My brother bought an air conditioner from Sears. It didn't work. He sued them. They settled for a partial refund of $6500.
They just sent him a 1099 listing the $6500 a "other income". How should he handle it? (Aside from telling them to correct it and including the full story in his comedy act.)
Seth
If that's the whole story (IOW, they didn't replace the unit and give him a refund) and it's a personal residence, it's a nontaxable rebate. (See IRS Publication 525.) I have to say, though, that I don't understand why he would settle for less than a full refund for something that didn't work. What's the rest of the story?
You say it didn't work. But did he get it fixed so that it does work now?
If so, I'd say he does have income. However if it never worked and they wouldn't take it back and he trashed it, it's not income.
ChEAr$, Harlan Lunsford, EA n LA
Yes, but what does he do?! There is a 1099 for $6,500 floating around that he will not be entering on his tax return. Couldn't something like that trigger an audit? How does he deal with it? (based on my experiences with Sears, he won't get any help there.)
There are two schools of thought on erroneous 1099's in general. One says list it on the 1040 then back it out. I prefer just leaving it off entirely and explaining to the IRS if and when they inquire. Someone who'd pay $X-6500 for an air conditioner that doesn't work would probably prefer the former since there seems to be a teensy problem with conflict.
OTOH, since the story doesn't make sense to me as it stands, Sears could have fixed the air conditioner and given him a $6,500 settlement of liquidated damages, in which case it would be taxable income on line 21 of the 1040.
$6,500 seems like a reasonable price for a high-end, whole house AC system.
I suspect there's a lot of facts and circumstances missing here.
Dick
The installation was very poorly done; he had to hire someone else to redo it. He kept the hardware.
Seth
Yes, but he had to pay someone else to redo the installation so that it worked.
Why? He spent a bunch of money, got some of it back, spent some more, and now has a working air conditioner. I don't see anything in that corresponding to income.
(Even if he fixed it himself, if he paid $12,000 for an air conditioner, and got $6500 back, how does that differ from someone who bought one on sale for $5500?)
Seth
How much did it cost him to fix it? If it's more than $6500 the difference is probably taxable. If it's less, probably not.
Stu
Because it's a $12,000 unit. Normally if something is worth $12,000 and you get to buy it for $5500, the difference is technically taxable.
Stu
Well. still..... Did they also refund the price he paid? If so, definitely taxable income.
ChEAr$, Harlan Lunsford, EA n LA
"Stuart A. Bronstein" wrote in news:Xns9BA890E2423D8spamtraplexregiacom@130.133.1.4:
That reasoning I do not understand. If a highfaluting store sells a memory board for $120, and I buy it from a discount store for $50, do I have to declare the difference of $70 as income? Similarly, If I buy a new car for $35,000 and get a cash back rebate of $5,000, is that income?
We seem to have gone off the path of the original question. IIRC:
As I see it a payment from Sears equal to $Y makes the taxpayer whole. If $6,500 - $Y is greater than zero, the difference is taxable damages.
Thoughts?
The other way around, surely: if he got reimbursed less than it cost, that just means he spent more.
But in any case, he ended up spending money out of pocket for a house air conditioner. Why should it be taxable?
Suppose you bought something, it worked, but wasn't as good as advertised. When you complained, you got some of your money back (and got to keep the item). I don't see anything taxable in that transaction.
If you got _more than_ you paid back, you got free money plus stuff, so at least the money part should be taxable. (Free stuff generally isn't if you didn't work or trade for it.)
Seth
Agreed: if they refunded his price _and_ gave him more money, the excess would be taxable. But they didn't. It was just a partial reimbursement.
As it happens, Sears agreed to fix the paperwork (void the 1099). But if they hadn't, I still don't know the proper way to file.
Seth
I still disagree. He got an air conditioner that wasn't as good as advertised (at least, it was harder to install than they claimed, since they claimed their installer could do it and he couldn't), for which he paid less than the asking price.
If I go into a department store and buy a scratched couch for less than the asking price for a new perfect one, there's nothing taxable. If I order a new perfect one and they deliver a scratched one, and we agree that I'll get a discount instead of exchanging it, that likewise shouldn't be taxable.
Seth
First of all, if the payment was $6,500 and the repairs were $Y, then the
1099-MISC should only have been for $6,500-$Y.More importantly, it was an arm length's transaction; Sears is certainly not giving him a gift. If Sears gave him $6,500, it must have been because he was damaged $6,500 in some way; perhaps there was lost time from work, the unit is aesthetically challenged, maybe he was overcharged in the first place, whatever. There is no income, only reimbursement for losses.
Sorry, but Phil is right. If he got it fixed and, after the rebate he ended up spending less than the full original cost of the unit, the difference is taxable. If his total net cost was the same or more than the original price, it's not.
Stu
Right, assuming Y is less than 6500. Otherwise it should not have been issued at all.
If it had technically been a gift, it wouldn't have been taxable, so this wouldn't be an issue. Often in disputes on party pays more than the amount required to result in zero taxable income - there are different legal reasons for that.
If the money lost would have been taxable, the reimbursement is taxable. So if part of the payment was for time lost at work, that part is taxable.
Stu
Suppose, instead of it not working, he had a coupon for a discount; that clearly wouldn't be taxable, right?
Suppose that he got the coupon just after the purchase, and when he went in to complain, they honored it as a partial refund. Would that be taxable?
How does the existing situation differ?
I often buy stuff for well under "list" or "fair" price; I don't have to pay Income Tax on the discounts.
Seth
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