(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 em

ploying 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 two situations:

(1) Section 1201 (a) (2), relating to the alternative tax for capital gains in case of a corporation, provides a different rate of tax for a taxable year beginning before April 1, 1954, than the rate of tax applicable to a taxable year beginning on or after April 1, 1954.

(2) The provisions of section 21 do not apply in the case of any taxpayer for taxable years beginning before January 1, 1954, and ending after December 31, 1953. For such taxable years, section 21 provides that section 108 (j) of the Internal Revenue Code of 1939, relating to individuals, shall continue to be applicable, and the tax shall be computed at the rate and in the manner set forth in 26 CFR (1939) 39.108-1 (Regulations 118).

(1) 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:

Example (1). A, an individual filing his return on a calendar year basis, has taxable income for the calendar year 1955, in the amount of $22,000 which includes $4,000 representing 50 percent of a long-term capital gain of $8,000. Assume, for the purpose

of this example, that there has been no change in the rates of tax as shown in the tax table under section 1 (a), but the tax on capital gains under section 1201 (b), relating to the alternative tax, has been increased from 25 percent to 35 percent and the effective date of the change in rate is July 1, 1955. The change in the rate of the capital gains tax affects a choice between the use of the tax table under section 1 and the alternative tax computation under section 1201 (b). Accordingly, the first tentative tax would consist of the alternative tax under section 1201 (b) and the second tentative tax would consist of the normal tax and surtax as computed by the use of the tax table under section 1. The income tax for the taxable year ended December 31, 1955, would be computed under section 21 as follows:

Example (2). For purposes of this example, the following facts are assumed: The taxpayer is a corporation, its taxable year is a calendar year of 365 days (that is, it is not a leap year), its taxable income for both normal tax and surtax purposes is $100,000, and it is subject to a change in the rate of the normal tax from 30 percent of taxable income to 25 percent of taxable income effective on July 1 of the taxable year. The change in the normal tax rate applicable to the corporation does not affect the amount of any other tax applicable to the corporation under chapter 1 of the Code. In such

case, the tentative tax at the 30 percent rate would be $30,000, and the tentative tax at the 25 percent rate would be $25,000. The proportionate part of the tentative tax at the 30 percent rate is $14,876.71, that is, an amount which is the same proportion of $30,000 as 181 (the number of days from January 1 to June 30 of the taxable year, both dates inclusive) is to 365 (the total number of days in the taxable year). The proportionate part of the tentative tax at the 25 percent rate is $12,602.74, that is, an amount which is the same proportion of $25,000 as 184 (the number of days from July 1, to December 31 of the taxable year, both dates inclusive) is to 365.

CREDITS AGAINST TAX

CREDITS ALLOWABLE

§ 1.31 Statutory provisions; tax withheld on wages.

SEC. 31. Tax withheld on wages—(a) Wage withholding for income tax purposes-(1) In general. The amount withheld under section 3402 as tax on the wages of any individual shall be allowed to the recipient of the income as a credit against the tax imposed by this subtitle.

(2) Year of credit. The amount so withheld during any calendar year shall be allowed as a credit for the taxable year beginning in such calendar year. If more than one taxable year begins in a calendar year, such amount shall be allowed as a credit for the last taxable year so beginning.

(b) Credit for special refunds of social security tax-(1) In general. The Secretary or his delegate may prescribe regulations providing for the crediting against the tax imposed by this subtitle of the amount determined by the taxpayer or the Secretary (or his delegate) to be allowable under section 6413 (c) as a special refund of tax imposed on wages. The amount allowed as a credit under such regulations shall, for purposes of this subtitle, be considered an amount withheld at source as tax under section 3402.

(2) Year of credit. Any amount to which paragraph (1) applies shall be allowed as a credit for the taxable year beginning in the calendar year during which the wages were received. If more than one taxable year begins in the calendar year, such amount shall be allowed as a credit for the last taxable year so beginning.

§ 1.31-1 Credit for tax withheld on

wages.

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 onehalf 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.

§ 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.

§ 1.32 Statutory provisions; tax withheld at source on nonresident aliens and foreign corporations and on tax-free covenant bonds.

SEC. 32. Tax withheld at source on nonresident aliens and foreign corporations and on tax-free covenant bonds. There shall be allowed as credits against the tax imposed by this chapter

(1) The amount of tax withheld at source under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and on foreign corporations), and

(2) The amount of tax withheld at source under subchapter B of chapter 3 (relating to interest on tax-free covenant bonds).

§ 1.33 Statutory provisions; taxes of foreign countries and possessions of the United States.

SEC. 33. Taxes of foreign countries and possessions of the United States. The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax imposed by this chapter to the extent provided in section 901.

§ 1.34 Statutory provisions; dividends received by individuals.

Sec. 34. Dividends received by individuals— (a) General rule. Effective with respect to taxable years ending after July 31, 1954, there shall be allowed to an individual, as a credit against the tax imposed by this subtitle for the taxable year, an amount equal to the following percentage of the dividends which are received from domestic corporations and are included in gross income:

(1) 4 percent of the amount of such dividends which are received before January 1, 1964, and

(2) 2 percent of the amount of such dividends which are received during the calendar year 1964.

(b) Limitation on amount of credit. The credit allowed by subsection (a) shall not exceed whichever of the following is the lesser:

(1) The amount of the tax imposed by this chapter for the taxable year, reduced by the credit allowable under section 33 (relating to foreign tax credit); or

(2) The following percent of the taxable income for the taxable year:

(A) 2 percent, in the case of a taxable year ending before January 1, 1955, or beginning after December 31, 1963.

(B) 4 percent, in the case of a taxable year ending after December 31, 1954, and beginning before January 1, 1964.

(c) No credit allowed for dividends from certain corporations. Subsection (a) shall not apply to any dividend from

(1) A corporation organized under the China Trade Act, 1922 (see sec. 941);

(2) A corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is

(A) A corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers' cooperative associations); or

(B) A corporation to which section 931 (relating to income from sources within possessions of the United States) applies; or

(3) A real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part II of subchapter M (sec. 856 and following).

(d) Special rules for certain distributions. For purposes of subsection (a)

(1) Any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.) shall not be treated as a dividend.

(2) A dividend received from a regulated investment company shall be subject to the limitations prescribed in section 854.

(e) Certain nonresident aliens ineligible for credit. No credit shall be allowed under subsection (a) to a nonresident alien individual with respect to whom a tax is imposed for the taxable year under section 871 (a).

(1) Cross references. (1) For exclusion of certain dividends from gross income, see section 116.

(2) For special rules relating to the credit provided by subsection (a), see sections 642 (trusts and estates), 702 (partnerships) and 584 (common trust funds).

(3) For disallowance of credit where tax is computed by Secretary or his delegate, see section 6014.

[Sec. 34 as amended by sec. 3(a), Life Insurance Company Income Tax Act 1959 (73 Stat. 139); sec. 10(e), Act of Sept. 14, 1960 (Pub. Law 86-779, 74 Stat. 1009); sec. 201(a), Rev. Act 1964 (78 Stat. 31); repealed by sec. 201 (b), Rev. Act 1964 (78 Stat. 31)]

[TD. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6598, 27 F.R. 4092, Apr. 28, 1962; T.D. 6777, 29 F.R. 17806, Dec. 16, 1964] § 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. 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.

For

(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