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the calendar years 1988 and 1989 (non-U.S. pooled investments).
The third type of income, dividends, consists of a dividend paid
by LTD to its shareholders during the calendar years 1985 and
1986.
2. Withholding Tax on Interest
Withholding tax, which is imposed only on gross income items
from sources within the United States, is reported on a calendar
year basis. Sec. 1.1461-2(c), Income Tax Regs. Source rules for
interest, however, are generally applied based upon the obligor’s
taxable year.
We first analyze the issue of who, in LTD’s pooled
investments program, is the obligor of the interest. Petitioners
argue that the obligor in LTD’s pooled investments program are
the U.S. and foreign banks from which LTD purchased the
investments. Petitioners, noting respondent’s concession that
the bank deposit exception to withholding tax applied to the
interest paid on certificates of deposit in the client’s name,
contend that there is no legal basis for distinguishing between
interest paid on certificates of deposit in the client's name and
interest paid on U.S. or foreign investments in LTD's name (the
pooled investments).22 Petitioners argue that all investments
21(...continued)
include the "Special Accounts" expense as an amount on which LTD
is potentially liable for withholding tax.
22
Petitioners do not argue that the interest is exempt from
(continued...)
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