The Kennedy 1099-OID Program
(Updated July 27, 2010)

    Back in January, 2008, both Tom Cryer and I heard about the promotion of the “1099-OID” argument by “Dr. Sam Kennedy.” We immediately wondered “who is ‘Dr. Sam Kennedy’”? Both of us still would like to know who he is:

Is Dr Sam Kennedy A White Ant?
Nu Moorish Science Temple

What shocked both Tom and me was the promotion of the 1099-OID argument. This argument is nothing but another extension of the flaky ideas of that car-thief, Roger Elvick. Here is Tom’s explanation of this 1099-OID process that was contained in one of his e-mails:

What about the 1099 OID, then?  Is there any basis in law for the claim that a 1099 OID form can be used as a form of payment or offset for a debt?  Let me take you on a lawyer's investigation, the way we research any question to determine whether there is any basis for a proposition.
Let's start out by remembering that the federal system is a civil law system.  If Congress didn't enact it then it isn't law.  So, let's search the U.S.C. and the Statutes at Large for " 1099 OID ".  Our result?  Zip.  Nada.  Nichts.  Not one single reference to 1099 OID, much less legal authorization to use it to offset or pay a debt with.
What, then, about regulations?  The Treasurer has the authority to promulgate regulations and designate forms and maybe some other cabinet department can dovetail off the Treasury regs, so let's search the CFR, all of it, for " 1099 OID ".
We get two hits and two hits only:  26 CFR 1.6049-1 and 26 CFR 1.6049-3.  (see attached)
These regulations designate the 1099 OID form as the proper form for a corporation to use in reporting discounted interest on an " original issue discount " debenture, bond, etc.
Its use is limited to corporations and corporations only.  I'm not a corporation, I'm a corpus, a living, breathing and real human being, a body, not an embodiment by charter of the state.  So 1099 OIDs have nothing to do with me unless a corporation issues one to me because I am the holder of an " original issue discount " bond as specified in the two regulations.
Once you read the two regulations you can see exactly what a 1099 OID really is.  It is a way for corporations to tattle on bond holders for interest they never received as they don't receive it.  Confusing?  The 1099 OID applies to corporate issues of bonds, debentures, notes or other evidences of indebtedness that are issued at a discount instead of issued for face value.
When a company borrows money by issuing bonds it can do it a number of different ways.  One, it can sell a bond at face value and pay interest on a monthly, quarterly or annual basis until the bond is redeemed for face value plus any additional interest accrued since the last payment.
Another way, though, is to issue the bond for less than its face value, discounting the interest from the sale price instead of paying it out during the life of the bond.  The bond starts out at the sale price and " grows up " to its face value during its term.
A good example that most of us are familiar with is a U.S. Savings Bond.  When you purchase a $100 savings bond you don't pay $100 for it.  You pay a good bit less.  Those bonds are sold for an amount which, when interest is added over the ten year period, would have a future value of $100 at ten years (or whatever the life of the bond is).
Although interest on U.S. Savings Bonds is exempt, interest from corporate bonds is not exempt.  So, when that unpaid interest, which was, instead, discounted from the face value at time of issue, accrues, increasing the redemption value of the bond by some increment each year, the government wants it's cut now, not at maturity.  So it requires corporations who have any " original issue discount " method of interest " payment " to report that accrued value or interest as earnings even though it was never actually paid or received.  The form to use for that is a 1099 OID (original issue discount).  If the bond were sold at face value and interest actually paid out each year, then they would have to report that, too, but on a different version of 1099.
But what isn't in those two sections is any way anyone other than a corporation can issue a 1099 OID and what else isn't in there is any way to use a 1099 OID as a form of payment or offset of a debt.  It's tedious reading and you'll probably drop off to sleep a few times before you get to the end, but it isn't there.
So now we know there is no basis for using a 1099 OID for payment or offset in the statutory law and we know there is no basis in federal regulations, either.  So far there is no basis found, making the notion . . . well . . . baseless.
What, then, about case law?  Where the law is silent, where there is a hiatus in the law, the courts can resort to " equity ".  So at least theoretically the courts could recognize a 1099 OID as a form of payment.  What do the courts have to say?
Well, let's do a search of all federal courts for " 1099 OID " and see what we get, and lo and behold and harken all ye within hail!!!  We get four whole hits.  Four cases dealing with the 1099 OID.  (see attached)
Let's roll our sleeves up and dig in. 
The first one is a bankruptcy court ruling, Harrison.  I don't subscribe to bankruptcy cases because I don't do those, so we don't have the full text of the case.  But the summary let's us know that the 1099 OID, along with the $3 million " Registered-Discharging and Indemnity Bond " drawn on Harrison's " account " with the " Department of Treasury " was not " accepted for value " and that Mr. Harrison has been moved from the waiting for a discharge in bankruptcy line to the waiting for his cell assignment line.  Nope, no help there.
The second case, Neal, is really entertaining.  Mr. and Mrs. Neal and their conglomeration of trusts and foundations were defendants in a federal foreclosure action.  The Neals sent notice of a " bonded promissory note " purporting to evidence a loan to the court, the attorney for the government and the clerk of court in the amount of $50,000,000 (I thought it was $25,000,000--wait, Mr. AND Mrs., so it's $25,000,000 each!) accompanied by a 2008 1099 OID showing $50,000,000 withheld from the loan proceeds for " taxes ".  We loaned you $50,000,000 but we've withheld 100% of the proceeds of the loan, which isn't taxable, for taxes.  (I wonder if they paid in the withheld funds, and if they didn't . . . whooee!  They're in some Dutch, now!)
But wait, it gets better.  The court also received by mail a notice from a notary (who was stupid enough to put her name on the document) notifying the court of its " non-performance " on the " bonded promissory note ".
This is definitely some " alternative law " if I've ever seen it.  Remember, a 1099 OID is issued by the BORROWER, the corporation issuing the bond, etc., to the LENDER, but in this case two people, not corporations, are claiming to be the LENDER and issuing the 1099 OID to the purported BORROWER.  Alternative, indeed.
But the court didn't order payment of the note.  Instead it referred the matter to the DOJ for prosecution for mail fraud, tax fraud and obstruction.  The Neals (and their notary) don't need to worry about the foreclosure because they probably won't need that house for some time, anyway. 
I think we can count this case as not providing any legal basis for similar use of the 1099 OID.
Now, the third, Mr. Martineau, was already in jail, so at least he didn't have to pack.  He filed a civil rights action, pro se, and attempted to pay the filing fee with a 1099 OID.  Didn't work there, either.
Still no basis.
How about the fourth case, Microdot?  Well, that one deals with a corporation that issued debentures in exchange for stock but at an " original issue discount ".  This case doesn't deal with the "alternative" application of the form, so no basis here, either.
Now, we've exhausted all law.  The Code, the Statutes at Large, all regulations and case law.  There is no basis for the use of a form 1099 OID by anyone other than a corporation issuing bonds and such at " original issue discount ".  And there is no legal basis for anyone, not even a corporation, using a 1099 OID as a form of payment.  If there were any legal basis we would have found it.
These folks have the inane idea that they can invent law (which is convenient, since they want to claim some proprietary interest in their " discovery ").  Law isn't invented, it's enacted, and none of us can merely issue proclamations, making new law, although if that were true it would allow for some pretty interesting arguments. 
This reminds me of the series M.A.S.H. where Hawkeye and his buddy played a game called " Triple Cranko ".  It was played with a chess board, chess pieces, checkers and a deck of cards and there were no rules.  Someone with some comic talent could probably build a pretty funny skit involving a couple of lawyers arguing before a judge, all three just making up laws as they go.
As for the other component, the " $25,000,000 bonded promissory note ", stop and think about that for a minute.  In the current myth the note is issued by the debtor but purports to evidence a debt owed by the creditor, who never signed it.  " Well, you want me to pay my car note?  Check this out, sucker!!  I'm writing a note for twice that amount from the bank to me!  Now give me my change and make it snappy or I'll write another note for triple what I owe the bank. "  Double Cranko at the very least.
I can't write and issue a note that makes anyone liable but me.  And who is bonding it?  If this note is bonded there is an insurance company or bank that is certifying that it has the money to pay the note off and if the note is dishonored it will turn that money over to the creditor.  Who bonds these notes? 
A bond, a promise to pay the debt or meet the obligation of another must be in writing.  Where is the writing?  Where is the bond?  Who signed it?  Where is the money backing it up?
All of this is as bogus as it gets.  The saddest part, though, is that people are eating it up and it's getting them in trouble.
Hope this sheds at least some light.

Both Tom and I immediately tried to warn people that following the “Dr. Sam Kennedy” program was a good way to “break into jail”. Of course, promoters of scams defend themselves with defamation of their accusers.

But now, the “chickens are coming home to roost.” In September, 2009, I heard about the case of Seth Sundberg, a man from California who had used the 1099-OID process. A criminal complaint was filed against him by the feds on September, 1, 2009. He was arrested and denied bond. An indictment was later returned against him, and he filed the following pleadings, among others:

Docket sheet     Sundberg Indictment      Doc. 35        Doc. 37       Doc. 40        Doc. 41      Doc. 42

In January, Sundberg plead guilty. He has filed the following since then:

Doc. 56         Doc. 58        Doc. 60     Doc 63      Doc. 62        Doc. 64

The prosecution's sentencing brief is Doc. 64; it asked that Sundberg be jailed for 71 months.  On July 22, 2010, Sundberg was sentenced to 71 months, given a 100,000 bux fine, and ordered to pay restitution of almost 2.5 million. These gurus work for the prosecution and have a better track record than the prosecutors: they have a 100% conviction rate.

Furthermore, a man named Armstrong from Colorado followed the "advice" of  “Dr. Sam Kennedy” and submitted 1099-OID tax returns to get huge refunds. The U.S. Attorney in response filed a criminal complaint against him followed by an indictment. Please read these documents.  If there is a trial, the defense should be "Dr. Sam Kennedy lied to me".

The DoJ has filed and posted on its website certain civil complaints filed against return preparers who were using this process:

Complaint against Teresa Marty

Complaint against McIntyre

Here are some Department of Justice news releases about civil and criminal prosecutions of people who used the "Dr. Kennedy" 1099-OID program.

Here is another indictment for using the 1099-OID "process." The gurus who promoted this garbage need to be impaled.

    Please, stay away from any 1099-OID scheme, redemption process, etc. These insane ideas created by guru/crackpots will get you into trouble.