The Tax Law Report: The U.S. Tax Court ruled that a taxpayer who proved a bona fide dispute with a creditor and who settled the dispute for less than the amount demanded by the creditor did not have discharge of indebtedness income with respect to the amount disputed and not paid.
“According to bank records, the taxpayers owed $8,042.10 to CitiFinancial and $2,875 to Chase. However, they disputed amounts owed. CitiFinancial agreed to settle the debt for $7,500 and Chase agreed to settle the debt for $1,000. Both banks issued 1099-C’s to the taxpayer for the difference between the settlement amount and the original amount of the debt. The IRS asserts that the taxpayers should recognize cancellation of debt (COD) income for this difference. . . . Here, the taxpayers provided ‘evidence [that] supports a conclusion that a bona fide dispute existed regarding . . . the debt . . . .’ The amount of the taxpayer’s debt ‘that was definite and liquidated’ was $7,549.66 and $1,000 for CitiFinancial and Chase respectively. Therefore, the taxpayer does not have cancellation of indebtedness income from Chase. But they do have $49.66 of cancellation of indebtedness income from CitiFinancial.”