Settlement debt write-offs require Forms 1099-C

Plain-English summary

A financial entity settled class-action claims alleging that defective presale notices made borrowers' remaining deficiency balances unenforceable under certain state laws. The entity agreed to write off those balances but argued that no Form 1099 reporting was required because state law, rather than an identifiable cancellation event, caused the discharge. The IRS disagreed because the settlement denied liability and reflected a negotiated compromise of disputed claims, not a final ruling that state law automatically invalidated the debts. The agreement to discharge the debts for less than full consideration was an identifiable event under the regulations, and the decision to stop collection could also qualify independently. The entity therefore had to file Forms 1099-C for reportable write-offs.

Ruling snapshot

• Question: Did a class-action settlement's write-off of deficiency balances avoid section 6050P reporting because state law allegedly made the debts unenforceable?
• Outcome: Denied; the settlement caused an identifiable discharge event and Forms 1099-C were required.
• Key authorities: IRC § 6050P; Treas. Reg. § 1.6050P-1(b)(2)(F) and (G)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201927005                                              [Third Party Communication:
Release Date: 7/5/2019                                         Date of Communication: Month DD, YYYY]
Index Number: 6050P.00-00
                                                               Person To Contact:
---------------------------------------------------------      --------------------------, ID No. ----------------
------------------------                                       ----------------------------------------------------
--------------------------------                               Telephone Number:
------------------------                                       ----------------------
                                                               Refer Reply To:
In Re: Request for Ruling Under Section                        CC:PA:01
6050P of the Internal Revenue Code                             PLR-126226-18
                                                               Date:
                                                               April 05, 2019


                  TY: -------

Legend:

Entity 1               =     ----------------------------------------------------------
Settlement             =     ---------------------------------------------------------------------------------------
agreement                    ---------------------------------------------------------------------------------------
                             -----------------------------------------------------




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



This letter responds to your request, dated August 28, 2018, submitted on behalf of
Entity 1, for a ruling that Entity 1 is not required to file Forms 1099 with respect to write-
offs of balances and charges (including any deficiency judgment balances) of members
of a settlement class pursuant to its settlement agreement in furtherance of a
preliminary order in “absolute bar states,”1 because the discharge was not the result of
an “identifiable event” listed in Treasury Regulation § 1.6050P-1(b)(2), but rather was
required by operation of state law. For the reasons set forth below, we conclude that
Entity 1 is required to comply with the reporting requirements of I.R.C. § 6050P and file
Forms 1099, because the discharge of indebtedness was the result of an identifiable
event listed in Treas. Reg. § 1.6050P-1(b)(2).


1
 These states prohibit creditors from collecting on any deficiency balance before such creditors send out a proper
presale notice, and if a presale notice does not strictly comply with notice requirements there is an absolute bar on
collecting any remaining deficiency balances.
PLR-126226-18                                             2

Facts

Entity 1 is -------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------.

When debtors were late in making payments on their loans, Entity 1 sent presale
notices to the debtors stating that collateral for the loans was being repossessed. In the
course of other litigation over outstanding debts to Entity 1, on ------------------, debtors
filed a nationwide consumer class-action counterclaim with the ---------------------------------
-------------------------------------------, arguing (among other things) that defects in the
presale notices render the underlying loan debts unenforceable as a matter of law in
“absolute bar states.”
On -------------------, Entity 1 and the debtor class signed a settlement agreement subject
to court approval. On --------------------, the court entered a “Preliminary Approval Order”
purporting to settle the entire class action lawsuit based on a settlement agreement. On
-------------------, the court entered a Final Approval Order approving of and incorporating
the settlement agreement.

Law and 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 $600.00.
The report is to include the name, address and taxpayer identification number of each
person whose indebtedness is discharged, the date of the discharge and the amount of
indebtedness discharged. In addition, section 1.6050P-1(b)(2) of the Treasury
regulations provides that a discharge of indebtedness occurs if one of eight “identifiable
events” that the regulation defines takes place. For purposes of this ruling we agree
that Entity 1 is an applicable entity.

Of the identifiable events, only two have a potential bearing on the requested ruling.
The first possible event, section 1.6050P-1(b)(2)(F), provides that an identifiable event
exists when the applicable financial entity and debtor agree to discharge the
indebtedness for less than full consideration. To establish consideration, there must be
a performance or a return promised which has been bargained for by the parties.
Restatement (Second) Contracts § 71(1) (1981). In this case, Entity 1 and the debtor
class members agreed to the entry of a judgment, approved and supervised by the
court, which incorporates the parties' settlement agreement by which Entity 1 will write
off all remaining absolute bar state debt balances as part of the overall settlement of the
pending litigation. This is an identifiable event described in subsection (F) of the
regulations.

Entity 1’s request for a ruling argues that the settlement agreement does not reflect a
mere agreement of the parties, or any other identifiable event, but rather is a recognition
that the write-off of the deficiency balances was required under the laws of “absolute bar
PLR-126226-18                                       3

states.” Entity 1 argues that the debt write-off is not triggered by the settlement but by
the application of various state laws, and that the settlement merely reflects the
operation of state law. The debtor’s counterclaim alleged that Entity 1’s presale notice
was defective in various ways, rendering the debts unenforceable.

The settlement agreement contains no admission or concession by Entity 1 with respect
to the claims or defenses alleged in the class action counterclaim. The settlement
agreement contains a specific denial of liability in paragraph 1, which denial of liability
was incorporated into the Preliminary Order and Final Approval Order. The Final Order
recites that by entering into the settlement agreement, the parties are not deemed to
have admitted or conceded liability with respect to any of the pending claims or
defenses alleged. Although the application of “absolute bar state” laws regarding the
sufficiency of the presale notices may have been a factor in the parties' decision to
settle the litigation, such considerations are typical of parties' assessment of litigation
hazards in arriving at a negotiated settlement. The fact that the terms of the settlement
agreement were approved and incorporated into the court's Preliminary Order and Final
Order does not serve to convert the discharge of the debt from being entered into
voluntarily to one forced by operation of state law. Therefore, section 1.6050P-
1(b)(2)(F) applies.

Entity 1 also argues that there was no identifiable event because the court in its
Preliminary Order stated that the court had made an independent judicial investigation
into the legal sufficiency of the presale notices and held that the presale notices are
unenforceable in “absolute bar states.” Entity 1 argues that under -------------law, a final
order incorporates all preliminary orders, citing ------------------------------------------------------
-------------------------------------------------------------.

The Preliminary Order provides that it will be null and void and without prejudice to the
rights of the parties if the settlement is rescinded or terminated, or if final approval of the
settlement does not occur. The court’s Final Approval of the settlement does not
incorporate the Preliminary Order, but it does incorporate the settlement agreement,
which includes a complete denial of liability. The Final Approval Order also notes in
paragraph 15 that nothing in the order or the judgment may be construed as an
admission or concession of any claim, including of any alleged violation or failure to
comply with any law. ---------------------does not address preliminary orders; instead, it
deals only with interlocutory judgments, which are “prior orders or judgments that
adjudicated some—but fewer than all—of the claims and the rights and liabilities of all
the parties.” Id. Under -------------law, a court’s final judgment on a case finalizes all
prior adjudication of issues in that case, permitting appeal of the prior adjudications. But
this says nothing about court orders that do not, on their own, adjudicate any issues.
Here, as discussed the Preliminary Order did not adjudicate any issues. As such, the
court’s final approval did through incorporation adjudicate the issue of the debts’
enforceability, and neither order causes the debts to be unenforceable by operation of
law.
PLR-126226-18                                  4

Entity 1 has never made any admission regarding the alleged inadequacy of the presale
notices. It vigorously pursued the litigation, including filing a Motion for Summary
Judgment, throughout the pendency of the case. It was only by entering into a
settlement agreement with the class members that Entity 1 gave up its disputed claims
to deficiency amounts. The debt write-off is due to the settlement agreement, which is
an identifiable event under section 1.6050P-1(b)(2)(F) of the Treasury regulations.

The second possible event, section 1.6050P-1(b)(2)(G), provides that a discharge of
indebtedness exists where a creditor discontinues collection activity pursuant to a
decision by the creditor or a defined policy of the creditor. According to section
1.6050P-1(b)(2)(iii), a creditor's defined policy includes both a written policy and the
creditor's established business practice. In this case, the cancellation of indebtedness
is not a result of any defined policy or business practice of Entity 1, but rather by its
decision to discontinue collection action as part of settling the litigation. This decision
therefore may fall within subsection (G). In any event, even if subsection (G) of the
regulation did not apply, the event set forth in regulation subsection (F), as set forth
above, does apply and the section 6050P reporting requirements must be met.

Conclusion

Based solely on the information provided and the representations made, Entity 1 is
required to file Forms 1099-C with respect to the write-off of balances and charges
pursuant to its settlement agreement because the discharge was the result of an
identifiable event listed in section 1.6050P-1(b)(2).

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, a copy of this letter is
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 Counsel, Branch 1
(Procedure & Administration)