In Rev. Rul. 71-142, the I.R.S. held that a U.S. resident was liable for, and was required to withhold, a 30% tax on the direct or constructive payment of interest to a foreign broker.
Under the facts of the ruling a U.S. resident individual, B, maintained a margin account with a nonresident foreign brokerage firm. Interest attributable to security transactions on margin was charged to B’s account by the foreign broker. Payment of the interest, as well as other charges, was effected by the remittance of amounts to the brokerage firm directly from B or from others for his account.
The interest income of the foreign broker was not effectively connected with the conduct of a trade or business within the United States and was not includible in the gross income of the broker under Code § 871(b)(2) but was taxable to the broker under Code § 871(a)(1)(A).
Code § 1441(a) provides that all persons in whatever capacity acting 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 or foreign corporation shall deduct and withhold from such items a tax equal to 30%. Interest is one of the items enumerated in Code § 1441(b).
Code § 861(a)(1) provides, in effect, that interest on interest-bearing obligations of United States residents shall be treated as income from sources within the United States. See also Treas. Reg. § 1.861-2(a)(1). The interest charged to B’s account was within the ambit of Code § 861(a)(1) and therefore was income from sources within the United States.
The interest income was received by the foreign broker when B made payments directly to the broker, or when the broker credited B’s account with amounts collected by it as agent on behalf of B. B had control over the margin account and the payment of interest thereon to the broker. The obligation to pay interest on the margin account was that of B. The fact that the interest was paid, on occasion, by offset from amounts due B from others was immaterial. In such case the brokerage firm, acting as agent for B, received income and deducted interest on the margin account.
Accordingly, the ruling held that B had the necessary control, receipt, custody, disposal, or payment of the interest to the broker required by Code § 1441(a), whether payment of the interest was made directly or constructively by him, and B was liable as a withholding agent for the taxes at the rate of 30% pursuant to Code § 1441(a).