1099 requirements

[Snaggletooth]

Question about the requirements for issuing a 1099:

1. Two guys, neither of which is self-employed and thus NOT IN THE BUSINESS of contracting or real estate, find an old house for $100,000 which is in need of extensive repairs. They jointly buy the house as an investment. Over the course of the next six months, they work on the old house, buy $20,000 in materials, and pay 4 other construction contractors $50,000 to repair and remodel. After six months, they are able to sell the house for $250,000. They must split $80,000 profit as a short-term capital gain.

2. With respect to the four contractors they have paid a total of $50,000:

Are they obligated to issue 1099s to these contractors? They are not in the business of doing this, they've never done it before, and have no plans for doing it again (so they say).
I'm not aware of a requirement for them to do so, but again, I'm not aware of lots of things.

[sea-tax]

SNAGG I agree with your logic. I would however do them anyways. I think it can't hurt and would also help legitimize the expense. But heck what do I know I just apparently blew the dependancy exemption question.

[Black Bart]

1099s

Snag / I also think I would issue the forms. This is one of those court case things, like in that TC memo some years ago where IRS made an exception for a one-time only job/guy, BUT, $80K is a tidy profit for two guys and there's a good chance they'll be doing it again and probably hiring the same workers again.

Also, as you know, some construction workers don't turn in non-1099ed labor and if their number comes up with IRS, you know how that would go: "John General Contractor didn't send me a 1099 like he's supposed to and I work so many jobs that I forgot it. He (or his accountant) is responsible for all this mess."

[Bill Tubbs]

How is the gain being reported?

If the gain is reported as Sch C, then file 1099s.

If the gain is reported as Sch D, then no 1099s. -- If you do file 1099s, the IRS could contend that since 1099s were filed that client must have been operating as a business and thus have more ammunition for changing it to Sch C.

Bill

[BP.]

1099-misc

From the Instructions for Form 1099-Misc - "Report on Form 1099-Misc only when payments are made in the course of your trade or business. You are engaged in a trade or business if you operate for GAIN OR PROFIT."

[OldJack]

Blow.

I agree with Bill Tubbs and BP. You issue 1099's and you probably blow 1040 Sch-D. However, you need to make sure the 2 guys did not hold them self out to be a partnership business while improving this real estate. You know, tax exempt sales tax on materials, contracts with contractors, etc.

[Jesse]

Joint Venture

Be careful on this, not so much the partnership requirements, but the profit motive. They put $70,000 into this house expecting to make a profit didn't they?

If the case would come to an audit clients can seem to get "selective memory syndrome".

[jainen]

They were in business

They never held this property as an investment for market appreciation. Their profit was a direct result of their own activity as general contractors. A business is defined on its own merits, not whether you have experience in the field or whether you continue it for some period of time. They were in business.

[Snaggletooth]

Schedule C

Thanks to the board for responses. I had defined in the original post that this was to be reported as a short-term investment and the profit reported on Schedule D.

With so many of you possibly redefining this as Schedule C income, then we not only have the matter of issuing 1099s, but also self-employment tax on the profits.

I think the phrase "Operation for Profit" from IRS instructions should be dissected. There is no question there is a profit motive, and also no question that it was an investment. The question is whether their activity was an "operation." I believe as Jainen does, that for six months, it WAS. But I don't necessarily agree with him that IRS guidelines would establish a one-time only deal as an "operation."

What if they had invested the money for the same purpose, but ended up LOSING money? Would Jainen net the loss against other self-employment income? He probably would -- he's not known for being inconsistent. But would he be correct???

Wonder if anyone from IRS or with IRS experience visits this board and would share with us. Thanks, Snag

[Bird Legs]

Question

Is this going to be an ongoing operation? Buying a house, fixing it up, selling it,
buying another house, etc.
If this was just a one time deal then I vote for Line 21, Other Income.
However, it is an ongoing procedure, then Sched. C.

[BP.]

dissection

OK, Snag, this is fun, let's dissect. The phrase you want to dissect is "operate for gain or profit." It's not "operation" and it's not "with" gain or profit, but "for" gain or profit. Definitions & synonyms for "operate" from my Oxford Color Dictionary: "be in action; produce an effect; function; run; perform; handle." Not trying to provide feedback on C v. D, just replying to your original question about issuing the 1099's. I like this dissection better than the ones we had to do on dead frogs!! Cheers!!

[Jesse]

From the Instructions for Form 1099-Misc - "Report on Form 1099-Misc only when payments are made in the course of your trade or business. You are engaged in a trade or business if you operate for GAIN OR PROFIT."

. There is no question there is a profit motive, and also no question that it was an investment.

According to the 1099MISC instructions then, I think you answered your own question because the payments were made in the operation for profit.

With so many of you possibly redefining this as Schedule C income, then we not only have the matter of issuing 1099s, but also self-employment tax on the profits.

This, like the hobby issues, is an area where not everyone sees it in terms of black and white. I just meant to point out that you need to be careful in dealing with your clients to make sure they are aware of any "grey" areas. If your 100% certain this is a capital gains issue if brought forth in an audit then you have nothing to make the client aware of right?

Is this going to be an ongoing operation? Buying a house, fixing it up, selling it,
buying another house, etc.
If this was just a one time deal then I vote for Line 21, Other Income.
However, it is an ongoing procedure, then Sched. C.

FACTS and CIRCUMSTANCES need to be assessed. Now you have the third opinion - Line 21 vs. Schedule D vs. Schedule C.

Did the clients play the role of general contractor for 6 months? Or did one of the other 4 contractors take care of obtaining permits, ordering the materials and scheduling the other "subcontractors", etc....? This is a job in itself even if no nails were physically pounded?

[ChEAr$]

Agree

I agree with Bill Tubbs and BP. You issue 1099's and you probably blow 1040 Sch-D. However, you need to make sure the 2 guys did not hold them self out to be a partnership business while improving this real estate. You know, tax exempt sales tax on materials, contracts with contractors, etc.

will Bill tubbs and BP and OldJack (any relation to Stonewall?) I even looked it up a couple of years ago when confronted with
same issue. It was schedule d item therefore NOT in trade or business.

And I think if a client just happens to do it one more time and not in the same year,
I could make similar case for schedule d. But third time? I reckon not.

Holiday ChEAr$,
Harlan Lunsford, EA n LA

[OldJack]

Be careful on this, not so much the partnership requirements, but the profit motive. They put $70,000 into this house expecting to make a profit didn't they?

If the case would come to an audit clients can seem to get "selective memory syndrome".

I guess if you bought 1 share of stock on the stock market with the expectation of making a profit you would have a problem of not having "investor" status and would therefore be a trader?

[OldJack]

They never held this property as an investment for market appreciation. Their profit was a direct result of their own activity as general contractors. A business is defined on its own merits, not whether you have experience in the field or whether you continue it for some period of time. They were in business.

Well... just from the post facts I would have to disagree. There is no reason an investor cannot improve his investment asset while holding it for future sale.

Most consider their residence as their largest investment holding for future sale and that does not keep them from improving the residence without fear of classification as a trade or business.

Maybe someone will define "Investor" or held for investment?