Implementation of the TRA '97 information reporting provisions.

The Taxpayer Relief Act of 1997 (TRA '97) is reputed to have included more information reporting provisions than all of the tax legislation enacted in the past decade combined. Most of these provisions became effective on Jan. 1, 1998, and therefore, win be reflected on 1998 information returns issued and filed in 1999. The IRS has provided guidance implementing many of these new provisions.

Payments of Qualified Tuition and Related Expenses Received by Colleges and Universities

The TRA '97 created an income tax credit allowable to certain taxpayers who pay qualified tuition and related expenses to an eligible educational institution. The TRA '97 also enacted Sec. 6050S, which requires eligible educational institutions that receive payments of qualified tuition and related expenses, or make reimbursements or refunds of such amounts, to file an information return with the Service for each student on whose behalf such payments are made.

In Notice 97-73, the IRS announced that Form 1098-T, Tuition Payments Statement, will be used for purposes of reporting tuition payments received. For 1998, institutions will be required to report on Form 1098-T the name, address and taxpayer identification number (TIN) of both the eligible educational institution that received the payments and the student for whom payments of qualified tuition and related expenses were received during 1998; an indication as to whether the student was enrolled for at least half the full-time academic workload during any academic period commencing in 1998; and an indication of whether the student was enrolled in a graduate-level program. In future years, institutions will also be required to report the aggregate amount of payments of qualified tuition and related expenses received by the institution with respect to the student.

Interest Received on Qualified Education Loans

Another provision in the TRA '97 allows certain taxpayers to claim a deduction for interest paid on qualified education loans. A qualified education loan is a loan used to pay the costs of attendance at an eligible educational institution. In addition to the information reporting requirement described, new Sec. 6050S also requires information reporting by any person engaged in a trade or business who, in the course of that trade or business, receives from an individual interest aggregating $600 or more for any post-1997 calendar year on one or more qualified education loans.

In Notice 98-7, the Service describes who must report information with respect to payments of student loan interest, and the nature of the information that will be required to be reported for 1998. The notice also announced that Form 1098-E, Student Loan Interest Statement, will be used for purposes of reporting student loan interest received.

For 1998, a properly completed Form 1098-E must include the name, address and TIN of both the payee (the lender) and the payor (the borrower). In addition, the Form 1098-E must report the aggregate amount of interest received during 1998 for student loans that have a "covered period" ending during, or after, 1998. A "covered period" generally begins on the date a loan enters repayment status and ends 60 months thereafter. A loan is deemed to be a "student loan" if it is subsidized, guaranteed, financed or otherwise treated as such under a Federal, state or local government program, or by a post-secondary educational institution, or if it is certified by the borrower to be a "student loan."

Capital Gains Reportable to Mutual Fund and REIT Shareholders

One of the most discussed provisions in the TRA '97 modified the capital gains tax rates. This provision essentially created different baskets of capital gains, taxed at different rates. As a result, mutual funds and real estate investment trusts reporting capital gain distributions to their shareholders must identify, the types of capital gains distributed.

In Announcement 97-109, the IRS stated that for 1997 information returns, payors should continue to report total capital gain distributions on Form 1099-DIV, Dividends and Distributions. However, the announcement also required payors to provide recipients with information sufficient to determine the portion of those distributions that represent 28% rate gain, as well as the amount that represents unrecaptured Sec. 1250 gain. Payors were permitted to provide shareholders with either a specific amount of gain subject to the 28% rate and the specific amount of unrecaptured Sec. 1250 gain, or a percentage of the total capital gain distribution that represents these amounts. The balance of the amounts reported as capital gain distributions on Forms 1099-DIV represents capital gains taxable at the 20% rate. Since payors were permitted to provide this information either as a "tag line" on a substitute information return, or on a supplemental statement given to the shareholder, income tax return preparers should take special care to ensure that they are properly reporting 1997 capital gain distributions on their clients' Schedules D.

The Form 1099-DIV has been significantly modified for dividends paid in 1998. The new form, to be filed in 1999, will have separate boxes for reporting total capital gain distributions (Box 2a), 28% rate gain (Box 2b), unrecaptured Sec. 1250 gains (Box 2c) and Sec. 1202 gains (Box 2d).

Reporting of Sales of Personal Residences

The TRA '97 modified the income tax treatment of gains from the sales of principal residences. Under the new law, taxpayers are generally able to exclude up to $250,000 of gain ($500,000 if married filing jointly) from the sale or exchange of a principal residence. A related provision provided that real estate reporting persons will not be required to file Forms 1099-S, Proceeds From Real Estate Transactions, for sales or exchanges of principal residences with a sales price of $250,000 or less for a single individual ($500,000 for married individuals), so long as the reporting person obtains a certification from the seller in a form acceptable to the Treasury that the property is the seller's principal residence and the full amount of the gain on such sale or exchange can be excluded. Thus, the number of Forms 1099-S issued each year will be dramatically reduced.

In Rev. Proc. 98-20, the Service has set forth the acceptable form of written assurances that a person reporting real estate transactions must obtain from the seller to avoid filing Form 1099-S. The certification must generally be obtained by January 31 of the year following the sale of the residence. However, for sales between May 6, 1997 and Dec. 31, 1997, the certification could have been provided to the real estate reporting person by Feb. 28, 1998. Rev. Proc. 98-20 provides a sample certificate that real estate reporting persons may, but are not required to, use for purposes of receiving the required certifications.

Payments to Corporations for Legal Services Rendered

Payments of $600 or more for services rendered are generally reportable on Form 1099-MISC, Miscellaneous Income. However, Regs. Sec. 1.6041-3(c) specifically excludes payments made to corporations from this requirement, although an exception to the exception requires that payments to most corporations providing medical services must be reported. The TRA '97 creates a second exception to the exception that applies to payments of attorney's fees. Therefore, effective for payments made in 1998, payments to corporations for legal services rendered will be reportable on Form 1099-MISC.

Payments of Gross Proceeds to Attorneys

Yet another provision in the TRA '97 amended Sec. 6045 and requires the information reporting of "any payment to an attorney in connection with legal services (whether or not such services are performed for the payor)," unless the payment is required to be reported under either Sec. 6041(a) or 6051. This provision is effective for payments made after 1997. Although the legislative history anticipates that gross proceeds reporting will be required on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, the IRS has decided that gross proceeds will be reportable on Form 1099-MISC, in Box 13, coded "A."

The type of payments subject to this new reporting requirement may not be clear at first glance, since a payment made directly to an attorney specifically and solely for services rendered either to the payor, or to a third party, are generally. reportable under either Sec. 6041 or 6051, and therefore will not be subject to amended Sec. 6045. However, a payment that represents more than simply a payment for professional fees (i.e., that represents both an attorney's fee and proceeds payable to a client) will be subject to this new information reporting requirement. Thus, for example, if an insurance company settles a claim for damages with a potential claimant, and issues a gross check payable to the claimant's attorney (or to the claimant and his attorney jointly), the payment will be reportable to the attorney as gross proceeds paid to him.

Partnerships Required to File Forms 1065 and Schedules K-1 on Magnetic Media

Finally, the TRA '97 amended Sec. 6011 (e) (2) to provide that all partnerships with more than 100 partners must file their Forms 1065 and the accompanying schedules, including Schedules K-1, on magnetic media. While the legislative history to the TRA '97 indicates that this amendment will be effective for tax years beginning after Dec. 31, 1997, the actual enactment date is for tax years ending on or after Dec. 31, 1997. Therefore, Sec. 6011(e)(2) requires partnerships with more than 100 partners to file their 1997 partnership returns on magnetic media. However, in Notice 97-77, the Service has announced that, despite the requirements, it will not assess penalties against partnerships with more than 100 partners that do not file their tax returns on magnetic media for years beginning before Dec. 31, 1997.