APRIL 23, 1924, 3 COMP. GEN. 789

APRIL 23, 1924, 3 COMP. GEN. 789

REFUNDS OF INCOME TAX ON BONDS CONTAINING A TAX-FREE COVENANT WHERE THE INCOME TAX ON BONDS CONTAINING A TAX-FREE COVENANT IS PAID BY THE ISSUING CORPORATION AT THE REQUEST OF THE BONDHOLDER AND IT IS SUBSEQUENTLY FOUND UPON AUDIT OF THE BONDHOLDER'S INCOME TAX RETURN THAT NO TAX WAS DUE BY HIM ON THE INTEREST RECEIVED, ON SUCH "TAX-FREE" BONDS, REFUND OF THE AMOUNT FOUND BY THE COMMISSIONER OF INTERNAL REVENUE TO HAVE BEEN SO COLLECTED MAY BE MADE, UNDER THE PROVISION OF THE ACT OF MARCH 4, 1923, 42 STAT., 1505, TO THE ISSUING CORPORATION.

COMPTROLLER GENERAL MCCARL TO THE SECRETARY OF THE TREASURY, APRIL 23, 1924:

THERE HAS BEEN RECEIVED YOUR LETTER OF MARCH 18, 1924, REQUESTING A DECISION AS TO LEGALITY OF THE EXISTING PRACTICE OF REFUNDING PAYMENTS OF TAXES MADE BY CORPORATIONS ON SO-CALLED "TAX-FREE" BONDS.

THE QUESTION ARISES FROM THE ISSUING BY CERTAIN CORPORATIONS OF BONDS CONTAINING A COVENANT BY WHICH SUCH CORPORATIONS OBLIGATE THEMSELVES TO PAY TO THE BONDHOLDERS A FIXED AMOUNT OF INTEREST AND IN ADDITION THERETO TO PAY THE INCOME TAX ASSESSED AGAINST THE BONDHOLDERS ON ACCOUNT OF THE RECEIPT OF THE INTEREST ON SUCH BONDS, THE EFFECT OF WHICH IS TO GUARANTEE TO THE HOLDERS A NET INCOME ON THEIR INVESTMENTS AT THE RATE FIXED IN THE BOND. WHILE SUCH BONDS ARE NOT TAX FREE THEY ARE COMMONLY REFERRED TO AS SUCH, AND IN THAT THE OBLIGATION OF THE ISSUING CORPORATION PROTECTS THE HOLDER FROM THE PAYMENT OF TAXES, THEY ARE TO HIM IN THE SAME CATEGORY AS THOSE BONDS SUCH AS STATE AND MUNICIPAL, WHICH BY LAW ARE ACTUALLY TAX- EXEMPT.

IN MAKING RETURNS TO THE COLLECTOR OF INTERNAL REVENUE FOR THE PAYMENT OF INCOME TAX THE HOLDERS OF THESE "TAX-FREE BONDS" ARE REQUIRED TO INCLUDE IN THEIR GROSS INCOME THE AMOUNT RECEIVED AS INTEREST ON SUCH BONDS PLUS THE AMOUNT OF THE INCOME TAX TO BE PAID BY THE OBLIGATING CORPORATION. THEY ARE NOT ALLOWED TO DEDUCT FROM THEIR GROSS INCOME THE AMOUNT OF THE INCOME TAX PAID BY THE CORPORATION IN THEIR BEHALF BUT ARE ENTITLED TO CREDIT SUCH AMOUNT AGAINST THEIR INCOME TAX OTHERWISE DUE.

IT IS UNDERSTOOD THAT WHEN THE INTEREST COUPONS FROM SUCH BONDS ARE PRESENTED FOR PAYMENT THEY ARE REQUIRED TO BE ACCOMPANIED BY "OWNERSHIP CERTIFICATES" WHICH MAY BE EITHER FORM 1000 OR FORM 1001. THE LATTER IS USED WHEN THE HOLDER IS NOT LIABLE FOR INCOME TAX, AND FORM 1000 IS USED WHEN THE BONDHOLDER IS LIABLE, OR BELIEVES HIMSELF TO BE LIABLE FOR INCOME TAX ON ACCOUNT OF THE RECEIPT OF THE INTEREST EVIDENCE BY SUCH COUPONS. IN EITHER CASE PAYMENT IS MADE TO THE BONDHOLDER OF THE AMOUNT OF INTEREST STIPULATED IN HIS BOND. THE CORPORATION IS REQUIRED TO MAKE RETURN TO THE COLLECTOR OF INTERNAL REVENUE OF THE TAXES FOR WHICH IT IS LIABLE ON ACCOUNT OF THE TAX-FREE COVENANTS IN ITS BONDS SEPARATE AND DISTINCT FROM THE REPORT OF ITS OWN EARNINGS AND TO TRANSMIT WITH SUCH RETURN THE OWNERSHIP CERTIFICATES WHICH ACCOMPLISH THE COUPONS WHEN PRESENTED FOR PAYMENT. PAYMENT OF TAXES IS REQUIRED TO BE MADE AT THE RATE OF 2 PERCENT ON THOSE COUPONS WHICH WERE ACCOMPANIED BY FORM 1000, REQUESTING THE CORPORATION TO MAKE PAYMENT OF THE TAXES ON SUCH INTEREST.

THE QUESTION PRESENTED BY YOU ARISES WHERE THE BONDHOLDERS FILE OWNERSHIP CERTIFICATES. "FORM 1000," REQUESTING THAT THE CORPORATION PAY INCOME TAX FOR THE INTEREST PAID ON THE BONDS AND AFTER PAYMENT IS MADE IT IS FOUND BY THE AUDIT OF THE BONDHOLDER'S TAX RETURNS THAT THE INCOME RECEIVED FROM THE INVESTMENT IN SUCH BONDS WAS NOT SUBJECT TO TAXATION EITHER AS A WHOLE OR IN PART. THE FINDINGS OF THE COMMISSIONER OF INTERNAL REVENUE AS TO THE AMOUNT OF AN OVERASSESSMENT OR ERRONEOUS COLLECTION OF A TAX, AND AS TO WHEN AND FROM WHOM SUCH ERRONEOUS COLLECTION WAS MADE, MAY BE ACCEPTED BY THIS OFFICE, BUT THE QUESTION AS TO WHO IS ENTITLED TO RECEIVE REFUND OF THE AMOUNT IS FINALLY FOR DETERMINATION BY THE GENERAL ACCOUNTING OFFICE, AND IT IS UNDERSTOOD THE MATTER IS SUBMITTED BY YOU TO THIS OFFICE FOR SUCH DETERMINATION.

THE WITHHOLDING AND PAYMENT AT THE SOURCE OF THE INCOME TAX ON THE INTEREST PAID ON BONDS IS PROVIDED FOR IN SECTIONS 221 AND 237 OF THE REVENUE ACT OF 1921, AND THE REFUND OF ERRONEOUS PAYMENTS MADE THEREUNDER IS GOVERNED BY SECTIONS 252, AS AMENDED BY THE ACT OF MARCH 4, 1923, 42 STAT., 1505, WHICH IS AS FOLLOWS:

WHERE A TAX HAS BEEN PAID UNDER THE PROVISIONS OF SECTION 221 OR 237 IN EXCESS OF THAT PROPERLY DUE ANY REFUND OR CREDIT MADE UNDER THE PROVISIONS OF THIS SECTION OR SECTION 3228 OF THE REVISED STATUTES SHALL BE MADE TO THE WITHHOLDING AGENT UNLESS THE AMOUNT OF SUCH TAX WAS ACTUALLY WITHHELD BY THE WITHHOLDING AGENT.

WHETHER EVENTUALLY THERE IS ANY CLAIM OF THE INDIVIDUAL TO THE MONEYS PAID BY THE CORPORATION AS HAVING BEEN PAID ON ITS ACCOUNT IN VIEW OF THE STIPULATIONS BY THE CORPORATION IN CONNECTION WITH THE BONDS IS A QUESTION BETWEEN THE CORPORATION AND THE TAXPAYER AND IS NOT FOR DETERMINATION HERE. PRIMA FACIE THE MONEYS APPEAR AS PAID BY THE CORPORATION, AND ALTHOUGH PERHAPS IN RELIEF OF PAYMENT OF TAXES BY THE TAXPAYER, YET IF IT BE DETERMINED THAT SUCH TAXES ARE NOT PAYABLE AND THEREFORE THE AMOUNT IS TO BE REFUNDED, THE REFUND MUST BE TO THE ONE WHO MADE THE PAYMENT UNLESS IT CAN BE SHOWN THE MONEYS WERE THE MONEYS OF ANOTHER. SUCH AGENCY OF THE CORPORATION AS MAY APPEAR IS IN CONNECTION WITH THE STIPULATION RELATING TO THE BONDS AND IS NOT NECESSARILY AN UNDERTAKING BY THE CORPORATION THAT SUCH MONEYS AS REPRESENT THE TAXES WOULD BE PAYABLE TO THE BONDHOLDER (TAXPAYER) OTHERWISE THAN ON TAX ACCOUNT.

THE CERTIFICATES OF OVERASSESSMENT UPON WHICH THE REFUNDS OR CREDITS ARE BASED IN SUCH CASES SHOULD BE ACCOMPANIED BY AN ADMINISTRATIVE CERTIFICATION TO THE EFFECT THAT SAID REFUNDS REPRESENT TAXES PAID BY THE CORPORATION UNDER TAX-FREE COVENANTS AND THAT THEY ARE BEING MADE TO THE PAYING CORPORATION UNDER THE PROVISIONS OF THE ACT OF MARCH 4, 1923, SUPRA. ..END :