Issues surrounding the discharge of indebtedness with regard to Form 1099-C filings have recently become a difficult issue for bankruptcy courts. When a debtor cannot afford to pay a creditor an outstanding debt, a Form 1099-C is utilized to “discharge the debt.” The resulting cancellation is then reportable for tax purposes for both the debtor (as cancellation-of-debt income – “COD income”) and the creditor (as a deduction). Form 1099-C filings are made by creditors and issued to each “debtor for whom . . . $600 or more of a debt owed” had been cancelled.
Courts have had to consider what the terms “cancelled” and “discharged” mean with regards to a debtor’s payment obligations and a creditor’s collection rights. In connection therewith, courts have also had to consider whether issuing a Form 1099-C releases the debtor from payment obligations as a matter of law. The majority of courts have held that the issuance of a Form 1099-C to a debtor, without more, does not discharge the debtor from liability. Therefore, under the majority approach, a creditor can continue to attempt to collect the debt after filing a Form 1099-C. The minority of courts, however, have concluded that issues of fairness and equity need to be addressed when deciding discharge of indebtedness after a Form 1099-C is filed. The rights of creditors to collect, and of debtors to be free from inequitable initial double payment, is the central discrepancy between the two camps.
The following is an exploration of each side and the ramifications for both creditors and debtors when facing the issue of a Form 1099-C filing. Part I of this Article discusses the rules and regulations that are currently in place with regards to Form 1099-C filings. Specifically it will explore the language of the Internal Revenue Code (“the IRC”) and the Code of Federal Regulations (“the CFR”). Part II of the Article will discus the case law surrounding Form 1099- C filings that has been handed down by courts. The Part will be broken into two sub-parts. The first sub-part will explore the case law making up the majority position. The second sub-part will review more recent decisions that are establishing a theme that appears to be developing into a minority approach. Finally, Part III will analyze the practical effects that a Form 1099-C filing will have for both creditors and debtors when occurring within majority, minority and neutral jurisdictions.