Legal Bills & Settlement Costs

[Gail in Virginia]

I have a corporate client that was involved in a lawsuit over ownership.  The legal bills were substantial, and the law firm that most of the money was paid to is in Boston.  When I told them they needed to do a 1099 for the legal fees, they called the law firm to get the information.  The law firm said they had never gotten a 1099.  In Virginia, almost all law firms are partnerships so I would think they would be used to getting 1099s from businesses.  But maybe it is different in Massachusetts?  Or am I missing something about 1099s?

Also, when I question this for the 1099s I found out that a substantial portion of the amount they paid the law firm was part of the settlement - they had to pay the other party's legal fees.  Should that be included on the 1099?  Is it even deductible?  

Any opinions or references would be appreciated.

[Lee B]

Deductibility depends on the ownership of what?

[Gail in Virginia]

22 minutes ago, Lee B said:

Deductibility depends on the ownership of what?

The business itself.  

[Lee B]

3 hours ago, Gail in Virginia said:

The business itself.  

Are you saying that the ownership of the corporate stock was at issue?

[Gail in Virginia]

Yes, that was the issue.  I am not sure of all the details but there was another substantial amount that was sent as part of the settlement to pay for the other party's share of the business which was not included in the corporation's books.  I am not sure whether any of it should have been, but I still think the fees paid to the attorney should be on a 1099.  Unless Mass. lawyers tend to be incorporated.  

[Lee B]

57 minutes ago, Gail in Virginia said:

Yes, that was the issue.  I am not sure of all the details but there was another substantial amount that was sent as part of the settlement to pay for the other party's share of the business which was not included in the corporation's books.  I am not sure whether any of it should have been, but I still think the fees paid to the attorney should be on a 1099.  Unless Mass. lawyers tend to be incorporated.  

If this was my client, I would be asking for an opinion letter from the law firm as to whether these expenses were a business expense or a personal expense?

[Slippery Pencil]

10 hours ago, Gail in Virginia said:

fees paid to the attorney should be on a 1099.  Unless Mass. lawyers tend to be incorporated.  

Entity type doesn't matter for lawyer 1099s.

[jklcpa]

Attorney should get 1099. IN GENERAL, the part for services provided to your client should be on NEC box 1. The settlement portion should be on the MISC, box 10. 

The amount to include will depend on how the check was made out. My basic understanding is that if the check was paid to only one attorney, then obviously that attorney gets the 1099 for full amount. If one check is paid to co-payees, I think they each get a 1099 for the full amount. If attorney gets money and part is for co-counsel, then attorney gets 1099 with full amount, and they issue a 1099 for amount they paid co-counsel, but again, that depends on who check is made payable to. 

There is also the issue on what type of settlement the payment is for. Example, as the article below explains, payments for personal injuries don't require 1099s to the injured party but will be issued to the attorney, depending on how the check is made out. 

I'd suggest start your reading with the article below from the ABA that is written in more layman's language and is informative before going to the 1099 instructions for preparation, and then the code . The 1099 instructions do reference the applicable code sections.

Also, perhaps a separate post would be better for what portions of these payments are deductible by your client. 

Slippery Pencil is correct that attorneys are an exception to the corporate rule. They get 1099s regardless.

Anyway, here is the ABA article to start with:

https://www.americanbar.org/groups/business_law/resources/business-law-today/2020-february/irs-form-1099-rules-for-settlements-and-legal-fees/

 

Edited 19 minutes ago by jklcpa