
Tax Consequences of Medical Debt Forgiveness (2016) - Tomte
https://www.proskauertaxtalks.com/2016/06/last-week-tonight-debt-forgiveness/
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zaroth
Interesting analysis. But isn’t an overriding quality of the tax code a
generalized “wash” rule - that transactions without an economic impact can be
disregarded?

Therefore “laundering” the debt forgiveness through a 501(c)(3) shouldn’t have
any impact of Oliver’s company actually had a hand in picking the debt which
was to be forgiven?

Oliver can donate to the 501(c)(3) and they can proceed with their independent
mission, but if Oliver had economic autonomy in the debt selection it seems
like that could theoretically skuttle the preferred tax treatment.

Of course IANAL and just a layman with an interest in tax law. And IMO
literally everything is taxable income if the IRS chooses to look at it hard
enough in one way or another.

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CPLX
It’s more accurate to say that intent matters. So transactions that exist only
to change the source of money but have no economic effect on the intent of the
transaction can be disregarded.

But in this case the intent of the act was very clearly to create a charitable
act.

So it’s the same principle you’re suggesting but with the precise opposite
conclusion. Ultimately a charity was the source of the economic activity, and
“laundering” it through the debt buyer did not make it less charitable.

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bradleyjg
Along these same lines, something else that may not be common knowledge: there
a few different kinds of student loan forgiveness. One is working for a
government or non-profit for ten years. That kind of forgiveness comes with no
tax debt. However under various income driven payment schemes (IBR, ICR, PAYE,
REPAYE) there is forgiveness after 20-25 years (depending on the program and
sub-program). Under tax law that forgiveness is taxable income to the
borrower.

Consider someone that went college and grad school, ended up with hundreds of
thousands of dollars worth of debt by age 25 at an average rate over 5%, could
easily be paying 10% of income after 150% of poverty line for 25 years, still
end up with a principal of double or more than they started with. Since the
income that year would be several hundred thousand dollars, he'd be in a high
tax bracket and could easily owe more in taxes on the forgiven debt than he
borrowed in the first place. In cases where a taxpayer can clearly not pay a
tax debt the IRS will generally work out a 10 year payment plan based on the
most they think you can afford to pay and then forgive the remaining amount.
So by age 60 our not so hypothetical borrower will finally be free of his
student loans.

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hprotagonist
_Therefore, if John Oliver (or, more precisely, his corporation, Central Asset
Recovery Professionals, also known as “CARP”) had simply forgiven the debt,
the debtors might have been taxable on the amount forgiven. Fortunately,
that’s not what John Oliver actually did. Instead, he donated the debt to
Medical Debt Resolution, Inc., which goes by the name, “RIP Medical Debt”
(“RIP”). RIP is a Section 501(c)(3) charity whose purpose is to provide
charitable aid by purchasing and forgiving the medical debt of poor people.
RIP forgave the debt as a gift to the debtor out of “detached and
disinterested generosity.” And that is why the debtors were not taxable._

~~~
justinjlynn
> Here's a little lesson in _tax avoidance_

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potentialdebto2
I love the legal epistemology of "RIP does have a pure heart" because it is a
501c3 with the purity defined in its incorporation documents, as opposed to
the unknown or presumably self-interested purity level of the company CARP or
the person John Oliver.

I wonder: can you see who is in the debt portfolios before you buy them? Or
even amounts and rough locations or services? This would be enough to identify
people in some cases, maybe even yourself! Let's say you owe $500k for some
operation and you can't pay it, won't ever pay it, and just plan on declaring
bankruptcy or letting it accrue interest and get traded around until you die.

But lets say you decide it would be best if you didn't have the debt; maybe
you want to buy a house someday. What would stop you from buying the portfolio
with your debt in it for say, $15k, and forgiving everybody, including
yourself? Anyone else who buys the portfolio is going to tell you that you
still owe $500k plus interest, but will give you a generous payment plan for
$350k or something.

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pnutjam
For $500k, your going to get sued. They're going to get something out of you
and garnish your wages forever. You'll probably have to pay something even
under bankruptcy, because of the bankruptcy changes under Bush. That debt will
never get resold like this.

If you have something smaller, maybe $5k, you might not get sued, depending on
how difficult it is for them to sue you. Once the debt gets so old it's
uncollectable (7 years), it might end up in one of these traded portfolios.

There is generally no reason anyone would ever pay these debts and it's
probably not even impacting your credit at that point. I'm guessing most of
this debt is over 7 years old, or very close to that date.

~~~
potentialdebto2
Right, the John Oliver portfolio was out-of-statute, meaning nobody was
legally required to pay it, but if a collector can get the debtor to
acknowledge or make any payments on the debt, it completely restarts (never
acknowledge or agree to make payments on debt over the phone!).

Looks like one would get garnished to the max for 3-5 years after (Chapter 13)
bankruptcy. If I ever get seriously ill and faced high medical bills, the
first thing I would do is take most of my non-exempt (basically, not
retirement accounts) assets and buy a cheap house, since in my state (Texas)
the entire value of your homestead is bankruptcy exempt. This is assuming I
have the health to do so, of course. I have a high enough credit score and
income that the hospital would assume that I could pay, and existing lines of
credit to pay for out-of-pocket stuff.

edit: you could really go nuts with the exemptions! Put in a pool, buy one of
these [1], fine home furnishings etc.

[1] [https://www.abebooks.com/book-search/title/king-james-
bible/...](https://www.abebooks.com/book-search/title/king-james-bible/first-
edition/sortby/1/page-1/)

~~~
ikeboy
People have done this after being sued, moved to a state with protections and
poured assets into a house.

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mrnobody_67
How much did he pay for the 15m?

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rosser
> _CARP located and purchased from Texas for about $60,000 a medical debt
> portfolio worth $14,922,261.76 — paying less than a half-cent on the
> dollar._ [0]

[0] [https://ripmedicaldebt.org/john-oliver-medical-
debt/](https://ripmedicaldebt.org/john-oliver-medical-debt/)

~~~
ceejayoz
Remarkably cost efficient.

I wonder how feasible it'd be to do this on a larger scale. TARP spent $400B
bailing out banks; seems like that'd go a long way here.

~~~
jjeaff
Might be better to spend the money on education. Since all this debt was over
7 years old, no one would have had any legal obligation to pay on the debt nor
would it show up in their credit reports.

Anyone who buys debt at that point is just hoping to be able to convince/trick
the indebted to paying anyway.

~~~
ceejayoz
> Anyone who buys debt at that point is just hoping to be able to
> convince/trick the indebted to paying anyway.

Seems like this should be illegal, then, with penalties.

~~~
jjeaff
Well, I mean morally, you still owe the money. Just because the law has
protected you from legal retribution after 7 years, I don't think it is
necessarily right to make it illegal to ask for what is rightfully yours.

There are other laws in place to keep creditors from harassing you forever. So
worst case, you could receive mail for the rest of your life asking for you to
pay up.

