Rev. Rul. 70-250

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3535, C.B. 1942-1, 129.

The question presented is whether a change in the rate of tax required to be withheld at the source, pursuant to the provisions of sections 1441 and 1442 of the Internal Revenue Code of 1954, will affect the tax to be withheld under the circumstances described below.

The taxpayer, a domestic corporation, issued dividend checks promptly after the dividends were declared payable. However, not all of the checks were promptly delivered to its foreign shareholders due to the following reasons:

(1) Checks were returned by the post office because of defective or incorrect addresses.

(2) Dividends are payable to shareholders whose funds are presently blocked under an Executive Order of the President of the United States.

(3) The original checks were lost and replacement checks were required to be issued.

As a result of the above delays in the delivery of the dividend checks, some checks were delivered to the shareholders at a time when a new withholding rate was in effect as a result of various treaty changes.

Section 1461 of the Code provides that every person required to deduct and withhold any tax under chapter 3 of the Code on nonresident aliens and foreign corporations is liable for such tax. Section 1.1461-2 of the Income Tax Regulations provides that every withholding agent shall make on or before March 15 an annual return on Form 1042 (U.S. Annual Return of Income Tax to Be Paid at Source), of the tax required to be withheld under chapter 3 of the Code during the preceding calendar year.

It is held that the taxpayer and its dividend disbursing agents were liable for the withholding of tax at the rates in effect on the date the dividend checks were first drawn, irrespective of whether such checks were later returned by the postal authorities because of defective or incorrect address, or held because of blocked funds, or whether a new check is subsequently issued to replace the original which has been lost.

Accordingly, in the instant case, Form 1042, U.S. Annual Return of Income Tax to Be Paid at Source, must be filed for the year in which the dividend checks were originally issued to report the tax that was required to be deducted and withheld at that time under section 1441 and 1442 of the Code.

I.T. 3535 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.