1099c and JDB's

[willingtocope]

One of the newer members, gum, keeps referring to a court case "re: Crosby" in which the court ruled that once a 1099c was issued for a charged off debt, the debt was no longer collectable by a JDB. I did a google on that and came up with a reference from the Georgia Collectors Association, Inc at http://www.acainternational.org/ga/?cid=346

Can I continue to collect on an account for which my client has issued a 1099 to the debtor?

I advise against this practice, although it is admittedly the subject of some debate. I have found at least two cases which have held that 1099 has extinguished the debt or otherwise rendered it uncollectible: In Re Crosby, 261 B.R. 470, 2001 Bankr. LEXIS 420 (2001), and Franklin Credit v. Nicholas, 73 Conn. App. 830; 812 A.2d 51 (2002). In each case the court discuss the unfairness or the inequity in submitting a 1099 to the IRS, which creates tax consequences for the debtor, while at the same time attempting to collect the debt. One court refers the 1099 as extinguishing the account; the other refers to the 1099 as assigning the account to the IRS. One court decided the issue primarily on a state law. In a sense, collecting on an account for which a 1099 was issued seems to contradict the very purpose of the 1099 itself. The 1099 form serves as a notice to the IRS that the person issuing it has given a taxable benefit (or income) to the consumer. Most often the benefit is in the form of wages or payment for services. However, debt forgiveness is considered by the IRS to be income. So, by issuing a 1099 on a collection account, the creditor is actually reporting that it has given income to the debtor. The IRS then taxes that income. If the creditor issues a 1099 on a defaulted account, thus representing to the IRS that the creditor has given the debtor income in the form of debt forgiveness, then on what basis can the creditor continue to collect the debt? New rules went into effect January 1, 2005, on the obligation to issue 1099's. The ACA is diligently pursuing clarification from the IRS on whether a 1099 truly extinguishes a debt and whether continued collection violates the law. Until there is clear statutory or regulatory guidance on the issue, I think agencies collecting accounts for which 1099's have been issued are at greater risk for litigation by debtors.

Some...you great legal minds, you...does this indeed hold water? If an OC does a CO, can you insist on a 1099c, and then, in effect, settle the debt by paying taxes to the IRS? 15% or so is a good deal!

[Recovering Attorney]

The flip side of the 1099 is the OC taking a deduction for the same amount, so how can the ceditor say it is owed money when it has told the world the deal has been compromised and finished? I would consider a 1099 followed by continued collection by a CA or JDB s a deceptive business practice

[willingtocope]

Which is exactly what the court cases seem to imply.

So...my suggestion is that when an OC lists an account as CO, we should demand a 1099c. Yes, we incur a tax liability, but we've effectively settled the debt for much less than a JDB would want and the IRS will take payments!

[Equaliser]

Plus there are two other quagmires that the lawyers have gotten us into (nothing personal to those who are on the site who are lawyers). The quagmires are these:

1) In administrative law, it's okay for one administrative entity to have a law that completely conflicts and counterdicts with that of another: Primary Example being tax law. The US Supreme Court continually rules that this is okay. NEVER has anyone clamored for uniformity of laws, thus creating the situation of "getting it from both ends."

2) The words "shall" and "must" are the legal equivilent of "may" and "might" and are thus not obligatory but discretionary. Thus, the government can do whatever it wants to without being held in check by the law itself - not what our founding fathers wanted.

According to an IRS Revenue Agent I spoke to, in situations like this, when circuit rulings conflict - say the 7th circuit is totally opposite of the ninth and the USSC (Supreme Court) has not made a ruling one way or another, you go by the circuit of residency as far as how to treat the situation is concerned.

Which goes to show that to err is human, but to really mess things up, you need a lawyer.