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    CREDITOR’S RIGHTS: IRS Form 1099-C—Reporting Requirement or Debt Extinguishment Trap?

    Posted by Charlene J. Hicks on Thu, Dec 13, 2018 @ 12:12 PM

    Charlene Hicks—Senior Attorney, National Legal Research Group 


                To date, no consensus has been reached among courts throughout the United States on the question as to whether a creditor’s issuance of an IRS Form1099-C results in the extinguishment of the reported debt in favor of the debtor. Form 1099-C bears the title “Cancellation of Debt,” and, according to the IRS, a creditor should issue this form to the debtor for any year in which a debt is cancelled. Depending on the state in which the debtor resides, a creditor’s issuance of a Form 1099-C may have the effect of barring further collection efforts and of completely discharging the reported debt.


                The two divergent approaches taken by courts on this issue result in opposite outcomes. The majority approach is illustrated by the Fourth Circuit’s opinion in FDIC v. Cashion, 720 F.3d 169 (4th Cir. 2013).  In that case, the court ruled that the plain language of 26 C.F.R. § 1.6050P-1 leads to the conclusion that a creditor’s filing of a Form 1099-C simply represents the required means that the creditor must use to satisfy its reporting obligation to the IRS and does not result in a discharge of the underlying debt. Id. at 178-79. This conclusion accords with Information Letters issued by the IRS itself. Id. As a result, the judicial policy of giving deference to an agency’s interpretation of its own regulations suggests that a creditor’s issuance of a Form 1099-C does not act to absolve the debtor from liability on the debt. Id. at 179; Capital One v. Massey, No. 4:10-CV-01707, 2011 WL 3299934, at *3 (S.D. Tex. Aug. 1, 2011).


                Some other courts have rejected this reasoning and have instead ruled that a creditor’s issuance of a Form 1099-C is prima facie evidence that the creditor wholly discharged the debt. See, e.g., In re Reed, 492 B.R. 261, 271 (Bankr. E.D. Tenn. 2013); Amtrust Bank v. Fossett, 223 Ariz. 438, 440, 224 P.3d 935, 937 (Ct. App. 2009). In one recent case, a federal district court found that a creditor’s issuance of a Form 1099-C “is enough to plausibly suggest that Plaintiff’s indebtedness was cancelled.” Kunwar v. Capital One, No. 17-CV-04849-LHK, 2017 WL 5991864, at *4 (N.D. Cal. Dec. 4, 2017). In making this determination, the court noted that seven of the eight identifiable events listed in 26 C.F.R. § 1.6050P-1 that trigger a creditor’s duty to issue a Form 1099-C “are all forms of debt cancellation.” Id. Further, some courts have reasoned that it would be inequitable to allow a creditor to pursue further collection of a debt in cases where the debtor, in reliance on the Form 1099-C, includes the cancelled debt in his or her gross income when filing his or her personal income tax forms. See Reed, 492 B.R. at 271; In re Crosby, 261 B.R. 470, 474 (Bankr. D. Kan. 2001).


                Given the large variance in the possible outcomes that a creditor may face upon issuing an annual Form 1099-C, caution should be exercised by any creditor subject to the IRS reporting requirements. On the flip side, debtor’s legal counsel would be well advised to research the governing jurisdiction’s law to ascertain whether it may be worthwhile to claim that a debt for which a Form 1099-C has been issued has been wholly discharged.



    Topics: creditor's rights, Charlene J. Hicks, IRS Form 1099-C, extinguishment of debt, discharge of debt

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