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Reporting 1099 Misc for Disbursements

Question: 
If we have a customer (individual) who has set up a line of credit secured by several lots and the customer is building multiple houses on these lots. If we, as a bank, disburse funds from the line of credit to contractors for our customer as payment of services, must we report 1099 Misc for these disbursements?
Answer: 

from Brian: According to the instructions, a 1099-MISC is only required if payments are made in the course of your trade or business. The contractors are providing services to your customer not to the bank so that bank would not provide a 1099-MISC.

Even if your customer had a business and the contractors were providing services to your customer's business, it would be your customer's responsibility, not the bank's to provide a 1099-MISC.

Answer: 

from John: While the concept behind Brian's answer is true, the IRS has actually determined -- back in 2002 -- that such payments made on behalf of the borrower are subject to 1099-MISC reporting under § 1.6041-1 of IRS regulations. If the bank were to disburse funds only to the builder who is the borrower in such scenarios, the rule would not apply; but payments made either directly to contractors on behalf of the borrower or to the borrower and contractors jointly, trigger the 1099-MISC requirement. In cases in which both the builder/borrower and the lender could have a reporting responsibility, the person closest in the chain to the payee is normally obligated to report, unless the parties agree in writing that one of the other parties will file the report. Further information is available in the IRS's publication of the rule in the Federal Register, at 67 FR 48754

First published on 03/24/2014

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