mining the amount of credit attributable to limited property possible disallowance under section 46(f) shall be disregarded.

(3) Additional credit allowed-(i) Credit earned in taxable year. The amount of additional credit allowed for credit earned for limited property for taxable year is an amount equal to the excess of—

(A) The credit allowed by section 38 for the taxable year (determined without regard to section 46(b)) multiplied by a fraction, the numerator of which is the amount of credit earned for limited property for the taxable year and the denominator of which is the amount of credit earned for all section 38 property for the taxable year, over

(B) The amount of normal credit allowed for limited property for the taxable year (determined without regard to section 46(b)). The amount of normal credit allowed for limited property is the amount of credit that would be allowed for the taxable year determined as if the Tax Reduction Act had not been enacted multiplied by a fraction, the numerator of which is the amount of credit earned for limited property for the taxable year determined as if the Tax Reduction Act had not been enacted and the denominator of which is the credit carned for all section 38 property for the taxable year determined as if the Tax Reduction Act had not been enacted.

(ii) Carryover or carryback to taxable year. The amount of additional credit allowed for limited property attributable to a carryover or a carryback of any unused credit to any taxable year in an amount equal to the excess of

(A) The amount of credit allowed by section 38 for the taxable year by reason of section 46 (b) multiplied by the fraction contained in paragraph (a) (3) (i) (A) of this section for the unused credit year, over

(B) The amount of unused normal credit allowed for limited property for the taxable year. The amount of unused normal credit allowed for limited property is the amount of unused credit that would be allowed for the taxable year under section 38 by reason of section 46(b), taking into account the amount of unused credit that would be allowed for any preceding year, determined as if the Tax Reduction Act had not been enacted, multiplied by the fraction contained in paragraph (a)(3)(i)

(B) of this section for the unused credit year.

(b) New election (1) In general. A taxpayer who made a 1972 election for immediate flow-through under section 46(f) (3) with respect to limited property may elect to apply section 46 (f) (3) to the additional credit allowed by the Tax Reduction Act of 1975 with respect to such property, or, if eligible, may make the election in paragraph (b)(2) of this section to apply section 46(f) (2) to such additional credit. The election to apply section 46(f) (2) or (3) must be made before June 28, 1975, in the manner provided in paragraph (c) of this section. If the taxpayer does not make a new election, section 46(f) (1) shall apply to additional credit for limited property. However, if the taxpayer made a 1972 election under section 46 (f) (2) with respect to property to which section 46(f) (3) does not apply, then section 46(f) (2) shall apply to such additional credit notwithstanding any prohibition in section 46(f) (3) to the contrary.

(2) Special section 46(f) (2) election. A taxpayer who:

(i) Made a 1972 election under section 46 (f) (3),

(ii) Did not make an election to apply section 46 (f) (2) with respect to property to which section 46(f) (3) does not apply, and

(iii) Did not acquire property to which section 46(f) (1) applied in any taxable year ending before January 1, 1975, may elect to apply section 46(f) (2) to the additional credit allowed by the Tax Reduction Act of 1975 with respect to limited property notwithstanding any prohibition in section 46 (f) (3) to the contrary.

(c) Method of making election. A taxpayer may make an election described in paragraph (b) of this section by filing a statement before June 28, 1975, with the district director or director of the internal revenue service center with whom the taxpayer ordinarily files its income tax return. For rules with respect to taxpayers filing consolidated returns, see § 1.1502-77(a) of part 1 of this chapter. The statement shall contain the following information: (1) the name, address, and taxpayer identification number of the taxpayer, and (2) the election which the taxpayer is making under paragraph (b) of this section. If a taxpayer is electing flow-through under section 46(f) (3), the statement shall also contain a

"vessel" also includes an ocean-going towing vessel or an ocean-going barge or comparable towing vessel or barge operated in the Great Lakes.

(b) Insofar as the computation and collection of taxes are concerned, other terms used in the regulations in this part, except as otherwise provided in the Act or this part, have the same meaning as in the Code and the regulations thereunder.

PART 8-TEMPORARY INCOME TAX REG

ULATIONS UNDER SECTION 3 OF THE ACT OF OCTOBER 26, 1974 (PUBLIC LAW 93-483)

§ 8.1

Charitable remainder trusts.

(a) Certain wills and trusts in existence on September 21, 1974. In the case of a will executed before September 21, 1974, or a trust created (within the meaning of applicable local law) after July 31, 1969, and before September 21, 1974, which is amended pursuant to section 2055 (e) (3) and § 24.1 of this Chapter (Temporary Estate Tax Regulations), a charitable remainder trust resulting from such amendment will be treated as a charitable remainder trust from the date it would be deemed created under § 1.664-1(a) (4) and (5) of this chapter (Income Tax Regulations), whether or not such date is after September 20, 1974.

(b) Certain transfers to trusts created before August 1, 1969. Property transferred to a trust created (within the meaning of law) applicable local before August 1, 1969, whose governing instrument provides that an organization described in section 170 (c) receives an irrevocable remainder interest in such trust shall be deemed transferred to a trust created on the date of such transfer, provided that the transfer occurs after July 31, 1969 and prior to October 18, 1971, and pursuant to an amendment provided in § 24.1 of this chapter (Temporary Estate Tax Regulations), the transferred property and any undistributed income therefrom is severed and placed in a separate trust as of the date of the amendment.

(Sections 2055(e)(3) and 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805)) [T.D. 7393, 40 FR 58853, Dec. 19, 1975]

PART 9-TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REDUCTION ACT OF 1975

§ 9.1 Investment credit-public utility property elections.

(a) Applicability of prior election under section 46(ƒ)—(1) In general. Except as provided in paragraph (a) (2) of this section, an election made before March 10, 1972 (hereinafter referred to as a 1972 election) under section 46(f) (redesignated from section 46(e) by the Tax Reduction Act of 1975) applies to the credit allowable for a taxable year with respect to public utility property described in section 46(f) (5) by reason of sections 301 and 302 of the Tax Reduction Act of 1975.

(2) 1972 immediate flow-through election. A 1972 election under section 46 (f) (3) (hereinafter referred to as an election for immediate flow-through) does not apply to the additional credit allowed under section 38 with respect to limited property (public utility property described in section 46(c) (3) (B) to which section 167(1) (2) (C) applies, other than nonregulated communication property of the type described in the last sentence of section 46 (c) (3) (B) by reason of the Tax Reduction Act of 1975. However, a 1972 election for immediate flowthrough does apply to the additional credit allowed for a taxable year with respect to property described in section 46(f) (5) (B). See paragraph (b) of this section for a new election under section 46(f) (3) with regard to the additional credit with respect to limited property allowed by reason of the Tax Reduction Act of 1975. See paragraph (a)(3) of this section for determination of additional credit. For purposes of this section the phrase "determined as if the Tax Reduction Act had not been enacted" means the following amendments shall be disregarded in determining credit allowable or allowed: (i) The increase in the amount of credit from 7 percent to 10 or 11 percent under section 46(a) (1) (A), (B), and (D), (ii) the increase in the amount of qualified investment from 4/7 to 7/7 under section 46(a) (1) (C) and (c) (3) (A), (iii) the increase in the dollar limitation from $50,000 to $100,000 on used property under section 48 (c) (2), and (iv) the increase in the limitation based on tax under section 46(a) (6) for certain public utilities. In deter

mining the amount of credit attributable to limited property possible disallowance under section 46(f) shall be disregarded.

(3) Additional credit allowed—(i) Credit earned in taxable year. The amount of additional credit allowed for credit earned for limited property for taxable year is an amount equal to the excess of

(A) The credit allowed by section 38 for the taxable year (determined without regard to section 46(b)) multiplied by a fraction, the numerator of which is the amount of credit earned for limited property for the taxable year and the denominator of which is the amount of credit earned for all section 38 property for the taxable year, over

(B) The amount of normal credit allowed for limited property for the taxable year (determined without regard to section 46(b)). The amount of normal credit allowed for limited property is the amount of credit that would be allowed for the taxable year determined as if the Tax Reduction Act had not been enacted multiplied by a fraction, the numerator of which is the amount of credit earned for limited property for the taxable year determined as if the Tax Reduction Act had not been enacted and the denominator of which is the credit carned for all section 38 property for the taxable year determined as if the Tax Reduction Act had not been enacted.

(ii) Carryover or carryback to taxable year. The amount of additional credit allowed for limited property attributable to a carryover or a carryback of any unused credit to any taxable year in an amount equal to the excess of

(A) The amount of credit allowed by section 38 for the taxable year by reason of section 46 (b) multiplied by the fraction contained in paragraph (a) (3) (i) (A) of this section for the unused credit year, over

(B) The amount of unused normal credit allowed for limited property for the taxable year. The amount of unused normal credit allowed for limited property is the amount of unused credit that would be allowed for the taxable year under section 38 by reason of section 46(b), taking into account the amount of unused credit that would be allowed for any preceding year, determined as if the Tax Reduction Act had not been enacted, multiplied by the fraction contained in paragraph (a) (3) (i)

(B) of this section for the unused credit year.

(b) New election—(1) In general. A taxpayer who made a 1972 election for immediate flow-through under section 46 (f) (3) with respect to limited property may elect to apply section 46 (f) (3) to the additional credit allowed by the Tax Reduction Act of 1975 with respect to such property, or, if eligible, may make the election in paragraph (b)(2) of this section to apply section 46(f) (2) to such additional credit. The election to apply section 46(f) (2) or (3) must be made before June 28, 1975, in the manner provided in paragraph (c) of this section. If the taxpayer does not make a new election, section 46(f) (1) shall apply to additional credit for limited property. However, if the taxpayer made a 1972 election under section 46 (f) (2) with respect to property to which section 46(f) (3) does not apply, then section 46(f) (2) shall apply to such additional credit notwithstanding any prohibition in section 46(f) (3) to the contrary.

(2) Special section 46(f) (2) election. A taxpayer who:

(i) Made a 1972 election under section 46(f) (3),

(ii) Did not make an election to apply section 46 (f) (2) with respect to property to which section 46 (f) (3) does not apply, and

(iii) Did not acquire property to which section 46(f) (1) applied in any taxable year ending before January 1, 1975, may elect to apply section 46(f) (2) to the additional credit allowed by the Tax Reduction Act of 1975 with respect to limited property notwithstanding any prohibition in section 46 (f) (3) to the contrary.

(c) Method of making election. A taxpayer may make an election described in paragraph (b) of this section by filing a statement before June 28, 1975, with the district director or director of the internal revenue service center with whom the taxpayer ordinarily files its income tax return. For rules with respect to taxpayers filing consolidated returns, see § 1.1502-77(a) of part 1 of this chapter. The statement shall contain the following information: (1) the name, address, and taxpayer identification number of the taxpayer, and (2) the election which the taxpayer is making under paragraph (b) of this section. If a taxpayer is electing flow-through under section 46 (f) (3), the statement shall also contain

a

written recitation that the election is made at the taxpayer's own option and without regard to any requirement imposed by an agency described in section 46(c) (3) (B) having jurisdiction over the taxpayer. The recitation shall be verified by a written declaration that it is made under the penalties of perjury. (Sec. 46(f) and 7805 of the Internal Revenue Code of 1954 (85 Stat. 503, 68A Stat. 917; 26 U.S.C. 46, 7805)) [T.D. 7360, 40 FR 25472, June 16, 1975]

PART 10-TEMPORARY INCOME TAX REGULATIONS UNDER PUBLIC LAW 93-625

Sec.

10.1 Election by real estate investment trust to treat certain property as foreclosure property.

10.2 Election to accrue vacation pay.

§ 10.1 Election by real estate investment trust to treat certain property as foreclosure property.

(a) In general. Under section 856(e) of the Code a real estate investment trust ("REIT") may elect to treat as foreclosure property any real property (including interests in real property), and any personal property incident to such real property, that the REIT acquires after December 31, 1973, as the result of having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was imminent) on a lease of such property (where the REIT was the lessor) or on an indebtedness owed to the REIT which such property secured. Personal property acquired on foreclosure (including personal property not subject to a mortgage or lease of the real property) will be considered incident to a particular item of real property if the use of such personal property is an ordinary and necessary corollary of the use to which the real property is put. For example, in the case of a hotel, such items as furniture, appliances, linens, china, food, etc. would be examples of incidental personal property. Personal property eligible for the election includes personal property acquired after the acquisition of the real property, if such personal property is incident to the real property and either replaces or supplements personal property of the same or a similar nature acquired upon foreclosure. Personal property used in the

58-095-76

continuation of a trade or business conducted on the property prior to foreclosure will be considered property eligible for the election. Also, if the REIT, through an independent contractor, completes construction of a building or other improvement on foreclosure property which was more than 10 percent complete when default was imminent, personal property (such as a refrigerator or stove) which is incident to such real property and which is placed in the building or other improvement in the course of the completion of the construction is eligible for the election to be treated as foreclosure property. Real property eligible for the election includes. a building or other improvement which has been constructed on land owned and leased by the REIT and which is acquired by the REIT upon default of the lease of the land.

(b) Special rules regarding termination of foreclosure property status-(1) Subsequent leases of foreclosure property. Under section 856(e) (4) (A), foreclosure property will cease to be fore-closure property on the first day (occurring on or after the day on which the REIT acquired the property) on which the REIT enters into a lease with re-spect to such property which, by its terms, will give rise to income which is. not described in section 856(c) (3) (other than subparagraph (F) of section 856 (c) (3)) or any amount is received or accrued, directly or indirectly, pursuant toa lease entered into on or after such day which is not described in such section.. If, by operation of law or by contract, the acquisition of the foreclosure property by the REIT terminates a preexisting lease of such property, or gives the REIT a right to terminate such lease, then for the purposes of section 856(e) (4) (A), a REIT, in such circumstances, will not be considered to have entered into a lease with respect to such property solely because the terms of such preexisting lease are continued in effect. after foreclosure without substantial modification. Also, solely for the purposes of section 856(e) (4) (A), if a REIT enters into a lease with respect to real. property on or after the day upon which the REIT acquires such real property by foreclosure, and a portion of the rent. from such lease is attributable to personal property which is foreclosure property incident to such real property, such rent attributable to the incidental per-sonal property will not be considered to

terminate the status of such real property (or such incidental personal property) as foreclosure property.

(2) Completion of construction after default is imminent. Under section 856 (e) (4) (B), property ceases to be foreclosure property if on or after the day on which the REIT acquires such property any construction takes place on such property, other than completion of a building, or completion of any other improvement, where more than 10 percent of the construction of such building or other improvement was completed before default became imminent. For purposes of section 856(e) (4) (B), if more than one default occurred with respect to an indebtedness or lease in respect of which there is an acquisition, the more-than10-percent test will not be applied at the time a particular default became imminent if it is clear that the acquisition did not occur as the result of such default. Construction by the REIT as mortgagee in possession may not be added to the construction previously completed to satisfy the more-than-10-percent test.

(3) Use of the property in a trade or business. Under section 856(e) (4) (C), property ceases to be foreclosure property if, more than 90 days after the property was acquired by the REIT, the REIT uses the property in the conduct of a trade or business, other than through an independent contractor from whom the REIT does not derive or receive any income. Thus, sale of property held primarily for sale to customers in the ordinary course of a trade or business more than 90 days after the real property was acquired, other than through an independent contractor, will not be a sale of foreclosure property.

(c) Taxable income-(1) Net income from foreclosure property. Section 857 (b) (4), as added by section 6(c) of Pub. L. 93-625, imposes a tax on the net income from foreclosure property (as defined in section 857(b) (4) (B)). For purposes of section 857(b) (4) (B), net income from foreclosure property means the aggregate of

(i) All gains and losses from sales or other dispositions of foreclosure property described in section 1221(1), and

(ii) The difference (hereinafter called "net gain or loss from operations") between (A) the gross income derived from foreclosure property (as defined in section 856(e)) to the extent such gross income is not described in subparagraph (A), (B), (C), (D), or (E) of section 856

(c) (3), and (B) the deductions allowed by chapter 1 of the Code which are directly connected with the production of such gross income.

Thus, the sum of the gains and losses from sales or other dispositions of foreclosure property described in section 1221(1) is aggregated with the net gain or loss from operations in arriving at net income from foreclosure property. Since income from the rental of personal property is not described in section 856 (c) (3) (A), (B), (C), (D), or (E), such income is subject to tax under section 857(b) (4). A deduction is "directly connected" with gross income if it has a proximate and primary relationship to the earning of such income. Thus, in the case of gross income from real property, "directly connected" deductions would include depreciation on the property, interest on any obligations attributable to the carrying of the property, real estate taxes, and fees paid to an independent contractor hired to manage the property. On the other hand, general overhead and administrative expenses are not "directly connected" deductions.

(2) Real estate investment trust taxable income. The tax imposed by section 857(b) (4) applies only if there is net income from foreclosure property. If there is a net loss from foreclosure property (that is, if the aggregate computed under subparagraph (1) of this paragraph results in a negative amount) such loss is taken into account in computing real estate investment trust taxable income under section 857(b)(2).

(d) Election on a property-by-property basis. An election under section 856 (e) to treat property as foreclosure property shall be made on a property-byproperty basis. Thus, if the REIT acquires property eligible for the election in each of two separate foreclosures with respect to two separate obligations, the REIT may make an election with respect to the property acquired upon either, or both, of the foreclosures.

(e) Time for making election. The election by a REIT to treat property as foreclosure property must be made on or before either the due date (including extensions of time) for filing the REIT'S income tax return for the taxable year in which the REIT acquires the property with respect to which the election is being made, or April 3, 1975, whichever is later. Thus a REIT which acquires property eligible for the election after December 31, 1973, may make an