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.

[TD. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6777, 29 F.R. 17806, Dec. 16, 1964]

§ 1.34-2 Limitations on credit.

amount of

(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 shortterm 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:

§ 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 corporations exempt from tax either under section 501, relating to charitable, etc., organizations, or under section 521, relating to farmers' cooperative associations.

are

(2) So-called dividends paid by mutual savings banks, cooperative banks, and buildin gand 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 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6598, 27 F.R. 4092, Apr. 28, 1962; T.D. 6625, 27 F.R. 12541, Dec. 19, 1962] § 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. § 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.

§ 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 F.R. 17807, Dec. 16, 1964] § 1.35 Statutory provisions; partially tax-exempt interest received by individuals.

SEC. 35. Partially tax-exempt interest received by individuals—(a) In general. 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 3 percent of the amount received as interest on obligations of the United States or on obligations of corporations organized under Act of Congress which are instrumentalities of the United States, but only if

(1) Such interest is included in gross income; and

(2) Such interest is exempt from normal tax under the Act authorizing the issuance of such obligations.

The

(b) Limitation on amount of credit. 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, or (2) 3 percent of the taxable income for the taxable year.

(c) 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).

of

(d) Cross reference. For reduction credit under this section on account of amortizable bond premium, see section 171. [Sec. 35 as amended by sec. 41(b), Technical Amendments Act 1958 (72 Stat. 1639); sec. 201 (d) (2) Rev. Act 1964 (78 Stat. 32)] [T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6777, 29 F.R. 17807, Dec. 16, 1964]

§ 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.

of

(b) For the treatment of partially tax-exempt interest in the case 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: Section 35 (a)

120

Limitation on credit under section 35 (b) (2); 3 percent of $4,000---Since of the three figures ($135, $110, and $120), the lesser is $110, A's credit under section 35 is limited to $110.

§ 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).

§ 1.36 Statutory provisions; credits not allowed to individuals paying optional tax or taking standard deduction. SEC. 36. Credits not allowed to individuals paying optional tax or taking standard deduction. If an individual elects to pay the optional tax imposed by section 3, or if he elects under section 144 to take the standard deduction, the credits provided by sections 32, 33, and 35 shall not be allowed. §1.37 Statutory provisions; retirement income.

SEC. 37. Retirement income-(a) General rule. In the case of an individual who has received earned income before the beginning

of the taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 17 percent, in the case of a taxable year beginning in 1964, or 15 percent, in the case of a taxable year beginning after December 31, 1964, of the amount received by such individual as retirement income (as defined in subsection (c) and as limited by subsection (d)); but this credit shall not exceed such tax reduced by the credits allowable under section 32(2) (relating to tax withheld at source on tax-free covenant bonds), section 33 (relating to foreign tax credit), and section 35 (relating to partially tax exempt interest).

(b) Individual who has received earned income. For purposes of subsection (a), an individual shall be considered to have received earned income if he has received, in each of any 10 calendar years before the taxable year, earned income (as defined in subsection (g)) in excess of $600. A widow or widower whose spouse had received such earned income shall be considered to have received earned income.

(c) Retirement income. For purposes of subsection (a), the term "retirement income" means

(1) In the case of an individual who has attained the age of 65 before the close of the taxable year, income from—

(A) Pensions and annuities (including, in the case of an individual who is, or has been, an employee within the meaning of section 401 (c) (1), distributions by a trust described in section 401(a) which is exempt from tax under section 501(a)),

(B) Interest,

(C) Rents,

(D) Dividends, and

(E) Bonds described in section 405(b) (1) which are received under a qualified bond purchase plan described in section 405 (a) or in a distribution from a trust described in section 401(a) which is exempt from tax under section 501 (a), or

(2) In the case of an individual who has not attained the age of 65 before the close of the taxable year, income from pensions and annuities under a public retirement system (as defined in subsection (f)),

to the extent included in gross income without reference to this section, but only to the extent such income does not represent compensation for personal services rendered during the taxable year.

(d) Limitation retirement on income. For purposes of subsection (a), the amount of retirement income shall not exceed $1,524 less

(1) In the case of any individual, any amount received by the individual as a pension or annuity—

(A) Under title II of the Social Security Act,

(B) Under the Railroad Retirement Acts of 1935 or 1937, or

(C) Otherwise excluded from gross income, and

(2) In the case of any individual who has not attained age 72 before the close of the taxable year

(A) If such individual has not attained age 62 before the close of the taxable year, any amount of earned income (as defined in subsection (g)) in excess of $900 received by such individual in the taxable year, or

(B) If such individual has attained age 62 before the close of the taxable year, the sum of (1) one-half the amount of earned income received by such individual in the taxable year in excess of $1,200 but not in excess of $1,700, and (11) the amount of earned income so received in excess of $1,700.

(e) Rule for application of subsection (d) (1). Subsection (d) (1) shall not apply to any amount excluded from gross income under section 72 (relating to annuities), 101 (relating to life insurance proceeds), 104 (relating to compensation for injuries or sickness), 105 (relating to amounts received under accident and health plans), 402 (relating to taxability of beneficiary of employees' trust), or 403 (relating to taxation of employee annuities).

(f) Public retirement system defined. For purposes of subsection (c) (2), the term "public retirement system" means a pension, annuity, retirement, or similar fund or system established by the United States, a State, a Territory, a possession of the United States, any political subdivision of any of the foregoing, or the District of Columbia.

(g) Earned income defined. For purposes of subsections (b) and (d) (2), the term "earned income" has the meaning assigned to such term in section 911 (b), except that such term does not include any amount received as a pension or annuity.

(h) Nonresident alien ineligible for credit. No credit shall be allowed under subsection (a) to any nonresident alien.

(1) Special rules for certain married couples-(1) Election. A husband and wife who make a joint return for the taxable year and both of whom have attained the age of 65 before the close of the taxable year may elect (at such time and in such manner as the Secretary or his delegate by regulations prescribes) to determine the amount of the credit allowed by subsection (a) by applying the provisions of paragraph (2).

(2) Special rules. If an election is made under paragraph (1) for the taxable year, for purposes of subsection (a) —

(A) If either spouse is an individual who has received earned income within the meaning of subsection (b), the other spouse shall be considered to be an individual who has received earned income within the meaning of such subsection; and

(B) Subsection (d) shall be considered as providing that the amount of the combined retirement income of both spouses shall not exceed $2,286, less the sum of the amounts specified in paragraphs (1) and (2) of subsection (d) for each spouse.

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

[Sec. 37 as amended by Act of Aug. 9, 1955 (Pub. Law 299, 84th Cong., 69 Stat. 591); Act of Jan. 28, 1956 (Pub. Law 398, 84th Cong., 70 Stat. 8); Act of Oct. 24, 1962 (Pub. Law 87-876, 76 Stat. 1199); sec. 7(a), SelfEmployed Individuals Tax Retirement Act 1962 (76 Stat. 828); secs. 113 (a), 201 (d) (3), and 202, Rev. Act 1964 (78 Stat. 24, 32, 33)] [T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6633, 28 F.R. 367, Jan. 15, 1963; T.D. 6722, 29 F.R. 5069, Apr. 14, 1964; T.D. 6791, 30 F.R. 85, Jan. 6, 1965]

§ 1.37-1 Allowance of credit for retirement income.

(a) In general. Section 37 provides a credit against the tax imposed by chapter 1 of the Internal Revenue Code of 1954 in the case of an individual who receives in the taxable year retirement income as defined in section 37 (c) and who meets the eligibility requirements of section 37(b). The amount of the credit is determined by multiplying the amount of retirement income for such taxable year, as limited by subsections (d) and (i) (2) (B) of section 37, by the rate provided in section 37(a) which is applicable for such year. The credit cannot exceed, however, the tax imposed by chapter 1, reduced by the credits enumerated in section 37(a).

(b) Maximum amount of retirement income and rate to be used to compute credit. (1) Section 37 (d) provides that the amount of retirement income with respect to which the retirement income credit is allowable cannot exceed $1,524 ($1,200 for taxable years ending before October 25, 1962). In the case of a joint return filed for a taxable year beginning after December 31, 1963, where both spouses have attained age 65 and they elect to compute their retirement income credit under the special rules of section 37(i), paragraph (2) (B) of section 37(i) provides that section 37(d) shall be considered as providing that the amount of combined retirement income of both spouses with respect to which the retirement income credit is allowable shall not exceed $2,286. For computation of the retirement income credit in the case of such joint returns, see paragraph (d) of this section.

(2) (1) For taxable years beginning before January 1, 1964, the amount of the retirement income credit is determined by multiplying the amount of retirement income, as limited by section 37 (d), by

the rate of tax applicable under section 1 of the Code to the first $2,000 of taxable income for such taxable year. Since the rate of tax under section 1 of the Code applicable to the first $2,000 of taxable income for taxable years beginning before January 1, 1964, is 20 percent, the maximum retirement income credit for an individual in a taxable year ending before October 25, 1962, is $240 (20 percent of $1,200) and in a taxable year beginning before January 1, 1964, and ending after October 25, 1962, is $304.80 (20 percent of $1,524).

(ii) For taxable years beginning in 1964, the amount of the retirement income credit is determined by multiplying the amount of retirement income, as limited by section 37 (d), by 17 percent. Thus, the maximum credit for an individual in a taxable year beginning in 1964 cannot exceed $259.08 (17 percent of $1,524). In the case of joint returns to which section 37(i) applies, the maximum credit cannot exceed $388.62 (17 percent of $2,286).

(iii) For taxable years beginning after December 31, 1964, the amount of the retirement income credit is determined by multiplying the amount of retirement income, as limited by section 37(d), by 15 percent. Thus, the maximum credit for an individual in a taxable year beginning after December 31, 1964 cannot exceed $228.60 (15 percent of $1,524). In the case of joint returns to which section 37(i) applies, the maximum credit cannot exceed $342.90 (15 percent of $2,286).

(c) Limitation on amount of credit. (1) Section 37(a) provides that the amount of retirement income credit shall not be greater than the excess of the individual's tax under chapter 1 of the Code for the taxable year over the sum of his credits against tax under section 32 (2) (relating to tax withheld at source on tax-free covenant bonds), section 33 (relating to foreign tax credit) and section 35 (relating to partially tax-exempt interest). Also, in the case of dividends received by an individual on or before December 31, 1964, the credit under section 34 (relating to credit for dividends received by individuals) shall be taken into account.

(2) The application of subparagraph (1) of this paragraph may be illustrated by the following example:

Example. Assume that the individual has a retirement income credit of $240 for the