There was a recent debate on a message board I follow about whether, when stiffed by a client, an attorney can file Form 1099-C on the deadbeat.

The proponent of the tactic was strongly rebuked, as 1099-Cs are to be filed only by governments and applicable financial entities. See Section 6050P and the regs.

But IRS can file them, and does. One result is that they get shot down, as shown in my blogpost “Sunk By The Navy?”, 9/28/11.

And today we have another example in a small-claimer, Suzanne Moore Bacon, 2015 T. C. Sum. Op. 15, filed 3/2/15, from The Judge With A Heart, STJ Armen.

Suzanne is no angel; she claimed FEMA money from the Northridge CA earthquake for what she said was her primary residence, except FEMA later claimed it wasn’t and sent Sue dunning letters for two years. Sue did nothing, of course, so FEMA bucked Sue’s file to DOJ so they could sue Sue for the $3450 of unguided largesse, with a billet doux stating the date when the SOL ran.

You can imagine what DOJ did. And Sue did the same.

The 28USC§2415 six-year SOL clock had long since run down while DOJ was doing other stuff. Nothing daunted, IRS dropped a 1099-C on Sue for the $3450 plus interest (which she ignored), asserting that sending the 1099-C was the “identifiable event” that Section 6050P requires to establish uncollectibility and therefore cancellation of debt.

Nope, says STJ Armen. “The Court recognizes that, in general, the expiration of a period of limitations on collection of indebtedness does not extinguish an underlying debt obligation but simply provides an affirmative defense for the debtor in an action by the creditor. Miller Trust v. Commissioner, 76 T.C. 191, 195 (1981). This is confirmed by section 1.6050P-1(b)(2)(ii), Income Tax Regs. However, the instant case deals with the second clause of the subdivision, ‘expiration of a statutory period for filing a claim’. Sec. 1.6050P-1(b)(2)(i)(C), Income Tax Regs. That clause is not so limited.”

So, even though the theoretical right remains (without a legal remedy), the end of the remediation period extinguishes the debt for tax purposes.

And the SOL ran six years before IRS dropped the 1099-C on Sue. So no cancellation of debt in that year, and no deficiency.