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A victory for bitter ex-mothers-in-law everywhere

October 23, 2009

Unhappy business associates long ago began wielding 1099 forms as a weapon, as tax lawyer Peter Pappas attests:

I have seen many cases where a disgruntled ex-partner or creditor rifled off an erroneous 1099-C just to get the taxpayer audited by the IRS.

What works for bitter businessmen works for bitter domestic relationships. When a former son-in-law in Illinois failed to settle an asserted loan by his ex-mother-in-law to her satisfaction, she gave up on collecting but issued a 1099-C reporting the amount as debt forgiveness income.

Ex-Son-in-Law took it badly, and fought back. He sued Ex-Mom, claiming that because she wasn't required to issue a 1099-C, it was fraudulent for her to do so.

The judge noted that Ex-Mom was not in fact required to file:

The filing of information returns is governed by § 6050P of the Internal Revenue Code, which provides, in relevant part, that "[a]ny applicable entity which discharges (in whole or in part) the indebtedness of any person during any calendar year shall make a return. . . ." 26 U.S.C. § 6050P(a) An "applicable entity" is a governmental agency, a financial institution, or other organization in the business of lending money.

Ex-Mom isn't an "applicable entity," so Ex-Son said that not only was she not required to file, she was forbidden to, and the filing, even if accurate, was fraudulent. The court disagreed:

..the court holds that the filing of a Form 1099-C by someone other than an applicable entity is not fraudulent or actionable per se under § 7434; nothing in § 6050P or any other applicable provision of the IRC forbids the voluntary filing of a truthful and accurate Form 1099-C.

Ex-Mom isn't out of the woods yet. Ex-Son can still argue that the contents of the filing were fraudulent. But the mere filing of a 1099 by someone who doesn't have to isn't fraud.

While this is unfortunate for Ex-Son, it is clearly the right result. Businesses that have to issue gobs of 1099s face expensive penalties if they fail to issue all that they are supposed to, so they err on the side of issuing too many, rather than too few. Sound policy doesn't punish taxpayers for too much third party reporting. As the court pointed out, truly malicious reporting can still be punished.

Cite: Cavoto v. Hayes, USDC-ED IL, No. 1:08-cv-06957

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