Court-ordered write-offs do not require Forms 1099-C

Plain-English summary

A financial institution was barred by a court order from collecting deficiency balances after its notices were found defective under state law. A later class settlement required the institution to write off those balances. The IRS ruled that the institution did not need to file Forms 1099-C because none of the regulation's identifiable events had occurred. The parties had not agreed to discharge the debt for less than full consideration, and the institution had not independently decided to stop collection and discharge the debt.

Ruling snapshot

• Question: Must the financial institution file Forms 1099-C for deficiency balances written off under a court order and settlement?
• Outcome: No, because no identifiable discharge event under the regulation occurred
• Key authorities: IRC § 6050P; Treas. Reg. § 1.6050P-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201603008 Third Party Communication: None
Release Date: 1/15/2016 Date of Communication: Not Applicable
6050P.00-00
Person To Contact:
------------------- ----------------------, ID No. ------------------
--------------------------------- Telephone Number:
--------------------------------- ----------------------
--------------------------------------- Refer Reply To:
CC:PA:02
In Re: --------------------------------- PLR-112599-15
Date:
September 30, 2015

Legend

Entity = ---------------------------------

State X = -------------

Asset = -------------------

Collection Action = ----------------------------------------------------------

Notices = ----------------------

Plaintiff =----------------------------

Court = -----------------------------------------------------------------------------------

Date 1 = ---------------------------

Dear -------------:

This letter responds to the letter dated March 31, 2015, submitted on behalf of Entity
requesting a ruling that Entity is not required by I.R.C. § 6050P and Treasury
Regulations § 1.6050P-1 to file Forms 1099-C to report the write-off of certain
balances under an order from the Court and subsequent settlement agreement. For the
reasons set forth below, we conclude that Entity is not required to report the discharge
of indebtedness because none of the identifiable events listed in § 1.6050P-1 has
occurred.

                                                 Facts

PLR-112599-15 2

Entity is a financial institution chartered in State X and engaged in, among other things,
financing consumer Asset purchases. When consumers defaulted on these loans,
Entity took Collection Action and, pursuant to State X law, sent Notices to the
consumers. Pursuant to State X law, Collection Action would sometimes result in a
deficiency balance. Plaintiff filed a class action lawsuit against Entity, alleging Entity’s
Notices were deficient under State X law, and seeking an injunction prohibiting Entity
from collecting the outstanding deficiency balances from the class of debtors who
received similar Notices along with statutory damages pursuant to State X law.

On Date 1, Court ruled that the Notice was deficient under State X law and that Entity
was barred from collecting any deficiency balance pursuant to the Notices that it sent to
Plaintiff and the class. Subsequently, Entity and the class entered into a settlement
agreement which included, inter alia, a provision requiring Entity to write-off deficiency
balances owed by the class.

                                 Law & Analysis

Section 6050P of the Internal Revenue Code requires that an applicable entity report
any discharges (in whole or in part) of indebtedness of any person in excess of $600 on
a Form 1099-C. Section 1.6050P-1(a)(1) of the Treasury Regulations provides that, for
information reporting purposes, a discharge of indebtedness is deemed to have
occurred upon the occurrence of an “identifiable event”, whether or not an actual
discharge of indebtedness has occurred on or before the date on which the identifiable
event has occurred. Section 1.6050P-1(b)(2) provides a list of identifiable events. Of
the listed identifiable events, two are potentially relevant to the requested ruling:
agreement by the parties to discharge the debt for less than full consideration and a
decision by the creditor to discontinue collection activity and discharge the debt.

In this case, the Court’s order barred Entity from collecting the deficiency balances.
Entity and the class did not arrive at an agreement to discharge the indebtedness, nor
did Entity decide to discharge the indebtedness, within the meaning of section 1.6050P-
1(b)(2). Because none of the identifiable events listed in section 1.6050P-1(b)(2)
occurred, Entity is not required to report these write-offs.

                                    Conclusion

Based solely on the information provided and representations made, we conclude that
Entity is not required to file Forms 1099-C with respect to the write-offs of the class
members’ deficiency balances because none of the identifiable events listed in section
1.6050P-1(b)(2) has occurred.
PLR-112599-15 3

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,




                                   Blaise Dusenberry
                                   Senior Technician Reviewer
                                   (Procedure & Administration)

Enclosures: (1) Copy of letter for section 6110 purposes
(2) Notice of Intention to Disclose, Notice 437