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Why SOL Should be a Last Resort in Fighting JDB Collections


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#1 flacorps

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Posted 16 February 2008 - 07:49 AM

Since the Debt Buyers Association v. Snow case came down a couple of years ago, JDBs have been under pressure by the IRS to issue forms 1099-c to debtors in cases where the JDBs stop collecting on debts without having been paid, or if they get more than $600 less than the value of their claim. The 1099-c will require the debtor to take the unpaid portion of the debt into income on his or her form 1040 and pay tax on it at the debtor's marginal rate. Although the debtor can attach a form 982 to partially or wholly blunt the effect of the 1099-c, that form essentially reqiures that the debtor be entitled to file a CH7 BK in order to afford any relief.

In the past, debtors have used the Statutute of Limitations defense as the key weapon to defend against claims asserted by JDBs. Unless debtors want to pay the IRS for their past mistakes, that will need to change. The change is needed because the key portions of the regs governing the issuance of the 1099-c forms (which I will not go into here) requires the issuance of the 1099-c if the JDB has not taken any steps to collect in 36 months, or if the account has gone past the statute of limitations. Now the latter requirement is only operant if the case has gone to court and been defeated on that grounds and the appeal time has expired. But the IRS's intent is clear: if it's SOL, there has to be a 1099-c no later than 36 months after that happens (assuming no further collection activity on the part of the JDB ... and the IRS regs also make clear that sending the occasional letter doesn't cut it).

The inequities of this situation are not immediately obvious, but a quick example will show you why this sucks. Let's say two different taxpayers have a $2000 bad debt with credit cards from two different department stores. Let's say taxpayer A's debt is sold to JDB Y, who resells it to JDB Y1 within 3 years of buying it, and let's say this pattern continues indefinitely. It is likely no 1099-c will ever issue, and none of the JDBs will have violated the tax code. Let's say taxpayer B's debt is sold to JDB X, who goes past the 36 month testing period after an initial burst of collections activity, so JDB X sends a 1099-c form before selling to JDB X1, who does the same, and this pattern continues indefinitely. An uninformed taxpayer will pay taxes on this account at three year intervals until the day he dies--and he should only have paid once.

The best way to fight this situation is to fight every JDB on the basis of their inability to document the claim (lack of access to, or unwillingness to purchase "media" from the OC, or the poor quality of the media purchased), and to keep a good papertrail of that fight. A JDB that can't prove to you (or anyone else) that the debt is owed and that it's yours is a JDB that probably will not be issuing a form 1099-c. And if they do issue one, attaching an explanatory letter to the form 1099-c and refusing to take it into income may be OK with the IRS (you may want to attach copies of other documentation, as well as pull a few quotes out of the DBA v. Snow decision where the court cites the DBA's arguments that their documentation won't pass muster).

In cases where the consumer negotiates the debt down, the consumer should include a statement in the settlement agreement or letter that the debt is doubtful and disputed and that no form 1099-c shall be issued.

And in cases of lawsuit, courts should be directed to lack of documentation defenses as the key determinants (and asked to rule clearly on that) rather than SOL, which should be used as a fallback only.

Having closed the door on many legitimate bankruptcies with the misguided "reform" act of 2005, the government is now inadvertantly (I can't believe it's malicious in this case, and those who know me will tell you that I'm a conspiracy theorist) making trouble for those who engage in what I call informal bankruptcy, which is simply reordering their lives to ride out the effects of defaulted debt.

I believe this is being done because folks at the IRS believe they are preserving the integrity of the tax code. The laws making this sort of debt relief into income have been on the books for a long time, however they have their greatest application in business scenarios, and at the time the laws were passed the $600 limitation would have allowed the vast bulk of defaulted consumer debt to escape its application. Owing to inflation and to the explosion in credit available to consumers, these days consumer debt can be in the thousands if not tens of thousands, so the picture is much different. I believe the additional dollars to the treasury will be minimal and they know it. Their focus is simply that what's on the books must be put into effect ... and if Congress then sees fit to change it, so be it.

The 1099-c will come at a time when the consumer is just beginning to recover financially, and it will hinder that recovery, and I believe that it will have no ultimate benefit to the treasury, rather by pushing people back down the economic ladder the treasury will ultimately collect less revenue because of it. As things stand now, this is something neither the Debt Buyers nor the taxpayers want (I can't imagine even the most prosperously smug taxpayer feeling like someone who had gone into financial hardship should bear this burden or be viewed as not paying his or her fair share). A lot of this debt will be medical debt, and the amounts involved in those cases will far exceed the typical consumer situation--and I still don't see it providing a lot of money to the treasury, just a lot of misery for the taxpayers and paperwork for the JDBs, who really don't want their state-law claims messed up by the defense that the 1099-c form operates to make the debt immune from suit.

Unless Congress acts to protect the people, the people will have to inform themselves and act to protect themselves.



#2 Why Chat

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Posted 16 February 2008 - 08:47 AM

I don't know your source of this entry, FlaCorps, and would appreciate any link to any IRS bulletin or legal opinion that says that a JDB CAN issue a 1099C on a purchased debt.

A 1099C can ONLY be issued by the OC, not by the JDB, unless the JDB has paid full purchase price for the debt.

Your assertion that the SOL affirmative defense should be the last defense used if someone is sued is ludicrous. If someone is sued they should use ALL their legitimate defenses.

EVEN if they win against a JDB on the basis of "SOL" there is NO WAY that the JDB can then issue a 1099C for their "lost" claim, no more than they can do so for any other basis of their lost case.

I believe that your post was taken "whole cloth" from a lying scum scam CA website.

Even IF a "settlement" was made with some lying scum CA for more than $600. less than the alleged collection amount, there is NO legal way a JDB can issue a 1099C for the balance.

Edited by Why Chat, 16 February 2008 - 08:50 AM.


#3 cajunbulldog1

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Posted 16 February 2008 - 08:59 AM

The above op is referring to a federal court case of DBA vs Snow in which the government won.The Jdb's now have a time limit on making effort before issuing a 1099. It is an interesting case and a real eye opener.

#4 EastRidge

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Posted 16 February 2008 - 09:13 AM

Flacorps, I'm not being critical here, I'm being
confused. Not that tax law has to make sense,
grin, but ...

Suppose Collector A sees the clock run out for
SOL, files the 1099C, and (somehow) still manages
to sell the debt to Collector B.

Collector B soon finds out that the debt is not
collectable, since SOL has already passed. So
within 36 months, Collector B must file a 1099C?
Even though there has already been a 1099C on
the same debt?

And suppose (there's a fool born every minute)
that Collector C buys from Collector B, then D buys
from C ... . In a package of pooled debts, there
have to be some clunkers, so this trading might
go on for quite awhile. You are saying, if I get
this straight, that the debtor will continue to see
1099C forms, without limit?

Second question: Is the 1099C for the ENTIRE
face value of the debt? That is, suppose it's a
$10,000 note and the collector buys it for a penny
on the dollar. Is the 1099C for the reduced price
of $100, or for the whole $10,000?

If the latter, it appears that the IRS might someday
collect more than the whole face value of the note!

Third question, if two are not too many: Suppose the
collector gets a junky note (not mine, really not mine)
but decides it is my problem. Three years later, they
cease collections efforts, and file a 1099C in my name.
Does this mean, I either mount a vigorous "not mine"
protest with the IRS, or else pay the extra tax?

ER

#5 flacorps

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Posted 16 February 2008 - 09:30 AM

I don't know your source of this entry, FlaCorps, and would appreciate any link to any IRS bulletin or legal opinion that says that a JDB CAN issue a 1099C on a purchased debt.


The big G still caches the Snow case here. It provides the best rundown of the situation as it stands:
http://72.14.205.104...G...;cd=1&gl=us

#6 flacorps

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Posted 16 February 2008 - 09:33 AM

Flacorps, I'm not being critical here, I'm being
confused. Not that tax law has to make sense,
grin, but ...

Suppose Collector A sees the clock run out for
SOL, files the 1099C, and (somehow) still manages
to sell the debt to Collector B.

Collector B soon finds out that the debt is not
collectable, since SOL has already passed. So
within 36 months, Collector B must file a 1099C?
Even though there has already been a 1099C on
the same debt?


Unless the collector that sells the debt somehow tells the subsequent collector(s) that a 1099-c has already issued, the new guy has got to assume that one hasn't (ideally it would be a new Y/N field in the database).

It would be up to the debtor to have the perspicacity to know that 1099-c #2 was for the same debt, and to clearly explain same when filing his 1040.

Oh, and one of the DBA's cavils in the Snow case was that they didn't know how to break out interest, etc. from the lump sum figures they were getting when they bought the debt so that the 1099-c forms would be correct.

Edited by flacorps, 16 February 2008 - 09:34 AM.


#7 flacorps

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Posted 16 February 2008 - 09:42 AM

Even IF a "settlement" was made with some lying scum CA for more than $600. less than the alleged collection amount, there is NO legal way a JDB can issue a 1099C for the balance.


The JDBs are quite in agreement with you, whether the amount is paid in settlement or whether there's no amount paid whatsoever.

It's the IRS that is in disagreement, and it's the court that said "we won't help ... why don't you just not comply with the IRS and fight the penalties later if you really feel that strongly about it."

#8 heavyjay

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Posted 16 February 2008 - 09:50 AM

This is from the internal revenue code 1.6050P-1
It lists the identifiable events under which a creditor must issue a 1099-C. The last paragraph specifically qualifies SOL to mean after it has been used successfully as an affirmative defense.

(2) Identifiable events--(i) In general. An identifiable event is--

(A) A discharge of indebtedness under title 11 of the United States

Code (bankruptcy);

(B ) A cancellation or extinguishment of an indebtedness that renders

a debt unenforceable in a receivership, foreclosure, or similar

proceeding in a federal or State court, as described in section

368(a)(3)(A)(ii) (other than a discharge described in paragraph

(b )(2)(i)(A) of this section);

(C ) A cancellation or extinguishment of an indebtedness upon the

expiration of the statute of limitations for collection of an

indebtedness, subject to the limitations described in paragraph

(b )(2)(ii) of this section, or upon the expiration of a statutory period

for filing a claim or commencing a deficiency judgment proceeding;

(D) A cancellation or extinguishment of an indebtedness pursuant to

an election of foreclosure remedies by a creditor that statutorily

extinguishes or bars the creditor's right to pursue collection of the

indebtedness;

(E) A cancellation or extinguishment of an indebtedness that renders

a debt unenforceable pursuant to a probate or similar proceeding;

(F) A discharge of indebtedness pursuant to an agreement between an

applicable entity and a debtor to discharge indebtedness at less than

full consideration;

(G) A discharge of indebtedness pursuant to a decision by the

creditor, or the application of a defined policy of the creditor, to

discontinue collection activity and discharge debt; or

(H) The expiration of the non-payment testing period, as described

in paragraph (b )(2)(iv) of this section.

(ii) Statute of limitations. In the case of an expiration of the

statute of limitations for collection of an indebtedness, an

identifiable event occurs under paragraph (b )(2)(i)(C ) of this section

only if, and at such time as, a debtor's affirmative statute of

limitations defense is upheld in a final judgment or decision of a

judicial proceeding, and the period for appealing the judgment or

decision has expired.


#9 flacorps

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Posted 16 February 2008 - 09:59 AM

This is from the internal revenue code 1.6050P-1
It lists the identifiable events under which a creditor must issue a 1099-C. The last paragraph specifically qualifies SOL to mean after it has been used successfully as an affirmative defense.


Which is not to say that it's improper to send the 1099-c earlier ... just that it's improper to send one later or not at all.

#10 hurricanesfans27

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Posted 16 February 2008 - 10:03 AM

This is from the internal revenue code 1.6050P-1
It lists the identifiable events under which a creditor must issue a 1099-C. The last paragraph specifically qualifies SOL to mean after it has been used successfully as an affirmative defense.


Which is not to say that it's improper to send the 1099-c earlier ... just that it's improper to send one later or not at all.



i had a creditor send one just 60 days after chargeoff

#11 heavyjay

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Posted 16 February 2008 - 10:16 AM

This is from the internal revenue code 1.6050P-1
It lists the identifiable events under which a creditor must issue a 1099-C. The last paragraph specifically qualifies SOL to mean after it has been used successfully as an affirmative defense.


Which is not to say that it's improper to send the 1099-c earlier ... just that it's improper to send one later or not at all.


Correct. And to answer Why Chat's assertion that only the OC can issue one, the IR code says at 1.6050P-2(e) regarding applicable entities:

(e) Acquisition of an indebtedness from a person other than the

debtor included in lending money. For purposes of this section, lending

money includes acquiring an indebtedness not only from the debtor at

origination but also from a prior holder of the indebtedness. Gross

income arising from indebtedness is gross income from the lending of

money without regard to who originated the indebtedness. If an

organization acquires an indebtedness, the organization is required to

report any cancellation of the indebtedness if the organization is

engaged in a significant trade or business of lending money.


This was also quoted in DBA v. Snow. Unfortunately, this means JDB's are required to issue 1099-C's. The DBA probably should have argued that this means factoring companies who purchase debts while they are still alive rather than debt buyers who purchase debts that have already been written off. Don't know if it would have flown, but at least the argument would have been in the record.

#12 flacorps

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Posted 16 February 2008 - 10:21 AM

The bottom line is that the IRS has told the Augeans (the JDBs) to clean their stables ... and the stuff that's in those stables flows downhill (to the taxpayers), knowwhatImean?

#13 heavyjay

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Posted 16 February 2008 - 10:28 AM

Yep. Bottom line is everyone is required to follow the rules and pay his fair share, but there's nothing wrong with arranging one's affairs so as to make his fair share as close to zero as possible.

#14 momintn

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Posted 16 February 2008 - 11:17 AM

I have a question, because I'm not good at math. But I want to preface this by saying I am NOT trying to get out of paying this debt that I do owe. I'm on CB to learn how to hold off the OC/CA from suing me until I can get the money to pay them in full. That said...

If the OC decided to charge this off b/c they see no chance of recovering, and they send me a 1099 for the $8,000 charged off, am I any worse off in my situation? Here's what I come up with:

Looking only at the 1040 tax table and not taking into account any deductions, etc., tax owed on dh's income for 2007 is $2,716. If we received a 1099 for an $8,000 chargeoff, the tax owed would be $3,916, or exactly $1,200 more.

If I paid that $1,200 to the OC instead, then they charged off the remaining $6,800 and issued a 1099 for that amount, we would owe $3,736 in taxes for 2007, which is $1,020 more than what we really owe. So then I would have paid out a total of $2,220 -- $1,200 to debtor, $1,020 to OC.

BUT, in reality, we have not had any tax liability in years -- that's what having 4 kids and lower income will do for you. So for US, even with the $8,000 1099 I would receive, increasing our income by that amount, we would still not owe any taxes in 2007. So wouldn't I be better off -- financially -- by pushing for the chargeoff and getting the 1099? (I'm not, just throwing out figures for all you math wonders).

#15 heavyjay

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Posted 16 February 2008 - 11:35 AM

If you pay them anything after they issue a 1099-C, it's gravy to them. They are not required to send you an amended 1099. They have to report it as income, but there is no benefit to you.

#16 sh9730

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Posted 16 February 2008 - 12:24 PM

If I recall from reading some other posts on this issue a few days ago, the POSITIVE of getting a 1099-c from a JDB though is that the zombie debt is FINALLY actually done, right? No more collection activity period, right?!

So, in a wierd way (and probably part of reason JDBs dont like it), is that if you can wait it out, and assuming that eventually you are going to pay someone, some amount, it could be less expensive to pay the tax (at marginal rates) on the "income", especially given that my understanding of the OP is that even if you settle with the JDB you still will get a 1099-c for the remaining amount on the debt? Right?

Of course as is pointed out in posts above, their is no guarantee that the zombie debt wont continue to move from JDB to JDB, even after a 1099-c, but it would be a "relatively" easy dispute to win should it affect credit issues past the date of the 1099 issuance....

#17 traveler505

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Posted 16 February 2008 - 12:45 PM

There seems to be several points of confusion which arise whenever the topic of 1099-C is discussed. (Primarily the relationship between the issuance of a 1099-C and the creditor's ability to write off the debt.) I may be adding to that, since I'm not an expert, but here is a greatly oversimplified version that I've pieced together, which may help in clarifying things. Feel free to correct me if I've gone astray.

OC loans Debtor $10000. There is no tax impact, because the money that Debtor received is offset by an equivalent amount of debt.

Debtor fails to pay, and OC sells the debt to a JDB for $1000. OC can deduct a $9000 loss on its taxes. Debtor's tax position has not changed; he still has $10000 and owes $10000.

Debtor still doesn't pay, and the JDB gives up and cancels the debt. JDB can take a tax loss for $1000 (the amount it paid for the cancelled debt). Debtor now has received $10000 but owes nothing; the IRS considers this taxable income, and the JDB must issue a 1099-C for $10000. This amount is based on how much the Debtor gained (i.e. how much debt was cancelled), not how much the JDB lost by cancelling it. Remember that the OC already took 90% of the loss on its taxes.

Complication No. 1 (DBA v. Snow): The JDB lacks sufficient information to fill out the 1099-C form correctly. While my example didn't mention interest owed, Form 1099-C apparently requires the JDB to figure out how much of the cancelled debt is principal and how much is interest, and most JDBs can't document the debt well enough to do this.

Complication No. 2: The IRS considers a debt to be cancelled if the JDB hasn't made any attempt to collect in three years, even if the JDB has no desire to cancel it. So JDBs may be forced to issue 1099-Cs on non-cancelled debt. At least one state court has held that issuance of a 1099-C automatically cancels a debt, effectively adopting the IRS definition of cancellation. But there is no guarantee that every state will agree with this holding. So there is a real possibility that a debt will be considered cancelled under federal law (meaning 1099-C tax liability for the Debtor) but not under state law (meaning the JDB can still collect or sell the debt to the next JDB).

In theory, only one 1099-C can be issued, since a debt that is cancelled for federal tax purposes remains cancelled forever. But there is no guarantee that JDB #1 will tell JDB #2 that the debt has been cancelled, so, yes, there is a risk that the Debtor will get multiple 1099-Cs from multiple JDBs.

If state law does not provide that a debt is automatically cancelled when a 1099-C is filed, and the Debtor pays the JDB after a 1099-C is issued, I suspect that the Debtor can either deduct the amount of payment from the current year or file an amended return for the 1099-C year, since the Debtor would no longer have the taxable income from cancellation of the debt. (This would be a comparable situation to an employee who is overpaid in 2005, and has to repay the excess wages in 2006.) But I don't know this for sure.

#18 flacorps

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Posted 16 February 2008 - 02:30 PM

Feel free to correct me if I've gone astray.


Actually, you summed the situation up quite nicely. The state which has held in the debtor's favor is Connecticut.

A couple of other states have held against the debtor, but in a business-law context, not with respect to consumer debt. While it's possible that seals the debtor's fate, if I were faced with the 1099-c situation in such a state I would argue that there is a qualitative difference between business debt and consumer debt and that the prior ruling against a business debtor should be distinguished from my situation.

#19 Why Chat

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Posted 16 February 2008 - 02:42 PM

I am very sorry that you chose to resurrect this ploy on the part of JDB's and garbage CA's that they used to "validate" their abusive practices of scaring people with threats of 1099C's.

Because you chose to misinform the readers of this forum by only referring to the JDB's lawsuit that they instituted to try to weasel out of FEDERAL repercussions of their improper and illegal violations of the FDCPA by being able to "claim" that they are "required" to send 1099C's you have played into their sneaky underhanded game.

I have added some links on the subject and a short commentary to my existing page about the 1099C

http://whychat.5u.com/1099.html

Edited by Why Chat, 16 February 2008 - 02:43 PM.


#20 lorree

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Posted 16 February 2008 - 03:28 PM

It would be great to have this a pinned topic on 1099's with everyone's opinions so we can keep it all in one place....this seems to be a very popular topic and always comes up.

#21 lorree

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Posted 16 February 2008 - 03:34 PM

Is it 3 years per specific JDB that they have to issue a 1099 if they hold on to the debt, or 3 years total no matter what JBD has it, after it goes into the JDB pool?

#22 flacorps

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Posted 16 February 2008 - 03:45 PM

I am very sorry that you chose to resurrect this ploy on the part of JDB's and garbage CA's that they used to "validate" their abusive practices of scaring people with threats of 1099C's.

Because you chose to misinform the readers of this forum by only referring to the JDB's lawsuit that they instituted to try to weasel out of FEDERAL repercussions of their improper and illegal violations of the FDCPA by being able to "claim" that they are "required" to send 1099C's you have played into their sneaky underhanded game.

I have added some links on the subject and a short commentary to my existing page about the 1099C

http://whychat.5u.com/1099.html


Oh, I completely agree that JDBs will use the 1099-c as a threat against the consumer. But they will use anything against the consumer. If the consumer is afraid of turning into Michael Jackson, the creditors will tell them that failing to pay debt will cause the consumer to want to wear one sequined white glove, bleach his face, narrow his nose with repeated plastic surgeries and build a theme park in his front yard as a child lure.

The JDBs want nothing to do with the 1099-c form because they do not want to face the following scenario, as written up by Ryan Carey in the Fall/Winter 2006 issue of Tickmarks, which is a publication of the Iowa Society of CPAs:

In Franklin Credit Management Corp. v
Nicholas, 812 A.2d 51 (Conn. App.
2002), the court addressed the issue and
found in favor of the debtor. The court
analyzed Connecticut Uniform
Commercial Code law and found that a
Form 1099-C was a “signed writing” that
legally discharged the debt. The court
held that the entire amount of the debt
had been discharged upon issuance of
the 1099-C. Similar reasoning was used
in In re Crosby, 261 B.R. 470 (Bkrtcy. D.
Kan. 2001). The Bankruptcy Court in
Crosby held that a creditor could not
enforce its claim when a 1099-C is
issued. The court noted that the creditor’s
“filing of the 1099-Cs was analogous
to assigning the debts to the IRS,
necessarily passing to the IRS any right
to collect money from the debtors on
account of the debts.” This is a clearly
erroneous statement, which is not supported
by a rational reading of tax law.
Nonetheless, the debtors prevailed in
both of these cases and the creditors
were barred from recovering the debts.


I have no love for the JDBs' abusive practices, and I don't think the JDBs can have any faith in the accuracy of the numbers
they receive from the OCs or from prior JDBs, and as such consumers should probably report them to the IRS for fraud as well as sue
them for violating the FDCPA each and every time the consumer gets a form 1099-c.

But from a practical standpoint, it's better not to get the damned things in the first place. And I believe that is more or less avoidable by playing one's cards correctly.

Butch & Sundance will tell you there's more than one way to get into a safe ... and the use of the SOL on a claim where fighting on the basis of documentation would do nicely is the equivalent of the unfortunate method they used in that boxcar.

#23 traveler505

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Posted 16 February 2008 - 04:46 PM

Again, a variety of issues are getting confused here.

First, Bud Hibbs and his unnamed "expert" speculate that JDBs can take the full amount of the 1099-C as a tax deduction. This is not how the tax code works in general, and I suspect that Bud and his "expert" are simply wrong about this. As I noted above, the OC would have already taken most of the write-off, and the JDB would only be able to take the amount which it paid for the debt as a tax loss.

Second, it seems rather clear that JDBs are required to file 1099-C forms when a debt is cancelled, or when certain events happen (primarilt 3 years without collection activity). From the DBA court case:

Treas. Reg. 1§ 6050P-2, the regulation at issue in the instant case, was passed on October25, 2004, effective for discharges occurring on or after January 1, 2005. 26 C.F.R. § 1.6050P-2. The regulation further clarifies what is “an organization a significant trade or business of whichis the lending of money” under 26 U.S.C. § 6050P©(2)(D). Pursuant to Treas. Reg. 1§ 6050P-2(e), “lending money includes acquiring an indebtedness not only from the debtor at originationbut also from a prior holder of the indebtedness.” Debt Buyers are encompassed by thisdefinition and hence required to submit 1099-C Forms to the IRS by February 28, 2006 (orMarch 31, 2006, if filed electronically) as well as informational reports to debtors by January 31,2006, for identifiable events that occurred in the year 2005.



Third, there are several ways in which a debt can be cancelled.

The owner of the debt (OC or JDB) can voluntarily cancel it. Ordinarily, this is a partial cancellation in exchange for payment, as in "You pay me $1000, and I'll cancel the remaining $9000." But a JDB can simply cancel the whole debt for the hell of it. In either case, the debt is extinguished and the Debtor has received a windfall (he still has the original $10000, but no longer has the matching debt). So the JDB is required to issue a 1099-C and the Debtor has to report it as income (subject to the insolvency rule, etc.).

Why would a JDB voluntarily cancel a debt? Well, in the case of a negotiated settlement, it's obvious. $1000 was as much as they thought they could get from the Debtor, and they still made a profit on the settlement. In this case, they probably wouldn't tell the Debtor that a 1099-C would be filed; why muddy the waters?

Total unilateral cancellation is another story. It's not in the interest of the JDB to actually cancel a debt, but the threat of a 1099-C might intimidate uninformed Debtors into paying something. "Which would you rather do, pay us $50/month or pay the IRS $2500 in April?" It's a game of chicken (to the extent that the JDB actually intends to carry through on its threats), since if the Debtor doesn't flinch, and the JDB cancels, the JDB loses everything except the write-off of the amount it paid for the debt.

(I admittedly haven't paid attention to posts about 1099-C threats, so perhaps the JDBs are using them in a different way that I haven't thought of.)

The JDBs had two basic objections to being required to provide 1099-Cs.

First, they claimed that they didn't have enough information about the amount owed, e.g. how much was principal and how much was interest, to accurately complete the form. Well, anyone who has ever DV'd a JDB knows that they are right. They can't substantiate the debt. The court in DBA basically said: Tough. Learn how to do your job.

Second, the JDBs were concerned that the Treasury regulation presumed for federal tax purposes that they had cancelled a debt if they had made no effort to collect for 3 years, and required them to issue 1099-Cs at that time. The JDBs worried that, if they issued the 1099-Cs, they would be treated the same by state courts as creditors who had voluntarily cancelled debts. (They didn't cite the Connecticut case, but it is a prime example of what the JDBs feared.) Voluntary cancellation extinguishes the underlying debt. Being presumed to have cancelled the debt for federal tax purposes doesn't, unless a state court decides that it does.

The 2002 Connecticut case held that a 1099-C is prima facie evidence that a debt has been voluntarily cancelled by the creditor. But it left the door wide open for a creditor to claim mistake or otherwise explain why the form was not intended to extinguish the debt. If a creditor came forward and said "We only filed the 1099-C because the IRS told us we had to once the debt was inactive for 3 years," I suspect that the Connecticut court would have reached a different result, unfortunately.

And this is pretty much what the federal court told the DBA: Just add a notation to the 1099-C saying that this form merely acknowledges the passage of 36 months since we atempted collection, not voluntarily cancellation of the debt, and you'll be fine.

Edited by traveler505, 16 February 2008 - 04:47 PM.


#24 Why Chat

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Posted 16 February 2008 - 06:21 PM

I am not, and never have suggested that a "SOL" defense be used by itself when defending against a lawsuit. The issue here has little or nothing to do with legal claims in a lawsuit.

The JDB's have used all sorts of deceptive practices in their collection activities, among them the "notice" of filing a 1099C on a time-barred debt when they knew they could not prevail in a lawsuit.

When they started to use this "dirty trick" back in 2001-2002 they were hit with a few class action suits that were brought into Federal Court because they involved "deceptive" threats of "legal" action, i.e. 1099C.

Their organization filed the suit, not to gain any advantage of NOT having to file a 1099C but just the reverse, getting a ruling that they were required to "give notice" to the debtor that they COULD and WOULD file a 1099C on time barred debts. They NEVER actually filed these with the IRS, ( they are not required to because the accounts can not be authenticated)but they wanted the ruling they obtained that they COULD send these spurious 1099C's to whomever they wished to WITHOUT the documentation the class action suits claimed were required under the FDCPA.

This particular "dirty trick" is among the many that are estopped ( in my opinion) by sending the CA the SOL letter I designed to prevent ANY AND ALL further collection activities, as their "notification" of a 1099C is included in a debt collection letter.

http://whychat.5u.com/nottoca.html

#25 flacorps

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Posted 17 February 2008 - 03:23 AM

When they started to use this "dirty trick" back in 2001-2002 they were hit with a few class action suits that were brought into Federal Court because they involved "deceptive" threats of "legal" action, i.e. 1099C.


Even though I'm a conspiracy theorist I'm not exactly ready to suspect that the DBA v. Snow matter was an example of the legal system being used collusively to reach a subversive end. Perhaps the subversive end had already been reached, and like many a scheme had been discovered to be counterproductive. I just don't think you go to court for an injunction when a situation is working for you.

I was well aware of the existence of the provisions in the law that are now being enforced in the early '90s, and they had existed since long before that. I don't know whether they were historically used in the consumer context, however as I have noted it is inflation and the explosion of consumer credit that has brought us to a point where the provisions even have applicability where the consumer is concerned.

Nonetheless (without getting political here), the timing of when the form 1099-C problems began is instructive. Perhaps a previous administration took a more enlightened view. Due to what the current occupant has done, I believe our single greatest potential source of energy might be Andrew Jackson spinning in his grave. Having his face appear on the $20 bill is a cruel irony given today's economic climate.

Edited by flacorps, 17 February 2008 - 03:30 AM.





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