ner as above provided with respect to dividend items. Where ownership certificate form 1000 (revised) is used, a monthly return shall be made on form 1012 (revised) and an annual return on form 1013 (revised), as provided in articles 361-376. .. .. (Art., 1079.)

It is to be noted that the name of the paying agent should be shown on forms 1012 (revised) and 1013 (revised) when they are used to make returns of ownership certificates covering foreign interest.21

License required for the collection of foreign items.—

LAW. Section 259. That all individuals, corporations, or partnerships undertaking as a matter of business or for profit the collection of foreign payments of interest or dividends by means of coupons, checks, or bills of exchange shall obtain a license from the Commissioner and shall be subject to such regulations enabling the Government to obtain the information required under this title as the Commissioner, with the approval of the Secretary, shall prescribe; and whoever knowingly undertakes to collect such payments without having obtained a license therefor, or without complying with such regulations, shall be guilty of a misdemeanor and shall be fined not more than $5,000, or imprisoned for not more than one year, or both.

REGULATION. Banks or agents collecting foreign items, as defined in article 1077,22 and required by article 1079 to make returns of information with respect thereto, must obtain a license from the Commissioner to engage in such business. Application form 1017 for such license may be procured from collectors. The license is issued without cost on form 1010. Foreign items shall not be accepted for collection by any bank or collecting agent so licensed unless properly indorsed or accompanied by proper ownership certificates giving all the information called for by such certificate. . . 23 (Art. IIII.)

Payer has right to demand name and address of recipient of income.

LAW. Section 256. . . . . When necessary to make effective the provisions of this section the name and address of the recipient of income shall be furnished upon demand of the individual, corporation, or partnership paying the income.

"[Former Procedure] This was not stated in the earlier edition

Information as to actual owner.

REGULATION. When the person receiving a payment falling within the provisions of the statute for information at the source is not the actual owner of the income received, the name and address of the actual owner shall be furnished upon demand of the individual, corporation or partnership paying the income, and in default of a compliance with such demand the payee becomes liable to the penalties provided. . . . .24 (Art. 1080.)

Returns cover calendar year.

LAW. Section 256. . . . The provisions of this section shall apply to the calendar year 1918 and each calendar year thereafter, . . . .

The instructions on form 1099 state:

One of these forms must be filled in for each person to whom income, as described on this form, was paid during the calendar year.

....

Returns of payments to non-resident aliens.25.

REGULATION. In the case of payments of annual or periodical income to nonresident alien individuals or to foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein, the returns by withholding agents on forms 1098 (revised) and 1042 (revised) shall constitute and be treated as returns of information. . 26 (Art. 1076.)

Return of payments of dividends.—

LAW. Section 254.27 That every corporation subject to the tax imposed by this title and every personal service corporation shall, when required by the Commissioner, render a correct return duly verified under oath, of its payments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him.

REGULATION. When directed by the Commissioner, either specially or by general regulation, every domestic or resident foreign

"See page 125.

See Chapter XXXIII, "Non-Resident Aliens."

See page 109 and Chapter XXXIII.

[Former Procedure] A similar provision was in the 1917 law, but no return of dividends paid was ever required, except in the case of payments to foreign corporations-these being liable to withholding of the tax.

corporation and every personal service corporation shall render a return on form 1097 of its payments of dividends and distributions to stockholders for such period as may be specified, stating the name and address of each stockholder, the number and class of shares owned by him, the date and amount of each dividend paid him, and when the surplus out of which it was paid was accumulated. (Art. 1051.)

Returns of brokers.

LAW. Section 255. That every individual, corporation, or partnership doing business as a broker shall, when required by the Commissioner, render a correct return duly verified under oath, under such rules and regulations as the Commissioner, with the approval of the Secretary, may prescribe, showing the names of customers for whom such individual, corporation, or partnership has transacted any business, with such details as to the profits, losses, or other information which the Commissioner may require, as to each of such customers, as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has been paid.28

Heavy penalties for failure to furnish information.-The specific penalties for failure or refusal to furnish information were increased in the 1918 law."

29

REGULATION. A penalty of not more than $1,000 attaches for failure punctually to make a required return, whether of income, withholding of information, or to pay or collect a required tax. If the failure is willful, however, or an attempt is made to defcat or evade the tax, the offender is liable to imprisonment and to a fine of not more than $10,000 and costs. See also the act of July 5, 1884. In addition to these specific penalties ad valorem penalties are imposed in various cases. An ad valorem penalty is assessed and collected as a part of the tax, while a specific penalty is recoverable only by suit. (Art. 1041.)

Monthly and annual returns.-Information concerning monthly and annual returns is given in Chapter IV, "Returns of Individuals, Partnerships and Corporations."

"[Former Procedure] Reg. 33, 1918, Art 33, referred to special Regulations 40, governing returns to be made by brokers, but these were apparently never promulgated.

Section 253

PAYMENT OF TAX AT SOURCE1

Under the laws of 1913 and 1916, collection of tax at the source imposed duties and obligations on practically every disburser of interest, salaries and wages and on many tenants, lessees and fiduciaries. These provisions proved so burdensome that in the 1917 law the entire system was abolished, except as it related to non-resident aliens and interest on bonds containing a so-called tax-free covenant.3 The original intention was to abolish withholding entirely in the case of citizens and residents, but this raised a storm of protest from owners of bonds and investment banking houses. As corporations that had issued such bonds had been paying the normal tax for their bondholders, such bonds had been traded in at higher prices than bonds that did not contain such a covenant, and those who had purchased them because of that privilege naturally resented being deprived of it. To meet these objections the 1917 law provided that the normal tax to the extent of 2 per cent only should be deducted and withheld from corporate bonds containing "a contract or pro

'As the subject of "Information at the Source" has been treated in Chapter IX, "Non-Resident Aliens" in Chapter XXXIII, "Monthly and Annual Returns" in Chapter IV, all questions as to forms of ownership and information certificates required in the various cases and the withholding of income paid to non-resident aliens and monthly and annual returns required have been omitted from this chapter.

This is variously called collection at the source, deduction at the source, withholding at the source and stoppage at the source. The scheme of using private citizens to aid the government in the collection of income taxes originated in England at a time when the tax in that country was evaded to such an extent as seriously to affect the revenue therefrom. It was adopted by the framers of our law merely on the strength of British experience and without any attempt to test first the operation of an income tax in this country by direct collection from the taxpayer.

The tax-free covenant stipulated that the debtor corporation would pay the interest on its bonds without deduction for any tax or taxes that it might be required by law to withhold or retain.

vision by which the obligor agrees to pay any portion of the tax imposed. . . . 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 there from under any law of the United States" [section 9 (c)].

The involved language of the foregoing provision was necessary because, in the case of a majority of bonds, the debtor corporation would be under no obligation to pay the tax for the bondholder unless it was required to withhold it. The theory was that the debtor corporation withheld 2 per cent of the interest which was paid to the Treasury, the balance of 98 per cent of the interest being paid to the bondholder, and then in accordance with its covenant the debtor corporation refunded to the bondholder the 2 per cent that had been withheld. In practice the corporation paid the interest in full and paid the 2 per cent tax to the Treasury, unless the bondholder claimed exemption from having the tax withheld -exemption was claimed, of course, only when the bondholder did not have a taxable income. In some cases corporations continued to pay only the I per cent normal tax imposed under the 1913 act, in which event 2 per cent was paid to the government and 99 per cent to the bondholder.

When a corporation has specifically agreed to pay the normal income taxes assessed against the owners of its bonds on the income accruing therefrom, it should be held strictly to such agreement, but obviously such an agreement must be reasonably if not strictly construed. If federal income taxes are the only ones mentioned, it cannot be contended that state income taxes are to be paid. If the normal tax rate in force when the bonds were issued was I per cent and the rate is raised to 2 per cent or 12 per cent, the corporation must pay the increased rate. But if 2 per cent is the "normal" rate. and a law specifies that in addition to the "normal" tax of 2 per cent an "additional" tax of 4 per cent is imposed, the corporation should not pay more than the 2 per cent normal tax.