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Catholic Charities paid security deposit.  Tenant wants the refund

If Catholic Charities paid the security deposit should it be returned to them or the tenant?  CC sent me a 1099MISC for rental income and I had to claim it on my taxes.. If it is refunded how do I handle this?  a deduction? charitable contribution?

I would assume a charitable contribution, talk to your accountant. And whoever paid the security is who the money would be returned to unless otherwise stated.
If the charity has paid the security then you must return it to them. When my father had given his apartment on rent, the security deposit was paid by the tenant's friend and on the expiry of the lease, our manager at Tropicana Realty stated that the amount must be returned to the tenant's friend and not the tenant.
They should have never filed the 1099 for the security deposit.  It is not income to you unless there are actual damages to the property and you keep a portion or all.  Since you reported it as income it will be a deduction in the year that you pay it back.
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