The Tax Court, in a recent summary opinion, ruled that an individual did not have cancellation of debt income in the year that a collection agency issued him a Form 1099-C and stopped its automated collection efforts.
The IRS determined a deficiency in David Stewart’s 2008 income tax of $2,138, based on a Form 1099-C issued by the collection agency. The underlying debt was incurred on a credit card obligation in 1994, and was defaulted on in 1996. Maryland Bank National Association (MBNA) charged off the debt that same year.
Portfolio Recovery Associates, LLC, acquired the defaulted account in late 2007, and began making automated attempts to collect payments. Stewart wrote PRA, demanding that it cease its automated collection activities. Once PRA received the letter, it stopped attempts at collection and issued Stewart a Form 1099-C, Cancellation of Debt, which reported $8,570 in COD income for taxable year 2008.
In its notice of deficiency, the IRS increased Stewart’s income by that amount, and Stewart filed a petition in Tax Court. The IRS contended that Stewart’s debt was discharged in 2008 when the Form 1099-C was issued, whereas Stewart argued that the debt was discharged long before then.
The court, noting that a debt is discharged the moment it becomes clear that it will never be repaid, acknowledged that it is often impossible to find only one event that clearly establishes the moment at which a debt is discharged, such as pinpointing the moment when property has been abandoned.
One of the identifiable events under which debt is considered discharged under the regulations is the expiration of a 36-month nonpayment testing period, which the Tax Court said expired in 1999. Therefore, the court found that Stewart had no COD income in 2008.
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