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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2365
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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We bought a new boat and after 6 months of being unable to

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We bought a new boat and after 6 months of being unable to use it and repeated failed repair attempts the manufacturer has agreed to cancel the sale and take it back directly. They will return the full purchase price and the cost of direct consequential expenses (electronics, out riggers, etc.) They want to issue us a 1099 for refunded amount. We don't understand why and they have cited IRS regulations require them to do so. How could we have to pay income tax on money we already paid tax on for the original purchase?

Anne :

hello

Anne :

thank you for using justanswer

JACUSTOMER-4riidbsh- :

Hi...

Anne :

you actually won't pay taxes on this amount

Anne :

was this boat purchased for pleasure or business?

JACUSTOMER-4riidbsh- :

pleasure use... right, but why are they insisting on issuing a 1099, seems silly and our negotiations have been more than difficult

Anne :

I understand your frustration, but the rule they're using is the one that states anytime you have a transaction that involves more than $600, you must issue a 1099

Anne :

in effect, you have "sold" the boat back to the dealer for the original purchase price plus the expenses you incurred

JACUSTOMER-4riidbsh- :

That's what we are stuck on 'transaction', if it is a canceled sale and handled like a return why is it any different from going to a retailer, making a purchase and then returning the item (keeping in mind the $600 threshold)?

JACUSTOMER-4riidbsh- :

We have a written agreement that clearly does not use words like sale, purchase, etc. for that reason. We are also planning to file a form with NYS Tax and Finance to recover our sales tax paid.

Anne :

you will report this transaction on 2009 Form 1040 (Schedule D)Capital Gains and Losses

Anne :

as "personal property"

Anne :

you will not be able to take any loss, but since they are only refunding your purchase price plus expenses, they should "0" ut

Anne :

If they do not reimburse the sales tax, then you may still claim it

JACUSTOMER-4riidbsh- :

We are taking a loss, even with the repayment and plan to sue the dealer as well, but can you tell me if there anything is the IRS tax code that mandates the issuance of the 1099 or is there anything that supports position that we don't want it? What about the attorney accepting the 1099 since the funds are being placed in his escrow account?

JACUSTOMER-4riidbsh- :

Our total costs are about $300K and the agreement is for $250K

Anne :

You can not take a loss on the sale/return of personal property. At best, XXXXX XXXXX "o" out the $ the boat dealer reimburses you.

Anne :

If you choose to sue the dealer, that's fine. Nothing is reportable unless you actually recover damages

Anne :

I understand you are taking a $50,000 hit here

Anne :

so yes, you have a loss

Anne :

however, since the boat was personal property, IRS will not recoginize your loss

Anne :

however, the courts might

Anne :

the 1099 is a formality, and in effect, might make your court case stronger

JACUSTOMER-4riidbsh- :

What are the downsides to accepting the 1099, if any?

Anne :

in this case....as long as they report it correctly, (not in box 7) nothing

Anne :

you must file the Sch D in order to "0" it out though

JACUSTOMER-4riidbsh- :

We are frightened that this will act as some kind of red flag with IRS...

Anne :

not at all

Anne :

just remember you can't take the loss on the Sch D

Anne :

also, the 1099 will be of help to your attorney

Anne :

proves they had to refund your purchase price plus the costs you put into the boat

JACUSTOMER-4riidbsh- :

we are making this settlement privately, if we went to court and received the refund would the 1099 apply then as well? Several people in the manufacturing business have advised us that they would not issue 1099 in this situation, thats one reasons we are hesitant

Anne :

Well, I have to admit I've never seen a 1099 for this particular situation, but I absoutely know it won't hurt you on your taxes

Anne :

I look at this as proof the boat was defective

Anne :

but this is something you need to take up with your attorney

JACUSTOMER-4riidbsh- :

Okay, that helps...we don't really need proof of the defect, since the settlement is with manufacturer and not dealer. We have been in the most awful situation with them for 6 mos and have found that some, if not all, of the clauses are either self serving or intended to harm us financially

Anne :

I'm truly sorry that this is being made more difficult for you than it should be

JACUSTOMER-4riidbsh- :

Would it be fair to say that it is not 'necessary' to issue 1099?

JACUSTOMER-4riidbsh- :

Ugh -- thanks!

Anne :

I wouldn't issue one, but they are going to do whatever they think they need to do

Anne :

if you have a good tax accountant who knows how to handle this, the 1099 is truly a non-issue tax wise

JACUSTOMER-4riidbsh- :

Agreed, but this is the last point we are trying finalize in our agreement before we sign, so we wanted to be more educated with our position.

Anne :

as long as they do not put the $ amount in box 7, "non employee comp" , accept the 1099 and "0" it out on your taxes

JACUSTOMER-4riidbsh- :

okay, thank you very much! I am clicking on the green button :-)

Anne :

Thank you for using justanswer

Anne :

be sure to come back if we can help you again

JACUSTOMER-4riidbsh- :

Have a nice evening and thanks again!

Anne :

You too


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