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Therefore, in cases in which the Form 1099-C was issued because of the 36-month rule but before the debt was actually discharged, the IRS did not subsequently receive third-party reporting when the debt was actually discharged. According to the preamble to the regulations, this potentially diminished the IRS’s ability to enforce collection of tax on the cancellation of indebtedness when the information reporting (the Form 1099-C) did not reflect an actual cancellation of indebtedness.
The regulations were amended to eliminate the 36-month rule because it confused borrowers (was the debt actually discharged requiring the borrower to report cancellation of indebtedness income?) and it made it difficult for the IRS to know whether a debt had actually been discharged. The problems created for borrowers and the IRS by the 36-month rule also are present with the identifiable event that required the lender in the Gericke case to issue a Form 1099-C. The lender properly determined that an identifiable event had occurred requiring the issuance of a Form 1099-C, but did not actually discharge the debt. While the lender in Gericke made clear to the borrower that the Form 1099-C “does not release the client’s judgment as it has not been settled or paid,” it is likely that this type of language also was provided by some lenders issuing Forms 1099-C under the 36-month identifiable event. Nevertheless, the IRS acknowledged that borrowers remained confused about whether the debt was actually discharged.
In support of his position, it appears that the borrower in Gericke raised the fact that the IRS had amended the regulations to eliminate the 36-month rule, presumably because of the confusion it created. The court dismissed this argument as irrelevant because Gericke involved a different identifiable event. Apparently, the court was unwilling to interpret the identifiable event in Gericke as requiring the lender to issue a Form 1099-C only when the lender has decided to actually discharge the debt – an interpretation that would eliminate borrower confusion.
Considering that this identifiable event, which is based on the lender’s decision that a debt is uncollectable, also confuses taxpayers and makes it difficult for the IRS to know whether a debt has actually been cancelled, the IRS should consider amending the identifiable event to require a Form 1099-C to be issued only when the lender decides to actually discharge the debt.
The IRS might be concerned that, if a lender was required to issue a Form 1099-C only when it has decided to actually discharge a debt, its failure to do so would mean there would not be an event triggering cancellation of indebtedness income for the borrower. The statute of limitations on collections would eventually bar collection activity (and potentially result in cancellation of the debt under state law), but the regulations rightly take the position that a Form 1099-C is required to be issued due to the expiration of the statute of limitations on collections only if and when a debtor’s affirmative statute of limitations defense is upheld in a final judgment. Thus, if the lender never makes a decision to actually cancel the debt, the borrower arguably never has cancellation of indebtedness income. While this is a potential result if the lender never makes a decision to actually discharge a debt, it would be the exception as most lenders make a decision to actually discharge a debt at some point. (When the decisions is made will vary depending on the facts (e.g., has the lender obtained a judgment against the borrower)).
Ultimately, the true policy question for the IRS is whether the benefits of requiring lenders to issue a Form 1099-C before they have actually discharged a debt outweighs the same type of confusion for borrowers and problems for the IRS created by the 36-month rule.
There are valid business reasons why a lender might determine that a debt is uncollectible before it has made a decision to actually cancel a debt. Most courts understand this and are on the side of lenders when it comes to issuing Forms 1099-C without actually discharging a debt. Nevertheless, it places lenders in a difficult position with their borrowers. Further, it unnecessarily exposes lenders to litigation and a possible adverse judgment from a court that follows the minority view (that the issuance of a Form 1099-C is prima facie evidence of cancellation of debt) where, unlike this case, the lender is deemed not to have sufficiently documented its attempts to clarify ambiguity created through no fault of its own.
Through advances in prenatal imaging and the field of immunology, the truly wondrous miracle that is pregnancy is now being more fully understood. Two aspects of pregnancy that your readers might be interested in knowing more about relate to the placenta and something known as fetomaternal microchimerism.
As many of your readers may know, the placenta is the organ through which the mother and prenatal child interface. The placenta is an organ that is attached to the inside of the uterus and connects to the prenatal child through the child’s umbilical cord.
What is not as well known about this organ is that the placenta is the only organ in human biology that is made by two persons, together, in cooperation. The placenta is ‘built’ from tissue that is part from mom, and part from the growing baby. Because of this, the placenta is referred to as a ‘feto-maternal’ organ. It is the only organ made by two people, in cooperation with providence. It is the first time mom and her baby come together, ...
