Hi burnside,
I'll take your questions one by one below.
Out of curiosity, how are you planning on handling the IRS reporting? What 1099 are you going to file? How are you handling the valuations?
Direct payments will be reported via 1099 as your suggested. As to which 1099 it is, is yet to be determined. My accountant is also a tax lawyer and will be advising me on this end of things. Valuations are handled at the time of the payments, so if BTC is $13.5 and you receive 4 BTC, the total value transfered is $54.
Thus any dollar values you report on any 1099's are going to be inaccurate, and worse, could end up screwing your customers. (eg, you report a value of $12, but when the customer exchanges it they exchange at $6)
I believe your thinking here is incorrect. I must report the value give at the time it is transferred. It is up to you to report any gain/loss incurred from converting the coins to something else. So in your example, I'd report the value given at $12 and you would report a loss of half the value because of the exchange rate fluctuation.
Is your lawyer a tax attorney?
Please see my first comment.