[Federal Register Volume 64, Number 98 (Friday, May 21, 1999)]
[Proposed Rules]
[Pages 27730-27733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12662]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-105312-98]
RIN 1545-AW72
Reporting of Gross Proceeds Payments to Attorneys
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
reporting of payments of gross proceeds to attorneys. The regulations
reflect changes to the law made by the Taxpayer Relief Act of 1997. The
regulations will affect attorneys who receive payments of gross
proceeds on behalf of their clients, and certain payors (defendants in
lawsuits and their insurance companies and agents) that in the course
of their trades or businesses make payments to these attorneys. This
document also provides notice of a public hearing on these proposed
regulations.
DATES: Written and electronic comments must be received by August 19,
1999. Outlines of topics to be discussed at the public hearing
scheduled for September 22, 1999, at 10 a.m., must be received by
September 1, 1999.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-105312-98), Room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
105312-98), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at http://www.irs.ustreas.gov/tax__regs/
regslist.html. The public hearing will be held in the IRS Auditorium,
7th Floor, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
A. Katharine Jacob Kiss at (202) 622-4920; concerning submissions of
comments, the hearing, and/or to be placed on the building access list
to attend the hearing, Michael Slaughter at (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of information should be received by
July 20, 1999. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
[[Page 27731]]
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in this proposed regulation is in
Sec. 1.6045-5(a). This information is required by the IRS to implement
section 1021 of the Taxpayer Relief Act of 1997. This information will
be used to verify compliance with section 6045 and to determine that
the taxable amount of these payments has been computed correctly. The
collection of information is mandatory. The likely respondents are
businesses and other for profit institutions.
Respondent taxpayers (payors) provide the information by completing
one Form 1099-MISC, Miscellaneous Income, for each attorney who has
received one or more payments of gross proceeds from the payor during
the calendar year. The burden for this requirement is reflected in the
burden estimate for Form 1099-MISC. The estimated burden of information
collection for the 1999 Form 1099-MISC is 14 minutes per return.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number assigned by the Office
of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR Part 1) under section 6045 of the Internal Revenue
Code. A new reporting requirement, section 6045(f), was added to the
Code by section 1021 of the Taxpayer Relief Act of 1997 (1997 Act)
(Pub. L. 105-34, 111 Stat. 922). Section 6045(f) provides for
information reporting for payments of gross proceeds made in the course
of a trade or business to attorneys in connection with legal services
(whether or not the services are performed for the payor). No
information return is required under section 6045(f) for the portion of
any payment that is required to be reported under section 6041(a) (or
that would be required except for the $600 limitation) or under section
6051 (employee compensation). The 1997 Act also provides that the
general exception for reporting to corporations in Sec. 1.6041-3(c)
does not apply to corporations providing legal services.
Explanation of Provisions
The proposed regulations take into account comments made by, among
others, insurance companies and other payors, the American Bar
Association, and the members of the Commissioner's Information
Reporting Program Advisory Committee (IRPAC). The operation of section
6045(f) was the subject of a paper presented at the IRPAC meeting held
in Washington, DC., on October 28 and 29, 1997, and comments were also
received at that meeting.
The proposed regulations clarify that there is no threshold amount
below which reporting under section 6045(f) is not required.
Additionally, payments made to corporations engaged in providing legal
services are reportable.
Several commentators asked whether reporting under section 6045(f)
relieves the payor of all other reporting obligations by shifting the
reporting obligations to the attorney. The proposed regulations do not
adopt this approach. Section 6045 imposes an additional reporting
requirement on payors and does not relieve them of any other pre-
existing or concurrently existing reporting requirement. The exception
in section 6045(f)(2)(B) is limited to situations in which the amount
of the attorney fee is already reportable to the attorney as income or
wages. The legislative history clearly supports this determination.
See, H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 546 (1997) and
Joint Committee on Taxation Staff, General Explanation of Tax
Legislation Enacted in 1997, 105th Cong., 1st Sess. 214-15 (1997).
Several commentators stated that in certain situations, a gross
proceeds payment is delivered to the attorney, but the attorney is not
listed as a payee on the check. In some instances this results from the
operation of local law; in other instances, attorneys request that
their names not appear on the check. The proposed regulations provide
that when a payment is delivered to an attorney, even if that attorney
is not listed as a payee, the payor is required to file an information
return under section 6045(f).
Wherever possible, however, the proposed regulations provide
exceptions to the reporting requirement. For example, the proposed
regulations provide for a rule of administrative convenience if
multiple attorneys are listed as payees. Generally, in those
situations, the payor is only required to report on the attorney who
receives the payment. The IRS and Treasury Department continue to
welcome comments on whether additional exceptions to the reporting
requirement are appropriate.
Many commentators suggested that Form 1099-B is not the best form
for reporting under section 6045(f). The proposed regulations provide
that the information return is made on Form 1099-MISC.
Several commentators asked the IRS to define legal services. Some
commentators requested a narrow definition that would exclude any
services that did not require that the provider be an attorney, e.g.,
property or financial management services. However, those commentators
also stated that the attorney would most likely be collecting a fee for
rendering those services. The IRS and Treasury Department have proposed
a broad definition of legal services that includes any services
performed by or under the supervision of an attorney.
One commentator asked whether the attorney's TIN must be certified.
The proposed regulations provide that, consistent with the general rule
under sections 6045 and 6041, the attorney's TIN need not be certified.
The proposed regulations clarify that payments of gross proceeds
are subject to backup withholding if the attorney does not provide a
TIN. This is consistent with the legislative history that provides:
Third, attorneys are required to promptly supply their TINS to
persons required to file these information reports, pursuant to
section 6109. Failure to do so could result in the attorney being
subject to penalty under section 6723 and the payments being subject
to backup withholding under section 3406.
H.R. Conf. Rep. No. 220, at 546 (1997).
Finally, all of the examples in the proposed regulations follow the
generally well-established principle of tax law that the income portion
of a plaintiff's settlement is not reportable net of the attorneys
fees. But, cf., Rev. Rul. 80-364, 1980-2 C.B. 294 (Situation 3 holding
that the attorney's fees portion of the settlement is a reimbursement
for expenses incurred by the union to enforce the collective bargaining
agreement and not includible in the gross income of the individual
employees), and Davis v. Commissioner,
[[Page 27732]]
T.C.M. 1998-248 (following Cotnam v. Commissioner, 263 F.2d 119 (5th
Cir. 1959) for determinations under Alabama law).
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. Chapter 5) does not apply to these regulations.
It is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the facts that: (1) the time required to prepare and file a Form 1099-
MISC is minimal (currently estimated at 14 minutes per form); and (2)
it is not anticipated that, as a result of these regulations, small
entities will have to prepare and file more than a few, at most, forms
per year. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a
signed original and eight (8) copies) that are submitted timely to the
IRS. The IRS and Treasury Department request comments on the clarity of
the proposed rules and how they can be made easier to understand. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for September 22, 1999,
beginning at 10 a.m. in the IRS Auditorium of the Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors must enter at the 10th Street
entrance, located between Constitution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 15 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and 8 copies)
by September 1, 1999. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving outlines has
passed. Copies of the agenda will be available free of charge at the
hearing.
Drafting Information: The principal author of these proposed
regulations is A. Katharine Jacob Kiss, Office of Assistant Chief
Counsel (Income Tax and Accounting). However, other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6041-3, effective on January 1, 2000, is amended
by revising the first sentence of paragraph (q)(1) to read as follows:
Sec. 1.6041-3 Payments for which no return of information is required
under section 6041.
* * * * *
(q) * * *
(1) A corporation described in Sec. 1.6049-4(c)(1)(ii)(A), except a
corporation engaged in providing legal services, and except a
corporation engaged in providing medical and health care services or
engaged in the billing and collecting of payments in respect to the
providing of medical and health care services. * * *
* * * * *
Par. 3. Section 1.6041-3, currently in effect as of May 21, 1999,
is amended by revising the introductory text of paragraph (c) to read
as follows:
Sec. 1.6041-3 Payments for which no return of information is required
under section 6041.
* * * * *
(c) Payments to a corporation, except payments made after December
31, 1997, to a corporation engaged in providing legal services, and
except payments made after December 31, 1970, to a corporation engaged
in providing medical and health care services or engaged in the billing
and collecting of payments in respect to the providing of medical and
health care services, other than payments to--
* * * * *
Par. 4. Section 1.6045-5 is added to read as follows:
Sec. 1.6045-5 Information reporting on payments to attorneys.
(a) Requirement of reporting--(1) In general. A person engaged in a
trade or business that makes a payment in the course of that trade or
business to an attorney in connection with legal services (whether or
not the services were performed for the payor) must, except as provided
in paragraph (c) of this section, file an information return on Form
1099-MISC, ``Miscellaneous Income'', with the Internal Revenue Service
for the calendar year in which the payment is made. For the time and
place of filing Form 1099-MISC, see Sec. 1.6041-6. The requirements of
this paragraph (a)(1) apply whether or not--
(i) Payments to the attorney aggregate less than $600 for the
calendar year;
(ii) A portion of a payment is kept by the attorney as compensation
for legal services rendered; or
(iii) Other information returns are required with respect to some
or all of a payment under other applicable provisions of the Internal
Revenue Code and the regulations thereunder.
(2) Information required. The information return required under
paragraph (a)(1) of this section must include the following
information:
(i) The name, address, and taxpayer identification number (TIN) (as
defined in section 7701(a)) of the person making the payment.
(ii) The name, address, and TIN of the attorney to whom the payment
was made.
(iii) The aggregate amount of payments for the calendar year.
(iv) Any other information required by Form 1099-MISC and its
instructions.
(3) Requirement to furnish statement. A person required to file an
information return under paragraph (a)(1) of this section must furnish
to the attorney a written statement of the information required to be
shown on the return. This
[[Page 27733]]
requirement may be met by furnishing a copy of the return to the
attorney. The written statement must be furnished to the attorney on or
before January 31 of the year following the year in which the payment
was made.
(b) Special rules--(1) Check delivered to non-payee attorney. If a
check is delivered to an attorney who is not a payee, an information
return must be filed under paragraph (a)(1) of this section with
respect to the attorney if, under the circumstances, it is reasonable
for the payor to believe that the attorney is receiving the check in
connection with legal services.
(2) Joint or multiple payees--(i) Check delivered to attorney. If
more than one attorney is listed as a payee on a check, an information
return must be filed under paragraph (a)(1) of this section with
respect to the attorney who received the check.
(ii) Check delivered to non-attorney. If a check has attorney and
non-attorney payees and the check is delivered to a non-attorney, an
information return must be filed under paragraph (a)(1) of this section
with respect to the first listed attorney.
(3) Attorney required to report payments made to the other
attorneys. An attorney with respect to whom an information return is
filed under paragraph (b)(1) or (2) of this section must file
information returns, as required under this section, for payments the
attorney makes to any other attorneys.
(c) Exceptions. A return of information is not required under
paragraph (a)(1) of this section with respect to the following
payments:
(1) Payments of wages or other compensation paid to an attorney by
the attorney's employer.
(2) Payments of compensation or profits paid or distributed to its
individual partner by a partnership engaged in providing legal
services.
(3) Payments of dividends or corporate earnings and profits paid to
its shareholder by a corporation engaged in providing legal services.
(4) Payments of income to an attorney of a fixed or determinable
amount required to be reported (or payments that would be required to
be reported were it not for failing to meet the dollar amount
limitation contained in section 6041(a)) pursuant to section 6041(a)
and Sec. 1.6041-1(a).
(5) Payments of the balance of the gross proceeds made to an
attorney if a payment described in paragraph (c)(4) of this section is
made.
(6) Payments made to a foreign attorney, if the foreign attorney
can clearly demonstrate that the attorney is not subject to U.S. tax.
(d) Definitions. The following definitions apply for purposes of
this section:
(1) Attorney means a person engaged in the practice of law, whether
as a sole proprietor, partnership, corporation, or joint venture.
(2) Legal services means all services performed by, or under the
supervision of, an attorney.
(e) Attorney to furnish TIN. A payor that is required to make an
information return under this section must solicit a TIN from the
attorney at or before the time the payor pays gross proceeds to the
attorney. Any attorney whose TIN is solicited must furnish the TIN to
the payor, but is not required to certify that the TIN is correct.
Except as otherwise provided under section 3406, if the attorney does
not furnish the attorney's TIN, the payment is subject to backup
withholding.
(f) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. A, a plaintiff in a suit for lost wages against T, is
represented by attorney B. A settles her suit for $300,000. Payment
is made by a check payable jointly to A and B. T does not know the
amount of the attorney fee. B retains $100,000 and disburses the
remaining $200,000 net proceeds to A. T must file a Form W-2 for
$300,000 with respect to A under section 6051. T must also file a
Form 1099-MISC with respect to B for $300,000 (see paragraph
(a)(1)(iii) of this section).
Example 2. The facts are the same as in Example 1, except that T
knows that the attorney fee is one-third of the settlement amount,
or $100,000. T must file a Form W-2 for $300,000 with respect to A
under section 6051. T must also file a Form 1099-MISC with respect
to B for $100,000 under section 6041. T is not required to file an
information return with respect to B for $200,000 (the balance of
the gross proceeds) because of the exception provided in paragraph
(c)(5) of this section.
Example 3. C, a plaintiff in a suit for physical personal injury
against V, is represented by attorney D. C settles his suit for
damages that are excludable from C's gross income under section
104(a)(2). The settlement check is payable jointly to C and D. V
does not know the amount of the attorney fee. V must file a return
of information with respect to D under paragraph (a)(1) of this
section. V is not required to file a return of information with
respect to C under section 6041 because the settlement amount is
excludable from C's income under section 104(a)(2).
Example 4. W, a defendant in a suit for wrongful injury, knows
that D, the plaintiff, has been represented by attorney E throughout
the proceeding. State O, where the suit is brought, mandates that
certain benefits and settlement awards be made payable to the
claimant only. W makes a check payable solely to D and delivers the
payment to E's office. W has made a payment to an attorney (see
paragraph (b)(1) of this section) and must file a return of
information under paragraph (a) of this section.
Example 5. X, a defendant in a suit for lost wages, reasonably
believes that F, the plaintiff, has been represented by attorney G
throughout the proceeding as evidenced by filings and correspondence
signed by G. X makes a check for damages payable solely to F and
delivers it to G's office. X has made a payment to an attorney (see
paragraph (b)(1) of this section) and must file a return of
information under paragraph (a) of this section.
Example 6. Y, a defendant in a suit, makes a payment of the
gross proceeds of the amount awarded under the suit to the
plaintiff's attorneys, H, I, and J. H, I, and J are not related
parties. The payment is delivered to J's office. J deposits the
monies into her trust account and pays H and I their respective
shares. Y must file a return of information with respect to J (see
paragraph (b)(2)(i) of this section). J must file a return of
information with respect to H and I (see paragraph (b)(3) of this
section).
(g) Cross reference to penalties. See the following sections
regarding penalties for failure to comply with the requirements of
section 6045(f) and this section:
(1) Section 6721 for failure to file a correct information return.
(2) Section 6722 for failure to furnish a correct payee statement.
(3) Section 6723 for failure to comply with other information
reporting requirements (including the requirement to furnish a TIN).
(4) Section 7203 for willful failure to supply information
(including a taxpayer identification number).
(h) Effective date. The rules in this section apply to payments
made after December 31, 1999.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-12662 Filed 5-20-99; 8:45 am]
BILLING CODE 4830-01-U