Form W-9

Stu, just to clarify for those reading, you are an attorney and this money is related to that work, right?

I don't have the precise answer, but I believe it starts in the instructions for Form 1099-MISC, which has a section titled "Gross proceeds paid to attorneys."

In the end, I think the reporting will be in Box 14 of the 1099-MISC issued to you, but I haven't dealt with this situation before. Here's something from the internet that looks promising, perhaps Scenario 4 applies to you.

Right. We are negotiating for the defendant to pay my client back for attorney's fees incurred. This is a reimbursement, so why are they talking about a W-9 anyway? There's no taxable income there. So under Section 6041, they don't need to file a 1099. Are they allowed to file one even if it's not a taxable payment?

Thanks. To me that looks mostly like someone paying fees directly to a lawyer, either his own or the other side. That's not what's happenning in this case.

Thanks. That helps a lot.

My initial thought is that I am holding the payment for the client in trust. In effect it is a grantor trust. So under Regulation Section 1.671-4(b), I, as the trustee, can elect to give a W-9 with the beneficiary's tax ID number.

Based on the link you sent, I found regulations under Section 6041 which say (in the examples) that for payments to attorneys on behalf of clients, the 1099 (if any) goes to the client.

Section 6041 also says that the return is only required for taxable income. Since the client is only being made whole for damages paid out (as attorney's fees), there should be no taxable income there.

Stu, just to clarify for those reading, you are an attorney and this money is related to that work, right?

I don't have the precise answer, but I believe it starts in the instructions for Form 1099-MISC, which has a section titled "Gross proceeds paid to attorneys."

In the end, I think the reporting will be in Box 14 of the 1099-MISC issued to you, but I haven't dealt with this situation before. Here's something from the internet that looks promising, perhaps Scenario 4 applies to you.

No, it's about sending a 1099 to the lawyer rather than the client. The money is being paid to the lawyer in trust for the client. It is the client's money, and the lawyer has no interest in it at all.

This is not income to anyone. This is a payment from a defendant to the client to reimburse the client for attorney's fees incurred in having to sue.

Take a look at Regulation ?1.6041-1(f)(2), examples 1 and 2. Money paid to a lawyer for the benefit of the client is reported on a

In addition, the 1099 is only for taxable income. How is it taxable if it is only for reimbursement and no damages?

The 1099 is issued to the client. The 1099 would include the amount of the settlement and the attorney fees (this issue was settled years ago by the USSC). The client must declare as income the full amount including the attorney fees. Then depending upon the type of settlement, the attorney fees will be fully deductible (e.g., lawful discrimination suit) or deductible on Schedule A as a misc. itemized deduction subject to the 2% haircut. Additionally, as misc. itemized deductions are not allowed for AMT, it is possible that the plaintiff will get royally screwed.

The 1099 is issued to the client. The 1099 would include the amount of the settlement and the attorney fees (this issue was settled years ago by the USSC). The client must declare as income the full amount including the attorney fees. Then depending upon the type of settlement, the attorney fees will be fully deductible (e.g., lawful discrimination suit) or deductible on Schedule A as a misc. itemized deduction subject to the 2% haircut. Additionally, as misc. itemized deductions are not allowed for AMT, it is possible that the plaintiff will get royally screwed. ============= The fact that the money is initially paid to the attorney's client trust account and then disbursed to the client doesn't matter. About a decade ago, the IRS had an audit project regarding attorneys and found that they were hiding income by placing it into their client trust accounts first. The correct resolution for this is for the attorney to send a 1099 to his client for further disbursements (even if they're not taxable - e.g. 26 U.S.C. 104(a) or 26 U.S.C. 111). Granted, that creates a mismatch for the client, but that's usually handled on a form 8275.

Take a look at Treas.Reg ?1.6041-1(f)(2), examples 1 and 2. They show that any money paid to an attorney for the benefit of his client (even if the payment includes a sum for attorney's fees) is 1099'd to the client, not the lawyer.

What if the fee was taken as a business expense? Then it's taxable. Under this likely scenario, the payor has no idea if the reimbursement is taxable because it had been expensed in a prior year.

So, yeah, the payor must prepare 1099-MISC unless another exception applies.

Doesn't/wouldn't IRC 6045(f) apply???

MTW

I don't see where it specifies to whom the 1099 will apply, attorney or client.

As I recall, that point is made clear in an associated reg. The 1099 is issued to the attorney when the attorney is a payee of the payment.

MTW

Sec. 6045(f) is trumped by 6041(a). (6045(f)(2)(B))

...but 6041(a) defers back to 6045 - see reference about half way through paragraph (a) - so around and around we go! :-)

Reg 1.6045-5 provides some examples demonstrating the interaction of the two sections, but it looks like in many instances the payor must report the payment TWICE - once to the attorney receiving it (presumably in box 14 on Form 1099-Misc), and then again to the winning party if it appears likely the settlement is taxable.

But back to Stuart's original quandary, it seems perfectly "legit" for the payor party to be requesting his tax ID info, etc., for use in this transaction. See Reg 1.6045-5(e).

MTW

1. I don't think we are dealing with brokers as defined in 6045 so 6045 would not be relevant. Forgetting that for a second...
2. It is not a circle. 6041 prescribes the requirement and defers to