NEW FORM 1099 REQUIREMENT FOR RENTAL INCOME
Taxpayers receiving income from renting real estate should be aware of their new information-reporting responsibilities under IRC § 6041(h)(1), as amended by the Small Business Jobs Act of 2010 (PL 111-240). The law requires them to report payments they make totaling $600 or more to any service provider during 2011 and each subsequent year. For this purpose only, rental income recipients are subject to the same requirements as a trade or business, even if they are not otherwise treated as engaged in the trade or business of renting real estate.
Unless the provision is repealed (two measures that also would have repealed the broader requirement of section 6041(a), as amended by the Patient Protection and Affordable Care Act, PL 111-148, failed to pass the Senate in late November), starting in early 2012, such recipients of real estate income must provide an information return (typically, Form 1099-MISC, Miscellaneous Income) to the IRS and to the service provider for payments made in the preceding calendar year for all services rendered in the course of earning rental income. Besides repairs and maintenance, for example, such payments could include those to accountants. Therefore, for payments made since Jan. 1, 2011, rental property owners will need to maintain records of the name, address and taxpayer identification number of each service provider, using Form W-9 or a similar form.
The law provides exceptions for individuals who can show that the requirement will create a hardship for them. The IRS was directed to issue guidance on what constitutes sufficient hardship to qualify for the exception or how a taxpayer would demonstrate that hardship. The law also provides for a de minimis exception for taxpayers receiving rental income below a certain amount to be determined by the IRS and an exception for members of the military or the “intelligence community” if substantially all their rental income comes from temporarily renting their principal residence.
Information return penalties. The act also increased penalties for failure to file this and other payee information returns correctly and by the prescribed filing date. It also removed lower penalty maximum amounts applicable under prior law for small businesses (those with average annual gross receipts under $5 million). For each information return required to be filed on or after Jan. 1, 2011, the first-tier penalty increases from $15 to $30; the second-tier penalty from $30 to $60; and the third-tier penalty from $50 to $100. For small business filers, the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. Higher amounts apply to taxpayers that do not qualify as small businesses. The minimum penalty for each failure due to intentional disregard increases from $100 to $250. The increased penalties apply to information returns required to be filed on or afterJan. 1, 2011.
NO TRUTH IN VERITAS FOR IRS
The IRS indicated it will not acquiesce in the Tax Court’s 2009 decision in VERITAS Software Corp. v. Commissioner (133 TC no. 24) (see previous Tax Matters coverage, March 2010, page 59).
The case concerns the company’s cost-sharing arrangement with an Irish subsidiary in a joint development project. Using the “comparable uncontrolled transaction” method, VERITAS valued pre-existing intangible assets it licensed to the subsidiary at $166 million and received payment from the subsidiary in that amount. The IRS instead applied the “forgone profits method,” saying the buy-in payment should have been $1.6 billion. It issued a deficiency totaling $758 million for tax years 2000 and 2001. The Tax Court concluded that VERITAS’ method, with certain adjustments, was appropriate, but the IRS’ method was “arbitrary, capricious and unreasonable.”
In Action on Decision 2010-05, the Service rejected the court’s reasoning and its results. It said the facts found by the court erroneously attributed no value to research and development rights to pre-existing technology. Also, the IRS said, the court erroneously applied Treas. Reg. § 1.482-7(g)(2) with respect to future income or value attributable to intangibles to be developed under the agreement, “apparently on the theory that such future income stream is already paid for through the participants’ cost shares of ongoing R&D.” The IRS argued that the regulations clearly prescribe that if a cost-sharing participant makes pre-existing intangibles available under a cost-sharing agreement for use in research in the intangible area, the participant must be compensated for the contribution of the intangibles to the research project. It did not appeal the decision, however.
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