↑ Acquiescence in the issues relating to (1) whether the payments made by the corporation to the former owner of all of its stock pursuant to a consulting agreement are deductible as compensation under section 162 of the Code or are constructive dividends to the purchasers of the stock, and (2) whether the negligence penalty should be imposed. • Acquiescence in result relating to whether petitioner is entitled to a credit for foreign taxes withheld by its subsidiary for payments made to the petitioner under Rev. Proc. 65-17 in repatriation of money allocated to the petition in prior years under section 482. Acquiescence "in result" means acceptance of the decision of the Court but disagreement with some or all the reasons assigned for the decision. • Acquiescence in the issues of (1) allocability of legal fees to intangible assets of trademarks and goodwill, and (2) the deductibility of unamortized costs of obtaining a loan upon its satisfaction with proceeds from another loan from the same lender. 1 Nonacquiescence relating to whether petitioner's articles of organization meet the organizational test of section 509 (a) (3) of the Code, thereby qualifying it as a support. ing organization and excluding it from private foundation status. "Nonacquiescence in the issue of whether taxpayer who erroneously claimed depreciation of the double declining balance method in years closed by the statute of limita. tions may use the 150 percent declining balance for all other years without obtaining the consent of the Commissioner. The acquiescence in result only published in 1977-2 C.B. 2 is withdrawn and nonacquiescence is substituted therefor. 13 Acquiescence published in 1974-1 C.B. 2, in issue No. 2 relating to whether all travel and entertainment expenses disallowed to corporation constituted income to share. holder-employee, is withdrawn and nonacquiescence is substituted therefor. Acquiescence relating to whether taxpayer, who stored her possessions in a home she previously shared with her estranged husband while she resided elsewhere, is entitled to a theft loss deduction under section 165 (c) (3) of the Code, for the possessions that were appropriated and removed from the house without her knowledge or permission. 14 Acquiescence in the issue relating to whether the petitioner-corporation properly followed the cash method of accounting in reporting income and expenses from its construction contracts. Acquiescence in result in the issue relating to whether petitioner, as common sole shareholder, received a constructive dividend from Magnon Service during 1973, as a result of Magnon Service's forgiveness of a sister corporation's indebtedness during the course of their business dealings. Acquiescence "in result" means ac. ceptance of the decision of the Court but disagreement with some or all the reasons assigned for the decision. 15 Acquiescence in result relating to whether an insured employee's right to prevent his employer (the beneficiary-owner) from cancelling an insurance policy upon his life, by purchasing the policy for its cash surrender value, constitutes an incident of ownership under section 2042 of the Code. Acquiescence "in result" means acceptance of the decision of the Court but disagreement with some or all the reasons assigned for the decision. 16 Acquiescence relating to whether certain partnerships in which taxpayer was a partner validly elected (or continued valid elections for) the benefits of the accelerated depreciation method provided by section 167 (k) of the Code. 17 Acquiescence relating to whether taxpayer's pre-election reserves for annuity options under life insurance and annuity contracts, to the extent they reflect future unaccrued claims indicated by facts existing in the years in question, qualify as life insurance reserves under section 801 (d) of the Code. 18 Nonacquiescence relating to whether taxpayer's pre-election reserves for annuity options under life insurance and annuity contracts, to the extent they reflect future unaccrued claims in excess of those indicated by facts existing in the years in question, qualify as life insurance reserves under section 801 (b) of the Code. 19 Nonacquiescence relating to whether an installment sale of an apartment building from petitioners to trusts of which the petitioners were trustees will be recognized for tax purposes where, as part of a prearranged plan, the trusts sold the apartments to a third party the following day. Acquiescence relating to whether petitioners commenced construction on their residence prior to March 26, 1975, so as to qualify for the section 44 credit for the purchase of a new principal residence. Acquiescence relating to whether petitioner is a corporation created or organized under the law of a state within the meaning of section 170 (c) (2) (A) of the Code. Acquiescence relating to whether the value of the decedent's contractual right to share in future attorney's fees, which are contingent in nature, is includible in the dece. dent's gross estate at the value determined by the respondent, or, whether it is excludable from the decedent's estate because it is too remote and speculative to be valued. Acquiescence relating to whether petitioner is entitled to a deduction for prepaid intangible drilling costs when all requirements of deductibility are met in the year of prepayment, but no wells are actually drilled in the subsequent year due to the drilling contractor's failure to perform under the contract. Acquiescence published in 1959-1 C.B. 5 is withdrawn and non acquiescence is substituted therefor relating to whether unreimbursed clothing expenditures made by a fashion coordinator for a shoe manufacturer are deductible as ordinary and necessary business expenses. Acquiescence relating to whether grantor trusts were required to recapture a portion of their previously claimed investment credits in 1973 when the trusts terminated on December 31, 1972. » Acquiescence in result relating to whether petitioner is entitled to a casualty loss deduction for the value of personal property abandoned in Saigon when the city was seized by the North Vietnamese. Acquiescence "in result" means acceptance of the decision of the Court but disagreement with some or all the reasons assigned for the decision. Subpart A.-Income Taxes Chapter 1.-Normal Taxes and Surtaxes Section 37.-Credit for the Elderly 26 CFR 1.37-1: General rules for the credit SUPPLEMENTARY BACKGROUND On February 27, 1980, the Federal Register published proposed amendments to the Income Tax Regulations (26 CFR Part 1) under section 37 of the Internal Revenue Code of 1954 (45 F.R. 12851). The proposed amendments also included the deletion of certain provisions of the Temporary Income Tax Regulations under the Tax Reform Act of 1976 (26 CFR Part 7) that would be superseded by the final regulations. The amendments were proposed to conform the regulations to section 503 (a) of the Tax Reform Act of 1976 (90 Stat. 1559) [supra at 35] and Credit for the elderly, determining section 701 (a) of the Revenue Act of eligibility 1978 (92 Stat. 2897) [supra at 131]. AGENCY: Internal Revenue Service, No public hearing on the proposed Treasury. 26.-INTERNAL REVENUE. CHAPTER I, SUBCHAPTER A, PART 1.-INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953; PART 7.-TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1976 amendments was requested, and ac- GENERAL INFORMATION Like the former retirement income credit which it replaced, the credit Generally, taxpayers age 65 and level, they further reduce the credit base by one-half of that excess. The credit is equal to 15 percent of the remaining credit base. Taxpayers under age 65 are eligible for the credit only if they receive public retirement income, that is, pension or annuity income for work for Federal, state, or local government. Many of the more detailed rules that applied generally under the former retirement income credit continue to apply to public retirees under age 65. Thus, the second reduction in the credit base for these retirees depends upon the amount of their earned income rather than the amount of their adjusted gross income. The preamble to the notice of proposed rulemaking presents a detailed discussion of the various issues addressed in the regulations. These include the determination of earned income when a taxpayer receives selfemployment income or disability annuity payments and the election available to married taxpayers who would individually qualify to compute the credit under different sets of rules. PUBLIC COMMENTS Two comments were submitted with respect to the notice of proposed rulemaking. One objected to the complexity of the computations. Since the rules for computation of the credit are prescribed by the Code, the regulations cannot be amended in the manner suggested in the comment. The other comment pointed out a discrepancy between the language of the Code and that the regulations with respect to the requirement that married taxpayers must generally file joint returns in order to qualify for the credit. While section 37 (d) (1) provides an exception for married taxpayers "who live apart at all times during the taxable year," the regulations provide an exception for married taxpayers "who are not members of the same household at any time during the taxable year." The Internal Rev enue Service believes that the provision in the regulations accurately reflects the intent of the statutory provision. The reason for the paraphrase is to equate the new statutory condition with the already established standard under section 143 (b) (3) (relating to determination of marital status). There is no evidence in the legislative history that Congress intended to create a different standard under section 37(d)(1). RULES FOR NONRESIDENT ALIENS The Treasury decision revises proposed § 1.37-1(d) to clarify the circumstances under which nonresident aliens may qualify for a credit under section 37. Generally, nonresident aliens are ineligible for the credit for the elderly. The Treasury decision makes it clear that this rule applies to any individual who was a nonresident alien at any time during the taxable year; the italicized phrase has appeared in the regulations under section 37 since they were first promulgated in 1956. The Treasury decision provides, however, that an individual treated as a United States resident by reason of an election under section 6013(g) or (h) may qualify for the credit despite the general rule. REVIEW The Treasury Department will review these regulations from time to time in light of comments received from offices within the Treasury Department or from other sources. DRAFTING INFORMATION The principal author of these regulations is Paul A. Francis of the Legislation and Regulations Division of the 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 The following amendments to 26 CFR Parts 1 and 7 are hereby adopted: Paragraph 1. Section 1.37 is deleted. Par. 2. Section 1.37-1 is revised to read as follows: 1.37-1 General rules for the credit for the elderly. (a) In general. In the case of an individual, section 37 provides a credit against the tax imposed by chapter 1 of the Internal Revenue Code of 1954. This section and §§ 1.37-2 and 1.37-3 provide guidance in the computation of the credit for the elderly provided under section 37 for taxable years beginning after 1975. For rules relating to the computation of the retirement income credit provided under section 37 for taxable years beginning before 1976, see 26 CFR 1.37-1 through 1.37-5 (Rev. as of April 1, 1980). Note that section 403 of the Tax Reduction and Simplification Act of 1977 [Pub. L. 95-30, 1977-1 C.B. 451, 468] provides that a taxpayer may elect to compute the credit under section 37 for the taxpayer's first taxable year beginning in 1976 in accordance with the rules applicable to taxable years beginning before 1976. (b) Limitation on the amount of the credit. The credit allowed by section 37 for a taxable year shall not exceed the tax imposed by chapter 1 of the Code for the taxable year (reduced, in the case of a taxable year beginning before 1979, by the general tax credit allowed by section 42). (c) Married couples must file joint returns. If the taxpayer is married at the close of the taxable year, the credit provided by section 37 shall be allowed only if the taxpayer and the taxpayer's spouse file a joint return for the taxable year. The preceding sentence shall not apply in the case of a husband and wife who are not members of the same household at any time during the taxable year. For the determination of marital status, see section 143 and § 1.143-1. (d) Nonresident aliens ineligible. No credit is allowed under section 37 to any individual for any taxable year during which that individual is at any time a nonresident alien unless the individual is treated, by reason of an election under section 6013(g) or (h), as a resident of the United States for that taxable year. Par. 3. Section 1.37-2 is revised to read as follows: § 1.37-2 Credit for individuals age 65 or over. (a) In general. This section illustrates the computation of the credit for the elderly in the case of an indibefore the close of the taxable year. vidual who has attained the age of 65 This section shall not apply to an individual for any taxable year for which the individual makes the election described in section 37 (e) (2) and paragraph (b) of § 1.37-3. (b) Computation of credit. The credit for the elderly for an individual to whom this section applies equals 15 percent of the individual's "section 37 amount" for the taxable year. An individual's "section 37 amount" for a taxable year is the initial amount determined under section 37 (b) (2), reduced as provided in section 37 (b) (3) and (c) (1). (c) Examples. The computation of the credit for the elderly for individuals to whom this section applies may be illustrated by the following examples: Example (1). A, a single individual who is 67 years old, has adjusted gross income of $8,000 for the calendar year 1977. A also receives social security payments of $1,450 during 1977. A does not itemize deductions. A's credit for the elderly is $120, computed as follows: Initial amount under section 37 (b) (2) Reductions required by section 37(b) (3) and (c)(1): Social security payments $1,450 $2,500 A's tax from the tax tables, which reflect the allowance of the general tax credit, is $662. Accordingly, the limitation of section 37 (c) (2) and paragraph (b) of § 1.37-1 does not reduce A's credit for the elderly. Example (2). H and W, who have both attained the age of 65, file a joint return for calendar year 1977. For that year H and W have adjusted gross income of $8,120; H also receives a railroad retirement pension of $1,550, and W receives social security payments of $1,200. H and W do not itemize deductions. The credit for the elderly allowed to H and W for 1977 is $139, computed as follows: Initial amount under 1.37-3 Credit for individuals under age 65 who have public retirement system income. (a) In general. This section provides rules for the computation of the credit for the elderly under section. 31(e) in the case of an individual who has not attained the age of 65 before the close of the taxable year and whose gross income for the taxable year includes retirement income within the meaning of paragraph (d) (1) (ii) of this section (i.e., under a public retirement system). If such an individual is married within the meaning of section 143 at the close of the taxable year and the spouse of the individual has attained the age of 65 before the close of the taxable year, this section shall apply to the individual for the taxable year only if both spouses make the election described in paragraph (b) of this section. If both spouses make the election described in paragraph (b) of this section for the taxable year, the credit of each spouse shall be determined under the rules of this section. See paragraph (f) (2) of this section for a limitation on the effects of community property laws in making determinations and computations under section 37 (e) and this section. (b) Election by certain married taxpayers. If a married individual under age 65 at the close of the taxable year has retirement income and the spouse of that individual has attained the age of 65 before the close of the taxable year, both spouses may elect to compute the credit provided by section 37 under the rules of section 37(e) and this section. The spouses shall signify the election on the return (or amended return) for the taxable year in the manner prescribed in the instructions accompanying the return. The election may be made at any time before the expiration of the period of limitation for filing claim for credit or refund for the taxable year. The election may be revoked without the consent of the Commissioner at any time before the expiration of that period by filing an amended return. (c) Computation of credit. The credit of an individual under section 37 (e) and this section equals 15 percent of the individual's credit base for the taxable year. The credit base of an individual for a taxable year is the lesser of (1) The retirement income of the individual for the taxable year, or (2) The amount determined under section 37 (e) (5), as modified by section 37 (e) (6) and (7). (d) Retirement income-(1) General rule-(i) For individuals 65 or over. Section 37 (e) (4) (A) enumerates the kinds of income which may be treated as the retirement income of an individual who has attained the age of 65 before the close of the taxable year. They include income from pensions and annuities, interest, rents, dividends, certain bonds received under a qualified bond purchase plan, and certain individual retirement accounts or annuities. (ii) For individuals under 65. In the case of an individual who has not attained the age of 65 before the close of the taxable year, retirement income consists only of income from pensions and annuities (including disability annuity payments) under a public retirement system which arises from services performed by that individual or by a present or former spouse of that individual. The term "public retirement system" means a pension, annuity, or retirement, or similar fund or system established by the United States, a State, a possession of the United States, any political subdivision of any of the foregoing, or the District of Columbia. (2) Rents. For purposes of section 37 (e) (4) (A) (iii), income from rents shall be the gross amount received, not reduced by depreciation or other expenses, except that beneficiaries of a trust or estate shall treat as retirement income only their proportionate shares of the taxable rents of the trust or estate. In the case of an amount received for board and lodging, only the portion of the amount received for lodging is income from rents. (3) Disability annuity payments received by individual under age 65. Disability annuity payments received under a public retirement system by an individual under age 65 at the close of the taxable year shall not be treated as retirement income unless the payments are for periods after the date on which the individual reached minimum retirement age, that is, the age at which the individual would be eligible to receive a pension or annuity |