[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.35-1]

[Page 106-107]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.35-1  Partially tax-exempt interest received by individuals.

    (a) The credit against tax under section 35 shall be allowed only to 
individuals and if the requirements of both paragraphs (1) and (2) of 
section 35(a) are met. Where the alternative tax on capital gains is 
imposed under section 1201(b), the taxable income for such taxable year 
is the taxable income as defined in section 63, 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 642(a)(1), and for treatment of amounts allocable to a 
beneficiary, see sections 652 and 662. For treatment of partially tax-
exempt interest received by a partnership, see section 702(a)(7). For 
treatment of such interest received by a common trust fund, see section 
584(c)(2).

[[Page 107]]

    (c) The application of section 35 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 33 is $610, and his dividends received credit under section 34 
is $120. A's credit under section 35 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            120
 $4,000......................................................



Since of the three figures ($135, $110, and $120), the lesser is $110, 
A's credit under section 35 is limited to $110.