[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: 26CFR1.51-1]

[Page 423-433]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.51-1  Amount of credit.

    (a) Determination of amount--(1) General rule. Except as provided in 
paragraph (a)(2) of this section, the amount of the targeted jobs credit 
for purposes of section 38 (formerly designated section 44B) for the 
taxable year equals 50 percent of the qualified first-year wages (minus 
any qualified first-year wages paid to individuals while such 
individuals are qualified summer youth employees) plus 25 percent of the 
qualified second-year wages.
    (2) Special rule for employment of qualified summer youth employees. 
In the case of an employer who pays or incurs qualified wages after 
April 30, 1983, to a qualified summer youth employee beginning work for 
the employer after such date, the amount of the targeted jobs credit for 
the taxable year is equal to the amount determined under paragraph 
(a)(1) of this section plus an amount equal to 85 percent of the first 
$3,000 of qualified wages paid to each qualified summer youth employee 
during the taxable year. Such wages must be attributable to services 
tendered by the qualified summer youth employee during any 90-day period 
beginning on or after May 1 and ending on or before September 15.
    (3) Limitation. See section 38(c) for rules limiting the amount of 
the credit to a percentage of the amount of the taxpayer's net tax 
liability.
    (b) Definitions--(1) Qualified wages. The term ``qualified wages'' 
means wages (as defined in paragraph (b)(4)) paid or incurred by the 
employer during the taxable year to individuals who are members of a 
targeted group (within the meaning of section 51(d)).
    (2) Qualified first-year wages--(i) General rule. Except in the case 
of qualified summer youth employees, the term ``qualified first-year 
wages'' means the first $6,000 of wages (as defined in paragraph (b)(4) 
of this section) attributable to service rendered by a member of a 
targeted group during the 1-year period beginning with the day the 
individual first begins work for the employer. In the case of a 
vocational rehabilitation referral (as defined in section 51(d)(2)) who 
begins work for the employer before July 19, 1984, the one-year period 
begins with the day the individual begins work for the employer on or 
after the beginning of such individual's rehabilitation plan. However, 
with the exception of vocational rehabilitation referrals for whom the 
employer claimed a credit under section 44B (as in effect prior to 
enactment of the Revenue Act of 1978) for a taxable year beginning 
before January 1, 1979, members of a targeted group who are first hired 
after September 26, 1978, and before January 1, 1979, will be treated as 
if they first began work for the employer on January 1, 1979. The date 
on which the wages are paid is not determinative of whether the wages 
are first-year wages; rather, the wages must be attributed to the period 
during which the work was performed. See paragraph (f)(1) of this 
section for an additional limitation on the term

[[Page 424]]

``qualified first-year wages''. (See examples 1, 2, 3, 4, 5, and 6 in 
paragraph (j) of this section for examples illustrating the application 
of the rules in this paragraph (b)(2)).
    (ii) Special rule for qualified summer youth employees. In the case 
of a qualified summer youth employee, qualified first-year wages for 
purposes of the 85 percent credit referred to in paragraph (a)(2) of 
this section include only wages attributable to services rendered by a 
qualified summer youth employee during any 90-day period beginning on or 
after May 1 and ending on or before September 15. If the individual is 
retained by the employer after the 90-day period and recertified as a 
member of another targeted group, the term ``qualified first-year 
wages'' for purposes of the 50 percent credit described by section 
51(a)(1) has the meaning assigned that term in paragraph (b)(2)(i) of 
this section except that the $6,000 limitation for qualified first-year 
wages shall be reduced by wages up to, but not more than, $3,000 
attributable to services rendered during the 90-day period.
    (3) Qualified second-year wages. The term ``qualified second-year 
wages'' means the first $6,000 of wages attributable to services 
rendered by a member of a targeted group, other than a qualified summer 
youth employee, during the 1-year period beginning on the day after the 
last day of the period for qualified first-year wages. The date on which 
the wages are paid is not determinative of whether the wages are second-
year wages; rather, the wages must be attributed to the period during 
which the work was performed.
    (4) Wages--(i) General rule. Except as otherwise provided in 
paragraphs (b)(4) (ii) and (iii) of this section, the term ``wages'' 
shall only include amounts paid or incurred after December 31, 1978, for 
taxable years ending after December 31, 1978. For purposes of this 
section, the term ``wages'' has the meaning assigned such term by 
section 3306(b) (determined without regard to any dollar limitation 
contained in such subsection).
    (ii) Special rules. In the case of agricultural labor or railway 
labor, the term ``wages'' means unemployment insurance wages within the 
meaning of subparagraph (A) or (B) of section 51(h)(1). The term 
``wages'' shall not include any amounts paid or incurred by an employer 
for any pay period to any individual for whom the employer receives 
federally funded payments for on-the-job training for such individual 
for such pay period. (See example 7 in paragraph (j) of this section.) 
The amount of wages which would otherwise be qualified wages under this 
section with respect to an individual for a taxable year shall be 
reduced by an amount equal to the amount of payments made to the 
employer (however utilized by such employer) with respect to such 
individual for such taxable year under a program established under 
section 414 of the Social Security Act. In addition, the term ``wages'' 
shall not include any amount paid or incurred by the employer in a 
taxable year beginning before January 1, 1982, to an individual with 
respect to whom the employer claims a credit under section 40 (relating 
to expenses of work incentive programs). For youths participating in a 
qualified cooperative education program:
    (A) Section 3306(c)(10)(C) (relating to the definition of employment 
for certain students) does not apply in determining wages under this 
section; and
    (B) The term ``wages'' shall include only those amounts paid or 
incurred by the employer that are attributable to services rendered by 
the individual while he or she meets the conditions specified in section 
51(d)(8)(A). For purposes of the preceding sentence, an employee who met 
the requirement in section 51(d)(8)(A)(iv), dealing with economically 
disadvantaged status, when hired, shall be deemed to continuously meet 
the requirement in section 51(d)(8)(A)(iv) during the time the employee 
is in the cooperative education program. See also paragraph (e) of this 
section for rules relating to the exclusion of wages paid to certain 
individuals.
    (iii) Termination. The term ``wages'' shall not include any amount 
paid or incurred to an individual who begins work for the employer after 
December 31, 1985.
    (5) Special rule for eligible work incentive employees. In the case 
of an eligible work incentive employee (as defined in

[[Page 425]]

Sec. 1.51-1(c)(4)), this paragraph (b) shall be applied for taxable 
years beginning after December 31, 1981, as if such employee had been a 
member of a targeted group for taxable years beginning before January 1, 
1982. (See example 8 in paragraph (j) of this section.)
    (c) Members of targeted groups--(1) In general. An individual is a 
member of a targeted group if the individual is certified as (i) a 
vocational rehabilitation referral, (ii) an economically disadvantaged 
youth, (iii) an economically disadvantaged Vietnam-era veteran, (iv) an 
SSI recipient, (v) a general assistance recipient, (vi) a youth 
participating in a cooperative education program, (vii) an economically 
disadvantaged ex-convict, (viii) an eligible work incentive employee, 
(ix) a qualified summer youth employee, or (x) an involuntarily 
terminated CETA employee. Except as provided below, see section 51(d) of 
this section for a definition of these groups. See paragraph (d) of this 
section for rules concerning the certification of individuals as members 
of one of these targeted groups.
    (2) Youths participating in a qualified cooperative education 
Program--(i) Student requirements. For an individual to qualify as a 
youth participating in a qualified cooperative education program, the 
individual must meet each of the following conditions (A) through (D)--
    (A) The youth must have attained the age of 16 but not 20. (An 
individual reaching 19 will be treated as a youth participating in a 
qualified cooperative education program only for wages paid or incurred 
after November 26, 1979.)
    (B) The youth must not have graduated from a high school or 
vocational school.
    (C) The youth must be enrolled in and actively pursuing a qualified 
cooperative education program (as defined in paragraph (c)(2)(iii) of 
this section).
    (D) With respect to wages paid or incurred after December 31, 1981, 
the youth must be a member of an economically disadvantaged family when 
initially hired.
    (ii) Economically disadvantaged family. See section 51(d)(11) for 
the rules relating to the determination of whether an individual is a 
member of an economically disadvantaged family.
    (iii) Qualified cooperative education program. The term ``qualified 
cooperative education program'' means a program of vocational education 
for individuals who (through written cooperative arrangements between a 
qualified school and one or more employers) receive instruction 
(including required academic instruction) by alternation of study in 
school with a job in any occupational field (but only if these two 
experiences are planned by the school and employer so that each 
contributes to the student's education and employability). See section 
51(d)(8)(C) for the definition of a ``qualified school.'' For purposes 
of this paragraph, the term ``program of vocational education'' means an 
organized educational program which is directly related to the 
preparation of individuals for employment, or for additional preparation 
for a career requiring other than a baccalaureate or advanced degree. An 
``organized educational program'' means only instruction related to the 
occupation or occupations for which the students are in training or 
instruction necessary for students to benefit from such training. The 
student's employment contributes to his or her education and 
employability only if it is related to the occupation, or a cluster of 
closely related occupations, for which the student is in training in 
school. However, the student's employment need not be directly related 
to or in the same technical field as the training the student receives 
in school. For example, a student studying carpentry does not have to 
work as a carpenter for the program to constitute a ``qualified 
cooperative education program.'' The program will qualify if, for 
example, the student works at a hardware store because the student's 
work would familiarize the student with the materials and tools used by 
carpenters. The program would not qualify, however, if the student works 
at a restaurant and generally performs tasks in such employment not 
related to carpentry.
    (iv) Actively pursuing. For purposes of this paragraph (c)(2), a 
youth will not be considered to be ``actively pursuing'' a school's 
qualified cooperative education program (within the meaning of paragraph 
(c)(2)(iii) of this section)

[[Page 426]]

during summer vacation unless that school program continues during the 
summer vacation. Whether the school program continues during the summer 
vacation will be determined by examining the written agreement between 
the school and the employer. Thus, if a written agreement specifically 
covers the summer vacation period and provides for a significant degree 
of involvement by school personnel to provide supervision for the 
students in the program during that period, the school program will be 
considered to continue during the summer, regardless of whether classes 
are held during the vacation period.
    (3) General assistance recipients. In order for an individual to 
qualify as a general assistance recipient, the individual, or another 
member of the assistance unit (within the meaning of 45 CFR 
205.40(a)(1)) that the individual is a member of, must receive 
assistance for a period of not less than 30 days ending within the 
preemployment period (as defined in section 51(d)(13)) from a qualified 
general assistance program. A qualified general assistance program is a 
program of a State or a political sudivision of a State that the 
Secretary (after consultation with the Secretary of Health and Human 
Services) has designated as providing general assistance (or similar 
assistance) which is based on need and consists of money payments or 
voucher or scrip. For purposes of the preceding sentences, a program 
qualifying as a general assistance program by reason of non-cash 
assistance (i.e., voucher or scrip) shall be so treated only with 
respect to amounts paid or incurred after July 1, 1982, to individuals 
beginning work for the employer after such date. For purposes of this 
subparagraph, the term ``money'' means cash or an instrument convertible 
into cash (e.g., a check).
    (4) Eligible work incentive employees. An eligible work incentive 
employee means an individual who has been certified by the designated 
local agency (as defined in paragraph (d)(10) of this section) as--
    (i) Being eligible for financial assistance under part A of title IV 
of the Social Security Act and as having continuously received such 
financial assistance during the 90-day period which immediately precedes 
the date on which such individual is hired by the employer, or
    (ii) Having been placed in employment under a work incentive program 
established under section 432(b)(1) or 445 of the Social Security Act.

The provisions of this paragraph (c)(4) are effective with respect to 
taxable years of the employer beginning after December 31, 1981. (See 
paragraph (b)(5) of this section for a special rule relating to eligible 
work incentive employees.)
    (5) Involuntarily terminated CETA employees--(i) In general. An 
involuntarily terminated CETA employee is an individual who first began 
work for an employer after August 13, 1981, in taxable years of the 
employer ending after August 13, 1981, and is certified by the 
designated local agency (as defined in paragraph (d)(10) of this 
section) as having been involuntarily terminated after December 31, 
1980, from employment financed in whole, or in part, under a program 
under part D of title II or title VI of the Comprehensive Employment and 
Training Act.
    (ii) Termination. Section 51(d)(10) and this paragraph (c)(5) shall 
not apply to any individual who begins work for the employer after 
December 31, 1982.
    (d) Certification--(1) General rule. Except as otherwise provided in 
this paragraph, an individual shall not be treated as a member of a 
targeted group unless, on or before the day on which such individual 
begins work for the employer, the employer has received, or has 
requested in writing, a certification that the individual is a member of 
a targeted group from the designated local agency (as defined in 
paragraph (d)(10) of this section). In addition, the employer must 
receive a certification before the targeted jobs credit can be claimed. 
However, with respect to individuals who began work for the employer on 
or before May 11, 1982, the certification will be timely only if 
requested or received before the day the individual began work for the 
employer. In the case of a request in writing mailed via the United 
States Postal Service, the request shall be deemed to be made on the 
date of the postmark

[[Page 427]]

stamped on the cover in which such request was mailed to the designated 
local agency provided the request is mailed in accordance with the 
mailing requirements in Sec. 301.7502-1(c) and delivered in accordance 
with the delivery requirements in Sec. 301.7502-1(d). In the case of a 
deadline that but for this sentence would fall on a Saturday, Sunday, or 
a legal holiday, the deadline for making a timely request in writing for 
a certification or receiving a timely certification shall be the next 
succeeding day which is not a Saturday, Sunday, or legal holiday. (See 
section 7503 for the definition of ``legal holiday.'') See paragraph 
(d)(2) of this section for transitional rules applicable to certain 
employees who began work for the employer before September 26, 1981. See 
paragraph (d)(3) of this section for special rules applicable to 
cooperative education students and paragraph (d)(4) of this section for 
special rules applicable to eligible work incentive employees.
    (2) Timeliness of certification in the case of an individual to whom 
a written preliminary eligibility determination has been issued. If on 
or before the day on which an individual begins work for the employer, 
such individual has received from a designated local agency (or other 
agency or organization designated pursuant to a written agreement with 
such designated local agency) a written preliminary determination that 
such individual is a member of a targeted group, then such individual 
may be treated as a member of a targeted group if on or before the fifth 
day after the day such individual begins work for the employer such 
employer receives, or requests in writing, from the designated local 
agency a certification that such individual is a member of a targeted 
group. This paragraph (d)(2) only applies to individuals who begin work 
for the employer after July 18, 1984.
    (3) Transitional rules for certain employees who began work for the 
employer on or before September 26, 1981. In the case of an individual, 
other than a cooperative education student, who began work for the 
employer before June 29, 1981, the employer must either receive, or 
request in writing, a certification before July 23, 1981. In the case of 
an individual, other than a cooperative education student, who began 
work for the employer after June 28, 1981, and on or before September 
26, 1981, the employer must either receive, or request in writing, a 
certification before September 26, 1981.
    (4) Cooperative education students. In the case of cooperative 
education students, the school administering the cooperative education 
program must issue the certification. Form 6199 is provided for this 
purpose. If the student begins work for the employer after September 26, 
1981, see the general rule in Sec. 1.51-1(d)(1) for the date when this 
certification must be received or requested. If the student begins work 
for the employer on or before September 26, 1981, the employer must 
receive the certification or request it in writing before September 26, 
1981. In order for an employer to claim a credit on wages paid or 
incurred to a cooperative education student after December 31, 1981, the 
employer must receive or request in writing a determination that the 
student is a member of an economically disadvantaged family. A request 
for economic eligibility determination for a cooperative education 
student must be made in writing by the employer to the participating 
school. If the student begins work for the employer on or before 
September 26, 1981, the employer must receive or request in writing such 
determination before September 26, 1981. However, a request in writing 
on or after August 13, 1981, to a participating school for certification 
will be deemed to include a request for an economic eligibility 
determination. In addition, any certification issued by a school after 
August 13, 1981, will be deemed to be issued in response to a request 
for certification which includes a request for an economic eligibility 
determination. The rule in the preceding sentence does not eliminate the 
requirement that the employer receive a certification that includes an 
economic eligibility determination in order to claim a credit for wages 
paid or incurred after December 31, 1981. If a certification issued by a 
school after August 13, 1984, does not contain an economic eligibility 
determination and the employer wishes to claim a credit

[[Page 428]]

for wages paid or incurred after December 31, 1981, the employer must 
receive a completed certification before the date on which the credit is 
claimed.
    (5) Eligible work incentive employees. In the case of eligible work 
incentive employees, the employer must either receive, or request in 
writing, a certification within the time requirements of paragraph (d) 
(1), (2), or (3) of this section, whichever is applicable. Before 
October 12, 1981 (the date the Economic Recovery Tax Act of 1981 
codified the State employment security agency as the designated local 
agency for certifying targeted groups), a certificate may be received or 
requested in writing from either the designated local agency (as defined 
in paragraph (d)(10) of this section) or the office or agency that 
properly issued certifications under former section 50B(h)(1) (relating 
to the work incentive credit).
    (6) Certifications that are not timely. Any certification that is 
not timely received or requested by the employer in accordance with the 
rules of this paragraph will be treated as invalid. Thus, the employer 
will not be allowed to claim a credit under section 51 with respect to 
any wages paid or incurred to an employee whose certification or request 
for certification is not timely. A timely request for certification does 
not eliminate the need for the employer to receive a certification 
before claiming the credit. In the case of a request for certification 
that was denied, resubmitted, and then approved, the timeliness of the 
request shall be determined by the timeliness of the first request.
    (7) Incorrect certification--(i) In general. Except as otherwise 
provided in paragraph (d)(7)(ii) of this section, if an individual has 
been certified as a member of a targeted group, and such certification 
is based on false information provided by such individual, the 
certification shall be revoked and wages paid by the employer after the 
date on which notice of revocation is received by the employer shall not 
be treated as qualified wages. For purposes of this paragraph, a 
certification will be revoked only if the individual would not have been 
certified had correct information been provided to the issuer of the 
certification. Thus, false information that is not material to an 
individual's eligibility as a member of a targeted group will not 
invalidate an otherwise valid certification.
    (ii) Employer's knowledge that the certification was incorrect. In 
the case of an employer who knew, or had reason to know, at the time of 
certification that the information provided to the designated local 
agency was false, none of the wages paid by such employer to an 
individual to whom an incorrect certification has been issued will be 
qualified wages.
    (8) Certifications issued to certain rehires. This paragraph (d)(8) 
applies in the case of an employee who first began work for the employer 
before August 13, 1981, and was dismissed and rehired by the employer. A 
certification received or requested by an employer with respect to such 
an employee will be considered timely only if there was a valid business 
reason, unrelated to the availability of the credit, for the dismissal 
and rehire and if the employer did not dismiss and then rehire the 
employee in order to meet the timing requirement with respect to 
certification. An individual who is dismissed and then rehired for the 
purpose described in the preceding sentence will be considered for 
purposes of section 51(d)(16) and this paragraph to have been 
continuously employed by the employer during the time between the 
dismissal and the rehire. Whether the employer was motivated by reason 
of the certification rules in section 51(d)(16) and this paragraph to 
dismiss and then rehire an employee is a question of fact to be 
determined from all the circumstances surrounding the dismissal and 
rehire. (See paragraph (e)(2) of this section for a separate rule 
disallowing the credit in the case of nonqualifying rehires.)
    (9) Individuals who continue to be employed by the same employer but 
as a member of another targeted group. This paragraph (d)(9) applies in 
the case of an employee who continues to be employed by the same 
employer but no longer qualifies as a member of the targeted group for 
which such employee was first certified (e.g., the employee was 
orginally certified as a qualified summer youth employee with respect to 
a ninety-day period between May 1

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and September 15, but such ninety-day period has ended). In such case, 
the employer may request a certification that the employee is a member 
of another targeted group, and if any wages paid to such individual are 
qualified first-year wages or qualified second-year wages, the employer 
may be entitled to a targeted jobs credit with respect to such wages. 
The second certification will not be invalid merely because it was 
requested or received after the individual began work for the employer; 
only the first certification (for example, the certification with 
respect to an individual hired first as a qualified summer youth 
employee) must meet the requirement of section 51(d)(16) that a 
certification must be requested or received by an employer on or before 
the day on which the individual begins work for the employer. In the 
case of a former qualified summer youth employee or a youth 
participating in a qualified cooperative education program who is 
recertified as an economically disadvantaged youth, the term ``hiring 
date'' in section 51(d)(3)(B) does not mean the day the individual is 
hired by the employer but means the day the individual is certified as a 
member of the new targeted group. Accordingly, the age requirement of 
section 51(d)(3)(B) shall be applied as of the day the individual is 
certified as a member of the second targeted group. In addition, see 
section 51(d)(11) for rules concerning the viability of the original 
economic eligibility determination.
    (10) Certification where a trade or business has been transferred to 
a new employer. In the case of a transfer of a trade or business in 
which an individual who is a member of a targeted group is retained as 
an employee in the trade or business, the certification obtained for 
such employee by the transferor-employer will apply with respect to the 
transferee-employer.
    (11) Designated local agency--(i) In general. For the period before 
October 12, 1981, the term ``designated local agency'' means the agency 
for any locality designated jointly by the Secretary and the Secretary 
of Labor to perform certifications of employees for employers in that 
locality. On or after October 12, 1981, the term ``designated local 
agency'' means a State employment security agency established in 
accordance with the Act of June 6, 1933, as amended (29 U.S.C. 49 
through 49n).
    (ii) Jurisdiction. The designated local agency is the agency that 
has, pursuant to its charter, jurisdiction over the individual that is 
sought to be certified. Thus, any certification that is issued with 
respect to an individual who is not within the jurisdiction of the 
designated local agency that issued the certification will be invalid. 
Notwithstanding any other provision of this section, a request in 
writing for certification to the appropriate designated local agency 
that is made before January 23, 1984, will be considered to be timely if 
it is made after an otherwise timely request in writing for 
certification was made to a designated local agency that does not have 
jurisdiction over the individual sought to be certified.
    (e) Certain ineligible individuals--(1) Related individuals. For 
purposes of section 51(a), ``qualified wages'' does not include any 
amounts paid or incurred by a taxpayer to any of the following 
individuals:
    (i) An individual who is related (within the meaning of any of 
paragraphs (1) through (8) of section 152 (a)) to the taxpayer;
    (ii) An individual who is a dependent (within the meaning of section 
152(a)(9)) of the taxpayer;
    (iii) An individual who is related (within the meaning of any of 
paragraphs (1) through (8) of section 152(a)) to a shareholder who owns 
(within the meaning of section 267(c)) more than 50 percent in value of 
the outstanding stock of the taypayer, if the taxpayer is a corporation;
    (iv) An individual who is a dependent (within the meaning of section 
152(a)(9)) of a shareholder described in paragraph (e)(1)(iii) of this 
section;
    (v) An individual who is a grantor, beneficiary or fiduciary of the 
taxpayer, if the taxpayer is an estate or trust;
    (vi) An individual who is a dependent (within the meaning of section 
152(a)(9)) of an individual described in paragraph (e)(1)(v) of this 
section; or

[[Page 430]]

    (vii) An individual who is related (within the meaning of any of 
paragraphs (1) through (8) of section 152(a)) to an individual described 
in paragraph (e)(1)(v) of this section.
    (2) Nonqualifying rehires. For purposes of section 51(a), 
``qualified wages'' does not include wages paid to an employee who had 
been employed by the employer prior to the current hiring date of the 
employee if at any time during such prior employment the employee was 
not a member of a targeted group. The preceding sentence shall not apply 
to an employee who was previously timely certified as a member of a 
targeted group with respect to the same employer. An employee shall be 
treated as not having been a member of a targeted group if the 
certification requirements of section 51(d)(16) were not met. (See 
example 8 in paragraph (j) of this section.)
    (3) Effective date. The provisions of this paragraph (e) are 
effective with respect to employees first beginning work for an employer 
after August 13, 1981.
    (f) Limitations--(1) Limitation on qualified first-year wages. With 
respect to taxable years beginning before January 1, 1982, the amount of 
the qualified first-year wages which may be taken into account for 
purposes of the targeted jobs credit for any taxable year shall not 
exceed 30 percent of the aggregate unemployment insurance wages paid by 
the employer during the calendar year ending in such taxable year. In 
the case of a group of trades or businesses under common control (as 
defined in Sec. 1.52-1(b)), the qualified first-year wages cannot exceed 
30 percent of the aggregate unemployment insurance wages paid to all 
employees of that group of trades or businesses under common control 
during the calendar year ending in such taxable year. For this purpose, 
the term ``unemployment insurance wages'' has the same meaning given to 
the term ``wages'' as defined in Sec. 1.51-1(b)(4). In this case of 
agricultural or railway labor, see section 51(h)(1) for the applicable 
definition of unemployment insurance wages. (See examples 13 and 14 in 
paragraph (j) of this section.)
    (2) Remuneration must be for trade or business employment. 
Remuneration paid by an employer to an employee during any taxable year 
shall be taken into account only if more than one-half of the 
remuneration paid by the employer to an employee is for services in a 
trade or business of the employer. This determination shall be made by 
each employer without regard to section 52 (a) or (b). Accordingly, 
employees of corporations that are members of a controlled group or 
employees of partnerships, proprietorships, and other trades or 
businesses (whether or not incorporated) which are under common control 
will be treated as being employed by each separate employer for this 
purpose. For this purpose, the term ``year'' means the taxable year of 
the employer. (See example 15 in paragraph (j) of this section.)
    (g) Election not to claim the targeted jobs credit. The election 
under section 51(j) (as amended by section 474(p) of the Tax Reform Act 
of 1984) not to claim the targeted jobs credit is available for taxable 
years beginning after December 31, 1983, and shall be made for the 
taxable year in which such credit is available by not claiming such 
credit on an original return or amended return at any time before the 
expiration of the 3-year period beginning on the last date prescribed by 
law for filing the return for the taxable year (determined without 
regard to extensions). The election may be revoked within the 3-year 
period by filing an amended return on which the credit is claimed.
    (h) Treatment of successor-employers. In the case of a successor-
employer referred to in section 3306(b)(1), the determination of the 
amount of credit under this section with respect to wages paid by such 
successor-employer shall be made in the same manner as if such wages 
were paid by the predecessor-employer referred to in such section. Thus, 
the 1-year period referred to in Sec. 1.51-1(b)(2)(i) will be considered 
to begin with the day the employee first began work for the transferor-
employer, and the amount of qualified first-year wages and qualified 
second-year wages paid or incurred with respect to the employee must be 
reduced by the amount of any such wages paid or incurred by the 
transferor-employer. (See examples 10 and 11 in paragraph (j)

[[Page 431]]

of this section.) Also, see paragraph (d)(10) of this section for rules 
concerning the viability of the employee's certification.
    (i) Treatment of employees performing services for other persons. No 
credit shall be determined under this section with respect to 
remuneration paid by an employer to an employee for services performed 
by such employee for another person unless the amount reasonably 
expected to be received by the employer for such services from such 
other person exceeds the remuneration paid by the employer to such 
employee for such services.
    (j) Examples. The application of this section may be illustrated by 
the following examples which, except as otherwise stated, assume that 
the limitations imposed by Secs. 1.51-1(f)(2) and 1.53-3 are 
inapplicable:

    Example 1. Corporation M is a calendar year, cash receipts and 
disbursements method taxpayer. A, an economically disadvantaged youth, 
first began work for Corporation M on October 1, 1978. Qualified first-
year wages with respect to A are wages attributable to the period 
beginning on January 1, 1979 (since A was first hired after September 
26, 1978, he is treated as having begun work on January 1, 1979) and 
ending on December 31, 1979. In the 1979 taxable year, Corporation M 
pays A $5,000 of qualified first-year wages attributable to services 
performed in 1979. Corporation M's allowable credit is equal to $2,500 
(50 percent of $5,000).
    Example 2. Assume the same facts as in example 1, except that in 
1980 Corporation M pays to A $100 of wages attributable to services 
rendered in 1979. These wages will still be considered as qualified 
first-year wages, but the credit may not be claimed until the 1980 
taxable year.
    Example 3. Corporation O is a calendar year, cash receipts and 
disbursements method taxpayer. C, a vocational rehabilitation referral, 
first began work for Corporation O on July 1, 1978. Corporation O 
claimed a credit under section 44B (as in effect prior to enactment of 
the Revenue Act of 1978) for $3,000 of wages paid to C in the 1978 
taxable year. Corporation O paid C $6,000 for services performed from 
January 1, 1979 to June 30, 1979. The period during which qualified 
first-year wages are determined begins on July 1, 1978, and ends on June 
30, 1979. Amounts paid before January 1, 1979, however, are not taken 
into consideration in determining the amount of qualified first-year 
wages. Accordingly, only the wages attributable to services performed 
from January 1, 1979, through June 30, 1979, are considered as qualified 
first-year wages. Corporation O's allowable credit is equal to $3,000 
(50 percent of $6,000).
    Example 4. I first began work for Corporation Q, a cash receipts and 
disbursements method taxpayer, on January 1, 1981, and was not a member 
of a targeted group. On March 1, 1981, I was convicted of a felony and 
sentenced to prison. I quit working for Corporation Q, and served the 
prison sentence. On November 1, 1981, I again was hired by Corporation Q 
and began work on that date. On the November 1, 1981 hiring date, I was 
an economically disadvantaged ex-convict for whom Corporation Q received 
a certificate. Corporation Q paid I $500 of wages for services performed 
from November 1, 1981, to December 31, 1981, and $6,000 of wages for 
services performed during 1982. The $500 of wages paid for services 
performed from November 1, 1981, to December 31, 1981, would be 
qualified first-year wages because these qualified wages were paid for 
services performed during the 1-year period beginning on the date I 
first began work for Corporation Q (January 1, 1981). The $6,000 of 
wages paid for services performed during 1982 would be qualified second-
year wages because these qualified wages were paid for services 
performed during the 1-year period beginning on the day after the first 
1-year period. Accordingly, Corporation Q has an allowable credit of 
$250 attributable to qualified first-year wages and $1,500 attributable 
to qualified second-year wages.
    Example 5. Assume the same facts as in example 4, except that all 
dates are 1 year later. Thus, I first began work for Corporation Q on 
January 1, 1982, was convicted on March 1, 1982, and was rehired on 
November 1, 1982. Under these facts, Q is not entitled to take a 
targeted jobs credit with respect to I's wages because I is a 
nonqualifying rehire.
    Example 6. J, an economically disadvantaged youth, first began work 
for Corporation R, a calendar year cash receipts and disbursements 
method taxpayer, on December 1, 1979. On July 1, 1980, J was laid off by 
Corporation R and began work for Corporation S, which is unrelated to 
Corporation R, on July 2, 1980. On November 1, 1980, J again began work 
for Corporation R and continued working for Corporation R until January 
1, 1982. At the time J first began work for Corporation S, J no longer 
met the qualifications of an economically disadvantaged youth. 
Corporation S may not claim a credit for wages paid to J because J was 
not a member of a targeted group at the time he began work for 
Corporation S. Corporation R, however, may claim a credit for wages paid 
to J because J was a member of a targeted group when he was hired by 
Corporation R. Corporation R's qualified first-year wages paid to J are 
the wages paid for services performed by J from December 1, 1979, to 
July 1, 1980, and from November 1, 1980, to November 30, 1980. 
Corporation R's qualified

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second-year wages paid to J are wages paid for services performed by J 
from December 1, 1980, to November 30, 1981. Corporation R may not claim 
a credit for wages paid for services performed by J after November 30, 
1981.
    Example 7. K, a member of a targeted group, first began work for 
Corporation T on January 1, 1979. For the pay periods from January 1, 
1979, to March 31, 1979, Corporation T received federally funded 
payments for on-the-job training for K and paid wages of $2,000 to K. 
During the remainder of 1979 Corporation T paid wages of $7,000 to K. 
Corporation T may claim a credit on $6,000 of qualified first-year 
wages. Amounts paid to K by Corporation T during the pay periods for 
which Corporation T received federally funded payments for on-the-job 
training for K are not considered wages for purposes of the credit. 
However, Corporation T may consider $6,000 of the total $7,000 of wages 
paid after March 31, 1979, as qualified first-year wages.
    Example 8. P first began work for Corporation X on January 1, 1981, 
as an individual who was certified to be an eligible employee for 
purposes of the WIN credit provided in section 40. Corporation X paid P 
$6,000 of wages during its taxable year beginning on January 1, 1981, 
and $6,000 of wages during its taxable year beginning on January 1, 
1982. X can claim a targeted jobs credit for the wages paid in 1982 if 
the requirements of section 51 are met. For purposes of section 51 (a), 
P's qualified first-year wages are the wages paid from January 1, 1981, 
to December 31, 1981, and P's qualified second-year wages are the wages 
paid from January 1, 1982, to December 31, 1982. Thus, Corporation X is 
only entitled to claim a targeted job credit based on P's qualified 
second-year wages.
    Example 9. (i) L, 15 years of age, first began work for Corporation 
U on August 1, 1979. On September 3, 1979, L began her junior year in 
high school and enrolled in a qualified cooperative education program 
that was to run for her junior and senior years. On October 1, 1979, 
when L turned 16, she met all the requirements of Sec. 1.51-1(c)(2)(i) 
and qualified as a youth participating in a qualified cooperative 
education program. Corporation U is entitled to claim a credit on wages 
paid or incurred for services performed by L after September 30, 1979, 
so long as L meets the requisite requirements. L's summer vacation began 
on June 1, 1980. Assume that the cooperative education program L was 
enrolled in did not continue during the summer vacation (i.e., the 
written agreement between the employer and the school did not cover the 
summer vacation). Thus, during her summer vacation, L did not meet the 
requirement of actively pursuing a qualified cooperative education 
program. Accordingly, Corporation U may not claim a credit on wages paid 
for services performed by L during L's summer vacation. On September 2, 
1980, L began her senior year, and again met all the requirements of 
Sec. 1.51-1(c)(2)(i). She continued to meet these requirements until 
June 5, 1981, when she graduated from high school. Accordingly, 
Corporation U may claim a credit on wages paid for services performed 
after September 1, 1980, and before June 5, 1981.

    (ii) Assume the same facts as in (i), above, except that all dates 
are 3 years later. Under these facts, U is not entitled to claim a 
targeted jobs credit with respect to any of L's wages because L has not 
been timely certified under section 51(d)(16) and Sec. 1.51-1(d)(3).
    Example 10. D began work for a drugstore owned by E as a sole 
proprietor on January 1, 1979, and was certified as a member of a 
targeted group with respect to E. On June 1, 1979, E sold the drugstore 
where D worked to F, who continued to operate the drugstore with D as an 
employee. D's qualification as a member of a targeted group is not 
required to be redetermined in order for F to qualify for the targeted 
jobs credit. F will take into account the certification of D's 
eligibility that was provided to E. F will have qualified first-year 
wages consisting of the first $6,000 of wages paid or incurred to D by E 
and F from January 1, 1979 to December 31, 1979 (reduced by any 
qualified wages paid or incurred by E to D from January 1, 1979, to May 
31, 1979). F's qualified second-year wages will consist of the first 
$6,000 of wages paid or incurred to D by F from January 1, 1980, to 
December 31, 1980.
    Example 11. G began work in a machine shop owned by H as a sole 
proprietor on January 1, 1979, and was certified as a member of a 
targeted group with respect to H. On June 1, 1980, H transferred all the 
assets of the machine shop to newly formed Corporation P. Corporation P 
retained G as an employee in the machine shop. G's qualification as a 
member of a targeted group is not required to be redetermined in order 
for P to qualify for the targeted jobs credit. H has qualified first-
year wages in the amount of the first $6,000 of wages paid or incurred 
to G by H from January 1, 1979, to December 31, 1979. Corporation P has 
qualified second-year wages in the amount of the first $6,000 of wages 
paid or incurred to G by H and Corporation P from January 1, 1980, to 
December 31, 1980 (reduced by any qualified second-year wages paid by H 
to G).
    Example 12. W operates a retail store as a sole proprietor. On June 
1, 1982, W hires S after receiving a written determination from a local 
community organization that S meets the requirements of an economically 
disadvantaged youth. W does not request a certification from the State 
employment security agency as to S's eligibility. W is not entitled to 
claim a credit with respect to wages paid to S because W did not 
receive, or

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request in writing, a certification from the State employment security 
agency as to S's eligibility on or before the day on which S began work 
for W.
    Example 13. Corporation V is a cash receipts and disbursements 
method taxpayer with a July 1 through June 30 taxable year. In the 
taxable year ending June 30, 1980, the aggregate unemployment insurance 
wages paid by V were $150,000. In calendar year 1979 the aggregate 
unemployment insurance wages paid by Corporation V were $110,000. 
Corporation V's qualified first-year wages are limited to 30 percent of 
the aggregate unemployment insurance wages paid by it in calendar year 
1979 or $33,000 (30 percent of $110,000), even though the aggregate 
unemployment insurance wages paid by it in the taxable year ending June 
30, 1980, were $150,000.
    Example 14. Assume the same facts as in example 13, except that all 
dates are 3 years later. Since the limitation on qualified first-year 
wages does not apply to taxable years beginning after December 31, 1981, 
Corporation V's qualified first-year wages are $150,000.
    Example 15. M operates a retail store as a sole proprietor. N and O, 
both members of a targeted group, first began work for M on January 1, 
1979. M paid N total qualified first-year wages of $6,000 in 1979. Three 
thousand one hundred dollars of those wages were for services in M's 
retail store, and $2,900 of those wages were for services as M's maid. M 
paid O total qualified first-year wages of $6,000 in 1979. Three 
thousand dollars of those wages were for services in M's store and 
$3,000 of those wages were for services as M's chauffeur. M has an 
allowable credit of $3,000 in 1979 on all $6,000 of qualified first-year 
wages paid to N because more than one-half of the remuneration paid by M 
to N was for services in M's trade or business. M may not take into 
account the wages paid to O because not more than one-half of the 
remuneration paid by M to O was for services in M's trade or business. 
Acordingly, M may not claim a credit on wages paid to O.

[T.D. 8062, 50 FR 45998, Nov. 6, 1985]

                              Tax Surcharge