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Cavoto v. Hayes

October 19, 2009


The opinion of the court was delivered by: Honorable David H. Coar


Mary Lou Hayes filed a Form 1099-C information return with her 2006 federal income taxes, in which she reported her cancellation of unpaid debts allegedly owed to her by Robert F. Cavoto. Cavoto filed suit, claiming, inter alia, that Hayes's filing was fraudulent and actionable per se under § 7434 of the Internal Revenue Code, since Hayes is not an "applicable entity" under § 6050P of the Code and is therefore prohibited from filing a Form 1099-C. See 26 U.S.C. §§ 6050P, 7434. In her motion for partial summary judgment, Hayes asks the court to resolve the narrow legal question whether a non"applicable entity" commits actionable fraud simply by filing a Form 1099-C. For the reasons stated below, the court holds that the answer is "no" and accordingly grants Hayes's motion for partial summary judgment.


Robert Cavoto is Mary Lou Hayes's former son-in-law. While Cavoto was married to Hayes's daughter, Hayes allowed the couple to have their own charge cards issued on Hayes's American Express account, which the couple used for business and personal expenses. The claim and counterclaim in this case arise from a disagreement concerning $30,238.51 in charges made to that account in 2002-03. Cavoto and Hayes dispute virtually all of the material facts surrounding the charges in question, but these factual disputes are largely immaterial to the question of law before the court. A brief summary of the terms of the dispute will provide some context for the present motion.

Hayes claims that in late 2002, Cavoto and his now-ex wife, Hayes's daughter Susan, could no longer afford to pay American Express for their charges to her account. At Cavoto's request, Hayes made payments to American Express on the understanding that Cavoto would pay her back. She has repeatedly tried to collect the money Cavoto owes her, to no avail. On or around December 8, 2006, Hayes concluded that Cavoto's debt to her was uncollectable and cancelled it. Cavoto, however, denies that there was ever any loan agreement in place; disputes that the charges in question are imputable to him, rather than to Hayes's daughter; insists that he has paid for all charges to the account for which he was ever personally responsible; maintains that Hayes reported her "cancellation" of his alleged debt in order to take an additional income tax deduction for 2006; and generally disputes all of Hayes's material allegations. These background disputes will all be resolved by a jury in due course.

What is undisputed-and material to the present motion-is that Hayes reported the cancellation of a $30,238.51 debt, which she imputed to Cavoto, on her 2006 income tax return; took a nonbusiness bad-debt deduction, in the form of a $3,000 short-term capital loss, on her 1040 Schedule D; and further reported the cancellation of debt on a Form 1099-C.

On September 22, 2007, the IRS informed Cavoto that he might incur additional tax liability for 2006 on account of Hayes's cancellation of his debt. But on December 12, 2008, the IRS informed Cavoto that it would not pursue the collection of any additional income tax from him for 2006. To date, the IRS has not in any way challenged Hayes's filing of the Form 1099-C as improper.


It is well established that the court may resolve a pure question of law on a motion for summary judgment. See, e.g., In re Smith, 966 F.2d 1527, 1529 (7th Cir. 1992). Summary judgment is proper only where the moving party has established that there is no genuine issue of material fact and that she is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The court "must construe all facts in the light most favorable to the non-moving party and draw all reasonable and justifiable inferences in favor of that party." Allen v. Cedar Real Estate Group, LLP, 236 F.3d 374, 380 (7th Cir. 2001).


In his complaint, Cavoto alleges: Relative to the $30,258.51 in alleged Charges, the Information Return issued by the Defendant to the Plaintiff in this case is false and fraudulent in one or more of the following respects: . . . (e) Defendant is not an "applicable entity" that is required to file a cancellation of debt information return[] . . . . (Compl. ¶14(e).) Cavoto alleges, in effect, that the filing of a Form 1099-C by anyone other than an "applicable entity" is fraudulent and actionable per se. In her motion for partial summary judgment, Hayes argues that she is entitled to judgment as a matter of law on the narrow ground of liability presented in ¶14(e) of the complaint. The court agrees with Hayes.

Hayes is entitled to claim a deduction for the discharge of any nonbusiness bad debts. See 26 U.S.C. § 166(d). IRS Form 1099-C is an information return on which a taxpayer reports the amount of a discharged debt and identifies the debtor. The filing of information returns is governed by § 6050P of the Internal Revenue Code, which provides, in relevant part, that "[a]ny applicable entity which discharges (in whole or in part) the indebtedness of any person during any calendar year shall make a return . . . ."

26 U.S.C. § 6050P(a) (emphasis added). An "applicable entity" is a governmental agency, a financial institution, or other organization in the business of lending money. Id. § 6050P(c). Hayes concedes that she is not an "applicable entity" and that § 6050P does not require her to file a Form 1099-C. She argues only that § 6050P does not forbid her from doing so.

Cavoto argues that "the plain language of 6050P . . . is intended to restrict or limit" the filing of a Form 1099-C to applicable entities. On the contrary, the plain language of ยง 6050P does not forbid anyone from filing an information return; it merely says that applicable entities shall-that is, must-file a Form 1099-C when discharging a debt of at ...

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