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

Discussion in 'Tax' started by simple219, Mar 17, 2010.

  1. simple219

    simple219 Guest

    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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    simple219, Mar 17, 2010
    #1
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  2. Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    simple219 <> 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?

    --
    Stu
    http://downtoearthlawyer.com

    --
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    << nor can it used, for the purpose of avoiding penalties >>
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    Stuart A. Bronstein, Mar 17, 2010
    #2
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  3. simple219

    Stan K Guest

    Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 17, 9:47 am, "Stuart A. Bronstein" <>
    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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    Stan K, Mar 17, 2010
    #3
  4. Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    Stan K <> 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

    --
    << ------------------------------------------------------- >>
    << 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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    << Copyright (2007) - All rights reserved. >>
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    Stuart A. Bronstein, Mar 17, 2010
    #4
  5. simple219

    Dick Adams Guest

    simple219 <> 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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    << nor can it used, for the purpose of avoiding penalties >>
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    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
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    Dick Adams, Mar 17, 2010
    #5
  6. Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 17, 6:47 am, "Stuart A. Bronstein" <>
    wrote:
    > simple219 <> 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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    << 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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    << Copyright (2007) - All rights reserved. >>
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    Richard Di Bernardo, CPA, Mar 17, 2010
    #6
  7. Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    "Richard Di Bernardo, CPA" <> 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

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Stuart A. Bronstein, Mar 17, 2010
    #7
  8. simple219

    Tom Russ Guest

    Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 17, 9:56 am, (Dick Adams) wrote:
    > simple219  <> 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?

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
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    Tom Russ, Mar 17, 2010
    #8
  9. Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 17, 12:58 pm, "Stuart A. Bronstein" <>
    wrote:
    > "Richard Di Bernardo, CPA" <> 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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    << 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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    << Copyright (2007) - All rights reserved. >>
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    Richard Di Bernardo, CPA, Mar 18, 2010
    #9
  10. Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    "Richard Di Bernardo, CPA" <> 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

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Stuart A. Bronstein, Mar 18, 2010
    #10
  11. simple219

    Alan Guest

    Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On 3/17/10 10:43 PM, Stuart A. Bronstein wrote:
    > "Richard Di Bernardo, CPA"<> 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.
    >

    I will merely point out that when a debt is canceled and accrued
    interest on that debt is also canceled, the interest is also
    considered income if the taxpayer could not have deducted the
    interest expense had he paid it. Example: Interest forgiven with
    consumer credit card debt is treated the same as the debt.
    Interest forgiven on a business debt is not income as the
    interest could have been deducted as a business expense if paid.

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Alan, Mar 18, 2010
    #11
  12. Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    Alan <> wrote:

    > I will merely point out that when a debt is canceled and accrued
    > interest on that debt is also canceled, the interest is also
    > considered income if the taxpayer could not have deducted the
    > interest expense had he paid it. Example: Interest forgiven with
    > consumer credit card debt is treated the same as the debt.
    > Interest forgiven on a business debt is not income as the
    > interest could have been deducted as a business expense if paid.


    Sounds reasonable, though I won't concede the point without further
    research.

    But in my case I'm alleging that the interest was in effect illegal
    and should not have been charged in the first place. You can't
    unilaterally claim someone owes you money, decide to forgive the debt
    and then cause your "debtor" to be required to recognize cancellation
    of debt income.

    --
    Stu
    http://downtoearthlawyer.com

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Stuart A. Bronstein, Mar 18, 2010
    #12
  13. simple219

    Dick Adams Guest

    Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    Stuart A. Bronstein <> wrote:
    > Alan <> wrote:


    >> I will merely point out that when a debt is canceled and accrued
    >> interest on that debt is also canceled, the interest is also
    >> considered income if the taxpayer could not have deducted the
    >> interest expense had he paid it. Example: Interest forgiven with
    >> consumer credit card debt is treated the same as the debt.
    >> Interest forgiven on a business debt is not income as the
    >> interest could have been deducted as a business expense if paid.


    > Sounds reasonable, though I won't concede the point without further
    > research.
    >
    > But in my case I'm alleging that the interest was in effect illegal
    > and should not have been charged in the first place. You can't
    > unilaterally claim someone owes you money, decide to forgive the debt
    > and then cause your "debtor" to be required to recognize cancellation
    > of debt income.


    Stu's point is if the interest should not have been charged in the first
    place, how can it be income? Let me give you an example.

    Taxpayer buys a personal product worth $25,000 on a credit card. The
    product is defective and TP demands satisfaction. TP makes minimum
    payments for 30 months at which point a settlement is reached and the
    original value is reduced to $15,000 plus all interest that accrued
    as a result of the 'overcharge'. This is not a "Cancellation of Debt",
    but rather is a "Recognition of an Overcharge". Neither the reduction
    of the debt nor the interest associated with it should be taxable
    income to the TP.

    Also I'm not agreeing with Alan that "Interest forgiven with consumer
    credit card debt is treated the same as the debt". My left hand is in
    a cast and I will deal with that when I am able to hunt-n-peck with
    two hands.

    Dick - Yes, my body is falling apart.

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
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    Dick Adams, Mar 18, 2010
    #13
  14. simple219

    D. Stussy Guest

    Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    "Dick Adams" <> wrote in message
    news:hnthoe$2fm$...
    > Stuart A. Bronstein <> wrote:
    > > Alan <> wrote:
    > >> I will merely point out that when a debt is canceled and accrued
    > >> interest on that debt is also canceled, the interest is also
    > >> considered income if the taxpayer could not have deducted the
    > >> interest expense had he paid it. Example: Interest forgiven with
    > >> consumer credit card debt is treated the same as the debt.
    > >> Interest forgiven on a business debt is not income as the
    > >> interest could have been deducted as a business expense if paid.

    >
    > > Sounds reasonable, though I won't concede the point without further
    > > research.
    > >
    > > But in my case I'm alleging that the interest was in effect illegal
    > > and should not have been charged in the first place. You can't
    > > unilaterally claim someone owes you money, decide to forgive the debt
    > > and then cause your "debtor" to be required to recognize cancellation
    > > of debt income.

    >
    > Stu's point is if the interest should not have been charged in the first
    > place, how can it be income? Let me give you an example.
    >
    > Taxpayer buys a personal product worth $25,000 on a credit card. The
    > product is defective and TP demands satisfaction. TP makes minimum
    > payments for 30 months at which point a settlement is reached and the
    > original value is reduced to $15,000 plus all interest that accrued
    > as a result of the 'overcharge'. This is not a "Cancellation of Debt",
    > but rather is a "Recognition of an Overcharge". Neither the reduction
    > of the debt nor the interest associated with it should be taxable
    > income to the TP.
    >
    > Also I'm not agreeing with Alan that "Interest forgiven with consumer
    > credit card debt is treated the same as the debt". My left hand is in
    > a cast and I will deal with that when I am able to hunt-n-peck with
    > two hands.
    >
    > Dick - Yes, my body is falling apart.


    I seem to remember something about this type of situation appearing in the
    tax rags a couple of years ago.

    For credit cards and unsecured debts:
    CoD income is recognized on the principal of the amount charged (i.e. what
    was originally charged).
    CoD income is NOT recognized for interest.* It is merely considered a
    renegotiation of the terms of the loan/line of credit.

    Threfore, I agree with the "overcharge" statement above as to its result -
    as to interest charges only. The example doesn't work as to principal.

    * - As the interest is unpaid, a cash basis accounting method taxpayer will
    have never previously deducted it. However, an accrual-basis taxpayer may
    have an income inclusion to the extent of any prior interest expense
    deduction claimed (or claimable) depending on the tax benefit rule of IRC
    Section 111.

    --
    << ------------------------------------------------------- >>
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    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    D. Stussy, Mar 18, 2010
    #14
  15. simple219

    Alan Guest

    Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On 3/18/10 5:30 PM, D. Stussy wrote:
    > "Dick Adams"<> wrote in message
    > news:hnthoe$2fm$...
    >> Stuart A. Bronstein<> wrote:
    >>> Alan<> wrote:
    >>>> I will merely point out that when a debt is canceled and accrued
    >>>> interest on that debt is also canceled, the interest is also
    >>>> considered income if the taxpayer could not have deducted the
    >>>> interest expense had he paid it. Example: Interest forgiven with
    >>>> consumer credit card debt is treated the same as the debt.
    >>>> Interest forgiven on a business debt is not income as the
    >>>> interest could have been deducted as a business expense if paid.

    >>
    >>> Sounds reasonable, though I won't concede the point without further
    >>> research.
    >>>
    >>> But in my case I'm alleging that the interest was in effect illegal
    >>> and should not have been charged in the first place. You can't
    >>> unilaterally claim someone owes you money, decide to forgive the debt
    >>> and then cause your "debtor" to be required to recognize cancellation
    >>> of debt income.

    >>
    >> Stu's point is if the interest should not have been charged in the first
    >> place, how can it be income? Let me give you an example.
    >>
    >> Taxpayer buys a personal product worth $25,000 on a credit card. The
    >> product is defective and TP demands satisfaction. TP makes minimum
    >> payments for 30 months at which point a settlement is reached and the
    >> original value is reduced to $15,000 plus all interest that accrued
    >> as a result of the 'overcharge'. This is not a "Cancellation of Debt",
    >> but rather is a "Recognition of an Overcharge". Neither the reduction
    >> of the debt nor the interest associated with it should be taxable
    >> income to the TP.
    >>
    >> Also I'm not agreeing with Alan that "Interest forgiven with consumer
    >> credit card debt is treated the same as the debt". My left hand is in
    >> a cast and I will deal with that when I am able to hunt-n-peck with
    >> two hands.
    >>
    >> Dick - Yes, my body is falling apart.

    >
    > I seem to remember something about this type of situation appearing in the
    > tax rags a couple of years ago.
    >
    > For credit cards and unsecured debts:
    > CoD income is recognized on the principal of the amount charged (i.e. what
    > was originally charged).
    > CoD income is NOT recognized for interest.* It is merely considered a
    > renegotiation of the terms of the loan/line of credit.
    >
    > Threfore, I agree with the "overcharge" statement above as to its result -
    > as to interest charges only. The example doesn't work as to principal.
    >
    > * - As the interest is unpaid, a cash basis accounting method taxpayer will
    > have never previously deducted it. However, an accrual-basis taxpayer may
    > have an income inclusion to the extent of any prior interest expense
    > deduction claimed (or claimable) depending on the tax benefit rule of IRC
    > Section 111.
    >

    Putting aside the issue of whether the amount of interest was
    legitimate, someone is going to have to provide a citation as to
    why the cancellation of the interest on consumer debt would not
    be CoDI. You contracted with the bank to take a loan. The
    contract said that if you do not pay the loan amount in full by
    the agreed upon date, you are going to be charged interest at X%.
    As long as no part of that credit card contract violates the law,
    then any interest charged becomes part of the debt. I don't see
    how one can exclude the interest from income when the debt is
    canceled. This is not the same as renegotiating the terms of a
    contract, such as asking for and obtaining a lower interest rate
    and making it retroactive to an earlier period.

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Alan, Mar 19, 2010
    #15
  16. Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    Alan <> wrote:

    > Putting aside the issue of whether the amount of interest was
    > legitimate, someone is going to have to provide a citation as to
    > why the cancellation of the interest on consumer debt would not
    > be CoDI. You contracted with the bank to take a loan. The
    > contract said that if you do not pay the loan amount in full by
    > the agreed upon date, you are going to be charged interest at X%.
    > As long as no part of that credit card contract violates the law,
    > then any interest charged becomes part of the debt. I don't see
    > how one can exclude the interest from income when the debt is
    > canceled. This is not the same as renegotiating the terms of a
    > contract, such as asking for and obtaining a lower interest rate
    > and making it retroactive to an earlier period.


    Well, that's like saying that when you buy something on credit, find
    out it's defective, and negotiate a lower price, you have COD income
    because you had a debt that was reduced. In reality it's a rebate or
    discount.

    Why isn't it like renegotiating a contract and having it applied
    retroactively? That's exactly what's going on.

    --
    Stu
    http://downtoearthlawyer.com

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Stuart A. Bronstein, Mar 19, 2010
    #16
  17. simple219

    Seth Guest

    Re: Fees paid to a company to settle credit card debt & cancellation of debt income

    In article <hnubv7$b44$>,
    D. Stussy <6lvw.ampr.org> wrote:
    >"Dick Adams" <> wrote in message
    >news:hnthoe$2fm$...


    >> Taxpayer buys a personal product worth $25,000 on a credit card. The
    >> product is defective and TP demands satisfaction. TP makes minimum
    >> payments for 30 months at which point a settlement is reached and the
    >> original value is reduced to $15,000 plus all interest that accrued
    >> as a result of the 'overcharge'. This is not a "Cancellation of Debt",
    >> but rather is a "Recognition of an Overcharge". Neither the reduction
    >> of the debt nor the interest associated with it should be taxable
    >> income to the TP.


    >I seem to remember something about this type of situation appearing in the
    >tax rags a couple of years ago.
    >
    >For credit cards and unsecured debts:
    >CoD income is recognized on the principal of the amount charged (i.e. what
    >was originally charged).
    >CoD income is NOT recognized for interest.* It is merely considered a
    >renegotiation of the terms of the loan/line of credit.
    >
    >Threfore, I agree with the "overcharge" statement above as to its result -
    >as to interest charges only. The example doesn't work as to principal.


    TP buys a product for $25,000. It's defective, and the store refuses
    to deal with him. He sues; the court rules that it was only worth
    $15,000 and awards him $10,000. The store pays him.

    No taxable event, right?

    Now suppose the same underlying facts, but he used the store's credit
    card, and instead of paying him the $10,000, the store credits his
    account $10,000. How is that different?

    Seth

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Seth, Mar 19, 2010
    #17
  18. Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 18, 6:27 pm, (Seth) wrote:
    > In article <hnubv7$>,
    >
    >
    >
    > D. Stussy <6lvw.ampr.org> wrote:
    > >"Dick Adams" <> wrote in message
    > >news:hnthoe$2fm$...
    > >> Taxpayer buys a personal product worth $25,000 on a credit card.  The
    > >> product is defective and TP demands satisfaction.  TP makes minimum
    > >> payments for 30 months at which point a settlement is reached and the
    > >> original value is reduced to $15,000 plus all interest that accrued
    > >> as a result of the 'overcharge'.  This is not a "Cancellation of Debt",
    > >> but rather is a "Recognition of an Overcharge".  Neither the reduction
    > >> of the debt nor the interest associated with it should be taxable
    > >> income to the TP.

    > >I seem to remember something about this type of situation appearing in the
    > >tax rags a couple of years ago.

    >
    > >For credit cards and unsecured debts:
    > >CoD income is recognized on the principal of the amount charged (i.e. what
    > >was originally charged).
    > >CoD income is NOT recognized for interest.*  It is merely considered a
    > >renegotiation of the terms of the loan/line of credit.

    >
    > >Threfore, I agree with the "overcharge" statement above as to its result -
    > >as to interest charges only.  The example doesn't work as to principal.

    >
    > TP buys a product for $25,000.  It's defective, and the store refuses
    > to deal with him.  He sues; the court rules that it was only worth
    > $15,000 and awards him $10,000.  The store pays him.
    >
    > No taxable event, right?
    >
    > Now suppose the same underlying facts, but he used the store's credit
    > card, and instead of paying him the $10,000, the store credits his
    > account $10,000.  How is that different?
    >
    > Seth


    To have COD income, there must be a discharge of a valid and legally
    enforceable debt according to the relevant state law. That's not the
    case for the $10,000.

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Richard Di Bernardo, CPA, Mar 19, 2010
    #18
  19. Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 18, 4:30 pm, "D. Stussy" <>
    wrote:
    > "Dick Adams" <> wrote in message
    >
    > news:hnthoe$2fm$...
    >
    >
    >
    > > Stuart A. Bronstein <> wrote:
    > > > Alan <> wrote:
    > > >> I will merely point out that when a debt is canceled and accrued
    > > >> interest on that debt is also canceled, the interest is also
    > > >> considered income if the taxpayer could not have deducted the
    > > >> interest expense had he paid it. Example: Interest forgiven with
    > > >> consumer credit card debt is treated the same as the debt.
    > > >> Interest forgiven on a business debt is not income as the
    > > >> interest could have been deducted as a business expense if paid.

    >
    > > > Sounds reasonable, though I won't concede the point without further
    > > > research.

    >
    > > > But in my case I'm alleging that the interest was in effect illegal
    > > > and should not have been charged in the first place.  You can't
    > > > unilaterally claim someone owes you money, decide to forgive the debt
    > > > and then cause your "debtor" to be required to recognize cancellation
    > > > of debt income.

    >
    > > Stu's point is if the interest should not have been charged in the first
    > > place, how can it be income?  Let me give you an example.

    >
    > > Taxpayer buys a personal product worth $25,000 on a credit card.  The
    > > product is defective and TP demands satisfaction.  TP makes minimum
    > > payments for 30 months at which point a settlement is reached and the
    > > original value is reduced to $15,000 plus all interest that accrued
    > > as a result of the 'overcharge'.  This is not a "Cancellation of Debt",
    > > but rather is a "Recognition of an Overcharge".  Neither the reduction
    > > of the debt nor the interest associated with it should be taxable
    > > income to the TP.

    >
    > > Also I'm not agreeing with Alan that "Interest forgiven with consumer
    > > credit card debt is treated the same as the debt".  My left hand is in
    > > a cast and I will deal with that when I am able to hunt-n-peck with
    > > two hands.

    >
    > > Dick - Yes, my body is falling apart.

    >
    > I seem to remember something about this type of situation appearing in the
    > tax rags a couple of years ago.
    >
    > For credit cards and unsecured debts:
    > CoD income is recognized on the principal of the amount charged (i.e. what
    > was originally charged).
    > CoD income is NOT recognized for interest.*  It is merely considered a
    > renegotiation of the terms of the loan/line of credit.
    >
    > Threfore, I agree with the "overcharge" statement above as to its result -
    > as to interest charges only.  The example doesn't work as to principal.
    >
    > * - As the interest is unpaid, a cash basis accounting method taxpayer will
    > have never previously deducted it.  However, an accrual-basis taxpayer may
    > have an income inclusion to the extent of any prior interest expense
    > deduction claimed (or claimable) depending on the tax benefit rule of IRC
    > Section 111.


    Sect 111 applies to recoveries of amounts deducted in prior years. A
    discharge is not a recovery. I would opine that the tax benefit rule
    is not applicable. However, see Zarin v. Comr 916 F.2d 110 (3d Cir
    1990) in which the 3rd Circuit overruled a reviewed Tax Court case by
    applying a tax benefit rule for a gambler's discharge.

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Richard Di Bernardo, CPA, Mar 19, 2010
    #19
  20. Re: Fees paid to a company to settle credit card debt & cancellationof debt income

    On Mar 18, 6:49 am, Alan <> wrote:
    > On 3/17/10 10:43 PM, Stuart A. Bronstein wrote:> "Richard Di Bernardo, CPA"<>  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.

    >
    > I will merely point out that when a debt is canceled and accrued
    > interest on that debt is also canceled, the interest is also
    > considered income if the taxpayer could not have deducted the
    > interest expense had he paid it. Example: Interest forgiven with
    > consumer credit card debt is treated the same as the debt.
    > Interest forgiven on a business debt is not income as the
    > interest could have been deducted as a business expense if paid.


    What if the discharge includes interest at a rate is 35% or higher?
    What about fees - such as $45 because you tool too long to lick a
    postage stamp? Would a discount of the interest be appropriate? Was
    the taxpayer enriched sufficiently to generate an equal amount of
    taxable income for by not paying a 35% or higher interest rate? Or by
    not paying those bogus fees?

    This runs afoul with the Supreme Court's judicial definitions of
    income (Glensaw Glass and others): A clear and realized ACCRETION To
    WEALTH over which the taxpayer has complete dominion and control. The
    "true" income should represent benefit for the forbearance of money at
    a reasonable market rate.

    Say you have a personal checking account that is overdrawn by a $46
    dollars. ($1 overdraft plus a $45 fee). You are angry at the bank
    so you don't pay it. Then the bank responds with a litany of charges
    so you account is now overdrawn by $316, including the $45 fee to
    close your account. After ruining your credit score, the bank kindly
    cancels your debt.

    I guess you would have $316 of taxable income from what was no less
    than extortion.

    --
    << ------------------------------------------------------- >>
    << 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 >>
    << are at www.asktax.org. >>
    << Copyright (2007) - All rights reserved. >>
    << ------------------------------------------------------- >>
     
    Richard Di Bernardo, CPA, Mar 19, 2010
    #20
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