91 Stat. 141, 144, 145, 147; 26 U.S.C. 44B(b), 52(b), 52(c), 52(h), 280C, 7805). JEROME KURTZ, Approved July 2, 1978. DONALD C. LUBICK, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on July 20, 1978, 8:45 a.m., and published in the issue of the Federal Register for July 21, 1978, 43 F.R. 31320) Section 53.-Limitation Based on Amount of Tax 26 CFR 1.53-1: Separate rule for passthrough of jobs credit. T.D. 75601 TITLE 26.-INTERNAL REVENUE. CHAPTER I, SUBCHAPTER A, PART 1.-INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953 NEW JOBS CREDIT AGENCY: Internal Revenue Service, Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations relating to the new jobs credit. The new jobs credit was enacted by the Tax Reduction and Simplification Act of 1977 [Pub. L. 9530, 1977-1 C.B. 451]. These regulations would provide the public with guidance needed to comply with the law and would affect all partners, beneficiaries of estates and trusts, and shareholders of subchapter S corporations seeking the benefit of a new jobs credit earned by the partnership, es tate or trust, or subchapter S corpora- provide that if the entity that earned tion. On April 3, 1978, the Federal Register published proposed amendments to the Income Tax Regulations (26 CFR Part 1) under section 53 of the Internal Revenue Code of 1954, 43 FR 13893. The amendments were proposed to conform the regulations to section 202 of the Tax Reduction and Simplification Act of 1977 (91 Stat. 141). After consideration of all comments received regarding the proposed amendments, those amendments. are adopted as revised by this Treasury decision. Section 53(a) limits the availability of the new jobs credit in any year to the tax liability (with certain adjustments) of the taxpayer. Section 53 (b) provides a separate limitation with respect to a credit passed through a partnership, estate or trust, or subchapter S corporation to the partners, beneficiaries, or shareholders. The separate limitation is designed to restrict the application of the credit to an amount equal to the tax on the income attributable to the taxpayer's interest in the entity. The separate limitation is applied to the credit both in the year it is passed through and in carryback or carryover years. A new paragraph (f) is added to § 1.53-1 to the credit changes its form of conducting business in a carryback or carryover year but the nature of its trade or business essentially remains the same, the separate limitation under section 53(b) should reflect the income attributable to the taxpayer's interest in the entity in its revised form. (a) In general. Under section 53 (b), in the case of a credit earned under section 44B by a partnership, estate or trust, or subchapter S corporation, the amount of the credit that may be taken into account by a partner, beneficiary, or shareholder may not exceed a limitation separately computed with respect to the partner's, beneficiary's, or shareholder's interest in the entity. The separate computation is required not only for the taxable year with respect to which the credit is earned but also for each taxable year to which an unused credit attributable to an interest in such an entity is carried back or over. This section prescribes rules, under the authority of section 44B (b), relating to computation of the separate limitation. (b) Application of credit earned. A credit earned under section 44B by a partnership, estate or trust, or subchapter S corporation shall be applied by a partner, beneficiary, or shareholder, to the extent allowed under section 53(b), before applying any other credit earned under section 44B. For example, if an individual has a new jobs credit from a proprietorship of $2,000 and from a partnership (after applying section 53(b)) of $1,800, but the credit must be limited under section 53(a) to $3,000, the entire $1,800 credit from the partnership would be applied before any part of the $2,000 amount is applied. (c) Amount of separate limitation. The amount of the separate limitation is equal to the partner's, beneficiary's, or shareholder's limitation under section 53(a) for the taxable year multiplied by a fraction. The numerator of the fraction is the portion of the taxpayer's taxable income for the year attributable to the taxpayer's interest in the entity. The denominator of the fraction is the taxpayer's total taxable income for the year reduced by the zero bracket amount, if any. (d) Portion of taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation (1) General rule. The portion of a taxpayer's taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation is the amount of income from that entity the taxpayer is required to include in gross income, reduced by (i) The amount of the deductions allowed to the taxpayer that are attributable to the taxpayer's interest in the entity; and (ii) A proportionate share of the deductions allowed to the taxpayer not attributable to a specific activity (as defined in paragraph (e)). If a deduction comprises both an item that is attributable to the taxpayer's interest in the entity and an item or items that are not attributable to the interest in the entity, and if the deduction is limited by a provision of the Code (such as section 170(b), relating to limitations on charitable contributions), the deduction must be prorated among the items taken into account in computing the deduction. For example, if an individual makes a charitable contribution of $5,000 and his distributive share of a partnership includes $2,000 in charitable contributions made by the partnership, and if the charitable contribution deduction is limited to $3,500 under section 170 (b), then the portion of the deduction allowed to the taxpayer that is not attributable to a specific activity is $2,500 ($3,500 × ($5,000 ÷ $7,000)) and the portion of the deduction allowed to the taxpayer that is attributable to the interest in the partnership is $1,000 ($3,500 X ($2,000 ÷ $7,000)). (2) Deductions attributable to an interest in an entity. Examples of deductions that are attributable to the taxpayer's interest in an entity include (but are not limited to) a deduction under section 1202 attributable to a net capital gain passed through the entity, and a deduction attributable to a deductible item (such as a charitable contribution) that has been passed through the entity. (3) Computation of the proportionate share of deductions not attributable to a specific activity. The proportionate share of a deduction of the taxpayer not attributable to a specific activity is obtained by multiplying the amount of the deduction by a fraction. The numerator of the fraction is the income from the entity that the taxpayer is required to include in gross income, reduced by the amount of the deductions of the taxpayer that are attributable to the taxpayer's interest in the entity. The denominator is the taxpayer's gross income reduced by the amount of all the deductions attributable to specific activities. (4) Examples. The method of determining the amount of taxable income attributable to an interest in a partnership, estate or trust, or sub (b) In order to determine the taxable income attributable to A's interest in S Corporation, it is necessary to reduce the amount of income from S Corporation that A is required to include in gross income by the amount of A's deductions attributable to the interest in S Corporation and by a proportionate share of A's deductions not attributable to a specific activity. These computations are made in paragraph (c) of this example. However, before the computation reducing A's income by a proportionate share of the deductions not attributable to a specific activity can be made, the ratio described in subparagraph (3) of this paragraph (d) must be determined. The numerator of the ratio (the amount of income from S Corporation that A is required to include in gross income, reduced by the amount of the deductions attributable to A's interest in S Corporation) is ohtained in paragraph (c) of this example in the process of computing A's taxable income attributable to the interest in S Corporation. The determination of the denominator (A's gross income reduced by the amount of all deductions attributable to specific activities), however, requires a separate computation, which follows: Gross income: Income from S Corp. $13,000 deductions not attributable to a specific activity. These computations are made in paragraph (c) of this example. However, before the computation reducing C's income by a proportionate share of the deductions not attributable to a specific activity can be made, the ratio described in subparagraph (3) of this paragraph (d) must be determined. The numerator of the ratio is determined in paragraph (c) of this example in the process of computing C's taxable income attributable to the interest in the partnership. The denominator, however, requires a separate computation, reducing C's gross income by the amount of all deductions attributable to specific activities. This computation is as follows: Gross income: Income from the partnership: Net long-term capital Ordinary income $58,420 Less: gain 6,000 Dividends $100 Less: Pro portionate share of dividend $38,420 20,000 80 6,000 $64,500 Deductions of the part ner attributable to the interest in the partnership: Section 1202 deduction (50% of $4,000)- $2,000 Charitable contri bution passed through the partnership 500 Net short-term capital loss passed through the $10,230 Ordinary income Net short-term capital gain $21,680 2,000 4,500 2,000 $400 anteed payment) $38,420 Guaranteed payment 20,000 Net long-term capital gain 6,000 Net short-term capital loss 2,000 Dividends qualifying for exclusion 100 80 320 24,000 $88,500 Less: the deductions of the partner not attributable to a specific activity: Section 1202 deduction ($1,000 × $60,000/$80,000) Deductible medical 750 expenses ($16,000 × Charitable contribu tions ($4,000 X $60,000/$80,000) Alimony ($18,000 X $60,000/$80,000) Interest and taxes on home ($8,000 X $60,000/$80,000) 3,000 13,500 6,000 Personal exemption deduction ($3,000 × $60,000/$80,000) 2,250 500 (b) In order to determine C's taxable income attributable to the interest in the partnership, it is necessary to reduce the amount of income from the partnership that C is required to include in gross income by the amount of C's deductions attributable to the interest in the partnership and by a proportionate share of C's passed through the partnership C's gross income, reduced by the amount of the deductions attributable to specific activities (denominator of the ratio for deter C has a deduction under section 1202 of $3,000. Of that deduction, $2,000 is attrib utable directly to C's interest in the partnership (50% of the net capital gain that would result from offsetting the $6,000 net long-term capital gain and the $2,000 net short-term capital loss that are attributable to C's interest in the partnership). Since the remaining $1,000 deduction under section 1202 cannot be attributed directly to either C's income from the partnership or any other specific activity, it must be treated as a deduction not attributable to a specific activity. (e) Deductions not attributable to a specific activity-(1) "Specific activity" defined. A "specific activity" means a course of continuous conduct involving a particular line of endeavor, whether or not the activity is carried on for profit. Examples of a specific activity are: (i) A trade or business carried on by the taxpayer; (ii) A trade or business carried on by an entity in which the taxpayer has an interest; (iii) An activity with respect to which the taxpayer is entitled to a deduction under section 212; (iv) The operation of a farm as a hobby. (2) Types of deductions not attributable to a specific activity. Examples of deductions not attributable to a specific activity include charitable contributions made by the partner, beneficiary, or shareholder; medical expenses; alimony; interest on personal debts of the partner, beneficiary, or shareholder; and real estate taxes on the personal residence of the partner, beneficiary, or shareholder. For purposes of this section, in cases in which deductions are not itemized, the zero bracket amount is considered to be a deduction not attributable to a specific activity. (f) Carryback or carryover of credit subject to separate limitation. A credit subject to the separate limitation under section 53(b) that is carried back or carried over to another taxable year is also subject to the separate limitation in the carryback or carryover year. The taxpayer to whom the credit has been passed through shall not be prevented from applying the unused portion in a carryback or carryover year merely because the entity that earned the credit changes its form of conducting business if the nature of its trade or business essentially remains the same. The computation of the separate limitation in such a case shall reflect the income attributable to the taxpayer's interest in the entity. in its revised form. Thus, a shareholder carrying over a credit from a subchapter S corporation may include dividends declared by that corporation after the subchapter S election had been terminated as income attributable to that person's interest in the entity. Similarly, if a partnership incorporates in a carryover year, any income attributable to an interest in the corporation will be regarded, for purposes of computing the separate limitation under section 53(b), as income attributable to an interest in the entity. This Treasury decision is issued under the authority contained in sections 44B (b) and 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 91 Stat. 141, 26 U.S.C. 44B(b), 7805). JEROME KURTZ, Approved August 11, 1978. DONALD C. LUBICK, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on Aug. 22, 1978 and Dec. 27, 1978, at 8:45 a.m., and published in the issues of the Federal Register for Aug. 23, 1978, 43 F.R. 37450 and Dec. 28, 1978, 43 F.R. 60445.) Part VI.-Minimum Tax for Tax Preferences Section 56.-Imposition of Tax 26 CFR 1.56-1: Imposition of tax. (Also Sections 57, 58; 1.57-1, 1.58-1.) T.D. 7564 1 TITLE 26.-INTERNAL REVENUE. CHAPTER I, SUBCHAPTER A, PART 1.-INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953; SUBCHAPTER F, PART 301.-PROCEDURE AND ADMINISTRATION Minimum tax for tax preferences AGENCY: Internal Revenue Service, Treasury. ACTION: Final regulations. SUMMARY: This document provides final regulations relating to the imposition of a minimum tax on tax preferences of both individuals and corporations. Changes to the applicable tax law were made by the Tax Reform Act of 1969 [Pub. L. 91-172, 1969-3 C.B. 10] and the Excise, Estate, and Gift Tax Adjustment Act of 1970 [Pub. L. 91-614, 1971-1 C.B. 533]. These regulations provide necessary guidance to the public for compliance with the law and affect all taxpayers who may have any items of tax pref erence. DATE: The regulations are generally effective for taxable years ending after December 31, 1969. FOR FURTHER INFORMATION CONTACT: Robert Coplan of the Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, Attention: CC:LR:T, 202566-3287), not a toll-free call. SUPPLEMENTARY INFORMA TION: BACKGROUND On December 30, 1970, the Federal Register published proposed amendments to the Income Tax Regulations (26 CFR Part 1) under sections 56 'This publication of the Treasury Decision contains the complete text of the regulations. The individual instructions for modifying the notices of proposed rulemaking have been omitted. through 58 of the Internal Revenue. Code of 1954 (35 FR 19757). The amendments were proposed to conform the regulations to section 301 of the Tax Reform Act of 1969 (83 Stat. 580). On June 24, 1971, the Federal Register published a notice of proposed rulemaking which withdrew portions of the previously proposed regulations (36 FR 12020). Revised provisions were proposed at that time. In addition, a new section of the regulations (1.56-5) was proposed to reflect the amendment made to section 56 of the Code by section 501 of the Excise, Estate, and Gift Tax Adjustment Act of 1970 (84 Stat. 1846). A public hearing was held on August 10, 1971. After consideration of all comments regarding the proposed amendments, those amendments are adopted as revised by this Treasury decision. LEGISLATIVE CHANGES REFLECTED IN REGULATIONS These amendments only reflect changes made by the Tax Reform Act of 1969 and the Excise, Estate, and Gift Tax Adjustment Act of 1970. In addition, changes have been made in § 1.56-1(b) and § 1.56-5(b) to reflect the addition of certain credits by the Revenue Act of 1971 (85 Stat. 497) [Pub. L. 92-178, 1972-1 C.B. 443]. Amendments to conform the regulations to changes made by other legislation, including the Tax Reform Act of 1976 [Pub. L. 94-455, 1976-3 C.B. (Vol. 1) 1], will be contained in separate documents. NATURE OF MINIMUM TAX The minimum tax for tax preferences is in addition to the regular income tax and is imposed with respect to specified items of tax preference. These items of tax preference represent income which is either (a) not subject to current taxation by reason of temporary exclusion or an acceleration of deductions or (b) not subject to full taxation by reason of certain deductions or a special rate of tax. IMPOSITION AND COMPUTATION OF MINIMUM TAX Section 1.56-1 of the regulations sets forth the general rules for the imposition and computation of the minimum tax for tax preferences. The rate of the minimum tax is 10 percent. The base of the tax for a taxable year is the sum of taxpayer's items of tax preference (to the extent they exceed $30,000), reduced by his liability for the year for income tax and certain special taxes. DEFERRAL OF MINIMUM TAX Section 1.56-2 of the regulations sets forth rules for the deferral of minimum tax liability in the case of certain net operating losses. Under these rules (which implement section 56(b) of the Code), if a taxpayer has a net operating loss for a taxable year, his liability for minimum tax is deferred to the year (or years) in which the net operating loss is applied to reduce taxable income. EFFECTIVE DATE AND CROSS-REFERENCES Section 1.56-3 of the regulations sets forth the effective date of the minimum tax provisions. In general, the minimum tax is applicable to taxable years ending after December 31, 1969. Section 1.56-4 cross-refers to § 1.58-2 through 1.58-6 for rules relating to certain "conduit" entities (estates, trusts, partnerships, and the like). CARRYOVER OF MINIMUM Under section 56(c) and § 1.56-5, a taxpayer may carry forward the excess of its income tax liability for a taxable year (except taxes imposed by sections 56, 72 (m) (5) (B), 402 (e), 408 (f), 531 and 541) over the amount by which its items of tax preference exceed the $30,000 exemption. This excess tax liability may be carried forward for up to seven years to re duce the taxpayer's minimum tax base for those subsequent years. REGULATIONS UNDER No material change has been made in the final regulations under section 56 from the provisions proposed in 1970 and 1971. ITEMS OF TAX PREFERENCE Section 1.57-1 of the regulations gives detailed definitions for 8 of the 9 items of tax preference listed in section 57 (a) as originally enacted. These 8 items are: accelerated depreciation on real property; accelerated depreciation on personal property subject to a net lease; amortization of certified pollution control facilities; amortization of railroad rolling stock; stock options; additions to reserves for losses on bad debts of financial institutions; depletion; and capital gains. The ninth item, excess investment interest, was repealed by the Tax Reform Act of 1976. Proposed § 1.57-2 deals with that item, but is not being adopted at this time for reasons discussed later in this preamble. CHANGES MADE IN § 1.57-1 IN RESPONSE TO COMMENTS Comments were received from the public suggesting that various changes be made to proposed § 1.57-1. The most significant changes made in § 1.57-1 of the final regulations in response to these comments are as follows: 1. Under the proposed regulations, the determination of the depreciation items of tax preference under section 57 (a) (2) and (3) is made with respect to each item of section 1250 property or section 1245 property. The final regulations now provide that a taxpayer who uses group, classified, or composite depreciation accounts will determine the amount of this tax preference in the aggregate with respect to all property in the account, provided that the account contains |