to show the name and address of the fiscal agent or the paying agent, should be used unless the owner (if so entitled) desires to claim exemption, in which case Form 1001 should be filed." (Art. 1077.)

RULING. Ownership certificates representing interest on bonds owned by nonresident aliens, bearing addresses of domestic bankers in lieu of the residences of the aliens, will be accepted. (C. B. 4, 233; O. D. 908.)

Foreign items presented for collection unaccompanied by ownership certificates.

REGULATION. If the foreign item is an interest coupon detached from bonds containing a tax-free covenant clause, issued by a foreign country or corporation having a paying agent in the United States, a statement and ownership certificate, Form 1000, shall be furnished as provided in article 368. (Art. 1078.)

This article relieves payees who receive from unknown owners foreign items unaccompanied by ownership certificates, from the necessity of submitting to the Commissioner a statement giving considerable information as to the name of the debtor corporation, date of dividend check or interest coupon, etc., together with a certificate of ownership prepared by the first bank receiving the foreign item.

REGULATION. (a) In the case of collections of foreign items, the ownership certificates (Form 1000, 1000A, or 1001) when required and duly filed shall constitute and be treated as returns of information. Where such certificates are used, a monthly return shall be made on Form 1012 and an annual return on Form 1013 as provided in article 370. Forms 1012 and 1013, when so used, should be modified to show the name and address of the paying agent, but the listing of Form 1001 on Form 1012 is not required.

(b) In the case of dividends on the stock of a nonresident foreign corporation or interest on bonds of a nonresident foreign corporation paid to citizens or residents of the United States, or resident partnerships, except as provided in (a), a return of information on Form 1099, is required if the amount paid in any taxable year to a single person is $1,500 or more, or to a married person is $3,500 or more. (But see article 1073.) Such forms accompanied by Form 1096 should be forwarded to the Commissioner of Internal Revenue, Sorting Section, Washington, D. C., on or before March 15 of each year. (Art. 1079.)

The name of the paying agent should be shown on forms 1012 and 1013 when they are used to make returns of ownership certificates covering foreign interest.

The provisions of subdivision (b) of Article 1079 are applicable also to foreign registered bonds. (C. B. 3, 313; O. D. 674.)

No attempt is made to tax non-resident aliens on income which simply passes through American banks for collection and is not income derived from sources within the United States. See Chapter 41.

Information returns on forms 1099 and 1096 are required in those cases in which dividends on the stock of a non-resident foreign corporation are paid to citizens or residents of the United States in amounts of $1,500 or more. This means that no report need be made on these forms unless the dividends from any one company equal or exceed $1,500.

RULING. It has been brought to the attention of the Bureau that banking corporations and others who receive foreign items for collection or payment have interpreted this article of the regulations to mean that an exhaustive record shall be kept with respect to each foreign item passing through their collection and paying departments. The Bureau does not deem it necessary for banks to maintain a record of each foreign item in order to comply with the provisions of the statute and the regulations pertaining thereto. It is expected, however, that all banks will exercise ordinary business care with respect to transactions involving foreign items and render a substantial compliance with the law. If the bank has reason to believe that the person receiving the income is one to whom payments during the calendar year of foreign items will amount to $1,000 or more, a record of the payments made to that person should be maintained in order that returns on Forms 1099 and 1096 may be filed not later than March 15 of the succeeding year.

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21

The same general question has also been raised in connection with interest on domestic bonds not containing a tax-free covenant clause and paid to citizens or residents of the United States. Returns of information are required with respect to payments aggregating $1,000 or more made during the calendar year to such individuals. As in the case of foreign items it is not the intention of the Bureau to require exhaustive records of these interest payments and the foregoing general principles in regard to foreign items are also applicable to interest on domestic bonds which do not contain a tax-free covenant clause. (C. B. II-2, 255; I. T. 1877.)

General

Penalties for failure to furnish information.—

LAW. Section 1114. (a) Any person required under this Act to pay any tax, or required by law or regulations made under authority thereof to make a return, keep any records, or supply any information, for the purposes of the computation, assessment, or collection of any tax imposed by this Act, who willfully fails to pay such tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than one year, or both, together with the costs of prosecution.

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(b) Any person required under this Act to collect, account for $1,500 under the 1926 act.

21 Ibid.

and pay over any tax imposed by this Act, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this Act or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

(c) Any person who willfully aids or assists in, or procures, counsels, or advises, the preparation or presentation under, or in connection with any matter arising under, the internal-revenue laws, of a false or fraudulent return, affidavit, claim, or document, shall (whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document) be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

REGULATION. The penalties provided for in section 1114 (a), (b), (c), and (e) can not be assessed but are enforceable only by suit or prosecution. For limitations on prosecutions, see the Act of July 5, 1884, as amended by the Revenue Act of 1924, and re-enacted without change by section 1110 of the Revenue Act of 1926. (Art. 1361.)

Withholding agent not prohibited from furnishing ownership certificates to debtor corporation.—

RULING. A withholding agent is not prohibited under section 3167 of the Revised Statutes and Law Opinion 879 (C. B. 1, 262) from furnishing the debtor corporation the ownership certificates received by the withholding agent, or from furnishing the names and addresses of the debtor corporation's bondholders as disclosed thereon upon demand. (C. B. II-2, 256; I. T. 1817.)

Withholding of tax at the source is restricted to the cases of nonresident aliens and of interest on bonds containing a so-called taxfree 2 covenant clause.

LAW. Section 221. (a) All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest (except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States and not having an office or place of business therein), rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, (other than income received as dividends of the class allowed as a credit by subdivision (a) of section 216) shall (except in the cases provided for in subdivision (b) and except as otherwise provided in regulations prescribed by the Commissioner under section 217) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 5 per centum thereof: Provided, That the Commissioner may authorize such tax to be deducted and withheld from the interest

1

1As the subject of "Information at the Source" has been treated in Chapter 10 and "Non-resident Aliens," in Chapter 41, all questions as to forms of ownership and information certificates required in the various cases and the withholding of tax on income paid to non-resident aliens and the monthly and annual returns required have been omitted from this chapter.

This term should not be confused with "tax-exempt," which means freedom from taxation-state, local or federal, or all three.

upon any securities the owners of which are not known to the withholding agent.

The legal theory of "deduction."-The tax-free covenant clause in bonds has long been a prolific source of misunderstanding, because of the necessarily involved legal phraseology of such covenants and the legal fiction of "deduction." The legal fiction is that a tax-free covenant requires the debtor corporation actually to deduct 2 per cent from the amount of the coupon, pay this sum to the government, and then pay the bondholder 98 per cent of his coupon plus an additional 2 per cent, if the corporation has agreed to reimburse him to that extent. In practice the corporation pays the coupon in full and in addition pays on behalf of the bondholder to the government a tax equivalent to 2 per cent of the amount of the coupon.

Under some tax-free covenants the debtor corporation agrees to reimburse the bondholder only up to 1 per cent of the amount of the coupon. In this case the theory is that 2 per cent is deducted from the coupon and the bondholder is paid 98 per cent of the coupon plus a reimbursement of 1 per cent. Practically, the bondholder gets 99 per cent of his coupon and the corporation pays 2 per cent to the government for him.

Limitation of the debtor corporation's liability.-When a corporation has specifically agreed to pay the normal income taxes assessed against the owners of its bonds on the income accruing therefrom, it should be held strictly to such agreement; but obviously such an agreement must be reasonably construed. If by it the corporation agrees to pay only the federal income tax it cannot be held liable to pay state income taxes. If it agrees to pay a normal tax not in excess of, say, 2 per cent, it is not obligated to pay more even if the normal tax is more. If it agrees to pay any normal tax which may be imposed without limitations as to the rate, it is of course obligated to the extent of any increased normal tax; but this would not require it to pay an "additional tax" if the law imposes a "normal tax" at a certain rate and also an "additional tax."

The usual tax-free covenant obligates the corporation to pay only such normal tax as it is required by law to deduct and retain for account of the bondholders. Sometimes the covenant is to pay only up to a sum which is less than it is required to deduct and retain (e.g., I per cent, while the deduction now required is 2 per cent).