Nor would winning on the gift question save it from running afoul of the private benefit question. A transfer without consideration to a private individual who is not poor or distressed is a private benefit. The IRS recently revoked the exemption of an organization that provided down payment assistance because it did not restrict those gifts to lower-income buyers. If it were to lose its 501 (c)(4) status, Rolling Jubilee would owe additional taxes and penalties.
What Would the Consequences Be if Rolling Jubilee Loses Its Tax Argument?
If Rolling Jubilee’s tax position is incorrect, the consequences would be ugly. In many cases, the people it claimed it was helping would be worse off than if it had done nothing.
The forgiven debt would be treated as taxable income. If the individual is a non-taxpayer (as in has too little income) the debt forgiveness could push them into owning taxes, and for anyone who was a taxpayer in the year the debt was forgiven, would result in additional taxes owed.
The worst of this is that in many cases, the debt forgiven by OWS would be invalid debt: past the statute of limitations, discharged in bankruptcy, disputed, paid off but for some reason not removed from a bank’s systems. In these cases, if Rolling Jubilee’s tax view turns out to be incorrect, the borrower will be considerably worse off, since he could have disputed the invalid debt (and debt collectors tend to roll easily) but will now have to disprove the validity of the debt to the IRS. The result is that this shifts the burden of proof: in debt collection matters, the burden of proof is on the plaintiff, the debt collector, to demonstrate the validity of the debt and the amount owed. In disputes with the IRS, the burden of proof is with the taxpayer.
In addition, even if Strike Debt is correct in its gift argument, it would in some cases owe gift taxes. It does not appear prepared for this eventuality. Nor would winning on the gift question save it from running afoul of the private benefit question. Even a gift to an individual is a private benefit. If it were to lose its 501 (c)(4) status, Rolling Jubilee would owe additional taxes and penalties.
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What has been most disturbing about bring up these issues is the defensive, even angry, reactions to raising legitimate questions about the tax issues. What Strike Debt is doing is analogous to someone who has found a chemical that kills cancer cells in a petri dish. Rather than do animal studies, or even do a lit search on whether this compound is toxic, they’ve proposed to go directly to putting it in the water of individuals who have neither been informed of nor given their consent to this procedure.
The previous post was analogous to saying there don’t seem to be any human studies on this particular compound, but similar compounds have caused adverse reactions. Rather than do further research or get patient/borrower consent, or hold a reserve for tax litigation and paying the taxes of adversely affected borrowers, Strike Debt’s allies instead are shooting the messengers.
This attitude is shocking. This OWS scheme has the potential to make the people it says it wants to help worse off than if it had done nothing. As discussed longer form in the earlier post, it has other courses of action open to it that would help them combat predatory debt collectors with no downside risk. Nor does it appear to be doing any contingency planning for possible adverse outcomes. But rather than do the responsible thing, undertake a proper investigation, and make course corrections if needed, Strike Debt appears more concerned about preserving its image with its celebrity backers than the welfare of debtors it says it wants to help.