Last month, I criticized the well meaning but naive strategy of the Occupy Wall Street group Strike Debt for dealing with consumer debt, which is to buy severely discounted debt from debt collectors and forgive it. My main complaint was that there were more productive approaches, such as wider publicity and distribution of the Debt Resistors’ Operations Manual, providing more counseling and legal support to borrowers, and using debt purchases to develop cases against the debt sellers. By contrast, the Rolling Jubilee increases the profitability of bad system by providing more revenues to the incumbents, while the debt purchases are unlikely to do more than help a few random people. It might make for feel-good PR, but it won’t make a dent in the problem.
Perversely the post got pushback on the last (and by implication, the least important) issue raised, namely, that of possible tax problems with the scheme. I wanted to revisit this issue and demonstrate why the responses of allies and members of Strike Debt have failed to put the issue to rest, and more important, why this matters.
The short version is that Strike Debt maintains that there is no risk here, when as we will demonstrate, the outcome is not knowable at this juncture (yes, that is unsatisfying, but welcome to the world of tax). It’s possible that things will work out just fine for the Rolling Jubilee. But if not, the ramifications to Strike Debt and the borrowers whose debt was cancelled would be significant. Thus, to dismiss this very real possibility is irresponsible.
Tax issues are nerdy. You need to be prepared to read this entire post, carefully. Go get some coffee or a cola. I’m planning to box readers about the ears if they raise issues that were addressed in the post.
To review: normally, the cancellation of indebtedness is treated as income unless the party is in bankruptcy or can establish that they are insolvent. Strike Debt claims they do not need to issue 1099-Cs, the usually-required notification to the IRS that debt has been forgiven. They further claim that they have “double checked” with the IRS on this matter. In addition, Strike Debt is conducting its activities through a 501 (c)(4), which is a form of tax exempt organization (a “Civic League and Social Welfare Organization”). As we will also discuss, its debt forgiveness plan also appears to run afoul of the IRS’s published requirements for a 501 (c)(4).
Why the Tax Risk is Real, and Strike Debt’s Due Diligence is Inadequate
While the Rolling Jubilee site currently does not discuss the tax implications for borrowers whose debt has been forgiven, the Strike Debt scheme rests fundamentally on the idea that their cancellation of debt can be construed as a gift. (note that the site previously stated, “a project like this …will almost certainly have no effect on anyone’s taxes.”). Otherwise, borrowers will have to report the cancelled debt as income, which in many cases would require them to pay more in taxes. And this issue is binary: a transfer is either a gift or it is income.
It is important to understand that issue separate from whether Rolling Jubilee has an obligation to report to the IRS on debt cancellations (as in the borrower liability for taxes is independent of whether the income is reported).
It is also important to understand that this is a novel tax argument. Allies of Strike Debt claim the movement has “double checked” with IRS on the impact of their plan on debtors, but this statement is a sign of inadequate tax knowledge. The only type of reading from the IRS that can be relied upon is a written opinion, known as a ruling.