John Oliver is known for demystifying complicated issues to get his “Last Week Tonight” audience riled up. He’s explained major problems with credit reports and the bizarrely undemocratic side of primaries and caucuses. In that way, last night’s episode devoted to debt buyers wasn’t all that different. He started out, in his entertainingly enraged way, by explaining how banks sell debt to other business for pennies on the dollar. Those companies have little knowledge of those owing money, but they can be terrifyingly predatory, taking advantage of consumers’ fear of legal action. Some of these debts are erroneous; some are “zombie debts” that have already been paid. And yet, debt collectors will persist, even employing dirty tactics to get cash.
But Oliver did more than educate last night. He explained to his viewers that he undertook the surprisingly easy task of starting a debt buying company, Central Asset Recovery Professional, Inc. — “or CARP, for the bottom-feeding fish,” he explained. No sooner had he set up a CARP web site, but another debt buyer was offering to sell Oliver nearly $15 million worth of medical debt for less than $60,000.
So CARP bought the debt of nearly 9,000 people — just so Oliver could forgive it. According to the host, this is the largest one-time giveaway ever on television, beating out Oprah Winfrey’s famous “you get a car! You get a car!” episode, which cost that show $8 million.
(Click on YouTube button on bottom right to view video directly on YouTube to avoid interruption caused by blog's refresh rate. The most relevant discussion begins at 17:15.)
A bit of internet digging shows that CARP sent the debt to a non-profit called RIP Medical Debt (RIP). (Seriously, who came up with that name?) RIP purchases medical debts and then forgives them. RIP has a FAQ page that says: “The forgiveness of the debt does not result in income to the debtor if that forgiveness is a gift that comes from a detached and disinterested generosity. We will not file a Form 1099-C with the IRS.”
I’m not entirely sure about the exact structure of the arrangement between CARP and RIP Medical Debts. It could be any number of things, and the strength or weakness of the “detached and disinterested generosity and hence gift and hence no tax” theory would vary based on the details of the structure. ...
[O]one might argue that the specific, non-cash form of CARP’s donation to RIP effectively controlled who would get the benefit, or at least made it inevitable that those whose debts were forgiven were the exact individuals whose debts were purchased by CARP. In this scenario, the argument for “gift” characterization may be a bit more tenuous, because this could be characterized as, in substance, a transaction between CARP/John Oliver/Last Week Tonight and the individual debtors directly, and it’s less obvious that CARP/John Oliver/Last Week Tonight are acting out of detached and disinterested generosity.
[S]ection 108(e)(2) ... provides that “no income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction. ... ”It appears ... that the IRS will not apply Section 108(e)(2) at that granular a level; in other words, they won’t look at each individual taxpayer and determine how much of the forgiven liabilty would have actually given rise to a deduction based on the taxpayer’s specific circumstances. Instead, it appears that the IRS is content to concede that Section 213 provides a tax deduction for medical expenses, and so you are permitted to exclude the forgiveness of the underlying medical liabilities, even if you don’t itemize your deductions or the sum of the deductions don’t exceed your AGI limit.