Credit union must file Forms 1099-C for debt written off in a class-action settlement (an "identifiable event")

Plain-English summary

A credit union asked the IRS to rule that it did not have to file Forms 1099-C (the information return for cancelled debt) when it wrote off deficiency balances as part of a class-action settlement. The class action claimed the credit union's repossession notices violated state law by not clearly stating whether borrowers would owe a deficiency, and the parties settled by agreeing the credit union would write off those balances, which a court then approved. Section 6050P requires certain lenders to report debt discharges over $600, but only when one of the "identifiable events" in Treasury Regulation 1.6050P-1(b)(2) occurs. The credit union argued the write-off was forced by state law, not an identifiable event. The IRS disagreed and ruled against the credit union: the write-off came from the parties' settlement agreement, which is an identifiable event (an agreement to discharge debt for less than full consideration under subsection (F)). The court's later finding that the notices were unenforceable did not change the result, because the credit union had fought the case and only gave up the deficiency claims by settling. So the credit union must file the Forms 1099-C.

Ruling snapshot

• Question: Must a credit union file Forms 1099-C for deficiency balances it wrote off under a court-approved class-action settlement, or was the discharge required by state law and therefore not an "identifiable event"?
• Outcome: Denied (the IRS ruled the write-off was an identifiable event; reporting is required)
• Key authorities: IRC § 6050P; Treas. Reg. § 1.6050P-1(b)(2), especially § 1.6050P-1(b)(2)(F)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202319009                                             Third Party Communication: None
Release Date: 5/12/2023                                       Date of Communication: Not Applicable
Index Number: 6050P.00-00
                                                              Person To Contact:
-----------------------------------                           --------------------, ID No. -----------------
-----------------------------                                 Telephone Number:
--------------------------------------------                  --------------------
                                                              Refer Reply To:
                                                              CC:PA:02
                                                              PLR-116307-22
                                                              Date:
                                                              February 08, 2023




Legend

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

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

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

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

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

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

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

Date 4 = -----------------

Re: ---------------------------------------------------------------------------------------------------------------
-------------------------------------------------

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

This letter responds to your request, dated August 11, 2022, for a ruling that Entity has
no reporting obligation under Section 6050P of the Internal Revenue Code for the write-
off of certain account balances pursuant to a court’s order granting final approval of a
class action settlement. Your letter contends that there should be no reporting obligation
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 the operation of state law. For
the reasons set forth below, we conclude that Entity 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.

Facts

Entity is a credit union organized in State X. When certain debtors defaulted on loans,
Entity sent presale notices to the debtors stating that the collateral for the loans was
being repossessed. Two of these debtors filed a class-action lawsuit in State X circuit
court. In the lawsuit, the debtors alleged that defects in the presale notices Entity sent
violated State X Law for failing to clearly state whether a borrower would owe the
deficiency balance. After the filing of an amended petition, the parties engaged in
discovery. The debtors filed a motion for class certification on Date 1. After the motion
was briefed and argued by the parties, the court certified the class on Date 2.
Subsequently, the parties agreed to a settlement. The settlement agreement was
executed Date 3. The joint motion for preliminary approval was entered that same day.
After a fairness hearing, the court granted final approval of the settlement on Date 4.

Law and Analysis

Section 6050P of the Internal Revenue Code requires that any discharge of debt greater
than $600 must be reported to the IRS by the applicable entity. It is not disputed that
Entity is an applicable entity. The report under section 6050P must include the name,
address, and Taxpayer Identification Number of the person whose debt is discharged,
among other details. Under the regulations pertaining to section 6050P, however, the
report of the discharge is only required when one of the “identifiable events” outlined in
Treasury Regulation section 1.6050P-1(b)(2) takes place.

The identifiable event of primary relevance here is found in section 1.6050P-1(b)(2)(F).
When an applicable financial entity and a debtor agree to discharge indebtedness for
less than full consideration, this constitutes an identifiable event, and the discharge
must be reported. 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 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 agreed to write off debt balances as part of the
overall settlement of the pending litigation. This is an identifiable event described in
section 1.6050P-1(b)(2)(F).

Entity’s request for a ruling contends 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 state law.

While the application of State X Law 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 Agreement states that “[Entity] disputes the claims but
desires to settle the claims being asserted against it on the terms and conditions in this
Agreement to avoid the burden, expense, and uncertainty of continuing litigation.” 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.

Entity also argues that there was no identifiable event because the court in its Final
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.
But Entity vigorously pursued the litigation, including contesting class certification,
throughout the pendency of the case. It was only by entering into a settlement
agreement with the class members that Entity gave up its disputed claims to deficiency
amounts. It was as part of this settlement agreement that the parties agreed to seek a
judicial determination into a matter that they had already resolved, a determination
made not as a result of the adversarial litigation process, but by mutual request of the
parties as part of the settlement agreement. The debt write-off is due to the settlement
agreement, not the court’s subsequent order.

Conclusion

Based solely on the information provided and the representations made, Entity 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 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,



                                     Melissa A. Henkel
                                     Branch Chief
                                     (Procedure & Administration)


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