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The Rolling Jubilee debt elimination project is one of the best ideas to come out of the Occupy Wall Street movement. Yet some, most notably Yves Smith of Naked Capitalism, have raised concerns that eliminating debt in this fashion might create tax liabilities for the former debtors.
It turns out that the Rolling Jubilee folks have already dealt with this potential issue:
Q. When a Rolling Jubilee abolishes someone’s debt will this raise their taxes?
A. No. We double-checked this with the IRS and a project like this does not meet the requirements to file a 1099-C Cancellation of Debt form and will almost certainly have no effect on anyone’s taxes.
The lawyers I’ve talked to agree that this is largely a non-issue and can be easily dealt with should it arise (and the only way it would arise is if the IRS chose for some unimaginable reason to apply the United States tax code in a way which has never been done in the past).
(Crossposted to Mercury Rising.)
UPDATE: Here’s what Forbes writer Tim Worstall — who as he states is a capitalist and neoliberal “red in tooth and claw” and thus not someone who normally would agree with Occupy Wall Street on anything — has to say about the tax issue:
Now when I first read all of this I thought there was a significant problem. Tax laws: yes, US tax law is so incredibly strange that a reduction in a debt that you owe is in fact income to you.
At a time when the government is taking extraordinary steps to assist individuals who stand to lose their homes to foreclosure, there is surprisingly little recognition that many of these individuals will face federal income tax consequences as a result. The same is true for individuals who default on consumer debt.1 Many taxpayers will be required to include the amount of any debts written off by the lender in gross income and pay the associated tax. Some taxpayers will be entitled to exclude the amount of canceled debt from gross income, but they will have to navigate extremely challenging tax reporting requirements to do it.
That’s actually the IRS itself stating that it’s all odd, difficult and even strange. If you owe $5,000 on a card and the company says, well, OK, we’ll take $1,000 now in full and final settlement then…..yup, the IRS will want income tax on the $4,000. There are exceptions: for mortgage debt in some circumstances, if you’re really actually bankrupt (no, someone going bankrupt for $1,000,000 of debt does not then owe income tax on $1 million. That would be insane, not just strange and or difficult.) and if you can show that you’re insolvent but not actually bankrupt.
And yes, all the companies out there that you might owe money to, the student loan agencies, credit card companies, mortgage banks and so on do indeed have to tell the IRS when they let you off. To the point that they have to file a form with the IRS so that the IRS can check your tax return to see that you are indeed paying the tax on that forgiven loan.
Which would seem to be something of a problem for this plan of course. However, there’s one more exception:Gifts
Generally, you do not have income from canceled debt if the cancellation or forgiveness of the debt is a gift.Which is fascinating. The company cannot lower your debt burden without dumping you with a large tax bill. But A.N. Random Individual can indeed lower your debt burden without that tax being due. You or I, OWS, can purchase the debt and then write it off and that’s a gift: no tax is payable upon that debt reduction.
The “generally” is another way of saying “if it’s less than $13,000″. And I seem to recall (and so do the TurboTax people) that any gift taxes are paid by the giver, not the recipient.
UPDATE 2: I just wanted to point out this from OFG’s last comment:
Because of the numerous ways in which people have attempted to claim income as gifts, the IRS, as a policy, will usually not officially comment on whether something is or is not a gift until after someone claims something is a gift and they can then look at back at all the facts surrounding a particular “gift” and then will rule on that particular exchange only. If there are any facts or indicators that one or more persons are conspiring to have something be a gift solely for the purpose of avoiding income taxes, then that’s when they will take action.
In this case, where the intent of OWS is pretty clear, that they are doing this as a gift and are not expecting anything of value in return, I just don’t see and can’t imagine any circumstance where it would fail to meet IRS muster for gifts.
And that is that.
25 Comments
Sorry for commenting but I was an accountant and I had been wondering where this tax issue was coming from.
There is only one area that I see that this action can affect taxes, and that would impact so few people that it’s almost not worth mentioning.
But if someone’s mortgage is forgiven, then what will (or should) occur is the basis of their now owned home is changed. For example, you put down $50,000 and take a $200,000 mortgage to buy a $250,000 home. As of today you’ve paid off another $50,000 of the principle and have $150,000 of principle left.
With no debt forgiveness, if this person were to sell his/her house it’s basis (the amount from which any capital gains are figured) would be $250,000, the total cost of the home. So if they then sold the home for $300,000, they would realize a capital gain of $50,000.
However, if they were fortunate enough to have their mortgage forgiven, the basis of their home is what would change. In other words, in this case they really only paid $100,000 for the home ($50,000 down and $50,000 of principle being paid off before it was forgiven).
Now if he/she were to sell this home for $300,000, they would realize a $200,000 capital gain because $300,000 – $100,000 (there new basis) equals $200,000.
However, very few people ever actually pay these capital gains on their homes because there are so many ways to avoid it, including a one time exemption for every taxpayer of $1,000,000. Don’t hold me to that $1,000,000 though because I haven’t practiced in over a decade nor have I attended any seminars or classes to keep up with changes in the tax code.
I hope I’ve explained that well enough for folks to understand.
During the inception of our current bailout economy I worked as a debt collector for Citibank (I quit after ~1.5 years and that local call center that employed hundreds for decades soon closed). One of the ways we were instructed to chivvy people away from partial settlements was to warn that any discharged debt would result in a 1099 filing that showed the forgiven debt as income to the debtor. Because Citibank only allowed partial settlements in cases of extreme hardship and the 1099 was ALWAYS sent well … that is a small example of why I was surprised that I made it a year.
I think that there is an element of choice on the part of the debtor who is tearing up the note. Because the Rolling Jubilee is built on respect and care for the debtors, I doubt there will be any 1099s filed, so, I can readily accept that there is a minimal risk of tax liability from the Rolling Jubilee debt forgiveness process.
Thanks. Excellent explanation.
Fortunately our benevolent masters keep Scalia & Co. on retainer for just such occasions.
Thanks;)Sad but true
Book Salon up with Sheila Bair’s Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself hosted by James K Galbraith
Thanks.
I think that a lot of people are (understandably) paranoid about what the government or banks might do to thwart anything OWS does. But in this case, they need to relax.
The Mortgage Relief Act of 2007 is not related to any capital gains or losses regarding someone’s home, it’s regarding the deficiency judgment. To take OFG’s example of a $250,000 home, if it goes back to the bank through foreclosure or if it’s sold through a short sale and it sells for only $100,000, that leaves $150,000 (or whatever the difference is between the sale price and what is still owed on the mortgage) as the deficiency judgment that the homeowner is still on the hook to pay (unless it’s a state barring deficiency judgments or the bank chooses not to pursue it). That $150,000 is normally considered as income by the IRS and the 2007 law (which expires at the end of this year unless Congress gets off their hands and passes an extension!) waives that provision.
I’m not an expert, but do know that the IRS considers charged off debt as income. I didn’t know that the creditor was required to submit the 1099, and don’t know how RJ would/could get around that requirement, but I agree with Yves that it’s something that may – not necessarily going to – but may end with a tax burden for the debtor. I’m also not saying that RJ didn’t check with the IRS on this issue, or that Yves doesn’t know what she’s saying, just that it’s better to be cautious about it until things get proven out one way or another.
I suggest you go back to the individuals who “checked” with the IRS and find out how they did that. It’s pretty certain they merely called an IRS office and got an agent. That is not advice you can rely on, particularly for a novel situation.
The IRS routinely gives erroneous advice on the phone (phone reps have only 20 hours of training). It happens on completely routine questions 20% to 30% of the time (this is pretty consistent over time, see here, for instance: http://money.cnn.com/magazines/moneymag/moneymag_archive/1997/04/01/224332/index.htm. http://www.taxhelpattorney.com/articles/irs-incorrect-answers.html, and http://www.stopirstakeover.org/facts/irs-tax-preparer-wrong-25-of-the-time ). Given this history, it’s quite a stretch to expect a field agent to render a reliable opinion on a complicated question like this where no case law exists. It’s completely beyond their level of training and expertise. As this article indicates, the IRS giving bad advice does not absolve the taxpayer of responsibility.
http://startchurch.com/blog/view/name/court-says-irs-allowed-to-give-you-bad-advice
The people I have checked with are tax authorities, tax attorneys who are recognized experts, write in professional journals and teach courses. The post explains why this is a grey area and most important, why the IRS will not render an opinion on this.
The thing is there is a Principle Residence Exception when the mortgage is the first mortgage of a person’s principle residence. Because of this exception, most people never have to treat the $150,000 you mention in your comment as income.
As for the MRA of 2007, I wasn’t intending nor trying to explain the effects of foreclosure. I was merely sharing the way in which mortgage debt is forgiven and the homeowner still owns the home. In this situation, as I stated above, there are no direct income tax affects, as the only affect would be to change the basis in the home you own.
And as far as non-mortgage debt being forgiven, I am having a hard time coming up with a single example of non-mortgage debt forgiveness affecting someone’s taxable income when the entity doing the debt forgiveness intends the forgiveness to be a gift by giving such forgiveness and expecting nothing of value in return. There may be, depending on how OWS is formally organized, another tax implication involved, but that would affect the entity doing the forgiving, not the taxpayer receiving the forgiveness.
I agree that to be diligent, OWS should have a qualified tax expert analyze the transactions to determine if any taxable events occur. But I believe about the only way it could result in any affect on taxes at all is if it’s mortgage debt being forgiven as my example above and then it does not treat the forgiveness as income as it merely adjusts the basis of the their home.
As an example of an entity giving something of value and not expecting anything in return, if The American Red Cross gives Hurricane Sandy victims food, building materials, and maybe even a few bucks to help them obtain living quarters somewhere, all of that aid is NOT income to the people receiving it.
And again I apologize for commenting. Last one I promise.
Yes indeed, with poor economy and high unemployment, the first tax implication could be that donations to Rolling Jubilee to create debt forgiveness are tax-deductible charitable donations! :-D
If whoever checked with the IRS did not obtain a written response from the IRS, I would still be concerned.
I have gone back to my tax experts on this. One pinged while traveling and so was curt: ” IRS can’t rule on gifts so I don’t buy it.”
As indicated in our post, whether or not something is a gift is not an IRS determination, it is established judicially. Hence the IRS will NOT render an opinion. If some rep shot from the hip, see my comment earlier. First, reps have a high error rate even on routine tax questions. And this is a novel question that the IRS simply cannot resolve, and hence no one in any position of authority will opine on. And on top of that, if the IRS rep gave bad advice, that does not exculpate the person they spoke to from any problems that result from relying on that bad advice.
Now this may turn out to be perfectly fine. But there is no way of knowing that. This is a known unknown, and Strike Debt is misleading donors in pretending otherwise.
Just keep this in mind – Yves Smith also advised Elizabeth Warren not to bother trying to run for Senate.
Considering the number of actions and the lengths both local governments and Federal governments went to shut their speech down it really isn’t surprising that people might be suspicious of the government and it intent toward activists.
To be taxed, a gift must fall within the IRS definition of “gift” for tax purposes. The motivation for the gift must be generosity, admiration or charity, as determined by surrounding circumstances. Even a sale can be classified as a gift if something is sold for less than its market value. The value of the “gift” in such cases is the market value of the goods minus the price paid in return.
Read more: IRS Taxes on Gifts | eHow.com http://www.ehow.com/info_7982252_irs-taxes-gifts.html#ixzz2CgbJQCrg
It seems to me that what Occupy is doing meets the legal definition of what the IRS considers a gift(it’s charitable and is “sold” for less than market value) as long as they limit their debt relief to under $13,000 per individual.
Masscio had a great solution. That Rollling Jubilee contact the debtors and eneter into a settlement in which each side asserts that they have claims and counter claims against each other which are being settled by general releases each in favor of the other.
In that way, something of value is given and there is no “gift” or “income”, since RJ is buying debt that has already passed through the hands of several debt colectors, the likelyhood is that there are significant Fair Debt Collectios Act violations on the file and that the debtors really do have claims to release.
Really? I didn’t know that. Then again, if true, Yves wouldn’t be alone in thinking that; a lot of people thought that Warren was being given the shot at Scott Brown as a mere sop and that she had no chance, much as a lot of people thought that Howard Dean had no chance to do anything when he was given the DNC Chair job.
Back to the subject of this post thread: OFG’s comments in this thread are pretty much in line with what I’ve heard from various attorneys and tax accountants. OFG, who is himself an accountant, is of the opinion that the only way there would be any negative tax scenarios would be in the case of mortgages — and the Rolling Jubilee is for now confining itself to paying off medical debt.
Except that the “Market value” of the debt that RJ is buying is on a ratio of somethig like $500/$10,000-$15,000. So the market value of the debt forgivness is not the face amount of the loan, it’s the amount RJ paid for it. So, I suspect that a great deal, if not all, of it will be below the $13,ooo limit.
$10,000 divided by $500 = 20 times value. $13,000 X 20 = $260,000 face value of debt per debtor
Meanwhile, here’s what Forbes writer Tim Worstall — who as he states is a capitalist and neoliberal “red in tooth and claw” and thus not someone who normally would agree with Occupy Wall Street on anything — has to say about the tax issue:
The “generally” is another way of saying “if it’s less than $13,000″. And I seem to recall (and so do the TurboTax people) that any gift taxes are paid by the giver, not the recipient.
Please, don’t be sorry for commenting! Comment even more, please!
I think that’s what the whole tax fear is based on: People who’ve received phone calls from folks who have had your job, calls intended to frighten people away from doing something that would keep outfits like Citibank from wringing every last cent out of these poor people.
If I remember correctly there is no tax implication for giving the gift. It’s a great way that the rich get to write off money while passing it along to Junior usually.
OK, ONE MORE, because I finally read the Yves Smith post and his/her comments in this thread and want to say something.
He/She is correct the IRS will not rule on whether something is a gift beforehand, and that will NEVER change. The IRS sets rules on how a gift is handled versus how say compensation is handled, and if there is a question or disagreement as to whether a transaction is a gift or not a gift that is something the COURTS decide.
You see, the problem is that because of the rules of excluding gifts from taxable income, many people have tried, and will continue to try to take advantage of that. I will give you an easy example. Ron owns a house with a leaky roof. Bill is a carpenter. Ron asks Bill to fix his roof, and Bill agrees to fix it if Ron gives him $500. So Bill fixes the roof, and Ron pays him the $500.
At tax time Bill doesn’t want to pay taxes on that $500, so he asks Ron to agree to say that the $500 was a gift, because he doesn’t have to include gifts on his taxable income.
Faced with that set of facts, and they will never rule one or the other until AFTER they see the facts, the IRS will rule this was not a gift, it was earned compensation. Then if Bill disagrees, he can go to tax court and try and win (he won’t win in this case though).
This is why there is so much gray area in gifts, because it has been a classic ploy of folks trying to avoid paying taxes. Over the years and after many court rulings and IRS interpretations, about the best they can do to explain what qualifies as a gift and what doesn’t is that it when something of value is given from one entity to another with NO EXPECTATION OF ANYTHING IN VALUE in return. The above example fails because Ron gave Bill something of value ($500) but did so fully expecting something of value in return (a new/fixed roof).
Because of the numerous ways in which people have attempted to claim income as gifts, the IRS, as a policy, will usually not officially comment on whether something is or is not a gift until after someone claims something is a gift and they can then look at back at all the facts surrounding a particular “gift” and then will rule on that particular exchange only. If there are any facts or indicators that one or more persons are conspiring to have something be a gift solely for the purpose of avoiding income taxes, then that’s when they will take action.
In this case, where the intent of OWS is pretty clear, that they are doing this as a gift and are not expecting anything of value in return, I just don’t see and can’t imagine any circumstance where it would fail to meet IRS muster for gifts.
That said, all I’ve EVER commented on in this thread is the affects of these transactions on the PERSON RECEIVING the tax forgiveness. There is another type of tax that comes into play here that COULD affect what OWS is doing, but that would directly impact those doing the debt forgiveness, not those having their debt forgiven.
These potential tax affects could be very large, but I am simply not going to in any way whatsoever comment on that side of the transaction because that’s an entirely different tax with an entirely different set of issues (not the least of which is what type of entity is buying the debt and then forgiving it).
I am hoping that OWS has themselves looked at this issue in order to protect themselves, and I would URGE them to seek such advice from a PRIVATE, non-governmental, and trusted source. Because it is my opinion that the federal government would like nothing better than to find some way of bringing down OWS and that desire, coupled with the fact that the IRS can legally lie about hypothetical tax transactions it is asked about would lead me to look to a private, trusted source.
You do NOT want to get caught up in a shitstorm surrounding the Gift tax, because if you’re an individual it could destroy your ability to leave your future assets to loved ones tax free and as an organization or an individual because the tax rates get to the highest so quickly it could financially ruin you.
I also wanted to comment that there was an awful lot in that Yves Smith piece that I agreed with, not the least of which this whole thing (RJ) is not what I would consider the best idea OWS has ever come up with. It’s well meaning and because of that I wouldn’t say I completely disagree with it, but if I were charge of this I don’t think this is what I would’ve come up with.
In some ways I think it may actually legitimize what otherwise is illegitimate debts and some of the cans of worms it opens up really, really bother me. (For example, who decides which debt to buy and who to buy from and how might that be manipulated to someone’s advantage either as a potential receiver of tax forgiveness or an owner of packages of debt?). I’m just not a big fan of this idea, but wouldn’t suggest they’re wrong for doing it.
And finally, and MOST IMPORTANT, I mentioned above I USED TO BE an accountant. I have not practices, nor kept with continuing education to stay current with tax law, IN OVER A DECADE. I’m old and my memory is failing daily, and with all of that please don’t take ANYTHING I’ve said as truth, or being correct. Check with other sources please.
I should’ve never said a word to begin with but this has been troubling me every since I first heard of the RJ and then the rumors of “tax problems for the debtors” as I simply couldn’t come up with any real adverse consequences for the debtors themselves myself and was wondering what that was all about. So I tried to explain my opinion on the only consequences I could think of.
The bottom line is I think it was Chicagogal above that said it best, OWS should have an expert review this and ensure it’s not going to get them in any IRS hot water. I am not and cannot be that expert for reasons stated above. If they want to continue to do well meaning things to help people, they should check with a bona fide expert to ensure this little program doesn’t end up doing more harm than good.