Discussion:1099-MISC issued to a C Corporation?

To minimize fees, the client copied what the accountant did for 2007. However, the IRS is not very happy about this and is wondering why this taxpayer is trying to “avoid” paying taxes. Based on the letter they did not look into 2006. I truly believe that my client was “trying to limit his personal liability” and was led astray. He is convinced that he did something to trigger the IRS. However, I have advised him that this is not the case. He was paid the money so he should pay the tax and 1099-MISCs are issued to individuals.

I have advised him to correct the 2006 tax return, but I am dealing with the most immediate issue of 2007. I plan to amend the 1120 and 1040, but I would like to allocate some of the expenses to the Schedule C to minimize the tax liability. Does anyone see any problems with my approach? Also, why don’t the insurance companies want to write checks to his c corporation?

because he is the 'producer' with the insurance agent's license who is appointed with the insurance carrier, not his corporation. Since the commission checks are made out to him, he gets the 1099.

this is quite common in the insurance and financial services industries

(also, you might be interested to know that 1099s don't have to be issued to most corporations)

and your comment 'the IRS is not very happy about this and is wondering why this taxpayer is trying to “avoid” paying taxes' - Was he audited? A CP-2000 correspondence audit? How do you know the IRS isn't 'happy'? Is it our job to make them 'happy' or to help the taxpayer pay the correct tax?

And so your thought to amend 2007 - what exactly are you amending? Why? What will be the result? I think you need to know before you do it. I'm not sure that you aren't making a big mistake.

But CAN YOU EVEN REPRESENT THE TAXPAYER? I note that you are not a CPA, EA or attorney. And you state that he did the return on his own.

I think you are over your head on this one, in all professional politeness. You are truly doing the taxpayer a disservice by trying to help him instead of sending him to someone qualified to help him.

And I am not blaming you. The taxpayer obviously has issues paying for professional help.

Are there any special concerns with regard to liability and this industry?

Yes, they did issue a CP2000. No, it is not my job to make the IRS happy. However, an individual received income and did not pay taxes on that income and they need to pay the correct income on that tax.

My plan is to amend 2007 and put the income my client received on a Schedule C and the income received by the corporation on the 1120. My only quandary is how to split the expenses on the 1120 between the 1040 and 1120. Allocating expenses to the 1040 will reduce the taxes owed per the CP2000.

My biggest problem is the accountant and client re-assigning the income to the corporation.

I have the experience (BIG 4, Fortune 100, tax, internal audit, and external audit) and education (MBA) to be a CPA. I am four exams away and I am actually taking REG (tax, business law) on 11/2 and plan to take AUD (audit) at the end of November. Then I will knock out the last two parts before the beginning of tax season.

Also, in all of my "BIG" experience there is no experience like hands on experience. No one will ever encounter this scenario in Big 4, Fortune 100, or the CPA exam. This is not a text book situation and this is why I appreciate this forum.

Do you really think that I am way in over my head? Is so, why?

There is a little more to it than how I presented it, but that there is the basics.

So, it looks like it was a presentation issue on the original return. Again, as Kevin said, take a hard look and see if this is above you right now, but if you decide to go for it, make sure you figure out the right way it should have been done and then figure out the path to get there.

Good luck no matter what you do.

For years one of the largest casualty insurance companies refused to recgonize their captive agent' corporations, and this may be so today, I do not know.

Assumed / given: Client is a licensed (individual) insurance producer receiving premium sales commission payments from an insurance company reporting same payments to him on a 1099.

Client’s position is that these payments should have been made to his c corporation and 1099’d to his c corporation and not to him personally.

Questions: Is the client’s c corporation a licensed insurance business entity? If yes, is client a licensed insurance producer affiliated with his own c corp.? If yes, with whom does the insurance company have a signed Producer’s Agreement: the client as an individual or his licensed c corp. insurance business entity?

Prospective Solution: If the Producer’s Agreement is with you client as an individual then the 1099’s were issued correctly; if this is not what your client wants then client will need to file a correct/new Producer’s Agreement with the insurance company paying the commissions.

If the Producer’s Agreement is with your client’s licensed c corp. business entity, then the 1099s were incorrectly issued and should be corrected by the insurance company who issued them. (This may be the basis why that other accountant had client pay and issue 1099s from himself to his licensed insurance business entity in 2006, but this is only a guess. The other option is that client really is just trying to avoid paying taxes.)

BTW In my job as the Controller of an “insurance company” (an MGA) I issue 1099s for insurance commissions we pay to all individuals, sole proprietorships, LLCs, and partnerships on the respective individual or business entity basis, as driven by the Producer Agreements on file. None of our own individual insurance producers ever receive a 1099 for commissions paid to us because all our own Producer Agreements are filed on our licensed c corp. business entity basis.

I hope this helps ATLsFTP.

I will defer to Mike-NJ in regards to the producer arrangement for the company he works for. I am not sure if State Farm does this or not, I was told by client that that is not an option.

I also have a guy who designs test tracks for LandRover. Same issue, they hired him personally, but he has a corp that does the work.

We put all payments received on the Schedule C and then in the other expense area we use this exact wording "Revenue reported on wholly owned S-Corp XYZ Corporation EIN # 12-3456789"

Explains to IRS what happens, they see the K-1 info input on personal tax return and they can cross check with the S Corp, etc.

Have never had an issue and don't expect one. We also make sure that the S-Corp pays a reasonable salary to the Shareholder/Employee.

Therefore, the tactic of assigning income to a husband-wife corporation, where only one is licensed, would be a violation of local law. Tax professionals should be careful not to inadvertently break the law.

Fred, it was State Farm to which I was making reference above. Many years ago I was told by a regional manager for State Farm that recognizing a corporation might present problems when the agent wanted to retire, or worse, passed away. Corporations have unlimited life; the company feared they would next be dealing with a wife or adult child of the agent.

And I wonder, too, about the pension paid by SF, which used to be based on commissions earned in the last x years of work....it is the individual that is covered, not the corporation.

I have another State Farm friend <not a client> who works with his wife, but they don't have a corp.

Bruce M. Isom, TC Memo 1995-383, Code Sec(s). 61; 6214, 8/14/1995

1. Gross income—to whom taxable—insurance commissions; Tax Court jurisdiction. Insurance commissions paid under salesman's employment contract were taxable to him, not his wholly owned corp.: corp. didn't control his activities or have contract with insurance co.; and commissions were paid under salesman's employment contract, which he didn't assign to corp. Court lacked jurisdiction to redetermine taxes for year not at issue.

Reference(s): ¶ 615.235(10) ; ¶ 62,145.02(5) Code Sec. 61 ; Code Sec. 6214

Another case that is similar in nature: Howard Pate, et ux., TC Memo 2008-272, Code Sec(s). 61; 162; 183; 1401; 1402; 6662; 7491; 7701, 12/9/2008

Here is an exerpt from that case "They merely supported a methodology designed to avoid reporting and paying Federal income tax and self-employment tax on Mr. Pate's earnings during the years in issue [pg. 1482]"

In both cases the IRS prevailed.

These quotes are from RIA, a leader in tax law research.

http://www.aaluwr.org/displayreport.php?wrID=695

Below is the excerpt which they base their disallowance on.

The Court noted that there are two necessary criteria for a corporation rather than a service provider to be considered the true earner of income. First, the corporation must have the right to direct or control the activities of the service provider in some meaningful way. Second, there must be a contract between the corporation and the entity for which the services are provided, and this contract must recognize the corporation's "controlling position."

End of excerpt

So, assuming under audit, the IRS would still disallow this method, although it seems like quite a few Sch C to Sub S's are doing it, how can we restructure these situations to be allowable under the system we have?

Can we set up a written agreement between the Sole prop and the Corp whereas the Corp provides the administrative services to the sole prop?

I'm thinking that there has to be some way in which this can be allowed. It's just a function of structure.

Anyone else had any like experience with this ?

Problem

The TP is an independent insurance agent and received several 1099-MISCs because the Insurance Agencies he contracted with would not accept his C Corporation as a payee. TP assigned the income to his C Corporation by issuing a 1099-MISC.

The IRS issued a CP2000 because the 1099-MISCs did not flow to a Schedule C and they are not following the assignment to the C Corporation (i.e., presentation issue).

Note: The IRS is not questioning the assignment. This is a presentation issue.

Conclusion

Amend 1040, add a Schedule C and include the amounts paid to TP on 1099-MISC and expense the entire amount as “Other Expense” including an explanation and EIN.

Support

A TP can make a case for excluding a payment from income by showing either that it received the payment as agent for a third party and under an obligation to forward the payment to such third party, or that not was a mere intermediary to facilitate a payment by the payor to the third party (i.e., agency &conduit theory). If the TP does not have the power to control whether it will retain a payment the payment cannot be income. Where the TP lacks such power, its ability to invest or use the proceeds in the period between the receipt and refund (or expenditure) of the funds has very little bearing on the tax treatment of the payment.

Note: Rev. Rulings 74-581, 76-479, 65-282, 58-220, 69-274, 58-515. JPE-When can a Payment Subject to an Offsetting Obligation be Excluded from Income (01.01.09).

Recommendations

In this situation, the TP should ensure the following: • The C Corporation is a licensed Insurance Agency • TP is a licensed agent with that agency • There should be an executed agreement that addresses the control and requirement to forward payments to the C Corporation.

Note: Document, document, document…

I’d like to thank everyone who contributed to this topic. Let me know you thoughts after reading this post.

Can the Corp itself become a licensed Insurance Agency and what type of hoops and expense must be done?

As for the wording in the Other Expense area, this is what I use -

Revenue reported on wholly owned S-Corp "ABC S-CORP" EIN # 12-2456789

I like the concept of being completely upfront - letting them know it's not an expense, but an assignment of the income.

I am still interested on hearing thoughts -

Let's say the way we do these are technically incorrect.

Could we run the income through the Schedule C - Pay the self employment tax that way.

Then, the contract between Sched C and the Corp is for the Administration of the office. Is this possibly a stronger legal contract between TP and C-Corp?

Net affect is the same. Administrative costs can be all excess. You could also, and probably should, pay additional salary out of the Corp.

Businesses contract with me to handle their accounting and administrative functions. Nothing wrong with outsourcing.

They had an agreement drawn up by which they had to turn over intact (when there was withholding in one year that a W-2 was issued instead, they had to gross it up) all funds paid to them directly that were properly the income of the corporation. They did so by personal check rather than endorsing over the contractor's check (to keep a clearer paper trail) and were given a signed, dated receipt from the corporation.

Lacking anything else that would require Schedule C, they reported the income on line 21 and then subtracted it out immediately as properly paid to another party.

One of the three was audited over this issue and the other two received tax notices. All three passed this test.

AND, the licensed insurance business entity with an affiliated licensed insurance producer may be (even with one or more non licensed owners) the recipient of insurance commission payments. It all depends on how the Producer Agreement is completed and is accepted by the commission payer.