8121 / How is discharge of debt income allocated between taxpayers who are jointly and severally liable with respect to the discharged debt?

The Form 1099-C regulations that govern this issue may cause confusion. In the case of multiple debtors (who are subject to joint and several liability) with respect to the discharge of $10,000 or more of indebtedness, the regulations require the creditor to issue a Form 1099-C to each debtor. With respect to spouses (who are co-obligors), only one Form 1099-C is required to be sent. Moreover, on each Form 1099-C (if more than one is sent to multiple debtors), the full amount of the discharged debt is reported. So if multiple debtors each receive a Form 1099-C, there may be confusion as to how much of the discharged debt each debtor must report.

Example: Asher, Ashley and Joel are jointly and severally liable with respect to a $120,000 bank loan. Two years later, the bank forgives the loan and issues each co-obligor a Form 1099-C reporting the discharge of the entire $120,000 loan. If each co-obligor was required to report $120,000 as discharge of debt income, it would be triple counted.

Although there are no regulations on point and no court has addressed this issue, in a chief counsel advice memorandum, the IRS stated that the full amount of discharge of debt should be allocated among the co-obligors (including co-obligor spouses) based on all the facts and circumstances. Thus, in the above example, if Asher, Ashley and Joel were equal partners, the $120,000 of discharged debt should be allocated among them equally.

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