(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).

(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 $4,000

120

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