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Fees paid to a company to settle credit card debt & cancellation ofdebt income

 
 
simple219
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      03-17-2010, 01:26 PM

I paid a company $3,000 to negotiate on my behalf to settle my credit
card debt (personal expenses) . I also received a 1099 -C
(Cancellation of Debt) for $25000. Is the fee paid to the company that
help to settle the debt deductible? Can the fees be applied to the
25,000 of 1099-C income. If yes, how should I report this amount on
the tax return ?

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Stuart A. Bronstein
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      03-17-2010, 01:47 PM
simple219 <(E-Mail Removed)> wrote:

> I paid a company $3,000 to negotiate on my behalf to settle my
> credit card debt (personal expenses) . I also received a 1099 -C
> (Cancellation of Debt) for $25000. Is the fee paid to the
> company that help to settle the debt deductible? Can the fees be
> applied to the 25,000 of 1099-C income. If yes, how should I
> report this amount on the tax return ?


Normally this is not deductible. You're paying money you owed anyway
or non-deductible charges. But they apparently are also forgiving
$25,000 in money you would otherwise owe, and that is generally
taxable as well.

But that brings up another issue. I have a client who was sued on a
credit card debt. We negotiated a settlement based on my claim that,
based on my proposal to them, simply eliminated interest and gave
back prior interest paid that I claim was illegally charged.

The bank wants to issue a 1099 for the amount of the cancelled debt,
though I claim it is just a deduction and return of illegal charges.
What's the best way to deal with this?

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Stu
http://downtoearthlawyer.com

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Stan K
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      03-17-2010, 03:14 PM
On Mar 17, 9:47*am, "Stuart A. Bronstein" <(E-Mail Removed)>
wrote:
>*I have a client who was sued on a
> credit card debt. *We negotiated a settlement based on my claim that,
> based on my proposal to them, simply eliminated interest and gave
> back prior interest paid that I claim was illegally charged.
>
> The bank wants to issue a 1099 for the amount of the cancelled debt,
> though I claim it is just a deduction and return of illegal charges. *
> What's the best way to deal with this?


As I'm sure you realize, the bank doesn't need your permission to
issue a 1099. If, in some clerk trainee's opinion the transaction
constituted a forgiveness of debt, and if that's the way that clerk
trainee codes the credit, the "computer" will issue a 1099.

A number of years ago, I read on a different newsgroup about a
business owner who 1099'd a teenage babysitter in order to reduce his
own income tax (the babysitting was not during normal working hours),
but this stuck the kid with the 15.3% FICA tax (aka self-employment
tax) in the process. The advice in that case was to report the
business owner to the IRS for tax fraud.

But I'm sure in your case, the bank will simply state that they are
"required by IRS regulations" to issue a 1099, and will totally ignore
(i.e., never even mention) your assertion that what they really did
was to refund overcharges. The reason, IMO, that they might do this
is that they don't want to admit they overcharged your client, because
if they did and if your client feels the overcharges were malicious,
there could be a lawsuit, and it would already be on the record that
there were in fact overcharges.

What I personally would do if I received such a 1099 would be to
adjust it to zero income if that is a tax-program option. If not, I'd
contact the IRS and ask what I should do about what I feel was a
fraudulent 1099, explaining that it wasn't a forgiveness of debt
because there was no debt, just bank overcharges that they backed down
from. They'll probably tell me to attach a note to a paper return
explaining why the 1099 wasn't reported as income.

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Stuart A. Bronstein
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      03-17-2010, 03:28 PM
Stan K <(E-Mail Removed)> wrote:

> But I'm sure in your case, the bank will simply state that they
> are "required by IRS regulations" to issue a 1099, and will
> totally ignore (i.e., never even mention) your assertion that
> what they really did was to refund overcharges. The reason,
> IMO, that they might do this is that they don't want to admit
> they overcharged your client, because if they did and if your
> client feels the overcharges were malicious, there could be a
> lawsuit, and it would already be on the record that there were
> in fact overcharges.


There's already been a lawsuit, and this is the settlement. I
proposed paying them what they asked for, less most interest both
still claimed due and for a refund of interest paid in the past.
They will agree to include a statement in the settlement agreement
that we claim it is just a reduction and repayment for interest, but
they don't seem to want to agree that it necessarily is.

--
Stu
http://downtoearthlawyer.com

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Dick Adams
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      03-17-2010, 04:56 PM
simple219 <(E-Mail Removed)> wrote:

> I paid a company $3,000 to negotiate on my behalf to settle my credit
> card debt (personal expenses) . I also received a 1099 -C
> (Cancellation of Debt) for $25000. Is the fee paid to the company that
> help to settle the debt deductible? Can the fees be applied to the
> 25,000 of 1099-C income. If yes, how should I report this amount on
> the tax return?


Let's start with the $3,000 in fees are not deductible
anywhere because it was a personal expense.

Why did the credit card company agree to forgive the
$25,000? Were you insolvent?

Dick

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Richard Di Bernardo, CPA
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      03-17-2010, 07:42 PM
On Mar 17, 6:47*am, "Stuart A. Bronstein" <(E-Mail Removed)>
wrote:
> simple219 <(E-Mail Removed)> wrote:
> > I paid a company $3,000 to negotiate on my behalf to settle my
> > credit card debt (personal expenses) . I also received a 1099 -C
> > (Cancellation of Debt) for $25000. Is the fee paid to the
> > company that help to settle the debt deductible? Can the fees be
> > applied to the 25,000 of 1099-C income. If yes, how should I
> > report this amount on the tax return ?

>
> Normally this is not deductible. *You're paying money you owed anyway
> or non-deductible charges. *But they apparently are also forgiving
> $25,000 in money you would otherwise owe, and that is generally
> taxable as well.
>
> But that brings up another issue. *I have a client who was sued on a
> credit card debt. *We negotiated a settlement based on my claim that,
> based on my proposal to them, simply eliminated interest and gave
> back prior interest paid that I claim was illegally charged.
>
> The bank wants to issue a 1099 for the amount of the cancelled debt,
> though I claim it is just a deduction and return of illegal charges. *
> What's the best way to deal with this?
>
> --
> Stuhttp://downtoearthlawyer.com



I recall a case where someone did not have COD income from a
"discharge" of a casino debt in Las Vegas. The debt was not valid and
legally enforceable under Nevada law. If the credit card principal
was valid and enforceable debt that was reduced, then I'd say its COD
income (subject to potential exclusion for insolvency). To the extent
hat the settlement represents a return or cancellation of illegal
interest, there should be no COD income. For the valid interest that
was canceled or returned, see pub 4861, page 3.

Trace the credit card proceeds to determine whether the interest, if
paid, would have been deductible.

Often a 1099 is just a mere inconvenience that results in a letter to
the IRS. Under TBOR II (I think it was II, back in 1998), a taxpayer
can contest an
information return during audit. Then IRS has the burden to obtain
supporting information to support the accuracy of the 1099. It was in
effect a codification of a Tax Court case (Portillo or something like
that) that absent other evidence, a 1009 is not entitled to a
presumption of
correctness over the taxpayer's assertion that the 1099 is in error.
A 1099 could report return of capital, loan repayments, and other
items not
included in gross income. A 1099 does not determine gross income. I
would formally assert the taxpayer's right to contest the 1099s, by
asserting that
they include amounts that are not income, as provided by TBOR. The
agent than can't use them unless she obtains other evidence to support
them.

Although I try to avoid future IRS inquiry, I often don't get excited
about incorrect 1099s. If mismatched to a return, a letter,
especially with TBOR II language.
fixes the problem.

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
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Stuart A. Bronstein
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      03-17-2010, 07:58 PM
"Richard Di Bernardo, CPA" <(E-Mail Removed)> wrote:

> Often a 1099 is just a mere inconvenience that results in a
> letter to the IRS. Under TBOR II (I think it was II, back in
> 1998), a taxpayer can contest an information return during audit.
> Then IRS has the burden to obtain supporting information to support
> the accuracy of the 1099. It was in effect a codification of a Tax
> Court case (Portillo or something like that) that absent other
> evidence, a 1009 is not entitled to a presumption of
> correctness over the taxpayer's assertion that the 1099 is in
> error. A 1099 could report return of capital, loan repayments,
> and other items not included in gross income. A 1099 does not
> determine gross income. I would formally assert the taxpayer's
> right to contest the 1099s, by asserting that they include amounts
> that are not income, as provided by TBOR. The agent than can't use
> them unless she obtains other evidence to support them.


Thanks, Richard. Great information.

--
Stu
http://downtoearthlawyer.com

--
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<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
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Tom Russ
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      03-17-2010, 08:00 PM
On Mar 17, 9:56*am, (E-Mail Removed) (Dick Adams) wrote:
> simple219 *<(E-Mail Removed)> wrote:
> > I paid a company $3,000 to negotiate on my behalf to settle my credit
> > card debt (personal expenses) . I also received a 1099 -C
> > (Cancellation of Debt) for $25000. Is the fee paid to the company that
> > help to settle the debt deductible?

>
> Let's start with the $3,000 in fees are not deductible
> anywhere because it was a personal expense.


Hmmm. This is just a random thought, but...
If the $3,000 fee resulted in $25,000 or cancellation of debt income,
could the fee be considered necessary to the production of income?
Some expenses involved in producing income are deductible, right?

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Richard Di Bernardo, CPA
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      03-18-2010, 01:49 AM
On Mar 17, 12:58*pm, "Stuart A. Bronstein" <(E-Mail Removed)>
wrote:
> "Richard Di Bernardo, CPA" <(E-Mail Removed)> wrote:
>
> > Often a 1099 is just a mere inconvenience that results in a
> > letter to the IRS. *Under TBOR II (I think it was II, back in
> > 1998), a taxpayer can contest an information return during audit.
> > Then IRS has the burden to obtain supporting information to support
> > the accuracy of the 1099. *It was in effect a codification of a Tax
> > Court case (Portillo or something like that) that absent other
> > evidence, a 1009 is not entitled to a presumption of
> > correctness over the taxpayer's assertion that the 1099 is in
> > error. A 1099 could report return of capital, loan repayments,
> > and other items not included in gross income. *A 1099 does not
> > determine gross income. *I would formally assert the taxpayer's
> > right to contest the 1099s, by asserting that they include amounts
> > that are not income, as provided by TBOR. The agent than can't use
> > them unless she obtains other evidence to support them.

>
> Thanks, Richard. *Great information.
>
> --
> Stuhttp://downtoearthlawyer.com


You are welcome, Stu.

One oversight: I think that return of valid interest paid would not
technically be a "discharge." It's a refund. It would be subject
sect 111 tax benefit rule.

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<< that may be imposed upon the taxpayer. >>
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Stuart A. Bronstein
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      03-18-2010, 04:43 AM
"Richard Di Bernardo, CPA" <(E-Mail Removed)> wrote:

> One oversight: I think that return of valid interest paid would
> not technically be a "discharge." It's a refund. It would be
> subject sect 111 tax benefit rule.


Exactly my thought. It's a cancellation of debt of a sort, but
really is more in the nature of a price reduction. The bank will
want to issue a 1099, and I'm trying to figure out the best way to
deal with it.

--
Stu
http://downtoearthlawyer.com

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