New 1099 "loan" situation

[Possi]

Why do I get these strange situations?

My client is in an unpaid apprenticeship for a particular job.
The "boss" I'll call him, and my client made a deal.
Client can't work while doing the apprenticeship, so Boss is LENDING him support for 2 1/2 years, until client gets his license.
The loan will be repaid when client gets licensed and starts working.

That would be fine except that Boss issued a 1099 for "other income" ... Not non-employee, but "other" income.

WTHeck is THAT about? I told Client I'd check the watercooler and see what y'all say, but I told him the the 1099 said 3 things.
1- the money is not taxable to Boss
2- the money is taxable to Client
3- this is not the way to treat a loan. (ok, I said that part, not the 1099)

What say you? And am I to treat this as "other income" not subj to S/E tax? He will be expected to re-pay that money with interest at the end of the apprenticeship.

[BP.]

The loan will be repaid

Is there a written loan document?

[Possi]

loan doc?

Is there a written loan document?

I don't know if it is written. I'll find out.....

[Possi]

Yes

Is there a written loan document?

Yes there is a loan document. It is not notarized, but they did make a written loan document together.

[Burke]

If this loan document does not state any interest, it may be that the boss is considering it an advance of funds to be recaptured out of future pay/commissions, etc. If so, 1099 might be correct, although maybe it should be a W-2 depending on circumstances. How is he calculating "support?" Is he paying him by the hour? Paying his expenses? If it is really a loan, then 1099 is incorrect and should be corrected showing "zero."

[Possi]

wierd quote

If this loan document does not state any interest, it may be that the boss is considering it an advance of funds to be recaptured out of future pay/commissions, etc. If so, 1099 might be correct, although maybe it should be a W-2 depending on circumstances. How is he calculating "support?" Is he paying him by the hour? Paying his expenses? If it is really a loan, then 1099 is incorrect and should be corrected showing "zero."

This is strange. I clicked "quote" and a completely different quote came into this window. I'll respond to THIS quote.
I do not know how they calculated support. I do know that he has been paid for 6 months in advance.
It really is not wages. It really is a loan.

[Burke]

I suppose the deciding factor is, will the TP have to pay the loan back regardless if he is still working for this boss at the time the loan is due. They should have covered that contingency in the loan document. And it should require interest. Otherwise, it could be considered an advance on future wages. And would be taxable to the TP. Deductible by employer. A true loan would not be either.

[Possi]

Not the employer

That is what is so unique. He is getting paid by someone who is not even an employer! Not his employer. Not anyone's employer. Just another professional in the same position that my client will be after the apprenticeship.

[Burke]

Then that sounds purely like a loan and the 1099 is definitely incorrect. I would get a copy of this "loan document" and see if there are are clauses in the document that requires any kind of performance from the TP or some other contingency. If that is the case, it might be a contract.

[Possi]

Thanks

I will ask to see the document. I appreciate your input more than you know.

[Possi]

Burke ?

Then that sounds purely like a loan and the 1099 is definitely incorrect. I would get a copy of this "loan document" and see if there are are clauses in the document that requires any kind of performance from the TP or some other contingency. If that is the case, it might be a contract.

I tried to upload the very simple "gentlemen's agreement" but it's too large...

It says:
"This document is intended to make clear the understaning A___ and B____ have agreed upon with regards to A___ training to become a ***** under the tutelage of B___.

1. B___ has agreed to pay A___, out of pocket, a yearly salary of $55,000.00 as a loan at 0% interest throughout the course A__'s training.

2. Upon certification as a **** and once A___ starts making money as a ****, A____ will repay his debt in full at a rate decided by A____.

3. In the event of A__'s injury or death prior to or after certification, A___'s estate is not liable to repay any of the above monies."

Signed by both.

So, I believe it is truly a loan and the 1099 should not have been issued. (Or else, when he repays the loan, he will do so by issuing 1099's back at him, and S/E tax will be paid by ALL... theoretically twice on the same money!) right?

What do you think? I'll go with your advise.

Thanks~

[Burke]

Oh, my aching back. The courts/estates, etc would have a field day with this one. It describes this as a loan and a salary in one sentence. And the part where if he is injured, the "estate" does not have to pay it back? What estate? What about him? It looks like an interest rate will be determined in the future, based on a contingency, and that it is payable on demand. Yet it also requires that he obtain certification in his profession, and, I would assume by inference, that he continue his "training" with "B." So that is a performance of some sort. As far as the IRS would rule, who knows? Give me a couple of days to mull this one over. I am not sure what to think of it. However, I believe the intent was to make it a loan. You can tell "B" he can't have his cake and eat it too. If he intends to make a loan, then he cannot deduct the "salary." And it is clear that a 1099 listed as "other income" is wrong in either case.

[Possi]

Dazed and confused...

Oh, my aching back. The courts/estates, etc would have a field day with this one. It describes this as a loan and a salary in one sentence. And the part where if he is injured, the "estate" does not have to pay it back? What estate? What about him? It looks like an interest rate will be determined in the future, based on a contingency, and that it is payable on demand. Yet it also requires that he obtain certification in his profession, and, I would assume by inference, that he continue his "training" with "B." So that is a performance of some sort. As far as the IRS would rule, who knows? Give me a couple of days to mull this one over. I am not sure what to think of it. However, I believe the intent was to make it a loan. You can tell "B" he can't have his cake and eat it too. If he intends to make a loan, then he cannot deduct the "salary." And it is clear that a 1099 listed as "other income" is wrong in either case.

Thanks~ I'll wait to hear from you. It's got me stumped. I truly believe it is a loan, and B doesn't know schies from shinola...

[BP.]

This is spilling over to the practice of law, interpreting that so-called contract.

[Possi]

Maybe I should call it...

This is spilling over to the practice of law, interpreting that so-called contract.

THEY call it a "loan" and maybe it's as simple as that. Should I just "call" it and tell them the 1099 is in error? I hate to drag y'all into my campout with this stupid stuff.