I am working on my petition for writ of certiorari to the United States Supreme Court, due in the mail by Monday. This passage shows how scrutiny of the debt buying and selling market may result in tightening a loophole and saving our nation a pile of money lost by tax evasion.

According to the Consumer Financial Protection Bureau (“CFPB”), Portfolio Recovery Associates has a practice of buying debt that it knows is invalid. (reference to the consent order in the appendix) The Laura Lynn debt falls into that category.

There is a plausible case of illegal tax fraud arising from this conduct. If credit card companies are selling phantom debt to PRA, and PRA knowingly purchases worthless data (with some legitimate debt interspersed to maintain appearances), both parties could be engaging in tax evasion.

For instance, Capital One claimed an unsubstantiated debt of $2,297.63. PRA likely purchased the data for $229.76, assuming a common rate of 10 cents on the dollar. Capital One then wrote off $2,067.87 as a loss ($2,297.63 minus $229.76). With a corporate tax rate of 21%, Capital One paid $434.25 less in taxes because of the illegitimate debt write-off.

PRA, unable to collect any money from Hammett, wrote off its $229.76 expenditure, reducing its taxable income by $48.25. The People of the United States, through the IRS, lost a combined $482.50 in tax revenue from these two transactions. If repeated across thousands of accounts, this scheme could cost taxpayers millions. Meanwhile, PRA’s business model is sustained by collecting on some of the data, more than offsetting its minimal investment. This setup relies on exploiting a loophole while pretending ignorance of the fact that destroyed records would reveal the disputed debts were never valid.

This scheme only applies to debts that were not created by fraud of third parties, for instance if the Debt was created by Hammett’s former romantic partner frequenting seedy bars and putting his tab on a credit card he intercepted in the mail; but the original account level documentation was destroyed, so there should be an inference that there was no transactional history bringing the balance from zero to $2,297.63.

This case illustrates the systemic impact when aggregated across countless cases, that this conduct could amount to millions in taxpayer losses.  This isn’t an isolated incident but potentially a large-scale practice of unverified tax deductions, coupled with a drain on judicial resources and government sanctioned corporate violations of privacy.

It looks bad that the judge on the case was counsel to one of the debt originators who sells to Portfolio Recovery Associates immediately before he became a judge. It will be poetic justice if this tax scheme gains public attention because Judge Lee P. Rudofsky threw the case and Circuit Judges Gruender, Erickson and Stras of the Eighth Circuit rubber stamped his orders.