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they will be subject to having the tax withheld only on interest from so-called tax-free covenant bonds.12
RESIDENT FOREIGN PARTNERSHIPS. Withholding was not required in any case on payments to a resident foreign partnership under the 1916 Law. For the purpose of establishing its identity and status, a form was provided which might be used to accompany coupons from bearer bonds in order to claim exemption from withholding at the source.13 Under the Revenue Act of 1918 withholding will be required against resident foreign partnerships only in the case of interest from so-called tax-free covenant bonds 14
Agents for Foreign Partnerships. A. resident of this country might for the purpose of the 1916 Law occupy the position of an agent for a foreign partnership and in connection therewith be subject to the duties of resident agents as indicated in the chapter on that subject.15
Nominal Stockholders. Under the 1916 Law if a foreign partnership was the actual owner of stock of domestic or resident corporations, the partners thereof were subject to the surtax (but not the normal tax) to the same extent as other individuals. The Income Tax Law did not require withholding of the tax from dividends, whether paid direct to a non-resident foreign partnership or through a nominal stockholder. Where the non-resident foreign partnership was the actual owner, and a resident of this country was the nominal holder of the stock, the latter was required to make disclosure of the actual owner by filing a certificate of actual ownership with the Commissioner of Internal Revenue for the information of the collector. No return was required to be made and no amount retained unless the nominal stockholder was so requested.16 If a non-resident foreign partnership was a nominal stockholder, a certificate disclosing the actual ownership was executed and forwarded to the Collector of Internal Revenue at Baltimore, Maryland, in order that the members of the partnership might avoid any liability for tax because of the apparent ownership of such stock.17 Income received as dividends from a corporation taxable upon its net income is no longer subject to withholding; 18 nevertheless dividends on stock of domestic corporations or resident foreign corporations are prima facie income to the record owners of the stock and such record owner will be liable for any surtax thereon unless a disclosure is made as set forth elsewhere in this book.19
12 Revenue Act of 1918, $ 221 (h); Reg. 45, Art. 361. See Chapter 40 on Collection at the Source.
13 The form used under the 1916 Law was Form No. 1001; Reg. 33 Rev., Art. 43. Telegram from Treasury Department dated May 21, 1918; I. T. S. 1918, 13364. See I. T. S. 1918, 3452a.
14 Revenue Act of 1918, $ 221 (b); Reg. 45, Art. 361. 15 See Chapter 6 on Resident Agents.
Procedure in Collecting Income. In collecting income from interest on bonds not containing a tax-free covenant a resident or non-resident foreign partnership makes use of a form certifying that it is not subject to having the income tax withheld at the source.20 In collecting any other form of income no prescribed certificate is necessary, but the partnership might be called upon to disclose its name and location for the purpose of supplying the payor of the income with the information which he is required to transmit to the Government.
Duty in Paying Out Income. Resident foreign partnerships are under the same duty in paying out income to others as are domestic partnerships; that is, they are required to withhold on payments made from the office in this country under the same conditions as would require domestic partnerships to withhold. They are also required to report the names of those to whom they pay fixed or determinable income, in the manner required by law of corporations, partnerships and individuals generally. 21
16 Reg. 33 Rev., Art. 32. 17 Reg. 33 Rev., Art. 32.
18 Revenue Act of 1918, S 221 (a); Reg. 45, Art. 362. See Chapter 40 on Collection of the Tax at the Source.
19 Reg. 45, Art. 404. See Chapter 7.
20 Reg. 45, Art. 365. Form No. 1001 (revised) is used for this purpose.
Extent to Which Taxable. Foreign partnerships, unless they are of the kind taxable as corporations, 22 are not taxable, but the partners are required to pay the tax in all cases on their distributive shares of the profits, gains or income arising from sources within the United States. Thus, in the case of resident foreign partnerships, the income from the business transacted in the United States and from investments in this country is taxable. In the case of a non-resident foreign partnership, income from investments in this country and gains from the buying and selling of property of any kind in this country are taxable.23 The law expressly provides that amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States are income from sources within the United States. Net income is ascertained under the rules applicable to non-resident alien individuals, 24 Returns. Neither resident nor
Neither resident nor non-resident foreign partnerships were required to file returns for the taxable year under the 1916 Law. Partnerships are now required to file returns of income annually, but no regulations have yet been issued prescribing returns by non-resident foreign partnerships. A resident foreign partnership will probably be required to file a return similar to the return of domestic partnerships. 25
21 See Chapters 39 and 40 on Information at the Source and Collection of the Tax at the Source.
22 See the discussion of Limited Partnerships in the preceding chapter.
23 Letter from Treasury Department dated December 6, 1916; I. T. S. 1918, ( 703.
24 Revenue Act of 1918, $ 213 (c); Reg. 45, Art. 91. A further discussion of the term "sources within the United States' is contained in Chapter 5 on Non-Resident Aliens.
25 Revenue Act of 1918, $ 224. Under the 1916 Law both resident and non-resident foreign partnerships might be called upon by the Commissioner to file special returns showing the net income from sources within this country and the distributive shares of the part
Special Returns. Resident foreign partnerships are required to make returns reporting the amount of tax withheld at the source and the names and addresses of persons to whom fixed and determinable income has been paid and broker returns in the same manner and subject to the same conditions as domestic partnerships.26
Returns by Partners. The partners of foreign partnerships are required to make a return showing their own distributive shares of the income of the partnership from sources in this country on the same form as is used in reporting other income.27 If a partner is a citizen or resident of this country he must, of course, include all of his income from the foreign partnership, but if he is a nonresident alien only so much as has been derived from sources within the United States. In making his personal return the partner will follow the procedure outlined for non-resident aliens or the procedure outlined for citizens and residents, as the case may be.
Foreign Items. Resident foreign partnerships undertaking as a matter of business and for profit the collection of foreign items are required to obtain a license in the
manner as domestic partnerships engaged in the same business.28
Penalties. Resident foreign partnerships or their members or employees are subject in certain cases to penalties both specific and ad valorem for failing or refusing to make returns, supply information, pay or collect any tax or for wilfully attempting in any manner to defeat or evade the income tax. Such penalties are more particularly discussed in another chapter 29 ners in such income, but such returns were not required to be filed unless the partnership was specifically requested to do so by the Commissioner.
26 Revenue Act of 1918, $$ 221 (c), 255, 256. See Chapter 39 on Information at the Source.
27 Form No. 1040 under the 1916 Law.
28 Revenue Act of 1918, $ 259. See Chapter 39 on Information at the Source.
29 See Chapter 36 on Penalties.
Corporations are taxed as separate entities apart from their stockholders. They are subject to a tax of 12% upon their net income for the year 1918 and 10% upon their net income for the year 1919 and subsequent years. This tax is in lieu of the taxes imposed by the 1916 Law ? as amended by the 1917 Law.3 The total tax to which corporations were subject under both the 1916 and the 1917 Laws was 6%. Corporations are not subject to the surtaxes. They are entitled to deduct from their gross income, which (except in the case of insurance companies) is computed in the same manner as the gross income of individuals,5 the deductions and credits specified in the law 6 which differ to some extent from the deductions and credits allowed to individuals. Corporations, like individuals, make returns for the calendar or their fiscal year, according to the annual accounting period employed in keeping their books. The mere existence of a corporation during any part of the year is sufficient to require it to make a return. Prior to the present law, the mere receipt of net
1 Revenue Act of 1918, $ 230. Transportation systems are taxable as to part of this rate by amendment of the 1917 Law. See paragraph on Transportation Systems, post.
2 Revenue Act of 1916, § 10.