chapter. In other cases, notably when large amounts of stock are left in the names of stock exchange houses, one may become a nominal stockholder without knowing the identity of the actual owner. Thus, stock certificates endorsed in blank by an actual owner, and sold on the market, may pass by delivery to several consecutive purchasers before the stock is transferred on the books of the corporation. In such cases, the original transferor remains the record owner until the transfer is made on the corporate books, and, as such, he is presumed to be the real owner of dividends declared on the stock, unless he proves that actual ownership of the stock does not rest in him.3 If, however, a nominal stockholder not only parts with the certificate of stock, endorsed in blank, but also gives the corporation a "dividend order" to pay dividends to another, his responsibility for tax on such dividends ceases, and the one to whom the corporation pays the dividend becomes liable for any tax thereon, unless he in turn shows that actual ownership does not rest in him. A nominal stockholder receiving dividends and paying them over to one claiming to be the actual owner, was required under the 1916 Law to ascertain the name and address of such claimant and proceed as indicated below.4 Application of Present Law to This Chapter. The Treasury Department based its authority for the rules and regulations discussed in this chapter in regard to withholding on dividend income against non-resident foreign corporations on the basis of apparent ownership, upon the provision of the 1916 Law that "all the provisions of this title relating to the tax authorized and required to be deducted and withheld and paid to the officer of the United States Government authorized to receive the same from the 3 Letter from Treasury Department dated Dec. 28, 1916; I. T. S. 1918, ¶ 274. 4 The regulations on this subject refer only to dividends on domestic corporations and resident foreign corporations. (Reg. 33 Rev., Arts. 32, 200, 201; T. D. 2374, 2386, 2388, 2401 and 2402.) 5 Revenue Act of 1916, § 13 (f). income of non-resident alien individuals from sources within the United States shall be made applicable to income derived from dividends upon the capital stock or from the net earnings of domestic or other resident corporations, joint-stock companies or associations, and insurance companies by non-resident alien companies, corporations, jointstock companies, or associations, and insurance companies not engaged in business or trade within the United States and not having any office or place of business therein." This provision was separate from and additional to the general withholding provision of the 1916 Law which expressly excepted from its scope "income derived from dividends on capital stock, or from the net earnings of a corporation, joint-stock company or association, or insurance company, which is taxable upon its net income as provided in this title." The Treasury Department based its authority for requiring the tax to be paid on dividend income of nonresident alien individuals, by nominal stockholders or record owners upon the provision 7 of the 1916 Law that "the intent and purpose of this title is that all gains, profits, and income of a taxable class, as defined by this title, shall be charged and assessed with the corresponding tax, normal and additional, prescribed by this title, and said tax shall be paid by the owner of such income, or the proper representative having the receipt, custody, control, or disposal of the same." The general withholding provision of the Revenue Act of 1918 expressly excepts from its scope "income received as dividends from a corporation which is taxable under this title on its net income," and contains no provision corresponding to the provision of the 1916 Law quoted above applying its general withholding requirements to income derived from dividends received by non-resident foreign corporations or making an agent liable for the surtaxes imposed upon his principal with respect to income passing through the hands of such agent. The reason for the 6 Revenue Act of 1916, $9 (b). 7 Revenue Act of 1916, §9 (g). failure of the present law to provide for withholding against non-resident foreign corporations as to income derived from dividends is that foreign corporations, as well as domestic corporations, are now entitled to deduct from gross income, in computing net income "amounts received as dividends from a corporation which is taxable upon its net income, and amounts received as dividends from a personal-service corporation out of earnings or profits upon which income tax has been imposed by act of Congress."9 Under the present law no withholding from corporate dividends is required in any case,10 but the Treasury Department holds that the responsible representatives of nonresident aliens in connection with any sources of income which such non-resident aliens may have within the United States shall make a return of such income, and shall pay any and all tax, normal and additional, assessed upon the income received by them in behalf of their non-resident alien principals, in all cases where the tax on income so in their receipt, custody or control, shall not have been withheld at the source. The agent of a non-resident alien is responsible for a correct return of all income accruing to his principal within the purview of the agency. The agency appointment will determine how completely the agent is substituted for the principal for tax purposes.11 Dividends on stock of domestic corporations or resident alien corporations are prima facie income of the record owner of the stock, and such record owner will be liable for any additional tax based thereon, unless a disclosure of the actual ownership is made to the Commissioner, which shall show that the record owner is not the actual owner and who the owner is and his address. In all cases where the actual owner is a non-resident alien individual and the record owner is a person in the United States, the record owner will be considered for tax purposes to have the receipt, custody, control and disposal of the dividend income and 9 Revenue Act of 1918, § 234 (a) 6 and (b). 10 Reg. 45, Art. 362. 11 Reg. 45, Art. 403. F. T.-7 will be required to make return for the actual owner, . regardless of the amount of the income, and to pay any surtax found by such return to be due.12 The rulings under the 1916 Law are stated below. PROCEDURE WHEN NOMINAL STOCKHOLDER WAS A RESIDENT AND ACTUAL OWNER WAS A RESIDENT. In cases where both the nominal stockholder and the actual owner were residents of the United States, the nominal stockholder was not required to obtain any certificate disclosing the name of the actual owner. The primary purpose of requiring disclosure of the actual owner was to assist in administering that provision of the 1916 Law, which made dividends on the stock of domestic corporations or resident foreign corporations taxable when paid to non-resident aliens and required withholding when paid to non-resident foreign corporations.13 The actual owner was, of course, in all cases under duty of reporting the dividends and paying the taxes thereon, if he was liable; the nominal stockholder was under no duty to report the dividends as his income but should be prepared to show conclusively,. if question arose, that the actual ownership did not rest in him.14 If a nominal stockholder paid over the dividends to a resident whom he knew to be the agent of a non-resident alien, he was under no duty as agent, since it was the one who collected the dividend for a non-resident, or who finally paid it over to a non-resident, who had impressed upon him the duty of agent within the meaning of the preceding chapter. PROCEDURE WHEN NOMINAL STOCKHOLDER WAS RESIDENT AND ACTUAL OWNER WAS NON-RESIDENT. In cases where the nominal stockholder was a resident, and the actual owner was a non-resident alien individual partnership or 12 Reg. 45, Art. 404. Disclosure is made on Form No. 1087 (revised). 13 Letter from Treasury Department dated Nov. 21, 1916; I. T. S. 1918, ¶ 272. 14 Letter from Treasury Department dated Nov. 21, 1916; I. T. S. 1918, ¶ 272. corporation, the nominal stockholder might make disclosure of the actual owner by filing a certificate of actual ownership.15 This certificate was obtained by the nominal stockholder from the actual owner and showed who the actual owner was, his address, and that the nominal stockholder was not the actual owner. It was to be forwarded by the nominal stockholder to the Collector, by attaching it to the return of income which he was required to file for the actual owner, 16 and was to be filed even if the amount of income was so small that no annual return was required, as proof of the fact that the nominal stockholder was not the actual owner of the stock. A certificate of ownership once filed was sufficient until the ownership changed, in which case it was necessary to disclose the new actual owner, as in the first instance.17 If the above disclosure was made, the nominal stockholder was held for income-tax purposes to have the receipt, custody, control and disposal of the dividend income and was required to make return for the actual owner and pay the tax found by such return to be due. When the actual owner was a non-resident foreign corporation return 18 was made, regardless of the amount of income and the normal tax paid. When the actual owner was a non-resident alien individual, a return was made regardless of the amount of income and the surtax was paid thereon when it exceeded $5,000. When the actual owner was a non-resident foreign partnership, the certificate of disclosure was transmitted to the Commissioner for the 19 15 Reg. 33 Rev., Art. 32. This article of Reg. 33 Rev. and also Art. 201, deal generally with the subject of this chapter. See also letter from Treasury Department dated June 6, 1918; I. T. S. 1918, ¶ 3528. Form No. 1087 was used for this purpose. 16 T. D. 2401. 17 T. D. 2401. 18 Form 1031. 19 Form 1040-B, modified to indicate that the return covered only income passing through hands of the nominal stockholder and did not purport to be a complete statement of income on behalf of the actual owner. |