IRS Cancellation Of Indebtedness Form Is Not An "Information Return" Under Section 7434
CAVOTO v. HAYES (February 28, 2011)
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When Susan and Robert Cavoto were experiencing financial difficulties, they turned to Susan’s mother, Mary Hayes. Hayes allowed the couple to accumulate $30,000 in debt on her American Express credit card. Although the couple later separated, Cavoto told Hayes that he would repay her -- but he didn't. Hayes made unsuccessful attempts to recover the debt. So she took a bad debt deduction on her 2006 tax return and filed a 1099-C form, which identified the amount of the discharged debt and the debtor. The IRS notified Cavoto that he could be liable for additional taxes because of the discharged debt. Cavoto brought suit against Hayes under § 7434, which creates a cause of action against a person who "willfully files a fraudulent information return." Cavoto argued both that Hayes’ information return was fraudulent because the information was not accurate and because, even if the information was accurate, she was not required to file the form. Hayes counterclaimed for the $30,000. Judge Coar (N.D. Ill.) rejected the latter argument. Even if Hayes was not required to file the form, doing so accurately was not fraudulent. After a bench trial, the court found for Hayes on both the complaint and her counterclaim. Cavoto appeals.
In their opinion, Judges Bauer, Rovner, and Sykes affirmed -- but on different grounds. Section 7434 creates a cause of action for the filing of some, but not all, fraudulent information returns. The statute lists nine types of returns that are covered -- cancellation of indebtedness is not one of them. The court should have dismissed the complaint for failure to state a claim. With respect to the counterclaim, the Court found no clear error in the district court's decision.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select