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Cancellation of Credit Card Debt Results in Cancellation of Indebtedness Of Income And Is Taxable As Ordinary Income

Credit Card DebtA taxpayer had a Mastercard and a Visa. The Visa account balance was transferred to his Mastercard account in April, 1996. The taxpayer sent a check for $1,000, a copy of his May, 1996 statement, and a request to verify that his balance was $29,837.91. Also, in 1996, he obtained a $1,200 cash advance against his Mastercard.

Between July 1996 and September 1997, he made payments totaling $4,250. In September 1997, he contested finance charges posted to his account. In October, he cease making payments and told the credit card company he might resume payment when a dispute of the charges was resolved.

In 1998 he and the credit card company settled for $12,700. The credit card company sent the taxpayer and the IRS a Form 1099-C, Cancellation of Debt, reporting discharge of indebtedness income of $19,866.70. The taxpayer returned the Form 1099-C to the credit card company with a letter saying there never was a forgiveness of anything, but rather a compromise of a claim.

The taxpayer attached a statement to his 1998 return saying the cancellation of indebtedness income on the Form 1099-C was in error and should have been characterized as a compromise of doubtful and disputed claim. The IRS concluded that the taxpayer received cancellation of indebtedness income in 1998.

The Tax Court noted that there is no indication that the settlement with the credit card company was based on the taxpayer’s inability to pay, and he had denied being insolvent.

The taxpayer’s June 1996 balance was $28,837.61, he also had charges of $1,210 for the cash advance, and he made payments totaling $4,250 and a final payment of $12,700. Thus, the net uncontested liquidated balance that should be the amount of cancellation of indebtedness income is $13,097.61. (Geore W. Earnshaw, T.C. Memo, 2002-191)

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