Current Issues in Information Reporting

Congress and the IRS continue to refine the rules in the area of information reporting by broadening certain reporting requirements and reducing the burden of others. Recent changes in the reporting requirements for cancellation of debt (COD) income, barter exchanges, stock acquisitions and the application of the predecessor/successor rules are discussed.

COD Income

Since 1994, financial institutions and the Federal government have been required to report COD under Sec. 6050P. Tax legislation in 1999 expanded this reporting requirement to any organization "a significant trade or business of which is the lending of money." As a result, finance companies, credit card companies and certain other businesses must issue Forms 1099-C, Cancellation of Debt, for debt discharges occurring after 1999.

Under Regs. Sec. 1.6050P-1(a)(1), a debt is deemed cancelled, and thus reportable, on the date that an "identifiable event" occurs. Regs. Sec. 1.6050P-1(b)(2) lists eight identifiable events, including:

• A cancellation under U.S. Code Title 11 (bankruptcy);
• An agreement between the creditor and debtor to cancel a debt at less than full consideration, if the last event necessary to cancel the debt has occurred;
• A cancellation resulting from a decision or a defined policy (including an established business practice) of the creditor to discontinue collection activity and cancel the debt; and
• The expiration of a "nonpayment testing period." This event is deemed to occur when the creditor has not received a payment on the debt during the prior 36-month period ending on December 31; however, the creditor can rebut the deemed occurrence if it has engaged in significant bona fide collection activity during the 12-month period ending on December 31 or if the facts and circumstances indicate that the debt has not been cancelled.

Debt cancellations must be reported if the cancelled debt is more than $600. The requirement applies to corporate debtors, as well as to individuals, partnerships, trusts, estates, associations and companies.

Many issues surround the 1999 expansion of COD reporting. For example, the legislative history does not define a "significant" lending activity, and does not make clear whether all discharges of debt by a company will be subject to reporting once the company is required to report, because a significant portion of its trade or business is the lending of money. However, in effect, lenders will have an extra year to resolve these questions; earlier this year, the Service announced (in Notice 2000-22) that no penalties will be imposed on lenders subject to the newly expanded reporting requirements for failure to issue Forms 1099-C for 2000.

Caution: This penalty relief only applies to lenders not required to report COD under Sec. 6050P prior to the 1999 amendment of that provision.

Barter Exchanges

Sec. 6045 generally requires a barter exchange to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, for exchanges of property or services through a barter exchange. A barter exchange is defined as any person whose members or clients contract with either each other or with such person to trade or barter property either directly or through such person. Barter exchanges generally are reportable on a transaction-by-transaction basis, unless the Form 1099 recipient is a corporation (in which case an aggregate Form 1099 may be issued).

The IRS announced, in Notice 2000-6, that barter exchanges no longer will be required to report exchanges involving property or services with a fair market value (FMV) of less than one dollar. Notice 2000-6 was issued in response to concerns by certain barter exchanges as to the information reporting burden caused by the high volume and minimal value of most Internet Website banner ad swaps.

Notice 2000-6 does not affect information reporting requirements resulting from the exchange of services between two parties engaged in a trade or business. Such transactions continue to be reportable under Sec. 6041, which requires reporting of payments of at least $600 for services rendered in the course of a trade or business during the calendar year; however, payments to corporations (other than for legal or medical services) are not subject to reporting under Sec. 6041.

Guidance on Sec. 6041 reporting for exchanged services was provided in Rev. Rul. 85-101, concluding that the FMV of services does not have to be reported by the payor under Sec. 6041, unless the services provided related to the "payor's" trade or business. In the ruling, an attorney represented a painter for nonpayment of business debts in exchange for the painting of the attorney's law offices. Each taxpayer was required to report the FMV of the services rendered by the "payor" on Form 1099-MISC. However, the Service stated that the painter would not be required to report the value of painting the law offices if the attorney had represented the painter in a divorce proceeding, although the attorney would still be required to report the value of his services on Form 1099-MISC. The distinction in the second case was that the divorce proceeding was a personal matter unrelated to the painter's trade or business.

Stock Acquisitions

Sec. 6045 generally requires a broker to report gross proceeds paid to a customer from the sale of securities on Form 1099-B. Under Regs. Sec. 1.6045-1(a)(1), a broker is a "person...that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others." In addition, Regs. Sec. 1.6045-1(a) provides that the term "effect" means, as to a sale, "to be a principal in such sale," and a customer is defined as the person who makes the sale. Therefore, a "broker" may be any person who purchases stock in the ordinary course of the person's trade or business.

Many companies periodically redeem or purchase their own shares; whether these acquisitions are reportable under Sec. 6045 depends on their regularity. Rev. Rul. 86-21 provided that a corporation purchasing odd-lot shares from its stockholders on an irregular basis is not a broker for Sec. 6045 purposes. In contrast, the ruling also concluded that, if a corporation regularly stands ready to redeem its stock, it is a broker for purposes of the reporting requirement. Thus, any company that regularly redeems its shares from stockholders should obtain Forms W-9, Request for Taxpayer Identification Number and Certification, and issue Forms 1099-B for those acquisitions. Similarly, a business (e.g., a venture capital firm) that regularly acquires the stock of other companies should obtain Forms W-9 from the selling shareholders and issue Forms 1099-B to those sellers.

Expansion of the Predecessor/Successor Rule

Under the long-established predecessor/successor rule and Rev. Proc. 96-60, an employer that acquires substantially all the assets of a trade or business can agree with the predecessor employer to issue one Form W-2 to employees transferred from the predecessor to the successor. A frequent question is whether the acquiring entity (purchaser) may issue one Form 1098/1099 for all the transactions for the entire year, including those recorded by the acquired (seller) entity. Such reporting was not permitted in the past. However, Rev. Proc. 99-50 permits such reporting, provided the purchaser acquired substantially all the property used either in the trade or business or in a separate unit of the seller, and the seller (or its separate unit) has not continued to make such payments after the acquisition.

The parties may agree to apply Rev. Proc. 99-50 to specific forms (e.g., Forms 1098 or 1099-INT) or specific reporting entities (i.e., any unit, branch or location within a particular business entity).

The Service will relieve a seller of its reporting obligations for designated forms only to the extent that the agreement meets the Rev. Proc. 99-50 requirements, and the purchaser satisfies all the agreement's conditions. The purchaser also must file a statement with the IRS, indicating that the appropriate forms are being filed on a combined basis and disclosing the amount of any tax that has been withheld respectively by the seller and by the purchaser for each type of form.

Rev. Proc. 99-50 permits combined information reporting on all forms in the 1099 series (Forms 1098, 5498, 1042-S and W-2G). It is effective for filings after 1999, and also may be applied retroactively, provided all its conditions were satisfied.

From Deborah J. Pflieger, J.D., LL.M., and George Fox, CPA, J.D., LL.M., Washington, DC