Reporting of Gross Proceeds Payments to Attorneys

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-105312-98] RIN 1545-AW72

TITLE: Reporting of Gross Proceeds Payments to Attorneys

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations relating to the
reporting of payments of gross proceeds to attorneys. The
regulations reflect changes to the law made by the Taxpayer Relief
Act of 1997. The regulations will affect attorneys who receive
payments of gross proceeds on behalf of their clients, and certain
payors (defendants in lawsuits and their insurance companies and
agents) that in the course of their trades or businesses make
payments to these attorneys. This document also provides notice of a
public hearing on these proposed regulations.

DATES: Written and electronic comments must be received by August
19, 1999. Outlines of topics to be discussed at the public hearing
scheduled for September 22, 1999, at 10 a.m., must be received by
September 1, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-105312-98), Room
5226, Internal Revenue Service, POB 7604, Ben Franklin.2 Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG-105312-98), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC.

Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/regslist.html. The public
hearing will be held in the IRS Auditorium, 7th Floor, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, A. Katharine Jacob Kiss at (202) 622-4920; concerning
submissions of comments, the hearing, and/or to be placed on the
building access list to attend the hearing, Michael Slaughter at
(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collection of information
should be sent to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Comments on the collection of
information should be received by July 20, 1999. Comments are
specifically requested concerning:

Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed
collection of information (see below); How the quality, utility, and
clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and Estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services to provide
information.

The collection of information in this proposed regulation is in
�1.6045-5(a). This information is required by the IRS to implement
section 1021 of the Taxpayer Relief Act of 1997. This information
will be used to verify compliance with section 6045 and to determine
that the taxable amount of these payments has been computed
correctly. The collection of information is mandatory. The likely
respondents are businesses and other for profit institutions.

Respondent taxpayers (payors) provide the information by completing
one Form 1099-MISC, Miscellaneous Income, for each attorney who has
received one or more payments of gross proceeds from the payor
during the calendar year. The burden for this requirement is
reflected in the burden estimate for Form 1099- MISC. The estimated
burden of information collection for the 1999 Form 1099-MISC is 14
minutes per return.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number assigned by the
Office of Management and Budget.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

This document contains proposed amendments to the Income Tax
Regulations (26 CFR Part 1) under section 6045 of the Internal
Revenue Code. A new reporting requirement, section 6045(f), was
added to the Code by section 1021 of the Taxpayer Relief Act of 1997
(1997 Act) (Public Law 105-34, 111 Stat. 922). Section 6045(f)
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 payor). No information return is required under section 6045(f)
for the portion of any payment that is required to be reported under
section 6041(a) (or that would be required except for the $600
limitation) or under section 6051 (employee compensation). The 1997
Act also provides that the general exception for reporting to
corporations in �1.6041-3(c) does not apply to corporations
providing legal services.

Explanation of Provisions

The proposed regulations take into account comments made by, among
others, insurance companies and other payors, the American Bar
Association, and the members of the Commissioner's Information
Reporting Program Advisory Committee (IRPAC). The operation of
section 6045(f) was the subject of a paper presented at the IRPAC
meeting held in Washington, DC., on October 28 and 29, 1997, and
comments were also received at that meeting.

The proposed regulations clarify that there is no threshold amount
below which reporting under section 6045(f) is not required.
Additionally, payments made to corporations engaged in providing
legal services are reportable.

Several commentators asked whether reporting under section 6045(f)
relieves the payor of all other reporting obligations by shifting
the reporting obligations to the attorney. The proposed regulations
do not adopt this approach. Section 6045 imposes an additional
reporting requirement on payors and does not relieve them of any
other pre-existing or concurrently existing reporting requirement.
The exception in section 6045(f)(2)(B) is limited to situations in
which the amount of the attorney fee is already reportable to the
attorney as income or wages. The legislative history clearly
supports this determination. See, H.R. Conf.

Rep. No. 220, 105th Cong., 1st Sess. 546 (1997) and Joint Committee
on Taxation Staff, General Explanation of Tax Legislation Enacted in
1997, 105th Cong., 1st Sess. 214-15 (1997).

Several commentators stated that in certain situations, a gross
proceeds payment is delivered to the attorney, but the attorney is
not listed as a payee on the check. In some instances this results
from the operation of local law; in other instances, attorneys
request that their names not appear on the check. The proposed
regulations provide that when a payment is delivered to an attorney,
even if that attorney is not listed as a payee, the payor is
required to file an information return under section 6045(f).

Wherever possible, however, the proposed regulations provide
exceptions to the reporting requirement. For example, the proposed
regulations provide for a rule of administrative convenience if
multiple attorneys are listed as payees.

Generally, in those situations, the payor is only required to report
on the attorney who receives the payment. The IRS and Treasury
Department continue to welcome comments on whether additional
exceptions to the reporting requirement are appropriate.

Many commentators suggested that Form 1099-B is not the best form
for reporting under section 6045(f). The proposed regulations
provide that the information return is made on Form 1099-MISC.

Several commentators asked the IRS to define legal services.

Some commentators requested a narrow definition that would exclude
any services that did not require that the provider be an attorney,
e.g., property or financial management services.

However, those commentators also stated that the attorney would most
likely be collecting a fee for rendering those services.

The IRS and Treasury Department have proposed a broad definition of
legal services that includes any services performed by or under the
supervision of an attorney.

One commentator asked whether the attorney's TIN must be certified.
The proposed regulations provide that, consistent with the general
rule under sections 6045 and 6041, the attorney's TIN need not be
certified.

The proposed regulations clarify that payments of gross proceeds are
subject to backup withholding if the attorney does not provide a
TIN. This is consistent with the legislative history that provides:

Third, attorneys are required to promptly supply their TINS to
persons required to file these information reports, pursuant to
section 6109. Failure to do so could result in the attorney being
subject to penalty under section 6723 and the payments being subject
to backup withholding under section 3406.

H.R. Conf. Rep. No. 220, at 546 (1997).

Finally, all of the examples in the proposed regulations follow the
generally well-established principle of tax law that the income
portion of a plaintiff's settlement is not reportable net of the
attorneys fees. But, cf., Rev. Rul. 80-364, 1980-2 C.B. 294
(Situation 3 holding that the attorney's fees portion of the
settlement is a reimbursement for expenses incurred by the union to
enforce the collective bargaining agreement and not includible in
the gross income of the individual employees), and Davis v.
Commissioner, T.C.M. 1998-248 (following Cotnam v.

Commissioner, 263 F.2d 119 (5th Cir. 1959) for determinations under
Alabama law).

Special Analyses It has been determined that this notice of proposed
rulemaking is not a significant regulatory action as defined in
Executive Order 12866. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. Chapter 5) does not apply to
these regulations.

It is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the facts that: (1) the time required to prepare and file a Form
1099-MISC is minimal (currently estimated at 14 minutes per form);
and (2) it is not anticipated that, as a result of these
regulations, small entities will have to prepare and file more than
a few, at most, forms per year. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a
signed original and eight (8) copies) that are submitted timely to
the IRS. The IRS and Treasury Department request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying.

A public hearing has been scheduled for September 22, 1999,
beginning at 10 a.m. in the IRS Auditorium of the Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC.

Due to building security procedures, visitors must enter at the 10th
Street entrance, located between Constitution and Pennsylvania
Avenues, NW. In addition, all visitors must present photo
identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 15 minutes before the hearing starts.

For information about having your name placed on the building access
list to attend the hearing, see the A FOR FURTHER INFORMATION
CONTACT @ section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing.10 must
submit written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and 8
copies) by September 1, 1999. A period of 10 minutes will be
allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be
available free of charge at the hearing.

Drafting Information The principal author of these proposed
regulations is A.

Katharine Jacob Kiss, Office of Assistant Chief Counsel (Income Tax
and Accounting). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects 26 CFR Part 1 Income taxes, Reporting and
recordkeeping requirements.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1
continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.6041-3, effective on January 1, 2000, is amended
by revising the first sentence of paragraph (q)(1) to read as
follows:

�1.6041-3 Payments for which no return of information is required
under section 6041.

* * * * *

(q) * * *

(1) A corporation described in �1.6049-4(c)(1)(ii)(A), except a
corporation engaged in providing legal services, and except a
corporation engaged in providing medical and health care services or
engaged in the billing and collecting of payments in respect to the
providing of medical and health care services. * * *

* * * * *

Par. 3. Section 1.6041-3, currently in effect as of May 21, 1999, is
amended by revising the introductory text of paragraph (c) to read
as follows:

�1.6041-3 Payments for which no return of information is required
under section 6041.

* * * * *

(c) Payments to a corporation, except payments made after December
31, 1997, to a corporation engaged in providing legal services, and
except payments made after December 31, 1970, to a corporation
engaged in providing medical and health care services or engaged in
the billing and collecting of payments in respect to the providing
of medical and health care services, other than payments to--

* * * * *

Par. 4. Section 1.6045-5 is added to read as follows:

�1.6045-5 Information reporting on payments to attorneys.

(a) Requirement of reporting--(1) In general. A person.12 engaged in
a trade or business that makes a payment in the course of that trade
or business to an attorney in connection with legal services
(whether or not the services were performed for the payor) must,
except as provided in paragraph (c) of this section, file an
information return on Form 1099-MISC, A Miscellaneous Income @ ,
with the Internal Revenue Service for the calendar year in which the
payment is made. For the time and place of filing Form 1099-MISC,
see �1.6041-6. The requirements of this paragraph (a)(1) apply
whether or not--

(i) Payments to the attorney aggregate less than $600 for the
calendar year;

(ii) A portion of a payment is kept by the attorney as compensation
for legal services rendered; or

(iii) Other information returns are required with respect to some or
all of a payment under other applicable provisions of the Internal
Revenue Code and the regulations thereunder.

(2) Information required. The information return required under
paragraph (a)(1) of this section must include the following
information:

(i) The name, address, and taxpayer identification number (TIN) (as
defined in section 7701(a)) of the person making the payment.

(ii) The name, address, and TIN of the attorney to whom the payment
was made.

(iii) The aggregate amount of payments for the calendar year.

(iv) Any other information required by Form 1099-MISC and its
instructions.

(3) Requirement to furnish statement. A person required to file an
information return under paragraph (a)(1) of this section must
furnish to the attorney a written statement of the information
required to be shown on the return. This requirement may be met by
furnishing a copy of the return to the attorney.

The written statement must be furnished to the attorney on or before
January 31 of the year following the year in which the payment was
made.

(b) Special rules --(1) Check delivered to non-payee attorney. If a
check is delivered to an attorney who is not a payee, an information
return must be filed under paragraph (a)(1) of this section with
respect to the attorney if, under the circumstances, it is
reasonable for the payor to believe that the attorney is receiving
the check in connection with legal services.

(2) Joint or multiple payees -- (i) Check delivered to attorney. If
more than one attorney is listed as a payee on a check, an
information return must be filed under paragraph (a)(1) of this
section with respect to the attorney who received the check.

(ii) Check delivered to non-attorney. If a check has attorney and
non-attorney payees and the check is delivered to a non-attorney, an
information return must be filed under paragraph (a)(1) of this
section with respect to the first listed attorney.

(3) Attorney required to report payments made to the other
attorneys. An attorney with respect to whom an information return is
filed under paragraph (b)(1) or (2) of this section must file
information returns, as required under this section, for payments
the attorney makes to any other attorneys.

(c) Exceptions. A return of information is not required under
paragraph (a)(1) of this section with respect to the following
payments:

(1) Payments of wages or other compensation paid to an attorney by
the attorney's employer.

(2) Payments of compensation or profits paid or distributed to its
individual partner by a partnership engaged in providing legal
services.

(3) Payments of dividends or corporate earnings and profits paid to
its shareholder by a corporation engaged in providing legal
services.

(4) Payments of income to an attorney of a fixed or determinable
amount required to be reported (or payments that would be required
to be reported were it not for failing to meet the dollar amount
limitation contained in section 6041(a)) pursuant to section 6041(a)
and �1.6041-1(a).

(5) Payments of the balance of the gross proceeds made to an
attorney if a payment described in paragraph (c)(4) of this section
is made.

(6) Payments made to a foreign attorney, if the foreign attorney can
clearly demonstrate that the attorney is not subject to U.S. tax.

(d) Definitions. The following definitions apply for purposes of
this section:

(1) Attorney means a person engaged in the practice of law, whether
as a sole proprietor, partnership, corporation, or joint venture.

(2) Legal services means all services performed by, or under the
supervision of, an attorney.

(e) Attorney to furnish TIN. A payor that is required to make an
information return under this section must solicit a TIN from the
attorney at or before the time the payor pays gross proceeds to the
attorney. Any attorney whose TIN is solicited must furnish the TIN
to the payor, but is not required to certify that the TIN is
correct. Except as otherwise provided under section 3406, if the
attorney does not furnish the attorney's TIN, the payment is subject
to backup withholding.

(f) Examples. The provisions of this section are illustrated by the
following examples:

Example 1. A, a plaintiff in a suit for lost wages against T, is
represented by attorney B. A settles her suit for $300,000. Payment
is made by a check payable jointly to A and B.

T does not know the amount of the attorney fee. B retains $100,000
and disburses the remaining $200,000 net proceeds to A.

T must file a Form W-2 for $300,000 with respect to A under section
6051. T must also file a Form 1099-MISC with respect to B for
$300,000 (see paragraph (a)(1)(iii) of this section).

Example 2. The facts are the same as in Example 1, except that T
knows that the attorney fee is one-third of the settlement amount,
or $100,000. T must file a Form W-2 for $300,000 with respect to A
under section 6051. T must also file a Form 1099- MISC with respect
to B for $100,000 under section 6041. T is not required to file an
information return with respect to B for $200,000 (the balance of
the gross proceeds) because of the exception provided in paragraph
(c)(5) of this section.

Example 3. C, a plaintiff in a suit for physical personal injury
against V, is represented by attorney D. C settles his suit for
damages that are excludable from C's gross income under section
104(a)(2). The settlement check is payable jointly to C and D. V
does not know the amount of the attorney fee. V must file a return
of information with respect to D under paragraph (a)(1) of this
section. V is not required to file a return of information with
respect to C under section 6041 because the settlement amount is
excludable from C's income under section 104(a)(2).

Example 4. W, a defendant in a suit for wrongful injury, knows that
D, the plaintiff, has been represented by attorney E throughout the
proceeding. State O, where the suit is brought, mandates that
certain benefits and settlement awards be made payable to the
claimant only. W makes a check payable solely to D and delivers the
payment to E's office. W has made a payment to an attorney (see
paragraph (b)(1) of this section) and must file a return of
information under paragraph (a) of this section.

Example 5. X, a defendant in a suit for lost wages, reasonably
believes that F, the plaintiff, has been represented by attorney G
throughout the proceeding as evidenced by filings and correspondence
signed by G. X makes a check for damages payable solely to F and
delivers it to G's office. X has made a payment to an attorney (see
paragraph (b)(1) of this section) and must file a return of
information under paragraph (a) of this section.

Example 6. Y, a defendant in a suit, makes a payment of the gross
proceeds of the amount awarded under the suit to the plaintiff's
attorneys, H, I, and J. H, I, and J are not related parties. The
payment is delivered to J's office. J deposits the monies into her
trust account and pays H and I their respective shares. Y must file
a return of information with respect to J (see paragraph (b)(2)(i)
of this section). J must file a return of information with respect
to H and I (see paragraph (b)(3) of this section).

(g) Cross reference to penalties. See the following sections
regarding penalties for failure to comply with the requirements of
section 6045(f) and this section:

(1) Section 6721 for failure to file a correct information return.

(2) Section 6722 for failure to furnish a correct payee statement.

(3) Section 6723 for failure to comply with other information
reporting requirements (including the requirement to furnish a TIN).

(4) Section 7203 for willful failure to supply information
(including a taxpayer identification number).

(h) Effective date. The rules in this section apply to payments made
after December 31, 1999.

Deputy Commissioner of Internal Revenue

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