American Education Services ("AES"), the loan servicing agent for Student Loan Xpress, has sent out 1099-C Cancellation of Debt forms to many of my clients who obtained loans from Student Loan Xpress to attend Silver State Helicopters flight schools. Here is information that can help you deal with this 1099-C issue, and perhaps avoid liability for debt settlement income. Please understand that I am not a tax attorney, and that I cannot guarantee how the IRS will treat any 1099-C that you received from AES.
First, here is information from class action counsel Kevin Rooney and Andrew August of Pinnacle Law Group:
"We are aware the SLX recently sent out 1099s to the Class Members. We cannot give you tax advice. However, the following is an excerpt from the Court's order approving the settlement regarding the issue of whether the debt forgiveness constitutes “taxable income” as follows:
9. The debt forgiveness provided by the amended settlement agreement (Doc. 157-1) should not qualify as taxable income, because:
a. In the third amended class action complaint, the plaintiffs allege that SLX colluded in Silver State’s fraudulent scheme. The plaintiffs assert against SLX statutory claims under the Ohio Retail and Installment Sales Act and claims for negligent misrepresentation and aiding and abetting fraud;
b. The plaintiffs dispute the amount of loan debt and also allege that, as a result of the alleged illegal and improper conduct of Silver State and the alleged improper conduct of SLX, the loans are invalid and unenforceable, because each loan was improperly procured and fails to reflect the true value of the benefit received by the students while enrolled at Silver State before Silver State’s bankruptcy petition and closure;
c. SLX asserts that each loan is valid and enforceable; and
d. In light of paragraphs 9(a)-(c) above:
i. The settlement resolves a bona fide, good faith dispute over the amount due under each loan, the method of procurement of each loan, and the validity and enforcement of each loan;
ii. The settlement constitutes a negotiated compromise of each disputed loan on a sub-class-by-sub-class (and not an
individual) basis, and the basis for the compromise is independent of, and excludes any recognition of, an individual class member’s insolvency or inability to pay a disputed loan.
A copy of the order can be found here:
If you have any questions about the tax issue or the 1099 issued to you, you should consult an accountant or tax lawyer."
Second, here is information that I got from my own CPA (and girlfriend) Jennifer Liu and my analysis of the information that she provided me with:
On May 13, 2010, Michael J. Montemuuro, Chief, Branch 4, Office of Associate Chief Counsel (Income Tax and Accounting) from the Department of the Treasury, Internal Revenue Service in Washington, D.C. 20224 responded to a letter from United States Senator Bill Nelson regarding possible tax treatment for students for certain student loan restructurings and debt forgiveness. While the published letter whites out the name of the school and certain other information, the facts discussed exactly describe the Silver State Helicopters loans and loan settlement under the class action agreement. Also, Senator Nelson of Florida is known to have tried to help former SSH students. The letter from Mr. Montemuuro appears to describe how the IRS would treat the cancellation of indebtedness issue for the students that attended Silver State Helicopters school. This IRS response has the number L Info 2010-0141 and a Release Date of 6/25/10.
The IRS letter cites Revenue Ruling 92-99 and says that student loan restructurings and debt forgiveness may qualify under Code Sec. 108(e)(5) (footnote 24 et seq) in the following situation: A private vocational school made private student loans and then sold the loans to a third party loan service. The school abruptly closed, the students and cosigners filed various lawsuits (based on fraud and other claims) that sought, among other things, to rescind the contracts and prohibit enforcement of or collection on the loans. In a settlement agreement, in exchange for releasing the claims, students and cosigners got loan restructuring or debt forgiveness. According to the IRS, the restructuring and debt forgiveness were not necessarily cancellation of debt income. Instead, they could represent a compromise of litigation claims, and so could be viewed as a purchase price adjustment based on an infirmity that relates back to the agreement to purchase educational services. Any discharge of indebtedness income would then be excludable from gross income under Code Section 108(e) (5).
Here are several direct quotes from Mr. Montemurro's letter:
"In the present situation, the loan restructurings and debt forgiveness may represent a compromise of numerous claims against several defendants, including fraud, aiding and abetting fraud, negligent misrepresentations, and violations of stated and federal consumer protection. Therefore, the debt restructurings and debt forgiveness could be viewed as a purchase price adjustment based on an infirmity that relates back to the agreement to purchase educational services, and any discharge of indebtedness income could be excludable from gross income under section 108(e)(5) of the Code. . . Not every cancellation of indebtedness results in gross income under section 61(a)(12) of the Code . . . The IRS has concluded that the amount owed by the taxpayer under a contract that is forgiven by the seller, in return for a release of a contract counterclaim, is not income from the discharge of indebtedness."
"This letter has called your attention to certain general principles of the law for informational purposes only. It does not constitute a ruling."
In conclusion, I believe that my former SSH student clients should not have to pay income tax based on the 1099-C Cancellation of Debt forms that were issued to them by AES. This is my opinion, based on the information set forth hereinabove. It is not a guarantee of how the IRS will treat any individual. Every former SSH student that received a 1099-C from American Education Services should consult his or her own tax advisor. This would normally be an accountant or tax lawyer. If you need a referral to an accountant, please contact me. Feel free to share this blog post with your tax advisor, and with anyone else who may be interested in it.