Information reporting on payments of gross proceeds to attorneys.

October 1, 1999

On October 1, 1999, Tax Executives Institute submitted the following comments to the Internal Revenue Service on proposed regulations under section 6045(g) of the Internal Revenue Code, relating to information reporting for payments of gross proceeds to attorneys. The comments were prepared under the aegis of the Institute's Federal Tax Committee, whose chair is Philip G. Cohen of Unilever United States Inc., and its Subcommittee on Employee Benefits, whose chair is Mitchell S. Trager of Georgia-Pacific Corporation. Leslie A. Honig of The Chase Manhattan Bank and Michael J. Nesbitt of Paychex, Inc. also contributed to the development of the Institute's comments.

Section 6045(f) of the Internal Revenue Code 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 payer). On May 20, 1999, the Internal Revenue Service issued proposed regulations (REG-105312-98) providing guidance to payers that must comply with this provision. The proposed rules were published in the FEDERAL REGISTER (64 Fed. Reg. 277730) and in the Internal Revenue Bulletin (1999-23 I.R.B. 14). A hearing on the proposed rules was held on September 22, 1999.

Background

Tax Executives Institute is the preeminent association of business tax executives in North America. Our more than 5,000 members represent 2,800 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under section 6045(f), relating to information returns for payments of gross proceeds to attorneys.

Overview

Prior to 1998, attorney's fees paid in the course of a trade or business were reported on information returns only to the extent that the payment amounts related to legal services performed by the attorney for the payer. Section 6045(f)(1), which was added to the Internal Revenue Code by The Taxpayer Relief Act of 1997 (hereinafter "the 1997 Act"), states that "any person engaged in a trade or business and making a payment (in the course of such trade or business) to which this subsection applies shall file a return under subsection (a) and a statement under subsection (b) with respect to such payment." Section 6045(f)(2)(A) states that section 6045(f) "shall apply to any payment to an attorney in connection with legal services (whether or not such services are performed for the payor)." Section 6045(f)(2)(B) carves out exceptions to eliminate duplicate reporting for payments reportable under section 6041(a) (nonwage, compensatory information reporting) and section 6051 (employee wage reporting). Hence, section 6045(f) now requires that payments to attorneys be reported to the IRS and to the attorneys even though (1) the payment is not solely for legal services performed for the payer and (2) the attorneys' clients may be entitled to a portion of the payment, whether as settlement proceeds, reimbursement of expenses, or for some other purpose (e.g., interest or liquidated damages for breach of contract).

The preamble to the proposed regulations notes that, prior to the release of these proposed regulations, a number of comments were submitted to the IRS in an attempt to make the provision workable. The IRS's Information Reporting Program Advisory Committee (IRPAC) developed a working paper on the provision and TEI commends the IRS for incorporating several of those recommendations in the proposed regulations and for demonstrating its willingness to address the concerns raised by taxpayers and other commentators. For example, the legislative history of the 1997 Act suggests that Form 1099-B (Broker Proceeds) should be employed as the designated form for reporting payments made to attorneys. Since this suggestion in the legislative history is at odds with current taxpayer reporting practices for attorney's fees and other reportable nonwage compensation for services, the proposed rules sensibly require such payments to be reported instead on Form 1099-MISC. In addition, the IRS's policy decision to refrain from requiring certification of the recipient attorney's Taxpayer Identification Number is a helpful step in minimizing taxpayer administrative burdens.

Notwithstanding these beneficial features, TEI is concerned about the administrability of the proposed rules. The following comments set forth our concerns and recommendations.

Payroll Tax Consequences of Reportable Payments

The proposed regulations generally address payments to attorneys made by payers in connection with a trade or business and the reporting of those payments on Form 1099-MISC. Notwithstanding the large variety of factual circumstances in which payments are made to attorneys, whether for services rendered or as agents collecting a payment on behalf of a client, the proposed regulations are exceedingly brief. Indeed, the six simple examples in Prop. Reg. [sections] 1.6045-5(f) provide minimal, "bare bones" guidance to illustrate the far-reaching application of the statute and proposed rules. As important, the proposed regulations, and the examples especially so, raise broader issues than information reporting for payments to attorneys because they assume that the tax treatment of many payments are known. Examples 1 and 2 of Prop. Reg. [sections] 1.6045-5(f), in particular, assume that the payroll tax consequences of settlement payments related to claims for backpay and related attorney's fees are well-settled under current law. In many cases, however, such issues either have not been addressed previously or the treatment in the proposed regulations seemingly conflicts with extant guidance.

Indeed, until the Small Business Jobs Protection Act of 1996 diminished the scope of the income exclusion under section 104(a)(2), settlement payments and damage awards were frequently structured to permit the amount to be...