Rev. Rul. 81-246, 1981-2 CB 249


Section 7701.--Definitions

26 CFR 301.7701-15: Income tax return preparer.

(Also Sections 6109, 6695; 1.6109-2, 1.6695-1.)


Where a department store licenses a corporation to prepare returns in its stores, and that corporation sublicenses this privilege to a second corporation, the individual employees of the sublicensee, the sublicensee, and the licensee may be considered income tax return preparers. The department store is not a preparer. The individual with primary responsibility for the accuracy of the return must sign the return and show his or her social security number. The name and employer identification number of the original licensee must also be shown on the return as the person who employed or engaged the preparer.


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ISSUE


Under the circumstances described below:


1. Who must sign the income tax return as the preparer?


2. Whose name must be entered on the return as the employer?


3. Whose identifying number must be shown on the return?


FACTS


A, the owner and operator of several large department stores, executed an agreement with B, a corporation, under which B is granted the privilege of operating a tax return preparation business as a licensed department in A's stores. Under the terms of the agreement, A receives all monies from the operation of the licensed department and pays over to B an established percentage of these receipts. B may operate any licensed department through a sublicensee, subject to A's approval. The agreement between A and B, while labeled a license agreement, is similar to a percentage lease agreement. B is required to operate within certain general rules established by A with respect to advertising, hours of operation, etc. The tax return preparation business is conducted under the joint names of A and B. Generally, A does not attempt to establish policies, procedures, or standards relating to the daily operation of B's tax return preparation business. A does not control, or have any right to control, the actual preparation of tax returns by B or by B's sublicensees.


B executed a sublicense agreement with C, a corporation, under which C was granted the privilege of operating a tax return preparation center in A's stores. Under the terms of the sublicense agreement, C operates its center in strict accordance with policies, procedures and standards established by B. C is responsible for staffing the center with qualified income tax return preparers. C is also liable under the license and sublicense agreements for payment of withholding taxes, social security taxes, workmen's compensation, and all assessments, contributions, taxes, or fees payable under Federal or state law providing for compensation benefits or insurance for its employees.All receipts from the center are paid to A, who pays a percentage to B. B then pays a fixed percentage of this amount over to C.


The license agreement between A and B is a part of the sublicense agreement between B and C. Under the terms of the license agreement, C is bound to perform every obligation of B. B assists C by making available to C the service of a consultant to help resolve any tax or administrative problem that may arise in connection with the operation of the center.


LAW AND ANALYSIS


Section 6109(a)(4) of the Internal Revenue Code provides that any return or claim for refund prepared by an income tax return preparer must bear the identification of the preparer, the preparaer's employer, or both, as prescribed.


Section 1.6109-2(a) of the Income Tax Regulations prescribes that each return or claim for refund prepared by one or more income tax return preparers must bear the social security number of the preparer required by section 1.6695-1(b) to sign the return or claim. If there is an employment arrangement between two or more preparers, the employer identification number of the person who employs or engages one or more persons to prepare the return must also appear on the return or claim.


Section 1.6695-1(b)(2) of the regulations provides that, if more than one income tax return preparer is involved in preparing the return or claim for refund, the individual preparer with the primary responsibility for the overall substantive accuracy of the preparation of the return or claim for refund is considered to be the income tax return preparer for purposes of the signature requirement.


Section 7701(a)(36) of the Code defines "income tax return preparer" as any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by subtitle A or any claim for refund of tax imposed by subtitle A.


Under section 301.7701-15(a) of the Regulations on Procedure and Administration, the term "employs" also means "engages."


A person who retains one or more persons to prepare the income tax returns of others is considered an income tax return preparer whether or not the persons retained are technically considered employees for purposes of other federal laws. H. Rep. 94-658, 94th Cong., 1st Sess. 276 (1976), 1976-3 C.B. (Vol. 2) 701, 968, s,. Rep. 94-938, 94th Cong., 2d Sess. 352, 1976-3 C.B. (Vol. 3) 49, 390.


In this case, the individual employee of C who has primary responsibility for the substantive accuracy of a return is required to sign the return as preparer. That employee's social security number must also be on the return. Because C employs such an employee within the meaning of section 301.7701-15(a) of the regulations, C is also considered an income tax return preparer with respect to the returns prepared by its employees.


Because B asserts control over the policies, procedures, and standards relating to the operation of the tax return preparation business, and because B provides assistance in resolving problems concerning return preparation, C is considered engaged by B for the purpose of preparing income tax returns for compensation within the meaning of section 301.7701-15(a) of the regulations. Therefore, B is an income tax return preparer with respect to the returns prepared by C's employees.


A does not control, or have any right to control, the actual preparation of tax returns. The license agreement between A and B is similar to a percentage lease arrangement; it merely gives A the right to control matters that relate only incidentally to the preparation of tax returns. Hence, A is not considered to be a return preparer within the meaning of section 301.7701-15(a) of the regulations.


Under section 1.6695-1(b) of the regulations, only the individual preparer with primary responsibility for the substantive accuracy of the return is required to manually sign the return as preparer. Because C is a corporation, oneof C's individual employees or agents is required to sign the return.


Section 6109(a)(4) of the Code and the applicable regulations contemplate that no more than two identifying numbers of income tax return preparers appear on the return. One should be that of the individual preparer required to sign the return. In a situation with more than two preparers, the other number should be that of the ultimate employer or engager of the person required to sign the return.


HOLDINGS


1. B and C and C's agents and employees are all considered income tax return preparers but only the individual preparer with primary responsibility for the accuracy of the return is required to sign the return.


2. B's name must be entered on the return as the person who employed or engaged the income tax return preparer.


3. The social security number of the individual preparer required to sign the return must be shown on the return. B's employer identification number must also be shown on the return.