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.
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.
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.
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.
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.
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.
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.
> 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]
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.
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.
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.