1099 update: plus: LLC regs and more Madoff guidance.

• Author: Williams, Leonard W.
• Position: CA Tax - Column

Prior columns have mentioned the requirement for businesses and rental property owners to file 1099 forms for payments to unincorporated independent contractors or incorporated attorneys.

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A surprising number of readers contested that conclusion, and said that when their business clients have been audited, the auditors never have asked for such copies of 1099s.

Spidell's California Taxletter (March 1, 2009) says the same thing that this column said for California's position on the lack of a 1099--"no 1099 means no deduction," and cites Revenue and Taxation Code secs. 17299.9 and 24447. In addition to disallowing the deduction, the FTB also may penalize the taxpayer for failure to file information returns, and Spidell cites RTC 18631, 19183 and 19184 for that.

In light of the controversy raised by some readers, the matter was referred to an IRS technical coordinators, and also will be referred for discussion at the CalCPA Committee on Taxation IRS liaison meeting.

An informal reply from the technical coordinator was that the Internal Revenue Code doesn't have a position equivalent to California's RTC position mentioned above. The fact that some IRS auditors have asked for copies of 1099s filed, and threatened to disallow deductions of more than $599 if none are forthcoming, probably is a policy of the local IRS office.

While most people complain about policies they don't like, they feel that it's cheaper to comply than to fight. That doesn't mean that all taxpayers should roll over and play dead if they disagree with the IRS or FTB. If everyone did that, there would never have been the Starker case, which opened up the realm of delayed Sec. 1031 exchanges.

Managing Vs. Non-managing Members

A booby trap in LLC taxation is that California's Employment Development Department differentiates between "managing members" and "non-managing" members.

The EDD considers managing members to be similar to partners and therefore follows the federal practice of reporting everything on the K-l. Non-managing members, however, usually are considered employees under the common-law tests, and the EDD considers their wages reportable on Form W-2. and subject to California payroll taxes.

The EDD takes this position irrespective of whether the LLC is taxed as a partnership or as a corporation, which can lead to some strange looking W-2 forms for California LLC members, as well as differences between federal and California wages on the payroll...