Top Tax Expert Confirms Our Doubts About Occupy Wall Street’s Debt Buying/Forgiveness Scheme

As readers may recall, we expressed serious reservations about the tax consequences of a program launched by Strike Debt, an Occupy Wall Street working group, to buy distressed consumer debt from debt collectors and forgive it. These concerns have been confirmed by a top tax expert, Lee Sheppard. Sheppard not only describes how the scheme has the potential to harm the borrowers that Strike Debt wants to help, but also points out how their initiative runs afoul of IRS rules for not for profits.*

Sheppard is a heavyweight in her field. Her bio at Forbes states:

Sheppard is one of the most widely read and respected tax commentators in the world. She has been a mainstay of Tax Analysts’ publications for 30 years. Trained as a lawyer, Sheppard specializes in cutting-edge financial issues, such as derivatives and hedge funds, and taxation of multinational corporations. She is frequently asked to speak on tax subjects. She has appeared on television shows such as 60 Minutes and Frontline, as well as in the documentary We’re Not Broke. Tax Analysts, the publisher of Tax Notes and related publications, is a nonprofit publisher that provides the latest and most in-depth tax information worldwide.

While Strike Debt’s plan, called Rolling Jubilee, sounds like a clever way to help debt overburdened consumers, upon inspection it looks more like a gimmick, since Strike Debt concedes it will be able to provide relief only to a small number of people. And in case you hoped that the project was using these purchases as a foundation to publicize the issue of consumer debt slavery, the Rolling Jubilee website proclaims that 100% of the proceeds of its fundraising will be used for debt purchases, which means no money will be spent on PR and lobbying.

As for the tax issues, we’ll recap our concerns, turn to Sheppard’s analysis, and discuss Strike Debt’s response.

Strike Debt’s Tax Problems

Strike Debt has two potential problems with its program. The first is that borrowers it is trying to help be liable for taxes and thus could wind up worse off than if Strike Debt did nothing. The second it that Strike Debt itself may be liable for failing to comply with the requirements of the type of not for profit it has elected to use, a 501 (c)(4). We’ve discussed these issues at much greater length, including extracts of IRS rules and discussions of case law, in two previous posts (see here and here)

The possible problem for borrowers is due to the fact that forgiveness of debt is taxable income to the borrower and the party writing off the debt is required to notify the IRS. Strike Debt cheerily claims that they can treat the forgiveness as a gift. A gift (up to $13,000 per donee per year) is not income to the recipient and if the transfer is indeed a gift, Strike Debt would not be obligated to report the forgiveness of debt to the IRS.

It is important to understand that this is a novel tax position. We discussed earlier at some length why this is grey and the outcome can’t be determined at this juncture. Even though a generous act of buying and writing off debt seems like a gift, intuition and tax law often don’t match.

The IRS’s discussion of gift treatment stresses that “there will not be any gift exception in a commercial context.” Debt buying is a commercial activity, and Strike Debt’s argument that it has no profit motive may not be sufficient to win it gift treatment, particularly in light of other rulings and case law in this area, some of which we cited in past posts.

And Strike Debt can’t get this question sorted out now; the IRS publishes a list every year of issues on which it will not issue a ruling, and whether a particular transfer is a gift is one of them. In addition, the IRS is much less generous in its view of who is a suitable recipient of charity than the public at large might be. People earning middle class incomes are not considered to be a “charitable class”, no matter how much difficulty they are having in paying their bills. Our understanding is that Strike Debt is making no effort to ascertain the income level of individuals whose debt it is buying.

The way Strike Debt is using a not for profit organization looks even dicier. As we noted earlier:

Rolling Jubilee is using a 501 (c)(4), which is a form of tax exempt organization used for “social welfare” purposes, which can include lobbying and political activities as long as they are primarily for the promotion of social welfare. However, the debt buying scheme appears to run afoul of the “private benefit” rule. From the IRS discussion of 501 (c)(4)s:

To qualify for exemption under section 501(c)(4), the organization’s net earnings must be devoted only to charitable, educational, or recreational purposes. In addition, no part of the organization’s net earnings can inure to the benefit of any private shareholder or individual.

Forgiving someone’s debt could be a violation of the private benefit rule.

Sheppard’s “Occupy Wall Street’s Santa Problem” Article

Sheppard confirms that Strike Debt’s tax position is risky. From her article in Forbes:

Ironically, the very aspect of the Rolling Jubilee project that is most charming to its proponents and the public—forgiving the debt of a lucky few—makes it problematic from a tax perspective. First, the tax law says that debt forgiveness by a creditor is income to the debtor in the amount of the principal forgiven.

There are some specific exceptions to this rule, such as the one recently enacted for forgiveness of residential mortgage debt, which expires at the end of this year (section 108(a)(1)(E)). Congress did not create an exception for gifts by creditors. Exceptions to cancellation of indebtedness income are narrowly construed—taxpayers don’t get to create their own exceptions by popular will.

Oh, but it’s a gift! Rolling Jubilee appears to be working on the premise that a creditor acting in an economically irrational way and wrapping forgiveness letters up in a bow establishes donative intent.

A gift would absolve the debtor from debt cancellation income. Gifts are excluded from income (section 102). But there is a presumption that a creditor will act like a creditor. When Rolling Jubilee purchases debt, it is stepping into the shoes of the creditor. So the organization has the burden of proving that debt forgiveness is a gift.

Sheppard also confirms our concerns about the IRS not seeing middle class borrowers as a charitable class, and raises more flags about Strike Debt’s use of a 501 (c)(4):

Section 501(c)(4) social welfare organizations are required to be operated exclusively for the promotion of social welfare. Giving big gifts of debt forgiveness to a few people is not consistent with the purpose of the exemption. It is not enough that the organization be operated as a nonprofit.

A social welfare organization must be operated to benefit a community, not a select group of individuals. Credit counseling services can qualify because they hold themselves open to all debtors needing assistance (Rev. Rul. 65-299).

Certainly overindebted middle class Americans constitute a broad class of people. But this class is not a charitable one and this group is not a community.

The Rolling Jubilee Fund by its own admission can only forgive the debts of a few. Its purpose is more symbolic than substantive in clearing out the huge backlog of debt—as one proponent noted, to start a conversation about debt.

Section 501(c)(4)(B) explicitly prohibits monetary benefits to any private shareholder or individual. It refers to “net earnings.” The net earnings of a debt purchaser would be the difference between the purchase price of the debts and the collectible amount. If Rolling Jubilee forgives one person’s debt, it has transferred its potential earnings on that item of debt to a private individual.

In other words, Houston, we have a problem.

Strike Debt’s Sort of Response

After we had published our concerns, we were told Strike Debt would issue a rebuttal. We’re not aware of any such discussion having been released. The closest we’ve seen is some remarks in a Village Voice article last week which announced that Strike Debt had mailed its first debt forgiveness letters. The article mentions that the initiative had spent $5,000 buying $100,000 of medical debt owed by 44 individuals. That means the average amount of indebtedness was $2,273. The good news is that if any of these individuals were to have the debt relief characterized as income, we aren’t talking about large tax liabilities (although if the people receiving relief are indeed in financial difficulty, even a few hundred dollars of extra taxes owed could be burdensome). The bad news is this is also not much in the way of debt relief.

Here is are the remarks from the unnamed advisor to Strike Debt on tax issues:

“I’m a little mystified by the critiques based on the tax implications,” says the tax lawyer who has been advising Strike Debt. (The lawyer works in the tax department at a top international law firm — her employer knows she is advising Strike Debt, but doesn’t want its name attached to the project.)

The tax lawyer dismisses the concern that the Rolling Jubilee is engaged in commercial activity: “It doesn’t make a great deal of sense to me,” she said. “When Habitat for Humanity is helping people build houses, someone still has to buy the lumber. It doesn’t change their tax status. The critical thing is that this is a not-for-profit organization, and it’s not engaged in trying to make money.”

Furthermore, the lawyer says, recipients don’t have to be poor to receive tax-free debt forgiveness. “This is focused on medical debt,” she says, “and people with health problems can be categorized as distressed. You don’t need to show that they’re impoverished.”

Note the logic is a bit circular: we are organized as a not-for-profit, ergo since we are not trying to make money, of course what we are doing is charitable. That doesn’t wash. Using the same reasoning, you could create a hospital that did plastic surgery for celebrities and claim it was a valid not for profit because it was not engaged in trying to make money because it has set its fees to cover all its costs and not have anything left over, and would send patients refund checks if it did. The IRS has specific notions of what constitutes charity and what constitutes social welfare. Rolling Jubilee’s activities need to conform to them. It does not appear that they do.

Specifically, the unnamed lawyer does not engage the “debt buying as commercial activity” argument. When borrowers get in distress and seek a resolution with their lender, they negotiate a restructuring or writedown. The loan remains with the original lender. I challenge Strike Debt to find previous instances of parties other than financial institutions, investors and debt collectors buying consumer debt. This is not at all analogous to housing, which is a basic human need and families, communities, and charities have a long history of providing assistance to the less fortunate in this arena.

The attorney argues that the borrowers in question are proper recipients of charity because the debt is medical debt and the borrowers are having health problems and therefore distressed. “Distressed” in the IRS’s eyes is distinct from poor (although the two often overlap) and distressed individuals are also valid candidates for charity. However, the IRS has a disquisition on its regulations and case law in this area. And it’s hard to see that the Strike Debt medical debt notion fits:

The term “distressed” generally is not equated with “poor.” The former term is used in revenue rulings dealing with emergency situations and with the elderly.

There is no mention of medical emergencies in the subsequent discussion. Furthermore, the typical amount of debt for which Strike Debt is seeking relief is not consistent with a health emergency (such as an accident or unexpected surgery) where the amounts charged would typically be much larger, or with a chronic health problem. You can rack up $1000-$3000 easily seeing a specialist and getting some tests and still get a clean or not all that bad bill of health, or in diagnosing and treating a not-serious ailment. Furthermore, as we discussed at some length in early posts, these debts may be junk debts: discharged in bankruptcy, disputed, past the statute of limitations, which would again mean that the borrower may not be under any kind of financial stress now. The failure of Strike Debt to ascertain the circumstances of the individuals whose debt is it forgiving increases the odds that it will have trouble if the IRS takes interest.

Now there may be other ways for Strike Debt to achieve its ends without running this level of tax risk for borrowers and itself. Bankruptcy attorney masaccio suggested one earlier this month:

[If the debtor has defenses to the indebtedness] Rolling Jubilee and the debtor can enter into a settlement agreement in which both sides release each other from all claims. In that situation, there is no debt forgiveness. Instead, each side gives consideration to the other to avoid litigation and serious loss. The situation can be improved if the debtor provides a statement of assets and liabilities and a budget showing that collection of the amount owed is highly unlikely. It is further improved if the debtor pays something towards the debt. That money can be used by Rolling Jubilee to offset the expenses of reaching out and settling, or even to buy more debt.

So far, Strike Debt has chosen to ignore the issues we’ve raised. Sheppard’s article confirms that the risks Strike Debt is running is real. The onus is on them to substantiate their reasoning, or better yet, revise their approach, since their statements so far are unpersuasive.

What is most distressing is that Strike Debt seems unconcerned about the idea that they could wind up hurting the people they profess they want to help to make a political point, and that they’ve put them at risk without getting their consent. We don’t need that from Occupy Wall Street. We have already have two parties for that sort of thing.


* Strike Debt is using a 501 (c)(4) and correctly tells donors that their contributions are not tax deductible, so any IRS action would not affect people who have donated to the program. However, losing its tax exempt designation would expose the program, Rolling Jubilee, to taxation.

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    1. Yves Smith Post author

      I am told by a tax expert “Indulgence toward business side is sadly normal.” The IRS did not enforce REMIC because it did not knowing about the issue, this was a choice not to blow up the mortgage industrial system. No such impediments exist here.

      Look, I am not saying the IRS WILL go after this issue, but it could, and the consequences to the people Strike Debt is trying to help would be bad. There are other ways to approach this issue, but rather than do the responsible thing and adjust course, Strike Debt appears to be handwaving instead. How charitable or public spirited is that? Their collective ego is apparently more important than doing the right thing.

        1. Yves Smith Post author

          You apparently didn’t bother reading the post, so I see no reason to spoon feed someone who cops a ‘tude without justification. There is a specific one in this post, and the previous posts, which are linked to in this one, suggested other approaches to this issue.

      1. Nathanael

        Here’s an important point, Yves: the Strike Debt activities are not actually *causing* tax bills for *anyone*.

        If the debts are written off as uncollectible, the exact same IRS law on “constructive income” applies.

        1. Yves Smith Post author

          If the debt is being traded, it has not been written off. The seller and a non-Strike Debt buyer, who presumably would also pay for it, is still treating it as collectable.

    2. Nathanael

      This “tax expert” is bloviating. I’m not even sure why Yves published this.

      If the IRS wants to go after Occupy Wall Street, or after random debtors, for something perfectly legal, why of course it can. The IRS has a record of harassing people for doing perfectly legal things.

      There is nothing anyone can do about that.

      However, the debt forgiveness is clearly a gift under the tax laws, and it is clearly a charitable activity, and it clearly doesn’t violate the “personal benefit to shareholder” rule (the phrasing of that indicates that it is supposed to be about persons with a conflict of interest).

      If the IRS chooses to take a frivolous legal position, it can. If frivolous right-wing judges choose to support the frivolous legal position, well, then it’s over to the court of public opinion.

      But that’s life. The IRS could just as well go after anyone for anything.

      1. Nathanael

        Here’s another way to put this.

        Most tax experts are hired to tell you “how to not get hassled by the IRS”, not “what the law is”. This fellow Lee Sheppard seems to be typical.

        At this point, that’s not the right question, and that’s not how Strike Debt should approach things.

        If the IRS is hassling bankrupt people and hassling a charity which helps them out, the next step is the media. Public opinion wins in the long run every time.

        1. Yves Smith Post author

          The IRS goes after charities all the time. You are wildly naive. Tax collectors are never popular and the IRS has never cared about media coverage.

          And you also fail on reading comprehension. Lee Sheppard is female, as indicated.

          And the IRS private benefit rule is well known. Strike Debt looks to be running afoul of that not for profit requirement. And its position on gifts is risky.

          Strike Debt may be putting borrowers in harms’ way without their consent, and you shoot the messenger. Charming.

          Your entire comment is ad hominem. You don’t have the goods and she does.

        2. RepubAnon

          Why not simply do it the simple way: via a settlement agreement? There are always defences to these collection actions – and this way, the risk of tax liability is minimized. As noted in the article above:

          [If the debtor has defenses to the indebtedness] Rolling Jubilee and the debtor can enter into a settlement agreement in which both sides release each other from all claims. In that situation, there is no debt forgiveness. Instead, each side gives consideration to the other to avoid litigation and serious loss.

  1. Eric Patton

    Regardless of who or what Occupy was, who and what is it now? Who runs it? Who funds it? Where do they get their money? Who’s making the decisions? Where are they based? Do they have offices? Who signed the relevant documents? Do they file tax returns? Do they track financial information in bookkeeping software? What does that information say? Who’s authorized to make decisions for them? Where do they get their money from?

    1. from Mexico

      I certainly don’t know the answers to your questions, but they are questions worth asking and questions that must be asked continuously. As Scott Noble warned:

      There are several predictable techniques used by the powerful to destroy movements for positive change. One is propaganda. Another is brute force. Another is co-optation by the establishment. Another is Counter-Intelligence, including “dirty tricks”. All of these are interlinked and feed off each other.

      The first goal is to divide and conquer the movement. You can already see this happening with Occupy, especially as the election season heats up. Writing in The American Prospect, Sally Kohn suggests that Occupy will soon break up into factions: “radicals” and “anarchists” will be marginalized (even though “radicals” and “anarchists” started the movement), while everyone else will go “mainstream”. She seems to think this is a good idea. But look closer.

      PR Watch published a fascinating communiqué by Ron Duchin, who served as president of Mongoven, Biscoe & Duchin (MDB,) a Washington D.C. public affairs firm specializing “in issues management and the motivation behind activist movements.”

      Duchin graduated from the US Army War College and served as special assistant to the Secretary of Defense. He is listed in the Association of Former Intelligence Officers.

      “In 1991 he gave a speech to the US National Cattlemen’s Association describing how MBD works to divide and conquer activist movements. Duchin claims that activists fall into four categories: radicals, opportunists, idealists and realists, and that a three-step strategy was needed to bring them down.

      “FIRST, YOU ISOLATE THE RADICALS – those who want to change the system and promote social justice. “Second, you carefully ‘cultivate’ the idealists: those who are altruistic, don’t stand to gain from their activism, and are not as extreme in their methods and objectives as the radicals. You do this by gently persuading them that their advocacy has negative consequences for some groups, thus transforming them into realists.”

      “Finally, you co-opt the realists (the pragmatic incrementalists willing to work within the system) into compromise.”

      1. Dan Kervick

        It seems to me the more important conflict occurring with Occupy will be between the tension between anarchists and socialists, not between “radicals” and “mainstream”. The anarchists are driven by an ideal of laissez faire voluntarism and decentralization that is only interested in replacing currently existing capitalist market structures with a lot of simplified localist free market structures. All it represents is the classic anti-authoritarianism of American culture by which capitalism harnesses the spirit of rebellion and the desire to be “free to choose” to creatively regenerate itself.

        But there are others in Occupy who seem to have a clearer view of history and human nature, and recognize the fact that inequality, exploitation, instability and persistent unemployment and subordination are the natural results of the laissez faire approach to life.

        1. Charles LeSeau

          I don’t claim to speak for them because I’m no anarchist, anarchocapitalist, or anarchosyndicalist, and – perhaps more importantly – I have rather sadly never spoken with an Occupy person at all, but I think the idea is that if politics are kept at a local community level, complaints about them can be kept local too and thus under some sort of “you’re in my town, so you should fear taking too much power or exploiting me or my friends” harness (unlike “you’re 2000 miles away, rule every aspect of my citizenship and hundreds of millions of others, and are not even approachable in the town in which you reside”), but I agree it seems to reduce to something like just a miniaturized “states rights” libertarian view, or perhaps “citystates rights” is more apt. Didn’t work out so hot for the Greeks, or later the Italians, at any rate.

          I do wish the simple question of limiting individual power and land ownership would creep into the national dialogue though, but that’s truly a taboo subject.

          1. rotter

            well limiting individual power is not what “anarcho” crypto-libertarians are all about…talk about cooption. how can politics be “kept local” with respect to global warming? with nuclear weapons? its an absurdity to treat the idea seriously.

          2. LifelongLib

            Yes, in the absence of big government, who’s going to tell George Wallace to get out of the schoolhouse door, much less the Russians to get their missiles out of Cuba? *

            * [Taking both events at face value for the sake of example; I realize there was more to them…]

          3. LifelongLib

            Re the linked article, it touches on something I’ve seen myself, that many small-business people seem to feel their interests are more aligned with Wall Street than with the people driving the trucks. Part of the problem is that higher wages/taxes appear immediately on the balance sheet, while the lack of customers (caused by lower wages and less government services) isn’t as obvious. The small-business people I know don’t recognize that (in aggregate at least) the same workers they’re paying as little as possible are the ones they want to come through the door as customers and spend as much as possible.

        2. Ruben

          “But there are others in Occupy who seem to have a clearer view of history and human nature, and recognize the fact that inequality, exploitation, instability and persistent unemployment and subordination are the natural results of the laissez faire approach to life.”

          You have a view of human nature that is consistent with anarchism, although you don’t realize it, for if inequality and exploitation are intrinsic to human nature, then the State will always evolve into a exploitative and inequality-making machine, as in fact does. In other words, a negative view of human nature such as yours entails that the privileged law-making positions of the State will be taken over by the bad guys.

          1. LifelongLib

            Aren’t all sizes of State vulnerable to that though, in fact the smaller ones more so?

            In the absence of a State, how do we settle disputes between individuals? Gunfights? What happens to people who need help that nobody else in the area can or will assist? Do they die? What about problems that can only be addressed on a large scale? Who does that?

            I can take your point about the bad aspects of States, but whatever replaces them will have replicate the good things that States do. How does it do that without (potentially) also doing the bad things?

          2. Lambert Strether

            Federalist 51:

            If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.

            This policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public. We see it particularly displayed in all the subordinate distributions of power, where the constant aim is to divide and arrange the several offices in such a manner as that each may be a check on the other — that the private interest of every individual may be a sentinel over the public rights. These inventions of prudence cannot be less requisite in the distribution of the supreme powers of the State.

          3. Ruben

            To LifelongLib:
            That’s a long bunch of question you pose there man. As Pierre de Fermat would say “to long to answer on the margins of this book”. But I got to tell you this: The State is a magnifier, agrandizement is its business, it turns murder into war, robbery into tax, vanity into patronizing, it has built the Hubble space telescope and it has dropped the A-bombs frying little japanese children, unleashing Operation Barbarossa, and so on. Private people would help private people, it’s cooperation, and it has been aroung a lot longer than the State, it arises naturally, as so many papers written by smart scientists are showing as of late.

            To Lambert Strether:
            How is that checks and balances democratic utopia working out for you man, considering all the bitching about your gov’t, the Police State is here with us, the drones and bail-outs, being posted in those fine blogs all day long? Looks to me, man, got to tell you, it aint fuc*ing working as advertised uh? Seems to me, your Federalist 51 piece means no sh*t no more. How about stopping dreaming about social utopias, and let nature takes it course?

        3. John Drinkwater

          This is nonsense. The anarchists in the Occupy movement *are* socialists. Anarchism was always an offshoot of the socialist movement, and unless you’ve read nothing about the history of the socialist movement, you’d know this. The distinction you may have in mind is one between libertarian socialists (aka anarchists) and state socialists. The latter may want to re-organize Occupy in a top-down fashion, ala a typical trade union or even along marxist-leninist lines. This is a whole separate debate. Just don’t insult the memory of anarchism by accusing it of being pro-capitalist. The “anarcho-capitalist” stuff didn’t begin until the 1950s; these are right-wingers, none of whom participate in Occupy. Since they believe in private land ownership and a police state to protect their land, they are anything but “anarchists” anyway.

          1. Ruben

            You got that right mister! What is socialism anyways? The means of production belonging to society or _to the workers themselves_. So an economy of individualist producers is at the same time anarchist and socialist, and it’s a private stateless market oriented economy. But don’t be rude to our brothers the anarcho-capitalists. As I figured long time ago, I’d do business with the anarch-caps, but I’d spend the weekends and vacations with the anarcho-communists, enjoying the communal thing in the means of goofing around. Long live Benjamin Tucker, the most outstanding American thinker! You rule Ben!

    2. Paul Tioxon

      None dare call it Conspiracy? Or, can you just take the time to look up their corporate filings yrself and spare me the hysterics.

    3. Yves Smith Post author

      There is not one “Occupy Wall Street”. There are a number of working groups operating under the OWS banner. This is one, Strike Debt.

      They claim they are offering “full transparency” regarding the spending of their funds, but I don’t see any disclosures yet. To offer the transparency they aspire to, one would assume they are keeping careful tabs on the money. But I can’t prove that.

      1. Nathanael

        The lack of transparency is much more worrisome than any putative tax issues.

        Without transparency, they’re hosed.

  2. OregonChris

    I like Masacio’s solution but have some concern that reaching out to settle these debts could be considered collection activity exposing rolling jubilee to FDCPA liability. Why not just sit on the debt for 10 or however many years until the statute of limitations has lapsed? Simply do nothing with it. Then when they write it off its not forgiveness because by then it is completely uncollectable anyways.

    This would also seem less onerous than having to individually evaluate each debt for potential defenses. Rolling Jubilee can create a uniform, indisputable defense by letting the statute of limitations lapse on each debt.

      1. Lambert Strether

        That’s kind of a nifty idea. Buy the debt and do nothing until the statute of limitations runs out. Is that a gift? Probably that’s a novel question to, but at least the answer doesn’t unwittingly involve the debtor.

        1. Yves Smith Post author

          You don’t understand the tax analysis. If there is not forgiveness, there is no transfer, so there is no gift, so you don’t have to worry about commercial context putting the gift status at risk.

      1. Nathanael

        It’s practically impossible to make the connection from the “distressed debt market” to the actual debtors, from either end.

        This is actually a major problem; the companies in the middle appear to be cheating both ends in the case of mortgage debts, for example. I’m not sure how to deal with that, though.

    1. Nathanael

      “I like Masacio’s solution but have some concern that reaching out to settle these debts could be considered collection activity exposing rolling jubilee to FDCPA liability”

      Yep. Don’t touch that option.

  3. GeorgeK

    By bringing debt forgiveness into the public debate Occupy has already succeed, as it did with changing the discussion over the federal debt into a discussion over income inequality.

    Publicity over debt forgiveness will at some point focus on the Bankruptcy Reform Act, ( ) pushed by the banks when they were giving loans to anyone with a pulse. Individuals, unlike corporations, are unable to file a chapter 11, to essentially wipe their debts clean, now they are forced to use a chapter 13 will amounts in indentured servitude to the banks that purposely made the bad loans.

    Occupy is about changing the discussion and with that changing public opinion, which hopefully will change legislation.

    1. reprobate

      OWS can lay claim to the 1% v 99% putting the focus on income inequality. But to give them credit for brinigng attention to consumer indebtedness is grandiose. There was tons of media and investor interest in this long before Strike Debt cooked up its scheme. I don’t see any evidence that this plan has done anything to increase public focus on this issue, save from a few articles in culture mags that might reach those who don’t read the MSM at all.

  4. John Glover

    I haven’t looked into the whole issue of the status of the entity as tax exempt, although I’m not sure that it matters. If in fact Strike Debt doesn’t make a profit, whether or not it qualifies as tax-exempt is irrelevant. You only pay tax if you earn a profit.

    As far as debt forgiveness is concerned, there is a general exemption from debt forgiveness income if the debtor is insolvent. If in fact the debtor is insolvent, the forgiveness is only income to the extent it renders the debtor solvent. So if the only big asset I have is my house and it is underwater, forgiving my medical debt won’t be income to me, because I’m still insolvent after the forgiveness. My guess is a lot of the beneficiaries of this program will be in this position – although if I were the tax advisor to the group I would want to make sure the beneficiaries were aware of this.

    1. Yves Smith Post author

      First, as we have discussed earlier, Strike Debt is buying and forgiving this debt blindly. They have no idea of the financial circumstances of the debt they are forgiving. There are plenty of cases where the debt sold is invalid via being disputed, actually paid off but still in the lenders systems (this happened with some debt a whistleblower at Chase called out), or past the statute of limitations.

      And what you are missing is the burden of proof is on the taxpayer to prove insolvency. The IRS sends a tax bill and you have to fight with them to get their assessment reversed. We have an exact parallel with the fact that as of the end of this year, an IRS provision to have lenders not send in 1099s on short sales expires. Homeowners who enter into short sales can still argue insolvency with the IRS. Yet economists and pundits are pushing hard to have the old provision continue, precisely because they recognize that having taxpayers prove financial hardship to the IRS takes time and frankly is stressful and some will not be organized enough to make their case even though they really are insolvent. The same issues apply here.

      Second, there is no certainty the borrowers actually ARE insolvent. Again, a lot of this debt is junk debt. The debt floating around could be the result of an error for a perfectly solvent borrower. Or the person could be have gone through a bad patch and now is OK (for instance, I know quite a few self employed tech people who filed for bankruptcy or defaulted on debt in the dot com bust but are now back on their feet).

      You are making lofty generalizations when you have absolutely no idea of the financial situation of the parties who have the debts that Strike Debt is buying.

      The first rule of any intervention is, or in my mind should be, “do no harm”. There is real potential to do harm here which you and they are pretending it does not exist.

      And as for their income, you also can’t be sure of that. If you have a regular corp, you take some care to make sure you make it broke by spending all the money by year end. If they elected cash rather than accrual based reporting, this year they raised what, $800,000 and spend only $5,000 on debt buying plus whatever other ancillary expenses they have had. So they could have a LOT of income for 2012.

      1. Nathanael

        I think we’re well beyond the situation where we can make anything better by following a “first, do no harm” rule.

        1. Lambert Strether

          “I think we’re well past the point where ‘Do unto others as you would have them do unto you’ applies.”

          “I think we’re well past the point where the Geneva Convention applies.”

          Point is, if Occupy want to be prefigurative, then it needs to prefigure. Meeting basic standards of due diligence and common every day ethical behavior would seem a reasonable place to begin.

      2. Nathanael

        I have explicitly not reported income reported on 1099s with a nice letter attached to the tax form saying “The numbers on this 1099 are entirely the result of accounting error at the issuer”.

        The IRS didn’t bug me about it. Obviously, if they had, I had a complete *correct* accounting.

      3. John Glover

        Frankly, if there was more that a slim hope of collection, the debt wouldn’t be trading at pennies in the dollar. Seems to me the chances of the debtors being insolvent is fairly high. I agree, though, that doing this blindly does raise the possibility someone might be hurt by the tax bill. But even if they are totally solvent, isn’t paying the government anywhere from 15 to 35 better than paying the creditor 100%?

        As for their income, the amount they raise from donors most likely is not income. It either is a gift (which as already stated is exempt to the recipient), or a non-shareholder contribution to capital excludable under section 118.

        1. RalphR

          No, you don’t look to be correct. They are not tax deductible to individuals. They appear to be “donations”. They aren’t capital contributions.

          1. John Glover

            The question is whether the amount Strike Debt raises from donors is income to the 501(c)(4), and would be taxable income to the organization if it was found to fail to qualify for the tax exemption. I think it’s highly unlikely that it would be.

            Yes, taxpayers do get notices from the IRS all the time. But those are for things like math errors or failure to report income that was reported on a 1099, which they can match with your return. It strikes me that getting a bill out of the blue for this – especially if 1099s are not filed – isn’t very likely.

            I’m actually pretty troubled by the fact that they are doing this without advanced notice to the debtor. Seems to me it wouldn’t take that much additional effort to notify them in advance, advise them what their options are, and give them the option of either forgiveness or forbearance. Maybe there is a concern then that this would be a de facto forgiveness in any event.

            But my guess is that the vast majority of people who have unpaid medical bills (which is what we’re talking about here) are insolvent. Look, most people don’t like having debt like this hanging over them. They will do anything – cash in the life insurance, sell the jewelry, drain the 401k (even though it can’t be reached by creditors) – to avoid default. The likelihood that they have significant assets in the clear they haven’t already used up is just not very likely if these debts are trading at pennies on the dollar. Frankly, if they do, Strike Debt shouldn’t be helping them – another reason why doing this blindly is a bad idea in my view.

            Honestly, I have a great deal of respect for Yves and for Lee Sheppard, who for many years has written about the dubious positions tax lawyers have taken in service to their Wall Street masters. I just question whether they should be concern trolling this program.

          2. Yves Smith Post author


            With all due respect you are just plain wrong on this. If Strike Debt loses its 501 (c)(4) status, it’s a regular corp, a C corp, since it would not have made a S election.

            Donations to corps are income. I pay taxes on donations to my fundraiser, for instance.

        2. John Glover

          Now you are engaging in ad hominem. The IRS does not “send you a tax bill”. You file a tax return reporting your income and the tax you owe on it. If the IRS examines the return – i.e. you are audited – and disagrees with what you reported, after you have had a chance to substantiate what you reported, then it sends you a bill and you have the burden of proving their determination is incorrect.

          I am assuming that Strike Debt is giving its debtors 1099s – there is a specific 1099 for reporting debt forgiveness income. There is also a separate form for claiming one of the exclusions under section 108, including the insolvency exclusion. Most consumer tax preparation software like Turbotax will walk you through the preparation of the necessary forms. If you received a 1099 and failed to report the debt forgiveness on your return or file the proper forms to claim the exclusion, then you will probably get a bill because the item on the 1099 was omitted from your return. But if you file the right forms, then you won’t get a bill unless you’re audited.

          The short sale exemption for1099s ties directly with the special exemptions for mortgage debt that also expire at the end of this year which you mention in your post. The two go hand in hand. If the mortgage exemption is extended, then the 1099 rule will probably be extended too.

          1. RalphR

            You need to Google “ad hominem”. It isn’t clear what you are referring to in this thread, but nothing above remotely qualifies.

            And as for Yves’ comment on “tax bill”, puhleeze. She uses a colloquialism and you get bent out of shape? And if we are going to play pedantic, individuals get IRS notices for taxes, interest and penalties due in circumstances other than audits.

            SD is not issuing 1099s, but given the press attention they’ve sought, the IRS might ask whose debt they’ve forgiven and take their own look at the recent fiing history of the taxpayers in question. If they really are non or low taxpayers as SD surminses, the IRS still might let sleeping dogs lie. But you don’t know and more important, SD does not know who they are helping. They are making assumptions and they might not be valid in a significant % of cases.

  5. Sam

    Scenario: the US middle class will default on the debt and Strike debt is the only payback received. I like Hedrick’s book on how the banks changed usury laws.

  6. John Glover

    Oh, and by the way, the gift tax only applies to gifts by individuals. A corporate entity – such as a 501(c)(4) organization – is not subject to the gift tax.

    1. reprobate

      Oh, but there may be taxes payable… the donors! How is THAT going to go over?

      “Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.”

  7. nobody

    Off topic, but speaking of OWS, The Partnership for Civil Justice Fund has been releasing FBI documents pertaining to OWS that they obtained as a result of their FOIA requests. There’s more than a hundred pages of stuff here:

    Including, on page 61:

    An identified [redacted] as of October planned to engage in sniper attacks against protestors in Houston, Texas, if deemed necessary. An unidentified [redacted] had received intelligence that indicated the protesters in New York and Seattle planned similar protests in Houston, Dallas, San Antonio, and Austin, Texas. [Redacted] planned to gather intelligence against the leaders of the protest groups and obtain photographs, then formulate a plan to kill the leadership via suppressed sniper rifles.

    After one more sentence, the rest of the page is entirely redacted.

    1. Nathanael

      Given that there’s no leadership in OWS, the fanatical would-be sniper would merely be murdering people, not dismantling a movement….

  8. Ché Pasa

    “Mutual Aid, Not Charity”

    The Rolling Jubilee is a form of mutual aid, not charity, and a demonstration that the People acting together are not powerless against entrenched interests — in this case the entrenched interests of the debt industry.

    Even at the rate of $10,000,000 in canceled debts over a period of months, the Rolling Jubilee cannot make a huge dent in the problem they’re addressing, but at least they’re doing something.

    Legal advice can always be found to do nothing, however, or to only do what can be reasonably assured to be safe. For whatever reason, Strike Debt has decided not to follow that advice and to strike out on a bolder and riskier path.

    The issues that Yves has raised should be heard, as I’m sure they have been by those undertaking the Rolling Jubilee project. They’ve decided to proceed anyway. Even so, the amounts of money raised and debts so far forgiven are less than a drop in the bucket in the overall context of American household indebtedness. They may be tossing a handful of sand in the works of the bottom feeders, but they’re nowhere near causing sleepless nights for those who prey on vulnerable debtors.

    A real danger from the IRS for those involved is that the IRS tends to look into 501(c)(3) or (c)(4) outfits and those they serve in response to complaints — or sometimes in response to media focus. There’s no sign that anything like that will happen in the case of Rolling Jubilee, but you never know.

    There’s no sign that Strike Debt is going to cease its Rolling Jubilee project due to the risks they may encounter, but there is every indication that they are proceeding with a good deal of caution.

    If somebody has a better idea or wants to start another project to deal with the crushing burden of household and individual debt in this country, there’s plenty of need and opportunity.

    1. Lambert Strether

      And the evidence that Yves has been heard would be… That they said they’d respond, and never did? If not that what?

      * * *

      And here’s am utterly classic case of not getting it:

      There’s no sign that Strike Debt is going to cease its Rolling Jubilee project due to the risks they may encounter…

      Except that’s not the point:

      What is most distressing is that Strike Debt seems unconcerned about the idea that they could wind up hurting the people they profess they want to help to make a political point, and that they’ve put them at risk without getting their consent. We don’t need that from Occupy Wall Street. We have already have two parties for that sort of thing.

      In other words, the risk to be concerend about isn’t the (narcissistic) risk to the project itself (“they”) but the risk to the people the project places at risk by trying to help.

      It really does seem to be impossible to get Strike Debt people to understand, or at least respond to, this point. At first I just thought it was sloppy commenting, a hazard of the trade, but now I’m starting to think it’s a problem with the project itself, since it’s so pervasive.

      1. Ché Pasa

        “We were told that Strike Debt would issue a rebuttal…” by whom? Was there some kind of consensus within the Strike Debt working group to respond point by point to Yves’ concerns? Was there a consensus to respond directly at all?

        Rather than a point-by-point rebuttal, perhaps the actual response is in the actions of the Rolling Jubilee project itself. In other words, they have decided to proceed with the project rather than ceasing it and using the money raised to hire marketing and legal firms to implement a completely different project that does not directly involve indebted individuals and households.

        Looked at from this perspective Strike Debt’s response — ie: proceeding with the project — is no doubt unsatisfactory to its critics, but that’s a hazard of taking any action.

        As for the criticism that Strike Debt hasn’t received permission from its beneficiaries to take action on their behalf, has the bottom-feeding debt industry got permission from the debtors to harass them, make their lives miserable, and often much worse?

        Could the Rolling Jubilee also make things worse for its beneficiaries? Maybe. There is no sign that it has or that it will, but the potential — as Yves has pointed out — is there.

        What would be the appropriate response if one of Yves’ potential hazards to debtors were to be realized?

        Would it be to denounce and condemn Strike Debt, or would it be to follow the principles of mutual aid and find an answer, one that may directly benefit many more people than the hundreds or perhaps thousands that the Rolling Jubilee may ultimately help?

        There’s nothing standing in the way of someone else raising money to hire marketing and legal firms to put together a very different sort of project that doesn’t directly involve debtors or directly relieve them of outstanding debt. Yves has lots of ideas on how to do it, and commenters on these threads have presented plenty of additional ideas. It seems to me that this field is wide open.

        Strike Debt’s Rolling Jubilee is a different kind of project that sets out to cancel debts outright. Yves has pointed out that there could be risks involved with such action for both Strike Debt and the debtors they are helping. Strike Debt has decided to go ahead anyway.

        1. Yves Smith Post author

          Charity that puts other people at risk is a very peculiar form of charity. Saying you’d rather run the risk of hurting people than bother doing your homework is a form of organizational narcissism. So you are fine with possibly throwing people under the bus because SD can’t be bothered to investigate these issues? That’s not being revolutionary, it’s lazy and childish.

          As for the rebuttal, that was promised on a Firedoglake post by someone who seemed to be speaking with direct knowledge.

          And you are straw manning. I never said they should cancel the project. I said they should hire a serious tax attorney, evaluate the risks, and see if they need to correct their course of action.

          Frankly, the bigger risk is loss of their 501 (c)(4) status, and they really ought to be concerned about that.

  9. Andrew Watts

    This should not surprise anyone in the slightest. Since when did the people who make up Occupy ever think about the consequences of their actions? Their general strike almost cost the Longshoremen union tens of thousands of dollars and potential jail time for union officials. I wrote off Occupy a long time ago when Occupy Portland tried to garner support by blocking traffic around the public library. The one constituent group they should have actively cultivated are the social misfits at the library. Who read books and don’t watch a lot of television. Instead, they ended up alienating as many sympathetic like-minded people as possible. Which only continues with this debt forgiveness scheme.

    It is unfortunate for the proponents of social change that Occupy amounted to so little.

    1. nobody

      On Friday, members of the ILWU and the labor community named the Occupy Movement as key to the settlement reached Thursday between ILWU Local 21 and the Export Grain Terminal (EGT). The contract finally provides for the use of ILWU labor in the grain terminal at the Port of Longview. After staging the December 12 port shutdowns in solidarity with Local 21, the West Coast Occupy Movement planned coordinated action together with labor allies for a land and water blockade of the EGT ship in Longview, should it attempt to use scab labor to load. Occupys in states where EGT’s parent company, Bunge, has its growth and operations were also planning actions against the company on the day of the arrival of the ship.

      ” ‘This is a victory for Occupy in their involvement in forcing negotiations. Make no mistake – the solidarity and organization between the Occupy Movement and the Longshoremen won this contract,’ said Jack Mulcahy, ILWU officer with Local 8. ‘The mobilization of the Occupy Movement across the country, particularly in Oakland, Portland, Seattle, and Longview were a critical element in bringing EGT to the bargaining table and forcing a settlement with ILWU local 21’.

      1. Andrew Watts

        Quite unlike Occupy the ILWU are burgeoning experts at cultivating potential allies. Which includes flattering their allies’ egos. In all fairness to Occupy the Longview dispute might not have received as much attention as it did at the time if not for it’s efforts.

        But notice that I was referencing Portland, OR not Longview, WA. When the general strike happened Occupy Portland did not see fit to inform, much less plan their action with the concerns of the Longshoremen in mind. Which did cause a fair degree of contention in private. Though this is not something that any union member would openly state. As for the reasons why this will never be publicly stated, this is due to the fact that ‘solidarity’ is a word they know the meaning of.

        It is not just a slogan to utilize when convenient.

  10. Curtis

    This is all very INTERESTING. I’m sure the reason that debt forgiveness won’t work is the DEVIL in the details. This has to be a quote by Goethe.

  11. vlade

    Thinking about it a bit more, SD is actually making the problem worse. It’s morphing a likely disputable and hard-to-enforce debt into a prime, undisputable, no-forgivness, we’ll-be-after-you-till-you-drop IRS debt. Thanks but no thanks.

    But given the emotional investment SD people have in this, I suspect they will claim doing God’s work even if IRS goes after every single letter then sent (which they legally can get access to just for asking).

  12. scraping_by

    Rolling Jubilee is also a form of theatre. They’re using the same mechanism of TARP and the other bailout mechanisms for real people. Buying worthless debt for face value vs buying debt at a discount

    I still don’t understand why there needs to be any pass-though benefit that causes grief to the debtor. Bad debt is entered as a charge against capital in the simplest form of bookkeeping. If OWS needs to, create a for-profit joint stock and have it do a lot of stupid deals.

    If the IRS penalizes citizens for getting the same deal as banks, the few people in denial may see the system’s broken.

  13. dannyb2b

    Debt forgiveness seems too complicated to implement. I think better is to unwind all the debt overhang and the economic drag its creating through balanced non debt originated stimulus. This can be easily implemented by modifying the federal reserve so it conducts monetary policy directly with the public instead of with commercial banks.

    1. Lambert Strether

      Sure, and sucking people into projects that claim to help and in fact harm, and without informing them of the true risks, is something “The Man” does every day. In fact, you might argue that’s how “The Man” makes his real money. Do you want to emulate that? Why?

    2. reprobate

      Huh? This program IS trying to play by “The Man’s” rules. It operates in the current paradign. That’s the problem with it. It isn’t just perpetuating a bad system, it’s actually given money, even if in small amounts, to the problem!

      Or maybe that’s your point and my irony meter is broken.

  14. alex morfesis

    although the thought is nice…a better way to work this would be to offer up a rescheduling of debts by the occupy folks(I am not an occupy fan) to the debtors…

    100 year amortization at 1 percent interest rate…

    2500 in debt works out to about $3.50 per month…and the upside…the person who had a ding on their credit can now insist that their credit report reflect they are making payments as agreed…

    a write off of the debt is a ding on the credit score…

  15. TheHube

    I’m no Lee Shephard, but I’ve made an entire career out of counseling rich folks to take positions that have a lot less substance than the one OWS is making. I’d bet dollars to dimes that some of the positions Romney took on the undisclosed returns ($100 million in an IRA anyone)were more flimsy than OWS claiming that the write off is a gift.

    If they take the position that it is a gift, they won’t file 1099s. Without 1099s, the IRS isn’t going after the recipients unless they waste a bunch of money going after OWS first. Hopefully, even if they (IRS) do that, OWS has enough resources or pro bono attorneys to delay anything for at least three years until the statute of limitations has expired for the beneficiaries of the program. It isn’t hard to do. I’m involved with a case that still hasn’t made it to court that relates to a 1993 tax liability.

    1. RalphR

      But you haven’t made noise in the press about the aggressive positions you have taken. Strike Debt has. On top of that, it’s generally known that the IRS is more cautious than it ought to be in going after wealthy taxpayers because they’ll spend a lot of money fighting if they think they have something of a case. Strike Debt has been loud and is not formidable. That would seem to change the odds of them being targeted.

      1. TheHube

        Unless they get significantly bigger, there just isn’t much money in it for the IRS compared to the effort it would take.. My guess is they do nothing.

  16. tom

    The debt collector has bought the debt from the originator or the shareholder trust?
    First it has to be determined if the debt collector has standing to collect – probably not. If the mortgage was securitized and sold to investors through a pass thru (ie) a loss has a tax consequence to the shareholder, the shareholder writes off his loss – then the debt can no longer be collected as the debt has been recognized by the shareholder as reported to the IRS via the tax consequence. No debt instrument therefore exists and a debt collector — who has bought these debts at a discount has no standing to collect – the debt has been extinguished via the recognition of loss and satisfaction thereof by the tax offset the shareholder has claimed in their tax consequence and reporting.
    Further, the whole issue of title/mortgage being together with the note (screwed m by MERS) puts into question whether the securitization is valid or extinguished. Anotherwords – the debt may be separable from the asset (home) and quiet title may be found.
    A non-profit could spend money on securitization audits to find that 1) the debt collector does not have a collectible debt – as it has already been forgiven 2) the securitization has been decoupled from the security via title/mortgage and note bifurcation. If ya can bifurcate the asset then the debt is unsecured and becomes a personal debt that can be discharged through bankruptcy.

  17. Matt

    When the hospital charges the uninsured patient a big markup over the medicare or private insurcance negotiated pricing, and then gives the patient a discount, there is no 1099.

    Instead of issuing a letter of forgiveness, the do-gooders could just sit on the debt and not attempt to collect, or negotiate a discounted price.

    Do bad debt collectors send out 1099s willy nilly everytime they forgive a debt they paid pennies on the dollar for and cannot document in any way shape or form? If not now, then real soon as they figure out another blackmailing assault tactic.

  18. khe

    It is simple: Stop Payment. Get friends, then friends of friends, then friends of friends, and have everyone stop payment on their student loans. They’ll take notice when tens of thousands dollars goes missing.

    They lied to you about an investment, and now, you and your friends are cutting your loses. They’ll understand that rational. They do it everyday.

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  20. Chris Wahmhoff

    Sounds like your trying to make an issue out of something good. I love occupy and participate as much as I possibly can in supporting it.. Nationally in Strike Debt, and also locally in Kalamazoo michigan.. I have a door not working on a car that has no heat, in a house with no hot water, that I cannot fix this month. Because even though banks caused a crisis in my home State of Michigan.. the house I bought in 08 at 64 thousand is now worth 16.. because no one here has a job, no one has anything but DEBT.. I work my fingers to the bone helping my community, helping others, hoping we can fix the country enough for me to have a family and just work and love my kids. The people who puts this together did the same and do so.. All of us on Occupy Sandy are getting crisis situations because NJ is writting people 5,000$ a day for not having there homes in ordinance in the following of hurricane Sandy.. and Bloomberg throws us out after NYPD says we helped keep crime down, and afetr we had to feed FEMA. . You know why we are doing strike debt? .. Because you continue to do nothing… accept talk.. keep talking, it will get you the same result. . NOTHING

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