Does a county clerk need to issue a Form 1099MISC to attorneys when the clerk sends funds to an attorney in various circumstances? For the situations considered in Chief Counsel Advice 201533012 the IRS’s answer was no.
Information returns must be issued by payors in certain situations when payments are made to various parties.
A general rule for payments made in the course of business is found in IRC §6041(a). The advice outlines these requirements as follows:
One applicable reporting requirement is that set forth in section 6041(a), which provides, in pertinent part, that all persons engaged in a trade or business and making payment of fixed or determinable gains, profits, or income in the course of that trade or business to another person of $600 or more in a tax year must report those payments in information returns filed with the Internal Revenue Service, and furnish written statements to the recipients of the payments. Treas. Reg. § 1.6041-1(i) provides that payments made by a state or a political subdivision are subject to this reporting requirement. Under the separate definitions set forth in Treas. Reg. § 1.6041-1(e), sometimes referred to as the middleman regulations, a person that makes a payment in the course of its trade or business on behalf of another person is the payor that must make the information return for that payment if the payment is one that must be reported under I.R.C. § 6041 and if, under all the facts and circumstances, that person:
- Performs management or oversight functions, that is, performs more than mere administrative or ministerial functions, Treas. Reg. § 1.6041-1(e)(1)(i), or
- Has a significant economic interest in the payment. Treas. Reg. § 1.6041-1(e)(1)(ii).
As well, if payments are made to attorneys in connection with legal services. As the advice explains:
A second applicable reporting requirement is provided by section 6045(f), which requires that all persons engaged in a trade or business who make certain payments to attorneys in connection with legal services in the course of that trade of business must report those payments in information returns filed with the Internal Revenue Service and furnish written statements to the recipients of the payments. The reporting requirement under Section 6045(f), however, does not apply to any payment which is required to be reported under Section 6041(a). See I.R.C. § 6045(f)((2)(B); Treas. Reg. § 1.6045-5(c)(4).
Treas. Reg. § 1.6045-5(d)(3) contains its own definition of the term "payor" and defines a payor for section 6045 purposes as a person who makes the payment if that person is:
1. an obligor on that payment, or
2. is the obligor's insurer or guarantor, see Treas. Reg. § 1.6045-5(d)(3).
The regulation further defines a "payor" to include a person who pays a settlement amount to an attorney of a client who has asserted a tort, contract, violation of law, or worker's compensation claim against the person, and the person's insurer if the insurer pays the settlement.
County Clerks often end up holding and then passing on money for various legal disputes and matters before the court. The advice considered the following three situations:
- The Court sends a debtor's garnished funds to a creditor's attorney, or to an attorney where the attorney is the creditor.
- An attorney who is refunded their client's money at the end of a case.
- When paying out proceeds on foreclosure real estate transactions.
The memorandum begins with the garnishment situation. The memorandum concludes that, as the Clerk has no discretionary authority with regard to the garnished funds and lacks an economic interest in the funds (as that term is defined at Reg. §1.6041-1(e)(1)(ii)) no reporting is required by the Clerk pursuant to IRC §6041(a) on such payments.
Similarly, since the Clerk is not either the payor or an insurer or a guarantor for the payor, no reporting is required under the special attorney reporting rules at IRC §6045.
For a refund of the client’s money, the memorandum concludes again that no reporting is required. Reporting under §6041(a) is not triggered because the Clerk cannot determine if a refund of client funds would be taxable to the attorney, since under IRC §111(a) income recovered in the current year is not taxable unless deducted in a prior year. The Clerk would not have access to that information, and therefore Reg. §1.6041-1(a) and (c) would provide no reporting is required under §6041.
And, once again, since the Clerk is neither the payor nor an insurer or guarantor of the payor no reporting under the attorney rules at §6045 is required.
Finally the memorandum looks at foreclosure proceeds. The memorandum notes that while, generally, a Form 1099S must be issued to report sales proceeds on the sale of real estate, that reporting is not required for “transfers in full or partial satisfaction of a debt secured by the property, including foreclosures, transfers in lieu of foreclosures, or abandonments” pursuant to Reg. §6045(e). Rather, in this case the lender would be obligated under IRC §6050J to report on a Form 1099A.