A taxpayer receives a notice of canceled debt income (Form 1099-C). He disputes the notice, stating that instead of the debt being canceled in 2008, the debt went away years earlier — 1996. The IRS says the notice says you have income so pay up. The dispute ends up in Tax Court. Who wins?
The taxpayer in question received a credit card from MBNA, and back in 1994 defaulted. MBNA wrote off the debt in 1996. In late 2007, a collection company (Portfolio Recovery Associates) acquired the debt from another collection agency (NCO Portfolio Management). PRA tries to collect, but the taxpayer writes a letter saying stop and the company ceases collection activities. PRA sends the taxpayer a Form 1099-C.
(Interestingly, the Court noted that a state statute of limitations had already expired on the debt in 2001. Thus, no one should be taking collection activities on the debt. If I were the Attorney General of Illinois, I might want to send a letter to PRA. But I digress….)
The Court found that the debt was discharged in 1998:
Without specific evidence to the contrary, it would appear that petitioner’s debt was discharged in 1999 when it was clear that the debt would not be repaid…
Respondent contends that petitioner’s debt was discharged in 2008 when PRA issued Form 1099-C. A decision by a creditor to discontinue collection activity may require that creditor to issue a Form 1099-C…It appears from the record that PRA attempted to revive the defaulted account in an attempt to coerce petitioner, using automated mailing and automated telephone calls, to make voluntary payments to PRA despite over a decade of nonpayment and an expired limitations period…
Therefore, on the basis of the record and after a practical assessment of the facts and circumstances surrounding the likelihood of repayment, we hold that petitioners did not have any COI income from PRA in 2008.
So the taxpayer today does not have canceled debt income.
One final point: Although the opinion doesn’t state this, it appears this case is the result of a CP2000. It is almost certain that the individuals who reviewed the responses from the taxpayer did not grasp the idea that not all IRS notices are correct.