## Facts

- Donald J. Blake Marshall, a Canadian citizen and nonresident alien, financed acquisition of a La Jolla, California motel intended for a time-share project.
- After financial problems arose with the original project sponsor, Marshall formed Casa De La Jolla Park, Inc. (a California corporation) to continue marketing the time-share units.
- Marshall became Casa’s sole shareholder, director, and creditor; Casa issued Marshall a promissory note exceeding $1.6 million bearing 28% interest.
- Marshall owed substantial debt to the Royal Bank of Canada, which sought assurance of repayment amid financial distress involving Marshall’s pledged assets.
- Casa directed the project’s collecting/disbursing bank (Bank of California) to remit time-share proceeds directly to Royal Bank, where the remittances were applied against Marshall’s personal indebtedness.
- For 1982 and 1983, Casa did not withhold U.S. tax on the amounts treated by the IRS as U.S.-source interest paid to Marshall through these remittances.
- The IRS determined withholding deficiencies under I.R.C. § 1441 for 1982 ($48,981) and 1983 ($79,236).

## Issues

1. Whether Casa was a “withholding agent” under I.R.C. § 1441(a) required to withhold tax on U.S.-source interest income belonging to its nonresident alien shareholder.
2. If Casa had a withholding duty, whether the interest was excepted from withholding under I.R.C. § 1441(c)(1) as effectively connected with a U.S. trade or business, and whether regulatory conditions were satisfied.

## Decision

- The Tax Court held Casa was a withholding agent under § 1441(a) with responsibility to withhold on Marshall’s interest income.
- The court treated the remittances to Royal Bank as payments of Casa’s interest obligation to Marshall, made by paying Marshall’s creditor at Casa’s direction.
- The court distinguished Tonopah & Tidewater R.R. Co. v. Commissioner, finding Casa’s control over disposition of its funds to satisfy its interest obligation placed it within § 1441(a).
- The court declined to reach the merits of the § 1441(c)(1) effectively connected income exception because Casa failed to meet the requirements of Treas. Reg. § 1.1441-4(a).

## Legal Principles

- A withholding agent under § 1441(a) includes any person with control, receipt, custody, disposal, or payment of U.S.-source FDAP income (including interest) belonging to a nonresident alien.
- Payment of a nonresident alien’s U.S.-source income to a third party (such as the alien’s creditor) at the direction of the obligor may be treated as a payment to the nonresident alien for withholding purposes.
- The § 1441(c)(1) exception for income effectively connected with a U.S. trade or business does not relieve withholding unless the payor receives the required statement or certification under Treas. Reg. § 1.1441-4(a).

## Conclusion

The Tax Court sustained withholding-agent liability because Casa controlled and directed payment of U.S.-source interest owed to its nonresident alien shareholder by remitting funds to his bank creditor, and Casa could not avoid withholding under the effectively connected income exception without satisfying the governing regulatory statement requirements.


Casa De La Jolla Park, Inc. v. Commissioner, 94 T.C. 384 (1990)