__._,_.___Question:
Your client Barbara stops by your office to discuss issues she is having with her Schedule C business. Her first issue relates to one of her difficult clients with whom she has just had a falling out with. Barbara has not been paid for services her business provided to Donald Deadbeat and when she last asked him when he was going to pay her the $5,000 bill he still owes, he told her she would never collect a dime from him. Barbara is angry with Donald and has asked you to prepare Form 1099-C, Cancellation of Debt, for the unpaid bill. What do you tell Barbara?Answer:
At this point, Form 1099-C is probably not appropriate as Barbara has not met the requirements for issuing the form. Normally, Form 1099-C is issued only by financial institutions such as banks and credit unions and taxpayers who are in the trade or business of lending money. However, in Service Center Advice 1998-020, the IRS ruled that there is no prohibition in the code or regulations to reporting of debt discharges by entities other than financial institutions and those in the business of lending money. Thus, a private business that extends credit to its customers, but is not a financial institution, may issue a Form 1099-C to a defaulting customer. The IRS cautioned that an entity which is not required to report, should not issue a Form 1099-C unless there is either a discharge of indebtedness or a specific identifiable event described in the regulations.For purposes of the reporting requirement for debt discharges, indebtedness is considered discharged on the occurrence of one of the following identifiable events:
- A discharge of indebtedness under Title 11 of the U.S. Code (bankruptcy);
- A cancellation or extinguishment of an indebtedness that renders a debt unenforceable in a receivership, foreclosure, or similar proceeding in a federal or state court, (other than the discharges under Title 11 listed in (1) above;
- A cancellation or extinguishment of indebtedness on the expiration of the statute of limitations for collection of the indebtedness, subject to the limits described below or on the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding;
- A cancellation or extinguishment of an indebtedness under an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor's right to pursue collection of the indebtedness;
- A cancellation or extinguishment of an indebtedness that renders a debt unenforceable under a probate or similar proceeding;
- A cancellation or extinguishment of an indebtedness under an agreement between the applicable entity and a debtor to discharge an indebtedness at less than full consideration;
- A discharge of indebtedness under a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt; or
- The expiration of the non-payment testing period.
Unless, as defined in (7), Barbara has a defined policy in her business that would apply to the nonpayment at this time, Barbara has not yet met the requirements to issue Form 1099-C to Donald Deadbeat because neither a discharge of indebtedness nor a specific identifiable event described in the regulations has occurred. Therefore, Form 1099-C should not be issued to Donald until those requirements are met.
IRS Circular 230 Disclosure: Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any tax transaction or tax-related matters that may be addressed herein.
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