1099C for Interest "forgiven"

[LCP]

Taxpayer received 1099-C from a credit card company for about $10k. The box for interest included is zero but could be innacurate.

Taxpayer says that none of it is income because it was all interest that they tried to charge him contrary to the agreement that he signed. The CC started out at 5% and then they illegally increased to 20%. He stopped paying, complained, got his brother-in-law the attorney involved and the CC company backed off.

How would you report this?

[Jesse]

Is the taxpayer insolvent to any degree?

[LCP]

Is the taxpayer insolvent to any degree?

Nope... not at all.

You're thinking it's taxable....... I'm thinking its not but that the 1099C is going cause a problem.

[Gretel]

If charges are disputed and settlement is reached for credit card then the disputed charges are not taxable income.

See Zarin v. Commissioner case (916 F.2d 110, 115 (3d Cir. 1990)

[Jesse]

Nope... not at all.

You're thinking it's taxable....... I'm thinking its not but that the 1099C is going cause a problem.

Actually I'm not sure whether it is or isn't, but if you could use the insolvency exclusion it would be a mute point for this client. This link might be useful:

http://ppc.thomson.com/SiteComposer2/Index.cfm?fuseaction=shell&txtFuse=dspShellPPCnetContentRecord&numContentID=148563&numSiteID=2&numTaxonomyTypeID=28&numTaxonomyID=220&mc_id=149874

[Zee]

Actually I'm not sure whether it is or isn't, but if you could use the insolvency exclusion it would be a mute point for this client. This link might be useful:

http://ppc.thomson.com/SiteComposer2...0&mc_id=149874

I

Good article. It includes the Zarin case which is very different. I'm also not sure of the correct answer with the limited information provided. Honestly, I've never read the small print on my credit card contracts. But, I would guess there was some language that permitted the increased interest rate. So, I would ask for a copy of the original agreement and updates your client periodically received (I get them all the time). I would also ask to see copies of all dispute correspondence, etc. Based on the limited information presented, I'm leaning towards inclusion as income. Or, I would advise the client a disclosure statement will be necessary.

[David1980]

You only exclude the interest on a 1099-c from income, when the interest would otherwise be deductible. So if there was interest included on the cancellation of debt from a foreclosure of one's primary home, you would exclude the interest as it's deductible as home mortgage interest.

But if the interest would not otherwise be deductible, it's included in income as cancellation of debt income. Publication 4681 specifically mentions personal loans. "If the interest would not be deductible (such as interest on a personal loan) and you do not meet any other exception or exclusion discussed later, include in your income the amount from Form 1099-C, box 2."

[WhiteOleander]

There is some question as to this t/p qualifying under the "Disputed Debt Doctrine".

This is a link to an article about that.

http://www.thefreelibrary.com/Recognition+of+%22debt+modification+income%22+following+consumer+...-a0154391540

Hope it works.

[LCP]

I

Good article. It includes the Zarin case which is very different. I'm also not sure of the correct answer with the limited information provided. Honestly, I've never read the small print on my credit card contracts. But, I would guess there was some language that permitted the increased interest rate. So, I would ask for a copy of the original agreement and updates your client periodically received (I get them all the time). I would also ask to see copies of all dispute correspondence, etc. Based on the limited information presented, I'm leaning towards inclusion as income. Or, I would advise the client a disclosure statement will be necessary.

What constitutes a disclosure statement ? Would showing the gross and a negative amount of "disputed interest" be adequate?

[Zee]

What constitutes a disclosure statement ? Would showing the gross and a negative amount of "disputed interest" be adequate?

Form 8275 should be used for the disclosure and the IRS requires you support your position with revenue rulings, tax code cites, court cases, etc. If your client is audited and the item disallowed, there will be no penalties imposed if the Form is attached. Of course, the disclosure might increase your risk of audit but as a preparer you'll protect yourself from preparer penalties.

I should add I'm very conservative. I just don't like the client's story, unless there's more information that wasn't provided in the original post. IMHO, it just isn't worth "pushing the envelope" to much for a small preparation fee (I'm assuming this isn't a big ticket client...or they could pay their bills rather than use credit so much).

[LCP]

Add'l info........ the credit card account got transferred twice to new institutions that didn't perform according to the original agreement.

They gave in pretty quickly despite the taxpayer's clear ability to pay.

[Zee]

Add'l info........ the credit card account got transferred twice to new institutions that didn't perform according to the original agreement.

They gave in pretty quickly despite the taxpayer's clear ability to pay.

How did they get transferred? Generally, the terms change don't they? Most often, they're reduced when transferred with a "hook" of some kind. i.e, a lower teaser rate for 60-90 days.

[erchess]

What I'm hearing

is that the taxpayer ran up debt on a credit card under a contract with Bank A. Then either the whole of Bank A or merely some debt including that of the taxpayer was sold and then re sold and the new holders of the debt did not honor the terms of the original contract. As I would imagine everyone on this board knows, a lender can ask a borrower to change the rules of the contract and provide no alternative except to stop further borrowing from this lender and pay back what is owed under the unchanged terms. There is of course an exception - the original contract can provide that under certain circumstances the lender can arbitrarily change specific things usually only within certain limits.

My personal belief is that there may be basis (Zarkin) for not taxing the client on this forgiven debt but the preparer certainly has to disclose.

[LCP]

is that the taxpayer ran up debt on a credit card under a contract with Bank A. Then either the whole of Bank A or merely some debt including that of the taxpayer was sold and then re sold and the new holders of the debt did not honor the terms of the original contract. As I would imagine everyone on this board knows, a lender can ask a borrower to change the rules of the contract and provide no alternative except to stop further borrowing from this lender and pay back what is owed under the unchanged terms. There is of course an exception - the original contract can provide that under certain circumstances the lender can arbitrarily change specific things usually only within certain limits.

My personal belief is that there may be basis (Zarkin) for not taxing the client on this forgiven debt but the preparer certainly has to disclose.

That's exactly what happened. I apologize for not being clear or specific...... but it did bring up a good discussion. Thanks to all!