Lapas attēli
PDF
ePub

containing a tax-free covenant where no exemption is claimed. The alien property custodian should use Form 1000 (Revised) in collecting interest on bonds containing a tax-free covenant and in all other cases should use Form 1001 (Revised). No distinction is to be made between payments directly to the alien property custodian and to his depositaries and between interest on registered bonds and interest on coupon bonds. In the case of enemies or allics of enemies holding a license granted under the provisions of the Trading with the Enemy Act, withholding is required as in the case of any non-resident alien not an enemy or ally of enemy.63 Where ownership certificates Form 1000 or Form 1001 is executed to cover funds paid over to the Alien Property Custodian, the certificate is sufficiently complete if the name of the taxpayer and the trust number are given under the heading owner of bonds with the name and address of the enemy or ally of enemy concerned excluded.64

63 Id. Art. 372.

64 Letter from Treasury Department dated July 13, 1918; I. T. S. 1918, 3608.

CHAPTER 41

COVENANTS TO PAY TAXES

Covenants to pay taxes are contained in bonds, mortgages, notes, leases, and similar instruments whereby it is stipulated that the debtor, lessee, or other payor shall pay the interest, rent, or other income without deduction for taxes. Many such covenants became operative under the 1913 Law, and the 1916 Law prior to its amendment by the Act of October 3, 1917, by reason of the requirement in those laws that the normal tax should be withheld at the source. They operate under the 1916 Law as amended and under the present law only in certain cases and to a limited extent. Such covenants for the purpose of this discussion may be divided into two classes: (1) those which are contained in bonds, mortgages, or deeds of trust, or other similar obligations of a corporation and (2) those contained in other instruments. Those contained in other instruments operate only when the payee is a non-resident alien or a foreign corporation not engaged in business within the United States and not having an office or place of business therein, unless the covenant is so broad that it imposes an obligation on the payer notwithstanding that the interest, rent, or other payments thereunder are made in full without deduction of any tax at the source. Covenants of the first class stated above may be of two kinds : (a) those which agree to assume the tax of the payee only to the extent that the interest specified in the obligation shall be paid in full and (b) covenants which may be so broad in their terms as to obligate the debtor to reimburse the creditor for any tax which may be imposed upon him

with respect to the interest after it has been received in full by the creditor. Covenants broad enough to fall within the second class are very unusual and are not covered by the discussion in this chapter. Those covenants to pay the tax which are embraced within the language of Section 221, subdivision (b) of the statute and discussed in this chapter are only those which have all the following qualifications: (a) they must be made by corporations; (b) they must be contained in bonds, mortgages, deeds of trust, or other similar obligations, and (c) they must be such as to bind the corporation-debtor to pay some portion of the tax imposed by the Revenue Act of 1918 on the creditor, or to reimburse the creditor for any portion of the tax, or to pay the interest without deduction for any tax which the debtor may be required or permitted to pay thereon or to retain therefrom under any law of the United States. Where payment of interest is made under such covenants a tax equal to 2% of the interest is required to be withheld at the source if the owner of the bonds or similar obligations is (a) an individual, whether citizen, resident, or non-resident alien; (b) a partnership, whether domestic or foreign, resident or non-resident; (c) a foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein. The Commissioner may require the tax to be withheld where the owner of the bonds is unknown to the withholding agent, but no withholding is required against unknown owners unless and until the Commissioner so orders. The tax is not required to be withheld on payments to domestic corporations or to foreign corporations having an office or place of business in the United States but is required to be withheld on payments to a fiduciary although the fiduciary may be a corporation

The tax cannot be withheld except against payees specified in the statute. If the bond contains a covenant to

1 Revenue Act of 1918, §§ 221 and 237.

pay the tax but the mortgage does not, or vice versa, the tax must be withheld under this provision. If the covenant specifies that a tax of 1% will be paid 2% must nevertheless be withheld; 1% being assumed by the debtor corporation and the other 1% by the bondholder. In such cases only 99% of the full amount of interest should be paid to the bondholder. If the covenant specifies that more than 2% will be paid by the debtor corporation only 2% may be withheld, the covenant being inoperative under the law with respect to any additional amount specified therein. If the bond, mortgage, deed of trust, or similar obligation does not contain a contract or provision obligating the debtor (a) to pay some portion of the tax imposed by the Revenue Act of 1918 on the creditor, or (b) to reimburse the creditor for any portion of the tax, or (c) to pay the interest without deduction for any tax which the debtor may be required or permitted to pay thereon or to retain therefrom under the laws of the United States, the debtor corporation cannot voluntarily undertake to withhold the tax under this provision and thereby assume the tax for its bondholders. In the case of payments to non-resident aliens or foreign corporations having no office or place of business in this country, only 2% may be withheld on obligations containing tax-free covenants, notwithstanding that on other income 8% or 10% is required to be withheld in such cases. Obligations of individuals or partnerships, whether or not containing tax-free covenants are not such as authorize withholding at the 2% rate or at any rate against citizens, residents, domestic corporations, or foreign corporations having an office or place of business in this country. Obligations of corporations other than bonds, mortgages, deeds of trust or similar obligations are not such as authorize withholding at the 2% rate or at any rate against citizens, residents, domestic corporations, or foreign corporations having an office or place of business in this country.

Withholding the tax at the source at the rate of 2% on interest paid with respect to obligations containing

tax-free covenants is not a measure designed or intended to insure the collection of revenue, as is withholding at the source generally, but is a measure whereby corporations may be compelled to pay a part of the tax which would otherwise be imposed upon the bondholder. The provision is inserted in the law on the theory that since corporations have issued bonds agreeing to pay the interest in full without deduction for any tax which might be required to be withheld at the source and presumably that provision has influenced either the price at which the bonds were sold or at the rate of interest, the law should be adapted to the end that the corporation be compelled to assume some part of the tax of the bondholder. Apparently the entire normal tax was deemed to be too great a burden and 2% was considered appropriate. No reason is advanced, however, for excluding bondholders which are domestic corporations from the benefits accruing to bondholders who are individuals and partnerships under "tax-free covenants" by this adaptation of the law, notwithstanding that among domestic corporations are savings banks and insurance companies where the advantage would inure ultimately to the benefit of depositors or policyholders.

Since there is a requirement in the law that a 2% tax be assumed by the corporation on interest paid to a large proportion of its bondholders where the bond contains a tax-free covenant it becomes a matter of importance to officers of corporations to determine whether or not the covenants in the bonds or mortgages of the corporation are broad enough in general language, or specific enough, to require the corporation to assume the burden under the present income tax. Unless there is a legal obligation to pay the tax, or any part thereof for the bondholder, the officers of the corporation may incur liability by making such payments, since if there is no legal compulsion, the payment of the tax of a bondholder is a diversion of the funds of the corporation to which stockholders and creditors may object and for which the officers may

« iepriekšējāTurpināt »