Rev. Rul. 85-50

Are referral commissions or split fees paid by one professional to another or by one tradesperson to another subject to the information reporting requirements of section 6041 of the Internal Revenue Code?

FACTS

SITUATION 1, An attorney obtains the assistance of a second attorney in serving a client. In return for the assistance the first attorney agrees to split the fee received for the services rendered. The amount of the split fee paid by the first attorney to the second attorney is $600. The second attorney is an individual and is not a corporation.

SITUATION 2, A realtor, A, refers a potential customer to second realtor, B, who is offering property for sale. When the customer purchases the property from B, B pays a referral commission of $600 to A. A is an individual and is not a corporation.

LAW AND ANALYSIS

Section 6041(a) of the Code provides that all persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits and income of $600 or more in any taxable year must render a true and accurate return setting forth the amount of such gains, profits, and income, and the name and address of the recipient of the payment.

Section 1.6041-1(a) of the Income Tax Regulations provides that returns required by section 6041 of the Code are to be made each calendar year and, with certain exceptions, are to be made on Forms 1096 and 1099.

Section 1.6041-1(d)(2) of the regulations requires the reporting of fees for professional services paid to attorneys, physicians, and members of other professions if paid by persons engaged in a trade or business and paid in the source of that trade or business.

Under section 1.6041-3(c) of the regulations, returns of information are not required with respect to payments to a corporation, except to a corporation engaged in providing medical and health care services or engaged in the billing and collecting of payments for such services, other than payments to certain hospitals and extended care facilities.

The payments made by the attorney in SITUATION 1 and by realtor B in SITUATION 2 are payments in the course of their trades or businesses and are of $600 or more. The exception for payments to corporations does not apply, because, under the facts, the recipient attorney and realtor A are not incorporated.

HOLDING

In SITUATION 1, the attorney making payment of a split-fee of $600 to an unincorporated attorney is required to make an information return under section 6041 of the Code.

In SITUATION 2, Realtor B, who pays a referral commission of $600 to A, another realtor, who is unincorporated, is required to make an information return under section 6041 of the Code.