Form 1099-C: Right or Wrong?
When a taxpayer has a debt cancelled, it is generally income to the taxpayer. Certain third-parties report debt cancellation amounts using Form 1099-C. Treasury Regulation §1.6050P-1(b) states that a reporting entity files Form 1099-C to report debt cancellation no later than the date of one of the identifiable events listed in the regulation.
If a taxpayer gets a Form 1099-C, do not assume it is correct. Do not simply report the amount as income on the tax return without doing additional inquiries. It is quite possible the Form 1099-C is incorrect and the taxpayer does not have income in that tax year.
When reviewing a Form 1099-C, consider these four issues before putting the income on the tax return:
Did the taxpayer actually have income due to debt cancellation? For a taxpayer to have income, the taxpayer had to have economic gain from the discharge. For example, a co-signer or guarantor generally will not realize income upon debt cancellation. The regulation states guarantors should not receive a Form 1099-C, but they often receive them erroneously. See Bullock v. Comm., T.C. Memo 2017-219 as an example of this.
Was the Form 1099-C issued for the correct tax year? If the reporting entity files Form 1099-C in the wrong tax year, then the amount is not income to the taxpayer in that year. Entities often file a Form 1099-C many years after the identifying event occurs. See Bacon v. Comm., T.C. Summary Opinion 2015-15 as an example of this.
Was the Form 1099-C issued for the correct amount? The debt cancellation amount should be the value of the debt discharged less (1) any amount paid to settle the debt and (2) the value of any property forfeited with the discharge. If the entity does not reduce the Form 1099-C by those amounts, then the entity overstated the debt cancellation amount. See Martin v. Comm., T.C. Summary Opinion 2009-121 as an example of this.
Does an exclusion in §108 apply? Consider this last because a taxpayer may have to reduce various tax attributes by the amount excluded. The most common §108 provision is that the taxpayer can exclude debt cancellation income to the extent the taxpayer was insolvent at the time of the debt cancellation. If a taxpayer uses the insolvency provision, then the taxpayer’s tax attributes are reduced by the amount excluded.
For the first three items above, the taxpayer should report the contested Form 1099-C amount on Form 8275, Disclosure Statement. The taxpayer should not report the contested amount as income. For the last item above, a taxpayer claims §108 exclusions and tax attribute reductions on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
If the IRS tries to challenge the position that the Form 1099-C is incorrect, then use §6201(d) to counter the IRS:
“In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed… by a third party and the taxpayer has fully cooperated with the Secretary… the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.”
If the issue goes to Tax Court, the IRS generally will have the burden to produce additional information to substantiate the Form 1099-C provided the taxpayer can show a reasonable dispute through credible testimony or other evidence. See Marchisio v. Comm., T.C. Summary Opinion 2011-39 and McCormack v. Comm., T.C. Memo 2009-239 as examples of this.
My Upcoming Education Events
Compass Tax Educators, of which I am a co-owner, is offering its annual all-access pass for all live webinar events from May 1, 2021 through April 30, 2022. We guarantee we will offer at least 30 CE/CPE. You can see the courses planned and purchase a pass here.
As part of the entire package, I’ll be teaching any “breaking news” events due to new tax law plus the following scheduled classes:
May 6, 2021 - Fringe Benefits & Accountable Plans
June 10, 2021 - Installment Sales
June 24, 2021 - Debt Cancellation & Bankruptcy Tax Issues
August 26, 2021 - Form 1116 - The Basics
October 21, 2021 - Gambling Tax Issues
December 2, 2021 - C Corporation Tax Planning
December 9, 2021 - 2021 Tax Update: Individuals
December 16, 2021 - 2021 Tax Update: Businesses
Oregon Association of Tax Consultants, Westside Chapter - February 22, 2021
PPP Loan Tax Issues and the Employee Retention Credit (2 CE)
Arizona Society of Enrolled Agents Southwest Fest - June 14-16, 2021
Topics to be announced