The withholding of the tax by the payer of the income has long been an important feature of the British income tax law, and this plan was incorporated in the first American law in 1913 and continued in the law of 1916. In practice, however, it proved to be unsuited to conditions in the United States and aroused much opposition. In the revision of the law in 1917 a system of "information at the source" was substituted, except as to non-resident aliens and certain corporation bond interest. This system, which is continued in all the Revenue Acts since 1917, requires returns of information concerning certain payments made by individuals, part nerships, and corporations, with the purpose of enabling the government to see that the recipients of some classes of taxable income report and pay taxes thereon. All persons making such payments should become familiar with the requirements of the law, as penalties are provided for noncompliance. For example, all payments to individuals for salaries, interest or rent amounting to $1,000 or more must be reported on the appropriate forms; and the farmer who pays a foreman $90 a month should be as careful to observe the law as a corporation which pays its president a salary of $9,000 a month. Returns of all payments of $1,000 or more, of every nature, would result in the submission of an immense amount of valueless material. The law therefore gives the Commissioner of Internal Revenue considerable discretion as to the character and form of the information which may be demanded, and the regulations on this subject are full and precise. Classification of Information Returns Returns of information may be divided for convenience of comment into the following groups: 1. Returns by corporations of dividends paid to stockholders; 4. Ownership certificates, required in the collection of interest This chapter deals with the first four of these classes of returns. Withholding returns are discussed in Chapter XVI. Returns by Corporations of Dividends Paid to Stockholders LAW. Section 254. Every corporation subject to the tax imposed by this title 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 shareholder, 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 corporation shall render a return on Form 1097 of its payments of dividends and distributions to shareholders for such period as may be specified, stating the name and address of each shareholder, 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. Dividends on the stock of domestic corporations or resident foreign corporations are prima facie the income of the record owner of the stock. The record owner will be liable for any tax based thereon, unless a disclosure to the Commissioner of the actual ownership is made on Form 1087. Returns of information (Form 1097) and ownership certificates (Form 1087) should be forwarded to the Commissioner of Internal Revenue, Sorting Section, Washington, D. C. (Art. 1060.) During 1924 a call was issued for the first time for such returns on form 1097, covering the calendar year 1923. The following were not required to be reported: payments to a stockholder of less than $500, stock dividends and liquidating dividends except to the extent that they were paid out of earnings accumulated since February 28, 1913.1 Corporations which paid no dividends were not required to file a return setting forth that fact.2 Such returns are now required to be rendered annually as prescribed in the following ruling: RULING. every domestic corporation, not specifically exempt from taxation, making payment of dividends and distributions (other than liquidating dividends and stock dividends, or other nontaxable distributions) to any stockholder who is an individual, fiduciary, or partnership, amounting to $500 or more during the calendar year, shall render an information return on Form 1C97 for the calendar year 1924 and each calendar year thereafter, stating the names and addresses of the shareholders to whom such payments were made and the amount paid to each. Similar returns of information shall also be rendered by resident foreign corporations to the extent that such dividend payments and distributions are made to citizens or residents of the United States, and domestic partnerships or fiduciaries. These returns shall be filed with the Commissioner of Internal Revenue not later than March 15 of the succeeding year. (III-45-1869; T. D. 3645.) Returns by Brokers LAW. Section 255. Every person 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 person has transacted any business, with such details as to the profits, losses, or other informa 1C. B. III-1, page 369; Mim. 3187. Letter from the Commissioner of Internal Revenue to Messrs. Seidman & Seidman, 1924. tion 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. REGULATION. When directed by the Commissioner, either specially or by general regulation, every person doing business as a broker shall render a return on Form 1100, showing the names and addresses of customers to whom payments were made or for whom business was transacted during the calendar year or other specified period next preceding, and giving the other information called for by the form. (Art. 1065.) The Commissioner has not yet required such a return by all brokers. Returns of Fixed or. Determinable Income The law requires returns of information only when the income is fixed or determinable. It is not necessary that the income be annual or periodical, as stipulated in the requirement for withholding. REGULATION. (a) Income is fixed when it is to be paid in amounts definitely predetermined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. . . . . (Art. 362.) It has been held that where a lease provides for a payment of rental in crop shares, the landlord and tenant sharing proportionately the expenses and dividing the proceeds, such payments are not fixed and determinable and need not be reported.3 Payments to lawyers and doctors and other payments for professional services need not be reported. Commission on account of a single transaction has been held not to be fixed or determinable annual income. Income credited but not paid is subject to the provisions of article 362.6 It has been held that cash deposits by a tenant to guarantee the carrying out of the provisions of his lease are not necessarily income for the year in which received, but should be reported as income for the years in which they are applicable as rent." RULINGS. A receiver in partition proceedings is required to file returns of information covering payments of commissions, attorney's 3 Treasury Bulletin “B," page 38; also C. B. 1, page 261; O. D. 115. 4 Art. 1073. C. B. 4, page 232; O. D. 907. C. B. 2, page 249; O. D. 428. C. B. I-1, page 324; I. T. 1291. fees, and other fixed or determinable income of $1,000 or more made to any person during the taxable year. (C. B. 5, page 252; O. D. 1149.) The income derived from the sale in the United States of securities by a nonresident alien individual is not fixed or determinable annual or periodical income. (C. B. II-1, page 140; I. T. 1679.) Persons required to file returns of fixed or determinable income. LAW. Section 256. All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, and employers, making payment to another person, of interest, rent, Description of payments. salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments described in section 254 and 255), [The exceptions are dividends and transactions by brokers (see page 410) but under T. D. 3645 previously quoted, dividends must be reported]. The amount to be reported. of $1,000 or more in any taxable year, Employees of United States government must make re turn."— or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, Form of returns.— shall render a true and accurate return to the Commissioner, under such regulations and in such form and manner and to such extent as may be prescribed by him with the approval of the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment. The regulation dealing with this matter follows: 10 REGULATION. All persons making payment to another person of fixed or determinable income of $1,000 or more in any calendar year must render a return thereof to the Commissioner for such year on or 8 Payments to corporations need not be reported (Art. 1073). No returns of information are required for payments made by the United States government to sailors, soldiers, and civilian employees. (Art. 1073.) 10 These returns are required for actual amounts paid or credited and made available during the calendar year equal to or exceeding $1,000. (C. B. 2, page 249; O. D. 428.) |