PLR 1147014: IRS requires Form 1099 reporting for supplemental unemployment benefits

Plain-English summary

An insurance company asked whether it had to report supplemental unemployment insurance benefits paid to insured individuals. The IRS concluded that the benefits were accessions to wealth, were not excluded from gross income, and were fixed and determinable income. Therefore, when the company paid at least $600 in benefits to an insured during a calendar year, it had to file Form 1099-MISC with the IRS and furnish a payee statement. The conclusion applied to the policy facts described in the ruling.

Ruling snapshot

• Question: Must the insurer report supplemental unemployment benefits under IRC § 6041?
• Outcome: Approved, with Form 1099-MISC reporting required for annual payments of $600 or more.
• Key authorities: IRC §§ 61, 6041, and 6110(k)(3); Treas. Reg. § 1.6041-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201147014 Third Party Communication: None
Release Date: 11/25/2011 Date of Communication: Not Applicable
Index Number: 6041.00-00, 6041.03-00
Person To Contact:
------------------------------------------------------------ ----------------------, ID No. -----------------

• Telephone Number:
  ---------------------- ---------------------
  -------------------------------------- Refer Reply To:
  ------------------------------------- CC:PA:02
  ---------------------------------------- PLR-113110-11
  -------------------------------------------------------- Date:
  August 16, 2011

LEGEND:

Company = -------------------------------------------------
State A = ------
State B = -------------

Dear --------------:

This letter responds to the ruling request dated March 25, 2011, submitted on
Company’s behalf by its authorized representative, concerning whether Company is
required under section 6041 of the Internal Revenue Code to file information returns
with respect to payments of supplemental unemployment insurance benefits.

FACTS

Company is a property and casualty insurer licensed and located in State A. Among the
types of insurance that Company sells is supplemental unemployment insurance.
Company is licensed to sell supplemental unemployment insurance in State B under a
policy that Company submitted to the State B Department of Insurance for approval.
Company will issue policies providing supplemental unemployment insurance coverage
to individuals who are employed in State B at the start of a policy period. The policy
period begins on the date shown in an insured’s policy and, unless extended, ends on
the earlier of the date shown in the policy or the effective date of either party’s
cancellation of the policy. There is no coverage during the first six months of a new
policy, and any unemployment or advance notice of unemployment occurring during
that time results in no entitlement to benefits and voids the policy.
PLR-113110-11 2

The sample policy submitted with the ruling request provides that Company will pay
“supplemental unemployment benefits” to an insured individual for a period of
involuntary unemployment covered by the policy. The benefits under the policy
supplement public unemployment benefits paid by the State of State B. To the extent
State B unemployment benefits (along with any payments of unemployment or
supplemental unemployment insurance under some other insurance policy) are less
than 50 percent of an insured’s wages (as defined in the policy), policy benefits are
payable to make up the difference. A formula to calculate the amount of benefits
payable is set forth in the policy. An individual must be approved for and must actually
receive state unemployment benefits for a prescribed number of weeks (labeled in the
policy as an “Elimination Period”) to be eligible for benefits under the policy. A number
of other stated conditions and exclusions apply as well. For example, the policy insures
only against loss of full-time employment; an insured must not have actual or
constructive knowledge of impending unemployment at the start of the policy; and
unemployment cannot be due to events such as illegal conduct, war, an act of terrorism,
or a labor dispute. Supplemental unemployment benefits will generally end when
involuntary unemployment ends, state benefits stop accruing, or the maximum benefits
are paid out under the policy, whichever is earlier.

The supplemental unemployment insurance can be purchased in different ways. In
some cases, employers may offer their employees the option to purchase the insurance
through the employer. Employees who elect this option pay the premiums for the
insurance through voluntary, after-tax deductions from their wages, and the employer
remits the premium payments to Company on the employee’s behalf. Alternatively,
individuals can purchase supplemental unemployment insurance directly from Company
online or through licensed insurance agents, and thus without an employer’s
involvement. The premiums for Company’s supplemental unemployment insurance are
based on prevailing market rates and on the experience rating associated with an
individual’s employment. Premium payments are due according to a schedule specified
in the policy. Coverage is portable from one job to another, though the dollar amount of
premiums (and presumably the benefits) could change.

An insured claims the benefits under a policy by timely notifying Company of involuntary
unemployment and submitting a completed claim form and supporting documents as
proof of loss, to establish that the insured is receiving approved state unemployment
benefits. An updated claim is required for each week in which public benefits are paid,
and a claim is due within 60 days after the end of the corresponding week.

LAW AND ANALYSIS

Section 6041(a) requires anyone “engaged in a trade or business and making payments
in the course of such trade or business to another person, of rent, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
PLR-113110-11 3

determinable gains, profits, and income (other than payments . . . [reportable under
certain other sections not relevant here]), of $600 or more in any taxable year” to file an
information return with the Internal Revenue Service reporting the amount of the gains,
profits, or income paid and the name and address of the recipient. If a payor is required
to file an information return with the IRS under section 6041(a), the payor must also
furnish a statement to the payee showing the amount reported and the name, address,
and phone number of the payor’s point of contact. I.R.C. § 6041(d). The $600
threshold in section 6041 is measured as an aggregate of payments to the payee during
the calendar year. See Treas. Reg. § 1.6041-1(a)(1)(i). The IRS has designated Form
1099 Series returns to report section 6041(a) payments. Treas. Reg. § 1.6041-1(a)(2).
Form 1099-MISC is the prescribed form to report payments of miscellaneous income.

The information reporting requirement of section 6041 only applies, however, to
payments made during the calendar year to another person of “fixed or determinable
income.” Treas. Reg. § 1.6041-1(a). Income is broadly defined and encompasses
virtually any accession to wealth. Commissioner v. Schleier, 515 U.S. 323, 327 (1995);
Commissioner v. Kowalski, 434 U.S. 77, 82-83 (1977); Lonsdale v. Commissioner, 661
F.2d 71, 72 (5th Cir. 1981) (per curium). Section 61(a) in particular provides that,
except as otherwise excluded by the income-tax provisions of the Code, gross income
includes income from whatever source derived. See also Treas. Reg. § 1.61-1(a)
(providing that income may be realized in any form). Accordingly, an individual must
include in gross income any accession to wealth, unless an exclusion applies.

While any accession to wealth is generally income, not all income is fixed or
determinable. Income is "fixed" when it is to be paid in amounts definitely
predetermined. Treas. Reg. § 1.6041-1(c). Income is "determinable" when there is a
basis of calculation by which the amount to be paid may be ascertained. Id. Because
section 6041(a) is conditioned on a payor knowing that a payment to a payee is in the
nature of income and the amount of such income, if a payor cannot determine either
that a payment is in the nature of income or in what amount, then the payor is not
required to file an information return under section 6041(a). For instance, the Service
held in Rev. Rul. 80-22, 1980-1 C.B. 286, that an insurance company was not required
to file returns under section 6041(a) for crop insurance proceeds paid to certain farmers
because the insurer did not know if the payments were income to the farmers. For
farmers who had informed the insurance company that they were required to capitalize
farming expenses, the amount of insurance proceeds constituting income depended on
each farmer’s basis in the destroyed crops. That information was not known to the
insurance company, and the company could not require the farmers to disclose the
information. As the revenue ruling illustrates, however, the facts and circumstances
must render the income not fixed and determinable.

In this case, any benefits that an insured receives under a policy with Company for
supplemental unemployment insurance are an accession to wealth, i.e., income.
Additionally, there are no applicable provisions of the Code that exclude any part of
PLR-113110-11 4

these benefits from gross income. The entire amount of benefits paid (without regard to
premiums) therefore is includible in the recipient’s gross income. Any benefits paid are
also fixed and determinable income. Company will know when it pays the benefits,
which are paid in predetermined or “fixed” amounts, that the benefits are entirely
income, and Company will know the amount of the income (it is “determinable”).

CONCLUSION

For the reasons discussed above, we conclude that to the extent Company pays
benefits of $600 or more to an insured under a policy for supplemental unemployment
insurance during a calendar year, Company must file Form 1099-MISC with the IRS to
report the benefits paid and must furnish a payee statement to the insured.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

The ruling contained in this letter is based upon information and representations
submitted by the requester and accompanied by a penalty-of-perjury statement
executed by an appropriate party. Although this office has not verified any of the
material submitted in support of the ruling request, this material is subject to verification
on examination.

This ruling is directed only to the person requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made when
the letter is disclosed under section 6110 of the Code.

In accordance with the power of attorney on file, a copy of this letter is being sent to
your authorized representative.

                                   Sincerely,




                                   Pamela Wilson Fuller
                                   Senior Technician Reviewer
                                   (Procedure and Administration)

Enclosure (1)