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 FR. 11402, Nov. 26, 1960, as amended by T.D. 6598, 27 FR. 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). Hand 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 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 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 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). (d) Cross reference. For reduction of 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. (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: Section 35 (a) Partially tax-exempt interest. $4,500 135 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 |