Rev. Rul. 57-245

Advice has been requested whether a domestic branch of a foreign bank doing business within the United States is required to withhold tax under section 1441 of the Internal Revenue Code of 1954 from dividends received by it for the benefit of a nonresident alien estate.

The bank holds shares of stock of United States corporations in safekeeping and as collateral for the account of an individual as the executor of the will of a decedent. The decedent was not a citizen of the United States and, at the time of his death, was domiciled in a foreign country. His will was admitted to original probate in this country because over 90 percent of his property was physically located in the United States at the date of his death and he owned few, if any, assets in the foreign country. The executor is a resident of the United States.

Section 1441(a) of the Code, relating to the withholding of tax on nonresident aliens, provides as follows:

(a) GENERAL RULE.-Except as otherwise provided in subsection (c), all persons, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States) 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 partnership not engaged in trade or business within the United States and composed in whole or in part of nonresident aliens, shall (except in the cases provided for in section 1451 and except as otherwise provided in regulations prescribed by the Secretary or his delegate under section 874) deduct and withhold from such items a tax equal to 30 percent thereof.

Section 1 of the Code imposes a tax on the taxable income of `every individual' but section 5(a) refers to sections 871 and 1441 for the rates of tax and withholding on nonresident aliens. Because an estate is a separate taxable entity, the question arises whether the administration within the United States of an estate subject to domiciliary administration in a foreign country creates a new taxable entity within the United States, the income of which would not be subject to the withholding of tax under section 1441 of the Code.

The ancillary administration in the United States of the estate of a nonresident alien decedent which is subject to domiciliary administration in a foreign country does not change the status of the estate for Federal income tax purposes from that of a nonresident alien entity. In the instant case, the probate of the decedent's will in a court within the United States is an ancillary proceeding in the technical sense and, thus, the estate is a nonresident alien entity irrespective of the fact that more than 90 percent of the decedent's property was physically located in the United States at the date of his death. It was only through the exercise of discretion by a United States' court that the decedent's will was admitted to original probate in the United States. This was done in order to avoid the expense and inconvenience of probate at the decedent's domicile followed by ancillary proceedings in the United States. However, the procedure followed in the administration of this estate, while pertinent to the economy thereof, is not in point in connection with its tax-paying capacity. The Internal Revenue Service holds that the status of an executor as a resident or a nonresident alien is not controlling in determining the tax status of an estate as a resident or a nonresident entity. See I.T. 1885, C.B. II-2, 164 (1923).

In view of the foregoing, the decedent's estate is classified as a nonresident entity and dividends derived by such estate are subject to the withholding of United States income tax under the provisions of section 1441 of the Code.