[Federal Register Volume 71, Number 134 (Thursday, July 13, 2006)]
[Rules and Regulations]
[Pages 39548-39553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11010]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9270]
RIN 1545-AW72
Reporting of Gross Proceeds Payments to Attorneys
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final 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
(1997 Act). The final regulations will affect attorneys who receive
payments of gross proceeds on behalf of their clients and will affect
certain payors (for example, defendants in lawsuits and their insurance
companies and agents) that, in the course of their trades or
businesses, make payments to these attorneys.
DATES: Effective Dates: These regulations are effective July 13, 2006.
Applicability Dates: For dates of applicability, see Sec. 1.6045-
5(h).
FOR FURTHER INFORMATION CONTACT: Nancy Rose, (202) 622-4940 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1644.
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, SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of information should be received by
September 11, 2006. Comments are specifically requested concerning:
Whether the 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 collection
of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the 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 collections of information in the final regulations are in
Sec. Sec. 1.6041-3(p) and 1.6045-5(a). Section 1021(a) of the 1997 Act
added section 6045(f) to the Internal Revenue Code (Code) and requires
the IRS to implement information reporting of certain payments made to
attorneys. Section 1021(b) of the 1997 Act provides that the exception
to information reporting in the regulations under section 6041 for
payments to corporations does not apply to payments to attorneys and
requires the IRS to implement information reporting for payments to
attorneys. This information will be used to verify compliance with
sections 6045(f) and 6041 and to determine that the amount of these
payments has been reported correctly. The collections of information
are mandatory. The likely respondents (payors) are businesses and other
for profit institutions.
Payors provide the information by completing Form 1099-MISC,
``Miscellaneous Income,'' for each attorney who has received one or
more payments aggregating $600 of more 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 2005 Form 1099-MISC is 16 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 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
return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to the 26 CFR part 1 under
sections 6041 and 6045 of the (Code). These amendments to the Income
Tax Regulations revise existing Sec. Sec. 1.6041-1 and 1.6041-3 and
add new Sec. 1.6045-5. This document finalizes proposed regulations
relating to information reporting under section 6045(f) of the Code for
gross proceeds paid to attorneys. The proposed regulations were
contained in a notice of proposed rulemaking (REG-126024-01) published
in the Federal Register on May 17, 2002 (67 FR 35064).
Section 6045(f) was added to the Code by the 1997 Act (Pub. L. 105-
34, section 1021 (111 Stat. 788)). Section 6045(f) generally requires
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
[[Page 39549]]
performed for the payor). No information reporting is required under
section 6045(f) for the portion of any payment that is required to be
reported under section 6041(a) (relating to payments made in the course
of a trade or business) (or that would be required to be reported under
section 6041 but for the $600 limitation) or under section 6051
(relating to receipts for employees). The 1997 Act also provides that
the general exception in Sec. 1.6041-3(p)(1) for reporting payments
made to corporations does not apply to payments of attorneys' fees.
Public Law 105-34, section 1021(b).
Proposed regulations under sections 6041 and 6045(f) were first
published in the Federal Register on May 21, 1999 (64 FR 27730) (the
1999 proposed regulations). The IRS received written comments on the
1999 proposed regulations, and held a public hearing on September 22,
1999. After considering those comments and the testimony at the public
hearing, the IRS and the Treasury Department decided to amend and
repropose regulations under sections 6041 and 6045(f). Those proposed
regulations (the reproposed regulations) were published in the Federal
Register on May 17, 2002 (67 FR 35064), and incorporated the guidance
in the 1999 proposed regulations with some modifications. A number of
written comments were received in connection with the reproposed
regulations. After considering those comments, the IRS is adopting the
reproposed regulations with revisions, as discussed below.
Summary of Comments
Generally, the section 6045(f) information reporting requirement is
intended to be broad, and few exceptions are warranted. See H. Conf.
Rep. 105-220, at 546 (1997). As suggested by commentators, the final
regulations adopt certain exceptions to the information reporting
requirement, described below.
Section 6045-5(c) of the reproposed regulations contains an
exception to the information reporting requirement relating to payments
made to an attorney who conducts settlements for sales or exchanges of
real estate. Commentators suggested an expansion of this exception to
include payments made in connection with a refinance of a mortgage and
certain other loan closings. After consideration of the comments, and
the nature of these transactions, these final regulations expand the
exception to include payments made to attorneys in connection with the
financing of real estate. The exception now covers, for example,
payments made to attorneys in connection with refinancings and
mortgages, not limited to purchase-money mortgages.
Many commentators on the 1999 proposed regulations requested
exceptions to the section 6045(f) information reporting requirements
for payments to trustees and other fiduciaries such as administrators
of estates and settlement funds. Those commentators suggested that the
definition of legal services should be narrowed to except payments to
those individuals, as the payments to attorneys acting as fiduciaries
have no correlation to their income. The preamble to the reproposed
regulations stated that this issue was considered, but reiterated that
a broad definition of legal services is appropriate and consistent with
the language and purpose of section 6045(f). (67 FR 35064) Although the
reproposed regulations made an exception for payments to attorneys
acting as real estate settlement agents, the reproposed regulations did
not except payments to trustees and administrators. The preamble noted
that in many situations, payments are or could be made to an estate or
fund, rather than to an attorney acting as a trustee or administrator.
If an estate or fund were the payee, information reporting under
section 6045(f) would not be required.
With respect to payments to bankruptcy trustees in particular,
Example 10 of the reproposed regulations describes a situation in which
a bankrupt's employer withholds amounts from the bankrupt's earnings
pursuant to a wage garnishment order, and forwards that amount to the
bankruptcy trustee. Commentators argued that a bankruptcy trustee who
receives such payments is not practicing law, and is not receiving
these amounts in connection with legal services. They pointed out that
many bankruptcy trustees are not attorneys. Commentators also discussed
the unique position of a bankruptcy trustee, which would make the
bankruptcy trustee reluctant to disclose his or her taxpayer
identifying number (TIN). They also described numerous administrative
burdens bankruptcy trustees would face in connection with the receipt
of a large number of information returns.
Further, numerous commentators stated that it is not always
possible to avoid information reporting; in many bankruptcy situations,
particularly in a Chapter 13 bankruptcy, a payor must write the check
to the bankruptcy trustee and not to the bankrupt's estate. After
considering the comments with respect to payments to bankruptcy
trustees, and considering the unique position of attorneys acting in
their capacity as bankruptcy trustees, it was determined that an
exception for payments to bankruptcy trustees was appropriate.
Therefore, the final regulations include an exception in Sec. 1.6045-
5(c)(7) for payments to attorneys acting in the capacity of bankruptcy
trustees, and remove the example contained in the reproposed
regulations relating to payments to bankruptcy trustees.
Another commentator recommended that payments of life insurance
made to an attorney on behalf of a client not be considered received in
connection with legal services and therefore be excepted from the
information reporting requirement. The IRS and the Treasury Department
continue to believe that a broad definition of legal services is
appropriate, and the final regulations do not adopt this suggestion. As
in the fiduciary situation, information reporting under section 6045(f)
would not be required if the attorney is not the named payee.
Commentators requested additional clarification of the interplay
between the information reporting rules in existing Sec. 1.6041-1(e)
and (f) and the reproposed regulations under section 6045(f). In
response, many of the examples in the final regulations include more
cross-references to other information reporting rules, and some
examples illustrate the correct reporting under sections other than
section 6045(f).
Some commentators asked that the IRS develop a new form for
reporting settlement payments made to plaintiffs and their attorneys
that would show the names and TINs of both plaintiff and attorney, the
amounts paid to each, and backup withholding if applicable. The
commentators proposed new Form 1099-SET, ``Settlement Proceeds,'' to
satisfy the reporting obligations set forth under both sections 6045
and 6041 with respect to these payments. The IRS already has several
different forms in the Form 1099 series that allow for reporting of a
variety of types of payments, including payments under section 6045(f).
Adding another form to the Form 1099 series limited to only one type of
payment would not increase efficiency for the IRS or taxpayers.
Moreover, payors could not use the proposed Form 1099-SET in connection
with settlement payments that constitute wages reportable on Form W-2,
``Wage and Tax Statement.'' For these reasons, the final regulations do
not adopt this suggestion.
[[Page 39550]]
A number of commentators correctly pointed out that under the
reproposed regulations, information reporting for amounts paid to
attorneys may be required even though the payors also must report these
amounts to the attorneys' clients pursuant to section 6041.
Commentators stated that duplicate reporting would be a problem under
automated systems for generating information returns. In many cases,
their systems are designed to generate only one Form 1099 for a
payment. Nevertheless, Congress mandated reporting by a payor under
both section 6045(f) (to an attorney) and 6041 (to the attorney's
client) with respect to the same payment. Section 6045(f)(2)(B)
provides an exception for payments required to be reported under
section 6041. The IRS and the Treasury Department interpret the
exception in section 6045(f)(2)(B) as applying only where the section
6045(f) payment otherwise would be required to be reported under
section 6041 with respect to the same payee (i.e., the attorney), and
not where section 6041 imposes a separate reporting requirement with
respect to another payee (i.e., the client). See Sec. 1.6045-5(c)(4).
In cases in which the payment is made to the attorney for the benefit
of the client, section 6041 requires reporting with respect to the
client, and section 6045(f) requires reporting with respect to the
attorney. Each of these statutory reporting requirements serves an
independent purpose--reporting the amount paid for the benefit of the
client who has to include that amount in income, and reporting a gross
proceeds payment to the attorney. Section 1.6041-1(a)(1) was revised to
clarify that there is a requirement to report to both the attorney and
client in that situation.
Other commentators discussed the requirement to backup withhold on
payments to an attorney if the attorney does not provide an accurate
TIN to the payor. The commentators suggested that there are both
practical and ethical problems with respect to backup withholding on
payments to attorneys. They noted that the amounts paid to the attorney
generally belong to the attorney's client and that there may be
difficulty in determining how to claim the withholding on the client's
income tax return. The IRS and the Treasury Department believe that
payments to attorneys for legal services are reportable payments under
section 3406(b)(3)(C), and are thus subject to backup withholding. The
legislative history to section 6045(f) makes clear that Congress
intended such payments to be subject to backup withholding. H. Conf.
Rep. 105-220, at 546 (1997). As the commentators point out, backup
withholding on a payment to an attorney that constitutes the income of
the attorney's client raises some practical concerns, but it is
nonetheless required by the statute. Backup withholding can be avoided
as long as the attorney provides an accurate TIN to the payor.
Furthermore, there are procedures in place affording an opportunity to
correct an inaccurate TIN before backup withholding is required. See
Sec. 31.3406(d)-5; Rev. Proc. 93-37 (1993-2 C.B. 477).
A comment was received with respect to the exception in Sec.
1.6045-5(c)(5) of the reproposed regulations for payments to certain
non-residents that are not engaged in a trade or business within the
United States and that do not perform any labor or personal services
within the United States. The commentator stated that, as drafted, the
exception is too narrow and will result in unnecessary information
reporting. The commentator suggested that the exception should be based
solely on whether the payment to the non-resident alien individual,
foreign partnership, or foreign corporation is in connection with legal
services performed outside the United States. The commentator suggested
that a payor be entitled to rely for purposes of making this
determination on a signed statement by the attorney or law firm to the
effect that the services for which payment is made were performed
outside the United States, provided that the payor does not know that
the statement is inaccurate. The commentator noted that payments of
gross proceeds to non-resident alien attorneys may be reportable under
this section although attorneys fees paid to such attorneys would not
be reportable under section 6041.
The gross proceeds reporting requirement under section 6045(f) is
intended to be broad and has a different purpose than information
reporting under section 6041 for payments for services. Congress
expressed its intent with respect to section 6045(f) ``that the IRS
will administer this provision so that it will not apply to foreign
attorneys who can clearly demonstrate that they are not subject to U.S.
tax.'' Joint Committee on Taxation Staff, General Explanation of Tax
Legislation Enacted in 1997, 105th Cong., 1st Sess. 215 (1997). Foreign
persons not engaged in trade or business within the United States are
subject to U.S. tax on amounts of certain types of income received from
sources within the United States (e.g., under section 871(a)). Foreign
persons engaged in trade or business within the United States are
subject to U.S. tax on taxable income effectively connected with the
conduct of such trade or business within the United States (e.g., under
section 871(b)). Thus, a foreign person can demonstrate clearly that it
is not subject to U.S. tax only if it clearly demonstrates both that
the income in question would not be subject to U.S. tax if the foreign
person were not engaged in trade or business in the United States and
that the income in question is not effectively connected with the
conduct of a trade or business within the United States. The
commentator's proposed approach would not produce a clear demonstration
that both conditions are satisfied and so would be inconsistent with
the intent expressed by Congress. Therefore, the final regulations do
not adopt the commentator's suggestion.
In addition to written comments, a number of telephone calls were
received with questions and comments regarding the reproposed
regulations. Many of the callers raised questions as to whether an
attorney is the payee of a check where the check is made out to the
attorney's client, but ``in care of'' the attorney, or to the
attorney's client trust account, or other scenarios. Since these
questions were raised by a number of callers, the final regulations
address them. Generally, an attorney is the payee on a check written to
the attorney's client trust fund, but not on a check which the attorney
may not negotiate. (Sec. 1.6045-5(d)(4)).
The reproposed regulations indicated in Sec. 1.6045-5(h) that the
regulations would become effective with payments made during the first
calendar year that begins at least two months after the publication of
the regulations as final regulations. Consequently, the final
regulations will apply to payments made in or after 2007. This delayed
effective date affords time to implement any changes required in
automated information processing systems.
Section 6724(a) states that no penalty relative to information
reporting shall be imposed with respect to a failure that is due to
reasonable cause and not to willful neglect. Section 301.6724-1(a)
provides in part that a penalty is waived for reasonable cause if the
filer establishes that there are significant mitigating factors with
respect to the failure, or that the failure arose from events beyond
the filer's control, and that the filer acted in a responsible manner.
Under Sec. 301.6724-1(b)(1), significant mitigating factors include
the fact that prior to the failure the filer was never required to file
the particular type of return with respect to which the failure
occurred. Under Sec. 301.6724-
[[Page 39551]]
1(d)(1)(i), acting in a responsible manner means that the filer
exercised reasonable care, which is that standard of care that a
reasonably prudent person would use under the circumstances in the
course of its business in determining its filing obligations. Pursuant
to these provisions, a penalty waiver may apply, for example, if an
information report would have been required under the reproposed
regulations, but not under the final regulations.
Special Analyses
It has been determined that this Treasury decision 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. Accordingly, a regulatory
flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. This certification is based on the facts
that: (1) The time required to prepare and file a 2005 Form 1099-MISC,
``Miscellaneous Income,'' is minimal (currently estimated at 16 minutes
per form); and (2) it is not anticipated that, as a result of these
regulations, many small entities will have to prepare and file more
than a few forms per year.
Pursuant to section 7805(f) of the Code, the Notice of Proposed
Rulemaking preceding this regulation was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Nancy L. Rose of the
Office of Associate Chief Counsel (Procedure and Administration),
Administrative Provisions and Judicial Practice Division.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.6041-1(a)(1) is amended as follows:
0
1. In paragraph (a)(1)(ii), the first sentence is removed and two
sentences are added in its place.
0
2. Paragraph (a)(1)(iii) is added.
The revision and addition read as follows:
Sec. 1.6041-1 Return of information as to payments of $600 or more.
(a) * * *
(1) * * *
(ii) * * * The payments described in paragraphs (a)(1)(i)(A) and
(B) of this section shall not include any payments of amounts with
respect to which an information return is required by, or may be
required under authority of, section 6042(a)(relating to dividends),
section 6043(a)(2)(relating to distributions in liquidation), section
6044(a)(relating to patronage dividends), section 6045(relating to
brokers' transactions with customers and certain other transactions),
sections 6049(a)(1) and (2) (relating to interest), section 6050N(a)
(relating to royalties), or section 6050P(a) or (b)(relating to
cancellation of indebtedness). For information returns required under
section 6045(f) (relating to payments to attorneys), see special rules
in Sec. Sec. 1.6041-1(a)(1)(iii) and 1.6045-5(c)(4). * * *
(iii) Information returns required under section 6045(f) on or
after January 1, 2007. For payments made on or after January 1, 2007 to
which section 6045(f)(relating to payments to attorneys) applies, the
following rules apply. Notwithstanding the provisions of paragraph
(a)(1)(ii) of this section, payments to an attorney that are described
in paragraph (a)(1)(i) of this section but which otherwise would be
reportable under section 6045(f) are reported under section 6041 and
this section and not section 6045(f). This exception applies only if
the payments are reportable with respect to the same payee under both
sections. Thus, a person who, in the course of a trade or business,
pays $600 of taxable damages to a claimant by paying that amount to the
claimant's attorney is required to file an information return under
section 6041 with respect to the claimant, as well as another
information return under section 6045(f) with respect to the claimant's
attorney. For provisions relating to information reporting for payments
to attorneys, see Sec. 1.6045-5.
* * * * *
0
Par. 3. Section 1.6041-3 is amended as follows:
0
1. Revising the first sentence in paragraph (p)(1).
0
2. In paragraph (p)(8), removing the language ``(q)'' and adding
``(p)'' in its place.
The revision reads as follows:
Sec. 1.6041-3 Payments for which no return of information is required
under section 6041.
* * * * *
(p) * * *
(1) A corporation described in Sec. 1.6049-4(c)(1)(ii)(A), except
with respect to payments made to a corporation after December 31, 1997
for attorneys' fees, 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. * * *
* * * * *
0
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. Except as provided in
paragraph (c) of this section, every payor engaged in a trade or
business who, in the course of that trade or business, makes payments
aggregating $600 or more during a calendar year to an attorney in
connection with legal services (whether or not the services are
performed for the payor) must file an information return for such
payments. The information return must be filed on the form and in the
manner required by the Commissioner. For the time and place for filing
the form, see Sec. 1.6041-6. For definitions of the terms under this
section, see paragraph (d) of this section. The requirements of this
paragraph (a)(1) apply whether or not--
(i) A portion of a payment is kept by the attorney as compensation
for legal services rendered; or
(ii) Other information returns are required with respect to some or
all of a payment under other 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 identifying number (TIN) (as
defined in section 7701(a)) of the payor;
(ii) The name, address, and TIN of the payee attorney;
(iii) The amount of the payment or payments (as defined in
paragraph (d)(5) of this section); and
(iv) Any other information required by the Commissioner in forms,
instructions or publications.
(3) Requirement to furnish statement. A person required to file an
information
[[Page 39552]]
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 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 calendar
year in which the payment was made.
(b) Special rules--(1) Joint or multiple payees--(i) Check
delivered to one payee 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 payee attorney to whom the
check is delivered.
(ii) Check delivered to payee nonattorney. If an attorney is listed
as a payee on a check but the check is delivered to a nonattorney who
is a payee on the check, an information return must be filed under
paragraph (a)(1) of this section with respect to the payee attorney
listed on the check. If more than one attorney is listed as a payee on
a check but the check is delivered to a nonattorney who is a payee on
the check, the information return must be filed with respect to the
first-listed payee attorney on the check.
(iii) Check delivered to nonpayee. If two or more attorneys are
listed as payees on a check, but the check is delivered to a person who
is not a payee on the check, an information return must be filed under
paragraph (a)(1) of this section with respect to the first-listed payee
attorney on the check.
(2) Attorney required to report payments made to other attorneys.
If an information return is required to be filed with respect to a
payee attorney under paragraph (b)(1) of this section, the attorney
with respect to whom the information return is required to be filed
(tier-one attorney) must file an information return under this section
for any payment that the tier-one attorney makes to other payee
attorneys with respect to that check, regardless of whether the tier-
one attorney is a payor under paragraph (d)(3) of this section.
(c) Exceptions. Notwithstanding paragraphs (a) and (b) of this
section, a return of information is not required under section 6045(f)
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
partners by a partnership engaged in providing legal services.
(3) Payments of dividends or corporate earnings and profits paid to
its shareholders by a corporation engaged in providing legal services.
(4) Payments made by a person to the extent that the person is
required to report with respect to the same payee the payments or
portions thereof under section 6041(a) and Sec. 1.6041-1(a) (or would
be required to so report the payments or portions thereof but for the
dollar amount limitation contained in section 6041(a) and Sec. 1.6041-
1(a)).
(5) Payments made to a nonresident alien individual, foreign
partnership, or foreign corporation that is not engaged in trade or
business within the United States, and does not perform any labor or
personal services in the United States, in the taxable year to which
the payment relates. For how a payor determines whether a payment is
subject to this exception, see Sec. 1.6041-4(a)(1).
(6) Payments made to an attorney in the attorney's capacity as the
person responsible for closing a transaction within the meaning of
Sec. 1.6045-4(e)(3) for the sale or exchange or financing of any
present or future ownership interest in real estate described in Sec.
1.6045-4(b)(2)(i) through (iv).
(7) Payments made to an attorney in the attorney's capacity as a
trustee in bankruptcy under Title 11, United States Code.
(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 proprietorship, partnership, corporation, or joint venture.
(2) Legal services means all services related to, or in support of,
the practice of law performed by, or under the supervision of, an
attorney.
(3) Payor means a person who makes a payment if that person is an
obligor on the payment, or the obligor's insurer or guarantor. For
example, a payor includes--
(i) A person who pays a settlement amount to an attorney of a
client who has asserted a tort, contract, violation of law, or workers'
compensation claim against that person; and
(ii) The person's insurer if the insurer pays the settlement amount
to the attorney.
(4) Payments to an attorney include payments by check or other
method such as cash, wire or electronic transfer. Payment by check to
an attorney means a check on which the attorney is named as a sole,
joint, or alternative payee. The attorney is the payee on a check
written to the attorney's client trust fund. However, the attorney is
not a payee when the attorney's name is included on the payee line as
``in care of,'' such as a check written to ``client c/o attorney,'' or
if the attorney's name is included on the check in any other manner
that does not give the attorney the right to negotiate the check.
(5) Amount of the payment means the amount tendered (e.g., the
amount of a check) plus the amount required to be withheld from the
payment under section 3406(a)(1), because a condition for withholding
exists with respect to the attorney for whom an information return is
required to be filed under paragraph (a)(1) of this section.
(e) Attorney to furnish TIN. A payor that is required to file an
information return under this section must solicit a TIN from the
attorney at or before the time the payor makes a payment to the
attorney. The attorney must furnish the correct TIN to the payor, but
is not required to certify the TIN. A payment for which a return of
information is required under this section is subject to backup
withholding under section 3406 and the regulations thereunder.
(f) Examples. The following examples illustrate the provisions of
this section. The examples assume that P is not a payor with respect to
A, the attorney, under section 6041. See section 6041 and the
regulations thereunder for rules regarding whether P is required under
section 6041 to file information returns with respect to C. The
examples are as follows:
Example 1. One check--joint payees--taxable to claimant.
Employee C, who sues employer P for back wages, is represented by
attorney A. P settles the suit for $300,000. The $300,000 represents
taxable wages to C under existing legal principles. P writes a
settlement check payable jointly to C and A in the amount of
$200,000, net of income and FICA tax withholding with respect to C.
P delivers the check to A. A retains $100,000 of the payment as
compensation for legal services and disburses the remaining $100,000
to C. P must file an information return with respect to A for
$200,000 under paragraph (a)(1) of this section. P also must file an
information return with respect to C under sections 6041 and 6051,
in the amount of $300,000. See Sec. Sec. 1.6041-1(f) and 1.6041-2.
Example 2. One check--joint payees--excludable to claimant. C,
who sues corporation P for damages on account of personal physical
injuries, is represented by attorney A. P settles the suit for a
$300,000 damage payment that is excludable from C's gross income
under section 104(a)(2). P writes a $300,000 settlement check
payable jointly to C and A and delivers the check to A. A retains
$120,000 of the payment as compensation for legal services and
remits the remaining $180,000 to C. P must file an information
return with respect to A for $300,000 under paragraph (a)(1) of this
section. P does not file an information return with respect to tax-
free damages paid to C.
[[Page 39553]]
Example 3. Separate checks--taxable to claimant. C, an
individual plaintiff in a suit for lost profits against corporation
P, is represented by attorney A. P settles the suit for $300,000,
all of which will be includible in C's gross income. A requests P to
write two checks, one payable to A in the amount of $100,000 as
compensation for legal services and the other payable to C in the
amount of $200,000. P writes the checks in accordance with A's
instructions and delivers both checks to A. P must file an
information return with respect to A for $100,000 under paragraph
(a)(1) of this section. Pursuant to Sec. 1.6041-1(a) and (f), P
must file an information return with respect to C for the $300,000.
Example 4. Check made payable to claimant, but delivered to
nonpayee attorney. Corporation P, is a defendant in a suit for
damages in which C, the plaintiff, has been represented by attorney
A throughout the proceeding. P settles the suit for $300,000.
Pursuant to a request by A, P writes the $300,000 settlement check
payable solely to C and delivers it to A at A's office. P is not
required to file an information return under paragraph (a)(1) of
this section with respect to A, because there is no payment to an
attorney within the meaning of paragraph (d)(4) of this section.
Example 5. Multiple attorneys listed as payees. Corporation P, a
defendant, settles a lost profits suit brought by C, for $300,000 by
issuing a check naming C's attorneys, Y, A, and Z, as payees in that
order. Y, A, and Z do not belong to the same law firm. P delivers
the payment to A's office. A deposits the check proceeds into a
trust account and makes payments by separate checks to Y of $30,000
and to Z of $15,000, as compensation for legal services, pursuant to
authorization from C to pay these amounts. A also makes a payment by
check of $155,000 to C. A retains $100,000 as compensation for legal
services. P must file an information return for $300,000 with
respect to A under paragraphs (a)(1) and (b)(1)(i) of this section.
A, in turn, must file information returns with respect to Y of
$30,000 and to Z of $15,000 under paragraphs (a)(1) and (b)(2) of
this section because A is not required to file information returns
under section 6041 with respect to A's payments to Y and to Z
because A's role in making the payments to Y and to Z is merely
ministerial. See Sec. 1.6041-1(e)(1), (e)(2) and (e)(5) Example 7
for information reporting requirements with respect to A's payments
to Y and Z. As described in Example 3, P must also file an
information return with respect to C, pursuant to Sec. 1.6041-1(a)
and (f).
Example 6. Amount of the payment--attorney does not provide TIN.
(i) Corporation P, a defendant, settles a suit brought by C for
$300,000 of damages. P will pay the damages by a joint check to C
and his attorney, A. A failed to furnish P with A's TIN. P is
required to deduct and withhold 28 percent tax from the $300,000
under section 3406(a)(1)(A) and paragraph (e) of this section. P
writes the check to C and A as joint payees, in the amount of
$216,000. P also must file an information return with respect to A
under paragraph (a)(1) of this section in the amount of $300,000, as
prescribed in paragraph (d)(5) of this section. If the damages are
reportable under section 6041 because they are not excludable from
gross income under existing legal principles, and are not subject to
any exception under section 6041, P must also file an information
return with respect to C pursuant to Sec. 1.6041-1(a) and (f) in
the amount of $300,000.
(ii) Rather than paying by joint check to C and A, P will pay
the damages by a joint check to C and F, A's law firm. F failed to
furnish its TIN to P. P is required to deduct and withhold 28
percent tax from the $300,000 under section 3406(a)(1)(A) and
paragraph (e) of this section. P writes the check to C and F as
joint payees, in the amount of $216,000. P also must file an
information return with respect to F under paragraph (a)(1) of this
section in the amount of $300,000, as prescribed in paragraph (d)(5)
of this section. If the damages are reportable under section 6041
because they are not excludable from gross income under existing
legal principles, and are not subject to any exception under section
6041, P must also file an information return with respect to C
pursuant to Sec. 1.6041-1(a) and (f) in the amount of $300,000.
Example 7. Home mortgage lending transaction. (i) Individual P
agrees to purchase a house that P will use solely as a residence. P
obtains a loan from lender L to finance a portion of the cost of
acquiring the house. L disburses loan proceeds of $300,000 to
attorney A, who is the settlement agent, by a check naming A as the
sole payee. A, in turn, writes checks from the loan proceeds and
from other funds provided by P to the persons involved in the
purchase of the house, including a check for $800 to attorney B,
whom P hired to provide P with legal services relating to the
closing.
(ii) P, not L, is the payor of the payment to A under paragraph
(d)(3) of this section. P, however, is not required to file an
information return with respect to A under paragraph (a)(1) of this
section because the payment was not made in the course of P's trade
or business. Even if P made the payment in the course of P's trade
or business, P would not be required to file an information return
under section 6045(f) with respect to A because P is excepted under
paragraph (c)(6) of this section.
(iii) A is not required to file an information return under
paragraph (a)(1) of this section with respect to the payment to B
because A is not the payor as that term is defined under paragraph
(d)(3) of this section. A is not required to file an information
return under paragraph (b)(2) with respect to the payment to B
because A was listed as sole payee on the check it received from P.
See section 6041 and Sec. 1.6041-1(e) for whether A or L must file
information returns under that section. See section 6045(e) and
Sec. 1.6045-4 for whether A is required to file an information
return under that section.
Example 8. Business mortgage lending transaction. The facts are
the same as in Example 7 except that P buys real property that P
will use in a trade or business. P, not L, is the payor of the
payment to A under paragraph (d)(3) of this section. P, however, is
not required to file an information return under section 6045(f)
with respect to A because P is excepted under paragraph (c)(6) of
this section. A is not required to file an information return under
paragraphs (a) or (b)(2) of this section with respect to the payment
to B. See section 6041 and Sec. 1.6041-1(e) to determine whether P
or L must file an information return under that section with respect
to the payment to A, and whether P or A must file a return with
respect to the payment to B. See section 6045(e) for rules regarding
whether A is required to file information returns under that
section.
Example 9. Qualified settlement fund. Corporation P agrees to
settle for $300,000 a class action lawsuit brought by attorney A on
behalf of a claimant class. Pursuant to the settlement agreement and
a preliminary order of approval by a court, A establishes a bank
account in the name of Q Settlement Fund, which is a qualified
settlement fund (QSF) under Sec. 1.468B-1. A is also designated by
the court as the administrator of the QSF. Corporation P transfers
$300,000 by wire in Year 1 to A, who deposits the funds into the Q
Settlement Fund. In Year 2, the court approves an award of
attorney's fees of $105,000 for A. In Year 2, Q Settlement Fund
delivers $105,000 to A. P is required to file an information return
under paragraph (a) of this section with respect to A for Year 1 for
the $300,000 payment it made to A. The Q Settlement Fund is required
to file an information return under section 6041(a) and Sec.
1.468B-2(l)(2) with respect to A for Year 2 for the $105,000 payment
it made to A.
(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 TIN).
(h) Effective date. The rules in this section apply to payments
made on or after January 1, 2007.
Approved: June 8, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E6-11010 Filed 7-12-06; 8:45 am]
BILLING CODE 4830-01-P