Attorney Robert Noggle has researched this question and found that the Indiana Court of Appeals in Leonard v. Old National Bank Corp. Nov 21, 2005, held that “bank’s filing of Form 1099-C in response to borrower’s bankruptcy proceeding did not operate to cancel debt.” The Court went on to say that the filing of Form 1099-C was “an informational return and was filed after an identifiable event, and bank did not intend to cancel debt by filing Form 1099-C, but rather was simply trying to follow IRS instructions, 26 U.S.C.A. § 6050P.” In the Discussion and Decision of the case, the Court stated that “Federal law requires every financial institution to send a copy of Form 1099-C to a debtor and to the IRS when discharging, in whole or in part, the indebtedness of any person, 26 U.S.C.A. § 6050P. The instructions published by the I.R.S. for filing Form 1099-C state the form must be filed after an “identifiable event,” which “includes, but is not limited to,” a discharge of debt in bankruptcy, an agreement between the creditor and debtor, and a cancellation or extinguishment of the debt by operation of law that makes the debt unenforceable. Form 1099-C instructs the debtor that the debtor must report the cancellation of the debt on its income tax returns. In conclusion,“the 1099-C does not cancel the debt in and of itself. Instead, it is a “clerical type filing to meet the requirements of the I.R.S. – It’s an informational thing after the fact of an identifiable event.”
Another case Attorney Robert Noggle found was in the U.S. Bankruptcy Court W.D. Pennsylvania. In re Stephen M. Zilka, Debtor, Eric Bononi, Trustee of the Bankruptcy Estate of Stephen Zilka, Movant v. Bayer Employees Fed. Credit Union, Respondent. No. 05-25205-MBM. July 16th, 2009. In a nutshell, “the Bankruptcy Court held that: (1) lender’s issuance of account statements to debtor-borrower, indicating that outstanding loan balance were $0.00 due to its its “charge off” of loans, was mere accounting procedure, that was not legal equivalent of its forgiveness of loans; (2) issuance of IRS forms was not in nature of “admission” that loans had been forgiven; (3) issuance of IRS forms did not itself operate to legally discharge debtor from further liability on loans.
Here’s an except from an article written by Attorney Brian G. Methner, Esq. December 2008. Methner and Associates, P.C. ” “The lender must issue a 1099-C if over $600 of the forgiven debt is discharged by the lender (26 U.S.C. § 6050P and IRS 2008 Instructions Form 1099 A-C) or a triggering event, as determined by the IRS, has occurred (26 C.F.R. § 1.6050P-2). Discharge of the debt precludes further collection activity, but a triggering event does not. A 1099-C may be required to be issued by your lender regardless of whether they plan on collecting in the future or not (Debt Buyers Association V. John W. Snow). Also, if your lender sends a 1099-C or specifies in the short sale documents that there will be a charge-off this does not mean they have discharged the debt. A charge-off may still be collected for applicable state and federal time periods. You, as an individual, must generally report income from forgiven debt (26 U.S.C. § 61(a)(12)). The 1099-C is sent to you and the IRS (Form 1099-C). The amount shown on the 1099-C in Box 2 is the amount you generally must include as gross income on your taxes (IRS Publication 908). You may request the Company not report the debt forgiveness as income on a 1099-C provided it is not taxable for such reasons as the debt is contested, the settlement is a non-taxable purchase price reduction, or you are insolvent. Your short sale contract should include a provision stating debt forgiveness should not be reported as income if it is not taxable and a follow-up letter should be sent stating the reasons the debt forgiveness is not income and that the letter itself serves to show that failure of the company to file the 1099-C ‘is due to reasonable cause and not to willful neglect’ (26 U.S.C. Section 6651).”