Court clerks generally need not issue Forms 1099 for specified disbursements

Plain-English summary

Chief Counsel considered three information-reporting questions involving county clerks of court. A clerk that forwards garnished funds to a creditor's attorney is not the payor under sections 6041 or 6045 because the clerk performs ministerial duties, lacks a significant economic interest, and is neither the obligor nor its insurer or guarantor. The same reasoning applies when the clerk refunds an attorney's unused deposit at the end of a case, and section 6041 also does not require reporting when the refund is not fixed or determinable income. A clerk also need not issue Form 1099-S for a foreclosure because transfers satisfying secured debt are excluded from that reporting rule. Instead, a lender acquiring or learning of abandoned secured property generally reports under section 6050J on Form 1099-A, with Form 1099-C potentially used when debt is canceled. The advice was expressly limited to the described facts.

Ruling snapshot

• Question: Must a county clerk issue Forms 1099 for garnishment payments, client-deposit refunds, or foreclosure transactions?
• Outcome: Advice given: no, under the specific facts analyzed
• Key authorities: IRC §§ 111, 6041, 6045, 6050J; Treas. Reg. §§ 1.6041-1, 1.6045-4, 1.6045-5

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201533012
       Release Date: 8/14/2015
       CC:PA:01: MEHara                        Third Party Communication: None
       POSTS-143207-14                         Date of Communication: Not Applicable

UILC: 6041.05-00, 6045.07-01, 6050J.00-00

date: May 04, 2015

 to:   Wendy E. Speelman
       Internal Revenue Agent
       Fed-State and Local Government
       (Tax Exempt and Government Entities)

from: Blaise Dusenberry
Senior Technician Reviewer
Branch 1
(Procedure & Administration)

subject: 1099 Requirement and Deposit Refunds/Garnishment

       This memorandum responds to your request for assistance. This advice may not be
       used or cited as precedent.

       ISSUES

          1. Whether an ------- County Clerk of Court is required to issue a Form 1099 to an
             attorney when the Court sends a debtor’s garnished funds to a creditor’s
             attorney, or to an attorney where the attorney is the creditor.

          2. Whether an ------- County Clerk of Court is required to issue a Form 1099 to an
             attorney who is refunded their client’s money at the end of a case.

          3. Whether an ------- County Clerk of Court is required to issue a Form 1099-S,
             Proceeds From Real Estate Transactions, on foreclosure real estate
             transactions.

POSTS-143207-14 2

CONCLUSIONS

   1. An ------- County Clerk of Court is not required to issue a Form 1099 to an
      attorney when the Court sends a debtor’s garnished funds to a creditor’s
      attorney.

   2. An ------- County Clerk of Court is not required to issue a Form 1099 to an
      attorney who is refunded their client’s money at the end of a case.

   3. An ------- County Clerk of Court is not required to issue a Form 1099-S, Proceeds
      From Real Estate Transactions, on foreclosure real estate transactions.

BACKGROUND INFORMATION

In -------, justices of the Supreme Court, and the judges of the court of appeals and the
court of common pleas are elected on a nonpartisan ballot.1 There is a court of
common pleas in each of the ---- counties.2 Specific courts of common pleas are divided
into separate divisions by the General Assembly, including general, domestic relations,
juvenile and probate divisions. --------County Clerks of Court are elected for ---- year
terms.3 The Clerk of Court’s duties include filing, docketing, indexing and preserving all
court pleadings for civil, felony criminal and domestic relations cases. The Clerk of
Courts also accounts for all monies collected, and issues writs to carry out Court orders
including summons, subpoenas, warrants to arrest and death warrants in capital cases.
Payments made by the ------- County Clerks of Court include garnishments and refunds
of deposits. Your office has inquired whether ------- Clerks of Court are required to file
and furnish payee statements in particular circumstances. We have analyzed these
situations under two potentially applicable reporting provisions. We stress that the
analysis discussed here does not apply to any other factual scenario.

REPORTING REQUIREMENTS IN GENERAL

There are several potential reporting provisions that may apply to ------- County Clerks
in the course of their business. One applicable reporting requirement is that set forth in
section 6041(a), which provides, in pertinent part, that all persons engaged in a trade or
business and making payment of fixed or determinable gains, profits, or income in the
course of that trade or business to another person of $600 or more in a tax year must
report those payments in information returns filed with the Internal Revenue Service,
and furnish written statements to the recipients of the payments. Treas. Reg. § 1.6041-
1(i) provides that payments made by a state or a political subdivision are subject to this
reporting requirement. Under the separate definitions set forth in Treas. Reg. § 1.6041-
1(e), sometimes referred to as the middleman regulations, a person that makes a
1
------------------------------------.
2
The Court of Common Pleas are established by the ------------------------------------------------------------
3
---------------------------------------------
POSTS-143207-14 3

payment in the course of its trade or business on behalf of another person is the payor4
that must make the information return for that payment if the payment is one that must
be reported under I.R.C. § 6041 and if, under all the facts and circumstances, that
person:

    1. Performs management or oversight functions, that is, performs more than
       mere administrative or ministerial functions, Treas. Reg. § 1.6041-1(e)(1)(i),
       or

    2. Has a significant economic interest in the payment. Treas. Reg. § 1.6041-
       1(e)(1)(ii).5

A second applicable reporting requirement is provided by section 6045(f), which
requires that all persons engaged in a trade or business who make certain payments to
attorneys in connection with legal services in the course of that trade of business must
report those payments in information returns filed with the Internal Revenue Service and
furnish written statements to the recipients of the payments. The reporting requirement
under Section 6045(f), however, does not apply to any payment which is required to be
reported under Section 6041(a). See I.R.C. § 6045(f)((2)(B); Treas. Reg. § 1.6045-
5(c)(4).

Treas. Reg. § 1.6045-5(d)(3) contains its own definition of the term “payor” and defines
a payor for section 6045 purposes as a person who makes the payment if that person
is:
1. an obligor on that payment, or

    2. is the obligor’s insurer or guarantor, see Treas. Reg. § 1.6045-5(d)(3).

The regulation further defines a “payor” to include a person who pays a settlement
amount to an attorney of a client who has asserted a tort, contract, violation of law, or
worker’s compensation claim against the person, and the person’s insurer if the insurer
pays the settlement.

4
The definition of “payor” under Treas. Reg. § 1.6045-5(d)(3) is different from the definition under Treas.
Reg. § 1.6041-1(e).
5
If two or more meet the requirement for making the return of information under Treas. Reg. § 1.6041-
1(e), the person obligated to make the payment is the person closest in the chain to the payee, unless the
parties agree in writing that one of the other parties meeting the requirement in Treas. Reg. § 1.6041-1(e)
will report the payment. Treas. Reg. § 1.6041-1(e)(2).
POSTS-143207-14 4

FACTS AND ANALYSIS

Issue 1. Whether an ------- County Clerk of Court is required to issue a Form 1099 to an
attorney when the Court sends a debtor’s garnished funds to a creditor, or to the
creditor’s attorney.

You describe a situation where a creditor files suit to collect a debt, and the Court
orders the debtor’s funds, usually wages, garnished to pay the debt. The Clerk of the
Court collects the garnishment proceeds, and forwards them to the creditor. The Clerk
is also authorized under ------- law to collect a “poundage fee” in garnishment actions.
Similarly, a criminal defendant ordered to make restitution to the victim may make a
remittance to the Clerk of the Court, who will forward the remittance to the victim.

Section 6041(a)
We first examine whether section 6041(a) applies to require reporting by --------Clerks of
Court of a payment of a debtor’s garnished funds to a creditor. We agree that the
amounts may constitute fixed or determinable gains, profits, or income to the creditor for
purposes of section 6041(a). The analysis does not end there, however. In order for
section 6041(a) reporting to apply, the Clerk must meet the separate definition of a
“payor” for purposes of the reporting requirements under section 6041(a) and Treas.
Reg. § 1.6041-1(e).

It is our view that since ------- County Clerks of Court neither perform management or
oversight functions, nor have a significant economic interest in the payment, they do not
meet the definition of “payors” that must make an information return when they send a
debtor’s garnished funds to a creditor’s attorney or to an attorney where the attorney is
the creditor under the middleman regulations pursuant to I.R.C. § 6041(a).

When a debtor’s garnished funds are paid through an ------- County Clerk of Court to a
creditor’s attorney, or to an attorney where the attorney is the creditor, the source of the
payment and the original “payor” is the debtor. Under the middleman regulations under
Treas. Reg. § 1.6041-1(e), however, a person will be considered a payor if the person
performs management or oversight functions, that is, performs more than mere
administrative or ministerial functions, see Treas. Reg. § 1.6041-1(e)(1)(i),or has a
significant economic interest in the payment, see Treas. Reg. § 1.6041-1(e)(1)(ii). The
regulation states that an example of a person that would not be required to make an
information return under these regulations is a person that merely writes checks at the
direction of others in connection with a transaction, because that person is performing a
task that is merely administrative or ministerial. See Treas. Reg. § 1.6041-1(e)(1).

The determination of whether a person performs management or oversight functions
with respect to a payment made on behalf of another, or has a significant economic
interest in connection with that payment, is a factual one. Examining the role of -------
County Clerks of Court, we conclude that they do not perform management or oversight
functions under Treas. Reg. § 1.6041-1(e)(1)(i). Although ------- County Clerks of Court
POSTS-143207-14 5

make garnishment payments, the true source of the payments is the debtor. The funds
are distributed pursuant to Court orders.6 An ------- County Clerk of Court has no
discretion in making the payments.7 We conclude that ------- County Clerks of Court do
not perform management or oversight functions with respect to these payments as they
are merely performing their administrative and ministerial duties.

We have also considered whether the Clerk of the Court has a significant economic
interest, particularly in light of the “poundage fee” being collected. The determination of
whether a person has a significant economic interest in connection with that payment is
a factual one. ------- Court clerks are authorized under ------- statute to subtract a
poundage fee in garnishment actions.8 Even though the “poundage fee” is paid over to
the Clerk, we conclude that ------- County Clerks of Court do not have a significant
economic interest in the payment under Treas. Reg. § 1.6041-1(e)(1)(ii).

Treas. Reg. § 1.6041-1(e)(1)(ii) states that a significant economic interest in a payment
is “an economic interest that would be compromised if the payment was not made, such
as by a mechanics lien on property to which the payment relates, or a loss of collateral.”
A poundage fee is not similar to a mechanics lien, which is a statutory interest that a
creditor has in another’s property that secures payment for labor or materials supplied in
improving, repairing, or maintaining real or personal property. Neither is a poundage
fee similar to a loss of collateral. Collateral is property that is pledged as security
against a debt, or property that is subject to a security interest. A poundage fee does
not involve security or a security interest, rather, it is a percentage commission awarded
for money recovered under a judicial process, such as an execution.

Examples under Treas. Reg. § 1.6041-1(e)(5) further illustrate the meaning of a
significant economic interest in the context of retaining a commission and provides:

6
Whether a judge in the exercise of his judicial duties in collection actions is subject to information
reporting responsibilities under the middleman regulations is a close call and this memorandum does not
express an opinion on that issue. We note, however, that neither I.R.C. § 6041 nor Treas. Reg. § 1.6041-
1(e) (the middleman regulations) expressly address court ordered payments. By analogy, we note that
I.R.C. § 6050I(g) addressing information reporting of cash receipts of over $10,000 specifically subjects
criminal court clerks to the filing requirements. If judicial entities were not already excluded from
information reporting requirements, I.R.C. § 6050I(g)’s provision subjecting criminal court clerks to the
Form 8300 reporting requirement would not be necessary. In any event, the issue of who should report
payments under the middleman regulations would be obviated if the court order of distribution or order to
disburse garnished personal earnings provided that defendants were responsible for information reporting
requirements under section 6041.
7
Treas. Reg. § 1.6041-1(e)(5) Examples 3 and 6.
8
A poundage fee is an amount allowed to the sheriff, for certain services specified by statute which the
court or its clerk shall tax in the bill of costs against the judgment debtor or those legally liable for the
judgment. --------------------------------------------
POSTS-143207-14 6

      Example 6. Literary agent J receives a payment from publisher L of
      fees earned by J's client, author K. J deposits the payment into a
      bank account in J's name. From time to time and as directed by K,
      J makes payments from these funds to attorneys, managers, and
      other third parties for services rendered to K. After subtracting J's
      commission, J pays K the net amount. J does not order or direct the
      provision of services by the third parties to K, and J exercises no
      discretion in making the payments to the third parties or to K. J is
      not performing management or oversight functions and does not
      have a significant economic interest in the payments and is not
      subject to the information reporting requirements of section 6041 in
      connection with the payments to K or to the third parties. For the
      rules relating to L's obligation to report the payment of the fees to K,
      see paragraphs (a)(1)(i) and (f) of this section. For the rules relating
      to K's obligation to report the payment of the commission to J and
      the payments to the third parties for services, see paragraphs
      (a)(1)(i) and (d)(2) of this section.

Thus, under Example 6, retention of a commission by a literary agent does not
constitute a significant economic interest. We believe that retention of a commission is
analogous to retention of a poundage fee, and accordingly we conclude retention of a
poundage fee in garnishment actions under the applicable ------- statute by ------- County
Clerks of Court does not constitute a significant economic interest in the payment.

Since ------- County Clerks of Court neither perform management or oversight functions,
nor have a significant economic interest in the payment, they do not meet the definition
of “payors” that must make an information return under the middleman regulations
pursuant to I.R.C. § 6041(a). Since the middleman regulations do not apply,9 the
general rule of section 6041 would apply to these facts. Under the general rule of I.R.C.
§ 6041, the filing and furnishing requirement falls upon the payor that is source of the
payment. Here, assuming all the other criteria of section 6041 are met, that person is
the debtor\garnishee.

Section 6045(f)
Since there is no reporting requirement under section 6041(a), we next turn to the
applicability of section 6045(f), see I.R.C. 6045(f)(2)(B). We conclude that the
provisions of section 6045(f) do not require an ------- County Clerk of Court to issue a
Form 1099 to an attorney when the Court sends a debtor’s garnished funds to a
creditor’s attorney. We believe that in this situation, the Clerk of the Court does not
meet the definition of a payor set forth in Treas. Reg. § 1.6045-5(d)(3). The Clerk is
neither an obligor on the payment, nor the obligor’s insurer or guarantor.

9
See footnote 7.
POSTS-143207-14 7

An obligor is colloquially defined as “One who has undertaken an obligation; a promisor
or a debtor.” BLACK’S LAW DICTIONARY (7th ed. 1999). Webster's Dictionary defines the
term “obligor” as “one that binds himself or gives his bond to another [or] one that
places himself under a legal obligation.” W EBSTER'S THIRD NEW INTERNATIONAL
DICTIONARY 1556 (3d ed.1981); Taylor Elec. Services, Inc. v. Armstrong Elec. Supply
Co., 167 S.W.3d 522 (Tex.App. 2005)(citing WEBSTER’S). The comments to the
Restatement (Second) of Contracts on Section 316 on assignments of rights and
delegation of duties under a contract in its comments define an obligor as “[a] person
subject to a duty.”10 These definitions do not describe a court clerk. Clerks receive
filing fees and deposits pursuant to Court rules and court orders, and disburse funds
upon request by court order. Performing this function does not make the Clerk of the
Court a party to the debt. Receiving mandated fees and deposits does not convert a
Clerk of Court into an obligor, or an obligor’s insurer or guarantor. We believe the same
result is true of criminal restitution payments.

In conclusion, an ------- County Clerk of Court is not required to issue a Form 1099 to an
attorney when the Court sends a debtor’s garnished funds to a creditor’s attorney,
because the Clerk of the Court is not a payor for purposes of the reporting requirements
under I.R.C. § 6045(f). We reach this conclusion because the County Clerk of Court is
neither an obligor on the payment, nor the obligor’s insurer or guarantor under Treas.
Reg. § 1.6045-5(d)(3). Further, County Clerk of Court is not a payor for purposes of
I.R.C. § 6041 as it is only making payment on behalf of another and neither performs
management or oversight functions, nor has a significant economic interest in the
payment for purposes of the reporting requirement under I.R.C. § 6041(a) under Treas.
Reg. § 1.6041-1(e)(1)(i) and (ii).

Issue 2. Whether an ------- County Clerk of Court is required to issue a Form 1099 to
attorneys who are refunded their client’s money at the end of a case.

Although your request was not specific, you indicated that in some cases, a party to a
civil action in an ------- court may deposit filing fees with the Clerk of the Court. At the
close of the litigation, the Clerk will return the unused fee to the party’s attorney. You
argue that the Clerk of Court is not required to issue a Form 1099 to an attorney whose
client’s money has been refunded at the end of a case. We agree.

Section 6041(a)
We first examine whether section 6041(a) applies to require reporting by ------- Clerks of
Court of a payment to attorneys when their client’s funds are refunded at the end of a
case. It is our view that section 6041 does not impose a reporting requirement in this
situation. Under section 6041(a), every person engaged in a trade or business must file
an information return for payments made to another person in the course of the payor’s

10
RESTATEMENT (SECOND) OF CONTRACTS § 316 cmt. c (1981).
POSTS-143207-14 8

trade or business that constitutes fixed or determinable income. Payments that are not
includible in the recipient’s income need not be reported.

Treas. Reg. § 1.6041-1(c) of the regulations provides that income is “fixed” when it is
paid in amounts definitely predetermined. Income is “determinable” when there is a
basis of calculation by which the amount to be paid may be ascertained.

Under Treas. Reg. § 1.6041-1(a) and (c), a payor generally is not required to make a
return under section 6041 for payments that are not includible in the recipient's income,
nor is a payor required to make a return if the payor does not have a basis to determine
the amount of a payment that is required to be included in the recipient's gross income.
The Supreme Court has defined income as “undeniable accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion.” Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955). A deposit made and returned to a
taxpayer generally does not constitute an accession to wealth.

I.R.C. § 111(a) provides that income recovered during the taxable year is excluded from
gross income for that year as long as the amount of the recovery did not reduce prior
Federal income taxes, that is, the taxpayer did not a deduction for the deposit amount.11
Income is determinable when there is a basis for calculating the amount to be paid.
Treas. Reg. § 1.6041-1(c). Where the payor cannot determine whether the payment is
includible in the recipient’s income, reporting is not required because the amount paid is
not fixed or determinable income.12 Here, the ------- County Clerk of Court does not
have the information whether the taxpayer who made the deposit took a deduction and
received a tax benefit for the amount deposited. Accordingly, an ------- County Clerk of
Court is not required to issue a Form 1099 to attorneys who are refunded their client’s
money at the end of a case.

Section 6045(f)
Since there is no reporting requirement under section 6041(a), we next turn to the
applicability of section 6045(f), see I.R.C. 6045(f)(2)(B). We conclude in this particular
instance that the Clerk of Court is not required under I.R.C. § 6045(f) to issue a Form
1099 to attorneys who are refunded their client’s funds because the Clerk of Court is not
a payor for purposes of the reporting requirement under I.R.C. § 6045(f) because it is
neither an obligor on the payment, nor the obligor’s insurer or guarantor, under Treas.
Reg. § 1.6045-5(d)(3).

As discussed above, I.R.C. § 6045(f) requires that all persons engaged in a trade or
business who make certain payments to attorneys in connection with legal services in
the course of that trade of business must report those payments in information returns
filed with the Internal Revenue Service and furnish written statements to the recipients

11
See also Treas. Reg. § 1.111–1.
12
See Rev. Rul. 80-22, 1980-1 C.B. 286.
POSTS-143207-14 9

of those payments. Just as in Issue 1, an ------- County Clerk of Court is not required
under I.R.C. § 6045(f) to issue a Form 1099 to attorneys who are refunded their client’s
fee deposit at the end of a case, because the Clerk of Court is not a payor as defined in
Treas. Reg. § 1.6045-5(d)(3). Under that regulation, the Clerk is neither an obligor on
the payment, nor the obligor’s insurer or guarantor. --------County Clerks of Court in the
course of their trade or business are merely performing their administrative and
ministerial duties and are thus not subject to the information reporting requirements of
I.R.C. § 6045(f) where they are returning a fee deposit.

Issue 3. Whether an ------- County Clerk of Court is required to issue of a Form 1099-S
on foreclosure real estate transactions.

Finally, you inquired whether the Clerk of Court’s involvement in a foreclosure action
imposed a reporting obligation on the Clerk for the foreclosure amount. We agree that
an ------- County Clerk of Court is not required to issue Form 1099-S, Proceeds From
Real Estate Transactions, on foreclosure real estate transactions. The acquisition of
U.S. property by foreclosure must be reported by the lender who held the property as
security for a loan to a non-exempt borrower on a Form 1099-A, Acquisition or
Abandonment of Secured Property.

Although in general gross proceeds of $600 or more from the sale or exchange of most
real estate must be reported by a real estate reporting person13 under I.R.C. § 6045(e),
no information return or information statement is required under this section for transfers
in full or partial satisfaction of a debt secured by the property, including foreclosures,
transfers in lieu of foreclosures, or abandonments, see Treas. Reg. § 1.6045-4(c)(1)(ii).
Under I.R.C. § 6050J, any person who, in connection with his trade or business, lends
money secured by property and who in full or partial satisfaction of any indebtedness
acquires an interest in that property or has reason to know that the property has been
abandoned, must file a return with the Internal Revenue Service14 and furnish a
statement to the debtor.15 Accordingly, the reporting requirement under I.R.C. § 6050J
is imposed only on lenders who make secured loans in connection with a trade or
business.16
13
For purposes of the real estate reporting rules, a real estate reporting person is any of the following
persons who are involved in a real estate transaction, in the following order:
(1) The person (including any attorney or title company) responsible for closing the transaction,
I.R.C. § 6045(e)(2)(A);
(2) The mortgage lender, I.R.C. § 6045(e)(2)(B);
(3) The transferor’s broker, I.R.C. § 6045(e)(2)(C);
(4) The transferee’s broker, I.R.C. § 6045(e)(2)(D);
(5) Any other person designated in regulations, I.R.C. § 6045(e)(2)(E).
14
I.R.C. § 6050J(a).
15
I.R.C. § 6050J(e).
16
Treas. Reg. § 1.605-J-1T Q-1, Q-15. Although under I.R.C. § 6045 (e), real estate transactions are
generally reported on a Form 1099-S, Proceeds From Real Estate Transactions, brokers are exempt from
POSTS-143207-14 10

Reporting of foreclosures by lenders under I.R.C. § 6050J is made on a Form 1099-A.17
If a lender cancels a debt of more than $600 in connection with a foreclosure or
abandonment of secured property, the lender need not file both Form 1099-A and Form
1099-C, Cancellation of Debt, for the same debtor, and may file Form 1099-C only.18

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 317-5417 if you have any further questions.

the reporting requirement under I.R.C. § 6045(e) in the case of foreclosures, see Treas. Reg. § 1.6045-
4(c)(1)(ii).
17
2015 Instructions for Forms 1099-A and 1099-C, Acquisition or Abandonment of Secured Property and
Cancellation of Debt, at 1.

18
Id. at 3.