without regard to disability, and any of the following conditions is satisfied

(i) The individual is precluded from seeking the benefits of section 105(d) (relating to certain disability payments) for that taxable year by reason of an irrevocable election;

(ii) The individual was not permanently and totally disabled at the time of retirement (and was not permanently and totally disabled either on January 1, 1976, or on January 1, 1977, if the individual retired before the later date on disability or under circumstances which entitled the individual to retire on disability); or

(iii) The payments are for periods after the individual reached mandatory retirement age.

For purposes of this paragraph, disability annuity payments include payments to an individual who retired on partial or temporary disability.

(4) Compensation for personal services rendered during the taxable year. Retirement income does not include any amount representing compensation for personal services rendered during the taxable year. For this purpose, amounts received as a pension shall not be treated as representing compensation for personal services rendered during the taxable year if the period of service during the taxable year is not substantial when compared with the total years of service. For example, an individual on the calendar year basis retires on November 30 after 5 years of service and receives a pension during the remainder of his taxable year. The pension is not treated as representing compensation for personal services rendered during such taxable year merely because it is paid by reason of the services of the individual for a period of 5 years which includes a portion of the taxable year.

(5) Amounts not includible in gross income. Retirement income does not include any amount not includible in the gross income of the individual for

the taxable year. For example, if a portion of an annuity is excluded from gross income under section 72, relating to annuities, that portion of the annuity is not retirement income; similarly, the portion of dividend income excluded from gross income under section 116, relating to the partial exclusion of dividends received by inIdividuals is not retirement income.

(e) Earned income-(1) In general. The term "earned income" in section 37 (e) (5) (B) generally has the same meaning as in section 911 (b), except that earned income does not include any amount received as a pension or annuity. See section 911 (b) and the regulations thereunder. Section 911(b) provides, in general, that earned income includes wages, salaries, professional fees, and other amounts received as compensation for personal services rendered.

(2) Earned income from self-employment. For purposes of section 37 (e) (5) (B), the earned income of a taxpayer from self-employment in a trade or business shall not exceed―

(i) The taxpayer's share of the net profits from the trade or business if capital is not a material income-procapital is not a material income-producing factor in that trade or business;

(f) Computation of credit under section 37 (e) in the case of joint returns-(1) In general. In the case of a joint return of husband and wife, the credit base of each spouse under section 37 (e) is computed separately. The spouses then combine their credit bases and compute a single credit. The limitation in section 37 (c) (2) and paragraph (b) of § 1.37-1 on the amount of the credit is determined by reference to the joint tax liability of the spouses. Thus, regardless of whether a spouse would be liable for the tax imposed by chapter 1 of the Code if the joint return had not been filed, the credit base of that spouse is taken into account in computing the credit.

(2) Community property laws. For taxable years beginning after 1977, married individuals filing joint returns shall disregard community property laws in making any determination or computation required under section 37(e) or this section. Each item of income is attributed in full to the spouse whose income it would have been in the absence of community property laws. Thus, if a 67-year old individual files a joint return with a 62-year old spouse for 1979 and the only income of the couple is from a public pension of the older spouse, that public pension is attributed in full to the older spouse for purposes of section 37 (e) even though the applicable community property law may treat one-half of the pension as the income of the 62-year old spouse. Since the younger spouse consequently has no retirement income within the meaning of paragraph (d) of this section, the couple may not make the election. described in paragraph (b) of this section.

(g) Examples. The computation of the credit for the elderly under section 37(e) and this section is illustrated by the following examples:

Example (1). B, who is 62 years old and single, receives a fully taxable pension of $2,400 from a public retirement system during 1977. B performed the services giv

ing rise to the pension. During that year, B also earns $2,650 from a part-time job. B receives no tax-exempt pension or annuity in 1977. Subject to the limitation of section 37 (c) (2) and paragraph (b) of § 1.37-1, B's credit for the elderly for 1977 under section 37 (c) is $195, computed as follows:

Maximum retirement income

level under section 37 (e) (5)

Earned income offset under

section 37 (e) (5) (B) (ii) :

Reduction required by section 37 (e) (5) (B): One-half of excess of earnings over $1,200 Amount determined under section 37 (e) (5)

Retirement income

$2,500

Credit base of W ----

Computation of credit Credit base of H

Example (2). During 1978 H, who is 67 years old, has earnings of $1,300 and retirement income (rents, interest, etc.) of $6,000. H also receives social security payments totalling $1,400. During 1978 W, who is 63 years old, earns $1,600 and receives a fully taxable pension of $1,400 from a public retirement system that constitutes retirement income. W performed the services giving rise to the pension. H and W file a joint return for 1978 and elect to compute the credit for the elderly under section 37(e). Under the applicable law these items of income are community income, and both spouses share equally in each item. Because H and W are filing a joint return, they disregard community property laws in computing their credit under section 37 (e). The couple allocates $1,600 of the $3,750 referred to in section 37(e) (6) to W and $2,150 to H. Subject to the limitation of section 37 (c) (2) and paragraph (b) of § 1.37-1, their credit for the elderly is $315, computed as follows: Credit base of H:

Amount allocated to H

under section 37 (e) (6)

Reductions required by

$2,150

$200

1,400 1,400 $1,400

$ 700

1,400

2,100

$ 315

Example (3). (a) Assume the same facts as in example (2) of this paragraph, except that H and W live apart at all times during 1978 and file separate returns. Under these circumstances, H and W must give effect to the applicable community property law in determining their credits under section 37 (e). Thus, each spouse must take into account one-half of each item of income.

(b) Subject to the limitation of section 37(c) (2) and paragraph (b) of § 1.37-1, H's credit for the elderly is $157.50, computed as follows:

section 37 (e) (5):

37 (e) (7)

$1,875

Par. 6. Section 1.37-5 is deleted. Par. 7. Section 7.0 is amended by deleting paragraph (c) (2), by deleting "paragraph (c) (2) and" from the first sentence of paragraph (e) (1), and by deleting "other than the elections referred to in paragraph (c) (2) of this section," from the first sentence of paragraph (e) (2).

This Treasury decision is issued under the authority contained in section. 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805). WILLIAM E. WILLIAMS, Acting Commissioner of Internal Revenue.

Approved December 10, 1980.

DONALD C. LUBICK, Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on December 19, 1980, 8:45 a.m., and published in the issue of the Federal Register for December 22, 1980, 45 F.R. 84048)

Section 39.-Certain Uses of
Gasoline, Special Fuels, and
Lubricating Oil

Whether direct payments to operators of commercial fishing vessels are available after December 31, 1978 with respect to tax-paid gasoline and lubricating oil used in such vessels. See Rev. Rul. 81-65, page 583.

Section 44C.-Residential Energy Credit

Residential energy credit; subsidized energy financing. An electric utility company that is a federal agency loans money at below market interest rates to individual customers to finance purchases of renewable energy source property. The utility obtains these loan funds from its revenues or from bonds sold to the U.S. Treasury at market

rates. The loans are not "subsidized energy financing" under section 44C(c)(10) of the Code.

Rev. Rul. 81-52

ISSUE

Are loans made by a utility that is a federal agency "subsidized energy financing" as defined in section 44C (c) (10) of the Internal Revenue Code under the circumstances described

below?

FACTS

Company A is an electric utility that is a federal agency. A purchases its electricity from another federal agency, transmits the electricity over its own distribution system, and sells the electricity to numerous local public utilities that in turn sell the electricity to their customers. A wishes to start a program under which A will make loans at below market interest rates directly to individual customers of the local utilities. The local public utility will act as the collection agent for repayment of the loans. The loans will be repayable over a period of time not in excess of 15 years and the proceeds will be used by the consumers to purchase renewable energy source property from A.

Under law, A must cover its full costs through its own revenues derived from the sale of power and other services. While A may borrow by sale of bonds to the United States Treasury, A must borrow at rates comparable to the rates prevailing in the market for similar bonds. Thus, the subsidized loans made under A's program will be financed by the profits from the sale of electricity to consumers and not by the federal gov

ernment.

LAW AND ANALYSIS

Section 44C (a) (2) of the Code allows a credit against federal income tax for qualified renewable energy source expenditures.

26.-INTERNAL REVENUE. CHAPTER 1, SUBCHAPTER A, PART PART I.-INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

FIFO and Other Ordering Rules for Investment Credit

AGENCY: Internal Revenue Service,

ACTION: Final regulations.

Section 44C (c) (10)(A) of the Code provides that for the purposes of determining the amount of renewable energy source expenditures made by the individual, with respect to any Treasury. dwelling unit, there shall not be taken into account expenditures made from "subsidized energy financing". For purposes of this subparagraph, the term "subsidized energy financing" means financing provided under a federal, state, or local program, a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce

energy.

The purpose of section 44C (c) (10) of the Code, in part, is to prevent persons from obtaining two tax supported subsidies for the same renewable energy source property. Such double benefits do not occur here. A's program, which is substantially the same as that carried out by private (investor-owned) utilities, is not a tax supported subsidy for renewable energy source property because the source of the funds for the loan program is solely A's revenue from the sale of electricity or A's unsubsidized borrowing from the United States Treasury at rates comparable to the rates prevailing in the market.

HOLDING

Loans made by a utility under the circumstances described above are not "subsidized energy financing" under section 44C (c) (10) of the Code, even though the utility is a federal agency.

Subpart B.-Rules for Computing Credit for Investment in Certain Depreciable Property

Section 46.-Amount of Credit

26 CFR 1.46-1: Determination of amount.

SUMMARY: This document provides final regulations relating to the firstin-first-out rule (FIFO) and other ordering rules for the investment credit. The final regulations also contain special rules for determining the amount of the energy credit. Changes in the applicable tax law were made by the Tax Reduction Act of 1975 [Pub. L. 94-12, 1975-1 C.B. 545], the Tax Reform Act of 1976 [Pub. L. 94455, 1976-3 C.B. (Vol. 1) 1], the Revenue Act of 1978 [Pub. L. 95-600, 1978-3 C.B. (Vol. 1) 1], and the Energy Tax Act of 1978 [Pub. L. 95618, 1978-3 C.B. (Vol. 2) 1]. DATES: In general, the amendments are effective for taxable years beginning after December 31, 1975. However, amendments under some of the acts have later effective dates. For ex

ample, the amendments under the Energy Tax Act of 1978 are effective for the period beginning October 1, 1978, and ending on December 31, 1982.

FOR FURTHER INFORMATION CONTACT: Mary Frances Pearson of the Legislation & Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, Attention: CC:LR:T (202-566-3458, not a toll-free call).

SUPPLEMENTARY
INFORMATION:

BACKGROUND

On July 10, 1980, the Federal Reg

ister published proposed amendments to the Income Tax Regulations (26 CFR Part I) under section 46 of the Internal Revenue Code of 1954, relating to ordering rules for the investment credit (45 FR 134). The proposed amendments published on July 10, 1980, were corrected by a correction notice published in the Federal Register for July 31, 1980 (45 FR 149). These amendments were proposed to conform the regulations to reflect certain changes made by the Tax Reduction Act of 1975 (89 Stat. 36), the Tax Reform Act of 1976 (90 Stat. 1580 and 1759), the Revenue Act of 1978 (92 Stat. 2824), and the Energy Tax Act of 1978 (92 Stat. 3194). None of these amendments reflected any changes made by the Crude Oil Windfall Profit Tax Act of 1980 (Pub. L. 96-223) [1980-3 C.B. 1].

Since a public hearing was not requested, none was held. After consideration of all written comments regarding the proposed amendments, these amendments are adopted as revised by this Treasury decision.

ORDERING OF CREDITS

All comments suggest clarification of the order of application of the regular and ESOP credits. Proposed § 1.46-1 (j) (relating to the definition of tax liability for the regular and ESOP credit) cross-references to § 1.46-8 (c) (9) (ii) and proposed § 1.46-1 (m) for the ordering of the regular and ESOP credits. Under § 1.46-8 (c) (9) (ii), in general, regular credits from a taxable year are allowed before ESOP credits from that year, but ESOP carryovers are applied before regular credit earned and ESOP credit earned is applied before regular carrybacks. The ordering of the regular and ESOP credits under § 1.46-8(c) (9) (ii) is inconsistent with proposed § 1.46-1(m), which requires application of regular carryovers, regular credit earned, and regular carrybacks before any ESOP credit.

of comments, the final regulations revise § 1.46-1 (m) to be consistent with § 1.46-8 (c) (9) (ii).

SUGGESTIONS NOT ADOPTED

One comment suggested adoption of the ordering rule as set forth in proposed § 1.46-1 (m). This suggestion was not adopted because proposed

1.46-1 (m) would result in "bumping" of ESOP credit by regular credit ing" of ESOP credit by regular credit carrybacks. Since the ESOP credit requires an irrevocable election and, quires an irrevocable election and, within 30 days, a contribution of cash or stock equal to the value of the ESOP credit to the plan ("TRASOP"), "bumping" may create burdensome administrative problems burdensome administrative problems for TRASOP's. In addition, regular credit earned would be utilized before credit earned would be utilized before older ESOP credit carried over to the current year.

Several other comments suggested applying all carryovers, including nonrefundable energy credit carryover, before credit earned and applying all credit earned, including nonrefundable energy credit earned, before any carrybacks. This comment was not adopted. Nonrefundable energy credits should be applied last because, in general, they have a 100 percent tax liability limitation and, thus, can be utilized more readily.

DRAFTING INFORMATION

The principal author of this regulation is Richard L. Mull of the Legislation & 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 regulation both on matters of substance and style.

Adoption of Amendments to the
Regulations

Accordingly, 26 CFR Part 1 is amended as follows:

DRAFTING INFORMATION Paragraph 1. Section 1.46-1 is

1. Paragraphs (a), (b), (c), and (d) are revised.

2. Paragraph (e) is redesignated as paragraph (o) and is changed by revising the first sentence.

3. Paragraph (f) is redesignated as paragraph (p) and is changed as follows:

a. Subparagraph (1) is changed by revising the first sentence.

b. Subparagraph (2) is changed by deleting the 7th sentence in subdivision. (i), and by deleting "section 46(a) (2)" in subdivision (iii) and inserting in lieu thereof "section 46 (a) (3)".

c. Subparagraph (4) is changed by revising the second sentence.

d. Examples (1) and (2) of subparagraph (5) are revised by changing "1970" wherever it appears to "1976", by changing "1971" wherever it appears to "1977", by changing "liability for tax" wherever it appears to "tax liability", and by changing "limitation based on amount of tax" wherever it appears to "tax liability limitation".

4. New paragraphs (e) through (n) are added. These new and revised provisions read as follows:

Energy Tax Act of 1978 [Pub. L. 95618, 1978-3 C.B. (Vol. 2) 1], section 301.

(3) Prior regulations. For taxable years beginning before January 1, 1976, see 26 CFR § 1.46-1 (Rev. as of April 1, 1979). Those regulations do not reflect changes made by Pub. L. 89-384 [1966-1 C.B. 414], Pub. L. 89389 [1966-1 C.B. 419], and Pub. L. 91172 [1969-3 C.B. 10].

(b) General rule. The amount of investment credit (credit) allowed by section 38 for the taxable year is the portion of credit available under section 46(a)(1) that does not exceed the limitation based on tax under section 46(a) (3).

(c) Credit available. The credit available for the taxable year is the sum of

over

(1) Unused credit carried from prior taxable years under section 46(b) (carryovers).

(2) Amount of credit determined under section 46(a) (2) for the taxable year (credit earned), and

(3) Unused credit carried back from succeeding taxable years under section 46(b) (carrybacks).

(d) Credit earned. The credit earned for the taxable year is the sum of the following percentages of qualified investment (as determined under section 46(c) and (d))

(1) The regular percentage (as determined under section 46 (a) (2) (B)).

(2) For energy property, the energy percentage (as determined under section 46(a) (2) (C)), and

(3) The ESOP percentage (as determined under section 46(a) (2) (E)).

(e) Designation of credits. The credit available for the taxable year is designated as follows:

(1) The credit attributable to the regular percentage is the "regular credit".

(2) The credit attributable to the ESOP percentage is the "ESOP credit".

(3) The credit attributable to the energy percentage for energy property other than solar or wind is the "nonrefundable energy credit".

(4) The credit attributable to the energy percentage for solar or wind energy property is the "refundable energy credit".

(f) Special rules for certain energy property. Energy property is defined in section 48(1). Under section 46 (a) (2) (D), energy property that is section 38 property solely by reason of section 48 (1)(1) qualifies only for the energy credit. Other energy property qualifies for both the regular credit (and, if applicable, the ESOP credit) and the energy credit. For limitation on the energy percentage for property financed by industrial development bonds, see section 48(1) (11).

(g) Transitional rule for regular and ESOP credit-(1) In general. Although section 46(a) (2)

was

amended by section 301(a)(1) of the Energy Tax Act of 1978 [Pub. L. 95618, 1978-3 C.B. (Vol. 2) 1, 20] to eliminate the transitional rules under section 46 (a) (2) (D), those rules still apply in certain instances. Section 46 (a) (2) (D) was added by section 301 (a) of the Tax Reduction Act of 1975 [Pub. L. 94-12, 1975-1 C.B. 545, 551] and amended by section 802(a) of the Tax Reform Act of 1976 [Pub. L. 94455, 1976-3 C.B. (Vol. 1) 1, 56].

(2) Regular credit. Under section 46(a) (2) (D), the regular credit is 10 percent and applies for the following property:

(i) Property to which section 46(d) does not apply, the construction, reconstruction, or erection of which is completed by the taxpayer after January 21, 1975, but only to the extent of basis attributable to construction, reconstruction, or erection after that date.

(ii) Property to which section 46 (a) does not apply, acquired by the taxpayer after January 21, 1975.

(iii) Qualified progress expendi

tures (as defined in section 46(d)) made after January 21, 1975.

(3) ESOP credit. See section 48 (m) for transitional rules limiting the period for which the ESOP percentage under section 46(a)(2) (E) applies. For prior statutes, see section 46 (a) (2) (B) and (D), as added by section 301 of the Tax Reduction Act of 1975 and amended by section 802 of the Tax Reform Act of 1976.

(4) Cross reference. (i) The principles of § 1.48-2(b) and (c) apply in determining the portion of basis attributable to construction, reconstruction, or erection after January 21, 1975, and in determining the time when property is acquired.

(ii) Section 311 of the Revenue Act of 1978 [Pub. L. 95-600, 1978-3 C.B. (Vol. 1) 1, 58] made the 10 percent regular credit permanent.

(5) Seven percent credit. To the extent that under paragraph (g) (1) of this section, the 10 percent does not apply, the regular credit, in general, is 7 percent. For a special limitation on qualified investment for public utility property (other than energy property), see section 46 (c) (3) (A).

(h) Tax liability limitation—(1) In general. Section 46 (a) (3) provides a tax liability limitation on the amount of credit allowed by section 38 (other than the refundable energy credit) for any taxable year. See section 46(a) (10) (C) (i). Tax liability is defined in paragraph (j) of this section. The excess of available credit over the applicable tax liability limitation for the year is an unused credit which may be carried forward or carried back under section 46(b).

(2) Regular and ESOP tax liability limitation. In general, the tax liability limitation for the regular and ESOP credits is the portion of tax liability that does not exceed $25,000 plus a percentage of the excess, as determined under section 46 (a) (3) (B).

(3) Nonrefundable energy credit tax liability limitation. (i) For nonrefundable energy credit carrybacks to a