The interview is below:
A volunteer-led organization that has raised hundreds of thousands of dollars to buy and pay off medical debts as a gift to debtors says it intends to seek IRS recognition as a section 501(c)(4) tax-exempt organization.
The Rolling Jubilee Fund works to educate the public about consumer credit — how and when it is advanced, how it is bought and sold, and how it’s collected, three attorneys representing the fund on a pro bono basis told Tax Analysts. The fund also furthers social welfare by helping patients with outstanding medical debt, the attorneys said.
“For centuries, charitable institutions have attempted to relieve the burdens of the sick,” the attorneys said. “And hundreds of tax-exempt organizations educate the public about debt and how to relieve debt. We are not aware of any organization that has combined these two objectives in exactly the way that Rolling Jubilee does, but we don’t believe that there is any reason such a combination should not be considered an exempt purpose that promotes social welfare.”
The organization hasn’t yet submitted its exemption application, and no conversations about it have taken place with IRS officials, the attorneys said. Rolling Jubilee is run by volunteers, many of whom were involved in the Occupy Wall Street movement and face debt burdens themselves, the attorneys said.
The three attorneys advising the group are David S. Miller of Cadwalader, Wickersham & Taft LLP, Deborah Hrbek of Hrbek Law LLC, whose practice focuses on entertainment and small business law, and Margaret Ratner Kunstler, a civil rights attorney with Hrbek Law.
According to the fund’s website, more than $560,000 has been raised to retire more than $11 million in debt, but the attorneys said the organization has so far bought and forgiven $100,000 in debt. (See http://rollingjubilee.org/.)
Rolling Jubilee has discovered that although patients unable to pay their bills are subject to collection agency demands to pay them all off, that debt can be bought for pennies on the dollar, the lawyers said. The fund is doing that and forgiving the debt to educate the country about the debt market, the lawyers said, adding that the fund may later acquire nonmedical debt of debtors in impoverished areas.
“Rolling Jubilee plans only to forgive debt when that forgiveness promotes social welfare,” the attorneys said.
Rolling Jubilee is “an interesting concept,” and the fund’s stated goal of educating the public about Americans going bankrupt when they get sick seems well targeted at boosting the country’s social welfare, said Ofer Lion of Hunton & Williams LLP. That, he said, is an exempt purpose for a 501(c)(4) organization.“Their actual methods don’t seem to run counter to charitable purposes either, as I understand that they wipe out burdensome medical-related debts — ‘relief of the distressed,’ in Treasury regulations parlance,” Lion said.
Lloyd Hitoshi Mayer of the University of Notre Dame Law School said there’s “at least a reasonably strong argument” for why the Rolling Jubilee effort generally furthers an exempt purpose. There are two elements of the argument, and the first is that standards for 501(c)(4) organizations are looser than those for 501(c)(3) groups, Mayer said.
“The second thing is I think you could argue that while it’s true they don’t do means testing of the people that benefit from this because it’s practically impossible, the debt they’re buying is highly distressed debt,” Mayer said.
According to Mayer, that could mean that most people holding that debt are in a precarious financial position; otherwise, the debt wouldn’t be available for purchase at such discounts. The same may not be true with other types of debt, he said.
“Mortgages I think are actually a little bit of a harder case because you have someone who is pretty well off, but their house is underwater and maybe the foreclosure process is difficult, and so the debt is being discounted not because the individuals are particularly bad off financially, but just because your chance of actually collecting on the debt is relatively small,” Mayer said.
A Detached and Disinterested Gift?
Miller, Kunstler, and Hrbek told Tax Analysts that forgiveness of the debt does not result in income to the debtor if that forgiveness comes from a detached and disinterested generosity. Lion said these debtors seem to have a good case that they’re receiving an exempt gift rather than a taxable gain.Mayer agreed, saying the debt forgiveness counts as a gift under section 102. He said that when Rolling Jubilee buys the debt, it doesn’t know who the beneficiaries are but discharges the debt purely out of a desire to benefit those who incurred it.
“It seems to be that’s about as detached and disinterested as you can get,” Mayer said. “The one weird thing is usually you don’t think of entities being detached and disinterested givers — you just think of individuals.”
Robert Willens of Robert Willens LLC said he believes the IRS would resist the characterization of these cancellations of debt as gifts but that they’ll “get lost” in the reporting process anyway.
“Since there’s no way for the IRS to verify all this, there won’t be much enforcement on their part,” Willens said. “That’s not the way we like to do tax planning, but I guess it could work.”
Mayer said he doesn’t expect immediate IRS movement regarding any aspect of the Rolling Jubilee program. Unless the dollar volume grows higher or there’s an indication of someone with Rolling Jubilee personally profiting, it won’t be a high priority for the IRS, he said.
Mayer said he doesn’t think the IRS would act “until at least an initial [Form] 990 is filed,” adding, “Even then, of course, the IRS has three years at minimum to audit the 990, and they may or may not bother to do so depending on their other priorities.”