Decisions — Information Please

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Image source: kuba; openclipart.org

Image source: kuba; openclipart.org

 

To file Form 1099 or not to file—that is the question. Internal revenue code section 6041 requires that you file annual information returns for payments to someone in the course of your trade or business when those payments amount to $600 or more in aggregate.

Note there are two requirements—that the payment be made in the course of your trade or business and that the sum of the payments to a particular payee amount to $600 or more during the year. Section 6041 requires that you report only those payments aggregating $600 or more that are includible in the recipient’s gross income.

Of course, there are exceptions. For example, you usually don’t need to send Form 1099 to a corporation or a government entity. However, you’ll want to remember exceptions to the exceptions, such as corporations “engaged in providing medical and healthcare services”, which are not exempted from the reporting requirement.

Would you file Forms 1099 in the following situations?

1.

A taxpayer made payments in the course of her trade or business to a veterinarian operating as a corporation. Do the payments have to be reported to the IRS on Form 1099 under internal revenue code section 6041?

The question here is whether the corporation rendering the veterinary services is an excepted payee or is “engaged in providing medical and healthcare services.”

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The IRS Chief Counsel’s Decision”

or

 

THE IRS CHIEF COUNSEL’S DECISION

For a full explanation, hover your mouse over “The Decision” link below

Office of Chief Counsel Memorandum Number 201349013

2

Drivers who are employees of taxicab companies engaged in the business of transporting passengers for a metered fare receive amounts paid by certain establishments to deliver passengers.

The cabs are equipped with meters that calculate and display the fares for any transportation. The drivers pick up and transport passengers to their requested destinations. Typically, the driver collects the fares from the passengers and the meter fare is split between the driver and the taxicab company.

Some adult entertainment clubs (and other establishments) have a practice of making payments to taxicab drivers who bring passengers to their establishments. Generally, the club personnel will not render payment to the driver until the passengers first pay a cover charge or otherwise indicate in some manner that they are patrons of the club (such as purchasing drinks or drink tickets).

Payments are usually made in cash, although some clubs issue vouchers to the drivers that can be exchanged for cash later. The amount of the cash or voucher payment may or may not bear any relationship to the meter fare. In addition, the payment may vary depending upon the number of passengers, and may be far greater than either the metered fare or the customary tip for the transportation.

Typically, drivers transport one or more passengers from a hotel directly to a club. In some cases the driver may make agreements with certain hotel personnel so that when a guest wants to go to a club, the hotel personnel will summon the driver’s taxicab from the queue at the hotel and the driver will split the payment from the club with the hotel personnel.

In some cases the passenger may not request a particular destination and the driver or hotel personnel will recommend a club that will pay an amount for delivering the passenger/club patron. Several clubs and other establishments advertise in a local magazine specifically targeted at drivers in the transportation industry that they will pay a “referral fee” or “tip” or “incentive” for delivery of passengers/patrons.

Generally, the clubs making the payments at issue are not reporting the payments to the individual drivers on Form 1099, Miscellaneous Income.

The clubs argue the payments should be treated as tips received in the course of the drivers’ employment that the drivers should report to their employer taxicab companies. The drivers are not separately reporting the payments to the taxicab companies as tips. That means the taxicab companies are not treating the payments as wages subject to employment taxes and required to be reported on Forms W-2.

The question here is what reporting requirements apply to the payments? Should the clubs issue Forms 1099? Or are the payments tips? That would mean the employee drivers must report the tips and the employer in turn must withhold and pay the applicable employment taxes and report the tips on Forms W-2. If the payments are tips, the clubs have no reporting obligation with respect to such payments.

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The IRS Chief Counsel’s Decision”

or

 

THE IRS CHIEF COUNSEL’S DECISION

For a full explanation, hover your mouse over “The Decision” link below

Office of Chief Counsel Memorandum Number 201106010

3

A county operates a welfare program in compliance with state law, the county charter, and the county program ordinance. Although governed by the state, the county issues and implements rules and procedures for the administration of this program.

The county assists needy persons residing within its political boundaries through the program by providing grants to eligible individuals to help them obtain food, shelter, and basic needs. An individual welfare recipient’s total monthly grant may be paid directly to the individual or the county may pay a portion of the grant to the recipient and another portion directly to the recipient’s landlord.

Under the program, the county requires submission of certain forms and information related to the recipient, the landlord, and the housing arrangement in order to determine if all eligibility criteria, such as residency requirements and reasonableness of rental amount, are met. The county may refuse to make payments to the landlord if the information provided does not comply with certain policies and guidelines of the program.

The question is whether the direct payments to landlords need to be reported on Forms 1099.

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The IRS Decision”

or

 

THE IRS DECISION

For a full explanation, hover your mouse over “The Decision” link below

Public Letter Ruling Number: 201017029

***

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

***

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Right answer!
Sorry, wrong answer :(
Yes, Form 1099 should be filed

The words “medical” and “healthcare” typically refer broadly to the prevention, diagnosis, treatment, and management of disease, illness, or injury by a professional.

The common definition of “veterinarian” is a professional engaged in the prevention, diagnosis, and treatment of animal diseases and injuries.

Reading these definitions together, a veterinarian’s services squarely fall within the scope of what are generally considered medical and healthcare services.

Congress and the IRS have historically included veterinarians in the field of medical and healthcare services, and specifically excluded veterinarians when exclusion was intended. For example, in Rev. Rul. 91-30 the IRS determined veterinarians are in the “field of health” and should be included within the meaning of “similar healthcare providers” akin to doctors, nurses, and dentists for purposes of defining a personal service corporation.

As an example where congress intended to exclude veterinarians from a consideration of what is considered “medical”, congress specifically limited the definition of “medical device” in internal revenue code section 4191(b)(1) to devices “intended for humans.”

The language in treasury regulation 1.6041-3(p)(1) does not limit the terms “medical” or “healthcare” to services intended to treat humans.

Accordingly, we conclude that a corporation providing veterinary services is “engaged in providing medical and healthcare services” for purposes of treasury regulation 1.6041-3(p)(1), and is therefore not excepted from the information reporting requirement of internal revenue code section 6041 as a corporate payee.

Right answer!
Sorry, wrong answer :(
Yes, Form 1099 should be filed by the clubs.

On the question of whether the payments at issue are tips received in the course of employment or payments for separate and distinct services, the facts and circumstances presented support the characterization that the payments at issue are for the drivers’ separate and distinct service of referring patrons, influencing patrons and delivering patrons to particular clubs, rather than merely transporting passengers as part of their duties for their employers, the taxicab companies.

The fact that the payments from the clubs are contingent upon the “passenger” becoming a “patron” of the club–whether by entering the club, paying the cover charge, buying a drink, etc.–illustrates that the payment is made for the separate service of delivering a patron rather than transporting a passenger. The club is not the recipient of the transportation service; they are the recipient of the delivery of a patron.

Furthermore, the fact that drivers frequently recommend the passenger’s destination, sometimes in collaboration with hotel personnel, in order to secure the payment from a particular club further strengthens the conclusion that the clubs are paying the drivers for bringing them customers, a service separate and distinct from merely transporting passengers to the passenger’s requested destination.

Certainly, in cases where a passenger requests a particular destination and the driver tries to persuade the passenger to go to a different destination because of the payment the driver expects to receive, the purpose of the payment for these separate services becomes even more apparent; however, this fact is not necessary to our conclusion that drivers are providing services that are separate and distinct from transporting passengers.

Differences in the facts and circumstances discussed above may influence the determination of whether particular payments are tips for driving passengers as an employee of a taxicab company or payments for separate and distinct services. For example, if the taxicab company shared in the payments made by the clubs (or other establishments) and drivers were aware that they must turn over a portion of the payments to the taxicab company to keep their jobs, then the portion of the payments the drivers keep may be tips as remuneration for driving the taxicab for the company.

The clubs and other establishments are responsible for complying with the reporting requirements under internal revenue code section 6041 with respect to such payments.

The reporting requirements applicable to the payments for services separate and distinct from the drivers’ employment are provided in internal revenue code section 6041(a) which requires all persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income of $600 or more in any taxable year, to file an information return with the IRS and to furnish an information statement to the payee.

Treasury regulation 1.6041-1(c) provides that payments are fixed when they are paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. Treasury regulation 1.6041-1(a)(2) requires payments that are fixed or determinable to be reported on Form 1099.

Because the payments at issue are for separate and distinct services of delivering patrons to the clubs, the clubs are required under internal revenue code section 6041 to file a Form 1099 with the IRS for each taxicab driver to whom they paid $600 or more during the calendar year.

Right answer!
Sorry, wrong answer :(
Yes, Form 1099 should be filed by the county.

The county is a political subdivision of the state and is therefore an organization engaged in a trade or business. Payments made by the county as a function of the program, a government welfare system implemented under state law, are considered to be made in the course of the county’s trade or business.

Treasury regulation 1.6041-1(e) provides that generally a person making payments in the course of its trade or business on behalf of another person must file an information return if such payments are described in regulation 1.6041-1(a), and that person performs managerial or oversight functions with respect to the payment, or the person has a significant economic interest in the payment.

Performance of managerial or oversight functions would exclude a person who performs mere administrative or ministerial functions such as writing checks at another’s direction.

Under the facts provided, it appears the county exercises management or oversight functions with respect to payments made to landlords on behalf of the recipients. Under the county program, the county requires submission of certain forms and information related to the recipient, the landlord, and the housing arrangement in order to determine if all eligibility criteria, such as residency requirements and reasonableness of rental amount, are met.

Further evincing the exercise of management or oversight, under the program regulations, the county may refuse to make payments to the landlord if the information provided does not comply with certain policies and guidelines of the program.

Accordingly, if the county makes a direct payment to a landlord pursuant to the program, the county is required to file an information return with the IRS and to furnish an information statement to the landlord.

We conclude that payments under the program will represent gross income to the landlords, that the county makes the payments to the landlords in the course of a trade or business, that the county performs management or oversight functions in connection with payments to landlords, and that the county is subject to the resulting information reporting requirements of internal revenue code section 6041 for payments aggregating more than $600 in a year.

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