Issuing a form 1099-C May Bar a Lender From Pursuing a Deficiency

This article came to me from my friend Attorney Phil Guttilla, a tax and estate attorney that is one of my go-to guys and who is helping people with the tax consequences of being part of entities that are in crisis due to the current market.

Yours, Ike


A recent Arizona Court of Appeals decision held that an Internal Revenue Service Form 1099-C sent by a lender to a delinquent borrower was prima facie evidence that the lender intended to cancel the debt.

In AmTrust Bank v. Fossett, 1 CA-CV 08-0840, the Court stated that this evidence may be rebutted by the lender; however, the lender’s intent was a factual issue which barred both parties from obtaining an early decision by summary judgment.

Generally accepted accounting principals and Federal tax law require lenders to report a discharge of indebtedness, which may give rise to taxable income for the borrower.

Under Arizona law, a discharge of debt may occur when a lender agrees not to sue or otherwise renounces its rights against the borrower by a signed writing.

In AmTrust Bank v. Fossett, the borrowers argued that because they reported and paid taxes as a result of the lender’s Form 1099-C, the lender was precluded from pursuing a deficiency under Arizona law. The Court recognized that under Federal law, certain conditions mandate that the lender file a Form 1099-C even if it still intends to pursue collection. The Court also noted that if the lender was not required to report under Federal law but did, then that is also a factor to be considered in determining whether the borrowers were still liable for the debt.

The concurring judges noted that other courts have remarked in similar situations that there is no reason why a lender can not include a statement with the Form 1099-C sent to a borrower explaining the reason for issuing the Form 1099-C and a notice of the lender’s intent to continue to pursue collection. While not controlling, the comment was instructional and we believe that a lender should include a reservation of rights and explanation letter with each Form 1099-C.

For more information on when a lender must file a Form 1099-C or for more information regarding the suggested form of letter, please contact Attorney Phillip Guttilla, pguttilla@rcalaw.com , (602) 440-4845 or see more about Phil Here:http://www.rcalaw.com/View-user-profile.php?qsln=g&user=96

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