Since Taxpayer Met Nonpayment Testing Period in 1999, He Didn't Recognize COD Income in 2008 on Subsequent Collection Attempts.
(Parker Tax Publishing June 13, 2012)

Because the taxpayer defaulted on his credit card account in 1994, and the credit card company charged off the debt in 1996, the 36-month nonpayment testing period expired in 1999 and he could not have had COD income in 2008; the issuance of a 1099-C for 2008 was irrelevant. Stewart v. Comm'r, T.C. Summary 2012-46 (5/21/12).

On October 22, 1994, David Stewart incurred a credit card obligation to Maryland Bank National Association (MBNA). David defaulted on his obligation to MBNA sometime between October 22, 1994, and September 6, 1996. David made no payments on the debt after the default. MBNA charged off the debt on September 12, 1996. At some point between September 12, 1996, and December 28, 2007, NCO Portfolio Management, Inc. (NCO), acquired David's defaulted account from MBNA. On December 28, 2007, Portfolio Recovery Associates, LLC (PRA), acquired David's defaulted account from NCO. Although aware that a state statute of limitations period for beginning collection activity in regard to the debt had expired on February 15, 2001, PRA began making automated attempts to collect payments from David.

In 2008, PRA received a letter from David that demanded PRA cease its automated collection activities. Once PRA received the 2008 letter, the company stopped its automated attempts at collection and took no other collection-related action. PRA subsequently issued to David a Form 1099-C, Cancellation of Debt, which reported $8,571 in COD income for the 2008 tax year. David timely filed a joint federal income tax return for 2008 but did not include the purported COD income on the return.

In a notice of deficiency, the IRS increased David's income by the amount reported on the Form 1099-C. David contested the deficiency, contending that the indebtedness at issue was actually discharged long before 2008. In response, the IRS provided account reports from PRA, which included the date PRA acquired David's defaulted account, the original account balance received by PRA, and a timeline of PRA's automated collection activity.

The Tax Court held that David did not recognize COD income in 2008. The court noted that the question as to the year for which a taxpayer realizes COD income is one of fact to be determined based on the evidence. Determining when that moment occurs, the court observed, requires a practical assessment of the facts and circumstances with respect to the likelihood of repayment. There can be a series of identifiable event, the court stated, and any identifiable event that fixes the loss with certainty may be considered.

The court looked to its decision in Kleber v. Comm'r, T.C. Memo. 2011-233, in which it concluded that a rebuttable presumption arises that an identifiable event occurred in a calendar year if, during a testing period ending at the close of that year, the creditor has received no payments from the debtor. The testing period for this rebuttable presumption is generally 36 months. The presumption that an identifiable event has occurred upon expiration of the 36-month nonpayment testing period may be rebutted in two specific ways. First, the presumption may be rebutted if the creditor (or a third-party collection agency on behalf of the creditor) has engaged in significant, bona fide collection activity at any time during the 12-month period ending at the close of the calendar year. According to the Tax Court, ministerial collection action, such as automated mailing, does not constitute significant, bona fide collection activity for purposes of rebutting the presumption that an identifiable event has occurred. Second, the presumption may be rebutted if facts and circumstances existing as of January 31 of the calendar year following expiration of the 36-month period indicate that the indebtedness has not been discharged. Citing Reg. Sec. 1.6050P-1(b)(2)(iv), the court noted that those facts and circumstances include the sale or packaging for sale of the indebtedness by the creditor.

The court was not persuaded that the decision by PRA to cease its automated collection activity and issue a Form 1099-C in 2008 was the first identifiable event indicating that David's debt would never have to be repaid. Since David defaulted on his credit card account sometime after October 22, 1994, and MBNA charged off the debt on September 12, 1996, and David made no payments on the defaulted account after the charge-off, the Tax Court found that the 36-month nonpayment testing period expired in 1999. Accordingly, a rebuttable presumption existed that an identifiable event indicating that the debt was discharged occurred in that year. The court found no evidence that MBNA, NCO, or PRA engaged in significant, bona fide collection activity at any time after MBNA charged off David's debt in 1996. Although PRA engaged in automated collection activity for approximately two months after the company acquired David's defaulted account, the court concluded that these ministerial actions did not constitute significant, bona fide collection.

Finally, the court noted that while the issuance of Form 1099-C is indeed an identifiable event, it is not dispositive of a discharged debt.

For a discussion of whether a debt has been discharged and the correct year of discharge, see Parker Tax ¶72,310. (Staff Contributor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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