The purpose of this Revenue Ruling is to update and restate, under the current statutes and regulations, the position set forth in O.D. 695, 3 C.B. 74 (1920).

An individual born in Canada in 1951 of British parents came to the United States with his parents in 1953 and remained here until 1970. In 1958 his parents became naturalized citizens of the United States, thereby conferring United States citizenship upon the child under 8 U.S.C. section 1432 (1970). The individual traveled and lived in other parts of the world from 1970 to 1973, and then he went to Canada where he registered with the United States consul in 1974 as a United States citizen. The individual had never performed any of the acts described in 8 U.S.C. section 1481 (1970) by which nationality is lost.

The question presented is whether the individual's United States citizenship was lost when he returned to Canada after attaining majority, so as to relieve him of the duty incumbent

576.

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

on United States citizens of filing Federal income tax returns.

Section 1 of the Internal Revenue Code of 1954 imposes an income tax on every individual, resident or nonresident, other than a nonresident alien individual subject to the tax imposed by section 871(a) or 877.

Section 1.1-1(b) of the Income Tax Regulations provides, in part, that all citizens of the United States, wherever resident, are liable to the income taxes

imposed by the Code whether the in

come is received from sources within or without the United States.

Section 1.1-1 (c) of the regulations provides that every person born or

subject to its jurisdiction is a citizen.

naturalized in the United States and

Since the mere act of returning to and residing in Canada is not one of the acts described in 8 U.S.C. section 1481 by which United States nationality is lost, and since the individual in the instant case had never performed any of the acts by which United States nationality is lost, he remained a United States citizen when he returned to Canada after attaining majority. Accordingly, he is not relieved of the duty incumbent on United States citizens of filing Federal income

tax returns.

O.D. 695 is superseded, since the position set forth therein is restated. under the current law in this Revenue Ruling.

Part IV.-Credits Against Tax Subpart A.-Credits Allowable

Section 37.-Retirement Income 26 CFR 1.37-3: Retirement income.

Whether gross income recognized with respect to crop shares received as rent constitutes retirement income for purposes of the retirement income credit. See Rev. Rul. 75-11, page 27.

Section 38.-Investment in Certain Depreciable Property

26 CFR 1.38-1: Investment in certain depreciable property.

Guidelines that the Service will use in determining whether certain transactions purporting to be leases of property are, in fact, leases for Federal income tax purposes. See Rev. Proc. 75-21, page 715.

26 CFR 1.38-1: Investment in certain

depreciable property.

A Revenue Procedure setting forth the information and representations required to be furnished by a taxpayer submitting a request for an advance ruling concerning whether a transaction purporting to be a leveraged lease within the meaning of Rev. Proc. 75-21, page 715, this Bulletin, is in fact a lease. See Rev. Proc. 75-28, page 752.

26 CFR 1.38-1: Investment in certain depreciable property.

Whether property is "manufactured or produced" by a noncorporate lessor. See Rev. Rul. 75-1, below.

26 CFR 1.38-1: Investment in certain depreciable property.

What effect does the creation of an unused investment credit carryover by a net operating loss have on earnings and profits. See Rev. Rul. 75-153, page 106.

Subpart B.-Rules for Computing Credit for Investment in Certain Depreciable Property

Section 46.—Amount of Credit

26 CFR 1.46-2: Carryback and carryover of unused credit.

What effect does the creation of an unused investment credit carryover by a net operating loss have on earnings and profits. See Rev. Rul. 75-153, page 106.

26 CFR 1.46-3: Qualified investment.

Whether the sale of a corporate taxpayer's partnership interest to another corporation, both of whom are members of an affiliated group, will result in the recapture of the investment tax credit under section 47 (a)(1) of the Internal Revenue Code of 1954. See Rev. Rul. 75-245, page 6.

26 CFR 1.46-4: Limitations with respect to certain persons.

(Also Section 38; 1.38-1.)

Investment credit; CATV manu

factured for partnership lessor. A cable antenna television system, owned by a partnership formed solely to finance the construction and lease of the system to a corporate operator, does not qualify as property manufactured by the partnership within the meaning of section 1.46-4(d)(1)(i) of the regulations and the partnership is not entitled to investment credit; Rev. Rul. 68-445 distinguished.

Rev. Rul. 75-1

Advice has been requested whether, under the circumstances described below, a noncorporate lessor of property, in the ordinary course of his business, manufactured or produced the property subject to a lease within the meaning of section 46(d) (3) (A) of Internal Revenue Code of 1954 and section 1.46-4(d) (1) (i) of the Income Tax Regulations.

In January 1972 X corporation was granted a franchise to operate a cable antenna television system (CATV). Subsequent thereto, a group of individuals formed a partnership solely for purposes of financing the construction and subsequent leasing of a CATV system to X. The partnership contracted with corporation Y for Y to manufacture and produce the CATV system. The partnership leased the CATV system to corporation X, but retained ownership of the system.

Section 38 of the Code allows a credit against Federal income tax for qualified investment in "section 38 property."

Section 46(d)(3) of the Code limits the extent to which the credit allowed by section 38 is available to noncorporate lessors.

Section 46(d) (3)(A) of the Code provides that a noncorporate lessor will be allowed the investment credit only if he has manufactured or produced the property subject to the lease.

Section 1.46-4(d) (1) (i) of the regulations provides that with respect

to leases entered into after September 22, 1971, a credit shall be allowed under section 38 of the Code to a noncorporate lessor of property only if such property has been manufactured or produced by the lessor in the ordinary course of his business.

The specific question is whether the CATV system was manufactured or produced by the partnership in the ordinary course of its business within the meaning of section 46(d) (3) (A) of the Code and section 1.46-4(d) (1) (i) of the regulations.

Consistent with the purposes of section 46(d) (3) (A) of the Code as expressed in the House of Representatives Report No. 92-533, 92nd Cong., 1st Sess. 29 (1971), the terms "manufactured or produced" are used in their ordinary sense to mean that the noncorporate lessor must have actually manufactured or produced the property subject to the lease in the ordinary course of his business.

Where lessor the noncorporate actually manufactures or produces the property subject to the lease in the ordinary course of his business, the leasing transaction is an integral part of his business and is not likely to be entered into for the purpose of reducing tax liabilities.

In the instant case, the partnership was formed for the purpose of financing the construction of a CATV system. The partnership merely purchased the CATV system and has not actually manufactured or produced anything in the ordinary course of its business.

Accordingly, in the instant case, the property that is subject to the lease (the CATV system) does not qualify as property manufactured or produced by the lessor within the meaning of section 46(d) (3) (A) of the Code and section 1.46-4(d) (1) (i) of the regulations. Thus, the partnership is not entitled to the investment credit under section 38 for the property subject to the lease.

holds that the construction of vessels according to the specifications of a taxpayer constitutes "construction" by the taxpayer for purposes of section 48(b) of the Code. That Revenue. Ruling is distinguishable since section. 48(b) defines "new section 38 property" and provides for the determination of the appropriate basis of such property for the computation of the investment credit. For this specific purpose the term "construction" is given a more expansive meaning than its ordinary one, consistent with the purpose of section 48(b). Section 1.48-2(b)(1) of the regulations.

Rev. Rul. 68-445 distinguished.

Section 47.-Certain Dispositions, etc., of Section 38 Property

26 CFR 1.47-1: Recomputation of credit allowed by section 38.

(Also Sections 46, 1502; 1.46-3, 1.1502-2.)

Investment credit recapture; sale of section 38 property within affiliated group. An affiliated group member's sale, during a consolidated return year, of its interest in a partnership owning section 38 property to another member of the group will not result in the recapture of investment tax credit under section 47(a)(1) of the Code by virtue of section 1.1502-3(f)(2)(i) of the regulations.

Rev. Rul. 75-245

Advice has been requested whether, under the circumstances described below, the sale of a partnership interest between members of the same affiliated group, will result in the recapture of the investment tax credit under section 47 (a) (1) of the Internal Revenue Code of 1954.

Pa domestic corporation, was a partner in a partnership that purchased certain equipment and leased such equipment to an unrelated corporation. P properly claimed an investment tax credit with respect to its proportionate share of the basis of the

P sold its partnership interest to S, a member of P's affiliated group as defined in section 1504(a) of the Code. The group filed a consolidated Federal income tax return for the taxable year of the sale.

Section 1.46-3 (f) (1) of the Income Tax Regulations provides, in part, that each partner shall be treated as a taxpayer with respect to his share of the basis of partnership section 38 property.

Section 47 (a) (1) of the Code provides for a recapture of the investment credit if during any taxable year any property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life that was taken into account in computing the credit.

With respect to the disposition of a partner's partnership interest, section 1.47-6(a) (2) of the regulations provides that the partnership's section 38 property ceases to be section 38 property with respect to such partner if (a) the basis (or cost) of partnership section 38 property is taken into account by a partner in computing his qualified investment and (b) after the date on which such partnership section 38 property was placed in service by the partnership and before the close

of the estimated useful life of the property, such partner's proportionate interest in the general profits of the partnership is reduced (for example, by a sale, a change in the partnership agreement, or the admission of a new partner) by more than one-third.

However, section 1.1502-3 (f) (2) (i) of the regulations states generally that, during a consolidated return year, a transfer of section 38 property, from one member of an affiliated group to another shall not be treated as a disposition or cessation within the meaning of section 47 (a) (1) of the Code.

Since the recapture rules of section 47 (a) (1) of the Code apply if section 38 property either is disposed of or otherwise ceases to be section 38

property with respect to the taxpayer, and since section 1.1502-3 (f) (2) (i) of the regulations was intended to prevent the application of the recapture rules with respect to transfers involving section 38 property between members of an affiliated group, section 1.1502-3(f) (2) (i) of the regulations will apply when section 38 property either is disposed of or otherwise ceases to be section 38 property with respect to the taxpayer.

Accordingly, the sale of P's partnership interest to S will not trigger a recapture of the investment credit.

or cabinet. Some of these air conditioning units that supplement the central air conditioning system for the total building are built into the wall. while others are window air conditioning units. There are other units with extensive duct work serving one or more local areas. Still other air conditioning units are required in order to maintain certain temperature and humidity requirements that are essential to the production activities, such as in the paint shop.

The buildings also contain unit heaters, which are mechanical devices that heat the air in relatively limited volumes within the proximate area

Rules

26 CFR 1.48-1: Definition of section 38 property.

Investment credit; factory air conditioning and heating units. Built-in air conditioning or heating units that supplement factory-wide central air conditioning and heating systems and those with extensive duct work serving one or more local areas do not qualify as section 38 property for investment credit purposes; but window air conditioning units, portable plug-in heaters, and the air conditioning or heater units used to maintain certain temperature and humidity requirements essential to a particular process or production activity qualify.

Rev. Rul. 75-77

Advice has been requested whether certain air conditioning units and unit heaters installed in manufacturing plants qualify as "section 38 property" for investment credit purposes, under the circumstances described below.

A taxpayer engaged in the business of manufacturing owns buildings containing air conditioning units that are mechanical devices consisting basically of a compressor, cooling coils, a blower, controls, and a housing unit

ditioning units, some of the unit heaters that supplement or are a part of the overall central heating system are built into the building. Others are portable plug-in types. Still others are related to a particular process and are essential in order to maintain certain temperature and humidity requirements in that process or production activity.

All of the air conditioning units. and unit heaters are depreciable property having a useful life of three years

or more.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for a qualified investment in "section 38 property." The determination of what qualifies as "section 38 property" is made in accordance with the rules provided in section 48.

Section 48(a) (1) of the Code provides, in part, that the term "section 38 property" means tangible personal property, or other tangible property (not including a building and its structural components) but only if such other tangible property is used. as an integral part of certain specified activities, including manufacturing.

Section 1.48-1(c) of the Income Tax Regulations provides, in part, that "tangible personal property" means any tangible property except land and improvements thereto, such as build