- A Majority Of Courts Find That Filing Of A Form 1099-C Does Not Preclude Further Collection Activity
- September 30, 2013 | Author: Jonathan VanGemert
- Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Troy Office
Creditors are required by the Internal Revenue Service to file a Form 1099-C upon the occurrence of certain events.1 Such a filing implies that a debt has been discharged, causing confusion amongst debtors and amongst the courts regarding the meaning of such a form in terms of collection of the debt for which the Form 1099-C was filed. Federal regulations make clear that the filing of Form 1099-C is “[s]olely for purposes of the reporting requirements,”2 but courts have been split regarding the treatment of such a filing with rulings to each extreme. This article will describe the treatment of jurisdictions throughout the nation, and best practices for avoiding subjective rulings based on the various court rulings.
26 USC § 6050P requires that “any applicable entity which discharges . . . the indebtedness [of $600.00 or more] of any person [including guarantors of commercial debt] during any calendar year shall make a return”3 filed on Form 1009-C. An applicable entity is defined as an applicable financial entity.4 An applicable financial entity includes any financial institution, any credit union, any corporation that is a direct or indirect subsidiary of a financial institution or credit union, and any organization in which a significant trade or business involves lending money,5 including debt buyers.6
26 CFR 1.6050P-1, which corresponds to 26 USC § 6050P identifies eight (8) “Events” that require a creditor to file a Form 1099-C, which classify a debt as cancelled, either actually or strictly for reporting purposes whether the creditor intends to discharge the debtor or not.7 Seven of the events - bankruptcy, other judicial relief, statute of limitations or expiration of deficiency period, foreclosure election, debt relief from probate or similar proceeding, by agreement, decision or policy to discontinue collection, and other actual discharge before identifiable event - are often the result of an actual discharge or cancellation of debt and preclude a creditor from continuing collection efforts.8
The eighth event is described as the “Expiration of nonpayment testing period.” “The testing period is a 36-month period, [during which] the creditor has not received a payment on the debt. . .”9
Creditors must file 1099-C at any time debt is discharged, but also must do so when any of the above referenced “events” occur whether actual discharge is intended or not. Despite an attempt made by the Debt Buyers’ Association on behalf of its members to be exempted from the statute, debt buyers fall within the purview of the statute as the court in Debt Buyer’s Assn v. Snow,10 held that there was no irreparable injury, and that the statute did not violate the Fair Debt Collection Practices Act.11
Creditors are not required by 26 USC § 6050P to identify an event by type on the Form 1099-C. This, in addition to the generally confusing nature of discharging a debt for reporting purposes, but not for collection purposes, has led to confusion amongst debtors and in the courts. The confusion is not entirely resolved despite clear rulings in recent United States Circuit Court cases.
The reason for the confusion is that a minority of courts have ruled that filing a Form 1099-C and failing to make clear the intent of its filing by way of a showing of practices and procedures or a showing that the filing was made by mistake may result in dismissal and actual discharge of the indebtedness.
One court overruled summary judgment in favor of a creditor that issued a Form 1099-C to the debtor where the creditor failed offer evidence of “its policies or practices with regard to debt cancellation or issuance of Forms 1099-C. . .”12
In Franklin Credit Mgmt. Corp. v. Nicholas, 73 Conn App. 830 (Conn. Super. July 12, 2001), the court dismissed the action of the creditor, finding that “the Defendant had put form 1099-C into evidence, [and the creditor] . . .presented no evidence of its practices and procedures . . . or whether a mistake had occurred or how the mistake occurred.”13
In Franklin, the court went so far as to dismiss an action in mortgage foreclosure where the defendant proved he had received a Form 1099-C in connection with the mortgage indebtedness, stating, “[It] would be inequitable. . . to require that [the debtor] report the discharge of debt as income on his federal tax return or face potential tax consequences and hold that the plaintiff may continue to hold him liable on the debt.”14
The majority of courts, however, find that the filing of a 1099-C Form does not discharge a debtor from liability and find the filing of same to be irrelevant to the point that such a filing does not raise a genuine issue of material fact sufficient to avoid summary judgment.
The majority “relies principally on the language of the IRS regulations and the purpose of a Form 1099-C.”15 In Owens v. Commissioner,16 the court reasoned that the filing of a Form 1099-C “was not evidence that a creditor had actually cancelled a debt, but rather reflected at most an intention to cancel the debt in the future.”17 The Court in FDIC, further reasoned that due to the fact that “a creditor can be required to file a Form 1099-C even where a debt has not been cancelled, the mere fact that a Form 1099-C is filed does not constitute sufficient evidence, standing alone, that a debt has been cancelled.”18 The court remarked that “the IRS did not create the form as a means of effectuating a discharge of a debt, . . . [but] as a reporting mechanism. . .”19 The court found that the reason for such a filing is so varied - discharge, intent to discharge in the future, any of the numerous “identifiable events,” or by simple mistake - “that is impossible for a court to know what the existence of a filed Form 10-99-C means.”20 The court then ruled that “[a]s a matter of law, a jury could not have rendered a verdict in [the debtor]’s favor that the Note was cancelled or assigned when the sole evidence put forth was the 1099-C Form.”21 On this basis, the court granted summary judgment for the creditor, indicating that submission by the debtor of his received Form 1099-C is insufficient to raise a genuine issue of material fact.
Despite the fact that the FDIC case is a ruling issued most recently and by the highest court to have ruled on this issue to date, it behooves “applicable entit[ies]” to take note of the decisions rendered by the courts in the minority when determining how to effectively navigate the requirement of filing a Form 1099-C with the Internal Revenue Service. Creditors are not required to identify a reason for the filing of Form 1099-C, but to protect against litigation headaches, it is advisable that creditors not only identify on the 1099-C Form its reason for filing, but draft a cover letter advising the debtor of its policies and procedures, including specific language identifying the debt as subject to further collection.
1. 26 USC § 6050P
2. 26 CFR 1.6050P-1
3. 26 USC § 6050P
4. 26 USC § 6050P(c)(1)(B)
5. 26 USC § 6050P(c)(2) (A)-(D)
6. Debt Buyer’s Assn v. Snow, 481 F. Supp. 2d 1, (D.D.C. 2006).
7. 26 CFR 1.6050P-1
10. Debt Buyer’s Assn. v. Snow
11. ld at 13-14.
12. Amtrust Bank v. Fossett, 223 Ariz. 438, Ariz. App. (2009).
13. Franklin Credit Mgmt. Corp. v. Nicholas, 73 Conn. App. 830, 842-43 (Conn. Super. July 12, 2001)
14. Id at 847-48.
15. FDIC v. Cashion, 720 F.3d 169, 178, 4th Cir. (2013).
16. Owens v. Commissioner, No. 02-61057, U.S. App. LEXIS 12481 (5th Cir. 2003).
17. FDIC v. Cashion at 178 (citing Owens v. Commissioner)
18. Id at 180.