Can we accept payments after sending a customer a 1099-C cancellation of debt form? In 2017, after determining we were unlikely to collect anything more from a borrower who is a farmer, we issued the borrower a 1099-C, listing identifiable event code “G.” We recorded the debt as “charged off” but did not make any alterations to the face of note or surrender it to the borrower. Recently, we were notified by a grain elevator that it has a $9,000 check payable to the borrower and our bank. Assuming we have the right to deposit the check, may we credit these funds to the outstanding loan balance, including uncollected interest, collection costs, and attorney’s fees that were incurred prior to issuing the 1099-C?

In our view, accepting payment on this debt after issuing a 1099-C due to “identifiable event G” may expose your bank to a claim that it can no longer collect on the debt, in which case it would not be entitled to apply the check to the outstanding loan balance.

For debts exceeding $600, a creditor is required to issue a 1099-C when an “identifiable event” occurs, irrespective of whether “an actual discharge of indebtedness has occurred on or before the date on which the identifiable event has occurred.” The IRS regulations recognize seven identifiable events — for example, a discharge in bankruptcy, an expiration of the statute of limitations to collect a debt, and an agreement between a debtor and a creditor to extinguish a debt, among others. Identifiable event G is “a discharge of indebtedness pursuant to a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt.”

In 2015, an Illinois appellate court considered for the first time the effect of a creditor filing a 1099-C on a debtor’s subsequent liability for a debt. The court noted that while a majority of courts in other states have held that a 1099-C is not evidence of a creditor’s intent to discharge a debt, a minority of courts have held that filing a 1099-C creates a rebuttable presumption of a debtor’s intent to discharge a debt. The Illinois appellate court went further than the minority, holding that filing a 1099-C does more than create a rebuttable presumption of a creditor’s intent to discharge a debt; it requires the creditor who filed a 1099-C to prove that it did not discharge the debt. In other words, under the court’s reasoning, when a bank files a 1099-C form under identifiable event G, it is “representing and acknowledging” that an “outright discharge” has occurred as a matter of law, unless the bank can establish factually that it did not discharge the debt (a much higher standard than simply proving intent).

Here, under the Illinois appellate court’s ruling, your filing of the 1099-C under identifiable event G — which states on its face that the debt was discharged — creates a strong basis for a finding by an Illinois court that the debt was discharged, in which case your bank would not be entitled to collect on the check that was made payable to both the borrower and your bank.

Needless to say, however, this is a complicated question that is dependent on both facts and law, and we recommend reviewing this matter with your bank counsel.

For resources related to our guidance, please see:

Internal Revenue Code, 26 CFR 1.6050P-1(a) (“Except as provided in paragraph (d) of this section, any applicable entity (as defined in section 6050P(c)(1)) that discharges an indebtedness of any person (within the meaning of section 7701(a)(1)) of at least $600 during a calendar year must file an information return on Form 1099-C with the Internal Revenue Service. Solely for purposes of the reporting requirements of section 6050P and this section, a discharge of indebtedness is deemed to have occurred, except as provided in paragraph (b)(3) of this section, if and only if there has occurred an identifiable event described in paragraph (b)(2) of this section, whether or not an actual discharge of indebtedness has occurred on or before the date on which the identifiable event has occurred. . . .”)

Internal Revenue Code, 26 CFR 1.6050P-1(b)(2) (“Solely for purposes of this section, except as provided in paragraph (b)(3) of this section, indebtedness is discharged on the date of the occurrence of an identifiable event specified in paragraph (b)(2) of this section. (2) Identifiable events—(i) In general. An identifiable event is—

* * * * *

(G) A discharge of indebtedness pursuant to a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt.”)

In re Estate of Hofer, 42 N.E.3d 480, 486 (3rd Dist. 2015) (“The Cashion court noted that a small majority of cases have held that filing a Form 1099-C is prima facie evidence of a creditor’s intent to discharge a loan, thus shifting the burden of persuasion to ‘the creditor to proffer evidence that it was filed by mistake or pursuant to another triggering event in the regulations’ that does not amount to a discharge. . . . We are convinced that the filing of a Form 1099-C is more significant than just presenting a rebuttable presumption of a creditor’s intent to discharge the debt. We find support for the conviction in the regulatory language, stating that the form is filed ‘if and only if’ there has occurred an ‘identifiable event.’”)

In re Estate of Hofer, 42 N.E.3d 480, 486–487 (3rd Dist. 2015) (“[S]everal of the ‘identifiable events’ are tantamount to actual discharges of the debt under Illinois law. Of the eight events, three (A, F, and G) identify outright discharges. . . . When the Bank, in this case, filed the form, it was representing and acknowledging that at least one of those identifiable events had, in fact, occurred.”)

In re Estate of Hofer, 42 N.E.3d 480, 487 (3rd Dist. 2015) (“[T]he standard for summary judgment requires that [the creditor] prove which of the ‘identifiable events’ triggered its filing of the Form 1099-C and that it was not a discharge under Illinois law.”)

Monty Titling Trust 1 v. Grafft, 2017 WL 3105893 at *9 (2nd Dist. 2017) (“The Hofer court concluded that the issuance of a Form 1099-C by the creditor coupled with additional evidence that the creditor had ‘charged off’ the loan on its books created a genuine issue of fact as to the creditor’s right to collect the debt, thereby precluding entry of summary judgment.”)