Reporting of gross-proceeds payments to attorneys.

• Author: Halloran, John W.

The IRS has reissued proposed regulations under Secs. 6041 and 6045 that clarify the reporting obligation for payments to attorneys. The effective date will apply to payments made during the first calendar year that begins at least two months after the final regulations' publication date. A formal hearing was set for Sept. 30, 2002; thus a strong possibility exists that the final regulations will be issued and effective for 2003.

Sec. 6045(f) was added to the Code by Section 1021 of the Taxpayer Relief Act of 1997. It generally requires information reporting for payments of gross proceeds made in the course of a trade or business to attorneys, for legal services (whether or not the services are performed for the payor). The following briefly outlines the changes in the new proposed regulations.

Rules, Definitions and Procedures

The delivery rule under the original proposed regulations required information reporting for payments delivered to a nonpayee attorney, if, under the circumstances, the payor reasonably believed that the attorney would receive the check for legal services. The IRS and Treasury have eliminated the delivery rule, because it would place a substantial burden on payors. Thus, the proposed regulations provide that a payment made to an attorney by check means a check on which an attorney is named as a sole, joint or alternative payee.

The proposed regulations define the term "payor" under Prop. Regs. Sec. 1.6045-5(d)(3) as the person who makes a payment, if that person is an obligor on the payment or the obligor's insurer or guarantor. A payor includes 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 the person's insurer, if the insurer pays the settlement amount to the attorney.

An exception in Sec. 6045(f)(2)(B) states that Sec. 6045(f)"shall not apply to the portion of any payment which is required to be reported under section 6041(a) (or would be so required but for the $600 limitation contained therein) or section 6051." The exception is available only if a payor has a reporting obligation under Sec. 6041 or 6051. The use of different standards under Secs. 6041 and 6045(f) for determining who is required to file and furnish an information return affects the scope of the Sec. 6045(f)(2)(B) reporting exception. The Service and Treasury believe that Congress intended for that exception to provide...