499
1falsewitness
3defense
Susie King Taylor 360x1000
Margaret Fuller 360x1000
2lafayette
13albion
1theleasofus
George F Wil...360x1000
2gucci
2confidencegames
storyparadox3
1lauber
Anthony McCann1 360x1000
Anthony McCann2 360x1000
1defense
Mark V Holmes 360x1000
11632
10abion
Stormy Daniels 360x1000
LillianFaderman
399
3paradise
Margaret Fuller5 360x1000
Thomas Piketty3 360x1000
Spottswood William Robinson 360x1000
4confidencegames
7confidencegames
storyparadox2
2theleastofus
Margaret Fuller3 360x1000
Tad Friend 360x1000
1lafayette
2paradise
199
2transadentilist
James Gould Cozzens 360x1000
5albion
2albion
2trap
3confidencegames
6confidencegames
5confidencegames
299
4albion
Office of Chief Counsel 360x1000
1lookingforthegoodwar
11albion
12albion
Samuel Johnson 360x1000
Susie King Taylor2 360x1000
Gilgamesh 360x1000
1confidencegames
Margaret Fuller2 360x1000
Betty Friedan 360x1000
3theleastofus
2defense
Maurice B Foley 360x1000
Thomas Piketty2 360x1000
lifeinmiddlemarch1
Learned Hand 360x1000
Thomas Piketty1 360x1000
1empireofpain
14albion
lifeinmiddlemarch2
Maria Popova 360x1000
1transcendentalist
Lafayette and Jefferson 360x1000
9albion
1trap
Storyparadox1
6albion
Mary Ann Evans 360x1000
George M Cohan and Lerarned Hand 360x1000
1albion
Margaret Fuller4 360x1000
Edmund Burke 360x1000
Brendan Beehan 360x1000
Ruth Bader Ginsburg 360x1000
Margaret Fuller 2 360x1000
2jesusandjohnwayne
1madoff
7albion
1jesusandjohnwayne
Adam Gopnik 360x1000
AlexRosenberg
8albion'
1paradide
3albion
2lookingforthegoodwar
Richard Posner 360x1000
Margaret Fuller1 360x1000
2falsewitness
1gucci

Originally published on Forbes.com July 25th, 2014

People can get in a lot of trouble for not sending out all the 1099s they should.  I worry about that from time to time.  What I have not thought about much, until now, is the hazard of sending out a 1099.  The danger comes from Internal Revenue Code Section 7434 which provides for civil damages for the fraudulent filing of information returns.  Basically, if the person who you sent the 1099  can convince the court that the 1099 is wrong and that you were willful, they can get damages from you.  The minimum amount is $5,000, but what with attorneys fees and the like it will probably turn out to be more than that.  It was the case of David Shiner V Bernard I. Turnoy , that brought this new thing to worry about to my attention.  Here is the story.

The Dispute

According to the decision, Mr. Turnoy and Mr. Shiner had an agreement to equally divide the commissions on the sale of certain life insurance policies.  The policies were issued in November 2012.  Mr. Turnoy claimed that the commissions totaled $298,119.81.  Mr. Shiner believed that there was more.  Mr. Turnoy issued a check in the amount of $149,059.91 to Mr. Shiner in December of 2012.  It doesn’t seem that rounding the half cent in his favor made Mr. Shiner happy.  He was upset about something else.

The check bore a restrictive endorsement that indicated that acceptance of it would constitute full satisfaction of the disputed debt.  Mr. Shiner was not going for that.  Mr. Shiner started a lawsuit and returned the check.  By that time Mr. Turnoy had already issued him a 1099.

Was The 1099 Right?

The judge found that the 1099, was not right, so I guess it wasn’t, but otherwise I might not be so sure.  Here is some of the analysis.

For purposes of a return of information, an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and is made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.

Whether there is a condition upon which payment is to be made is essentially the same question as whether the creditor has the legal right to refuse to accept that payment (see Bones v. Comm’r, 4 T.C. 415, 420 (1944)). Normally creditors do not have the right to refuse or delay their acceptance of a check for tax purposes, and so they are in constructive receipt from the time they receive the check. When there is a dispute over the underlying debt for which a check purports to be in full satisfaction, however, the placement of a restrictive endorsement on that check imposes a condition upon its acceptance and gives the creditor a legal right to reject the condition by refusing the check. In such situations receiving a check with a restrictive endorsement does not constitute constructive receipt, and no payment will be considered as having been made unless and until the check is actually accepted.

The thing that I find just a bit confusing is the precise timing.  Mr. Turnoy was advised by his CPA that he needed to send the 1099 out by January 31.  He sent it on January 25.  He received notice of the lawsuit on January 30.  The decision does not discuss Form 1096, which is the transmittal of the 1099 to the IRS which is due at the end of February.

The Court was rather harsh in its analysis of Mr. Turnoy’s willfulness.

Turnoy contends that he “at the very least had a good-faith belief that he satisfied his debt to Plaintiff with the Check” .  In other words, Turnoy takes the position that by sending a check containing a restrictive endorsement he was both making a payment and fully satisfying a disputed debt — regardless of whether the check was accepted. That preposterous argument is no better than an attempt to have his proverbial cake and eat it too: conditioning the check by inserting a restrictive endorsement, thus expecting to use Shiner’s acceptance of the check as protection from future liability, while simultaneously insisting that the check itself constituted payment to Shiner regardless of whether it was actually accepted. (Emphasis added)

 What About Damages?

The Court has not yet determined damages and that is where things seem a little odd.  The most common practice I have seen when you have a 1099 that you think is wrong is to include it in the return and then back it out, possibly with an explanatory statement That way the return will not generate a document mismatch.  Since very few returns are ever audited, that will likely be the end of the story.  For whatever reason, this particular case, flew through the system with this decision coming less than a year after it was filed.  Oddly enough, that makes it rather impractical to say whether the “bad 1099” really did any harm, since there is still plenty of time for Mr. Shiner’s return to get audited – or, as may be more likely, not.

Maybe That Restrictive Endorsement Was Not Such A Hot Idea

Somehow I doubt that creating tax drama will help settle a business dispute.  When I think about how Mr. Turnoy is supposed to handle his own 2012 return, I get a headache.  Assuming he is on the cash basis, does he still have a good argument for deducting the  $149,059.91 that it has now been ruled he can’t say he paid?  Some sort of agency argument.  Assuming the deduction is not good, will he be able to use “claim of right” when he ultimately does pay?  Interestingly the judge, in this case, is not inclined to let the matter slide. One of the footnotes reads:

As a corollary of this opinion’s holding, Turnoy necessarily underpaid his own 2012 income taxes. Because the IRS would have no knowledge of that underpayment without being apprised of this opinion, a copy is being transmitted to the Chicago office of that agency.

I also have to wonder whether the 1099 lawsuit was worth the trouble. If Mr. Shiner’s goal is to collect money from Mr. Turnoy, possibly not.  On the other hand, if he is seeking to make his life miserable he may have succeeded.

You can follow me on twitter @peterreillycpa.