By: Shu-Yi Oei
So John Oliver just forgave $15 million of debt on his talk show.
See video @ around 17:15.
Specifically, Oliver apparently set up a debt-buying company (CARP), which bought $15 million worth of incurred medical debt of nearly 9,000 people for $60,000, less than half a cent on the dollar. And then he forgave the $15 million of debt on television. The Washington Post reports that “this is the largest one-time giveaway ever on television, beating out Oprah Winfrey’s famous “you get a car! You get a car!” episode, which cost that show $8 million.” (Smart talk show economics, to top Oprah’s giveaway while only paying $60,000 for the debt.)
Of course, because tax professors love talking about the tax consequences of Oprah’s free car giveaway, I wondered whether this $15 million debt forgiveness event was going to result in cancellation of indebtedness income to some of the debtors whose debt was forgiven. As tax people know, IRC Section 61(a)(12) provides that income from the cancellation of indebtedness is includible in gross income. But IRC Section 108 provides that there is no gross income in certain circumstances–for example, if the debtor is in Title 11 bankruptcy, or is insolvent, or if the debt is certain types of real property related indebtedness.
Would CARP have to send these folks a Form 1099-C? And would some of them then have CODI income due to the debt forgiveness?
Well, according to Oliver, “instead of having the file [of debts] sent to CARP, we had the seller [of the debt] send it directly to a non-profit organization which specializes in forgiving medical debt with no tax consequences for the debtor.” I wonder how long they spent working on that line.
A bit of internet digging shows that CARP sent the debt to a non-profit called RIP Medical Debt (RIP). (Seriously, who came up with that name?) RIP purchases medical debts and then forgives them. RIP has a FAQ page that says: “The forgiveness of the debt does not result in income to the debtor if that forgiveness is a gift that comes from a detached and disinterested generosity. We will not file a Form 1099-C with the IRS.”
I’m not entirely sure about the exact structure of the arrangement between CARP and RIP Medical Debts. It could be any number of things, and the strength or weakness of the “detached and disinterested generosity and hence gift and hence no tax” theory would vary based on the details of the structure. Let’s say, for example, that CARP donated the purchased debts to RIP. CARP would presumably claim a charitable contribution deduction, since RIP is a 501(c)(3). Now, CARP is out of the picture and RIP holds and forgives the medical debt, per its usual practice and in accordance with its non-profit mission. That scenario seems pretty straightforward, and it could be argued that RIP has “detached and disinterested generosity” and this is hence a gift.
But you could also imagine contexts in which such a donation through a non-profit might raise eyebrows. Just to spin an alternative hypothetical: let’s imagine an employer bought up the medical debt of an employee and donated it to RIP. RIP forgives the debt and doesn’t issue a Form 1099-C, on the theory that it’s a detached and disinterested gift. If the employer had purchased and forgiven the debt directly, or given the employee cash, it would presumably NOT be a gift under IRC Section 102(c) (providing that employee gifts are not gifts). Would the presence of the IRC Section 102(c) rule create gross income for the employee, even though the cancellation of indebtedness was accomplished through RIP?
If this type of logic were extended to the CARP-RIP structure that I hypothesized above, one might argue that the specific, non-cash form of CARP’s donation to RIP effectively controlled who would get the benefit, or at least made it inevitable that those whose debts were forgiven were the exact individuals whose debts were purchased by CARP. In this scenario, the argument for “gift” characterization may be a bit more tenuous, because this could be characterized as, in substance, a transaction between CARP/John Oliver/Last Week Tonight and the individual debtors directly, and it’s less obvious that CARP/John Oliver/Last Week Tonight are acting out of detached and disinterested generosity.
I’m curious if others have thoughts.
UPDATE @ 5:23 pm: Thanks to Paul Caron’s Taxprof Blog post, I now know that Tony Nitti at Forbes also covered this issue today. Interestingly, he thinks that the 108(e)(2) exclusion for liabilities that would have given rise to a deduction if paid is what creates the “no gross income” result for all taxpayers. This, despite the fact that in order to deduct the medical expense, (1) you’d have to itemize deductions, and (2) the expenses would generally have to exceed 10% of your AGI. I’m not sure what the authority is for this interpretation…and honestly have maxed out on the amount of time I can spend thinking about John Oliver or cancellation of indebtedness today. It’s worth noting that, at least according to their FAQs, RIP Medical Debt (the nonprofit that buys up and forgives medical debt) does not appear to hang its hat on 108(e)(2) but rather on the notion that the debt forgiveness is a detached and disinterested gift.
The Surly Subgroup 
108 (e)2 is silly, for the reasons you say. For the employer scenario, step transaction doctrine would remove the straw c (3) in the middle of the triangle…there are cases like that with stuff other than debt. On twitter, I said that there probably is no coi because, in effect, RIP has purchased consumption for debtors at a discount, and there is no rule saying that donees have income just because the donor was able to make a bargain purchase. Right?
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I did a quick Checkpoint dig on 108(e)(2) and didn’t see anything obvious supporting that theory, though perhaps I’m missing something. On the CARP-RIP issue, I think my worry is whether the same theory that removes the (c)(3) as a straw in the 102(c) context may also apply to the “detached and disinterested generosity” analysis. If you think of Oliver/Last Week Tonight as the actual donor–disregarding the straw (c)(3)–it seems a bit less likely that there’s Dubersteinian “detached and disinterested generosity” there.
To be clear, as a matter of public policy, I think that if it comes to it, IRS will (and should) find a way to make this CODI transaction tax free, like the baseball. I’m just playing with the analysis.
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I see. Interesting. But it seems important that we’re outside the usual Old Colony Trust set of relationships, doesn’t it? That is, we don’t have a compensatory or firm/shareholder transfer. It seems pretty routine, and indeed an intended feature of extending section 170 to corporations, that a firm would donate goods or cash to an intermediary charity for distribution, rather than doing so itself (which potentially could still be expensed as advertising, but maybe not). No one in that case would say that the charity in the middle is a straw, even though it is clear that the transfer from the firm would otherwise be taxable to donee under Duberstein.
So, maybe Oprah should’ve distributed her cars through the Ford Foundation?
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I do think that the case for ignoring the straw is weaker than in employer/employee or firm/shareholder relationships. But it’s arguably a bit stronger than in the case of a straight donation of cash or goods, where the (c)(3) can fully control what to do with the cash or goods. Under my hypo, CARP selects the debt portfolio to be purchased and then transfers the file over to RIP. So CARP basically directs the identity of the donees and the debts purchased and the amounts forgiven, thereby exerting a degree of control over outcome that’s more than in a donation of just cash or goods. I’m just curious whether this may create a bit more tax risk for CARP/Oliver/Last Week Tonight than the base case of a cash donation by CARP to RIP. (Again, this is all just a hypo. We don’t know the exact transaction between CARP and RIP.)
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