INTEREST ON OBLIGATIONS OF DOMESTIC OR RESIDENT CORPORATIONS. In the case of payments of interest, regardless of amount, upon bonds and similar obligations of domestic or resident foreign corporations, the original ownership certificates, when duly filed, constitute and are treated as returns of information. If a bondholder files no ownership certificate in the case of payments of interest on registered bonds, the withholding agent is required to make out such a certificate in each instance and file it.3 32

Exempt Corporations. Exempt corporations are required to furnish information at the source in the same manner and according to the same rules as taxable corporations.33

of transmittal under oath, to be used in forwarding the several forms 1097 to the Commissioner. Reporting at the source by corporations may be required specially or by general regulation (Reg. 45, Art. 1051).

32 Reg. 45, Art. 1075. Monthly return is made on Form No. 1012 (revised). See also Reg. 33 Rev., Art. 43; T. D. 2769.

33 T. D. 2693.

CHAPTER 40

COLLECTION OF THE TAX AT THE SOURCE

The 1913 Law provided for withholding at the source of the normal tax (1%) on all payments of fixed or determinable annual or periodical income to individuals, whether citizens, residents or non-resident aliens. The 1916 Law provided also for withholding at the source of the normal tax (2%) on payments of similar income to individuals 2 but by the Amendment of October 3, 1917, the law was changed so as to require withholding only (a) on payments of fixed or determinable annual or periodical income (except dividends) to non-resident aliens at the rate of 2%; (b) on payments of interest upon bonds of domestic or other resident corporations to foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein, at the rate of 6%; (c) on payments of dividends of domestic or other resident corporations to foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein, at the rate of 2%; (d) at the rate of 2% on payment of interest on bonds, mortgages, deeds of trust and similar obligations, of corporations to individuals, citizens, residents or aliens, if such bonds, mortgages, deeds of trust and similar obligations, contained a covenant to pay any portion of the income tax for the bondholder, or to pay the interest without deduction for any tax which the corporation might be required or permitted to pay thereon or to retain therefrom under any law of the United States, and (e) at the rate of 6% where the owner of bonds, mortgages, deeds of trust, or similar obligations, was not known.3 The amendment was retroactive to January 1, 1917, and any normal tax withheld from income paid to citizens or residents in 1917, other than interest described in (d) above, was

1 Act of October 3, 1913, § D.

2 Revenue Act of 1916, § 9 (b), (c), (d), (e).

3 Revenue Act of 1916, as amended, § 9 (b), (c), (g), 13 (e), (f).

required by the law to be released and paid over to the persons from whose income such tax was withheld.*

The 1918 Law provides for withholding at the source on payments of fixed or determinable annual or periodical gains, profits, and income, of any non-resident alien individual (other than income received as dividends from a corporation which is taxable upon its net income) at the rate of 8%, except if the income is from bonds and mortgages, deeds of trust, or similar obligations, of a corporation, containing a covenant to pay any portion of the tax for the bondholder, in which case withholding shall be at the rate of 2%.5 It is also provided that payments of fixed or determinable annual or periodical gains, profits, and income, of any foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein (other than income received as dividends from a corporation which is taxable upon its net income) shall be withheld at the rate of 10% except in cases where the income is from bonds, mortgages, or deeds of trust or other similar obligations of a corporation containing a covenant to pay any portion of the tax for the bondholder, in which case withholding shall be at the rate of 2%.8 No withholding is required on payment of fixed or determinable income to partnerships whether resident or non-resident, or to citizens or residents, except in case of payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations, of a corporation containing a covenant to pay the tax, in which case withholding is required at the rate of 2%.7 In no case is any tax withheld at the source on payments to domestic corporations or to foreign corporations engaged in trade or business within the United States or having an office or place of business in the United States. Personal service corporations may, after receiving notice from the Commissioner that they have been recognized as such, but not before, proceed as though they were partnerships.7a

Definition. For convenience, certain terms used in this chapter are here defined. A non-resident foreign corporation is one not

4 Revenue Act of 1917, § 9 and § 1212.

5 Revenue Act of 1918, § 221.

6 Revenue Act of 1918, § 237.

7 Revenue Act of 1918, § 221; Reg. 45, Art. 361.

7a Letter from Treasury Department dated November 20, 1919; I. T. S. 1919. ¶ 3651.

engaged in trade or business within the United States and not having any office or place of business therein. The term “withholding agent" means any person required to deduct and withhold any tax required to be deducted and withheld by the law. A withholding agent may be a corporation with bonds outstanding, a trustee under a corporate mortgage, or any corporation, partnership or private individual.10 The term "bond interest,' as used in this chapter, means obligations of domestic corporations.11 The term does not include interest payments on ordinary bankable commercial paper of corporations or ordinary promissory notes of corporations not exceeding one year in time.12 The term "covenant to pay the tax," means a covenant, contract or provision in the bonds, mortgage, deed of trust or other similar obligations of a corporation by which the obligor agrees to pay any portion of the income tax imposed by the Revenue Act of 1918 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.13

Fixed or Determinable Annual or Periodical Income. The phrase "fixed or determinable annual or periodical" income expressly includes interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, but expressly excludes income received as dividends from a corporation taxable upon its net income. It also expressly excludes interest on bonds, mortgages or similar obligations of corporations containing covenants to pay any portion of the tax.14 Only (a) fixed or determinable (b) annual or periodical income is subject to withholding. Among such income, giving an idea of the general character of income intended, the statute specifies interest, rent, salaries, wages, premiums, annuities, compensations, remunerations and emoluments. But other kinds of income may be included. Income is fixed when it is to be paid in amounts definitely pre-de

8 Revenue Act of 1918, § 237. Revenue Act of 1918, § 200. 10 Reg. 45, Art. 1533.

11 Revenue Act of 1918, § 221.

12 T. D. 2090.

13 Revenue Act of 1918, § 221.

14 Revenue Act of 1918, § 221,

termined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. The income need not be paid annually if it is paid periodically, that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with someone's will or with the happening of an event does not make the payments any the less determinable or periodical.15 In the following paragraph the term is defined in its various aspects.

SALARIES. Per diem salaries paid on a straight basis of compensation for services rendered are fixed or determinable annual or periodical income, unless the employee is required by the terms of his employment or contract to pay therefrom his own traveling and other legitimate expenses incident to the business of his employment.16 It is held that salaries, wages and commissions, paid by domestic business enterprises to non-resident alien employees for service rendered entirely in a foreign country are not income in the hands of the recipient as from a source within the United States. They are, therefore, not subject to withholding at the source.1 17

PARTNERSHIP SALARIES. Salaries stipulated by contract or articles of agreement between partnership members constitute fixed or determinable and annual or periodical income. But where, by agreement or otherwise, members of a firm are permitted to draw either stated or unstated sums in advance of an annual or periodical determination of partnership profits, no withholding is required, as these sums do not represent fixed or determinable

15 Reg. 45, Art. 362; Revenue Act of 1918, §§ 221, 256. Income of farmers, merchants, agents (unless the compensation is in the form of commissions), iawyers (except annual retainers), doctors, authors, inventors, and other professional persons, whose income is irregular or indefinite, is not fixed or determinable and annual or periodical and is not, therefore, subject to withholding. (T. D. 1890; T. D. 2090.) Although payments of income which is not fixed or determinable and annual or periodical are not subject to withholding, a resident in this country having the receipt, control, or custody of such income may be required, as agent for the non-resident principal owner, to report the amount of such income and to account for any and all tax, normal and additional thereon. (Reg. 45, Art. 404.) See p. 56.

16 T. D. 2135.

17 Reg. 45, Art. 92; Reg. 33 Rev., Art. 32.