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 §1.15612A(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 291⁄2 percent with respect to gain in excess of $50,000 and the effective date of the change in rate is January 1, 1970. The income tax for the taxable year ended June 30, 1970, would be computed under section 21 as follows:

TENTATIVE TAX

Taxable income exclusive of capital gains and

$50,000 75,000 125,000 37,500 87,500

losses

Long-term capital gain

Deduct 50% of long-term capital gain

Taxable income

Tax under section 1 (1969 and 1970 rates)

37,690

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:

Taxable income under 1970 deduction provisions

215,375.00

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

1964-91/366 of $44,500

...

$34,938.52 11,064.21 46,002.73

Total tax for the taxable year ...

Example 7. Corporation N files its income ax returns on the basis of a fiscal year endng June 30. For its taxable year ending in 976, the taxable income of N is $100,000. N's ncome tax liability is determined for the period July 1, 1975, through December 31, 1975, y taking into account two rates of normal ax under section 11(b)(2) (A) and (B) and the increase to $50,000 in the surtax exemption inder section 11(d). For the period January 1, 1976, through June 30, 1976, N's income tax iability 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:

$100,000 (1976 rates) 22 percent of $100,000

Surtax on $75,000 (1976 rates and $25,000 surtax exemption) 26 percent of $75,000

$22,000

19,500

Total tentative tax at rates and

surtax exemption effective on and after January 1, 1976 ....

41,500

The 1975 and 1976 tentative taxes are apportioned as follows:

1975-184/366 of $34,500 1976-182/366 of $41,500

Total tax for the taxable year

...

$17,344

20,637

37,981

(Secs. 1561(a) (83 Stat. 599; 26 U.S.C. 1561(a)) of the Internal Revenue Code)

[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 7164, 37 FR 4190, Feb. 29, 1972; T.D. 74-13, 41 FR 12639, Mar. 26, 1976; T.D. 7528, 42 FR 64694, Dec. 28, 1977; T.D. 7728, 45 FR 72651, Nov. 3, 1980]

§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 occupant (see §1.23-3(h)) with respect to the same dwelling unit, and which wer taken into account in computing th credit for prior taxable years. In the case of expenditures made during ta able years beginning before January. 1980, the reduction of the maximu amount under paragraph (c) must fir be made with respect to the first $2,00 of expenditures (to which a 30 percer rate applies) and then with respect the next $8,000 of expenditures (t which a 20 percent rate applies). Thi reduction must be made if all or ar part of the credit was allowed in or wa carried over from a prior taxable year

(ii) Change of principal residence. A taxpayer is eligible for the maximu credit for qualifying expenditures made with respect to a new principal res dence notwithstanding the allowanc of a credit for qualifying expenditures made with respect to the taxpayer' previous principal residence. Further more, except in certain cases involving joint occupancy (see §1.23-3(h)), a tax payer is eligible for the maximum cred it notwithstanding the allowance of credit to a prior owner of the tax payer's new principal residence.

(iii) Example. The rules with respect to the reduction for prior expenditures are illustrated by the following exam ple:

Example. In 1978, A has $1,000 of energy conservation expenditures and $5,000 of renew able energy source expenditures in connec tion with A's principal residence. A's resi dential 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 expend itures (30 percent of the first $2,000 plus 2 percent of the next $3,000). In 1979 A has a additional $2,000 of energy conservation ex penditures 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 expendi tures taken into account in 1978). The maximum residential energy credit allowable to