Rev. Rul. 72-87

Advice has been requested whether a distribution made by a domestic corporation in the ordinary course of its business to a nonresident alien individual with respect to its stock, which distribution may be treated in whole or in part as gain from the sale or exchange of property, under section 301(c)(3)(A) of the Internal Revenue Code of 1954, is subject to withholding of tax at the source under section 1441 of the Code.

During a taxable year a domestic corporation, in the ordinary course of its business, contemplates making a cash distribution to A, a nonresident alien individual, with respect to its stock. At the time of the distribution the corporation may not know how much is out of earnings and profits and how much is from other than earnings and profits.

The United States is not a party to any tax convention with the country in which A is a citizen.

Section 301(c)(3)(A) of the Code provides, in general, that that portion of a distribution of property made by a corporation to a shareholder with respect to its stock which is not a dividend shall be treated as gain from the sale or exchange of property to the extent that it exceeds the adjusted basis of the stock.

Section 1441(a) of the Code provides, in pertinent part, that all persons having the control, receipt, custody, disposal, or payment of any of the items of income specified in section 1441(b) of the Code (to the extent that any of such item constitutes gross income from sources within the United States), of any nonresident alien individual shall deduct and withhold from such items a tax equal to 30 percent thereof. The items of income referred to in section 1441(b) of the Code include dividends.

Section 1.1441-2(a)(3) of the Income Tax Regulations provides that income derived from the sale in the United States of property, whether real or personal, is not fixed or determinable annual or periodical income.

Section 1.1441-3(b) of the regulations provides, with two exceptions, that tax shall be withheld at the source under section 1.1441-1 of the regulations on the gross amount of any distribution made by a corporation. The exception from the withholding requirement pertinent in the instant case is section 1.1441-3(b)(1)(ii) of the regulations, relating to a distribution which is treated as a distribution in part or full payment in exchange for stock.

Revenue Ruling 69-244, C.B. 1969-1, 215, holds that dividends that are designated by a regulated investment company as capital gain dividends under section 852(b)(3)(C) of the Code do not constitute fixed or determinable annual or periodical income within the meaning of section 1441 of the Code and such dividends are not subject to withholding of tax at the source.

A distribution from a corporation that may or may not be treated by the shareholders as gain from the sale or exchange of property is distinguishable from income derived from the actual sale of property and, therefore, section 1.1441-2(a)(3) of the regulations, relating to characterization of income derived from the sale of property as not fixed or determinable annual or periodical income, is not applicable in the instant case. Revenue Ruling 69-244 does not apply in the instant case since that Revenue Ruling relates to a capital gain dividend that has been so designated and distributed by a regulated investment company.

Section 1.1441-3(b)(1)(ii) of the regulations excepts a distribution which is treated as a distribution in part or full payment in exchange for stock from the withholding of tax under section 1441 of the Code. This exception refers to a distribution in exchange for stock such as a distribution in liquidation of a corporation under section 331(a) of the Code. A distribution under section 301(c)(3)(A) of the Code, even though not out of earnings and profits, is not a distribution treated in part or full payment in exchange for stock within the intendment of section 1.1441-3(b)(1)(ii) of the regulations. The distribution referred to in section 301(c)(3)(A) of the Code is a distribution made by a corporation with respect to its stock in the ordinary course of its business and is not a distribution in liquidation of the corporation.

Accordingly, the distribution to A, if made by the domestic corporation in the ordinary course of its business with respect to its stock is subject to withholding under section 1441 of the Code, even though some or all of such distribution may be treated as gain from the sale or exchange of property under section 301(c)(3)(A) of the Code. If it is subsequently determined that A is entitled to a refund of some or all of the income tax withheld under section 1441 of the Code, such refund will be made upon A's filing of a claim for refund, together with appropriate supporting evidence, with the Director of International Operations, Internal Revenue Service, Washington, D.C. 20225.

Revenue Ruling 69-244 is distinguished.