if you owe many creditors, or debt collectors, can you expect to receive a lot of 1099C forms? If this is the case, then isn't it true that if you file bankruptcy, you do not have to pay the taxes on these debts?
I think the real key is insolvency. One need not file bankruptcy. Download and read the instructions for IRS form 982. Income form a 1099c is not taxable if you are insolvent. Insolvency is calculated based on assets v. liabilities immediately preceding the debt cancellation. Therefore, the debt that was canceled is included as a liability for purposes of calculating insolvency.
I am not a bankruptcy specialist. My understanding is that the above insolvency test is also applied if a bankruptcy is involved.
I think the abuse of repeated 1099s the poster referred to gets to the fact there is more than one debtor in a debt collection business.
I don't think so -- at least I read the post in the context of multiple 1099s from different collectors for the same debt.
But, in terms of multiple borrowers, in my experience, bankers issue the 1099 to the person whose social security number is associated with the debt. Generally, the primary borrower. How co-borrowers split that up between themselves is between them and the IRS.
Some will pay and some will not. Thats how the debt collectors make money--from the people who paid. If they could deduct as a loss the entire amount of the 1099, that would be very sweet as they could shelter a lot of money with little cost.
But the debt owner cannot deduct the amount of the 1099 as a loss. I know a little about accounting. The buyer of the debt cannot deduct more than the purchase price of the debt. If you paid $2 for $1 Zillion, you cannot shelter more than $2 of income.
And even that is a zero sum game -- actually less than zero. If you paid $2, and collected $0, you can only take a $2 charge to earnings. At a 40% corporate tax rate, you would have a tax deduction of 80 cents -- but you paid $2 to get that 80 cent deduction!
And, if they could sell the debt again to another, and the other could shelter that full amount rather than the amount paid, double sweet.
Again, it does not work that way. One can only "shelter" the amount paid. Some shelter!
Finally, with all this debt sitting out there which is never paid floating around, regular businesses can buy thousands of dollars of debt for pennies, issue 1099s and shelter thousands of dollars of income. Tripple, no...infinity sweet.
Auuuuuugh! The "face amount" of the 1099 only affects the taxes of the recipient.
Clearly this is not the case. The accounting for debt and the book effects of having it be uncollectable can be complex. While I do this on trusts (with SCIN) at times, I don't have the experience to just know the answer and I'm not in the mood to go through the code to say why it ain't so as . I'm just here to say, it ain't so.
Well, I would not know a trust from a hole in the ground. But I do know banking and financial services -- and buying debts is not fundamentally different than buying cars. Each debt/car has a purchase price (or basis) associated with it when acquired. Unlike cars, debts cannot be depreciated so there is never an adjustment of basis until the asset is liquidated. At that time you either have a gain or a loss over your basis. When you add up all the gains and all the losses you have gross income. Subtract your expenses of operations, financing, etc. What is left over is net income. Pay taxes on that amount.
It is that simple (well, maybe a little more complex -- but not much).
I don't see a way to game the system. All the accounting "games" I have ever seen that resulted in a scandal (sub-prime mortgages, the savings and loan crisis, hedge funds, Enron, WorldCom, Societe Generale, Barings) involved either a regulatory system that was asleep at the wheel (the first 2), off-balance sheet assets (the middle 3) or cooking the books to hide losses (the last 2).
Now, in theory, if you were a drug dealer, you might be able to create something that would allow you to launder your drug money -- but the success or failure of the endeavor would have nothing to do with 1099s.
Can I go sell this plan to Columbia?
I think the real key is insolvency. One need not file bankruptcy. Download and read the instructions for IRS form 982. Income form a 1099c is not taxable if you are insolvent. Insolvency is calculated based on assets v. liabilities immediately preceding the debt cancellation. Therefore, the debt that was canceled is included as a liability for purposes of calculating insolvency.
I am not a bankruptcy specialist. My understanding is that the above insolvency test is also applied if a bankruptcy is involved.
I think the abuse of repeated 1099s the poster referred to gets to the fact there is more than one debtor in a debt collection business.
I don't think so -- at least I read the post in the context of multiple 1099s from different collectors for the same debt.
But, in terms of multiple borrowers, in my experience, bankers issue the 1099 to the person whose social security number is associated with the debt. Generally, the primary borrower. How co-borrowers split that up between themselves is between them and the IRS.
Some will pay and some will not. Thats how the debt collectors make money--from the people who paid. If they could deduct as a loss the entire amount of the 1099, that would be very sweet as they could shelter a lot of money with little cost.
But the debt owner cannot deduct the amount of the 1099 as a loss. I know a little about accounting. The buyer of the debt cannot deduct more than the purchase price of the debt. If you paid $2 for $1 Zillion, you cannot shelter more than $2 of income.
And even that is a zero sum game -- actually less than zero. If you paid $2, and collected $0, you can only take a $2 charge to earnings. At a 40% corporate tax rate, you would have a tax deduction of 80 cents -- but you paid $2 to get that 80 cent deduction!
And, if they could sell the debt again to another, and the other could shelter that full amount rather than the amount paid, double sweet.
Again, it does not work that way. One can only "shelter" the amount paid. Some shelter!
Finally, with all this debt sitting out there which is never paid floating around, regular businesses can buy thousands of dollars of debt for pennies, issue 1099s and shelter thousands of dollars of income. Tripple, no...infinity sweet.
Auuuuuugh! The "face amount" of the 1099 only affects the taxes of the recipient.
Clearly this is not the case. The accounting for debt and the book effects of having it be uncollectable can be complex. While I do this on trusts (with SCIN) at times, I don't have the experience to just know the answer and I'm not in the mood to go through the code to say why it ain't so as . I'm just here to say, it ain't so.
Well, I would not know a trust from a hole in the ground. But I do know banking and financial services -- and buying debts is not fundamentally different than buying cars. Each debt/car has a purchase price (or basis) associated with it when acquired. Unlike cars, debts cannot be depreciated so there is never an adjustment of basis until the asset is liquidated. At that time you either have a gain or a loss over your basis. When you add up all the gains and all the losses you have gross income. Subtract your expenses of operations, financing, etc. What is left over is net income. Pay taxes on that amount.
It is that simple (well, maybe a little more complex -- but not much).
I don't see a way to game the system. All the accounting "games" I have ever seen that resulted in a scandal (sub-prime mortgages, the savings and loan crisis, hedge funds, Enron, WorldCom, Societe Generale, Barings) involved either a regulatory system that was asleep at the wheel (the first 2), off-balance sheet assets (the middle 3) or cooking the books to hide losses (the last 2).
Now, in theory, if you were a drug dealer, you might be able to create something that would allow you to launder your drug money -- but the success or failure of the endeavor would have nothing to do with 1099s.
Can I go sell this plan to Columbia?
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