Extent to which Dividends Are Taxable. The extent to which a dividend is taxable depends upon the status of the corporation paying the same, and upon the status of the recipient of the dividend.5

In the case

DIVIDENDS OF DOMESTIC CORPORATIONS. of dividends declared and paid by a domestic corporation, which is taxable upon its net income under the law, the dividend is not subject to the normal tax if received by an individual. If the individual is a nonresident alien, exemption from the normal tax on such dividends will be allowed only in case he files a return of his total net income, received from all sources in the United States, in the manner prescribed by law. If such dividend is received by a corporation, domestic or foreign, it is subject to the 2% tax imposed by the 1916 Law, but is not subject to the 4% tax imposed by the 1917 Law.

DIVIDENDS OF NON-RESIDENT FOREIGN CORPORATIONS. Dividends of a non-resident foreign corporation, if paid out of its earnings or profits accrued since March 1st, 1913, are taxable when received by a citizen or resident of this country, and must be reported for the purpose of both the normal tax and the supertaxes. When received by a domestic corporation such dividends are taxed under the 1916 Law and the 1917 Law. Such dividends received by non-resident aliens or foreign corporations are subject to no tax, although the dividend may be paid by the paying agent for such corporation at a place within the United States.

DIVIDENDS PAID BY RESIDENT FOREIGN CORPORATIONS. When a foreign corporation derives its entire income

5a The rate depends upon the year in which the profits were accumulated by the corporation. See p. 267.

from business done wholly within the United States, and pays the income tax upon its entire net income, dividends declared by it should be treated in the same manner as dividends from domestic corporations. It seems, also, that if a foreign corporation pays the income tax on a part of its net income, the dividends it pays should be treated, to that extent, as dividends of domestic corporations are treated. Thus, if a foreign corporation pays the income tax on half of its income, half of its dividends should be free from normal tax when paid to individuals, and from the 1917 tax when paid to corporations.

DIVIDENDS RECEIVED BY CITIZENS AND RESIDENTS. When dividends are received by individuals who are citizens or residents of this country, they must be included in the return of annual net income; but for the purpose of assessing the normal tax under each of the present laws, the amount of dividends received from the net earnings of any corporation taxable upon its net income, as indicated in the foregoing paragraphs, may be excluded. For the purpose of assessing the supertaxes under each of the present laws, such dividends must be included. The same rule applies where dividends are received by the estate of a deceased citizen or resident or by a trust estate created by a citizen or resident. The fact that an individual may not have legal title to the stock on which the dividends are declared does not alter the rule, if he is the actual beneficial owner. Therefore, the amount which may be received by a trustee in the form of dividends may be treated as dividends by the beneficiary in making his return; and similarly dividends received by a part

6 T. D. 2090.

nership are treated as dividends received by the partners, when the partners make their personal returns of their net distributive shares in the profits of the partnership.

DIVIDENDS RECEIVED BY NON-RESIDENT ALIENS. A non-resident alien is subject to the normal tax on dividends of domestic corporations, unless he files or causes to be filed a return of annual net income showing his total income received from all sources, corporate or otherwise, in the United States, in the manner prescribed for non-resident aliens. By so doing he is entitled to claim exemption from the normal tax on the amount of dividends received from any corporation taxable upon its net income." Although this exemption from normal tax may be enjoyed by a non-resident alien only by filing a return of annual net income, the normal tax is, nevertheless, not deducted at the source upon payments of dividends to non-resident aliens, since the section of the law providing for deduction at the source expressly declares that it shall not apply to income derived from dividends on capital stock, or from the net earnings of a corporation which is taxable upon its net income. Dividends received by a non-resident alien from the net earnings of foreign corporations are not income from sources within this country, even though the dividend is paid in this country.

DIVIDENDS RECEIVED BY CORPORATIONS. With respect to the 2% tax imposed by the 1916 Law, a corporation must include in its taxable income all dividends

7 Act of September 8, 1916, § 6 (c), as amended by Act of October 3, 1917.

8 Act of September 8, 1916, §9 (b), as amended by Act of October 3, 1917.

received from corporations of which it may be a stockholder, whether the paying corporation is taxable on its net income or not. For the purpose of computing the 4% tax imposed by the 1917 Law, a corporation may exclude the amount it receives as dividends upon the stock of any other corporation, which is taxable upon its net income.9

DIVIDENDS RECEIVED BY NOMINAL STOCKHOLDERS. When a dividend is received by one who is not the actual owner of the stock, but is the owner of record, he is not required to include the amount in his own income tax return, 10 but should proceed in accordance with the rules stated in the chapter on nominal stockholders.11

DIVIDENDS ON STOCK OF FEDERAL RESERVE BANKS. Dividends or income derived from the stock of Federal Reserve Banks is exempt from the tax on the theory that the exemption provided for in the Federal Reserve Act attaches to and follows the dividends into the hands of the member banks holding the Federal Reserve Bank stock.12

Dividends from Profits or Surplus of Prior Years. The rate of tax on dividends received in 1917 or subsequent years, depends upon the year in which the amount distributed as dividends was earned by the paying corporation. The law provides expressly that

9 Act of October 3, 1917, Titlc I. § 4.

10 Letter from Treasury Department dated November 21, 1916; I. T. S. 1917, ¶ 183.

11 See Chapter 7 on Nominal Stockholders.

12 Federal Reserve Bulletin, April 1, 1916.

the dividends shall be a part of the annual income of the distributee for the year in which received, but shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation.13 The language of this provision is obscure, but it seems to mean, for instance, that if an individual receives a dividend from profits or surplus accumulated by the corporation in 1916, he will add it to the amount of his income reported for 1916 and pay the supertax thereon at the 1916 rates; and similarly with respect to dividends from profits or surplus accumulated in 1915, 1914, or 1913. When such dividends are received by a corporation, the computation is more simple, as there is no graduated tax to be taken into consideration. Thus, a corporation receiving $30,000 in dividends in 1917, $10,000 of which is from surplus earned in each of the years 1914, 1915 and 1916, will pay 1% on $20,000 (the rate for 1914 and 1915) and 2% on $10,000 (the rate for 1916).

Dividends Deemed to Be from Most Recently Accumulated Profits or Surplus. Any distribution made to stockholders in 1917, or thereafter, shall be deemed, under the express provisions of the law, to have been made from the most recently accumulated undivided profits or surplus. This provision would seem to have reference to the profits and surplus in existence at the time of the declaration of the dividend, and not the time of payment. It would seem that a dividend declared in the current year would not be considered to be out of that year's earnings, unless the books of a corporation, at the time the dividend was declared, had been

13 Act of September 8, 1916, § 31, added by Act of October 3, 1917.