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medium of permitting its gains and profits to accumulate, instead of being divided or distributed, the stockholders of such corporation will be subject to income tax in the same manner as the stockholders of a personal-service corporation. 89

89 Revenue Act of 1918, $ 220. For a full discussion of this subject see Chapter 2 on the Income Tax Rates.

CHAPTER 11

FOREIGN PARTNERSHIPS

The 1916 Law expressly mentioned foreign partnerships in only one provision, that which required the withholding of the tax on payments of income from interest upon bonds and mortgages or deeds of trust or similar obligations of domestic or other resident corporations, to nonresident alien firms and copartnerships not engaged in business or trade within the United States and not having any office or place of business therein. The Revenue Act of 1918 defines the term “foreign" when applied to a partnership as meaning "created or organized outside the United States, "2 but does not use the word “foreign" in connection with partnerships in the part of the Act imposing the income tax. The Act, however, provides that individuals carrying on business in partnership shall be liable for income tax in their individual capacity and this implies that the income of a foreign partnership from sources within the United States is taxable in the hands of the non-resident alien partners, to the extent included in the distributive share of each and such has been the ruling of the Treasury Department. The income received by a non-resident alien partnership from sources within the United States does not, like the income received by a domestic or resident alien partnership lose its identity as to source when distributed to a non-resident alien member of a firm. If the partner is a citizen or resident of this country, he is of course subject to tax upon his entire distributive share of the profits of any partnership of which he may be a member.

1 Revenue Act of 1916, $ 13 (e).

2 Revenue Act of 1918, $ 200. Under the regulations a foreign partnership is one created or organized outside the United States including only the States, the Territories of Alaska and Hawaii, and the District of Columbia. (Reg. 45, Art. 1508.) The term "foreign" is applied to partnerships in the title imposing Stamp Taxes. (Revenue Act of 1918, $ 1107, Schedule A-15.)

3 Letter from Treasury Department dated April 7, 1917; I. T. S. 1918, 1702. Letter from Treasury Department dated June 6, 1918;

Definition. In the 1916 Law the phrase "alien partnership” was used, but no definition of the term was given in the law or was to be found in the regulations. The 1916 Law also referred to "non-resident alien firms" and to "non-resident alien copartnerships' synonymously, and applied the terms without regard to whether or not the firm or copartnership was engaged in business or trade within the United States or had an office or place of business in this country. The term may be argued to have had reference to the status of the partners composing the firm, and in this respect it was indefinite, as a firm may be composed of non-resident aliens and resident aliens or citizens. For the sake of clearness in discussing the subject of this chapter, the term "foreign partnership” as used herein is defined as a partnership or firm, whether composed of aliens or citizens, residents or non-residents, which has its principal place of business in a foreign country and directs all or the principal part of its business from its office outside the jurisdiction of the United States.

I. T. S. 1918, s 3528. Letter from Treasury Department dated October 1, 1918; I. T. S. 1918, 13641.

4 Letter from Treasury Department dated October 1, 1918; I. T. S. 1918, 13641.

5 Under the present law a foreign partnership is defined as indi. cated in note 2. The nationality or residence of the members of a partnership does not affect its status. Thus a partnership created hy articles entered into in San Francisco between residents of the United States and residents of China is held to be a domestic partnership. (Reg. 45, Art. 1508.) According to the definition in the statute and regulations, a partnership composed entirely of citizens Limited Partnerships. If the foreign partnership is one of the kind which, if it were domestic, would be treated as a corporation or association, it seems that it should report its net income and pay the tax according to the provisions of the law and regulations applicable to foreign corporations. Having done so, its partners should treat their net distributive shares of the profits as dividends. Since non-resident alien stockholders of a non-resident foreign corporation are not taxable to any extent on the dividends of such corporation, it would follow that the partners of a non-resident foreign partnership or association which is required by the regulations to report and pay the tax as a corporation, would not be subject to any tax on their net distributive shares of the profits.

General Partnerships. If the foreign partnership is a general partnership, not having the characteristics which would require it to pay the tax in the manner of corporations, it is not, itself, subject to the tax on income derived from sources within this country, but each of its individual members is subject to the tax on such part of his distributive share of the partnership profits as is composed of income from this country. 8

RESIDENT FOREIGN PARTNERSHIPS. A foreign partnership which is engaged in business or trade within the United States and has an office or place of business herein is a resident foreign partnership.

NON-RESIDENT FOREIGN PARTNERSHIPS. A non-resident foreign partnership is defined as a foreign partnership which does not have any office or place of business within the jurisdiction of the United States.

and residents and doing all its business here would be a “foreign” partnership if created by articles entered into in a foreign country. The intention of the parties as to the place where the principal business is to be carried on (which is best evidenced by the subsequent aets of the partnership) is a sounder basis for a distinction between domestic and foreign partnerships.

6 See the discussion of Limited Partnerships in the preceding chapter.

7 See discussion of General Partnerships in the preceding chapter.

8 Letter from Treasury Department dated December 6, 1916; I, T. S. 1918, 1703.

Collection of the Tax at the Source. A non-resident partnership is not subject to having any tax withheld at the source on income from sources in this country, except in the case of bonds of corporations containing covenants to pay the tax. The Treasury Department under the 1916 Law made no distinction based upon the status of the individual partners and no such distinction is made under the present law.9

NON-RESIDENT FOREIGN PARTNERSHIPS. Under the 1916 Law non-resident foreign partnerships were not subject to having the tax withheld on interest from investments in the bonds or similar obligations of domestic or resident corporations,10 or on dividends 11 on the stock of corporations or other income. Under the Revenue Act of 1918

9 Telegram from Treasury Department dated May 17, 1918; I. T. S. 1918, 1 3362. It is interesting to note in this connection that immediately after the 1913 Law was enacted and before it was held that partnerships were not subject to withholding, the Treasury Department provided for the use of partnerships an ownership certificate which required a statement of the names and addresses of each of the partners. No such disclosure of the names of the partners of non-resident foreign partnerships was subsequently required, which indicates that the Treasury Department did not consider the individual status of the partners to be essential in determining whether or not withholding is necessary.

10 Telegram from Treasury Department dated May 17, 1918; I. T. S. 1918, 3362. The language of the Revenue Act of 1916, § 13 (e) as amended, was ambiguous. It provided that the provisions relating to withholding of the tax should be made applicable to the tax imposed by Subdivision (a) of $ 10 upon incomes derived from interest upon bonds and mortgage or deeds of trusts or similar obligations of domestic or other resident corporations

by non-resident alien firms." No tax, as a matter of fact, was imposed upon firms or partnerships by Subdivision (a) of $ 10, and consequently it was ruled that no tax need be withheld.

11 Reg. 33 Rev., Art. 32. Letter from Treasury Department dated June 6, 1918; I. T. S. 1918, s 3528.

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