Occupy Wall Street's Plan To Forgive Distressed Consumer Debt May Have A Tax Problem

Occupy Wall Street Rolling Jubillee

Occupy Wall Street spin-off Rolling Jubilee has received a good amount of attention in the last few weeks.

The plan, which involves crowd-sourcing funds to buy up distressed consumer debt, has earned praise from some — the Guardian’s Charles Eisenstien called it “brilliant”, for example.

But the fact is, the mechanics of distressed consumer debt (and how to buy consumer debt as a charitable venture), are murky and complicated.

Over at the Awl, Maria Bustillos has spent some time (and around 4,000 words) trying to get to the bottom of how Rolling Jubliee would actually work. While Bustillos findings aren’t completely negative (she admits she herself has given money to the cause), she does find that one issue that the movement appears to be unable to explain: Tax.

You see technically, forgiven debt could well be technically considered income, and if you have your debt forgiven, you may owe money on that “cancellation of debt income.”

Bustillos writes:

Then there are the tax problems. There is a not insignificant danger that the beneficiaries of the Rolling Jubilee’s largesse will wind up owing tax on the forgiven debt. I spoke with a number of accountants and tax attorneys, and not one of them was able to give a definitive answer to this question. It is true that IRS Form 4681 states quite clearly that “generally, you do not have income from canceled debt if the cancellation or forgiveness of the debt is a gift.” Another wrinkle: one accountant told me that there is a $13,000 limit to the amount one may receive as a gift; after that you might have to pay Gift Tax, apparently.

The Rolling Jubilee website claims unequivocally that they will not have to issue 1099-Cs, a form that would definitely raise the possibility of tax liability for Rolling Jubilee beneficiaries. One accountant told me that the tax liability might hinge on whether or not recipients were legally indigent; it might vary considerably from case to case.

Other experts seem more certain.

“There’s not any doubt about the tax outcome at all,” says one New York tax expert in a Bloomberg Businessweek article Bustillos cites. “That’s almost always the case with debt discharges—you wind up with this tax problem that almost always mitigates the benefit of the discharge.”

There does seem to be a chance that, as the action of forgiving the debt is a gift, it may not be subject to the same tax laws. This is how Rolling Jubilee’s FAQ’s explain it at least, and Felix Salmon seems to agree. Others don’t seem so sure — in an update to the Bloomberg article, two tax experts expressed varying (strong to absolute) doubt, and Megan McArdle of the Daily Beast sides with them.

Perhaps the biggest confusion here is that organisers of Rolling Jubilee have perhaps been less than helpful when explaining this factor. They apparently ignored a number of requests for an interview with Nick Summers, the Bloomberg writer, and Bustillos got a different type of evasion:

Had the IRS issued a letter to the Rolling Jubilee organisers letting their beneficiaries off the hook for this potential mess, it stands to reason they would have shown it to the press. When I asked Strike Debt organiser Ann Larson directly about the tax issue, she replied, “I’m withholding comment.” I was told that I’d be unable to speak with anyone on their legal team.

SEE ALSO: Occupy Wall Street Is Giving People Some Shady Financial Advice >

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