united-states international tax-law
Do ACAT transfers of stock positions between brokers clarify as gross amount of US source income paid or credited to account?
<p>This will probably be a bit tricky.</p>
<p>Let's say a non-US person holds 100 US stock ETFs in US Broker A.</p>
<p>Then does ACAT transfer of those 100 US stock ETFs to US Broker B.</p>
<p>Then doesn't do anything else (no selling or anything)</p>
<p><strong>Question:</strong></p>
<p>Are the stock positions in US Broker B (if they aren't sold, just held) seen as:
the gross amount of other U.S. source income paid or credited to the account, to the extent subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code. ?</p>
<p>The Revenue Code articles in question:</p>
<p><a href="https://irc.bloombergtax.com/public/uscode/toc/irc/subtitle-f/chapter-61" rel="nofollow noreferrer">https://irc.bloombergtax.com/public/uscode/toc/irc/subtitle-f/chapter-61</a></p>
<p><a href="https://irc.bloombergtax.com/public/uscode/toc/irc/subtitle-a/chapter-3" rel="nofollow noreferrer">https://irc.bloombergtax.com/public/uscode/toc/irc/subtitle-a/chapter-3</a></p>
<p>All I am looking is for a simple yes or no if the mere act of transferring the stock positions counts as &quot;U.S. source income paid or credited to&quot; within scope of those articles.</p>

<p><strong>Terminology</strong></p>
<p>First, I will clarify some terminology in the question.</p>
<blockquote>
<p>What Is the Automated Customer Account Transfer Service (ACATS)?</p>
<p>The Automated Customer Account Transfer Service (ACATS) is a system
that facilitates the transfer of securities from one trading account
to another at a different brokerage firm or bank. The National
Securities Clearing Corporation (NSCC) developed the ACATS system,
replacing the previous manual asset transfer system with this fully
automated and standardized one.</p>
</blockquote>
<p>(<a href="https://www.investopedia.com/terms/a/acat.asp" rel="nofollow noreferrer">Source</a>)</p>
<p>An &quot;ETF&quot; is an exchange traded fund, in which an entity owns a portfolio of publicly held securities (which is publicly disclosed to investors) and trading by members of the public on a securities exchange takes place not in the underlying securities owned by the ETF, but in shares of the ETF entity itself.</p>
<p><strong>Answer</strong></p>
<p>Now, onto the question:</p>
<blockquote>
<p>All I am looking is for a simple yes or no if the mere act of
transferring the stock positions counts as &quot;U.S. source income paid or
credited to&quot; within scope of those articles.</p>
</blockquote>
<p>The answer is &quot;no&quot;, this is not income.</p>
<p><strong>Analysis</strong></p>
<p>This is because the securities are not sold and it is not a &quot;disposition&quot; of property. 26 U.S.C. §§ 904(f)(3) and 1001. The shares are merely being transferred &quot;in kind&quot; between custodians of these securities without a change in ownership. This is the intangible property equivalent of moving your jewelry from one bank's safe deposit box to a different bank's safe deposit box.</p>
<p>In addition, there is also an express exemption from income for a transfer of stock of a corporation for stock of the same corporation. 26 U.S.C. § 1036(a).</p>
<p>More generally, a transfer that is economically equivalent to an &quot;in kind&quot; transfer of fungible securities is tax free. 26 U.S.C. § 1058.</p>
<p>This is true even if U.S. Broker B doesn't end up controlling precisely the same security that U.S. Broker A held. For example, if U.S. Broker A had 100 shares represented by certificate number 1, and U.S. Broker B ended up with 100 shares of the same class represented by certificate number 2, the transaction would still not be taxable.</p>
<p>However, if the securities were transferred &quot;in kind&quot; from US Broker A for the benefit of Carl to US Broker B for the benefit of Sam, with whom he traded other securities owned by Sam that were transferred to US Broker A for the benefit of Carl from US Broker B for the benefit of Sam, that would be a taxable barter exchange to both Carl and to Sam, since a barter is a form of taxable &quot;disposition&quot; of stock.</p>
<p>26 U.S.C. § 1441, which is the pertinent provision of Chapter 3, does not apply, because it does not come within the scope of that section set forth in 26 U.S.C. § 1441(a) which states (emphasis added):</p>
<blockquote>
<p>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) (<strong>to the extent that any of such items constitutes
gross income from sources within the United States</strong>), of any
nonresident alien individual or of any foreign partnership shall
(except as otherwise provided in regulations prescribed by the
Secretary under section 874) deduct and withhold from such items a tax
equal to 30 percent thereof, except that in the case of any item of
income specified in the second sentence of subsection (b), the tax
shall be equal to 14 percent of such item.</p>
</blockquote>
<p>Thus, since this transaction does not give rise to gross income under U.S. income tax laws, it is not subject to withholding pursuant to 26 U.S.C. § 1441.</p>
<p>I'm honestly not sure whether this transaction would generate a requirement that either broker issue an information return of some kind under Chapter 61 to the owner of the shares. But even if it did, it would not be an information return that would indicate that there was any income generated or that there was a taxable realization of proceeds or credits of any kind.</p>
