Home-buyer cash rebates from a brokerage's referral program are purchase-price adjustments, not income, and need no Form 1099 reporting

Plain-English summary

An online real estate brokerage matches home buyers with brokers and collects a referral fee out of the broker's commission when a deal closes. Under a promotional program, the brokerage pays a buyer a cash amount after closing (a percentage of its referral fee, up to a cap). The brokerage's parent asked whether that cash payment is taxable income to the buyer, and whether the brokerage must report it on a Form 1099-MISC. The IRS ruled it is not income: the payment effectively reduces what the buyer paid for the home, so it is an adjustment to the purchase price, not gross income. The IRS relied on a line of authority treating rebates and allowances as purchase-price reductions (Pittsburgh Milk Co. and revenue rulings on manufacturer rebates, down-payment assistance, and Medicaid rebates). Because the payment is not includible in the buyer's gross income, the brokerage has no information-reporting obligation under Section 6041, so no Form 1099-MISC is required.

Ruling snapshot

• Question: Are cash rebates a brokerage pays to home buyers taxable income, and must they be reported on Form 1099-MISC?
• Outcome: Approved (payments are purchase-price adjustments, not income; no § 6041 reporting)
• Key authorities: IRC §§ 61, 6041; Treas. Reg. § 1.6041-1; Pittsburgh Milk Co. v. Commissioner; Rev. Ruls. 76-96, 2006-27, 2008-26

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202047002 Third Party Communication: None
Release Date: 11/20/2020 Date of Communication: Not Applicable
Index Number: 61.00-00, 6041.03-00
Person To Contact:
------------------------ --------------------, ID No. -----------------
------------------------ Telephone Number:
--------------------------------------- --------------------
------------------------------- Refer Reply To:
CC:PA:02
PLR-104096-20
Date:
----------- August 21, 2020

LEGEND:

Taxpayer = ------------------------

Subsidiary = ---------------

State X = -------------

State Y = --------

Program = ----------------------------

$a = ------------

b = ---

c% = -------

$d = -----------

Dear -------------:

This is in reply to Taxpayer’s request for a ruling on behalf of its indirectly wholly-owned
Subsidiary, as to the information reporting obligations of Subsidiary with respect to cash
payments Subsidiary makes to home buyers under Program.
PLR-104096-20 2

                                     FACTS

Taxpayer is a corporation headquartered in State X. Subsidiary is a real estate
brokerage company in State Y. Subsidiary provides online platforms where potential
buyers may be matched with a broker for the purpose of buying a home. Subsidiary
receives referral fees from a broker when a qualifying transaction is closed. The referral
fees are paid out of the broker’s commissions.

Subsidiary offers buyers the opportunity to participate in Program, and to receive a cash
payment after closing a qualifying transaction with a broker referred through
Subsidiary’s client referral network. To join Program, a buyer submits an inquiry online
about Program, and is contacted and then matched with a broker. A buyer might also
be asked if they want to be in Program after making a general inquiry.

To receive a cash payment under Program, a buyer must purchase a home in an
eligible area for a closing price of at least $a within #b months after submitting an
inquiry about the program or responding affirmatively when asked if they would like to
participate in Program. The amount of the cash payment is based on the closing price
of the home and is c% of Subsidiary’s referral fee, not to exceed $d. Subsidiary pays
the cash payment to the buyer only if the broker pays Subsidiary its contracted referral
fee in full. The referral fee is paid to Subsidiary after the close of the qualifying
transaction.

Taxpayer requests a ruling that payments Subsidiary makes to a buyer under Program
be considered adjustments to purchase price of the home and thus are not includible in
the buyer’s gross income under section 61 of the Internal Revenue Code (“Code”), and
therefore Subsidiary does not have an obligation to file or furnish Forms 1099-MISC,
Miscellaneous Income, for these payments under section 6041 of the Code.

                             LAW AND ANALYSIS

Income Taxation

Section 61 of the Code provides that, except as otherwise provided, gross income
means all income from whatever source derived.

In Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), the taxpayer was a
licensed milk dealer under state law. Pursuant to state law, it was unlawful to sell milk
at a price less than the minimum price applicable to a particular transaction. Contrary to
this law, the taxpayer gave certain customers discounts, allowances or rebates
(collectively, “allowances”) on purchases of milk products. Customers were billed (and
paid) the full amount of the billings reflected in their accounts, but were subsequently
issued checks by the taxpayer in the amount of the agreed upon allowance. The Tax
Court likened the allowances to situations in which goods were sold at a catalog list
price, less a trade discount. In such cases, the Tax Court had recognized that trade
PLR-104096-20 3

discounts reduce gross sales. Accordingly, the Tax Court held that the milk product
allowances in this case should be applied to reduce the taxpayer’s gross sales, and
thus reflected the actual agreed upon prices for which the milk was sold.

Similarly, courts have concluded that contractual allowances that provided for the
delivery of extra merchandise were purchase price adjustments and thus were excluded
from the taxpayer’s gross income. See, e.g., Max Sobel Wholesale Liquors v.
Commissioner, 69 T.C. 477 (1977), aff’d, 630 F.2d 670 (9th Cir. 1980); Haas Brothers,
Inc. v. Commissioner, 73 T.C. 1217 (1980).

Situation 2 of Rev. Rul. 2006-27, 2006-21 I.R.B. 915, involves a nonprofit corporation
that provides down payment assistance towards the purchase of homes to low-income
individuals and families. The ruling holds that down payment assistance received by a
home purchaser represents a rebate or an adjustment to the purchase price, and, as
such, is not included in a purchaser's gross income.

Rev. Rul. 76-96, 1976-1 C.B. 23, as modified by Rev. Rul. 2005-28, 2005-1 C.B. 997,
involves a manufacturer of automobiles that paid rebates to its retail customers who
purchased or leased new automobiles from dealers. The ruling holds that a rebate is
not includible in a customer's gross income; but rather, represents an adjustment to the
purchase price of the automobile.

In Rev. Rul. 2008-26, 2008-1 C.B. 985, the Service concluded that Medicaid rebates
paid by a pharmaceutical manufacturer to State Medicaid agencies were adjustments to
the sales price of drugs ultimately dispensed to Medicaid patients for purposes of
computing gross receipts.

In the present case, the payment to the buyer from Subsidiary essentially reduces the
amount that the buyer ultimately paid in order to acquire the home, which reduced the
overall cost of the home to the buyer. Accordingly, the payment represents an
adjustment to the purchase price of the home and generally is not includible in a buyer's
gross income.

Information Reporting

Section 6041 of the Code requires all persons engaged in a trade or business and
making payment in the course of such trade or business to another person, of rent,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable gains, profits, and income of $600 or more in any
taxable year, to file an information return with the Internal Revenue Service and to
furnish an information statement to the payee. Section 1.6041-1(a)(2) of the Income Tax
Regulations provides that the return required by section 6041(a) is made on Forms
1096 and 1099.

Section 1.6041-1(c) provides that payments are fixed when they are paid
PLR-104096-20 4

in amounts definitely predetermined. Income is determinable whenever there is a basis
of calculation by which the amount to be paid may be ascertained.

A payor generally is not required to make a return under section 6041 of the Code for
payments that are not includible in the recipient's income, nor is a payor required to
make a return if the payor does not have a basis to determine the amount of a payment
that is required to be included in the recipient's income. As used in section 6041,
“income” means “gross income.”

Subsidiary does not have an information reporting obligation under section 6041 of the
Code with respect to payments to buyers under Program because, as concluded above,
such payments represent adjustments to the purchase price of the homes and are
generally not includible in the buyers’ gross income. Nor does Subsidiary have an
information reporting obligation for those amounts under any other section of the Code.

                                   CONCLUSION

Based strictly on the information submitted and the representations made, we conclude
that payments from Subsidiary to buyers under Program are adjustments to the
purchase price of the homes and are not includible in the buyers’ gross income.
Subsidiary is not required to file or furnish Forms 1099-MISC to report these payments.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
PLR-104096-20 5

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                 Sincerely,

                                 /s/ Pamela W. Fuller

                                 Pamela W. Fuller
                                 Senior Technician Reviewer, Branch 2
                                 (Procedure and Administration)

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