Many corporations for which the bank acts as paying agent appoint the bank to make returns of the income tax to the gov ernment. Some of them deposit with the bank additional funds to cover the normal tax on the interest paid on their bonds. The other companies who pay the tax on their bonds agree to have the bank charge their account for any tax which it is required to remit to the government. When the company elects to make its own returns, the bank demands a letter of indemnity guarantee ing it against any claim which the government may make against the bank as paying agent.
Method of Handling the Coupons To facilitate the work of paying coupons they are divided into classes according to distinctions made necessary by the regu lations of the United States Treasury relating to the federal in come tax. Coupons on bonds of the United States government, state and city governments, and on subdivisions thereof, are free from the normal tax, but the bonds of domestic and foreign cor porations and foreign countries are subject to that tax. Some corporate bonds contain the tax-free covenant, and some are owned by non-resident alien individuals or foreign corporations.
The Commissioner of Internal Revenue requires owners of bonds to file with the coupons from each issue of bonds (except municipals) a certificate of ownership stating whether or not they are exempt from the normal tax at the source. As an aid to the classification of these certificates by the paying agents, those claiming exemption are printed on yellow paper, those not claim ing exemption on white paper, and those of foreign securities on green paper. The person or corporation first receiving coupons for collection must place his or its name and address, together with the date of collection, on the back of the certificate. The collecting agent is permitted to issue substitute certificates for the originals.
The department employs the following books in its work: the coupon check book, the coupon return book, and the coupon ledger. A card index serves as a ready reference file and contains all needed information about the different issues which the department pays.
When bonds and coupons are presented for payment, they are examined for genuineness, maturity, stop-payments, and calls. They are then counted and the following entries are made in the check book: date, number of check, title of bonds, to whom paid, number of bonds or coupons, net amount paid; and when taxable, the name and address of the owner, and the amount, less the income tax, are included.
The checks are drawn for the net amount, to be paid to each presenter in accordance with these entries.
The coupons are then recounted and canceled. Af ter bank ing hours they are sorted and each kind is entered on a separate list, from which a ticket is made out, debiting the account to be charged and crediting the coupon account against which the checks have been drawn. The amount of the tax withheld dur ing the day is then credited to the federal income tax account.
Entries are first made in the coupon ledger, showing the amount of coupons paid for each account and then in the return book; the total of this book must prove against the amount of checks issued.
At the end of each month the coupon accounts are ruled off and the balances compared with those on the ledger. At this time the certificates of ownership, detached from the coupons of the different corporations which have designated the bank as with holding agent to make return of the tax to the government, are divided into groups preparatory to making the monthly reports required by the United States Internal Revenue Service on or before the twentieth of each month succeeding that during which the coupons are paid. One of these reports covers the payments of interest on bonds and other similar obligations of domestic and resident corporations and foreign corporations having a pay ing agent in the United States, which contain a tax-free covenant clause providing for payment of the normal income tax at the source. The three classes of this type are described in the pre ceding section. This report lists alphabetically the names of the payees, with their addresses and the amount of interest paid to and tax withheld from each. Of these monthly reports an annual summary, giving totals by months and classes of payees, is prepared and on or before March I is, like the monthly re ports, sent to the Collector of Internal Revenue for the district in which the withholding agent is located.
A monthly information return with respect to payments of interest of domestic and resident corporations, foreign corpora tions and countries, and dividends on stock of foreign corporations, is required to be sent to the Commissioner of Internal Revenue at Washington on or before the twentieth of the month succeed ing that for which it is made. This covers payments on which the tax is not withheld and paid at the source. The proper ownership certificates must accompany this monthly report, and an annual return summarizing the monthly reports is required on or before March is of the following year.