Discussion:1099-S?

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Discussion Forum Index --> Tax Questions --> 1099-S?


Feffcpa (talk|edits) said:

28 January 2013
I have a client who "flips" houses. She reports this on Schedule C. This year she had an investor who invested money in a project and then received a percentage of the proceeds when the house was sold. The investor was not active in the business and did not have his name on the property's title. The investor's CPA is asking us to prepare a 1099-S - does that seem right? If not, what reporting would you reccomend if any? Thanks for any input!

Ckenefick (talk|edits) said:

28 January 2013
I would recommend you file a 1065, since you have a partnership.

Feffcpa (talk|edits) said:

28 January 2013
Could it be considered a joint venture?

Ckenefick (talk|edits) said:

28 January 2013
Sure, and what tax form does a "joint venture" file?

DavidG (talk|edits) said:

28 January 2013
Feffcpa, you would file a 1099-S. Your situation appears to exactly match the 1099 general instructions, page 2 under the paragraph titled "nominee".

Ckenefick (talk|edits) said:

29 January 2013
Feff's situation seems to match a common law partnership, which we've beaten to death on this board.

WEISSEA (talk|edits) said:

29 January 2013
I had a similiar case a few years back. The parties never formed a partnership so no 1065. I did not think a 1099-S was the right form as it deals with the closing of a real estate property transaction. Further it reports the gross sale price of the transaction( see below). I wound up issuing a 1099-MISC to the party with his net share of income as "other income".

1099-S instructions: For sales or exchanges of certain real estate, the person responsible for closing a real estate transaction must report the real estate proceeds to the Internal Revenue Service and must furnish this statement to you. Box 2. Shows the gross proceeds from a real estate transaction, generally the sales price

Trillium (talk|edits) said:

29 January 2013
Here are a couple of discussions like those Chris was referring to above: Search flipping "common law partnership". Or maybe just search "common law partnership" - in case that helps.

Also, this search needs more search terms, to eliminate non-applicable discussions, but it may come in handy: Search "1099-S" 1065.

Ckenefick (talk|edits) said:

29 January 2013
http://www.taxalmanac.org/index.php/Discussion:%22quiet%22_investor_in_a_startup_deal

The parties never formed a partnership so no 1065.

Sure they did. Once they contributed capital/services, began operating the business and had an economic interest in the profits and losses related thereto, they had a partnership. Certainly, the "investor" described in OP made an equity investment. This contribution would fail, in all respects, as a loan.

This business of having one guy report it all and then issue a 1099 to the other guy doesn't fly. What does that 1099 payment represent? It represents the investor's share of the profit, as in "distributive share" and as in "return of investment" and maybe "return on investment." It does not represent interest on a purported loan. It does not represent compensation to the investor in any sense of the word. And if it is treated as such, would we not have a deduction on one end (by the guy that reported everything) and then income, of course, on the investor's end? Or, if it is compensatory, why wouldn't it be capitalized, resulting in some circularity?

Maybe someone needs to look up the definition of "partnership." Well, here's something from Haley, a 1953 case (and Culbertson is cited in all similar cases):

It appears settled that neither local law nor the expressed intent of the parties as to the legal nature and effect of their written agreements are conclusive as to the existence or non-existence of a partnership or joint venture for federal tax purposes. See C. I. R. v. Culbertson, 337 U.S. 733, 736, 742, 69 S.Ct. 1210, 93 L.Ed. 1659; Heiner v. Mellon, 304 U.S. 271, 279, 58 S.Ct. 926, 82 L.Ed. 1337; Second Carey Trust v. Helvering, 75 U.S.App.D.C. 263, 126 F.2d 526, 528; Poplar Bluff Printing Co. v. C. I. R., 8 Cir., 149 F.2d 1016. Substance rather than form controls in applying the federal tax statutes, and "the realities of the taxpayer's economic interest rather than the niceties of the conveyancer's art should determine the power to tax." Helvering v. Safe Deposit & Trust Co. of Baltimore, 316 U.S. 56, 58, Footnote 1, 62 S.Ct. 925, 927, 86 L.Ed. 1266; Cf. Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 84 L.Ed. 788. Applying that principle here, even though it was expressly stated that the parties did not intend to enter into a joint venture or partnership, if the agreements and the conduct of the parties thereunder plainly show the existence of such relationship, and the intent to enter into it, it will nevertheless be held to exist for tax purposes. See Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 255, 60 S.Ct. 209, 84 L.Ed. 226; Bankers Mortgage Co. v. Commissioner, 5 Cir., 141 F.2d 357; Hogan v. Commissioner, 5 Cir., 141, F.2d 92, 94; West v. Commissioner, 5 Cir., 150, F.2d 723; Benton v. Commissioner, 5 Cir., 197 F.2d 745. As the Tax Court itself held in Claire Hoffman, 2 T.C. 1160, at page 1172, "where his contract and the surrounding circumstances show him to be in fact a joint venturer, contributing to the capital and sharing in the profits and losses, he may be adjudged to be a partner even though the contract with his co-adventurers specifically provides otherwise."

A joint venture has been defined as a "special combination of two or more persons, where in some specific venture a profit is jointly sought without any actual partnership or corporate designation". Tompkins v. Commissioner, 4 Cir., 97 F.2d 396, 398; Aiken Mills v. United States, 4 Cir., 144 F.2d 23; See also Mertens' Law of Federal Income Taxation, Vol. 6, Sec. 35.05, p 118. Section 3797(a)(2) of the Internal Revenue Code (beginning with Sec. 1111 (a)(3) of the 1932 Act) 2 has defined the term "Partnership" so as to include a joint venture, as follows:

"Partnership and partner. The term 'partnership' includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or [pg. 857] by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term 'partner' includes a member in such a syndicate, group, pool, joint venture, or organization."

You'll pretty much see that last paragraph in current Sec 761; pretty broad indeed.

Here's another case for your perusal:

JOHNSON v. U.S., Cite as 57 AFTR 2d 86-846 (632 F Supp 172), 01/14/1986 , Code Sec(s) 704

WEISSEA (talk|edits) said:

29 January 2013
I agree should be a partnership if they operated like one. Not clear from post if they did as they had executed no partership formalities. Need to see if they had an unwritten agreement that meets the following from Rev Proc 2002-22. The fact the investor was not on the title leans toward a partnership.

Section 301.7701–1(a)(2) provides that a joint venture or other contracual arrangement may create a separate entity for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom, but the mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes.

Ckenefick (talk|edits) said:

29 January 2013
OP is using words like "project" and "business" - doesn't sound like mere co-ownership. Sounds like an asset is being bought, then re-hab'd, then sold.

UNC-CPA (talk|edits) said:

8 February 2013
How would you handle a similar situation in which Real Estate Agent/Investor finances the purchase of house which is titled in the name of his brother-in-law. Investor then renovates house. House is sold and brother-in-law receives 1099-S. Investor receives all or virtually all of the proceeds. Would you treat as partnership? I have a potential client with 3-4 completed renovation/sales in 2012 and one pending.

Ckenefick (talk|edits) said:

8 February 2013
I'd handle it the same way - 1065.

UNC-CPA (talk|edits) said:

8 February 2013
Ckenefick...Thanks for confirming my thought.

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