For tax professionals assisting clients with litigation proceeds, the proper issuance of information returns regarding settlement payments is a frequent source of contention. In the recent case of Adusei v. Auer, No. CV-25-01722-PHX-SMB (D. Ariz. Jan. 20, 2026), the United States District Court for the District of Arizona addressed a plaintiff’s claims that the defendants fraudulently filed Form 1099-MISC regarding a settlement payout. The Court’s order provides a reinforcement of the broad definition of gross income and the high bar required to establish a claim for fraudulent filing of information returns under 26 U.S.C. § 7434.

Facts of the Case

The plaintiff, Oluronke Briana Adusei, was dismissed from the nursing program at Arizona College in 2018. Following a lawsuit regarding that dismissal, the parties reached a settlement in which the plaintiff received a "lump sum of $56,744". The plaintiff alleged that the settlement funds were "without any explanation or allocation" in the agreement, though she contended the funds were refunds for student loans and Pell Grants.

Arizona College and its legal counsel, Bonnet Fairbourn Friedman & Balint (BFFB), subsequently issued Form 1099-MISC information returns to the IRS reporting the payment. The plaintiff alleged that the defendants reported the sum as "self-employment income" paid as "compensation for services rendered," resulting in a "fabricated income of $115,288 being reported to the IRS" due to duplicate filings. The plaintiff claimed this resulted in an initial IRS notice alleging a tax liability exceeding $30,000, which was later reduced to $2,000 after correspondence with the Service.

However, the Court noted significant discrepancies between the plaintiff’s allegations and the exhibits attached to her complaint. While the plaintiff claimed the forms reported self-employment income, the Court observed that "the attached 1099s show that the $57,655 was reported as ’other income’". Furthermore, despite the plaintiff’s claim that the funds were clearly identified as loan refunds, the Court found this "refuted by the settlement agreement itself," which did not itemize the payment but treated it "as a whole figure meant to represent the settlement amount".

Plaintiff’s Request for Relief

Proceeding pro se, the plaintiff filed an Amended Complaint asserting a wide array of claims against the college and its counsel. The core of the plaintiff’s grievance was the issuance of the Form 1099s. She sought relief under 26 U.S.C. § 7434 for fraudulent filing of information returns, alleging the filing was "deliberate and conspiratorial in nature".

Additionally, the plaintiff sought relief under various criminal statutes (including 26 U.S.C. § 7206 for fraud and false statements), and asserted state law claims for legal malpractice, negligent infliction of emotional distress (NIED), intentional infliction of emotional distress (IIED), and discrimination under 42 U.S.C. § 1981 and Title VI. The plaintiff contended that the lack of transparency in the settlement allocation was a "calculated decision to misrepresent all funds as compensatory damages".

Court’s Analysis of the Law

The Court analyzed the motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Regarding the tax reporting obligations, the Court relied on the framework established in Johnson v. LPL Fin. Servs. to determine if a Form 1099 was required. This analysis asks three questions: (1) is the payer in a trade or business? (2) is the settlement payment gross income to the taxpayer? and (3) how is the payer paying the taxpayer?.

The Court emphasized the presumption regarding the taxability of settlements: "Since the definition of gross income is very broad and the exceptions are limited, the Court assumes a judgment or settlement payment is gross income to Plaintiff unless Plaintiff can point to the I.R.C. or Treas. Regs. to demonstrate otherwise".

Regarding the specific cause of action for fraudulent information returns, the Court outlined the elements required to prevail under 26 U.S.C. § 7434(a). A plaintiff must prove: "(1) the defendant filed an information return; (2) the information return was fraudulent; and (3) the defendant filed the fraudulent return willfully".

The Court also addressed the plaintiff’s attempt to use criminal tax statutes as a basis for civil liability. Citing Linda R.S. v. Richard D. and various district court precedents, the Court ruled that private citizens lack a judicially cognizable interest in the prosecution of others and that 26 U.S.C. § 7206 is a "criminal provision[] that do[es] not give rise to a private right of action".

Application of Law to Facts

In applying the law to the facts, the Court found that the defendants were legally obligated to file the Form 1099s. The Court rejected the plaintiff’s argument that the funds were non-taxable educational refunds under 26 U.S.C. § 117(a) (scholarships) or § 108(f) (student loan forgiveness). The Court noted that the "Plaintiff’s allegations and exhibits do not plausibly suggest that the $57,655 constitutes a scholarship or a student loan".

Because the settlement agreement contained a lump sum "without any explanation or allocation," and the plaintiff could not demonstrate that the funds fell into a specific statutory exclusion, the presumption of gross income applied. Consequently, the Court held that "Plaintiff has not plausibly alleged that it was improper for American College to file a 1099".

This determination proved fatal to the § 7434 claim. Because the 1099s were filed in accordance with the settlement agreement and relevant law, the plaintiff could not establish the second element of the claim—that the return was fraudulent. The Court concluded that "the 1099s properly identified the amount and the category of the payment to Plaintiff".

The Court similarly dismantled the tort claims arising from the tax filings. Regarding the Intentional Infliction of Emotional Distress (IIED) claim, the Court noted that liability requires conduct that is "extreme" and "outrageous". The Judge explicitly ruled that "the filing of a tax document in accordance with federal law can never be deemed extreme and outrageous," warranting dismissal with prejudice. Similarly, the Court dismissed the abuse of process claim, noting that while filing a 1099 involves using a process, the case did "not remotely implicate a judicial process" required for the tort.

Conclusions

The District Court granted the motions to dismiss filed by both Arizona College and BFFB. The Court dismissed the § 7434 claim with prejudice, affirming that the defendants’ filing of the 1099s was proper given the lump-sum nature of the settlement. The Court asserted that the plaintiff’s arguments regarding non-taxable educational funds were "moot" because the settlement instrument did not allocate the funds as such.

The claims attempting to enforce criminal tax statutes (Count II regarding § 7206 and § 1001) were dismissed with prejudice because those statutes do not create a private right of action. The Court also dismissed the claims for NIED, IIED, Title VI discrimination, and abuse of process with prejudice.

The only claims surviving with leave to amend were a specific legal malpractice claim (Count I) and a 42 U.S.C. § 1981 claim, though the Court expressed skepticism, noting it "would be futile to suggest that the filing of a tax statement in accordance with federal law impairs contractual rights on the basis of race". The Court concluded by warning the pro se plaintiff regarding the citation of "fake, nonexistent, misleading authorities," which could result in sanctions.

Prepared with assistance from NotebookLM.