equipment, and their appurtenances; and

(ii) is certified by the State water pollution control agency (as defined in section 13(a) of the Federal Water Pollution Control Act) as being in conformity with the State program or requirements for control of water pollution and is certified by the Secretary of Interior as being in compliance with the applicable regulations of Federal agencies and the general policies of the United States for cooperation with the States in the prevention and abatement of water pollution under the Federal Water Pollution Control Act.

(C) AIR POLLUTION CONTROL FACILITY. For purposes of subparagraph (A), the term "air pollution control facility" means any section 38 property which-

(i) is used primarily to control atmospheric pollution or contamination by removing, altering, or disposing of atmospheric pollutants or contaminants; and

(ii) is certified by the State air pollution control agency (as defined in section 302(b) of the Clean Air Act) as being in conformity with the State program or requirements for control of air pollution and is certified by the Secretary of Health, Education, and Welfare as being in compliance with the applicable regulations of Federal agencies and the general policies of the United States for cooperation with the States in the prevention and abatement of air pollution under the Clean Air Act.

(D) STANDARDS FOR FACILITY.Subparagraph (A) shall apply in the case of any facility only if the taxpayer constructs, reconstructs, erects, or acquires such facility in furtherance of Federal, State, or local standards for the control of water pollution or atmospheric pollution or contaminants.

(13) CERTAIN REPLACEMENT PROPERTY.-Section 38 property constructed, reconstructed, erected, or acquired by the taxpayer shall be treated as property which is not suspension period property to the extent

(1) IN GENERAL.-In the case of property acquired by the taxpayer by purchase for use in his trade or business which would (but for this subsection) be suspension period property, the taxpayer may select items to which this subsection applies, to the extent of an aggregate cost, for the suspension period, of $20,000. Any item so selected shall be treated as property which is not suspension period property for purposes of this subpart (other than for purposes of paragraphs (4), (5), (6), (7), (8), (9), and (10) of subsection (h)).

(2) APPLICABLE RULES.-Under regulations prescribed by the Secretary or his delegate rules similar to the rules provided by paragraphs (2) and (3) of subsection (c) shall be applied for purposes of this subsection. Subsection (d) shall not apply with respect to any item to which this subsection applies.

(j) SUSPENSION PERIOD.-For purposes of this subpart, the term "suspension period" means the period beginning on October 10, 1966, and ending on March 9, 1967.

(k) CROSS Reference.

For application of this subpart to certain acquiring corporations, see section 381 (c) (23).

[Sec. 48 as added by sec. 2(b), Rev. Act 1962 (76 Stat. 963) [P.L. 87-834, C.B. 1962-3, 111]; as amended by sec. 203 (a) (1) and (3) (A), b, and (c), Rev. Act 1964 (78 Stat. 33, 34) [P.L. 88-272, C.B. 1964-1 (Part 2), 6]; sec. 1(a), Act of Nov. 8, 1966 (Pub. Law 89-800, 80 Stat. 1508) [C.B. 1966–2, 649]; sec. 201(a), Act of Nov. 13, 1966 (Pub. Law 89-809, 80 Stat. 1575, 1576) [C.B. 1966–2, 656]; sec. 1, 2(a), and (3), Act of June 13, 1967 (Pub. Law 90-26, 81 Stat. 57, 58) [C.B. 1967-2, 481]]

(a) GENERAL RULE.-For purposes of this subpart, the term "section 38 property" does not include property

(1) the physical construction, reconstruction, or erection of which is begun after April 18, 1969, or

(2) which is acquired by the taxpayer after April 18, 1969, other than pre-termination property.

(b) PRE-TERMINATION PROPERTY.— For purposes of this section

(1) BINDING CONTRACT.—Any property shall be treated as pre-termination property to the extent that such property is constructed, reconstructed, erected, or acquired pursuant to a contract which was, on April 18, 1969, and at all times thereafter, binding on the taxpayer.

(2) EQUIPPED BUILDING RULE.—If—

(A) pursuant to a plan of the taxpayer in existence on April 18, 1969 (which plan was not substantially modified at any time after such date and before the taxpayer placed the equipped building in service), the taxpayer has constructed, reconstructed, erected, or acquired a building and the machinery and equipment necessary to the planned use of the building by the taxpayer, and

(B) more than 50 percent of the aggregate adjusted basis of all the property of a character subject to the allowance for depreciation making up such building as so equipped is attributable to either property the construction, reconstruction, or erection of which was begun by the taxpayer before April 19, 1969, or property the acquisition of which by the taxpayer occurred before such date,

then all property comprising such building as so equipped (and any incidental property adjacent to such building which is necessary to the planned use of the building) shall be pre-ter

mination property. For purposes of subparagraph (B) of the preceding sentence, the rules of paragraphs (1) and (4) shall be applied. For purposes of this paragraph, a special purpose structure shall be treated as a building. (3) PLANT FACILITY RULE.— (A) GENERAL RULE.—If—

(i) pursuant to a plan of the taxpayer in existence on April 18, 1969 (which plan was not substantially modified at any time after such date and before the taxpayer placed the plant facility in service), the taxpayer has constructed, reconstructed, or erected a plant facility, and either

(ii) the construction, reconstruction, or erection of such plant facility was commenced by the taxpayer before April 19, 1969, or

(iii) more than 50 percent of the aggregate adjusted basis of all the property of a character subject to the allowance for depreciation making up such plant facility is attributable to either property the construction, reconstruction, or erection of which was begun by the taxpayer before April 19, 1969, or property the acquisition of which by the taxpayer occurred before such date,

then all property comprising such plant facility shall be pretermination property. For purposes of clause (iii) of the preceding sentence, the rules of paragraphs (1) and (4) shall be applied.

(B) PLANT FACILITY DEFINED.-For purposes of this paragraph, the term "plant facility" means a facility which does not include any building (or of which buildings constitute an insignificant portion) and which is

(i) a self-contained, single operating unit or processing operation,

(ii) located on a single site, and (iii) identified, on April 18, 1969, in the purchasing and internal financial plans of the taxpayer as a single unitary project.

(C) SPECIAL RULE. For purposes of this subsection, if

(i) a certificate of convenience and necessity has been issued before April 19, 1969, by a Federal regulatory agency with respect to two or more

plant facilities which are included under a single plan of the taxpayer to construct, reconstruct, or erect such plant facilities, and

(ii) more than 50 percent of the aggregate adjusted basis of all the property of a character subject to the allowance for depreciation making up such plant facilities is attributable to either property the construction, reconstruction, or erection of which was begun by the taxpayer before April 19, 1969, or property the acquisition of which by the taxpayer occurred before such date,

such plant facilities shall be treated as a single plant facility.

OR EQUIPMENT

(4) MACHINERY RULE. Any piece of machinery or equipment—

(A) more than 50 percent of the parts and components of which (determined on the basis of cost) were held by the taxpayer on April 18, 1969, or are acquired by the taxpayer pursuant to a binding contract which was in effect on such date, for inclusion or use in such piece of machinery or equipment, and

(B) the cost of the parts and components of which is not an insignificant portion of the total cost,

shall be treated as property which is pre-termination property.

(5) CERTAIN LEASE-BACK TRANSACTIONS, ETC.

(A) Where a person who is a party to a binding contract described in paragraph (1) transfers rights in such contract (or in the property to which such contract relates) to another person but a party to such contract retains a right to use the property under a lease with

such other person, then to the extent of the transferred rights such other person shall, for purposes of paragraph (1), succeed to the position of the transferor with respect to such binding. contract and such property. In any case in which the lessor does not make an election under section 48 (d)—

(i) the preceding sentence shall apply only if a party to the contract retains the right to use the property under a lease for a term of at least 1 year; and

(ii) if such use is retained (other than under a long-term lease), the lessor shall be deemed for the purposes of section 47 as having made a disposition of the property at such time as the lessee loses the right to use the property. For purposes of clause (ii), if the lessee transfers the lease in a transfer described in paragraph (7), the lessee shall be considered as having the right to use of the property so long as the transferee has such use.

(B) For purposes of subparagraph (A)

(i) a person who holds property (or rights in property) which is pre-termination property by reason of the application of paragraph (4) shall, with respect to such property, be treated as a party to a binding contract described in paragraph (1), and

(ii) a corporation which is a member of the same affiliated group (as defined in paragraph (8)) as the transferor described in subparagraph (A) transfer of property to another person and which simultaneously with the acquires a right to use such property under a lease with such other person shall be treated as the transferor and as a party to the contract.

(6) CERTAIN LEASE AND CONTRACT

OBLIGATIONS.

(A) Where, pursuant to a binding lease or contract to lease in effect on April 18, 1969, a lessor or lessee is obligated to construct, reconstruct, erect, or acquire property specified in such lease or contract or in a related document filed before April 19, 1969, with a Federal regulatory agency, or property the specifications of which are

readily ascertainable from the terms of such lease or contract or from such related document, any property so constructed, reconstructed, erected, or acquired by the lessor or lessee shall be pre-termination property. In the case of any project which includes property other than the property to be leased to such lessee, the preceding sentence shall be applied, in the case of the lessor, to such other property only if the binding leases and contracts with all lessees in effect on April 18, 1969, cover real property constituting 25 percent or more of the project (determined on the basis of rental value). For purposes of the preceding sentences of this paragraph, in the case of any project where one or more vendorvendee relationships exist, such vendors and vendees shall be treated as lessors and lessees.

(B) Where, in order to perform a binding contract or contracts in effect on April 18, 1969, (i) the taxpayer is required to construct, reconstruct, erect, or acquire property specified in any order of a Federal regulatory agency for which application was filed before April 19, 1969, (ii) the property is to be used to transport one or more products under such contract or contracts, and (iii) one or more parties to the contract or contracts are required to take or to provide more than 50 percent of the products to be transported over a substantial portion of the expected useful life of the property, then such property shall be pre-termination property,

(C) Where, in order to perform a binding contract in effect on April 18, 1969, the taxpayer is required to construct, reconstruct, erect, or acquire property specified in the contract to be used to produce one or more products and (unless the other party to the contract is a State or a political subdivision of a State which is required by the contract to make substantial expenditures which benefit the taxpayer) the other party to the contract is required to take substantially all of the products to be produced over a substantial portion of the expected useful life of the property,

then such property shall be pre-termination property. For purposes of applying the preceding sentence in the case of a contract for the extraction of minerals, property shall be treated as specified in the contract if (i) the specifications for such property are readily ascertainable from the location and characteristics of the mineral properties specified in such contract from which the minerals are to be extracted; (ii) such property is necessary for and is to be used solely in the extraction of minerals under such contract; (iii) the physical construction, reconstruction, or erection of such property is begun by the taxpayer before April 19, 1970, such property is acquired by the taxpayer before April 19, 1970, or such property is constructed, reconstructed, erected, or acquired pursuant to a contract which was, on April 18, 1970, and at all times thereafter, binding on the taxpayer; (iv) such property is placed in service on or before December 31, 1972; (v) such contract is a fixed price contract (except for provisions for price changes under which the loss of the credit allowed by section 38 would not result in a price change); and (vi) such property is not placed in service to replace other property used in extracting minerals under such contract.

(7) CERTAIN TRANSFERS TO BE DIS

REGARDED.

(A) If property or rights under a contract are transferred in—

(i) a transfer by reason of death,

(ii) a transaction as a result of which the basis of the property in the hands of the transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 371 (a), 374(a), 721, or 731, or

(iii) a sale of substantially all of the assets of the transferor pursuant to the terms of a contract, which was on April 18, 1969, and at all times thereafter, binding on the transferee, and such property (or the property acquired under such contract) would be treated as pre-termination property in the hands of the decedent or the trans

feror, such property shall be treated as pre-termination property in the hands of the transferee.

(B) If—

(i) property or rights under a contract are acquired in a transaction to which section 334(b) (2) applies,

(ii) the stock of the distributing corporation was acquired before April 19, 1969, or pursuant to a binding contract in effect April 18, 1969, and

(iii) such property (or the property acquired under such contract) would be treated as pre-termination property in the hands of the distributing corporation,

such property shall be treated as pretermination property in the hands of the distributee.

(8) PROPERTY ACQUIRED FROM afFILIATED CORPORATION.-In the case of property acquired by a corporation which is a member of an affiliated group from another member of the same group

(A) such corporation shall be treated as having acquired such property on the date on which it was acquired by such other member,

(B) such corporation shall be treated as having entered into a binding contract for the construction, reconstruction, erection, or acquisition of such property on the date on which such other member entered into a contract for the construction, reconstruction, erection, or acquisition of such property, and

(C) such corporation shall be treated as having commenced the construction, reconstruction, or erection of such property on the date on which such other member commenced such construction, reconstruction, or erection. For purposes of this subsection and subsection (c), a contract between two corporations which are members of the same affiliated group shall not be treated as a binding contract as between such corporations, unless, at all times after June 30, 1969, and prior to the completion of performance of such contract, such corporations are not members of the same affiliated

group. For purposes of the preceding sentences, the term "affiliated group" has the meaning assigned to it by section 1504(a), except that all corporations shall be treated as includible corporations (without any exculsion under section 1504 (b)).

(9) BARGES FOR OCEAN-GOING VESSELS.-Barges specifically designed and constructed, reconstructed, erected, or acquired for use with ocean-going vessels which are designed to carry barges and which are pre-termination property, but not in excess of—

(A) the number to be used with such vessels specified in applications for mortgage or construction loan insurance filed with the Secretary of Commerce on or before April 18, 1969,

under title XI of the Merchant Marine Act, 1936, or

(B) if subparagraph (A) does not apply and if more than 50 percent of the barges which the taxpayer establishes as necessary to the initial planned use of such vessels are pre-termination property (determined without regard to this paragraph), the number which the taxpayer establishes as so necessary,

together with the machinery and equipment to be installed on such barges and necessary for their planned use, shall be treated as pre-termination property.

(10) CERTAIN NEW-DESIGN PRODUCTS.-Where

(A) on April 18, 1969, the taxpayer had undertaken a project to produce a product of a new design pursuant to binding contracts in effect on such date which—

(i) were fixed-price contracts (except for provisions requiring or permitting price changes resulting from changes in rates of pay or costs of materials), and

(ii) covered more than 50 percent of the entire production of such design to be delivered by the taxpayer before January 1, 1973, and

(B) on or before April 18, 1969, more than 50 percent of the aggregate adjusted basis of all property of a char

acter subject to the allowance for depreciation required to carry out such binding contracts was property the construction, reconstruction, or erection of which had been begun by the taxpayer, or had been acquired by the taxpayer (or was under a binding contract for such construction, reconstruction, erection, or acquisition), then all tangible personal property placed in service by the taxpayer before January 1, 1972, which is required to carry out such binding contracts shall be deemed to be pre-termination property. For purposes of subparagraph (B) of the preceding sentence, jigs, dies, templates, and similar items which can be used only for the manufacture or assembly of the production under the project and which were described in written engineering and internal financial plans of the taxpayer in existence on April 18, 1969, shall be treated as property which on such date was under a binding contract for construction.

(c) LEASED PROPERTY.-In the case of property which is leased after April 18, 1969 (other than pursuant to a binding contract to lease entered into before April 19, 1969), which is section 38 property with respect to the lessor but is property which would not be section 38 property because of the application of subsection (a) if acquired by the lessee, and which is property of the same kind which the lessor ordinarily sold to customers before April 19, 1969, or ordinarily leased before such date and made an election under section 48(d), such property shall not be section 38 property with respect to either the lessor or the lessee. (d) PROPERTY PLACED IN SERVICE AFTER 1975.-For of this subpurposes part, the term "section 38 property" does not include any property placed in service after December 31, 1975.

[Sec. 49 as added by sec. 703 (a), Tax Reform Act 1969 (83 Stat. 660) [P.L. 91–172, C.B. 1969-3, 10]]

(This Treasury decision is issued under the authority contained in sections 47(a) (76 Stat. 966; 26 U.S.C. 47(a)) and 7805 (68A Stat. 917;

26 U.S.C. 7805) of the Internal Revenue Code of 1954.)

RANDOLPH W. THROWER,
Commissioner of Internal Revenue.
Approved June 7, 1971.
EDWIN S. COHEN,
Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June 9, 1971, 8:52 a.m., and published in the issue of the Federal Register for June 10, 1971, 36 F.R. 11190)

Subchapter B. Computation of Taxable Income Part I. Definition of Gross Income, Adjusted Gross Income, and Taxable Income

Section 61.-Gross Income
Defined

26 CFR 1.61-1: Gross income.
(Also Sections 164, 701; 1.164–1, 1.701–1.)

The Indiana gross income tax paid by a partnership is deductible from the partnership's gross income; such tax is not an allowable deduction to the individual partners; I.T. 3766 superseded.

Rev. Rul. 71-278 1

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3766, C.B. 1945, 83.

The question presented is whether the Indiana gross income tax paid by a partnership on account of the receipt by it of gross income is deductible from partnership gross income under section 164 of the Internal Revenue Code of 1954.

The Indiana gross income tax is levied upon the "receipt of gross income" of all persons residing or domiciled in the State, upon the receipt of gross income derived from activities or business or any other source within the State, and upon the receipt of gross income by all persons who are not residents of the State who derive income from sources therein. See section 642602 of Burns' Indiana Statutes Annotated, and the decision of the United

1 Prepared pursuant to Rev. Proc. 67–6, C.B. 1967-1, 576.

States Supreme Court in J. D. Adams Manufacturing Co. v. Storen et al., 304 U.S. 307 (1938), where the Court upheld the constitutionality of the Indiana Gross Income Tax Act of 1933.

Partnerships are subject to the Indiana gross income tax, and if the tax imposed upon the receipt of gross income by the partnership has been paid by the partnership, such gross income is exempt from the tax when received by the individual members. For Federal income tax purposes, partnerships are not treated as taxable entities, but the members thereof are liable for tax in their individual capacities. Section 701 of the Internal Revenue Code. The taxable income of a partnership is computed, for Federal income tax purposes, in the same manner and on the same basis as in the case of an individual, with certain exceptions not material here. Thus, if a tax paid to a State by an individual is deductible under section 164 of the Code in computing the individual's taxable income, the same tax would be deductible in computing the taxable income of a partnership.

Accordingly, it is held that in computing the taxable income of a partnership and the distributable shares of the partners, the Indiana gross income tax paid by a partnership on account of the receipt by it of gross income is deductible from partnership gross income under section 164 of the Code. The partnership tax is not allowable as a deduction to the partners, but they are not precluded from claiming the optional standard deduction under section 141 of the Code.

I.T. 3766 is hereby superseded since the position therein is set forth under the current law in this Revenue Ruling.

26 CFR 1.61-1: Gross income.

Proceeds of matured National Service Life Insurance contracts and dividends paid on unmatured contracts are not includible in gross income; interest on dividends left on deposit is includible in income

in the taxable year received or credited.

Rev. Rul. 71-306

Advice has been requested whether payments of the proceeds of matured insurance contracts issued under the National Service Life Insurance Act of 1940, payments of dividends on unmatured insurance contracts issued under such Act, and payments of interest earned on such dividends left on deposit with the Veterans' Administration are subject to Federal income

taxes.

The National Service Life Insurance Act of 1940, Public Law 801, Seventy-sixth Congress, 54 Stat. 1008, as amended, was reenacted by Public Law 85-857, 72 Stat. 1105, 38 U.S.C. 701-725.

The following is provided with respect to the taxation of benefits administered by Veterans' Administration at 38 U.S.C. 3101(a):

(a) Payments of benefits due or to become due under any law administered by the Veterans' Administration ✶✶ and such payments made to, or on account of, a beneficiary shall be exempt from taxation * *

The Administrator of Veterans' Affairs is authorized to pay dividends on National Service Life Insurance contracts. The dividends may be left on deposit with the Veterans' Administration or received in cash at the option of the insured. Dividends left on deposit with the Veterans' Administration earn interest that is credited to the insured's account. Both the dividends and interest thereon, if any, are withdrawable by the insured at any time.

It is held that both the proceeds of matured insurance contracts issued under the National Service Life Insurance Act of 1940, as amended and reenacted, and the dividends paid under unmatured contracts are not subject to Federal income tax. However, the interest earned on dividends left on deposit with the Veterans' Administration is includible in gross income in the taxable year received or made available to the insured. See Revenue Ruling 57-441, C.B. 1957-2, 45.

26 CFR 1.61-1: Gross income. (Also Sections 3306, 3401; 31.3306(b)−1, 31.3401(a)-1.)

Payments made by a State welfare agency to participants in work training programs under Title V of the Economic Opportunity Act of 1964 are not includible in gross income and are not wages for em. ployment tax purposes; Revenue Ruling 67-144 modified.

Rev. Rul. 71-425

Advice has been requested whether payments of amounts derived from funds supplied by a State welfare agency, made to participants in programs under Title V of the Economic Opportunity Act of 1964, Public Law 88-452, 42 U.S.C. 2701, and similar programs are includible in the gross incomes of the recipients for Federal income tax purposes and are "wages” subject to the withholding of income tax and the taxes under the Federal Insurance Contributions Act.

The State welfare agency requires individuals on a welfare roll who are able to work to participate in work experience projects that it sponsors or administers under Title V of the Economic Opportunity Act of 1964. The agency makes the work assignments and makes the only payments the participants receive in connection with the work. A participant receives payments at a rate equal to the prevailing hourly rate for similar work in the community or the minimum rate established by the State law for such work, whichever is higher. The participant works only the number of hours that produce a payment equal to the relief allowance he and his family would receive in any one month period. If a participant incurs transportation expenses to and from work or other expenses, such as the cost of safety equipment required for the work, the additional cost is met by an increase in the number of hours worked by him.

The question is whether the payments received while the participant is engaged in the work related program are compensation for services per