25 CFR 277.42 Canceling a contract for cause.
(a) Any contract entered into under this part may be canceled for
cause when the contractor fails to perform the work called for under the
contract.
(b) Before canceling the contract, the Bureau will advise the
contractor in writing of the following:
(1) The reasons why the Bureau is considering canceling the contract.
(2) That the contractor will be given an opportunity to bring its
work up to an acceptable level.
(c) If the contractor does not overcome the deficiencies in its
contract performance, the Bureau shall cancel the contract for cause.
The Bureau will notify the contractor, in writing, of the cancellation.
The notice shall give the reasons for the cancellation and the right of
the contractor to appeal under subpart C of 43 CFR part 4.
(d) When a contract is cancelled for cause, the Bureau will either
perform the work with its own forces or by another contract, as
appropriate.
25 CFR 277.42 Subpart E -- Appeals
25 CFR 277.51 Contract appeal.
A contractor may appeal an adverse decision or action of a Bureau
contracting officer regarding a contract under this part as provided in
subpart C of 43 CFR part 4.
25 CFR 277.52 Appeal from decision to cancel contract for cause.
A contractor may appeal the decision of a Bureau official to cancel a
contract under this part for cause. The appeal shall be made as
provided in subpart C of 43 CFR part 4.
25 CFR 277.53 Other appeals.
Any decision or action taken by a Bureau official under this part,
other than those given in 277.51 and 277.52, may be appealed only as
provided in part 2 of this chapter.
25 CFR 277.53 Part 278
25 CFR 277.53 PART 278 -- SPECIAL GRANTS FOR ECONOMIC DEVELOPMENT AND CORE MANAGEMENT GRANTS TO SMALL TRIBES
25 CFR 277.53 Subpart A -- General Provisions
Sec.
278.1 Purpose.
278.2 Definitions.
278.3 Information collection.
278.4 Effect on Indian rights.
278.5 Request from tribal governing body.
278.6 Participation.
278.7 Uniform administrative requirements.
278.8 Appeals from administrative actions.
25 CFR 277.53 Subpart B -- Special Grants for Economic Development
278.11 Purposes of grants.
278.12 Eligible applicants.
278.13 Application form and content.
278.14 Grant requirements and limitations.
278.15 Application selection criteria.
278.16 Application review process.
278.17 Grant administration.
278.18 Subgrants and contracts.
25 CFR 277.53 Subpart C -- Core Management Grants to Small Tribes
278.21 Purposes of grants.
278.22 Eligibility criteria.
278.23 Pre-application technial assistance.
278.24 Content of application.
278.25 Application review process.
278.26 Grant administration.
278.27 Grant renewal.
Authority: 25 U.S.C. 13.
Source: 48 FR 32007, July 13, 1983, unless otherwise noted.
25 CFR 277.53 Subpart A -- General Provisions
25 CFR 278.1 Purpose.
The purpose of the regulations in this part is to provide the
application and approval procedures for the award of economic
development grants and for the award of core management grants to small
tribes for the strengthening and improvement of tribal governments.
25 CFR 278.2 Definitions.
As used in this part:
(a) Applicant means a tribal governing body or tribal organization
applying for a grant under this part.
(b) Area Director means the official in charge of a Bureau of Indian
Affairs Area Office.
(c) Assistant Secretary -- Indian Affairs means the Assistant
Secretary -- Indian Affairs who discharges the authority and
responsibility of the Secretary for the activities pertaining to Indians
and Indian Affairs.
(d) Bureau means the Bureau of Indian Affairs.
(e) Commissioner means the operational head of the Bureau of Indian
Affairs, under the direction and supervision of the Assistant Secretary
-- Indian Affairs, who is responsible for the direction of day-to-day
operations of the Bureau of Indian Affairs.
(f) Core management grant means a grant, the purpose of which is to
enable small tribes to supplement other resources in order to employ
staff to administer tribal affairs and programs as well as Federal
programs in a competent and responsible manner.
(g) Economic enterprise means any commercial, industrial,
agricultural, or business activity that is established or organized for
the purpose of profit.
(h) Economic development grant means a grant for the development,
construction, improvement, or operation of tribal facilities or
reservation resources for the purpose of profit.
(i) Grant means a written agreement between the Bureau and a tribal
governing body or a tribal organization where the Bureau provides funds
to carry out specified programs, services, or activities and where the
administrative and programmatic provisions are specified.
(j) Grantee means a tribal governing body or a tribal organization
which is responsible for administration of the grant.
(k) Indian means a person who is a member of an Indian tribe.
(l) In kind means assets such as buildings, machinery, equipment or
other physical resources which are utilized in the economic enterprise
and which are appraised at fair market value by a qualified appraiser.
(m) Multi-tribal organization means a group of two or more tribes
banding together to apply for a grant under this Part; the organization
must have a governing body with representation from each member tribe
and have selected a chairman or other designated head of the
organization from among its members.
(n) Non-Federal source means tribal funds, investments from the
private sector, or loans from private lending institutions.
(o) Secretary means the Secretary of the Interior.
(p) Small tribe means an Indian tribe with a population of 1500 or
less Indian people residing on or near the tribe's reservation.
(q) Superintendent means the official in charge of a Bureau of Indian
Affairs Agency office.
(r) Tribal government, tribal governing body, and tribal council
means the recognized governing body of an Indian tribe.
(s) Tribal organization means the recognized governing body of any
Indian tribe; any legally established organization of Indians which is
controlled, sanctioned or chartered by such governing body or which is
democratically elected by the adult members of the Indian community to
be served by such organization and which includes the maximum
participation of Indians in all phases of its activities: Provided,
That in any case where a grant is made to an organization to perform
services benefitting more than one Indian tribe, the approval of each
such Indian tribe shall be a prerequisite to the awarding of such grant.
(t) Tribe means any Indian tribe, Band, Nation, Rancheria, Pueblo,
Colony, or Community, including any Alaska Native village or regional or
village corporation as defined in or established pursuant to the Alaska
Native Claims Settlement Act (85 Stat. 688) which is federally
recognized as eligible by the U.S. Government through the Secretary for
the special programs and services provided by the Secretary to Indians
because of their status as Indians.
(u) Tribal resolution means the formal manner in which the tribal
government expresses its legislative will pursuant to its organic
documents. In the absence of such organic documents, a written
expression adopted pursuant to current tribal practices will be
acceptable.
25 CFR 278.3 Information collection.
The information collection requirements contained in 278.12,
278.13, 278.17, 278.22, 278.24 and 278.26 have been approved by the
Office of Management and Budget under 44 U.S.C. 3501 et seq. and
assigned clearance number 1076-0077 for Economic Development Grants and
1076-0078 for Core Management Grants. The information is being
collected to ensure eligibility and grant criteria compliance. The
information will be used to determine which applicants will receive
grants under this part. Response is required to obtain a benefit.
25 CFR 278.4 Effect on Indian rights.
The regulations in this part are not meant to and do not:
(a) Affect, modify, diminish, or otherwise impair the sovereign
immunity from suit enjoyed by an Indian tribe; or
(b) Authorize, require, or permit the termination of any existing
trust responsibility of the United States with respect to the Indian
people.
25 CFR 278.5 Request from tribal governing body.
The Bureau shall not make a grant under this part unless specifically
and officially requested to do so by a tribal governing body. This
request may be in the form of a tribal resolution, an endorsement
included in the grant application or such other forms as the tribal
constitution or current practice requires. For a multi-tribal
organization, a tribal resolution from each participating tribe shall be
required.
25 CFR 278.6 Participation.
Participation of eligible tribes or tribal organizations under this
part will be on a voluntary basis and grants will be awarded subject to
availability of funds.
25 CFR 278.7 Uniform administrative requirements.
Administrative requirements for all grants provided under this part
shall be those prescribed in 25 CFR part 276, save for any which are
applicable only to grants awarded under Section 104 of the Indian
Self-Determination and Education Assistance Act, 25 U.S.C. 450(h).
25 CFR 278.8 Appeals from Administrative actions.
(a) An applicant for a grant, or a grantee, may appeal any decision
made or action taken with regard to their application or grant. If the
action or decision being appealed is made by an Agency Superintendent,
the appeal shall be to the appropriate Area Director. If an Area
Director's decision or action is being appealed, the appeal shall be to
the Commissioner. The time periods in which appeals may be taken and
the appeal procedures to be followed for appeals to Area Directors and
the Commissioner are set out in 25 CFR part 2. No appeal lies from the
Commissioner's decision, which is final for the Department.
(b) The appellant shall provide its own attorney or other advocates
to represent it during the appeal process.
25 CFR 278.8 Subpart B -- Special Grants for Economic Development
25 CFR 278.11 Purposes of grants.
In order to strengthen and improve tribal governments, grants shall:
(a) Provide funds for the establishment or expansion of locally
determined profit making economic enterprises which generate income and
employment opportunities for participating tribes.
(b) Serve as an inducement when combined with a tribe's financial and
other resources to attract private sector investment or loans from
private lending institutions for the development of the tribe's
resources.
(c) Reduce tribal dependence on the Federal Government over the long
term through economic development projects which contribute to a stable
reservation economy.
25 CFR 278.12 Eligible applicants.
Applications for economic development grants will be accepted only
from the governing body of a tribe or a tribal organization which is
unable to meet its total financing needs for economic development
projects or enterprises from its own resources and/or by loans or equity
investment from private, non-Federal sources.
25 CFR 278.13 Application form and content.
Applicants for economic development grants will follow the
application requirements procedures set forth in Attachment M of the
Office of Management and Budget Circular A-102. In addition, each
proposal shall include the following:
(a) A concise description of the tribal government organizational
structure with emphasis on the political stability and financial
responsibility of its operations in recent years. Also describe the
relationship between the tribal governing body and planned management of
the enterprise, with emphasis on independence of the enterprise from the
tribe's political processes.
(b) A plan showing conformity of the proposed project to long range
tribal goals.
(c) A schedule for the start and projected completion dates for
actions or efforts to implement and maintain operation of the proposed
project; include timetable for major purchase of equipment, building
construction, production start up and projections as to when the project
will reach break even point and become profit making.
(d) Projected work force requirements for a period of three years
that will identify management, labor and the technical expertise for the
project. Where relevant to the business plan, provide reservation labor
force data as to availability and skill level of the local labor force,
training needs and any other information pertaining to the fulfillment
of labor force requirements of the project.
(e) Each application shall contain a business plan which includes an
analysis of all factors affecting the feasibility of the proposed
enterprise. A model business plan outline is included in the program
guidelines.
25 CFR 278.14 Grant requirements and limitations.
(a) Applicant's must be able to obtain at least 75 percent of the
total project financing required fron non-Federal sources. Loans
guaranteed or subsidized by the United States shall not be considered as
a non-Federal source. Provided, tribes may provided up to 25 percent of
the project cost as an in kind contribution, as defined in 278.2, when
the in kind contribution is used as an essential part of the project.
Appraised land value may be used as in kind contributions for up to 10
percent of the project cost, but in no instance shall the total in kind
contribution be credited as meeting the non-Federal share in an amount
in excess of 25 percent of the cost of the project or $500,000, which
ever is the lesser amount.
(b) No grant will be awarded in excess of $500,000 nor will a project
with a total cost of less than $100,000 be considered for a grant.
(c) Applicants shall provide evidence of a stable tribal government
structure which will ensure the continuity of the enterprise. The
applicant must have a record of fiscal responsibility and demonstrate
the integrity and capability of the organization which will manage the
proposed enterprise.
(d) Grant funds may not be used for refinancing or debt consolidation
for past financial obligations.
(e) A grantee will not be considered for a subsequent grant if in
violation of conditions of a previous grant under this subpart.
(f) Grant approvals shall be subject to availability of funds which
are directly appropriated for implementation of Special Grants for
Economic Development.
(g) Grant funds may not be used for any purpose other than that for
which the grant was awarded.
(h) Grantees will be required to return unused grant funds to the
Bureau of Indian Affairs if the economic enterprise for which the grant
was approved is not initiated, i.e., lease obtained, if needed,
construction started, equipment purchased or other activity essential to
commencing project operations, within the time stated in the grant
agreement. The Bureau of Indian Affairs may, if warranted by
circumstances beyond the control of the grantee, extend the time to
allow for initiation of the enterprise, provided there is assurance the
enterprise will be initiated forthwith within the extended time period.
The Bureau of Indian Affairs will notify the grantee and any lender or
investor, if appropriate, in writing, of a proposed action to require
the return of unused grant funds or of a proposal to extend the time.
25 CFR 278.15 Application selection criteria.
Grants made under this subpart must demonstrate a high potential for
success based on the following rating criteria:
(a) The potential for profitability and long range benefits to the
tribe.
(b) Anticipated return on investment.
(c) Managerial capability including fiscal accountability of proposed
tribal enterprise.
(d) Degree of independence of economic enterprise management from the
political structure of the applicant.
(e) Relative proportion of tribal and private sector investment to
requested grant funds.
25 CFR 278.16 Application review process.
An application for a grant under this subpart shall be processed in
the following manner:
(a) Superintendent's responsibility. Upon receipt of an application
for a grant under this subpart, the Superintendent shall:
(1) Acknowledge in writing receipt of the application within five
days of its arrival at the Agency office.
(2) Review the application for completeness and conformity to the
purpose of the program. If the application meets all the requirements
of this subpart, it shall be forwarded with comments and recommendations
within 15 calendar days to the Area Director and Commissioner for
further action.
(3) Based on the review, inform the applicant, in writing, of any
special problems or impediments which are likely to result in
disapproval; offer whatever technical assistance available to help in
overcoming such problems or impediments.
(b) Area Director's responsibility. Upon receipt of an application
for a grant the Area Director shall:
(1) Review the application for completeness of information required
by administrative directives including 278.13 of this part.
(2) Assess the feasibility of the proposal taking into consideration
the comments and recommendations of the Superintendent and its
conformity to objectives of this subpart.
(3) If additional data is necessary to establish the feasibility of
the proposed project, notify the applicant and Superintendent, and offer
technical assistance to provide the necessary data.
(4) Within 15 calendar days of receipt of the application, forward
the feasibility assessment and any other comments pertinent to the
application to the Commissioner.
(c) Central office review and decision. Upon initial receipt of an
application for a grant, the Commissioner shall within 5 days notify the
applicant of its receipt and within 60 calendar days:
(1) Review the application for conformity to the objectives and
purposes of the program as defined in 278.11, 278.13 and 278.14.
(2) Evaluate the application applying the criteria as prescribed by
278.15.
(3) Approve or disapprove the application and, if approved, determine
the amount of the grant funds to be awarded.
(4) The Commissioner may hold a pre-award conference with the
applicant to negotiate changes in the proposed project if such
modifications will enhance the potential of the proposed project.
(5) In the event of an application disapproval, provide the applicant
detailed reasons for such action.
(6) A grantee may appeal any adverse decision.
(d) The Commissioner, upon actual notice to all tribes, may establish
due dates for submission of grant applications under this subpart.
25 CFR 278.17 Grant administration.
Day-to-day oversight responsibility for approved individual tribal
grants shall rest with Agency offices with guidance, support and
assistance provided by Area offices. Bureau Central office staff shall
have overall responsibility for the administration, monitoring and
evaluation of grants awarded under this subpart. Administrative
requirements for all grants provided under this part shall be those
prescribed in 25 CFR part 276, save for any which are applicable only to
grants awarded under Section 104 of the Indian Self-Determination and
Education Assistance Act, 25 U.S.C. 450(h).
25 CFR 278.18 Subgrants and contracts.
The grantee may make subgrants or subcontracts under this subpart
provided that such subgrants are for the purpose for which the grant was
made and the grantee retains administrative and financial responsibility
over the activity with the approval of the Commissioner.
25 CFR 278.18 Subpart C -- Core Management Grants to Small Tribes
25 CFR 278.21 Purposes of grants.
(a) Purposes of grants under this subpart are:
(1) To supplement the resources of small tribes in order to permit
them to address basic or core tribal management needs such as an
administrator, bookkeeper and clerical support.
(2) Through such assistance, enable small tribes to overcome problems
associated with governmental operations and the administration of tribal
and Federal programs, with particular emphasis being placed on financial
accountability.
(3) Contribute to the stability of tribal governments and set a
climate for community and economic development and other activity
designed to reduce tribal dependency and promote small tribes exercise
of self-determination.
(b) In order to accomplish the purpose of the grants under this
subpart, applicants may request assistance to meet their respective
management needs in a variety of ways. Some examples of how applicants
may use core management grants are as follows:
(1) Employ an overall programs administrator and necessary support
staff if applicant operates several Federal programs and lacks financial
resources to employ such personnel.
(2) Employ a bookkeeper when a multi-tribal organization which
operates several Federal programs experiences problems because of
untrained bookkeeping staff.
(3) Hire a ''circuit rider'' accountant to establish and maintain a
financial management system for each member tribe of a multi-tribal
organization. A large multi-tribal organization may establish a
''circuit rider office'' staffed by an accountant and necessary support
staff.
(4) Employ a tribal planner or economic development specialist if the
tribe has substantial, identifiable undeveloped resources and does not
have funds to plan for the development of such resources.
(5) Employ staff to address specific and/or identifiable managerial
problems under a one time only grant.
(6) Retain an accountant to perform annual independent audits.
25 CFR 278.22 Eligibility criteria.
The governing body of any small tribe or multi-tribal organization
may apply for a grant under this subpart provided that:
(a) The tribe or multi-tribal organization meets the definition for a
small tribe contained in 278.2, under one of the following criteria:
(1) To be eligible for a grant as a small tribe, a tribe must have a
population of at least 400 and not more than 1,500 Indian people living
on or near the reservation.
(2) To receive a grant as a multi-tribal organization or consortium,
each member tribe of the organization must have a population of less
than 400 Indian persons living on or near the reservation.
(3) Exceptions: Exceptions to 278.22(a) (1) and (2) may be made
based on any one of the following criteria:
(i) A Multi-tribal organization consisting primarily of small tribes
currently receiving Federal support for a program is eligible to apply
for a grant under this subpart regardless of the population of any of
its member tribes.
(ii) A tribe with a population of less than 400 which presently
administers three (3) or more Federal grants or contracts as an
individual tribe may apply for a grant as an individual grantee.
(iii) The tribe is geographically isolated thereby making a
multi-tribal funding arrangement impractical.
(b) The tribe or multi-tribal organization can demonstrate or
document that it experiences three or more of the following problems or
has needs in at least three of the areas cited below:
(1) A lack of financial resources to meet its core administrative or
management needs.
(2) Audit reports indicate serious financial management problems.
(3) Delinquency in making progress or financial status reports.
(4) Failure to close-out program grants or contracts which are no
longer in operation.
(5) Problems in achieving current or past contract or grant program
goals and objectives.
(6) Inability to plan and develop identifiable reservation resources.
(7) Inability to develop acceptable grant or contract applications.
(8) Largely dependent on Federal grants or contracts for programs,
services, income and job opportunities.
(c) The applicant makes a commitment as part of the tribal
resolution, as prescribed in 278.5, to establish and maintain a sound
management system.
(d) No elected tribal official may receive a salary or any other form
of compensation from a grant under this subpart.
25 CFR 278.23 Pre-application technical assistance.
Technical assistance to develop and prepare an application for a
grant will be provided to the extent practicable by the Agency office on
request of an applicant.
25 CFR 278.24 Content of application.
(a) Applications for a grant under this subpart shall follow the
application requirements set forth in Attachment M of the Office of
Management and Budget Circular A-102.
(b) The application shall also contain program narrative statements
which include:
(1) A statement of the specific needs and/or problems to be addressed
under the proposed grant as provided by 278.22(b).
(2) A description of how the grant funds will be used to overcome the
problems or meet the needs which have been identified.
(3) A schedule for the start and projected completion dates for
actions or efforts to be taken to resolve problems or meet needs
identified under the grant.
(4) A detailed description of how grant funds will be used in
coordination with, or, to supplement, self-determination grants and/or
contracts, or funds from other agencies.
(5) A budget justification which indicates how grant funds will be
used to carry out the actions or efforts and achieve the goals and
objectives of the proposed application.
(c) The applicant must indicate how other available resources such as
tribal income, self-determination grants or capacity building grants
from other agencies will be committed to complement or support this
effort.
25 CFR 278.25 Application review process.
(a) Agency office responsibility. Applications for a grant under
this subpart shall be initially submitted to the appropriate Agency
Superintendent for review and comment to insure that the application is
consistent with 278.21, 278.22 and 278.24. Grant approvals shall be
subject to the availability of funds which are directly appropriated for
implementation of Core Management Grants to Small Tribes. The
Superintendent shall upon receipt of the application:
(1) Acknowledge in writing receipt of the application within five
days of its arrival at the Agency office.
(2) Review the application for completeness of information and,
within 10 days, request any additional information which may be required
to conduct a review of the application.
(3) If the application is sufficiently complete, forward it to the
Area Director with comments and recommendations to approve or disapprove
within 15 working days of its receipt.
(4) In instances where disapproval of an application is recommended,
the Superintendent shall provide detailed reasons for the
recommendation.
(b) Area office responsibility. Upon receipt of the application the
Area Director shall:
(1) Conduct a review of each application for consistency with
278.21, 278.22 and 278.24 and utilize comments and recommendations of
the Superintendent.
(2) Upon completion of the application review process the Area
Director shall initiate, within 15 working days, one of the following
actions:
(i) Approve the application for funding based on the application
review and Superintendent's recommendation.
(ii) Disagree with the Superintendent's recommendation to disapprove
based on his/her own review of the application, and approve the grant.
(iii) Delay the decision on whether to approve or disapprove the
application if it is marginal or contains minor deficiencies. Return
the application with a cover letter containing suggestions or guidance
for revising the application to make it acceptable for funding.
(iv) Delay the decision to approve or disapprove if the application
contains major but remediable deficiencies. Return to the applicant and
Agency office with a notification to the applicant that it may request
technical assistance to overcome deficiencies.
(v) Disapprove the application based on the reasons set forth by the
Superintendent and upon Area office review. Notify the applicant by
explanatory letter of the decision to disapprove the application,
advising the applicant of its appeal rights.
25 CFR 278.26 Grant administration.
Day-to-day monitoring responsibility for approved individual tribal
grants shall rest with Agency offices with guidance, support and
assistance provided by Area offices. The Area office shall have overall
responsibility for the approval, administration, and evaluation of
grants awarded under this subpart. Administrative requirements for all
grants provided under this part shall be those prescribed in 25 CFR part
276, save for any which are applicable only to grants awarded under
Section 104 of the Indian Self-Determination and Education Assistance
Act, 25 U.S.C. 450(h).
25 CFR 278.27 Grant renewal.
Grants under this subpart are intended to permit small tribes to
establish and maintain a competent core management capability.
Succeeding year grants may be awarded contingent on available
appropriations, provided that:
(a) The first year grant goals and objectives were so sufficiently
complex and/or difficult that they could not be achieved in a single
year or the needs to be addressed are of an on-going nature.
(b) The grantee tribe or multi-tribal organization continues to
experience administrative problems and does not have sufficient
resources to continue its efforts to establish a competent, responsible
management system.
(c) A tribe has substantial undeveloped resources, is largely
dependent on the Federal Government and lacks the financial ability to
develop its resources.
(d) Substantial progress has been made in achieving previous year
goals and objectives as evidenced by:
(1) Delinquent audits and/or current audits have been, or are being,
reconciled.
(2) Delinquent reports have been submitted and past grants or
contracts have been properly closed out.
(3) Monitoring and financial status reports indicate that the grantee
is meeting, or is beginning to meet, the goals and objectives of the
programs it administers and is following sound financial management
practices.
25 CFR 278.27 SUBCHAPTER N -- ECONOMIC ENTERPRISES
25 CFR 278.27 PART 286 -- INDIAN BUSINESS DEVELOPMENT PROGRAM
Sec.
286.1 Definitions.
286.2 Purpose.
286.3 Eligible applicants.
286.4 Eligible economic enterprises.
286.5 Information collection.
286.6 (Reserved)
286.7 Location of enterprise.
286.8 Priority criteria.
286.9 Environmental and flood disaster protection.
286.10 Preservation of historical and archeological data.
286.11 Management and technical assistance.
286.12 Content of application.
286.13 -- 286.14 (Reserved)
286.15 Application procedures.
286.16 Grant approval authority.
286.17 Grant limitations and requirements.
286.18 Written notice.
286.19 (Reserved)
286.20 Disbursement of grant funds.
286.21 Return of unused funds.
286.22 Reports.
Authority: 25 U.S.C. 1524.
Source: 39 FR 44748, Dec. 27, 1974, unless otherwise noted.
Redesignated at 47 FR 13328, Mar. 30, 1982.
Editorial Note: Nomenclature changes to part 286 appear at 55 FR
36273, Sept. 5, 1990.
25 CFR 286.1 Definitions.
As used in this part 286:
Area Director means the Bureau of Indian Affairs official in charge
of an area office or his authorized representative.
Assistant Secretary means the Assistant Secretary -- Indian Affairs
of the United States Department of the Interior or the official in the
Bureau of Indian Affairs to whom the Assistant Secretary has delegated
authority to act on behalf of the Assistant Secretary.
Cooperative Association means an association of individuals organized
pursuant to state, Federal, or tribal law, for the purpose of owning and
operating an economic enterprise for profit with profits distributed or
allocated to patrons who are members of the organization.
Corporation means an entity organized pursuant to state, Federal, or
tribal law, with or without stock, for the purpose of owning and
operating an economic enterprise.
Economic enterprise means any Indian-owned, commercial, industrial,
agricultural, or business activity established or organized for the
purpose of profit, provided that eligible Indian ownership constitutes
not less than 51 per centum of the enterprise.
Grantee(s) means the recipient(s) of a nonreimburseable grant under
this part.
Indian means a person who is a member of an Indian tribe or a person
of Alaska Native descent who is a shareholder in a corporation organized
under the Alaska Native Claims Settlement Act (85 Stat. 688), as
amended.
Partnership means a form of business organization in which two or
more legal persons are associated as co-owners for the purposes of
business or professional activities for private pecuniary gain.
Profits means the net income earned after deducting operating
expenses from operating revenues.
Reservation means Indian reservation, California rancheria, public
domain Indian allotment, former Indian reservation in Oklahoma, and land
held by Alaska Native groups incorporated under the provisions of the
Alaska Native Claims Settlement Act (85 Stat. 688), as amended.
Secretary means the Secretary of the Interior.
Superintendent means the Bureau official in charge of a Bureau agency
office or other local office reporting to an Area Director.
Tribe means any Indian tribe, band, nation, rancheria, pueblo, colony
or community, including any Alaska Native village or any regional,
village, urban or group corporation as defined in or established
pursuant to the Alaska Native Claims Settlement Act (85 Stat. 688) as
amended, which is recognized by the Federal Government as eligible for
services from the Bureau of Indian Affairs.
(55 FR 36273, Sept. 5, 1990)
25 CFR 286.2 Purpose.
The purpose of this part 286 is to prescribe the regulations and
procedures under which non-reimbursable grants may be made to eligible
applicants to stimulate and increase Indian entrepreneurship and
employment through establishment, acquisition or expansion of
profit-making Indian-owned economic enterprises which will contribute to
the economy of a reservation.
25 CFR 286.3 Eligible applicants.
Applications for grants may be accepted only from individual Indians,
Indian tribes, Indian partnerships, corporations or cooperative
associations authorized to do business under State, Federal, or Tribal
law. These applicants must have a form of organization acceptable to
the Assistant Secretary and unable to meet their total financing needs
from their own resources and by loans from other sources such as banks,
Farmers Home Administration, Small Business Administration, Production
Credit Associations, and Federal Land Banks. Associations, corporations
or partnerships shall be at least fifty-one percent owned by eligible
Indians or an eligible Indian tribe. This Indian ownership must
actively participate in the management and operation of the economic
enterprise by representation on the board of directors of a corporation
or cooperative association proportionate to the Indian ownership which
will enable the Indian owner(s) to control management decisions. The
legal organization documents will provide for the number of Indians
which are to be on the board of directors, how they along with other
directors will be elected or appointed and qualifications required as a
condition for becoming a member of the board of directors. The legal
organization documents shall provide safeguards which will prevent
Indian ownership and control from decreasing below fifty-one percent.
Evidence of Indian ownership in a cooperative association or corporation
will be evidenced by stock ownership, if stock is or has been issued, or
by other evidence satisfactory to the Assistant Secretary. Partnerships
will be evidenced by written partnership agreements which show the
percentage of Indian ownership, role and authority in making management
decisions in controlling the operation of the economic enterprise.
25 CFR 286.4 Eligible economic enterprises.
An economic enterprise as defined in 286.1(k) is eligible to receive
equity capital through non-reimbursable grants if it is or will be
self-sustaining and profit-oriented and will create employment for
Indians. In the case of Indian-owned cooperative associations, they
must distribute or allocate profits for later distribution, to members
who are patrons, unless prohibited from doing so by law.
25 CFR 286.5 Information collection.
(a) The collections of information contained in 286.12 and 286.22
have been approved by the Office of Management and Budget under 44
U.S.C. 3501 et seq. and assigned clearance number 1076-0093. The
information will be used to rate applicants in accordance with the
priority criteria listed at 25 CFR 286.8. Response to this request is
required to obtain a benefit in accordance with 25 U.S.C. 1521.
(b) Public reporting for this information is estimated to average 45
minutes per response, including the time for reviewing instructions,
searching existing data sources, gathering and maintaining the data
needed, and completing and reviewing the collection of information.
Send comments regarding this burden estimate or any other aspect of this
collection of information, including suggestions for reducing the
burden, to the Information Collection Clearance Officer, Bureau of
Indian Affairs, Mailstop 337-SIB, 18th and C Streets, NW., Washington,
DC 20240; and the Office of Management and Budget, Paperwork Reduction
Project (1076-0093), Washington, DC 20503.
(55 FR 36273, Sept. 5, 1990)
286.6 (Reserved)
25 CFR 286.7 Location of enterprise.
To be eligible for a grant an economic enterprise must be located on
an Indian reservation or located where it makes or will make an economic
contribution to a nearby reservation by providing employment to tribal
members residing thereon or by expending a portion of its income for
materials or services on the reservation. Economic enterprises which
are or will be operated on a reservation must comply with the
requirements of applicable rules, resolutions or ordinances adopted by
the governing body of the tribe, if applicable.
25 CFR 286.8 Priority criteria.
The following priority will be used in selecting economic enterprises
for grant funding:
(a) First priority. First priority will be given to economic
enterprises located on a reservation that will:
(1) Utilize Indian resources, both natural and human.
(2) Create the highest ratio of Indian jobs to the total amount of
dollars to be invested, including market value of materials and
equipment contributed to the project.
(3) Create the highest ratio of income to a tribe or its members in
relation to the total amount of dollars to be invested, including market
value of materials or equipment contributed to the project.
(4) Generate the most non-Bureau financing.
(b) Second priority. Second priority will be given to projects
located in the immediate vicinity of a reservation that will:
(1) Utilize Indian resources, both natural and human.
(2) Create the highest ratio of Indian jobs to the total amount of
dollars to be invested, including market value of materials and
equipment contributed to the project.
(3) Generate the most non-Bureau financing.
25 CFR 286.9 Environmental and flood disaster protection.
Grant funds will not be advanced until there is assurance of
compliance with any applicable provisions of the Flood Disaster
Protection Act of 1973 (Pub. L. 93-234), the National Environmental
Policy Act (Pub. L. 91-190), 42 U.S.C. 4321 and Executive Order 11514.
25 CFR 286.10 Preservation of historical and archeological data.
The Assistant Secretary before approving a grant where the grant
funds and/or the loan funds will be used to finance activities involving
excavations, road construction, and land development or involving the
disturbance of land on known or reported historical or archeological
sites, will take appropriate action to assure compliance with applicable
provisions of the Act of June 27, 1960 (74 Stat. 220 (16 U.S.C. 469)),
as amended by the Act of May 24, 1974 (Pub. L. 93-291, 88 Stat. 174),
relating to the preservation of historical and archeological data.
25 CFR 286.11 Management and technical assistance.
(a) Prior to and concurrent with the making of a grant to finance an
Indian economic enterprise, the Assistant Secretary -- Indian Affairs
will insure that competent management and technical assistance is
available to the grantee in the preparation of the application for a
grant and/or administration of the funds granted, consistent with the
grantee's knowledge and experience and the nature and complexity of the
economic enterprise being financed. The competence of the management
and technical assistance provided will be determined by the local agency
superintendent after consultation with the applicant concerning his
business needs.
(b) The lender providing the loan funds under 286.17(b) to finance
an economic enterprise will include with the grantee's application the
need for equity capital, the lender's evaluation of the applicant's need
for management and technical assistance, specific areas of need and
whether the lender will provide such assistance to the applicant.
(39 FR 44748, Dec. 27, 1974. Redesignated at 47 FR 13328, Mar. 30,
1982, and amended at 55 FR 36274, Sept. 5, 1990)
25 CFR 286.12 Content of application.
Applications shall be on a form prescribed by the Assistant Secretary
which shall at the minimum include:
(a) Total capital requirement, including operating capital required
until such time as the cash generated from operations will be sufficient
to make the enterprise self-sustaining.
(b) Amount of total financing required as well as what is obtainable
from other sources, including the applicant's personal resources, and a
statement of terms and conditions under which any borrowed portion is
obtainable.
(c) Capital deficiency, which will be the basis for the amount of
grant requested.
(d) Pro forma balance sheets and operating statements showing
estimated expenses, income and net profit from operations for three
years following receipt of the requested grant.
(e) Annual operating statements and balance sheets, audited if
available, for the prior two years or applicable years for enterprises
already in operation.
(f) Current financial statements, consisting of a balance sheet and
operating statement.
(g) A plan of operation which shall be acceptable to the lender
making the loan and the Assistant Secretary.
286.13 -- 286.14 (Reserved)
25 CFR 286.15 Application procedures.
Applications are to be submitted to the Superintendent having
administrative jurisdiction over the reservation on which an enterprise
will be or is located. If the enterprise site is near two or more
reservations, application is to be made to the Superintendent having
administrative jurisdiction over the reservation nearest to the location
of the enterprise which the enterprise will benefit economically.
25 CFR 286.16 Grant approval authority.
Applications for grants require approval by the Assistant Secretary.
25 CFR 286.17 Grant limitations and requirements.
(a) Grants will be made to assist in establishing new economic
enterprises, or in purchasing or expanding established ones. However, a
grant may be made only when in the opinion of the Assistant Secretary
the applicant is unable to obtain adequate financing from other sources.
Prior to making any grant, the Assistant Secretary shall assure that,
to the extent practical, the applicant's own resources have been
invested in the proposed project. The applicant shall not be required
to invest own resources to the extent that they are already committed to
endeavors deemed by the Assistant Secretary to be essential to the
welfare of the applicant. If the information in an application, which
must include personal financial statements, indicates that it may be
possible for the applicant to obtain financing without a grant, the
Assistant Secretary will require the applicant to furnish letters from
two customary lenders in the area, if available, who are making loans
for similar purpose, showing whether or not they will make a loan to the
applicant for the total financing needed without a grant.
(b) A grant may be made only to an applicant who is able to obtain at
least 75 percent of the necessary financing from other sources.
(c) No grant in excess of $250,000 may be made to an Indian tribe or
in excess of $100,000 to an Indian individual, partnership, corporation,
or cooperative association.
(d) Revolving loan funds as prescribed in Title I of the Indian
Financing Act of 1974 and guaranteed or insured loans as prescribed in
Title II of said Act may not be used as the sources of the loan portion
of the total financing requirement if financing from other governmental
or institutional lenders is available on reasonable terms and
conditions. If a loan is not available from other sources, guaranteed
or insured loans under the provisions of Title II of said Act may then
be considered. If a guaranteed or insured loan is not available loans
under the provisions of Title I of said Act may then be considered.
Applicants for a loan from either source must meet the eligibility
requirements for such loans.
(e) A grant will not be approved unless there is assurance the
applicant can and will be provided with needed competent technical and
management assistance commensurate with the nature of the enterprise to
be funded and the knowledge and management skills of the applicant.
(f) Grant funds may not be used for refinancing or debt consolidation
unless approval is justified and required due to the applicant's
financial position and is clearly to the advantage of the grant
applicant.
(g) Ordinarily, not more than one grant will be made for a project.
Nevertheless, in certain circumstances a second grant may be made to
applicants for a new project or expansion of the original project. An
additional grant will not be approved for an economic enterprise
previously funded under the provisions of Title IV of the Indian
Financing Act of 1974 except for expanding a successful enterprise,
provided the total of grants made shall not exceed $250,000 to an Indian
tribe and $100,000 to an Indian individual, partnership, corporation, or
cooperative association.
(h) An application for a second grant will not be approved if the
applicant: (1) has not complied with the reporting requirements in
connection with the first grant, or (2) has not followed the plan of
operation, if any, developed for the management and operation of the
economic enterprise, or (3) did not follow and use the management and
technical assistance furnished, or (4) is in violation of one or more
provisions of the loan agreement entered into between the applicant and
the lender who furnished the loan portion of the financing in connection
with the first grant.
(i) An applicant for an expansion grant must meet the same
eligibility requirements as an original applicant.
(j) A grantee will be required to return all or a portion of the
grant if the business or enterprise for which the grant was utilized is
sold within three years of the date on which the grant was disbursed to
the grantee, unless the proceeds from the sale are re-invested in a new
business or business expansion which will benefit the Indian reservation
economy. Such sale and re-investment must have the prior approval of
the local agency superintendent. The grantee shall refund the lessor of
the grant amount or a pro rata portion of sales proceeds. The pro rata
portion of sales proceeds shall be based on the ratio of grant amount to
its corresponding matching financing. The new business or business
expansion utilizing such sale proceeds must meet the same criteria for
eligibility as an original grant.
(39 FR 44748, Dec. 27, 1974. Redesignated at 47 FR 13328, Mar. 30,
1982, and amended at 55 FR 36274, Sept. 5, 1990; 56 FR 12436, Mar. 25,
1991)
25 CFR 286.18 Written notice.
The applicant for a grant which is disapproved will be notified by
letter, stating the reasons for disapproval and the right of appeal
pursuant to 25 CFR 2. A copy of the letter will be sent to the
prospective lender.
(39 FR 44748, Dec. 27, 1974. Redesignated at 47 FR 13328, Mar. 30,
1982; 48 FR 13414, Mar. 31, 1983)
286.19 (Reserved)
25 CFR 286.20 Disbursement of grant funds.
Unless otherwise provided by an agreement between a lender and the
grantee, the Assistant Secretary may in his discretion advance grant
funds directly to a grantee. He may require the funds to be deposited
in a special account at the appropriate Agency headquarters office or
deposited in a joint account in a bank and disbursed as needed by the
grantee. The terms of a lender's loan agreement may require the
lender's approval before disbursement of the funds. Grant funds will
not be disbursed to a grantee until the Assistant Secretary has been
informed by the lender that a loan has been approved for the grantee in
the amount of the loan financing needed.
25 CFR 286.21 Return of unused funds.
Grantees will be required to return unused grant funds to the
Assistant Secretary if the economic enterprise for which the grant was
approved is not initiated, i.e., lease obtained, if needed, construction
started, equipment purchased or other, within the time stated in the
grant agreement. The Assistant Secretary may, if warranted by
circumstances beyond the control of the grantee, extend the time to
allow for initiation of the enterprise, provided there is assurance the
enterprise will be initiated forthwith within the extended time period.
The Assistant Secretary will notify the lender in writing of a proposed
action to require the return of grant funds or of a proposal to extend
the time.
25 CFR 286.22 Reports.
(a) Grantees are required to furnish the Assistant Secretary
comparative balance sheets and profit and loss statements semi-annually
for the first two years of operation following receipt of the grant, and
annually thereafter for the succeeding three years. These may be copied
of financial statements required by and furnished to the lender which
provided the loan portion of the total financing required. If the
lender does not require financial statements, the grantee must prepare
and furnish copies of comparative balance sheets and profit and loss
statements to the Assistant Secretary.
(b) The Assistant Secretary will establish accounting and reporting
systems which will appropriately show the status of the Indian Business
Development Program at all times.
25 CFR 286.22 SUBCHAPTER O -- MISCELLANEOUS (RESERVED)
25 CFR 286.22 APPENDIX TO CHAPTER I -- EXTENSION OF THE TRUST OR RESTRICTED STATUS OF CERTAIN INDIAN LANDS
25 CFR 286.22 Appendix, Chapter I
This appendix contains citations of Executive orders and acts of
Congress continuing the trust or restricted period of Indian land, which
would have expired otherwise, within the several Indian reservations in
the States named. The asterisk to the left of the name of a reservation
indicates that the reservation is subject to the benefits of the Indian
Reorganization Act of June 18, 1934 (48 Stat. 984; 25 U.S.C. 461-479),
as amended, and as therein provided the trust or restricted period of
the land is extended indefinitely. Where the name of a reservation is
not preceded by an asterisk, such reservation is not subject to the
Reorganization Act and is not subject to the benefits of such indefinite
trust or restricted period extension, but such reservation is dependent
upon acts of Congress or Executive orders for extension of the trust or
restricted period of the land.
For the purpose of insuring the continuation of the trust or
restricted status of Indian allotments within Indian reservations not
subject to the Reorganization Act, Congress by the act of June 15, 1935
(49 Stat. 378) reimposed such restrictions as may have been expired
between the dates of June 18, 1934, and December 31, 1936.
Pursuant to act of June 21, 1906 (34 Stat. 325) extending trust or
other period of restriction contained in patents issued to Indians for
land on the public domain, the following orders have been promulgated:
No further separate orders covering extension of trust periods on
public domain allotments were issued subsequent to Executive Order 3365
of December 7, 1920. The trust or other periods of restriction
contained in patents issued to Indians for land on the public domain
have thereafter been extended by the terms of the general Executive
orders.
Beginning with Executive Order 6498, issued December 15, 1933,
regardless of the location of the allotments, all trust or restrictive
periods on allotments expiring on a given date have been extended by one
general Executive order issued annually.
Note: Executive orders and orders of the Secretary of the Interior
(17 FR 799, Jan. 26, 1952; 18 FR 106, Jan. 6, 1953; 18 FR 8897, Dec.
31, 1953; 19 FR 8658, Dec. 17, 1954; 20 FR 8519, Nov. 11, 1955; 21 FR
9644, Dec. 6, 1956; 23 FR 112, Jan. 7, 1958; 24 FR 127, Jan. 7, 1959;
24 FR 9847, Dec. 8, 1959; 25 FR 13688, Dec. 24, 1960; 26 FR 12569,
Dec. 28, 1961; 28 FR 122, Jan. 4, 1963; 28 FR 11630, Oct. 31, 1963;
33 FR 15067, Oct. 9, 1968; 38 FR 34463, Dec. 14, 1973; 43 FR 58369,
Dec. 14, 1978; 48 FR 34026, July 27, 1983); 53 FR 30674, Aug. 15,
1988, extended the trust periods on Indian lands expiring during the
calendar years of 1949, 1950, 1951, 1952, 1953, 1954, 1955, 1956, 1957,
1958, 1959, 1960, 1961, 1962, 1963, 1964-1968, 1969-1973, 1974-1978,
1979-1983, 1984-1988, 1989-1993 respectively.
25 CFR 286.22 25 CFR Ch. II (4-1-92 Edition)
25 CFR 286.22 Indian Arts and Crafts Board, Interior
25 CFR 286.22 CHAPTER II -- INDIAN ARTS AND
25 CFR 286.22 CRAFTS BOARD, DEPARTMENT OF THE INTERIOR
Part
Page
301 Navajo, Pueblo, and Hopi silver and turquoise products;
standards
304 Navajo, Pueblo, and Hopi silver, use of Government mark
307 Navajo all-wool woven fabrics; use of Government certificate of
genuineness
308 Regulations for use of certificates of the Indian Arts and Crafts
Board to be attached to their trade-marks by Indian enterprises
concerned with the production and sale of genuine handicrafts
310 Use of Government marks of genuineness for Alaskan Indian and
Alaskan Eskimo hand-made products
25 CFR 286.22
25 CFR 286.22 25 CFR Ch. II (4-1-92 Edition)
25 CFR 286.22 Indian Arts and Crafts Board, Interior
25 CFR 286.22 PART 301 -- NAVAJO, PUEBLO, AND HOPI SILVER AND TURQUOISE
PRODUCTS; STANDARDS
Sec.
301.1 Eligibility for use of Government stamp.
301.2 Specifications of material.
301.3 Specifications of dies.
301.4 Application of dies.
301.5 Applique elements in design.
301.6 Stone for ornamentation.
301.7 Stonecutting.
301.8 Finish.
Authority: Sec. 3, 49 Stat. 892; 25 U.S.C. 305b. Interpret or
apply sec. 2, 49 Stat. 891, as amended; 25 U.S.C. 305a.
Source: The provisions of this Part 301 contained in standards for
Navajo, Pueblo, and Hopi silver and turquoise products, Mar. 9, 1937,
unless otherwise noted.
25 CFR 301.1 Eligibility for use of Government stamp.
Subect to the detailed requirements that follow, the Government stamp
shall be affixed only to work individually produced and to work entirely
hand-made. No object produced under conditions resembling a bench work
system, and no object in whose manufacture any power-driven machinery
has been used, shall be eligible for the use of the Government stamp.
25 CFR 301.2 Specifications of material.
Silver slugs of 1 ounce weight or other silver objects may be used,
provided their fineness is at least 900, and provided further that no
silver sheet shall be used. Unless cast, the slug or other object is to
be hand hammered to thickness and shape desired. The only exceptions
here are pins on brooches or similar objects; ear screws for earrings;
backs for tie clasps and chains which may be of silver of different
fineness and mechanically made.
25 CFR 301.3 Specifications of dies.
Dies used are to be entirely hand-made, with no tools more mechanical
than hand tools and vise. Dies shall contain only a single element of
the design.
25 CFR 301.4 Application of dies.
Dies are to be applied to the object with the aid of nothing except
hand tools.
25 CFR 301.5 Applique elements in design.
All such parts of the ornament are to be hand-made. If wire is used,
it is to be hand-made with no tool other than a hand-made draw plate.
These requirements apply to the boxes for stone used in the design.
25 CFR 301.6 Stone for ornamentation.
In addition to turquoise, the use of other local stone is permitted.
Turquoise, if used, must be genuine stone, uncolored by any artificial
means.
25 CFR 301.7 Stonecutting.
All stone used, including turquoise, is to be hand-cut and polished.
This permits the use of hand- or foot-driven wheels.
25 CFR 301.8 Finish.
All silver is to be hand polished.
25 CFR 301.8 PART 304 -- NAVAJO, PUEBLO, AND HOPI SILVER, USE OF
GOVERNMENT MARK
Sec.
304.1 Penalties for imitation or unauthorized use.
304.2 Marking and ownership of dies.
304.3 Classifying and marking of silver.
304.4 Standards and additional requirements.
304.5 Dies to identify tribe.
304.6 Responsibility of dealer.
304.7 Eligibility of silver meeting standards.
304.8 Use of label by dealer.
304.9 Placards; display of regulations.
Authority: Sec. 3, 49 Stat. 892; 25 U.S.C. 305b. Interpret or
apply sec. 2, 49 Stat. 891, as amended; 25 U.S.C. 305a.
Source: The provisions of this Part 304 contained in regulations
governing use of Government mark on Navajo, Pueblo, and Hopi silver,
April 2, 1937, unless otherwise noted.
25 CFR 304.1 Penalties for imitation or unauthorized use.
The use of Government trade-marks in an unauthorized manner, or the
colorable imitation of such marks, is subject to the criminal penalties
imposed by section 5 of the said act (49 Stat. 892; 25 U.S.C. 305d).
25 CFR 304.2 Marking and ownership of dies.
All dies used to mark silver will be provided by and owned by the
Indian Arts and Crafts Board.
25 CFR 304.3 Classifying and marking of silver.
For the present the Indian Arts and Crafts Board reserves to itself
the sole right to judge what silver complying with its standards shall
bear the Government mark. All such marking of silver shall, for the
present, be done by an agent of the Indian Arts and Crafts Board.
25 CFR 304.4 Standards and additional requirements.
No piece of silver, though made in compliance with the standards set
forth by the Indian Arts and Crafts Board, shall bear the Government
mark unless:
(a) Its weight is substantially in accord with Indian usage and
custom.
(b) Its design elements are substantially in accord with Indian usage
and tradition.
(c) Its workmanship is substantially that expected in good hand
craftsmanship.
25 CFR 304.5 Dies to identify tribe.
Dies are marked with name of tribe. A Navajo stamp will be used
where the marker is a Navajo Indian; similarly, for Zuni, Hopi, and Rio
Grande Pueblo.
25 CFR 304.6 Responsibility of dealer.
All dies will be numbered, and each wholesaler or dealer will be held
responsible for any violation of standards in silver that bears his
mark. Until such time as the Board relinquishes its sole right to mark
silver, the responsibility of the dealer for whom silver is marked will
be confined to misrepresentations as to quality of silver and of stones
used for ornament and to methods of production.
25 CFR 304.7 Eligibility of silver meeting standards.
In addition to silver currently made in compliance with the standards
of the Indian Arts and Crafts Board, other silver products made prior to
the promulgation of the regulations in this part may be stamped,
provided the maker thereof is known to be an Indian, and the product
satisfies the requirements in 304.4.
25 CFR 304.8 Use of label by dealer.
Any dealer offering for sale silver bearing the Government mark may,
if he wishes, attach to silver so marked a label or ticket calling
attention to the Government mark.
25 CFR 304.9 Placards; display of regulations.
Every dealer offering for sale silver bearing the Government mark may
display in a prominent place a placard setting forth the standards and
the regulations in this part, such placard to be furnished by the Indian
Arts and Crafts Board.
(Regs., Apr. 2, 1937, as amended Feb. 21, 1938)
25 CFR 304.9 PART 307 -- NAVAJO ALL-WOOL WOVEN FABRICS; USE OF
GOVERNMENT CERTIFICATE OF GENUINENESS
Sec.
307.1 Penalties.
307.2 Certificates of genuineness; by whom affixed.
307.3 Granting of licenses, contract and bond requirements.
307.4 Standards for fabrics.
307.5 Hand seal press and certificates to be furnished.
307.6 Fees.
307.7 Suspension of license.
307.8 Revocation of license.
307.9 Surrender of license.
307.10 Period of license.
307.11 Certificates fastened to fabrics.
307.12 Certificates, dating, and signing thereof.
307.13 Licensee's responsibility.
Authority: Sec. 3, 49 Stat. 892 (25 U.S.C. 305b). Interpret or
apply sec. 2, 49 Stat. 891, as amended (25 U.S.C. 305a).
Source: The provisions of this Part 307 contained in regulations
governing the use of Government certificate of genuineness for Navajo
all-wool woven fabrics, Oct. 20, 1937, unless otherwise noted.
25 CFR 307.1 Penalties.
The use of Government trade-marks in an unauthorized manner, or the
colorable imitation of such marks, is subject to the criminal penalties
imposed by section 5 of the said act (49 Stat. 892; 25 U.S.C. 305d),
which provides:
Any person who shall counterfeit or colorably imitate any Government
trade-mark used or devised by the Board as provided in section 305a of
this chapter, or shall, except as authorized by the Board, affix any
such Government trade-mark, or shall knowingly, willfully, and corruptly
affix any reproduction, counterfeit, copy, or colorable imitation
thereof upon any products, Indian or otherwise, or to any labels, signs,
prints, packages, wrappers, or receptacles intended to be used upon or
in connection with the sale of such products, or any person who shall
knowingly make any false statement for the purpose of obtaining the use
of any such Government trade-mark shall be guilty of a misdemeanor, and
upon conviction thereof shall be enjoined from further carrying on the
act or acts complained of and shall be subject to a fine not exceeding
$20,000, or imprisonment not exceeding six months, or both such fine and
imprisonment.
25 CFR 307.2 Certificates of genuineness; by whom affixed.
Government certificates of genuineness for Navajo all-wool woven
fabrics may be affixed to fabrics meeting the conditions specified in
307.4 by persons duly authorized to affix such certificates, under
license issued by the Indian Arts and Crafts Board.
25 CFR 307.3 Granting of licenses, contract, and bond requirements.
A license may be granted to any person desiring to use the Government
certificate of genuineness for Navajo all-wool woven fabrics who shall
make application therefor and shall execute a contract acceptable to the
Indian Arts and Crafts Board providing for the use of such certificates
in conformity with the regulations in this part, which contract shall be
accompanied by an indemnity bond acceptable to the Indian Arts and
Crafts Board, in the amount of $500, conditioned upon faithful
performance of such contract.
25 CFR 307.4 Standards for fabrics.
No fabric may carry the Government certificate of genuineness for
Navajo all-wool woven fabric unless all of the following conditions are
met:
(a) The fabric is made entirely of local wool that is locally
hand-spun and is entirely woven on a native Navajo loom;
(b) The fabric is made by a member of the Navajo Tribe working under
conditions not resembling a workshop or factory system;
(c) The size of the fabric is indicated in the certificate;
(d) The licensee signs the certificate.
(Regs., Oct. 20, 1937, as amended at 4 FR 2436, June 17, 1939)
25 CFR 307.5 Hand seal press and certificates to be furnished.
Each licensee will be furnished, upon payment of the registration and
license fees specified in 307.6 one hand seal press and a supply of
blank Government certificates, which shall be used only in accordance
with this license, and shall remain at all times the property of the
Board.
25 CFR 307.6 Fees.
Each licensee shall pay a registration fee of $2, together with a
license fee which shall be determined on the basis of $1 for each 40
Government certificates ordered by the licensee from the Board.
25 CFR 307.7 Suspension of license.
In the event that complaint is made to the Board that any provision
of any license or of the regulations in this part has been violated by
any licensee, the Board may suspend the license and all authority
conferred thereby, in its discretion, for a period of 30 days, by
notifying the licensee of such suspension, by mail, by telegraph, or in
any other manner.
25 CFR 307.8 Revocation of license.
In the event that the Board, after giving a licensee written notice
of charges and affording an opportunity to reply to such charges, orally
or in writing, is satisfied that any provision of any license or of the
regulations in this part has been violated by any licensee, the Board
may revoke the license by notifying the licensee of such revocation, by
mail, by telegraph, or in any other manner. Upon notice of such
revocation all authority conferred by the license so revoked shall
forthwith terminate, but the validity of actions taken while the license
was in force shall not be affected.
25 CFR 307.9 Surrender of license.
Any license may be surrendered by the licensee at any time by
surrendering to the Board the Government hand seal press and unused
certificates of genuineness entrusted to the licensee, accompanied by a
copy of the license marked ''surrendered'' and signed by the licensee.
Such surrender shall take effect as of the time that such property and
document have been received by the Board.
25 CFR 307.10 Period of license.
Each license shall be in effect from the date of execution thereof
and until 1 year thereafter, unless sooner surrendered or canceled in
accordance with the foregoing provisions.
25 CFR 307.11 Certificates fastened to fabrics.
Certificates shall be fastened to the woven fabric by wire caught in
a lead seal disc that shall be impressed and made fast with the hand
seal press furnished by the Indian Arts and Crafts Board.
25 CFR 307.12 Certificates, dating, and signing thereof.
When the certificate is first affixed the lower of the two spaces
provided for the purpose shall be signed by the licensee. In the event
the ultimate retailer of any fabric so marked is not the person who
originally attached the certificate, that ultimate retailer may sign the
upper of the two spaces provided for the purpose and detach the original
signature.
(4 FR 2436, June 17, 1939)
25 CFR 307.13 Licensee's responsibility.
Certificates may be attached only to products which are in the
ownership or possession of the licensee. Certificates will be
consecutively numbered and records of the allocation of such
certificates will be maintained by the Indian Arts and Crafts Board.
Each licensee will be held responsible for the proper use of such
certificates and of the Government hand seal press furnished to such
licensee.
25 CFR 307.13 PART 308 -- REGULATIONS FOR USE OF CERTIFICATES OF THE
INDIAN ARTS AND CRAFTS BOARD TO BE ATTACHED TO THEIR TRADE-MARKS BY
INDIAN ENTERPRISES CONCERNED WITH THE PRODUCTION AND SALE OF GENUINE
HANDICRAFTS
Sec.
308.1 Penalties.
308.2 Certificates of genuineness to be attached to trade-marks.
308.3 Conditions of eligibility to attach certificates.
308.4 Revocation of privilege of attaching certificates.
Authority: Sec. 3, 49 Stat. 892 (25 U.S.C. 305b). Interpret or
apply sec. 2, 49 Stat. 891, as amended (25 U.S.C. 305a).
Source: 8 FR 8736, June 26, 1943, unless otherwise noted.
25 CFR 308.1 Penalties.
The use of Government trade-marks in an unauthorized manner, or the
colorable imitation of such marks, is subject to the criminal penalties
imposed by section 5 of the said act (49 Stat. 892; 25 U.S.C. 305d),
which provides:
Any person who shall counterfeit or colorably imitate any Government
trade-mark used or devised by the Board as provided in section 305a of
this chapter, or shall, except as authorized by the Board, affix any
such Government trade-mark, or shall knowingly, willfully, and corruptly
affix any reproduction, counterfeit, copy, or colorable imitation
thereof upon any products Indian or otherwise, or to any labels, signs,
prints, packages, wrappers, or receptacles intended to be used upon or
in connection with the sale of such products, or any person who shall
knowingly make any false statement for the purpose of obtaining the use
of any such Government trade-mark, shall be guilty of a misdemeanor, and
upon conviction thereof shall be enjoined from further carrying on the
act or acts complained of and shall be subject to a fine not exceeding
$2,000, or imprisonment not exceeding six months, or both such fine and
imprisonment.
25 CFR 308.2 Certificates of genuineness to be attached to trade-marks.
(a) To insure the widest distribution of genuine Indian handicraft
products, and to protect the various enterprises organized by individual
Indian craftsmen, or by groups of Indian craftsmen, for the purpose of
the production and sale of such handicraft products, the Indian Arts and
Crafts Board offers each such enterprise the privilege of attaching to
its trademark a certificate declaring that it is recognized by the
Indian Arts and Crafts Board as an Indian enterprise dealing in genuine
Indian-made handicraft products, and that its trade-mark has the
approval of the Board.
(b) The certificate shall consist of a border around the trade-mark
bearing the words ''Certified Indian Enterprise Genuine Handicrafts,
U.S. Indian Arts and Crafts Board, Department of the Interior,'' and
these words may be used wherever the trade-mark appears.
25 CFR 308.3 Conditions of eligibility to attach certificates.
To be eligible to attach the certificate, an enterprise must meet the
following conditions:
(a) It must offer for sale only Indian-made genuine handicraft
products, i.e., objects produced by Indian craftsmen with the help of
only such devices as allow the manual skill of the maker to condition
the shape and design of each individual product.
(b) It must be entirely Indian owned and organized either by
individual Indians or by groups of Indians.
(c) It must agree to apply certificates of genuineness only to such
products as meet the standards of quality prescribed by the Indian Arts
and Crafts Board at the time of the application of the enterprise for
the privilege of attaching the certificate.
(d) It must agree to obtain the approval of the Indian Arts and
Crafts Board as to the manner of production of the certificates.
25 CFR 308.4 Revocation of privilege of attaching certificates.
If an enterprise, after securing the privilege of attaching the
certificates, should fail to meet the above-named conditions, the Board
reserves the right to revoke the privilege.
25 CFR 308.4 PART 310 -- USE OF GOVERNMENT MARKS OF GENUINENESS FOR
ALASKAN INDIAN AND ALASKAN ESKIMO HAND-MADE PRODUCTS
Sec.
310.1 Penalties.
310.2 Certificates of genuineness, authority to affix.
310.3 Conditions.
310.4 Application of mark.
310.5 Certificates of genuineness, authority to affix.
310.6 Conditions.
310.7 Application of mark.
Authority: Sec. 3, 49 Stat. 892; 25 U.S.C. 305b. Interpret or
apply sec. 2, 49 Stat. 891, as amended; 25 U.S.C. 305a.
Source: 4 FR 515, Feb. 4, 1939, unless otherwise noted.
25 CFR 310.1 Penalties.
The use of Government trade-marks in an unauthorized manner, or the
colorable imitation of such marks, is subject to the criminal penalties
imposed by section 5 of the said act (49 Stat. 892; 25 U.S.C., 305d),
which provides:
Any person who shall counterfeit or colorably imitate any Government
trade-mark used or devised by the Board as provided in section 305a of
this chapter, or shall, except as authorized by the Board, affix any
such Government trade-mark, or shall knowingly, willfully, and corruptly
affix any reproduction, counterfeit, copy, or colorable imitation
thereof upon any products, Indian or otherwise, or to any labels, signs,
prints, packages, wrappers, or receptacles intended to be used upon or
in connection with the sale of such products, or any person who shall
knowingly make any false statement for the purpose of obtaining the use
of any such Government trade-mark, shall be guilty of a misdeameanor,
and upon conviction thereof shall be enjoined from further carrying on
the act or acts complained of and shall be subject to a fine not
exceeding $2,000 or imprisonment not exceeding six months or both such
fine and imprisonment.
25 CFR 310.1 Alaskan Indian
25 CFR 310.2 Certificates of genuineness, authority to affix.
Government marks of genuineness for Alaskan Indian hand-made products
may be affixed to articles meeting the conditions specified in 310.3 by
persons duly authorized by the Indian Arts and Crafts Board to affix
such marks.
25 CFR 310.3 Conditions.
No article may carry the Government mark of genuineness for Alaskan
Indian hand-made products unless all of the following conditions are
met:
(a) The article is hand-made by an Alaskan Indian.
(b) The article is hand-made under conditions not resembling a
workshop or factory system.
(c) All raw materials used in carving, basketry and mat making, and
all furs and hides used in the manufacture of hand-made artifacts, must
be of native origin.
25 CFR 310.4 Application of mark.
All marks shall be applied to the article with a rubber stamp to be
furnished by the Indian Arts and Crafts Board. Each stamp shall bear a
distinctive letter and may be used only by the person to whom it has
been issued. With the addition of the distinctive letter, each stamp
shall read:
25 CFR 310.4 ( )
25 CFR 310.4 Hand-Made
25 CFR 310.4 Alaskan Indian
25 CFR 310.4 U S
25 CFR 310.4 Indian Arts & Crafts Board
25 CFR 310.4 I D
or, in the case of articles too small to carry this stamp:
25 CFR 310.4 ( )
25 CFR 310.4 U S I D
25 CFR 310.4 Alaskan Indian
On baskets and fabrics which offer no surface for the application of
such a rubber stamp, the stamp shall be placed on a paper tag attached
to the article by a wire caught in a lead seal disc that shall be
impressed and made fast with a hand seal press furnished by the Indian
Arts and Crafts Board.
25 CFR 310.4 Alaskan Eskimo
25 CFR 310.5 Certificates of genuineness, authority to affix.
Government marks of genuineness for Alaskan Eskimo hand-made products
may be affixed to articles meeting the conditions specified in 310.6 by
persons duly authorized by the Indian Arts and Crafts Board to affix
such marks.
25 CFR 310.6 Conditions.
No article may carry the Government mark of genuineness for Alaskan
Eskimo hand-made products unless all of the following conditions are
met:
(a) The article is hand-made by an Alaskan Eskimo.
(b) The article is hand-made under conditions not resembling a
workshop or factory system.
(c) All raw materials used in the making of the articles are of
native origin except:
(1) Commercial fasteners.
(2) Calfskin trimmings for decorative borders on parkas and mukluks.
(3) Tops for mukluks made of commercial fabric.
(4) Commercially made draw-cords for mukluks.
(5) Commercial fabrics for parka linings.
(6) Sewing thread and glass beads.
25 CFR 310.7 Application of mark.
All marks shall be applied to the article with a rubber stamp to be
furnished by the Indian Arts and Crafts Board. Each stamp shall bear a
distinctive letter and may be used only by the person to whom it has
been issued. With the addition of the distinctive letter, each stamp
shall read:
25 CFR 310.7 ( )
25 CFR 310.7 Hand-Made
25 CFR 310.7 Alaskan Eskimo
25 CFR 310.7 U S
25 CFR 310.7 Indian Arts & Crafts Board
25 CFR 310.7 I D
or, in the case of articles too small to carry this stamp:
25 CFR 310.7 ( )
25 CFR 310.7 U S I D
25 CFR 310.7 Alaskan Eskimo
On baskets and fabrics which offer no surface for the application of
such a rubber stamp, the stamp shall be placed on a paper tag attached
to the article by a wire caught in a lead seal disc that shall be
impressed and made fast with a hand seal press furnished by the Indian
Arts and Crafts Board.
25 CFR 310.7 25 CFR Ch. III (4-1-92 Edition)
25 CFR 310.7 National Indian Gaming Commission
25 CFR 310.7 CHAPTER III -- NATIONAL INDIAN GAMING COMMISSION
Part
Page
500-513 (Reserved)
514 Fees
515-599 (Reserved)
25 CFR 310.7 25 CFR Ch. III (4-1-92 Edition)
25 CFR 310.7 National Indian Gaming Commission
25 CFR 310.7 PARTS 500 -- 513 (RESERVED)
25 CFR 310.7 PART 514 -- FEES
Authority: 25 U.S.C. 2706, 2708, 2710, 2717, 2717a.
25 CFR 514.1 Annual fees.
(a) Each class II gaming operation under the jurisdiction of the
Commission shall pay to the Commission annual fees as established by the
Commission. The Commission, by a vote of not less than two of its
members, shall adopt the rates of fees to be paid.
(1) The Commission shall adopt preliminary rates for each calendar
year during the first quarter of that year (or as soon thereafter as
possible), and, if considered necessary, shall modify those rates during
the second and third quarters of the calendar year.
(2) The Commission shall adopt final rates of fees for each calendar
year during the fourth quarter of that year.
(3) The Commission shall publish the rates of fees in a notice in the
Federal Register.
(4) The rates of fees imposed shall be --
(i) No less than 0.5 percent nor more than 2.5 percent of the first
$1,500,000 (1st tier), and
(ii) No more than 5 percent of amounts in excess of the first
$1,500,000 (2nd tier) of the assessable gross revenues from each class
II gaming operation regulated by the Commission.
(5) If a tribe has a certificate of self-regulation, the rate of fees
imposed shall be no more than .25 percent of assessable gross revenues
from self-regulated class II gaming operations.
(b) For purposes of computing fees, assessable gross revenues for
each gaming operation are the annual total amount of money wagered in
class II gaming, admission fees (including table or card fees), less any
amounts paid out as prizes or paid for prizes awarded, and less an
allowance for amortization of capital expenditures for structures.
(1) Unless otherwise provided by the regulations, generally accepted
accounting principles shall be used.
(2) The allowance for amortization of capital expenditures for
structures shall not exceed 5% of the cost of structures in use
throughout the year and 2 1/2% of the cost of structures in use during
only a part of the year.
(3) Example:
(4) All revenues from gaming operations determined by the licensing
tribe to be class II are to be included.
(c) Each Class II gaming operation regulated by the Commission shall
file with the Commission quarterly a statement showing its assessable
gross revenues for the previous calendar year.
(1) These quarterly statements shall show the amounts derived from
each class II type of game, the amounts deducted for prizes, and the
amounts deducted for the amortization of structures;
(2) These quarterly statements shall be filed no later than -- March
31, June 30, September 30, and December 31, of each calendar year the
Class II gaming operation is subject to the jurisdiction of the
Commission, beginning in September 1991. Any changes or adjustments to
the previous year's assessable gross revenue amounts from one quarter to
the next shall be explained.
(3) The quarterly statements shall identify an individual or
individuals to be contacted should the Commission need to communicate
further with the gaming operation. The telephone numbers of the
individual(s) shall be included.
(4) The quarterly statements shall be transmitted to the Commission
to arrive no later than the due date.
(5) Each Class II gaming operation shall determine the amount of fees
to be paid and remit them with the statement required in paragraph (c)
of this section. The fees payable shall be computed using --
(i) The most recent rates of fees adopted by the Commission pursuant
to paragraph (a)(1) or (a)(2) of this section,
(ii) The assessable gross revenues for the previous calendar year as
reported pursuant to this paragraph, and
(iii) The amounts paid and credits received during previous quarters.
(6) Each quarterly statement shall include the computation of the
fees payable, showing all amounts used in the calculations. The
required calculations are as follows:
(i) Multiply the previous calendar year's 1st tier assessable gross
revenues by the rate for those revenues adopted by the Commission.
(ii) Multiply the previous calendar year's 2nd tier assessable gross
revenues by the rate for those revenues adopted by the Commission.
(iii) Add (total) the results (products) obtained in paragraphs
(c)(6) (i) and (ii) of this section.
(iv) Multiply the total obtained in paragraph (c)(6)(iii) of this
section by the fraction representing the quarter for which the
computation is being made: 1st quarter -- 1/4; 2nd quarter -- 1/2 (
2/4); 3rd quarter -- 3/4; and 4th quarter -- 1 ( 4/4). For the
purpose of making these computations in 1991 only, the third calendar
quarter is the first quarter and the fourth calendar quarter is the
second quarter. There will be no third or fourth quarter in 1991.
(v) Subtract the amounts already remitted by the operation for the
current year and credits, if any, which are due for any previous year's
overpayment from the amount determined in paragraph (c)(6)(iv) of this
section.
(vi) The amount computed in paragraph (c)(6)(v) of this section is
the amount to be remitted.
(7) Examples of fee computations follow:
(i) Example 1: Where a filing is made for the first quarter of the
calendar year, the previous year's assessable gross revenues are
$2,000,000, the fee rates adopted by the Commission are 2% on the first
$1,500,000 and 4% on the remainder, and a credit of $2,000 is due from
the previous year, the amounts to be used and the computations to be
made are as follows:
(ii) Example 2: Where a filing is being made for the third quarter,
the previous year's assessable gross revenues are $5,000,000, the fee
rates adopted by the Commission are 1% on the first $1,500,000 and 1.5%
on the remainder, and $35,000 has already been remitted, the amounts to
be used and the computations to be made are as follows:
(iii) Example 3: Where a filing is being made for the third quarter
of 1991, the previous year's assessable gross revenues are $5,000,000,
the fee rates adopted by the Commission are 1% on the first $1,500,000
and 1% on the remainder, and nothing has already been remitted, the
amounts to be used and the computations to be made are as follows:
(8) Quarterly statements, remittances and communications about fees
shall be transmitted to the Commission at the following address: Office
of Finance, National Indian Gaming Commission, 1850 M Street, NW., suite
250, Washington, DC 20036-5803. Checks should be made payable to the
National Indian Gaming Commission (do not remit cash).
(9) The Commission may assess a penalty for failure to file timely a
quarterly statement.
(10) Interest shall be assessed at rates established from time to
time by the Secretary of the Treasury on amounts remaining unpaid after
their due date (31 U.S.C. 3717).
(d) The total amount of all fees imposed during any fiscal year shall
not exceed $1,500,000. The Commission shall credit pro-rata any fees
collected in excess of this amount against amounts otherwise due at the
end of the quarter following the quarter during which the Commission
makes such determination.
(1) The Commission will notify each gaming operation as to the amount
of overpayment, if any, and therefore the amount of credit to be taken
against the next quarterly payment otherwise due.
(2) The notification required in paragraph (d)(1) of this section
shall be made in writing addressed to the gaming operation.
(e) Failure to pay fees, any applicable penalties, and interest
related thereto may be grounds for:
(1) Closure, or
(2) Disapproving or revoking the approval of the Chairman of any
license, ordinance, or resolution required under this Act for the
operation of gaming.
(f) To the extent that revenue derived from fees imposed under the
schedule established under this paragraph are not expended or committed
at the close of any fiscal year, such funds shall remain available until
expended (Pub. L. 101-121; 103 Stat. 718; 25 U.S.C. 2717a) to defray
the costs of operations of the Commission.
(g) The information collection requirements contained in paragraph
(c) of this section have been approved by the Office of Management and
Budget under 44 U.S.C. 3501 et seq. and assigned clearance number
3200-0011. The information is being collected to determine the
assessable gross revenues of each gaming operation and the aggregate
assessable gross revenues of all gaming operations. The information
will be used to set and adjust fee rates and to verify the computations
of fees paid by each class II gaming operation. Response is mandatory.
(56 FR 40709, Aug. 15, 1991; 56 FR 57373, Nov. 8, 1991)
25 CFR 514.1 PARTS 515 -- 599 (RESERVED)
25 CFR 514.1 25 CFR Ch. IV (4-1-92 Edition)
25 CFR 514.1 The Office of Navajo and Hopi Indian Relocation
25 CFR 514.1 CHAPTER IV -- THE OFFICE OF NAVAJO AND HOPI INDIAN
25 CFR 514.1 RELOCATION
Part
Page
700 Commission operations and relocation procedures.
720 Enforcement of nondiscrimination on the basis of handicap in
programs or activities conducted by the Navajo and Hopi Indian
Relocation Commission
25 CFR 514.1
25 CFR 514.1 25 CFR Ch. IV (4-1-92 Edition)
25 CFR 514.1 The Office of Navajo and Hopi Indian Relocation
25 CFR 514.1 Pt. 700
25 CFR 514.1 PART 700 -- COMMISSION OPERATIONS AND RELOCATION PROCEDURES
25 CFR 514.1 Subpart A -- General Policies and Instructions
Sec.
700.1 Purpose.
700.3 Assurances with respect to acquisition and displacement.
700.5 Supersedure of regulations.
700.11 Manner of notice.
700.13 Waiver of regulations.
700.15 Waiver of rights by owner.
700.31 Applicability of definitions.
700.33 Act (The Act).
700.35 Applicant.
700.37 Application for relocation assistance benefits and agreement
to move.
700.39 Appraisal.
700.41 Appraiser.
700.43 Assistance payment.
700.45 Business.
700.47 Commission.
700.49 Certified eligible head of household.
700.51 Custodial parent.
700.53 Dwelling, replacement.
700.55 Decent, safe, and sanitary dwelling.
700.57 Dependent.
700.59 Displaced person.
700.61 Fair market value.
700.65 Farm operation.
700.67 Habitation.
700.69 Head of household.
700.71 Improvements.
700.77 Livestock.
700.79 Marriage.
700.81 Monthly housing cost.
700.83 Nonprofit organization.
700.85 Owner.
700.87 Person.
700.89 Relocation contract.
700.91 Relocation report.
700.93 Relocation plan.
700.95 Replacement housing funds.
700.97 Residence.
700.99 Salvage value.
700.101 Single person.
700.103 Uniform Act.
700.105 Utility charges.
25 CFR 514.1 Subpart B -- Acquisition and Disposal of Habitation and/or
Improvements
700.111 Applicability of acquisition requirements.
700.113 Basic acquisition policies.
700.115 Preliminary acquisition notice.
700.117 Criteria for appraisals.
700.119 Establishment of fair market value.
700.121 Statement of the basis for the determination of fair market
value.
700.123 Expenses incidental to transfer of ownership to the
Commission.
700.125 Disposal of property.
700.127 Payments for acquisition of improvements.
25 CFR 514.1 Subpart C -- General Relocation Requirements
700.131 Purpose and applicability.
700.133 Notice of displacement.
700.135 Relocation assistance advisory services.
700.137 Final date for voluntary relocation application.
700.138 Persons who have not applied for voluntary relocation by July
7, 1986.
700.139 Referral for action.
700.141 General requirements -- claims for relocation payments.
700.143 Payments for divorced or separated relocatees.
700.145 Payments to estates.
700.147 Eligibility.
25 CFR 514.1 Subpart D -- Moving and Related Expenses, Temporary
Emergency Moves
700.151 Eligibility.
700.153 Actual reasonable moving and related expenses -- residential
moves.
700.155 Expenses in searching for replacement dwelling -- residential
moves.
700.157 Actual reasonable moving and related expenses --
nonresidential moves.
700.159 Payment for direct loss of personal property --
nonresidential moves.
700.161 Substitute personal property -- nonresidential moves.
700.163 Expenses in searching for replacement locations --
nonresidential moves.
700.165 Ineligible moving and related expenses.
700.167 Moving and related expenses -- fixed payment.
700.169 Fixed payment for moving expenses -- residential moves.
700.171 Fixed payment for moving expenses -- nonresidential moves.
700.173 Average net earnings of business or farm.
700.175 Temporary emergency moves.
25 CFR 514.1 Subpart E -- Replacement Housing Payments
700.181 Eligibility.
700.183 Determination of replacement housing benefit.
700.187 Utilization of replacement home benefits.
700.189 Expenditure of replacement home benefits.
25 CFR 514.1 Subpart F -- Incidental Expenses
700.195 General.
700.197 Basic eligibility requirements.
700.199 Incidental expenses.
25 CFR 514.1 Subpart G -- Assistance Payments (Incentive Bonus)
700.205 Eligibility requirements.
25 CFR 514.1 Subpart H -- Last Resort Replacement Housing
700.209 Applicability.
700.211 Basic rights and rules.
700.213 Methods of providing last resort replacement housing.
25 CFR 514.1 Subpart I -- Commission Operations
700.219 General.
25 CFR 514.1 Subpart J -- Inspection of Records
700.235 Purpose and scope.
700.237 Definitions.
700.239 Records available.
700.241 Request for records.
700.243 Action on initial requests.
700.245 Time limits on processing of initial requests.
700.247 Appeals.
700.249 Action on appeals.
700.251 Fees.
25 CFR 514.1 Subpart K -- Privacy Act
700.255 Purpose and scope.
700.257 Definitions.
700.259 Records subject to Privacy Act.
700.261 Standards for maintenance of records subject to the Act.
700.263 Assuring integrity of records.
700.265 Conduct of employees.
700.267 Disclosure of records.
700.269 Accounting for disclosures.
700.271 Requests for notification of existence of records:
Submission.
700.273 Request for notification of existence of records: Action on.
700.275 Requests for access to records.
700.277 Requests for access to records: Submission.
700.279 Requests for access to records: Initial decision.
700.281 Requests for notification of existence of records and for
access to records: Appeals.
700.283 Requests for access to records: Special situations.
700.285 Amendment of records.
700.287 Petitions for amendment: Submission and form.
700.289 Petitions for amendment: Processing and initial decision.
700.291 Petitions for amendment: Time limits for processing.
700.293 Petitions for amendment: Appeals.
700.295 Petitions for amendment: Action on appeals.
700.297 Statements of disagreement.
25 CFR 514.1 Subpart L -- Determination of Eligibility, Hearing and
Administrative Review (Appeals)
700.301 Definitions.
700.303 Initial Commission determinations.
700.305 Availability of hearings.
700.307 Request for hearings.
700.309 Presiding officers.
700.311 Hearing scheduling and documents.
700.313 Evidence and procedure.
700.315 Post-hearing briefs.
700.317 Presiding officer decision.
700.319 Final agency action.
700.321 Direct appeal to Commissioners.
25 CFR 514.1 Subpart M -- Life Estate Leases
700.331 Application for Life Estate Leases.
700.333 Determination of disability.
700.335 Grouping and granting of applications for Life Estate Leases.
700.337 Establishment of boundaries of Life Estate Leases.
700.339 Residency on Life Estate Leases.
700.341 Access to Life Estate Leases.
700.343 Life Estate Leases.
25 CFR 514.1 Subpart N -- Discretionary Funds
700.451 Purpose.
700.453 Definitions.
700.455 Financial assistance.
700.457 Assistance to match or pay 30% of grants, contracts or other
expenditures.
700.459 Assistance for demonstration projects and for provision of
related facilities and services.
700.461 Method for soliciting applications.
700.463 Requirements for applications.
700.465 Technical feasibility.
700.467 Construction costs.
700.469 Unallowable program and project costs.
700.471 Review and approval.
700.473 Administrative expenditures of the Commission.
700.475 Reports.
700.477 Administration of financial assistance and recordkeeping
requirements.
700.479 Administrative review.
25 CFR 514.1 Subpart O -- Employee Responsibility and Conduct
700.501 Statement of purpose.
700.503 Definitions.
700.505 Coverage.
700.507 Responsibilities.
700.509 Duties of the designated agency ethics official.
700.511 Statements of employment and financial interests.
700.513 Business dealings on behalf of the government.
700.515 Conflicts of interest.
700.517 Affiliations and financial interests.
700.519 Gifts, entertainment and favors.
700.521 Outside work and interests.
700.523 Business relationships among employees.
700.525 Use of government information or expertise.
700.527 Endorsements.
700.529 Negotiations for employment.
700.531 Government property.
700.533 Restrictions affecting travel and travel expense
reimbursement.
700.535 Nepotism.
700.537 Indebtedness.
700.539 Soliciting contributions.
700.541 Fraud or false statement in a Government matter.
700.543 Gambling.
700.545 Alcoholism and drug abuse.
700.547 Consuming intoxicants on Government premises or during duty
hours.
700.549 Employee organizations.
700.551 Franking privilege and official stationery.
700.553 Use of official titles.
700.555 Notary services.
700.557 Political activity.
700.559 Equal opportunity.
700.561 Sexual harassment.
700.563 Statutory restrictions from 18 U.S.C. 207, which are
applicable to former Government employees.
700.565 Miscellaneous statutory provisions.
25 CFR 514.1 Subpart P -- Hopi Reservation Evictees
700.601 Definitions.
700.603 Eligibility.
700.605 Relocation assistance.
700.607 Dual eligibility.
700.609 Appeals.
700.611 Application deadline.
25 CFR 514.1 Subpart Q -- New Lands Grazing
700.701 Definitions.
700.703 Authority.
700.705 Objectives.
700.707 Regulations; scope.
700.709 Grazing privileges.
700.711 Grazing permits.
700.713 Tenure of grazing permits.
700.715 Assignment, modification, and cancellation of grazing
permits.
700.717 Stocking rate.
700.719 Establishment of grazing fees.
700.721 Range management plans.
700.722 Grazing Associations.
700.723 Control of livestock disease and parasites.
700.725 Livestock trespass.
700.727 Impoundment and disposal of unauthorized livestock.
700.729 Amendments.
700.731 Appeals.
Authority: Pub. L. 99-590; Pub. L. 93-531, 88 Stat. 1712 as
amended by Pub. L. 96-305, 94 Stat. 929, Pub. L. 100-666, 102 Stat.
3929 (25 U.S.C. 640d).
Source: 47 FR 2092, Jan. 14, 1982, unless otherwise noted.
25 CFR 514.1 Subpart A -- General Policies and Instructions
25 CFR 700.1 Purpose.
The purpose of this part is to implement provisions of the Act of
December 22, 1974 (Pub. L. 93-531, 88 Stat. 1712 as amended by Pub. L.
96-305, 94 Stat. 929), hereinafter referred to as the Act, in accordance
with the following objectives --
(a) To insure that persons displaced as a result of the Act are
treated fairly, consistently, and equitably so that these persons will
not suffer the disproportionate adverse, social, economic, cultural and
other impacts of relocation.
(b) To set forth the regulations and procedures by which the
Commission shall operate; and implement the provisions of the Act.
(c) To establish standards consistent with those established in the
implementation of the Uniform Relocation Assistance and Real Property
Acquisition Policies Act of 1970 (84 Stat. 1894, 42 U.S.C. 4601 et.
seq., Pub. L. 91-646), hereinafter referred to as the Uniform Act.
(d) To insure that owners of habitations and other improvements to be
acquired pursuant to the Act are treated fairly and consistently, to
encourage and expedite acquisition by agreements with such owners, to
minimize litigation, relieve congestion in the courts and to promote
public confidence in the Commission's relocation program.
(e) To facilitate development of a relocation plan according to the
Act and carry out the directed relocation as promptly and fairly as
possible, with a minimum of hardship and discomfort to the relocation,
in accordance with the Act.
25 CFR 700.3 Assurances with respect to acquisition and displacement.
The Commission will not approve any programs or projects which may
result in the acquisition of habitations and/or improvements, or in the
displacement of any person, until such time as written assurances are
submitted to the Commission that such projects or programs are in
accordance with the Act. It will --
(a) Assure that, within a reasonable period of time prior to
displacement, adequate, decent, safe and sanitary replacement dwellings
(defined at 700.55) will be available to all certified eligible heads
of households.
(b) Carry out relocation services in a manner that will promote
maximum quality in housing.
(c) Inform affected persons of their rights under the policies and
procedures set forth under the regulations in this part.
25 CFR 700.5 Supersedure of regulations.
These regulations supersede the regulations formerly appearing in
this part. However, any acquisition of property or displacement of a
person occurring prior to the effective date of these regulations shall
continue to be governed by the regulations at 25 CFR Part 700 in effect
at the time of the acquisition or displacement.
25 CFR 700.11 Manner of notice.
Each notice which the Commission is required to provide under these
regulations shall be personally served, receipt documented, or sent by
certified or registered first-class mail, return receipt requested.
Each notice shall be written in plain understandable language.
Recipients who notify the Commission that they are unable to read and
understand the notice will be provided with appropriate translation and
counseling. Each notice shall indicate the name and telephone number of
a person who may be contacted for answers to questions or other needed
help.
25 CFR 700.13 Waiver of regulations.
(a) Any time limit specified for the filing of a claim or an appeal
under the regulations in this part may, on a case by case basis, be
extended by the Commission.
(b) The Commission may waive any requirement of these regulations in
this part if such requirement is not required by law and if the
Commission finds such waiver or exception to be in the best interest of
individual Indian applicants, the Commission, and the United States.
Any request for a Commission waiver shall be submitted in writing to the
Commission and shall be justified on a case by case basis.
25 CFR 700.15 Waiver of rights by owner.
Nothing in these regulations shall prevent a fully informed applicant
from voluntarily waiving any of his/her rights under the regulations in
this part. A waiver of rights shall in no way constitute an exemption
from the requirement to relocate pursuant to the Act.
25 CFR 700.15 Definitions
25 CFR 700.31 Applicability of definitions.
Except where otherwise noted, the definitions appearing in this
Subpart A apply to the regulations in this part.
25 CFR 700.33 Act (The Act).
(a) The Act. The Act is Pub. L. 93-531, (88 Stat. 1712, 25 U.S.C.
640d.) as amended by Pub. L. 96-305 (94 Stat. 929).
25 CFR 700.35 Applicant.
A person who applies for relocation assistance benefits and agrees to
relocate as required by the Act.
25 CFR 700.37 Application for relocation assistance benefits and
agreement to move.
The application for relocation assistance benefits and agreement to
move is Commission Form 69-R0001, completion of which is used for
establishing the date upon which a person shall be deemed to have a
contract with the Commission to relocate pursuant to section 14(b) of
the Act.
25 CFR 700.39 Appraisal.
The appraisal is an estimate of the fair market value which is placed
on the habitation and other improvements owned by a relocatee.
25 CFR 700.41 Appraiser.
An appraiser is a person appointed or hired by the Commission to make
an appraisal of the habitation and other improvements on the land owned
by the relocatees. All compensation for the appraiser shall be paid by
the Commission.
25 CFR 700.43 Assistance payment.
An assistance payment is the additional payment made to the certified
eligible head of household pursuant to Section 14(b) of the Act. This
term is synonymous with ''incentive bonus''.
25 CFR 700.45 Business.
The term business means any lawful activity, except a nonprofit
organization or a farm operation, that is --
(a) Conducted primarily for the purchase, sale, lease and or rental
of personal and/or real property, and/or for the manufacture,
processing, and/or marketing of products, commodities, and/or any other
personal property; or
(b) Conducted primarily for the sale of services to the public; or
(c) Solely for the purpose of Subpart D of this part, conducted
primarily for outdoor advertising display purposes, when the display(s)
must be moved as a result of the Act.
25 CFR 700.47 Commission.
The Navajo and Hopi Indian Relocation Commission is that entity
established pursuant to 25 U.S.C. 640d-11 (Section 12(a) of the Act).
25 CFR 700.49 Certified eligible head of household.
A certified eligible head of household is a person who has received
notice from the Commission that he/she has been certified as eligible to
receive certain relocation assistance benefits.
25 CFR 700.51 Custodial parent.
A custodial parent is a person who has the immediate personal care,
charge, and control of a minor child who resides in his/her household,
or a person who fills the parental role but who is not necessarily
blood-related.
25 CFR 700.53 Dwelling, replacement.
The term replacement dwelling means a dwelling selected by the head
of a household as a replacement dwelling that meets the criteria of this
section. A replacement dwelling is a dwelling that:
(a) Is decent, safe, and sanitary as described in 700.55.
(b) May include existing dwellings for resale, new construction,
modular homes, mobile homes, mutual self-help housing or other federally
assisted housing programs.
(c) Is in an area not subjected to unreasonable adverse environmental
conditions from either natural or man-made sources and in an area not
generally less desirable than that of the acquired dwelling with respect
to public utilities, public and commercial facilities, and schools.
(d) Is available at a purchase price within the ability-to-pay of the
displaced person. A replacement dwelling shall be considered within the
ability-to-pay of the displaced person if, after he receives a
replacement housing payment and any available housing assistance
payments, his new monthly housing cost (defined at 700.81) for the
replacement dwelling does not exceed twenty-five percent (25%) of the
monthly gross income of all adult members of the household, including
supplemental income payments received from public agencies. If the
person's monthly income pattern is irregular, the Commission shall base
its determination of average gross monthly income on the period of time,
actual and/or projected, that most fairly and equitable represents the
person's ability-to-pay.
(e) Is actually available to the displaced person on the private
market, other federally-sponsored housing projects, tribal-sponsored
housing projects and/or Commission-sponsored housing projects.
25 CFR 700.55 Decent, safe, and sanitary dwelling.
(a) General. The term decent, safe, and sanitary dwelling means a
dwelling which --
(1) Meets applicable federal, state and local housing and occupancy
codes; including but not limited to the Uniform Building Code, National
Electrical Code, ICBO Plumbing Code, the Uniform Mechanical Code, HUD
Minimum Property Standards, and HUD Mobile Home Construction and Safety
Standards (24 CFR part 4080).
(2) Is structurally sound, clean, weathertight and in good repair and
has adequate living space and number of rooms.
(3) Has an adequate and safe electrical wiring system for lighting
and other electrical services where economically feasible.
(4) Meets the requirements of the HUD lead-based paint regulations
(24 CFR part 42) issued under the Lead-Based Paint Poisoning Prevention
Act (42 U.S.C. 4831 et seq.);
(5) In the case of a physically handicapped person, is free of any
architectural barriers. To the extent that standards prescribed by the
American National Standards Institute, Inc., in publication ANSI
A117.1-1961 (R 1971), are pertinent, this provision will be considered
met if it meets those standards;
(6) Has heating as required by climatic conditions;
(7) Has habitable sleeping area that is adequately ventilated and
sufficient to accommodate the occupants;
(8) Has a separate well-lighted and ventilated bathroom, affording
privacy to the user, that contains a sink and bathtub or shower stall,
properly connected to hot and cold water, and a flush toilet, all in
good working order and properly connected to a sewage drainage system;
and
(9) In the case of new construction or modular housing, complies with
the energy performance standards for new buildings set forth by the U.S.
Department of Energy.
(10) The Commission may waive paragraph (a) (3) or (8) of this
section on a case-by-case basis if it is determined that it is in the
best interest of the individual relocatee to do so.
25 CFR 700.57 Dependent.
A dependent is a person who either derives more than one-half of
his/her support from another or is under the custody, control and care
of another. In instances where there are conflicting claims for the
dependent status of a person in more than one household, the household
of the person having custody, control and care shall be determined to be
the household wherein the person is a dependent.
25 CFR 700.59 Displaced person.
Displaced person means a member of the Hopi Tribe residing within the
area partitioned to the Navajo Tribe or a member of the Navajo Tribe
residing within the area partitioned to the Hopi Tribe who must be
relocated pursuant to the Act. This term is synonymous with the term
''relocatee''.
25 CFR 700.61 Fair market value.
Fair market value shall mean the value placed on the habitation and
improvements owned by each head of household as determined pursuant to
700.117 through 700.121.
25 CFR 700.65 Farm operation.
Farm operation means any activity conducted for the production of one
or more agricultural products or commodities including livestock, crops
and timber for sale or home use, and customarily producing such products
or commodities in sufficient quantity to be capable of contributing
materially to the operator's support as determined in 700.171(b)(3).
25 CFR 700.67 Habitation.
The term habitation means the dwelling(s) of each household required
to relocate under the term of the Act.
25 CFR 700.69 Head of household.
(a) Household. A household is:
(1) A group of two or more persons living together at a specific
location who form a unit of permanent and domestic character.
(2) A single person who at the time his/her residence on land
partitioned to the Tribe of which he/she is not a member actually
maintained and supported him/herself or was legally married and is now
legally divorced.
(b) Head of household. The head of household is that individual who
speaks on behalf of the members of the household and who is designated
by the household members to act as such.
(c) In order to qualify as a Head of Household, the individual must
have been a Head of Household as of the time he/she moved from the land
partitioned to a tribe of which they were not a member.
(49 FR 22278, May 29, 1984)
25 CFR 700.71 Improvements.
Improvements are structures and attached fixtures to the land owned
by a member of a household required to relocate under the terms of the
Act, in addition to the habitation which improvements cannot readily be
moved without substantial damage, or whose movement would require
unreasonable cost.
25 CFR 700.77 Livestock.
The term livestock shall mean all domesticated animals of every type
owned by the displaced person.
25 CFR 700.79 Marriage.
Marriage is a legally recorded marriage or a traditional commitment
between a man or woman recognized by the law of the Hopi Tribe or the
Navajo Tribe.
25 CFR 700.81 Monthly housing cost.
(a) General. The term monthly housing cost for a replacement
dwelling purchased by a certified eligible head of household is the
average monthly cost for all mortgage payments, real property taxes,
reasonable utility charges, and insurance.
(b) Computation of monthly housing cost for replacement dwelling. A
person's monthly housing cost for a replacement dwelling shall be a
projected amount that includes one-twelfth of the estimated reasonable
annual cost for utility charges.
25 CFR 700.83 Nonprofit organization.
The term nonprofit organization means a corporation, individual, or
other public or private entity that is engaged in a lawful business,
professional, or instructional activity on a nonprofit basis and that
has established its nonprofit status under applicable Federal, State, or
Tribal law.
25 CFR 700.85 Owner.
The term owner means the person who holds any interest in habitations
and improvements to be acquired by the Commission pursuant to section
15(a) of the Act, which the Commission determines warrants consideration
of ownership.
25 CFR 700.87 Person.
The term person means any individual, partnership, corporation, or
association.
25 CFR 700.89 Relocation contract.
The Relocation Contract is that contract signed by the head of
household in which he/she agrees to purchase an existing house or to
construct a new house, the owner of such existing house or the builder
of the proposed new house agrees to sell or perform the construction,
and the Commission agrees to make payments according to such agreement.
(47 FR 17988, Apr. 27, 1982)
25 CFR 700.91 Relocation report.
The relocation report shall be the report prepared by the Commission
and submitted to Congress pursuant to section 13(a) of the Act.
25 CFR 700.93 Relocation plan.
The relocation plan shall be the plan prepared by the Commission and
submitted to Congress pursuant to section 13(c) of the Act.
25 CFR 700.95 Replacement housing funds.
Replacement housing funds means those funds authorized to be
appropriated pursuant to section 25(a)(1) of the Act.
25 CFR 700.97 Residence.
(a) Residence is established by proving that the head of household
and/or his/her immediate family were legal residents as of 12/22/74 of
the lands partitioned to the Tribe of which they are not members.
(49 FR 22278, May 29, 1984)
25 CFR 700.99 Salvage value.
Salvage value means the probable sale price of an item, if offered
for sale on the condition that it will be removed from the property at
the buyer's expense, allowing a reasonable period of time to find a
person buying with knowledge of the uses and purposes for which it is
adaptable and capable of being used, including separate use of
serviceable components and scrap when there is no reasonable prospect of
sale except on that basis.
25 CFR 700.101 Single person.
A single person is a widow, widower, unmarried or divorced person.
25 CFR 700.103 Uniform Act.
The term Uniform Act means the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970 (84 Stat. 1894; 42 U.S.C.
4601 et seq.; Pub. L. 91-646).
25 CFR 700.105 Utility charges.
Utility charges means the cost for heat, lighting, hot water,
electricity, natural gas, butane, propane, wood, coal or other fuels
water, sewer and trash removal.
25 CFR 700.105 Subpart B -- Acquisition and Disposal of Habitations and/or Improvements
25 CFR 700.111 Applicability of acquisition requirements.
General. The requirements of this subpart B apply to all Commission
acquisition of habitations and/or improvements that occur on or after
the effective date of these regulations.
25 CFR 700.113 Basic acquisition policies.
(a) Appraisal and invitation to owner. Before the initiation of
negotiations, the Commission shall have the habitations and/or
improvements appraised to its satisfaction and will attempt to assure
that the owner or his designated representative is contacted in advance
of the appraisal(s) and given an opportunity to accompany each appraiser
during the appraiser's inspection of the property.
(b) Determination and offer of fair market value. Before the
initiation of negotiations, the Commission shall establish an amount
which it believes is fair market value for improvements. This amount
shall be based on a current appraisal at the time negotations commence
for the relocation contract between the NHIRC and the relocatee. The
appraisal will be adjusted according to the Boeckh Building Cost
Modifier for time or any physical changes in the improvements. If any
changes are necessary the appraisal will be corrected to reflect a
current dollar value. The amount of the current appraisal will be
offered as just compensation for the improvements acquired, except as
provided in paragraph (d) of this section. A copy of the initial
appraisal will be sent to the owner as soon as possible after the
appraisal program is completed.
(c) Basic negotiation procedures. The Commission will attempt to
meet with the owner or his/her representative to discuss its offer to
purchase his/her property including the basis for the determination of
fair market value and explain acquisition policies and procedures,
including payment of incidental expenses. The owner shall be given
reasonable opportunity to present material which he/she believes is
relevant to determining the value of the property and to suggest
modification in the proposed terms and conditions of the purchase. The
Commission shall consider the owner's presentation.
(d) If the condition of the property indicates the need for a new
appraisal or if a significant delay has occurred since the time of the
latest appraisal of the property, the Commission shall have the
appraisal updated or obtain a new appraisal. If a new appraisal is for
a lesser value than the previous appraisal and said lesser value is due
to damage done to the property during the time between the two
appraisals, and such damage was not caused by the owner of the
improvement, the owner shall be entitled to the higher appraisal value.
(e) (Reserved)
(f) Objection to determination of fair market value. If the owner
objects to the Commission's determination of fair market value, the
owner may request a hearing pursuant to the Commission's Hearing and
Administrative Review procedures;
(g) Payment before taking possession. Before requiring an owner to
surrender possession of his habitations and/or improvements, the
Commission shall --
(1) Apply the agreed purchase price towards the acquisition price of
the replacement dwelling or;
(2) Deposit with the court in an appropriate proceeding, such as
divorce or probate, for the benefit of the owner, an amount not less
than the Commission's determination of fair market value for the
property or the court award of compensation for the property up to the
maximum benefit allowed under the then existing replacement housing
benefit.
25 CFR 700.115 Preliminary acquisition notice.
As soon as feasible in the acquisition process, the Commission shall
issue a preliminary acquisition notice to the owner. The notice shall
--
(a) Inform the owner of the Commission's interest in acquiring
his/her habitations and/or improvements.
(b) Explain that such preliminary acquisition notice is not a notice
to vacate and that it does not establish eligibility for relocation
payments or other relocation assistance under these regulations.
25 CFR 700.117 Criteria for appraisals.
(a) Appraisal standards. The Commission's appraisals shall be based
upon nationally recognized appraisal standards and techniques to the
extent that such principles are consistent with the concepts of value
that the Commission may establish.
(b) Documentation. Appraisal reports must contain sufficient
documentation, including supporting valuation data and the appraiser's
analyses of that data, to demonstrate the reasonableness of the
appraiser's opinion(s) of value.
(c) Conflict of interest. No appraiser shall have any interest,
direct or indirect, in the habitations and/or improvements which he
appraisers for the Commission that would in any way conflict with his
performance of the appraisal.
25 CFR 700.119 Establishment of fair market value.
(a) General. The Commission shall establish the amount of fair
market value to be offered to the owner for the habitations and/or
improvements. Such amount shall not be less than --
(1) The appraiser's recommendations as to the fair market value of
the habitations and/or improvements; or
(2) The fair market value estimate set forth in the agency's approved
appraisal, if the property is valued at $2,000 or less.
(b) Owner retention of improvements. If the owner of a habitation
and/or improvement is permitted to retain it for removal off-site, the
amount determined to be just compensation for the interest in
habitations and/or improvements to be acquired from him shall not be
less than the amount determined by subtracting the salvage value of the
improvements he retains for off-site removal from the amount determined
to be fair market value for his entire interest in the habitation and
improvement. Retention of improvements by the owner shall not change,
alter or abrogate the requirement of the Act that the owner must move
from land partitioned to the tribe of which he/she is not a member.
25 CFR 700.121 Statement of the basis for the determination of fair
market value.
At the time of the initiation of negotiations to acquire the
habitations and/or improvements, the Commission shall furnish the owner,
along with the initial written purchase offer, a written statement of
the basis for the determination of fair market value. To the extent
permitted by the Commission, the statement shall include the following
--
(a) A description and location identification of the habitations
and/or improvements to be acquired.
(b) An inventory identifying the buildings, structures, fixtures, and
other improvements, including appurtenant removable building equipment,
which are considered to be part of the habitations and/or improvements
for which the offer of fair market value is made.
(c) A recital of the amount of the offer and a declaration that such
amount --
(1) Is the full amount believed by the Commission to be just
compensation for the property and is not less than the fair market value
of the property as determined on the basis of the appraisal(s);
(2) Does not reflect any relocation payments or other relocation
assistance which the owner is entitled to receive.
(d) If only a portion of a habitation and/or improvement is to be
acquired, an apportionment of the total estimated just compensation for
the partial acquisition will be made. In the event that the Commission
determines that partial acquisitions are necessary, all portions so
acquired will be acquired simultaneously.
25 CFR 700.123 Expenses incidental to transfer of ownership to the
Commission.
Eligible costs. The Commission shall reimburse the owner for
reasonable expenses he/she necessarily incurred incidental to the
transfer of habitations and/or improvements to the Commission. The
Commission is not required to pay costs solely required to perfect the
owner's interest in the habitations and/or improvements.
25 CFR 700.125 Disposal of property.
Property acquired by the Commission pursuant to the Act shall be
disposed of in one of the following manners:
(a) If the Commission determines that the property acquired
constitutes a substantial risk to public health and safety, the
Commission may remove or destroy the property.
(b) The Commission may transfer the property acquired by gratuitous
conveyance to the tribe exercising jurisdiction over the area. Notice
of such transfer shall be in writing and shall be completed within sixty
(60) days from the finalization of all property acquisition procedures,
unless the tribe notifies the Commission in writing within that time
that the property transfer is refused. In the event of a refusal by the
tribe, the Commission shall remove the property.
25 CFR 700.127 Payments for acquisition of improvements.
Payments for acquisition of improvements shall be made in the
following situations:
(a) To individuals who have been denied benefits under these rules
and who can prove ownership of habitations and improvements on land
partitioned to the tribe of which they are not members. If the owner is
deceased the payment shall be made to his or her estate. Payments under
this subsection are further limited by 25 U.S.C. 640d-14(c), Pub. L.
93-531, sec. 15(c).
(b) To individuals who have been certified as eligible for relocation
benefits but who at the time of certification, own a decent, safe and
sanitary dwelling as determined by the Commission pursuant to 700.187
and who own habitation and improvements on land partitioned to the tribe
of which they are not members.
Ownership shall be determined on the basis of Commission appraisal
records at the time of the initial eligibility determination.
(25 U.S.C. 640d, Pub. L. 93-531, 25 U.S.C. 640d-14, Pub. L. 96-305)
(49 FR 35379, Sept. 7, 1984)
25 CFR 700.127 Subpart C -- General Relocation Requirements
25 CFR 700.131 Purpose and applicability.
This subpart prescribes general requirements governing the provision
of relocation payments and other relocation assistance under the
regulations in this part. The relocation requirements of the
regulations in this part apply to the relocation of any displaced
person.
25 CFR 700.133 Notice of displacement.
After the Commission's Relocation Report and Plan is in effect
pursuant to the Act, the Commission shall issue a preliminary relocation
notice to each person identified by the Commission as potentially
subject to relocation. This notice shall --
(a) Be published in a newspaper of general circulation in the area of
the former Joint Use Area at least two times, and shall be sent to each
Chapter House on the former Joint Use Area for posting.
(b) Inform the person that he/she will be required to relocate
permanently in the future unless the person has applied for and is
determined to be eligible for a Life Estate.
(c) Generally describe the relocation assistance program for which
the person may become eligible, including the maximum allowable dollar
amounts and basic conditions of eligibility for the payments.
25 CFR 700.135 Relocation assistance advisory services.
(a) General. The Commission may carry out a relocation assistance
advisory program which offers the services described in paragraph (b) of
this section. If the Commission determines that a person occupying
habitations and/or improvements adjacent to the habitations and/or
improvements acquired pursuant to the Act is caused substantial social,
economic cultural or other injury because of such acquisition, it may
offer such services to such person.
(b) Services to be provided. The advisory program will include such
measures, facilities, and services as may be necessary or appropriate in
order to --
(1) Personally interview where possible each certified eligible head
of household to determine his/her relocation needs and preferences, and
explain to him/her the relocation payments and other assistance for
which he/she may be eligible, the related eligibility requirements, and
the procedures for obtaining such payments and assistance;
(2) Provide current and continuing information on the availability,
purchase prices, and rental costs of replacement dwellings and
commercial and farm properties and locations, as the case may be.
(3) Assure that replacement dwellings are available to all certified
eligible heads of households.
(4) Assist any persons displaced from a business or farm operation to
obtain and become established in a suitable replacement location;
(5) Supply persons to be displaced with appropriate information
concerning Tribal, Federal, State or local housing programs, disaster
loans and other programs administered by the Small Business
Administration, and other Federal or State programs offering assistance
to persons to be displaced;
(6) Endeavor to minimize the adverse social, economic, cultural and
other hardships and impacts of relocation on persons involved in
adjusting to such relocation.
(c) Coordination of relocation activities. The Commission shall, to
the maximum extent feasible, coordinate its relocation assistance
advisory services activities with existing local, state, federal and
Tribal agencies to the extent necessary to enable it to carry out its
program. Referrals of displaced persons for services to existing
services providers will be utilized whenever possible.
(d) Policy. The Commission shall continue to provide assistance to a
family, individual, business concern, non-profit organization, or farm
operation until relocation has been achieved unless section 700.139
becomes applicable.
(e) Reasons for Terminating Assistance. In general, the
circumstances under which the Commission's relocation obligations cease
are the following:
(1) Two years have elapsed since the family or individual has moved
to a decent, safe and sanitary replacement dwelling and has received all
assistance payments to which entitled.
(2) All reasonable efforts to trace a family or individual have
failed.
(3) The family or individual on his/her own initiative moves to
substandard housing and has refused reasonable offers of additional
assistance in moving to a decent, safe and sanitary replacement
dwelling.
(4) The business concern, farm operation, or non-profit organization
has received all assistance and payments to which it is entitled, and
has either been successfully relocated or ceased operations.
(5) Other relevant reasons as determined by the Commission.
25 CFR 700.137 Final date for voluntary relocation application.
(a) In order to be considered for voluntary relocation assistance
benefits, an applicant must have filed a completed application form with
the Commission by the close of business on July 7, 1986.
(b) To qualify for relocation assistance, individuals must meet the
eligibility requirements as of July 7, 1986.
(51 FR 19170, May 28, 1986)
25 CFR 700.138 Persons who have not applied for voluntary relocation by
July 7, 1986.
(a) Pursuant to 25 U.S.C. 640d-14 (d)(3) heads-of-household who do
not make timely arrangements for relocation by filing an application by
July 7, 1986, shall be provided a replacement home by the Commission.
To be eligible for benefits (Housing and Moving Expenses), such persons
must be, as of July 7, 1986, physically residing full time on land
partitioned to a tribe of which they are not members and they must also
otherwise meet all other current eligibility criteria.
(b) The Commission shall utilize amounts payable with respect to such
households pursuant to 25 U.S.C. 640d-14(b)(2) and 25 U.S.C. 640d-34(a)
for the construction or acquisition of a home and related facilities for
such households.
(c) Persons identified by the Commission as potentially subject to
relocation who have not applied for relocation assistance shall be
contacted by the Commission as soon as practicable after July 7, 1986.
At such time, the Commission shall --
(1) Request that the head-of-household choose an available area for
relocation, and contract with the Commission for relocation; and
(2) Offer the relocatee suitable housing; and
(3) Offer to purchase from the head-of-household the habitation and
improvements; and
(4) Offer provisions for the head-of-household and his family to be
moved (e.g., moving expenses, etc.).
(d) If a person so identified fails to agree to move after the
actions outlined in this section are taken by the Commission and
suitable housing is available (or sufficient funds are available to
assure the relocation assistance to which the relocatee may be
entitled), the Commission will issue a ninety-day notice stating the
date by which the person will be required to vacate the area partitioned
to the Tribe of which he is not a member.
(51 FR 19170, May 28, 1986)
25 CFR 700.139 Referral for action.
Upon the expiration of all notice periods and upon the failure or
refusal of any relocatees to make timely arrangements to move, the
Commission shall forward the names and addresses of such relocatees to
the Secretary of the Interior and to the U.S. Attorney for the District
of Arizona for such action as they deem appropriate. The Commission
will assure the availability of relocation assistance to which the
relocatees may be entitled.
25 CFR 700.141 General requirements -- claims for relocation payments.
(a) Documentation. Any claim for a relocation payment under subpart
D, E, F, G, or H of this part shall be submitted to the Commission on
the appropriate Commission form and supported by such documentation as
may reasonably be required by the Commission to demonstrate expenses
incurred, such as bills and receipts.
(b) Time for filing. All claims for a relocation payment shall be
filed with the Commission within sixty (60) days after the family
occupies the replacement home unless this time period is extended by the
Commission.
(c) Direct payment of claim. Relocation payments shall be made in
accordance with the terms of the Relocation contracts and are not
subject to claims of creditors or assignments.
25 CFR 700.143 Payments for divorced or separated relocatees.
General. The following considerations apply to certified eligible
heads of household who are legally separated or divorced and intend to
establish separate eligibility.
(a) Determination of benefits. Eligibility for relocation benefits
is determined as of the time that the Relocation Contract is signed.
(1) If the divorce or separation took place before benefits were
first applied for, the spouse who vacated the habitation will not be
eligibile for benefits and all relocation benefits will accrue to the
spouse remaining in occupancy as head of the household remaining to be
relocated.
(2) If both husband and wife are in possession of the habitation at
the time that benefits are first applied for, and are divorced or
separated prior to signing of a Relocation Contract, both husband and
wife may qualify separately for benefits if each meets the requirements
of eligibility under these regulations.
(3) If both husband and wife are in possession of the habitation at
the time a Relocation Contract is signed but are divorced or separated
prior to occupancy of the replacement dwelling, only one benefit will be
paid to the household. Such benefits (including the assistance payment,
moving expenses and replacement dwelling benefit) and the purchase price
of the habitation and improvements may be prorated between husband and
wife in such manner as they may agree in writing so long as such
proration is consistent with the terms of the Relocation Contract. Such
proration may also be made by a court of competent jurisdiction. In the
absence of an agreement between the parties or a court order, any
necessary prorations shall be made by the Commission.
(b) For purposes of this section, a head of household shall be
considered as married even though living apart from his or her spouse
unless legally separated under a decree or separate maintenance.
(47 FR 17988, Apr. 27, 1982)
25 CFR 700.145 Payments to estates.
(a) Relocation benefits can be paid to the estate of a deceased
Certified Eligible Head of Household under the following circumstances:
(1) If there is no household requiring relocation pursuant to the Act
surviving the deceased head of household:
(i) Compensation for the habitation and other improvements owned by
the deceased head of household and the cost of removing personal
property from the acquired habitation and other improvements shall be
paid to the estate of a deceased head of household, or as otherwise
directed by a court of competent jurisdiction.
(ii) No replacement housing benefit or assistance payment (bonus)
shall be paid under this circumstance.
(2) Replacement housing benefits may be paid to an estate only when a
certified eligible head of household was qualified for such a housing
payment pursuant to the Act and signed a Relocation Contract but died
before the replacement housing was occupied. The estate of a certified
eligible head of household who had not signed a Relocation Contract at
the time of his/her death is not eligible for payment of a replacement
housing benefit.
(b) If one of a married couple who was a certified eligible head of
household dies, the surviving spouse may be paid the same relocation
assistance benefits, including replacement housing payments, which the
couple would have received had death not occurred. If there is no
surviving spouse, a court of competent jurisdiction may appoint a
guardian to act for minor members of the household. The Commission
shall deal with such guardian and any members of the household who have
attained their majority in a manner to effect relocation of the
remaining household under these regulations.
(47 FR 17988, Apr. 27, 1982)
25 CFR 700.147 Eligibility.
(a) To be eligible for services provided for under the Act, and these
regulations, the head of household and/or immediate family must have
been residents on 12/22/74 of an area partitioned to the Tribe of which
they were not members.
(b) The burden of proving residence and head of household status is
on the applicant.
(c) Eligibility for benefits is further restricted by 25 U.S.C.
640d-13(c) and 14(c).
(d) Individuals are not entitled to receive separate benefits if it
is determined that they are members of a household which has received
benefits.
(e) Relocation benefits are restricted to those who qualify as
heads-of-household as of July 7, 1986.
(49 FR 22278, May 29, 1984, as amended at 51 FR 19170, May 28, 1986)
25 CFR 700.147 Subpart D -- Moving and Related Expenses, Temporary Emergency Moves
25 CFR 700.151 Eligibility.
(a) General. All certified eligible heads of household are eligible
for moving and related expenses as prescribed in this subpart. A
certified eligible head of household who lives on his/her business or
farm property may be eligible for both a payment as a dwelling occupant
and a payment with respect to the business or farm operation.
(b) Least costly approach. The amount of payment for an eligible
expense under this subpart shall not exceed the least costly method, as
determined by the Commission, of accomplishing the objective of the
payment without causing undue hardship to the certified eligible heads
of household.
(c) Prior approval. Written approval of the Commission must be
obtained for all moving and search expenses in this subpart. Such
approval shall be obtained by each certified eligible head of household
prior to incurring any expense from the real estate specialist to whom
the case is assigned. If prior approval and the amount thereof is not
obtained from the Commission, the Commission thereafter will determine:
(1) Whether the travel was required and the expenses reasonable and;
(2) The amount of reimbursement to be paid, if any.
25 CFR 700.153 Actual reasonable moving and related expenses --
residential moves.
Subject to the limitations contained in this subpart, a certified
eligible head of household is entitled to actual reasonable expenses for
--
(a) Transportation computed at prevailing federal per diem and
mileage allowance schedules, meals and lodging away from home required
by the Commission.
(b) Transportation computed at prevailing federal per diem and
mileage allowance schedules of the household and personal property from
the acquired site to the replacement site.
(c) Packing, crating, unpacking and uncrating of the personal
property.
(d) Disconnecting, dismantling, removing, reassembling and
reinstalling relocated household appliances, and other personal
property;
(e) Storage of the personal property, not to exceed one year unless
extended by the Commission.
(f) Insurance of the personal property in connection with the move
and necessary storage; and
(g) Other moving related expenses that are not listed as ineligible
under 700.165, as the Commission determines to be reasonable and
necessary.
25 CFR 700.155 Expenses in searching for replacement dwelling --
residential move.
(a) A certified eligible head of household is entitled to actual
reasonable expenses incurred in the search for a replacement dwelling.
(b) Transportation, meals and lodging when required to be away from
home by the Commission, computed at prevailing federal per diem and
mileage allowance schedules.
25 CFR 700.157 Actual reasonable moving and related expenses --
nonresidential moves.
(a) Eligible costs. Subject to the limitations of 700.151(c) a
certified eligible business, farm operation or nonprofit organization is
entitled to payment for actual reasonable expenses for:
(1) Transportation of personal property from the acquired site to the
replacement site.
(2) Packing, crating, unpacking, and uncrating the personal property.
(3) Disconnecting, dismantling, removing, reassembling and installing
relocated and substitute machinery, equipment, and other personal
property. This includes connection to utilities available nearby and
modifications necessary to adapt such property to the replacement
structure or to the utilities or to adapt the utilities to the personal
property;
(4) Storage of the personal property;
(5) Insurance of personal property in connection with the move and
necessary storage;
(6) Any license, permit or certification required by the displaced
person, to the extent such cost is (i) necessary to its re-establishment
at the replacement location and (ii) does not exceed either the cost for
one year or for the remaining useful life of the existing license,
permit, or certification, whichever is less;
(7) Professional services, including architect's, attorney's and
engineer's fees, and consultant's charges, necessary for (i) planning
the move of the personal property, (ii) moving the personal property, or
(iii) installing the relocation personal property at the replacement
location.
(8) Relettering signs and printing replacement stationery made
obsolete as a result of the move;
(9) Actual direct loss of personal property;
(10) Purchase of substitute personal property;
(11) Searching for a replacement location;
(12) Other moving-related expenses that are not listed as ineligible
under 700.165.
(b) Self-move. If the displaced person self-moves his business, farm
operation, or nonprofit organization, the Commission may approve a
payment for his moving expenses in an amount not to exceed the lowest
acceptable bid or estimate obtained by the Commission, without
submission of documentation of moving expenses actually incurred.
(c) Notification to Commission and inspection. To be eligible for a
payment under this section, the displaced person shall permit the
Commission to make reasonable and timely inspections of the personal
property at the displacement and replacement sites.
25 CFR 700.159 Payment for direct loss of personal property --
nonresidential moves.
(a) General. A certified eligible business is entitled to payment
for actual direct loss of an item of tangible personal property incurred
as a result of moving or discontinuing his business, farm operation, or
nonprofit organization. The payment shall consist of the reasonable
costs incurred in attempting to sell the item plus the less of --
(1) The fair market value of the item for continued use at the
acquired site, less the proceeds from its sale. (When payment for
property loss is claimed for goods held for sale, the fair market value
shall be based on the cost of the goods to the business, not the
potential selling price); or
(2) The estimated cost of moving the item, but with no allowance for
storage. (If the business, farm operation or nonprofit organization is
discontinued, the estimated cost shall be based on a moving distance of
50 (fifty) miles.)
(b) Advertising sign. The amount of a payment for direct loss of an
advertising sign, which is personal property, shall be the lesser of --
(1) The depreciated reproduction cost of the sign as determined by
the Commission, less the proceeds from its sale; or
(2) The estimated cost of moving the sign.
(c) Sales effort. To be eligible for payment for direct loss of
personal property, the claimant must make good faith effort to sell the
personal property, unless the Commission determines that no such effort
is necessary.
(d) Transfer of ownership. To be eligible for payment for direct
loss of personal property, the claimant shall transfer to the Commission
ownership of the unsold personal property.
25 CFR 700.161 Substitute personal property -- nonresidential moves.
(a) General. If an item of personal property, which is used as part
of a business, farm operation or nonprofit organization, is not moved
but is promptly replaced with a comparable substitute item at the
replacement site, the displaced person is entitled to payment of the
lesser of --
(1) The cost of the substitute item, including installation cost at
the replacement site, minus any proceeds from the sale or trade-in of
the replaced item, if any; or
(2) The estimated cost of moving the replaced item, based on the
lowest acceptable bid or estimate obtained by the Commission for
eligible moving and related expenses, but with no allowance for storage.
(b) Transfer of ownership. To be eligible for a payment under this
section, the claimant shall transfer to the Commission ownership of the
personal property that has not been sold or traded in.
25 CFR 700.163 Expenses in searching for replacement location --
nonresidential moves.
A displaced business, farm or nonprofit organization is entitled to
an amount not to exceed $500 (five-hundred dollars), as determined by
the Commission, for actual reasonable expenses incurred in searching for
a replacement location, including --
(a) Transportation computed at prevailing federal per diem and
mileage allowance schedules; meals and lodging away from home;
(b) Time spent searching, based on reasonable earnings;
(c) Fees paid to a real estate agent or broker to locate a
replacement site.
25 CFR 700.165 Ineligible moving and related expenses.
A displaced person is not entitled to payment for --
(a) The cost of moving any structure or other improvement in which
the displaced person reserved ownership; or
(b) Interest on a loan to cover moving expenses; or
(c) Loss of goodwill; or
(d) Loss of profits; or
(e) Loss of trained employees; or
(f) Physical changes at replacement location of business, farm or
nonprofit organization, except as provided at 700.157; or
(g) Any additional expense of a business, farm, or nonprofit
organization incurred because of operating in a new location.
25 CFR 700.167 Moving and related expenses -- fixed payment.
A displaced person (other than an outdoor advertising display
business who is eligible for a payment for his actual moving and related
expenses under subpart D of these regulations) is entitled to receive a
fixed payment in lieu of a payment for such actual moving and related
expenses.
25 CFR 700.169 Fixed payment for moving expenses -- residential moves.
The fixed payment for moving and related expenses of a certified
eligible head of household from a dwelling consists of --
(a) A moving expense allowance not to exceed $300 (three hundred
dollars).
(b) A dislocation allowance of $200 (two hundred dollars).
25 CFR 700.171 Fixed payment for moving expenses -- nonresidential
moves.
(a) General. The fixed payment for moving and related expenses of a
displaced business or farm operation that meets applicable requirements
under this section is an amount equal to its average annual net earnings
as computed in accordance with 700.173, but not less than $2,500 nor
more than $10,000. A nonprofit organization which meets the applicable
requirements under this section is entitled to a payment of $2,500.
(b) Business. A business qualifies for payment under this section if
the Commission determines that --
(1) The business cannot be relocated without a substantial loss of
its existing patronage.
(2) The business is not part of a commercial enterprise having
another establishment, which is not being acquired by the Commission,
and which is under the same ownership and engaged in the same or similar
business activities. For purposes of this rule, no remaining business
facility which had average annual gross receipts of less than $1,000 and
average annual net earnings of less than $500, during the two taxable
years prior to displacement, shall be considered ''another
establishment''; and
(3) The business had (i) average annual gross receipts of at least
$1,000 during the two taxable years prior to displacement, or (ii)
average annual net earnings of at least $500 as determined in accordance
with 700.173. However, the Commission may waive this test in any case
in which it determines that its use would cause a substantial hardship.
(c) Determining number of businesses acquired. In determining
whether two or more legal entities, all of which have been acquired,
constitute a single business, which is entitled to only one fixed
payment, all pertinent factors shall be considered, including the extent
to which --
(1) The same premises and equipment are shared;
(2) Substantially identical or interrelated business functions are
carried out and business and financial affairs are commingled;
(3) The entities are held out to the public, and to those customarily
dealing with them, as one business, and
(4) The same person or closely related persons own, control or manage
the affairs of the entities.
(d) Farm operation. A farm operation qualifies for a payment under
this section if the Commission determines that it meets the criteria set
forth in 700.171(b)(3). In the case of a partial acquisition, the fixed
payment shall be made only if the Commission determines that --
(1) The part acquired was a farm operation before the acquisition;
or
(2) The partial acquisition caused the operator to be displaced from
the farm operation; or
(3) The partial acquisition caused a substantial change in the nature
of the farm operation.
(e) Nonprofit organization. A nonprofit organization qualifies for a
$2,500 payment under this section, if the Commission determines that it
--
(1) Cannot be relocated without a substantial loss of existing
patronage (membership and clientele). A nonprofit organization is
assumed to meet this test, unless the Commission demonstrates otherwise;
and
(2) Is not part of an enterprise having at least one other
establishment engaged in the same or similar activity which is not being
acquired by the Commission.
25 CFR 700.173 Average net earnings of business or farm.
(a) Computing net earnings. For purposes of this subpart, the
average annual net earnings of a business or farm operation is one-half
of its net earnings before Federal, State and local income taxes, during
the two taxable years immediately prior to the taxable year in which it
was displaced. However, if the business or farm was not in operation
for the full two taxable years prior to displacement, net earnings shall
be computed on the basis of the actual period of operation on the
acquired site, projected to an annual rate. Also, average annual net
earnings may be based upon a different period of time when the
Commission determines it to be more equitable. Net earnings include any
compensation obtained from the business or farm operation by its owner,
his spouse, or dependents.
(b) Documentation. A displaced person who elects to receive a fixed
payment in lieu of actual expenses incurred in moving his business or
farm shall furnish the Commission proof of his net earnings through
income tax returns, certified financial statements or other reasonable
evidence.
25 CFR 700.175 Temporary emergency moves.
(a) General. An eligible household may be granted temporary
relocation resources, at the Commission's discretion, provided:
(1) That the move is for a limited time period not to exceed 12
months unless extended by the Commission.
(2) That permanent relocation resources are not available at the time
of displacement.
(3) Prior approval of the Commission is obtained.
(4) That a Relocation Contract providing for permanent relocation has
been executed.
(5) The head of household actually remained domiciled on lands
partitioned to the tribe of which he is not a member as of December 22,
1974, and continuously thereafter.
(6) The head of household shall vacate all improvements owned by him
on lands partitioned to the tribe of which he is not a member and shall
transfer title to said improvements to the Commission.
Temporary relocation shall in no way diminish the responsibility of
the Commission to offer relocation assistance and services designed to
achieve permanent and suitable facilities.
(b) Conditions under which move to temporary housing accommodations
may be approved. The move of a family or individual into temporary
housing accommodations may be approved by the Commission only if the
following conditions are met.
(1) The move will be undertaken because:
(i) It is necessary because of an emergency as determined by the
Commission; or
(ii) The individual or family is subject to conditions hazardous to
his or his family's health or safety.
(2) The temporary housing is decent, safe, and sanitary.
(3) The Commission shall have determined that within twelve (12)
months of the date of the temporary move, replacement housing meeting
Commission-approved standards will be available for occupancy by the
persons temporarily rehoused.
(4) Prior to the move, the Commission shall provide in writing
assurance to each head of household that:
(i) Replacement housing will be available at the earliest possible
time but in any event no later than twelve (12) months from the date of
the move to temporary housing.
(ii) Replacement housing will be made available on a priority basis,
to the individual or family who has been temporarily rehoused.
(iii) The move to temporary rehousing will not, in any way, affect a
claimant's eligibility for a replacement housing payment nor deprive him
of the same choice or replacement housing units that would have been
made available had the temporary move not been made.
(iv) The Commission will pay all costs in connection with the move to
temporary housing, including any increased housing costs.
(c) Agency documentation. To request Commission approval for a
temporary move of a family, the following information shall be submitted
to the Commission (additional information may be required on a
case-by-case basis):
(1) An explanation of the necessity for the temporary move, based
upon the criteria set forth by the Commission.
(2) The estimated duration of the temporary occupancy.
(3) In the case of the family or individual, (i) a copy of the
written assurance which will be provided to the person explaining his
rights and the continuing obligation of the agency to provide relocation
assistance, and (ii) evidence that the family or individual agrees to
make the temporary move.
(d) Costs in connection with temporary move -- (1) Costs included.
Costs included in a temporary move may cover the following:
(i) Actual reasonable moving costs and related expenses for the move
to temporary accommodations.
(ii) For the family or individual moved from a rental unit the
difference, if any, between the rental cost of the dwelling vacated and
the rental cost of the temporary unit.
(iii) For a homeowner who retains ownership of his dwelling the
reasonable cost of renting the temporary dwelling.
(iv) For a homeowner whose dwelling has been acquired the difference,
if any, between his housing costs for the acquired dwelling and the
rental cost of the temporary unit.
(2) Costs not a replacement home benefit. Costs in connection with a
move to temporary accommodations are not to be considered as relocation
payments under the Act. (See paragraph (e) of this section.)
(e) Distinguishing between cost of temporary move and relocation
payment. The costs of a temporary move, as decribed in the foregoing
subparagraphs, are not to be considered as all or a part of the
relocation payment to which a displaced person is entitled under the
Act. Thus, when a family is moved to temporary accommodations, a
relocation payment is not made and the election or choice of type of
payments that would ordinarily be made upon displacement must be delayed
until the final move is made. When the move out of temporary
accommodations is made, the displaced person shall receive the full
relocation payments to which he/she is entitled pursuant to Commission
regulations.
25 CFR 700.175 Subpart E -- Replacement Housing Payments
25 CFR 700.181 Eligibility.
(a) Basic eligibility requirements. A certified eligible head of
household who established his/her residency requirements in the area
partitioned to the tribe of which he/she is not a member, is eligible
for the replacement housing payment specified at 700.183(a).
(b) Other rules and requirements. A payment under this subpart E is
subject to the other applicable rules and requirements of these
regulations.
25 CFR 700.183 Determination of replacement housing benefit.
(a) Amount of benefit -- The replacement housing benefit for a
certified eligible head-of-household is an amount not to exceed
Fifty-Five Thousand Dollars ($55,000) for a household of three or less
and not to exceed Sixty-Six Thousand Dollars ($66,000) for a household
of four or more. Subject to such other requirements of these
regulations as may apply, the replacement housing benefit shall be
calculated as follows;
(1) The amount of the fair market value of the habitation and
improvements purchased from an eligible head-of-household pursuant to
subpart B of this part shall be applied first toward the cost of a
replacement dwelling.
(2) An additional amount shall be added to the value of the
habitation and improvements to equal the cost of a decent, safe, and
sanitary replacement dwelling.
(3) The total value of the replacement dwelling shall not exceed the
amount of the replacement housing benefit specified in paragraph (a) of
this section.
(4) In the event the cost of providing a decent, safe, and sanitary
replacement dwelling is less than the fair market value of the
habitation and improvements purchased from an eligible head-of-household
pursuant to subpart B of this part, the difference shall be paid to that
head-of-household.
(b) The Commission shall, on or before the first Friday in April of
each fiscal year, after consultation with the Secretary of the
Department of Housing and Urban Development, annually increase, decrease
or leave unadjusted the above limitations on replacement housing
benefits to reflect changes in housing or development and construction
costs, other than costs of land, during the preceding year. In
determining whether to increase or decrease the replacement housing
benefit limitations set forth above, the Commission shall consider the
following:
(1) The most recent percentage rate of increase or decrease in single
family housing construction costs reported by HUD. (General Prototype
Housing Costs For One to Four Family Dwelling Units).
(2) The most recent Boecht Building Cost Modifier.
(3) The experience of relocatee families in obtaining replacement
housing within the current benefits.
(4) The cost of available replacement housing which meets Commission
standards as set forth in these regulations.
(5) Such other available information which the Commission deems
appropriate and which is relevant to a determination of whether
replacement housing benefits should be increased or decreased to reflect
change in housing or development and construction costs during the
preceding year.
(c) If the owner retains ownership of his dwelling, moves it from the
acquired site, and reoccupies it on a replacement site, the purchase
price of the replacement dwelling shall be considered to be the sum of
--
(1) The cost of the replacement site, if any; plus
(2) The moving and restoration expenses; plus
(3) The costs, if any, incurred to make the unit a decent, safe, and
sanitary replacement dwelling; but not to exceed the above limitation
on total replacement home benefits.
(47 FR 17988, Apr. 27, 1982, as amended at 52 FR 21951, June 10,
1987)
25 CFR 700.187 Utilization of replacement home benefits.
The Commission shall assure that all eligible heads of household
receive a decent, safe and sanitary replacement dwelling in the
following manner:
(a) If the eligible head of household owns no dwelling other than
that on the area from which he or she must move pursuant to the Act, the
Commission will make funds available to the head of household as
provided in these regulations for the acquisition of a replacement home
in one of the following manners:
(1) Purchase of an existing home, by the head of household,
(2) Construction of a home by the head of household,
(3) Participation or purchase by the head of household in a mutual
help housing or other home ownership project under the U.S. Housing Act
of 1937 (50 Stat. 888, as amended; 42 U.S.C. 1401) or in any other
federally assisted housing program.
(b) If the eligible head of household owns or is buying or building a
home in an area other than the area from which he or she must move
pursuant to the Act, the Commission will expend relocation benefits in
one of the following manners:
(1) If the home is decent, safe, and sanitary, but is encumbered by a
mortgage, such mortgage existing as of the effective date of these
regulations, the Commission will expend replacement housing benefits up
to the maximum then existing benefit to accelerate to the maximum extent
possible the achievement by that household of debt-free home ownership.
(2) If the home is owned free and clear but does not meet Commission
decent, safe, and sanitary standards, the Commission will, at its
discretion, either:
(i) Expend replacement home benefits for improvements to assure the
home meets decent, safe, and sanitary standards, or
(ii) Expend replacement home benefits for the acquisition of a
replacement dwelling as if the eligible head of household or spouse did
not own a home as in paragraph (a) of this section.
(3) If the home is neither owned free and clear nor decent, safe, and
sanitary, the Commission will, at its discretion, either:
(i) Expend replacement home benefits for improvements to assure that
the home meets decent, safe, and sanitary standards, and to accelerate
to the maximium extent possible the achievement of debt-free home
ownership, or
(ii) Expend replacement home benefits for the acquisition of a
replacement dwelling as if the eligible head of household or spouse did
not own a home as in paragraph (a) of this section.
(4) If the home is decent, safe, and sanitary, and is owned free and
clear, no replacement home benefits will be paid.
(c) Home improvements shall include the following: General repairs,
painting and texturing, fencing -- including corrals, landscaping,
grading, room additions, re-modeling, roofing, insulating, repair or
improvements to the water, sewerage, cooling, heating, or electrical
systems, storage buildings, energy conservation measures, and other home
improvements as determined and defined by the Commission.
(d) In implementing these regulations the Commission will encourage
the use of innovative energy or other technologies in order to achieve
the minimum monthly housing cost feasible for each replacement house.
25 CFR 700.189 Expenditure of replacement home benefits.
Replacement home benefits shall be expended or obligated in full at
or before the time of original acquisition except as stated below. It
is not anticipated that such exceptions would be common and each such
instance shall be reviewed and a determination will be made by the
Certification Officer.
(a) Under unusual circumstances such as: Unknown (latent) defects in
the replacement dwellings, significant change of circumstances and
extreme hardship, benefits may be expended after the time of original
acquisition up to the the existing maximum replacement home benefit.
(b) All replacement home benefits shall be expended not later than
one (1) year after the date of payment of the incentive bonus, except
under unusual circumstances as stated above, up to the statutory
maximum.
(c) Replacement home benefits shall not be expended for maintenance
except under unusual circumstances as stated above, up to the statutory
maximum.
(d) For purposes of this paragraph, the time of original acquisition
shall be defined as the date of execution of the Commission's relocation
contract.
25 CFR 700.189 Subpart F -- Incidental Expenses
25 CFR 700.195 General.
Incidental expenses are those reasonable expenses, as determined by
the Commission, to be incidental to the purchase of the replacement
dwelling, but not prepaid.
25 CFR 700.197 Basic eligibility requirements.
A certified eligible head of household is eligible for reimbursement
of expenses that are incidental to the purchase of a replacement
dwelling, as provided in 700.199 hereof.
25 CFR 700.199 Incidental expenses.
(a) Eligible costs. Subject to the limitations in paragraphs (b) and
(c) of this section, the incidental expenses to be paid are those
actually incurred by the displaced person incident to the purchase of
the replacement dwelling, including --
(1) Legal, closing, and related costs, including those for title
search, preparing conveyance instruments, notary fees, preparing plats,
recording fees; and title insurance;
(2) Lender, FHA or VA appraisal fees;
(3) FHA or VA application fee;
(4) Certification of structural soundness when required by the
lender;
(5) Credit report;
(6) Owner's and mortgagee's evidence or assurance of title;
(7) Escrow agent's fee;
(8) State revenue or documentary stamps, sales or transfer taxes;
(9) Such administrative costs as are necessary to secure and acquire
homesite leases and/or allotments on tribal lands. These costs may
include survey fees, appropriate tribal fees and other conveyance
instruments as may be appropriate;
(10) Costs, such as advertising charges, incurred incident to the
purchase of the improvements owned by the head of household.
(11) Cost related to fee inspector's inspections of the replacement
dwelling.
(12) Such other costs as the Commission determines to be incidental
to the purchase.
(b) Truth in lending charge. Any expense, which is determined to be
part of the debt service or finance charge under 15 U.S.C. 131-1641 and
Regulation Z (12 CFR Part 226) issued thereunder by the Board of
Governors of the Federal Reserve System, is not eligible for
reimbursement as an incidental expense.
25 CFR 700.199 Subpart G -- Assistance Payments (Incentive Bonus)
25 CFR 700.205 Eligibility requirements.
A certified eligible head of household is eligible for the assistance
payment pursuant to sec. 14(b) of the Act.
(a) Amount of payment. The amount of payment shall be computed in
accordance with the schedule provided for in sec. 14(b) of the Act.
(b) Date for determination of amount of assistance payment. The date
of completion and filing with the Commission of the Application for
Relocation Assistance and Agreement to Relocate shall be the date used
for determination of the amount of the assistance payment.
(c) Time of payment. Assistance payments provided for in this
section shall only be paid upon actual occupancy of the replacement
dwelling and vacation of the acquired habitation and/or improvement, if
any, in the area partitioned to the Tribe of which he/she is not a
member.
25 CFR 700.205 Subpart H -- Last Resort Replacement Housing
25 CFR 700.209 Applicability.
The provisions of this subpart apply only when the Commission
determines that, unless it acts under the provisions of this subpart,
there is a reasonable likelihood that replacement dwelling(s) will not
be available on a timely basis to person(s) to be displaced.
25 CFR 700.211 Basic rights and rules.
The provisions of this subpart do not deprive any displaced person of
any rights described elsewhere in these regulations. The Commission may
meet its obligation to provide persons with reasonable opportunities to
relocate to a replacement dwelling by offering such opportunities
developed or to be developed under this subpart.
25 CFR 700.213 Methods of providing last resort replacement housing.
(a) General. The methods of providing last resort housing include,
but are not limited to --
(1) Rehabilitation of, and/or additions to, an existing replacement
dwelling;
(2) A replacement housing payment in excess of the limits set forth
in subparts E and F of this part or the provision of direct Commission
mortgage financing;
(3) The construction of a new replacement dwelling;
(4) The relocation and, if necessary, rehabilitation of a replacement
dwelling;
(5) The purchase of land and/or a replacement dwelling by the
Commission and subsequent sale or lease to, or exchange with, a
displaced person; and
(6) The removal of barriers to the handicapped as may be necessary.
25 CFR 700.213 Subpart I -- Commission Operations
25 CFR 700.219 General.
(a) The operation of the Commission shall be governed by a Management
Manual passed, amended or repealed by a majority of the Commission at
any regular or special meeting. The Management Manual is the prescribed
medium for publication of policies, procedures and instructions which
are necessary to facilitate the day-to-day operations and administration
of the Commission.
(b) Meetings. The Commission shall hold a regular monthly meeting on
the first Friday of each month at a time and place designated by public
notice unless said Friday falls on a legal holiday, in that event, the
meeting shall begin on the next regular workday. The monthly meeting
may continue for as many days thereafter as is necessary to complete the
regular affairs of the Commission, and may be recessed from time to time
and reconvened at times designated by the Chairperson.
(c) Special public meetings. May be called by any Commissioner with
ten (10) working days written notice given to the other Commissioners.
Written notice may be waived by a release bearing the signatures of all
three Commissioners.
(d) Executive Session. During a regular or special meeting, any
Commissioner may request an Executive Session for purposes of personnel
and administrative matters.
(e) Compliance with other laws and regulations. As a federal agency,
the Commission will conduct its activities in conformance with
applicable federal statutes and administrative procedures.
25 CFR 700.219 Subpart J -- Inspection of Records
25 CFR 700.235 Purpose and scope.
(a) This subpart contains the regulations of the Commission
implementing the requirement of subsection (a)(3) of the Freedom of
Information Act, 5 U.S.C. 552(a)(3), which provides that the Commission
''upon any request for records which (1) Reasonably describes such
records and (2) is made in accordance with published rules stating the
time, place, fees (if any), and procedures to be followed, shall make
the records promptly available to any person.'' This subpart describes
the procedures by which records may be obtained from the Commission.
The procedures in this subpart are not applicable to requests for
records published in the Federal Register or opinions in the
adjudication of cases, statements of policy and interpretations and
administrative staff manuals which have been published or made available
under subpart A of this part.
25 CFR 700.237 Definitions.
Act. As used in this subpart, ''Act'' means the ''Freedom of
Information Act,'' 5 U.S.C. 552.
25 CFR 700.239 Records available.
(a) Commission policy. It is the policy of the Commission to make
the records of the Commission available to the public to the greatest
extent possible, in keeping with the spirit of the Freedom of
Information Act.
(b) Statutory disclosure requirement. The Freedom of Information Act
requires that the Commission, on a request from a member of the public
to inspect or copy records made in accordance with the procedures in
this subpart, shall promptly make the records available.
(c) Statutory exemptions. The Act exempts nine categories of records
from this disclosure requirement. The Act provides that disclosure is
not required of matters that are:
(1) Specifically authorized under criteria established by an
Executive order to be kept secret in the interest of national defense or
foreign policy and in fact properly classified pursuant to such
Executive Order;
(2) Related solely to the internal personnel rules and practices of
an agency;
(3) Specifically exempt from disclosure by statute;
(4) Trade secrets and commercial or financial information obtained
from a person and privileged or confidential;
(5) Inter-agency or intra-agency memorandums or letters which would
not be available by law to a party other than an agency in litigation
with the agency;
(6) Personnel and medical files and similar files the disclosure of
which would constitute a clearly unwarranted invasion of personal
privacy;
(7) Investigatory records compiled for law enforcement purposes, but
only to the extent that production of such records would
(i) Interfere with enforcement proceedings;
(ii) Deprive a person of a right to a fair trial or an impartial
adjudication,
(iii) Constitute an unwarranted invasion of personal privacy,
(iv) Disclose the indentity of a confidential source and, in the case
of a record compiled by a criminal law enforcement authority in the
course of a criminal investigation, or by an agency conducting a lawful
national security intelligence investigation, confidential information
furnished only by the confidential source,
(v) Disclose investigative techniques and procedures, or
(vi) Endanger the life or physical safety of law enforcement
personnel;
(8) Contained in or related to examination, operating, or condition
reports prepared by, on behalf of, or for the use of an agency
responsible for the regulation or supervision of financial institutions;
or
(9) Geological and geophysical information and data, including maps,
concerning wells.
(d) Decisions on requests. It is the policy of the Commission to
withhold information falling within an exemption only if (1) disclosure
is prohibited by statute or Executive Order or (2) sound grounds exist
for invocation of the exemption.
(e) Deletion of portions of records. If a requested record contains
material within an exemption together with material not within an
exemption and it is determined under the regulations in this subpart to
withhold the exempt material, any reasonably segregable nonexempt
material shall be separated from the exempt material.
(f) Creation of records. This subpart applies only to records which
exist at the time a request for records is made. Records are not
required to be created in response to a request by combining or
compiling selected items from the files or by preparing a new computer
program, nor are records required to be created to provide the requester
with such data as proportions, percentages, frequency distributions,
trends, or comparisons.
(g) Records of concern to other departments and agencies. (1) If the
release of a record would be of concern to both the Commission and
another Federal agency, the record will be made available by the
Commission only if the interest of the Commission is the primary
interest. If the Commission's interest is not the primary interest, the
requester shall be referred in writing to the agency having the primary
interest. The Commission has the primary interest in a record if the
record was developed pursuant to Commission regulations, directives, or
request even though the record originated outside of the Commission.
(2) If the release of a record in which the Commission has a primary
interest would be of substantial concern to another agency, the official
processing the request, should, if administratively feasible and
appropriate, consult with that agency before releasing the record.
(h) Records obtained from the public. If a requested record was
obtained by the Commission from a person or entity outside of the
Government, the official responsible for processing the request shall,
when it is administratively feasible to do so, seek the views of that
person or entity on whether the record should be released before making
a decision on the request.
25 CFR 700.241 Request for records.
(a) Submission of requests. A request to inspect or copy records
shall be made to the installation where the records are located. If the
records are located at more than one installation or if the specific
location of the records is not known to the person wishing to inspect or
copy the records, he may direct his request to the head of the
appropriate bureau, or the bureau's chief public information officer, if
any.
(b) Form of request. (1) Requests invoking the Freedom of
Information Act shall be in writing.
(2)(i) A request must reasonably describe the records requested. A
request reasonably describes the records requested if it will enable an
employee of the Commission familiar with the subject area of the request
to locate the record with a reasonable amount of effort. If such
information is available, the request should identify the subject matter
of the record, the date when it was made, the place where it was made,
and the person or office that made it, the present custodian of the
record, and any other information which will assist in location of the
requested records. If the request involves a matter known by the
requester to be in litigation, the request should also state the case
name and court hearing the case.
(ii) If the description of a record sought is insufficient to allow
identification and location of the record, the response denying the
request on this ground shall so state and, to the extent possible,
indicate what additional descriptive information, if any, would assist
in location of the record.
(3) A request shall state the maximum amount of fees which the
requester is willing to pay. Requesters are notified that under
700.251, the failure to state willingness to pay fees as high as are
anticipated by the Commission will delay running of the time limit and
delay processing of the request, if the responsible official anticipates
that the fees chargeable may exceed $25.00.
(4)(i) To insure expeditious handling, requests shall be prominently
marked, both on the envelope and on the face of the request, with the
legend ''FREEDOM OF INFORMATION REQUEST.'' The failure of a request to
bear such a legend will not disqualify a request from processing under
the procedures in this subpart if the request otherwise meets the
requirments of this section. A request not bearing the legend ''FREEDOM
OF INFORMATION REQUEST'' will not, however, be deemed to have been
received for purposes of the running of the time limit set out in
700.245 until it has been identified by bureau personnel as a Freedom of
Information request and marked by them with this legend.
(ii) Commission personnel identifying a communication from the public
not bearing the legend ''FREEDOM OF INFORMATION REQUEST'' as a request
otherwise meeting the requirements of this section shall immediately (A)
mark the communication with the legend ''FREEDOM OF INFORMATION
REQUEST.'' (B) date the request to reflect the date on which it was
identified, and (C) take steps to assure proper processing of the
request under the procedures in this subpart.
(d) Categorical requests. (1) A request for all records falling
within a reasonably specific category shall be regarded as conforming to
the statutory requirement that records be reasonably described if (i) it
can be determined which particular records are covered by the request
and (ii) the records can be searched for, collected and produced without
unduly burdening or interfering with Commission operations because of
the staff time consumed or the resulting disruption of the files.
(2) If a categorical request is determined under paragraph (d)(1) of
this section not to reasonably describe the records requested, the
response denying the request on that ground shall specify the reasons
why and shall extend to the requester an opportunity to confer with
knowledgeable Commission personnel in an attempt to reduce the request
to manageable proportions by reformulation and by agreeing on an orderly
procedure for the production of the records.
25 CFR 700.243 Action on initial requests.
(a) Granting of requests. (1) A requested record shall be made
available if (i) the record is not exempt from disclosure or (ii) the
record is exempt from disclosure, but its withholding is neither
required by statute or Executive order nor supported by sound grounds.
(b) Form of grant. (1) When a requested record has been determined
to be available, the official processing the request shall immediately
notify the person requesting the record as to where and when the record
is available for inspection or as the case may be, where and when copies
will be available. If fees are due under 700.251, the responsible
official shall also state the amount or, if the exact amount cannot be
determined, the approximate amount of fees due.
(2) If the record was obtained by the Commission from a person or
entity outside of the Government, the responsible official shall, when
it is administratively feasible to do so, notify that person or entity
that the record has been made available.
(c) Denial of requests. (1) A request for a record may be denied
only if it is determined that (i) the record is exempt from disclosure
and (ii) that withholding of the record is required by statute or
Executive order or supported by sound grounds.
(2) A request to inspect or copy a record shall be denied only by the
Freedom of Information Act Officer or by an official whom the Executive
Director has in writing designated.
(d) Form of denial. A reply denying a request shall be in writing
and shall include:
(1) A reference to the specific exemption or exemptions under the
Freedom of Information Act authorizing the withholding of the record;
(2) The sound ground for withholding;
(3) A listing of the names and titles or positions of each person
responsible for the denial;
(4) A statement that the denial may be appealed to the Commission
pursuant to 700.247 and that such appeal must be in writing and be
received by this official within twenty (20) days (Saturdays, Sundays,
and public legal holidays excepted) after the date of the denial, in the
case of the denial of an entire request, or within twenty (20) days
(Saturdays, Sundays, and public legal holidays excepted) of records
being made available, in the case of a partial denial, by writing to the
Freedom of Information Act Officer, Navajo-Hopi Indian Relocation
Commission, P.O. Box KK, Flagstaff, Arizona 86002.
(e) Exception. The requirements of paragraphs (c), (d), and (e) of
this section do not apply to requests denied under 2.14 on the ground
that the request did not reasonably describe the records requested or to
requests for records which do not exist.
(f) Filing of denials. Copies of all replies denying, in whole or
part, a request for a record which are issued under this section of
700.243 shall be promptly submitted by the Freedom of Information Act
Officer, denials to the Executive Director and the Commission's legal
counsel.
25 CFR 700.245 Time limits on processing of initial requests.
(a) Basic limit. Requests for records shall be processed promptly.
A determination whether to grant or deny a request shall be made within
no more than ten (10) days (excepting Saturdays, Sundays, and legal
public holidays) after receipt of a request. This determination shall
be communicated immediately to the requester.
(b) Running of basic time limit. For purposes of paragraph (a) of
this section, the time limit commences to run when a request is received
at the Commission's office in Flagstaff, Arizona.
(c) Extensions of time. In the following unusual circumstances, the
time limit for acting upon an initial request may be extended to the
extent reasonably necessary to the proper processing of the particular
request, but in no case may the time limit be extended for more than ten
(10) working days:
(1) The need to search for and collect the requested records from
field facilities or other establishments that are separate from the
office processing the request;
(2) The need to search for, collect, and appropriately examine a
voluminous amount of separate and distinct records which are demanded in
a single request; or
(3) The need for consultation, which shall be conducted with all
practicable speed, with another agency having a substantial interest in
the determination of the request or among two or more components of the
agency having substantial subject-matter interest therein.
(d) Authority to make extensions. (1) An extension of time under
paragraph (c) of this section may be made only by the Freedom of
Information Act Officer or such higher authority as the Commission has
in writing designated.
(2) The person requesting the records shall be notified in writing of
the extension. The written notice shall state the reason for the
extension and the date on which a determination on the request is
expected to be dispatched.
(3) The Freedom of Information Act Officer shall be responsible for
promptly furnishing copies of such notices to the Executive Director and
the Commission's legal counsel.
(e) Treatment of delay as denial. (1) If no determination has been
reached at the end of the ten (10) day period for deciding an initial
request, or the last extension thereof, the requester may deem his
request denied and may exercise a right of appeal in accordance with the
provisions of 700.247.
(2) When no determination can be reached within the applicable time
limit, the responsible official shall nevertheless continue to process
the request. On expiration of the time limit, the responsible official
shall inform the requester of the reason for the delay, of the date on
which a determination may be expected to be dispatched, and of his right
to treat the delay as a denial for purposes of appeal to the Commission
in accordance with 700.247. The requester may be asked to consider
delaying use of his right to appeal until the date on which the
determination is expected to be dispatched. If the requester so agrees,
he is deemed not to have treated the failure to respond within the
applicable time limit as a denial for purposes of the running of the
twenty (20) working-day appeal period set out in 700.247. If a
determination of the request is not issued by the new agreed upon date,
or if the request is denied in whole or part, the requester will have
available his full right of appeal under 700.247, including the entire
twenty (20) working-day period for filing of the appeal.
25 CFR 700.247 Appeals.
(a) Right of appeal. Where a request for records has been denied, in
whole or part, the person submitting the request may appeal the denial
to the Commission.
(b) Time for appeal. An appeal must be received no later than twenty
(20) days (Saturdays, Sundays, and public legal holidays excepted) after
the date of the initial denial, in the case of a denial of an entire
request, or twenty (20) days (Saturdays, Sundays, and public legal
holidays excepted) after records have been made available, in the case
of a partial denial.
(c) Form of appeal. (1) An appeal shall be initiated by filing a
written notice of appeal. The notice shall be accompanied by copies of
the original request and the initial denial and should, in order to
expedite the appellate process and give the requester an opportunity to
present his arguments, contain a brief statement of the reasons why the
requester believes the initial denial to have been in error.
(2) The appeal shall be addressed to Freedom of Information Act
Officer, Navajo-Hopi Indian Relocation Commission, P.O. Box KK,
Flagstaff, Arizona 86002.
(3)(i) Both the envelope containing the notice of appeal and the face
of the notice shall bear the legend ''FREEDOM OF INFORMATION APPEAL''.
The failure of an appeal to bear such a legend will not disqualify an
appeal from processing under 2.18 if the appeal otherwise meets the
requirements of this section. An appeal not bearing the legend
''FREEDOM OF INFORMATION APPEAL'' will not, however, be deemed to have
been received for purposes of the running of the time limit set out in
700.249 until it has been identified by Commission personnel as a
Freedom of Information appeal and marked by them with this legend.
(ii) Commission personnel identifying a communication from the public
not bearing the legend ''FREEDOM OF INFORMATION APPEAL'' as an appeal
otherwise meeting the requirements of this section shall immediately (A)
mark the communication with the legend ''FREEDOM OF INFORMATION
APPEAL,'' (B) date the appeal to reflect the date on which it was
identified, and (C) take steps to assure proper processing of the appeal
under the procedures in this subpart.
(4) The Freedom of Information Act Officer shall be responsible for
promptly furnishing copies of such notices to the Executive Director and
the Commission's legal counsel.
25 CFR 700.249 Action on appeals.
(a) Authority. Appeals from initial denials of requests for records
shall be decided for the Commission by the Executive Director after
consultation with the Commission's legal counsel.
(b) Time limit. A final determination on any appeal shall be made
within twenty (20) days (excepting Saturdays, Sundays, and public legal
holidays) after receipt of the appeal.
(c) Extensions of time. (1) If the time limit for responding to the
initial request for a record was not extended under the provisions of
700.245 or was extended for fewer than ten (10) working days, the time
for processing of the appeal may be extended by the Executive Director
to the extent reasonably necessary to the proper processing of the
appeal, but in no event may the extension, when taken together with any
extension made during processing of the initial request, result in an
aggregate extension with respect to any one request of more than ten
(10) working days. The time for processing of an appeal may be extended
only if one or more of the unusual circumstances listed in 700.245(c)
requires an extension.
(2) The Executive Director shall, in writing, advise the appellant of
the reasons for the extension and the date on which a final
determination of the appeal is expected to be dispatched.
(3) If no determination on the appeal has been reached at the end of
the twenty (20) working-day period for deciding an appeal, or the last
extension thereof, the requester is deemed to have exhausted his
administrative remedies, giving rise to a right of review in a district
court of the United States as specified in 5 U.S.C. 552(a)(4). When no
determination can be reached within the applicable time limit, the
appeal will nevertheless continue to be processed. On expiration of the
time limit, the requester shall be informed of the reason for the delay,
of the date on which a determination may be expected to be dispatched,
and of his right to seek judicial review. The requester may be asked to
consider delaying resort to his right to judicial review until the date
on which the determination on his appeal is expected to be dispatched.
(d) Form of decision. The final determination on an appeal shall be
in writing and shall state the basis for the determination. If the
determination is to release the requested records or portions thereof,
the Freedom of Information Act Officer shall immediately make the
records available or instruct the appropriate bureau official to make
them immediately available. If the determination upholds in whole or
part the initial denial of a request for records, the determination
shall advise the requester of his right to obtain judicial review in the
U.S. District Court for the district in which the withheld records are
located, or in which the requester resides or has his principal place of
business or in the U.S. District Court for the District of Columbia, and
shall set forth the names and titles or positions of each person
responsible for the denial.
(e) Distribution of copies. Copies of final determinations issued by
the Commission shall be provided to the Commission's legal counsel.
25 CFR 700.251 Fees.
(a) Services for which fees may be charged. (1) Unless waived
pursuant to the provisions of paragraph (c) of this section, user fees
shall be charged for document search and duplication costs incurred in
responding to requests for records. User fees also shall be charged for
the formal certification of verification attached to authenticated
copies of records under the seal of the Commission.
(2) Unless waived or reduced pursuant to paragraph (c) of this
section, user fees shall be charged in accordance with the schedule of
charges contained in the Commission's Management Manual.
(b) Services for which fees may not be charged. No fee may be
charged for any services required by the Freedom of Information Act to
be performed in responding to a request for records other than those
services for which fees may be charged under paragraph (a) of this
section. Services for which no fees may be charged include, but are not
limited to,
(1) Examining requested records to determine whether they are exempt
from mandatory disclosure or whether, even if exempt, they should
nevertheless be made available in whole or part,
(2) Deleting exempt matter from records so that the remaining
portions of the records may be made available,
(3) Monitoring a requester's inspection of agency records made
available to him for inspection, and
(4) Resolving legal and policy issues affecting access to requested
records.
(c) Waiver or reduction of fees. (1) Fees otherwise chargeable for
document search and duplication costs incurred in responding to requests
for records may be waived or reduced, as appropriate, if the official
making the records available determines that furnishing the records can
be considered as primarily benefiting the public as opposed to the
requester.
(2) Fees otherwise applicable for document research and duplication
costs incurred in responding to requests may be waived and not charged
if the request involves:
(i) Furnishing unauthenticated copies of any documents reproduced for
gratuitous distribution;
(ii) Furnishing one copy of a personal document (e.g., a birth
certificate) to a person who has been required to furnish it for
retention by the Commission;
(iii) Furnishing one copy of the transcript of a hearing before a
hearing officer in a grievance or similar proceeding to the employee for
whom the hearing was held.
(3) Fees otherwise chargeable for document search and duplication
costs incurred in responding to requests may be waived or reduced if the
cost of collecting the fee would exceed the amount of the fee or if the
request involves:
(i) Furnishing records to press, radio and television representatives
for dissemination through the media to the general public;
(ii) Furnishing records to donors with respect to their gifts;
(iii) Furnishing records to individuals or private non-profit
organizations having an official voluntary or cooperative relationship
with the Commission to assist the individual or organization in its work
with the Commission;
(iv) Furnishing records to state, local and tribal governments and
public international organizations when to do so without charge is an
appropriate courtesy, or when the recipient is carrying on a function
related to that of the Commission and to do so will help to accomplish
the work of the Commission;
(v) Furnishing records when to do so saves costs and yields income
equal to the direct cost of providing the records (e.g., where the
Commission's fee for the service would be included in a billing against
the Commission);
(vi) Furnishing records when to do so is in conformance with
generally established business custom (e.g., furnishing personal
reference data to prospective employers of former Commission employees);
(vii) Furnishing one copy of a record in order to assist the
requester to obtain financial benefits to which he is entitled (e.g.,
veterans or their dependents, employees with Government employee
compensation claims or persons insured by the Government).
(d) Notice of anticipated fees and prepayment. (1) Where it is
anticipated that fees chargeable under this section may amount to more
than $25.00 and the requester has not indicated in advance his
willingness to pay fees as high as are anticipated, the request shall be
deemed not to have been received for purposes of the time limits
established by 700.245 until the requester is advised of the fees which
are anticipated and has agreed to pay these fees. Advice to requesters
with respect to anticipated fees shall be provided promptly.
(2) The appropriate cases, advance payment of fees may be required
before requested records are made available to the requester.
(3) A notice of anticipated fees or notice of request for advance
payment shall extend an offer to the requester to confer with
appropriate personnel in an attempt to reformulate the request in a
manner which will reduce the anticipated fees and meet the needs of the
requester.
(e) Form of payment. Payment of fees shall be made by check or money
order payable to the Navajo-Hopi Indian Relocation Commission. The term
United States or the initials ''U.S.'' shall not be included on the
check or money order. Where appropriate, the official responsible for
handling a request may require that payment by check be made in the form
of a certified check.
25 CFR 700.251 Subpart K -- Privacy Act
25 CFR 700.255 Purpose and scope.
This subpart contains the regulations of the Navajo and Hopi Indian
Relocation Commission implementing Section 3 of the Privacy Act.
25 CFR 700.257 Definitions.
(a) Act. As used in this subpart, ''Act'' means Section 3 of the
Privacy Act, 5 U.S.C. 552a.
(b) Individual. As used in this subpart, ''individual'' means a
citizen of the United States or an alien lawfully admitted for permanent
residence.
(c) Maintain. As used in this subpart, the term ''maintain''
includes maintain, collect, use or disseminate.
(d) Record. As used in this subpart, ''record'' means any item,
collection, or grouping of information about an individual that is
maintained by the Commission including, but not limited to, education,
financial transactions, medical history, and criminal or employment
history and that contains the individual's name, or the identifying
number, symbol, or other identifying particular assigned to the
individual, such as a finger or voice print, or a photograph.
(e) System of records. As used in this subpart, ''System of
records'' means a group of any records under the control of the
Commission from which information is retrieved by the name of the
individual or by some identifying number, symbol, or other identifying
particular assigned to the individual.
(f) Medical records. As used in this subpart, ''medical records''
means records which relate to the identification, prevention, cure or
alleviation of any disease, illness or injury including psychological
disorders, alcoholism and drug addiction.
(g) Civil Service Commission personnel records. As used in this
subpart, ''Civil Service Commission personnel records'' means records
maintained for the Civil Service Commission by the Commission and used
for personnel management programs or processes such as staffing,
employee development, retirement, and grievances and appeals.
(h) Statistical records. As used in this subpart, ''statistical
records'' means records in a system of records maintained for
statistical research or reporting purposes only and not used in whole or
in part in making any determination about an identifiable individual.
(i) Routine use. As used in this subpart, ''routine use'' means a
use of a record for a purpose which is compatible with the purpose for
which it was collected.
(j) System notice. As used in this subpart, ''system notice'' means
the notice describing a system of records required by 5 U.S.C.
552a(e)(4) to be published annually in the Federal Register.
(k) System manager. As used in this subpart, ''system manager''
means the official designated in a system notice as having
administrative responsibility for a system of records.
(l) Commission Privacy Act Officer. As used in the subpart,
''Commission Privacy Act Officer'' means the official in the Commission
charged with responsibility for assisting the Commission in carrying out
the functions which he is assigned in this subpart and for coordinating
the activities of the divisions of the Commission in carrying out the
functions which they are assigned in this subpart.
25 CFR 700.259 Records subject to Privacy Act.
The Privacy Act applies to all ''records'' as that term is defined in
700.257(d), which the Commission maintains in a ''system of records,''
as that term is defined in 700.257(e).
25 CFR 700.261 Standards for maintenance of records subject to the Act.
(a) Content of records. Records subject to the Privacy Act shall
contain only such information about an individual as is relevant and
necessary to accomplish a purpose of the agency required to be
accomplished by statute or Executive Order of the President.
(b) Standards of accuracy. Records subject to the Privacy Act which
are used in making any determination about any individual shall be
maintained with such accuracy, relevance, timeliness, and completeness
as is reasonably necessary to assure fairness to the individual in
making the determination.
(c) Collection of information. (1) Information which may be used in
making determination about an individual's rights, benefits, and
privileges under Federal programs shall, to the greatest extent
practicable, be collected directly from that individual.
(2) In deciding whether collection of information from an individual,
as opposed to a third party source, is practicable, the following
factors, among others may be considered:
(i) Whether the nature of the information sought is such that it can
only be obtained from a third party;
(ii) Whether the cost of collecting the information from the
individual is unreasonable when compared with the cost of collecting it
from a third party;
(iii) Whether there is a risk that information collected from third
parties if inaccurate, could result in an adverse determination to the
individual concerned;
(iv) Whether the information, if supplied by the individual, would
have to be verified by a third party; or
(v) Whether provisions can be made for verification, by the
individual, of information collected from third parties.
(d) Advice to individual concerning uses of information. (1) Each
individual who is asked to supply information about himself which will
be added to a system of records shall be informed of the basis for
requesting the information, how it may be used, and what the
consequences, if any, are of not supplying the information.
(2) At a minimum, the notice to the individual must state;
(i) The authority (whether granted by statute or Executive Order of
the President) which authorizes the solicitation of the information and
whether disclosure of such information is mandatory or voluntary;
(ii) The principal purpose or purposes for which the information is
intended to be used;
(iii) The routine uses which may be made of the information; and
(iv) The effects on him, if any, of not providing all or any part of
the requested information.
(3)(i) When information is collected on a standard form, the notice
to the individual shall be on the form or on a tear-off sheet attached
to the form or on a separate sheet, whichever is most practical.
(ii) When information is collected by an interviewer, the interviewer
shall provide the individual with a written notice which the individual
may retain. If the interview is conducted by telephone, however, the
interviewer may summarize the notice for the individual and need not
provide a copy to the individual unless the individual requests that a
copy be mailed to him.
(iii) An individual may be asked to acknowledge, in writing, that he
has been afforded the notice required by this section.
(e) Records concerning activity protected by the First Amendment. No
record may be maintained describing how any individual exercises rights
guaranteed by the First Amendment to the Constitution unless (1)
expressly authorized by statute or by the individual about whom the
record is maintained or (2) pertinent to and within the scope of an
authorized law enforcement activity.
25 CFR 700.263 Assuring integrity of records.
(a) Statutory requirement. The Privacy Act requires that records
subject to the Act be maintained with appropriate administrative,
technical and physical safeguards to insure the security and
confidentiality of records and to protect against any anticipated
threats or hazards to their security or integrity which could result in
substantial harm, embarassment, inconvenience, or unfairness to any
individual on whom information is maintained, 5 U.S.C. 522a(e)(10).
(b) Records maintained in manual form. When maintained in manual
form, records subject to the Privacy Act shall be maintained, at a
minimum, subject to the following safeguards, or safeguards affording
comparable protection:
(1) Areas in which the records are maintained or regularly used shall
be posted with an appropriate warning stating that access to the records
is limited to authorized persons. The warning shall also summarize the
requirements of 700.265 and state that the Privacy Act contains a
criminal penalty for the unauthorized disclosure of records to which it
applies.
(2) During working hours, (i) the area in which the records are
maintained or regularly used shall be occupied by authorized personnel
or (ii) access to the records shall be restricted by their storage in
locked metal file cabinets or a locked room.
(3) During non-working hours, access to the records shall be
restricted by their storage in locked metal file cabinets or a locked
room.
(c) Records maintained in computerized form. When maintained in
computerized form, records subject to the Privacy Act shall be
maintained, at a minimum, subject to safeguards based on those
recommended in the National Bureau of Standards booklet ''Computer
Security Guidelines for Implementing the Privacy Act of 1974'' (May 30,
1975), and any supplements thereto, which are adequate and appropriate
to assuring the integrity of records in the system.
(d) Civil Service Commission personnel records. A system of records
made up of Civil Service Commission personnel records shall be
maintained under the security requirements set out in 5 CFR 293.108.
25 CFR 700.265 Conduct of employees.
(a) Handling of records subject to the Act. Employees whose duties
require handling of records subject to the Privacy Act shall, at all
times, take care to protect the integrity, security and confidentiality
of these records.
(b) Disclosure of records. No employee of the Commission may
disclose records subject to the Privacy Act unless disclosure is
permitted under 700.267 or is to the individual to whom the record
pertains.
(c) Alteration of records. No employee of the Commission may alter
or destroy a record subject to the Privacy Act unless (1) such
alteration or destruction is properly undertaken in the course of the
employee's regular duties or (2) such alteration or destruction is
required by a decision under 700.287-700.295 or the decision of a
court of competent jurisdiction.
25 CFR 700.267 Disclosure of records.
(a) Prohibition of disclosure. No record contained in a system of
records may be disclosed by any means of communication to any person, or
to another agency, except pursuant to a written request by, or with the
prior written consent of, the individual to whom the record pertains.
(b) General exceptions. The prohibition contained in paragraph (a)
of this section does not apply where disclosure of the record would be:
(1) To those officers or employees of the Commission who have a need
for the record in the performance of their duties; or
(2) Required by the Freedom of Information Act, 5 U.S.C. 522.
(c) Specific exceptions. The prohibition contained in paragraph (a)
does not apply where disclosure of the record would be:
(1) For a routine use as defined in 700.257(i) which has been
described in a systems notice published in the Federal Register;
(2) To the Bureau of the Census for purposes of planning or carrying
out a census or survey or related activity pursuant to the provisions of
title 13 U.S. Code.
(3) To a recipient who has provided the System Manager responsible
for the system in which the record is maintained with advance adequate
written assurance that the record will be used solely as a statistical
research or reporting record, and the record is to be transferred in a
form that is not individually identifiable;
(4) To the National Archives of the United States as a record which
has sufficient historical or other value to warrant its continued
preservation by the U.S. Government, or for evaluation by the
Administrator of General Services or his designee to determine whether
the record has such value;
(5) To another agency or to an instrumentality of any governmental
jurisdiction within or under the control of the United States for a
civil or criminal law enforcement activity if the activity is authorized
by law, and if the head of the agency or instrumentality has made a
written request to the Department specifying the particular portion
desired and the law enforcement activity for which the record is sought;
(6) To a person pursuant to a showing of compelling circumstances
affecting the health or safety of an individual if upon such disclosure
notification is transmitted to the last known address of such
individual;
(7) To either House of Congress, or, to the extent of matter within
its jurisdiction, any committee or subcommittee thereof, any joint
committee of Congress or subcommittee of any such joint committee;
(8) To the Comptroller General, or any of his authorized
representatives, in the course of the performance of the duties of the
General Accounting Office; or
(9) Pursuant to the order of a court of competent jurisdiction.
(d) Reviewing records prior to disclosure. (1) Prior to any
disclosure of a record about an individual, unless disclosure is
required by the Freedom of Information Act, reasonable efforts shall be
made to assure that the records are accurate, complete, timely and
relevant for agency purposes.
(2) When a record is disclosed in connection with a Freedom of
Information request made under Subpart B of this part and it is
appropriate and administratively feasible to do so, the requester shall
be informed of any information known to the Commission indicating that
the record may not be fully accurate, complete, or timely.
25 CFR 700.269 Accounting for disclosures.
(a) Maintenance of an accounting. (1) Where a record is disclosed to
any person, or to another agency, under any of the specific exceptions
provided by 700.267(c), an accounting shall be made.
(2) The accounting shall record (i) the date, nature, and purpose of
each disclosure of a record to any person or to another agency and (ii)
the name and address of the person or agency to whom the disclosure was
made.
(3) Accountings prepared under this section shall be maintained for
at least five years or the life of the record, whichever is longer,
after the disclosure for which the accounting is made.
(b) Access to accountings. (1) Except for accountings of disclosures
made under 700.267(c)(5), accountings of all disclosures of a record
shall be made available to the individual to whom the record relates at
his request.
(2) An individual desiring access to accountings of disclosures of a
record pertaining to him shall submit his request by following the
procedures of 700.277.
(c) Notification of disclosure. When a record is disclosed pursuant
to 700.267(c)(9) as the result of the order of a court of competent
juridiction, reasonable efforts shall be made to notify the individual
to whom the record pertains as soon as the order becomes a matter of
public record.
25 CFR 700.271 Requests for notification of existence of records:
Submission.
(a) Submission of requests. (1)(i) An individual desiring to
determine under the Privacy Act whether a system of records contains
records pertaining to him shall address his inquiry to the system
manager having responsibility for the system unless the system notice
describing the system prescribes or permits submission to some other
official or officials.
(ii) If a system notice describing a system requires that an
individual contact more than two officials concerning the existence of
records in the system, an individual desiring to determine whether the
system contains records pertaining to him may contact the system manager
for assistance in determining which official is most likely to be in
possession of records pertaining to that individual.
(2) If an individual desires to determine whether records pertaining
to him are maintained in two or more systems, he shall make a separate
inquiry concerning each system.
(b) Form of request. (1) An inquiry to determine whether a system of
records contains records pertaining to an individual shall be in
writing.
(2) To insure expeditious handling, the request shall be prominently
marked, both on the envelope and on the face of the request, with the
legend ''PRIVACY ACT INQUIRY.''
(3) The request shall state that the individual is seeking
information concerning records pertaining to himself and shall supply
such additional identifying information, if any, as is called for in the
system notice describing the system.
(4) If an individual has reason to believe that information
pertaining to him or her may be filed under a name other than the name
he or she is currently using (e.g., a maiden name), he or she shall
include this information in the request.
25 CFR 700.273 Request for notification of existence of records:
Action on.
(a) Decisions on Request. (1) An individual inquiring to determine
whether a system of records contains records pertaining to him shall be
advised within ten (10) days (excepting Saturdays, Sundays and legal
public holidays) whether or not the system does contain records
pertaining to him unless (i) the records were compiled in reasonable
anticipation of a civil action or proceeding or (ii) the system of
records is one which has been excepted from the notification provisions
of the Privacy Act by rulemaking.
(2) If the records were compiled in reasonable anticipation of a
civil action or proceeding or the system of records is one which has
been excepted from the notification provisions of the Privacy Act by
rulemaking, the individual will be promptly notified that his is not
entitled to notification of whether the system contains records
pertaining to him.
(b) Authority to deny requests. A decision to deny a request for
notification of the existence of records shall be made by the Privacy
Act Officer.
(c) Form of decision. (1) No particular form is required for a
decision informing an individual whether or not a system of records
contains records pertaining to him.
(2) A decision declining to inform an individual whether or not a
system of records contains records pertaining to him shall be in writing
and shall state the basis for denial of the request and shall advise the
individual that he may appeal the declination to the Executive Director
pursuant to 700.285 by writing to the Privacy Act Officer, Navajo and
Hopi Indian Relocation Commission, P.O. Box KK, Flagstaff, Arizona
86002, and that the appeal must be received by this official within
twenty (20) days (Saturdays, Sundays and public legal holidays excepted)
of the date of the decision.
25 CFR 700.275 Requests for access to records.
The Privacy Act permits an individual, upon his request, to gain
access to his record or to any information pertaining to him which is
contained in a system and to review the record and have a copy made of
all or any portion thereof in a form comprehensive to him, 5 U.S.C.
552a(d)(1). A request for access shall be submitted in accordance with
the procedures in this subpart.
25 CFR 700.277 Requests for access to records: Submission.
(a) Submission of requests. (1) Requests for access to records shall
be submitted to the system manager having responsibility for the system
in which the records are maintained unless the system notice describing
the system prescribes or permits submission to some other official or
officials.
(2) If an individual desires access to records maintained in two or
more separate systems, he shall submit a separate request for access to
the records in each system.
(b) Form of request. (1) A request for access to records subject to
the Privacy Act shall be in writing.
(2) To insure expeditious handling, the request shall be prominently
marked, both on the envelope and on the face of the request, with the
legend ''PRIVACY ACT REQUEST FOR ACCESS.''
(3) The request shall specify whether the requester seeks all of the
records contained in the system which relate to him or only some portion
thereof. If the requester seeks only a portion of the records which
relate to him, the request shall reasonably describe the specific
records sought.
(4) If the requester seeks to have copies of the requested records
made, the request shall state the maximum amount of copying fees which
the requester is willing to pay. A request which does not state the
amount of fees the requester is willing to pay will be treated as a
request to inspect the requested records. Requesters are further
notified that under 700.279(d) the failure to state willingness to pay
fees as high as are anticipated by the Commission will delay processing
of a request.
(5) The request shall supply such identifying information, if any, as
is called for in the system notice describing the system.
(6) Requests failing to meet the requirements of this paragraph shall
be returned to the requester with a written notice advising the request
of the deficiency in the request.
25 CFR 700.279 Requests for access to records: Initial decision.
(a) Decisions on requests. A request made under this subpart for
access to a record shall be granted promptly unless (1) the record was
compiled in reasonable anticipation of a civil action or proceeding or
(2) the record is contained in a system of records which has been
excepted from the access provisions of the Privacy Act by rulemaking.
(b) Authority to deny requests. A decision to deny a request for
access under this subpart shall be made by the Privacy Act Officer.
(c) Form of decision. (1) No particular form is required for a
decision granting access to a record. The decision shall, however,
advise the individual requesting the record as to where and when the
record is available for inspection or, as the case may be, where and
when copies will be available. If fees are due under 700.279(d), the
individual requesting the record shall also be notified of the amount of
fees due or, if the exact amount has not been determined, the
approximate amount of fees due.
(2) A decision denying a request for access, in whole or part, shall
be in writing and shall state the basis for denial of the request. The
decision shall also contain a statement that the denial may be appealed
to the Executive Director pursuant to 700.281 by writing to Privacy Act
Officer, Navajo and Hopi Indian Relocation Commission, P.O. Box KK,
Flagstaff, Arizona 86002, and that the appeal must be received by this
official within twenty (20) days (Saturdays, Sundays and public legal
holidays excepted) of the date of the decision.
(d) Fees. (1) No fees may be charged for the cost of searching for
or reviewing a record in response to a request made under 700.271.
(2) Fees for copying a record in response to a request made under
700.271 shall be charged in accordance with the schedule of charges
contained in the Commission's Management Manual, unless the official
responsible for processing the request determines that, in his/her
opinion, reduction or waiver of fees is appropriate.
(3) Where it is anticipated that fees chargeable in connection with a
request will exceed the amount the person submitting the request has
indicated he/she is willing to pay, the official processing the request
shall notify the requester and shall not complete processing of the
request until the requester has agreed, in writing, to pay fees as high
as are anticipated.
25 CFR 700.281 Requests for notification of existence of records and
for access to records: Appeals.
(a) Right of appeal. If an individual has been notified that he/she
is not entitled to notification of whether a system of records contains
records pertaining to him or has been denied access, in whole or part,
to a requested record that individual may appeal to the Executive
Director.
(b) Time for appeal. (1) An appeal must be received by the Privacy
Act Officer no later than twenty (20) days (Saturdays, Sundays and
public legal holidays excepted) after the date of the initial decision
on a request.
(2) The Executive Director may, for good cause shown, extend the time
for submission of an appeal if a written request for additional time is
received within twenty (20) days (Saturdays, Sundays and public legal
holidays excepted) of the date of the initial decision of the request.
(c) Form of appeal. (1) An appeal shall be in writing and shall
attach copies of the initial request and the decision on the request.
(2) The appeal shall contain a brief statement of the reasons why the
appellant believes the decision on the initial request to have been in
error.
(3) The appeal shall be addressed to Privacy Act Officer, Navajo and
Hopi Indian Relocation Commission, Box KK, Flagstaff, Arizona 86002.
(d) Action on appeals. (1) Appeals from decisions on initial
requests made pursuant to 700.273 and 700.277 shall be decided for the
Commission by the Executive Director after consultation with the
Commission's legal counsel.
(2) The decision on an appeal shall be in writing and shall state the
basis for the decision.
25 CFR 700.283 Requests for access to records: Special situations.
(a) Medical records. (1) Medical records shall be disclosed to the
individual to whom they pertain unless it is determined, in consultation
with a medical doctor, that disclosure should be made to a medical
doctor of the individual's choosing.
(2) If it is determined that disclosure of medical records directly
to the individual to whom they pertain could have an adverse effect on
that individual, the individual may designate a medical doctor to
receive the records and the records will be disclosed to that doctor.
(b) Inspection in presence of third party. (1) An individual wishing
to inspect records pertaining to him which have been opened for his
inspection may, during the inspection, be accompanied by a person of his
own choosing.
(2) When such a procedure is deemed appropriate, the individual to
whom the records pertain may be required to furnish a written statement
authorizing discussion of his record in the accompanying person's
presence.
25 CFR 700.285 Amendment of records.
The Privacy Act permits an individual to request amendment of a
record pertaining to him if be believes the record is not accurate,
relevant, timely or complete, 5 U.S.C. 552a(d)(2). A request for
amendment of a record shall be submitted in accordance with the
procedures in this subpart.
25 CFR 700.287 Petitions for amendment: Submission and form.
(a) Submission of petitions for amendment. (1) A request for
amendment of a record shall be submitted to the system manager for the
system of records containing the record unless the system notice
describing the system prescribes or permits submission to a different
official or officials. If an individual wishes to request amendment of
records located in more than one system, a separate petition must be
submitted to each system manager.
(2) A petition for amendment of a record may be submitted only if the
individual submitting the petition has previously requested and been
granted access to the record and has inspected or been given a copy of
the record.
(b) Form of petition. (1) A petition for amendment shall be in
writing and shall specifically identify the record whose amendment is
sought.
(2) The petition shall state, in detail, the reasons why the
petitioner believes the record, or the portion thereof objectionable to
him, is not accurate, relevant, timely or complete. Copies of documents
or evidence relied upon in support of these reasons shall be submitted
with the petition.
(3) The petition shall state, specifically and in detail, the changes
sought in the record. If the changes involve rewriting of the record or
portions thereof or involve adding new language to the record, the
petition shall propose specific language to implement the changes.
25 CFR 700.289 Petitions for amendment: Processing and initial
decision.
(a) Decisions on petitions. In reviewing a record in response to a
petition for amendment, the accuracy, relevance, timeliness and
completeness of the record shall be assessed against the criteria set
out in 700.261. In addition, personnel records shall be assessed
against the criteria for determining record quality published in the
Federal Personnel Manual and the Commission Manual addition thereto.
(b) Authority to decide. An initial decision on a petition for
amendment may be made only by the Privacy Act Officer.
(c) Acknowledgement of receipt. Unless processing of a petition is
completed within ten (10) days (Saturdays, Sundays and public legal
holidays excepted), the receipt of the petition for amendment shall be
acknowledged in writing by the system manager to whom it is directed.
(d) Inadequate petitions. (1) If a petition does not meet the
requirements of 700.287, the petitioner shall be so advised and shall
be told what additional information must be submitted to meet the
requirements of 700.287.
(2) If the petitioner fails to submit the additional information
within a reasonable time, his petition may be rejected. The rejection
shall be in writing and shall meet the requirements of paragraph (e) of
this section.
(e) Form of decision. (1) A decision on a petition for amendment
shall be in writing and shall state concisely the basis for the
decision.
(2) If the petitioned for amendment is rejected, in whole or part,
the decision shall advise the petitioner that the rejection may be
appealed to the Executive Director by writing to the Privacy Act
Officer, Navajo and Hopi Indian Relocation Commission, Box KK,
Flagstaff, Arizona 86002, and that the appeal must be received by this
official within twenty (20) days (Saturdays, Sundays and public legal
holidays excepted) of the date of the decision.
(f) Implementation of initial decision. If a petitioned for
amendment is accepted, in whole or part, the appropriate Commission
Division maintaining the record shall:
(1) Correct the record accordingly and,
(2) Where an accounting of disclosures has been made pursuant to
700.269 advise all previous recipients of the record that the correction
was made and the substance of the correction.
25 CFR 700.291 Petitions for amendment: Time limits for processing.
(a) Acknowledgement of receipt. The acknowledgement of receipt of a
petition required by 700.289(c) shall be dispatched not later than ten
(10) days (Saturdays, Sundays and public legal holidays excepted) after
receipt of the petition by the system manager responsible for the system
containing the challenged record, unless a decision on the petition has
been previously dispatched.
(b) Decision on petition. A petition for amendment shall be
processed promptly. A determination whether to accept or reject the
petitioned for amendment shall be made within no more than thirty (30)
days (Saturdays, Sundays, and public legal holidays excepted) after
receipt of the petition by the system manager responsible for the system
containing the challenged record.
(c) Suspension of time limit. The thirty (30) day time limit for a
decision on a petition shall be suspended if it is necessary to notify
the petitioner, pursuant to 700.289(d) that additional information in
support of the petition is required. Running of the thirty (30) day
time limit shall resume on receipt of the additional information by the
system manager responsible for the system containing the challenged
record.
(d) Extensions of time. (1) The thirty (30) day time limit for a
decision on a petition may be extended if the official responsible for
making a decision on the petition determines that an extension is
necessary for one of the following reasons:
(i) A decision on the petition requires analysis of voluminous record
or records;
(ii) Some or all of the challenged records must be collected from
facilities other than the facility at which the official responsible for
making the decision is located.
(2) If the official responsible for making a decision on the petition
determines that an extension is necessary, he shall promptly inform the
petitioner of the extension and the date on which a decision is expected
to be dispatched.
25 CFR 700.293 Petitions for amendment: Appeals.
(a) Right of appeal. Where a petitioned-for amendment has been
rejected, in whole or part, the individual submitting the petition may
appeal the denial to the Executive Director.
(b) Time for appeal. (1) An appeal must be received no later than
twenty (20) days (Saturdays, Sundays and public legal holidays excepted)
after the date of the decision on a petition.
(2) The Executive Director may, for good cause shown, extend the time
for submission of an appeal if a written request for additional time is
received within twenty (20) days (Saturdays, Sundays and public legal
holidays excepted) of the date of the decision on a petition.
(c) Form of appeal. (1) An appeal shall be in writing and shall
attach copies of the initial petition and the decision on that petition.
(2) The appeal shall contain a brief statement of the reasons why the
appellant believes the decision on the petition to have been in error.
(3) The appeal shall be addressed to Privacy Act Officer, Navajo and
Hopi Indian Relocation Commission, Box KK, Flagstaff, Arizona 86002.
25 CFR 700.295 Petitions for amendment: Action on appeals.
(a) Authority. Appeals from decisions on initial petitions for
amendment shall be decided for the Commission by the Executive Director
after consultation with the Commission's legal counsel unless the record
challenged by the initial petition is a Civil Service Commission
personnel record maintained for the Commission by the Navajo and Hopi
Indian Relocation Commission. Appeals from decisions on initial
petitions requesting amendment of Civil Service Commission records
maintained for the Commission by the Navajo and Hopi Indian Relocation
Commission shall be transmitted by the Executive Director, for decision.
(b) Time limit. (1) A final determination on any appeal shall be
made within thirty (30) days (Saturdays, Sundays and legal public
holidays excepted) after receipt of the appeal.
(2) The thirty (30) day period for decision on an appeal may be
extended, for good cause shown, by the Commission. If the thirty (30)
day period is extended, the individual submitting the appeal shall be
notified of the extension and of the date on which a determination on
the appeal is expected to be dispatched.
(c) Form of decision. (1) The final determination on an appeal shall
be in writing and shall state the basis for the determination.
(2) If the determination upholds, in whole or part, the initial
decision rejecting the petitioned for amendment, the determination shall
also advise the individual submitting the appeal:
(i) Of his or her right to file a concise statement of the reasons
for disagreeing with the decision of the agency;
(ii) Of the procedure established by 700.297 for the filing of the
statement of disagreement;
(iii) That the statement which is filed will be made available to
anyone to whom the record is subsequently disclosed together with, at
the discretion of the Commission, a brief statement by the Commission
summarizing its reasons for refusing to amend the record;
(iv) That prior recipients of the challenged record will be provided
a copy of any statement of dispute to the extent that an accounting of
disclosure was maintained; and
(v) Of his or her right to seek judicial review of the Commission's
refusal to amend the record.
(3) If the determination reverses, in whole or in part, the initial
decision rejecting the petitioned for amendment, the system manager
responsible for the system containing the challenged record shall be
directed to:
(i) Amend the challenged record accordingly; and
(ii) If an accounting of disclosure has been made, advise all
previous recipients of the record which was amended of the amendment and
its substance.
25 CFR 700.297 Statements of disagreement.
(a) Filing of statements. If the determination of the Executive
Director under 700.295 rejects in whole or part, a petitioned for
amendment, the individual submitting the petition may file with the
system manager for the system containing the challenged record, a
concise written statement setting forth the reasons for his disagreement
with the determination of the Department.
(b) Disclosure of statements. In any disclosure of a record
containing information about which an individual has filed a statement
of disagreement under this section occurring after the filing of the
statement, the disputed portion of the record will be clearly noted and
the recipient shall be provided copies of the statement of disagreement.
If appropriate, a concise statement of the reasons of the Commission
for not making the requested amendments may also be provided to
recipient.
25 CFR 700.297 Subpart L -- Determination of Eligibility, Hearing and
Administrative Review (Appeals)
Source: 46 FR 46801, Sept. 22, 1981; 47 FR 15774, Apr. 13, 1982,
unless otherwise noted.
25 CFR 700.301 Definitions.
(a) Certifying Officer, as used in this subpart, means that member of
the Commission staff who certifies eligibility for relocation assistance
benefits and/or for life estate leases.
(b) An aggrieved person, as used in this subpart, means a person who
has been denied any relocation assistance benefits for which he/she has
applied.
25 CFR 700.303 Initial Commission determinations.
(a) Initial Commission Determination concerning individual
eligibility or benefits for any person who has filed a claim for
benefits or for granting of Life Estate Leases shall be made by the
Certifying Officer. The Determination shall include the amount, if any,
to which the individual is entitled, and shall state the reasons
therefor. Such Determination shall be communicated to the Applicant by
certified letter or in person by Commission staff. A record of personal
notice shall be maintained by the Commission.
(b) An explanatory conference shall be scheduled by and with the
Certifying Officer, if requested by the Applicant or the Certifying
Officer, within thirty days of the communication of the Determination;
the right to a hearing is not dependent on the holding of such a
conference. The Certifying Officer may reverse, amend, or leave
standing the Initial Determination as a result of such conference:
Provided, however, his/her decision shall be communicated in writing to
the Applicant by certified letter or in person by Commission staff
within five days after such conference.
(c) Communications of Determinations to the Applicant as provided for
in 700.303(a) shall include an explanation of the availability of
grievance procedures, including hearings and representation of counsel
and the fact that a hearing must be requested within 30 (thirty) days of
receipt of the determination.
(d) No decision which at the time of its rendition is subject to
appeal to the Commission shall be considered final agency action subject
to judicial review under 5 U.S.C. 704, Provided that in the event of a
whole or partial denial, no benefits shall be paid unless and until said
Determination is reversed or modified as provided for herein.
25 CFR 700.305 Availability of hearings.
All persons aggrieved by Initial Commission Determinations concerning
eligibility, benefits, or for granting of Life Estate Leases may have a
Hearing to present evidence and argument concerning the Determination.
Parties seeking such relief from the Commission's Initial Determination
shall be known as ''Applicants.'' When multiple Applicants claim
interest in one benefit, determination, or question of eligibility,
their hearings may be consolidated at the Presiding Officer's
discretion.
25 CFR 700.307 Request for hearings.
Hearing requests shall be made in person or by letter and must be
received by the Commission within thirty days after the notice letter
was received, the personal notice was given, or if an explanatory
conference is held, after the decision of the Certifying Officer. The
request shall also contain a specific statement indicating the basis for
the request.
25 CFR 700.309 Presiding officers.
The hearing shall be presided over and conducted by one of the
Commissioners appointed pursuant to 25 U.S.C. 640d-11(b) or by such
other person as the Commission may designate.
25 CFR 700.311 Hearing scheduling and documents.
(a) Hearings shall be held as scheduled by the Presiding Officer.
(b) Notice of the hearing shall be communicated in writing to the
applicant at least thirty days prior to the hearing and shall include
the time, date, place, and nature of the hearing.
(c) Written notice of the Applicant's objections, if any, to the
time, date, or place fixed for the hearing must be filed with the
Presiding Officer at least five days before the date set for the
hearing. Such notice of objections shall state the reasons therefor and
suggested alternatives. Discretion as to any changes in the date, time,
or place of the hearing lies entirely with the Presiding Officer,
Provided, that the 30 (thirty) day notice period as provided in
paragraph (b) of this section shall be observed unless waived in writing
by the applicant or his representative.
(d) All hearings shall be held within thirty days after Commission
receipt of the applicant's request therefor unless this limit is
extended by the Presiding Officer.
(e) All hearings shall be conducted at the Commission office in
Flagstaff, Arizona, unless otherwise designated by the Presiding
Officer.
(f) All time periods in this regulation include Saturdays, Sundays
and holidays. If any time period would end on a Saturday, Sunday, or
holiday, it will be extended to the next consecutive day which is not a
Saturday, Sunday, or holiday.
(g) A copy of each document filed in a proceeding under this section
must be filed with the Commission and may be served by the filing party
by mail on any other party or parties in the case. In all cases where a
party is represented by an attorney or representative, such attorney or
representative will be recognized as fully controlling the case on
behalf of his client, and service of any document relating to the
proceeding shall be made upon such attorney or representative, which
service shall suffice as if made upon the Applicant. Where a party is
represented by more than one attorney or representative, service upon
one of the attorneys or representatives shall be sufficient.
(h) Hearings will be recorded verbatim and transcripts thereof shall
be made when requested by any parties; costs of transcripts shall be
borne by the requesting parties unless waived according to
700.313(a)(5).
(i) Applicants may be represented by a licensed attorney or by an
advocate licensed to practice in any Hopi or Navajo Tribal Court.
25 CFR 700.313 Evidence and procedure.
(a) At the hearing and taking of evidence the Applicant shall have an
opportunity to:
(1) Submit and have considered facts, witnesses, arguments, offers of
settlement, or proposals of adjustment;
(2) Be represented by a lawyer or other representative as provided
herein;
(3) Have produced Commission evidence relative to the determination,
Provided, that the scope of pre-hearing discovery of evidence shall be
limited to relevant matters as determined by the Presiding Officer;
(4) Examine and cross-examine witnesses;
(5) Receive a transcript of the hearing on request and upon payment
of appropriate Commission fees as published by the Commission, which may
be waived in cases of indigency.
(b) The Presiding Officer is empowered to:
(1) Administer oaths and afffirmations;
(2) Rule on offers of proof;
(3) Receive relevant evidence;
(4) Take depositions or have depositions taken when the ends of
justice would be served and to permit other pre-hearing discovery within
his/her discretion;
(5) Regulate the course and conduct of the hearings; including
pre-hearing procedures;
(6) Hold pre-hearing or post-hearing conferences for the settlement
or simplification of the issues;
(7) Dispose of procedural requests or similar matters;
(8) Make a record of the proceedings;
(9) Hold the record open for submission of evidence no longer than
fourteen days after completion of the hearings;
(10) Make or recommend a decision in the case based upon evidence,
testimony, and argument presented;
(11) Enforce the provisions of 5 USCA section 557(d) in the event of
a violation thereof;
(12) Issue subpoenas authorized by law; and
(13) Extend any time period of this subpart upon his/her own motion
or upon motion of the applicant, for good cause shown.
25 CFR 700.315 Post hearing briefs.
Applicants may submit post-hearing briefs or written comments to the
Presiding Officer within fourteen days after conclusion of the Hearings.
In the event of multiple applicants or parties to a hearing, such
briefs shall be served on all such applicants by the applicant
submitting the brief.
25 CFR 700.317 Presiding officer decisions.
(a) The Presiding Officer shall submit to the Commission a written
decision based upon the evidence and argument presented, within sixty
days, not including any period the record is held open, if any, after
conclusion of the hearing, unless otherwise extended by the Presiding
Officer.
(b) Copies of the Presiding Officer's decision shall be mailed to the
Applicant. The Applicant may submit briefs or other written argument to
the Commission within fourteen days of the date the Presiding Officer's
determination was mailed to the Applicant.
25 CFR 700.319 Final agency action.
Within 30 (thirty) days after receipt of the Presiding Officer's
decision, the Commission shall affirm or reverse the decision and issue
its final agency action upon the application in writing; Provided, that
in the event one Commissioner sits as the Presiding Officer, the final
agency action shall be determined by the remaining Commissioners and
such other person as they may designate who did not so preside over the
hearing. Such decisions shall be communicated in writing to the
Applicant by certified mail.
25 CFR 700.321 Direct appeal to Commissioners.
Commission determinations concerning issues other than individual
eligibility or benefits which do not require a hearing may be appealed
directly to the Commission in writing. The Commission decision will
constitute final agency action on such issues.
25 CFR 700.321 Subpart M -- Life Estate Leases
Authority: Sec. 30(b), Pub. L. 96-305, 94 Stat. 929 (25 U.S.C.
640d).
Source: 46 FR 27921, May 22, 1981; 47 FR 15774, Apr. 13, 1982,
unless otherwise noted.
25 CFR 700.331 Application for Life Estate Leases.
The following standards and procedures shall govern the application
for Life Estate Leases:
(a) Filing of application. Applications for Life Estate Leases shall
be filed at the Commission's office in Flagstaff, AZ, not later than
July 1, 1981, unless extended for good cause. Application should be
made on an approved Commission form known as ''Application for Life
Estate Lease'' and should contain the following information:
(1) Name, address, birthdate, social security number, census number,
spouse, and date of marriage, if married. The head of household who
applies for a Life Estate Lease shall be known as the ''applicant''.
(2) Applicant's Quad Map location in the Former Joint Use Area.
(3) Information listing any other places of Applicant's residence
since December 22, 1974.
(4) Name, birthdate, census number, and social security number, if
any, of the applicant's minor dependent children.
(5) A statement by the applicant setting forth the nature of the
applicant's disability, if any.
(6) Applications should be accompanied, wherever possible, with
documentation such as Birth Certificates, Baptismal Records, Tribal
Records, Family Census Cards, Marriage Certificates, Tax Returns, and
such other documentation required by the Commission.
(b) Extensions of time for filing of applications for Life Estate
Leases. Extensions of time for filing of applications for Life Estate
Leases shall be governed by the following procedures:
(1) The Commission shall, on a case-by-case basis, determine whether
good cause exists to warrent a time extension for the receipt of
applications.
(2) Initial Commission determinations concerning the time extension
for receipt of applications shall be made by the Certification Officer.
Any extensions granted shall be in writing and shall state the length of
the extensions and the reasons therefore.
(3) In no event shall an extension be granted for more than
eighty-nine (89) days after July 1, 1981.
(4) In the event an extension of time is denied or an application is
refused for filing, the Certification Officer shall state the reasons
therefore and such determination shall be communicated to the applicant
by certified letter or in person by Commission staff.
(5) All persons aggrieved by initial Commission determination may
have a hearing to present evidence and argument concerning the
determination. Such hearings shall be requested and governed by the
Commission's Hearings and Administrative Review Procedures contained in
700.8 of the Commission's Operations and Relocation Procedures.
(6) For purpose of this subsection, ''good cause'' shall be defined
as follows:
(i) Lack of actual notice.
(ii) Lack of transportation or physical incapacity preventing timely
filing.
(iii) Acts of God.
(iv) Such other facts or reasons deemed sufficient in the discretion
of the Commission.
25 CFR 700.333 Determination of disability.
The Commission shall determine disability pursuant to the following:
(a) An applicant shall be considered to be disabled if he/she is
unable to engage in any substantial gainful activity by reason of any
medically determined physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve months. A physical or mental
impairment is an impairment that results from anatomical, physiological,
or psychological abnormalities which are demonstrable by medically
acceptable clinical and laboratory diagnostic techniques.
(b) Each applicant who claims entitlement to a life estate lease by
virture of a disability shall be examined by a physician selected by the
Commission or one selected by the applicant and approved by the
Commission. The reasonable costs of such examinations shall be paid by
the Commission. The examining physician shall submit a report of
his/her examination to the rating physician who shall be a physician
selected by the Commission. The rating physician shall submit to the
Commission a report stating his/her opinion as to whether or not the
applicant is a least 50% (fifty percent) disabled and if so, the percent
of disability. In addition, the rating physician shall state in his/her
report the conditions or conditions of the applicant upon which the
rating is based.
(c) In performing examinations and in making ratings, the physician
shall follow the procedures and adopt the standards set forth in subpart
I -- Determination of Disability or Blindness, of the Social Security
Administration, contained in title 20, Code of Federal Regulations,
416.901 through 416.985, including the appendices, etc., to the extent
that such procedures and standards are appropriate to this examination
and rating.
(d) In making its determination as to the disability and the
percentage thereof of an applicant who claims disability, the Commission
shall consider the report of the rating physician and such other matters
as the Commission deems relevant.
25 CFR 700.335 Grouping and granting of applications for Life Estate
Leases.
Upon receipt of applications filed pursuant to this section, the
Commission shall group and award life estate leases in the following
manner:
(a) Applicants who are determined to be at least 50% (fifty percent)
disabled as certified by a physician approved by the Commission. Such
applicants shall be ranked in the order of the severity of their
disability.
(b) Applicants who are not at least 50% (fifty percent) disabled
shall be ranked in order of their age with the oldest listed first and
the youngest listed last; provided that, if any applicant physically
resides in Quarter Quad Numbers 78 NW, 77NE, 55SW, or 54 SE, as
designated on the Quarter Quad Maps of the Former Joint Use Area
prepared by the Bureau of Indian Affairs Field Administrative Office,
such applicant shall be given priority over another applicant of equal
age.
(c) Applicants who did not, as of December 22, 1974, and continuously
thereafter, maintain a separate place of abode and actually remain
domiciled on Hopi Partitioned Lands, and who, but for this subsection
would be required to relocate, shall be rejected by the Commission.
(d) Applicants who were not at least forty-nine (49) years of age on
December 22, 1974, or are not at least 50% (fifty percent) disabled
shall also be rejected by the Commission.
(e) The Commission shall award life estate leases to not more than
one hundred and twenty (120) Navajo applicants with first priority being
given to applicants listed pursuant to 700.335(a) and the next priority
being given to applicants listed pursuant to 700.335(b), in order of
such listing.
(f) The Commission shall award life estate leases to not more than
ten (10) Hopi applicants with first priority being given to applicants
listed pursuant to 700.335(a) and the next priority being given to
applicants listed pursuant to 700.335(b) in order of such listing
except that the portion of 700.335(b) concerning residency in Quarter
Quad Numbers 78 NW, 77NE, 77NW, 55 SW, 54SE, etc., shall not apply to
Hopi applicants.
25 CFR 700.337 Establishment of boundaries of Life Estate Leases.
(a) Prior to the issuance of a life estate lease, the Commission
shall, after consultation with the Tribe upon whose land the life estate
lease will be located, establish the actual configuration, shape and
boundaries of the land area of the life estate lease. The present
residence of the life tenant shall be within the boundaries of the life
estate lease and the area of the life estate lease shall not exceed
ninety (90) acres.
(b) The following factors will be considered in establishing the
configuration, shape, and boundaries of a life estate lease:
(1) The location of the present residence of the applicant and the
traditional land use area associated with such residence.
(2) The topography and soil conditions of the land in the immediate
vicinity of the applicant's present residence.
(3) The location of the nearest source of water.
(4) The proximity of roads.
(5) Such other factors may be necessary or appropriate.
25 CFR 700.339 Residency on Life Estate Leases.
(a) No person may reside on a life estate lease other than the life
tenant, his or her spouse, and minor dependents and such persons who are
necessarily present, as determined by the Commission, to provide for the
care of the life tenant.
(b) In determining who is necessarily present for the care of the
life tenant, the Commission shall consider the following criteria:
(1) The age of the life tenant.
(2) The nature and extent of the life tenant's disability, if any.
(3) The location of the life estate lease, including but not limited
to, the following factors:
(i) Topography,
(ii) Proximity to water,
(iii) Proximity to fuel,
(iv) Proximity to shopping and medical services, and
(v) Any other factors deemed relevant to the Commission.
(4) The nature and extent of care to be provided to a disabled life
tenant.
(5) Any other factors deemed relevant by the Commission.
(c) In the event it becomes necessary to change the identity of the
person(s) or number of persons identified as necessarily present for the
care of the life tenant, the life tenant shall make such request for
change to the Commission. The Commission, upon review of the request,
may grant an amended life estate lease to reflect the requested change.
25 CFR 700.341 Access to Life Estate Leases.
(a) Family members and other persons may enter upon the life estate
lease premises for the purpose of visiting the life estate lease
residents so long as such visit does not exceed thirty (30) consecutive
days in any one visit or ninety (90) days total of all visits within any
lease year, except that grandchildren and their descendants who are not
minor dependents of the life tenant and who have not attained the age of
18 (eighteen) years may visit for ninety (90) consecutive days in any
lease year, the first of which shall commence on the date of issuance of
the life estate lease. There shall be no limitation on visits which do
not extend overnight.
(b) Visitors and residents shall use the existing road systems and
access rights of way when traveling to and from life estate lease
premises.
25 CFR 700.343 Life Estate Leases.
The Commission shall execute a life estate lease to each applicant to
whom a life estate lease is granted, which lease shall contain the
following:
(a) The names of the persons entitled to reside on the life estate
lease which shall be the life tenant, his or her spouse, and minor
dependents and/or such persons who are necessarily present to provide
for the care of life tenant.
(b) A description of the exterior boundaries of the land included in
said lease.
(c) The term of the life estate lease which shall end either upon
voluntary relinquishment or upon the death of the life tenant or his/her
spouse, whichever occurs last.
(d) That the life tenant may feed not to exceed twenty-five (25)
sheep units per year or equivalent livestock on the life estate lease
premises.
(e) That no person may reside on a life estate lease other than the
life tenant, his or her spouse, and minor dependents, and/or such
persons who are necessarily present to provide for the care of the life
tenant.
(f) That the Secretary of Interior shall pay, pursuant to 25 U.S.C.
640d-28(i), Pub. L. 96-305, section 30(i), on an annual basis, the fair
market rental value of such life estate lease to the tribe to whom the
lands leased were partitioned. Rental payments shall be made within
thirty (30) days of the execution date of the life estate lease.
(g) That the life tenant may make reasonable improvements on the life
estate lease which are related to the residence and agricultural
purposes of the life tenancy as determined by the Commission. Such
improvements:
(1) May include the renovation or replacement of existing dwelling
structures and privies or outhouses so as to improve their utility,
safety or level of modern utilities or amenities, but
(2) Shall not increase the number, size, or capacity of dwelling
structures on the leased area except with the express written approval
of the Commission based upon a showing of actual need, or to reasonably
accommodate a resident care provider for whom there is not adequate
existing residential capacity.
(3) May include not more than one shed or barn to be used in
connection with livestock and/or agricultural activities permitted.
(4) May include one ceremonial hogan and one traditional ramada type
structure.
(5) May include a garden of reasonable size.
(6) May include such other improvements as the Commission finds to be
reasonable under the circumstances of each lease.
(h) That no person may visit on a life estate lease for more than
thirty (30) consecutive days in any one visit or ninety (90) days total
of all visits within any lease year the first of which shall commence on
the date of issuance of the life estate lease, except that grandchildren
and their descendants who are not minor dependents of the life tenant
and who have not attained the age of eighteen (18) years may visit for
ninety (90) consecutive days in any lease year. There shall be no
limitation on visits which do not extend overnight.
(i) That said life tenant or his or her surviving spouse may
relinquish said life estate lease at any time and may receive relocation
benefits from the Secretary at the time of relinquishment as provided in
25 U.S.C. 640d-28(h), (Pub. L. 96-305, section 30(h)).
(j) The purposes for which the life estate lease may be used.
(k) The life estate tenure shall end by voluntary relinquishment, or
at the death of the life tenant or the death of his or her spouse,
whichever occurs last, all as provided in 25 U.S.C. 640d-28(g) (Pub. L.
96-305, section 30(g)).
(l) No livestock shall be allowed in the lease area until the
perimeter of the lease area is fenced.
(m) Such other terms and conditions deemed necessary or appropriate
by the Commission.
25 CFR 700.343 Subpart N -- Discretionary Funds
Source: 47 FR 57916, Dec 29, 1982, unless otherwise noted.
25 CFR 700.451 Purpose.
(a) The purpose of this subpart is to establish procedures for the
submission, review and approval, and administration of applications for
financial assistance from the discretionary fund established by Pub. L.
93-531, as amended.
(b) The purpose of the discretionary fund is to provide financial
assistance to activities which will facilitate and expedite the
relocation and resettlement of individuals under the Act and ease the
hardship incurred by these individuals.
25 CFR 700.453 Definitions.
(a) Act means Pub. L. 93-531 (88 Stat. 1712, 25 U.S.C. 640d), as
amended.
(b) Applicant means with respect to this subpart, any applicant as
defined under 700.457(c) or 700.459(b).
(c) Business means any lawful activity, except a nonprofit
organization, that is --
(1) Conducted primarily for the purchase, sale, lease and/or rental
of personal and/or real property, and/or for the manufacture,
processing, and/or marketing of products, commodities, and/or any other
personal property; or
(2) Conducted primarily for the sale of services to the public.
(d) Commissioners means the three Commissioners of the Navajo and
Hopi Indian Relocation Commission.
(e) In-kind contribution means a noncash contribution as described in
attachment F of OMB Circular A-102.
(f) Local government means a local unit of government including
specifically a county, municipality, city, town, township, local public
authority, special district, council of governments, and other regional
or interstate entity, or any agency or instrumentality of a local
government.
(g) Nonprofit organization means a corporation, partnership,
individual, or other public or private entity that is engaged in a
lawful business, professional, or instructional activity on a nonprofit
basis and that has established its nonprofit status under applicable
Federal, State, or Tribal law.
(h) Related facilities means any building or structure normally found
in a community and includes but is not limited to water, sewer and
electrical lines, community centers, health centers and clinics, roads,
and business establishments.
(i) Services means activities relating to human development
including, but not limited to, educational and job training, mental
health counseling, health care, and technical assistance in business
administration, agriculture, and home economics.
(j) Tribe means the Navajo Chapter or the Hopi Village.
(k) Tribal subdivision means a Navajo Chapter or a Hopi Village.
25 CFR 700.455 Financial assistance.
(a) The Commission may provide financial assistance to applicants
eligible under this subpart from funds available for any fiscal year.
(b) To obtain financial assistance, an applicant shall submit an
application in accordance with 700.463.
(c) The Commission may make funding decisions throughout the year as
applications are approved. The Commission shall, to the extent
possible, make funds available throughout the year for approved
applications. Based upon the merit of applications received under this
subpart, the Commission shall determine how funds available under this
subpart shall be apportioned among the activities described in 700.457
and 700.459.
25 CFR 700.457 Assistance to match or pay 30% of grants, contracts or
other expenditures.
(a) The purpose of applications for financial assistance under this
section shall be to aid individuals subject to relocation under the Act
and to assist the host communities, towns, cities, or other entities in
adjusting to and meeting the needs of the relocatees. For this purpose,
the discretionary fund may be used to match or pay not to exceed 30%
(thirty percent) of any grant, contract, or other expenditure of the
Federal Government, State or local government, tribal government or
chapter, or private organization for the benefit of the Navajo or Hopi
Tribe, if the Commission determines that such grant, contract, or
expenditure would significantly assist the Commission in carrying out
its responsibility or assist either tribe in meeting the burdens imposed
by this Act.
(b) An ''other expenditure'' under this subsection is defined as
cooperative agreements, direct provision of services, or in-kind
contributions. The Commission may match or pay not to exceed 30%
(thirty percent) of another expenditure through a grant, contract, or
cooperative agreement.
(c) Eligible applicants under this section for a grant, contract, or
cooperative agreement are defined as States, local government, the
Navajo and Hopi Tribes, tribal chapters or villages and profit and
nonprofit organizations.
(d) Total Federal financial assistance under this section may reach
100% (one hundred percent) if the applicant receives 70% (seventy
percent) Federal funding from Federal agencies other than the
Commission.
(e) When another Federal agency is a primary source of financial
assistance for an applicant, the Commission may, pursuant to an
interagency agreement, transfer funds to the primary Federal agency
providing financial assistance to the applicant.
(f) The Commission may, pursuant to an interagency agreement,
transfer not to exceed 10% (ten percent) of the funds available under
this subpart to another Federal agency directly assisting relocatees if
such agency's activities would accomplish the purpose of paragraph (a)
of this section. Financial assistance transferred to accomplish an
eligible activity under paragraph (a) of this section may not exceed the
funding limitation of paragraph (a) of this section.
(g) An applicant may apply for financial assistance under this
section in accordance with the funding limitations described in
paragraph (a) for the purpose of undertaking a technical feasibility
study of a construction project or any major project with a total
funding of over $200,000 (two hundred thousand dollars) or any dollar
amount which the Commission may prescribe at some future time.
25 CFR 700.459 Assistance for demonstration projects and for provision
of related facilities and services.
(a) The purpose of applications for financial assistance under this
section shall be to aid individuals subject to relocation under the Act.
For this purpose, the discretionary fund may be used by the Commission
to engage or participate either directly through Federal activities, or
by cooperative agreement, grant, or contract in demonstration efforts to
employ innovative energy or other technologies in providing housing and
related facilities and services in the relocation and resettlement of
individuals under this Act.
(b) Applicants eligible under this section to receive grants,
cooperative agreements or contracts are: states, local governments, the
Navajo and Hopi Tribes, tribal chapters, profit and nonprofit
organizations, and individuals.
(c) Applicants for assistance under this section may receive up to
100% (one hundred percent) project or program funding from the
Commission, however, the Commission may specify whether applications for
certain types of programs or projects under this section require
matching funding from the applicant.
(d) Activities described in 700.457(a) and paragraph (a) of this
section may be provided by the Commission through in-house activities
which receive financial assistance under this section.
(e) The Commission may, pursuant to an interagency agreement,
transfer not to exceed 10% (ten percent) of the funds available under
this subpart to another Federal agency directly assisting relocatees if
such agency's activities would accomplish the purpose of 700.457(a)
and 700.459(a).
(f) An applicant may apply for financial assistance under this
section for the purpose of undertaking a technical feasibility study of
a construction project, or any major project with a total planned
funding of over $200,000, (two hundred thousand dollars) or any dollar
amount which the Commission may prescribe at some future time.
25 CFR 700.461 Method for soliciting applications.
(a) The Commission shall utilize two methods to solicit applications
for funding:
(1) The Commission shall issue an annual announcement of the
availability of funds for programs which will most effectively meet the
purposes of 700.457(a) or 700.459(a). Applicants submitting
applications under this announcement must demonstrate that the proposed
project or program will effectively facilitate and expedite the
relocation effort of the Commission.
(2) As priority needs are identified by the Commission, calls shall
be issued during the fiscal year for specific proposals. Requests for
proposal shall define the need to be addressed and the scope of work
required.
(b) The annual announcements of the availability of funds and
periodic requests for proposals shall be issued through the Commerce
Business Daily and media which has regional and local circulation. The
Commission may fund approved applications through grant, contract, or
direct provision of services, pursuant to Pub. L. 93-531, as amended.
25 CFR 700.463 Requirements for applications.
(a) Applicants shall submit preapplications for funding assistance.
The preapplication shall be due by the closing date published by the
Commission, and shall consist of:
(1) Standard Form 424;
(2) A brief narrative not to exceed one page describing how the
program or project will meet the priorities established by the
Commission pursuant to 700.457 or 700.459.
(b) The Commission shall respond to each preapplication, and shall
request each person submitting an acceptable preapplication to submit an
application.
(c) Applications for financial assistance for a project or program
may be submitted by the due date established by the Commission for a
particular funding cycle. Applications received after the due date will
be considered for the next funding cycle, although the Commission, at
its discretion, may select such a project for funding under the current
cycle. An original and 5 (five) copies of each application must be
submitted to the Commission. Applications shall be submitted on such
forms as the Commission may prescribe in conformity with OMB circulars
A102 or A110.
(d) Applications under 700.457 for matching financial assistance not
to exceed 30% of another expenditure, shall include:
(1) A detail sheet showing the sources of matching funds, including
both cash and in-kind contributions, and documentation that the
applicant has fulfilled all of the requirements of any Federal agency,
state or local government or chapter, or private organization from which
the financial assistance is also requested; and
(2) A narrative statement which includes an explanation of how the
application would aid relocatees and assist the host communities, towns,
cities, or other entities in adjusting to and meeting the needs of
relocatees.
(e) Applications for financial assistance under 700.459 must justify
the proposed project or program as a demonstration effort in order to be
eligible for 100% funding.
(f) Applications shall contain a statement of how the applicant plans
to comply with the provisions of the Indian Self-Determination Act (25
U.S.C. 450e) and the Act of April 16, 1934 (48 Stat. 596) as amended (25
U.S.C. 452-457).
25 CFR 700.465 Technical feasibility.
Unless required by a non-Commission source of financial assistance,
completed plans and specifications are not required at the time an
application is submitted for construction, technology, or another
engineering project, however, an application for a construction,
technology or another engineering project shall:
(a) Include sufficient information to determine the nature and scope
of the project, its probable useful life, and a reasonable estimate of
cost;
(b) Fully show that the applicant will follow design and performance
criteria which conform to professionally recognized standards and which
adequately define the technical capability of the project to serve
current and foreseeable needs; and
(c) Justify any evidence or use of unorthodox design.
(d) Show that the applicant has a management plan for the facility
which identifies probable sources of operating funds.
(e) An applicant who is awarded a grant under 700.465 is required to
submit completed plans and specifications for the construction,
technology, or other engineering project prior to construction. The
Commission shall review the completed plans and specifications for
technical adequacy as part of its oversight function.
25 CFR 700.467 Construction costs.
Construction costs and costs relating to construction such as
machinery and equipment, architect/engineer services, and administrative
services may be allowable as determined by the Commission.
25 CFR 700.469 Unallowable program and project costs.
Costs for program or project operating expenses are not allowable
except in the following cases --
(a) An application for an annual contract for services under
700.457 or 700.459 may include necessary operating expenses; and
(b) An application for a demonstration effort under 700.459 may
include costs relating to the operation of the demonstration.
25 CFR 700.471 Review and approval.
(a) Upon receipt of an application for financial assistance under
this subpart, members of the Commission staff shall begin a preliminary
review of the application with the intent of submitting a recommendation
to the Commissioners of whether to accept or deny the application. The
Commission staff may inform the applicant before its recommendation to
the Commissioners, of any special problems or impediments which may
result in a recommendation for disapproval; may offer any available
technical assistance required to overcome such problems or impediments;
and solicit the applicants written response.
(b) The Commission staff may solicit comments on an application from
technical specialists, community groups and others, when such advice is
needed to fully evaluate the application.
(c) The Commission staff shall forward the application with their
recommendation to the Commissioners. The Commissioners may approve
applications if they determine that:
(1) The application meets the requirements of this subpart;
(2) The application meets the intent of the Act;
(3) The application fully demonstrates that it will expedite the
relocation and resettlement of individuals under the Act and ease the
hardship incurred by these individuals or by the Tribes;
(4) The application is compatible with priorities identified by the
Commission;
(5) The applicant can carry out the activities described in the
application and can maintain proper financial controls on the activities
for which financial assistance is requested;
(6) The applicant can and will comply with requirements for Indian
preference in employment and training in connection with the
administration of the grant, and preference to Indian organizations and
Indian owned economic enterprises in the award of subcontracts or
subgrants; and
(7) Funds are available.
(d) All applicants shall be notified in writing of the Commission's
approval or disapproval of the grant applications.
25 CFR 700.473 Administrative expenditures of the Commission.
The Commission may use funds in an amount not to exceed 5 percent of
the funds authorized under this subpart for expenses relating to the
administration of the discretionary fund including --
(a) Personnel, whose time is expended directly in support of such
administration;
(b) Supplies which are expended directly in support of such
administration;
(c) Contracts, where the work performed is directly related to such
administration;
(d) Printing, directly in support of such administration; and
(e) Travel, directly related to such administration.
25 CFR 700.475 Reports.
Reports shall be furnished by any recipient of financial assistance
under this subpart, in such manner as may be required by the Commission.
25 CFR 700.477 Administration of financial assistance and recordkeeping
requirements.
(a) A State or local government (except an institution of higher
education or a hospital since they are governed by paragraph (b) of this
section), or the Navajo or Hopi Tribe receiving a grant or cooperative
agreement under this subpart shall comply with applicable law including
the following requirements --
(1) Office of Management and Budget Circular A-102, entitled
''Uniform Administrative Requirements for Grants-in-Aid to State and
Local Governments'' including attachment C describing recordkeeping
requirements; and
(2) Federal Management Circular 74-4 5 CFR part 1310, entitled ''Cost
Principles Applicable to Grants and Contracts with State and Local
Governments.''
(b) A nonprofit organization, institution of higher education, or
hospital receiving a grant or cooperative agreement under this subpart
shall comply with applicable law including the following requirements --
(1) Office of Management and Budget Circular A-110, entitled ''Grants
and Agreements with Institutions of Higher Education, Hospitals and
Other Nonprofit Organizations'' including attachment C describing
recordkeeping requirements; and
(2) Office of Management and Budget Circular A-122, entitled ''Cost
Principles for Nonprofit Organizations.''
(c) A profit organization receiving a grant or cooperative agreement
under this subpart shall comply with applicable law including Federal
Procurement Regulations (41 CFR subpart 1-15.2) for determining the
reasonableness, allowability, and allocability of costs.
(d) A profit organization, tribal chapter, or individual receiving a
grant or cooperative agreement under this subpart shall --
(1) Follow sound and proper procedures for the administration of the
financial assistance including any procedures established by the
Commission; and
(2) Retain records as required by the Commission.
(e) A State, local government, the Navajo or Hopi Tribe, a tribal
chapter or an individual receiving a contract under this subpart shall
comply with applicable law including Federal Procurement Regulations (41
CFR parts 1-1 through 1-30). Recordkeeping requirements for contracts
are described in 1-3.814-2, 1-7.103-3, 1-7.103-18, 1-7.603-20, and
1-7.603-7 of the Federal Procurement Regulations.
(f) A State, local government, profit or nonprofit organization, or
an individual residing off of the Navajo or Hopi reservation applying
for a grant or cooperative agreement under this subpart shall comply
with Office of Management and Budget Circular A-95, entitled
''Evaluation, Review and Coordination of Federal and Federally Assisted
Programs and Projects'' unless exempted under Part I, section 8.b. of
this circular.
(g) Recipients of financial assistance under this subpart shall
comply with other procedures which the Commission may from time to time
prescribe for the administration of financial assistance provided under
this subpart.
(h) A state or local government, nonprofit organization, institution
of higher education, hospital, profit organization or individual
receiving a grant, subgrant, contract or subcontract under this part
shall comply with the provisions of the Indian Self-Determination Act
(25 U.S.C. 450e) and the Act of April 16, 1934 (48 Stat. 596) as amended
(25 U.S.C. 452-457) which require that to the greatest extent feasible:
(1) Preferences and opportunities for training and employment in
connection with the administration of such contracts or grants shall be
given to Indians; and
(2) Preference in the award of subcontracts and subgrants in
connection with the administration of such contracts or grants shall be
given to Indian organization and to Indian owned economic enterprises as
defined in Section 3 of the Indian Financing Act of 1974 (88 Stat. 77)
(25 U.S.C. 1452).
25 CFR 700.479 Administrative review.
(a) If the Commissioners determine that implementation of an
application approved according to 700.471 fails to meet the
requirements of this subpart, the Commissioners shall give notice to the
recipient of their intent to terminate or suspend financial assistance
to the recipient.
(b) The Commission shall issue such notice in written form sent by
registered mail, return receipt requested, which notice shall include a
statement of the reasons for the findings referred to in paragraph (a)
of this section, and an explanation whether any amendments or actions
would result in compliance with grant terms and conditions.
(c) Any person whose approved financial assistance is terminated or
suspended under paragraph (b) of this section may request a review of
such action by the Commission. Such request for review shall be in
writing and must be mailed or delivered to the Commission not later than
thirty (30) days after receipt of the notice from the Commission by the
applicant. Such request for review shall state the reasons for the
request and shall include any additional matters not before the
Commission which the applicant deems appropriate. The Commission may
grant or deny a review at its discretion and shall inform the applicant
of its decision in writing.
25 CFR 700.479 Subpart O -- Employee Responsibility and Conduct
Source: 47 FR 11858, Mar. 19, 1982, unless otherwise noted.
25 CFR 700.501 Statement of purpose.
This part prescribes appropriate standards of conduct and
responsibilites, financial disclosure reports, and rules of ethics in
the conduct of Government business that are mandatory for all who serve
with the Navajo and Hopi Indian Relocation Commission, and in order to
implement the requirements of law, Executive Order 11222 and 5 CFR part
905. The rules promulgated by the Commission as essential to agency
operations are in addition to the criminal laws and other laws governing
conduct of Federal employees. Like the laws, they will be strictly
interpreted and firmly enforced. Ignorance of these rules or laxity in
observance or enforcement of them will not be condoned. They are the
prime responsibility of all Commission personnel.
25 CFR 700.503 Definitions.
(a) ''Special Government Employee'': An officer or employee who has
been employed to perform temporary duties, with or without compensation,
for not more than 130 days during any period of 365 consecutive days,
either on a full-time or intermittent basis (18 U.S.C. 202(a)).
(b) ''Employee'': Any officer or employee of the Commission who is
not a special government employee.
(c) ''Commission personnel'': All officers and employees of the
Commission, including special Government employees.
(d) ''Persons'': An individual, corporation, company, association,
firm, partnership, society, joint stock company, or any other
organization or institution.
(e) ''Gratuity'': Any gift, honorarium, favor, entertainment,
hospitality, transportation, loan, or any other tangible thing, and any
other intangible benefit (i.e. discounts) given to or on behalf of
Commission employees or their spouses or dependent children for which
fair market value is not paid by the recipient or by the Government.
25 CFR 700.505 Coverage.
The regulations contained in this part apply to all Commission
personnel. Exceptions applicable to special Government employees and
members of the Senior Executive Service are noted in the body of this
part.
25 CFR 700.507 Responsibilities.
(a) Office of the Commission and Office of Executive Direction. (1)
The Chairman of the Commission shall prepare and submit to the Office of
Personnel Management for approval, standards of employee conduct which
implement requirements of law, Executive Order 11222 and provisions of 5
CFR part 905; and prescribe additional standards of ethical and other
conduct and reporting requirements that are appropriate to the agency.
After OPM approval, the Chairman shall submit the agency's regulations
to the Federal Register for publication. These requirements also apply
to any amendments to agency regulations.
(2) The Commissioners shall appoint a Designated Agency Ethics
Official and Deputy Ethics Official in accordance with 5 CFR 738.202(b).
Responsibilities of these officials are described below in 735.15.
(3) The Executive Director shall ensure that the regulations
published under this part are disseminated to all Commission personnel
and that staff are familiar with and understand the standards of conduct
and statutes governing conflicts of interest and post Federal employment
restrictions.
(4) The Executive Director shall ensure that disciplinary or remedial
action is taken in the case of all agency personnel who violate these
standards or related laws and regulations, and against supervisors who
fail to carry out their responsibilities in taking disciplinary or
remedial action in such cases.
(b) Managers and supervisors. Managers and supervisors shall ensure
that all Commission personnel under their supervision are familiar with
and understand these regulations governing standards of conduct,
conflict of interest, and referenced statutory restrictions, and adhere
to them at all times. Issues and problems which cannot be resolved
through the discussion process inherent in the supervisor-employee
relationship shall be referred to the Designated Agency Ethics Official.
Managers and supervisors shall ensure that disciplinary or remedial
action is taken with all agency personnel who violate these regulations,
and against subordinate supervisors who fail to carry out their
responsibilities for effecting or recommending disciplinary or remedial
action in these cases.
(c) Employees. All Commission personnel shall be familiar with the
standards of conduct governed in this directive and the laws governing
conflicts of interest and post employment restrictions, and shall comply
with them. When in doubt as to the permissibility of an action under
the terms of this directive, the employee shall not act without first
consulting the immediate supervisor and as appropriate seeking the
advice of the Designated Agency Ethics Official.
(d) Office of Management Operations. (1) The Office of Management
Operations shall give each employee a copy of these regulations and
shall conduct an oral briefing on their contents, within 30 days of
approval. New personnel shall receive a copy and oral briefing promptly
upon assuming their duties. Additions and amendments shall be similarly
communicated upon approval.
(2) The Office shall conduct annual review sessions of these
standards for all personnel.
(3) The Office shall provide the Designated Agency Ethics Official
with necessary administrative and clerical staff support.
25 CFR 700.509 Duties of the designated agency ethics official.
The Designated Agency Ethics Official shall coordinate and manage the
agency's ethics program. The Deputy Ethics Official shall serve as
alternate Agency Ethics Official in the absence of the Designated Agency
Ethics Official, or upon his or her express delegation. Specific duties
of the Officer include:
(a) Liaison with Office of Government Ethics (OGE). The Designated
Agency Ethics Official shall establish and maintain close working
relations with the OGE, and shall coordinate communications between the
Commission and OGE through the Agency Liaison Division and Office of
Ethics of the General Services Administration. If the Designated Agency
Ethics Official receives a request which he or she believes should be
answered by the Office of Government Ethics, a referral procedure is
available. Requests for advisory opinions shall be submitted as
specified in 5 CFR 738.304. The Designated Agency Ethics Official shall
provide the OGE with records, reports and any other information which
may be required under the Ethics in Government Act (Pub. L. 95-521, as
amended) or requested by the OGE.
(b) Review of statements. The Designated Agency Ethics Official
shall review the statements of employment and financial interest
submitted by agency personnel assessing the application of conflict of
interest laws and regulations to the information reported. When the
review discloses a conflict, or the appearance of a conflict, between
the private interests of an employee and the performance of his or her
duties as a Commission employee, the Designated Agency Ethics Official
shall bring the conflict to the attention of the employee, grant the
individual an opportunity to explain the conflict, and attempt to
resolve it. If the conflict is not resolved at this point, the
Designated Agency Ethics Official shall forward a written report on the
conflict to the Chairman of the Commission recommending appropriate
action. In developing the recommendation the Designated Agency Ethics
Official may consult, as appropriate, with the agency General Counsel
and the GSA Ethics Office.
(c) Education and counseling program. The Designated Agency Ethics
Official shall design and conduct an education and counseling program
for supervisors and employees on all ethics and standards of conduct
matters, including post-employment matters. Records shall be kept as
appropriate on the advice rendered.
(d) Administrative systems review. The Designated Agency Ethics
Official shall ensure that these regulations and implementing
administrative systems are evaluated annually to determine their
adequacy and effectiveness in relation to current agency
responsibilities. Amendments shall be developed and approved pursuant
to the results of systems review.
25 CFR 700.511 Statements of employment and financial interests.
(a) Employees required to file statements. (1) Members of the
Commission shall submit Financial Disclosure Reports (SF-278) to the
Deputy Ethics Counselor of the Department of Interior, according to
instructions received from that office. Issues of real or apparent
conflict of interest which involve employees of the Senior Executive
Service shall be resolved by the Ethics Officer of the Department of the
Interior.
(2) The Designated Agency Ethics Official shall submit SF-278 to the
Office of Government Ethics for review.
(3) The employee appointed as Deputy Ethics Official and incumbents
of the positions listed below shall file NHIRC form 738.1F with the
Designated Agency Ethics Official:
(i) Executive Director.
(ii) General Counsel.
(iii) Assistant Director for Management Operations.
(iv) Assistant Director for Relocation Operations.
(v) Chief, Technical Services Division.
(vi) Chief, Realty Division.
(vii) Chief, Advisory Services Division.
(viii) Chief, Office of Research, Planning and Evaluation.
(ix) Procurement/Fiscal Officer.
(x) Realty Specialists.
(xi) Construction Inspectors.
(4) The Designated Agency Ethics Official may require Statements of
Employment and Financial Interest from employees in other specified
positions, if analysis of duties and responsibilities shows the
positions meet the criteria listed in paragraph (b) of this section.
(5) Special Government Employees shall file NHIRC form 738.2F with
the Designated Agency Ethics Official prior to beginning employment or
service with the Commission. The Designated Agency Ethics Official may
waive this requirement if the duties of the position held by the special
Government employee are of a nature or at such a level of responsibility
that the submission of the statement by the incumbent is not necessary
to protect the integrity of the Commission or the Government.
(b) Criteria for selection of positions subject to filing
requirements. The following criteria govern selection of employees who
must also file statements of Employment and Financial Interest (NHIRC
Form 738.1F) with the Designated Agency Ethics Official.
(1) Statements of Employment and Financial Interest shall be required
of employees holding positions which are responsible for:
(i) Contracting or procurement.
(ii) Administering or monitoring grants and subcontracts.
(iii) Other activities where the decision or action has an economic
impact on the interests of any person or non-Federal enterprise.
(2) When a new position is established or the duties of an existing
position are materially changed, the position shall be evaluated
pursuant to the criteria of this section to determine whether or not it
should be designated as one requiring the incumbent to submit a
Statement of Employment and Financial Interests.
(c) Interests of relatives. The interest of a spouse, minor child,
or other member of an employee's immediate household is considered to be
an interest of the employee. Reports must include but are not limited
to identification of such an individual's employer, financial holdings
and debts. These provisions also apply to special Government employees.
(d) Employee complaint against filing requirements. An employee who
believes that his or her position has been improperly included among
those requiring the submission of a Statement of Employment and
Financial Interests may obtain review through the Commission's
administrative grievance procedure.
(e) Procedures for obtaining statements. Following approval of these
regulations, the Designated Agency Ethics Official shall give each
employee and special Government employee required to file under this
part, a copy of the appropriate NHIRC form. An enclosure with the form
shall advise that:
(1) The completed form shall be returned in a sealed envelope marked
''personal-in confidence'' to the Designated Agency Ethics Official
within 30 days.
(2) The services of the Designated Agency Ethics Official are
available to assist and advise in preparation of the statement.
(3) Any additions or deletions to the information furnished must be
reported within 30 days of the time they occur, or in the case of a
special Government employee, at the time the change occurs, and
(4) No later than June 1 of each year all employees and special
Government employees required to file under paragraph (a)(3) of this
section shall file an annual supplementary statement to update the
information previously filed.
(5) New employees required to file under paragraph (a)(3) of this
section shall submit a statement within 30 days of beginning employment
with the Commission.
(e) Confidentiality of statements. Statements of employment and
financial interest shall be held in confidence. Access to information
from the statements shall not be disclosed except to carry out the
purpose of this directive.
(f) Resolving conflicts of interest. When the Designated Agency
Ethics Official determines from review of the statement that a conflict
of interest may exist, the submitter shall have the opportunity to
provide additional information, which shall become part of the record.
The Designated Agency Ethics Official and the concerned employee shall
make every effort to resolve the conflict in a manner that is mutually
acceptable. If these efforts are not successful the Designated Agency
Ethics Official shall forward a report and recommendation to the
Chairman of the Commission for final action. Remedial action directed
by the Chairman may include but is not limited to:
(1) Disqualification for a particular assignment.
(2) Change in assigned duties.
(3) Divestment of the employee or special Government employee of the
conflicting interests.
(4) Disciplinary action, including removal.
25 CFR 700.513 Business dealings on behalf of the government.
(a) All employees shall conduct themselves on the job so as to
efficiently discharge the work of the Commission. Employees shall
observe courtesy, consideration and promptness in dealing with clients,
other governmental agencies, and members of the public.
(b) Commission personnel conducting business with contractors,
realtors, vendors, service providers and other public and private
agencies, organizations, business and individuals shall maintain strict
impartiality in their business dealings. Commission employees shall not
allow themselves to be placed in a position in which a conflict of
interest might arise or might justifiably be suspected. Such a conflict
may arise or appear to arise by the acceptance of gratuities or by any
action which could reasonably be interpreted as influencing the strict
impartiality that must prevail in all business relationships involving
the Commission. However, this requirement of impartiality is not
intended to prohibit advocacy of client interests, as is required as a
stated duty of certain agency positions. Such advocacy may occur for
example during warrantee representation or during technical
representation with builders.
25 CFR 700.515 Conflicts of interest.
(a) A conflict of interest may exist when an employee uses, or
appears to use, his or her official position to obtain benefits for
himself or herself, close friends, relatives, or business associates. A
conflict of interest may also exist if an employee's private activities
interfere with the proper discharge of his or her official duties. If
an employee has any doubt about whether or not a particular situation
is, or gives the appearance of being a conflict of interest, the
situation should be discussed with the immediate supervisor. Should
further review be required, the Designated Agency Ethics Official shall
be consulted.
(b) Principal situations where conflict of interest may develop are
regulated by the sections which follow. However, these regulations do
not preclude other conflict of interest situations which may arise in
connection with the work of the Commission.
(c) These prohibitions apply to all Commission employees, whether or
not they are required to file financial and employment disclosure
statements.
25 CFR 700.517 Affiliations and financial interests.
(a) Commission personnel shall not engage in any personal, business,
or professional activity, or receive or retain any direct or indirect
financial interest, which places them in a position of conflict or
apparent conflict between their private interests and the public
interests of the United States as related to the duties of their
Commission positions.
(b) Employees are prohibited from accepting money, goods or services
other than official compensation for any act performed by the employee
as part of his or her official duties.
(c) Commission personnel shall not use, directly or indirectly,
inside information for private gain for themselves, family members, or
others if that information is not generally available to the public and
was obtained as a result of Commission employment.
(d) Commission personnel are prohibited from using their official
positions to induce, coerce, or in any manner influence any person,
including subordinates, to provide any improper benefit, financial or
otherwise, to themselves or others.
(e) Employees may not have any personal interest in transactions
which are directed, regulated, or effected by the Commission pursuant to
the authorities vested in the agency by Pub. L. 93-531 and Pub. L.
96-395. Specifically:
(1) No Commission employee shall have a personal interest in a
contract, subcontract, memorandum of understanding or agreement, or
other arrangement resulting in payment for the delivery of goods,
services, or supplies to the Commission, to the Navajo or Hopi tribal
governments, or to individual relocatees or groups of relocatees.
(2) No Commission employee shall have or seek an interest in real or
personal property acquired for transfer to the Navajo or Hopi Tribes.
(3) No Commission employee shall have or seek an interest in any
activity supported financially by the Commission through the award of
Discretionary Funds.
(4) During the process of acquiring replacement housing for
relocatees no employee may have a personal interest in the activities of
a contractor, realtor, or other business entity selected by the
relocatee to furnish replacement housing; nor may the employee
influence the relocatee to select any realtor, contractor or other
business entity with which the employee has personal or business
affiliations.
(5) Nothing in this section shall restrict a relocatee's right to
exercise free and independent judgment in selecting a realtor,
contractor, or other vendor or service provider; regardless of any
personal or business relationship of that entity to a Commission
employee, provided the employee has not influenced the choice of the
relocatee in any manner.
(6) Nothing in this section shall restrict a Commission employee who
is eligible for relocation benefits from applying for and obtaining such
benefits according to published criteria; nor to prevent the Commission
from employing a member of the Hopi or Navajo Tribe who has been, or is
in the process, of being relocated pursuant to the law.
(7) Commission employees shall disqualify themselves from
investigating and preparing recommendations regarding eligibility
determination for applicants to whom they are closely related by blood
or marriage.
25 CFR 700.519 Gifts, entertainment and favors.
(a) Acceptance of gratuities, including gifts, entertainment and
favors, (no matter how innocently tendered or received) from those who
have or seek business dealings with the Commission, is prohibited as it
may be a source of embarrassment to the recipient, and may impair public
confidence in the integrity of the conduct of the Government's business.
It is emphasized that prohibited conflicts and apparent conficts of
interest can sometimes arise even from relationships and transactions
that the persons concerned perceive as inconsequential.
(b) Except as provided in paragraphs (c) and (d) of this section,
Commission personnel and their spouses, minor children and members of
their households shall not solicit nor accept, either directly or
indirectly, any gift, gratuity, favor, entertainment loan or any other
thing of monetary value from any person who:
(1) Has, or is seeking to obtain, contractual or other business or
financial relations with the Commission,
(2) Conducts operations or activities that are regulated by the
Commission or significantly affected by Commission decisions, or
(3) Has interests that may be substantially affected by the
performance or non-performance of the employee's official duty.
(c) Employees are specifically prohibited from accepting gifts or
favors from vendors, contractors, builders, realtors, tribal officials
or other individuals with whom Commission employees do business. This
prohibition extends to the acceptance of meals and refreshments offered
by individuals conducting or seeking business with the Commission
whether during duty or non-duty hours.
(d) The following circumstances are excepted from the prohibitions
listed above:
(1) An employee may accept unsolicited advertising or promotional
material with the name of the company imprinted, such as pencils,
calendars and similar items of nominal intrinsic value.
(2) An employee may accept transportation and meals provided by a
contractor in connection with official business when arrangements for
Government or commercial transportation or meals are clearly
impracticable and the supervisor has granted prior approval.
(3) An employee may accept an invitation extended by a relocatee to
attend a housewarming, potluck, accept a meal and refreshments while
traveling on the reservation, or similar social activity when
circumstances would make it rude for the employee to refuse.
(4) Other circumstances may arise in which it would be to the
Commission's advantage for an employee to participate in activities
ordinarily prohibited. In such cases, the employee shall consult with
his or her supervisor about the course of action to be followed. If
prior consultation is not possible, the employee shall exercise prudent
judgement and promptly inform the supervisor of the activity.
25 CFR 700.521 Outside work and interests.
Commission employees may engage in outside work or other activity
which does not create a conflict between the employee's private
interests and official duties nor prevent employees from devoting their
talents and energies to the Commission. An employee's outside work
shall not reflect discredit upon the Commission.
(a) Employees engaged in or considering outside employment shall
inform their supervisor of the work, and supply such additional details
as may be required to determine whether the employment is compatible
with the full and proper discharge of the employee's official duties.
(b) Similarly, employees shall inform the supervisor and request
approval of other types of outside activities which may present an
actual or apparent conflict of interest between the employees' official
duties and their private lives. The supervisor shall determine if the
outside employment or activity is prohibited by these regulations, and
so inform the employee. The Designated Agency Ethics Official is
available to assist supervisors in making such determinations.
(c) Guidelines and limitations. Outside employment or other outside
activity is incompatible with the full and proper discharge of an
employee's duties and responsibilities and hence is prohibited if:
(1) It would involve the violation of a Federal or State statute, a
local ordinance, Executive Order, or regulation to which the employee is
subject.
(2) It would be of such extent or nature as to interfere with the
efficient performance of the employee's Government duties, or impair the
employee's mental or physical capacity to perform them in an acceptable
manner.
(3) It would tend to influence the exercise or impartial judgement on
any matters coming before the employee in the course of his or her
duties;
(4) It would involve work for contractors, subcontractors, realtors,
tribal offices, clients or other entities and individuals which have
business with or receive services from the Commission or conduct
activities which are regulated by the Commission.
(5) Involves a person or enterprise that may be substantially
affected by the performance or nonperformance of the employee's official
duties.
(6) It involves the use of the employee's time during official
working hours.
(7) It involves the receipt of salary or anything of monetary value
from a private source as compensation for services to the Government.
(8) It involves acceptance of a fee, compensation, gift, payment of
expense, or any other thing of monetary value under circumstances in
which acceptance might result in, or create the appearance of, a
conflict of interest.
(9) It would be of a nature which might be construed by the general
public to be an official act of the Commission, or would give the
impression that a business or product which is involved in the
relocation project is officially endorsed or approved by the Commission.
(10) It would involve use by the employee of official facilities,
e.g., office space, office machines, or supplies, or the services of
other employees during duty hours.
(11) It might bring discredit upon, or cause unfavorable criticism
of, the Government or the Commission or lead to relationships which
might impair public confidence in the integrity of the Government or the
Commission.
(12) It would involve the use of information obtained as a result of
Government employment that is not freely available to the general public
in that it either has not been made available to the general public or
would not be made available upon request.
25 CFR 700.523 Business relationships among employees.
Business relationships among Commission employees which take place
after working hours and away from Commission premises are not matters
for regulation, unless they violate the restrictions listed above.
25 CFR 700.525 Use of government information or expertise.
(a) Commission personnel may engage in teaching, lecturing and
writing about the relocation program, provided the Information which
they present is public knowledge or would be made available to the
public upon request.
(b) Employees shall inform their supervisors in advance of any
teaching, writing, or lecturing activity which relates to the Commission
operations. The Commissioners may at their discretion exercise the
right of review and approval of materials to be presented.
(c) Employees must obtain supervisory approval for release of
information considered confidential, and release of information not
previously published as public information.
(d) Disclosure of information from records shall conform with the
provisions of the Freedom of information and the Privacy Acts (5 U.S.C.
552). An employee may not release confidential information maintained by
the Commission and available to the employee because of his position as
an employee of the Commission. Violation of this prohibition may result
in prosecution under the terms of the Privacy Act in addition to any
disciplinary penalties levied by the employee's supervisor.
(e) Commission personnel may not accept compensation for an article,
speech, consultant service, or other activity if it involves the use of
information obtained as the result of Government employment which is not
available to the general public as described in paragraph (a) of this
section, or results in an actual or appearance of conflict of interest.
(f) Unless there is a definite Commission position on a matter which
is the subject of an employee's writing or speech, and the individual
has been authorized by the Commissioners to present that position
officially, the employee shall expressly present his or her views on the
matter as his or her own and not as those of the Commission.
(g) The right of an employee to express personal opinions is
respected. However, once the Commission has established policy and
procedure, every employee is obligated to carry out all lawful
regulations, orders, and assignments, and to support the programs of the
Commission as long as they are part of recognized public policy.
(h) In dealing with the public and with relocatees, employees should
avoid issuing opinions or decisions contrary to Commission policy which
can be mistaken as official Commission policy.
25 CFR 700.527 Endorsements.
Employees are prohibited from endorsing in an official capacity
business products or processes or the services of commercial firms for
advertising publicity or sale purposes. Use of materials, products or
services, by the Commission does not constitute official endorsement.
Employees may not recommend for or against any particular builder,
supplier, realtor, contractor or other person or business seeking to
sell any product or service to relocatees.
25 CFR 700.529 Negotiations for employment.
An employee shall inform the supervisor and seek the advice of the
Designated Agency Ethics Official if he or she wishes to negotiate for
future non-Federal employment with persons or organizations having
business with the Commission if the employee is involved in making
recommendations or decisions affecting those persons or organizations.
25 CFR 700.531 Government property.
Employees shall be held accountable for Government property and
monies entrusted to their individual use or in connection with their
official duties. An employee has a positive duty to protect and
conserve Government property and to use it economically and for official
purposes only, for example:
(a) Only official documents and materials may be reproduced on
Government reproduction equipment.
(b) Government vehicles may be used only on official business and may
not be used for personal use or for travel to or from an employee's
place of residence, unless specifically authorized or assigned by the
supervisor.
(c) An employee may not use FTS to make personal phone calls at
Government expense.
(d) An employee may not use Government purchase authority for
personal acquisitions even though reimbursement is made.
25 CFR 700.533 Restrictions affecting travel and travel expense
reimbursement.
(a) When an employee is on officially authorized travel his or her
expenses are reimbursed by the Government. The employee may not request
nor accept reimbursement in cash or kind for travel expenses from any
other source, even when the employee's expenses exceed the maximum
Government allowance.
(b) An employee who is authorized to attend a convention, seminar, or
similar meeting while on official duty, whose travel is being paid by
the sponsoring association, may not also claim travel expenses from the
Government.
(c) An employee may accept accommodations and expense reimbursement
for attending meetings, functions, etc. in his or her private capacity
and on his or her own time, provided that such acceptance does not
produce an actual or apparent conflict of interest. This restriction
prohibits an employee from accepting accommodations or reimbursement
from anyone having or seeking business with the Commission.
(d) Commission employees traveling on official business, as well as
employees traveling on personal business, may not accept the use of
private airplanes, cars, or other means of transportation offered at no
expense by individuals conducting or seeking business dealings with the
Commission, nor from clients of the Commission.
Exception: An employee may accept transportation and meals of modest
value provided by a contractor or client in connection with official
business when it is not practical to make arrangements for Government or
commercial accommodations. The employee must receive prior approval of
the supervisor in such case. This might occur, for example, if an
employee were traveling to a remote area where no Government vehicle
were available, or where there are no nearby restaurants or eating
places. There is no prohibition against a contractor or private citizen
traveling as a passenger in a Government vehicle driven by a Commission
employee on official business, provided administrative procedures have
been followed in making the travel arrangements.
25 CFR 700.535 Nepotism.
An employee may not appoint or advocate the appointment to any
position under his or her control, any individual who is a relative of
the employee. No employee shall supervise a member of his or her own
family except in emergency situations.
25 CFR 700.537 Indebtedness.
(a) Commission personnel shall pay their just financial obligations
in a timely manner, especially those imposed by law, such as Federal,
state, or local taxes. For the purposes of this paragraph, ''just
financial obligation'' means one acknowledged by the employee or reduced
to judgment by a court.
(b) Employees shall promptly refund any salary overpayments and
excess travel advances.
(c) An employee's debts to private creditors are his or her personal
concern. Any complaints or questions concerning such obligations will
be referred to the employee for handling. Creditors and collectors
shall not have access to employees on Agency premises during duty hours.
25 CFR 700.539 Soliciting contributions.
(a) An employee shall not solicit a contribution from another
employee for a gift to an official superior, make a donation as a gift
to an official superior or accept a gift from an employee receiving less
pay than himself or herself. (5 U.S.C. 7351) However, this paragraph
does not preclude a voluntary gift of nominal value made on a special
occasion.
(b) If authorized by the supervisor, an employee may solicit
contributions for charitable causes. He or she may also be permitted to
collect small donations for gifts for fellow employees for special
occasions during slack moments.
25 CFR 700.541 Fraud or false statement in a Government matter.
''Whoever, in any matter within the jurisdiction of any department or
agency of the United States, knowingly or wilfully falsifies, conceals
or covers up by a trick, scheme or device a material fact, or makes or
uses any false writing or document knowing the same to contain false,
fictitious or fraudulent statement or entry, shall be fined not more
than $10,000 or imprisoned not more than 5 years or both (18 U.S.C.
1001).'' Special attention is required in the certification of time and
attendance reports, applications for employment, personnel security
forms, requests for travel reimbursement, client certification
documents, and purchase orders and receiving forms.
25 CFR 700.543 Gambling.
An employee shall not sponsor or participate in any gambling activity
during working hours on Government premises.
25 CFR 700.545 Alcoholism and drug abuse.
An employee who habitually uses intoxicants to excess is subject to
removal (5 U.S.C. 7352). The Relocation Commission recognizes alcoholism
and drug abuse as serious and treatable illnesses. Excessive absence
and poor work performance are two of the specific problems resulting
from excessive use of alcohol and drugs. The Commission management will
assist any employee who has such a problem to obtain professional help
and will make reasonable allowance as permitted by work schedules to
allow an employee approved leave for professional treatment. Anyone who
seeks such assistance will be guaranteed confidential handling of his or
her case. Disciplinary action will be considered if an employee rejects
or ignores treatment or other appropriate assistance.
25 CFR 700.547 Consuming intoxicants on Government premises or during
duty hours.
Consuming alcohol or non-prescription drugs on agency premises, or
while driving or riding in a Government vehicle, or during working hours
are prohibited conduct and employees violating this regulation are
subject to disciplinary acton, including discharge.
25 CFR 700.549 Employee organizations.
An employee may not knowingly be a member of an organization of
Government employees that advocates the overthrow of the United States'
constitutional form of government (5 U.S.C. 7311). Employees are also
prohibited from striking against the Federal Government. With these
restrictions, an employee has the right to form, join, or assist lawful
employee organizations. Similarly, an employee has also the right to
refrain from such activity. In either case, the employee may exercise
his or her right freely and without fear of penalty or reprisal and
shall be protected in the exercise of such rights.
25 CFR 700.551 Franking privilege and official stationery.
An employee is strictly prohibited from using Government franked
envelopes with or without applied postage, or official letterhead
stationery for personal business. (18 U.S.C. 1719)
25 CFR 700.553 Use of official titles.
Employees are prohibited from using their official titles in
conducting private business or participation in private or public group
activities not concerned with official duties. Use is strictly limited
to those occasions and circumstances where representation is official.
25 CFR 700.555 Notary services.
An employee may not charge a fee for performing notarial services as
part of his or her job duties (EO 977 Nov. 24, 1908).
25 CFR 700.557 Political activity.
(a) Regulations on the political activity of Federal employees can be
found in 5 U.S.C. 73. In general, the law and the rules prohibit using
official authority or influence for the purpose of interfering with an
election or affecting its results, and taking an active part in partisan
political management or partisan political campaigns.
(b) Special Government employees of the Commission are subject to the
political activity restrictions contained in 5 U.S.C. 73 and 18 U.S.C.
602, 603, 607 and 608 while on an active duty status only.
(c) Pursuant to provisions of the regulations cited, employees may
take part in certain local elections. However, Commission employees are
restricted from taking an active role in political elections of the
Navajo and Hopi tribal governments, even though such elections are not
partisan in the usual meaning of the word. With respect to tribal
elections, employees may not:
(1) Run for tribal elective office.
(2) Organize, direct, nor actively participate in a tribal electoral
campaign.
(3) Solicit or attempt to coerce fellow employees to contribute
anything of value to an individual or group engaged in tribal political
activity.
(4) Circulate petitions, posters, or other political materials during
working hours or on Commission premises.
(5) Engage in any other type of tribal political activity which
produces a conflict of interest between the employee's job
responsibilities and the political activity.
25 CFR 700.559 Equal opportunity.
Commission personnel shall scrupulously adhere to the Commission
program of equal opportunity regardless of race, color, religion, sex,
age, handicap, or national origin.
25 CFR 700.561 Sexual harassment.
(a) Sexual harassment is a form of employee misconduct which
undermines the integrity of the employment relationship. All employees
must be allowed to work in an environment free from unsolicited and
unwelcome sexual overtures. Sexual harassment is defined by the Office
of Personnel Management as ''deliberate or repeated unsolicited verbal
comments, gestures, or physical contact of a sexual nature which are
unwelcome.'' Sexual harassment does not refer to occasional compliments.
It refers to behavior which is not welcome, which is personally
offensive and debilitates morale, interfering with the work
effectiveness of its victims and their co-workers.
(b) Sexual harassment is a prohibited personnel practice when it
results in discrimination for or against an employee on the basis of
conduct not related to performance.
For example:
-- If submission to sexual advances is a condition of employment,
whether expressed in explicit or implicit terms;
-- If employment decisions, such as promotion, training, salary
increases, rewards, etc., are based on an employee's submission to or
rejection of sexual advances;
-- If the sexual conduct substantially interferes with an
affected person's work performance, or creates an intimidating, hostile
or offensive work environment.
(c) Within the Federal Government, a supervisor who uses implicit or
explicit coercive sexual behavior to control, influence, or affect the
career, salary or job of an employee is engaging in sexual harassment.
Similarly, an employee of an agency who behaves in this manner in the
process of conducting agency business is engaging in sexual harassment.
Finally, any employee who participates in deliberate or repeated
unsolicited verbal comments, gestures, or physical contact of a sexual
nature which are unwelcome and interfere with work productivity is also
engaging in sexual harassment.
(d) It is the policy of the Relocation Commission that sexual
harassment is unacceptable conduct in the workplace and will not be
condoned. An employee who believes that he or she is subject to sexual
harassment may contact one or more of the following people within the
Commission for assistance:
(1) The immediate supervisor or second level supervisor.
(2) The EEO Counselor.
(3) The agency EEO Officer.
(4) The EEO Counselor at the Agency Liaison Division of the General
Services Administration.
25 CFR 700.563 Statutory restrictions from 18 U.S.C. 207, which are
applicable to former Government employees.
(a) Restrictions applicable to all former officers and employees --
(1) Permanent bar. A former Government employee is permanently barred
from serving as agent or attorney for anyone other than the United
States before any Government office or agency on any particular matter
involving specific parties in which the former officer or employee had
participated personally and substantially while with the Government.
(2) Two year bar. A restriction similar to the one summarized above
prevents a former employee for two years from representational
activities on all particular matters which were actually pending under
the former employee's ''official responsibility'' during the one-year
period prior to the termination of such responsibility.
(b) Restrictions applicable only to ''senior employees.'' (1) Members
of the Senior Executive Service are considered senior employees.
(2) Two-year ban on assisting in representation by personal presence.
A former senior employee may not assist in the representation of
another person by personal presence at an appearance before the
Government on any particular matter in which the former employee
personally and substantially participated while with the Government.
(3) One-year on attempt to influence former agency. A former senior
employee may not represent another person or himself in attempting to
influence his own former agency on a matter pending before, or of
substantial interest to, such agency. Certain communications are
exempted from this provision. These include communications by former
senior employees who are employed by State or local governments or by
certain educational or medical institutions, other exempt communications
are those that are purely social or informational, communications on
matters that are personal, including any expression of personal views
where the former employee has no pecuniary interest, and response to a
former agency's requests for information.
(c) Implementing regulations. (1) Detailed regulations implementing
this law have been published by the Director, Office of Government
Ethics (see 5 CFR Part 737). The Designated Agency Ethics Official
should be consulted for any additional information.
25 CFR 700.565 Miscellaneous statutory provisions.
Commission personnel shall acquaint themselves with Federal statutes
which relate to their ethical and other conducts as employees of the
Commission and of the Government. The attention of Commission personnel
is directed to the following statutory provisions:
(a) House Concurrent Resolution 175, 85th Congress 2d Session, 72A
Stat. B12, the ''Code of Ethics for Government Service.''
(b) Chapter 11 of Title 18, United States Code, relating to bribery,
graftm and conflicts of interest, as appropriate to the employees
concerned.
(c) The prohibition against lobbying with appropriated funds (18
U.S.C. 1913).
(d) The prohibitions against disloyalty and striking (5 U.S.C. 7311,
18 U.S.C. 1918).
(e) The prohibition against the employment of a member of the
Communist organization (50 U.S.C. 784).
(f) The prohibitions against (1) the disclosures of classified
information (18 U.S.C. 798, 50 U.S.C. 783); and (2) the disclosure of
confidential information (18 U.S.C. 1905).
(g) The provision relating to the habitual use of intoxicants to
excess (5 U.S.C. 7352).
(h) The prohibition against the misuse of a Government vehicle (31
U.S.C. 638a(c)).
(i) The prohibition against the misuse of the franking privilege (18
U.S.C. 1719).
(j) The prohibition against the use of deceit in an examination or
personnel action in connection with Government employment (18 U.S.C.
1917).
(k) The prohibition against fraud or false statements in a Government
matter.
(l) The prohibition against mutilating or destroying a public record
(18 U.S.C. 2071).
(m) The prohibition against counterfeiting and forging transportation
requests (18 U.S.C. 508).
(n) The prohibitions against (1) embezzlement of Government money or
property (18 U.S.C. 641); (2) failing to account for public money (18
U.S.C. 643); and (3) embezzlement of the money or property of another
person in the possession of an employee by reason of his employment (18
U.S.C. 654).
(o) The prohibition against unauthorized use of documents relating to
claims from or by the Government (18 U.S.C. 285).
(p) The prohibitions against political activities in subchapter III
of chapter 73 of Title 5, United States Code and 18 U.S.C. 602, 603, 607
and 608.
(q) The prohibition against an employee acting as the agent of a
foreign principal registered under the Foreign Agents Registration Act
(18 U.S.C. 219).
25 CFR 700.565 Subpart P -- Hopi Reservation Evictees
Source: 48 FR 51771, Nov. 14, 1983, unless otherwise noted.
25 CFR 700.601 Definitions.
(a) Hopi reservation evictees. Hopi reservation evictees are those
members of the Navajo Tribe who were evicted from the Hopi Indian
Reservation as a consequence of the decision in the case of United
States v. Kabinto (456 F. 2d 1087) (1972).
(b) Head of household. (1) A household is group of two or more
persons who live together at a specific location, who form a unit of
permanent and domestic character.
(2) The head of household is the individual who speaks on behalf of
the members of the household and who is determined by the Commission to
represent the household.
(3) In order to be eligible for benefits under this section, an
individual must be a head of household as of the date of certification
for benefits.
(4) Those single individuals who actually maintain and support
themselves as of the date of certification for benefits shall be
considered a head of household.
(c) Hopi reservation. For purposes of this subpart Hopi reservation
shall mean the lands in Land Management District No. Six as defined in
the September 28, 1962 Judgment in Healing v. Jones Civ. No. 579 pCT
(d), Ariz., and shall not include the Hopi partitioned Lands.
(d) Equivalent assistance from federal agencies. Housing provided
for Hopi reservation evictees shall be considered equivalent assistance
if it meets the Commission's standards for a decent, safe and sanitary
dwelling under 700.55 of these rules.
25 CFR 700.603 Eligibility.
(a) Those heads of household who were members of the Navajo Tribe and
were evicted from the Hopi reservation as a consequence of the decision
in the United States v. Kabinto shall be eligible to receive relocation
assistance on a preference basis.
(b) proof of eviction shall be determined by one of the following
criteria:
(1) Inclusion on the list of defendants in the case of United States
v. Kabinto (456 F. 2d 1087) (1972);
(2) Inclusion on the lists prepared by the BIA dated May 10, 1979 and
May 21, 1979 as a result of having provided services to those heads of
household.
(3) Inclusion on a list prepared by the Navajo Tribe and submitted to
the Commission on January 16, 1981;
(4) Inclusion on a list prepared by the Navajo Legal Aid Service
dated April 29, 1970;
(5) Other evidence furnished by the applicant which is sufficient to
prove their status as evictees from the Hopi reservation, as determined
by the Commission.
25 CFR 700.605 Relocation assistance.
(a) Each eligible head of household of Hopi reservation evictees
shall be entitled to receive the following assistance:
(1) Relocation advisory services as provided in 700.135 of this
part;
(2) Moving and search expenses, as provided in 700.151 of this part;
(3) Replacement housing payments as set forth below.
(b)(1) If the head of household owns no dwelling, the Commission will
make funds available to the head of household as provided in these
regulations for the acquisition of a replacement home in one of the
following manners:
(i) Purchase of an existing home by the head of household,
(ii) Contracting by the head of household for the construction of a
home,
(iii) Participation or purchase by the head of household in a mutual
help housing or other home ownership project under the U.S. Housing Act
of 1937 (50 Stat. 888, as amended; 42 U.S.C. 1401) or in any other
federally assisted housing program.
(2) If the eligible head of household owns or is buying or building a
home, the Commission will expend relocation benefits in one of the
following manners:
(i) If the home is decent, safe and sanitary, but is encumbered by a
mortgage, such mortgage existing as of the effective date of these
regulations, the Commission may expend replacement housing benefits up
to the maximum then existing replacement home benefit to accelerate to
the maximum extent possible the achievement by that household of
debt-free home ownership.
(ii) If the home is owned free and clear but does not meet Commission
decent, safe and sanitary standards; or the home is neither owned free
and clear, nor is decent, safe and sanitary, the Commission will, at its
discretion either:
(A) Expend replacement home benefits for improvements to assure the
home meets the Commission's decent, safe and sanitary standards, or
(B) Expend replacement home benefits for the acquisition of a
replacement dwelling as if the eligible head of household or spouse did
not own a home as in paragraph (b)(1) of this section.
(3) If the home is decent, safe and sanitary, and is owned free and
clear, no replacement housing benefits will be paid.
(4) The amount of the replacement housing payment shall be calculated
in accordance with 700.183 of these rules except that no compensation
will be paid for habitation and improvements.
(5) The determination of whether the head of household of Hopi
reservation evictees currently occupies a decent, safe and sanitary
dwelling shall be made in accordance with 700.55 of these rules.
(C) If the head of household has received equivalent assistance from
other federal agencies as defined in 700.601(d), they shall not be
entitled to additional assistance from the Commission.
25 CFR 700.607 Dual eligibility.
Those individuals who moved from the Hopi reservation following
eviction to the Hopi partitioned Lands and who are eligible to receive
benefits under the general regulations shall not receive benefits under
this subpart but shall receive benefits under the general regulations on
a preferential basis.
25 CFR 700.609 Appeals.
Appeals of eligibility, hearings and administrative review (appeals)
will be administered under subpart L of this part.
25 CFR 700.611 Application deadline.
The deadline for receipt of applications for benefits under this
subpart shall be 120 days following publication of these final rules.
25 CFR 700.611 Subpart Q -- New Lands Grazing
Source: 56 FR 13397, Apr. 2, 1991, unless otherwise noted.
25 CFR 700.701 Definitions.
(a) Act means Pub. L. 93-531 (88 Sat. 1712, 25 U.S.C. 640 et. seq.)
as amended by Pub. L. 96-305 and Pub. L. 100-666.
(b) New Lands means the land acquired for the use of relocatees under
the authority of Pub. L. 96-305, 25 U.S.C. 640d-10. These lands include
the 215,000 acres of lands acquired by the Navajo and Hopi Indian
Relocation Commission and added to the Navajo Reservation and 150,000
acres of private lands previously owned by the Navajo Nation in fee and
taken in trust by the United States pursuant to 25 U.S.C. 640d-10.
(c) Commissioner means the Commissioner of The Office of Navajo and
Hopi Indian Relocation in Flagstaff, Arizona. Reference to approval or
other action by the Commissioner will also include approval or other
action by another Federal officer under delegated authority from the
Commissioner.
(d) Tribe means the Navajo Nation.
(e) Range unit means a tract of range land designated as a management
unit for administration of grazing.
(f) Range Management Plan means a land use plan for a specific range
unit that will provide for a sustained forage production consistent with
soil, watershed, wildlife, and other values.
(g) Stocking Rate means the authorized stocking rate by range unit as
determined by the Commissioner. The stocking rate shall be based on
forage production, range utilization, land management applications being
applied, and range improvements in place to achieve uniformity of
grazing under sustained yield management principles.
(h) Grazing Permit means a revocable privilege granted in writing
limited to entering on and utilizing forage by domestic livestock on a
specified tract of land. The term, as used herein, shall include
written authorization issued to enable the crossing or trailing of
domestic livestock across specified tracts or range.
(i) Animal Unit (AU) means one adult cow with unweaned calf by her
side or equivalent thereof based on comparative forage consumption.
Accepted conversion factors are: Sheep and Goats -- one ewe, doe, buck,
or ram equals 0.25 AU. Horses and Mules -- one horse, mule, donkey or
burro equals 1.25 AU.
(j) Sheep Unit means one ewe with lamb at side or a doe goat with
kid.
(k) SUYL means one sheep unit grazed yearlong.
(l) HPL means the area partitioned to the Hopi Tribe pursuant to Pub.
L. 93-531 known as the Hopi Partitioned Land.
25 CFR 700.703 Authority.
It is within the authority of the Commissioner on Navajo and Hopi
Indian Relocation to administer the New Lands added to the Navajo
Reservation pursuant to 25 U.S.C. 6-10(d)-10.
25 CFR 700.705 Objectives.
It is the purpose of the regulations in this part to aid the Navajo
Indians in achievement of the following objectives:
(a) The preservation of the forage, the land, and the water resources
on the New Lands.
(b) The resettlement of Navajo Indians physically residing on the HPL
to the New Lands.
25 CFR 700.707 Regulations; scope.
The grazing regulations in this part apply to the New Lands within
the boundaries of the Navajo Reservation held in trust by the United
States for the Navajo Tribe which lands were added to the Navajo
Reservation pursuant to 25 U.S.C. 640(d)-10; 25 CFR parts 166 and 167
are not applicable to the New Lands.
25 CFR 700.709 Grazing privileges.
(a) A list of permittees eligible to receive grazing permits is kept
at the Office of Navajo and Hopi Indian Relocation in Flagstaff,
Arizona. This list is composed of individuals eligible for New Lands
grazing permits who:
(1) have a current HPL grazing permit, or have had an HPL permit
issued since 1980, or are current HPL residents and can show
documentation of a past grazing permit issued in their name for grazing
on an area now on the HPL, and
(2) who have not received relocation benefits under Pub. L. 93-531,
and who relocate from the HPL on to a New Lands range unit. Individuals
on this list will receive a commitment that a permit will be issued to
them.
(b) If such persons cannot relocate immediately because their chosen
relocation site is not ready for occupancy, the Office will issue a
commitment to them that a grazing permit will be granted upon their
relocation.
(c) If such persons are notified by the Office that their relocation
site is ready for occupancy and they fail or refuse to make timely
arrangements to relocate when requested by the Office to do so, the
commitment may be withdrawn.
(d) Persons on this list must file application for a New Lands
grazing permit by June 1, 1992, or lose their priority status for
receiving permits. After this date, the Commissioner, at his sole
discretion, may issue permits to individuals if it is determined that to
do so will facilitate relocation.
(e) Initial determinations on eligibility for grazing permits will be
made by the Range Supervisor.
25 CFR 700.711 Grazing permits.
(a) All livestock grazed on the New Lands must be covered by a
grazing permit authorized and issued by the Commissioner on Navajo and
Hopi Indian Relocation.
(b) Permit holders must:
(1) Be enrolled Navajo Tribal members,
(2) Be over 18 years of age,
(3) Maintain a permanent residency on the New Lands Range Unit of
permit issue, and
(4) Own livestock which graze on the range unit of permit issue.
(c) Permits will be issued for a base of 80 SUYL (20 AU) and may not
be divided or transferred for less than 80 SUYL.
(d)(1) Temporary seasonal grazing permits for periods not to exceed
one year may be issued to permittees:
(i) To use extra forage made available under rotation grazing
management as regulated by a range unit management plan,
(ii) To use forage created by unusually favorable climatic
conditions,
(iii) To allow use of range while term permits are held in suspension
under 700.715(d).
(2) These temporary permits may be reissued prior to termination
provided:
(i) The permittee is managing grazing in compliance with grazing
regulations,
(ii) Livestock grazing is in compliance with the cooperative range
unit range management plan, and
(iii) Forage is available on the range to sustain the livestock
authorized under the temporary permit.
25 CFR 700.713 Tenure of grazing permits.
(a) All active regular grazing permits shall be for five years and
shall be automatically reissued for another five-year period provided
the permittee is not in violation of 700.711 or 700.715 or 700.719 or
700.723 or 700.725 of the regulations. Permits will initially be issued
with an ending date of October 31 of the fifth year following the date
of initial issuance.
(b) Amendments to these regulations extending or limiting the tenure
of grazing permits are applicable and become a condition of all
previously granted permits.
25 CFR 700.715 Assignment, modification, and cancellation of grazing
permits.
(a) Grazing permits may be assigned or transferred with the written
consent of the contracting parties. The Commissioner will issue a new
permit provided the transferee meets qualifications under 700.711(b).
(b) Temporary permits issued under 700.711(d) are directly tied to
the term permit and may be transferred with the term permit if the
transferee signs the range unit management plan which provides the
management for continuation of the temporary grazing permit. Temporary
permits will not be transferred and shall be null and void if the term
permit transferee does not sign the management plan agreeing to practice
conservation management.
(c) Grazing permits may be assigned for transfer through a notarized
document to an heir who meets the qualifications for a grazing permit
under 700.711.
(d) Grazing permits must be transferred in whole to a single
transferee -- the transferor relinquishing all grazing privileges at the
time of transfer.
(e) The Commissioner may revoke or withdraw all or any part of a
grazing permit by cancellation or modification on a 30 day written
notice for violation of the permit or of the management plan,
non-payment of grazing fees, violation of these regulations, or because
of the termination of the trust status of the permitted land.
25 CFR 700.717 Stocking rate.
The Commissioner will determine livestock carrying capacity for each
range unit and set the stocking rate and adjust that rate as conditions
warrant. The Commissioner may consult with the Tribe when making
adjustments to the stocking rate.
25 CFR 700.719 Establishment of grazing fees.
The Commissioner may establish a minimum acceptable grazing fee per
SUYL. The Commissioner may consult with the Tribe prior to establishing
fees.
25 CFR 700.721 Range management plans.
The Commissioner (or his designee) and the permittees of each range
unit will meet as a group and develop a Range Management Plan for the
common use of the range unit. The plan will include but will not be
limited to the following:
(a) Goals for improving vegetative productivity.
(b) Incentives for carrying out the goals.
(c) Stocking rate.
(d) Record of brands of livestock authorized to graze on the range
unit.
(e) Grazing plan and schedule.
(f) Range monitoring schedule.
(g) Wildlife management.
(h) Needs assessment for range and livestock improvements.
(i) Scheduling for operation and maintenance of existing range
improvements.
25 CFR 700.722 Grazing Associations.
(a) The Commissioner may recognize, cooperate with, and assist range
unit livestock associations in the management of livestock and range
resources.
(b) These associations will provide the means for the members:
(1) To jointly manage their permitted livestock and the range
resources,
(2) To meet jointly with the ONHIR range staff to discuss and
formulate range management plans,
(3) To express their wishes through designated officers or
committees,
(4) To share costs for handling livestock, construction of range
improvements, fence and livestock facilities maintenance, and other land
or livestock improvement projects agreed on, and
(5) To formulate association special rules needed to assure
cooperation and resource management.
(c) The requirements for receiving recognition by the Commissioner
are:
(1) The members of the association must be grazing permittees and
constitute a majority of the grazing permittees on the range unit
involved.
(2) The officers of the association must be elected by a majority of
the association members or of a quorum as specified by the association's
constitution and bylaws.
(3) The officers other than secretary and treasurer must be grazing
permittees on the range unit involved.
(4) The association's activities must be governed by a constitution
and bylaws acceptable to the Commissioner and signed by him.
(5) The association's constitution and bylaws must recognize
conservation management goals and the need to follow a range unit
management plan.
(d) The Commissioner may withdraw his recognition of the association
whenever:
(1) The majority of the grazing permittees request that the
association be dissolved.
(2) The association becomes inactive and does not meet in annual or
special meetings during a consecutive two-year period.
(e) A recognized association may hold a grazing permit to benefit its
members according to the rules of the association constitution and
bylaws. All of the association's livestock will be run under an
association brand properly registered with the Navajo Tribe and the
ONHIR.
(f) Associations may acquire permits from consenting permittees on
the range unit in accordance with 700.711 and may assign or transfer
these permits in accordance with 700.715.
25 CFR 700.723 Control of livestock disease and parasites.
Whenever livestock within the New Lands become infected with
contagious or infectious disease or parasites or have been exposed
thereto, such livestock must be treated and the movement thereof
restricted by the responsible permittee in accordance with applicable
laws.
25 CFR 700.725 Livestock trespass.
The following acts are prohibited:
(a) The grazing of livestock upon, or driving of livestock across,
any of the New Lands without a current approved grazing or crossing
permit.
(b) The grazing of livestock upon an area specifically rested from
the grazing of livestock according to the range unit Range Management
Plan.
(c) The grazing of livestock upon any land withdrawn from use for
grazing to protect it from damage after receipt of appropriate notice
from the Commissioner.
(d) The grazing of livestock in excess of those numbers authorized on
the livestock grazing permit approved by the Commissioner.
(e) Grazing of livestock whose brand is not recorded in the range
unit Range Management Plan.
The owner of any livestock grazing in trespass on the New Lands is
liable to a civil penalty of $1 per head per day for each cow, bull,
horse, mule or donkey and 25 per head per day for each sheep or goat in
trespass and a reasonable value for damages to property injured or
destroyed. The Commissioner may take appropriate action to collect all
such penalties and damages and seek injunctive relief when appropriate.
All payments for such penalties and damages shall be paid to the
Commissioner for use as a range improvement fund.
25 CFR 700.727 Impoundment and disposal of unauthorized livestock.
Unauthorized livestock within any range unit of the New Lands which
are not removed therefrom within the periods prescribed by the
regulation will be impounded and disposed of by the Commissioner as
provided herein.
(a) When the Commissioner determines that unauthorized livestock use
is occurring, and has definite knowledge of the kind of unauthorized
livestock and knows the name and address of the owners, the owner shall
be given written notice and a 10 day period shall be allowed for the
permittee to solve the unauthorized use without penalty. If after this
10 day period the unauthorized use is not resolved, such livestock may
be impounded at any time after five days after written Notice of Intent
to Impound Unauthorized Livestock is mailed by certified mail or
personally delivered to such owners or their agent.
(b) When the Commissioner determines that unauthorized livestock use
is occurring, but does not have complete knowledge of the number and
class of livestock, or if the name and address of the owner thereof are
unknown, such livestock may be impounded at anytime after 15 days after
the date a General Notice of Intent to Impound Unauthorized Livestock is
first published in a local newspaper, posted at the nearest chapter
house, and in one or more local trading posts.
(c) Unauthorized livestock on the New Lands which are owned by
persons given notice under paragraph (a) of this section and any
unauthorized livestock in areas for which notice has been posted and
published under paragraph (b) of this section, will be impounded without
further notice anytime within the 12-month period immediately following
the effective date of the notice.
(d) Following the impoundment of unauthorized livestock, a notice of
sale of impounded livestock or unauthorized livestock will be published
in a local newspaper, posted at the nearest chapter house, and in one or
more local trading posts. The notice will describe the livestock and
specify the date, time, and place of sale. The date set shall be at
least five days after the publication and posting of such notice.
(e) The owners or their agent may redeem the livestock anytime before
the time set for the sale by submitting proof of ownership and paying
for all expenses incurred in gathering, impounding, and feeding or
pasturing the livestock and any trespass fees and/or damages caused by
the animals.
(f) Livestock erroneously impounded shall be returned to the rightful
owner, and all expenses accruing thereto shall be waived.
(g) If the livestock are not redeemed before the time fixed for their
sale, they shall be sold at public sale to the highest bidder. When
livestock are sold pursuant to this regulation, the Commissioner shall
furnish the buyer a bill of sale or other written instrument evidencing
the sale.
(h) The proceeds of any sale of impounded livestock shall be applied
as follows:
(1) To the payment of all expenses incurred by the United States in
gathering, impounding, and feeding or pasturing the livestock.
(2) Trespass penalties assessed pursuant to 700.725 shall be paid to
a separate account to be administered by the Commissioner for use as a
range improvement fund for the New Lands.
(3) Any remaining amount shall be paid over to the owner of said
livestock upon his submitting proof of ownership.
Any proceeds remaining after payment of the first and second items
noted above, not claimed within one year from the date of sale, will be
credited to the United States.
25 CFR 700.729 Amendments.
These regulations may be amended or superseded as needed.
25 CFR 700.731 Appeals.
Persons who have filed a claim for a grazing permit and whose claim
has been denied by the Range Supervisor may appeal to the Commissioner.
Appeals must be made in writing and must be received by the Office not
more than 30 days after the date the claim was denied. The appeal shall
state with specificity why the decision being appealed is in error and
shall incorporate all supporting documents. The Commissioner will issue
a decision affirming or reversing the decision of the Range Supervisor
within 60 days of receipt of the appeal. Such decision will constitute
final action by the Office and will be communicated to the appellant by
certified mail.
25 CFR 700.731 PART 720 -- ENFORCEMENT OF NONDISCRIMINATION ON THE
BASIS OF HANDICAP IN PROGRAMS OR ACTIVITIES CONDUCTED BY THE NAVAJO AND
HOPI INDIAN RELOCATION COMMISSION
Sec.
720.101 Purpose.
720.102 Application.
720.103 Definitions.
720.104 -- 720.109 (Reserved)
720.110 Self-evaluation.
720.111 Notice.
720.112 -- 720.129 (Reserved)
720.130 General prohibitions against discrimination.
720.131 -- 720.139 (Reserved)
720.140 Employment.
720.141 -- 720.148 (Reserved)
720.149 Program accessibility: Discrimination prohibited.
720.150 Program accessibility: Existing facilities.
720.151 Program accessibility: New construction and alterations.
720.152 -- 720.159 (Reserved)
720.160 Communications.
720.161 -- 720.169 (Reserved)
720.170 Compliance procedures.
Authority: 29 U.S.C 794.
Source: 51 FR 22891, 22896, June 23, 1986, unless otherwise noted.
25 CFR 720.101 Purpose.
This part effectuates section 119 of the Rehabilitation,
Comprehensive Services, and Developmental Disabilities Amendments of
1978, which amended section 504 of the Rehabilitation Act of 1973 to
prohibit discrimination on the basis of handicap in programs or
activities conducted by Executive agencies or the U.S. Postal Service.
25 CFR 720.102 Application.
This part applies to all programs or activities conducted by the
agency.
25 CFR 720.103 Definitions.
For purposes of this part, the term --
''Assistant Attorney General'' means the Assistant Attorney General,
Civil Rights Division, U.S. Department of Justice.
''Auxiliary aids'' means services or devices that enable persons with
impaired sensory, manual, or speaking skills to have an equal
opportunity to participate in, and enjoy the benefits of, programs or
activities conducted by the agency. For example, auxiliary aids useful
for persons with impaired vision include readers, brailled materials,
audio recordings, telecommunications devices and other similar services
and devices. Auxiliary aids useful for persons with impaired hearing
include telephone handset amplifiers, telephones compatible with hearing
aids, telecommunication devices for deaf persons (TDD's), interpreters,
notetakers, written materials, and other similar services and devices.
''Complete complaint'' means a written statement that contains the
complainant's name and address and describes the agency's alleged
discriminatory action in sufficient detail to inform the agency of the
nature and date of the alleged violation of section 504. It shall be
signed by the complainant or by someone authorized to do so on his or
her behalf. Complaints filed on behalf of classes or third parties
shall describe or identify (by name, if possible) the alleged victims of
discrimination.
''Facility'' means all or any portion of buildings, structures,
equipment, roads, walks, parking lots, rolling stock or other
conveyances, or other real or personal property.
''Handicapped person'' means any person who has a physical or mental
impairment that substantially limits one or more major life activities,
has a record of such an impairment, or is regarded as having such an
impairment.
As used in this definition, the phrase:
(1) ''Physical or mental impairment'' includes --
(i) Any physiological disorder or condition, cosmetic disfigurement,
or anatomical loss affecting one or more of the following body systems:
Neurological; musculoskeletal; special sense organs; respiratory,
including speech organs; cardiovascular; reproductive; digestive;
genitourinary; hemic and lymphatic; skin; and endocrine; or
(ii) Any mental or psychological disorder, such as mental
retardation, organic brain syndrome, emotional or mental illness, and
specific learning disabilities. The term ''physical or mental
impairment'' includes, but is not limited to, such diseases and
conditions as orthopedic, visual, speech, and hearing impairments,
cerebral palsy, epilepsy, muscular dystrophy, multiple sclerosis,
cancer, heart disease, diabetes, mental retardation, emotional illness,
and drug addiction and alocoholism.
(2) ''Major life activities'' includes functions such as caring for
one's self, performing manual tasks, walking, seeing, hearing, speaking,
breathing, learning, and working.
(3) ''Has a record of such an impairment'' means has a history of, or
has been misclassified as having, a mental or physical impairment that
substantially limits one or more major life activities.
(4) ''Is regarded as having an impairment'' means --
(i) Has a physical or mental impairment that does not substantially
limit major life activities but is treated by the agency as constituting
such a limitation;
(ii) Has a physical or mental impairment that substantially limits
major life activities only as a result of the attitudes of others toward
such impairment; or
(iii) Has none of the impairments defined in paragraph (1) of this
definition but is treated by the agency as having such an impairment.
''Historic preservation programs'' means programs conducted by the
agency that have preservation of historic properties as a primary
purpose.
''Historic properties'' means those properties that are listed or
eligible for listing in the National Register of Historic Places or
properties designated as historic under a statute of the appropriate
State or local government body.
''Qualified handicapped person'' means --
(1) With respect to preschool, elementary, or secondary education
services provided by the agency, a handicapped person who is a member of
a class of persons otherwise entitled by statute, regulation, or agency
policy to receive education services from the agency.
(2) With respect to any other agency program or activity under which
a person is required to perform services or to achieve a level of
accomplishment, a handicapped person who meets the essential eligibility
requirements and who can acheive the purpose of the program or activity
without modifications in the program or activity that the agency can
demonstrate would result in a fundamental alteration in its nature;
(3) With respect to any other program or activity, a handicapped
person who meets the essential eligibility requirements for
participation in, or receipt of benefits from, that program or activity;
and
(4) ''Qualified handicapped person'' is defined for purposes of
employment in 29 CFR 1613.702(f), which is made applicable to this part
by 720.140.
''Section 504'' means section 504 of the Rehabilitation Act of 1973
(Pub. L. 93-112, 87 Stat. 394 (29 U.S.C. 794)), as amended by the
Rehabilitation Act Amendments of 1974 (Pub. L. 93-516, 88 Stat. 1617),
and the Rehabilitation, Comprehensive Services, and Developmental
Disabilities Amendments of 1978 (Pub. L. 95-602, 92 Stat. 2955). As used
in this part, section 504 applies only to programs or activities
conducted by Executive agencies and not to federally assisted programs.
''Substantial impairment'' means a significant loss of the integrity
of finished materials, design quality, or special character resulting
from a permanent alteration.
720.104 -- 720.109 (Reserved)
25 CFR 720.110 Self-evaluation.
(a) The agency shall, by August 24, 1987, evaluate its current
policies and practices, and the effects thereof, that do not or may not
meet the requirements of this part, and, to the extent modification of
any such policies and practices is required, the agency shall proceed to
make the necessary modifications.
(b) The agency shall provide an opportunity to interested persons,
including handicapped persons or organizations representing handicapped
persons, to participate in the self-evaluation process by submitting
comments (both oral and written).
(c) The agency shall, until three years following the completion of
the self-evaluation, maintain on file and make available for public
inspection:
(1) A description of areas examined and any problems identified, and
(2) A description of any modifications made.
25 CFR 720.111 Notice.
The agency shall make available to employees, applicants,
participants, beneficiaries, and other interested persons such
information regarding the provisions of this part and its applicability
to the programs or activities conducted by the agency, and make such
information available to them in such manner as the head of the agency
finds necessary to apprise such persons of the protections against
discrimination assured them by section 504 and this regulation.
720.112 -- 720.129 (Reserved)
25 CFR 720.130 General prohibitions against discrimination.
(a) No qualified handicapped person shall, on the basis of handicap,
be excluded from participation in, be denied the benefits of, or
otherwise be subjected to discrimination under any program or activity
conducted by the agency.
(b)(1) The agency, in providing any aid, benefit, or service, may
not, directly or through contractual, licensing, or other arrangements,
on the basis of handicap --
(i) Deny a qualified handicapped person the opportunity to
participate in or benefit from the aid, benefit, or service;
(ii) Afford a qualified handicapped person an opportunity to
participate in or benefit from the aid, benefit, or service that is not
equal to that afforded others;
(iii) Provide a qualified handicapped person with an aid, benefit, or
service that is not as effective in affording equal opportunity to
obtain the same result, to gain the same benefit, or to reach the same
level of achievement as that provided to others;
(iv) Provide different or separate aid, benefits, or services to
handicapped persons or to any class of handicapped persons than is
provided to others unless such action is necessary to provide qualified
handicapped persons with aid, benefits, or services that are as
effective as those provided to others;
(v) Deny a qualified handicapped person the opportunity to
participate as a member of planning or advisory boards; or
(vi) Otherwise limit a qualified handicapped person in the enjoyment
of any right, privilege, advantage, or opportunity enjoyed by others
receiving the aid, benefit, or service.
(2) The agency may not deny a qualified handicapped person the
opportunity to participate in programs or activities that are not
separate or different, despite the existence of permissibly separate or
different programs or activities.
(3) The agency may not, directly or through contractual or other
arrangments, utilize criteria or methods of administration the purpose
or effect of which would --
(i) Subject qualified handicapped persons to discrimination on the
basis of handicap; or
(ii) Defeat or substantially impair accomplishment of the objectives
of a program activity with respect to handicapped persons.
(4) The agency may not, in determining the site or location of a
facility, make selections the purpose or effect of which would --
(i) Exclude handicapped persons from, deny them the benefits of, or
otherwise subject them to discrimination under any program or activity
conducted by the agency; or
(ii) Defeat or substantially impair accomplishment of the objectives
of a program activity with respect to handicapped persons.
(5) The agency, in the selection of procurement contractors, may not
use criteria that subject qualified handicapped persons to
discrimination on the basis of handicap.
(6) The agency may not administer a licensing or certification
program in a manner that subjects qualified handicapped persons to
discrimination on the basis of handicap, nor may the agency establish
requirements for the programs or activities of licensees or certified
entities that subject qualified handicapped persons to discrimination on
the basis of handicap. However, the programs or activities of entities
that are licensed or certified by the agency are not, themselves,
covered by this part.
(c) The exclusion of nonhandicapped persons from the benefits of a
program limited by Federal statute or Executive order to handicapped
persons or the exclusion of a specific class of handicapped persons from
a program limited by Federal statute or Executive order to a different
class of handicapped persons is not prohibited by this part.
(d) The agency shall administer programs and activities in the most
integrated setting appropriate to the needs of qualified handicapped
persons.
720.131 -- 720.139 (Reserved)
25 CFR 720.140 Employment.
No qualified handicapped person shall, on the basis of handicap, be
subjected to discrimination in employment under any program or activity
conducted by the agency. The definitions, requirements, and procedures
of section 501 of the Rehabilitation Act of 1973 (29 U.S.C. 791), as
established by the Equal Employment Opportunity Commission in 29 CFR
part 1613, shall apply to employment in federally conducted programs or
activities.
720.141 -- 720.148 (Reserved)
25 CFR 720.149 Program accessibility: Discrimination prohibited.
Except as otherwise provided in 720.150, no qualified handicapped
person shall, because the agency's facilities are inaccessible to or
unusable by handicapped persons, be denied the benefits of, be excluded
from participation in, or otherwise be subjected to discrimination under
any program or activity conducted by the agency.
25 CFR 720.150 Program accessibility: Existing facilities.
(a) General. The agency shall operate each program or activity so
that the program or activity, when viewed in its entirety, is readily
accessible to and usable by handicapped persons. This paragraph does
not --
(1) Necessarily require the agency to make each of its existing
facilities accessible to and usable by handicapped persons;
(2) In the case of historic preservation programs, require the agency
to take any action that would result in a substantial impairment of
significant historic features of an historic property; or
(3) Require the agency to take any action that it can demonstrate
would result in a fundamental alteration in the nature of a program or
activity or in undue financial and administrative burdens. In those
circumstances where agency personnel believe that the proposed action
would fundamentally alter the program or activity or would result in
undue financial and administrative burdens, the agency has the burden of
proving that compliance with 720.150(a) would result in such alteration
or burdens. The decision that compliance would result in such
alteration or burdens must be made by the agency head or his or her
designee after considering all agency resources available for use in the
funding and operation of the conducted program or activity, and must be
accompanied by a written statement of the reasons for reaching that
conclusion. If an action would result in such an alteration or such
burdens, the agency shall take any other action that would not result in
such an alteration or such burdens but would nevertheless ensure that
handicapped persons receive the benefits and services of the program or
activity.
(b) Methods -- (1) General. The agency may comply with the
requirements of this section through such means as redesign of
equipment, reassignment of services to accessible buildings, assignment
of aides to beneficiaries, home visits, delivery of services at
alternate accessible sites, alteration of existing facilities and
construction of new facilities, use of accessible rolling stock, or any
other methods that result in making its programs or activities readily
accessible to and usable by handicapped persons. The agency is not
required to make structural changes in existing facilities where other
methods are effective in achieving compliance with this section. The
agency, in making alterations to existing buildings, shall meet
accessibility requirements to the extent compelled by the Architectural
Barriers Act of 1968, as amended (42 U.S.C. 4151-4157), and any
regulations implementing it. In choosing among available methods for
meeting the requirements of this section, the agency shall give priority
to those methods that offer programs and activities to qualified
handicapped persons in the most integrated setting appropriate.
(2) Historic preservation programs. In meeting the requirements of
720.150(a) in historic preservation programs, the agency shall give
priority to methods that provide physical access to handicapped persons.
In cases where a physical alteration to an historic property is not
required because of 720.150(a)(2) or (a)(3), alternative methods of
achieving program accessibility include --
(i) Using audio-visual materials and devices to depict those portions
of an historic property that cannot otherwise be made accessible;
(ii) Assigning persons to guide handicapped persons into or through
portions of historic properties that cannot otherwise be made
accessible; or
(iii) Adopting other innovative methods.
(c) Time period for compliance. The agency shall comply with the
obligations established under this section by October 21, 1986, except
that where structural changes in facilities are undertaken, such changes
shall be made by August 22, 1989, but in any event as expeditiously as
possible.
(d) Transition plan. In the event that structural changes to
facilities will be undertaken to achieve program accessibility, the
agency shall develop, by February 23, 1987 a transition plan setting
forth the steps necessary to complete such changes. The agency shall
provide an opportunity to interested persons, including handicapped
persons or organizations representing handicapped persons, to
participate in the development of the transition plan by submitting
comments (both oral and written). A copy of the transition plan shall
be made available for public inspection. The plan shall, at a minimum
--
(1) Identify physical obstacles in the agency's facilities that limit
the accessibility of its programs or activities to handicapped persons;
(2) Describe in detail the methods that will be used to make the
facilities accessible;
(3) Specify the schedule for taking the steps necessary to achieve
compliance with this section and, if the time period of the transition
plan is longer than one year, identify steps that will be taken during
each year of the transition period; and
(4) Indicate the official responsible for implementation of the plan.
(e) Housing. The agency shall ensure that any dwelling purchased for
a relocatee household is readily accessible to and usable by any
handicapped person who is a member of that household.
(51 FR 22891, 22896, June 23, 1986, as amended at 51 FR 22892, June
23, 1986)
25 CFR 720.151 Program accessibility: New construction and
alterations.
(a) Each building or part of a building that is constructed or
altered by, on behalf of, or for the use of the agency shall be
designed, constructed, or altered so as to be readily accessible to and
usable by handicapped persons. The definitions, requirements, and
standards of the Architectural Barriers Act (42 U.S.C. 4151-4157), as
established in 41 CFR 101-19.600 to 101-19.607, apply to buildings
covered by this section.
(b) The agency shall ensure that any dwelling that is constructed for
a relocatee household is designed and constructed so as to be readily
accessible to and usable by any handicapped person who is a member of
that household.
(51 FR 22891, 22896, June 23, 1986, as amended at 51 FR 22892, June
23, 1986)
720.152 -- 720.159 (Reserved)
25 CFR 720.160 Communications.
(a) The agency shall take appropriate steps to ensure effective
communication with applicants, participants, personnel of other Federal
entities, and members of the public.
(1) The agency shall furnish appropriate auxiliary aids where
necessary to afford a handicapped person an equal opportunity to
participate in, and enjoy the benefits of, a program or activity
conducted by the agency.
(i) In determining what type of auxiliary aid is necessary, the
agency shall give primary consideration to the requests of the
handicapped person.
(ii) The agency need not provide individually prescribed devices,
readers for personal use or study, or other devices of a personal
nature.
(2) Where the agency communicates with applicants and beneficiaries
by telephone, telecommunication devices for deaf person (TDD's) or
equally effective telecommunication systems shall be used.
(b) The agency shall ensure that interested persons, including
persons with impaired vision or hearing, can obtain information as to
the existence and location of accessible services, activities, and
facilities.
(c) The agency shall provide signage at a primary entrance to each of
its inaccessible facilities, directing users to a location at which they
can obtain information about accessible facilities. The international
symbol for accessibility shall be used at each primary entrance of an
accessible facility.
(d) This section does not require the agency to take any action that
it can demonstrate would result in a fundamental alteration in the
nature of a program or activity or in undue financial and adminstrative
burdens. In those circumstances where agency personnel believe that the
proposed action would fundamentally alter the program or activity or
would result in undue financial and administrative burdens, the agency
has the burden of proving that compliance with 720.160 would result in
such alteration or burdens. The decision that compliance would result
in such alteration or burdens must be made by the agency head or his or
her designee after considering all agency resources available for use in
the funding and operation of the conducted program or activity, and must
be accompanied by a written statement of the reasons for reaching that
conclusion. If an action required to comply with this section would
result in such an alteration or such burdens, the agency shall take any
other action that would not result in such an alteration or such burdens
but would nevertheless ensure that, to the maximum extent possible,
handicapped persons receive the benefits and services of the program or
activity.
720.161 -- 720.169 (Reserved)
25 CFR 720.170 Compliance procedures.
(a) Except as provided in paragraph (b) of this section, this section
applies to all allegations of discrimination on the basis of handicap in
programs or activities conducted by the agency.
(b) The agency shall process complaints alleging violations of
section 504 with respect to employment according to the procedures
established by the Equal Employment Opportunity Commission in 29 CFR
part 1613 pursuant to section 501 of the Rehabilitation Act of 1973 (29
U.S.C. 791).
(c) The Assistant Director for Relocation Operations shall be
responsible for coordinating implementation of this section. Complaints
may be mailed to Assistant Director for Relocation Operations, Navajo
and Hopi Indian Relocation Commission, P.O. Box KK, Flagstaff, Arizona
86002.
(d) The agency shall accept and investigate all complete complaints
for which it has jurisdiction. All complete complaints must be filed
within 180 days of the alleged act of discrimination. The agency may
extend this time period for good cause.
(e) If the agency receives a complaint over which it does not have
jurisdiction, it shall promptly notify the complainant and shall make
reasonable efforts to refer the complaint to the appropriate government
entity.
(f) The agency shall notify the Architectural and Transportation
Barriers Compliance Board upon receipt of any complaint alleging that a
building or facility that is subject to the Architectural Barriers Act
of 1968, as amended (42 U.S.C. 4151-4157), or section 502 of the
Rehabilitation Act of 1973, as amended (29 U.S.C. 792), is not readily
accessible to and usable by handicapped persons.
(g) Within 180 days of the receipt of a complete complaint for which
it has jurisdiction, the agency shall notify the complainant of the
results of the investigation in a letter containing --
(1) Findings of fact and conclusions of law;
(2) A description of a remedy for each violation found; and
(3) A notice of the right to appeal.
(h) Appeals of the findings of fact and conclusions of law or
remedies must be filed by the complainant within 90 days of receipt from
the agency of the letter required by paragraph (g) of this section. The
agency may extend this time for good cause.
(i) Timely appeals shall be accepted and processed by the head of the
agency.
(j) The head of the agency shall notify the complainant of the
results of the appeal within 60 days of the receipt of the request. If
the head of the agency determines that additional information is needed
from the complainant, he or she shall have 60 days from the date of
receipt of the additional information to make his or her determination
on the appeal.
(k) The time limits cited in paragraphs (g) and (j) of this section
may be extended with the permission of the Assistant Attorney General.
(l) The agency may delegate its authority for conducting complaint
investigations to other Federal agencies, except that the authority for
making the final determination may not be delegated to another agency.
(51 FR 22891, 22896, June 23, 1986, as amended at 51 FR 22891, June
23, 1986)
25 CFR 720.170 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
List of CFR Sections Affected
Chap.
25 CFR 720.170 Table of CFR Titles and Chapters
25 CFR 720.170 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)
25 CFR 720.170 Title 2 -- (Reserved)
25 CFR 720.170 Title 3 -- The President
I Executive Office of the President (Parts 100 -- 199)
25 CFR 720.170 Title 4 -- Accounts
I General Accounting Office (Parts 1 -- 99)
II Federal Claims Collection Standards (General Accounting Office --
Department of Justice) (Parts 100 -- 299)
III General Accounting Office (CASB) (Parts 300 -- 499)
25 CFR 720.170 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)
IV Advisory Committee on Federal Pay (Parts 1400 -- 1499)
V The International Organizations Employees Loyalty Board (Parts 1500
-- 1599)
VI Federal Retirement Thrift Investment Board (Parts 1600 -- 1699)
VII Advisory Commission on Intergovernmental Relations (Parts 1700 --
1799)
VIII Office of Special Council (Parts 1800 -- 1899)
IX Appalachian Regional Commission (Parts 1900 -- 1999)
XI United States Soldiers' and Airmen's 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)
XV Office of Administration, Executive Office of the President (Parts
2500 -- 2599)
XVI Office of Government Ethics (Parts 2600 -- 2699)
25 CFR 720.170 Title 6 -- Economic Stabilization (Reserved)
25 CFR 720.170 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 Soil Conservation Service, Department of Agriculture (Parts 600 --
699)
VII Agricultural Stabilization and Conservation Service (Agricultural
Adjustment), Department of Agriculture (Parts 700 -- 799)
VIII 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)
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 Electrification Administration, Department of Agriculture
(Parts 1700 -- 1799)
XVIII Farmers Home Administration, Department of Agriculture (Parts
1800 -- 2099)
XXI Foreign Economic Development Service, Department of Agriculture
(Parts 2100 -- 2199)
XXII Office of International Cooperation and Development, Department
of Agriculture (Parts 2200 -- 2299)
XXV Office of the General Sales Manager, 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, Department of Agriculture (Parts 2900 -- 2999)
XXX Office of Finance and Management, Department of Agriculture
(Parts 3000 -- 3099)
XXXI Office of Environmental Quality, Department of Agriculture
(Parts 3100 -- 3199)
XXXII Office of Grants and Program Systems, Department of Agriculture
(Parts 3200 -- 3299)
XXXIII Office of Transportation, Department of Agriculture (Parts
3300 -- 3399)
XXXIV Cooperative State Research Service, Department of Agriculture
(Parts 3400 -- 3499)
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)
XXXIX Economic Analysis Staff, Department of Agriculture (Parts 3900
-- 3999)
XL Economics Management Staff, Department of Agriculture (Parts 4000
-- 4099)
XLI National Agricultural Library, Department of Agriculture (Part
4100)
25 CFR 720.170 Title 8 -- Aliens and Nationality
I Immigration and Naturalization Service, Department of Justice
(Parts 1 -- 499)
25 CFR 720.170 Title 9 -- Animals and Animal Products
I Animal and Plant Health Inspection Service, Department of
Agriculture (Parts 1 -- 199)
II Packers and Stockyards Administration, Department of Agriculture
(Parts 200 -- 299)
III Food Safety and Inspection Service, Meat and Poultry Inspection,
Department of Agriculture (Parts 300 -- 399)
25 CFR 720.170 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)
XV Office of the Federal Inspector for the Alaska Natural Gas
Transportation System (Parts 1500 -- 1599)
XVII Defense Nuclear Facilities Safety Board (Parts 1700 -- 1799)
25 CFR 720.170 Title 11 -- Federal Elections
I Federal Election Commission (Parts 1 -- 9099)
25 CFR 720.170 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)
XI Federal Financial Institutions Examination Council (Parts 1100 --
1199)
XIII Farm Credit System Assistance Board (Parts 1300 -- 1399)
XIV Farm Credit System Insurance Corporation (Parts 1400 -- 1499)
XV Thrift Depositor Protection Oversight Board (Parts 1500 -- 1599)
XVI Resolution Trust Corporation (Parts 1600 -- 1699)
25 CFR 720.170 Title 13 -- Business Credit and Assistance
I Small Business Administration (Parts 1 -- 199)
III Economic Development Administration, Department of Commerce
(Parts 300 -- 399)
25 CFR 720.170 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 Office of Commercial Space Transportation, Department of
Transportation (Parts 400 -- 499)
V National Aeronautics and Space Administration (Parts 1200 -- 1299)
25 CFR 720.170 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 (Parts 400 -- 499)
VII Bureau of Export Administration, 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)
XII United States Travel and Tourism Administration, Department of
Commerce (Parts 1200 -- 1299)
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
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)
25 CFR 720.170 Title 16 -- Commercial Practices
I Federal Trade Commission (Parts 0 -- 999)
II Consumer Product Safety Commission (Parts 1000 -- 1799)
25 CFR 720.170 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)
25 CFR 720.170 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)
25 CFR 720.170 Title 19 -- Customs Duties
I United States Customs Service, Department of the Treasury (Parts 1
-- 199)
II United States International Trade Commission (Parts 200 -- 299)
III International Trade Administration, Department of Commerce (Parts
300 -- 399)
25 CFR 720.170 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, Department of Health and Human
Services (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)
VI Employment Standards Administration, 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, Department of Labor (Parts 1000 -- 1099)
25 CFR 720.170 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)
25 CFR 720.170 Title 22 -- Foreign Relations
I Department of State (Parts 1 -- 199)
II Agency for International Development, International Development
Cooperation Agency (Parts 200 -- 299)
III Peace Corps (Parts 300 -- 399)
IV International Joint Commission, United States and Canada (Parts
400 -- 499)
V United States Information Agency (Parts 500 -- 599)
VI United States Arms Control and Disarmament Agency (Parts 600 --
699)
VII Overseas Private Investment Corporation, International
Development Cooperation Agency (Parts 700 -- 799)
IX Foreign Service Grievance Board Regulations (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 Board for International Broadcasting (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)
25 CFR 720.170 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)
25 CFR 720.170 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)
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)
VII Office of the Secretary, Department of Housing and Urban
Development (Section 8 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 and Section 202 Direct Loan Program) (Parts
800 -- 899)
IX Office of Assistant Secretary for Public and Indian Housing,
Department of Housing and Urban Development (Parts 900 -- 999)
X Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Interstate
Land Sales Registration Program) (Parts 1700 -- 1799)
XI Solar Energy and Energy Conservation Bank, Department of Housing
and Urban Development (Parts 1800 -- 1899)
XII Office of Inspector General, Department of Housing and Urban
Development (Parts 2000 -- 2099)
XV Mortgage Insurance and Loan Programs under the Emergency
Homeowners' Relief Act, Department of Housing and Urban Development
(Parts 2700 -- 2799)
XX Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Parts 3200 --
3699)
XXV Neighborhood Reinvestment Corporation (Parts 4100 -- 4199)
25 CFR 720.170 Title 25 -- Indians
I Bureau of Indian Affairs, Department of the Interior (Parts 1 --
299)
II Indian Arts and Crafts Board, Department of the Interior (Parts
300 -- 399)
III National Indian Gaming Commission (Parts 500 -- 599)
IV Office of Navajo and Hopi Indian Relocation (Parts 700 -- 799)
25 CFR 720.170 Title 26 -- Internal Revenue
I Internal Revenue Service, Department of the Treasury (Parts 1 --
799)
25 CFR 720.170 Title 27 -- Alcohol, Tobacco Products and Firearms
I Bureau of Alcohol, Tobacco and Firearms, Department of the Treasury
(Parts 1 -- 299)
25 CFR 720.170 Title 28 -- Judicial Administration
I Department of Justice (Parts 0 -- 199)
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)
25 CFR 720.170 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 Bureau of Labor-Management Relations and Cooperative Programs,
Department of Labor (Parts 200 -- 299)
III National Railroad Adjustment Board (Parts 300 -- 399)
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 Pension and Welfare Benefits Administration, Department of Labor
(Parts 2500 -- 2599)
XXVI Pension Benefit Guaranty Corporation (Parts 2600 -- 2699)
XXVII Federal Mine Safety and Health Review Commission (Parts 2700 --
2799)
25 CFR 720.170 Title 30 -- Mineral Resources
I Mine Safety and Health Administration, Department of Labor (Parts 1
-- 199)
II Minerals Management Service, Department of the Interior (Parts 200
-- 299)
III Board of Surface Mining and Reclamation Appeals, Department of
the Interior (Parts 300 -- 399)
IV Geological Survey, Department of the Interior (Parts 400 -- 499)
VI Bureau of Mines, Department of the Interior (Parts 600 -- 699)
VII Office of Surface Mining Reclamation and Enforcement, Department
of the Interior (Parts 700 -- 999)
25 CFR 720.170 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)
25 CFR 720.170 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)
XIX Central Intelligence Agency (Parts 1900 -- 1999)
XX Information Security Oversight Office (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)
25 CFR 720.170 Title 33 -- Navigation and Navigable Waters
I Coast Guard, Department of Transportation (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)
25 CFR 720.170 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 Vocational and Adult Education, Department of Education
(Parts 400 -- 499)
V Office of Bilingual Education and Minority Languages Affairs,
Department of Education (Parts 500 -- 599)
VI Office of Postsecondary Education, Department of Education (Parts
600 -- 699)
VII Office of Educational Research and Improvement, Department of
Education (Parts 700 -- 799)
25 CFR 720.170 Title 35 -- Panama Canal
I Panama Canal Regulations (Parts 1 -- 299)
25 CFR 720.170 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)
VII Library of Congress (Parts 700 -- 799)
VIII Advisory Council on Historic Preservation (Parts 800 -- 899)
IX Pennsylvania Avenue Development Corporation (Parts 900 -- 999)
XI Architectural and Transportation Barriers Compliance Board (Parts
1100 -- 1199)
XII National Archives and Records Administration (Parts 1200 -- 1299)
25 CFR 720.170 Title 37 -- Patents, Trademarks, and Copyrights
I Patent and Trademark Office, Department of Commerce (Parts 1 --
199)
II Copyright Office, Library of Congress (Parts 200 -- 299)
III Copyright Royalty Tribunal (Parts 300 -- 399)
IV Assistant Secretary for Technology Policy, Department of Commerce
(Parts 400 -- 499)
V Under Secretary for Technology, Department of Commerce (Parts 500
-- 599)
25 CFR 720.170 Title 38 -- Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0 -- 99)
25 CFR 720.170 Title 39 -- Postal Service
I United States Postal Service (Parts 1 -- 999)
III Postal Rate Commission (Parts 3000 -- 3099)
25 CFR 720.170 Title 40 -- Protection of Environment
I Environmental Protection Agency (Parts 1 -- 799)
V Council on Environmental Quality (Parts 1500 -- 1599)
25 CFR 720.170 Title 41 -- Public Contracts and Property Management
Subtitle B -- Other Provisions Relating to Public Contracts
50 Public Contracts, Department of Labor (Parts 50-1 -- 50-999)
51 Committee for Purchase from the Blind and Other Severely
Handicapped (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, Department of Labor (Parts 61-1 -- 61-999)
Subtitle C -- Federal Property Management Regulations System
101 Federal Property Management Regulations (Parts 101-1 -- 101-99)
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)
132 Department of the Air Force (Parts 132-1 -- 132-99)
Subtitle D -- Other Provisions Relating to Property Management
(Reserved)
Subtitle E -- Federal Information Resources Management Regulations
System
201 Federal Information Resources Management Regulation (Parts 201-1
-- 201-99)
Subtitle F -- Federal Travel Regulation System
301 Travel Allowances (Parts 301-1 -- 301-99)
302 Relocation Allowances (Parts 302-1 -- 302-99)
303 Payment of Expenses Connected with the Death of Certain Employees
(Parts 303-1 -- 303-2)
304 Payment from a non-Federal source for travel expenses (Parts
304-1 -- 304-99)
25 CFR 720.170 Title 42 -- Public Health
I Public Health Service, Department of Health and Human Services
(Parts 1 -- 199)
IV Health Care Financing Administration, Department of Health and
Human Services (Parts 400 -- 499)
V Office of Inspector General-Health Care, Department of Health and
Human Services (Parts 1000 -- 1999)
25 CFR 720.170 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 200 --
499)
II Bureau of Land Management, Department of the Interior (Parts 1000
-- 9999)
25 CFR 720.170 Title 44 -- Emergency Management and Assistance
I Federal Emergency Management Agency (Parts 0 -- 399)
IV Department of Commerce and Department of Transportation (Parts 400
-- 499)
25 CFR 720.170 Title 45 -- Public Welfare
Subtitle A -- Department of Health and Human Services, General
Administration (Parts 1 -- 199)
Subtitle B -- Regulations Relating to Public Welfare
II Office of Family Assistance (Assistance Programs), Family Support
Administration, Department of Health and Human Services (Parts 200 --
299)
III Office of Child Support Enforcement (Child Support Enforcement
Program), Family Support Administration, 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)
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, Family Support Administration,
Department of Health and Human Services (Parts 1000 -- 1099)
XI National Foundation on the Arts and the Humanities (Parts 1100 --
1199)
XII ACTION (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)
XX Commission on the Bicentennial of the United States Constitution
(Parts 2000 -- 2099)
XXI Commission on Fine Arts (Parts 2100 -- 2199)
XXII Christopher Columbus Quincentenary Jubilee Commission (Parts
2200 -- 2299)
XXIV James Madison Memorial Fellowship Foundation (Parts 2400 --
2499)
25 CFR 720.170 Title 46 -- Shipping
I Coast Guard, Department of Transportation (Parts 1 -- 199)
II Maritime Administration, Department of Transportation (Parts 200
-- 399)
III Coast Guard (Great Lakes Pilotage), Department of Transportation
(Parts 400 -- 499)
IV Federal Maritime Commission (Parts 500 -- 599)
25 CFR 720.170 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)
25 CFR 720.170 Title 48 -- Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1 -- 99)
2 Department of Defense (Parts 200 -- 299)
3 Department of 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 United States Information Agency (Parts 1900 -- 1999)
22 Small Business Administration (Parts 2200 -- 2299)
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)
34 Department of Education Acquisition Regulation (Parts 3400 --
3499)
35 Panama Canal Commission (Parts 3500 -- 3599)
44 Federal Emergency Management Agency (Parts 4400 -- 4499)
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)
57 African Development Foundation (Parts 5700 -- 5799)
61 General Services Administration Board of Contract Appeals (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)
25 CFR 720.170 Title 49 -- Transportation
Subtitle A -- Office of the Secretary of Transportation (Parts 1 --
99)
Subtitle B -- Other Regulations Relating to Transportation
I Research and Special Programs Administration, Department of
Transportation (Parts 100 -- 199)
II Federal Railroad Administration, Department of Transportation
(Parts 200 -- 299)
III Federal Highway Administration, Department of Transportation
(Parts 300 -- 399)
IV Coast Guard, Department of Transportation (Parts 400 -- 499)
V National Highway Traffic Safety Administration, Department of
Transportation (Parts 500 -- 599)
VI Urban Mass Transportation Administration, Department of
Transportation (Parts 600 -- 699)
VII National Railroad Passenger Corporation (AMTRAK) (Parts 700 --
799)
VIII National Transportation Safety Board (Parts 800 -- 899)
X Interstate Commerce Commission (Parts 1000 -- 1399)
25 CFR 720.170 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 Regulatory Agencies (Fishing and Whaling) (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)
25 CFR 720.170 CFR Index and Finding Aids Subject/Agency Index
List of Agency Prepared Indexes Parallel Table of Statutory Authorities
and Rules Acts Requiring Publication in the Federal Register List of CFR
Titles, Chapters, Subchapters, and Parts
25 CFR 720.170 Alphabetical List of Agencies Appearing in the CFR
CFR Title, Subtitle or
Agency
Chapter
ACTION 45, XII
Administrative Committee of the Federal Register 1, I
Administrative Conference of the United States 1, III
Advisory Commission on Intergovernmental Relations 5, VII
Advisory Committee on Federal Pay 5, IV
Advisory Council on Historic Preservation 36, VIII
African Development Foundation 22, XV; 48, 57
Agency for International Development 22, II; 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agricultural Stabilization and Conservation Service 7, VII
Agriculture Department
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agricultural Stabilization and Conservation Service 7, VII
Animal and Plant Health Inspection Service 7, III; 9, I
Commodity Credit Corporation 7, XIV
Cooperative State Research Service 7, XXXIV
Economic Analysis Staff 7, XXXIX
Economic Research Service 7, XXXVII
Economics Management Staff 7, XL
Energy, Office of 7, XXIX
Environmental Quality, Office of 7, XXXI
Farmers Home Administration 7, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Federal Grain Inspection Service 7, VIII
Finance and Management, Office of 7, XXX
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Economic Development Service 7, XXI
Forest Service 36, II
General Sales Manager, Office of 7, XXV
Grants and Program Systems, Office of 7, XXXII
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
International Cooperation and Development Office 7, XXII
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
Operations Office 7, XXVIII
Packers and Stockyards Administration 9, II
Rural Electrification Administration 7, XVII
Rural Telephone Bank 7, XVI
Secretary of Agriculture, Office of 7, Subtitle A
Soil Conservation Service 7, VI
Transportation, Office of 7, XXXIII
World Agriculture Outlook Board 7, XXXVIII
Air Force Department 32, VII; 41, Subtitle C, Ch. 132
Federal Acquisition Regulation Supplement 48, 53
Alaska Natural Gas Transportation System, Office of the Federal
Inspector 10, XV
Alcohol, Tobacco and Firearms, Bureau of 27, I
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers Compliance Board 36, XI
Arms Control and Disarmament Agency, U.S. 22, VI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Assistant Secretary for Technology Policy, Department of Commerce 37,
IV
Benefits Review Board 20, VII
Bicentennial of the United States Constitution, Commission on the 45,
XX
Bilingual Education and Minority Languages Affairs, Office of 34, V
Blind and Other Severely Handicapped, Committee for Purchase from 41,
51
Board for International Broadcasting 22, XIII
Budget, Office of Management and 5, III
Census Bureau 15, I
Central Intelligence Agency 32, XIX
Child Support Enforcement, Office of 45, III
Christopher Columbus Quincentenary Jubilee Commission 45, XXII
Civil Rights Commission 45, VII
Civil Rights, Office for (Education Department) 34, I
Claims Collection Standards, Federal 4, II
Coast Guard 33, I; 46, I, III; 49, IV
Commerce Department 44, IV
Census Bureau 15, I
Assistant Secretary for Technology Policy 37, IV
Economic Affairs, Under Secretary 37, V
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Endangered Species Committee 50, IV
Export Administration Bureau 15, VII
Federal Acquisition Regulation 48, 13
Fishery Conservation and Management 50, VI
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 Administration 15, IX; 50, II, III,
IV, VI
National Telecommunications and Information Administration 15, XXIII;
47, III
Patent and Trademark Office 37, I
Productivity, Technology and Innovation, Assistant Secretary for 37,
IV
Secretary of Commerce, Office of 15, Subtitle A
Technology Administration 15, XI
Under Secretary for Technology 37, V
United States Travel and Tourism Administration 15, XII
Commercial Space Transportation, Office of, Department of
Transportation 14, III
Commission on the Bicentennial of the United States Constitution 45,
XX
Committee for Purchase from the Blind and Other Severely Handicapped
41, 51
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 17, I
Community Planning and Development, Office of Assistant Secretary for
24, V, VI
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining Commission 29, IX
Consumer Product Safety Commission 16, II
Cooperative State Research Service 7, XXXIV
Copyright Office 37, II
Copyright Royalty Tribunal 37, III
Cost Accounting Standards Board, Office of Federal Procurement Policy
48, 99
Council on Environmental Quality 40, V
Customs Service, United States 19, I
Defense Department 32, Subtitle A
Air Force Department 32, VII; 41, Subtitle C, Ch. 132
Army Department 32, V; 33, II; 36, III, 48, 51
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 2
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 32, I
Defense Logistics Agency 32, XII
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Affairs, Under Secretary (Commerce) 37, V
Economic Analysis, Bureau of 15, VIII
Economic Analysis Staff, Department of Agriculture 7, XXXIX
Economic Development Administration 13, III
Economics Management Staff 7, XL
Economic Research Service 7, XXXVII
Education, Department of
Bilingual Education and Minority Languages Affairs, Office of 34, V
Civil Rights, Office for 34, I
Educational Research and Improvement, Office of 34, VII
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, Office of 34, III
Vocational and Adult Education, Office of 34, IV
Educational Research and Improvement, Office of 34, VII
Elementary and Secondary Education, Office of 34, II
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board, International Organizations 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 10, II, III, X; 41, 109
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 18, I
Energy, Office of, Department of Agriculture 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 40, I; 41, 115; 48, 15
Environmental Quality, Office of (Agriculture Department) 7, XXXI
Equal Employment Opportunity Commission 29, XIV
Equal Opportunity, Office of Assistant Secretary for 24, I
Executive Office of the President 3, I
Administration, Office of 5, XV
Export Administration Bureau 15, VII
Export-Import Bank of the United States 12, IV
Family Assistance, Office of 45, II
Family Support Administration 45, II, III, IV, X
Farm Credit Administration 12, VI
Farm Credit System Assistance Board 12, XIII
Farm Credit System Insurance Corporation 12, XIV
Farmers Home Administration 7, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Federal Claims Collection Standards 4, II
Federal Communications Commission 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 12, III
Federal Election Commission 11, I
Federal Emergency Management Agency 44, I; 48, 44
Federal Energy Regulatory Commission 18, I
Federal Financial Institutions Examination Council 12, XI
Federal Financing Bank 12, VIII
Federal Grain Inspection Service 7, VIII
Federal Highway Administration 23, I, II; 49, III
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Finance Board 12, IX
Federal Information Resources Management Regulations 41, Subtitle E,
Ch. 201
Federal Inspector for the Alaska Natural Gas Transportation System,
Office of 10, XV
Federal Labor Relations Authority, and General Counsel of the Federal
Labor Relations Authority 5, XIV; 22, XIV
Federal Law Enforcement Training Center 31, VII
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 29, XXVII
Federal Pay, Advisory Committee on 5, IV
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Property Management Regulations System 41, Subtitle C
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Federal Retirement Thrift Investment Board 5, VI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 16, I
Federal Travel Regulation System 41, Subtitle F
Finance and Management, Department of Agriculture 7, XXX
Fine Arts Commission 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Fishery Conservation and Management 50, VI
Fishing and Whaling, International Regulatory Agencies 50, III
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 United States 45, V
Foreign Economic Development Service 7, XXI
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 Accounting Office 4, I, II, III
General Sales Manager, Office of 7, XXV
General Services Administration
Contract Appeals Board 48, 61
Federal Acquisition Regulation 48, 5
Federal Information Resources Management Regulations 41, Subtitle E,
Ch. 201
Federal Property Management Regulations System 41, 101, 105
Federal Travel Regulation System 41, Subtitle F
Payment of Expenses Connected With the Death of Certain Employees 41,
303
Reduction in Meeting and Training Allowance Payments 41, 304
Relocation Allowances 41, 302
Travel Allowances 41, 301
Geological Survey 30, IV
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grants and Program Systems, Office of 7, XXXII
Great Lakes Pilotage 46, III
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 45, Subtitle A
Child Support Enforcement, Office of 45, III
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Family Support Administration 45, II, III, IV, X
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Health Care Financing Administration 42, IV
Human Development Services Office 45, XIII
Inspector General, Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Social Security Administration 20, III; 45, IV
Health Care Financing Administration 42, IV
Housing and Urban Development, Department of
Community Planning and Development, Office of Assistant Secretary for
24, V, VI
Equal Opportunity, Office of Assistant Secretary for 24, I
Federal Acquisition Regulation 48, 24
Government National Mortgage Association 24, III
Housing -- Federal Housing Commissioner, Office of Assistant
Secretary for 24, II, VIII, X, XX
Inspector General, Office of 24, XII
Mortgage Insurance and Loan Programs Under Emergency Homeowners'
Relief Act 24, XV
Public and Indian Housing, Office of Assistant Secretary for 24, IX
Secretary, Office of 24, Subtitle B, VII
Solar Energy and Energy Conservation Bank 24, XI
Housing -- Federal Housing Commissioner, Office of Assistant
Secretary for 24, II, VIII, X, XX
Human Development Services Office 45, XIII
Immigration and Naturalization Service 8, I
Indian Affairs, Bureau of 25, I
Indian Arts and Crafts Board 25, II
Information Agency, United States 22, V; 48, 19
Information Resources Management, Office of, Agriculture Department
7, XXVII
Information Security Oversight Office 32, XX
Inspector General, Office of, Agriculture Department 7, XXVI
Inspector General, Office of, Health and Human Services Department
42, V
Inspector General, Office of, Housing and Urban Development
Department 24, XII
Inter-American Foundation 22, X
Intergovernmental Relations, Advisory Commission on 5, VII
Interior Department
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
Indian Arts and Crafts Board 25, II
Land Management Bureau 43, II
Minerals Management Service 30, II
Mines, Bureau of 30, VI
National Park Service 36, I
Reclamation Bureau 43, I
Secretary of the Interior, Office of 43, Subtitle A
Surface Mining and Reclamation Appeals, Board of 30, III
Surface Mining Reclamation and Enforcement, Office of 30, VII
United States Fish and Wildlife Service 50, I, IV
Internal Revenue Service 26, I
International Boundary and Water Commission, United States and Mexico
22, XI
International Cooperation and Development Office, Department of
Agriculture 7, XXII
International Development, Agency for 22, II
International Development Cooperation Agency 22, XII
International Development, Agency for 22, II
Overseas Private Investment Corporation 22, VII
International Joint Commission, United States and Canada 22, IV
International Organizations Employees Loyalty Board 5, V
International Regulatory Agencies (Fishing and Whaling) 50, III
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 49, X
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 28, I; 41, 128
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 4, II
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the United States 45, V
Immigration and Naturalization Service 8, I
Offices of Independent Counsel 28, VI
Prisons, Bureau of 28, V
Labor Department
Benefits Review Board 20, VII
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 of 41, 60
Federal Procurement Regulations System 41, 50
Labor-Management Relations and Cooperative Programs, Bureau of 29, II
Labor-Management Standards, Office of 29, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Pension and Welfare Benefits Administration 29, XXV
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
Veterans' Employment and Training, Office of the Assistant Secretary
for 41, 61; 20, IX
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I
Labor-Management Relations and Cooperative Programs, Bureau of 29, II
Labor-Management Standards, Office of 29, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Office 37, II
Management and Budget, Office of 5, III; 48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II
Micronesian Status Negotiations, Office for 32, XXVII
Mine Safety and Health Administration 30, I
Minerals Management Service 30, II
Mines, Bureau of 30, VI
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Mortgage Insurance and Loan Programs Under the Emergency Homeowners'
Relief Act, Department of Housing and Urban Development 24, XV
National Aeronautics and Space Administration 14, V; 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National Archives and Records Administration 36, XII
National Bureau of Standards 15, II
National Capital Planning Commission 1, IV
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information Science 45, XVII
National Credit Union Administration 12, VII
National Foundation on the Arts and the Humanities 45, XI
National Highway Traffic Safety Administration 23, II, III; 49, V
National Indian Gaming Commission 25, III
National Institute of Standards and Technology 15, II
National Labor Relations Board 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 45, VI; 48, 25
National Security Council 32, XXI
National Security Council and Office of Science and Technology Policy
47, II
National Telecommunications and Information Administration 15, XXIII;
47, III
National Transportation Safety Board 49, VIII
Navy Department 32, VI; 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Nuclear Regulatory Commission 10, I
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Office of Independent Counsel 28, VII
Office of Navajo and Hopi Indian Relocation 25, IV
Offices of Independent Counsel, Department of Justice 28, VI
Operations Office, Department of Agriculture 7, XXVIII
Overseas Private Investment Corporation 22, VII
Oversight Board 12, XV
Packers and Stockyards Administration 9, II
Panama Canal Commission 48, 35
Panama Canal Regulations 35, I
Patent and Trademark Office 37, I
Payment of Expenses Connected With the Death of Certain Employees 41,
303
Peace Corps 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension and Welfare Benefits Administration, Department of Labor 29,
XXV
Pension Benefit Guaranty Corporation 29, XXVI
Personnel Management, Office of 5, I; 45, VIII; 48, 17
Federal Employees Health Benefits Acquisition Regulation 48, 16
Postal Rate Commission 39, III
Postal Service, United States 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House Fellowships 1, IV
Presidential Documents 3
Prisons, Bureau of 28, V
Productivity, Technology and Innovation, Assistant Secretary
(Commerce) 37, IV
Property Management Regulations System, Federal 41, Subtitle C
Public Contracts, Department of Labor 41, 50
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation Bureau 43, I
Reduction in Meeting and Training Allowance Payments 41, 304
Refugee Resettlement, Office of 45, IV
Regional Action Planning Commissions 13, V
Relocation Allowances 41, 302
Research and Special Programs Administration 49, I
Resolution Trust Corporation 12, XVI
Rural Electrification Administration 7, XVII
Rural Telephone Bank 7, XVI
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
Science and Technology Policy, Office of, and National Security
Council 47, II
Secret Service 31, IV
Securities and Exchange Commission 17, II
Selective Service System 32, XVI
Small Business Administration 13, I; 48, 22
Smithsonian Institution 36, V
Social Security Administration 20, III; 45, IV
Soil Conservation Service 7, VI
Solar Energy and Energy Conservation Bank, Department of Housing and
Urban Development 24, XI
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, Office of 34, III
State Department 22, I
Federal Acquisition Regulation 48, 6
Surface Mining and Reclamation Appeals, Board of 30, III
Susquehanna River Basin Commission 18, VIII
Technology Administration 15, XI
Tennessee Valley Authority 18, XIII
Thrift Supervision Office, Department of the Treasury 12, V
Trade Representative, United States, Office of 15, XX
Transportation, Department of 44, IV
Coast Guard 33, I; 46, I, III; 49, IV
Commercial Space Transportation, Office of 14, III
Contract Appeals Board 48, 63
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II; 49, III
Federal Railroad Administration 49, II
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 49, V
Research and Special Programs Administration 49, I
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Urban Mass Transportation Administration 49, VI
Transportation, Office of, Department of Agriculture 7, XXXIII
Travel Allowance 41, 301
Travel and Tourism Administration, United States 15, XII
Treasury Department 17, IV
Alcohol, Tobacco and Firearms, Bureau of 27, I
Comptroller of the Currency 12, I
Customs Service, United States 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Law Enforcement Training Center 31, VII
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision Office 12, V
United States Customs Service 19, I
Truman, Harry S. Scholarship Foundation 45, XVIII
Under Secretary for Technology, Department of Commerce 37, V
United States and Canada, International Joint Commission 22, IV
United States Arms Control and Disarmament Agency 22, VI
United States Customs Service 19, I
United States Fish and Wildlife Service 50, I, IV
United States Information Agency 22, V; 48, 19
United States International Development Cooperation Agency 22, XII
United States International Trade Commission 19, II
United States Postal Service 39, I
United States Soldiers' and Airmen's Home 5, XI
United States Trade Representative, Office of 15, XX
United States Travel and Tourism Adminstration 15, XII
Urban Mass Transportation Administration 49, VI
Veterans Affairs Department 38, I; 48, 8
Veterans' Employment and Training, Office of the Assistant Secretary
for 41, 61; 20, IX
Vice President of the United States, Office of 32, XXVIII
Vocational 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 Agriculture Outlook Board 7, XXXVIII
25 CFR 720.170 25 CFR (4-1-92 Edition)
25 CFR 720.170 List of CFR Sections Affected
25 CFR 720.170 List of CFR Sections Affected
All changes in this volume of the Code of Federal Regulations which
were made by documents published in the Federal Register since January
1, 1986, 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 and parts as
well as sections for revisions.
For the period before January 1, 1986, see the ''List of CFR Sections
Affected, 1949-1963, 1964-1972, and 1973-1985'' published in seven
separate volumes.
25 CFR 720.170 1986
25 CFR
51 FR
Page
Chapter I
5.1 (e) revised 32632
5.4 Added 32632
63 Removed 21161
64 Removed 21161
67 Removed 21161
68 Removed 21161
71 Removed 21161
72 Removed 21161
74 Removed 21161
77 Removed 21161
115.10 Redesignated as 115.11; new 115.10 added 2874
115.11 Redesignated as 115.12; new 115.11 redesignated from 115.10
2874
115.12 Redesignated as 115.13; new 115.12 redesignated from 115.11
2874
115.13 Redesignated as 115.14 and revised; new 115.13 redesignated
from 115.12 2874
115.14 Redesignated as 115.13 and revised 2874
115.15 Added 2875
151 Policy decision 5993
168.6 (b)(4) amended 23052
274.6 Added 39524
277.5 Added 39524
Chapter IV
700 Authority citation revised 22934
700.137 Revised; interim 19170
700.138 Revised; interim 19170
700.147 (e) added; interim 19170
700.701 -- 700.729 (Subpart Q) Added; interim 22934
720 Added 22891, 22896
720.150 (e) added 22892
720.151 Existing text designated as (a); (b) added 22892
720.170 (c) revised 22891
25 CFR 720.170 1987
25 CFR
52 FR
Page
Chapter I
22 Removed 30920
38.14 Added 3428
62 Revised 30160
76 Revised 31392
118 Removed 15722
120 Removed 11468
140.5 See EO 12608 34621
141.31 See EO 12608 34621
211 Revised 31929
Effective date deferred 35702
Revision at 52 FR 31929 withdrawn 39332
212 Removed 31937
Effective date deferred 35702
Removal at 52 FR 31937 withdrawn 39332
225 Added 31937
Effective date deferred 35702
Addition at 52 FR 31937 withdrawn 39332
244 Revised 23806
249.11 -- 249.21 (Subpart B) Removed 9656
250 Revised; interim 27330
256.11 Added 38
272.28 Added 38
Chapter IV
700 Authority citation revised 21951
700.183 (a) revised; interim 21951
25 CFR 720.170 1988
25 CFR
53 FR
Page
Chapter I
Chapter I Appendix amended 30674
11.1 Heading revised; (f) added 21994
13.2 Added 21994
20.4 Added 21994
21.9 Added 21994
23.4 Existing text designated as (b); (a) added 21994
38 Revised 37678
61 Authority citation revised 11272
61.4 (f) and (g) added 11272
69 Removed 21996
102 Removed 44010
125.7 Added 21995
151.14 Added 21995
175.56 Added 21995
176.22 Added 21995
176.51 Revised 6145
176.52 Revised 6145
176.54 Revised 6145
176.55 (b) and (c) (1) and (4) revised 6146
177.55 Added 21995
179 Added 25953
271.5 Added 21995
25 CFR 720.170 1989
25 CFR
54 FR
Page
Chapter I
2 Revised 6480
2.2 Corrected 7666
2.6 (c) corrected 7666
2.7 Heading corrected 7666
2.8 (a) corrected 7666
2.10 (c) corrected 7666
2.12 (b) corrected 7666
5.1 (e) revised 283
5.4 Revised 283
38.6 (c) through (e) redesignated as (d) through (f); new (c) added;
new (d)(1) introductory text revised 46374
61 Authority citation revised 14193
61.4 (h) added 14193
101 Authority citation revised 34974
101.2 (b) introductory text revised 34974
101.3 (a) revised 34974
101.7 Amended 34975
101.17 Revised 34975
101.26 Added 34975
103 Authority citation revised 34975
103.4 (a) amended 34975
103.8 Revised 34975
103.13 (a) revised 34975
103.15 (b)(2) amended; (c) added 34975
103.39 Revised 34976
103.41 Amended 34976
103.55 Added 34975
122 Revised 34155
177.51 (b) and (c) revised 113
177.52 (b) and (c) revised 113
200 Added 22188
200.11 Technical correction 24789
25 CFR 720.170 1990
25 CFR
55 FR
Page
Chapter I
61 Authority citation revised 41519
61.4 (e) added 7494
(j) added 41519
143 Added; interim 19621
176.51 Revised 42956
176.52 Revised 42956
176.54 Revised 42956
176.55 (b), (c)(1) and (4) revised 42957
177.51 (b) revised 20456
177.52 (b) revised 20456
226 Authority citation revised 33114
226.1 (h) revised 33114
226.6 (a) and (c) amended 33114
226.11 (a)(2) revised; (b)(1) amended 33114
226.13 (a) amended 33114
226.14 (b) revised 33114
226.15 (e) added 33115
226.18 Introductory text and (e) revised 33115
226.19 (a), (b) and (d) amended 33115
226.21 (f) amended 33115
226.22 (b) amended; (e) revised 33115
226.23 Amended 33115
226.25 Amended 33115
226.28 Introductory text and (a) amended; (c) added 33115
226.29 (a) revised 33115
226.33 Amended 33116
226.34 Revised 33116
226.36 Revised 33116
226.42 Amended 33116
226.43 (a), (b), (d), (g), (h) amended; (j) added 33116
226.44 Revised 33116
226.45 Revised 33116
226.46 Added 33116
286 Authority citation revised; nomenclature change 36273
286.1 Revised 36273
286.5 Added 36273
286.11 (a) revised 36274
286.17 (a), (c), and (g) revised; (j) added 36274
Chapter IV
700.701 -- 700.729 (Subpart Q) Revised; interim 37871
25 CFR 720.170 1991
25 CFR
56 FR
Page
Chapter I
39 Authority citation revised 35795
39.120 -- 39.123 (Subpart J) Revised 35795
61.4 (j)(1) corrected 10806
175 Revised 15136
176 Removed 15136
177 Removed 15136
244 Removed 14836
286.17 (b) revised 12436
Chapter III
Chapter III Established 40709
514.1 (c)(7)(iii) corrected 57373
Chapter IV
Chapter IV Heading revised 13397
700 Authority citation revised 13398
700.701 -- 700.731 (Subpart Q) Revised 13398
25 CFR 720.170 1992
25 CFR
57 FR
Page
Chapter I
11.1 (a)(23) added 3270
Chapter II
256 Revised 3105
25
Indians
Revised as of April 1, 1992
CONTAINING
A CODIFICATION OF DOCUMENTS
OF GENERAL APPLICABILITY
AND FUTURE EFFECT
AS OF APRIL 1, 1992
With Ancillaries
Published by
the Office of the Federal Register
National Archives and Records
Administration
as a Special Edition of
the Federal Register
Washington, DC 20402-9328
25 CFR 720.170 Table of Contents
Page
Explanation
Title 25:
Chapter I -- Bureau of Indian Affairs, Department of the Interior
Chapter II -- Indian Arts and Crafts Board, Department of the
Interior
Chapter III -- National Indian Gaming Commission
Chapter IV -- The Office of Navajo and Hopi Indian Relocation
Finding Aids:
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
List of CFR Sections Affected
25 CFR 720.170 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, 1992), 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
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dates and effective dates are usually not the same and care must be
exercised by the user in determining the actual effective date. In
instances where the effective date is beyond the cut-off date for the
Code a note has been inserted to reflect the future effective date. In
those instances where a regulation published in the Federal Register
states a date certain for expiration, an appropriate note will be
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. 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.
OBSOLETE PROVISIONS
Provisions that become obsolete before the revision date stated on
the cover of each volume are not carried. Code users may find the text
of provisions in effect on a given date in the past by using the
appropriate numerical list of sections affected. For the period before
January 1, 1986, consult either the List of CFR Sections Affected,
1949-1963, 1964-1972, or 1973-1985, published in seven separate volumes.
For the period beginning January 1, 1986, a ''List of CFR Sections
Affected'' is published at the end of each CFR volume.
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 Statutory
Authorities and Agency Rules (Table I), and Acts Requiring Publication
in the Federal Register (Table II). A list of CFR titles, chapters, and
parts and an alphabetical list of agencies publishing in the CFR are
also included in this volume.
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.
This index is based on a consolidation of the ''Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
There are no restrictions on the republication of material appearing
in the Code of Federal Regulations.
INQUIRIES AND SALES
For a summary, legal interpretation, or other explanation of any
regulation in this volume, contact the issuing agency. Inquiries
concerning editing procedures and reference assistance with respect to
the Code of Federal Regulations may be addressed to the Director, Office
of the Federal Register, National Archives and Records Administration,
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Director,
Office of the Federal Register.
April 1, 1992.
25 CFR 720.170 THIS TITLE
Title 25 -- Indians is composed of one volume. The contents of this
volume represent all current regulations codified under this title of
the CFR as of April 1, 1992.
For this volume, Gertrude E. Belton was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Richard L. Claypoole, assisted by Alomha S. Morris.
26 CFR 0.0 26 CFR Ch. I (4-1-92 Edition)
26 CFR 0.0 Internal Revenue Service, Treasury
26 CFR 0.0 Title 26 -- Internal Revenue
26 CFR 0.0 (This book contains Part 1, 1.0-1 to 1.60)
Part
chapter i -- Internal Revenue Service, Department of the Treasury 1
26 CFR 0.0 26 CFR Ch. I (4-1-92 Edition)
26 CFR 0.0 Internal Revenue Service, Treasury
26 CFR 0.0 CHAPTER I -- INTERNAL REVENUE SERVICE,
26 CFR 0.0 DEPARTMENT OF THE TREASURY
26 CFR 0.0 (Part 1, 1.0-1 to 1.60)
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, March 31, 1980.
26 CFR 0.0 SUBCHAPTER A -- INCOME TAX
Part
Page
1 Income tax; taxable years beginning after December 31, 1953 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.
26 CFR 0.0 SUBCHAPTER A -- INCOME TAX
26 CFR 0.0 PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953
26 CFR 0.0 Pt. 1
Sec.
1.0-1 Internal Revenue Code of 1954 and regulations.
26 CFR 0.0 Normal Taxes and Surtaxes
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(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.
1.11-1 Tax on corporations.
1.21-1 Changes in rate during a taxable year.
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).
1.25-3T 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).
1.28-0 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.
1.31-1 Credit for tax withheld on wages.
1.31-2 Credit for ''special refunds'' of employee social security
tax.
1.34-1 Credit against tax and exclusion from gross income in case of
dividends received by individuals.
1.34-2 Limitations on amount of credit.
1.34-3 Dividends to which the credit and exclusion apply.
1.34-4 Taxpayers not entitled to credit and exclusion.
1.34-5 Effective date; taxable years ending after July 31, 1954,
subject to the Internal Revenue Code of 1939.
1.34-6 Dividends received after December 31, 1964.
1.35-1 Partially tax-exempt interest received by individuals.
1.35-2 Taxpayers not entitled to credit.
1.37-1 General rules for the credit for the elderly.
1.37-2 Credit for individuals age 65 or over.
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 Introduction to regulations under section 41.
1.41-2 Qualified Research Expenses.
1.41-3 Base period research expense.
1.41-4 Qualified research for taxable years beginning after December
31, 1985. (Reserved)
1.41-5 Qualified research for taxable years beginning before January
1, 1986.
1.41-6 Basic research for taxable years beginning after December 31,
1985. (Reserved)
1.41-7 Basic research for taxable years beginning before January 1,
1986.
1.41-8 Aggregation of expenditures.
1.41-9 Special rules.
1.41-0A Credit or deduction for political and newsletter fund
contributions -- scope and note.
1.41-1A Same -- definitions of certain items.
1.41-2A Same -- limitations and special rules.
1.41-3A Same -- unspent contributions.
1.41-4A Same -- procedure for electing a credit or deduction.
1.41-5A Same -- verifications.
1.41-6A Same -- taxation of certain organizations.
1.41-7A Same -- transitional rule for past contributions.
1.41-8A Same -- effective dates.
1.42-0 Table of contents.
1.42-1 (Reserved)
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).
1.42A-1 General tax credit for taxable years ending after December
31, 1975, and before January 1, 1979.
1.43-1 Earned income credit for taxable years beginning before
January 1, 1979.
1.43-2 Earned income credit for taxable years beginning after
December 31, 1978.
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.
1.44A-1 Expenses for household and dependent care services necessary
for gainful employment.
1.44A-2 Limitations on amount creditable.
1.44A-3 Special rules applicable to married individuals.
1.44A-4 Other special rules relating to employment-related expenses.
1.44B-1 Credit for employment of certain new employees.
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.
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 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.
1.48-7 Adjustment to basis.
1.48-8 Motion picture and television films and tapes.
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.
1.48-12T Tax-exempt entity leasing (temporary).
1.50-1 Restoration of credit.
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 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.
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.
1.56-0 Table of contents to 1.56-1, adjustment for book income of
corporations.
1.56-1 Adjustment for the book income of corporations.
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.
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.
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.
1.58-9T Application of the tax benefit rule to the minimum tax for
taxable years beginning prior to 1987 (Temporary).
1.59 -- 1.60 (Reserved)
Authority: Sec. 7805, 68A Stat. 917 (26 U.S.C 7805), unless
otherwise noted.
Sections 1.23-1 -- 1.23-6 also issued under 26 U.S.C. 23;
Sections 1.25-1T -- 1.25-8T also issued under 26 U.S.C. 25;
Section1.28-0 also issued under 26 U.S.C. 28(d)(5);
Section 1.28-1 also issued under 26 U.S.C. 28(d)(5);
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 is also issued under 26 U.S.C. 42(n);
Section 1.43-3T also issued under 26 U.S.C. 43(c)(2)(B);
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);
Section 1.58-9T 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.
26 CFR 0.0 26 CFR Ch. I (4-1-92 Edition)
26 CFR 0.0 Internal Revenue Service, Treasury
26 CFR 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 Pub. L. 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.
(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).
26 CFR 1.0-1 Normal Taxes and Surtaxes
DETERMINATION OF TAX LIABILITY
26 CFR 1.0-1 Tax on Individuals
26 CFR 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:
(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 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):
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):
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:
(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 Puerto Rico during the entire taxable
year is, except as provided in section 933 with respect to Puerto Rican
source income, 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 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.
(T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 7332, 39
FR 44216, Dec. 23, 1974)
26 CFR 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)
26 CFR 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)
26 CFR 1.1(i)-1T Questions and answers relating to the tax on unearned income certain minor children (Temporary).
26 CFR 1.1(i)-1T 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.
26 CFR 1.1(i)-1T 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 ($500
15%). 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 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
10,000 3,300) and B and C's share of the tax is $825 (2,500 10,000
3,300) each. See A-5.
26 CFR 1.1(i)-1T 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 decuctions 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).
26 CFR 1.1(i)-1T 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.
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.
26 CFR 1.1(i)-1T 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.
26 CFR 1.1(i)-1T 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, or
are children from a prior marriage of the spouse of such child's parent.
26 CFR 1.1(i)-1T 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.
26 CFR 1.1(i)-1T 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, C will be liable for interest on the $50.
However, C will not have to pay any penalty on the delinquent amount.
26 CFR 1.1(i)-1T 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)
26 CFR 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 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 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:
(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:
(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)
26 CFR 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 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 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 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 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 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 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)
26 CFR 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 (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
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 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)
26 CFR 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 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 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 1.152-1. See paragraphs (c) and (d) of 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 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)
26 CFR 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, April 13, 1973)
26 CFR 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).
(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)
26 CFR 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.
26 CFR 1.4-4 Tax on Corporations
26 CFR 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 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:
(f) For special rules applicable to foreign corporations engaged in
trade or 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)
26 CFR 1.11-1 Changes in Rates During a Taxable Year
26 CFR 1.21-1 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 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 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
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 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:
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:
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:
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:
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:
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:
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:
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:
(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)
26 CFR 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 paragraph (d) and
the special rules contained in 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
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 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 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 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 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, 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
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 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 --
(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)
26 CFR 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 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 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, 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 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 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 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:
(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, 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 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 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 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 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 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, 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:
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 componets and renewable energy source improvements did not
diminish the original purpose of the farm and home loan program, the
1984 legislation added anther 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 solor
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 arrangements
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)
26 CFR 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 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 1.23-1 and paragraph (i) of 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 1.23-2(a)) and a renewable energy source expenditure (as
defined in 1.23-2(b)), the taxpayer may claim either a credit under
1.23-1(b) (relating to qualified energy conservation expenditures) or
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:
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 $300) and $225 to B ($1,500/$2,000 300). 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.
(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 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 $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 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 (
1.23-1(d)(1)), prior expenditures ( 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 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)
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)
26 CFR 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 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
( 1.23-2(d)(4)).
(3) The item meets the definition of solar energy property (see
1.23-2(f)), wind energy property (see 1.23-2(g)), or geothermal energy
property (see 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 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 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 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 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)
26 CFR 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
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 601.601 to include the item as an
energy-conserving component or as a renewable energy 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 cooling (see 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 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 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
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 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)
26 CFR 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 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 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 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 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
(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 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 1.25-1T through 1.25-8T, an
affidavit filed in connection with the requirements of 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)
26 CFR 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
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 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 ((.3 $50,000) + (.25 $100,000) + (.1 $50,000) + (.1
$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, 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 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 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 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.
(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 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 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 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 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 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 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)
26 CFR 1.25-3T Qualified mortgage credit certificate (Temporary).
(a) Definition of qualified mortgage credit certificate. For
purposes of 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 1.25-4T).
(c) Required form and information. A certificate meets the
requirements of this paragraph if it is in the form specified in
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 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 1.25-1T (b)(7)),
(ii) Any qualified home improvement loan (as defined in 1.25-1T
(b)(3)), and
(iii) Any qualified rehabilitation loan (as defined in 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 a 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 described 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 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 1.25-1T (b)(9)) applicable to that residence. In the case
of a targeted area residence (as defined in 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
mortage,
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 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 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
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 and affidavit stating that the 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 calender year following the
calendar year for which the issuer elected not to issue qualified
mortgage bonds under 1.25-4T with respect to that issue of mortgage
credit certificates. Thus, for example, if on October 1, 1984, and
issuing authority elects under 1.25-4T not to issue qualified 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 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 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 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 1.6709-1T with respect to the penalty for filing negligent or
fraudulent statements.
(T.D. 8023, 50 FR 19348, May 8, 1985)
26 CFR 1.25-4T Qualified mortgage credit certificate program
(Temporary).
(a) In general -- (1) Definition of qualified mortgage credit
certificate program. For purposes of 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 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 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.
(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, 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 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,
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 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:
Name of issuer:
Address of issuer:
TIN of issuer:
Reporting period:
(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 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 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
(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 prceding 3 calendar years for
single-family, owner-occupied residences in targeted areas within the
jurisdication 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 sufficient for County W to detrmine 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 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 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 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)
26 CFR 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.
(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 (2,000 x
(.2 x $50,000)). Since this amount does not exceed 20 percent of the
nonissued bond amount (.2 x $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 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
$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 (.2 $100 million); the excess credit 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)
26 CFR 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
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 1.25-3T(d),
relating to residence requirement,
(10) Whether the certificate meets the requirements of 1.25-3T(e),
relating to 3-year requirement,
(11) Whether the certificate meets the requirements of 1.25-3T(g),
relating to new mortgage requirement,
(12) Whether the certificate meets the requirements of 1.25-3T(i),
relating to prohibited mortgages,
(13) Whether the certificate meets the requirements of 1.25-3T(j),
relating to particular lenders,
(14) Whether the certificate meets the requirements of 1.25-3T(k),
relating to allocations to particular developments,
(15) Whether the certificate meets the requirements of 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)
26 CFR 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.
(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)
26 CFR 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 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)
26 CFR 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 1.28-1, this section lists the
paragraphs, subparagraphs, and subdivisions contained in 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.
(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)
26 CFR 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 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 1.28-1.
(iii) 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
(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 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 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 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, eg., 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 -- (1) 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).
(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 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.
(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 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)
26 CFR 1.28-1 Credits Against Tax
26 CFR 1.28-1 credits allowable
26 CFR 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.
26 CFR 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 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.
26 CFR 1.34-1 Credit against tax and exclusion from gross income in
case of dividends received by individuals.
(a) In general. (1) Section 34 provides a credit against the income
tax of an individual for certain dividends received after July 31, 1954,
and on or before December 31, 1964. The credit, subject to the
limitations provided in section 34(b), is equal to 4 percent of the
dividends received before January 1, 1964, and 2 percent of the
dividends received during the calendar year 1964. The credit is
allowable with respect to dividends received in any taxable year ending
after July 31, 1954, but applies only to dividends received on or before
December 31, 1964. The credit applies only to dividends which are
received from domestic corporations and which are included in the gross
income of the taxpayer. Section 116 provides for the exclusion from
gross income of the first $100 ($50 for dividends received in taxable
years beginning before January 1, 1964) of certain dividends received by
an individual. See 1.116-1. In determining which dividends are
entitled to the credit against income tax provided by section 34, the
exclusion from gross income provided in section 116 is applied to the
first dividends received in the taxable year. Since the exclusion
applies to dividends received at any time during a taxable year ending
after July 31, 1954, dividends received before August 1, 1954, may be
taken into account in determining the exclusion from gross income under
section 116 but do not constitute dividends for which a credit is
allowed.
(2) The application of section 34 (without regard to the limitations
provided in section 34(b)) may be illustrated by the following example:
Example. A, an individual who makes his return on the basis of the
calendar year, receives in the year 1954 the following dividends: $100
on March 1, $100 on June 1, $100 on September 1, and $100 on December 1.
$50 of the dividends received by A on March 1, 1954, is excluded from
gross income under section 116. The balance of the dividends received
in 1954, amounting to $350, is includible in the gross income of A.
Subject to the limitation in section 34(b) a credit of $8 is allowed
under section 34 (4 percent of $200, the amount of the dividends
received after July 31, 1954, that is, $100 received on September 1,
1954, and $100 received on December 1, 1954).
(b) Tax credit. The credit is used to reduce the tax imposed by
Subtitle A of the Code, including the alternative tax under section 1201
in the case of capital gains and the self-employment tax under chapter 2
of the Code; however, it may not be used by the taxpayer as a credit
against penalties, additions to the tax, or interest on delinquent
taxes.
(c) Joint return of husband and wife. (1) In the case of a joint
return the credit is determined on the basis of the dividends received
by both the husband and wife after taking into account the exclusion
allowed by section 116. See 1.116-1. The credit is allowable in the
case of a joint return on account of the dividends received by each
spouse without regard to whether the spouse would be liable for the tax
imposed by Subtitle A if the joint return had not been filed. However,
the limitations on amount of credit in section 34(b) are determined by
reference to the tax and the credit under section 33 required to be
shown on the joint return and to the combined taxable income of husband
and wife. For this purpose, it makes no difference whether the tax, the
credit, or the taxable income is attributable to one or the other
spouse. If both the husband and wife are entitled to the credit, their
combined credit shall not exceed the amount so computed.
(2) The application of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example 1. H and W, husband and wife, make a joint return for the
calendar year 1954. The only dividend received by either of them during
the year is a dividend received by H on September 1 in the amount of
$400. Subject to the limitations of section 34(b), the credit amounts
to $14 (4 percent of $350, the dividends included in gross income after
allowance of the exclusion of $50 under section 116).
Example 2. The facts are the same as in example (1) except that W
also received a dividend on September 1 of $30. Since this dividend
(being less than the maximum amount allowable as an exclusion under
section 116(a)) is excluded from W's gross income, it does not affect
the computation of the tax credit and the tax credit is the same as in
example (1).
Example 3. H and W, husband and wife, make a joint return for the
calendar year 1954. H and W each received a $400 dividend on September
1, 1954, and these were the only dividends received by them in 1954.
Since H and W may each exclude $50 of the dividends received by them,
$700 of dividend income is included in gross income. Subject to the
limitations in section 34(b), the credit against the tax of H and W
amounts to $28 (4 percent of $700).
(d) Individuals receiving dividends. Where two or more persons hold
stock as tenants in common, as joint tenants, or as tenants by the
entirety, the dividends received with respect to such stock shall be
considered as being received by each tenant to the extent that he is
entitled under local law to a share of such dividends. Where dividends
constitute community property under local law each spouse shall be
considered as receiving one-half of such dividends.
(e) Time dividends are received. In cases where it is necessary to
determine the time of receipt of dividends, the rules established to
determine in which taxable year dividends must be included in gross
income apply, including the rules relating to constructive receipt. See
section 451 and regulations thereunder.
(T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6777, 29
FR 17806, Dec. 16, 1964)
26 CFR 1.34-2 Limitations on amount of credit.
(a) Under section 34(b) the credit may not exceed the lesser of
either --
(1) The amount of the tax imposed by Chapter 1 of the Code for the
taxable year reduced by the foreign tax credit allowable under section
33, or
(2) Whichever of the following is applicable:
(i) In the case of a taxable year ending before January 1, 1955, or
beginning after December 31, 1963, 2 percent of the taxable income for
such taxable year;
(ii) In the case of a taxable year ending after December 31, 1954,
and beginning before January 1, 1964, 4 percent of the taxable income
for such taxable year. In the case of a taxpayer who computes his tax
under section 3 or who uses the standard deduction provided by section
141, the taxable income for the taxable year is the adjusted gross
income for the taxable year reduced by the standard deduction prescribed
in section 141 and the deductions for personal exemptions provided in
section 151. 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) The application of the limitations in paragraph (a) of this
section may be illustrated by the following example:
Example. Assume the following facts in the case of an individual
whose taxable year is the calendar year:
Computation of tax liability without regard to the dividend received
credit:
Computation of limitation under section 34(b)(1):
Computation of limitation under section 34(b)(2):
Dividends received credit allowable:
Computation of tax liability without regard to the dividend received
credit:
Computation of limitation under section 34(b)(1):
Computation of limitation under section 34(b)(2):
Dividends received credit allowable:
(T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6777, 29
FR 17807, Dec. 16, 1964)
26 CFR 1.34-3 Dividends to which the credit and exclusion apply.
(a) General rule. The credit under section 34 and the exclusion
under section 116 apply only to distributions of property defined as
dividends by section 316. Thus, the credit and the exclusion are not
allowed with respect to patronage dividends paid by either exempt or
taxable farm cooperatives. Nor are they allowed for distributions to
nonstockholding policyholders by an insurance company having shares of
stock or for any distribution by a mutual insurance company. See
paragraph (b) of this section for an additional restriction with respect
to stock life insurance companies. The credit and the exclusion are,
however, allowed with respect to dividends paid on capital stock by
nonexempt cooperatives and with respect to dividends paid on capital
stock by building and loan associations. However, see paragraph (b) of
this section with respect to so-called dividends paid by building and
loan associations ineligible for the credit and the exclusion. The
credit and the exclusion are allowed with respect to distributions from
any organization taxed as a corporation if the distribution falls within
the definition of a dividend in section 316.
(b) Dividends from certain corporations. (1) Section 34 (c) and (d)
contains further restrictions on the type of distributions which are
treated as dividends for purposes of the credit and exclusion. Thus, no
credit or exclusion is applicable with respect to dividends received
from a corporation organized under the China Trade Act, 1922; from
stock life insurance companies before January 1, 1959, in taxable years
ending before such date; from corporations which during their taxable
year of the distribution or their preceding taxable year were
corporations to which section 931 applies (relating to income from
sources within possessions of the United States); from corporations
which during the taxable year of the distribution or the preceding
taxable year are corporations exempt from tax either under section 501,
relating to charitable, etc., organizations, or under section 521,
relating to farmers' cooperative associations.
(2) So-called dividends paid by mutual savings banks, cooperative
banks, and building and loan associations which are allowed as a
deduction under section 591 are ineligible for the credit and exclusion.
(3) For special rules as to the limitation on the amount of dividends
for which a credit and exclusion are allowable in the case of dividends
paid by a regulated investment company, see section 854 and the
regulations thereunder.
(4) See section 857(c) and paragraph (d) of 1.857-4 for special
rules which deny a credit under section 34 and exclusion under section
116 in the case of dividends received from a real estate investment
trust with respect to a taxable year for which such trust is taxable
under part II, Subchapter M, Chapter 1 of the Code.
(T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6598, 27
FR 4092, Apr. 28, 1962; T.D. 6625, 27 FR 12541, Dec. 19, 1962)
26 CFR 1.34-4 Taxpayers not entitled to credit and exclusion.
(a) The credit or exclusion is not available to nonresident aliens
with respect to whom a tax is imposed for the taxable year under section
871(a). If the taxpayer elects under section 6014 to have the
Government compute his tax, the credit is not taken into account in such
computation although the taxpayer is allowed the exclusion under section
116.
(b) For treatment of dividends received by estates or trusts, and the
allocation of such dividends between an estate or trust and the
beneficiary thereof, see sections 642, 652, and 662 and the regulations
thereunder.
(c) For treatment of dividends received by a partnership see section
702 and the regulations thereunder.
(d) For treatment of dividends received by a common trust fund, see
section 584 and the regulations thereunder.
26 CFR 1.34-5 Effective date; taxable years ending after July 31,
1954, subject to the Internal Revenue Code of 1939.
Pursuant to section 7851(a)(1)(C), the regulations prescribed in
1.34-1 to 1.34-4, inclusive, shall also apply to taxable years beginning
before January 1, 1954, and ending after July 31, 1954, and to taxable
years beginning after December 31, 1953, and ending after July 31, 1954,
but before August 17, 1954, though such years are subject to the
Internal Revenue Code of 1939.
26 CFR 1.34-6 Dividends received after December 31, 1964.
In the case of dividends received after December 31, 1964, section 34
and the regulations issued thereunder do not apply.
(T.D. 6777, 29 FR 17807, Dec. 16, 1964)
26 CFR 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).
(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:
Since of the three figures ($135, $110, and $120), the lesser is
$110, A's credit under section 35 is limited to $110.
26 CFR 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).
26 CFR 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 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 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)
26 CFR 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
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:
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 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 to
H and W for 1977 is $139, computed as follows:
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)
26 CFR 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 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 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
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 1.37-1, B's credit for the elderly for
1977 under section 37(e) is $195, computed as follows:
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 1.37-1, their credit for the elderly is
$315, computed as follows:
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 1.37-1, H's credit for the elderly is $157.50, computed as follows:
(c) Subject to the limitation of section 37(c)(2) and paragraph (b)
of 1.37-1, W's credit for the elderly is computed as follows:
(T.D. 7743, 45 FR 84050, Dec. 22, 1980)
26 CFR 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)
26 CFR 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)
26 CFR 1.40-1 Taxable Years Beginning After December 31, 1986
Source: Sections 1.41-0 -- 1.41-9 appear by T.D. 8251, 54 FR 21204,
May 17, 1989, unless otherwise noted.
26 CFR 1.41-0 Table of contents.
This section lists the paragraphs contained in 1.41-0 through
1.41-9.
1.41-0 Table of Contents.
1.41-1 Introduction to regulations under section 41.
(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.
(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.
(a) General rule.
(b) Activities outside the United States.
(1) In-house research.
(2) Contract research.
(c) Social sciences arts 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.
(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.
(a) Controlled group of corporations; trade or businesses under
common control.
(1) In general.
(2) Definition of trade or business.
(3) Determination of common control.
(4) Examples.
(b) Minimum base period research expenses.
(c) Tax accounting periods used.
(1) In general.
(2) Special rule where timing of research is manipulated.
(d) Membership during taxable year in more than one group.
(e) Intra-group transactions.
(1) In general.
(2) In-house research expenses.
(3) Contract research expenses.
(4) Lease Payments.
(5) Payment for supplies.
(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.
26 CFR 1.41-1 Introduction to regulations under section 41.
Sections 1.41-2 through 1.41-9 deal only with certain provisions of
section 41. The following table identifies the provisions of section 41
that are dealt with, and lists each with the section of the regulations
in which it is covered:
Sections 1.41-4 and 1.41-6 deal with the definition of qualified
research and basic research for taxable years beginning after December
31, 1985. Section 1.41-3 also deals with 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 sections 30 and 44F. The regulations refer to these
sections as section 41 for conformity purposes. Of course, whether
section 41, 30 or 44F applies to a particular expenditure depends upon
when the expenditure was paid or incurred.
26 CFR 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 1.41-5(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 1.41-5(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 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 1.41-9(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, 1oss, 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 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 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 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, 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 1.41-5, 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 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:
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.
26 CFR 1.41-3 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 --
(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:
(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 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:
(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 1/3x
(($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).
1.41-4 Qualified research for taxable years beginning after December
31, 1985. (Reserved)
26 CFR 1.41-5 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 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
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 1.41-2(e)(2)) are not
treated as funding. For special rules regarding funding between
commonly controlled businesses, see 1.41-8(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) 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
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:
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 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.
26 CFR 1.41-6 Basic research for taxable years beginning after December 31, 1985. (Reserved)
26 CFR 1.41-7 Basic research for taxable years beginning before January
1, 1986.
(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 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 1.41-5(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.
26 CFR 1.41-8 Aggregation of expenditures.
(a) Controlled group of corporations; trades or businesses under
common control -- (1) In general. In determining the amount of research
credit allowed with respect to a trade or business that at the end of
its taxable year is a member of a controlled group of corporations or a
member of a group of trades or businesses under common control, all
members of the group are treated as a single taxpayer and the credit (if
any) allowed to the member is determined on the basis of its
proportionate share (if any) of the increase in qualified research
expenses of the aggregated group.
(2) Definition of trade or business. For purposes of this section, 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). 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.
(3) Determination of common control. For rules for determining
whether trades or businesses are under common control, see paragraphs
(b) through (g) of 1.52-1 except that the words ''singly or'' in
1.52-1(d)(1)(i) shall be treated as deleted.
(4) Examples. The following examples illustrate provisions of this
paragraph.
Example 1. (i) Facts. A controlled group of four corporations (all
of which are calendar-year taxpayers) had qualified research expenses
(''research expenses'') during the base period and taxable year as
follows:
(ii) Total credit. Because the research expenses of the four
corporations are treated as if made by one taxpayer, the total amount of
incremental expenses eligible for the credit is $35 ($55 increase
attributable to B, C, and D less $20 decrease attributable to A). The
total amount of credit allowable to members of the group is 20% of the
incremental amount or $7.00.
(iii) Allocation of credit. No amount of credit is allocated to A
since A's research expenses did not increase in the taxable year. The
$7.00 credit is allocated to B, C, and D, the members of the group that
increased their research expenses. This allocation is made on the basis
of the ratio of each corporation's increase in its research expenses to
the sum of increases in those expenses. Inasmuch as the total increase
made by those members of the group whose research expenses rose (B, C,
and D) was $55, B's share of the $7.00 credit is 5/55; C's share is
40/55; and D's share is 10/55.
Example 2. The facts are the same as in example (1) except that A
had zero research expenses in the taxable year. Thus, the controlled
group had a decrease rather than an increase in aggregate research
expenses. Accordingly, no amount of credit is allowable to any member
of the group even though B, C, and D actually increased their research
expenses in comparison with their own base period expenses.
(b) Minimum base period research expenses. For purposes of this
section, the rule in section 41(c)(3) (pertaining to minimum base period
research expenses) shall be applied only to the aggregate amount of base
period research expenses. See the treatment of corporation C in example
(1) of paragraph (a)(4) of this section.
(c) Tax accounting periods used -- (1) In general. The credit
allowable to a member of a controlled group of corporations or of a
group of trades or businesses under common control is that member's
share of the aggregate credit computed as of the end of such member's
taxable year. In computing the aggregate credit in the case of a group
whose members have different taxable years, a member shall generally
treat the taxable year of another member that ends with or within the
determination year of the computing member as the determination year of
that other member. The base period research expenses taken into account
with respect to a determination year of another member shall be the base
period research expenses determined for that year under 1.41-3, except
that 1.41-3(c)(2) shall be applied only at the aggregate level.
(2) Special rule where 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, the district director 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.
(d) 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 district director with audit
jurisdiction of the return will determine the group in which the
business is to be included.
(e) 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 qualified research expenses 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 qualified research 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
--
(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.
26 CFR 1.41-9 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, 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 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
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 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 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.
26 CFR 1.41-9 Taxable Years Beginning Before January 1, 1987
26 CFR 1.41-0A Credit or deduction for political and newsletter fund
contributions -- scope and note.
Section 41 allows a limited credit against the income tax for
political and newsletter fund contributions. Section 218 allows a
limited deduction for contributions. The Revenue Act of 1978, however,
increases the maximum annual credit under section 41 and repeals section
218. These changes are effective for political and newsletter fund
contributions payment of which is made in taxable years of the
contributor beginning after December 31, 1978. Sections 1.41-1A through
1.41-8A apply to both sections 41 and 218.
(T.D. 7603, 44 FR 18222, Mar. 27, 1979. Redesignated and amended by
T.D. 8251, 54 FR 21204, May 17, 1989)
26 CFR 1.41-1A Same -- definitions of certain items.
(a) Campaign committee. A ''campaign committee'' is any group
described in section 41(c)(1)(B). Thus, to be a campaign committee a
group must be organized and operated exclusively to further the
nomination or election of one or more candidates. That means it may
not, except as otherwise provided in 1.41-3A(a), spend any money for
any other purpose. Therefore, a group that engages in any general
political, educational, or legislative activities is not a campaign
committee. Such a group may, however, organize a separate campaign
committee exclusively to further the nomination or election of one or
more candidates.
(b) Candidate. A ''candidate'' is an individual described in section
41 (c)(2). A candidate remains a candidate until enough money has been
raised to pay the debts incurred in a previous campaign for elective
public office. For example, A, a candidate for Senator from State X in
1977, is elected to that office in 1978. A sustains a campaign debt
with respect to A's Senatorial campaign. A remains a candidate solely
for the purpose of soliciting contributions to extinguish the campaign
debt.
(c) Elective public office. An ''elective public office'' is any
governmental position for which one must be directly chosen by the
casting of votes by the general public or the Electoral College. It
does not, however, include any office or position in any national,
state, or local political party or similar organization, or membership
in the Electoral College.
(d) Furthering a candidacy. Expenditures further a candidacy within
the meaning of section 41(c)(1) (A) and (B) if they are directly related
to, and are intended to support, a candidate's campaign for elective
public office. Examples include payments for --
(1) Researching and polling campaign issues;
(2) Trips in connection with campaigning by the candidate or persons
acting on his or her behalf;
(3) Raising funds; and
(4) Campaign-related debts left over from a previous political
campaign.
(e) Meets the qualifications. An individual ''meets the
qualifications prescribed by law'' to hold an elective public office if
the individual can be reasonably expected to meet those qualifications
on or before the date the office is to be filled.
(f) Newsletter fund contribution. The term ''newsletter fund
contribution'' means a contribution of money or gift of money directly
to a fund described in section 527(g) (relating to the treatment of
newsletter funds as political organizations).
(g) Political contribution. A ''political contribution'' is a
contribution of money or gift of money directly to a person described in
section 41(c)(1). A political contribution is not limited to that
portion of the contribution or gift that is eligible as a credit under
section 41(b) or deduction under section 218(b).
(h) Publicly announces. An individual ''publicly announces'' that he
or she is a candidate by making a positive statement available for media
distribution that he or she is seeking nomination or election to a
specific elective public office. An example is a news release or other
statement by an individual intended for distribution via television,
radio, newspapers, or magazines within the geographic area associated
with the elective public office being sought which states that he or she
seeks nomination or election to the office. Incumbency in an office
does not constitute a public announcement that one is seeking reelection
to that office. Furthermore, if because of death or any other reason an
individual does not make a public announcement, the individual is not a
candidate even though the individual was about to make a public
announcement.
(T.D. 7603, 44 FR 18222, Mar. 27, 1979. Redesignated and amended by
T.D. 8251, 54 FR 21204, May 17, 1989)
26 CFR 1.41-2A Same -- limitations and special rules.
(a) When payment must be made. A taxpayer may elect the credit under
section 41 or the deduction under section 218 only if a political or
newsletter fund contribution is actually paid within the taxable year
for which the taxpayer claims the credit or deduction. The method of
accounting the taxpayer uses and the date the contribution is pledged
are irrelevant. Where a partnership makes a political or newsletter
fund contribution, each partner is considered as having paid his or her
distributive share of the political or newsletter fund contribution.
(b) Campaign committee supporting more than one individual. A
section 41 credit or section 218 deduction may be available for a
contribution of money to a campaign committee that supports, or intends
to support, more than one candidate if at least one individual it
supports is a candidate for the calendar year in which the contribution
is made. However, if a taxpayer indicates at the time the contribution
is made that it is for a specific individual, and that individual is not
a candidate for the calendar year in which the contribution is made, no
credit or deduction is available.
(c) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. B, an individual, makes a contribution of money in 1977
to the Good Government Committee, which is a campaign committee. The
Good Government Committee supports C and D in 1977. C is a candidate
for 1977. D is not a candidate for 1977. B may elect the credit under
section 41 or deduction under section 218 for the contribution in 1977.
Example 2. Assume the same facts as in example (1), except that B
earmarks the contribution solely to further the candidacy of D. B may
not elect the credit under section 41 or deduction under section 218 for
the 1977 contribution.
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.41-3A Same -- unspent contributions.
(a) General rule. Except as provided in paragraph (b) of this
section, all unspent political contributions must be used within a
reasonable period of time to make a deposit or contribution described in
section 527 (d).
(b) Special rules -- (1) Candidates. An individual who was a
candidate may retain unspent political contributions in reasonable
anticipation of using them solely to support his or her future candidacy
for any Federal, State, or local elective public office.
(2) Campaign committee. A campaign committee may retain unspent
political contributions in reasonable anticipation of using them to
support the future candidacy of any individual for any Federal, State,
or local elective public office.
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.41-4A Same -- procedure for electing a credit or deduction.
(a) Scope note. This section prescribes procedures for making the
election under sections 41 and 218 to take either a credit or deduction
for political and newsletter contributions.
(b) How to elect. A taxpayer elects the credit or deduction by
making the appropriate entries on his or her income tax return for the
taxable year in which the contribution is made.
(c) Changing or revoking one's election. The election may be changed
or revoked. Thus, a taxpayer may change an election from credit to
deduction or vice versa. In addition, if a taxpayer elects a credit or
deduction for a particular taxable year to which, it later turns out, he
or she is not entitled, the taxpayer must pay any additional tax that is
due as a result. A taxpayer may change or revoke the election by use of
an amended return.
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.41-5A Same -- verifications.
This section prescribes rules under sections 41(b)(3) and 218(b)(2)
to tell a taxpayer how to verify political and newsletter fund
contributions for which a credit or deduction is claimed. A taxpayer
must have a written receipt to substantiate any claim that a
contribution was made. A cancelled check, the payee of which is a
person or fund described in section 41(c) (1) or (5), ordinarily meets
this requirement. However, in appropriate cases, the Internal Revenue
Service may require a taxpayer to furnish additional proof that the
payee was a person or fund described in section 41(c) (1) or (5), or
that the purpose of the payment was to make a political or newsletter
fund contribution.
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.41-6A Same -- taxation of certain organizations.
See section 527 and the regulations thereunder for the tax treatment
of a person or fund described in section 41(c) (1) or (5) that is
treated as a section 527(e)(1) political organization.
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.41-7A Same -- transitional rule for past contributions.
A credit or deduction for a political contribution the payment of
which was made before January 1, 1980 will be allowed if it meets the
requirements for a credit or deduction under the notice of proposed
rulemaking published on September 19, 1972 (37 FR 19140).
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.41-8A Same -- effective dates.
(a) Political contributions. Except as otherwise provided, these
regulations apply to political contributions made in taxable years of
the contributor beginning after December 31, 1971.
(b) Newsletter fund contributions. These regulations apply to
newsletter fund contributions made in taxable years of the contributor
beginning after December 31, 1974.
(T.D. 7603, 44 FR 18223, Mar. 27, 1979. Redesignated by T.D. 8251, 54
FR 21204, May 17, 1989)
26 CFR 1.42-0 Table of contents.
This section lists the paragraphs contained in 1.42-1 and 1.42-2.
1.42-1 (Reserved)
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)
1.42-1 (Reserved)
26 CFR 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
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 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
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 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 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.
Tne 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 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., .08 x $100,000 x ( 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., .08 x $100,000, the
1987 credit alllocation, +.09 x $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 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 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. A taxpayer is required to
complete the Form 8609 on which a housing credit agency made the
applicable housing credit allocation and submit a copy of such Form 8609
with its Federal income tax return for each year in the compliance
period. Failure to comply with the requirement of the preceding
sentence with respect to any taxable year after the first taxable year
in the credit period shall be treated as a mathematical or clerical
error for purposes of the provisions of section 6213 (b)(1) and (g)(2).
(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 .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 .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, based on the effective
housing credit allocation from 1987, of $78,000 (i.e., $72,000 +
($200,000 .06 .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 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 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 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 and special rules -- (1) Completed form. For
purposes of this section, a form shall be treated as completed if the
State or local housing credit agency or the building owner has made a
good faith effort to complete the form in accordance with the form and
the instructions for the form.
(2) Manner of filing. A completed Form 8586, Low-Income Housing
Credit, shall 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 during the 10-year credit period.
A completed Form 8609 (or copy thereof) shall be filed with the owner's
Federal income tax return for each of the 15 taxable years in the
compliance period. If a housing credit allocation is not required to be
received by an owner under paragraph (f) of this section, the owner
shall obtain a blank copy of Form 8609 and fill in the address of the
building and the name and address of the owner in Part I. Part II of
Form 8609 shall be completed by the owner of the qualified low-income
building only for the first year the low-income housing credit is
claimed by the building owner. Part III of Form 8609 (Statement of
Qualification) shall be completed by the owner of the qualified
low-income building for each year of the 15-year compliance period.
(3) Revised or renumbered forms. If any form is revised or
renumbered, any reference in this section to the form shall be treated
as a reference to the revised or renumbered form.
(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 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)
26 CFR 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 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. 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 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)
26 CFR 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 Januray 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.
(2) Allowance of credit for taxable years beginning after December
31, 1976, and ending before Januray 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 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 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 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 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 of any nonresident
alien individual. As used in this subparagraph, the term ''nonresident
alien individual'' has the meaning provided by 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 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 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 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 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)
26 CFR 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 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)
26 CFR 1.43-1 Earned income credit for taxable years beginning before
January 1, 1979.
(a) Allowance of credit. For taxable years beginning before January
1, 1979 (and after December 31, 1974), subject to the limitations of
paragraph (b) of this section, an eligible individual (as defined in
paragraphs (c)(1) and (2) of this section) is allowed as a credit
against the tax imposed by chapter 1 for the taxable year, and amount
equal to 10 percent of the first $4,000 of earned income (as defined in
paragraph (c)(3) of this section) for the taxable year. For later
taxable years beginning after December 31, 1978, see 1.43-2.
(b) Limitations -- (1) Amount of credit. The amount of the credit
allowed by section 43 and paragraph (a) of this section for the taxable
year shall be reduced (but not below zero) by an amount equal to 10
percent of the excess over $4,000 of the greater of --
(i) The adjusted gross income (within the meaning of section 62 and
the regulations thereunder) of the individual for the taxable year, or
(ii) The earned income (as defined in paragraph (c)(3) of this
section) of the individual for the taxable year.
Thus, if the individual has adjusted gross income or earned income of
$8,000 or more, he will not be entitled to the credit.
(2) Married individuals. No credit shall be allowed by section 43
and paragraph (a) of this section in the case of an eligible individual
who is married (within the meaning of section 143 and the regulations
thereunder) unless such individual and his spouse file a single return
jointly 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 shall not apply to an
eligible individual who is not considered as married under section
143(b) and the regulations thereunder (relating to certain married
individuals living apart).
(3) Length of taxable year. No credit shall be allowed by section 43
and paragraph (a) of this section in the case of a taxable year covering
a period of less than 12 months. However, the rule of the preceding
sentence shall not apply to a taxable year closed by reason of the death
of the eligible individual.
(c) Definition -- (1) Eligible individual for taxable years beginning
after December 31, 1974, and ending before Janurary 1, 1976. For
purposes of this section, with respect to taxable years beginning after
December 31, 1974, and ending before Januray 1, 1976, an eligible
individual is an individual who meets the following requirements of this
subparagraph.
(i) For the entire taxable year, the individual maintains a household
(within the meaning of section 44A(f)(1) and the regulations thereunder)
in the United States, which household for the taxable year is the
principal place of abode of that individual and of one or more of the
children of that individual with respect to whom he is entitled to claim
a deduction under section 151(e)(1)(B) and the regulation thereunder
(relating to additional exemptions for dependents). The rules of
1.152-1(b) and of section 44A(f)(1) and the regulations thereunder shall
apply in determining whether such household is the principal place of
abode of that individual and of one or more of his children. In
addition, and only for purposes of determining a child's principal place
of abode under this subparagraph, in the case of a child who is adopted
during the taxable year (including a child who is placed with that
individual during the taxable year by an authorized placement agency for
legal adoption pursuant to a formal application filed by that individual
with the agency) or who becomes that individual's stepchild during the
taxable year, such household is only required to be the child's
principal place of abode during that portion of the taxable year when he
is that individual's child. However, in the case of a foster child who
is treated as a child of the individual by blood under section
152(b)(2), such household is required to be the child's principal place
of abode for the entire taxable year. The rules of this subdivision are
illustrated by the following provisions which relate to members of the
Armed Forces. A member of the United States Armed Forces who maintains
his household outside the United States for any part of the taxable year
is not an eligible individual. However, if he maintains his household
within the United States for the entire taxable year and he is only
temporarily absent therefrom by reason of military service and such
household is the principal place of abode both of himself and of his
child with respect to whom he is entitled to claim a deduction under
section 151(e)(1)(B), then he will be an eligible individual if he meets
the requirements of subdivision (ii) of this subparagraph.
(ii) For the entire taxable year, the individual is not entitled to
exclude any amount from gross income under section 911 and the
regulations thereunder (relating to earned income from sources without
the United States) or section 931 and the regulations thereunder
(relating to income from sources within the possessions of the United
States).
(2) Eligible individual for taxable years ending after December 31,
1975, and beginning before January 1, 1979. For purposes of this
section, with respect to taxable years ending after December 31, 1975,
and beginning before January 1, 1979, an eligible individual is an
individual who meets the following requirements of this subparagraph.
(i) For the entire taxable year, the individual maintains a household
(within the meaning of section 44A(f)(1) and the regulations thereunder)
in the United States.
(ii) For the entire taxable year, the household must be the principal
place of abode of the individual. The household must also be the
principal place of abode of one or more of the children of that
individual who either have not attained the age of 19 at the close of
the calendar year in which the taxable year of the individual begins or
are students, or are disabled within the meaning of section 72(m)(7) and
the regulations thereunder. However, a child of the individual who has
attained age 19, is not a student, and is disabled must be a child with
respect to whom the individual is entitled to claim a deduction under
section 151(e) and the regulations thereunder (relating to additional
exemptions for dependents). For purposes of section 43 and this
section, the children of the individual include a son, stepson,
daughter, stepdaughter, adopted son, or an adopted daughter of the
individual; a child who is placed with the individual by an authorized
placement agency for legal adoption pursuant to a formal application
filed by that individual with the agency; and a foster child of the
individual. For purposes of this subdivision (ii), a foster child is a
child who is in the care of a person or persons (other than the parents
or adopted parents of the child) who care for the child as their own
child. However, such a child is not a foster child if his natural or
adopted parents provide over half of the child's support for their
taxable year beginning in the calendar year in which the taxable year of
the person or persons caring for the child begins. The rules of
1.152-1(b) and of section 44A(f)(1) and the regulations thereunder shall
apply in determining whether the household maintained by the individual
is the principal place of abode of the individual and of one or more of
his children. In addition, and only for purposes of determining a
child's principal place of abode under this subparagraph, in the case of
a child who is adopted during the taxable year (including a child who is
placed with that individual during the taxable year by an authorized
placement agency for legal adoption pursuant to a formal application
filed by that individual with the agency) or who becomes that
individual's stepchild during the taxable year such household is only
required to be the child's principal place of abode during that portion
of the taxable year when he is that individual's child. However, in the
case of a foster child as defined in this subdivision (ii), such
household is required to be the child's principal place of abode for the
entire taxable year.
(iii) For the entire taxable year, the individual is not entitled to
exclude any amount from gross income under section 911 and the
regulations thereunder (relating to earned income from sources without
the United States) or has made an election under section 911(e) for that
section not to apply, and is not entitled to exclude any amount from
gross income under section 931 and the regulations thereunder (relating
to income from sources within the possessions of the United States).
(iv) The rules of this subparagraph are illustrated by the following
examples:
Example 1. A, who is a member of the United States Armed Forces,
maintains his household outside the United States for part of the
taxable year. A is not an eligible individual. However, if A maintains
his household within the United States for the entire taxable year and
is only temporarily absent therefrom by reason of military service and
if such household is his principal place of abode and the principal
place of abode of his child who has not attained the age of 19 at the
close of the calendar year in which the individual's taxable year begins
or is a student, then the individual will be an eligible individual if
he meets the requirements of subdivision (iii) of this subparagraph.
Example 2. B maintains his household within the United States for
the entire taxable year. The household is B's principal place of abode
and for the entire taxable year the principal place of abode of B's
grandchild who is 12 years old and whose natural parents are deceased.
The grandchild, who is not an adopted child, is in B's care and is cared
for as B's own child. In these circumstances, the grandchild is B's
foster child regardless of whether B provides sufficient support to
claim the grandchild as a dependent and B will be an eligible individual
if he meets the requirements of subdivision (iii) of this subparagraph.
Example 3. Assume the same facts as in example 2 except that the
deceased parents have left an estate sufficient to provide for all or
any part of the grandchild's material needs. In these circumstances,
the grandchild is B's foster child and B will be an eligible individual
if he meets the requirements of subdivision (iii) of this subparagraph.
Example 4. C maintains his household within the United States for
the entire taxable year. The household is his principal place of abode
and for the entire taxable year the principal place of abode of a 12
year old child whose natural parents are deceased and who is placed with
C by a State agency to provide the child with foster care. C receives
compensation from the State agency to cover all of the cost of
maintaining the child in his home. The child is in C's care and is
cared for as C's own child. In these circumstances, the child is C's
foster child and C will be an eligible individual if he meets the
requirements of subdivision (iii) of this subparagraph.
Example 5. Assume the same facts as in example 4 except that C
receives no compensation from the State agency. In these circumstances,
the child is C's foster child regardless of whether C provides
sufficient support to claim the child as a dependent and C will be an
eligible individual if he meets the requirements of subdivision (iii) of
this subparagraph.
Example 6. D maintains his household within the United States for
the entire taxable year. The household is D's principal place of abode
and for the entire taxable year the principal place of abode of D's
nephew who is 15 years old. Although D cares for his nephew as his own
child, the nephew's natural parents provide over half of his support.
Since the nephew's natural parents provide over half of his support the
nephew is not D's foster child and D is not an eligible individual.
Example 7. Assume the same facts as in example 6 except that the
nephew's grandparents provide over half of his support. Since D's
nephew's natural parents do not provide over half of his support, he is
D's foster child and D will be an eligible individual if D meets the
requirements of subdivision (iii) of this subparagraph.
(3) Earned income. For purposes of this section, earned income means
--
(i) Wages, salaries, tips, other employee compensation, and
(ii) Net earnings from self-employment (within the meaning of section
1402(a) and the regulations thereunder)
which are includible in the eligible individual's gross income for
the taxable year in which the credit is claimed. However, earned income
shall be computed without regard to any community property laws which
may otherwise be applicable. Earned income shall be reduced by any net
loss in earnings from self-employment. Earned income shall not include
amounts received as a pension or an annuity, 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), or an amount excluded from gross income under section 105 and
the regulations thereunder (relating to amounts received under accident
and health plans).
(d) Example. The application of this section is illustrated by the
following example. For purposes of this example, assume that the
eligible individual's adjusted gross income is equal to his earned
income and that he does not receive a pension or an annuity, or an
amount to which section 871(a), 911, or 931 applies.
Example. A and B (married individuals) maintain a household within
the United States which is their principal place of abode and the
principal place of abode of their two children who are 12 and 14 years
old. A and B are calendar year taxpayers and, for 1977, they file a
joint return. A and B have a total earned income of $7,500 (computed
without regard to any community property laws) and have adjusted gross
income of less than $7,500. The earned income credit of $50 is
determined as follows:
(e) Effective dates. The rules of this section apply only for
taxable years beginning both after December 31, 1974, and before January
1, 1979. For later taxable years beginning after December 31, 1978, see
1.43-2.
(T.D. 7537, 43 FR 13877, Apr. 3, 1978, as amended by T.D. 7683, 45 FR
16175, Mar. 13, 1980)
26 CFR 1.43-2 Earned income credit for taxable years beginning after
December 31, 1978.
(a) Allowance of credit. For taxable years beginning after December
31, 1978, subject to the limitations of paragraph (b) of this section,
an eligible individual (as defined in paragraph (c)(1) of this section)
is allowed as a credit against the tax imposed by subtitle A of the Code
for the taxable year, an amount equal to 10 percent of the first $5,000
of earned income (as defined in paragraph (c)(2) of this section) for
the taxable year. For earlier taxable years beginning before January 1,
1979, see 1.43-1.
(b) Limitations -- (1) Amount of credit. The amount of the credit
allowed by section 43 and paragraph (a) of this section for the taxable
year must not exceed the excess, if any, of $500 over 12.5 percent of
that amount of the adjusted gross income (or, if greater, the earned
income) of the taxpayer for the taxable year which exceeds $6,000. For
the meaning of the term ''earned income,'' see paragraph (c)(2) of this
section. Adjusted gross income is determined under section 62 and the
regulations thereunder. If an individual has adjusted gross income or
earned income of $10,000 or more, the individual is not entitled to the
credit.
(2) Married individuals. No credit is allowed by section 43 and
paragraph (a) of this section in the case of an eligible individual who
is married (within the meaning of section 143 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 143(b) and the regulations thereunder (relating to certain
married individuals living apart).
(3) Length of taxable year. No credit is allowed by section 43 and
paragraph (a) of this section 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) Eligible individual. For purposes of this
section, an eligible individual is an individual who meets the following
requirements of this paragraph (c)(1).
(i) For the taxable year the individual must meet any one of the
following three requirements set forth, respectively, in (A), (B), and
(C) of this subdivision (i).
(A) The individual must be married (within the meaning of section 143
and the regulations thereunder) and be entitled to a deduction under
section 151 for a child (within the meaning of section 151(e)(3) and the
regulations thereunder). The child must have the same principal place
of abode (as defined in 1.2-2(c)) as the individual and that principal
place of abode must be in the United States for the entire taxable year.
(B) The individual must qualify as a surviving spouse (as determined
under section 2(a) and the regulations thereunder). Thus, the spouse of
the individual must have died within the period of the 2 taxable years
immediately preceding the individual's taxable year. Also, the
individual must have furnished over half the cost of maintaining as the
individual's home a household in the United States for the entire
taxable year which is the principal place of abode of a child of the
individual who qualifies as a dependent for whom the individual is
entitled to a deduction under section 151.
(C) The individual must qualify as a head of household (as determined
under section 2(b) and the regulations thereunder but without regard to
section 2(b)(1)(A)(ii) and (B) and the regulations, thereunder). Thus,
the individual cannot be married as of the close of the taxable year and
also cannot qualify as a surviving spouse under section 2(a). Also, the
individual must have furnished over half the cost of maintaining as the
individual's home a household in the United States for the entire
taxable year which is the principal place of abode of a child or
descendant of the individual who is unmarried or who qualifies as a
dependent for whom the individual is entitled to a deduction under
section 151.
(ii) For the entire taxable year, the individual must not be entitled
to exclude any amount from gross income under section 911 (relating to
earned income by individuals in certain camps outside the United States)
or section 931 and the regulations thereunder (relating to income from
sources within the possessions of the United States).
(iii) The rules of this paragraph (c)(1) are illustrated by the
following examples:
Example 1. A, who is married and a member of the United States Armed
Forces, maintains his household outside the United States for part of
the taxable year. A is not an eligible individual. However, if A
maintains his household inside the United States for the entire taxable
year and is only temporarily absent therefrom by reason of military
service and if the household is his principal place of abode and the
principal place of abode of his child who receives over half of his
support from the taxpayer for the calendar year in which the taxable
year of the taxpayer begins and who either has less than $1,000 of gross
income for the calendar year in which the individual's taxable year
begins or who has not attained the age of 19 at the close of the
calendar year in which the individual's taxable year begins or is a
student, then the individual is an eligible individual if he meets the
requirements of subdivision (ii) of this paragraph.
Example 2 B's wife died in 1975 and B has not remarried. For his
entire taxable year beginning January 1, 1979, B maintains his household
inside the United States. The household is, for the entire taxable
year, B's principal place of abode and the principal place of abode of
B's unmarried grandchild whose natural parents are deceased. Thus B
qualifies as a head of household (as determined under section 2(b)
without regard to subparagraphs (A)(ii) and (B) of section 2(b)(1)). In
these circumstances, regardless of whether B provides sufficient support
to claim the grandchild as a dependent, B is an eligible individual if
he meets the requirements of subdivision (ii) of this paragraph.
Example 3. C is married and maintains his household inside the
United States for the entire taxable year. The household is his
principal place of abode and, for the entire year, is also the principal
place of abode of a 12 year old child whose natural parents are deceased
and who is placed with C by a State agency to provide the child with
foster care. C receives compensation from the State agency to cover all
of the cost of maintaining the child in his home. The child is in C's
care and is cared for as C's own child. In these circumstances, the
child is C's foster child, but C is not able to claim the child as a
dependent since C did not provide half the child's support for the year.
C is not eligible for the earned income credit.
Example 4. Assume the same facts as in exampe (3) except that C
receives no compensation from the State agency, and C provides over half
the child's support and is able to claim the child as a dependent. C is
an eligible individual if he meets the requirements of subdivision (ii)
of this paragraph.
Example 5. D's husband died in 1974 and D has not remarried. For
the entire taxable year beginning January 1, 1979, D maintains her
household inside the United States. The household is D's principal
place of abode and, for the entire taxable year, is also the principal
place of abode of D's unmarried son. D cares for her son in all
respects except that her parents provide over half of the son's support.
D qualifies as a head of household (as determined under section 2(b)
without regard to subparagraph (A)(ii) and (B) of section 2(b)(1)). D
is an eligible individual if D meets the requirements of subdivision
(ii) of this paragraph.
Example 6. Assume the same facts as in example 5 except that D is
married. Since D cannot qualify as a head of household, and D's son
cannot be claimed as D's dependent, D is not an eligible individual.
(2) Earned income. For purposes of this section, earned income means
--
(i) Wages, salaries, tips, other employee compensation, and
(iii) Net earnings from self-employment (within the meaning of
section 1402(a) and the regulations thereunder).
Earned income includes compensation excluded from gross income, such
as disability income excluded under section 105(d), the rental value of
a parsonage excluded under section 107, and the value of meals and
lodging furnished for the convenience of the employer excluded under
section 119. 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) Examples. The application of this section is illustrated by the
following examples. For purposes of these examples, assume that the
eligible individual does not receive a pension, an annuity, or an amount
to which section 871(a), 911, or 931 applies.
Example 1. A and B (married individuals) maintain a household inside
the United States which is their principal place of abode and the
principal place of abode of their two children who are 12 and 14 years
old. A and B are calendar year taxpayers and, for 1979, they file a
joint return. A and B have a total earned income of $7,600 (computed
without regard to any community property laws) and have adjusted gross
income of less than $7,600. The earned income credit of $300 is
determined as follows:
Example 2. Assume the same facts as in example 1 except that A and B
have earned income of $4,000 and adjusted gross income of $7,000. The
earned income credit of $375 is determined as follows:
(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 Code for purposes of
determining the amount of any credit (other than the earned income
credit) allowable under Subpart A, Part IV, Subchapter A, Chapter 1 of
the Code.
(T.D. 7683, 45 FR 16175, Mar. 13, 1980)
26 CFR 1.43-3T Certification (Temporary).
(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 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 and
(2) 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 production 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 acreage that was substantially
unaffected by a previously implemented project, a precise delineation of
the acreage affected by the previously implemented project;
(B) If the expansion affects a reservoir that was unaffected by a
previously implemented project, a precise delineation of the reservoir
affected by the previously implemented project; or
(C) 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.
(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.
(e) Effective date. Section 1.43-3T is effective for taxable years
beginning after December 31, 1990.
(T.D. 8384, 56 FR 67177, Dec.30, 1991; 57 FR 6074, Feb. 20, 1992;
57 FR 6353, Feb. 24, 1992)
26 CFR 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 1.44-5) which is property to which section 44 applies
(as provided in 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 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 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)
26 CFR 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:
(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 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 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 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:
(T.D. 7391, 40 FR 55852, Dec. 2, 1975; 40 FR 58138, Dec. 15, 1975)
26 CFR 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
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 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 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 lake front 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 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 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 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:
1001 Statements or entries generally.
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)
26 CFR 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 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 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 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 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
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 1.44-5(a)).
(T.D. 7391, 40 FR 55854, Dec. 2, 1975; 40 FR 58138, Dec. 15, 1975)
26 CFR 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 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
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).
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)
26 CFR 1.44A-1 Expenses for household and dependent care services
necessary for gainful employment.
(a) In general. (1) This section applies only for expenses incurred
in taxable years beginning after December 31, 1975. For deductibility
of expenses incurred in taxable years beginning before January 1, 1972,
see 1.214-1. For deductibility of expenses incurred in taxable years
beginning after December 31, 1971, and before January 1, 1976, see
1.214A-1 through 1.214A-5.
(2) Section 44A allows a credit against the tax imposed by chapter 1
of the Code to an individual who maintains a household (within the
meaning of paragraph (d) of this section) which includes as a member one
or more qualifying individuals (as defined in paragraph (b) of this
section). The amount of the credit is equal to the applicable
percentage of the employment-related expenses (as defined in paragraph
(c) of this section) paid by the individual during the taxable year (but
subject to the limits prescribed in 1.44A-2(a)). However, the credit
cannot exceed the tax imposed by chapter 1, reduced by the sum of the
allowable credits enumerated in section 44A(b). The term ''applicable
percentage'' means 30 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 $10,000, but in no event shall the
percent be less than 20 percent. Thus, for example, if a taxpayer's
adjusted gross income is over $10,000, but less than $12,000.01, the
applicable percentage is 29 percent. (For expenses incurred in taxable
years beginning before January 1, 1982, the applicable percentage is a
flat 20 percent).
(3) Generally, the credit for employment-related expenses is
allowable, regardless of the taxpayer's method of accounting, only for
expenses which are actually paid during the taxable year and which are
incurred during the taxable year or were incurred during a prior taxable
year beginning after December 31, 1975. If the expenses are incurred
but not paid during the taxable year, no credit may be taken for that
year on account of those expenses. Thus, if an expense is incurred in
the last month of a taxable year but not paid until the following
taxable year, a credit for the expense is not allowed for the earlier
taxable year but is allowed for the following taxable year. However, if
an expense is incurred in a taxable year beginning before January 1,
1976, and paid in a later taxable year, no credit is allowed with
respect to the expense under section 44A. Section 214 and the
regulations thereunder are applicable in determining whether a deduction
for the expense is allowed in the year of payment.
(4) Since an expense cannot be an employment-related expense until
the services for which the expense was incurred are performed (see
paragraph (c) of this section), prepaid expenses may be claimed only in
the taxable year in which the services are performed.
(5) The requirements of section 44A, this section and 1.44A-2
through 1.44A-4 are applied to expenses as of the time they are incurred
regardless of when they are paid.
(6) For special rules relating to employment-related expenses which
also qualify as medical expenses deductible under section 213, see
1.44A-4(b).
(7) For substantiation of the credit, see paragraph (e) of this
section.
(b) Qualifying individual -- (1) In general. A person is considered
to be a qualifying individual if he or she is --
(i) The taxpayer's dependent who is under the age of 15 and is an
individual for whom the taxpayer is entitled to a deduction for a
personal exemption under section 151(e);
(ii) The taxpayer's dependent (not described in subdivision (i)) who
is physically or mentally incapable of self-care; or
(iii) The taxpayer's spouse who is physically or mentally incapable
of self-care.
The term ''dependent,'' as used in this paragraph (b)(1), includes
any individual who is a dependent within the meaning of section 152.
However, see paragraph (b)(2) of this section for special rules for
determining which parent may treat a child as a qualifying individual
where the parents are divorced, legally separated, or separated under a
written separation agreement.
(2) Special dependency test in case of divorced or separated parents.
A child (as defined in section 151(e)(3)) who --
(i) Is under age 15 or is physically or mentally incapable of
self-care,
(ii) Receives over half of his or her support during the calendar
year from his or her parents who are divorced or legally separated under
a decree of divorce or separate maintenance or who are separated under a
written separation agreement, and
(iii) Is in the custody of one or both of his or her parents for more
than one-half of the calendar year,
is treated for any taxable year beginning in the calendar year as a
qualifying individual (described in subdivision (i) or (ii), as the case
may be, of paragraph (b)(1) of this section) of that parent who has
custody for a longer period during the calendar year than the other
parent. Accordingly, a child may be treated as a qualifying individual
of a parent even though the parent is not entitled to a dependency
exemption for the child. The child cannot be treated as a qualifying
individual with respect to more than one parent.
(3) Qualification on a daily basis. The status of a person as a
qualifying individual is determined on a daily basis. Thus, if a
dependent or spouse of a taxpayer ceases to be a qualifying individual
on September 16, the dependent or spouse is treated as a qualifying
individual through September 15 only.
(4) Physical or mental incapacity. An individual is considered to be
physically or mentally incapable of self-care if as a result of a
physical or mental defect the individual is incapable of caring for his
or her hygienical or nutritional needs, or requires full-time attention
of another person for his or her own safety or the safety of others.
The fact that an individual, by reason of a physical or mental defect,
is unable to engage in any substantial gainful activity, or is unable to
perform the normal household functions of a homemaker or to care for
minor children, does not of itself establish that the individual is
physically or mentally incapable of self-care. An individual who is
physically handicapped or is mentally defective, and for such reason
requires constant attention of another person, is considered to be
physically or mentally incapable of self-care.
(c) Employment-related expenses -- (1) Gainful employment -- (i) In
general. Expenses are considered to be employment-related expenses only
if they are incurred to enable the taxpayer to be gainfully employed and
are paid for household services or for the care of one or more
qualifying individuals. The expenses must be incurred while the
taxpayer is gainfully employed or is in active search of gainful
employment. The employment may consist of service either within or
without the home of the taxpayer and may include self-employment. An
expense is not considered to be employment-related merely because it is
incurred while the taxpayer is gainfully employed. The purpose of the
expense must be to enable the taxpayer to be gainfully employed.
Volunteer work for a nominal salary does not constitute gainful
employment. Whether the purpose of an expense is to enable the taxpayer
to be gainfully employed depends upon the facts and circumstances of the
particular case. Any tax required to be paid by the taxpayer under
section 3111 (relating to the Federal Insurance Contributions Act) and
3301 (relating to the Federal Unemployment Tax Act), or under similar
State payroll taxes, in respect of any wages which otherwise constitute
employment-related expenses is considered to be an employment-related
expense.
(ii) Determination of period of employment on a daily basis. An
allocation of expenses is required on a daily basis when the expenses
cover any period during part of which the taxpayer is gainfully employed
or is in active search of gainful employment and during the other part
of which there is no employment or active search for gainful employment.
Thus, for example, if a taxpayer incurs during each month of the
taxable year $60 of expenses which would be employment-related if he or
she were gainfully employed all year, and the taxpayer is gainfully
employed, or in active search of gainful employment, for only 2 months
and 10 days during such year, the amount of employment-related expenses
is limited to $140.
(2) Household services. Expenses are considered to be paid for
household services if they are paid for the performance in and about the
taxpayer's home of ordinary and usual services necessary to the
maintenance of the household. However, expenses are not considered as
paid for household services unless the expenses are attributable in part
to the care of the qualifying individual. Thus, amounts paid for the
services of a domestic maid or cook are considered to be expenses paid
for household services if a part of those services is provided to the
qualifying individual. Amounts paid for the services of an individual
who is employed as a chauffeur, bartender, or gardener, however, are not
considered to be expenses paid for household services.
(3) Care of qualifing individual -- (i) In general. The primary
purpose of expenses for the care of a qualifying individual must be to
assure that individual's well-being and protection. Not all benefits
bestowed upon a qualifying individual are considered as provided for the
individual's care. Accordingly, amounts paid to provide food, clothing,
or education are not expenses paid for the care of a qualifying
individual. However, where the manner of providing care is such that
the expense which is incurred includes expenses for other benefits which
are incident to and inseparably a part of the care, the full amount of
the expense is considered to be incurred for care. Thus, for example,
the full amount paid to a nursery school in which a qualifying child is
enrolled is considered as being for the care of the child, even though
the school also furnishes lunch and educational services. Educational
expenses incurred for a child in the first or higher grade level are not
expenses incurred for the care of a qualifying individual. Expenses
incurred for transportation of a qualifying individual described in
paragraph (b)(1)(i) of this section between the taxpayer's household and
a place outside the taxpayer's household where services for the care of
the qualifying individual are provided are not incurred for the care of
a qualifying individual.
(ii) Manner of providing care. The manner of providing the care need
not be the least expensive alternative available to the taxpayer. For
example, the taxpayer's mother may reside at the taxpayer's home and be
available to provide adequate care at no cost for the taxpayer's wife
who is physically or mentally incapable of caring for herself.
Nevertheless, the expenses incurred in providing a nurse for the wife
may be an expense for the care of the wife. See paragraph (c)(1)(i) of
this section with respect to the requirement that the expense must be
for the purpose of permitting the taxpayer to be gainfully employed.
(4) Services outside the taxpayer's household. The credit is allowed
under section 44A with respect to employment-related expenses incurred
for services performed outside the taxpayer's household only if those
expenses are incurred for the care of --
(i) One or more qualifying individuals who are described in paragraph
(b)(1)(i) of this section; or
(ii) One or more qualifying individuals (as to expenses incurred for
taxable years beginning after December 31, 1981) who are described in
paragraph (b)(1) (ii) or (iii) of this section and who regularly spend
at least 8 hours each day in the taxpayer's household.
(5) Dependent care centers. The credit is allowed under section 44A
with respect to employment-related expenses incurred in taxable years
beginning after December 31, 1981, for services provided outside the
taxpayer's household by a dependent care center only if --
(i) The center complies with all applicable laws and regulations of a
State or unit of local government (e.g., State or local requirements for
licensing, if applicable, and building and fire Code regulations); and
(ii) The requirement provided in paragraph (c)(4)(i) or (ii) of this
section is met.
The term ''dependent care center'' means any facility that provides
full-time or part-time care for more than six individuals (other than
residents of the facility) on a regular basis during the taxpayer's
taxable year, and receives a fee, payment, or grant for providing
services for any such individuals (regardless of whether such facility
is operated for profit). For purposes of the preceding sentence, a
facility will be presumed to provide full-time or part-time care for six
or less individuals on a regular basis during the taxpayer's taxable
year if the facility has six or less individuals (including the
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 in the case where the 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.
(6) Allocation of expenses. Where a portion of an expense is for
household services or for the care of a qualifying individual and a
portion of such expense is for other purposes, a reasonable allocation
must be made and only the portion of the expense paid which is
attributable to such household services or care is considered to be an
employment-related expense. No allocation is required to be made,
however, if the portion of expense for the other purpose is minimal or
insignificant. An allocation must be made, for example, if a servant
performs household duties, cares for the qualifying children of the
taxpayer, and also performs social services for the taxpayer (for which
a deduction is not allowable) or clerical services in the office of the
taxpayer outside the home (for which a deduction may be allowable under
section 162). Employment-related expenses include household service
expenses which are provided in conjunction with the care of a qualifying
individual. Thus, if an expense is in part attributable to the care of
a qualifying individual and in part to household services, no allocation
is required.
(7) Illustrations. The application of this paragraph (c) may be
illustrated by the following examples:
Example 1. The taxpayer lives with her mother who is physically
incapable of caring for herself. In order to be gainfully employed the
taxpayer hires a practical nurse whose sole duty consists of providing
for the care of the mother in the home while the taxpayer is at work.
All amounts spent for the services of the nurse are employment-related
expenses.
Example 2. The taxpayer has a dependent child 10 years of age who
has been attending public school. The taxpayer, who has been working
part time, is offered a position involving full-time employment which
she can accept only if the child is placed in a boarding school. The
taxpayer accepts the position and the child is sent to a boarding
school. The expenses paid to the school must be allocated between that
part of the expenses which represents care for the child and that part
which represents tuition for education. The part of the expense
representing care of the child is incurred for the purpose of permitting
the taxpayer to be gainfully employed.
Example 3. The taxpayer, in order to be gainfully employed, employs
a full-time housekeeper who cares for the taxpayer's two children, aged
9 and 15 years, respectively, performs regular household services of
cleaning and cooking, and chauffeurs the taxpayer to and from his place
of employment. The chauffeuring service never requires more than 30
minutes out of the total period of employment each day. No allocation
is required for purposes of determining the portion of the expense
attributable to the chauffeuring (not a household service expense) since
it is de minimis. Further, no allocation is required for the purpose of
determining the portion of the expense attributable to the care of the
15-year-old child (not a qualifying individual) since the household
expense is in part attributable to the care of the 9-year-old child, who
is a qualifying individual. Accordingly, the entire expense of
employing the housekeeper is an employment-related expense. However,
the total amount of employment-related expenses taken into account would
be limited to the amount allowable for one qualifying individual.
(d) Maintenance of a household -- (1) In general. An individual is
considered to have maintained a household for the taxable year (or
lesser period) only if the individual (and his or her spouse if the
individual is married) have furnished over one-half of the cost incurred
for such taxable year (or lesser period) in maintaining the household.
The household must actually constitute for the taxable year the
principal place of abode of the taxpayer and the qualifying individual
or individuals described in paragraph (b) of this section. It is not
sufficient that the taxpayer maintain the household without being its
occupant. A physical change in the location of the home does not,
however, prevent the home from constituting the principal place of abode
of the taxpayer and a qualifying individual. The fact that an
individual is born or dies during the taxable year does not prevent a
home from constituting his or her principal place of abode for such
year. An individual is not considered to have terminated a household as
his or her principal place of abode merely by reason of temporary
absences therefrom by reason of illness, education, business, vacation,
military service, or a custody agreement.
(2) Two or more families. Solely for purposes of section 44A and
this section, if two or more families occupy living quarters in common,
each of the families is treated as constituting a separate household,
and the taxpayer who provides more than one-half of the costs of
maintaining such a separate household is treated as maintaining that
household. Thus, for example, if two unrelated taxpayers each with
children occupy living quarters in common and each taxpayer pays more
than one-half of the household costs incurred by each respective family,
each taxpayer will be treated as maintaining a separate household.
(3) Costs of maintaining a household. The costs of maintaining a
household are the expenses incurred for the mutual benefit of the
occupants thereof by reason of its operation as the principal place of
abode of the occupants. 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. These
expenses do not include the cost of clothing, education, medical
treatment, vacations, life insurance, or transportation or payments on
mortgage principal or for the purchase, permanent improvement,
betterment, or replacement of property. Further, the costs of
maintaining a household do not include the value of services performed
in the household by a qualifying individual described in paragraph (b)
of this section. An expense incurred by a taxpayer which is paid or
reimbursed by another is not considered as a cost of maintaining a
household.
(4) Monthly proration of annual costs. In determining the cost
incurred for a period of less than a taxable year in maintaining a
household, the cost incurred during the entire taxable year must be
prorated on the basis of the number of calendar months within such
lesser period. For this purpose a period of less than a calendar month
will be treated as a calendar month. Thus, for example, if the cost of
maintaining a household for a taxable year is $6,600, and the period in
respect of which a determination is being made under section 44A is from
June 20 to December 31, the taxpayer must furnish more than $1,925
(($6,600 7/12) 50 percent) in maintaining the household from June 1 to
December 31.
(e) Substantiation. A taxpayer claiming a credit under paragraph (a)
of this section for employment-related expenses must substantiate by
adequate records or other sufficient evidence any credit taken under
this section. For example, if requested, the taxpayer must furnish
information as to the nature and period of the physical or mental
incapacity of any dependent or spouse in respect of whom a credit is
claimed, including necessary information from the attending physician as
to the nature of the physical or mental incapacity.
(Secs. 44A(g) and 7805 of the Internal Revenue Code of 1954 (90 Stat.
1565, 26 U.S.C. 44A(g); 68A Stat. 917, 26 U.S.C. 7805))
(T.D. 7643, 44 FR 50332, Aug. 28, 1979, as amended by T.D. 7951, 49
FR 18091, Apr. 27, 1984)
26 CFR 1.44A-2 Limitations on amount creditable.
(a) Annual dollar limit on amount creditable. The amount of the
employment-related expenses incurred during any taxable year which may
be taken into account under 1.44A-1 (a) cannot exceed --
(1) $2,400 ($2,000 in the case of expenses incurred in taxable years
beginning before January 1, 1982) if there is one qualifying individual
with respect to the taxpayer at any time during the taxable year, or
(2) $4,800 ($4,000 in the case of expenses incurred in taxable years
beginning before January 1, 1982) if there are two or more qualifying
individuals with respect to the taxpayer at any one time during the
taxable year.
For example, a calendar year taxpayer whose only qualifying
individual reaches age 15 on April 1, 1982, is subject for 1982 to the
entire annual dollar limit of $2,400, without proration of the $2,400
limit. However, only expenses incurred prior to the child's 15th
birthday may be employment-related expenses.
(b) Earned income limitation -- (1) In general. The amount of
employment-related expenses incurred during any taxable year which may
be taken into account under 1.44A-1(a) cannot exceed --
(i) For an individual not married at the close of the year, the
individual's earned income for the year, or
(ii) For an individual married at the close of the year, the lesser
of the individual's earned income or the earned income of his or her
spouse for the year.
For purposes of this paragraph (b)(1), the earned income of only the
spouse to whom the taxpayer is married at the close of the year is taken
into account (and not the earned income of another spouse who died or
was divorced from the taxpayer during the year). Further, the spouse's
earned income for the entire year is taken into account, even though the
taxpayer and his or her spouse were married for only a part of the year.
For purposes of this paragraph (b), certain married individuals legally
separated or living apart are treated as not married (see 1.44A-3 (b)
and (c), respectively).
(2) Earned income. For purposes of this section, earned income means
--
(i) Wages, salaries, tips, other employee compensation, and
(ii) Net earnings from self-employment (within the meaning of section
1402(a) and the regulations thereunder).
For taxable years beginning before January 1, 1979, earned income
includes only amounts described in subdivision (i) or (ii) of this
paragraph (b)(2) which are includible in the eligible individual's gross
income for the taxable year of the individual in which the credit is
claimed. For all taxable years, however, 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 or an annuity 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).
(3) Special rule for spouse who is a student or incapable of
self-care. (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 1.44A-1(b)(1)(iii), to be gainfully
employed and to have earned income of not less than --
(A) $200 ($166 for taxable years beginning before January 1, 1982) if
there is one qualifying individual with respect to the taxpayer at any
one time during the taxable year, or
(B) $400 ($333 for taxable years beginning before January 1, 1982),
if there are two or more qualifying individuals with respect to the
taxpayer at any one time during the taxable year.
However, in the case of any husband and wife, this subparagraph shall
apply with respect to only one spouse for any one month.
(ii) A ''full-time student'' is an individual who is enrolled at and
attends and educational institution during each of 5 calendar months of
the taxable year of the taxpayer for the number of course hours which is
considered to be a full-time course of study. The enrollment for 5
calendar months need not be consecutive. School attendance exclusively
at night does not constitute a full-time course of study. However, a
full-time course of study may include some attendance at night.
(iii) For the definition of ''educational institution'', see
1.151-3(c).
(4) Illustrations. The application of this paragraph may be
illustrated by the following examples:
Example 1. During the 1982 taxable year, A, a married taxpayer,
incurs and pays employment-related expenses of $4,000 for the care of a
qualifying individual. A's earned income for the taxable year is
$20,000 and his wife's earned income is $1,500. Under these
circumstances, the amount of employment-related expenses for the year
which may be taken into account under 1.44A-1(a) is $1,500, determined
as follows:
Employment-related expenses incurred during taxable year ($4,000, but
limited to $2,400 by paragraph (a)(1) of this section), . . . . . .
$2,400
Application of paragraph (b)(1)(ii) of this section
(employment-related expenses, may not exceed wife's earned income of
$1,500 . . . . . $1,500
Employment-related expenses taken into account . . . . . $1,500
Example 2. Assume the same facts as in example 1 except that A's
wife is a full-time student for nine months of the taxable year and
earns no income for the year. Under these circumstances, the amount of
employment-related expenses for the year which may be taken into account
under 1.44A-1(a) is $1,800, determined as follows:
Employment-related expenses incurred during taxable year ($4,000, but
limited to $2,400 by paragraph (a)(1) of this section . . . . . $2,400
Application of paragraph (b)(3) of this section (employment-related
expenses may not exceed wife's earned income of $1,800 (200 9) . .
$1,800
Employment-related expenses taken into account . . . .$1,800
(Secs. 44A(g) and 7805 of the Internal Revenue Code of 1954 (90 Stat.
1565, 26 U.S.C. 44A(g); 68A Stat. 917, 26 U.S.C. 7805))
(T.D. 7643, 44 FR 50334, Aug. 28, 1979, as amended by T.D. 7951, 49
FR 18092, Apr. 27, 1984)
26 CFR 1.44A-3 Special rules applicable to married individuals.
(a) Joint return requirement. This section applies only if the
taxpayer is married at the close of a taxable year in which
employment-related expenses are paid. In such a case the credit
provided by section 44A with respect to employment-related expenses is
allowed only if for the taxable year the taxpayer and his or her spouse
file a joint return. If either spouse dies during the taxable year and
a joint return may be made for the year under section 6013(a)(2) for the
survivor and the deceased spouse, 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 his or her first
spouse dies, a credit is allowed on the separate return which is made
for the decedent spouse. For purposes of this section, certain married
individuals legally separated or living apart are treated as not
married, as provided in paragraphs (b) and (c), respectively, of this
section.
(b) Marital status. For purposes of section 44A, an individual
legally separated from his or her spouse under a decree of divorce or of
separate maintenance is not considered as married.
(c) Certain married individuals living apart. For purposes of
section 44A, an individual who is married within the meaning of section
143(a) is treated as not married for the entire taxable year, if the
individual --
(1) Files a separate return for the year,
(2) Maintains as his or her home a household which constitutes for
more than one-half of the taxable year the principal place of abode of a
qualifying individual, and
(3) Furnishes over one-half of the cost of maintaining the household
for the year,
and if the individual's spouse is not a member of the household at
any time during the last 6 months of the year. Thus for example, an
individual who is married during the taxable year, but is treated as not
married by reason of this paragraph, may determine the earned income
limitation upon the amount of employment-related expenses without taking
into account the earned income of his or her spouse under 1.44A-2(b).
(T.D. 7643, 44 FR 50335, Aug. 28, 1979)
26 CFR 1.44A-4 Other special rules relating to employment-related
expenses.
(a) Payments to related individuals -- (1) Taxable years beginning
after December 31, 1978. For taxable years beginning after December 31,
1978, a credit is not allowed under section 44A with respect to the
amount of any employment-related expenses paid by the taxpayer to an
individual --
(i) With respect to whom for the taxable year a deduction under
section 151(e) (relating to deduction for personal exemptions for
dependents) is allowable either to the taxpayer or his or her spouse, or
(ii) Who is a child of the taxpayer (within the meaning of section
151(e)(3)) who is under age 19 at the close of the taxable year.
For purposes of this paragraph (a)(1), the term ''taxable year''means
the taxable year of the taxpayer in which the service is performed.
(1943)
(2) Taxable years beginning before January 1, 1979. For taxable
years beginning before January 1, 1979, except as otherwise provided in
paragraph (a)(3) of this section, a credit is not allowed under section
44A with respect to the amount of any employment-related expenses paid
by the taxpayer to an individual who bears to the taxpayer any
relationship described in section 152(a) (1) through (8). These
relationships are those of a son or daughter or descendant thereof; a
stepson or stepdaughter; a brother, a sister, stepbrother, or
stepsister; a father or mother or an ancestor, of either; a stepfather
or stepmother; a nephew or niece; an uncle or aunt; or a son-in-law,
daughter-in-law, father-in-law, mother-in-law, brother-in-law, or
sister-in-law. In addition, no credit is allowed with respect to the
amount of any employment-related expenses paid by the taxpayer to an
individual who qualifies as a dependent of the taxpayer for the taxable
year within the meaning of section 152(a)(9), which relates to an
individual (other than the taxpayer's spouse) whose principal place of
abode for the taxable year is the home of the taxpayer and who is a
member of the taxpayer's household.
(3) Exception for payments to certain related individuals. For
taxable years beginning before January 1, 1979, a credit is allowed for
the amount of any employment-related expenses paid by the taxpayer to an
individual provided that neither the taxpayer nor his or her spouse is
entitled to a deduction under section 151(e) (relating to deduction for
personal exemptions for dependents) with respect to such individual for
the taxable year in which the service is performed; and the service
with respect to which the amount is paid constitutes employment within
the meaning of section 3121(b). The following services performed for a
taxpayer by a relative who is an employee of the taxpayer may qualify as
employment within the meaning of section 3121(b):
(i) Services performed by the taxpayer's child age 21 or over.
(ii) Domestic services in the taxpayer's home performed by the
taxpayer's parent if --
(A) The taxpayer has living in his or her home a child (as defined in
section 151(e)(3)) who is under age 18 or who has a physical or mental
condition requiring the personal care of an adult during at least 4
continuous weeks in the calendar quarter, and
(B) The taxpayer is a widow or widower or is divorced, or has a
spouse living in the home who, because of a physical or mental
condition, is incapable of caring for his or her child during at least 4
continuous weeks in the calendar quarter in which services are rendered.
(iii) Services of all relatives other than a child, spouse, or parent
of the taxpayer.
For taxable years beginning before January 1, 1979, a credit is not
allowed under section 44A with respect to employment-related expenses
paid by the taxpayer to a relative for services which do not constitute
employment under section 3121(b). Services performed by a relative do
not constitute employment if they relate to the relative's trade or
business the income from which is includible in computing the relative's
net earnings for purposes of the self-employment tax under section 1401.
(4) Payments to entities or partnerships. If the services are
performed by an entity or partnership, paragraph (a) (1) and (2) of this
section is normally not applicable. If, however, the entity or
partnership is established or maintained primarily to avoid the
application of paragraph (a) (1) or (2) in order to permit the taxpayer
to obtain the credit with respect to employment-related expenses, for
purposes of this paragraph (a), the payments of employment-related
expenses shall be treated as made directly to each owner of the entity
or partner in proportion to his or her share of the entity or
partnership. A factor to consider for purposes of determining whether
an entity or partnership is so established or maintained is whether the
entity or partnership is set up solely to care for the taxpayer's
qualifying individual and to provide household services to the taxpayer.
(5) Illustrations. The application of this paragraph may be
illustrated by the following examples:
Example 1. For A's taxable year ending December 31, 1978, A, a
divorced taxpayer, pays $5,000 of employment-related expenses to his
mother for the care of his child age 5. A's mother cares for the child
in her home. The services performed by A's mother do not constitute
employment under section 3121(b). Accordingly, A is not allowed a
credit with respect to the amounts paid to the mother for the care of
his child.
Example 2. Assume the same facts as in example 1 except that A's
taxable year under consideration begins after December 31, 1978. A is
not entitled to a deduction under section 151(e) for his mother.
Accordingly, A is allowed a credit with respect to the amounts paid to
the mother for the care of his child even though the services performed
by A's mother do not constitute employment under section 3121(b).
Example 3. For B's taxable year ending December 31, 1978, B, a
divorced taxpayer, pays $6,000 of employment-related expenses to his
sister (who is not a dependent of the taxpayer) for the care of his
child. The services performed by B's sister in the care of his child
constitute a trade or business the income from which is includible in
computing net earnings for purposes of the self-employment tax under
section 1401. Accordingly, B is not allowed a credit with respect to
the amounts paid to the sister for the care of his child.
Example 4. Assume the same facts as in example 3 except that B's
taxable year under consideration begins after December 31, 1978. B is
allowed a credit with respect to the amounts paid to the sister for the
care of his child, even though the services performed by B's sister do
not constitute employment under section 3121(b).
(b) Expenses qualifying as medical expenses. An expense which may
constitute an amount otherwise deductible under section 213, relating to
medical, etc., expenses, may also constitute an expense with respect to
which a credit is allowable under section 44A. In such a case, that
part of the amount with respect to which a credit is allowed under
section 44A will not be considered as an expense for purposes of
determining the amount deductible under section 213. On the other hand,
where an amount is treated as a medical expense under section 213 for
purposes of determining the amount deductible under that section, it may
not be treated as an employment-related expense for purposes of section
44A. The application of this paragraph may be illustrated by the
following examples:
Example 1. In 1982, a calendar year taxpayer incurs and pays $5,000
of employment-related expenses during the taxable year for the care of
his child when the child is physically incapable of self-care. These
expenses are incurred for services performed in the taxpayer's household
and are of a nature which qualify as medical expenses under section 213.
The taxpayer's adjusted gross income for the taxable year is $100,000.
Of the total expenses, the taxpayer may take $2,400 into account under
section 44A; the balance of the expenses, or $2,600, may be treated as
medical expenses to which section 213 applies. However, this amount
does not exceed 3 percent of the taxpayer's adjusted gross income for
the taxable year and is thus not allowable as a deduction under section
213.
Example 2. Assume the same facts as in example 1. It is not proper
for the taxpayer first to determine his deductible medical expenses of
$2,000 ($5,000 -- ($100,000 3 percent)) under section 213 and then claim
the $3,000 balance as employment-related expenses for purposes of
section 44A. This is because the $3,000 balance has been treated as a
medical expense in computing the amount deductible under section 213.
Example 3. In 1982, a calendar year taxpayer incurs and pays $12,000
of employment-related expenses during the taxable year for the care of
his child. These expenses are incurred for services performed in the
taxpayer's household, and they also qualify as medical expenses under
section 213. The taxpayer's adjusted gross income for the taxable year
is $18,000. The taxpayer takes $2,400 of such expenses into account
under section 44A. The balance, or $9,600, he treats as medical
expenses for purposes of section 213. The allowable deduction under
section 213 for the expenses is limited to the excess of the balance of
$9,600 over $540 (3 percent of the taxpayer's adjusted gross income of
$18,000), or $9,060.
(Secs. 44A(g) and 7805 of the Internal Revenue Code of 1954 (90 Stat.
1565, 26 U.S.C. 44A(g); 68A Stat. 917, 26 U.S.C. 7805))
(T.D. 7643, 44 FR 50335, Aug. 28, 1979, as amended by T.D. 7951, 49
FR 18092, Apr. 27, 1984)
26 CFR 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 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)
26 CFR 1.44B-1 rules for computing credit for investment in certain depreciable property
26 CFR 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:
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 1.48-12(b)) that is attributable to qualified
rehabilitation expenditures (as defined in 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 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 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 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 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 ending after October 1, 1978. The provisions listed below set
forth the alternative limitations:
(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 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 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:
(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 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.
(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 a 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 paragraph (b)(1) of 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
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 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 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 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 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
(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 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 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 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, 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 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 the thirty year old portion. This allocation shall be
made using the principles in 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
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 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 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 1.48-12(c)).
(4) Effective date. The rehabilitation percentage is applicable only
to qualified rehabilitation expenditures (as defined in 1.48-12(c)).
For rules relating to applicability of the regular percentage to
qualified rehabilitation expenditures (as defined in 1.48-11(c)), see
1.48-11.
(T.D. 6731, 29 FR 6064, May 8, 1964)
Editorial Note: For Federal Register citations affecting 1.46-1,
see the List of CFR Sections Affected in the Finding Aids section of
this volume.
26 CFR 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 1.46-1(h). For a further example, see the special ordering
rule in 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
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 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.
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.
(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
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.
(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)
26 CFR 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
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 1.48-2 and 1.48-3, respectively. See
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 disposed of or
otherwise ceases to be section 38 property during such year, except
where 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 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 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:
Corporation Y's qualified investment for 1972 is $220,000 determined
in the following manner:
(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 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 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 1.48-3. However, the aggregate cost of
used section 38 property which may be taken into account in any taxable
year in computing qualified investment cannot exceed $50,000 (see
paragraph (c) of 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 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 1.194-3(c)) are
incurred during the taxable year in connection with qualified timber
property (as defined in 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 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 to the taxpayer under
section 38 with respect to such property. See 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 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) In the case of ''mass assets'' (as defined in paragraph (e)(4)
of 1.47-1) for which the taxpayer is permitted to use an appropriate
mortality dispersion table (including a standard mortality dispersion
table) under paragraph (e)(2) of 1.47-1 (determined without regard to
paragraph (e)(2)(ii) thereof), the taxpayer may use such table for
purposes of determining estimated useful lives by assigning, under
subdivision (ii) (b) of this subparagraph, separate lives to such assets
based on the estimated range of years taken into consideration in
establishing the average useful life. If a taxpayer uses a standard
mortality dispersion table for any taxable year, such table must be used
for all subsequent taxable years unless the taxpayer obtains the consent
of the Commissioner to change.
(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 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 1.167(a)-11(b)(4),
whether or not such property constitutes mass assets (as defined in
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 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 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 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 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 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:
(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, 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, 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
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 --
(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 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 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 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)
26 CFR 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 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.
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 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 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 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 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
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 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.
(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 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 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
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 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 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 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 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 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)
26 CFR 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 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
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 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 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 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 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 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 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 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 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
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, 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 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
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 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 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
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
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 followng 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 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.
(2) Status as progress expenditure property. (i) If the transfer
requires recapture under section 47(a)(3) and 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 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
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
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
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 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)
26 CFR 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 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
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
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
1.46-3(g)(4) apply except that accounts 365 through 371 inclusive
(Transmission Plant) are added to the accounts listed in
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 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 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 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 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).
(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 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 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.
(T.D. 7602, 44 FR 17668, Mar. 23, 1979, as amended by T.D. 8089, 51
FR 18777, May 22, 1986)
26 CFR 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 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 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 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)
26 CFR 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 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.
(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 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 54.4975-11 of this chapter (Pension
Excise Tax Regulations). See 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 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 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 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 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 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
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
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 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 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 paragraph (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:
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).
(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
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 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.
(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 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 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 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 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 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 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 shares x 9 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.
(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
commmon 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
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 54.4975-7(b)(10)-(12)
and 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 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. 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 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 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 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)
26 CFR 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 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
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
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 1.46-8(b):
(i) TRASOP. See 1.46-8(b)(1).
(ii) Employer. See 1.46-8(b)(3).
(iii) Employer securities. See 1.46-8(b)(4).
(iv) TRASOP securities. See 1.46-8(b)(5).
(v) Publicly traded. See 1.46-8(b)(6).
(vi) Value. See 1.46-8(b)(7).
(vii) Compensation. See 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 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 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.
(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
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 1.46-8 and 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 1.46-8(c)(5).
(4) Funding a TRASOP -- (i) Employer contributions. The carryover
option under 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 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
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 1.46-8(c)(8) (i) through (iii), applies to TRASOP securities
acquired with matching employee contributions.
(5) Claiming additional credit. In applying 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 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 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 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 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 1.46-8; second, allocations under this section. See
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 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 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 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 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 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
1.46-8(e)(6)(iii), only employer contributions under 1.46-8(c)(8) and
paragraph (c)(4)(i) of this section are considered. In determining the
ceiling on administrative expenses under 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 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 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 1.46-8(f) apply independently to withdrawal assets
attributable to TRASOP securities under 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 under 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 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 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 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 1.46-8(c)(8)(ii)
or, if 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 securites 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 securitites 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 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 1.46-8(c) (2) through (5) and paragraph (c)(1) of this section to
obtain an additional credit, 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
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 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 1.46-8 other than those excluded under
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
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)
1.46-10 (Reserved)
26 CFR 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 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 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)
26 CFR 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 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 1.46-3) or is a qualifying commuter highway vehicle (as defined
in paragraph (a) of 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 1.46-1 and paragraph (a) of 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 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 1.47-2. For rules relating to
certain exceptions to the application of this section, see 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, 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 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 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 1.46-3. Thus, section 38
property which is assigned, under paragraph (e) of 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 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.
(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 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 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.
(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 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 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
1.167(a)(10)) in computing depreciation with respect to section 38
property, then, for purposes of this section and 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 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 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 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. 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 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 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 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 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 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 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 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 $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:
(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 ($15,870 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 ($34,130 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 ($34,130 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 1.46-3(e)(3) (ii)(b) or (iii) may treat such assets
as having been 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 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 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 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 1.46-3(e)(3) (ii)(b) or
(iii). For definition of abnormal retirement, see paragraph (b) of
1.167(a)-8.
(4) Definition of ''mass assets''. For purposes of this paragraph
and paragraph (e)(3)(iii) of 1.46-3, the term ''mass assets'' means a
mass or group of individual items of property (i) not necessarily
homogeneous, (ii) each of which is minor in value relative to the total
value of such mass or group, (iii) numerous in quantity, (iv) usually
accounted for only on a total dollar or quantity basis, and (v) with
respect to which separate identification is impracticable. The term
includes portable air and electric tools, jigs, dies, railroad ties,
overhead conductors, hardware, textile spindles, and minor items of
office, plant, and store furniture and fixtures; and returnable
containers and other items which are considered subsidiary assets for
purposes of computing the allowance for depreciation.
(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:
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:
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:
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
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) 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
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:
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:
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 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 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
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 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 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
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
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.
(ii) A qualified intercity bus described in 1.48-9(q) must meet the
predominant use test (of 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 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 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, 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 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 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
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 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 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 (as defined in 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:
(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)
26 CFR 1.47-2 ''Disposition'' and ''cessation''.
(a) General rule -- (1) ''Disposition''. For purposes of this
section and 1.47-1 and 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 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
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 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 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
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 1.47-1, if, under 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 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
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
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 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 asset. Under paragraph (c)(2)(i) of 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 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 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)
26 CFR 1.47-3 Exceptions to the application of 1.47-1.
(a) In general. Notwithstanding the provisions of 1.47-2, relating
to ''disposition'' and ''cessation,'' paragraph (a) of 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 1.47-2, relating to ''disposition''
and ''cessation'', paragraph (a) of 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 1.47-1 shall not apply to the transfer of the
deceased taxpayer's interest to the surviving joint tenant. If, under
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, paragraph (a) of 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 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 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
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 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
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 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 1.47-2, relating to
''disposition'' and ''cessation'', paragraph (a) of 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 1.47-1 shall apply except to the
extent provided in subdivisions (ii) and (iii) of this subparagraph.
(ii) Paragraph (a) of 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 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 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.
(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
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 1.46-3, by
$23,000. (See example 1 of paragraph (h)(3) of 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 1.46-3. Paragraph (a) of 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 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 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 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 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 1.48-3(e)) the amount apportioned to such member under paragraph
(e) of 1.48-3 shall be substituted for such $50,000 amount.
(2) Application of paragraph (a) of 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
provisions of 1.47-2 (relating to ''disposition'' and ''cessation''),
paragraph (a) of 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 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 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 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 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
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 1.47-1 does 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 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 1.47-2, relating to ''disposition''
and ''cessation'', paragraph (a) of 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 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
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
1.47-1 does not apply to the January 15, 1967, transfer to Y
Corporation. However, paragraph (a) of 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 1.47-2, relating
to ''disposition'' and ''cessation'', paragraph (a) of 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,
(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 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 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 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
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
1.47-4 (relating to electing small business corporations), paragraph
(a)(2) of 1.47-5 (relating to estates or trusts) or paragraph (a)(2) of
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
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
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
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
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
1.47-1 does not apply to the March 15, 1963, transfer by the ABC
Partnership to X Corporation. Paragraph (a) of 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 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
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 1.47-2, relating to ''disposition''
and ''cessation'', paragraph (a) of 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 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 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 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 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 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 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)
26 CFR 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 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 1.47-1.
(2) Disposition of shareholder's interest. (i) If --
(a) The basis (or cost) of section 38 property is apportioned, under
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 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
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
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 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, 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 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 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:
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 1.48-5, the total bases of
section 38 properties was apportioned to the shareholders of X
Corporation as follows:
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:
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:
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)
26 CFR 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 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 1.47-1.
(2) Disposition of interest. (i) If --
(a) The basis (or cost) of section 38 property is apportioned, under
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 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 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 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:
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 1.48-6, the
total bases of the section 38 properties was apportioned to XYZ Trust
and beneficiary A as follows:
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:
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:
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)
26 CFR 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 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 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 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 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:
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 1.46-3, each partner's share of the basis of the
partnership section 38 property is as follows:
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:
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:
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
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)
26 CFR 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 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 1.46-3. For the meaning
of ''estimated useful life'', see paragraph (e) of 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 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 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 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 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 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 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 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 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 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 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.
(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 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 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 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
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 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 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 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.
(l) Livestock -- (1) In general. The term ''section 38 property''
does not include horses but such term does include all other livestock
that is property described in section 50. The term ''livestock''
includes cattle, hogs, sheep, goats, and mink and other fur-bearing
animals.
(2) Cost. For purposes of computing qualified investment under
section 46(c) with respect to livestock, the cost of livestock acquired
by the taxpayer shall be reduced by any amount realized on the sale or
other disposition of substantially identical livestock which is sold or
otherwise disposed of by the taxpayer during the 1-year period beginning
6 months before the date of such acquisition, except that no reduction
shall be made on account of a sale or other disposition to which section
47(a) (relating to recapture) applies or which constitutes an
involuntary conversion (within the meaning of section 1033). If a
particular sale or other disposition of substantially identical
livestock falls within 2 or more 1-year periods relating to separate
acquisitions, the amount realized from such sale or other disposition
shall be applied in order of time beginning with the earliest
acquisition of livestock which is section 38 property. If there is more
than one sale or other disposition of substantially identical livestock
during a particular 1-year period, the sales or dispositions are to be
taken into account in order of time beginning with the earliest. If an
amount realized from a sale or other disposition has been taken into
account to reduce the cost of acquired livestock, such amount is not to
be taken into account to reduce the cost of any other acquired
livestock. If a taxpayer claims a credit for any livestock acquired in
a taxable year and if the amount realized on any sale or other
disposition of substantially identical livestock in a subsequent taxable
year is applied to reduce the cost of the acquired livestock, the
taxpayer must file an amended return for the year in which the credit
was claimed.
(3) Substantially identical. In determining whether livestock sold
or otherwise disposed of by the taxpayer is substantially identical to
livestock acquired by the taxpayer, the sex and age of the livestock and
the use to which it is put are taken into account. Thus, if the
taxpayer sells a cow used for breeding purposes and acquires another cow
of approximately the same age to be used for breeding purposes, the two
cows are substantially identical. However, a cow suitable for dairy
purposes which is acquired by the taxpayer to replace a cow no longer
suitable for dairy purposes is not substantially identical to the
replaced cow.
(4) Original use. For purposes of determining whether livestock is
''new section 38 property,'' that is, whether the original use of
livestock commences with the taxpayer under 1.48-2(b)(7), the original
use of a breeding or dairy animal for breeding or dairy purposes begins
at the time the animal first becomes suitable for such purposes unless
the animal has previously been used for other purposes. Thus, if a
taxpayer acquires for dairy purposes an animal that previously has not
been used for any purpose, the animal will be new section 38 property at
the time it first gives milk. However, if the taxpayer acquires an
animal for breeding purposes which previously had been used for dairy
purposes, the animal will not be new section 38 property when it is
first used for breeding purposes.
(5) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example 1. (a) Individual A, a farmer and calendar year taxpayer,
owns three dairy cows which he purchased in 1970 for $250 each. In
1971, A buys three dairy cows, one each on October 1, November 1, and
December 1, for $290 each. On October 15, 1971, A sells for $300 one of
the cows purchased in 1970, and on November 15, 1971, he sells for $300
another of the cows purchased in 1970. All of the cows bought and sold
by A are substantially identical. The cows purchased by A have an
estimated useful life of 5 years.
(b) Of the $300 realized from the October 15 sale, $290 is applied to
reduce the cost of the cow purchased October 1 to zero. The remaining
$10 realized from the October 15 sale and $280 of the $300 realized from
the November 15 sale are applied to reduce the cost of the cow purchased
November 1 to zero. The remaining $20 realized from the November 15
sale is applied to reduce the cost of the cow purchased December 1 to
$270.
(c) Since the basis of the cows purchased October 1 and November 1 is
zero for investment credit purposes, no credit is allowable with respect
to those two cows. The cow purchased December 1 has a basis for
investment credit purposes of $270. Since the useful life of the cow
purchased December 1 is at least 5 years but less than 7 years, the
qualified investment of A with respect to the cow is $180 ( 2/3 $270).
Example 2. Assume the same facts as in example 1 except that on May
1, 1972, A sells for $300 the third cow purchased in 1970. Since the
third cow is sold within 6 months of the acquisition of the cow
purchased December 1, 1971, the amount realized on such sale is applied
to reduce the cost of the cow purchased December 1, 1971, to zero.
Consequently, A must file an amended return for 1971 and claim no
investment credit for the cow purchased December 1, 1971.
(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
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 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)) 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) Property of foreign origin -- (1) In general. Property (other
than pretermination property) shall not be treated as section 38
property if (i) such property was completed outside the United States,
or (ii) less than 50 percent of the basis or cost of such property is
attributable to value added within the United States. For purposes of
this paragraph, the term ''United States'' includes the Commonwealth of
Puerto Rico and the possessions of the United States.
(2) Period of application. (i) Subparagraph (1) of this paragraph
shall apply only to property described in section 50 --
(a) The construction, reconstruction, or erection of which by the
taxpayer is begun after August 15, 1971, and before December 20, 1971,
or
(b) Which is acquired pursuant to an order placed before December 20,
1971, unless acquired pursuant to an order which the taxpayer
establishes was placed before August 16, 1971.
The principles of 1.48-2 (b) and (c) shall be applied in determining
when construction, reconstruction, or erection by the taxpayer begins.
An order is any directive, written or oral, to another person reasonably
designed to effect the acquisition of property at a later date. An
order need not be a binding contract. Where an order placed during the
surcharge period (August 16, 1971, through December 19, 1971) is
canceled and a reorder is placed which is substantially the
reinstitution of the original order, the property acquired as a result
of the reorder is considered to be acquired pursuant to the original
order.
(ii) See section 48(a)(7) (C) and (D) for circumstances under which
the President of the United States may provide by Executive order for
the period specified in such order that (a) section 48(a)(7)(A) shall
not apply to certain property, or (b) such section shall apply to
certain property notwithstanding the termination of Proclamation 4074.
(3) Property completed outside the United States. Property is
completed outside the United States if it enters the country in a form
which is operational for the purposes for which it is intended or
designed, regardless of the United States content of the property.
Property is in an operational state even though it is necessary to
perform minor activities such as packaging, labeling, testing, or
adjusting. On the other hand, substantial assembly of an article in the
United States, such as in the case of aircraft, the installation of the
customer's engines, or the installation of navigation equipment and the
completion of the seating and interior arrangements, is to be considered
completion of the article in the United States, rather than outside the
United States.
(4) Value added within the United States. In determining whether
less than 50 percent of the basis of property is attributable to value
added within the United States, shipping and insurance costs incurred in
transporting any part of such property to the United States and any duty
payable upon entry of the property into the United States are treated as
value added without the United States. Profit realized on the sale of
property completed in the United States, and any profit attributable to
any other U.S. activity, is treated as value added within the United
States. The cost of any component part of the property (whether added
to the property within or without the United States) which originates
and is completed in the United States and meets the United States value
added test is treated as value added within the United States.
(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 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 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, as amended by T.D. 6838, 30 FR
9060, July 20, 1965; T.D. 6958, 33 FR 9171, June 21, 1968; T.D. 6971,
33 FR 12899, Sept. 12, 1968; T.D. 7203, 37 FR 17129, Aug. 25, 1972;
T.D. 7229, 37 FR 28142, Dec. 21, 1972; T.D. 7927, 48 FR 55849, Dec. 16,
1983; T.D. 8031, 50 FR 26697, June 28, 1985; T.D. 8233, 53 FR 39592,
Oct. 11, 1988)
26 CFR 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 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 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.
(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, 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, 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 1.48-11.
(T.D. 6731, 29 FR 6076, May 8, 1964, as amended by T.D. 8031, 50 FR
26698, June 28, 1985)
26 CFR 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 is not ''new section 38 property.'' See 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 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 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 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 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.
(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 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
1.48-5; in the case of estates and trusts, see paragraph (a)(2) of
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 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:
(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:
(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:
(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:
(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 paragraph (b)(1) of 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, 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 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) 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/$250,000 $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/$300,000 $50,000) and $33,333 ($200,000/$300,000 $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)
26 CFR 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 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 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 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 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 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 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 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 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 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 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
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 1.48-7 (relating 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
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 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 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 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 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 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)
26 CFR 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 1.1371-1 and of paragraph (a)(2) of
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 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 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 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:
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:
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:
(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)
26 CFR 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 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 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 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 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:
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:
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:
(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)
26 CFR 1.48-7 Adjustment to basis.
(a) Reduction of basis; general -- (1) In general. Under section
48(g)(1), the basis of ''section 38 property'' placed in service before
January 1, 1964, shall be reduced by an amount equal to 7 percent of the
''qualified investment'' with respect to such property. The reduction
in basis shall be made as of the time such property is placed in service
by the taxpayer. The basis of such property must be reduced by 7
percent of the qualified investment even though the limitation based on
amount of tax under section 46(a)(2) reduces the amount of the credit
allowed by section 38 for the taxable year in which the property is
placed in service. The reduction in basis of section 38 property placed
in service before January 1, 1964, shall be taken into account for all
purposes of Subtitle A of the Code, except in computing (or recomputing
in the case of early disposition, etc.) the qualified investment with
respect to such property. Thus, such reduction in basis is taken into
account in determining a reasonable allowance for depreciation under
section 167, except that the additional amount allowed under section 179
(relating to additional first-year depreciation allowance for small
business) with respect to the cost of certain property is determined
without regard to such reduction in basis. Section 48(g)(1) and this
section do not apply to section 38 property placed in service after
December 31, 1963. For increase in basis of property to which this
section applies, see paragraphs (c), (d), and (e) of this section.
(2) Special rules. For purposes of applying subparagraph (1) of this
paragraph --
(i) If, under 1.48-4, the lessor of new section 38 property makes a
valid election to treat the lessee as having purchased such property for
purposes of the credit allowed by section 38, the basis of such property
shall not be reduced.
(ii) If property is used section 38 property and if the cost, or any
part thereof, of such property is not, because of the application of the
$50,000 limitation on the cost of used section 38 property, taken into
account in computing qualified investment (see paragraph (c) of 1.48-3)
by the person who placed such property in service or by a person to whom
the cost of such property was apportioned, no reduction shall be made to
the basis of such property to the extent such cost, or any part thereof,
is not so taken into account.
(iii) In the case of used section 38 property within a particular
useful life category the cost of which is apportioned by an electing
small business corporation, estate, or trust, if any part of such cost
is not taken into account in computing qualified investment (because of
the $50,000 limitation) by a shareholder or beneficiary, the electing
small business corporation, estate, or trust shall choose, to the extent
such cost is not so taken into account, the item (or items) of used
section 38 property, within such useful life category, with respect to
which no reduction in basis shall be made.
(iv) The basis of section 38 property, which is disposed of or
otherwise ceases to be section 38 property in the taxable year in which
it is placed in service (except where 1.47-3 applies), shall not be
reduced. See paragraph (a)(2) of 1.46-3.
(3) Examples. This paragraph may be illustrated by the following
examples:
Example 1. (i) X Corporation, which makes its return on the basis of
the calendar year, acquires and places in service on January 2, 1962, an
item of new section 38 property with a basis of $10,000 and a useful
life of 10 years. The amount of qualified investment with respect to
such asset is $10,000 ($10,000 basis multiplied by 100 percent
applicable percentage). For the taxable year 1962, X Corporation is
allowed under section 38 a credit of $700 (7 percent of $10,000) against
its liability for tax of $1,000.
(ii) Under section 48(g)(1), the basis of the property is reduced to
$9,300 ($10,000 minus $700). Thus, for purposes of determining a
reasonable allowance for depreciation under section 167 with respect to
such property for the taxable year 1962, its adjusted basis is $9,300.
Example 2. (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 $500. Therefore, the credit allowed by section 38
against X Corporation's liability for tax for 1962 is limited to $500
and the excess of $200 ($700 credit earned minus $500 limitation) is an
investment credit carryover.
(ii) The result is the same as in example 1, that is, under section
48(g)(1), the basis of the property is reduced to $9,300 ($10,000 minus
$700).
Example 3. (i) The facts are the same as in example 1 except that
the property is, for purposes of depreciation, placed in a multiple
asset account. On January 1, 1962, the cost or other basis of the
property in such account amounted to $50,000 and no other additions or
retirements were reflected in such account during 1962.
(ii) Under section 48(g)(1), since the basis of the property is
reduced to $9,300 ($10,000 minus $700), the cost or other basis of the
property in the multiple asset account is increased to $59,300 ($50,000
plus $9,300) for purposes of computing depreciation under section 167.
Example 4. (i) The facts are the same as in example 1 except that X
Corporation makes a valid election under paragraph (a) of 1.179-4 to
claim an additional first-year depreciation allowance with respect to
the entire cost of the property.
(ii) Under section 48(g)(1), the basis of the property is reduced to
$9,300 ($10,000 minus $700). In addition, $2,000 (20 percent of
$10,000) is allowed as an additional first-year depreciation allowance.
Thus, for purposes of determining a reasonable allowance for
depreciation under section 167 (in addition to the $2,000 computed under
section 179) for the taxable year 1962 with respect to such property,
its adjusted basis is $7,300 ($9,300 minus $2,000).
Example 5. (i) X Corporation acquires and places in service on
January 1, 1962, used assets Nos. 1, 2, and 3. Each asset has a cost
of $25,000 and a useful life of 10 years. Such used assets qualify as
used section 38 property. X Corporation selects the $25,000 cost of
used asset No. 1 and the $25,000 cost of used asset No. 2 to be taken
into account in computing qualified investment.
(ii) Under section 48(g)(1), the basis of asset No. 1 is reduced to
$23,250, that is, basis of $25,000 minus $1,750 (7 percent of $25,000
qualified investment). Likewise, the basis of asset No. 2 is reduced
to $23,250. The basis of asset No. 3 is not reduced.
Example 6. (i) X Corporation acquires and places in service on
January 1, 1962, used assets Nos. 1, 2, and 3 which qualify as used
section 38 property. Each asset has a cost of $20,000 and a useful life
of 10 years. X Corporation selects the $20,000 cost of used asset No.
1, the $20,000 cost of used asset No. 2, and $10,000 of the cost of
used asset No. 3 to be taken into account in computing qualified
investment.
(ii) Under section 48(g)(1), the basis of asset No. 1 is reduced to
$18,600, that is basis of $20,000 minus $1,400 (7 percent of $20,000
qualified investment). Likewise, the basis of asset No. 2 is reduced
to $18,600. The basis of asset No. 3 is reduced to $19,300, that is
basis of $20,000 minus $700 (7 percent of $10,000 qualified investment).
Example 7. (i) X Corporation, an electing small business corporation
which makes its return on the basis of the calendar year, acquires and
places in service on January 1, 1962, five used assets which qualify as
used section 38 property. The cost of each used section 38 property and
the estimated useful life of each property are as follows:
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. All the shareholders make their returns on
the basis of a calendar year. X Corporation selects the $20,000 cost of
asset No. 1, the $24,000 cost of asset No. 2, the $3,000 cost of asset
No. 3, and $3,000 of the cost of asset No. 4 to be apportioned to its
shareholders. Under 1.48-5, the total cost of the used section 38
property selected is apportioned to the shareholders of X Corporation as
follows:
Assume that shareholders A, B, and C did not place in service during
their taxable years ending December 31, 1962, 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)(1)(B) each shareholder computes his qualified investment
as follows:
(ii) Under section 48(g)(1), the basis of each asset (except asset
No. 5) is reduced by 7 percent of the qualified investment with respect
to such asset, as follows:
Example 8. (i) The facts are the same as in example 7 except that
shareholder C acquired and placed in service on June 1, 1962, in his
individual proprietorship, used asset No. 6 with a cost of $27,000 and
an estimated useful life of 10 years. In computing his qualified
investment, shareholder C selects the $27,000 cost of asset No. 6, the
$10,000 cost of used section 38 property within the 8 years or more
useful life category apportioned to him by X Corporation, the $12,000
cost of used section 38 property within the 6 to 8 years useful life
category apportioned to him by X Corporation, and $1,000 of the cost of
used section 38 property within the 4 to 6 years useful life category
apportioned to him by X Corporation. Under section 46(c)(1)(B), he
computes his qualified investment as follows:
(ii) Since only $4000 of the $6000 cost of used section 38 property
in the 4 to 6 years useful life category apportioned by X Corporation
was taken into account by shareholders A, B, and C in computing their
qualified investment, only $4000 of the bases of the assets in such
category is subject to reduction. Under subparagraph (2)(iii) of this
paragraph, X must choose an item of property in such category, $2000 of
the basis of which will not be subject to the reduction. Therefore, X
Corporation chooses to reduce the basis of asset No. 4 by 7 percent of
qualified investment with respect to only $1,000 of the cost of such
asset (in lieu of the $3,000 previously selected). The bases of assets
Nos. 1, 2, and 3 are reduced by 7 percent of the qualified investment
with respect to each such asset. The basis of each asset is reduced as
follows:
(iii) The basis of asset No. 6, in the hands of shareholder C, is
reduced to $25,110, that is, basis of $27,000 minus $1,890 (7 percent of
$27,000 qualified investment).
Example 9. (i) ABC Partnership, which makes its return on the basis
of the calendar year, acquires and places in service on January 1, 1962,
five used assets which qualify as used section 38 property. The cost of
each used section 38 property and the estimated useful life of each
property are as follows:
Partners A, B, and C share the profits and the losses of partnership
ABC in the ratio of 50 percent, 30 percent, and 20 percent,
respectively. ABC Partnership selects the $20,000 cost of asset No. 1,
the $24,000 cost of asset No. 2, the $3,000 cost of asset No. 3, and
$3,000 of the cost of asset No. 4, to be taken into account by its
members in computing qualified investment. Under paragraph (f)(2) of
1.46-3, each partner's share of the cost of the partnership used section
38 property to be taken into account in computing qualified investment
is as follows:
Each partner makes his return on the basis of the calendar year.
Assume that partners A, B, and C did not place in service during their
taxable years ending December 31, 1962, any section 38 property and that
such partners did not own any interests in other partnerships, estates,
trusts, or electing small business corporations. Under section 46(c),
each partner computes his qualified investment as follows:
(ii) Under section 48(g)(1), the basis of each asset selected by the
partnership is reduced by 7 percent of the qualified investment with
respect to such asset, as follows:
Example 10. (i) The facts are the same as in example 9 except that
partner A acquired and placed in service on June 1, 1962, in his
individual proprietorship, used asset No. 6 with a cost of $26,000 and
an estimated useful life of 10 years. Partner A selects the $26,000
cost of asset No. 6, his $10,000 share of the cost of asset No. 1, his
$12,000 share of the cost of asset No. 2, his $1,500 share of the cost
of asset No. 3, and $500 of his share of the cost of asset No. 4, to
be taken into account in computing his qualified investment. Under
section 46(c), he computes his qualified investment as follows:
(ii) Under section 48(g)(1), the basis of each asset selected by the
partnership is reduced by 7 percent of the qualified investment with
respect to such asset as follows:
(iii) The basis of asset No. 6, in the hands of partner A, is
reduced to $24,180, that is, basis of $26,000 minus $1,820 (7 percent of
$26,000 qualified investment).
(b) Reduction of basis; purchase of leased property by lessee
treated as purchaser. (1) If a lessor of property placed in service
before January 1, 1964, makes a valid election under 1.48-4 to treat
the lessee as having purchased such property for purposes of the credit
allowed by section 38 and if such lessee at a later date (in a taxable
year of the lessee beginning before January 1, 1964) actually purchases
such property, the basis of such property shall be reduced, as of the
time of the actual purchase, by an amount equal to the excess of --
(i) The credit earned (as defined in paragraph (k)(2)(i) of 1.48-4)
with respect to such property, over
(ii) The sum of the amounts by which the lessee-purchaser has
decreased, under paragraph (k)(2) of 1.48-4, his deductions otherwise
allowable under section 162 for amounts paid or accrued to the
lessor-vendor under the lease with respect to such property.
(2) The operation of this paragraph may be illustrated by the
following example:
Example. (i) X Corporation acquires on January 1, 1962, an item of
new section 38 property with a basis of $12,000 and with a useful life
of 8 years. Y Corporation, which makes its return on the basis of a
calendar year, leases such property from X Corporation and places it in
service on February 1, 1962. Under 1.48-4, X Corporation makes a valid
election to treat Y Corporation as having purchased such property for
purposes of the credit allowed by section 38. Under paragraph (k)(2)(i)
of 1.48-4, the amount of the credit earned with respect to such
property is $840 (7 percent of $12,000). For the taxable year 1962 Y
Corporation decreases, under paragraph (k)(2)(ii) of 1.48-4, its
deductions otherwise allowable under section 162 for amounts paid to X
Corporation under the lease with respect to such property by $96.25
($840 multiplied by 11/96). On January 1, 1963, Y Corporation actually
purchases such property from X Corporation for $9,000.)
(ii) As of January 1, 1963, Y Corporation must reduce the basis of
the property by $743.75 ($840 minus $96.25). Thus, for purposes of
determining a reasonable allowance for depreciation under section 167
with respect to such property for the taxable year 1963, its adjusted
basis is $8,256.25 ($9,000 minus $743.75).
(c) Increase in basis on account of early disposition, etc. -- (1) In
general. If, as a result of an early disposition, etc., in a taxable
year beginning before January 1, 1964, with respect to section 38
property placed in service before such date, the tax imposed under
chapter 1 of the Code is increased under section 47(a) (1) or (2), or an
adjustment in an unused credit carryback or carryover is made under
section 47(a)(3), then the basis of such property shall be increased.
Such increase shall be in an amount equal to the sum of the portion of
such increase in tax and the portion of such adjustment in carrybacks or
carryovers attributable to such property but not in excess of the
reduction in basis made under paragraph (a) of this section or, in the
case of leased property purchased by a lessee treated as the purchaser,
the reduction in basis under paragraph (b) of this section plus the
decrease in rental deductions made under paragraph (k)(2) of 1.48-4.
See paragraph (a)(2) of this section for rules indicating when basis is
not reduced under paragraph (a) of this section. The increase in basis
of such property shall be made immediately before the event which causes
section 47(a) (1), (2), or (3) to apply, and this increase in basis
shall be taken into account for all purposes of subtitle A of the Code.
If, after the event described in the preceding sentence, the taxpayer
continues the use of the property in a trade or business or in the
production of income, the principles described in paragraph (d)(1) of
this section shall be applied in computing the allowances for
depreciation over the remaining useful life of the property.
(2) Examples. The operation of this paragraph may be illustrated by
the following examples:
Example 1. (a) The facts are the same as those in example 1 of
paragraph (a)(3) of this section except that on June 15, 1963,
corporation X sold the property causing section 47(a)(1) to apply.
(b) Section 48(g)(2) requires that the basis of said property be
increased immediately before the sale by the amount of $700 which amount
is equal to the increase in tax for the taxable year 1963 arising under
section 47(a)(1) ($700 credit allowed less credit allowable of 0).
Example 2. (a) The facts are the same as in example 1 of this
subparagraph except that for the taxable year 1962 X Corporation's
liability for tax was only $500, and a $200 unused credit carryover to
1963 resulted.
(b) The result is the same as in example 1 of this subparagraph, that
is, the basis of the property is increased under section 48(g)(2) by the
amount of $700 ($500 credit allowed plus $200 adjustment in carryover to
1963 less credit allowable of 0).
Example 3. (a) The facts are the same as those in example 1 of
paragraph (a)(3) of this section except that the property was physically
located outside of the United States during more than 50 percent of the
taxable year 1963 within the meaning of paragraph (g) of 1.48-1, and
section 47(a)(1) therefore became applicable.
(b) The basis of the property is increased by $700 as of the first
day of the taxable year 1963.
Example 4. (a) The facts are the same as example 5 of paragraph
(a)(3) of this section. Assume also that on January 1, 1963, there is
an early disposition, etc., of the three assets as described under
section 47(a)(1).
(b) Section 48(g)(2) requires that the basis of asset No. 1 be
increased immediately before such early disposition, etc., by the amount
of $1,750 ($1,750 credit allowed less credit allowable of 0). Likewise,
the basis of asset No. 2 is increased by the amount of $1,750. There
is no increase in the basis of asset No. 3 since the basis of such
asset was not reduced.
(d) Increase in basis of property placed in service before January 1,
1964 -- (1) In general. Under section 203(a)(2)(A) of the Revenue Act
of 1964, the basis of section 38 property placed in service before
January 1, 1964, shall be increased by an amount equal to 7 percent of
the qualified investment with respect to such property (determined as of
the date the property was placed in service) but not in excess of the
net reduction in basis under section 48(g). For this purpose, the net
reduction in basis under section 48(g) is the reduction in basis under
section 48(g)(1) and paragraph (a) of this section less any increase in
basis under section 48(g)(2) and paragraph (c) of this section. The
increase in basis described in this paragraph shall be made as of the
first day of the taxpayer's first taxable year beginning after December
31, 1963. For taxable years beginning after December 31, 1963, this
increase in basis shall be taken into account for all purposes of
Subtitle A of the Code. Thus, for example, during that part of the
remaining useful life of the property falling within the taxable years
beginning after December 31, 1963, such increase in basis shall be taken
into account in determining reasonable allowances for depreciation under
section 167. In determining depreciation allowances with respect to the
property for periods after such increase in basis, appropriate
adjustments shall be made (except as otherwise provided in this
paragraph), whenever necessary, to the rate or other factors previously
applied for taxable years beginning before January 1, 1964, so that the
total depreciation allowances made during the remaining useful life of
the property, plus the allowances for the expired useful life, will
equal or approximate the allowances which would have resulted if section
48(g)(1) had not applied. In the case of section 38 property contained
in a multiple asset account, the taxpayer may reflect the increase in
basis by adjusting the basis of the account and by adjusting the rate of
depreciation applied to the entire account. In lieu of that, he may
continue to apply to the entire account (reflecting the basis increase)
the rate previously employed. As a third alternative, solely for the
purposes of determining the depreciation adjustment occasioned by the
increase in basis (and not for the purposes of determining method of
depreciation, effect of retirements, application of sections 1245 and
1250, or other purposes), he may continue to utilize the previous rate
for the main account (not reflecting the increase in basis) and treat
the increase in basis as a separate account to be depreciated over the
remaining useful life of the assets to which the increase in basis
relates. Except as provided in section 167 and the regulations
thereunder, no change may be made in the method of depreciation to be
applied during the remaining life of the property. For purposes of
section 167(d), any increase in basis under this paragraph shall
constitute a fact not taken into consideration in the adoption of any
agreement under that section fixing the rate of depreciation. In no
event shall an adjustment be made which would result in recovery of the
increase in basis through depreciation allowances prior to expiration of
the remaining useful life.
(2) Special rules. (i) The increase in basis provided by
subparagraph (1) of this paragraph shall be taken into account
ordinarily by the person in whose hands the basis of the property was
reduced under section 48(g)(1). However, if the property is transferred
in a transaction described in section 47(b) (other than a transfer by
reason of death) prior to the first day of the first taxable year of the
transferor beginning after December 31, 1963, then, to the extent that
the basis of such property reflects the net reduction in basis described
in subparagraph (1) of this paragraph in the hands of the transferor,
the increase in basis provided for in this paragraph shall be taken into
account by the transferee.
(ii) The basis of any section 38 property is not to be increased
under subparagraph (1) of this paragraph if the taxpayer dies in a
taxable year beginning before January 1, 1964.
(3) Examples. The application of this paragraph may be illustrated
by the following examples:
Example 1. (a) A, an individual who makes his return on the basis of
the calendar year, acquired and placed in service on January 1, 1962,
asset No. 1 and asset No. 2, both of which assets qualified as new
section 38 property. Each asset had a basis of $10,000, a salvage value
of $1,000, and an estimated useful life of 10 years. Depreciation for
each asset was computed under the straight line method. For the taxable
year 1962, A was allowed under section 38 a credit of $1,400 (7 percent
of $20,000). On January 2, 1963, A took asset No. 1 out of his
business and on said date commenced to use such property entirely for
personal purposes. Thus, for purposes of section 48(g)(2), there was an
early disposition, etc., as described under section 47(a)(1).
(b) Under section 48(g)(1), the basis of each asset in 1962 was
reduced to $9,300. Thus, depreciation with respect to each asset for
the taxable year 1962 was $830 (adjusted basis of $9,300 minus salvage
value of $1,000 divided by estimated useful life of 10 years).
(c) Immediately before the early disposition, etc., with respect to
asset No. 1, the basis of such asset was increased by $700 to $9,170
(cost of $10,000 minus reduction in 1962 under section 48(g)(1) of $700,
minus depreciation of $830, and plus the addition to basis in 1963 under
section 48(g)(2) of $700). As of December 31, 1963, the adjusted basis
of asset No. 2 was $7,640 (original cost of $10,000 minus reduction in
1962 under section 48(g)(1) of $700, minus depreciation of $830 in 1962,
and minus depreciation of $830 in 1963).
(d) The basis of asset No. 1 is not increased under this section
since the basis of such asset had previously been increased under
section 48(g)(2) in the amount of $700, the full amount of the reduction
previously made under section 48(g)(1). The basis of asset No. 2 is
increased under this paragraph as of January 1, 1964, by $700 to $8,340
($7,640 plus 7 percent of $10,000). The rate of depreciation to be
applied to the adjusted basis of asset No. 2 for the remaining useful
life of 8 years is adjusted in order to produce a total depreciation
allowance of $9,000 at the end of the asset's useful life. Depreciation
with respect to such asset for the taxable year 1964 and for each of the
succeeding 7 years is $917.50 (adjusted basis of $8,340 minus salvage
value of $1,000 divided by estimated remaining useful life of 8 years).
Example 2. (a) X Corporation, which makes its return on the basis of
the calendar year, acquired and placed in service on January 1, 1962, an
asset which qualified as new section 38 property. The asset had a basis
of $165,000, a salvage value of $15,000, and an estimated useful life of
5 years. Depreciation was computed under the declining balance method
at a rate of 200 percent of the straight line rate. The qualified
investment with respect to such asset was $55,000 (33 1/3 percent of
$165,000). For the taxable year 1962, X Corporation was allowed under
section 38 a credit of $3,850 (7 percent of $55,000).
(b) Under section 48(g)(1), the basis of such property in 1962 was
reduced to $161,150 ($165,000 minus $3,850). Thus, depreciation with
respect to such asset for the taxable year 1962 was $64,460 (adjusted
basis of $161,150 multiplied by 40 percent). Depreciation for the
taxable year 1963 was $38,676 ($161,150 minus $64,460 multiplied by 40
percent).
(c) As of January 1, 1964, the basis of such property is increased by
$3,850 to $61,864 ($161,150 minus $64,460, minus $38,676, and plus
$3,850). No adjustment in the rate of the allowance for depreciation is
necessitated by the increase in basis under this section since the rate
and method applied in 1962 and 1963 will produce a total allowance of
$150,000 over the entire estimated useful life of the property. Thus,
depreciation with respect to such asset for 1964 is $24,746 ($61,864
multiplied by 40 percent), for 1965 is $14,847 ($61,864 minus $24,746
multiplied by 40 percent), and for 1966 is $7,271, since such property
cannot be depreciated below its salvage value of $15,000.
Example 3. (a) The facts are the same as in example 2 except that
depreciation was computed under the sum of the years-digits method.
Thus, depreciation with respect to such asset for the taxable year 1962
was $48,717 (adjusted basis of $161,150 minus $15,000 multiplied by
5/15). For the taxable year 1963 depreciation was $38,973 ($161,150
minus $15,000 multiplied by 4/15).
(b) As of January 1, 1964, the basis of such property is increased in
the amount of $3,850. In order to produce a total allowance of $150,000
over the entire useful life, it is necessary to adjust the annual
allowance. Thus, as of January 1, 1964, under the taxpayer's method of
depreciation, a new rate of 3/6 is determined for the taxable year 1964.
Commencing with such taxable year, this new rate is applied against the
asset's adjusted basis of $77,310 minus salvage value of $15,000. The
adjusted basis as of January 1, 1964, is determined as follows:
Depreciation for the taxable year 1964 is $31,155 (adjusted basis of
$77,310 minus salvage value of $15,000 multiplied by 3/6). Likewise,
depreciation for the taxable year 1965 shall be $20,770 ($77,310 minus
$15,000 multiplied by 2/6).
Example 4. (a) The facts are the same as in example 2 except that
the useful life was estimated in terms of units of production and
depreciation was computed under the unit-of-production method. The
estimated total production of the property was 150,000 units, and 30,000
units were produced annually. Thus, depreciation for the taxable year
1962 was $29,230 (adjusted basis of $161,150 minus $15,000 multiplied by
30,000/150,000). For the taxable year 1963 depreciation was again
$29,230.
(b) As of January 1, 1964, the basis of such property is increased in
the amount of $3,850. In order to permit a total allowance of $150,000
over the entire useful life of the property, it is necessary to adjust
the annual allowance for depreciation over its remaining life. Thus, as
of January 1, 1964, under the taxpayer's method of depreciation, a new
rate of 30,000/90,000 is determined for the taxable year 1964.
Commencing with such taxable year, this new rate is applied against the
adjusted basis of the property of $106,540 minus salvage value of
$15,000. The adjusted basis as of January 1, 1964, is determined as
follows:
Depreciation for the taxable year 1964 is $30,513 (adjusted basis of
$106,540 minus salvage value of $15,000 multiplied by 30,000/90,000).
Likewise, for the taxable year 1965 depreciation shall be $30,513
($106,540 minus $15,000 multiplied by 30,000/90,000).
Example 5. (a) X Corporation, a calendar year basis taxpayer,
acquired and placed in service on January 1, 1962, a number of assets
which qualified as new section 38 property. Such assets had a total
basis of $180,000, a total salvage value of $18,000 and were accounted
for in a multiple asset account containing other assets similar in kind,
but not qualifying as section 38 property. Depreciation was computed
under the straight line method over an average estimated useful life of
10 years.
For the taxable year 1962, X Corporation was allowed under section 38
a credit of $12,600 (7 percent of $180,000). Under section 48(g)(1),
the basis of such property in 1962 was reduced to $167,400.
(b) As of January 1, 1964, the basis of the assets is increased in
the amount of $12,600. To produce a total allowance equal to the
allowance which would have resulted if section 48(g)(1) had not applied,
an adjustment in the rate of depreciation would be necessary. If the
taxpayer selects the third alternative described for multiple asset
accounts in subparagraph (1) of this paragraph, the amount of the
adjustment will be determined with reference to the increase in basis
alone. In that case, under the taxpayer's method of depreciation,
depreciation with respect to the increase in basis for the taxable year
1964 and for each of the seven succeeding years is $1,575 (increase in
basis of $12,600 divided by estimated remaining useful life of 8 years).
(e) Increase in basis; purchase of leased property by lessee treated
as purchaser -- (1) In general. If a lessor of property placed in
service before January 1, 1964, made a valid election under 1.48-4 to
treat the lessee as having purchased such property for purposes of the
credit allowed by section 38 and if the lessee actually purchased the
property at a later date prior to the expiration of the useful life used
in computing the credit, the basis of the property shall be increased.
If the property was purchased by the lessee in a taxable year beginning
before January 1, 1964, the increase shall be made as of the first day
of the lessee's first taxable year beginning after December 31, 1963, in
an amount equal to 7 percent of the qualified investment in the property
(determined as of the date the property was placed in service), but not
in excess of the reduction in basis made under paragraph (b) of this
section plus the decrease in rental deductions made under paragraph
(k)(2) of 1.48-4. If the property was purchased by the lessee in a
taxable year beginning after December 31, 1963, the increase shall be
made to the basis of the property as of the date of purchase by an
amount equal to any decrease in rental deductions actually made under
paragraph (k)(2) of 1.48-4 minus any increase in rental deductions
taken into account by the lessee under paragraph (m) of 1.48-4. Any
increase in basis under this paragraph shall be reduced to the extent of
any increase in basis previously made under paragraph (c) of this
section on account of early disposition, etc., of the property. For
taxable years of a lessee beginning after December 31, 1963, such
increase in basis shall be taken into account for all purposes of
Subtitle A of the Code.
(2) Special rules. (i) The increase in basis provided by this
paragraph shall be taken into account ordinarily by the lessee treated
as the purchaser. However, if the property under the lease is
transferred before the purchase 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, or if the property is purchased by the
lessee in a taxable year beginning before January 1, 1964, and
subsequently transferred in a transaction described in section 47(b)
(other than a transfer by reason of death), the increase in basis
provided for in this paragraph shall be taken into account by the
transferee.
(ii) The basis of any section 38 property is not to be increased
under subparagraph (1) of this paragraph if the taxpayer dies in a
taxable year beginning before January 1, 1964.
(3) Examples. The application 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 $10,000, an estimated useful
life of 10 years, and a salvage value of $1,000. Y Corporation, which
makes its return on the basis of a calendar year, leased such property
from X Corporation and placed it in service on January 2, 1962. Under
1.48-4, X Corporation made a valid election to treat Y Corporation as
having purchased such property for purposes of the credit allowed by
section 38. The amount of the credit earned with respect to such
property was $700 (7 percent of $10,000). For the taxable year 1962, Y
Corporation decreased, under paragraph (k)(2) of 1.48-4, its deductions
otherwise allowable under section 162 for amounts paid to X Corporation
under the lease with respect to such property by $70 ($700 multiplied by
12/120). On January 1, 1963, Y Corporation purchased such property from
X Corporation for $8,830.
(b) As of January 1, 1963, Y Corporation in accordance with paragraph
(b) of this section reduced the basis of the property by the amount of
$630 ($700 minus $70). The adjusted basis of the property for the
taxable year 1963 for purposes of determining a reasonable allowance for
depreciation under section 167 was $8,200 ($8,830 minus $630).
Depreciation under the straight line method for such taxable year
amounted to $800 (adjusted basis of $8,200 minus salvage value of $1,000
and divided by estimated remaining useful life of 9 years). As of
December 31, 1963, the adjusted basis had been reduced to $7,400 ($8,200
minus depreciation of $800 for the taxable year 1963).
(c) As of January 1, 1964, the basis of such property is increased to
$8,100 ($7,400 plus $700). To permit a total allowance of $7,900 over
the entire useful life of the property (treating as a part of the
depreciable basis of the property the decrease of $70 made in the
taxpayer's rental deductions for the taxable year 1962), it is necessary
to recompute the annual allowance for depreciation. Thus, depreciation
for the taxable year 1964 and for each of the 7 succeeding years is
$887.50 (adjusted basis of $8,100 minus salvage value of $1,000 and
divided by estimated remaining useful life of 8 years).
Example 2. (a) The facts are the same as in example 1 of paragraph
(m)(2) of 1.48-4 except that Y Corporation purchased the property on
January 3, 1965, for $20,000.
(b) For the taxable year 1964 Y Corporation increases its deductions
otherwise allowable under section 162 by $42.
(c) As of January 3, 1965, Y Corporation increases the basis of the
property ($20,000) by $294 ($336 decrease in rental deductions made in
1962 and 1963 minus $42 increased rental deductions taken into account
in 1964).
(T.D. 6731, 29 FR 6084, May 8, 1964, as amended by T.D. 6838, 30 FR
9061, July 20, 1965; T.D. 6931, 32 FR 14040, Oct. 10, 1967)
26 CFR 1.48-8 Motion picture and television films and tapes.
(a) Entitlement to investment credit -- (1) In general. Under
section 48(k) an investment credit is allowable under section 38 with
respect to certain motion picture films and video tapes. For the
taxpayer to be entitled to the investment credit, the film or tape
placed in service must be ''new section 38 property'', determined
without regard to its useful life. The film or tape must be a qualified
film within the meaning of paragraph (a)(3) of this section, and the
taxpayer must have an ownership interest in at least a part of the film
(within the meaning of paragraph (a)(4) of this section). The
investment credit is allowable only for the year in which the qualified
film is placed in service except for investment credit with respect to
subsequently incurred costs described in paragraph (e)(9) of this
section. The refund (or credit) of any overpayment of tax that is
attributable to the investment credit is subject to the provisions of
section 6511. The provisions of this paragraph apply to all films and
tapes regardless of the taxable year in which the film or tape was
placed in service.
(2) Film may be divided into parts. Once a qualified film is placed
in service in any medium of exhibition in any geographical area of the
world, it becomes used property and no investment credit with respect to
the film is available to a taxpayer that acquires the film after that
time (except for subsequently incurred costs described in paragraph
(e)(9) of this section which the taxpayer incurs). Thus, for example, a
film previously exhibited in theaters will not be new section 38
property even when modified for television. However, where parts of
film have been sold before the film or any of its parts have been placed
in service in any medium of exhibition in any geographical area of the
world, each part is new section 38 property until that part is first
placed in service. For purposes of this section, ''a part'' of a film
means the exclusive right to display a qualified film in one or more
mediums of exhibition in one or more geographical areas over the entire
period of substantial exploitation of the film in the medium(s) in the
geographical area(s). The period will be determined on the basis of a
reasonable estimate made as of the date the film is first placed in
service. For purposes of this section the term ''medium of exhibition''
includes, for example, free television (network telecasts and television
syndications) or movie theaters. The term does not include the video
tape or video disc household markets. For purposes of this section, the
term ''geographical area'' means a geographically defined commercial
market recognized by the movie or television industry, but which in no
case may be smaller than one country or include a portion of a country.
Notwithstanding the preceding sentence, border areas of Canada and
Mexico, which under industry practice are considered part of the United
States television market, may be treated as within the geographical area
that includes the United States and not within the geographical area
that includes Canada or Mexico. (See paragraph (g)(1) of this section
for apportionment of amount paid if a taxpayer purchases one or more
parts of a film and in the same transaction acquires an interest which
does not constitute a part.) If the owner of a qualified film transfers
to another person rights to display the film on a limited basis, which
do not constitute a transfer of an ownership interest in a part of the
film, the owner will still be treated as having ''the exclusive right to
display the film.'' For example, if the owner of a film transfers to a
television network the right to display the film on network television
(but does not transfer to the network syndication rights) the owner is
considered to retain the ''exclusive right to display the film.'' On the
other hand, if the owner transfers to a television network all free
television rights (network telecasts and television syndications) to the
film before the film or any of its parts have been placed in service,
the owner is considered to have sold a part of the film to the network
and the network will be entitled to claim investment credit based on its
qualified United States production costs as determined under paragraph
(g)(1) of this section.
(3) Qualified film -- (i) In general. Under section 48(k)(1)(B), the
term ''qualified film'' means a motion picture film or video tape or
part thereof created primarily for use as public entertainment or for
educational purposes. A film or tape is a single asset consisting of
the physical films and tapes (including the original negative or tape
and duplicate negatives, release prints or tapes, and original sound
recordings and all other sound recordings, if any, created to
simultaneously accompany the pictorial material), and the worldwide
rights to exploit the completed film or tape in all mediums of
exhibition in all geographical areas of the world.
(ii) Public entertainment or educational purposes. A film or tape is
created primarily for use as public entertainment only if created
principally for public exhibition for the amusement, enlightenment, or
gratification of an audience. Thus, a dramatic or situation comedy show
or episode of a dramatic or situation comedy series would be a film or
tape created primarily for use as public entertainment. A film or tape
is created primarily for educational purposes if it is created
principally for use by educational institutions or governmental units
such as primary or secondary schools, colleges and universities,
vocational and post-secondary educational institutions, public
libraries, and other government agencies. Films and tapes created
primarily for use by industrial or commercial organizations do not
qualify for the credit. Thus, advertisements and industrial training
films and tapes do not qualify for the credit.
(iii) Topical or transitory films and tapes. The term ''qualified
film'' does not include any film or tape the market for which is
primarily topical or is otherwise essentially transitory in nature. A
film or tape is topical or essentially transitory in the nature if it
primarily deals with events and personalities of current interest at the
time the film or tape is placed in service. It does not matter that a
film or tape which is topical or essentially transitory in nature may be
shown in subsequent years or is actually shown in subsequent years.
Topical or transitory films or tapes include news shows such as the
evening news and news specials relating to current affairs, interview
shows such as ''The Tonight Show'' or ''Meet the Press'', award shows,
and shows consisting of sporting events. Topical or transitory films
and tapes do not include dramatic shows (including dramatized
recreations of recent events) or situation comedy shows which present
entertainers as characters in a dramatization.
(4) Ownership interest -- (i) In general. To obtain the investment
credit with respect to a qualified film, a taxpayer must have an
ownership interest in at least a part of the film. That is, the
taxpayer must have a depreciable interest in at least a part of the
film. However, the amount of credit allowable to a taxpayer with
respect to a qualified film is determined only on the basis of that
taxpayer's proportionate share of any loss which may be incurred with
respect to the production costs of the qualified film. The
proportionate share of any loss which may be incurred with respect to
production costs by a taxpayer is the amount that the taxpayer's capital
is at risk. Advance rentals (i.e., payments for the transfer of less
than a part) received or accrued by a taxpayer prior to the date on
which a qualified film is placed in service, and which are includible as
ordinary income in the taxpayer's gross income will not reduce the
amount that the taxpayer's capital is at risk. If a taxpayer's capital
is considered at risk under the principles of section 465, the
taxpayer's capital will be considered to be at risk under this
paragraph. Regardless of whether a taxpayer is at risk under the
principles of section 465, a taxpayer's capital will be considered at
risk under this paragraph if the taxpayer will suffer the economic loss
if the qualified film fails to generate sufficient revenue to cover or
repay production costs. For purposes of this paragraph, the amount
which a taxpayer has at risk will not be considered to be reduced by a
deduction for participations or residuals paid or accrued, or by a
deduction under section 167 with respect to the costs of preparing
prints described in paragraph (f)(1)(ii) of this section.
(ii) Time ownership interest is determined. An ownership interest in
a qualified film and the amount that the taxpayer's capital is at risk
with respect to the interest is determined at the time the film is
placed in service. However, an ownership interest with respect to
subsequently incurred costs (described in paragraph (e)(9) of this
section) and the amount at risk with respect to such costs are
determined at the time they are paid or incurred. Thus, a taxpayer
purchasing a part of a qualified film after the film has been placed in
service acquires no ownership interest in that part for purposes of the
credit except with respect to subsequently incurred costs. However, if
a taxpayer had purchased the part before the film has been placed in
service in any medium of exhibition in any geographical area of the
world, the taxpayer will have acquired an ownership interest in that
part of the film for purposes of the credit.
(iii) Certain lenders and guarantors considered to have an ownership
interest. To qualify for the investment credit with respect to a
qualified film, the taxpayer must have a depreciable interest in at
least a part of the film. Solely for purposes of this paragraph, a
taxpayer who, at the time a film is first placed in service, is a lender
or guarantor of all or a portion of the funds used to produce or acquire
the film or part thereof, will be regarded as having a depreciable
interest in at least a part of the film if he can look for repayment or
relief from liability solely to the proceeds generated from the
exhibition or disposition of at least a part of the film. In addition,
if the financing for a film was part of an agreement which provided
funds for the production of several qualified films, and a lender or
guarantor can look for repayment or relief from liability solely to the
aggregate proceeds generated from at least a part of each film, the
lender or guarantor will be considered to have an ownership interest in
each film. A commercial lender will not be considered to have an
ownership interest in any film simply by reason of a commercial loan.
If a lender or guarantor (other than a producer who owned the film and
made or guaranteed a loan to a purchaser) is regarded as having an
ownership interest in the film, the lender or guarantor shall be treated
as having purchased the interest under paragraph (g)(1) of this section
for an amount equal to the principal amount of the loan which it made or
guaranteed.
(iv) Partnerships, electing small business corporations, and estates
and trusts. If a partnership has an ownership interest in a qualified
film, the qualified investment will be apportioned pro rata among the
partners on the basis of their percentage of capital at risk in the
partnership at the time the film is placed in service. If an electing
small business corporation has an ownership interest in a qualified
film, the qualified investment will be apportioned among the
shareholders on the basis of their percentage of ownership of stock of
the corporation on the last day of its taxable year in which the film is
placed in service. If an estate or trust has an ownership interest in a
qualified film, the qualified investment will be apportioned between the
estate or trust and the beneficiaries on the basis of the distributable
net income of the estate or trust allocable to each in the taxable year
of the trust or estate in which the film is placed in service. For
purposes of determining ownership interest with respect to subsequently
incurred costs (described in paragraph (e)(9) of this section), a
taxpayer's proportionate share of the capital at risk in a qualified
film owned by a partnership or electing small business corporation is
determined on the basis of the taxpayer's capital at risk in the entity
on the last day of the taxable year of the entity in which the
subsequently incurred costs are paid or incurred. The amount of capital
which a taxpayer has at risk does not include any amount previously
taken into account in determining the investment credit to which the
taxpayer is entitled under section 48(k). For example, if a taxpayer
has claimed investment credit with respect to the entire amount which he
has at risk in a partnership, no additional investment credit may be
claimed by the taxpayer with respect to that amount. However, if a
taxpayer's capital at risk that was invested in a qualified film is
recovered and re-invested in another qualified film, investment credit
with respect to the amount reinvested may be claimed.
(v) Examples. This subparagraph may be illustrated by the following
examples:
Example 1. (a) Partnership P executes a production-distribution
agreement with D, a motion picture distribution company, for P to
produce a new feature-length motion picture. D agrees to provide the
funds for the production by direct loans to P. The amounts borrowed by
P would be repayable only out of net profits from the distribution of
the picture. P assumes no liability for the repayment of any amount.
In consideration for the sum advanced by D, P assigns to D the sole and
exclusive right to rent, lease, exhibit, license and otherwise dispose
of, or trade and deal in and with the picture. Proceeds realized from
the sale or distribution of the picture would first be used to reimburse
D for amounts advanced. Any amount remaining following the
reimbursement to D would be distributed 50 percent to D and 50 percent
to P. For purposes of this example, it is assumed that neither a
partnership nor a joint venture is created.
(b) Under paragraph (a)(4)(iii) of this section, D is regarded as
having a depreciable interest in the picture for purposes of the credit.
P's only interest in the picture is to share in any future profits.
Since only D's capital is at risk, D may claim the allowable credit with
respect to the entire qualified U.S. production costs of the picture.
Example 2. (a) A and B execute a partnership agreement under which B
agrees to provide the funds for the production of a motion picture in
return for a 50-percent interest in the net profits of the film. A
agrees to provide his services and to supply the necessary talent to
produce the film in exchange for the remaining 50-percent interest. Any
lease, exhibition, license, or other disposition of the film is subject
to the veto of either party.
(b) The AB partnership has a depreciable interest in the film. Under
paragraph (a)(4)(iv) of this section, the qualified investment will be
apportioned among the partners on the basis of their percentage of
capital at risk in the partnership. A has no capital at risk in the
partnership and therefore is not entitled to any credit with respect to
the film. Since B has supplied all the risk capital for the
partnership, B may claim all the investment credit with respect to the
film.
Example 3. (a) X produces a new feature-length motion picture with
its own funds. Upon completion X sells the film to Y. The purchase
price is payable solely out of the proceeds generated from the
exhibition of the film in movie theaters in the United States. Y
obtains exclusive control over the distribution of the film and agrees
to use its best efforts in promoting the distribution.
(b) Since X can look solely to the proceeds generated from the
exhibition of the film to recoup its funds used to produce the film, X
is treated as having a depreciable interest for purposes of the credit.
Since X's capital at risk equals the production costs of the film, X may
claim all of the investment credit with respect to the film.
(c) The facts are the same as in (a) of this example except that as
part of the purchase agreement Y paid to X $200,000 on the delivery of
the film which could be recouped by Y before any further amount was paid
to X. At the time the film is placed in service both X and Y have an
ownership interest in the film. Y has $200,000 of its capital at risk
and is entitled to investment credit to the extent that the amount does
not exceed the qualified United States production costs (as defined in
paragraph (e)(1) of this section) of the film. X is entitled to the
credit with respect to the remainder, if any, of the qualified United
States production costs.
Example 4. (a) T, a television network, produces an in-house film
for television. Prior to the time the film is placed in service, T
transfers to S the rights to syndicate the film among nonaffiliated
stations within the United States, beginning two years after the film is
first shown on network television. In exchange for the syndication
rights, S pays T an amount equal to 25 percent of the total production
costs of the film.
(b) Under paragraph (a)(2) of this section, if the owner of a
qualified film transfers to another taxpayer rights to display a film on
a limited basis, which do not constitute a transfer of an ownership
interest in a part of the film, the owner will still be treated as
having the exclusive right to display the film. The transfer of only
syndication rights to S is a transfer of less than a part of the film.
Accordingly, T is treated as retaining the exclusive right to display
the film and is entitled to the entire investment credit.
Example 5. (a) Individuals C and D form a partnership and each makes
a capital contribution of $50,000. The partnership produces a qualified
film which has qualified United States production costs of $100,000 and
places it in service. On the partnership return for the taxable year,
gross receipts from the film are $120,000, a depreciation deduction of
$90,000 is allowed, and $50,000 of other expenses relating to the film
are properly deducted. The partnership uses the $70,000 remaining after
the loss on the film to produce a second qualified film entirely in the
United States which is also placed in service.
(b) C and D may each claim investment credit with respect to $50,000
of the qualified investment relating to the first qualified film
produced by the partnership. In addition, under paragraph (a)(4)(iv) of
this section, if a taxpayer's capital at risk that was invested in a
qualified film is recovered and reinvested in another qualified film,
investment credit with respect to the amount reinvested may be claimed.
Accordingly, each partner may also claim an additional investment credit
with respect to $35,000 of the qualified investment relating to the
second qualified film.
(5) Placed in service. A qualified film is placed in service when it
is first exhibited or otherwise utilized before the primary audience for
which the qualified film was created. Thus, a qualified film is placed
in service when it is first publicly exhibited for entertainment
purposes and a qualified educational film is placed in service when it
is first exhibited for instructional purposes. Each episode of a
television film or tape series is placed in service when it is first
exhibited. A qualified film is not placed in service merely because it
is completed and therefore in a condition or state of readiness and
availability for exhibition, or merely because it is exhibited to
prospective exhibitors, sponsors, or purchasers, or is shown in a
''sneak preview'' before a select audience.
(b) Applicable percentage for post-1974 qualified films. For all
qualified films placed in service in taxable years beginning after
December 31, 1974, the applicable percentage under section 46(c)(2),
which is used to determine the qualified investment, is 66 2/3 percent
unless the taxpayer elects to have the credit computed under the 90
percent rule provided in section 48(k)(3). If the taxpayer determines
the credit under section 48(k)(2) (using an applicable percentage of 66
2/3 percent), section 47 (relating to recapture of investment credit
upon early disposition) will not apply with respect to investment credit
claimed on a qualified film.
(c) Election of 90-percent rule -- (1) In general. If a taxpayer
makes an election under section 48(k)(3), the applicable percentage
under section 46(c)(2) for each qualified film will be determined on a
film-by-film basis. The taxpayer must state an estimated useful life
for each qualified film and any investment credit claimed is subject to
recapture upon early disposition or upon early expiration of its useful
life. For purposes of this paragraph, a qualified film's useful life
will be considered to have expired at the close of the first taxable
year in which the aggregate amount allowable as a deduction under
section 167 equals or exceeds 90 percent of the basis of the film. If
the taxpayer determines the deduction under section 167 using a method
which does not require an estimate of the useful life of the film in
terms of years (e.g., the income forecast method), the estimated total
income or other estimate used in computing the deduction for the taxable
year in which a qualified film is placed in service must be used for all
subsequent years in determining whether the aggregate amount allowable
as a deduction under section 167 equals or exceeds 90 percent of the
basis of the film. In determining whether the aggregate amount
allowable as a deduction under section 167 equals or exceeds 90 percent
of the basis of the film, contingent costs determined after a film is
placed in service are not taken into account.
(2) Time and manner for making the election. To elect under section
48(k)(3) to use the 90-percent rule in determining investment credit
with respect to qualified films placed in service in taxable years
beginning after December 31, 1974, the taxpayer shall write in
parentheses, ''48(k)(3)'' after the cost or basis of property upon which
the credit is claimed on the Form 3468 filed with the original return
for the taxable year for which the 90-percent rule will first apply.
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. Notwithstanding the preceding sentences, an election
with respect to taxable years ending before April 5, 1979, will be valid
if the taxpayer indicates on an amended return or returns filed with the
district director having audit jurisdiction over the last return to
which the election relates on or before July 5, 1979, that the taxpayer
wishes section 48(k)(3) to apply. A taxpayer that has claimed
investment credit for any preceding taxable year with respect to any
qualified film placed in service in a taxable year beginning after
December 31, 1974, using the applicable percentage determined under
section 48(k)(2), may not elect to use section 48(k)(3) unless the
consent of the Secretary has been obtained.
(3) Who may elect. The election under section 48(k)(3) may be made
by any taxpayer that has a depreciable interest in a qualified film.
However, where a qualified film is owned by a partnership, electing
small business corporation (as defined in section 1371(b)), estate, or
trust, the election must be made separately by each partner, shareholder
or beneficiary. The election is not to be made by a partnership or
electing small business corporation and is to be made by a trust or
estate only if the trust or estate in determining its tax liability
would be allowed investment credit on a qualified film subject to the
election. The election of any partner, shareholder, beneficiary or
trust or estate will be effective regardless of whether any related
partner, shareholder, beneficiary, or trust or estate makes the
election. The method used by the taxpayer or any related business
entity for the first taxable year for which investment credit under
section 48(k) (2) or (3) was claimed must be used for all subsequent
years. A different method may be used by the taxpayer or any related
business entity for subsequent years only if permission is first
obtained from the Secretary.
(4) Related business entity. Two or more corporations, partnerships,
trusts, estates, proprietorships, or other entities are ''related
business entities'' if the conditions described in section 48(k)(3)(D)
are met.
(d) Predominant use test and qualified investment -- (1) Place of
exhibition not relevant. For qualified films placed in service in
taxable years beginning after December 31, 1974, section 48(a)(2)
(relating to property used outside the United States) does not apply.
Whether a qualified film is ultimately exhibited entirely within the
United States, entirely outside the United States, or partially within
and partially outside the United States, is not relevant for purposes of
determining the investment credit.
(2) Qualified investment. In determining the qualified investment
under section 46(c)(1), in place of the basis of a qualified film an
amount equal to the qualified United States production costs (as defined
in section 48(k)(5) and paragraph (e)(1) of this section) with respect
to the film must be used.
(e) Definitions -- (1) Qualified United States production costs. For
purposes of section 48(k), the term ''qualified United States production
costs'' means with respect to any film --
(i) Direct production costs allocable to the United States, plus
(ii) If 80 percent or more of the direct production costs are
allocable to the United States, all other production costs except direct
production costs allocable outside the United States.
(2) Production costs. The term ''production costs'', for purposes of
section 48(k), includes the following:
(i) A reasonable allocation of general overhead costs, if
capitalized,
(ii) The cost of obtaining screen rights and other material being
filmed, and of developing the screenplay, if capitalized,
(iii) Residuals (as defined in paragraph (e)(3) of this section)
whether or not capitalized,
(iv) Participations (as defined in paragraph (e)(4) of this section)
whether or not capitalized, subject to the limitations provided in
paragraph (e)(5) of this section, and
(v) All direct production costs described in paragraph (f) of this
section. The term ''production costs'' does not include advertising,
marketing, distribution costs, and any cost (other than residuals and
participations) that is not capitalized for United States tax purposes.
It also does not include any subsequently incurred costs except for the
costs described in paragraph (e)(9) of this section.
(3) Residuals. The term ''residuals'', for purposes of section 48(k)
and paragraph (e) of this section, means contingent compensation
payments (as opposed to payments fixed in amount that will be paid in
all events) paid to creative and technical personnel, to their unions
(including guilds) or to pension, health, or welfare funds, pursuant to
the terms of collective bargaining agreements betweeen a union and a
member of the film industry. A payment which is fixed in amount and
payable in all events will not be characterized as a contingent
compensation payment merely because it may be applied against an
obligation to make a contingent compensation payment. The collective
bargaining agreements generally cover all films produced over a period
of several years. For example, the conditions which fix the amount of
residuals payable in any instance may be based upon a percentage of
gross receipts of the film or upon the number of times the film has been
broadcast in a particular market.
(4) Participations. The term ''participations'' for purposes of
section 48(k) and paragraph (e) of this section means contingent
compensation payments, paid for the services of actors, production
personnel, writers, composers, directors and producers for their
services in connection with the production of the film. The terms of
participations generally are negotiated on a film-by-film basis. The
amount of a participation due in any case generally is based upon the
gross income or net income of the film. Participations do not include
any payment which represents a distribution of profits to a person on
the basis of an ownership interest. However, the mere fact that a
payment is contingent on the net profits derived from the exhibition of
a film does not mean that the payment is based on an ownership interest.
(5) Limitations. Notwithstanding any other provision of this
paragraph, the term ''production costs'' does not include
participations, paid during the taxable year, with respect to all
qualified films placed in service by the taxpayer during a particular
taxable year, to the extent that such participations exceed the lesser
of:
(i) The sum of 25 percent of each participation paid to each person
(excluding that part of any participation payable to one person in
excess of $1,000,000 for one qualified film) for each qualified film
placed in service during the same particular taxable year; or
(ii) Twelve and one-half percent of the aggregate United States
production costs determined under paragraph (e)(1) of this section
(other than residuals described in paragraph (e)(3) of this section and
participations described in paragraph (e)(4) of this section) of all
qualified films placed in service during the same particular taxable
year.
(6) Rules with respect to the 25-percent limitation. In applying
paragraph (e)(5)(i) of this section in taxable years after qualified
films were placed in service, participations paid in all prior years on
the films placed in service in the same taxable year are taken into
account. Thus, if films X and Y were placed in service in 1975 and
participations of $100 on film X and $40 on film Y were paid in 1975 and
participations of $20 on film X and $16 on film Y were paid in 1976, the
25-percent limitation would limit participations includible in
production costs with respect to all films placed in service in 1975 to
a maximum of $44 (25 percent of $176 ($100+$40+$20+$16)). If paragraph
(e)(5)(i) of this section limits total includible participations for all
qualified films placed in service during a particular taxable year, the
includible participations with respect to each qualified film placed in
service in that year will be 25 percent of each participation paid
during the taxable year (excluding that part of any participation
payable to one person in excess of $1,000,000) with respect to each of
these qualified films. Accordingly, under the example in this
subparagraph, if the $44 amount is less than the limitation computed
under paragraph (e)(5)(ii) of this section, participations taken into
account under section 48(k)(5)(B)(vi) in 1976, for films placed in
service in 1975, is $9 (25 percent of ($20+$16)).
(7) Rules with respect to the 12 1/2-percent limitation. If
paragraph (e)(5)(ii) of this section limits total includible
participations for all qualified films placed in service during a
particular taxable year, the includible participations with respect to
films placed in service in that year will be 12 1/2 percent of the
taxpayer's aggregate qualified United States production costs (other
than residuals and participations) of those films, reduced by
participations includible in production costs in prior years with
respect to those films. In such a case, includible participations with
respect to each such qualified film shall be determined by apportioning
total includible participations pro rata among all qualified films
placed in service in the particular taxable year on the basis of total
participation paid with respect to each such qualified film, taking into
account no more than $1,000,000 in participations for any one individual
with respect to any one film. If participations are based on the income
from a group of films, for purposes of applying the 12 1/2-percent
limitation and the $1,000,000 limitation, participations will be
allocated among the films in the group on any reasonable basis that is
satisfactory to the district director. In determining includible
participations under paragraph (e)(5)(ii) of this section in taxable
years after a qualified film has been placed in service, costs of
preparing prints described in paragraph (f)(1)(ii) of this section are
taken into account.
(8) Examples. Paragraph (e)(5) of this section may be illustrated by
the following examples:
Example 1. (a) X, a corporation using a calendar taxable year,
produced two motion picture films entirely within the United States,
film L and film M, and placed them both in service in 1975. Corporation
X incurred $5,750,000 in aggregate production costs other than residuals
and participations in producing film L and $565,000 in aggregate
production costs other than residuals and participations in producing
film M. On December 31, 1975, $1,250,000 in residuals and $2,000,000 in
participations were paid in connection with film L and $25,000 in
residuals and $10,000 in participations were paid in connection with
film M. Participations paid in connection with film L consisted of
$1,100,000 paid to the starring actor and $900,000 paid to the director.
All participations paid in connection with film M were paid to one
actor.
(b) The 25-percent limitation on participations in paragraph
(e)(5)(i) of this section would limit participations includible in
production costs to a maximum of $475,000 with respect to film L. This
amount consists of $250,000 (25 percent of $1,000,000 ($1,100,000
participation paid to the starring actor -- $100,000 paid in excess of
$1,000,000)) plus $225,000 (25 percent of the $900,000 participation
paid to the director). The 25-percent limitation would limit
participations with respect to film M to $2,500 (25 percent of the
$10,000). The 25-percent limitation would limit participations
includible in production costs with respects to all film placed in
service in 1975 to a maximum of $477,500 ($475,000 plus $2,500).
(c) The 12 1/2-percent limitation on participations in paragraph
(e)(5)(ii) of this section would limit participations includible in
production costs with respect to all films placed in service in 1975 to
a maximum of $789,375 (12 1/2 percent of $6,315,000 ($5,750,000 in
aggregate production costs of film L other than residuals and
participations +$565,000 in aggregate production costs of film M other
than residuals and participations)).
(d) Under paragraph (e)(5) of this section, the lower limit on
participations in paragraph (b) of this example applies to limit the
participations includible in production costs on December 31, 1975, to
$475,000 for film L and $2,500 for film M. Production costs to be taken
into account in 1975 for film L are $7,475,000 ($5,750,000 in aggregate
production costs other than residuals and participations plus $1,250,000
in residuals and $475,000 for includible participations). Production
costs to be taken into account in 1975 for film M are $592,500 ($565,000
in aggregate production costs other than residuals and participations
plus $25,000 in residuals and $2,500 for includible participations).
The cumulative unused balance of includible participations, for films
placed in service in 1975, available for future years under the 12
1/2-percent limitation, at the end of 1975, is $311,875
($789,375^$477,500).
Example 2. (a) The facts are the same as in example 1 except that in
1976 an additional $20,000 in residuals and $10,000 in participations
were paid with respect to film L. In addition, corporation X produced
film N entirely within the United States and placed it in service.
Corporation X incurred $750,000 in aggregate production costs other than
residuals and participations in producing film N. On December 31, 1976,
$25,000 in residuals and $25,000 in participations were paid in
connection with film N. All participations paid in connection with film
L were paid to the director and all participations paid in connection
with film N were paid to the starring actor.
(b) The 25-percent limitation on participations in paragraph
(e)(5)(i) of this section would limit participations includible in
production costs with respect to all films placed in service in 1975 to
a maximum of $480,000 ($475,000 for includible participations under
paragraph (e)(5)(i) of this section in 1975 with respect to film L plus
$2,500 for includible participations under paragraph (e)(5)(i) of this
section in 1975 with respect to film M plus $2,500 (25 percent of the
$10,000 participations paid in 1976 for film L)). It would also limit
participations includible in production costs with respect to all films
placed in service in 1976 to a maximum of $6,250 (25 percent of the
$25,000).
(c) The 12 1/2-percent limitation on participations in paragraph
(e)(5)(ii) of this section would limit additional participations
includible in production costs with respect to all films places in
service in 1975 (films L and M) to a maximum of $311,875 (See
computation in paragraph (d) of Example 1.) It would also limit
production costs with respect to the only film places in service in 1976
(film N) to a maximum of $93,750 (12 1/2 percent of $750,000 in
aggregate production costs other than residuals and participations).
(d) Under paragraph (e)(5) of this section, the lower limit on
participations in paragraph (b) of this example applies to limit the
participations includible in production costs on December 31, 1976, to
$2,500 for film L and $6,250 for film N. Total production costs to be
taken into account by corporation X in 1976 are $22,500 ($20,000 in
residuals +$2,500 in participations) for film L and $781,250 ($750,000
in aggregate production costs other than residuals and participations
+$25,000 in residuals and $6,500 in includible participations) for film
N. The cumulative unused balance of includible particiaptions, for
films placed in service in 1975, available for future years under the 12
1/2-percent limitation, at the end of 1976, is $309,375
($789,375^($477,500+$2,500)). The balance for film N, placed in service
in 1976, is $87,500 ($93,750^$6,250).
Example 3. (a) The facts are the same as in examples 1 and 2 except
that in 1977 an additional $250,000 in residuals and $700,000 in
participations were paid with respect to film N. In addition,
corporation X produced film O and P entirely within the United States
and placed them in service in 1977. Corporation X incurred $1,000,000
in aggregate production costs other than residuals and participations in
producing film O and $500,000 in aggregate production costs other than
residuals and participations in producing film P. On December 31, 1977,
$200,000 in residentials and $1,000,000 in participations were paid in
connection with film O and $100,000 in residuals and $300,000 in
participations were paid in connection with film P. Participations paid
in connection with films N, O, and P were all paid to the starring actor
of each film.
(b) The 25-percent limitation on participations in paragraph
(e)(5)(i) of this section would limit participations includible in
production costs with respect to all films placed in service in 1976 to
a maximum of $181,250 ($6,250 in participations included in 1976 with
respect to film N plus $175,000 (25 percent of the $700,000
participation paid in 1977 for film N)). It would also limit
participations includible in production costs with respect to all films
placed in service in 1977 to a maximum of $250,000 (25 percent of the
$1,000,000 participation paid to the starring actor) with respect to
film O and $75,000 (25 percent of the $300,000 participation paid to the
starring actor) with respect to film P.
(c) The 12 1/2 percent limitation on participations in paragraph
(e)(5)(ii) of this section would limit additional participations
includible in production costs with respect to all films placed in
service in 1976 (film N) to a maximum of $87,500. (See computation in
paragraph (d) of Example 2). It would also limit participations
includible in production costs with respect to all films placed in
service in 1977 to a maximum of $187,500 (12 1/2 percent of $1,500,000
($1,000,000 in aggregate production costs of film O other than residuals
and participations plus $500,000 in aggregate production costs of film P
other than residuals and participations)).
(d) Under paragraph (e)(5) of this section, the lower limit on
participations in paragraph (c) of this example applies to limit the
participations includible in production costs on December 31, 1977, to
$87,500 for all films placed in service in 1976 and to $187,500 for all
films placed in service in 1977. No additional payments of
participations with respect to films placed in service in 1976 or 1977
are includible in production costs.
(9) Subsequently incurred costs. The only costs incurred after a
qualified film has been placed in service which are includible in
production costs are the cost of preparing prints placed in service
within 12 months after the film (or part) is initially released for
public exhibition in any medium, residuals described in paragraph (e)(3)
of this section, and participations described in paragraph (e)(4) of
this section. Thus, the cost of additions, modifications, or editing of
a film for a new medium incurred after the film is placed in service, is
not includible in production costs.
(f) Direct production costs -- (1) Definition. The term ''direct
production costs'', for purposes of section 48(k)(5), includes the
following capitalized costs:
(i) Compensation for services performed by actors, production
personnel, writers, composers, directors, and producers (not including
participations and residents),
(ii) The cost of preparing prints placed in service (as described in
1.46-3(d)) within 12 months after the qualified film is intially
released for public exhibition in any medium (excluding the cost of
distributing those prints),
(iii) The cost of equipment and supplies, and related shipping costs,
(iv) The cost of costumes, props, scenery, and all accessories,
(v) Any rental charges other than overhead,
(vi) The cost of film editing,
(vii) Per diem and other living allowances for all personnel involved
in the motion picture production, and
(viii) Travel expenses for personnel.
The term does not include any cost described in paragraphs (e)(2)(i)
through (e)(2)(iv) of this section or any cost which is not includible
in the term ''production costs''.
(2) Allocation of direct production costs. For purposes of section
48(k)(5) of the Code and paragraph (e)(1) of this section, direct
production costs are characterized as either direct production costs
allocable to the United States or direct production costs allocable
outside the United States, under the following rules:
(i) Compensation paid for services (including fringe benefits) is
allocated to the country in which the services are performed, except
that payments to United States persons (within the meaning of section
7701(a)(30) of the Code) for services performed outside the United
States are allocated to the United States. For purposes of this
subparagraph (2), and expense described in paragraph (f)(2) (iii) or
(iv) of this section will be treated as compensation and not subject to
the allocation rules described therein, to the extent that the expense
is treated by the taxpayer as compensation paid to an employee and as
wages to the employee for purposes of witholding under chapter 24
(relating to collection of income tax at source on wages). Payments to
an electing small business corporation (within the meaning of section
1371) or to a partnership are considered payments to a United States
person only to the extent that the payments are included in the gross
income of a United States person other than an electing small business
corporation or partnership. Payments to a domestic corporation, other
than an electing small business corporation, are not considered payments
to a United States person to the extent of the value of services
provided by the corporation which are performed by persons who are not
United States persons.
(ii) All printing costs (within the meaning of section 48(k)(B)(ii)
and paragraph (f)(1)(ii) of this section) are allocated to the country
in which the costs are incurred.
(iii) Per diem and other living allowances are allocated to the
country in which the expenses are incurred.
(iv) Travel expenses for personnel are apportioned one-half to direct
production costs allocable to the country of departure and one-half to
direct production costs allocable to the country of arrival.
(v) Amounts for equipment, supplies, and related shipping costs are
allocated to the country in which, with respect to the production of the
film, the predominant use occurs. In the absence of better evidence as
to the actual place of predominant use, allocations may be made in
accordance with the shooting days of the film.
(vi) All other items are allocated consistent with the principle set
forth in section 48(k)(5)(D)(ii) and paragraph (f)(2)(v) of this
section.
(g) Entitlement to investment credit by taxpayers other than original
owner -- (1) Purchase or sale of a qualified film. If a taxpayer
purchases an entire qualified film before it is placed in service, the
purchaser's qualified United States production costs are equal to the
lesser of the total qualified United States production costs of the
seller or the fixed purchase price of the film. If a taxpayer purchases
a part of a film before it is placed in service, the purchaser's
qualified United States production costs are equal to the lesser of (i)
the qualified United States production costs of the seller at the time
of the sale or at the time of completion if later, reduced by the amount
of any prior purchase, or (ii) the fixed purchase price of that part of
the film purchased. Notwithstanding the preceding sentences, in
determining a purchaser's qualified United States production costs, the
purchaser of a qualified film may include subsequently incurred costs
(as described in paragraph (e)(9) of this section) which he incurs. If
a taxpayer purchases one or more parts of a film, and in the same
transaction acquires an interest in the film that does not constitute a
part, the fixed purchase price for purposes of this subparagraph (1) is
reduced by the amount paid attributable to the interest. If a taxpayer
sells a part of a film before the film is placed in service, his
qualified United States production costs are reduced by the fixed
purchase price of that part of the qualified film sold. For example,
assume a producer sells, for $75, all rights to display a film in
Europe. The total qualified United States production costs for the film
were $100. The producer's qualified United States production costs for
that part of the film retained are $25 ($100 in total qualified United
States production costs for the whole film reduced by the $75 purchase
price).
(2) Purchases before January 20, 1978. For a qualified film
purchased before January 20, 1978 --
(i) The district director may require the purchaser to establish the
seller's qualified United States production costs. If the purchaser
informs the district director in writing that the purchaser does not
know, and after making reasonable efforts cannot establish those costs,
then the district director may establish them by making appropriate
inquiries of the seller or any other person. (See paragraph (e)(2) of
this section which requires that all production costs other than
residuals and participations be capitalized for United States tax
purposes by the producer.)
(ii) If the seller's qualified United States production costs cannot
be established, the amount of those costs will be presumed to equal the
amount of the fixed purchase price: Provided, The purchaser can show
that the film was produced entirely in the United States. Absent such a
showing, the purchaser must establish the seller's qualified United
States production costs on the basis of a reasonable estimate.
(3) Purchases after January 19, 1978. For a qualified film purchased
after January 19, 1978, no credit is allowable unless the purchaser
attaches to its income tax return in which the credit is claimed, a
statement addressed to the district director, signed by the seller which
(i) describes the nature and an amount of each item qualifying as United
States production costs, (ii) specifies the nature and purchase price of
any part of the film previously sold, and (iii) states that the seller
has not previously placed the film in service. If prior to December 20,
1977, a person has entered into a binding contract to purchase a
qualified film, the qualified film will be regarded as having been
purchased prior to January 20, 1978.
(4) Credit unavailable to lessees. The election under section 48(d)
by which a lessor of property may elect to treat a lessee as having
acquired the property is not available with respect to a qualified film.
To obtain the credit with respect to a film a taxpayer must acquire
full rights to exploit a qualified film for its estimated useful life
through at least a particular medium in a particular geographical area.
Furthermore, the amount with respect to which the credit may be claimed
is limited by the amount that the taxpayer has at risk. Under paragraph
(a) of this section, a taxpayer who possesses such rights and is at risk
is an owner of a part, irrespective of the term used to characterize the
taxpayer in any private agreement of contract. Accordingly, a taxpayer
who meets these requirements is entitled to the credit without the use
of section 48(d). If a lessee does not meet these requirements, a
lessor cannot elect under section 48(d) to treat the lessee as having
acquired the film. For example, where a taxpayer is precluded (by law,
regulation or government action) from acquiring a part of a film and
thus can only lease the film, the lessor cannot elect under section
48(d) to treat the lessee as having acquired the film.
(Secs. 38(b) and 7805, Internal Revenue Code of 1954 (76 Stat. 962,
68A Stat. 917; 26 U.S.C. 38(b), 7805))
(44 FR 20417, Apr. 5, 1979, as amended by T.D. 8195, 53 FR 12678,
Apr. 18, 1988)
26 CFR 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 determined if depreciation (or
amortization in lieu of depreciation) is allowable for property, see
1.48-1(b).
(ii) For the meaning of ''estimated useful life'', see 1.46-3(e)(7).
(iii) The meaning of ''acquired'', ''original use'',
''construction'', ''reconstruction'', and ''erection'' is determined
under the principles of 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 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
(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
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.
(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.
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 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 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 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
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 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 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.
(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 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 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
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.
(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 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 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 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 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 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 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.
(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 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 approrpiate 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
1.47-1(h)(3)(ii).
(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.
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 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 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
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. 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 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:
Accordingly, the energy credit earned in 1981 for each of the
qualifying buses is determined as follows:
(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 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 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:
(b) X makes the following calculations to determine the energy credit
earned for calendar year 1980.
Accordingly, X earned an energy credit of $4,000 in 1980 ($40,000
1/3 10% 3 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.
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 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 buses 50
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.
(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)
26 CFR 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 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 1.48-1(l). Under section
48(p)(6) poultry constitutes livestock for purposes of 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.
(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 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 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 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)
26 CFR 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 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 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
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 ''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 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 x 20 and two other external walls
measuring 100 x 20 . C tore down one of the 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 x 4 to 6 x 8 . 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 airconditioning 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.
(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 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 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 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 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 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 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 1.48-11 shall not apply to
expenditures incurred after December 31, 1981.
(2) Transitional rule. This 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)
26 CFR 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
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
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.)
(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 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 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 (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 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
with 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 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 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 the amount of
expenditures incurred by C before the transfer. (See paragraph (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
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.
(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 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 x 20 and two other external walls measuring 100 x
20 . 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 x 4 to 6 x 8 . 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 x 20 and the rear and front walls measure 75 x 20 .
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 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 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 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 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
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 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 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:
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, 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 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.
(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.
(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 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 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.
(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 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 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 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
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
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)
26 CFR 1.48-12T Tax-exempt entity leasing (Temporary).
In general. For certain investment tax credit consequences for
property which is tax-exempt use property under section 168(j), see
1.168(j)-1T.
(T.D. 8033, 50 FR 27223, July 2, 1985)
26 CFR 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 --
(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 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)
26 CFR 1.50-1 rules for computing credit for expenses of work incentive programs
26 CFR 1.50A-1 Determination of amount.
(a) In general. Except as otherwise provided in this section and in
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 1.50B-1).
The amount equal to 20 percent of the WIN expenses shall be referred to
in this section and 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 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 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 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 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 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 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:
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
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 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 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 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 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 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. 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 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)
26 CFR 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 1.50A-1)
over the limitation based on amount of tax for such taxable year (as
determined under paragraph (b) of 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 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. ( 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:
(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:
(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:
(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:
(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 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:
(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:
(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:
(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:
(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:
(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 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)
26 CFR 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 1.50B-1) are taken into account under paragraph (a) of 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 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 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 1.50B-1) to an employee, with respect to whom WIN
expenses are taken into account under paragraph (a) of 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 1.50A-1 by not taking into account WIN
expenses with respect to the employee (or employees) described in
subparagraph (1) or (2) of this paragraph. There shall be recomputed
under the principles of 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, 1.50A-5, 1.50A-6 or 1.50A-7.
(ii) For purposes of this section and 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
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 terminations were not subject to the exceptions
provided by 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 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 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 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)
26 CFR 1.50A-4 Exceptions to the application of 1.50A-3.
(a) In general. Notwithstanding the provisions of paragraph (a) of
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 1.50A-3
if the 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 1.50A-3 if, after the initial date of employment (as
defined in paragraph (c)(1) of 1.50A-3) and before the close of the
period referred to in paragraph (a)(1) of 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 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
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 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 1.50B-1) shall not be deemed terminated for
purposes of paragraph (a) of 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 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 1.50A-3), then paragraph (a)(3) of 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 1.50A-3) of such employee 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 1.50A-3 due to the liquidation of X
Corporation on December 15, 1973. Thus, no recapture determination
under paragraph (a)(3) of 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 1.50A-3. For purposes of applying the period described in
paragraph (a)(1) of 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 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 1.50A-3 on February 2, 1974. Thus, Y Corporation shall make a
recapture determination under paragraph (a) of 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 1.50B-1) shall not be
deemed terminated for purposes of paragraph (a) of 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 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 1.50A-3. For purposes
of determining the period described in paragraph (a)(1) of 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 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 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
1.50A-5 (relating to electing small business corporations), paragraph
(a)(2) of 1.50A-6 (relating to estates or trusts), or paragraph
(a)(2)(ii) of 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 1.50A-3) to
the WIN employee within the period described in paragraph (a)(1) of
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 1.50A-3. For
purposes of determining the period described in paragraph (a)(1) of
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, 1.50A-5,
1.50A-6, or 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
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
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
1.50A-3 applies to the June 1, 1973, termination of WIN employees by X
Corporation. 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
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 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
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 1.50A-3 does not apply to the March 15, 1973, transfer by the ABC
Partnership. Paragraph (a)(1) of 1.50A-3 applies with respect to
partner B's $2,000 share of the WIN expenses. See paragraph (a)(2) of
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
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)
26 CFR 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 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
1.50A-3 with respect to each shareholder who is treated, under paragraph
(a) of 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 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 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 1.50A-3). For the definition of the term ''recapture determination''
see paragraph (a)(3) of 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
(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 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
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 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
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 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 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 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 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, 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 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
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 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 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 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
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, 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:
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:
(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)
26 CFR 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 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 1.50A-3 with respect to the
estate or trust, and each beneficiary who is treated, under paragraph
(a) of 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 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 1.50A-3).
For definition of ''recapture determination'' see paragraph (a)(3) of
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 into account and before the
close of the period to which paragraph (a)(1) of 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 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
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 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 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 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 year. Under paragraph (a) of this section, the WIN
expenses were apportioned to XYZ Trust and to beneficiary A as follows:
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 1.50B-4, each beneficiary's share and the trust's share of the WIN
expenses are apportioned as follows:
(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)
26 CFR 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 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 1.50A-3 with respect to each partner
who is treated, under paragraph (a) of 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 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
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
1.50A-3). For the definition of ''recapture determination'' see
paragraph (a)(3) of 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 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 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 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 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 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 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:
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, 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:
(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)
26 CFR 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 1.50A-1
through 1.50B-5, the term ''work incentive program expenses'' (referred
to in 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 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 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 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 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 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
(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 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 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 1.50A-4 applies.
(38 FR 6161, Mar. 7, 1973)
26 CFR 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 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 1.1371-1 and of
paragraph (a)(2) of 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 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 1.50A-3, then such shareholder shall
make a recapture determination under the provisions of section 50A (c)
and (d) of the Code and 1.50A-3. See 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
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:
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 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 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:
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:
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)
26 CFR 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 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.
(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 1.50A-3, or if there is a failure (which is subject to
the rules is paragraphs (a) (2) and (3) of 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 1.50A-3. See 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
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:
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:
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)
26 CFR 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 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 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 1.50A-3, then such partner shall make
a recapture determination under the provisions of section 50A (c) and
(d) of the Code and 1.50A-3. See 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 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 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-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 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:
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:
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)
26 CFR 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 1.50B-1, and
(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 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 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 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 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 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 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 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)
26 CFR 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, 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 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 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 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 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 301.7502-1(c) and delivered
in accordance with the delivery requirements in 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 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 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 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
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 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 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 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 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 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 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 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 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 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)