medicaid Services, Department
of Health and Human Services (Parts 400--599)
V Office of Inspector General-Health Care, Department of
Health and Human Services (Parts 1000--1999)
Title 43--Public Lands: Interior
Subtitle A--Office of the Secretary of the Interior
(Parts 1--199)
Subtitle B--Regulations Relating to Public Lands
I Bureau of Reclamation, Department of the Interior
(Parts 400--999)
II Bureau of Land Management, Department of the Interior
(Parts 1000--9999)
III Utah Reclamation Mitigation and Conservation
Commission (Parts 10000--10099)
Title 44--Emergency Management and Assistance
I Federal Emergency Management Agency, Department of
Homeland Security (Parts 0--399)
IV Department of Commerce and Department of
Transportation (Parts 400--499)
Title 45--Public Welfare
Subtitle A--Department of Health and Human Services
(Parts 1--199)
Subtitle B--Regulations Relating to Public Welfare
II Office of Family Assistance (Assistance Programs),
Administration for Children and Families,
Department of Health and Human Services (Parts
200--299)
III Office of Child Support Enforcement (Child Support
Enforcement Program), Administration for Children
and Families, Department of Health and Human
Services (Parts 300--399)
IV Office of Refugee Resettlement, Administration for
Children and Families, Department of Health and
Human Services (Parts 400--499)
V Foreign Claims Settlement Commission of the United
States, Department of Justice (Parts 500--599)
[[Page 661]]
VI National Science Foundation (Parts 600--699)
VII Commission on Civil Rights (Parts 700--799)
VIII Office of Personnel Management (Parts 800--899)
X Office of Community Services, Administration for
Children and Families, Department of Health and
Human Services (Parts 1000--1099)
XI National Foundation on the Arts and the Humanities
(Parts 1100--1199)
XII Corporation for National and Community Service (Parts
1200--1299)
XIII Office of Human Development Services, Department of
Health and Human Services (Parts 1300--1399)
XVI Legal Services Corporation (Parts 1600--1699)
XVII National Commission on Libraries and Information
Science (Parts 1700--1799)
XVIII Harry S. Truman Scholarship Foundation (Parts 1800--
1899)
XXI Commission on Fine Arts (Parts 2100--2199)
XXIII Arctic Research Commission (Part 2301)
XXIV James Madison Memorial Fellowship Foundation (Parts
2400--2499)
XXV Corporation for National and Community Service (Parts
2500--2599)
Title 46--Shipping
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Maritime Administration, Department of Transportation
(Parts 200--399)
III Coast Guard (Great Lakes Pilotage), Department of
Homeland Security (Parts 400--499)
IV Federal Maritime Commission (Parts 500--599)
Title 47--Telecommunication
I Federal Communications Commission (Parts 0--199)
II Office of Science and Technology Policy and National
Security Council (Parts 200--299)
III National Telecommunications and Information
Administration, Department of Commerce (Parts
300--399)
IV National Telecommunications and Information
Administration, Department of Commerce, and
National Highway Traffic Safety Administration,
Department of Transportation (Parts 400--499)
Title 48--Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1--99)
2 Defense Acquisition Regulations System, Department of
Defense (Parts 200--299)
[[Page 662]]
3 Health and Human Services (Parts 300--399)
4 Department of Agriculture (Parts 400--499)
5 General Services Administration (Parts 500--599)
6 Department of State (Parts 600--699)
7 Agency for International Development (Parts 700--799)
8 Department of Veterans Affairs (Parts 800--899)
9 Department of Energy (Parts 900--999)
10 Department of the Treasury (Parts 1000--1099)
12 Department of Transportation (Parts 1200--1299)
13 Department of Commerce (Parts 1300--1399)
14 Department of the Interior (Parts 1400--1499)
15 Environmental Protection Agency (Parts 1500--1599)
16 Office of Personnel Management, Federal Employees
Health Benefits Acquisition Regulation (Parts
1600--1699)
17 Office of Personnel Management (Parts 1700--1799)
18 National Aeronautics and Space Administration (Parts
1800--1899)
19 Broadcasting Board of Governors (Parts 1900--1999)
20 Nuclear Regulatory Commission (Parts 2000--2099)
21 Office of Personnel Management, Federal Employees
Group Life Insurance Federal Acquisition
Regulation (Parts 2100--2199)
23 Social Security Administration (Parts 2300--2399)
24 Department of Housing and Urban Development (Parts
2400--2499)
25 National Science Foundation (Parts 2500--2599)
28 Department of Justice (Parts 2800--2899)
29 Department of Labor (Parts 2900--2999)
30 Department of Homeland Security, Homeland Security
Acquisition Regulation (HSAR) (Parts 3000--3099)
34 Department of Education Acquisition Regulation (Parts
3400--3499)
51 Department of the Army Acquisition Regulations (Parts
5100--5199)
52 Department of the Navy Acquisition Regulations (Parts
5200--5299)
53 Department of the Air Force Federal Acquisition
Regulation Supplement (Parts 5300--5399)
[Reserved]
54 Defense Logistics Agency, Department of Defense (Parts
5400--5499)
57 African Development Foundation (Parts 5700--5799)
61 Civilian Board of Contract Appeals, General Services
Administration (Parts 6100--6199)
63 Department of Transportation Board of Contract Appeals
(Parts 6300--6399)
99 Cost Accounting Standards Board, Office of Federal
Procurement Policy, Office of Management and
Budget (Parts 9900--9999)
[[Page 663]]
Title 49--Transportation
Subtitle A--Office of the Secretary of Transportation
(Parts 1--99)
Subtitle B--Other Regulations Relating to
Transportation
I Pipeline and Hazardous Materials Safety
Administration, Department of Transportation
(Parts 100--199)
II Federal Railroad Administration, Department of
Transportation (Parts 200--299)
III Federal Motor Carrier Safety Administration,
Department of Transportation (Parts 300--399)
IV Coast Guard, Department of Homeland Security (Parts
400--499)
V National Highway Traffic Safety Administration,
Department of Transportation (Parts 500--599)
VI Federal Transit Administration, Department of
Transportation (Parts 600--699)
VII National Railroad Passenger Corporation (AMTRAK)
(Parts 700--799)
VIII National Transportation Safety Board (Parts 800--999)
X Surface Transportation Board, Department of
Transportation (Parts 1000--1399)
XI Research and Innovative Technology Administration,
Department of Transportation (Parts 1400--1499)
[Reserved]
XII Transportation Security Administration, Department of
Homeland Security (Parts 1500--1699)
Title 50--Wildlife and Fisheries
I United States Fish and Wildlife Service, Department of
the Interior (Parts 1--199)
II National Marine Fisheries Service, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 200--299)
III International Fishing and Related Activities (Parts
300--399)
IV Joint Regulations (United States Fish and Wildlife
Service, Department of the Interior and National
Marine Fisheries Service, National Oceanic and
Atmospheric Administration, Department of
Commerce); Endangered Species Committee
Regulations (Parts 400--499)
V Marine Mammal Commission (Parts 500--599)
VI Fishery Conservation and Management, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 600--699)
[[Page 665]]
Alphabetical List of Agencies Appearing in the CFR
(Revised as of April 1, 2015)
CFR Title, Subtitle or
Agency Chapter
Administrative Committee of the Federal Register 1, I
Administrative Conference of the United States 1, III
Advisory Council on Historic Preservation 36, VIII
Advocacy and Outreach, Office of 7, XXV
Afghanistan Reconstruction, Special Inspector 22, LXXXIII
General for
African Development Foundation 22, XV
Federal Acquisition Regulation 48, 57
Agency for International Development 2, VII; 22, II
Federal Acquisition Regulation 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agriculture Department 2, IV; 5, LXXIII
Advocacy and Outreach, Office of 7, XXV
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Animal and Plant Health Inspection Service 7, III; 9, I
Chief Financial Officer, Office of 7, XXX
Commodity Credit Corporation 7, XIV
Economic Research Service 7, XXXVII
Energy Policy and New Uses, Office of 2, IX; 7, XXIX
Environmental Quality, Office of 7, XXXI
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Forest Service 36, II
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National Institute of Food and Agriculture 7, XXXIV
Natural Resources Conservation Service 7, VI
Operations, Office of 7, XXVIII
Procurement and Property Management, Office of 7, XXXII
Rural Business-Cooperative Service 7, XVIII, XLII, L
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV, L
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII, L
Secretary of Agriculture, Office of 7, Subtitle A
Transportation, Office of 7, XXXIII
World Agricultural Outlook Board 7, XXXVIII
Air Force Department 32, VII
Federal Acquisition Regulation Supplement 48, 53
Air Transportation Stabilization Board 14, VI
Alcohol and Tobacco Tax and Trade Bureau 27, I
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
American Indians, Office of the Special Trustee 25, VII
[[Page 666]]
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers 36, XI
Compliance Board
Arctic Research Commission 45, XXIII
Armed Forces Retirement Home 5, XI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Blind or Severely Disabled, Committee for 41, 51
Purchase from People Who Are
Broadcasting Board of Governors 22, V
Federal Acquisition Regulation 48, 19
Census Bureau 15, I
Centers for Medicare & Medicaid Services 42, IV
Central Intelligence Agency 32, XIX
Chemical Safety and Hazardous Investigation 40, VI
Board
Chief Financial Officer, Office of 7, XXX
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X
Civil Rights, Commission on 5, LXVIII; 45, VII
Civil Rights, Office for 34, I
Council of the Inspectors General on Integrity 5, XCVIII
and Efficiency
Court Services and Offender Supervision Agency 5, LXX
for the District of Columbia
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Commerce Department 2, XIII; 44, IV; 50, VI
Census Bureau 15, I
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 13
Foreign-Trade Zones Board 15, IV
Industry and Security, Bureau of 15, VII
International Trade Administration 15, III; 19, III
National Institute of Standards and Technology 15, II
National Marine Fisheries Service 50, II, IV
National Oceanic and Atmospheric 15, IX; 50, II, III, IV,
Administration VI
National Telecommunications and Information 15, XXIII; 47, III, IV
Administration
National Weather Service 15, IX
Patent and Trademark Office, United States 37, I
Productivity, Technology and Innovation, 37, IV
Assistant Secretary for
Secretary of Commerce, Office of 15, Subtitle A
Technology Administration 15, XI
Technology Policy, Assistant Secretary for 37, IV
Commercial Space Transportation 14, III
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 5, XLI; 17, I
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining 29, IX
Commission
Consumer Financial Protection Bureau 5, LXXXIV; 12, X
Consumer Product Safety Commission 5, LXXI; 16, II
Copyright Royalty Board 37, III
Corporation for National and Community Service 2, XXII; 45, XII, XXV
Cost Accounting Standards Board 48, 99
Council on Environmental Quality 40, V
Court Services and Offender Supervision Agency 5, LXX; 28, VIII
for the District of Columbia
Customs and Border Protection 19, I
Defense Contract Audit Agency 32, I
Defense Department 2, XI; 5, XXVI; 32,
Subtitle A; 40, VII
[[Page 667]]
Advanced Research Projects Agency 32, I
Air Force Department 32, VII
Army Department 32, V; 33, II; 36, III,
48, 51
Defense Acquisition Regulations System 48, 2
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, I, XII; 48, 54
Engineers, Corps of 33, II; 36, III
National Imagery and Mapping Agency 32, I
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 2, XI; 32, I
Defense Contract Audit Agency 32, I
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, XII; 48, 54
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
District of Columbia, Court Services and 5, LXX; 28, VIII
Offender Supervision Agency for the
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Economic Research Service 7, XXXVII
Education, Department of 2, XXXIV; 5, LIII
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Civil Rights, Office for 34, I
Educational Research and Improvement, Office 34, VII
of
Elementary and Secondary Education, Office of 34, II
Federal Acquisition Regulation 48, 34
Postsecondary Education, Office of 34, VI
Secretary of Education, Office of 34, Subtitle A
Special Education and Rehabilitative Services, 34, III
Office of
Career, Technical, and Adult Education, Office 34, IV
of
Educational Research and Improvement, Office of 34, VII
Election Assistance Commission 2, LVIII; 11, II
Elementary and Secondary Education, Office of 34, II
Emergency Oil and Gas Guaranteed Loan Board 13, V
Emergency Steel Guarantee Loan Board 13, IV
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 2, IX; 5, XXIII; 10, II,
III, X
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 5, XXIV; 18, I
Property Management Regulations 41, 109
Energy, Office of 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 2, XV; 5, LIV; 40, I, IV,
VII
Federal Acquisition Regulation 48, 15
Property Management Regulations 41, 115
Environmental Quality, Office of 7, XXXI
Equal Employment Opportunity Commission 5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary 24, I
for
Executive Office of the President 3, I
Environmental Quality, Council on 40, V
Management and Budget, Office of 2, Subtitle A; 5, III,
LXXVII; 14, VI; 48, 99
National Drug Control Policy, Office of 2, XXXVI; 21, III
National Security Council 32, XXI; 47, 2
Presidential Documents 3
[[Page 668]]
Science and Technology Policy, Office of 32, XXIV; 47, II
Trade Representative, Office of the United 15, XX
States
Export-Import Bank of the United States 2, XXXV; 5, LII; 12, IV
Family Assistance, Office of 45, II
Farm Credit Administration 5, XXXI; 12, VI
Farm Credit System Insurance Corporation 5, XXX; 12, XIV
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Commercial Space Transportation 14, III
Federal Claims Collection Standards 31, IX
Federal Communications Commission 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 5, XXII; 12, III
Federal Election Commission 5, XXXVII; 11, I
Federal Emergency Management Agency 44, I
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Federal Energy Regulatory Commission 5, XXIV; 18, I
Federal Financial Institutions Examination 12, XI
Council
Federal Financing Bank 12, VIII
Federal Highway Administration 23, I, II
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Enterprise Oversight Office 12, XVII
Federal Housing Finance Agency 5, LXXX; 12, XII
Federal Housing Finance Board 12, IX
Federal Labor Relations Authority 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center 31, VII
Federal Management Regulation 41, 102
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration 49, III
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Board of Governors 5, LVIII
Federal Retirement Thrift Investment Board 5, VI, LXXVI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 5, XLVII; 16, I
Federal Transit Administration 49, VI
Federal Travel Regulation System 41, Subtitle F
Financial Crimes Enforcement Network 31, X
Financial Research Office 12, XVI
Financial Stability Oversight Council 12, XIII
Fine Arts, Commission on 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Food and Drug Administration 21, I
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Assets Control, Office of 31, V
Foreign Claims Settlement Commission of the 45, V
United States
Foreign Service Grievance Board 22, IX
Foreign Service Impasse Disputes Panel 22, XIV
Foreign Service Labor Relations Board 22, XIV
Foreign-Trade Zones Board 15, IV
Forest Service 36, II
General Services Administration 5, LVII; 41, 105
Contract Appeals, Board of 48, 61
[[Page 669]]
Federal Acquisition Regulation 48, 5
Federal Management Regulation 41, 102
Federal Property Management Regulations 41, 101
Federal Travel Regulation System 41, Subtitle F
General 41, 300
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death 41, 303
of Certain Employees
Relocation Allowances 41, 302
Temporary Duty (TDY) Travel Allowances 41, 301
Geological Survey 30, IV
Government Accountability Office 4, I
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Gulf Coast Ecosystem Restoration Council 2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 2, III; 5, XLV; 45,
Subtitle A,
Centers for Medicare & Medicaid Services 42, IV
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Human Development Services, Office of 45, XIII
Indian Health Service 25, V
Inspector General (Health Care), Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Homeland Security, Department of 2, XXX; 6, I; 8, I
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Customs and Border Protection 19, I
Federal Emergency Management Agency 44, I
Human Resources Management and Labor Relations 5, XCVII
Systems
Immigration and Customs Enforcement Bureau 19, IV
Transportation Security Administration 49, XII
HOPE for Homeowners Program, Board of Directors 24, XXIV
of
Housing and Urban Development, Department of 2, XXIV; 5, LXV; 24,
Subtitle B
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Equal Opportunity, Office of Assistant 24, I
Secretary for
Federal Acquisition Regulation 48, 24
Federal Housing Enterprise Oversight, Office 12, XVII
of
Government National Mortgage Association 24, III
Housing--Federal Housing Commissioner, Office 24, II, VIII, X, XX
of Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Inspector General, Office of 24, XII
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Secretary, Office of 24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of 24, II, VIII, X, XX
Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Human Development Services, Office of 45, XIII
Immigration and Customs Enforcement Bureau 19, IV
Immigration Review, Executive Office for 8, V
Independent Counsel, Office of 28, VII
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
[[Page 670]]
Indian Health Service 25, V
Industry and Security, Bureau of 15, VII
Information Resources Management, Office of 7, XXVII
Information Security Oversight Office, National 32, XX
Archives and Records Administration
Inspector General
Agriculture Department 7, XXVI
Health and Human Services Department 42, V
Housing and Urban Development Department 24, XII, XV
Institute of Peace, United States 22, XVII
Inter-American Foundation 5, LXIII; 22, X
Interior Department 2, XIV
American Indians, Office of the Special 25, VII
Trustee
Endangered Species Committee 50, IV
Federal Acquisition Regulation 48, 14
Federal Property Management Regulations System 41, 114
Fish and Wildlife Service, United States 50, I, IV
Geological Survey 30, IV
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
Land Management, Bureau of 43, II
National Indian Gaming Commission 25, III
National Park Service 36, I
Natural Resource Revenue, Office of 30, XII
Ocean Energy Management, Bureau of 30, V
Reclamation, Bureau of 43, I
Safety and Enforcement Bureau, Bureau of 30, II
Secretary of the Interior, Office of 2, XIV; 43, Subtitle A
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Internal Revenue Service 26, I
International Boundary and Water Commission, 22, XI
United States and Mexico, United States
Section
International Development, United States Agency 22, II
for
Federal Acquisition Regulation 48, 7
International Development Cooperation Agency, 22, XII
United States
International Joint Commission, United States 22, IV
and Canada
International Organizations Employees Loyalty 5, V
Board
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 5, XL
Investment Security, Office of 31, VIII
James Madison Memorial Fellowship Foundation 45, XXIV
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 2, XXVIII; 5, XXVIII; 28,
I, XI; 40, IV
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 31, IX
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the 45, V
United States
Immigration Review, Executive Office for 8, V
Offices of Independent Counsel 28, VI
Prisons, Bureau of 28, V
Property Management Regulations 41, 128
Labor Department 2, XXIX; 5, XLII
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office 41, 60
of
Federal Procurement Regulations System 41, 50
[[Page 671]]
Labor-Management Standards, Office of 29, II, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Office of Workers' Compensation Programs 20, VII
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I
Labor-Management Standards, Office of 29, II, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Royalty Board 37, III
U.S. Copyright Office 37, II
Local Television Loan Guarantee Board 7, XX
Management and Budget, Office of 5, III, LXXVII; 14, VI;
48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II, LXIV
Micronesian Status Negotiations, Office for 32, XXVII
Military Compensation and Retirement 5, XCIV
Modernization Commission
Millennium Challenge Corporation 22, XIII
Mine Safety and Health Administration 30, I
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Morris K. Udall Scholarship and Excellence in 36, XVI
National Environmental Policy Foundation
Museum and Library Services, Institute of 2, XXXI
National Aeronautics and Space Administration 22, XVIII; 5, LIX; 14, V
Federal Acquisition Regulation 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National and Community Service, Corporation for 2, XXII; 45, XII, XXV
National Archives and Records Administration 2, XXVI; 5, LXVI; 36, XII
Information Security Oversight Office 32, XX
National Capital Planning Commission 1, IV
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information 45, XVII
Science
National Council on Disability 34, XII
National Counterintelligence Center 32, XVIII
National Credit Union Administration 5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact 28, IX
Council
National Drug Control Policy, Office of 2, XXXVI; 21, III
National Endowment for the Arts 2, XXXII
National Endowment for the Humanities 2, XXXIII
National Foundation on the Arts and the 45, XI
Humanities
National Highway Traffic Safety Administration 23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency 32, I
National Indian Gaming Commission 25, III
National Institute of Food and Agriculture 7, XXXIV
National Institute of Standards and Technology 15, II
National Intelligence, Office of Director of 32, XVII
National Labor Relations Board 5, LXI; 29, I
National Marine Fisheries Service 50, II, IV
National Mediation Board 29, X
National Oceanic and Atmospheric Administration 15, IX; 50, II, III, IV,
VI
National Park Service 36, I
National Railroad Adjustment Board 29, III
National Railroad Passenger Corporation (AMTRAK) 49, VII
National Science Foundation 2, XXV; 5, XLIII; 45, VI
Federal Acquisition Regulation 48, 25
[[Page 672]]
National Security Council 32, XXI
National Security Council and Office of Science 47, II
and Technology Policy
National Telecommunications and Information 15, XXIII; 47, III, IV
Administration
National Transportation Safety Board 49, VIII
Natural Resources Conservation Service 7, VI
Natural Resource Revenue, Office of 30, XII
Navajo and Hopi Indian Relocation, Office of 25, IV
Navy Department 32, VI
Federal Acquisition Regulation 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Northeast Interstate Low-Level Radioactive Waste 10, XVIII
Commission
Nuclear Regulatory Commission 2, XX; 5, XLVIII; 10, I
Federal Acquisition Regulation 48, 20
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Ocean Energy Management, Bureau of 30, V
Offices of Independent Counsel 28, VI
Office of Workers' Compensation Programs 20, VII
Oklahoma City National Memorial Trust 36, XV
Operations Office 7, XXVIII
Overseas Private Investment Corporation 5, XXXIII; 22, VII
Patent and Trademark Office, United States 37, I
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death of 41, 303
Certain Employees
Peace Corps 2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension Benefit Guaranty Corporation 29, XL
Personnel Management, Office of 5, I, XXXV; 45, VIII
Human Resources Management and Labor Relations 5, XCVII
Systems, Department of Homeland Security
Federal Acquisition Regulation 48, 17
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Pipeline and Hazardous Materials Safety 49, I
Administration
Postal Regulatory Commission 5, XLVI; 39, III
Postal Service, United States 5, LX; 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House 1, IV
Fellowships
Presidential Documents 3
Presidio Trust 36, X
Prisons, Bureau of 28, V
Privacy and Civil Liberties Oversight Board 6, X
Procurement and Property Management, Office of 7, XXXII
Productivity, Technology and Innovation, 37, IV
Assistant Secretary
Public Contracts, Department of Labor 41, 50
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation, Bureau of 43, I
Recovery Accountability and Transparency Board 4, II
Refugee Resettlement, Office of 45, IV
Relocation Allowances 41, 302
Research and Innovative Technology 49, XI
Administration
Rural Business-Cooperative Service 7, XVIII, XLII, L
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV, L
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII, L
Safety and Environmental Enforcement, Bureau of 30, II
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
[[Page 673]]
Science and Technology Policy, Office of, and 47, II
National Security Council
Secret Service 31, IV
Securities and Exchange Commission 5, XXXIV; 17, II
Selective Service System 32, XVI
Small Business Administration 2, XXVII; 13, I
Smithsonian Institution 36, V
Social Security Administration 2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, 34, III
Office of
State Department 2, VI; 22, I; 28, XI
Federal Acquisition Regulation 48, 6
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Surface Transportation Board 49, X
Susquehanna River Basin Commission 18, VIII
Technology Administration 15, XI
Technology Policy, Assistant Secretary for 37, IV
Tennessee Valley Authority 5, LXIX; 18, XIII
Thrift Supervision Office, Department of the 12, V
Treasury
Trade Representative, United States, Office of 15, XX
Transportation, Department of 2, XII; 5, L
Commercial Space Transportation 14, III
Contract Appeals, Board of 48, 63
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II
Federal Motor Carrier Safety Administration 49, III
Federal Railroad Administration 49, II
Federal Transit Administration 49, VI
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 47, IV; 49, V
Pipeline and Hazardous Materials Safety 49, I
Administration
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Surface Transportation Board 49, X
Transportation Statistics Bureau 49, XI
Transportation, Office of 7, XXXIII
Transportation Security Administration 49, XII
Transportation Statistics Bureau 49, XI
Travel Allowances, Temporary Duty (TDY) 41, 301
Treasury Department 2, X;5, XXI; 12, XV; 17,
IV; 31, IX
Alcohol and Tobacco Tax and Trade Bureau 27, I
Community Development Financial Institutions 12, XVIII
Fund
Comptroller of the Currency 12, I
Customs and Border Protection 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Claims Collection Standards 31, IX
Federal Law Enforcement Training Center 31, VII
Financial Crimes Enforcement Network 31, X
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
Investment Security, Office of 31, VIII
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision, Office of 12, V
Truman, Harry S. Scholarship Foundation 45, XVIII
United States and Canada, International Joint 22, IV
Commission
United States and Mexico, International Boundary 22, XI
and Water Commission, United States Section
U.S. Copyright Office 37, II
Utah Reclamation Mitigation and Conservation 43, III
Commission
[[Page 674]]
Veterans Affairs Department 2, VIII; 38, I
Federal Acquisition Regulation 48, 8
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Vice President of the United States, Office of 32, XXVIII
Career, Technical and Adult Education, Office of 34, IV
Wage and Hour Division 29, V
Water Resources Council 18, VI
Workers' Compensation Programs, Office of 20, I
World Agricultural Outlook Board 7, XXXVIII
[[Page 675]]
Table of OMB Control Numbers
The OMB control numbers for chapter I of title 26 were consolidated into
Sec. Sec. 601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR
58008, Nov. 12, 1996, Sec. 601.9000 was removed. Section 602.101 is
reprinted below for the convenience of the user.
PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT--Table of Contents
Sec. 602.101 OMB Control numbers.
(a) Purpose. This part collects and displays the control numbers
assigned to collections of information in Internal Revenue Service
regulations by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980. The Internal Revenue Service intends
that this part comply with the requirements of Sec. Sec. 1320.7(f),
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations
implementing the Paperwork Reduction Act), for the display of control
numbers assigned by OMB to collections of information in Internal
Revenue Service regulations. This part does not display control numbers
assigned by the Office of Management and Budget to collections of
information of the Bureau of Alcohol, Tobacco, and Firearms.
(b) Display.
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control
No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................ 1545-1654
1.23-5..................................................... 1545-0074
1.25-1T.................................................... 1545-0922
1545-0930
1.25-2T.................................................... 1545-0922
1545-0930
1.25-3T.................................................... 1545-0922
1545-0930
1.25-4T.................................................... 1545-0922
1.25-5T.................................................... 1545-0922
1.25-6T.................................................... 1545-0922
1.25-7T.................................................... 1545-0922
1.25-8T.................................................... 1545-0922
1.25A-1.................................................... 1545-1630
1.28-1..................................................... 1545-0619
1.31-2..................................................... 1545-0074
1.32-2..................................................... 1545-0074
1.32-3..................................................... 1545-1575
1.36B-5.................................................... 1545-2232
1.37-1..................................................... 1545-0074
1.37-3..................................................... 1545-0074
1.41-2..................................................... 1545-0619
1.41-3..................................................... 1545-0619
1.41-4A.................................................... 1545-0074
1.41-4 (b) and (c)......................................... 1545-0074
1.41-8(b).................................................. 1545-1625
1.41-8(d).................................................. 1545-0732
1.41-9..................................................... 1545-0619
1.42-1T.................................................... 1545-0984
1545-0988
1.42-2..................................................... 1545-1005
1.42-5..................................................... 1545-1357
1.42-6..................................................... 1545-1102
1.42-8..................................................... 1545-1102
1.42-10.................................................... 1545-1102
1.42-13.................................................... 1545-1357
1.42-14.................................................... 1545-1423
1.42-17.................................................... 1545-1357
1.42-18.................................................... 1545-2088
1.43-3(a)(3)............................................... 1545-1292
1.43-3(b)(3)............................................... 1545-1292
1.44B-1.................................................... 1545-0219
1.45D-1.................................................... 1545-1765
1.45G-1.................................................... 1545-2031
1.46-1..................................................... 1545-0123
1545-0155
1.46-3..................................................... 1545-0155
1.46-4..................................................... 1545-0155
1.46-5..................................................... 1545-0155
1.46-6..................................................... 1545-0155
1.46-8..................................................... 1545-0155
1.46-9..................................................... 1545-0155
1.46-10.................................................... 1545-0118
1.46-11.................................................... 1545-0155
1.47-1..................................................... 1545-0155
1545-0166
1.47-3..................................................... 1545-0155
1545-0166
1.47-4..................................................... 1545-0123
1.47-5..................................................... 1545-0092
1.47-6..................................................... 1545-0099
1.48-3..................................................... 1545-0155
1.48-4..................................................... 1545-0155
1545-0808
1.48-5..................................................... 1545-0155
1.48-6..................................................... 1545-0155
1.48-12.................................................... 1545-0155
1545-1783
1.50A-1.................................................... 1545-0895
1.50A-2.................................................... 1545-0895
1.50A-3.................................................... 1545-0895
1.50A-4.................................................... 1545-0895
1.50A-5.................................................... 1545-0895
1.50A-6.................................................... 1545-0895
1.50A-7.................................................... 1545-0895
1.50B-1.................................................... 1545-0895
1.50B-2.................................................... 1545-0895
1.50B-3.................................................... 1545-0895
[[Page 676]]
1.50B-4.................................................... 1545-0895
1.50B-5.................................................... 1545-0895
1.51-1..................................................... 1545-0219
1545-0241
1545-0244
1545-0797
1.52-2..................................................... 1545-0219
1.52-3..................................................... 1545-0219
1.56-1..................................................... 1545-0123
1.56(g)-1.................................................. 1545-1233
1.56A-1.................................................... 1545-0227
1.56A-2.................................................... 1545-0227
1.56A-3.................................................... 1545-0227
1.56A-4.................................................... 1545-0227
1.56A-5.................................................... 1545-0227
1.57-5..................................................... 1545-0227
1.58-1..................................................... 1545-0175
1.58-9(c)(5)(iii)(B)....................................... 1545-1093
1.58-9(e)(3)............................................... 1545-1093
1.59-1..................................................... 1545-1903
1.61-2..................................................... 1545-0771
1.61-2T.................................................... 1545-0771
1.61-4..................................................... 1545-0187
1.61-15.................................................... 1545-0074
1.62-2..................................................... 1545-1148
1.63-1..................................................... 1545-0074
1.66-4..................................................... 1545-1770
1.67-2T.................................................... 1545-0110
1.67-3..................................................... 1545-1018
1.67-3T.................................................... 1545-0118
1.71-1T.................................................... 1545-0074
1.72-4..................................................... 1545-0074
1.72-6..................................................... 1545-0074
1.72-9..................................................... 1545-0074
1.72-17.................................................... 1545-0074
1.72-17A................................................... 1545-0074
1.72-18.................................................... 1545-0074
1.74-1..................................................... 1545-1100
1.79-2..................................................... 1545-0074
1.79-3..................................................... 1545-0074
1.83-2..................................................... 1545-0074
1.83-5..................................................... 1545-0074
1.83-6..................................................... 1545-1448
1.103-10................................................... 1545-0123
1545-0940
1.103-15AT................................................. 1545-0720
1.103-18................................................... 1545-1226
1.103(n)-2T................................................ 1545-0874
1.103(n)-4T................................................ 1545-0874
1.103A-2................................................... 1545-0720
1.105-4.................................................... 1545-0074
1.105-5.................................................... 1545-0074
1.105-6.................................................... 1545-0074
1.108-4.................................................... 1545-1539
1.108-5.................................................... 1545-1421
1.108-7.................................................... 1545-2155
1.108(i)-1................................................. 1545-2147
1.108(i)-2................................................. 1545-2147
1.110-1.................................................... 1545-1661
1.117-5.................................................... 1545-0869
1.118-2.................................................... 1545-1639
1.119-1.................................................... 1545-0067
1.120-3.................................................... 1545-0057
1.121-1.................................................... 1545-0072
1.121-2.................................................... 1545-0072
1.121-3.................................................... 1545-0072
1.121-4.................................................... 1545-0072
1545-0091
1.121-5.................................................... 1545-0072
1.127-2.................................................... 1545-0768
1.132-1T................................................... 1545-0771
1.132-2.................................................... 1545-0771
1.132-2T................................................... 1545-0771
1.132-5.................................................... 1545-0771
1.132-5T................................................... 1545-0771
1545-1098
1.132-9(b)................................................. 1545-1676
1.141-1.................................................... 1545-1451
1.141-12................................................... 1545-1451
1.142-2.................................................... 1545-1451
1.142(f)(4)-1.............................................. 1545-1730
1.148-0.................................................... 1545-1098
1.148-1.................................................... 1545-1098
1.148-2.................................................... 1545-1098
1545-1347
1.148-3.................................................... 1545-1098
1545-1347
1.148-4.................................................... 1545-1098
1545-1347
1.148-5.................................................... 1545-1098
1545-1490
1.148-6.................................................... 1545-1098
1545-1451
1.148-7.................................................... 1545-1098
1545-1347
1.148-8.................................................... 1545-1098
1.148-11................................................... 1545-1098
1545-1347
1.149(e)-1................................................. 1545-0720
1.150-1.................................................... 1545-1347
1.151-1.................................................... 1545-0074
1.152-3.................................................... 1545-0071
1545-1783
1.152-4.................................................... 1545-0074
1.152-4T................................................... 1545-0074
1.162-1.................................................... 1545-0139
1.162-2.................................................... 1545-0139
1.162-3.................................................... 1545-0139
1.162-4.................................................... 1545-0139
1.162-5.................................................... 1545-0139
1.162-6.................................................... 1545-0139
1.162-7.................................................... 1545-0139
1.162-8.................................................... 1545-0139
1.162-9.................................................... 1545-0139
1.162-10................................................... 1545-0139
1.162-11................................................... 1545-0139
1.162-12................................................... 1545-0139
1.162-13................................................... 1545-0139
1.162-14................................................... 1545-0139
1.162-15................................................... 1545-0139
1.162-16................................................... 1545-0139
1.162-17................................................... 1545-0139
1.162-18................................................... 1545-0139
1.162-19................................................... 1545-0139
1.162-20................................................... 1545-0139
1.162-24................................................... 1545-2115
1.162-27................................................... 1545-1466
1.163-5.................................................... 1545-0786
1545-1132
1.163-8T................................................... 1545-0995
1.163-10T.................................................. 1545-0074
1.163-13................................................... 1545-1491
1.163(d)-1................................................. 1545-1421
1.165-1.................................................... 1545-0177
1.165-2.................................................... 1545-0177
1.165-3.................................................... 1545-0177
1.165-4.................................................... 1545-0177
1.165-5.................................................... 1545-0177
1.165-6.................................................... 1545-0177
1.165-7.................................................... 1545-0177
1.165-8.................................................... 1545-0177
1.165-9.................................................... 1545-0177
1.165-10................................................... 1545-0177
1.165-11................................................... 1545-0074
[[Page 677]]
1545-0177
1545-0786
1.165-12................................................... 1545-0786
1.166-1.................................................... 1545-0123
1.166-2.................................................... 1545-1254
1.166-4.................................................... 1545-0123
1.166-10................................................... 1545-0123
1.167(a)-5T................................................ 1545-1021
1.167(a)-7................................................. 1545-0172
1.167(a)-11................................................ 1545-0152
1545-0172
1.167(a)-12................................................ 1545-0172
1.167(d)-1................................................. 1545-0172
1.167(e)-1................................................. 1545-0172
1.167(f)-11................................................ 1545-0172
1.167(l)-1................................................. 1545-0172
1.168(d)-1................................................. 1545-1146
1.168(f)(8)-1T............................................. 1545-0923
1.168(i)-1................................................. 1545-1331
1.168-5.................................................... 1545-0172
1.169-4.................................................... 1545-0172
1.170-1.................................................... 1545-0074
1.170-2.................................................... 1545-0074
1.170-3.................................................... 1545-0123
1.170A-1................................................... 1545-0074
1.170A-2................................................... 1545-0074
1.170A-4(A)(b)............................................. 1545-0123
1.170A-8................................................... 1545-0074
1.170A-9................................................... 1545-0052
1545-0074
1.170A-11.................................................. 1545-0074
1545-0123
1545-1868
1.170A-12.................................................. 1545-0020
1545-0074
1.170A-13.................................................. 1545-0074
1545-0754
1545-0908
1545-1431
1.170A-13(f)............................................... 1545-1464
1.170A-14.................................................. 1545-0763
1.171-4.................................................... 1545-1491
1.171-5.................................................... 1545-1491
1.172-1.................................................... 1545-0172
1.172-13................................................... 1545-0863
1.173-1.................................................... 1545-0172
1.174-3.................................................... 1545-0152
1.174-4.................................................... 1545-0152
1.175-3.................................................... 1545-0187
1.175-6.................................................... 1545-0152
1.177-1.................................................... 1545-0172
1.179-2.................................................... 1545-1201
1.179-3.................................................... 1545-1201
1.179-5.................................................... 1545-0172
1545-1201
1.179B-1T.................................................. 1545-2076
1.179C-1................................................... 1545-2103
1.179C-1T.................................................. 1545-2103
1.180-2.................................................... 1545-0074
1.181-1.................................................... 1545-2059
1.181-2.................................................... 1545-2059
1.181-3.................................................... 1545-2059
1.182-6.................................................... 1545-0074
1.183-1.................................................... 1545-0195
1.183-2.................................................... 1545-0195
1.183-3.................................................... 1545-0195
1.183-4.................................................... 1545-0195
1.190-3.................................................... 1545-0074
1.194-2.................................................... 1545-0735
1.194-4.................................................... 1545-0735
1.195-1.................................................... 1545-1582
1.197-1T................................................... 1545-1425
1.197-2.................................................... 1545-1671
1.199-6.................................................... 1545-1966
1.213-1.................................................... 1545-0074
1.215-1T................................................... 1545-0074
1.217-2.................................................... 1545-0182
1.243-3.................................................... 1545-0123
1.243-4.................................................... 1545-0123
1.243-5.................................................... 1545-0123
1.248-1.................................................... 1545-0172
1.261-1.................................................... 1545-1041
1.263(a)-1................................................. 1545-2248
1.263(a)-3................................................. 1545-2248
1.263(a)-5................................................. 1545-1870
1.263(e)-1................................................. 1545-0123
1.263A-1................................................... 1545-0987
1.263A-1T.................................................. 1545-0187
1.263A-2................................................... 1545-0987
1.263A-3................................................... 1545-0987
1.263A-8(b)(2)(iii)........................................ 1545-1265
1.263A-9(d)(1)............................................. 1545-1265
1.263A-9(f)(1)(ii)......................................... 1545-1265
1.263A-9(f)(2)(iv)......................................... 1545-1265
1.263A-9(g)(2)(iv)(C)...................................... 1545-1265
1.263A-9(g)(3)(iv)......................................... 1545-1265
1.265-1.................................................... 1545-0074
1.265-2.................................................... 1545-0123
1.266-1.................................................... 1545-0123
1.267(f)-1................................................. 1545-0885
1.268-1.................................................... 1545-0184
1.274-1.................................................... 1545-0139
1.274-2.................................................... 1545-0139
1.274-3.................................................... 1545-0139
1.274-4.................................................... 1545-0139
1.274-5.................................................... 1545-0771
1.274-5A................................................... 1545-0139
1545-0771
1.274-5T................................................... 1545-0074
1545-0172
1545-0771
1.274-6.................................................... 1545-0139
1545-0771
1.274-6T................................................... 1545-0074
1545-0771
1.274-7.................................................... 1545-0139
1.274-8.................................................... 1545-0139
1.279-6.................................................... 1545-0123
1.280C-4................................................... 1545-1155
1.280F-3T.................................................. 1545-0074
1.280G-1................................................... 1545-1851
1.281-4.................................................... 1545-0123
1.302-4.................................................... 1545-0074
1.305-3.................................................... 1545-0123
1.305-5.................................................... 1545-1438
1.307-2.................................................... 1545-0074
1.312-15................................................... 1545-0172
1.316-1.................................................... 1545-0123
1.331-1.................................................... 1545-0074
1.332-4.................................................... 1545-0123
1.332-6.................................................... 1545-2019
1.336-2.................................................... 1545-2125
1.336-4.................................................... 1545-2125
1.337(d)-1................................................. 1545-1160
1.337(d)-2................................................. 1545-1160
1545-1774
1.337(d)-4................................................. 1545-1633
1.337(d)-5................................................. 1545-1672
1.337(d)-6................................................. 1545-1672
1.337(d)-7................................................. 1545-1672
1.338-2.................................................... 1545-1658
1.338-5.................................................... 1545-1658
1.338-10................................................... 1545-1658
1.338-11................................................... 1545-1990
[[Page 678]]
1.338(h)(10)-1............................................. 1545-1658
1.338(i)-1................................................. 1545-1990
1.341-7.................................................... 1545-0123
1.351-3.................................................... 1545-2019
1.355-5.................................................... 1545-2019
1.362-2.................................................... 1545-0123
1.362-4.................................................... 1545-2247
1.367(a)-1T................................................ 1545-0026
1.367(a)-2T................................................ 1545-0026
1.367(a)-3................................................. 1545-0026
1545-1478
1.367(a)-3T................................................ 1545-2183
1.367(a)-6T................................................ 1545-0026
1.367(a)-7................................................. 1545-2183
1.367(a)-7T................................................ 1545-2183
1.367(a)-8................................................. 1545-1271
1545-2056
1545-2183
1.367(b)-1................................................. 1545-1271
1.367(b)-3T................................................ 1545-1666
1.367(d)-1T................................................ 1545-0026
1.367(e)-1................................................. 1545-1487
1.367(e)-2................................................. 1545-1487
1.368-1.................................................... 1545-1691
1.368-3.................................................... 1545-2019
1.371-1.................................................... 1545-0123
1.371-2.................................................... 1545-0123
1.374-3.................................................... 1545-0123
1.381(b)-1................................................. 1545-0123
1.381(c)(4)-1.............................................. 1545-0123
1545-0152
1545-0879
1.381(c)(5)-1.............................................. 1545-0123
1545-0152
1.381(c)(6)-1.............................................. 1545-0123
1545-0152
1.381(c)(8)-1.............................................. 1545-0123
1.381(c)(10)-1............................................. 1545-0123
1.381(c)(11)-1(k).......................................... 1545-0123
1.381(c)(13)-1............................................. 1545-0123
1.381(c)(17)-1............................................. 1545-0045
1.381(c)(22)-1............................................. 1545-1990
1.381(c)(25)-1............................................. 1545-0045
1.382-1T................................................... 1545-0123
1.382-2.................................................... 1545-0123
1.382-2T................................................... 1545-0123
1.382-3.................................................... 1545-1281
1545-1345
1.382-4.................................................... 1545-1120
1.382-6.................................................... 1545-1381
1.382-8.................................................... 1545-1434
1.382-9.................................................... 1545-1120
1545-1260
1545-1275
1545-1324
1.382-11................................................... 1545-2019
1.382-91................................................... 1545-1260
1545-1324
1.383-1.................................................... 1545-0074
1545-1120
1.401-1.................................................... 1545-0020
1545-0197
1545-0200
1545-0534
1545-0710
1.401(a)-11................................................ 1545-0710
1.401(a)-20................................................ 1545-0928
1.401(a)-31................................................ 1545-1341
1.401(a)-50................................................ 1545-0710
1.401(a)(9)-1.............................................. 1545-1573
1.401(a)(9)-3.............................................. 1545-1466
1.401(a)(9)-4.............................................. 1545-1573
1.401(a)(9)-6.............................................. 1545-2234
1.401(a)(31)-1............................................. 1545-1341
1.401(b)-1................................................. 1545-0197
1.401(f)-1................................................. 1545-0710
1.401(k)-1................................................. 1545-1039
1545-1069
1545-1669
1545-1930
1.401(k)-2................................................. 1545-1669
1.401(k)-3................................................. 1545-1669
1.401(k)-4................................................. 1545-1669
1.401(m)-3................................................. 1545-1699
1.401-12(n)................................................ 1545-0806
1.401-14................................................... 1545-0710
1.402(c)-2................................................. 1545-1341
1.402(f)-1................................................. 1545-1341
1545-1632
1.402A-1................................................... 1545-1992
1.403(b)-1................................................. 1545-0710
1.403(b)-3................................................. 1545-0996
1.403(b)-7................................................. 1545-1341
1.403(b)-10................................................ 1545-2068
1.404(a)-4................................................. 1545-0710
1.404(a)-12................................................ 1545-0710
1.404A-2................................................... 1545-0123
1.404A-6................................................... 1545-0123
1.408-2.................................................... 1545-0390
1.408-5.................................................... 1545-0747
1.408-6.................................................... 1545-0203
1545-0390
1.408-7.................................................... 1545-0119
1.408(q)-1................................................. 1545-1841
1.408A-2................................................... 1545-1616
1.408A-4................................................... 1545-1616
1.408A-5................................................... 1545-1616
1.408A-7................................................... 1545-1616
1.410(a)-2................................................. 1545-0710
1.410(d)-1................................................. 1545-0710
1.411(a)-11................................................ 1545-1471
1545-1632
1.411(d)-4................................................. 1545-1545
1.411(d)-6................................................. 1545-1477
1.412(b)-5................................................. 1545-0710
1.412(c)(1)-2.............................................. 1545-0710
1.412(c)(2)-1.............................................. 1545-0710
1.412(c)(3)-2.............................................. 1545-0710
1.414(c)-5................................................. 1545-0797
1.414(r)-1................................................. 1545-1221
1.415-2.................................................... 1545-0710
1.415-6.................................................... 1545-0710
1.417(a)(3)-1.............................................. 1545-0928
1.417(e)-1................................................. 1545-1471
1545-1724
1.417(e)-1T................................................ 1545-1471
1.419A(f)(6)-1............................................. 1545-1795
1.422-1.................................................... 1545-0820
1.430(f)-1................................................. 1545-2095
1.430(g)-1................................................. 1545-2095
1.430(h)(2)-1.............................................. 1545-2095
1.436-1.................................................... 1545-2095
1.441-2.................................................... 1545-1748
1.442-1.................................................... 1545-0074
1545-0123
1545-0134
1545-0152
1545-0820
1545-1748
1.443-1.................................................... 1545-0123
1.444-3T................................................... 1545-1036
1.444-4.................................................... 1545-1591
1.446-1.................................................... 1545-0074
1545-0152
[[Page 679]]
1.446-4(d)................................................. 1545-1412
1.448-1(g)................................................. 1545-0152
1.448-1(h)................................................. 1545-0152
1.448-1(i)................................................. 1545-0152
1.448-2.................................................... 1545-1855
1.448-2T................................................... 1545-0152
1545-1855
1.451-1.................................................... 1545-0091
1.451-4.................................................... 1545-0123
1.451-5.................................................... 1545-0074
1.451-6.................................................... 1545-0074
1.451-7.................................................... 1545-0074
1.453-1.................................................... 1545-0152
1.453-2.................................................... 1545-0152
1.453-8.................................................... 1545-0152
1545-0228
1.453-10................................................... 1545-0152
1.453A-1................................................... 1545-0152
1545-1134
1.453A-2................................................... 1545-0152
1545-1134
1.453A-3................................................... 1545-0963
1.454-1.................................................... 1545-0074
1.455-2.................................................... 1545-0152
1.455-6.................................................... 1545-0123
1.456-2.................................................... 1545-0123
1.456-6.................................................... 1545-0123
1.456-7.................................................... 1545-0123
1.457-8.................................................... 1545-1580
1.458-1.................................................... 1545-0879
1.458-2.................................................... 1545-0152
1.460-1.................................................... 1545-1650
1.460-6.................................................... 1545-1031
1545-1572
1545-1732
1.461-1.................................................... 1545-0074
1.461-2.................................................... 1545-0096
1.461-4.................................................... 1545-0917
1.461-5.................................................... 1545-0917
1.463-1T................................................... 1545-0916
1.465-1T................................................... 1545-0712
1.466-1T................................................... 1545-0152
1.466-4.................................................... 1545-0152
1.468A-3................................................... 1545-1269
1545-1378
1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d)..................... 1545-2091
1.468A-4................................................... 1545-0954
1.468A-7................................................... 1545-0954
1545-1511
1.468A-8................................................... 1545-1269
1.468B-1................................................... 1545-1631
1.468B-1(j)................................................ 1545-1299
1.468B-2(k)................................................ 1545-1299
1.468B-2(l)................................................ 1545-1299
1.468B-3(b)................................................ 1545-1299
1.468B-3(e)................................................ 1545-1299
1.468B-5(b)................................................ 1545-1299
1.468B-9................................................... 1545-1631
1.469-1.................................................... 1545-1008
1.469-2T................................................... 1545-0712
1545-1091
1.469-4T................................................... 1545-0985
1545-1037
1.469-7.................................................... 1545-1244
1.471-2.................................................... 1545-0123
1.471-5.................................................... 1545-0123
1.471-6.................................................... 1545-0123
1.471-8.................................................... 1545-0123
1.471-11................................................... 1545-0123
1545-0152
1.472-1.................................................... 1545-0042
1545-0152
1.472-2.................................................... 1545-0152
1.472-3.................................................... 1545-0042
1.472-5.................................................... 1545-0152
1.472-8.................................................... 1545-0028
1545-0042
1545-1767
1.475(a)-4................................................. 1545-1945
1.475(b)-4................................................. 1545-1496
1.481-4.................................................... 1545-0152
1.481-5.................................................... 1545-0152
1.482-1.................................................... 1545-1364
1.482-4.................................................... 1545-1364
1.482-7.................................................... 1545-1364
1545-1794
1.482-9(b)................................................. 1545-2149
1.501(a)-1................................................. 1545-0056
1545-0057
1.501(c)(3)-1.............................................. 1545-0056
1.501(c)(9)-5.............................................. 1545-0047
1.501(c)(17)-3............................................. 1545-0047
1.501(e)-1................................................. 1545-0814
1.501(r)-3................................................. 1545-0047
1.501(r)-4................................................. 1545-0047
1.501(r)-6................................................. 1545-0047
1.503(c)-1................................................. 1545-0047
1545-0052
1.505(c)-1T................................................ 1545-0916
1.507-1.................................................... 1545-0052
1.507-2.................................................... 1545-0052
1.508-1.................................................... 1545-0052
1545-0056
1.509(a)-3................................................. 1545-0047
1.509(a)-4................................................. 1545-2157
1.509(a)-5................................................. 1545-0047
1.509(c)-1................................................. 1545-0052
1.512(a)-1................................................. 1545-0687
1.512(a)-4................................................. 1545-0047
1545-0687
1.521-1.................................................... 1545-0051
1545-0058
1.527-2.................................................... 1545-0129
1.527-5.................................................... 1545-0129
1.527-6.................................................... 1545-0129
1.527-9.................................................... 1545-0129
1.528-8.................................................... 1545-0127
1.533-2.................................................... 1545-0123
1.534-2.................................................... 1545-0123
1.542-3.................................................... 1545-0123
1.545-2.................................................... 1545-0123
1.545-3.................................................... 1545-0123
1.547-2.................................................... 1545-0045
1545-0123
1.547-3.................................................... 1545-0123
1.551-4.................................................... 1545-0074
1.552-3.................................................... 1545-0099
1.552-4.................................................... 1545-0099
1.552-5.................................................... 1545-0099
1.556-2.................................................... 1545-0704
1.561-1.................................................... 1545-0044
1.561-2.................................................... 1545-0123
1.562-3.................................................... 1545-0123
1.563-2.................................................... 1545-0123
1.564-1.................................................... 1545-0123
1.565-1.................................................... 1545-0043
1545-0123
1.565-2.................................................... 1545-0043
1.565-3.................................................... 1545-0043
1.565-5.................................................... 1545-0043
1.565-6.................................................... 1545-0043
1.585-1.................................................... 1545-0123
1.585-3.................................................... 1545-0123
[[Page 680]]
1.585-8.................................................... 1545-1290
1.586-2.................................................... 1545-0123
1.593-1.................................................... 1545-0123
1.593-6.................................................... 1545-0123
1.593-6A................................................... 1545-0123
1.593-7.................................................... 1545-0123
1.595-1.................................................... 1545-0123
1.597-2.................................................... 1545-1300
1.597-4.................................................... 1545-1300
1.597-6.................................................... 1545-1300
1.597-7.................................................... 1545-1300
1.611-2.................................................... 1545-0099
1.611-3.................................................... 1545-0007
1545-0099
1545-1784
1.612-4.................................................... 1545-0074
1.612-5.................................................... 1545-0099
1.613-3.................................................... 1545-0099
1.613-4.................................................... 1545-0099
1.613-6.................................................... 1545-0099
1.613-7.................................................... 1545-0099
1.613A-3................................................... 1545-0919
1.613A-3(e)................................................ 1545-1251
1.613A-3(l)................................................ 1545-0919
1.613A-5................................................... 1545-0099
1.613A-6................................................... 1545-0099
1.614-2.................................................... 1545-0099
1.614-3.................................................... 1545-0099
1.614-5.................................................... 1545-0099
1.614-6.................................................... 1545-0099
1.614-8.................................................... 1545-0099
1.617-1.................................................... 1545-0099
1.617-3.................................................... 1545-0099
1.617-4.................................................... 1545-0099
1.631-1.................................................... 1545-0007
1.631-2.................................................... 1545-0007
1.641(b)-2................................................. 1545-0092
1.642(c)-1................................................. 1545-0092
1.642(c)-2................................................. 1545-0092
1.642(c)-5................................................. 1545-0074
1.642(c)-6................................................. 1545-0020
1545-0074
1545-0092
1.642(g)-1................................................. 1545-0092
1.642(i)-1................................................. 1545-0092
1.645-1.................................................... 1545-1578
1.663(b)-2................................................. 1545-0092
1.664-1.................................................... 1545-0196
1.664-1(a)(7).............................................. 1545-1536
1.664-1(c)................................................. 1545-2101
1.664-2.................................................... 1545-0196
1.664-3.................................................... 1545-0196
1.664-4.................................................... 1545-0020
1545-0196
1.665(a)-0A through
1.665(g)-2A................................................ 1545-0192
1.666(d)-1A................................................ 1545-0092
1.671-4.................................................... 1545-1442
1.671-5.................................................... 1545-1540
1.701-1.................................................... 1545-0099
1.702-1.................................................... 1545-0074
1.703-1.................................................... 1545-0099
1.704-2.................................................... 1545-1090
1.706-1.................................................... 1545-0074
1545-0099
1545-0134
1.706-1T................................................... 1545-0099
1.707-3(c)(2).............................................. 1545-1243
1.707-5(a)(7)(ii).......................................... 1545-1243
1.707-6(c)................................................. 1545-1243
1.707-8.................................................... 1545-1243
1.708-1.................................................... 1545-0099
1.732-1.................................................... 1545-0099
1545-1588
1.736-1.................................................... 1545-0074
1.743-1.................................................... 1545-0074
1545-1588
1.751-1.................................................... 1545-0074
1545-0099
1545-0941
1.752-2.................................................... 1545-1905
1.752-5.................................................... 1545-1090
1.752-7.................................................... 1545-1843
1.754-1.................................................... 1545-0099
1.755-1.................................................... 1545-0099
1.761-2.................................................... 1545-1338
1.801-1.................................................... 1545-0123
1545-0128
1.801-3.................................................... 1545-0123
1.801-5.................................................... 1545-0128
1.801-8.................................................... 1545-0128
1.804-4.................................................... 1545-0128
1.811-2.................................................... 1545-0128
1.812-2.................................................... 1545-0128
1.815-6.................................................... 1545-0128
1.818-4.................................................... 1545-0128
1.818-5.................................................... 1545-0128
1.818-8.................................................... 1545-0128
1.819-2.................................................... 1545-0128
1.821-1.................................................... 1545-1027
1.821-3.................................................... 1545-1027
1.821-4.................................................... 1545-1027
1.822-5.................................................... 1545-1027
1.822-6.................................................... 1545-1027
1.822-8.................................................... 1545-1027
1.822-9.................................................... 1545-1027
1.823-2.................................................... 1545-1027
1.823-5.................................................... 1545-1027
1.823-6.................................................... 1545-1027
1.825-1.................................................... 1545-1027
1.826-1.................................................... 1545-1027
1.826-2.................................................... 1545-1027
1.826-3.................................................... 1545-1027
1.826-4.................................................... 1545-1027
1.826-6.................................................... 1545-1027
1.831-3.................................................... 1545-0123
1.831-4.................................................... 1545-0123
1.832-4.................................................... 1545-1227
1.832-5.................................................... 1545-0123
1.848-2(g)(8).............................................. 1545-1287
1.848-2(h)(3).............................................. 1545-1287
1.848-2(i)(4).............................................. 1545-1287
1.851-2.................................................... 1545-1010
1.851-4.................................................... 1545-0123
1.852-1.................................................... 1545-0123
1.852-4.................................................... 1545-0123
1545-0145
1.852-6.................................................... 1545-0123
1545-0144
1.852-7.................................................... 1545-0074
1.852-9.................................................... 1545-0074
1545-0123
1545-0144
1545-0145
1545-1783
1.852-11................................................... 1545-1094
1.853-3.................................................... 1545-2035
1.853-4.................................................... 1545-2035
1.854-2.................................................... 1545-0123
1.855-1.................................................... 1545-0123
1.856-2.................................................... 1545-0123
1545-1004
1.856-6.................................................... 1545-0123
1.856-7.................................................... 1545-0123
[[Page 681]]
1.856-8.................................................... 1545-0123
1.857-8.................................................... 1545-0123
1.857-9.................................................... 1545-0074
1.858-1.................................................... 1545-0123
1.860-2.................................................... 1545-0045
1.860-4.................................................... 1545-0045
1545-1054
1545-1057
1.860E-1................................................... 1545-1675
1.860E-2(a)(5)............................................. 1545-1276
1.860E-2(a)(7)............................................. 1545-1276
1.860E-2(b)(2)............................................. 1545-1276
1.860G-2................................................... 1545-2110
1.861-2.................................................... 1545-0089
1.861-3.................................................... 1545-0089
1.861-4.................................................... 1545-1900
1.861-8.................................................... 1545-0126
1.861-8(e)(6) and (g)...................................... 1545-1224
1.861-9T................................................... 1545-0121
1545-1072
1.861-18................................................... 1545-1594
1.863-1.................................................... 1545-1476
1.863-3.................................................... 1545-1476
1545-1556
1.863-3A................................................... 1545-0126
1.863-4.................................................... 1545-0126
1.863-7.................................................... 1545-0132
1.863-8.................................................... 1545-1718
1.863-9.................................................... 1545-1718
1.864-4.................................................... 1545-0126
1.871-1.................................................... 1545-0096
1.871-6.................................................... 1545-0795
1.871-7.................................................... 1545-0089
1.871-10................................................... 1545-0089
1545-0165
1.874-1.................................................... 1545-0089
1.881-4.................................................... 1545-1440
1.882-4.................................................... 1545-0126
1.883-0.................................................... 1545-1677
1.883-1.................................................... 1545-1677
1.883-2.................................................... 1545-1677
1.883-3.................................................... 1545-1677
1.883-4.................................................... 1545-1677
1.883-5.................................................... 1545-1677
1.884-0.................................................... 1545-1070
1.884-1.................................................... 1545-1070
1.884-2.................................................... 1545-1070
1.884-2T................................................... 1545-0126
1545-1070
1.884-4.................................................... 1545-1070
1.884-5.................................................... 1545-1070
1.892-1T................................................... 1545-1053
1.892-2T................................................... 1545-1053
1.892-3T................................................... 1545-1053
1.892-4T................................................... 1545-1053
1.892-5T................................................... 1545-1053
1.892-6T................................................... 1545-1053
1.892-7T................................................... 1545-1053
1.897-2.................................................... 1545-0123
1545-0902
1.897-3.................................................... 1545-0123
1.897-5T................................................... 1545-0902
1.897-6T................................................... 1545-0902
1.901-2.................................................... 1545-0746
1.901-2A................................................... 1545-0746
1.901-3.................................................... 1545-0122
1.902-1.................................................... 1545-0122
1545-1458
1.904-1.................................................... 1545-0121
1545-0122
1.904-2.................................................... 1545-0121
1545-0122
1.904-3.................................................... 1545-0121
1.904-4.................................................... 1545-0121
1.904-5.................................................... 1545-0121
1.904-7.................................................... 1545-2104
1.904-7T................................................... 1545-2104
1.904(f)-1................................................. 1545-0121
1545-0122
1.904(f)-2................................................. 1545-0121
1.904(f)-3................................................. 1545-0121
1.904(f)-4................................................. 1545-0121
1.904(f)-5................................................. 1545-0121
1.904(f)-6................................................. 1545-0121
1.904(f)-7................................................. 1545-1127
1.905-2.................................................... 1545-0122
1.905-3T................................................... 1545-1056
1.905-4T................................................... 1545-1056
1.905-5T................................................... 1545-1056
1.911-1.................................................... 1545-0067
1545-0070
1.911-2.................................................... 1545-0067
1545-0070
1.911-3.................................................... 1545-0067
1545-0070
1.911-4.................................................... 1545-0067
1545-0070
1.911-5.................................................... 1545-0067
1545-0070
1.911-6.................................................... 1545-0067
1545-0070
1.911-7.................................................... 1545-0067
1545-0070
1.913-13................................................... 1545-0067
1.921-1T................................................... 1545-0190
1545-0884
1545-0935
1545-0939
1.921-2.................................................... 1545-0884
1.921-3T................................................... 1545-0935
1.923-1T................................................... 1545-0935
1.924(a)-1T................................................ 1545-0935
1.925(a)-1T................................................ 1545-0935
1.925(b)-1T................................................ 1545-0935
1.926(a)-1T................................................ 1545-0935
1.927(a)-1T................................................ 1545-0935
1.927(b)-1T................................................ 1545-0935
1.927(d)-1................................................. 1545-0884
1.927(d)-2T................................................ 1545-0935
1.927(e)-1T................................................ 1545-0935
1.927(e)-2T................................................ 1545-0935
1.927(f)-1................................................. 1545-0884
1.931-1.................................................... 1545-0074
1545-0123
1.934-1.................................................... 1545-0782
1.935-1.................................................... 1545-0074
1545-0087
1545-0803
1.936-1.................................................... 1545-0215
1545-0217
1.936-4.................................................... 1545-0215
1.936-5.................................................... 1545-0704
1.936-6.................................................... 1545-0215
1.936-7.................................................... 1545-0215
1.936-10(c)................................................ 1545-1138
1.937-1.................................................... 1545-1930
1.952-2.................................................... 1545-0126
1.953-2.................................................... 1545-0126
1.954-1.................................................... 1545-1068
1.954-2.................................................... 1545-1068
1.955-2.................................................... 1545-0123
1.955-3.................................................... 1545-0123
1.955A-2................................................... 1545-0755
1.955A-3................................................... 1545-0755
[[Page 682]]
1.956-1.................................................... 1545-0704
1.956-2.................................................... 1545-0704
1.959-1.................................................... 1545-0704
1.959-2.................................................... 1545-0704
1.960-1.................................................... 1545-0122
1.962-2.................................................... 1545-0704
1.962-3.................................................... 1545-0704
1.962-4.................................................... 1545-0704
1.964-1.................................................... 1545-0126
1545-0704
1545-1072
1545-2104
1.964-3.................................................... 1545-0126
1.970-2.................................................... 1545-0126
1.985-2.................................................... 1545-1051
1545-1131
1.985-3.................................................... 1545-1051
1.988-0.................................................... 1545-1131
1.988-1.................................................... 1545-1131
1.988-2.................................................... 1545-1131
1.988-3.................................................... 1545-1131
1.988-4.................................................... 1545-1131
1.988-5.................................................... 1545-1131
1.988-6.................................................... 1545-1831
1.992-1.................................................... 1545-0190
1545-0938
1.992-2.................................................... 1545-0190
1545-0884
1545-0938
1.992-3.................................................... 1545-0190
1545-0938
1.992-4.................................................... 1545-0190
1545-0938
1.993-3.................................................... 1545-0938
1.993-4.................................................... 1545-0938
1.994-1.................................................... 1545-0938
1.995-5.................................................... 1545-0938
1.1001-1................................................... 1545-1902
1.1012-1................................................... 1545-0074
1545-1139
1.1014-4................................................... 1545-0184
1.1015-1................................................... 1545-0020
1.1017-1................................................... 1545-1539
1.1031(d)-1T............................................... 1545-1021
1.1033(a)-2................................................ 1545-0184
1.1033(g)-1................................................ 1545-0184
1.1034-1................................................... 1545-0072
1.1039-1................................................... 1545-0184
1.1041-1T.................................................. 1545-0074
1.1041-2................................................... 1545-1751
1.1042-1T.................................................. 1545-0916
1.1044(a)-1................................................ 1545-1421
1.1045-1................................................... 1545-1893
1.1060-1................................................... 1545-1658
1545-1990
1.1071-1................................................... 1545-0184
1.1071-4................................................... 1545-0184
1.1081-4................................................... 1545-0028
1545-0046
1545-0123
1.1081-11.................................................. 1545-2019
1.1082-1................................................... 1545-0046
1.1082-2................................................... 1545-0046
1.1082-3................................................... 1545-0046
1545-0184
1.1082-4................................................... 1545-0046
1.1082-5................................................... 1545-0046
1.1082-6................................................... 1545-0046
1.1083-1................................................... 1545-0123
1.1092(b)-1T............................................... 1545-0644
1.1092(b)-2T............................................... 1545-0644
1.1092(b)-3T............................................... 1545-0644
1.1092(b)-4T............................................... 1545-0644
1.1092(b)-5T............................................... 1545-0644
1.1211-1................................................... 1545-0074
1.1212-1................................................... 1545-0074
1.1221-2................................................... 1545-1480
1.1231-1................................................... 1545-0177
1545-0184
1.1231-2................................................... 1545-0177
1545-0184
1.1231-2................................................... 1545-0074
1.1232-3................................................... 1545-0074
1.1237-1................................................... 1545-0184
1.1239-1................................................... 1545-0091
1.1242-1................................................... 1545-0184
1.1243-1................................................... 1545-0123
1.1244(e)-1................................................ 1545-0123
1545-1447
1.1245-1................................................... 1545-0184
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1.6662-4(e) and (f)........................................ 1545-0889
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1.6694-2(c)(3)............................................. 1545-1231
1.6694-3(e)................................................ 1545-1231
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1.7701(l)-3................................................ 1545-1642
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1.9100-1................................................... 1545-0074
1.9101-1................................................... 1545-0008
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2.1-5...................................................... 1545-0123
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2.1-11..................................................... 1545-0123
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2.1-26..................................................... 1545-0123
3.2........................................................ 1545-0123
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5c.44F-1................................................... 1545-0619
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5c.168(f)(8)-1............................................. 1545-0123
5c.168(f)(8)-2............................................. 1545-0123
5c.168(f)(8)-6............................................. 1545-0123
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6a.103A-2.................................................. 1545-0123
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11.410-1................................................... 1545-0710
11.412(c)-7................................................ 1545-0710
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12.7....................................................... 1545-0190
12.8....................................................... 1545-0191
12.9....................................................... 1545-0195
14a.422A-1................................................. 1545-0123
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20.2010-2T................................................. 1545-0015
20.2011-1.................................................. 1545-0015
20.2014-5.................................................. 1545-0015
1545-0260
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20.2016-1.................................................. 1545-0015
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20.2032A-8................................................. 1545-0015
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20.2055-2.................................................. 1545-0015
1545-0092
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20.2056(b)-4............................................... 1545-0015
20.2056(b)-7............................................... 1545-0015
1545-1612
20.2056A-2................................................. 1545-1443
20.2056A-3................................................. 1545-1360
20.2056A-4................................................. 1545-1360
20.2056A-10................................................ 1545-1360
20.2106-1.................................................. 1545-0015
20.2106-2.................................................. 1545-0015
20.2204-1.................................................. 1545-0015
20.2204-2.................................................. 1545-0015
20.6001-1.................................................. 1545-0015
20.6011-1.................................................. 1545-0015
20.6018-1.................................................. 1545-0015
1545-0531
20.6018-2.................................................. 1545-0015
20.6018-3.................................................. 1545-0015
20.6018-4.................................................. 1545-0015
1545-0022
20.6036-2.................................................. 1545-0015
20.6060-1(a)(1)............................................ 1545-1231
20.6061-1.................................................. 1545-0015
20.6065-1.................................................. 1545-0015
20.6075-1.................................................. 1545-0015
20.6081-1.................................................. 1545-0015
1545-0181
[[Page 687]]
1545-1707
20.6091-1.................................................. 1545-0015
20.6107-1.................................................. 1545-1231
20.6161-1.................................................. 1545-0015
1545-0181
20.6161-2.................................................. 1545-0015
1545-0181
20.6163-1.................................................. 1545-0015
20.6166-1.................................................. 1545-0181
20.6166A-1................................................. 1545-0015
20.6166A-3................................................. 1545-0015
20.6324A-1................................................. 1545-0754
20.7520-1.................................................. 1545-1343
20.7520-2.................................................. 1545-1343
20.7520-3.................................................. 1545-1343
20.7520-4.................................................. 1545-1343
22.0....................................................... 1545-0015
25.2511-2.................................................. 1545-0020
25.2512-2.................................................. 1545-0020
25.2512-3.................................................. 1545-0020
25.2512-5.................................................. 1545-0020
25.2512-9.................................................. 1545-0020
25.2513-1.................................................. 1545-0020
25.2513-2.................................................. 1545-0020
1545-0021
25.2513-3.................................................. 1545-0020
25.2518-2.................................................. 1545-0959
25.2522(a)-1............................................... 1545-0196
25.2522(c)-3............................................... 1545-0020
1545-0196
25.2523(a)-1............................................... 1545-0020
1545-0196
25.2523(f)-1............................................... 1545-0015
25.2701-2.................................................. 1545-1241
25.2701-4.................................................. 1545-1241
25.2701-5.................................................. 1545-1273
25.2702-5.................................................. 1545-1485
25.2702-6.................................................. 1545-1273
25.6001-1.................................................. 1545-0020
1545-0022
25.6011-1.................................................. 1545-0020
25.6019-1.................................................. 1545-0020
25.6019-2.................................................. 1545-0020
25.6019-3.................................................. 1545-0020
25.6019-4.................................................. 1545-0020
25.6060-1(a)(1)............................................ 1545-1231
25.6061-1.................................................. 1545-0020
25.6065-1.................................................. 1545-0020
25.6075-1.................................................. 1545-0020
25.6081-1.................................................. 1545-0020
25.6091-1.................................................. 1545-0020
25.6091-2.................................................. 1545-0020
25.6107-1.................................................. 1545-1231
25.6151-1.................................................. 1545-0020
25.6161-1.................................................. 1545-0020
25.7520-1.................................................. 1545-1343
25.7520-2.................................................. 1545-1343
25.7520-3.................................................. 1545-1343
25.7520-4.................................................. 1545-1343
26.2601-1.................................................. 1545-0985
26.2632-1.................................................. 1545-0985
1545-1892
26.2642-1.................................................. 1545-0985
26.2642-2.................................................. 1545-0985
26.2642-3.................................................. 1545-0985
26.2642-4.................................................. 1545-0985
26.2642-6.................................................. 1545-1902
26.2652-2.................................................. 1545-0985
26.2654-1.................................................. 1545-1902
26.2662-1.................................................. 1545-0015
1545-0985
26.2662-2.................................................. 1545-0985
26.6060-1(a)(1)............................................ 1545-1231
26.6107-1.................................................. 1545-1231
31.3102-3.................................................. 1545-0029
1545-0059
1545-0065
31.3121(b)(19)-1........................................... 1545-0029
31.3121(d)-1............................................... 1545-0004
31.3121(i)-1............................................... 1545-0034
31.3121(k)-4............................................... 1545-0137
31.3121(r)-1............................................... 1545-0029
31.3121(s)-1............................................... 1545-0029
31.3121(v)(2)-1............................................ 1545-1643
31.3302(a)-2............................................... 1545-0028
31.3302(a)-3............................................... 1545-0028
31.3302(b)-2............................................... 1545-0028
31.3302(e)-1............................................... 1545-0028
31.3306(c)(18)-1........................................... 1545-0029
31.3401(a)-1............................................... 1545-0029
31.3401(a)(6).............................................. 1545-1484
31.3401(a)(6)-1............................................ 1545-0029
1545-0096
1545-0795
31.3401(a)(7)-1............................................ 1545-0029
31.3401(a)(8)(A)-1 ........................................ 1545-0029
1545-0666
31.3401(a)(8)(C)-1 ........................................ 1545-0029
31.3401(a)(15)-1........................................... 1545-0182
31.3401(c)-1............................................... 1545-0004
31.3402(b)-1............................................... 1545-0010
31.3402(c)-1............................................... 1545-0010
31.3402(f)(1)-1............................................ 1545-0010
31.3402(f)(2)-1............................................ 1545-0010
1545-0410
31.3402(f)(3)-1............................................ 1545-0010
31.3402(f)(4)-1............................................ 1545-0010
31.3402(f)(4)-2............................................ 1545-0010
31.3402(f)(5)-1............................................ 1545-0010
1545-1435
31.3402(h)(1)-1............................................ 1545-0029
31.3402(h)(3)-1............................................ 1545-0010
1545-0029
31.3402(h)(4)-1............................................ 1545-0010
31.3402(i)-(1)............................................. 1545-0010
31.3402(i)-(2)............................................. 1545-0010
31.3402(k)-1............................................... 1545-0065
31.3402(l)-(1)............................................. 1545-0010
31.3402(m)-(1)............................................. 1545-0010
31.3402(n)-(1)............................................. 1545-0010
31.3402(o)-2............................................... 1545-0415
31.3402(o)-3............................................... 1545-0008
1545-0010
1545-0415
1545-0717
31.3402(p)-1............................................... 1545-0415
1545-0717
31.3402(q)-1............................................... 1545-0238
1545-0239
31.3404-1.................................................. 1545-0029
31.3405(c)-1............................................... 1545-1341
31.3406(a)-1............................................... 1545-0112
31.3406(a)-2............................................... 1545-0112
31.3406(a)-3............................................... 1545-0112
31.3406(a)-4............................................... 1545-0112
31.3406(b)(2)-1............................................ 1545-0112
31.3406(b)(2)-2............................................ 1545-0112
31.3406(b)(2)-3............................................ 1545-0112
31.3406(b)(2)-4............................................ 1545-0112
31.3406(b)(2)-5............................................ 1545-0112
31.3406(b)(3)-1............................................ 1545-0112
31.3406(b)(3)-2............................................ 1545-0112
31.3406(b)(3)-3............................................ 1545-0112
31.3406(b)(3)-4............................................ 1545-0112
[[Page 688]]
31.3406(b)(4)-1............................................ 1545-0112
31.3406(c)-1............................................... 1545-0112
31.3406(d)-1............................................... 1545-0112
31.3406(d)-2............................................... 1545-0112
31.3406(d)-3............................................... 1545-0112
31.3406(d)-4............................................... 1545-0112
31.3406(d)-5............................................... 1545-0112
31.3406(e)-1............................................... 1545-0112
31.3406(f)-1............................................... 1545-0112
31.3406(g)-1............................................... 1545-0096
1545-0112
1545-1819
31.3406(g)-2............................................... 1545-0112
31.3406(g)-3............................................... 1545-0112
31.3406(h)-1............................................... 1545-0112
31.3406(h)-2............................................... 1545-0112
31.3406(h)-3............................................... 1545-0112
31.3406(i)-1............................................... 1545-0112
31.3501(a)-1T.............................................. 1545-0771
31.3503-1.................................................. 1545-0024
31.3504-1.................................................. 1545-0029
31.6001-1.................................................. 1545-0798
31.6001-2.................................................. 1545-0034
1545-0798
31.6001-3.................................................. 1545-0798
31.6001-4.................................................. 1545-0028
31.6001-5.................................................. 1545-0798
31.6001-6.................................................. 1545-0029
1459-0798
31.6011(a)-1............................................... 1545-0029
1545-0034
1545-0035
1545-0059
1545-0074
1545-0256
1545-0718
1545-2097
31.6011(a)-2............................................... 1545-0001
1545-0002
31.6011(a)-3............................................... 1545-0028
31.6011(a)-3A.............................................. 1545-0955
31.6011(a)-4............................................... 1545-0034
1545-0035
1545-0718
1545-1413
1545-2097
31.6011(a)-5............................................... 1545-0028
1545-0718
1545-2097
31.6011(a)-6............................................... 1545-0028
31.6011(a)-7............................................... 1545-0074
31.6011(a)-8............................................... 1545-0028
31.6011(a)-9............................................... 1545-0028
31.6011(a)-10.............................................. 1545-0112
31.6011(b)-1............................................... 1545-0003
31.6011(b)-2............................................... 1545-0029
31.6051-1.................................................. 1545-0008
1545-0182
1545-0458
1545-1729
31.6051-2.................................................. 1545-0008
31.6051-3.................................................. 1545-0008
31.6053-1.................................................. 1545-0029
1545-0062
1545-0064
1545-0065
1545-1603
31.6053-2.................................................. 1545-0008
31.6053-3.................................................. 1545-0065
1545-0714
31.6053-4.................................................. 1545-0065
1545-1603
31.6060-1(a)(1)............................................ 1545-1231
31.6065(a)-1............................................... 1545-0029
31.6071(a)-1............................................... 1545-0001
1545-0028
1545-0029
31.6071(a)-1A.............................................. 1545-0955
31.6081(a)-1............................................... 1545-0008
1545-0028
31.6091-1.................................................. 1545-0028
1545-0029
31.6107-1.................................................. 1545-1231
31.6157-1.................................................. 1545-0955
31.6205-1.................................................. 1545-0029
1545-2097
31.6301(c)-1AT............................................. 1545-0035
1545-0112
1545-0257
31.6302-1.................................................. 1545-1413
31.6302-2.................................................. 1545-1413
31.6302-3.................................................. 1545-1413
31.6302-4.................................................. 1545-1413
31.6302(c)-2............................................... 1545-0001
1545-0257
31.6302(c)-2A.............................................. 1545-0955
31.6302(c)-3............................................... 1545-0257
31.6402(a)-2............................................... 1545-0256
1545-2097
31.6413(a)-1............................................... 1545-0029
1545-2097
31.6413(a)-2............................................... 1545-0029
1545-0256
1545-2097
31.6413(c)-1............................................... 1545-0029
1545-0171
31.6414-1.................................................. 1545-0029
1545-2097
32.1....................................................... 1545-0029
1545-0415
32.2....................................................... 1545-0029
35a.3406-2................................................. 1545-0112
35a.9999-5................................................. 1545-0029
36.3121(l)(1)-1............................................ 1545-0137
36.3121(l)(1)-2............................................ 1545-0137
36.3121(l)(3)-1............................................ 1545-0123
36.3121(1)(7)-1............................................ 1545-0123
36.3121(1)(10)-1........................................... 1545-0029
36.3121(1)(10)-3........................................... 1545-0029
36.3121(1)(10)-4........................................... 1545-0257
40.6060-1(a)(1)............................................ 1545-1231
40.6107-1.................................................. 1545-1231
40.6302(c)-3(b)(2)(ii)..................................... 1545-1296
40.6302(c)-3(b)(2)(iii).................................... 1545-1296
40.6302(c)-3(e)............................................ 1545-1296
40.6302(c)-3(f)(2)(ii)..................................... 1545-1296
41.4481-1.................................................. 1545-0143
41.4481-2.................................................. 1545-0143
41.4483-3.................................................. 1545-0143
41.6001-1.................................................. 1545-0143
41.6001-2.................................................. 1545-0143
41.6001-3.................................................. 1545-0143
41.6060-1(a)(1)............................................ 1545-1231
41.6071(a)-1............................................... 1545-0143
41.6081(a)-1............................................... 1545-0143
41.6091-1.................................................. 1545-0143
41.6107-1.................................................. 1545-1231
41.6109-1.................................................. 1545-0143
41.6151(a)-1............................................... 1545-0143
41.6156-1.................................................. 1545-0143
41.6161(a)(1)-1............................................ 1545-0143
44.4401-1.................................................. 1545-0235
44.4403-1.................................................. 1545-0235
44.4412-1.................................................. 1545-0236
[[Page 689]]
44.4901-1.................................................. 1545-0236
44.4905-1.................................................. 1545-0236
44.4905-2.................................................. 1545-0236
44.6001-1.................................................. 1545-0235
44.6011(a)-1............................................... 1545-0235
1545-0236
44.6060-1(a)(1)............................................ 1545-1231
44.6071-1.................................................. 1545-0235
44.6091-1.................................................. 1545-0235
44.6107-1.................................................. 1545-1231
44.6151-1.................................................. 1545-0235
44.6419-1.................................................. 1545-0235
44.6419-2.................................................. 1545-0235
46.4371-4.................................................. 1545-0023
46.4374-1.................................................. 1545-0023
46.4375-1.................................................. 1545-2238
46.4376-1.................................................. 1545-2238
46.4701-1.................................................. 1545-0023
1545-0257
48.4041-4.................................................. 1545-0023
48.4041-5.................................................. 1545-0023
48.4041-6.................................................. 1545-0023
48.4041-7.................................................. 1545-0023
48.4041-9.................................................. 1545-0023
48.4041-10................................................. 1545-0023
48.4041-11................................................. 1545-0023
48.4041-12................................................. 1545-0023
48.4041-13................................................. 1545-0023
48.4041-18................................................. 1545-0023
48.4041-19................................................. 1545-0023
48.4041-20................................................. 1545-0023
48.4041-21................................................. 1545-1270
48.4042-2.................................................. 1545-0023
48.4052-1.................................................. 1545-1418
48.4061(a)-1............................................... 1545-0023
48.4061(a)-2............................................... 1545-0023
48.4061(b)-3............................................... 1545-0023
48.4064-1.................................................. 1545-0014
1545-0242
48.4071-1.................................................. 1545-0023
48.4073-1.................................................. 1545-0023
48.4073-3.................................................. 1545-0023
1545-1074
1545-1087
48.4081-2.................................................. 1545-1270
1545-1418
48.4081-3.................................................. 1545-1270
1545-1418
1545-1897
48.4081-4(b)(2)(ii)........................................ 1545-1270
48.4081-4(b)(3)(i)......................................... 1545-1270
48.4081-4(c)............................................... 1545-1270
48.4081-6(c)(1)(ii)........................................ 1545-1270
48.4081-7.................................................. 1545-1270
1545-1418
48.4082-1T................................................. 1545-1418
48.4082-2.................................................. 1545-1418
48.4082-6.................................................. 1545-1418
48.4082-7.................................................. 1545-1418
48.4091-3.................................................. 1545-1418
48.4101-1.................................................. 1545-1418
48.4101-1T................................................. 1545-1418
48.4101-2.................................................. 1545-1418
48.4161(a)-1............................................... 1545-0723
48.4161(a)-2............................................... 1545-0723
48.4161(a)-3............................................... 1545-0723
48.4161(b)-1............................................... 1545-0723
48.4216(a)-2............................................... 1545-0023
48.4216(a)-3............................................... 1545-0023
48.4216(c)-1............................................... 1545-0023
48.4221-1.................................................. 1545-0023
48.4221-2.................................................. 1545-0023
48.4221-3.................................................. 1545-0023
48.4221-4.................................................. 1545-0023
48.4221-5.................................................. 1545-0023
48.4221-6.................................................. 1545-0023
48.4221-7.................................................. 1545-0023
48.4222(a)-1............................................... 1545-0014
1545-0023
48.4223-1.................................................. 1545-0023
1545-0257
1545-0723
48.6302(c)-1............................................... 1545-0023
1545-0257
48.6412-1.................................................. 1545-0723
48.6416(a)-1............................................... 1545-0023
1545-0723
48.6416(a)-2............................................... 1545-0723
48.6416(a)-3............................................... 1545-0723
48.6416(b)(1)-1............................................ 1545-0723
48.6416(b)(1)-2............................................ 1545-0723
48.6416(b)(1)-3............................................ 1545-0723
48.6416(b)(1)-4............................................ 1545-0723
48.6416(b)(2)-1............................................ 1545-0723
48.6416(b)(2)-2............................................ 1545-0723
48.6416(b)(2)-3............................................ 1545-0723
1545-1087
48.6416(b)(2)-4............................................ 1545-0723
48.6416(b)(3)-1............................................ 1545-0723
48.6416(b)(3)-2............................................ 1545-0723
48.6416(b)(3)-3............................................ 1545-0723
48.6416(b)(4)-1............................................ 1545-0723
48.6416(b)(5)-1............................................ 1545-0723
48.6416(c)-1............................................... 1545-0723
48.6416(e)-1............................................... 1545-0023
1545-0723
48.6416(f)-1............................................... 1545-0023
1545-0723
48.6416(g)-1............................................... 1545-0723
48.6416(h)-1............................................... 1545-0723
48.6420(c)-2............................................... 1545-0023
48.6420(f)-1............................................... 1545-0023
48.6420-1.................................................. 1545-0162
1545-0723
48.6420-2.................................................. 1545-0162
1545-0723
48.6420-3.................................................. 1545-0162
1545-0723
48.6420-4.................................................. 1545-0162
1545-0723
48.6420-5.................................................. 1545-0162
1545-0723
48.6420-6.................................................. 1545-0162
1545-0723
48.6421-0.................................................. 1545-0162
1545-0723
48.6421-1.................................................. 1545-0162
1545-0723
48.6421-2.................................................. 1545-0162
1545-0723
48.6421-3.................................................. 1545-0162
1545-0723
48.6421-4.................................................. 1545-0162
1545-0723
48.6421-5.................................................. 1545-0162
1545-0723
48.6421-6.................................................. 1545-0162
1545-0723
48.6421-7.................................................. 1545-0162
1545-0723
48.6424-0.................................................. 1545-0723
48.6424-1.................................................. 1545-0723
48.6424-2.................................................. 1545-0723
48.6424-3.................................................. 1545-0723
[[Page 690]]
48.6424-4.................................................. 1545-0723
48.6424-5.................................................. 1545-0723
48.6424-6.................................................. 1545-0723
48.6427-0.................................................. 1545-0723
48.6427-1.................................................. 1545-0023
1545-0162
1545-0723
48.6427-2.................................................. 1545-0162
1545-0723
48.6427-3.................................................. 1545-0723
48.6427-4.................................................. 1545-0723
48.6427-5.................................................. 1545-0723
48.6427-8.................................................. 1545-1418
48.6427-9.................................................. 1545-1418
48.6427-10................................................. 1545-1418
48.6427-11................................................. 1545-1418
49.4251-1.................................................. 1545-1075
49.4251-2.................................................. 1545-1075
49.4251-4(d)(2)............................................ 1545-1628
49.4253-3.................................................. 1545-0023
49.4253-4.................................................. 1545-0023
49.4264(b)-1............................................... 1545-0023
1545-0224
1545-0225
1545-0226
1545-0230
1545-0257
1545-0912
49.4271-1(d)............................................... 1545-0685
49.5000B-1................................................. 1545-2177
51.2(f)(2)(ii)............................................. 1545-2209
51.7....................................................... 1545-2209
52.4682-1(b)(2)(iii)....................................... 1545-1153
52.4682-2(b)............................................... 1545-1153
1545-1361
52.4682-2(d)............................................... 1545-1153
1545-1361
52.4682-3(c)(2)............................................ 1545-1153
52.4682-3(g)............................................... 1545-1153
52.4682-4(f)............................................... 1545-0257
1545-1153
52.4682-5(d)............................................... 1545-1361
52.4682-5(f)............................................... 1545-1361
53.4940-1.................................................. 1545-0052
1545-0196
53.4942(a)-1............................................... 1545-0052
53.4942(a)-2............................................... 1545-0052
53.4942(a)-3............................................... 1545-0052
53.4942(b)-3............................................... 1545-0052
53.4945-1.................................................. 1545-0052
53.4945-4.................................................. 1545-0052
53.4945-5.................................................. 1545-0052
53.4945-6.................................................. 1545-0052
53.4947-1.................................................. 1545-0196
53.4947-2.................................................. 1545-0196
53.4948-1.................................................. 1545-0052
53.4958-6.................................................. 1545-1623
53.4961-2.................................................. 1545-0024
53.4963-1.................................................. 1545-0024
53.6001-1.................................................. 1545-0052
53.6011-1.................................................. 1545-0049
1545-0052
1545-0092
1545-0196
53.6060-1(a)(1)............................................ 1545-1231
53.6065-1.................................................. 1545-0052
53.6071-1.................................................. 1545-0049
53.6081-1.................................................. 1545-0066
1545-0148
53.6107-1.................................................. 1545-1231
53.6161-1.................................................. 1545-0575
54.4972-1.................................................. 1545-0197
54.4975-7.................................................. 1545-0575
54.4977-1T................................................. 1545-0771
54.4980B-6................................................. 1545-1581
54.4980B-7................................................. 1545-1581
54.4980B-8................................................. 1545-1581
54.4980F-1................................................. 1545-1780
54.4981A-1T................................................ 1545-0203
54.6011-1.................................................. 1545-0575
54.6011-1T................................................. 1545-0575
54.6060-1(a)(1)............................................ 1545-1231
54.6107-1.................................................. 1545-1231
54.9801-3.................................................. 1545-1537
54.9801-4.................................................. 1545-1537
54.9801-5.................................................. 1545-1537
54.9801-6.................................................. 1545-1537
54.9812-1T................................................. 1545-2165
54.9815-1251T.............................................. 1545-2178
54.9815-2711T.............................................. 1545-2179
54.9815-2712T.............................................. 1545-2180
54.9815-2714T.............................................. 1545-2172
54.9815-2715............................................... 1545-2229
54.9815-2719AT............................................. 1545-2181
54.9815-2719T.............................................. 1545-2182
55.6001-1.................................................. 1545-0123
55.6011-1.................................................. 1545-0123
1545-0999
1545-1016
55.6060-1(a)(1)............................................ 1545-1231
55.6061-1.................................................. 1545-0999
55.6071-1.................................................. 1545-0999
55.6107-1.................................................. 1545-1231
56.4911-6.................................................. 1545-0052
56.4911-7.................................................. 1545-0052
56.4911-9.................................................. 1545-0052
56.4911-10................................................. 1545-0052
56.6001-1.................................................. 1545-1049
56.6011-1.................................................. 1545-1049
56.6060-1(a)(1)............................................ 1545-1231
56.6081-1.................................................. 1545-1049
56.6107-1.................................................. 1545-1231
56.6161-1.................................................. 1545-0257
1545-1049
57.2(e)(2)(i).............................................. 1545-2249
145.4051-1................................................. 1545-0745
145.4052-1................................................. 1545-0120
1545-0745
1545-1076
145.4061-1................................................. 1545-0224
1545-0230
1545-0257
1545-0745
156.6001-1................................................. 1545-1049
156.6011-1................................................. 1545-1049
156.6060-1(a)(1)........................................... 1545-1231
156.6081-1................................................. 1545-1049
156.6107-1................................................. 1545-1231
156.6161-1................................................. 1545-1049
157.6001-1................................................. 1545-1824
157.6011-1................................................. 1545-1824
157.6060-1(a)(1)........................................... 1545-1231
157.6081-1................................................. 1545-1824
157.6107-1................................................. 1545-1231
157.6161-1................................................. 1545-1824
301.6011-2................................................. 1545-0225
1545-0350
1545-0387
1545-0441
1545-0957
301.6011(g)-1.............................................. 1545-2079
301.6017-1................................................. 1545-0090
301.6034-1................................................. 1545-0092
301.6035-1................................................. 1545-0123
[[Page 691]]
301.6036-1................................................. 1545-0013
1545-0773
301.6047-1................................................. 1545-0367
1545-0957
301.6056-1................................................. 1545-2251
301.6056-2................................................. 1545-2251
301.6057-1................................................. 1545-0710
301.6057-2................................................. 1545-0710
301.6058-1................................................. 1545-0710
301.6059-1................................................. 1545-0710
301.6103(c)-1.............................................. 1545-1816
301.6103(n)-1.............................................. 1545-1841
301.6103(p)(2)(B)-1........................................ 1545-1757
301.6104(a)-1.............................................. 1545-0495
301.6104(a)-5.............................................. 1545-0056
301.6104(a)-6.............................................. 1545-0056
301.6104(b)-1.............................................. 1545-0094
1545-0742
301.6104(d)-1.............................................. 1545-1655
301.6104(d)-2.............................................. 1545-1655
301.6104(d)-3.............................................. 1545-1655
301.6109-1................................................. 1545-0003
1545-0295
1545-0367
1545-0387
1545-0957
1545-1461
1545-2242
301.6109-3................................................. 1545-1564
301.6110-3................................................. 1545-0074
301.6110-5................................................. 1545-0074
301.6111-1T................................................ 1545-0865
1545-0881
301.6111-2................................................. 1545-0865
1545-1687
301.6112-1................................................. 1545-0865
1545-1686
301.6112-1T................................................ 1545-0865
1545-1686
301.6114-1................................................. 1545-1126
1545-1484
301.6222(a)-2.............................................. 1545-0790
301.6222(b)-1.............................................. 1545-0790
301.6222(b)-2.............................................. 1545-0790
301.6222(b)-3.............................................. 1545-0790
301.6223(b)-1.............................................. 1545-0790
301.6223(c)-1.............................................. 1545-0790
301.6223(e)-2.............................................. 1545-0790
301.6223(g)-1.............................................. 1545-0790
301.6223(h)-1.............................................. 1545-0790
301.6224(b)-1.............................................. 1545-0790
301.6224(c)-1.............................................. 1545-0790
301.6224(c)-3.............................................. 1545-0790
301.6227(c)-1.............................................. 1545-0790
301.6227(d)-1.............................................. 1545-0790
301.6229(b)-2.............................................. 1545-0790
301.6230(b)-1.............................................. 1545-0790
301.6230(e)-1.............................................. 1545-0790
301.6231(a)(1)-1........................................... 1545-0790
301.6231(a)(7)-1........................................... 1545-0790
301.6231(c)-1.............................................. 1545-0790
301.6231(c)-2.............................................. 1545-0790
301.6241-1T................................................ 1545-0130
301.6316-4................................................. 1545-0074
301.6316-5................................................. 1545-0074
301.6316-6................................................. 1545-0074
301.6316-7................................................. 1545-0029
301.6324A-1................................................ 1545-0015
301.6361-1................................................. 1545-0024
1545-0074
301.6361-2................................................. 1545-0024
301.6361-3................................................. 1545-0074
301.6402-2................................................. 1545-0024
1545-0073
1545-0091
301.6402-3................................................. 1545-0055
1545-0073
1545-0091
1545-0132
1545-1484
301.6402-5................................................. 1545-0928
301.6404-1................................................. 1545-0024
301.6404-2T................................................ 1545-0024
301.6404-3................................................. 1545-0024
301.6405-1................................................. 1545-0024
301.6501(c)-1.............................................. 1545-1241
1545-1637
301.6501(d)-1.............................................. 1545-0074
1545-0430
301.6501(o)-2.............................................. 1545-0728
301.6511(d)-1.............................................. 1545-0024
1545-0582
301.6511(d)-2.............................................. 1545-0024
1545-0582
301.6511(d)-3.............................................. 1545-0024
1545-0582
301.6652-2................................................. 1545-0092
301.6685-1................................................. 1545-0092
301.6689-1T................................................ 1545-1056
301.6707-1T................................................ 1545-0865
1545-0881
301.6708-1T................................................ 1545-0865
301.6712-1................................................. 1545-1126
301.6723-1A(d)............................................. 1545-0909
301.6903-1................................................. 1545-0013
1545-1783
301.6905-1................................................. 1545-0074
301.7001-1................................................. 1545-0123
301.7101-1................................................. 1545-1029
301.7207-1................................................. 1545-0092
301.7216-2................................................. 1545-0074
301.7216-2(o).............................................. 1545-1209
301.7425-3................................................. 1545-0854
301.7430-2(c).............................................. 1545-1356
301.7502-1................................................. 1545-1899
301.7507-8................................................. 1545-0123
301.7507-9................................................. 1545-0123
301.7513-1................................................. 1545-0429
301.7517-1................................................. 1545-0015
301.7605-1................................................. 1545-0795
301.7623-1................................................. 1545-0409
1545-1534
301.7654-1................................................. 1545-0803
301.7701-3................................................. 1545-1486
301.7701-4................................................. 1545-1465
301.7701-7................................................. 1545-1600
301.7701-16................................................ 1545-0795
301.7701(b)-1.............................................. 1545-0089
301.7701(b)-2.............................................. 1545-0089
301.7701(b)-3.............................................. 1545-0089
301.7701(b)-4.............................................. 1545-0089
301.7701(b)-5.............................................. 1545-0089
301.7701(b)-6.............................................. 1545-0089
301.7701(b)-7.............................................. 1545-0089
1545-1126
301.7701(b)-9.............................................. 1545-0089
301.7805-1................................................. 1545-0805
301.9000-5................................................. 1545-1850
301.9001-1................................................. 1545-0220
301.9100-2................................................. 1545-1488
301.9100-3................................................. 1545-1488
301.9100-4T................................................ 1545-0016
1545-0042
1545-0074
[[Page 692]]
1545-0129
1545-0172
1545-0619
301.9100-6T................................................ 1545-0872
301.9100-7T................................................ 1545-0982
301.9100-8................................................. 1545-1112
301.9100-11T............................................... 1545-0123
301.9100-12T............................................... 1545-0026
1545-0074
1545-0172
1545-1027
301.9100-14T............................................... 1545-0046
301.9100-15T............................................... 1545-0046
301.9100-16T............................................... 1545-0152
302.1-7.................................................... 1545-0024
305.7701-1................................................. 1545-0823
305.7871-1................................................. 1545-0823
404.6048-1................................................. 1545-0160
420.0-1.................................................... 1545-0710
Part 509................................................... 1545-0846
Part 513................................................... 1545-0834
Part 514................................................... 1545-0845
Part 521................................................... 1545-0848
601.104.................................................... 1545-0233
601.105.................................................... 1545-0091
601.201.................................................... 1545-0019
1545-0819
601.204.................................................... 1545-0152
601.401.................................................... 1545-0257
601.504.................................................... 1545-0150
601.601.................................................... 1545-0800
601.602.................................................... 1545-0295
1545-0387
1545-0957
601.702.................................................... 1545-0429
------------------------------------------------------------------------
(26 U.S.C. 7805)
[T.D. 8011, 50 FR 10222, Mar. 14, 1985]
Editorial Note: For Federal Register citations affecting Sec.
602.101, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
[[Page 693]]
List of CFR Sections Affected
All changes in this volume of the Code of Federal Regulations (CFR) that
were made by documents published in the Federal Register since January
1, 2010 are enumerated in the following list. Entries indicate the
nature of the changes effected. Page numbers refer to Federal Register
pages. The user should consult the entries for chapters, parts and
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the
annual edition of the monthly List of CFR Sections Affected (LSA). The
LSA is available at www.fdsys.gov. For changes to this volume of the CFR
prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 1964-
1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. The
``List of CFR Sections Affected 1986-2000'' is available at
www.fdsys.gov.
2010
26 CFR
75 FR
Page
Chapter I
Technical correction...........................3160, 26061, 52267, 65567
Authority citation amended......9102, 17856, 27931, 33991, 44903, 49386,
49401, 64084, 64135, 75899, 78161, 80701
2011
26 CFR
76 FR
Page
Chapter I
1 Technical correction....708, 27609, 36996, 43891, 51878, 53818, 55256,
61946
Authority citation amended........17528, 28892, 33995, 36994, 36998,
49571, 65111, 71879, 75777, 78559, 80087, 80250, 81080
1.41-0 Amended.....................................................33995
1.41-0T Removed....................................................33995
1.41-6 (b)(1), (c)(2), (e) introductory text, (j) introductory
text heading and (3) revised; (e) Example 7 added..........33995
1.41-6T Removed....................................................33996
1.41-8 Heading, (b)(2), (3), (4)(ii) and (5) revised...............33996
1.41-8T Removed....................................................33996
1.41-9 Revised.....................................................33996
1.41-9T Removed....................................................33997
1.45D-0 Added......................................................75777
1.45D-1 (a), (d)(4)(i) introductory text and (h) heading revised;
(b)(1), (d)(4)(i)(A), (B)(1), (C) and (iv)(A) amended;
(d)(9) and (h)(3) added....................................75778
2012
26 CFR
77 FR
Page
Chapter I
1 Technical correction....................3605, 5700, 9845, 41048, 50373
Authority citation amended...6006, 26178, 27614, 30385, 36915, 45483
1.36B-0 Added......................................................30385
1.36B-1 Added......................................................30385
1.36B-2 Added......................................................30385
1.36B-3 Added......................................................30385
(g)(3) Example 1 correctly amended.............................41048
1.36B-4 Added......................................................30385
(b)(6) Example 5 correctly amended.............................41048
(b)(6) Example 9 corrected.....................................41270
1.36B-5 Added......................................................30385
1.42-18 Added......................................................26178
1.45D-0 Amended....................................................59546
1.45D-1 (c)(1)(iii), (3)(ii) introductory text and (d)(1)(i)
revised; (h)(1) amended; (c)(8), (d)(10) and (h)(4) added
59546
[[Page 694]]
2013
26 CFR
78 FR
Page
Chapter I
1 Authority citation amended............................667, 5899, 17030
Technical correction......................................3325, 9802
1.36B-2 (c)(3)(v)(A)(2) and (D) Example 2 revised...................7265
2014
26 CFR
79 FR
Page
Chapter I
1 Technical correction........................18161, 24331, 45683, 65142
Authority citation amended........26117, 37639, 41888, 48667, 51091,
67351, 73824
1.36B-0 Amended....................................................26117
1.36B-2 (b)(2) and (c)(3)(v)(C) revised; (d) added.................43626
1.36B-2T Added.....................................................43627
1.36B-3 (g)(1) revised; (m) added..................................43627
1.36B-3T Added.....................................................43627
1.36B-4 (b)(5) removed; (b)(6) redesignated as new (b)(5);
(a)(1)(ii), (4) Example 4, (b)(3), (4) and new (b)(5)
Example 9 revised; (a)(3)(iii), (4) Examples 10 through
14, new (b)(5) Example 10 and (c) added....................43627
1.36B-4T Added.....................................................43628
1.36B-5 Revised....................................................26117
1.41-9 (b)(2) revised..............................................31864
1.41-9T Added......................................................31864
1.45R-0 Added......................................................36646
1.45R-1 Added......................................................36646
1.45R-2 Added......................................................36646
1.45R-3 Added......................................................36646
1.45R-4 Added......................................................36646
1.45R-5 Added......................................................36646
2015
(Regulations published from January 1, 2015, through April 1, 2015)
26 CFR
80 FR
Page
Chapter I
1 Authority citation amended..........................7326, 13238, 17317
Technical correction....................................12760, 12761
1.41-9 (b)(2) revised; (d) added...................................10589
1.41-9T Removed....................................................10590
[all]