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Nonprofit Law/1099 Reporting for Paid Coaches

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QUESTION: Our youth hockey association primarily uses non-paid parent coaches.  We use some paid coaches for special camps.  If paid more than $600 we send them a 1099.  One team asked each family to pay a coach $200 directly.  In total the coach was paid $2,000.  Does the hockey association need to send the coach a 1099 for the total of what the parents paid the coach directly?

ANSWER: If the hockey association took part in that arrangement, then it is possible that the IRS could allege that there was a conspiracy to evade taxes, especially if the coach does not declare the $2000 as income.

The IRS often uses a "Substance over Form" doctrine. The concept of the substance over form doctrine is that the tax results of an arrangement are better determined based on the
underlying substance rather than an evaluation of the mere formal steps by which the arrangement was undertaken.  For instance, two transactions that achieve the same underlying result should not be taxed differently simply because they are achieved through different legal steps.   As the Supreme Court stated some years ago in Minnesota Tea Co. v. Helvering, 302 U.S. 609, 58 S. Ct. 393, 82 L. Ed. 474 (1938), "A given result at the end of a straight path is not made a different result because reached by following a devious path." 302 U.S. at 613, 58 S. Ct. at 394.

Section 7701(o) of the Internal Revenue Code defines the economic substance doctrine as the common law doctrine under which certain tax benefits are not allowable if the transaction does not have economic substance or lacks a business purpose and states that "[t]he determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if [the legislation] had never been enacted." The statute further states that "[i]n the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if-(A) the transaction changes in
a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and (B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for
entering into such transaction."  That code section is available at http://goo.gl/JWjxQ

A 2010 Act added section 6662(b)(6), which imposes a strict liability penalty of 20 percent (40 percent for undisclosed transactions) of any underpayment attributable to the disallowance
of claimed tax benefits by reason of the application of the economic substance doctrine or failing to meet the requirements of any similar rule of law.

Let me know if the team you referred to is a separate entity from your youth hockey association.  If not, then it appears that the youth hockey association is responsible for the indirect payments. Did the parents pay on behalf of the team?  Were the parents given something in return for the $@00 payments, such as a $200 reduction in membership fees to the team or association? After you give me that information I will reply further.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

QUESTION: Here are the answers to your questions.  The team is part of the association.  All families are members of the association. All parents on the team were required to pay $200 for the coach to put on the camp for the team.  The parents received no other direct benefit from the association.  The coach of the team arranged this transaction without input from the association; however, the camp was put on during the team's already scheduled practice ice time provided by the association.

Answer
It appears that the team worked out the arrangement with the coach.  You wrote earlier, "One team asked each family to pay a coach $200 directly."  But now you state that the parents were required to each pay $200"  I suggest that the arrangement is for the team and, as such, should be accounted for and paid for by the team.  An arrangement as the coach has it now, unless he declares the $2000 as income, could come back to haunt the team (and, therefore, the association), under the form over substance doctrine or the economic substance doctrine.

I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. Your issue is a 1099 issue, which would apply to for-profits or nonprofits. I did give you some guidance, though. I would be willing to work on your matter further, but I would need to spend a substantial amount of time and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, which appears complicated, because it was for payments made in 2012, please contact me directly to the email address below.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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