No Hardship Exception Exists for Recognition of Cancellation of Debt Income Despite Advice from Bank and IRS Office

Mr. Dunnigan would discover, in the case of Dunnigan v. Commissioner, TC Memo 2015-190 that merely because your bank and an IRS employee told you there wouldn’t be tax due on a cancellation of debt, that doesn’t mean there actually won’t be tax due.

Mr. Dunnigan had taken out a $50,000 line of credit for his business in 2008.  In 2009 Mr. Dunnigan found he was unable to pay off the line of credit, so he negotiated an agreement with the bank where the bank would take $15,628 in full satisfaction of the debt in question. 

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Referral to Collection Agency By Itself Not Sufficent to Rebut 36 Month Presumption of Debt Cancellation

The timing of cancellation of debt and the simple reality that banks often issue 1099C’s in a year other than the one where the income event took place came back to haunt the IRS yet again in the case of Clark v. Commissioner, TC Memo 2015-175.  But it had the interesting twist of the Court determining that the mere referral of a debt to a collection agency by a bank did not, by itself, show there had been substantial efforts expended in various years to collect the debt.

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Nonrecourse Determination for Debt under §752 Does Not Control Treatment for Nature for Determining Cancellation of Debt Rules for §61(a)(12)

In tax law (and, in fact, law in general) confusion may reign because words are often given a specific definition in a particular context—such as when dealing with a particular statute or regulation.  That limited scope may exist even though an identical term is used in a very similar context—such as the same term having different (though somewhat related) meanings for two different provisions of the Internal Revenue Code.

In Chief Counsel Advice 201525010 the IRS looks at the issue of “nonrecourse debt” under the tax law and the fact that the term is used in two very different contexts.

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Failure to Notify Debtor that Accepting Debt Compromise Could Lead to Taxes Not a Deceptive Practice on Part of Collection Agency

A debt collection agency did not mislead debtors by failing to inform them that compromising a debt could have tax consequences according to the Second Circuit Court of Appeals in the case of Altman v. J.C. Christensen & Associates, Inc., 2015 TNT 94-13, CA2, No. 14-2240.  Thus there was no basis for the claim that the collector had violated the Fair Debt Collections Practices Act (FDCPA).

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Expiration of Statute of Limitations on Collection of Outstanding Debt Found Not to Have Caused Discharge of Indebtedness for Federal Tax Purposes

In the case of Johnston v. Commissioner, TC Memo 2015-91, the IRS argued that the taxpayer failed to report cancellation of debt income in 2007, leading to a tax liability.

The question of whether a debt has been cancelled for the purposes of federal tax law depends on the showing that a debt will never be repaid, taking into account any identifiable event that establishes this fact.  The Tax Court cited the case of Cozzi v. Commissioner, 88 T.C. 435 to support the above analysis.

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Real Property Foreclosure and Cancellation of Debt Audit Technique Guide Issued by IRS

The IRS issued a new Audit Technique Guide entitled Real Property Foreclosure and Cancellation of Debt Audit Technique Guide that is meant to provide guidance to agents who encounter issues involving foreclosures and/or cancellation of debt.  However, as is true of many other such guides, the guide also provides a reasonably useful primer on the tax treatment in this area and contains some hints about the National Office of the IRS’s thinking on certain issues that may not be clear.

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FEMA Issued Form 1099C Years After Actual Cancellation of Debt, Taxpayer Not Liable for Tax in Year IRS Questioned

Erroneous Forms 1099C continue to plague clients and they often come from sources that an adviser would think should know better.  In the case of Bacon v. Commissioner, TC Summary Opinion 2015-15 the offending issuer was, like in the case of Kleber v. Commissioner, TC Memo 2011-233, an agency of the United States government, though this time it was the Federal Emergency Management Agency (FEMA) rather than the U.S. Navy.

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Late Election Relief Granted Where Partnership Tax Adviser Failed to Follow Through on Providing Guidance to LLC Members on Making Qualified Real Property COD Election

Sometimes events occur during an engagement that can cause an advisor to lose focus and fail to take into account issues the adviser knows about.  That appears to have been the case in a series of private letter rulings, each of which basically duplicates what is found in PLR 201509020.

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