nish lodging. The term "lodging facility" includes an apartment house, hotel, motel, dormitory, or any other facility (or part of a facility) where sleeping accommodations are provided and let..

Section 1.48-1 (h) (1) (ii) of the regulations provides that property that is used predominantly in the operation of a lodging facility or in serving tenants shall be considered used in connection with the furnishing of lodging, whether furnished by the owner of the lodging facility or another person.

In its business, the taxpayer leases furniture to tenants in lodging facilities as that term is defined in section 1.48-1 (h) (1) (i) of the regulations. The furniture is used predominantly in serving tenants, and such property is defined by section 1.48 (h) (1) (ii) as property used in connection with the furnishing of lodging. This section further provides that the property is so defined whether furnished by the owner of the lodging facility or another person. HOLDING

The furniture leased to the tenants in the lodging facilities in the instant case is property used in connection with the furnishing of lodging and, therefore, not section 38 property for investment tax credit purposes.

26 CFR 1.48-1: Definition of section 38 property.

Investment credit; lodging facilities; truck. A pickup truck used predominantly for hauling trash, carrying materials and equipment for repairs and maintenance, and for snow removal at a taxpayer's apartment complex that rents to tenants for periods of more than 30 days is property used in connection with the furnishing of lodging and is not section 38 property for investment tax credit purposes.

Rev. Rul. 78-439 ISSUE

Is a pickup truck used by a taxpayer under the circumstances described below property used in connection with the business of furnishing lodging and, therefore, not "section 38 property" for investment tax credit purposes? FACTS

The taxpayer owns and operates an apartment complex that rents to tenants for periods of more than 30 days. The pickup truck, owned by the taxpayer, is used predominantly for hauling trash from the complex and carrying materials and equipment that are used for repair, maintenance, and snow removal at the complex.

LAW AND ANALYSIS

Section 1.48-1 (h) (1) (i) of the Income Tax Regulations provides that the term "section 38 property" does not include property that is used predominantly to furnish lodging or used predominantly in connection with the furnishing of lodging during the taxable year. The term "lodging facility" includes an apartment house, hotel, motel, dormitory, or any other facility (or part of a facility) where sleeping accommodations are provided and let.

Section 1.48-1 (h) (1) (ii) of the regulations provides that property used predominantly in the operation of a lodging facility or in serving tenants shall be considered used in connection with the furnishing of lodging. As examples of property used in connection with the furnishing of lodging and not qualifying for the investment credit, section 1.48-1 (h) (1) (ii) lists lobby furniture, office equipment, and laundry and swimming pool facilities used in the operation of an apartment house

or in serving tenants.

The use of the truck described above is in connection with the operation of the lodging facility in the same manner as are the properties referred to in section 1.48-1 (h) (1) (ii) of the regulations.

HOLDING

The truck used predominantly in hauling trash from the apartment complex and carrying materials and equipment that are used for repairs, maintenance, and snow removal at the complex is property used in connection with the furnishing of lodging and, therefore, not "section 38 property" for investment tax credit purposes.

26 CFR 1.48-1: Definition of section 38 property.

Whether an investor is entitled to the investment tax credit for animals involved in a breeding and raising operation. See Rev. Rul. 78-411, page 112.

Subpart D.-Rules for Computing Credit for Employment of Certain New Employees

Section 52.-Special Rules

26 CFR 1.52-1: Trades or businesses that are under common control. (Also Section 280C, 1.280C-1.) T.D. 75531 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. 95-30, 1977-1 C.B. 451]. These regulations would provide the public with the guidance needed to comply with

1 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.

the law and would affect employers seeking to obtain the new jobs credit.

DATE: The new regulations are effective for taxable years beginning fective for taxable years beginning

after December 31, 1976, and would apply to credit carrybacks from such 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, 202-566-3458 (not a toll-free number).

SUPPLEMENTARY

TION:

INFORMA

BACKGROUND

On December 14, 1977, the Federal Register published proposed amendments to the Income Tax Regulations (26 CFR Part 1) under sections 52 and 280C of the Internal Revenue Code of 1954, 42 F.R. 62932. 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.

Several technical changes have been made to the proposed amendments. Paragraph (a) of § 1.52-1 is amended to clarify the method of computing the credit in a situation in which a consolidated return is filed. Paragraph (b) is amended to provide rules for treating organizations that are members of more than one group of trades or businesses under common control. Paragraphs (c) and (d) are revised to make it clear that the ownership percentage requirements for a group under common control differ from the requirements for controlled groups of corporations in section 1563 only with respect to parent-subsidiary groups. Paragraph (a) of § 1.52-2 is amended to emphasize that the adjustments re

§ 1.52-1 Trades or businesses that are under common control.

(a) Apportionment of new jobs credit among members of a group of trades or businesses that are under common control-(1) General rule. In the case of a group of trades or businesses that are under common control at any time during the calendar year, the amount of the new jobs credit (computed under section 51 as if all the organizations that are under common control are one trade or business) must be apportioned among the members of the group on the basis of each member's proportionate contribution to the increase in unemployment insurance wages of the entire group. The limitations in section 53 apply to each organization individ

ually (although, in applying these limitations, an affiliated group of corporations electing to make a consolidated return shall be treated as one organization).

(2) Example. Subparagraph (1) of this paragraph may be illustrated by the following example:

Example. (a) A Company and its three subsidiaries, B, C, and D Companies, are a group of businesses that are under common control. A, B, C, and D have paid out the following amounts in unemployment insurance wages during 1976 and 1977:

(b) Since all employees of trades or businesses that are under common control are treated as employed by a single employer, the computations in section 51 are performed as if all the organizations which are under common control are one trade or business. Consequently, the amounts of the total unemployment insurance wages of the group in 1976 (i.e., $2,140,000) and 1977 (i.e., $2,345,000) are used to determine the increase in unemployment insurance wages in 1977 over the 1976 wage base. Since the amount equal to 102 percent of the 1976 unemployment insurance wages ($2,182,800) is greater than the amount equal to 50 percent of the 1977 unemployment insurance wages ($1,172,500), the increase in unemployment insurance wages in 1977 over the 1976 wage base is $162,200 ($2,345,000 - $2,182,800). The limitations in section 51 (c), (d), and (g) must also be computed as though all the organizations under common control are one trade or business. For purposes of this example, it is assumed that none of those limitations reduce the amount of the increase in unemployment insurance wages. As a result, the amount of the new jobs credit allowed to the group of businesses is $81,100 (50% of $162,200).

(c) The credit is apportioned among A, B, and D Companies on the basis of their proportionate contributions to the increase in unemployment insurance wages. No credit would be allowed to C Company because it did not contribute to the increase in the group's unemployment insurance wages. A Company's share of the credit would be $5,406.66 ($81,100 × ($15,000

$225,000 (i.e., $15,000 + $150,000 + $60,000))), B Company's share would be $54,066.67 ($81,100 X ($150,000 ÷

$225,000)), and D Company's share would be $21,626.67 ($81,100 × ($60,000 ÷ $225,000)).

(b) Trades or businesses that are under common control. For purposes of this section, the term "trades or businesses that are under common control" means any group of trades or businesses that is either a "parentsubsidiary group under common control" as defined in paragraph (c) of this section, a "brother-sister group under common control" as defined in paragraph (d) of this section, or a "combined group under common control" as defined in paragraph (e) of this section. For purposes of this section and §§ 1.52-2 and 1.52-3, the term "organization" means a sole proprietorship, a partnership, a trust, an estate, or a corporation. An organization may be a member of only one group of trades or businesses under common control. If, without the application of this paragraph, an organization would be a member of more than one such group, that organizazation shall indicate in its timely filed return the group in which it is being included. If the organization does not so indicate, then the district director with audit jurisdiction of the organizaion's return will determine the group in which the organization is to be included.

(c) Parent-subsidiary group under common control—(1) In general. The term "parent-subsidiary group under common control" means one or more

chains of organizations conducting

trades or businesses that are conducted through ownership of a controlling interest with a common parent organization if

(i) A controlling interest in each of the organizations, except the common parent organization, is owned (directly and with the application of § 11.414 (c)-4(b)(1), relating to options) by one or more of the other organizations; and

(ii) The common parent organization owns (directly and with the ap

plication of § 11.414(c) -4(b)(1), relating to options) a controlling interest in at least one of the other organizations, excluding, in computing the controlling interest, any direct ownership interest by the other organizations.

(2) Conrolling interest defined. For purposes of this paragraph, the term "controlling interest" means:

(i) In the case of a corporation, ownership of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of the shares of all classes of stock of the corporation.

(ii) In the case of a trust or estate, ownership of an ownership of an actuarial interest (determined under paragraph (f) of this section) of more than 50 percent

of the trust or estate;

(iii) In the case of a partnership, ownership of more than 50 percent of the profit interest or capital interest of the partnership; and

(iv) In the case of a sole proprietorship, ownership of the sole proprietorship.

(d) Brother-sister group under common control—(1) In general. The term "brother-sister group under common control" means two or more organizations conducting trades or businesses if—

(i) The same five or fewer persons who are individuals, estates, or trusts own (directly and with the application bination, a controlling interest of each of § 11.414(c)-4), singly or in comorganization; and

(ii) Taking into account the ownership of each person only to the extent that person's ownership is identical with respect to each organization, such persons are in effective control of each organization.

(2) Controlling interest defined. For purposes of this paragraph, the term "controlling interest" means:

(i) In the case of a corporation, ownership of stock possessing at least 80 percent of the total combined vot

ing power of all classes of stock entitled to vote or at least 80 percent of the total value of the shares of all classes of stock of the corporation;

(ii) In case of a trust or estate, ownership of an actuarial interest (determined under paragraph (f) of this section) of at least 80 percent of the trust or estate;

(iii) In the case of a partnership, ownership of at least 80 percent of the profit interest or capital interest of the partnership, and

(iv) In the case of a sole proprietorship, ownership of the sole proprietorship.

(3) Effective control defined. For purposes of this paragraph "effective control" means:

(i) In the case of a corporation, ownership of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of the shares of all classes of stock of the corporation;

(ii) In the case of a trust or estate, ownership of an actuarial interest (determined under paragraph (f) of this section) of more than 50 percent of the trust or estate;

(iii) In the case of a partnership, ownership of more than 50 percent of the profit interest or capital interest of the partnership; and

(iv) In the case of a sole proprietorship, ownership of the sole proprietorship.

(e) Combined group under common control. The term "combined group under common control" means a group of three or more organizations, in which (1) each organization is a member of either a parentsubsidiary group under common control or brother-sister group under common control, and (2 (2) at least one organization is the common parent organization of a parent-subsidiary group under common control and also a member of a brother-sister group under common control.

(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 acquir ing physical assets. The acquisition. must transfer a viable trade or business.

(iii) Subdivision (ii) of this subparagraph may be illustrated by the following examples:

Example (1). R Company, a restaurant, sells its building and all its restaurant equipment to S Company and moves into a larger, more modern building across the street. R Company purchases new equipment, retains its name and continues to operate as a restaurant. S Company opens a restaurant in the old R Company building. S Company has merely acquired the old R Company assets; it has not acquired any portion of R Company's busi

new

ness.

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.

(b) The facts are the same as in (a) above, except that Q Corporation buys the division merely to obtain its store locations. Before the Q Corporation takes over, the division liquidates its inventory in a goingout-of-business sale. The Q Corporation has merely acquired assets in this transaction, not a separate unit of P Company's busi

ness.

Example (3). The R Company processes and distributes meat products. Both the processing division and the distributorship are self-sustaining, profitable operations. The acquisition of either the meat processing division or the distributorship would be an acquisition of a separate unit of the R 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

ness.

(3) Major portion. All the facts and circumstances surrounding the transaction shall be taken into account in determining what constitutes a major portion of a trade or business (or separate unit). Factors to be considered include:

(i) The fair market value of the assets in the portion relative to the fair market value of the other assets of the trade or business (or separate unit);

(ii) The proportion of goodwill

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).

(b) Regulated investment companies 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 or 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.

(c) Cooperatives. (1) In the case

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,