DIVIDENDS ON STOCK OF TAXABLE CORPORATIONS. With respect to dividend payments of corporations, the law provides that the return to be made by the corporation if required by the Commissioner, shall state the names and addresses of the stockholders, the number of shares owned by each, and the amount of dividends paid to each during the period covered by the report.27 INTEREST ON OBLIGATIONS OF DOMESTIC OR RESIDENT CORPORATIONS. In the case of payments of interest, regardless of amount, upon bonds and similar obligations of domestic or resident corporations, the original ownership certificates, when duly filed, constitute and are treated as returns of information. If a bondholder files no ownership certificate in the case of payments of interest on registered bonds, the withholding agent is required to make out such a certificate in each instance and file it with his monthly return.28 Exempt Corporations. Exempt corporations are required to furnish information at the source in the same manner and according to the same rules as other taxable corporations.29 27 Revenue Act of 1918, § 254. Two forms of return are contemplated for the reporting of dividends paid by taxable corporations. Form 1097 (revised) gives the required information separately with regard to each stockholder, and must, if required, be forwarded to the Commissioner within ten days from the receipt of notice demanding it. Form 1096 (revised) is merely a letter of transmittal under oath, to be used in forwarding the several forms 1097 to the Commissioner. Reporting at the source by corporations may be required specially or by general regulation (Reg. 45, Art. 1051). 28 Reg. 45, Art. 1074. Monthly return is made on Form No. 1012 (revised). See also Reg. 33 Rev., Art. 43; T. D. 2769. 29 T. D. 2693. CHAPTER 40 COLLECTION OF TAX AT THE SOURCE The 1913 Law provided for withholding at the source of the normal tax (1%) on all payments of fixed and determinable income to individuals, whether citizens, residents or non-resident aliens. The 1916 Law provided also for withholding at the source of the normal tax (2%) on payments of similar income to individuals but by the Amendment of October 3, 1917, the law was changed so as to require withholding only (a) on payments of fixed and determinable income (except dividends) to non-resident aliens at the rate of 2%; (b) on payments of interest upon bonds of domestic or other resident corporations to foreign corporations not engaged in trade or business in the United States and not having an office or place of business therein, at the rate of 6%; (c) on payments of dividends of domestic or other resident corporations to foreign corporations not engaged in business in the United States and not having an office or place of business therein, at the rate of 2%; (d) at the rate of 2% on payment of interest on bonds of corporations to individuals, citizens, residents or aliens, if such bonds, or the mortgages under which they were issued, contained a covenant to pay any portion of the income tax for the bondholder, or to pay the interest without deduction for any tax which the corporation might be required or permitted to pay thereon or to retain therefrom under any law of the United States, and (e) at the rate of 6% where the owner of the bond was not known. The amendment was retroactive to January 1, 1917, and any normal tax withheld from income paid to citizens or residents in 1917, other than interest described in (d) above, was required by the law to be released and paid over to the persons from whose income such tax was withheld.1 The 1918 Law provides for withholding at the source on payments of fixed or determinable annual or periodical gains, profits, and income, of any non-resident alien individual (other than income received as dividends from a corporation which is taxable upon its net income) at the rate of 8%, except if the income is from bonds, mortgages, or deeds of trust or similar obligations of a corporation containing a covenant to pay the tax for the bondholder, in which case withholding shall be at the rate of 2%. It is also provided that payments of fixed or determinable annual or periodical gains, profits, and income, of any foreign corporation not engaged in business within the United States and not having an office or place of business therein (other than income received as dividends from a corporation which is taxable upon its net income) shall be withheld at the rate of 10% except in cases where the income is from bonds, mortgages, or deeds of trust or other similar obligations of a corporation containing a covenant to pay the tax for the bondholder, in which case withholding shall be at the rate of 2%. No withholding is required on payment of fixed or determinable income to partnerships whether resident or non-resident, or to citizens or residents, except in any case where bonds, mortgages, or deeds of trust or other similar obligations of a corporation contain a covenent to pay the tax, in which case withholding is required at the rate of 2%. In no case is any tax withheld at the source on payments to domestic corporations or to foreign corporations having an office or place of business in the United States. Fixed or Determinable Income. The phrase as used in the law includes interest, rent, salaries, wages, premiums, 1 Revenue Act of 1917, § 9 and § 1212. 2 Revenue Act of 1918, § 221. 3 Id. § 237. 4 Id. § 221; Reg. 45, Art. 361. annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, but expressly excludes income received as dividends from a corporation taxable upon its net income. It also expressly excludes interest on bonds, mortgages or similar obligation of corporations containing covenants to pay the tax.5 Under the 1913 and 1916 Laws, the Treasury Department defined the term in its various aspects in a series of regulations, as follows: 6 COMMISSIONS. Where an individual works on a straight commission basis and, in earning his commissions, incurs and personally pays traveling and other expenses, the amounts paid to him as commissions are not fixed or determinable income. If the agent incurs and pays no necessary business expenses in earning his commissions, the amount paid him is fixed and determinable income.7 PROFIT SHARINGS. The amount received as a share of the profits of the employer is fixed and determinable income.8 BONUS. A bonus paid in addition to salary is fixed and determinable income, unless it is a mere gift or gratuity. SALARIES. Per diem salaries paid on a straight basis of compensation for services rendered are fixed and determinable income, unless the employee is required by the terms of his employment or contract to pay therefrom his own traveling and other legitimate expenses incident to the business of his employment.10 It is held that salaries, wages and commissions, paid by domestic corporations, resident individuals, or partnerships to non-resident alien employees for services rendered entirely in a foreign country are not subject to deduction and withholding of the normal tax, and such payments of income will not be subject to the 5 Id. § 221. 6 Compare Rev. Act of 1918, § 221 and § 256. 7 Letter from Treasury Department dated January 12, 1917; I. T. S. 1016. 8 T. D. 2090. 9 T. D. 2135. income tax in the hands of the recipient as from a source within the United States.11 RENT. Rent is fixed and determinable income subject to withholding, and this is true whether payment is made in cash or in notes.12 Where permanent improvements are made by a tenant under the terms of a lease the value thereof is considered income to the landlord to be accounted for by the landlord as gain or profit at the termination of the lease, but the amount is not fixed or determinable income.13 Rent paid by domestic corporations, resident individuals, or partnerships to non-resident aliens as rent for property located in a foreign country is not subject to collection at the source.14 PARTNERSHIP SALARIES. Salaries stipulated by contract or articles of agreement between partnership members constitute fixed and determinable income. But where, by agreement or otherwise, members of the firm are permitted to draw either stated or unstated sums in advance of an annual or periodic determination of partnership profits, no withholding is required, as these sums do not represent fixed or determinable income within the meaning of the law.15 Withholding seems not to be required against the partners on payment of the net distributive shares of the income of the partnership. EXEMPT INCOME. Although exempt income may be fixed and determinable, no withholding is required upon the payment thereof.16 PROMISSORY NOTES. When a note is given in payment of fixed and determinable income the duty of withholding the tax is imposed upon the maker of the note.17 INTEREST. Interest as a general rule is held to be fixed 11 Reg. 33 Rev., Art. 32. 12 T. D. 2090. 13 T. D. 2442. 14 Reg. 33 Rev., Art. 32. 15 Memorandum from Treasury Department, I. T. S. 1917, ¶ 2282. 16 T. D. 1890. 17 Reg. 33, Art. 68. |