form 46 will be considered. (Telegram to A. Iselin & Co., New York, N. Y., signed by P. S. Talbert, Acting Assistant to the Commissioner, and dated September 8, 1919.) From the above it would appear that no withholding is necessary by a debtor corporation in the case of coupons from bonds now presented but due prior to March 1, 1913; but on any coupons maturing subsequent to that date, withholding must be made at the rate in existence at the time of payment. The date of maturity does not determine the rate of withholding. Of course, if an excessive tax is withheld and paid, the bondholder may secure relief by filing a claim for refund. Scrip issued by a corporation in lieu of interest on its bonds is equivalent to cash and is subject to withholding under the rates in force at a time of issuance. (C. B. 1, 183; O. D. 279.) Bonds having no tax-free covenant may not be considered tax-free.—The government has taken the position that corporations whose securities do not contain a tax-free covenant must not pay the tax except under supplemental agreements. RULING. Bonds without tax-free covenant not permitted to be considered tax-free bonds at option of issuing corporation. Corporation prohibited from paying tax on interest derived from such bonds when owned by citizens or residents of United States. (Telegram to the Farmers' Loan & Trust Company, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated June 2, 1919.) Withholding on interest paid on foreign loans not evidenced by bonds or notes.-Foreign partnerships and corporations are taxable only upon so much of their income as is derived from sources within the United States, determined under the provisions of section 217 of the law [Section 213 (c)]. Section 217 (a) lists specific items of income as income from sources within the United States, and among others includes "(1) Interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise." Section 217 (c) lists specific items of income as income from sources without the United States-among others "interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a)." RULINGS. A domestic corporation less than 20 per cent of whose gross income has been derived from sources within the United States, as "Now form 843. determined under the provisions of section 217 for the period specified therein, is not required to withhold tax from interest paid to non-resident alien individuals on its tax-free covenant bonds. (C. B. III-2, 191; I. T. 2116.) No tax is required to be withheld from dividends paid to non-resident aliens by a China Trade Act corporation which derives less than 20 per centum of its gross income from sources within the United States. This exemption from withholding with respect to dividends paid by a China Trade Act corporation also extends to Filipino shareholders who are not residents of the United States. (C. B. III-2, 191; I. T. 2119.) Where a citizen or resident of the United States has borrowed money from a foreign partnership or corporation, but where such borrowing is evidenced only by book entries, and no bond, note, or other interest-bearing obligation has been given therefor, it is the opinion of some authorities that the interest paid or credited thereon is not income from sources within the United States as defined by the law, and is therefore not subject to taxation or withholding. When withheld tax payable. LAW. Section 221. . . (c) Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15 pay the tax to the official of the United States Government authorized to receive it. . . . Withholding agents liable for deductible taxes. LAW. Section 221. (c) .... Every such person is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. Penalties for failure to withhold. LAW. Section 1114. .... (b) Any person required under this Act to collect, account for 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. The penalties provided above cannot be assessed but are enforceable, only by suit or prosecution. When no liability of withholding agent for collecting of tax at source. LAW. Section 221. . . . . (e) If any tax required under this section to be deducted and withheld is paid by the recipient of the income, it shall not be re-collected from the withholding agent; nor in cases in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment. Monthly and annual returns required.— REGULATION. (a) Every withholding agent shall make an annual return of the tax withheld from interest on corporate bonds or other obligations on or before March 15 on Form 1013. This return need not be executed in duplicate and should be filed with the collector for the district in which the withholding agent is located. The withholding agent shall also make a monthly return on Form 1012 on or before the 20th day of the month following that for which the return is made. The ownership certificates, Forms 1000, 1000A, and 1001, must be forwarded to the Commissioner with the monthly return, which need not be executed in duplicate. Form 1001, however, need not be listed on the return. (b) Every person required to deduct and withhold any tax from income other than such bond interest shall make an annual return thereof to the collector on or before March 15 on Form 1042, showing the amount of tax required to be withheld for each nonresident alien (individual or fiduciary), partnership not engaged in trade or business in the United States and not having an office or place of business therein, composed in whole or in part of nonresident aliens, or foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein, to whom income other than bond interest was paid during the previous taxable year. Form 1042 (no duplicate necessary) should be filed with the collector for the district in which the withholding agent is located. In every case of both classes the tax withheld must be paid on or before June 15 of each year to the collector. For penalties attaching upon failure to make such returns or such payment, see sections 276 and 1114, section 3176 of the Revised Statues as amended, and articles 446, 1261, and 1361. (Art. 370.) If a non-resident alien claims exemption on tax-free convenant bonds on or before February 1 by filing with the withholding agent form 1001B, the amount of tax due from the withholding agent as shown by form 1013 may be reduced by 2 per cent of the aggregate amount of interest payments made to such individual during the calender year. (See Chapter 41.) When form 1001 is used there is no actual withholding, such returns being simply information returns. Forms 1096A and 1096B are no longer required. (C. B. IV-2, 67; T. D. 3772.) Tax paid on tax-free covenant bond interest not considered income.-Section 234 (a-3) specifically provides that taxes paid by an obligor under tax-free covenants shall not be included in the gross income of the obligee. Tax paid on tax-free covenant bond interest not deductible by corporation.9-Under section 234 (a-3) of the law, the debtor corporation is not allowed to make deduction for federal taxes so paid under the heading of either interest or taxes. Credit for taxes paid at source.-Taxpayers are allowed to credit their total normal and surtaxes with the amount of any tax paid for them at the source. [Section 221 (d).] Tax-free covenant bonds sold between interest dates. RULING. Where you own tax-free covenant bonds on an interest date, you are entitled to a credit for tax paid at the source equal to 2 per cent of the full amount of the interest collected, regardless of the fact that you did not own the bonds during the entire period during which the interest accrued. Where you sell tax-free covenant bonds before a certain interest date you are not entitled to a credit for any part of the 2 per cent tax paid at the source on the interest payable on that date, since only the person presenting the interest coupon for payment is entitled to credit for tax paid at the source of such interest. (Extract from letter to Lyle T. Alverson, signed by E. H. Batson, Deputy Commissioner, dated April 20, 1922.) 8 For discussion, see Chapter 23. 'For discussion, see Chapter 32. |