Is A Form 1099 Automatically Income?

I have a tax question for you.

It may seem straightforward, but this issue actually went to the Tax Court.

You bought a house in 2008. You took out a first and second mortgage.

During 2011 you fell behind on the mortgage. You caught up in 2012.

In 2014 you received a check for $13,508 from the mortgage company. Included with the check was a note stating

… based on a recent review of your account, we may not have provided you with the level of service you deserve, and are providing you with this check.”

The letter also stated you could call with any questions. You did but obtained no more information than we have above. You cashed the check.

The mortgage company sent a Form 1099-MISC for $12,789 and a 1099-INT for $719.

QUESTION: Do you have taxable income?

Several things are crossing through my mind.

(1)  First, if you deducted the $12,789 as mortgage interest, the recovery of a previous interest deduction can be taxable.

(2) Second, how would you know without further detail from the mortgage company?

(3) Third, is their reporting on a Form 1099 fatal?

I admit, I am thinking mortgage interest. To the extent the interest was previously deducted, its recovery could be taxable under the tax benefit doctrine.

The IRS has an easy argument.

Hey, you received a 1099. Two, in fact. A 1099 means income. If the 1099 is wrong, contact the mortgage company and have them void the 1099. Until then, as far as we are concerned you have income.

You have a tougher argument. You have to show that the monies are from a nontaxable source, but the mortgage company is not exactly baring its soul here.

You show the Court the letter. You point out that you paid both principal and interest on the mortgage. It is possible that the mortgage company is repaying you for principal it overcharged.

Did you rise to the occasion?

Here is the Court:

We hold that petitioner presented credible evidence that the $12,789 was a reimbursement for a mistake that [...] had made on his accounts. This return of $12,789 of petitioner’s mortgage payments was not a taxable event and the amount is therefore not includible in income.”

All parties agree that the $719 is taxable as interest income.

You did a good job, but you had a big break.

The IRS presented nothing other than they had received two 1099s. Most of the time that is a winning play.

But you could trump it by providing enough doubt that the 1099s sprung from a taxable source.

You did.

You may have had a sympathetic Court, though. You see, you served in the U.S. Army, and you were serving in Africa as you caught up on your mortgage during 2012.

The Court wouldn’t say, of course. We have to read between the lines.

Our case this time is Jin Man Park v Commissioner.