(f) Actuarial interest. For purposes of this section, the actuarial interest of each beneficiary of a trust or estate shall be determined by assuming the maximum exercise of discretion by the fiduciary in favor of the beneficiary. The factors and method prescribed in § 20.2031-10 of this chapter (Estate Tax Regulations) for use in ascertaining the value of an interest in property for estate tax purposes will be used to determine a beneficiary's actuarial interest.

(g) Exclusion of certain interests and stock in determining control. In determining control under this paragraph, the term "interest" and the term "stock" do not include an interest that is treated as not outstanding under § 11.414(c)-3. In addition, the term "stock" does not include treasury stock or nonvoting stock that is limited and preferred regarding dividends.

§1.52-2 Adjusments for acquisitions and dispositions.

(a) General rule. If, after December 31, 1975, an employer acquires the major portion of a trade or business or the major portion of a separate unit of a trade or business, then, for purposes of computing the credit for any calendar year ending after the acquisition, both the amount of unemployment insurance wages and the amount of total wages considered to have been paid by the acquiring employer, for both the year in which the acquisition occurred and the preceding year, must be increased, respectively, by the amount of unemployment insurance wages and the amount of total wages paid by the predecessor employer that are attributable to the acquired portion of the trade or business or separate unit. If the predecessor employer informs the acquiring employer in writing of the amount of unemployment insurance wages and the amount of total wages attributable to the acquired portion of the trade or business that have been paid during the periods preceding the acquisition, then, for purposes of computing the

credit for any calendar year ending after the acquisition, the amount of unemployment insurance wages and the amount of total wages considered paid by the predecessor employer shall be decreased by those amounts. Regardless of whether the predecessor employer so informs the acquiring employer, the predecessor employer shall not be allowed a credit for the amount of any increase in the unemployment insurance wages or the total wages in the calendar year of the acquisition attributable to the acquired portion of the trade or business over the amount of such wages in the calendar year preceding the acquisition.

(b) Meaning of terms (1) Acquisition. (i) For purposes of this section, the term "acquisition" includes a lease agreement if the effect of the lease is to transfer the major portion of the trade or business or of a separate unit of the trade or business for the period of the lease. For instance, if one company leases a factory (including equipment) to another company for a twoyear period, the employees are retained by the second company, and the factory is used for the same general purposes as before, then for purposes of this section the lessee has acquired the lessor's trade or business for the period of the lease.

(ii) Neither the major portion of a trade or business nor the major portion of a separate unit of a trade or business is acquired merely by acquiring physical assets. The acquisition must transfer a viable trade or business.

(iii) Subdivision (ii) of this sub

Example (2). The facts are the same as in Example (1), except that R Company also sells its name and goodwill to S Company and ceases to operate a restaurant business. S Company operates its restaurant using the old R Company name. In this situation, S Company has acquired R Company's business.

(2) Separate unit. (i) A separate unit is a segment of a trade or business capable of operating as a selfsustaining enterprise with minor adjustments. The allocation of a portion of the goodwill of a trade or business to one of its segments is a strong indication that that segment is a separate unit.

(ii) The following examples are illustrations of the acquisition of a separate unit of a trade or business:

Example (1). The M Corporation, which has been engaged in the sale and repair of boats, leases the repair shop building and all the property used in its boat repair operations to the N Company for four years and gives the N Company a covenant not to compete in the boat repair business for the period of the lease. The N Company is considered to have acquired a separate unit of M Corporation's business for the period of the lease.

Example (2). (a) The P Company is engaged in the operation of a chain of department stores. There are eight divisions, each division is located in a different metropolitan area of the country, and each division operates under a different name. Although certain buying and merchandising functions are centralized, each division's day-to-day operations are independent of the others. The Q Corporation acquires all of the physical and intangible assets of one of the divisions, including the division's name. Other than making those minor adjustments necessary to give the division buying and merchandising departments, the Q Corporation allows the division to continue doing business in the same manner as it had been operating prior to the acquisition. The Q Corporation has acquired a separate unit of the P Company's business. Example (4). The S Corporation is engaged in the manufacture and sale of steel and steel products. S Corporation also owns a coal mine, which it operates for the sole purpose of supplying its coal requirements for its steel manufacturing operations. The acquisition of the coal mine would be an acquisition of a separate unit of the S Company's business.

Example (5). The T Company, which is engaged in the business of operating a chain of drug stores, sells its only downtown drug store to the V Company and agrees not to open another T Company store in the downtown area for five years. Included in the purchase price is an amount that is charged for the goodwill of the store location. The V Company has acquired a separate unit of the T Company's business.

Example (6). The W Company, which is engaged in the business of operating a chain of drug stores, sells one of its stores to the X Company, but continues to operate another drug store three blocks away. The X Company opens the store doing business under its own name. The X Company has not acquired a separate unit of the W Company's business.

Example (7). (a) The Y Corporation, which is engaged in the manufacture of mattresses, sells one of its three factories to the Z Company. At the time of the sale, the factory is capable of profitably manufacturing mattresses on its own. Z Company has acquired a separate unit of the Y Corporation.

(b) The facts are the same as in (a) above, except that a profitable manufacturing operation cannot be conducted in the factory standing on its own. Z Company has not acquired a separate unit of the Y Corporation.

Example (8). The O Construction Company is owned by A, B, and C, who are unrelated individuals. It owns equipment valued at 1.5 million dollars and construction contracts valued at 6 million dollars. A, wishing to start his own company, exchanges his interest in O Company for 2 million dollars of contracts and a sufficient amount of equipment to enable him to begin business immediately. A has acquired a separate unit of the O Company's busi

attributable to the portion of the trade or business (or separate unit);

(iii) The proportion of the number of employees of the trade or business (or separate unit) attributable to the portion in the periods immediately preceding the transaction; and

(iv) The proportion of the sales or gross receipts, net income, and budget of the trade or business (or separate unit) attributable to the portion.

§1.52-3 Limitations with respect to certain persons.

(a) Mutual savings institutions. In the case of an organization to which section 593 applies (that is, a mutual savings bank, a cooperative bank, or a domestic building and loan association), the amount of the credit allowable under section 44B shall be 50 percent of the amount otherwise determined under section 51, or, in the case of an organization under common control, under section 52(a) or (b).

com

(b) Regulated investment panies and real estate investment trusts. In the case of a regulated investment company or a real estate investment trust subject to taxation under subchapter M, chapter 1 of the Code, the amount of the credit allowable under section 44B shall be reduced to the company's or trust's ratable share of the credit. The ratable share shall be the ratio which the taxable income of the regulated investment company or real estate investment trust for the taxable year bears to its taxable income increased by the amount of the deduction for dividends paid taken into account under section 852(b) (2) (D) in computing investment company taxable income under section 857(b) (2) (B) in computing real estate investment trust taxable income, as the case may be. For purposes of computing the ratable share, the reduction of the deduction for wage or salary expenses under section 280C shall not be taken into

account.

or

(c) Cooperatives. (1) In the case

of a cooperative organization described in section 1381(a), the amount of the credit allowable under section 44B shall be reduced to the cooperative's ratable share of the credit. The ratable share shall be the ratio which the taxable income of the cooperative for the taxable year bears to its taxable income increased by the amount of the deductions allowed under section 1382(b) and (c). For purposes of computing the ratable share, the reduction of the deduction for wage or salary expenses under section 280C shall not be taken into account.

Par 2. A new section 1.280C-1 is added to read as follows:

§ 1.280C-1 Disallowance of certain deductions for wage or salary expenses.

If an employer is entitled to a credit under section 44B, it must reduce its deduction for wage or salary expenses paid or incurred in the year the credit is earned by the amount allowable as credit (determined without regard to the provisions of section 53). In the case in which wages and salaries are capitalized, the amount subject to depreciation must be reduced by an amount equal to the amount of the credit (determined without regard to the provisions of section 53) in determining the depreciation deduction. If the employer is an organization that is under common control (as described in § 1.52-1), it must reduce its deduction for wage or salary expenses by the amount of the credit that it is allowed under subsections (a) or (b) of section 52. The deduction for wage and salary expenses must be reduced in the year the new jobs credit is earned, even if the employer is unable to use the credit in that year because of the limitations imposed by section 53.

This Treasury decision is issued under the authority contained in sections 44B(b), 52(b), 52(c), 52(h), 280C, and 7805 of the Internal Revenue Code of 1954 (68A Stat. 917, 91 Stat. 141, 144, 145, 147; 26 U.S.C. 44B(b), 52(b), 52(c), 52(h), 280C, 7805).

JEROME KURTZ,
Commissioner of
Internal Revenue.

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. 7560 1

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

This publication of the Treasury Decision contains the complete text of the regulations. The individual instructions for modifying the notice of proposed rulemaking have been omitted.

DATE: The new regulations are effective for taxable years beginning after December 31, 1976, and would apply to credit carrybacks from those years.

FOR FURTHER INFORMATION CONTACT: Robert M. Fowler 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 (202566-3458, not a toll-free number).

SUPPLEMENTARY

TION:

INFORMA

BACKGROUND

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.

or

shareholders. The

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, 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 principal author of these final regulations was Mr. Robert M. Fowler of the Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the final regulations, both on matters of substance and style.

Adoption of amendments to the regutions

The following regulations are hereby adopted:

§1.53-1 Separate rule for passthrough of jobs credit.

(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 × ($2,000 ÷ $7,000)).

(2) Deductions attributable to an interest in an entity. Examples of de

ductions 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 Income from other

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:

Ordinary income

Net long-term capital

gain

$58,420

Less:

6,000

Dividends

$100

$64,500

$100/$500) 20

80

partnership

$64,500

Net short-term

$21,680

2,000

Dividends

$400

(Numerator of the ratio for deter

Less: Propor

tionate share

of dividend

mining the proportionate share of deductions not attributable to a specific activity)

$60,000

exclusion

($100 ×

Less:

$38,420

$400/$500)

the deductions of the partner not attributable to a specific activity:

100

Section 1202

500

expenses ($16,000 × $60,000/$80,000)

12,000

400

partnership Loss related to

----

$2,000

500

Calso has items of income from other

sources and deductions, as follows:

Ordinary income

Short-term capital gain

Dividends qualifying for exclusion

Deductions:

Deductible medical expenses

Deductions attributable

Section 1202 deduction attributable to the interest in the partnership Charitable contribution deduction passed through the partnership

2,000

Charitable contribu

C has a deduction under section 1202 of $3,000. Of that deduction, $2,000 is attrib