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 surtax imposed upon his principal with respect to income passing through the hands of such agent. The reason for the 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." 38 Under the present law no withholding from corporate dividends is required in any case,39 and the responsibility of a nominal stockholder pertains only to the surtax for which a non-resident individual actual owner may be liable. He is a resident agent within the meaning of this chapter as to dividend income, but since the dividends of domestic or resident corporations are in no case subject to the normal tax, his liability is somewhat narrower than the liability of other resident agents.40 PROCEDURE WHEN NOMINAL STOCKHOLDER IS A RESIDENT AND ACTUAL OWNER IS A RESIDENT. In cases where both the nominal stockholder and the actual owner are residents of the United States, the nominal stockholder is not required to obtain any certificate disclosing the name of the actual owner. The primary purpose of requiring disclosure of the actual owner is to assist in administering that provision of the law which makes dividends on the stock of domestic or resident foreign corporations liable to surtax when paid to non-resident alien individuals.1 The

38 Revenue Act of 1918, § 234 (a) 6 and (b). Reg. 45, Art. 363.

39 See p. 56 in regard to the deficiency of authority in the Commissioner under the present law in this connection.

40 See letter from Treasury Department dated November 21, 1916; I. T. S. 1918, ¶272, dealing with the 1916 law.

41 Letter from Treasury Department dated November 21, 1916; I. T. S. 1918, 272.

F. T.-5

actual owner is, of course, in all cases obligated to report the dividends and pay the surtax thereon, if he is liable; the nominal stockholder is under no duty to report the dividends as his income but should be prepared to show conclusively, if question arises, that actual ownership does not rest in him. If a nominal stockholder pays over the dividends to a resident whom he knows to be the agent of a non-resident alien, he is under no duty as agent, since it is the one who collects the dividend for a non-resident, or who finally pays it over to a non-resident, who has impressed upon him the duty of a resident agent.

PROCEDURE WHERE NOMINAL STOCKHOLDER IS RESIDENT AND ACTUAL OWNER IS NON-RESIDENT.43 In this case it is immaterial whether the nominal stockholder is an individual, partnership, or corporation, since irrespective of his or its individual or corporate status, the nominal stockholder may be held responsible as resident agent for the surtax payable by the actual owner upon dividends. It is ruled under the 1918 Law that 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 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.44 If the actual owner is an individual, the return made by the nominal stockholder on his behalf may show that a surtax is due, since individuals are liable to the surtax. If, however, the actual owner is a partnership or corporation, the return made by the nominal stockholder on its behalf will not show any surtax to be due, since partnerships are not subject to any income tax as such, and corporations are not liable to the surtax.46

42 Letter from Treasury Department dated November 21, 1916; I. T. S. 1918, ¶ 272.

43 For the procedure under the 1916 Law see Reg. 33 Rev., Arts. 32 and 201; T. D. 2301; letter from Treasury Department dated June 6, 1918, I. T. S. 1918, 3528.

44 Reg. 45, Art. 405.

45 Revenue Act of 1918, § 218.

46 Reg. 33, Art. 185.

1

PROCEDURE WHERE NOMINAL STOCKHOLDER IS NON-RESIDENT AND ACTUAL OWNER IS RESIDENT. 47 In this case, whether the actual owner is an individual, partnership, or corporation is immaterial, since the residence of the actual owner within the United States dispenses with the necessity of impressing the duty of the resident agent on the nominal stockholder. It is ruled under the 1918 Law that dividends on the stock of domestic or resident foreign 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 48 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.49 If the nominal stockholder is an individual and fails to make this disclosure, the dividends will, therefore, be subject to surtax as if they belonged to the individual nominal stockholder. If the nominal stockholder is a partnership, and fails to make such disclosure, the dividends will be regarded as income 50 of the partnership, to be reported in the information return of the partnership, and such dividends will ultimately be subject to surtax in the hands of the individual partners. If the nominal stockholder is a corporation and fails to make such disclosure, the dividends will be regarded as income of the corporation. But since dividends paid by domestic or resident foreign corporations are deductible from gross income when received by corporations, domestic or foreign,51 they will not be taxable income in this event and it follows that a corporation need not make such disclosure.

PROCEDURE IN CASE OF DUTCH ADMINISTRATION OFFICES. Under the 1916 Law a special ruling having application to many similar situations in foreign countries was made with respect to the so-called "Administration Offices" in Holland. It appears that the Dutch Administration Offices are the registered owners of large blocks of American stocks, against which they have issued bearer certificates, with coupons attached. These coupons, upon presentation and surrender, entitle the bearer to dividends

47 See Note 43.

48 This disclosure is made on Form No. 1087 (revised).

49 Reg. 45, Art. 405.

50 See Revenue Act of 1918, § 224.

51 Revenue Act of 1918, § 234 (a) 6, (b).

declared on the stocks. The Administration Offices were held to be prima facie liable for the tax on dividends paid on the stock standing in their names, unless they disclosed the names of the actual owners by use of the proper certificates.52 By appointing an agent in the United States they could avoid having the tax withheld at the source. Such agent was required to make returns of income for the Dutch Administration Office represented by him and pay the corporation tax of 2% on all dividends received by it, except such amounts as were shown by certificates disclosing actual ownership to have been received for the account of nonresident alien individuals or partnerships. Such certificates were attached to and made the basis of the return when filed.53

CERTIFICATES ISSUED TO BEARER. When stock of an American corporation is floated in some European countries, where investors are accustomed to bearer stock certificates, a block of the stock is sometimes issued to a trust company in this country which in turn issues bearer certificates entitling the holder to certificates of stock for the number of shares designated, upon the surrender of the bearer certificates, and to any dividends which may be declared on such shares while the bearer certificate is outstanding. The bearer certificates pass by delivery, the dividends being claimed through foreign banks by presentation and surrender of numbered coupons, attached thereto. In such cases the trust company was, under the 1916 Law, in the position of a resident nominal stockholder. Under the 1918 Law the rule would still seem to apply, and where the actual owner is å nonresident alien individual the trust company will be required to make return for such actual owner and pay the surtax found to be due.54

52 Disclosure was made on Form No. 1087.

53 T. D. 2386; T. D. 2669. This ruling was based on the theory that the Dutch Administration offices were "non-resident alien corporations, "' subject to tax on dividends and to having the tax withheld at the source. Since the Revenue Act of 1918 does not tax corporations on dividends received by them, it seems that only on some other theory can they be required to ascertain and disclose the names of the owners of their bearer certificates, under the present law. Neither the law nor the latest regulations have provided for the case of a foreign corporation nominal stockholder and a non-resident alien actual

owner.

54 See Reg. 45, Art. 405. Form 1087 should be used to disclose actual ownership when the owner is a non-resident alien.

CHAPTER 6

FIDUCIARIES

The Revenue Act of 1918 has in general clarified rather than changed the provisions of the 1916 Law fixing the special duties and responsibilities of fiduciaries. Fiduciaries are classed as individuals under the law, irrespective of their status, individual or corporate, and may be required to make returns of income or returns of information, according to the character of their relationship with their beneficiaries or the nature of the income constituting the subject of the trust. In certain cases trust estates are taxed as entities in which cases the fiduciary is required to pay the tax for the estate; in other cases the law, ignoring the entity of the trust estate, taxes the income in the hands of the beneficiary, in which event the fiduciary is not required to pay any tax upon the estate. The provisions of law and regulations pertaining particularly to fiduciaries and trust estates are indicated below.

Who Are Fiduciaries. The Revenue Act of 1918 defines the term "fiduciary" to mean a "guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate." In view of the definition of the word "person" used in this definition,2 a corporation, partnership, joint-stock company or insurance company may be a fiduciary under the law. It has been held that a fiduciary for income tax purposes is one who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest, or receives and controls the income of another, as in the case of receivers or minors. It has also been ruled that the term "fiduciary" applies to all persons or

1 Revenue Act of 1918, § 200.

2 In Revenue Act of 1918, § 1, the term "person" is defined to include "partnerships and corporations, as well as individuals." The term "corporation" includes associations, joint-stock companies, and insurance companies. 3 Reg. 45, Art. 1521; T. D. 2090.