Unsure which 1099 to issue

[jhrebik]

What is the name of your state (only U.S. law)? DC

My client, a nonprofit organization, has been contracted to distribute payments from a legal settlement to individuals from the tenant association who sued building ownership for violation of TOPA rights. Some of the tenants intend to claim the payments are capital gains, which may be appropriate, yet others who received payments were not impacted by the initial violation but had to agree to give up any right to TOPA claims under the agreement.

From my understanding, the defendant will issue a 1099 to the association for the initial disbursement of settlement funds, who will then issue a 1099 to my client. Since the funds are passing through both and this falls outside of UBIT due to being a one-time event, I don't think there is an issue thus far. Then, I believe that as the issuer of the payments to the individuals, my client will need to provide 1099s for each recipient. However, I am unsure which form to issue and neither my client nor the association wishes to take a stance on the taxation.

If there is doubt, is it appropriate to issue a 1099-MISC (box 3 Other Income) to all individuals and let them defend their tax treatment with the IRS?

Are there any other issues my client should be aware of?

Thanks very much!

 

[justalayman]

. You use the appropriate 1099 and that is all there is to it. You do not determine anything regarding the recipients tax status.

scroll down to page 20 or so for a listing of the various 1099's and what each of them are used for. Choose the appropriate form based upon the purpose of the payment to the recipient.

http://www.irs.gov/pub/irs-pdf/i1099gi.pdf

 

[jhrebik]

Thank you for your response. I understand that the "purpose of the payment" is determined by the origin of the claim for which the damages were awarded. In this case, none of the individuals were actually party to the suit and not all who received payments were aggrieved. In other words, it is difficult to determine the actual purpose of the payment and apply it to all individuals. In the absence of such, is it acceptable just to report all payments on a 1099-MISC?

For example, one could make an argument that a 1099-S may be appropriate: File Form 1099-S, Proceeds From Real Estate Transactions, to report the sale or exchange of real estate. Reportable Real Estate: Generally, you are required to report a transaction that consists in whole or in part of the sale or exchange for money, indebtedness, property, or services of any present or future ownership interest in any of the following: Inherently permanent structures, including any residential, commercial, or industrial building;

...but I am not certain because the individuals gave up this interest, not the association, but they weren't the plaintiffs. Does that make sense? Which form would you send out?

 

[davew128]

I would agree that a generic 1099-MISC for "Other Income" would be appropriate. Its not the issuers responsibility to determine how each recipient treats the income on their return.

Case in point would be the numerous 1099s I see every year from mutual fund settlements. Shows up as Other Income on the 1099 but since it relates to a capital asset (presumably held long term) I report them all as long term gains.

 

[justalayman]

Given that you tossed in the

In this case, none of the individuals were actually party to the suit and not all who received payments were aggrieved

I have no idea what so ever as to why they would be receiving the payments at all.


If it is this confusing to you, where you have the facts, I would suggest you seek the counsel of a tax attorney or CPA who can review the specific facts and give you an opinion.

 

[LdiJ]

Given that you tossed in the



I have no idea what so ever as to why they would be receiving the payments at all.


If it is this confusing to you, where you have the facts, I would suggest you seek the counsel of a tax attorney or CPA who can review the specific facts and give you an opinion.

I agree that a consultation with a professional who can review all of the facts of the situation would be appropriate. I disagree that it needs to be a tax attorney or CPA at this point. They can review it with an experienced tax professional who could refer them to a tax attorney or CPA if the facts warrant the involvement of a tax attorney or CPA.

The lack of facts here, make it difficult to give much of a response. I tend to think that in the end, dave's take on it is going to be correct, but the lack of facts here make me hesitate to agree.