come for the year of receipt and for each of the four preceding taxable years is greater (and thus is the amount of his increase in tax attributable to the receipt of the 825,800), B's taxable income for the taxable year of receipt, and for the immediately preceding taxable year, is treated, under subparagraph (8) (1) of this paragraph, as being 85,120 (825.800 divided by 5).

(f) Meaning of disabled. (1) For taxable years beginning after December 31, 1966, section 72(m) (7) provides that an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of longcontinued and indefinite duration. In determing whether an individual's impairment makes him unable to engage in any substantial gainful activity, primary consideration shall be given to the nature and severity of his impairment. Consideration shall also be given to other factors such as the individual's education, training, and work experience. The substantial gainful activity to which section 72 m) (7) refers is the activity, or a comparable activity, in which the individual customarily engaged prior to the arising of the disability (or prior to retirement if the individual was retired at the time the disability arose).

(2) Whether or not the impairment in a particular case constitutes a disability is to be determined with reference to all the facts in the case. The following are examples of impairments which would ordinarily be considered as preventing substantial gainful activity:

(i) Loss of use of two limbs;

(H) Certain progressive diseases which have resulted in the physical loss or atrophy of a limb, such as diabetes, multiple sclerosis, or Buerger's disease;

(iii) Diseases of the heart, lungs, or blood vessels which have resulted in major loss of heart or lung reserve as evidenced by X-ray, electrocardiogram, or other objective findings, so that despite medical treatment breathlessness, pain, or fatigue is produced on slight exertion, such as walking several blocks, using public transportation, or doing small chores?

Iv. Cancer which is inoperable and progressive:

(vi) Mental diseases (eg. psychom v severe psychoneurosis) requiring endtinued institutionalization or ecostat supervision of the individual:

(vii) Loss or diminution of Tinon t the extent that the affected TOTE has a central visual acuity of no bemar than 20/200 in the better eye after ben correction, or has a limitation the fields of vision such that the widest dameter of the visual fields subtends an ange no greater than 20 degrees;

(viii) Permanent and total low f speech;

(ix) Total deafness uncorrectible by & hearing aid.

The existence of one or more of the inpairments described in this subparagraph (or of an impairment of greater severity will not, however, in and of theelf alwaETE permit a finding that an individual disabled as defined in section 72: Any impairment, whether of lesser T greater severity, must be evalmased terms of whether it does in fact prevent the individual from engaging in his cuNtomary or any comparable substanna gainful activity.

(3) In order to meet the requirements of section 7246m (7), an impairment mu be expected either to continue for a long and indefinite period or to result in deat Ordinarily, a terminal illness because of disease or injury would result in discity. Indefinite is used in the sense that a cannot reasonably be anticipated the the impairment will in the foreseeace future, be so diminished as no longer m prevent substantial gainful activity Pr example, an individual who suffers a bone fracture which prevents him from worting for an extended period of time wi not be considered disabled, if his recovery can be expected in the foreseeable future if the fracture persistently falls to k the individual would ordinarily be coosidered disabled.

(4) An impairment which is remed able does not constitute a disability with in the meaning of section 72 m. 7.AS individual will not be deemed disabled with reasonable effort and safety to self. the impairment can be diminished to the extent that the individual will a be prevented by the impairment from engaging in his customary or any COLDparable substantial gainful activity (TD. 8876. 28 FR. 10136. Sept. 17, 1963 an amended by TD 6825. 2: FR. 7800 Size 1 1922, TD. 6585, 23 PR. 18811, Dec. 2T, 1958

§ 1.72-18 Treatment of certain total

distributions with respect to selfemployed individuals.

(a) In general. The Self-Employed Individuals Tax Retirement Act of 1962 permits self-employed individuals to be treated as employees for purposes of participation in pension, profit-sharing, and annuity plans described in sections 401(a) and 403(a). In general, amounts received by a distributee or payee which are attributable to contributions made on behalf of a participant while he was self-employed are taxed in the same manner as amounts which are attributable to contributions made on behalf of a common-law employee. However, such amounts which are paid in one taxable year representing the total distributions payable to a distributee or payee with respect to an employee are not eligible for the capital gains treatment of section 402(a) (2) or 403 (a) (2). This section sets forth the treatment of such distributions, except where such a distribution is subject to the penalties of section 72(m) (5) and paragraph (e) of § 1.72-17.

(b) Distributions to which this section applies. (1) (i) Except as provided in subparagraphs (2) and (3) of this paragraph, this section applies to amounts distributed to a distributee in one taxable year of the distributee in the case of an employees' trust described in section 401 (a) which is exempt under section 501(a), or to amounts paid to a payee in one taxable year of the payee in the case of an annuity plan described in section 403 (a), which constitute the total distributions payable, or the total amounts payable, to the distributee or payee with respect to an employee.

(ii) For the total distributions or amounts payable to a distributee or payee to be considered paid within one taxable year of the distributee or payee for purposes of this section, all amounts to the credit of the employee-participant through the end of such taxable year which are payable to the distributee or payee must be distributed or paid within such taxable year. Thus, the provisions of this section are not applicable to a distribution or payment to a distributee or payee if the trust or plan retains any amounts after the close of such taxable year which are payable to the same distributee or payee even though the amounts retained may be attributable to

contributions on behalf of the employeeparticipant while he was a common-law employee in the business with respect to which the plan was established.

(iii) For purposes of this section, the total amounts payable to a distributee or the amounts to the credit of the employee do not include United States Retirement Plan Bonds held by a trust to the credit of the employee. Thus, a distribution to a distributee by a qualified trust may constitute a distribution to which this section applies even though the trust retains retirement plan bonds registered in the name of the employee on whose behalf the distribution is made which are to be distributed to the same distributee. Moreover, the proceeds of a retirement bond received as part of a distribution which constitutes the total distributions payable to the distributee are not entitled to the special tax treatment of this section. See section 405 (d) and paragraph (a)(1) of § 1.405-3.

(iv) If the amounts payable to a distributee from a qualified trust with respect to an employee-participant includes an annuity contract, such contract must be distributed along with all other amounts payable to the distributee in order to have a distribution to which this section applies. However, the proceeds of an annuity contract received in a total distribution will not be entitled to the tax treatment of this section unless the contract is surrendered in the taxable year of the distributee in which the total distribution was received.

(v) In the case of a qualified annuity plan, the term "total amounts" means all annuities payable to a payee. If more than one annuity contract is received under the plan by a distributee, this section shall not apply to an amount received on surrender of any such contracts unless all contracts under the plan payable to the payee are surrendered within one taxable year of the payee.

(vi) (a) The provisions of this section are applicable where the total amounts payable to a distributee or payee are paid within one taxable year of the distributee or payee whether or not a portion of the employee-participant's interest which is payable to another distributee or payee is paid within the same taxable year.

However, a distributee or payee who, in prior taxable years received amounts (except amounts described in (b) of this subdivision) after

the employee-participant ceases to be eligible for additional contributions to be made on his behalf, does not receive a distribution or payment to which this section applies, even though the total amount remaining to be paid to such distributee or payee with respect to such employee is paid within one taxable year. On the other hand, a distribution to a distributee or payee prior to the time that the employee-participant ceases to be eligible for additional contributions on his behalf does not preclude the application of this section to a later distribution to the same distributee or payee. (b) The receipt of an amount which constitutes

(1) A payment in the nature of a dividend or similar distribution to an individual in his capacity as a policyholder of an annuity, endowment, or life insurance contract, or

(2) A return of excess contributions which were not willfully made,

does not prevent the application of this section to a total distribution even though the amount is received after the employee-participant ceases to be eligible for additional contributions and in a taxable year other than the taxable year in which the total amount is received.

(vi) For purposes of this section, the total amounts payable to a distributee or payee, or the amounts to the credit of the employee, do not include any amounts which have been placed in a separate account for the funding of medical benefits described in section 401(b) as defined in paragraph (a) of 1.40114 Thus, a distribution by a qualified trust or annuity plan may constitute a distribution to which this section applies even though amounts attributable to the funding of section 401(h) medical benefits as defined in paragraph (a) of 1.401-14 are not so distributed.

(2) This section shall apply(i) Only if the distribution or payment is made

(a) On account of the employee's death at any time.

(b) After the employee has attained the age 59 2 years, or

(c) After the employee has become disabled: and

(Only to so much of the distribution or payment as is attributable to contributions made on behalf of an employee while he was a self-employed in

dividual in the business with respect to which the plan was established. Any de tribution or payment, or any portice thereof, which is not so attributable sha be subject to the rules of taxation whic apply to any distribution or payment that is attributable to contributions on behalf of common-law employees.

For taxable years beginning after December 31, 1966, see section 72 ? and paragraph (f) of 1.72-17 for the meaning of disabled. For taxable reas beginning before January 1, 1967, section 213 g) (3) for the meaning i disabled. For taxable years beginning after December 31, 1968, if this section applicable by reason of the distribution or payment being made after the exployee has become disabled, then for the taxable year in which the amounts Do which this section applies are distrira or paid, there shall be submitted with the recipient's income tax return a doctor i statement as to the nature and effes f the employee's impairment.

(3) This section shall not apply to(1) Distributions or payments which the penalty provisions of sectare 72 m) (5) and paragraph (e) of $1.7217 apply.

(1) Distributions or payments from a trust or plan made to or on behalf of an individual prior to the time such individ ual ceases to be eligible for additional contributions (except the contributo attributable to the last year of service to be made to the trust or plan on his behalf as a self-employed individual anc

(H) Distributions or payments made to the employee from a plan or tra unless contributions which were allowed as a deduction under section 404 ATE been made on behalf of such employe as a self-employed individual under rat trust or plan for 5 or more taxable years (whether or not consecutive/ proct to the taxable year in which such distres tions or payments are made. D.str.tions or payments to which this sectio does not apply by reason of this suDOLTIston are taxed as otherwise provided = section 72. However, for taxable year beg.nning before January 1, 1964. section 72 e 3, as in effect before putt date, is not applicable. Por taxi: # years beginning after December 31.1962 Such distributions or payments may be taken into account under sections 1331 through 1315 relaxe ing to income averaging).

(4) The portion of any distribution or payment attributable to contributions on behalf of an employee-participant while he was self-employed includes the contributions made on his behalf while he was self-employed and the increments in value attributable to such contributions. Where the amounts to the credit of an employee-participant include amounts attributable to contributions on his behalf while he was a self-employed individual and amounts attributable to contributions on his behalf while he was a common-law employee, the increment in value attributable to the employee-participant's interest shall be allocated to the contributions on his behalf while he was selfemployed either by maintaining a separate account, or an accounting, which reflects the actual increment attributable to such contributions, or by the method described in paragraph (e) (1) (iv) (c) of § 1.72-17. However, if the latter method is used, the numerator of the fraction is the total contributions made on behalf of the individual as a self-employed individual, weighted for the number of years that each contribution was in the plan.

come.

(c) Amounts includible in gross in(1) Where a total distribution or payment to which this section applies is made to one distributee or payee and includes the total amount remaining to the credit of the employee-participant on whose behalf the distribution or payment was made, the distributee or payee shall include in gross income an amount equal to the portion of the distribution or payment which exceeds the employeeparticipant's investment in the contract. For purposes of this paragraph, the investment in the contract shall be reduced by any amounts previously received from the plan or trust by or on behalf of the employee-participant which were cludable from gross income as a return of the investment in the contract.

ex

(2) In the case of a distribution to which this section applies and which is made to more than one distributee or payee, each element of the amounts to the credit of an employee-participant shall be allocated among the several distributees or payees on the basis of the ratio of the value of the distributee's or payee's distribution or payment to the total amount to the credit of the employee-participant. The elements to

be so allocated include the investment in the contract, the increments in value, and the portion of the amounts to the credit of the employee-participant which is attributable to the contributions on behalf of the employee-participant while he was a self-employed individual.

(d) Computation of tax. (1) The tax attributable to the amounts to which this section applies for the taxable year in which such amounts are received is the greater of

(i) 5 times the increase in tax which would result from the inclusion in gross income of the recipient of 20 percent of so much of the amount so received as is includible in gross income, or

(ii) 5 times the increase which would result if the taxable income of the recipient for such taxable year equaled 20 percent of the excess of the aggregate of the amounts so received and includible in gross income over the amount of the deductions allowed the recipient for such taxable year under section 151 (relating to deduction for personal exemptions). In any case in which the application of subdivision (ii) of this subparagraph results in an increase in taxable income for any taxable year, the resulting increase in taxes imposed by section 1 or 3 for such taxable year shall be reduced by the credit against tax provided by section 31 (tax withheld on wages), but shall not be reduced by any other credits against tax.

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

Example. B, a sole proprietor, established a qualified pension trust to which he made annual contributions for 10 years of 10 percent of his earned income. B withdrew his entire interest in the trust during a taxable year for which, without regard to the distribution, he had a net operating loss and for which he is allowed under section 151 a deduction for one personal exemption. At the time of the withdrawal, B was 64 years old. The amount of the distribution that is includible in his gross income is $25,600. Because of B's net operating loss, the tax attributable to the distribution is determined under the rule of subparagraph (1)(11) of this paragraph. For purposes of determining the tax attributable to the $25,600, B's taxable income for the taxable year in which he received such amount is treated, under subparagraph (1)(1) of this paragraph, as being 20 percent of $25,000 ($25,600 minus $600 (the deduction allowed for his per

sonal exemptions)). Thus, under subparagraph (1) of this paragraph, the tax attributable to the $25,600 would be 5 times the increase which would result if the taxable income of B for the taxable year he received such amount equaled $5,000. B has had no amounts withheld from wages and thus is not entitled to reduce the increase in taxes by the credit against tax provided in section 31 and may not reduce the increase in taxes by any other credits against

tax.

[TD. 6676, 28 FR. 10138, Sept. 17, 1963, as amended by TD. 6722, 29 PR. 5070, Apr. 14. 1964, T.D. 6885, 31 FR. 7800, June 2, 1966, T.D. 6985, 33 FR. 19812, Dec. 27, 1968]

§ 1.73 Statutory provisions; services of child.

SEC. 73. Services of child—(a) Treatment of amounts received. Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child. (b) Treatment of expenditures. All expenditures by the parent or the child attributable to amounts which are includible in the gross income of the child (and not of the parent) solely by reason of subsection (a) shall be treated as paid or incurred by

the child

(a) Compensation for personal services of a child shall, regardless of the provisions of State law relating to who is entitled to the earnings of the child, and regardless of whether the income is in fact received by the child, be deemed to be the gross income of the child and not the gross income of the parent of the child. Such compensation, therefore, shall be included in the gross income of the child and shall be reflected in the return rendered by or for such child. The income of a minor child is not required to be included in the gross income of the parent for income tax purposes. For requirements for making the return by such child, or for such child by his guardian, or other person charged with the care of his person or property, see section 6012.

(b) In the determination of taxable income or adjusted gross income, as the

case may be, all expenditures made by the parent or the child attributable to amounts which are includible in the gross income of the child and not of the parent solely by reason of section 73 are deemed to have been paid or incurred by the child. In such determination, the child is entitled to take deductions not only for expenditures made on his behalf by his parent which would be commonly considered as business expenses, but also for other expenditures such as charitable contributions made by the parent in the name of the child and out of the child's earnings.

(c) For purposes of section 73, the term "parent" includes any individual who is entitled to the services of the child by reason of having parental rights and duties in respect of the child. See section 6201 (c) and the regulations in Part 301 of this chapter (Procedure and Administration) for assessment of tax against the parent in certain cases. § 1.74 Statutory provisions; prizes and

awards.

SEC. 74. Prizes and awards (a) Geners. rule. Except as provided in subsection (b) and in section 117 (relating to scholarships and fellowship grants). gross income includes amounts received as prizes and awards.

(b) Ezception. Gross income does not include amounts received as prizes and awards made primarily in recognition of religions. charitable, scientific, educational, artistic. literary, or civic achievement, but only if

(1) The recipient was selected without any action on his part to enter the contest or proceeding; and

(2) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

§ 1.74-1 Prizes and awards.

(a) Inclusion in gross income. (1) Section 74(a) requires the inclusion in gross income of all amounts received as prizes and awards, unless such prizes or awards qualify as an exclusion from gross income under subsection (b), or unless such prize or award is a scholarship or fellowship grant excluded from gross income by section 117 Prizes and awards which are includible in gross income include (but are not limited to) amounts received from radio and television giveaway shows, door prizes, and awards in contests of all types, as well as any prizes and awards from an employer to as employee in recognition of some achieve