College Properly Reported Settlement Payment to Former Student on Form 1099

(Parker Tax Publishing February 2026)

A district court held that a college and a law firm that represented it in a lawsuit brought by a former student who was dismissed from the college's nursing school, properly reported a $56,744 settlement payment to the former student in settlement of her lawsuit on Form 1099-MISC after finding that no provision excluded the funds from her gross income. The court also rejected the former student's contention that the college was liable for damages under Code Sec. 7434 for fraudulent tax reporting because the 1099 was filed in accordance with the settlement agreement and the relevant law governing 1099s. Adusei v. Auer, et al., 2026 PTC 12 (D. Ariz. 2026).

Background

Oluronke Adusei was dismissed from Arizona College's nursing program in 2018. In response, Adusei sued Arizona College, represented by Bonnet Fairbourn Friedman & Balint (BFFB) and Colleen Auer. The parties settled.

Adusei claimed that she received a lump sum payment of $57,644 in satisfaction of her claims but "without any explanation or allocation." She contended that "this lack of transparency was a calculated decision to misrepresent all funds as compensatory damages" thus subjecting Adusei to income tax. Adusei asserted that she "explicitly and repeatedly requested that the refunded student loan and grant monies be returned to the U.S. Department of Education, as they were disbursed through Title IV federal funding." However, Auer ignored this request, which was, according to Adusei, "deliberate and conspiratorial in nature."

Adusei continued, alleging that Arizona College and BFFB each submitted a Form 1099-MISC, Miscellaneous Income, to the IRS. The forms were alleged to report the $57,644 as "self-employment income" paid as compensation for services rendered. Adusei asserted that "This resulted in a fabricated income of $115,288 being reported to the IRS, despite [Adusei] never working for either [Arizona College or BFFB] or receiving compensation in that amount." Based on these filings, Adusei claimed that she was "blindsided" by IRS notices alleging that she owed more than $30,000 in back taxes on an alleged $115,288 in unreported income. After two years of "extensive correspondence," the IRS reduced Adusei's tax liability to $2,000, which Adusei continued to dispute.

Adusei sued Arizona College and BFFB in a district court, asserting a variety of claims under state and federal law predicated on the alleged duplicate submission of the 1099s. Arizona College and BFFB each argued: (1) that it was required to file the 1099, which obviated Adusei's claims; and (2) even if it wrongfully filled the 1099, the claims otherwise had defects justifying dismissal.

In Johnson v. LPL Fin. Servs. 517 F.Supp. 1231 (S.D. Cal. 2007), the Southern District of California provided a three-step analysis for determining whether a payer is required to issue a Form 1099 with regard to a judgment or settlement payment. The questions asked at each step are: (1) is the payer engaged in a trade or business; (2) is the settlement payment gross income to the taxpayer; and (3) how is the payer paying the taxpayer. Adusei did not contest the first and third elements. She primarily argued that the second element was not met because the $57,644 did not constitute gross income. Adusei contended that under Reg. Sec. 1.6041-1(a)(2) and IRS Pub. 970, Tax Benefits for Education, refunds of student loans and Pell grants, reimbursements of transcript fees, and payments "wholly unrelated to any services rendered" are nontaxable and expressly excluded from Form 1099 reporting. Adusei pointed out that under Code Secs. 117(a) and Code Sec. 108(f), financial aid and loan cancellations used for educational expenses are not includable in gross income.

Adusei also alleged that BFFB and Auer failed to properly advise her about the legal implications of signing Form W-9, Request for Taxpayer Identification Number and Certification, and failed to protect her from "the foreseeable tax consequences of misclassified settlement funds." Accordingly, Adusei alleged that BFFB's and Auer's "breach of fiduciary duty and professional responsibility directly resulted in Adusei being "falsely taxed" on nontaxable funds, leading to severe emotional, financial, and academic damage.

Analysis

The district court granted Arizona College's and BFFB's motions to dismiss. In the court's view, Adusei failed to plausibly allege that the it was improper to file the 1099s reflecting a settlement amount that ostensibly Adusei agreed to. Further, to the extent Adusei attempted to bring a legal malpractice claim predicated on facts unrelated to the filing of the 1099, the court found that there were not enough facts to allow the court to evaluate such a claim.

The court noted that gross income is broadly defined in Code Sec. 61 as all income from whatever source derived. The court also cited Johnson, where the Southern District of California observed that payments of a settlement "will likely fall within the broad scope taxable income" and said that courts will assume a settlement payment is gross income unless the recipient can point to an exclusion in the Code or regulations. Adusei, the court found, did not point to any Code or regulation to demonstrate that the settlement payment was not gross income. In the court's view, Adusei's own filings belied her claim that the $57,644 comprised educational refunds or reimbursements. Further, the court found that the 1099s did not represent that the $57,644 as being paid in consideration for services rendered by Adusei. To the court, these facts rendered moot Adusei's arguments, since she could not plausibly suggest that the payment represented a scholarship or a student loan.

Under Code Sec. 7434(a), civil damages can be recovered for the fraudulent filing of an information return. To prevail on a Code Sec. 7434(a) claim, a plaintiff must prove that (1) the defendant filed an information return; (2) the information return was fraudulent; and (3) the defendant filed the fraudulent return willfully. Having already established that Adusei failed to show that the 1099s were filed in error, the court concluded that the second element of Code Sec. 7434(a) was not met because the 1099s properly identified the amount and the category of the payment to Adusei. The court therefore dismissed Adusei's Code Sec. 7434 claim because the 1099s were filed in accordance with the settlement agreement and the relevant law governing 1099s.

For a discussion of the rules for filing Form 1099-MISC, For a discussion of claims for damages for fraudulent filing of information returns, see Parker Tax ¶262,135.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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