If I gave a random person with troubling debt some money, because I’m rich and that’s what I like to do and my motivation was love kindness and charity, then I don’t issue a 1099 and the recipient doesn’t recognize taxable income.

If a previously-established charity gave people in financial distress money, they don’t issue a 1099 and the recipient doesn’t have taxable income.

If RJ gives people in financial distress money, they don’t issue a 1099 and the recipient doesn’t have taxable income.

If RJ has an asset, and gives that asset to a person in financial distress , then RJ doesn’t issue a 1099 (for the FMV of that asset) and the recipient doesn’t have taxable income on the FMV of that asset.

Which one of those bothers you, and which not?

“felixsalmon @asymmetricinfo What happens if all the amounts forgiven are less than $13k? Then does the problem go away?”

Gift tax is payable (by the DONOR) on all gifts to a single donee in excess of $13/14k per year by a single donor. Single-year gifts of less than this amount are home free IF, IF, IF – the IRS accepts that the transactions are truly “gifts”, not the commercial write-off of debt. If they don’t – the whole load is taxable to the donee as income. It’s the IRS’s call on the characterization question – unless the Congress or the USSC decide to overrule IRS. (Kind of ‘Twilight Zone’ stuff to imagine an OWS-type lawyer arguing a tax case to the USSC.)

IMO OWS should operate this thing as a Not-For-Profit business, collecting something more than cost from debtors who want to clear their records, the mark-up to cover losses on those who can’t or won’t contribute. Good for the program and better for OWS types – they need to learn some things about business reality; this would do that.

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That is the 95 tax loss you complain about.

No different than the same tax loss incurred from a bank selling the debt to a real debt collector for 5.

I understand that there is a moral/fairness issue here of why should someone who knowingly took on debt just getting it wiped out. And I’m 100% positive that some of the debt wiped out by RJ will be for people who don’t deserve the break, will just run up more debt, etc. But if you look at the reasons most people have debts like this, it’s really not all welfare queens who bought flat screen TVs on credit. Its mostly unpaid medical bills from someone who got sick and got hit with massive expenses they can’t pay, people who made a mistake and got pushed deeper and deeper into debt by a system can easily turn a missed payment into fees multiple times higher than the original amount, etc.

I think it’s OK to say, you know what, things are pretty heavily stacked against the little guy in this country. We routinely let large powerful individuals and institutions get away with stuff in terms of the common good. Here’s a way to do that for individuals and pretty much zero cost to anyone except the people who voluntarily give their money. I’m OK with the fact that somewhere, someone who I don’t approve of will get a small break.

If it’s the former, this is a debate about legal facts, but you are offering up nothing to support your contention. If it’s the latter, you at least have an argument. But then you should be explaining why you think the laws as written are a scam and not just throwing around accusations. If it’s OK to wipe out debt under bankruptcy, why is it not OK when it is done as charity?

If I gave someone a bond of a troubled company with a notional amount of $100,000, which was trading at $25,000 on the open market due to the likelihood of bankruptcy, did I give them $100,000 or $25,000? I gave them $25,000, regardless of the number of zeros on the debenture.

@streeteye: the tax code says the government doesn’t get a slice of the economic transaction on an INCOME TAX basis if it is motivated by love, kindness or charity, with nothing expected in return. The tax code separately says that in an ESTATE TAX context, gifts from one family member to another are likely to be more for inter-generational estate tax planning purposes, and limits the non-estate-taxable amount of those transfers. But even in that context, there are no income tax effects resulting from that gift.

A company making an economic decision to not bother collecting on a debt is not motivated by kindness, love or charity, and because the underlying economics of the transaction are different, the tax treatment is different.

Financial institutions are not allowed to do this. It appears (with some debate) that a person or entity who is not in the business of lending or trying to profit from lending is allowed to do this. If this is a correct interpretation of the law, it isn’t “fraud”, it’s just the law. If you don’t think that’s fair, fine, argue the law should be changed.

I sure as heck don’t want to contribute to Social Security *AND* be forced to burn another 10% on top of that on a new questionable government program. That could seriously hamper my retirement savings.

So the “gift” is of the entire debt amount. I don’t think the price they paid to acquire the debt is relevant. I think the only relevant question is can a third party acquire and then gift the debt away.