Rental payment platform is a third-party settlement organization

Plain-English summary

An online platform helps landlords and property managers list rental properties, enter leases, and receive tenant payments through a payment portal. The IRS ruled that the platform operator is a third-party settlement organization under Section 6050W because its arrangement connects a substantial number of providers and customers, supplies payment-settlement standards and mechanisms, and guarantees provider payments initiated through the portal. Under the thresholds then stated in Section 6050W, the operator must report a provider's transactions on Form 1099-K when payments exceed $20,000 and the number of transactions exceeds 200. The IRS did not decide whether Section 6041 also requires reporting because Section 6050W controls when both provisions apply.

Ruling snapshot

• Question: Must the rental platform report provider payments under Section 6050W or Section 6041?
• Outcome: Mixed. The platform is a third-party settlement organization subject to Section 6050W reporting, and the IRS did not reach the Section 6041 question.
• Key authorities: IRC §§ 6041 and 6050W; Treas. Reg. §§ 1.6041-1 and 1.6050W-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202112002 Third Party Communication: None
Release Date: 3/26/2021 Date of Communication: Not Applicable
Index Number: 6050W.00-00, 6041.00-00,
6041.06-00 Person To Contact:
-------------------, ID No. ------------
----------------------------------------- Telephone Number:
--------------------------------------------------------- --------------------
------------------------ Refer Reply To:
CC:PA:02
PLR-114800-20
Date:
December 22, 2020

Legend

Taxpayer = ------------------------------------------------------------------

Platform = -----------------------

Customers = ----------

Providers = ----------------------------------------------

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

This is in response to the June 30, 2020 ruling requested submitted on your behalf by
your authorized representative concerning your federal income tax reporting obligations
under sections 6050W and 6041 of the Internal Revenue Code (Code). Specifically,
you requested rulings on the following issues:

1. Is Taxpayer a third party settlement organization under section 6050W with
   respect to rental transactions it settles on behalf of Providers via its Platform; and

2. Is Taxpayer responsible for reporting rental payments collected on behalf of
   Providers via its Platform under section 6041?

                                                 FACTS

Taxpayer provides an online suite of tools and services that helps facilitate relationships
between landlords and property managers (collectively, Providers) and tenants
(Customers). Specifically, Taxpayer’s online platform, -----------------------(Platform) -------
PLR-114800-20 2

to Customers. The properties are owned or managed by Providers. In order to use the
Platform, Providers and Customers must agree to the terms and conditions outlined in
the Platform’s Terms & Conditions, as well as its Terms of Service.

The Platform provides Customers the ability to review rental listings to determine the
availability and pricing of rental properties located in different geographic regions. The
Platform also allows Customers to submit rental applications, consent to background
and credit screenings, submit documentation, enter into leases with Providers, and
make rental payments. Customers must pay a fee to use the Platform’s services. The
fees do not include any deposits, payments, or fees that may be requested by the
Provider, and the Provider may require additional ---------------------------------------------------
-------------------------------------------.

The Platform allows Providers to list properties, find Customers, accept rental
applications from Customers, receive certain consumer credit and public record
information, offer and enter into leases with Customers and receive rental payments
from Customers.

Taxpayer’s Platform offers a web-based payment portal to facilitate the payments
between Customers and Providers (Payment Portal). The Platform uses a third-party
payment processor to process payments made using the Payment Portal. Customers
may initiate both one-time and recurring payments through the Payment Portal using
various payment methods (e.g., credit card, debit card, ACH transfer, etc.). Providers
may send electronic notifications to Customers related to lease obligations, rental
amounts, and renewals, using the Payment Portal. In order to facilitate payments,
Taxpayer creates an account with the third-party payment processer on behalf of each
Provider and Customer. If a Customer initiates a payment using the Payment Portal,
the third-party payment processer then processes the payment and deposits the
requisite amounts into the Provider’s bank account. Providers and Customers must
register for and create an account on the Platform in order to use the Payment Portal
services.

Taxpayer does not act as ----------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------ and does not
guarantee any results from using the Platform. Taxpayer does not independently verify
any Providers or Customers, does not perform --------------------------------------, and does
not make any representations or warranties as to the quality or trustworthiness of
Providers and Customers. Taxpayer also does not make any ----------------------------------

-----------------------------------------------------------------------------on the Platform. Taxpayer
does not provide legal advice to Providers or Customers and does not -----------------------
------------------------------------------. In addition, Providers are solely responsible for
establishing their own standards and criteria for selecting suitable Customers as well as
PLR-114800-20 3

determining whether a Customer satisfies such criteria. Taxpayer is not a party to any -
--------agreements between Providers and Customers that are entered into using the
Platform. Taxpayer also does not receive a commission with respect to any services
provided via the Platform. In sum, the primary aim of the Platform is to facilitate ----------
transactions between Providers and Customers.

                                 LAW & ANALYSIS

Section 6050W

Section 6050W of the Code, as enacted by the Housing Tax Assistance Tax Act of
2008, requires payment settlement entities to file an information return for each
calendar year with respect to payments made in settlement of reportable payment
transactions. The annual information return must set forth (1) the name, address, and
taxpayer identification number (TIN) of the participating payee to whom payments were
made and (2) the gross amount of the reportable payment transactions with respect to
that payee. I.R.C. § 6050W(a). The regulations define gross amount to mean the total
dollar amount of the aggregate reportable payment transactions for each participating
payee, without regard to any adjustments for credits, cash equivalents, discount
amounts, fees, refunded amounts, or any other amounts. Treas. Reg.
§ 1.6050W-1(a)(6). Taxpayers required to make returns under section 6050W do so by
filing Forms 1099-K, Payment Card and Third Party Network Transactions.

Section 6050W covers two types of reportable payment transactions: (1) payment card
transactions, and (2) third party network transactions. I.R.C. § 6050W(c). A payment
settlement entity in the payment card context is a merchant acquiring entity; in the third
party network context, it is a third party settlement organization (TPSO). I.R.C.
§ 6050W(b)(1).

The Code and regulations define a merchant acquiring entity as the bank or other
organization with the contractual obligation to make payments to participating payees in
payment card transactions. A payment card transaction is any transaction in which a
payment card is accepted as payment. I.R.C. § 6050W(b)(2)-(3), 6050W(c)(2); Treas.
Reg. § 1.6050W-1(b)(1)-(2).

The Code and regulations define a TPSO as the central organization that has the
contractual obligation to make payments to the participating payees of third party
network transactions. I.R.C. § 6050W(b)(3); Treas. Reg. § 1.6050W-1(c)(2). A third
party network transaction is any transaction that is settled through a third party payment
network. I.R.C. § 6050W(c)(3). A central organization is a TPSO with a reporting
obligation if it provides a third party payment network that allows purchasers to transfer
funds to providers of goods and services. Treas. Reg. § 1.6050W-1(c)(2).

A third party payment network is any agreement or arrangement that (i) involves the
establishment of accounts with a central organization by a substantial number of
PLR-114800-20 4

providers of goods or services who are unrelated to the central organization and who
have agreed to settle transactions for the provision of goods and services with
purchasers according to the terms of agreements; (ii) provides standards and
mechanisms for settling transactions; and (iii) guarantees payments to the providers of
goods and services in settlement of transactions with the purchasers. I.R.C.
§ 6050W(d)(3); Treas. Reg. § 1.6050W-1(c)(3). Neither the Code nor the regulations
defines what constitutes a “substantial number” of providers for the purposes of defining
a third party payment network. However, in its technical explanation of the Housing
Assistance Tax Act of 2008, the Joint Committee on Taxation interpreted the term
“substantial number” to mean more than 50 providers of goods and services. Joint
Committee on Taxation, Technical Explanation of Division C of H.R. 3221, The
“Housing Assistance Tax Act of 2008” as Scheduled for Consideration by the House of
Representatives on July 23, 2008 (JCX-63-08) at 61, July 23, 2008.

A participating payee, in the case of a third party network transaction, is any person who
accepts payment from a third party settlement organization in the settlement of such
transaction. I.R.C. § 6050W(d)(1)(A)(ii).

A TPSO is not required to report third party network transactions for a participating
payee unless the amount to be reported exceeds $20,000 and the aggregate number of
transactions with that participating payee exceeds 200. I.R.C. § 6050W(e).

Section 6041

Section 6041(a) provides that a person making payments in the course of a trade or
business to another person of “rent, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable gains,
profits, and income (other than payments to which certain other Code provisions
apply)” of $600 or more in any taxable year must report the payment on Form 1099-
MISC, Miscellaneous Income.

If a payment is subject to reporting under both sections 6041 and 6050W, then the
payment must be reported in accordance with the provisions of section 6050W, rather
than section 6041. Treas. Reg. § 1.6041-1(a)(1)(ii). For example, if a restaurant makes
a payment of $600 to a repairman by credit card, then the restaurant is not required to
report the payment on Form 1099-MISC. Treas. Reg. §1.6041-1(a)(1)(v), Example 1.
Instead, the payment settlement entity that is responsible for ultimately distributing the
funds to the repairman is responsible for reporting the payment on Form 1099-K in
accordance with the provisions of section 6050W.

Analysis

Taxpayer is a TPSO with respect to payments made through its Platform because it is a
central organization that has the contractual obligation to make payments to the
PLR-114800-20 5

participating payees of a third party network transaction and provides a third party
payment network that allows purchasers to transfer funds to providers of services.

Taxpayer has established a third party payment network because it has an
arrangement: (1) through which a substantial number of providers of services who are
unrelated to Taxpayer have established accounts with Taxpayer and have agreed to
settle transactions for the provision of services; (2) which provides standards and
mechanisms for settling transactions, as provided in the contractual agreement between
Taxpayer and Providers; and (3) which guarantees that persons providing services
pursuant to this arrangement will be paid for providing these services, as provided in the
contractual agreement between Taxpayer and Providers.

Here, the providers of services are the Providers who make accommodations available
to Customers. Although the term “goods and services” is not defined in section 6050W
or the regulations promulgated thereunder, the accommodations provided and related
activities performed by Providers fall within the concept of “goods and services” as
contemplated by section 6050W.1 A substantial number of these Providers, who are
unrelated to Taxpayer, have established accounts with Taxpayer to settle transactions
for the provision of their services. The standards and mechanisms for settling
transactions between Providers and Customers for the provision of these services are
provided in the contractual agreement between Taxpayer and the Providers, along with
a guarantee that Providers will be paid for their provision of services for any payments
that are initiated through Taxpayer’s Payment Portal. Therefore, Taxpayer has
established a third party payment network and is a TPSO with respect to transactions
settled through its Platform.

As a TPSO, Taxpayer is required to report third party network transactions for a
participating payee – here, a Provider – when the amount to be reported exceeds
$20,000 and the aggregate number of transactions with that Provider exceeds 200.
Taxpayer must report the gross amount of all reportable payment transactions with
respect to that Customer on a Form 1099-K.

1 Although not determinative, a 2004 revenue procedure that classifies businesses by Merchant Category

Codes according to whether they predominantly furnish services or goods supports the position that
Providers are providing services. Rev. Proc. 2004-43, 2004-2 C.B. 124 (obsoleted by T.D. 9699,
removing regulations relating to information reporting and backup withholding for the Qualified Payment
Card Agent Program). Under the revenue procedure, the following type of business, among others, are
considered to predominantly provide services: “Real Estate Agents and Managers – Rentals.” Providers
fit within this business type; thus Providers can be viewed as predominantly providing services.
Moreover, business which provide other types of rentals are also considered as predominantly providing
services, including car rentals, boat rentals and leases, clothing rentals, equipment rental, truck and trailer
rentals, recreational vehicle rentals and video tape rentals. Rev. Proc. 2004-43 was obsoleted following
the enactment of section 6050W and the payment card reporting regime, but it still provides guidance in
determining whether a particular business is a type that should be classified as one predominantly
furnishing services.
PLR-114800-20 6

Because this ruling concludes the Taxpayer has established a third party payment
network and is a TPSO with respect to transactions settled through its Platform, this
ruling does not address whether Taxpayer is responsible for reporting payments
collected on behalf of Providers through its Platform under section 6041. Regardless of
the conclusion on that issue, Taxpayer would be subject to reporting under section
6050W for the transactions settled through its Platform. Treas. Reg. § 1.6041-
1(a)(1)(iv).

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.

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

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

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

                                   Sincerely,



                                   Melissa A. Henkel
                                   Senior Technician Reviewer
                                   (Procedure & Administration)

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