Repayment of COD income allows for refund claim.

• Author: Laffie, Lesli S.
• Position: Cancellation of debt

T, a cash-basis taxpayer, defaulted on a consumer credit obligation, although the debt was not formally forgiven or compromised. The creditor issued T Form 1099-C, Cancellation of Debt, under Regs. Sec. 1.6050P-1(b)(2)(iv). T included the amount in income for that year, but repaid the debt in a later year.

Analysis

Sec. 61(a)(12) provides that gross income includes cancellation of debt (COD) income. Sec. 6050P requires certain financial entities to report debt discharges of $600 or more during any calendar year. Under Regs. Sec. 1.6050P-1(a), debt discharge must be reported if one of eight identifiable events occurs. If one of the identifiable events has occurred, a debt discharge is deemed to have occurred "[s]olely for purposes of the reporting requirements," whether or not an actual debt discharge has occurred.

The eight identifiable events include a decision to discontinue collection activity by the creditor and the expiration of the "non-payment testing period." Under Regs. Sec. 1.6050P-1(b)(2)(iv), there is a rebuttable presumption that an identifiable event has occurred during a calendar year if a creditor has not received a payment on a debt at any time during a testing period ending at the close of the year. The testing period is a 36-month period, increased by times during which the creditor is precluded from engaging in collection by a stay in bankruptcy or a similar bar under state or Federal law.

The timing requirements discussed above are for reporting purposes only and do not automatically mean that a debtor must take the amounts reported into income in the year in question. While in most cases, the amounts are required to be taken into income under Sec 451 in the same year they are required to be reported by the creditor, they do not have to be

Generally, COD income must be taken into income when there is an "identifiable event"; see Cozzi, 88 TC 435 (1987) Whether a debt has been cancelled or discharged depends on the substance of the transaction and is determined on the facts and circumstances; see, e.g., Miller Trust, 76 TC 191 (1981). Taxpayers who have not reported Form 1099-C income have been required to include those amounts; see, eg., Johnson, TC Memo 1999-162.

Under the facts presented, the debt survived as a legally enforceable obligation. Under the case law, this...