CCA 1313028: State DOT must report condemnation payments on Form 1099-S

Plain-English summary

The IRS advised that a state transportation department acquiring real property through condemnation proceedings has an information-reporting obligation under IRC § 6045(e). The department must generally issue Forms 1099-S for the entire cash payment to the property owners, unless the transaction or recipient is exempt. The department is the proper filer because it is the transferee, even though a court issues the payments. It must solicit the transferors' taxpayer identification numbers, but generally will not face penalties for missing numbers if it made a good-faith effort to obtain them.

Ruling snapshot

• Question: Which party must report condemnation payments, and which form and amount must be reported?
• Outcome: Advice given that the state DOT must generally file Form 1099-S under IRC § 6045(e).
• Key authorities: IRC §§ 6041, 6045(e), 1033, and 121; Treas. Reg. §§ 1.6045-4(c)(1)(iii), 1.6045-4(d), 1.6045-4(e)(4)(iv), 1.6045-4(h)(1)(iv), 1.6045-4(i)(2), and 1.6045-4(l)(1)-(2)

Full text (IRS public release)

ID: CCA-651036-12 Number: 201313028
Release Date: 3/29/2013
Office: --------------
UILC: 6045.03-00

From: ----------------
Sent: Tuesday, June 5, 2012 10:36 AM
To: --------------------
Cc: -----------------
Subject: Information Reporting Requirements for Condemnation Payments

This is to confirm our prior oral advice in response to your request concerning the
reporting requirement and issuance of Forms1099 by the ----------------- State
Department of Transportation (DOT) when making payments for real property acquired
through condemnation proceedings. Your email states that the DOT issues Forms
1099-MISC for the condemnation awards, pursuant to I.R.C. § 6041, and is not sure
whether the DOT is the proper “payer” to be shown on the 1099-MISC since the
payments are actually issued by the court. The inquiry from DOT to you also is seeking
advice concerning the reluctance or refusal of the property owners to provide their
taxpayer identification numbers or Social Security numbers for the Forms 1099. For the
reasons explained below, we conclude that the DOT has a reporting requirement under
I.R.C. § 6045(e), rather than § 6041, and must issue Forms 1099-S reflecting the entire
cash payments to the recipients, unless the transaction or the recipient is exempt from
the reporting requirement. The DOT is required to solicit the TINs of the transferors, but
will not be subject to penalties if it has complied in good faith with the requirements set
forth in the regulations to solicit the TINs.

We assume for this analysis that the DOT acquires title to the real property as part of
the condemnation proceeding. A condemnation is treated as a sale or exchange of
property for tax purposes. Place Realty Corp. v. Commissioner, T.C. Memo 1962-144;
I.R.C. § 1033. Accordingly, the DOT has a reporting requirement under I.R.C. §
6045(e)(1) regarding returns required in the case of real estate transactions. That
section requires the “real estate reporting person” to file an information return with the
IRS, using Form 1099-S, and send a statement to the transferor with respect to the
real estate transaction. While some or all of the condemnation award may be excluded
from income, the regulations under section 6045 provide that the entire cash proceeds of
the “real estate transaction” are reportable even if the transaction is not currently taxable.
Therefore, under Regulation § 1.6045-4(h)(1)(iv), the Form 1099-S must include the
entire amount of the “gross proceeds” of the real estate transaction, including the
expenses of the transferor such as legal expenses. Reg. § 1.6045-4(i)(2).

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The regulations define “real estate reporting person” as the person responsible for
“closing the transaction” or, in the absence of such a person, the transferee. Reg. §
1.6045-4(e)(4)(iv). Accordingly, the State DOT, the transferee, is the proper party to
issue the Form 1099-S, and the DOT information should be set forth on the form as the
“Filer” information.

Reporting under I.R.C. § 6045(e) is required for transactions with value of $600 or more.
Reg. § 1.6045-4(c)(1)(iii). Certain sales or exchanges are exempt, and certain
transferors are exempt recipients, as set forth in the Code, regulations, and form
instructions. See Reg. § 6045-4(d) for a description of certain exempt transferors. In
addition, the seller of a principal residence may be exempt from § 6045(e) reporting
requirements if the seller provides the real estate reporting person with a certification
that the sale involves the principal residence, and that the full amount of gain on the
sale is excludable from gross income under I.R.C. § 121. See Rev. Proc. 98-20, 1998-7
I.R.B. 32, for a sample certification form.

With respect to the transferor’s information, the regulations require the reporting person
to “solicit a TIN from the transferor at or before the time of closing.” Reg. § 1.6045-
4(l)(1). The transferor is required to furnish the TIN to the reporting person and certify
that the TIN is correct. If the reporting person does not receive the transferor’s TIN, the
reporting person will not be subject to penalties, assuming that the reporting person has
complied in good faith with the requirement to solicit the TIN. Reg. § 1.6045-4(l)(2).

Please contact me if you have any further questions in this matter.

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