Rev. Rul. 69-41

Advice has been requested whether a corporation is required, under the provisions of section 1441 of the Internal Revenue Code of 1954, to withhold Federal income tax from dividend payments made under the circumstances described below.

A number of individuals, the majority of them nonresident aliens, organized and became shareholders of a domestic corporation, hereinafter referred to as the "operating company." Subsequently a second domestic corporation, hereinafter referred to as the "securities corporation," was organized by substantially the same shareholders. Any shareholder of the operating company who wished to do so was entitled to exchange his shares in that company for numbered bearer certificates issued by the securities corporation. Any shareholder of the operating company who exchanged his shares for bearer certificates or any purchaser of bearer certificates was entitled to exchange them for an equal number of registered shares of the operating company. These bearer certificates had coupons attached which were designated by the same number as the certificate to which they were attached, as well as by a sequence number.

As a result of exchanges of the operating company shares for the securities corporation bearer certificates, the securities corporation holds, registered in its name, the major portion of the shares of the operating company, and the majority of the former shareholders of the operating company hold bearer certificates issued by the securities corporation. The purpose of the described arrangement is to make it possible to trade in shares of the operating company on foreign exchanges that do not permit trading in registered shares.

When the operating company pays a dividend, the securities corporation immediately has notice inserted in financial publications that a specific sequentially numbered coupon from its bearer certificates can be presented for payment. Any holder of a coupon (whether attached or detached) of that sequential number who presents it to the securities corporation or one of its paying agents in this country or abroad is then entitled to claim his share of the dividend which the operating company has paid.

The question asked is whether it is necessary for the securities corporation to withhold Federal income tax from these dividends paid by the securities corporation or its agents to holders of detached coupons who present them for payment.

Payments by the securities corporation to holders of detached dividend coupons, under the circumstances described, are payments of dividends, irrespective of whether the payees are also holders of bearer certificates or are purchasers of the detached coupons.

Subsection (a) of section 1441 of the Code provides, with certain exceptions not relevant here, that all persons having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes gross income from sources within the United States), of any nonresident alien individual or of any foreign partnership shall deduct and withhold from such items a tax equal to 30 percent thereof. Subsection (b) of section 1441 of the Code lists dividends among the items of income referred to in subsection (a). Under section 1442 of the Code, withholding is required in like manner from dividends paid to a foreign corporation.

The application of section 1441 of the Code to dividends paid to a shareholder whose status is not definite is set forth in section 1.1441-3(b)(3) of the Income Tax Regulations. Under its provisions, when a payer corporation or any other person, including a nominee, having the control, receipt, custody, disposal, or payment of dividends has no definite knowledge of the status of a shareholder, the tax shall be withheld under section 1.1441-1 of the regulations if the shareholder's address is outside the United States. If a shareholder changes his address from a place outside the United States to a place within the United States, the tax shall be withheld on dividends unless (1) proof is furnished showing that, in the case of an individual, he is a citizen or resident of the United States or, in the case of a partnership or corporation, it is a domestic partnership or corporation, or (2) the withholding agent is otherwise satisfied that the shareholder is not a person who is subject to withholding under section 1.1441-1 of the regulations.

The general provisions for claiming to be a person not subject to withholding under section 1.1441-1 of the regulations are found in section 1.1441-5 of the regulations. Section 1.1441-5(a) of the regulations provides that an individual's written statement that he is a citizen or resident of the United States may be relied upon by the payer of the income as proof that such individual is a citizen or resident of the United States. Section 1.1441-5(b) of the regulations contains a like provision regarding statements by partnerships and corporations that they are domestic organizations.

When a detached dividend coupon is presented for payment, inasmuch as an individual or other person presenting a detached bearer coupon to the securities corporation or its paying agents may or may not be the holder of the bearer certificate, insofar as the securities corporation is concerned the status of the shareholder to whom or on whose behalf the dividend is being paid is not definite, and section 1.1441-3(b)(3) of the regulations is applicable, regardless of the status of the person presenting the coupon for payment. Under that section it is incumbent upon the securities corporation or its paying agent to refer to the records of the securities corporation to determine the address of the holder of the bearer certificate that corresponds by number to the coupon presented for payment. If the latest address of record of the shareholder is a foreign address, or if the shareholder's address has changed from a foreign address to a United States address, the securities corporation or its paying agent is required to withhold Federal income tax from the payment at the appropriate rate unless the current shareholder furnishes a written statement that he is a citizen or resident of the United States (or a domestic partnership or corporation), or unless the corporation is otherwise satisfied that the shareholder is not a person who is subject to withholding under section 1.1441-1 of the regulations.