Yet the IRS has always included the question of whether a transfer is a gift (and a cancellation of debt is a transfer) on their annual published list of questions on which it will not issue a ruling. Moreover, even if Rolling Jubilee had been able to get a ruling, a ruling is valid ONLY for the party requesting it. Thus Rolling Jubilee could not obtain a ruling as to the tax implications for borrowers; it can get rulings only regarding its own tax matters.
Thus whatever view Strike Debt got from the IRS on the gift question (I’d hazard from a phone rep) is irrelevant. The agents that answer the call center lines are not lawyers, have only 20 hours of training, and their job is to answer routine questions, like whether points on your mortgage are tax deductible, not novel and complex tax issues. Even so, they have been found to give incorrect answers 20% to 30% of the time on everyday tax matters (see here, here and here). Relying on bad tax advice from IRS does not relieve the taxpayer of the consequences, such as filing late, owing penalties or more tax.
The 2012 IRS “no ruling” list, (Section 3, item 10), concerns "gifts and inheritances" and the question of whether a transfer is a gift.
We need to underscore the basic problem: Strike Debt issue is an extraordinary question involving a rare intersection of incompatible rules. No one gives phone answers to complex questions like that, not just in the IRS but in general.
Sophisticated taxpayers get tax opinions from law firms with recognized expertise in tax matters, or ask for rulings from IRS (a non-starter here), or document their positions with heavily researched memos. Rolling Jubilee should get one of its sympathetic celebrites to write a check to a serious tax lawyer to take a proper look.
Now it may be that Strike Debt has confused the issue of whether it needs to file 1099-Cs with the question of borrower tax liability. Rolling Jubilee has this cheery language in its FAQ:
Will the Rolling Jubilee have to file a 1099-C Cancellation of Debt form with the IRS?
No. The Rolling Jubilee will earn no income from the lending of money and is therefore exempt from filing a Form 1099-C under the Internal Revenue Code Section 6050P.
As one tax attorney wrote:
Now, this isn’t the end of the story in my mind–the form is just a form, and the IRS is very clear on that same page that COD [cancellation of debt] income is owed even if no form is required, just like you still have to pay tax on income even if you (for various reasons) never got a 1099-DIV/INT/etc. In fact, if there is COD income but no form, I’d actually be *more* pissed at Strike Debt, because they imply (but do not legally state) that there is no COD income, thus leaving the COD cancellation recipients hanging in the wind when the IRS comes tapping on audit (the argument “I saw it on an Occupy website and that’s why I didn’t pay taxes” has exactly zero legal bearing on audit).
And the IRS does audit about 1% of the people making under $200,000 a year. (Their position on not being required to issue 1099-Cs is also debatable*, but that’s not germane to the thrust of this post).
There are at least two reasons why the transfer might be deemed to be income rather than a gift. The first is that Rolling Jubilee, by buying debt, is participating in a commercial activity. The second is that the IRS has very stringent notions of who proper recipients of gifts are. Middle class individuals are not seen by the IRS as proper recipients of charity.