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Agents May


83. Under rulings by the Treasury Department, properly authorized agents within the United States may Act for execute on behalf of nonresident alien owners the certi- Non-resident ficates required in the collection of bond interest. Such representatives need to observe carefully any regulations by the Department as to the extent of their duties. In general, however, the Department facilitates the handling of non-resident alien's affairs in this country by properly authorized agents. Fiduciaries must make returns for any non-resident alien beneficiary, stating specifically the items of the gross income and the allowable deductions and credits.

84. The following paragraphs on tax free covenants and deduction at the source contain frequent reference to matters interesting to non-resident aliens. It has not seemed practicable to attempt to segregate the provisions which affect them.

Tax-Free Covenants

85. A large proportion of the outstanding mortgages or other indentures of American corporations contains what is commonly known as the tax-free covenant. It is a provision in substance that the principal and interest of the bonds or other obligations secured thereby shall be paid without deduction for any tax or taxes which the company may be required (and in some cases, permitted) to pay or deduct therefrom under any present or future law of the United States. The weight of published opinion has been that this makes the corporation liable for the normal tax as imposed under the provisions of the 1913 and 1916 Laws, and for whatever reasons, legal or practical, corporations generally paid the normal



tax on presentation of proper certificates. As the law now stands (it has not been substantially changed from last year) it would seem logical to expect corporations in general to continue to pay for the bondholder the amount of tax which the statute declares shall be deducted at the source. What the amount of this tax is, as applied to different classes of taxpayers, is referred to subsequently.

86. Pending the enactment of the Income Tax Law of 1913, there was some discussion of this matter of taxfree covenants in corporate mortgages. The view prevailed in some quarters that corporations should be prohibited by law from making any new agreements of this sort. As then passed, the Law contained the provision of somewhat uncertain scope that "no contract entered into after this Act takes effect (shall) be valid in regard to any Federal income tax upon a person liable to such payment." There was some diversity of opinion as to whether the above quoted provision of the 1913 Law prevented corporations from including the tax-free covenant in any new mortgage or other indenture executed by them. As a consequence it has not been unusual for corporations, since the enactment of that law, to agree to pay the income tax subject to deduction at the source as and to the extent that they might lawfully do so.

87. The 1916 Law repealed the old statute, including the above quoted provision, and contained no prohibition against the inclusion of any tax-free covenant in corporate mortgages. That is the situation under the present law.

Deduction at the Source


at the

88. The system of "deduction at the source" has been one of the fundamentals of this Government's income tax "machinery" since the enactment of the 1913 law. Source" The system served a dual purpose. First, it collected the normal or basic tax levied against certain income; and secondly, it supplied information desired by the Government.

at the Source

89. With the enactment of the 1917 War Revenue Information Law, this system was substantially modified. Deduction at the source continued to apply in certain cases, but in large part was abolished. On the other hand, an elaborate system of information at the course was inaugurated. This supplies the Government with all of the information it received under the old "deduction at the source" plan, and much more. We thus now have the dual system of "deduction at the source" (which also supplies the essential information) and "information at the source." This system applies differently to different classes of taxpayers as is set forth in the following paragraphs.

the Source Under


90. In so far as citizens or residents of the United Deduction at States are concerned, deduction at the source applies only in the case of interest on obligations containing Tax-free the "tax-free" covenant; in such case the tax deducted is two per cent. The balance of the tax due on such income is paid by personal return, in the customary way, to the Collector of Internal Revenue. As to the "taxfree" covenant obligations, the statute provides that deduction at the source shall apply in any case in which bonds, mortgages or similar corporate obligations con

Deduction at the


as to



Owner of

Known to

tain 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 provisions above recited, which were originally included in 1917 and are now continued in substantially the same form, would seem to be a recognition by Congress of the existence of the much-used "tax-free" cov


91. In the case of a non-resident alien individual, deduction at the source applies to all income arising within the United States, except only dividends of domestic corporations. The amount of tax deducted is eight per cent. except in the case of interest on "tax-free" covenant bonds and similar obligations, the tax deducted at the source is two per cent. as in the case of individual citizens or residents of the United States.

92. For the first time there is included in the Statute, in connection with the general non-resident alien provisions, a stipulation that the Commissioner may authorize the full eight per cent. tax of 1919 to be deducted from the interest upon any securities "the owners of which are not known to the withholding agent." In respect to the provisions requiring deduction of two per cent. from interest on tax-free covenant securities received by all classes of individuals and partnerships, the law contains the further new provision that the Commissioner may authorize such two per cent. tax to be withheld if the owners of such se

curities are not known to the withholding agent. These provisions are unusual, and it would seem advisable for paying agents to proceeded cautiously until official Treasury rulings are received regarding them.

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93. Deduction at the source applies to non-resident alien partnerships apparently only as to interest from "tax-free" covenant securities; the amount is two per cent. The tax is deducted at the source in the case of foreign corporations not engaged in business or trade within the United States and not having any office or place of business in this country. The tax so deducted is two per cent. in the case of interest on "tax-free" covenant securities, and ten per cent. on all other income arising within the United States.

94. Deduction at the source does not apply to any income paid domestic corporations.

95. In respect to obligations containing the "tax-free" covenant, it seems that the system of deduction at the source will apply even though the corporation should decline to recognize its covenant to pay the tax. In such a case, apparently, the paying agent would be required to withhold the tax from the interest paid the bondholder. Whatever recourse the bondholder would have would seem to be against the debtor corporation which had declined to recognize its covenant.

Return of Withholding

96. Every individual, corporation or partnership required to deduct and withhold any tax, must make returns thereof on or before March 1, of this year and pay Agent the tax to the proper officials on or before June 15th. Every such individual, corporation or partnership, is liable for such tax, but is indemnified against any de•ment made

mands or claims for the amount

of any paym

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