Taxation & Estate Planning

The Cancellation of Indebtedness "Scam"

By Joel A. Schoenmeyer

Here's a (seemingly) new credit card company practice that looks like a scam:

A decedent dies in early 2007, and her estate goes through probate. The administrator discovers an outstanding credit card balance of about $17,000, and sends notice to the credit card company of decedent's death and the probate. (The administrator also asks for more information about the balance, as there's some evidence that the decedent's credit card may have been stolen prior to her death.)

In response to the administrator's questions, the credit card company does nothing. It files no claims against the estate and, as time passes, all claims against the estate become barred under Illinois law. The estate is closed in late 2008, and all is quiet.

Then, out of the blue, a form 1099-C for the year 2009 arrives in the administrator's mail. On it, the credit card company shows that it forgave indebtedness to the decedent in the amount of $17,000 on November 11, 2009.

A form 1099-C has two effects:

1. Generally speaking, debts that are forgiven are treated as income to the debtor. And the form 1099-C is sent to the IRS.

2. Forgiven debts can be deducted by the credit card company on their tax returns.

To me, it looks like the credit card company is running a scam. The credit card company knows that, because of its own incompetence, the debt is no longer valid under Illinois law. Yet the credit card company wants its deduction, so it pretends that the debt is valid. And the fact that an innocent estate has to pay -- by forking over the tax on the "income," or by hiring professionals to fight the tax -- is beside the point to them. This seems like the credit card company's modus operandi -- I've heard from other attorneys who encountered the same situation with the company.

Full post as published by Death and Taxes Blog on March 01, 2010 (boomark / email).