Professional Services Accounting ARTICLE -
Payments to Attorneys - Form 1099-MISC
Target Audience: Law Firm Professionals, Lawyers, Contribution Plans Interest
Proposed Regulation §1.6045-5, Information Reporting on Payments to Attorneys, was issued and although it has not been finalized, the IRS has stated that these regulations may be relied upon to provide a safe harbor for interpretation of the statute.
According to these regulations, every payor engaged in a trade or business who, in the course of that trade or business, makes payments aggregating $600 or more during a calendar year to an attorney in connection with legal services (whether or not the services are performed for the payor) must file an information return for such payments. The requirement applies whether or not a portion of a payment is kept by the attorney as compensation for legal services rendered; or other information returns are required.
A person required to file an information return 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 calendar year in which the payment was made.
(1) Joint or multiple payees:
(i) Check delivered to payee attorney. If more than one attorney is listed as a payee on a check, an information return must be filed with respect to the payee attorney, if any, who received the check.
(ii) Check delivered to nonpayee or to payee nonattorney. If one or more than one attorney is listed as a payee on a check and the check is delivered to a person who is not a payee on the check, or to a payee who is not an attorney, an information return must be filed with respect to the first-listed payee attorney on the check.
(2) Attorney required to report payments made to other attorneys. If, due to the payment of a check, an information return is required to be filed, the attorney with respect to whom the information return is required to be filed (tier-one attorney) must file an information return, as required under this section, for any payment that the tier-one attorney makes to other attorneys with respect to that check.
A return of information is not required 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 partners by a partnership engaged in providing legal services.
(3) Payments of dividends or corporate earnings and profits paid to its shareholders by a corporation engaged in providing legal services.
(4) Payments made to a nonresident alien individual, foreign partnership, or foreign corporation that does not engage in a trade or business in the United States and does not perform any labor or personal services in the United States.
(5) Payments made to an attorney in the attorney’s capacity as the person responsible for closing a transaction for the sale or exchange of any present or future ownership interest in real estate.
Example 1. One check--joint payees--taxable to claimant. Employee C, who sues employer P for back wages, is represented by attorney A. P settles the suit for $300,000 that represents taxable wages under existing legal principles and writes a settlement check payable jointly to C and A in the amount of $200,000, net of income and FICA tax withholding. P delivers the check to A. A retains $100,000 of the payment and disburses the remaining $100,000 to C. P must file an information return with respect to A for $200,000.P must also furnish an information return to C in the amount of $300,000.
Example 2. One check--joint payees--excludable to claimant. C, who sues corporation P for damages on account of personal physical injuries, is represented by attorney A. P settles the suit for a $600,000 damage payment that is excludable from C’s gross income. P writes the $600,000 settlement check payable jointly to C and A and delivers the check to A. A retains $240,000 of the payment as A’s attorney’s fees and remits the remaining $360,000 to C. P must file an information return with respect to A for $600,000.
Example 3. Separate checks--taxable to claimant. C, a plaintiff in a suit for lost profits against corporation P, is represented by attorney A. P settles the suit for $300,000. A requests P to write two checks, one payable to A in the amount of $100,000 for A’s attorney’s fees and the other payable to C in the amount of $200,000. P writes the checks in accordance with A’s instructions and delivers both checks to A. P must file an information return with respect to A for $100,000.
Example 4. Check made payable to claimant, but delivered to nonpayee attorney. Corporation P, a defendant in a suit for damages knows that C, the plaintiff, has been represented by attorney A throughout the proceeding. P settles the suit for $500,000. Pursuant to a request by A, P writes the $500,000 settlement check payable solely to C and delivers it to A at A’s office. P is not required to file an information return with respect to A, because there is no payment to an attorney.
Example 5. Multiple attorneys listed as payees. Corporation P, a defendant, settles a lost profits suit brought by C, for $1,000,000 by paying a check naming C’s attorneys, Y, A, and Z, as payees in that order. Y, A, and Z are not related parties. P delivers the payment to A’s office. A deposits the check proceeds into a trust account and makes payments by separate checks to Y of $100,000 and to Z of $50,000, for their attorneys’ fees. A also makes a payment by check of $550,000 to C. P must file an information return for $1,000,000 with respect to A. A, in turn, must file information returns with respect to Y of $100,000 and to Z of $50,000.
Example 6. Amount of the payment--attorney does not provide TIN. Corporation P, a defendant, settles a suit brought by C for $1,000,000 of damages. C’s attorney, A, did not furnish P with A’s TIN. P is required to deduct and withhold tax from the $1,000,000. Therefore, P makes the payment by a $720,000 check naming C and C’s attorney, A, as joint payees. P must also file an information return with respect to A in the amount of $1,000,000.
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