Chief Counsel Advice 201106010
In Chief Counsel Advice (CCA), IRS determined that amounts paid by clubs to taxicab drivers who deliver passengers to the clubs are income to the drivers, but are not tips received by the drivers in the course of their employment with taxicab companies. Rather, the payments are for services separate and distinct from the drivers' employment, and the clubs making the payments are responsible for complying with Code Sec. 6041 's reporting requirements.
Background. Code Sec. 61(a)(1) provides that gross income includes all income from whatever source derived. Under Reg. §1.61-2(a)(1), tips must be included by the recipient in his gross income.
Although tips aren't defined in the Code or regs, Rev Rul 59-252, 1959-2 CB 215 sets out a number of factors to be used in evaluating whether an amount received in an employment relationship is a tip, the absence of any of which would tend to indicate that the payment may be a service charge:
(1) the payment must be made free from compulsion;
(2) the customer must have unrestricted right to determine the amount thereof;
(3) the payment should not be the subject of negotiation or dictated by employer policy; and
(4) generally, the customer has the right to determine who receives the payment.
Under Code Sec. 6041, information returns must be made by every payor engaged in a trade or business who makes payments aggregating $600 or more in any tax year to a payee in the course of the payor's trade or business. The information returns must be filed with IRS, and corresponding statements must be sent to each payee.
Facts. The drivers are employees of taxicab companies engaged in the business of picking up and transporting passengers to their requested destinations for a metered fare. Typically, the driver collects the fares from the passengers, and the fare is split between the driver and the taxicab company. Drivers often receive a tip in addition to the meter fare for the transportation provided.
Certain clubs have a practice of making payments to taxicab drivers who bring passengers to their establishments. Generally, the club personnel will not render payment to the driver until the passengers pay a cover charge or otherwise indicate in some manner that they are patrons—for example, by purchasing drinks. Such payments are usually made in cash, although some clubs issue vouchers that can be exchanged for cash at a later time. The amount of the cash or voucher payments sometimes, but not always, bears a relationship to factors such as the meter fare or the number of passengers delivered.
The passengers are generally transported from a hotel directly to a club. In some cases, the drivers have agreements with certain hotel personnel so that when a guest wants to go to a club, the hotel personnel will summon that driver and the driver will split the club payment with the hotel personnel. In other cases, the passenger may not request a particular destination, and the driver or hotel personnel will recommend a club that will pay a referral fee for delivering the passenger. Several clubs place advertisements targeting drivers stating that they will pay a “referral fee,” or “tip” or “incentive,” for passengers who are delivered to the club.
The clubs are generally not reporting the payments on a Form 1099, Miscellaneous Income, purportedly on the basis that the drivers should treat the payments as tips received in the course of their employment and report them to the taxicab companies. However, the drivers are not separately reporting the payments to the taxicab companies as tips, so the taxicab companies are not treating the payments as reportable wages. This may result in some drivers not reporting the payments as income on their income tax returns.
Analysis. IRS determined as an initial manner that, regardless of the payments' characterization, they are clearly income to the drivers. IRS then concluded that, under the particular facts of the CCA, the payments are not tips received by the drivers in the course of their employment with the taxicab companies, but are rather payments for the separate and distinct services of referring and delivering patrons to clubs.
IRS distinguished between the drivers' duties under their employment, to simply deliver a passenger to his requested location, and the transactions at issue—influencing a passenger and delivering him to a specific club in return for a payment. IRS also found it telling that the drivers' payments were conditioned upon the passenger becoming a patron of the club and that the drivers sometimes collaborated with hotel personnel, both of which further distinguished these transactions from their ordinary duties.
Observation: In a CCA (Chief Counsel Advice 201106009) regarding similar payments, IRS concluded that whether the payments are tips for services performed as employees or payments for separate and distinct services depends on the specific facts and circumstances. For instance, IRS noted that if a passenger independently selected an establishment with which the driver had such an arrangement, without any encouragement or persuasion from the driver, this could support characterization of the payment as a tip because the driver merely performed the transportation service that the passenger requested.
IRS then determined that, given that the payments are for the separate and distinct services of delivering patrons to the clubs, the clubs are required under Code Sec. 6041 to file a Form 1099 with IRS for each taxicab driver to whom they pay $600 or more during the calendar year. If the clubs fail to do so, they could be subject to penalties under Code Sec. 6721.
References: For income from services, see FTC 2d/FIN ¶H-1000; United States Tax Reporter ¶614.007; TaxDesk ¶131,000; TG ¶7001. For information returns on business payments of $600 or more, see FTC 2d/FIN ¶S-3656; United States Tax Reporter ¶60,414; TaxDesk ¶814,001; TG ¶60201