BANK SERVING AS ESCROW AGENT FOR GENERAL CONTRACTOR MUST REPORT DISBURSEMENTS TO SUBCONTRACTORS.

Rev. Rul. 93-70

ISSUE

When an escrow agent performs an oversight function with respect to a construction project and makes payments on behalf of the owner and the general contractor of the project, is the escrow agent required to file information returns for payments of income reportable under section 6041 of the Internal Revenue Code?

FACTS

X is a bank chartered and supervised under federal law. X enters into a construction fund disbursement agreement with an owner and a general contractor under which the owner assigns to X, as trustee, funds borrowed for a real estate construction project. X maintains the funds in a separate non-interest-bearing escrow account for each construction project.

Under the disbursement agreement, X pays for labor, materials, services, and other costs and expenses incurred in connection with the construction project. Each project uses a voucher system consisting of disbursement orders and lien releases. Disbursement orders received from the general contractor may request reimbursement for expenses paid by the general contractor, or the orders may direct that payment be made to a subcontractor. The checks used to pay the expenses are drawn by X on the escrow account. Any funds remaining in the escrow account after completion of the project are repaid by X to the owner.

X also performs an oversight function under the disbursement agreement to ensure that loan proceeds will be properly applied and all approved bills properly paid in order to avoid mechanics' or materialmen's liens. Site inspections are conducted by X to determine whether work has been completed, but not to determine the quality of the work. If X determines that work has not been completed, it may withhold payments relating to that work until the work is completed. X also evaluates and assesses the cost of the project, including the cost of any changes considered during the project. X is to communicate any resulting concerns it has about the project to the owner and general contractor so that, if necessary, modifications to the original project or proposed changes may be made or additional funding may be provided by the owner and assigned to X.

LAW AND ANALYSIS

Section 6041(a) of the Code requires, in part, that all persons engaged in a trade or business and making payment in the course of such trade or business to another person of salaries, wages, compensation, remuneration, emoluments, or other fixed or determinable gains, profits, and income, of $600 or more in any taxable year must provide an information return setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

Section 1.6041-3(p) of the Income Tax Regulations provides an exception from reporting for payments made to principals by persons carrying on the banking business, and by persons which are mutual savings banks, cooperative banks, building and loan associations, homestead associations, credit unions, or similar organizations chartered and supervised by federal or state law, of funds collected when acting in the capacity of collection agents. Section 1.6041-3(p) states, however, that this reporting exception does not apply to collection of items on a regular and continuing basis under a so- called escrow, trust, custody, or investment advisory agreement.

Rev. Rul. 77-53, 1977-1 C.B. 368, states, in part, that section 1.6041-3(p) of the regulations requires reporting when an institution assumes a management function or retains the collected funds under an arrangement other than the customary depositor relationship.

In this case, X maintains owner-provided funds in an escrow account for use in connection with a construction project, performs an oversight function with respect to that project, and makes the requisite disbursements from the escrow account to the general contractor or the appropriate subcontractor. Thus, X performs a management function and retains the escrow funds under an arrangement other than the customary depositor relationship. Therefore, X is required to file information returns under section 6041 of the Code with respect to reportable payments it makes in the course of performing services as an escrow agent.

This conclusion also applies to non-bank escrow agents that make construction project disbursements under circumstances similar to those of X. See, e.g., Rev. Rul. 59-328, 1959-2 C.B. 379, in which a medical service operating as a fiscal administrator for a state medical society was required to file information returns under section 6041 of the Code with respect to its payment of government funds to participating physicians for the authorized care that they rendered under the program.

HOLDING

When an escrow agent performs an oversight function with respect to a construction project and makes payments on behalf of the owner and the general contractor of the project, the escrow agent is required to file information returns for payments of income reportable under section 6041 of the Code. This reporting requirement applies whether or not the escrow agent is a bank.

DRAFTING INFORMATION

The principal author of this revenue ruling is John J. McGreevy of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. McGreevy on (202) 622-4910 (not a toll-free call).