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Premature Occupy Wall Street Group Effort Wants Consumer Debt to Vanish with Rolling Jubilee

The Occupy Wall Street initiative has come up with a plan to make consumer debt vanish. Instead of fighting the system they’ve decided to participate with something called the Rolling Jubilee.

Organizers are buying up consumer debt for pennies on the dollar and instead of collecting on it they are forgiving it. Kind of an interesting idea I must say.

“As a trial run, we spent $466 and successfully bought and abolished $14,000 of medical debt,” says the Occupy Wall Street group.

The goal of their current fund drive is to raise $50,000 in cash to buy $1,000,000 in face value debt and then forgive it.

While you might hope they could purchase the debt of one individual and erase it, they say, “We cannot buy specific individual’s debt – instead, we help liberate debtors at random through a campaign of mutual support, good will, and collective refusal.”

I suppose they’ll be issuing 1099s, as required by the IRS, so those consumers that have their debt forgiven and who are not insolvent will wind up owing taxes on the forgiven debt. Otherwise, I sure hope the Occupy Wall Street folks have a letter in hand from the IRS that definitively says they are exempt from having to file a 1099 on the forgiven debt.

In my opinion the effort is misguided because this strategy can result in those with their debt forgiven, owing the IRS. Otherwise, I’d love to see they have vetted the idea fully before proceeding. If they purchase larges chunks of debt and then have to backtrack later and issue 1099-Cs, it could impact a lot of people.

Consumers that would not be subject to taxes due from debt forgiveness would be insolvent already. Those consumers would most likely benefit from a consumer bankruptcy that discharged all of their debt quickly. Those that would owe taxes on the forgiven debt are most likely going to be solvent, meaning their assets exceed their liabilities, and will not be able to waive the tax due.

According to tax expert and CPA Jim Buttonow, a former IRS examiner, “This is a very complicated area of taxation. The amount that a taxpayer includes in income depends on the facts and circumstances in each case. The fact that a lender does not issue a Form 1099C does not determine whether or not the transaction is taxable. It is the facts and circumstances in each case.

It appears that OWS is not one of the organizations that is required to file a Form 1099C (again, see the instructions for Form 1099C that lists a host of organizations required to file Form 1099C).

If the debtor is going to take a different position on the forgiveness of debt (i.e. it is a gift), they better have substantial authority to do so. My guess is that it will not be applicable as a debt was cancelled, not fully paid for by someone else and intended to be a gift.

My recommendation: have the OWS ask the IRS for a private letter ruling on the taxablity. It will provide the debtors a definitive position (assuming the IRS will rule on the issue) and eliminate the confusion.”

The Occupy Wall Street outrage seems to be the banks were bailed out and that consumers should not be forced to go into debt to cover basic needs. “It’s time for a bailout of the people, by the people,” they say. – Source

For more, watch their video below.

I reached out to the organization last week but as of yet they have not responded.

For more information, visit rollingjubilee.org.

For now I’ll have to chalk this up as a nice gimmick with some possible nasty unintended consequences for consumers.

Premature Occupy Wall Street Group Effort Wants Consumer Debt to Vanish with Rolling Jubilee
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Jim

    Interesting thread. Keep in mind that the issuance of an information statement to the IRS (Form 1099C) is not what makes a transaction taxable or not. It is the identifiable event of the cancellation or forgiveness of indebtedness. These rules are complicated.

    The bottom line is- whether a Form 1099C is issued or not – that if debt is forgiven or canceled to a taxpayer and there is an ascension of wealth (retention of the collateral while removing the debt associated with it) without a specific statutory exclusion (bankruptcy, insolvency, qualified principal residence debt exclusion, etc.), there is income.

    This is a very complicated area of taxation. The amount that a taxpayer includes in income depends on the facts and circumstances in each case. The fact that a lender does not issue a Form 1099C does not determine whether or not the transaction is taxable. It is the facts and circumstances in each case.

    It appears that OWS is not one of the organizations that is required to file a Form 1099C (again, see the instructions for Form 1099C that lists a host of organizations required to file Form 1099C)..

    If the debtor is going to take a different position on the forgiveness of debt (i.e. it is a gift), they better have substantial authority to do so. My guess is that it will not be applicable as a debt was cancelled, not fully paid for by someone else and intended to be a gift.

    My recommendation: have the OWS ask the IRS for a private letter ruling on the taxablity. It will provide the debtors a definitive position (assuming the IRS will rule on the issue) and eliminate the confusion.

    Just my $.02

    I will look forward to reading the threads.

  • http://GetOutOfDebt.org Steve Rhode

    In searching for more informaiton from OWS, here is what I found and it is apparently a statement from them.

    “Hi everyone. I want to assure you all that we are aware of the tax implications. We are working with a pro-bono tax lawyer and have called the IRS several times. The IRS informed us that we do not meet the requirements to file a 1099-c (we are not a bank, credit union, etc.)Our tax lawyer has written some technical langue for our website. The bottom line is that we will be purchasing debt of people who are most likely insolvent and if you are insolvent there is no tax implications. Period. Even if they are not insolvent the chain of events that would have to take place to result in this counting as taxable income is highly unlikely. It’s not impossible, but it’s very very very (lots more verys) unlikely.

    The long answer is much longer and more technical but rest assured, we are aware of the tax implications and it’s not a problem.” – http://news.ycombinator.com/item?id=4761241

    It appears there is no definitive IRS statement on this, but some phone calls. If there is someone with something from the IRS, please forwarded it to me.

  • birdseed

    Seems like a good idea until the Tax Man gets a hold of you. There must be a more balanced and fair (to coin a phrase?) approach to debt forgiveness, or many of us sort of get the short end of the stick no matter how hard we try to “do the right thing.”

    • http://GetOutOfDebt.org Steve Rhode

      Balanced and fair. Hum. But to whom?

      If you are looking for fairness to the consumer then bankruptcy would eliminate the debt and not result in a tax liability.

      Those that would want to avoid bankruptcy would have assets or not be insolvent. They have a tax liability.

  • alhidalgo

    Steve— I really hope that your organization can find a way to collaborate with the Rolling Jubilee. Talk about an effective way to eliminate debt! Genius!

    • http://GetOutOfDebt.org Steve Rhode

      I’ve reached out to them and while it is cute, I don’t know about genius.

      The two primary issues is that it is not targeted and that while the debt is eliminated at random, unsuspecting people may now find themselves owing the IRS unexpectedly.

      I get the point and the effort but besides being a bit of a gimmick, there are issues so far with the approach.

      • CuriousAboutItToo

        On what basis are you concerned about the tax implications? The RollingJubilee folks seem to address this in their FAQ stating they are in fact “exempt from filing a Form 1099-C”. They have elsewhere stated that this type of loan forgiveness is not in the same category as when the original creditor cancels a debt (which is often a taxable event). I’m asking so I can be clear on this as perhaps you have some other expertise. Thanks!

      • http://GetOutOfDebt.org Steve Rhode

        Here is who must file a 1099c.

        File Form 1099-C if you are:
        1. A financial institution described in section 581 or 591(a) (such as a domestic bank, trust company, building and loan or savings and loan association).
        2. A credit union.
        3. Any of the following, its successor, or subunit of one of the
        following:
        a. Federal Deposit Insurance Corporation,
        b. Resolution Trust Corporation,
        c. National Credit Union Administration,
        d. Any other federal executive agency, including government
        corporations,
        e. Any military department,
        f. U.S. Postal Service, or
        g. Postal Rate Commission.
        4. A corporation that is a subsidiary of a financial institution or credit union, but only if, because of your affiliation, you are subject to supervision and examination by a federal or state regulatory agency.
        5. A Federal Government agency including:
        a. A department,
        b. An agency,
        c. A court or court administrative office, or
        d. An instrumentality in the judicial or legislative branch of the
        government.
        6. Any organization whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution). The lending of money is a significant trade or business if money is lent on a regular and continuing basis. Regulations section 1.6050P-2(b) lists three safe harbors under which reporting may not be required for the current year. See Safe harbor rules next.
        Safe harbor rules. The three safe harbor rules in which an entity will not be considered to have a significant trade or business of lending money are:
        1. No prior year reporting required. An organization will not have a significant trade or business of lending money for the current year if the organization was not required to report in the prior year and if its gross income from lending money in the most recent test year (see item 3 below) is less than both 15% of the organization’s gross income and $5 million.
        2. Prior year reporting requirement. An organization that had a prior year reporting requirement will not have a significant trade or business of lending money for the current year if, for each of the 3 most recent test years, its gross income from lending money is less than both 10% of the organization’s gross income and $3 million.
        3. No test year. Newly formed organizations are considered not to have a significant trade or business of lending money even if the organization lends money on a regular and continuing basis. However, this safe harbor does not apply to an entity formed or availed of for the principal purpose of holding loans acquired or originated by another entity. In this instance, the transferee entity (including real estate mortgage investment conduits (REMICs) and pass-through securitized indebtedness arrangements) may be required to report cancellation of indebtedness on Form 1099-C. See Regulations section 1.6050P-1(e) (5).

        If a debt is owned (or treated as owned for federal income tax purposes) by more than one creditor, each creditor that is described under Who Must File, earlier, must issue a Form 1099-C if that creditor’s part of the canceled debt is $600 or more. A creditor will be deemed to have met its filing requirements if a lead bank, fund administrator, or other designee of the creditor complies on its behalf. The designee may file a single Form 1099-C reporting the aggregate canceled debt or may file Form 1099-C for that creditor’s part of the canceled debt. Use any reasonable method to determine the amount of each creditor’s part of the canceled debt.
        Debt owned by a partnership is treated as owned by the partners and must follow the rules for multiple creditors.

      • CuriousAboutItToo

        Does posting this answer the question though? You have not offered anything to substantiate your assertion. The movement claims to not make any income from lending activities. In my reading of this, they would not be required to file. I’m asking if in your research, you have come to another conclusion on which to base the substance of your criticism of the effort. I appreciate the dialog.

      • http://GetOutOfDebt.org Steve Rhode

        Only the IRS can answer this question definitively. Feel free to give them a call.

        Hopefully the OWS folks have an IRS determination letter in hand before doing this. I have not seen such a letter.

      • weakassshit

        so basically, you’re hating on the idea without any basis. opportunistically using the press around this issue to draw attention to your own stupid website. shameless.

      • http://GetOutOfDebt.org Steve Rhode

        Actually, if you look at what I wrote I said there is a potential tax liability but hope OWS has an IRS determination letter in hand to assure this is not the case. If you are aware that such a letter has been issued, please share it with me.

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