In Paul Gugger, Plaintiff, v. USAA Federal Savings Bank, Defendant., 2017 WL 5552254, at *2–4 (S.D.Cal., 2017), the District Court denied a motion to dismiss a credit reporting complaint premised on the theory that a 1099-C discharged a debt, making reporting of the balance of the debt inaccurate.
The Internal Revenue Code requires a creditor discharging indebtedness to file an “information return on Form 1099-C with the Internal Revenue Service.” 26 C.F.R. § 1.6050P-1(a). Whether or not an actual discharge of indebtedness has occurred, a “discharge of indebtedness is deemed to have occurred” for the sole purpose of reporting requirements. Id.  USAA argues the plain language of the IRS Form 1099-C sent to Gugger does not, alone, extinguish Gugger’s debt. (Doc. No. 4 at 6.) USAA asserts the IRS Code section 1.6050P-1(a) requires creditors to file Form 1099-C even when the debt is not cancelled. (Id. at 7.) USAA relies on two IRS Information Letters explaining the IRS “does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.” (Id. at 8.) As additional evidence, USAA cites courts in other jurisdictions that have followed the IRS Information Letters and concluded that the mere filing of a Form 1099-C does not discharge debt. (Id. at 9.)  In opposition, Gugger argues USAA admitted to discharging Gugger’s debt by selecting code “G” on the Form 1099-C. (Doc. No. 11 at 7.) Gugger cites to IRS Publication 4681 on the IRS website1 that states code “G” discontinues the debt. (Id.) Further, Gugger argues the IRS Information Letters do not offer any opinion on USAA’s selection of code “G.” (Id. at 10.) Gugger states these letters are “vague, unconvincing, and misleading.” (Id.)  In USAA’s reply, it relies heavily on F.D.I.C. v. Cashion from the Fourth Circuit. (See generally Doc. No. 12.) Ruling on a summary judgment motion, the court held Form 1099-C was “not a means of accomplishing an actual discharge or debt,” but, is instead a reporting obligation. F.D.I.C. v. Cashion, 720 F.3d 169, 179 (4th Cir. 2013). USAA argues the Cashion court’s decision not to discuss whether certain codes were checked reveals that the codes are unimportant to Gugger’s claims. (Doc. No. 12 at 3.)
At oral argument, USAA cited to Mennes v. Capital One, N.A. as the only federal court case that addresses the same issue under a motion to dismiss. See Mennes v. Capital One, N.A., No. 13CV822BBC, 2014 WL 1767079, at *6 (W.D. Wis. May 5, 2014). The Mennes court granted Defendant’s motion to dismiss as to Plaintiff’s claim the Form 1099-C is evidence of debt cancellation. Id. Thus, USAA argues at the bare minimum, the Court should rule similarly and grant the motion to dismiss with leave to amend.  Examining applicable case law and the cited publication, the Court finds a split in authority as to the legal effect to issuing a Form 1099-C. Compare Cashion, 720 F.3d at 181 n.10 (affirming summary judgment against debtor offering only the Form 1099-C as evidence the debt was extinguished), and Ware v. Bank of America Corp., 9 F.Supp.3d 1329, 1341 (2014) (affirming summary judgment against debtor for presenting no legal authority supporting the theory a 1099-C discharges debt), with In re Reed, 492 B.R. 261, 273 (Bankr. E.D. Tenn. 2013) (holding a creditors issuance of a 1099-C reflects a discharge of debt). But, most of these cases are decided on summary judgment and after parties have had the benefit of discovery. See Cashion, 720 F.3d at 181 n.10. Also, none of these cases discuss code “G’s” effect on discharge.  Here, Gugger asserts his claims on the pleadings without the opportunity to conduct discovery, which favors denying USAA’s motion to dismiss. Habetmariam v. Vida Capital Group, LLC, No. 216CV01189MCEGGH, 2017 WL 627404, at *3 (E.D. Cal. Feb. 14, 2017) (denying defendant’s motion to dismiss because a Form 1099-C in addition to supporting evidence could plausibly extinguish debt and the parties should have the benefit of discovery). In addition, some authority suggests “a Form 1099-C may itself be prima facie evidence for cancellation of debt.” Id. (citing Amtrust Bank v. Fossett, 224 P.3d 935, 936–37 (Ariz. Ct. App. 2009)).
Furthermore, the 2015 Form 1099-C section “Instructions for Debtor,” box 6 states code “G” means “[d]ecision or policy to discontinue collection.” The Form 1099-C section “Instructions for Creditor,” also references 2015 Instructions for Forms 1099-C. These instructions state a creditor enters code “G” in box 6 to indicate “[a] discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt.”3 At the pleading stage, the Court is required to accept all material allegations in the complaint as true. Thus, the Court finds that Gugger’s argument that code “G” indicates a discharge of debt under the plain language of the 2015 Form 1099-C is plausible.  At this stage of the proceedings, the Court is unable to rely on Cashion, as this case is not before the court on a motion for summary judgment, but on a motion to dismiss. Additionally, the court in Cashion was “careful to note the specific circumstances” of the case and its narrow holding. Cashion, 720 F.3d at 181. The Cashion court emphasized “[i]n another case, where a properly authenticated Form 1099-C is introduced into evidence along with other circumstantial evidence of cancellation of the debt, the Form 1099-C could be properly considered by the trier of fact under the totality of the circumstances on the ultimate issue of whether the debt in question was, in fact, cancelled.” Id. Thus, it is possible that Gugger can discover evidence indicating his debt was actually cancelled.  Further, the Court is also unable to rely on Mennes because Mennes relies in part on the IRS Information Letters. While the IRS Information Letters are persuasive, they go to the merits of the claim to negate Gugger’s allegations. At this stage, the Court is bound to draw reasonable inferences in Gugger’s favor and accept his allegations as true. Cahill, 250 F.3d at 732. So while these letters may be relevant at some time in the future, these letters are inappropriate to resolve in a motion to dismiss. Therefore, the Court will not engage in the interpretation and determination as to the authority of the IRS Information Letters at this stage.