Reg. § 1.35-1 Partially tax-exempt interest received by individuals.
(a) The credit against tax under section shall be allowed only to individuals and if the requirements of both paragraphs (1) and (2) of section are met. Where the alternative tax on capital gains is imposed under section , the taxable income for such taxable year is the taxable income as defined in section , which includes 50 percent of the excess of net long-term capital gain over net short-term capital loss.
(b) For the treatment of partially tax-exempt interest in the case of amounts not allocable to any beneficiary of an estate or trust, see section , and for treatment of amounts allocable to a beneficiary, see sections and . For treatment of partially tax-exempt interest received by a partnership, see section . For treatment of such interest received by a common trust fund, see section .
(c) The application of section may be illustrated by the following example:
Example.
In his taxable year, 1955, A received $4,500 of partially tax-exempt interest. A's taxable income is $4,000 upon which the tax prior to any credits against tax is $840. His foreign tax credit under section is $610, and his dividends received credit under section is $120. A's credit under section for partially tax-exempt interest is $110, determined as follows:
| Section 35(a) | ||
| Partially tax-exempt interest | $4,500 | |
| Credit computed under section 35(a); 3 percent of $4,500 | 135 | |
| Section 35(b)(1) | ||
| Tax imposed by chapter 1 | 840 | |
| Less: | ||
| Credit allowed under section 33 | $610 | |
| Credit allowed under section 34 | 120 | |
| ____ | $730 | |
| Limitation on credit under section 35(b)(1) | 110 | |
| Section 35(b)(2) | ||
| Taxable income | 4,000 | |
| Limitation on credit under section 35(b)(2); 3 percent of $4,000 | 120 |
Since of the three figures ($135, $110, and $120), the lesser is $110, A's credit under section is limited to $110.