of nonresident alien individuals, the Artemis Corporation must withhold 8% of all annual or periodical gains, profits, and income of foreign principals, except on the following: 1. Dividends collected on the stock of domestic corporations not entitled to the benefits of section 262. 2. Dividends collected on the stock of foreign corporations more than 50% of whose gross income for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or such part of such period as the corporation had been in existence) was derived from sources within the United States as determined under the provisions of section 217. 3. Interest received on tax-free covenant bonds. 4. Interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States and not having an office or place of business therein. 5. Other income that may be specifically exempted under regulations to be prescribed by the Commissioner in connection with section 217. In the case of tax-free covenant bonds only 2% of the interest upon such bonds is required to be withheld. This is withheld by the obligor. REFERENCES: Sec. 221 (a): "That all individuals, corporations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or payment of interest (except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States and not having an office or place of business therein), rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, of any nonresident alien individual or partnership composed in whole or in part of nonresident aliens (other than income received as dividends of the class allowed as a credit by subdivision (a) of section 216) shall (except in the cases provided for in subdivision (b) and except as otherwise provided in regulations prescribed by the Commissioner under section 217) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to eight per centum thereof: Provided, That the Commissioner may authorize such tax to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent." Sec. 221 (b) (Quoted under following Problem). PROBLEM 176 Illustrating Withholding of Tax-Interest Received on TaxFree Covenant Bonds FACTS: The McCandless House Wrecking Company has outstanding 5% tax-free covenant bonds, the holders of which comprise nonresident alien individuals, individual citizens or residents of the United States, partnerships, and others whose status is unknown. QUESTION: What tax, if any, is required to be withheld by the McCandless Company on interest payments? ANSWER: Two percent must be withheld on all such payments to a nonresident alien individual or to an individual citizen or resident of the United States or to a partnership. The Commissioner may also authorize such withholding where the holder of the bonds is unknown to the obligor. Such withholding is not required in the case of a citizen or resident who files with the obligor before February 2, a signed notice in writing (form 1001 under the 1918 Act) claiming personal exemption covering such tax; nor will withholding be required in the case of a nonresident alien individual if regulations to be promulgated by the Commissioner under Section 217 (g) should so prescribe. REFERENCE: Sec. 221 (b): "In any case where bonds, mortgages, or deeds of trust, or other similar obligations of a corporation contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee, or to reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon, or to retain therefrom under any law of the United States, the obligor shall deduct and withhold a tax equal to 2 per centum of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods and whether payable to a nonresident alien individual or to an individual citizen or resident of the United States or to a partnership: Provided, That the Commissioner may authorize such tax to be deducted and withheld in the case of interest upon any such bonds, mortgages, deeds of trust, or other obligations, the owners of which are not known to the withholding agent. Such deduction and withholding shall not be required in the case of a citizen or resident entitled to receive such interest, if he files with the withholding agent on or before February 1 a signed notice in writing claiming the benefit of the credits provided in subdivisions (c) and (d) of section 216; nor in the case of a nonresident alien individual if so provided for in regulations prescribed by the Commissioner under subdivision (g) of section 217." PROBLEM 177 Illustrating the Reporting of and Payment of Tax Withheld at Source FACTS: The Iriquois Ink Company in 1921 withholds, in accordance with section 221 (a), 8% of the compensation of certain nonresident alien individuals in its employ. QUESTION: What disposition is to be made by the Iriquois Ink Company of the tax so withheld? ANSWER: A report must be filed not later than March 1, 1922, and the tax must be paid in to the Government not later than June 15th. REFERENCE: Sec. 221 (c): "Every individual, corporation, or partnership required to deduct and withhold any tax under this section shall make return thereof on or before March 1 of each year and shall on or before June 15 pay the tax to the official of the United States Government authorized to receive it. Every such individual, corporation, or partnership is hereby made liable for such tax and is hereby in demnified against the claims and demands of any individual, corporation, or partnership for the amount of any payments made in accordance with the provisions of this section." PROBLEM 178 Illustrating Method of Reporting Income Received on FACTS: Giuseppi Travoli, a nonresident alien, in 1921 receives salary for services performed within the United States on which tax has been withheld at the source. QUESTION: How is this income to be reported? ANSWER: The entire income upon which the tax has been withheld is to be included in the return of the recipient of the income, but the amount of tax withheld is to be credited against the tax as computed in such return. REFERENCE: Sec. 221 (d): "Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return." PROBLEM 179 Illustrating Case in Which Tax is Paid by Nonresident Alien on Income Received upon which Tax had not been Withheld FACTS: Haaken Hansen, a nonresident alien, in 1920 receives certain income in the United States on which the tax has not been withheld at the source. Mr. Hansen reports the full income and pays the full tax thereon. QUESTION: Will the tax be re-collected from the withholding agent, and will penalties accrue because of this irregularity? ANSWER: The tax will not be re-collected from the withholding agent, and no penalties will accrue unless such irregularity was due to fraud and an attempt to evade payment of the tax. REFERENCE: Sec. 221 (e): "If any tax required under this section to be deducted and withheld is paid by the recipient of the income, it shall not be recollected from the withholding agent; nor in cases in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment." PROBLEM 180 Illustrating Credit for Taxes Paid to a Possession of the United States by a Resident of the United States FACTS: J. Partola, a resident of the United States, one third of whose net income is received from sources within Porto Rico, the other two thirds being derived from sources within the United States, in the calendar year 1921 pays to Porto Rico an income tax amounting to $30. The firm, Partola and Partola, in which he has one-half interest, in the same year pays to Porto Rico income tax amounting to $40. Mr. Partola's total income-tax liability to the United States is $300. QUESTION: May any portion of the $30 paid by Mr. Partola or of the $40 paid by the firm of Partola and Partola be taken as a credit against his Federal income tax liability? ANSWER: Yes. He may apply as a credit the full $30 paid by himself |