1099's and Refused Payment

[NCA]

Hoping for some help on a situation I've not encountered before.

Client was paying a consultant for some work then decided the consultant was either milking them or very inefficient and cancelled the contract. Payments made to date were $20k, then a final check to compensate the consultant for partial-completed work was sent for $3,000. Consultant refused to accept the $3,000 check as final payment and sent it back (both happened in 2016). There is an on-going squabble over a final payment amount.

Is that $3,000 check amount that was paid included in the total 1099 amount paid or not since it was refused and returned? I'm leaning towards not including it since it was returned, but I haven't been able to find any clear guidance to support or refute that logic.

Anybody had a similar situation and/or can offer some resources?

Thanks!

[kathyc2]

Hoping for some help on a situation I've not encountered before.

Client was paying a consultant for some work then decided the consultant was either milking them or very inefficient and cancelled the contract. Payments made to date were $20k, then a final check to compensate the consultant for partial-completed work was sent for $3,000. Consultant refused to accept the $3,000 check as final payment and sent it back (both happened in 2016). There is an on-going squabble over a final payment amount.

Is that $3,000 check amount that was paid included in the total 1099 amount paid or not since it was refused and returned? I'm leaning towards not including it since it was returned, but I haven't been able to find any clear guidance to support or refute that logic.

Anybody had a similar situation and/or can offer some resources?

Thanks!

1099's are issued for the year in which payment has been made, not necessarily for the year in which the work was performed. Since the 3K check was returned, that amount was not paid in 2016 and should not be included.

[taxea]

I agree. If 20K was paid in 2016 then that is the amount on the 1099.

[Roland Slugg]

A check issued by a solvent payor is income when received by a cash basis payee, unless there's a restriction on the payee's right to cash the check. If the check was marked "acceptance of this check represents the recipient's agreement that it is payment in full of all sums owing," or similar wording, then there was no payment when the check was refused and returned. Absent such a restrictive legend, however, there was nothing to prevent the payee from cashing that check and still demanding more, even suing if he chose to do so.

The OP didn't say anything about restrictive language on the check, and if there wasn't any, then the $3,000 was paid when the check was sent. If that's the case, I would advise the company to keep the check and not void it, and would also advise that the 1099-MISC form should report $23,000.

The contractor will eventually either: (A) accept the $3,000 tendered, or (B) negotiate or even sue for a larger amount. It's not very likely that he will settle for less. Regardless of what eventually happens, the fact will remain that he was sent $3,000 in 2016. The company that paid it should deduct it on its 2016 tax return, and the payee should report it as income on his.

[NCA]

Thank you all for your input. Did further inquiry and there was a letter sent with the check stating that the acceptance and cashing of the check was acceptance of payment in full. Therefore, I think I won't include that payment in the 1099 amount since it was not cashed and returned to the client stated it was rejected all in 2016.

Happy tax season!

[Roland Slugg]

... I think I won't include that payment in the 1099 amount.

Concur. I would also advise the client to void that check.

Off-point opinion: The recipient may have made a foolish decision to reject that $3k check. The old saying "A bird in the hand ..." may very well apply here. The OP didn't say, so we don't know how much the payee actually billed ... a little more than the $3,000 tendered or a lot more ... but if was just a little more, like, say, $3,500 or $4,000, I would have advised him to take it and move on. By having the $3,000 check rejected, the company may now decide to take a tough stance and force the contractor to sue ... or get nothing. He may be on the verge of learning an expensive lesson.