USA hired Jesse to install a computer system for the company and paid him $8,000 for the work. USA soon realized that there were problems with the system and asked Jesse to refund the payment. At the end of the year the dispute had not been resolved. Jesse is in the 25% tax bracket in the year he did the original work. During the next year, when he is in the 15% tax bracket, Jesse refunds the $8,000 to USA.
a. Is the original payment taxable to Jesse when he receives it?
b. What options are available to Jesse when he repays the $8,000?
c. What option would have been available to Jesse if he had been asked to repay only $2,000?
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