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



If the court had determined that there was never a valid debt, your argument would be correct. But there's no such court ruling.
The court ruled that the debt was uncollectible due to being filed too late. That's not the same as there never was a debt.
Seth
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Collecting in court was barred by statute. Did any statute prohibit issuing a 1099-C?

Suppose the 1099-C was filed _before_ the deadline. The creditor still had the _option_ to file a claim with the court, but chose not to. That would clearly lead to cancellation of debt income.
Is a legally uncollectable debt still a debt? I would argue that it is; certainly in colloquial language that applies, but also statutes against collecting gambling debts implies that they are debts. Therefore, subsequent to the SoL barring collection, the debt still existed. However, it isn't clear that there's any income involved with its subsequent cancellation, as that has no real-world effect, so the 1099-C creating income would be a triumph of form over substance.
Seth
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I don't see how this can be a scam. If the credit card company was on a cash basis then they wouldn't have reported the 17k as income because they never received it, so they should not be able to deduct it even if they issue a 1099-C (is that right?). If they were on an accrual basis, then they record the 17k as taxable income. Writing off the 17k makes perfect sense, 'cause why should they pay tax on money they never received.
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They also have a "reserve against losses" that should increase by $17k and therefore there's no effect on income.

They won't; they'll carry the $17k as "uncollectable" and "reserved against" with no net tax effect.
For that matter, writing it off (without formally forgiving it) should still avoid them paying taxes on it.
Seth
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On Mar 21, 9:38 pm, snipped-for-privacy@panix.com (Seth) wrote:

I'm confused. Am not familiar with this "reserve against losses" concept -- is there a line on form 1120 or Schedule L for it? I'm familiar with Schedule C, so this may be beyond me.
Here's my thinking. When you buy 17k of stuff on credit card, the credit card company pays the payer right away. At least that's how I think it is, because when I buy on EBay and pay by credit card, the person receives the money right away and ship right away (they only ship when they receive the money). But if you pay by eCheck, it takes 5 days to clear and they ship then. But my credit card bill is due about one and a half months later and I can choose to not pay, or I can forget. So how does it look from the credit card company's point of view? Their reserves have gone down by say 17k minus fees, and say the fees are $200, so they have a loss of 16,800. If they are on the accrual basis they report 17k income. So they have net income of $200 (which is just their fees on the 17k). But when the person defaults, the credit card company has to deduct the 17k of income that they included in their income earlier but never received.
And what if the credit card company sells the debt for 1k to a collection agency? The accounting gets really complicated then.
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[Summary: Can you get Cancellation of Debt (COD) Income from a debt that is not asserted in a probate estate?]
I'm not up on the legal fine points of this issue (IANAL), but it seems that the following is true.
Bankruptcy. Debts that are discharged in bankruptcy do not generate COD income. This is, AFAIK, an explicit provision in the tax code. Although I am not really conversant with bankruptcy law, as a layman I would think that a debt not asserted to the bankruptcy court would be discharged and not just those that were asserted.
Probate. Here things are perhaps a bit fuzzier. What I don't know is if there is any provision similar to that regarding discharge of debt in a bankruptcy. But, on the other hand, if we think about the purpose of probate and why debt gets barred, it seems to me that it is so that the final financial affairs of the decedent can be wrapped up. Given that goal, it seems odd (OK, not a good legal argument) that after the close of probate, things can happen which will cause claims on the probate estate.
Presumably when probate closes, the estate can be distributed. So what assets are then even available for paying taxes on any COD income that arises because of the statutory bar to collecting the debt? Are the heirs on the hook? The executor of the estate? Or is this a case where the estate, at the time the COD arises is considered insolvent (it no longer has any assets), and that the COD income is not taxed based on insolvency?
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Form 1120, Line 15 "Bad Debts".
Seth
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No, they expect (say) .2% losses, so the income they report is $16,966.

$166.
Less reserve for losses.

However, when 499 other people _don't_ default, the credit card company adds back the 17k they'd reserved against all those other charges.

Bank tax returns have never been simple.
Seth
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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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On Mar 17, 9:56 am, snipped-for-privacy@panix.com (Dick Adams) wrote:

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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