State-law write-off does not require Forms 1099-C

Plain-English summary

A financial institution agreed to write off deficiency balances as part of settling a class action over legally defective presale notices. The court’s ruling and the settlement acknowledged that state law barred collection of the balances, meaning the deficiencies had not legally accrued. The IRS ruled that the write-off was not caused by either a negotiated discharge for less than full consideration or a creditor decision to abandon collection. Because the discharge occurred by operation of state law rather than an identifiable event under Treasury Regulation section 1.6050P-1(b)(2), the institution did not have to file Forms 1099-C for the affected balances.

Ruling snapshot

• Question: Whether the state-law write-off triggered Form 1099-C reporting under section 6050P
• Outcome: Approved, no Forms 1099-C were required
• Key authorities: I.R.C. § 6050P; Treas. Reg. § 1.6050P-1(b)(2)

Full text (IRS public release)

Internal Revenue Service                               Department of the Treasury
                                                       Washington, DC 20224

Number: 201540009                                      [Third Party Communication:
Release Date: 10/2/2015                                Date of Communication: Month DD, YYYY]
 6050P.00-00
                                                       Person To Contact:
---------------------                                  --------------------, ID No. ----------------
-----------------------------------                    Telephone Number:
---------------------                                  --------------------
---------------------------                            Refer Reply To:
                                                       CC:PA:02
In Re: ---------------------                           PLR-145676-14
                                                       Date:
                                                       June 26, 2015




Legend

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

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

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

Collection Remedy = ---------------------------------------------

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

Date 2 = ------------------

Date 3 = -----------------------

Court 1 = -----------------------------------

Court 2 = --------------------------------


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

This letter responds to the letter dated December 9, 2014, submitted on behalf of Entity
requesting a ruling that Entity is not required to file Forms 1099-C to report the write-off
of certain balances under a settlement agreement and court order approving the
settlement agreement 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 is not
PLR-145676-14                                 2

required to report the discharge of indebtedness because of the occurrence of an
identifiable event listed in Treasury Regulation section 1.6050P-1(b)(2).

                                           Facts

Entity is a financial institution chartered in State X engaged in, among other things, the
business of extending credit to consumers for the purchase of certain assets.

Plaintiff filed a class action lawsuit against Entity, alleging Entity’s presale notices
violated State X law, and seeking statutory damages and an injunction prohibiting Entity
from collecting the outstanding deficiency balances from the class of debtors who
received similar presale notices. Specifically, the lawsuit alleged that notices related to
Collection Remedy did not meet statutory notice requirements.

On Date 1, Court 1 found that the presale notice sent to plaintiff did not meet statutory
notice requirements. On Date 2, the parties signed an agreement purporting to settle
the entire class action lawsuit. On Date 3, Court 2 granted preliminary approval of the
settlement. Also on Date 3, Court 2 enjoined Entity from collecting the outstanding
deficiency balances from the class members, based on Court 1’s finding that the
presale notice sent to plaintiff did not meet statutory notice requirements. In relevant
part, the settlement agreement requires Entity to write off balances owed by the class
members. The settlement agreement acknowledges that Entity is entering the
settlement to eliminate the risk, burden and expense of further litigation. The settlement
agreement further acknowledges the court’s finding that the presale notices sent to
class members did not meet statutory standards and as such, State X law bars Entity
from collecting deficiency balances.

                                     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. The Form 1099-C 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. 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. Reg. Section 1.6050P-1(b)(2)
provides a list of identifiable events. Of the identifiable events, two are potentially
relevant to the requested ruling: agreement by the parties to discharge the debt for less
than full consideration, or a decision by the creditor to discontinue collection activity and
discharge the debt.

Discharge by agreement of the parties
PLR-145676-14                                3


Regulation section 1.6050P-1(b)(2)(F) provides that an identifiable event occurs when
the applicable entity and debtor agree to discharge the indebtedness for less than full
consideration. To establish consideration, there must be a performance or a return
promise which has been bargained for by the parties. Restatement (Second) Contracts
§ 71(1) (1981). In this case, Entity and the debtor-class members agreed to the entry of
a judgment, approved and supervised by the court, which incorporates the parties’
agreement by which Entity will write off all remaining deficiency balances as part of the
overall settlement of the pending litigation. The discharge in this case does not fall
under the identifiable event described in subsection (F) of the regulations because the
debt was discharged by operation of state law, and not pursuant to the agreement of the
parties to settle the litigation.

The violation of state law found by the court in its preliminary order and admitted by
Entity in the settlement agreement means that the deficiency balances never accrued in
the first place and Entity is barred from recovering any deficiency balances. This bar is
effective whether or not the creditor “agrees” to discharge the debt. Therefore, the
write-off of the balances for the class is not triggered by an agreement between Entity
and the debtors, but rather by application of state law.

Discharge by decision of the creditor

Treasury Regulation section 1.6050P-1(b)(2)(G) provides that a discharge of
indebtedness occurs upon a decision by the creditor, or the application of a defined
policy of the creditor, to discontinue collection activity and discharge debt. For the same
reasons as set forth above, this identifiable event does not apply. The discharge
occurred by operations of state law, and not by a decision or application of a defined
policy by entity.

                                        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-off of deficiency
balances pursuant to the settlement agreement and preliminary order because the
discharge was not the result of an identifiable event listed in section 1.6050P-1(b)(2),
but rather was by operation of state law.

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.
PLR-145676-14                                  4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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




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